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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
-- ---
Common Stock outstanding at May 12, 2003: 322,262,966 shares, without par value.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2003 and 2002........................................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three Months Ended March 31, 2003 and 2002.......................................... 2
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2003 and 2002........................................... 3
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002................................................. 4
Notes to Financial Statements........................................................ 5
Independent Accountants' Report...................................................... 27
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 60
Item 4. Controls and Procedures.............................................................. 61
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 61
Item 4. Submission of Matters to a Vote of Security Holders ................................. 63
Item 6. Exhibits and Reports on Form 8-K .................................................... 63
SIGNATURE............................................................................................. 64
CERTIFICATIONS........................................................................................ 65
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. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
(millions of dollars,
except per share amounts)
Operating revenues.................................................................. $2,815 $2,453
------ ------
Costs and expenses:
Cost of energy sold and delivery fees............................................ 1,387 800
Operating costs.................................................................. 429 365
Depreciation and amortization.................................................... 227 220
Selling, general and administrative expenses..................................... 262 338
Franchise and revenue-based taxes................................................ 111 118
Other income..................................................................... (14) (7)
Other deductions................................................................. 20 47
Interest income.................................................................. (10) (8)
Interest expense and other charges............................................... 254 216
----- -----
Total costs and expenses..................................................... 2,666 2,089
----- -----
Income from continuing operations before income taxes and cumulative effect
of changes in accounting principles.............................................. 149 364
Income tax expense.................................................................. 43 107
----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles.............................................. 106 257
Loss on discontinued operations, net of tax benefit (Note 3)........................ (3) (2)
Cumulative effect of changes in accounting principles, net of tax benefit (Note 2).. (58) --
----- -----
Net income ......................................................................... 45 255
Preference stock dividends.......................................................... 5 5
----- -----
Net income available for common stock............................................... $ 40 $ 250
===== =====
Average shares of common stock outstanding (millions):
Basic............................................................................ 321 265
Diluted.......................................................................... 378 265
Per share of common stock:
Basic earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles......................................... $ 0.31 $ 0.95
Loss on discontinued operations, net of tax benefit........................... (0.01) (0.01)
Cumulative effect of changes in accounting principles, net of tax benefit (0.17) --
Net income available for common stock......................................... 0.13 0.94
Diluted earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles......................................... $ 0.30 $ 0.95
Loss on discontinued operations, net of tax benefit........................... (0.01) (0.01)
Cumulative effect of changes in accounting principles, net of tax benefit (0.15) --
Net income available for common stock......................................... 0.14 0.94
Dividends declared............................................................... 0.125 0.60
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before cumulative effect of changes
in accounting principles ................................................. $ 106 $ 257
------ -----
Other comprehensive income (loss) --
Net change during the period, net of tax effects:
Cumulative foreign currency translation adjustment ....................... 55 31
Minimum pension liability adjustments (net of tax benefit of $3).......... (6) -
Cash flow hedges:
Net change in fair value of derivatives (net of tax benefit of
$56 and $18)......................................................... (108) (31)
Amounts realized in earnings during the period (net of tax
expense of $42 and $7) ............................................. 81 15
------ -----
Total.................................................. 22 15
------ -----
Comprehensive income from continuing operations............................... 128 272
Comprehensive income from discontinued operations............................. (3) (53)
Cumulative effect of changes in accounting principles, net of tax benefit..... (58) -
------ -----
Comprehensive income.......................................................... $ 67 $ 219
====== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
2003 2002
---- ----
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before cumulative effect of
changes in accounting principles....................................................... $ 106 $ 257
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by operating activities:
Depreciation and amortization ........................................................ 246 251
Deferred income taxes and investment tax credits - net ............................... - (19)
Net gain from sale of assets......................................................... (6) -
Net unrealized loss from mark-to-market valuations of commodity contracts............. 27 119
Net equity loss from unconsolidated affiliates and joint ventures..................... 15 14
Over (under) recovered gas costs...................................................... (39) 40
Reduction in regulatory liability..................................................... (42) (13)
Changes in operating assets and liabilities.............................................. 619 (203)
------ -----
Cash provided by operating activities............................................. 926 446
------ -----
Cash flows - financing activities:
Issuances of securities:
Long-term debt........................................................................ 1,317 145
Common stock.......................................................................... 4 1
Retirements/repurchases of securities:
Long-term debt........................................................................ (565) (604)
Preferred stock of subsidiary, subject to mandatory redemption........................ (4) -
Change in notes payable:
Commercial paper...................................................................... 5 749
Banks................................................................................. (1,286) (292)
Cash dividends paid:
Common stock.......................................................................... (40) (159)
Preference stock...................................................................... (5) (5)
Redemption deposit applied to debt retirements........................................... 138 -
Debt premium, discount, financing and reacquisition expenses............................. (48) (28)
------ -----
Cash used in financing activities................................................. (484) (193)
------ -----
Cash flows - investing activities:
Capital expenditures..................................................................... (228) (272)
Proceeds from sale of assets............................................................. 13 1
Nuclear fuel ............................................................................ - (10)
Other.................................................................................... 25 2
------ -----
Cash used in investing activities................................................. (190) (279)
------ -----
Effect of exchange rates on cash and cash equivalents...................................... 1 (9)
Cash contributions to discontinued operations.............................................. - (144)
------ -----
Net change in cash and cash equivalents.................................................... 253 (179)
Cash and cash equivalents - beginning balance.............................................. 1,574 216
------ -----
Cash and cash equivalents - ending balance................................................. $1,827 $ 37
====== =====
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
--------- -------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents................................................... $ 1,827 $ 1,574
Restricted cash............................................................. 72 210
Accounts receivable-- trade................................................. 1,848 1,696
Income taxes receivable..................................................... 34 488
Inventories................................................................. 426 493
Commodity contract assets................................................... 1,472 1,298
Other current assets........................................................ 231 263
------- -------
Total current assets................................................. 5,910 6,022
------- -------
Investments:
Restricted cash.............................................................. 111 96
Other investments............................................................ 786 757
Property, plant and equipment-- net............................................ 20,456 19,642
Goodwill....................................................................... 1,956 1,588
Regulatory assets-- net....................................................... 1,923 1,772
Commodity contract assets...................................................... 549 657
Cash flow hedges and other derivative assets................................... 163 150
Other noncurrent assets........................................................ 320 332
------ -------
Total assets.......................................................... $32,174 $31,016
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper......................................................... $ 24 $ 18
Banks.................................................................... 1,021 2,306
Long-term debt due currently................................................ 739 958
Accounts payable-- trade.................................................... 1,206 1,054
Commodity contract liabilities.............................................. 1,377 1,138
Other current liabilities................................................... 1,084 1,209
------- -------
Total current liabilities............................................ 5,451 6,683
------- -------
Accumulated deferred income taxes and investment tax credits.................. 4,187 4,060
Commodity contract liabilities................................................ 461 520
Cash flow hedges and other derivative liabilities............................. 306 220
Other noncurrent liabilities and deferred credits............................. 2,498 2,144
Long-term debt, less amounts due currently.................................... 13,459 11,597
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.......................................... 17 21
Contingencies (Note 7)
Shareholders' equity (Note 6)................................................. 5,090 5,066
------- -------
Total liabilities and shareholders' equity........................... $32,174 $31,016
======= =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- 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 with its
principal United States (US) operations conducted through TXU US Holdings
Company (US Holdings) and TXU Gas Company (TXU Gas). US Holdings is also a
holding company with its principal operations conducted through TXU Energy
Company LLC (TXU Energy) and Oncor Electric Delivery Company (Oncor). TXU
Corp.'s principal international operations are conducted through TXU Australia
Holdings (Partnership) Limited Partnership (TXU Australia) and had also been
previously conducted through TXU Europe Limited (TXU Europe).
The term "TXU Corp.," refers to TXU Corp. and/or its consolidated
subsidiaries, depending on the context.
Exit of TXU Europe Business - In October 2002, TXU Corp. wrote off its
investment in TXU Europe. The results of operations for all periods presented
have been restated to reflect the operations in Europe as discontinued. See Note
3 for a summary of discontinued results.
Basis of Presentation -- The condensed consolidated financial
statements of TXU Corp. and its subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States of America
(US GAAP) and, except for the rescission of Emerging Issues Task Force (EITF)
Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities," the adoption of Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations " and the
adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" discussed below,
on the same basis as the audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 2002 (2002 Form 10-K). 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. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with US GAAP have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Because the
consolidated interim financial statements do not include all of the information
and footnotes required by US GAAP, they should be read in conjunction with the
audited financial statements and related notes included in the 2002 Form 10-K.
The results of operations for an interim period may not give a true indication
of results for a full year. 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. Certain previously reported amounts have
been reclassified to conform to current classifications.
With respect to the telecommunications joint venture, Pinnacle One
(Pinnacle), in late February 2003, TXU Corp. and the joint venture partner
(Zenith, an unaffiliated statutory business trust with a bank as its trustee)
entered into a Put/Call Agreement that among other provisions, gave TXU Corp.
the right to buy from Zenith all of its interests in Pinnacle and Pinnacle's
general partner for $150 million in cash. In consideration of the rights
accorded TXU Corp. under the agreement and applicable accounting rules, TXU
Corp. consolidated the operations of Pinnacle in its financial statements
effective March 1, 2003. Previously, TXU Corp. used the equity method of
accounting for its investment in Pinnacle. Pinnacle's revenues for the month
ended March 31, 2003 were $16 million, and its net loss was $8 million. On a
proforma basis for the three months ended March 31, 2003, operating revenues
would have been $33 million higher had Pinnacle been consolidated at the
beginning of the period. TXU Corp. exercised its right under the Put/Call
Agreement and acquired all Zenith's interest on May 13, 2003. On May 14, 2003,
TXU Corp. finalized a formal plan to dispose of the telecommunications business
by sale. Accordingly, activities of Pinnacle will be reported as discontinued
operations.
5
The following summarizes the impact of the Pinnacle consolidation on
TXU Corp.'s balance sheet as of March 31, 2003:
Total current assets................................. $ 30
Investments.......................................... 36
Property, plant and equipment - net.................. 236
Goodwill............................................. 317
Other noncurrent assets.............................. 3
------
Total assets................................... $ 622
======
Total current liabilities............................ $ 42
Accumulated deferred income tax ..................... (16)
Other noncurrent liabilities......................... (219)
Long-term debt, less amounts due currently ($2 million) 829
Retained earnings.................................... (8)
Accumulated other comprehensive income............... (6)
-------
Total liabilities and shareholders' equity..... $ 622
======
The reduction in other noncurrent liabilities reflects the
elimination of the negative investment in Pinnacle, less the recording of the
minority interest, as a result of the consolidation.
Changes in Accounting Standards -- In October 2002, the EITF rescinded
EITF Issue No. 98-10, which required mark-to-market accounting for all trading
activities. SFAS No. 143 became effective on January 1, 2003. As a result of the
implementation of these two accounting standards, TXU Corp. recorded a
cumulative effect of changes in accounting principles as of January 1, 2003.
(See Note 2 for a discussion of the impacts of these two accounting standards.)
As a result of guidance provided in 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," TXU Corp.
has not recognized origination gains on commercial/industrial retail contracts
in 2003. For the three months ended March 31, 2002, TXU Corp. had recognized $13
million in origination gains on such contracts.
SFAS No. 145, became 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." As required by the standard, the
results for the three months ended March 31, 2002 reflects a reclassification of
a previously reported extraordinary loss of $17 million (after-tax) on the early
extinguishment of debt to other deductions ($26 million) and income tax expense
($9 million) as the loss 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," 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. The
adoption of SFAS No. 146 did not materially impact results of operations for
the three months ended March 31, 2003.
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
provides transition alternatives when companies adopt fair value accounting for
stock-based compensation. TXU Corp. accounts for certain of its stock-based
compensation plans, including stock options, using the intrinsic value method.
TXU Corp. does not currently issue stock options, and only approximately 26,000
previously issued options remain outstanding at March 31, 2003. Had compensation
expense for these stock-based compensation plans been determined based upon the
fair value methodology prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation", TXU Corp.'s net income and per share amounts would
not have been materially different from reported amounts.
6
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" requires recording
the fair value of guarantees upon issuance or modification after December 31,
2002. The interpretation also requires expanded disclosures of guarantees (see
Note 7 under Guarantees). The adoption of FIN No. 45 did not materially impact
results of operations for the three months ended March 31, 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 existing variable interest entities in the
quarter ending September 30, 2003 and immediately for any new variable interest
entities.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities," was issued in April 2003 and becomes effective on June
30, 2003. SFAS No. 149 clarifies the definition of a derivative and the
treatment in the statement of cash flows when a derivative contains a financing
component.
For accounting standards not yet adopted or implemented, TXU Corp. is
evaluating the potential impact on its financial position and results of
operations.
Earnings Per Share -- Basic earnings per share applicable to common
stock are based on the weighted average number of common shares outstanding
during the quarter. Diluted earnings per share include the effect of all
potential issuances of common shares under certain debt securities and other
arrangements. For the quarter ended March 31, 2003, the $750 million
exchangeable subordinated notes issued in November 2002 were dilutive and were
included in the calculation of diluted earnings per share. Assuming these
securities were converted to common stock at the beginning of the period at the
exercise price of $13.1242 per share, 57.1 million more shares would have been
issued and net income would have increased by $12.6 million, representing the
after-tax interest savings on the notes.
Additional dilution of earnings per share would result from
approximately 7.0 million shares and 18.0 million shares of common stock
issuable 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 end of a reporting period is above the strike
price of $62.91 and $55.68 per share, for the respective issuances.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for the three months
ended March 31, 2003 for changes in accounting principles effective January 1,
2003:
Charge from rescission of EITF Issue No. 98-10, net of tax effect of $34 million....... $(63)
Credit from adoption of SFAS No. 143, net of tax effect of $3 million.................. 5
----
Total net charge.................................................................. $(58)
====
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,
"Accounting for Derivative Instruments and Hedging Activities," 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 $97 million ($63 million after-tax) has been reported by TXU Energy
as a cumulative effect of a change in accounting principles in the first quarter
of 2003. Of the total, $75 million reduced net commodity contract assets and
liabilities and $22 million reduced inventory that had previously been
marked-to-market as a trading position. The cumulative effect adjustment
represents the net gains previously recognized for these contracts under
mark-to-market accounting.
7
SFAS No. 143 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 of its inception. For TXU Corp., such
liabilities relate to nuclear generation plant decommissioning, land reclamation
related to lignite mining and removal of lignite plant ash treatment facilities.
The liability is recorded at its net present value with a corresponding increase
in the carrying value of the related long-lived asset. The liability is accreted
each period, representing the time value of money, and the capitalized cost is
depreciated over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (which was previously reflected in accumulated depreciation) TXU Corp.
had previously recorded as depreciation expense and $26 million (reflected in
other noncurrent liabilities) of unrealized net gains associated with the
decommissioning trust.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS No. 143:
Increase in property, plant and equipment - net......... $488
Increase in other noncurrent liabilities and deferred
credits............................................... (528)
Increase in accumulated deferred income taxes........... (3)
Increase in regulatory assets - net..................... 48
----
Cumulative effect of change in accounting principles.... $ 5
====
The asset retirement liability at March 31, 2003 was $560 million,
comprised of the $554 million liability as a result of adoption of SFAS No. 143
and $6 million of accretion during the period.
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 regulated decommissioning fees from retail
electric providers on behalf of TXU Energy, and will be deferring such
differences as part of the regulatory cost-recovery process.
On a pro forma basis, prior to deregulation in January 2002,
TXU Corp.'s earnings for the years ended December 31, 2001 and 2000 would not
have been impacted by the adoption of SFAS No. 143. Assuming SFAS No. 143 had
been adopted at the beginning of the periods, earnings for the year ended
December 31, 2002 and the three months ended March 31, 2002, would have
increased by $6.5 million and $1.5 million, respectively, and the liability for
asset retirement obligations as of December 31, 2001, March 31, 2002, and
December 31, 2002, would have been $522 million, $531 million and $554 million,
respectively.
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial
information of TXU Europe reported as discontinued operations:
Three Months Ended
March 31, 2002
------------------
Operating revenues...................................... $1,510
Operating costs and expenses............................ 1,445
Other deductions-- net.................................. 3
Interest income......................................... (6)
Interest expense and other charges...................... 83
------
Loss before income taxes................................ (15)
Income tax benefit...................................... (13)
------
Loss from discontinued operations .................. $ (2)
======
Additional legal, audit and administrative expenses of $4 million ($3
million after-tax) related to TXU Europe were accrued in the three months ended
March 31, 2003.
8
4. FINANCING ARRANGEMENTS
Credit Facilities -- At March 31, 2003, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of approximately $1.0
billion and commercial paper (in Australia) of $24 million. Weighted average
interest rates on short-term borrowings were 2.84% and 2.60% at March 31, 2003
and December 31, 2002, respectively.
During the first quarter of 2003, $1.3 billion in outstanding
short-term borrowings were repaid with proceeds from the issuance of long-term
debt in March 2003 and cash flows from operations.
At March 31, 2003, TXU Corp. and its subsidiaries had credit
facilities (some of which provide for long-term borrowings) as follows:
At March 31, 2003
--------------------------------------------------
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 $ 152 $ 500 $ 348
364-Day Senior Secured Credit Facility December 2003 Oncor 150 -- -- 150
Five -Year Revolving Credit Facility February 2005 US Holdings 1,400 371 -- 1,029
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 500 --
------- ------ ------ ------
Total North America $ 3,050 $ 523 $1,000 $1,527
Senior Facility (a) October 2004 TXU Australia $ 1,052 $ -- $ 850 $ 198
Working Capital Facility October 2003 TXU Australia 60 -- 18 42
Standby Facility (a) December 2003 TXU Australia 20 -- -- --
------- ------ ------ ------
Total Australia $ 1,132 $ -- $ 868 $ 240
(a) Commercial paper borrowings totaling $24 million at March 31, 2003 were
supported by the Standby Facility ($20 million) and the Senior Facility ($4
million).
In April 2003, all outstanding cash borrowings under the North
America credit facilities were repaid. A new $450 million revolving credit
facility was established for TXU Energy and Oncor that matures on February 25,
2005. The new facility will be used for working capital and other general
corporate purposes, including commercial paper backup and letters of credit, and
replaces the $1 billion 364-day revolving credit facility that expired in April
2003. Up to $450 million of letters of credit may be issued under the facility.
In connection with the restructuring of the North America credit
facilities of TXU Corp. and its subsidiaries in April 2003:
o Oncor cancelled its undrawn $150 million secured 364-day credit
facility that was scheduled to expire in December 2003.
o US Holdings replaced TXU Corp. as the borrower under the $500
million three-year revolving credit facility. Concurrently, the
facility was reduced to $400 million and TXU Corp. entered into
additional separate revolving credit facilities of $45 million and
$55 million, each of which expires on May 1, 2005.
o US Holdings' $1.4 billion five-year revolving credit facility was
amended. Among other things, the amendment increased the amount of
letters of credit allowed to be issued under the facility to $1
billion from $500 million.
9
As a result of the repayments and other activities discussed above,
TXU Corp. and its North America subsidiaries' credit facilities as of May 13,
2003 were as follows:
At May 13, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
Five-Year Revolving Credit Facility February 2005 US Holdings $ 1,400 $ 377 $ -- $1,023
Revolving Credit Facility February 2005 TXU Energy, Oncor 450 -- -- 450
Three-Year Revolving Credit Facility May 2005 US Holdings 400 -- -- 400
Revolving Credit Facility May 2005 TXU Corp. 55 -- -- 55
Revolving Credit Facility May 2005 TXU Corp. 45 -- -- 45
------- ------ ------ ------
Total North America $ 2,350 $ 377 $ -- $1,973
Australia's credit facilities were not affected by the above
refinancings.
In addition to providing back-up of commercial paper issuance by TXU
Energy and Oncor, the North America facilities above are for general corporate
and working capital purposes, including providing collateral support for TXU
Energy portfolio management activities. At March 31, 2003 and May 13, 2003,
there was no outstanding commercial paper under these programs.
10
Long-Term Debt -- At March 31, 2003 and December 31, 2002, the
long-term debt of TXU Corp. and its consolidated subsidiaries consisted of the
following:
March 31, December 31,
--------- ------------
2003 2002
TXU Energy ---- ----
- ----------
Pollution Control Revenue Bonds:
Brazos River Authority:
Floating Taxable Series 1993 due June 1, 2023.................................... $ -- $ 44
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
6.750% Fixed Series 1999B due September 1, 2034(c)............................... 16 16
7.700% Fixed Series 1999C due March 1, 2032(c)................................... 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
1.500% Floating Taxable Series 2001F due December 31, 2036(d).................... 39 39
1.500% Floating Taxable Series 2001G due December 31, 2036(d).................... 72 72
1.360% Floating Taxable Series 2001H due December 31, 2036(d).................... 31 31
1.310% Floating Taxable Series 2001I due December 31, 2036(d).................... 63 63
1.250% Floating Series 2002A due May 1, 2037(d).................................. 61 61
6.750% Fixed Series 2003A due April 1, 2038(c).................................. 44 --
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
1.500% Floating Taxable Series 2001D due December 31, 2036(d).................... 12 12
1.360% Floating Taxable Series 2001E due December 31, 2036(d).................... 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 LP due May 1, 2003................ 72 72
6.875% Fixed Senior Notes - TXU Mining Company LP due August 1, 2005............. 30 30
9.000% Fixed Exchangeable Subordinated Notes due November 22, 2012............... 750 750
6.125% Fixed Senior Notes due March 15, 2008..................................... 250 --
7.000% Fixed Senior Notes due March 15, 2013..................................... 1,000 --
Capital lease obligations........................................................ 10 10
Other............................................................................ 8 8
Unamortized premium and discount................................................. (116) (110)
------ ------
Total TXU Energy ............................................................ 3,849 2,605
------ ------
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 73
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 67 68
2.150% 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 US Holdings ........................................................... 159 160
------ ------
11
March 31, December 31,
--------- ------------
2003 2002
---- ----
Oncor
- -----
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... -- 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... -- 11
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. -- 133
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. 70 70
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
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. 133 133
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................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized premium and discount and fair value adjustments...................... (32) (35)
------ ------
Total Oncor.................................................................. 4,151 4,399
------ ------
TXU Gas
- -------
6.250% Fixed Notes due January 1, 2003........................................... -- 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 1
------- -------
Total TXU Gas ............................................................... 426 551
------- -------
TXU Australia
- -------------
5.570% Floating Notes due October 30, 2003(b).................................... 18 17
5.222% Floating Notes due September 21, 2007(b).................................. 165 155
5.763% Floating Note, Tranche A Facility due October 26, 2004(b)................. 24 23
5.760% Floating Note, Tranche A Facility due October 26, 2004(b)................. 75 142
5.710% Floating Note, Tranche B Facility due October 26, 2004(b)................. 120 113
5.723% Floating Note, Tranche B Facility due October 26, 2004(b)................. 36 34
5.740% Floating Note, Tranche B Facility due October 26, 2004(b)................. 66 62
5.710% Floating Note, Tranche B Facility due October 26, 2004(b)................. 78 73
5.832% Floating Note, Tranche C Facility due October 26, 2004(b)................. 331 311
5.907% Floating Note, Tranche C Facility due October 26, 2004(b)................. 120 113
7.000% Fixed Medium Term Notes due September 22, 2005............................ 120 113
5.260% Floating Senior Notes due December 1, 2006(b)............................. 217 203
5.510% Floating Senior Notes due December 1, 2016(a)............................. 74 70
Unamortized premium and discount and fair value adjustments...................... 81 99
------ ------
Total TXU Australia.......................................................... 1,525 1,528
------ ------
12
March 31, December 31,
--------- ------------
2003 2002
---- ----
Corporate and Other
8.830% Fixed Senior Secured Notes due August 15, 2004 (e)....................... 810 --
7.270% to 8.640% Fixed Mortgage Notes due December 20, 2013 (e)................ 18 --
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.......................... 323 323
4.050% Fixed Senior Notes Series E due August 16, 2004.......................... 2 2
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)............. 440 440
6.000% Fixed Telecom Overfund Trust Debt due bi-annually through August 15, 2004 135 178
11.98% Floating Notes due monthly through October 31, 2007 (a).................. 4 4
8.820% Building Financing due bi-annually through February 11, 2022............. 135 140
Capital Lease Obligation (e).................................................... 3 --
Unamortized premium and discount................................................ 43 50
------ ------
Total Corporate and Other.................................................. 4,088 3,312
------ ------
Total TXU Corp. consolidated.................................................... 14,198 12,555
Less amount due currently....................................................... 739 958
------ ------
Total Long-Term Debt............................................................ $13,459 $11,597
======= =======
NOTES:
(a) Interest rates in effect at March 31, 2003. (b) Interest rates fixed by
swaps at March 31, 2003.
(c) These series are in the multiannual mode and 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 March 31, 2003. These series are in a
flexible or weekly rate mode and are classified as long-term as they
are supported by long-term irrevocable letters of credit. Series
in the flexible mode will be remarketed for periods of less than 270
days.
(e) These obligations relate to Pinnacle. See Basis of Presentation in
Note 1 for discussion of Pinnacle consolidation.
In January 2003, TXU Gas redeemed, at par value, $125 million
principal amount 6.25% Notes at maturity. TXU Gas used cash advances from TXU
Corp. and cash on hand to fund the redemption of these notes.
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 in the amount of $250 million is due March
15, 2008, and bears interest at the annual rate of 6.125%, and the other series
in the amount of $1 billion is due March 15, 2013, and bears interest at the
annual rate of 7%. Net proceeds from the issuance were used for general
corporate purposes, including the repayment of borrowings under credit
facilities.
In March 2003, Oncor redeemed all ($103 million principal amount) of
its First Mortgage and Collateral Trust Bonds, 8.75% Series due November 1,
2023, at 104.01% of the principal amount thereof, plus accrued interest to the
redemption date.
In March 2003, Oncor redeemed all ($133 million principal amount) of
its First Mortgage Bonds, 6.75% Series, at the maturity date for par value plus
accrued interest. A restricted cash deposit of $138 million was utilized to fund
the redemption.
In March 2003, the Brazos River Authority issued $44 million
aggregate principal amount of pollution control revenue bonds for TXU Energy.
The bonds will bear interest at the annual rate of 6.75% until the mandatory
tender date of April 1, 2013. On April 1, 2013, the bonds will be remarketed.
Proceeds from the issuance of the bonds were used to refund the entire principal
amount of Brazos River Authority Series 1993 pollution control revenue bonds due
June 1, 2023.
13
In March 2003, the Brazos River Authority Series 1999B and 1999C
pollution control revenue bonds (aggregate principal amount of $66 million)
were converted from a floating rate mode to a multiannual mode at annual rates
of 6.75% and 7.7%, respectively. These rates will remain in effect until 2013
at which time they will be remarketed and the 1999C bonds will be callable.
In April 2003, the Brazos River Authority Series 1999A pollution
control revenue bonds were remarketed. The bonds now bear interest at a fixed
annual rate of 7.70% and are callable beginning on April 1, 2013 at a price of
101% until March 31, 2014 and at 100% thereafter.
In April 2003, Oncor redeemed all ($70 million principal amount)
of its First Mortgage Bonds, 6.75% Series, at the maturity date for par value
plus accrued interest. The remaining restricted cash deposit of $72 million was
utilized to fund the redemption.
On May 1, 2003, $72 million principal amount of the 7% TXU
Mining Company LP (TXU Mining) fixed rate senior notes were repaid on maturity.
Australia -- At March 31, 2003, TXU Australia had A$505 million ($303
million) in medium-term notes outstanding, of which interest and principal
payments associated with A$475 million ($285 million) were guaranteed under a
policy of insurance. The medium-term notes have three tranches consisting of
fixed and variable rates of which A$30 million ($18 million) is due October 2003
and the remainder is due between September 2005 and September 2007.
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 March 31, 2003, 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 March 31, 2003, $1.2 billion face
amount of receivables were sold to TXU Receivables Company under the program in
exchange for cash of $302 million and $907 million in subordinated notes, with
$5 million of losses on sales for the three months ended March 31, 2003 that
principally represents the interest costs on the underlying financing. These
losses approximated 6% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis. Funding under the program
decreased from $406 million at December 31, 2002 to $302 million at March 31,
2003 primarily due to reserve requirements which apply factors from the prior
12-month period in determining the current period reserve. This period reflects
the billing and collection delays previously experienced as a result of new
systems and processes in TXU Energy and the Electric Reliability Council of
Texas (ERCOT) for clearing customers switching and billing data upon the
transition to competition.
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 amended to allow receivables that are 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
14
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 all
originators and the 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 and the financial institutions do not
waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first quarter of 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 billing delays have been resolved but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios into 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 and the parent guarantor, if
any, 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 $50,000. If either an originator, TXU
Business Services Company or TXU Receivables Company defaults on indebtedness of
the applicable threshold, the facility could terminate.
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 March 31, 2003, TXU Corp. and
its subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its
subsidiaries contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material cross
default 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.
15
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million. A default by TXU Australia would not trigger the cross
default provision contained in these facilities.
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
$1.4 billion US Holdings five-year revolving credit facility, the $400 million
US Holdings credit facility, the $68.1 million US Holdings letter of credit
reimbursement and credit facility agreement and $102 million of TXU Mining
senior notes (which have a $1 million threshold).
A default by TXU Energy or Oncor or any subsidiary thereof in respect
of indebtedness in a principal amount in excess of $50 million or more would
result in a cross default for such party under the TXU Energy/Oncor $450 million
revolving credit facility. Under this 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, 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, but not as to TXU Energy.
A default or similar event under the terms of TXU Energy's
exchangeable subordinated notes (or any security of TXU Energy or its
subsidiaries issued directly or indirectly upon the conversion, exchange or
extension (in whole or in part) of such notes) that results in the acceleration
(or other mandatory repayment prior to the maturity date) of such notes or such
other security or the failure to pay such notes or such other security at
maturity would result in a default under TXU Energy's $1.25 billion senior
unsecured notes.
TXU Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust ($135 million outstanding at March 31, 2003) and Pinnacle's 8.83%
Senior Secured Notes due 2004 ($810 million outstanding at March 31, 2003)
contain cross default provisions relating to a failure to pay principal or
interest on indebtedness of TXU Corp. or TXU Communications Ventures Company (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 $124 million that would terminate upon the default of
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
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.
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.
16
5. TRUST SECURITIES
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)-- The statutory
business trust subsidiaries had Trust Securities and trust assets outstanding as
follows:
Trust Securities Maturity
-------------------------------------------------- Trust Assets --------
Units (000's) Amount Amount
------------------------ ------------------------
March 31, December 31, March 31, December 31, March 31, December 31,
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
TXU Corp.
- ---------
TXU Corp. Capital I
(7.25% Series)..... 9,200 9,200 $223 $ 223 $237 $237 2029
TXU Corp. Capital II
(8.70% Series)..... 6,000 6,000 145 145 155 155 2034
------ ------ ---- ----- ---- ----
Total TXU Corp..... 15,200 15,200 368 368 392 392
------ ------ ---- ----- ---- ----
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(a).... 150 150 147 147 155 155 2028
------ ------ ---- ----- ---- ----
Total.............. 15,350 15,350 $515 $ 515 $547 $547
====== ====== ==== ===== ==== ====
(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.
6. SHAREHOLDERS' EQUITY
March 31, December 31,
2003 2002
------- ------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption........... $ 300 $ 300
------ ------
Common stock without par value:
Authorized shares: 1,000,000,000
Outstanding shares: March 31, 2003 -- 322,155,194
and December 31, 2002-- 321,974,000 ....................... 10 7,995
Additional paid in capital...................................... 8,097 111
Retained deficit................................................ (2,899) (2,900)
Accumulated other comprehensive loss............................ (418) (440)
------- -------
Total common stock equity.................................. 4,790 4,766
------ ------
Total shareholders' equity............................... $5,090 $5,066
====== ======
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 and preferred stock (stated capital). The write-off in 2002 of
TXU Corp.'s investment in TXU Europe resulted in negative surplus as of December
31, 2002. 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 was
reclassified from stated capital to additional paid-in capital, resulting in
surplus of $4.78 billion at March 31, 2003.
17
Additional paid-in capital includes $109 million and $111 million
of discount on the 9% Fixed Enchangeable Subordinated Notes of TXU Energy at
March 31, 2003 and December 31, 2002, respectively.
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 flows and capital requirements as
well as financial and other business conditions existing at the time.
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 March 31, 2003, there were no restrictions
on the payment of dividends under these provisions.
7. CONTINGENCIES
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 nuclear
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 March 31, 2003, 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 March 31, 2003, 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 $9 million and the maximum total potential payout is approximately
$56 million. The fair value of guarantees issued during the three months ended
March 31, 2003 was $1.8 million with a maximum potential payout of $42 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 were outstanding at March 31,
2003 to support existing floating rate pollution control revenue bond debt of
approximately $432 million. The letters of credit are available to fund the
payment of such debt obligations. These letters of credit have expiration dates
in 2003 and 2004; 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. In April 2003, approximately $173 million of the $523
million of letters of credit referenced above were terminated as a result of the
refinancing of approximately $110 million of floating rate pollution control
revenue bonds.
TXU Corp. has outstanding letters of credit in the amount of $111
million to support portfolio management margin requirements in the normal
course of business. As of March 31, 2003, approximately 78% 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 an outstanding letter of credit in the amount of $34
million as support for a subordinated loan related to a pipeline construction
project in Australia. The obligation expires on January 31, 2005.
18
TXU Australia has outstanding letters of credit in the amount of
approximately $57 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 outstanding surety bonds of
approximately $48 million to support performance under various subsidiary
construction contracts in the normal course of business. The term of the surety
bond obligations is approximately two years.
Other -- 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 March 31, 2003,
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 5.50% 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. 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 in connection with $19 million remaining principal amount of bonds
at March 31, 2003, 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.
In 1992, a discontinued engineering and construction business of TXU
Gas completed construction of a plant, the performance of which is warranted
through 2008. The maximum contingent liability under the guarantee is $92
million. No claims have been asserted under the guarantee and none are
anticipated.
Income Tax Contingencies -- On its United States federal income tax
return for calendar year 2002, TXU Corp. claimed a deduction related to the
worthlessness of TXU Corp.'s investment in TXU Europe, the tax benefit of which
is now expected to be $983 million. The previous estimate of the tax benefit was
$1.2 billion. While TXU Corp. believes that its tax reporting for the TXU Europe
write-off was proper, there is a risk that the Internal Revenue Service could
challenge TXU Corp.'s position regarding this deduction. As previously reported,
TXU Corp. has not recognized in book income any tax benefit for the TXU Europe
deduction. In the first quarter of 2003, TXU Corp. received a cash refund of
$527 million related to the deduction, which may be repaid in the future, with
interest, should TXU Corp. not prevail in its position.
Legal Proceedings -- In October, November and December 2002 and
January 2003, at least twenty-nine 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),
19
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 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. While TXU Corp. believes the claims are 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.
On April 28, 2003, a lawsuit was filed by a former employee
of TXU Portfolio Management Company LP (TXU Portfolio Management), in the
United States District Court for the Northern District of
20
Texas, Dallas Division, against TXU Corp., TXU Energy and TXU Portfolio
Management. Plaintiff asserts claims under Section 806 of the Sarbanes Oxley-Act
of 2002 (Sarbanes-Oxley) arising from plaintiff's employment termination and
claims for breach of contract relating to payment of certain bonuses. Plaintiff
seeks back pay, payment of bonuses and alternatively, reinstatement or future
compensation, including bonuses. TXU Corp. believes the plaintiff's claims are
without merit. The plaintiff was terminated as the result of a reduction in
force, not as a reaction to any concerns the plaintiff had expressed and
plaintiff was not in a position with TXU Portfolio Management such that he had
knowledge or information that would qualify the plaintiff to evaluate TXU
Corp.'s financial statements or assess the adequacy of TXU Corp.'s financial
disclosures. Thus, TXU Corp. does not believe that there is any merit to the
plaintiff's claims under Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and
TXU Portfolio Management intend to vigorously defend the litigation. While TXU
Corp., TXU Energy and TXU Portfolio Management dispute the plaintiff's claims,
like any litigation, TXU Corp. is unable to predict the outcome of this
litigation or the possible loss in the event of an adverse judgment.
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.
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.
8. SEGMENT INFORMATION
TXU Corp. has three reportable segments: North America Energy,
North America Energy Delivery and Australia.
North America Energy - consists of operations of TXU Energy, which
are principally in the competitive Texas market, involving power production,
wholesale energy sales, retail energy sales and services, and portfolio
management, including risk management and certain trading activities.
North America Energy Delivery - consists of operations of Oncor
and TXU Gas, which are largely regulated, involving the transmission and
distribution of electricity and the purchase, transportation, distribution and
sale of natural gas in Texas.
Australia - consists of 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.
Effective with reporting for the three months ended March 31, 2003,
results for the North America Energy segment exclude expenses incurred by the US
Holdings holding company in order to present the segment on the same basis as
the separate reporting for TXU Energy Company LLC and as the results of the
business are evaluated by management. The activities of the holding company
consist primarily of the servicing of approximately $160 million of debt. Prior
year amounts are presented on the revised basis.
21
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. Effective January 1, 2003, TXU Business Services Company billings
for such services in Corporate and Other are reflected as allocation of costs.
Prior year amounts have been reclassified to conform to this presentation.
Three Months Ended
March 31,
2003 2002
Operating revenues -
North America Energy................... $ 1,806 $1,799
North America Energy Delivery.......... 1,127 838
Australia.............................. 225 212
Corporate and other ................... 43 30
Eliminations........................... (386) (426)
------- ------
Consolidated......................... $ 2,815 $2,453
======= ======
Regulated revenues included in
operating revenues -
North America Energy .................. $ - $ -
North America Energy Delivery.......... 1,127 838
Australia.............................. 20 14
Corporate and other.................... 35 23
Eliminations........................... (380) (419)
-------- -------
Consolidated......................... $ 802 $ 456
======= ======
Affiliated revenues included in
operating revenues -
North America Energy .................. $ 6 $ 7
North America Energy Delivery.......... 380 419
Corporate and other.................... - -
Eliminations........................... (386) (426)
------- -------
Consolidated......................... $ - $ -
======= ======
Income from continuing operations
before cumulative effect of changes
in accounting principles -
North America Energy .................. $ 35 $ 187
North America Energy Delivery.......... 110 101
Australia ............................. 27 51
Corporate and other.................... (66) (82)
------- ------
Consolidated......................... $ 106 $ 257
======= ======
22
9. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Operating revenues:
Regulated................................................. $ 1,182 $ 875
Unregulated............................................... 2,019 2,004
Intercompany sales eliminations - regulated............... (380) (419)
Intercompany sales eliminations - unregulated ............ (6) (7)
------ ------
Total operating revenues.............................. 2,815 2,453
------ ------
Costs and operating expenses:
Cost of energy sold and delivery fees - regulated........... 457 203
Cost of energy sold and delivery fees - unregulated*........ 930 597
Operating costs - regulated................................. 212 187
Operating costs - unregulated............................... 217 178
Depreciation and amortization - regulated................... 100 91
Depreciation and amortization - unregulated................. 127 129
Selling, general and administrative expenses - regulated.... 41 41
Selling, general and administrative expenses - unregulated.. 221 297
Franchise and revenue-based taxes - regulated............... 74 79
Franchise and revenue-based taxes - unregulated............. 37 39
Other income................................................ (14) (7)
Other deductions............................................ 20 47
Interest income............................................. (10) (8)
Interest expense and other charges.......................... 254 216
----- ------
Total costs and expenses............................... 2,666 2,089
----- ------
Income from continuing operations before income taxes and
cumulative effect of changes accounting principles.......... $ 149 $ 364
====== ======
--------------
*Includes cost of fuel consumed of $425 million in 2003 and $270
million in 2002. 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.
Other Income and Deductions --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Other income:
Net gain on sale of businesses and other properties. $ 6 $ 1
Lignite coal royalties.............................. - 2
Unrealized foreign exchange gain on Australian dollar
denominated note receivable..................... 5 -
Allowance for funds used during construction........ 1 1
Other............................................... 2 3
---- ----
Total other income............................. $ 14 $ 7
==== ====
Other deductions:
Equity in losses of unconsolidated entities......... $ 16 $ 14
Loss on retirement of debt.......................... - 26
Charges related to sold business.................... - 3
Other............................................... 4 4
---- ----
Total other deductions......................... $ 20 $ 47
==== ====
23
Interest Expense and Related Charges --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Interest................................................... $ 233 $ 198
Distributions on mandatorily redeemable, preferred securities
of subsidiary trusts, each holding solely junior subordinated
debentures of the obligated company:
TXU Corp. obligated................................... 8 8
Subsidiary obligated.................................. 2 2
Preferred stock dividends of subsidiaries................... 3 3
Amortization of debt discounts, premiums and issuance cost.. 11 8
Allowance for borrowed funds used during construction
and capitalized interest................................. (3) (3)
----- -----
Total interest expense and other related charges.... $ 254 $ 216
===== =====
Regulatory Assets and Liabilities --
March 31, December 31,
2003 2002
------- ------
Regulatory Assets:
Generation-related regulatory assets subject to securitization $1,652 $1,652
Securities reacquisition costs............................. 125 124
Recoverable deferred income taxes - net.................... 69 76
Other regulatory assets.................................... 300 217
------ ------
Total regulatory assets.................................. 2,146 2,069
------ ------
Regulatory Liabilities:
Liability related to excess mitigation credit.............. 125 170
ITC and protected excess deferred taxes.................... 96 99
Other regulatory liabilities............................... 2 28
------ ------
Total regulatory liabilities............................. 223 297
------ ------
Net regulatory assets.................................... $1,923 $1,772
====== ======
Included above are assets of $1.9 billion at March 31, 2003 and $1.8
billion at December 31, 2002, that were not earning a return. Of the assets not
earning a return, $1.652 billion is expected to be recovered over the term of
the securitization bonds expected to be issued by Oncor in 2003 and 2004
pursuant to the regulatory settlement plan approved by the Commission. All
other regulatory assets have a remaining recovery period of 13 to 48 years.
Included in other regulatory assets as of March 31, 2003 was $57
million related to nuclear decommissioning liabilities. (See Note 2 for a
discussion of the accounting impact of recording asset retirement obligations.)
Restricted Cash -- At March 31, 2003, approximately $72 million of
the net proceeds from Oncor's issuance of senior secured notes in December 2002
remained in a trust to pay interest and principal of First Mortgage Bonds of
Oncor due on April 1, 2003, and was reported in current assets on the balance
sheet. Other restricted cash included $111 million as collateral for letters of
credit issued and was reported in investments on the balance sheet.
Accounts Receivable -- At March 31, 2003 and December 31, 2002,
accounts receivable are stated net of allowance for uncollectible accounts of
$87 million and $83 million, respectively.
24
Accounts receivable included $627 million and $644 million of
unbilled revenues at March 31, 2003 and December 31, 2002, respectively.
Intangible Assets -- SFAS No. 142, "Goodwill and Other Intangible
Assets," 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. SFAS No. 142 also requires additional disclosures
regarding intangible assets (other than goodwill) that are amortized or not
amortized:
As of March 31, 2003 As of December 31, 2002
------------------------------ ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ---- -------- ------------ ----
Amortized intangible assets (included in
property, plant and equipment):
Capitalized software.............. $ 563 $ 243 $320 $540 $217 $323
Land easements.................... 195 70 125 195 68 127
Mineral rights and other.......... 32 21 11 32 21 11
----- ----- ---- ------ ------ ------
Total....................... $ 790 $ 334 $456 $767 $306 $461
===== ===== ==== ==== ==== ====
Unamortized intangible assets -
Licenses (a)................ $ 336 $ 34 $302 $321 $ 32 $289
===== ===== ==== ==== ===== ====
(a) The amortization of indefinite-life licenses was suspended with the adoption
of SFAS No. 142.
Unamortized intangible assets are included with goodwill on the
balance sheet.
Aggregate TXU Corp. amortization expense for intangible assets was
$23 million and $22 million for the three months ended March 31, 2003 and 2002,
respectively.
Changes in the carrying amount of goodwill (net of accumulated
amortization) for the quarter ended March 31, 2002, are as follows:
North
North America
America Energy Corp. and
Energy Delivery Australia Other Total
------ -------- --------- ----- -----
Balance at December 31, 2002.............. $ 533 $ 331 $ 724 $ - $ 1,588
Goodwill from Pinnacle consolidation
(net of accumulated amortization of
$24 million)...................... - - - 317 317
Foreign currency translation effects - - 51 - 51
------- ------ -------- --------- ---------
Balance at March 31, 2003................ $ 533 $ 331 $ 775 $ 317 $ 1,956
======= ====== ======== ========= =========
At March 31, 2003 and December 31, 2002, goodwill was stated net of
accumulated amortization of $220 million and $189 million, respectively.
Commodity Contracts -- At March 31, 2003 and December 31, 2002,
current and noncurrent commodity contract assets totaling $2.0 billion are
stated net of applicable credit (collection) and performance reserves totaling
$38 million and $44 million, respectively. Performance reserves are provided for
direct, incremental costs to settle the contracts.
25
Inventories by Major Category --
March 31, December 31,
2003 2002
------- ------
Materials and supplies................. $ 230 $ 227
Fuel stock............................. 88 91
Gas stored underground................. 108 175
------ ------
Total inventories.................. $ 426 $ 493
====== ======
Inventories were reduced by $22 million as a result of the
rescission of EITF Issue No. 98-10 as discussed in Note 2.
Property, Plant and Equipment -- At March 31, 2003 and December 31,
2002, property, plant and equipment is stated net of accumulated depreciation
and amortization of $11.3 billion and $11.1 billion, respectively.
As of March 31, 2003, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.1 billion) was
pledged as collateral on Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- TXU Corp. experienced net hedge
ineffectiveness of $6 million, reported as a gain in revenues, for the three
months ended March 31, 2003.
As of March 31, 2003, it is expected that $109 million of after-tax
net losses accumulated in other comprehensive income, primarily related to
commodities hedges, will be reclassified into earnings during the next twelve
months. This amount represents the projected value of the hedges over the next
twelve months relative to what would be recorded if the hedge transactions had
not been entered into. The amount expected to be reclassified is not a
forecasted loss incremental to normal operations, but rather it demonstrates the
extent to which volatility in earnings and cash flows (which would otherwise
exist) is mitigated through the use of cash flow hedges.
Supplemental Cash Flow Information --
See Note 1 under Basis of Presentation for a summary of the balance sheet
impact of the consolidation of Pinnacle, which was a noncash activity.
See Note 2 for the effects of adopting SFAS No. 143, which was a noncash
transaction.
26
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries (TXU Corp.) as of March 31, 2003, and the related
condensed statements of consolidated income, comprehensive income and cash flows
for the three-month periods ended March 31, 2003 and 2002. These financial
statements are the responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report (which includes explanatory
paragraphs related to the adoption of Statement of Financial Accounting
Standards No. 142 and the discontinuance of European operations), dated February
14, 2003 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
As discussed in Note 1 to the Notes to Financial Statements, TXU Corp. changed
its method of accounting for asset retirement obligations in 2003 in connection
with the adoption of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations," changed its method of accounting
for certain contracts with the rescission of Emerging Issues Task Force Issue
98-10 "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," and changed its method of reporting gains and losses on the
extinguishment of debt in accordance with requirements of SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections."
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 2003
27
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
The term "TXU Corp.," refers to TXU Corp. and/or its consolidated
subsidiaries, depending on the context.
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).
With respect to the telecommunications joint venture, Pinnacle One
(Pinnacle), in late February 2003, TXU Corp. and the joint venture partner
(Zenith, an unaffiliated statutory business trust with a bank as its trustee)
entered into a Put/Call Agreement that among other provisions, gave TXU Corp.
the right to buy from Zenith all of its interests in Pinnacle and Pinnacle's
general partner for $150 million in cash. In consideration of the rights
accorded TXU Corp. under the agreement and applicable accounting rules, TXU
Corp. consolidated the operations of Pinnacle in its financial statements
effective March 1, 2003. Previously, TXU Corp. used the equity method of
accounting for its investment in Pinnacle. Pinnacle's revenues for the month
ended March 31, 2003 were $16 million, and its net loss was $8 million. On a
proforma basis for the three months ended March 31, 2003, operating revenues
would have been $33 million higher had Pinnacle been consolidated at the
beginning of the period. TXU Corp. exercised its right under the Put/Call
Agreement and acquired all Zenith's interest on May 13, 2003. On May 14, 2003,
TXU Corp. finalized a formal plan to dispose of the telecommunications business
by sale. Accordingly, activities of Pinnacle will be reported as discontinued
operations.
TXU Corp. has three reportable segments: North America Energy, North
America Energy Delivery and Australia. (See Note 8 to Financial Statements for
further information concerning reportable business segments.)
The following exchange rates have been used to convert foreign
currency denominated amounts into United States (US) dollars, unless they were
determined using exchange rates on the date of a specific event:
Income Statements
(Average Rates)
-----------------
Balance Sheets
----------------------- Three Months
Ended March 31,
March 31, December 31, ---------------
2003 2002 2003 2002
---- ---- ---- ----
Australian dollars (A$) $0.6013 $0.5650 $0.5928 $0.5188
Dollar amounts in the following tables are stated in millions of US
dollars unless otherwise noted.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Reference is made to comparisons of results by business segment
following the discussion of consolidated results presented below.
TXU Corp.'s operating revenues increased $362 million, or 15%, to $2.8
billion in 2003. Revenues in the North America Energy Delivery segment rose by
$289 million, or 34%, reflecting increases in both the electricity and gas
delivery businesses of $12 million and $277 million, respectively. The higher
28
gas delivery revenue reflected the effects of higher gas prices, colder weather
and improved rate structures. Revenues in the North America Energy segment
increased a nominal $7 million, reflecting a decline in large commercial and
industrial retail electric sales volumes and pricing, offset by higher wholesale
sales and favorable energy portfolio management activities. Operating revenues
rose $13 million, or 6%, in the Australia segment, driven by higher commercial
and industrial retail sales volumes and higher pricing.
Gross Margin
Three Months Ended
March 31,
-------------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues............................................... $ 2,815 100% $ 2,453 100%
Costs and expenses:
Cost of energy sold and delivery fees....................... 1,387 49% 800 32%
Operating costs............................................. 429 15% 365 15%
Depreciation and amortization related to operating assets... 207 8% 193 8%
------ ----- ------ -----
Gross margin..................................................... $ 792 28% $ 1,095 45%
====== ===== ====== =====
Gross margin decreased $303 million, or 28%, to $792 million in 2003,
driven by the North America Energy segment. This decline reflected lower volumes
and prices in the large commercial/industrial retail electric business, as well
as the effect of higher natural gas costs on fuel and purchased power costs and
higher operating costs, partially offset by favorable results from portfolio
management activities. Mark-to-market accounting for commodity contracts reduced
revenues and gross margin by $27 million in 2003 (as compared to accounting on a
settlement basis), and reduced results by $119 million in 2002. Operating costs
rose $64 million, or 18%, primarily due to employee severance costs associated
with cost reduction initiatives, higher pension and other postemployment costs,
increased insurance expenses and higher operating costs in the small strategic
retail services business.
Depreciation and amortization (including amounts shown in the gross
margin table above) increased $7 million, or 3%, to $227 million due primarily
to investments in systems to support competitive operations and normal
replacements of delivery facilities in the North America Energy Delivery
segment.
Effective with the second quarter of 2003, TXU Energy expects to
adjust depreciation rates related to its generation facilities based on a review
of the remaining estimated depreciable lives of its generation fleet. This
change in estimate is anticipated to result in a reduction of approximately $50
million in annual depreciation expense and is due to an extension in the
estimated useful life of its nuclear generation facility of approximately 11
years (to 2041), partially offset by higher depreciation expense in lignite and
gas facilities.
Selling, general and administrative (SG&A) expense decreased $76
million, or 22%, to $262 million in 2003. The decrease was driven by lower bad
debt expense and cost reductions initiatives. Bad debt expense declined
primarily due to the favorable resolution of most billing issues experienced in
2002 in connection with the transition to competition in Texas. Cost reductions,
primarily lower staffing and related administrative expenses, were initiated in
response to 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. The effects of these
cost reduction initiatives were partially offset by employee severance costs and
higher computer software costs and marketing expenses. Favorable comparisons of
SG&A expenses are expected to continue over the balance of 2003.
Franchise and revenue-based taxes decreased $7 million, or 6%, to
$111 million in 2003, due primarily to lower retail revenues on which gross
receipts taxes are based.
Other income increased $7 million to $14 million in 2003. The 2003
period includes a net $6 million gain on the sale of certain
commercial/industrial retail gas operations and $5 million of unrealized foreign
exchange gain on an Australian denominated note receivable.
29
Other deductions decreased $27 million to $20 million in 2003. The
2002 period includes a $26 million loss on retirement of debt. Equity losses on
unconsolidated subsidiaries, principally Pinnacle (until March 2003), were $16
million in 2003 and $14 million in 2002.
Interest income rose $2 million, or 25%, to $10 million in 2003. The
increase reflected higher cash balances on hand as credit facilities were drawn
down in the fourth quarter of 2002 to enhance liquidity.
Interest expense and other charges increased $38 million, or 18%, to
$254 million in 2003, reflecting a $24 million increase due to higher average
debt levels, resulting from funds drawn under the credit facilities and the
addition of Pinnacle to the balance sheet, an $11 million increase due to higher
average interest rates resulting from the replacement of short-term debt with
permanent financing, and a $3 million increase due to higher amortization of
discount on the TXU Energy exchangeable subordinated notes.
The effective income tax rate on income from continuing operations
before cumulative effect of changes in accounting principles of 28.9% in 2003
was comparable to the 29.4% effective rate in 2002.
Income from continuing operations before cumulative effect of changes
in accounting principles decreased $151 million, or 59%, to $106 million in
2003. This performance reflected a decline of $152 million, or 81%, in the North
America Energy segment, due primarily to lower gross margin and higher interest
expense, partially offset by lower SG&A expenses. The North America Energy
segment results also reflected a $16 million (after-tax) gain, primarily
reported in revenues, on the settlement of outstanding counterparty
default events and $11 million (after-tax) in severance charges. A decline in
the Australia segment of $24 million, or 47%, was offset by growth of $9
million, or 9% in the North America Energy Delivery segment and lower Corporate
and Other expenses of $16 million, or 20%. The decline in these expenses was due
primarily to the prior period loss on retirement of debt. The segment
performances are discussed below. Net pension and postretirement benefit costs
reduced net income by $24 million in 2003 and $14 million in 2002.
The cumulative effect of changes in accounting principles,
representing an after-tax charge of $58 million, reflects the rescission of
Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities," and the adoption of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." See Note 2 to Financial Statements for further
discussion.
Diluted earnings per share from continuing operations before
cumulative effect of changes in accounting principles available to common
shareholders decreased $0.65, or 68%, to $0.30 per share in 2003. Of this
decline, $0.28 per share is due to a 43% increase in average shares in the
computation and $0.37 per share is due to lower earnings. The increase in
average shares reflected the issuance of common stock in August and December
2002 and the dilutive effect of 57.1 million shares issuable in connection with
the $750 million of exchangeable subordinated notes issued in November 2002.
Net income available to common shareholders decreased $210 million,
or 84%, to $40 million in 2003. The decline reflected the $58 million charge
related to accounting changes and the $151 million earnings decrease before such
charge, as discussed above.
30
COMMODITY CONTRACTS AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets
and liabilities for the three months ended March 31, 2003, for continuing
operations. The net decrease, excluding "cumulative effect of change in
accounting principle" and "other activity" as described below, of $27 million
represents the net unfavorable effect of mark-to-market accounting on earnings
for the three months ended March 31, 2003. This effect represents the difference
between earnings under mark-to-market accounting versus accounting for gains and
losses upon settlement of the contracts.
Balance of net commodity contract assets at December 31, 2002............... $ 297
Cumulative effect of change in accounting principle (1) .................... (75)
Settlements of positions included in the opening balance (2) ............... (53)
Unrealized mark-to-market valuations of positions held at end of period(3).. 26
Other activity (4).......................................................... (12)
-----
Balance of net commodity contract assets at March 31, 2003 ................. $ 183
=====
--------------------------
(1) Represents a portion of the pre-tax cumulative effect of the rescission
of EITF Issue No. 98-10 (see Note 2 to Financial Statements).
(2) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the period.
(3) There were no significant changes in fair value attributable to changes
in valuation techniques.
(4) Includes initial values of positions assumed in acquisitions or
involving the receipt or payment of cash, or other consideration, such
as option premiums, amortization of such positions, the sale of
certain retail commercial and industrial gas operations and the impact
of currency translation. These activities have no effect on
unrealized mark-to-market valuations.
As a result of guidance provided in 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," TXU Corp.
has not recognized origination gains on commercial/industrial retail contracts
in 2003. (See Note 1 to Financial Statements.)
Maturity Table -- Of the net commodity contract asset balance above
at March 31, 2003, the amount representing unrealized mark-to-market net gains
that have been recognized in current and prior years' earnings is $269 million.
The offsetting net liability of $85 million included in the March 31, 2003
balance sheet is comprised principally of amounts representing current and prior
years' net receipts 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 March 31, 2003, scheduled by
contractual settlement dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at March 31, 2003
--------------------------------------------------------------------------
Maturity less Maturity in
than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years Total Total
- ---------------------- --------- ------------ ----------- ------- -----
Prices actively quoted........... $ 4 $ (1) $ - $ - $ 3
Prices provided by other
external sources............. 96 76 11 2 185
Prices based on models........... 46 15 1 19 81
---- ---- --- ---- ----
Total............................ $146 $ 90 $12 $ 21 $269
==== ==== === ==== ====
Percentage of total fair value... 54% 34% 4% 8% 100%
As the above table indicates, approximately 88% of the unrealized
mark-to-market valuations at March 31, 2003 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
31
positions at locations for which over-the-counter (OTC) broker quotes are
available. OTC quotes for power and natural gas generally extend through 2005
and 2010, respectively, in the US. 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.
SEGMENTS
North America Energy
- --------------------
Financial Results
Three Months Ended
March 31,
-------------------
2003 2002
----- -----
Operating revenues.......................................... $ 1,806 $ 1,799
------- -------
Costs and expenses:
Cost of energy sold and delivery fees.................. 1,218 941
Operating costs........................................ 193 162
Depreciation and amortization.......................... 113 119
Selling, general and administrative expenses........... 144 220
Franchise and revenue-based taxes ..................... 28 30
Other income .......................................... (8) (2)
Other deductions....................................... 2 3
Interest income........................................ (2) (9)
Interest expense and other charges..................... 77 59
------- -------
Total costs and expenses........................... 1,765 1,523
------- -------
Income before income taxes and cumulative effect of
changes in accounting principles........................ 41 276
Income tax expense.......................................... 6 89
------- -------
Income before cumulative effect of changes in accounting
principles................................................ $ 35 $ 187
======= =======
32
North America Energy
- --------------------
Segment Highlights
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Operating statistics:
Retail electric sales volumes (Gigawatt hours-GWh).......... 19,398 22,386
Wholesale electric sales volumes (GWh)...................... 7,451 6,199
Retail electric customers (end of period & in
thousands-number of meters)............................... 2,701 2,756
Operating revenues (millions of dollars):
Retail electric:
Residential............................................... $ 684 $ 695
Commercial and industrial ................................ 748 1,050
------- -------
Total.................................................. 1,432 1,745
Wholesale electric ......................................... 237 146
Wholesale portfolio management activities................... 91 (63)
Other revenues.............................................. 46 (29)
------- -------
Total operating revenues............................... $ 1,806 $ 1,799
======= =======
Weather (average for service territory)
Percent of normal:
Cooling degree days................................. 50.0% 94.1%
Heating degree days................................. 106.6% 101.5%
- --------------------------
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).
33
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Effective with reporting for the three months ended March 31, 2003, results
for the North America Energy segment exclude expenses incurred by the TXU US
Holdings Company (US Holdings) holding company in order to present the segment
on the same basis as the separate reporting for TXU Energy Company LLC and as
the results of the business are evaluated by management. The activities of the
holding company consist primarily of the servicing of approximately $160
million of debt. Prior year amounts are presented on the revised basis.
Operating revenues for the TXU Energy segment increased a nominal $7
million to $1.8 billion in 2003. Retail electric revenues declined $313 million,
or 18%, to $1.4 billion, reflecting a $233 million reduction due to lower
volumes and an $80 million reduction due to lower average prices. A 13% decline
in overall retail electric sales volumes was primarily due to the effects of
increased competitive activity in the large commercial and industrial segment of
the market. The price variance primarily reflects lower average commercial and
industrial prices, reflecting the effect of large customers remaining on
regulated or "standard offer" rates, some into the second quarter of 2002, while
evaluating competitive offers before contracting at new lower rates. Wholesale
electric revenues increased $91 million, or 62%, to $237 million reflecting a
$61 million increase due to higher average prices and a $30 million increase due
to higher volumes. Higher wholesale electric prices reflect significantly higher
natural gas costs. The increase in wholesale electric volumes reflected a
partial shift in the large commercial and industrial customer base from retail
to wholesale services. Wholesale portfolio management activities posted a net
improvement of $154 million due to the effect of favorable price movements on
commodity contract positions.
Gross Margin
Three Months Ended
March 31,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 1,806 100% $ 1,799 100%
Cost and expenses:
Cost of energy sold and delivery fees............. 1,218 67% 941 52%
Operating costs................................... 193 11% 162 9%
Depreciation and amortization related to operating
assets........................................ 102 6% 101 6%
------- ----- ------- ------
Gross margin........................................... $ 293 16% $ 595 33%
======= ===== ======= ======
Gross margin decreased $302 million, or 51%, to $293 million in 2003. The
decrease was driven by the lower volumes and prices in the large
commercial/industrial business, as well as the effect of higher natural gas
prices on fuel and purchased power costs, which was partially offset by the
favorable portfolio management results. Mark-to-market accounting for commodity
contracts reduced revenues and gross margin by $23 million in 2003 (as compared
to accounting on a settlement basis), and reduced results by $146 million in
2002. Operating costs rose $31 million, or 19%, to $193 million primarily due to
employee severance costs associated with cost reduction initiatives, higher
pension and other postemployment costs, increased insurance expenses and higher
operating costs in the small strategic retail services business.
34
The following table analyzes the North America Energy segment's gross
margin between its realized and unrealized components:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Gross margin.................................................. $ 293 $ 595
Noncash items:
Unrealized mark-to-market (gain) loss...................... 23 146
Depreciation and amortization related to generation assets. 99 97
Cash flow hedge ineffectiveness............................ (6) 8
Other noncash items included in gross margin............... 5 (14)
------ ------
Gross margin on a cash basis........................... $ 414 $ 832
====== ======
A decrease in depreciation and amortization (including amounts shown in the
gross margin table above) of $6 million, or 5%, to $113 million was primarily
due to timing of intangible asset amortization expense during the 2002 year.
Effective with the second quarter of 2003, TXU Energy expects to adjust
depreciation rates related to its generation facilities, based on a review of
the remaining depreciable lives of its generation fleet. This change in estimate
is anticipated to result in a reduction of approximately $50 million in annual
depreciation expense and is due primarily to an extension in the estimated
useful life of its nuclear generation facility of approximately 11 years (to
2041), partially offset by higher depreciation expense in lignite and gas
facilities.
A decrease in SG&A expenses of $76 million, or 35%, to $144 million
reflected lower bad debt expense of $54 million and cost reduction initiatives.
Bad debt expense declined primarily due to the favorable resolution of most
billing issues experienced in 2002 in connection with the transition to
competition in Texas. Cost reductions, primarily lower staffing and related
administrative expenses, were initiated in response to 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. The effects of these cost reduction initiatives were
partially offset by employee severance costs and higher computer software costs
and marketing expenses. Favorable comparisons of SG&A expenses are expected to
continue over the balance of 2003.
Franchise and revenue-based taxes declined by $2 million, or 7%, to $28
million due primarily to lower retail revenues on which gross receipts taxes are
based.
Other income increased by $6 million to $8 million, primarily reflecting a
net $6 million gain on the sale of certain retail commercial and industrial gas
operations.
Other deductions decreased by $1 million to $2 million, primarily due to
lower equity losses from an unconsolidated investment.
Interest income declined by $7 million, or 78%, to $2 million primarily due
to lower average advances to affiliates.
Interest expense and other charges increased $18 million, or 31%, to $77
million. The increase reflects $8 million due to higher average debt levels, $5
million due to higher interest rates, including credit line fees and $5 million
due to higher amortization of discount, primarily the discount on the
exchangeable subordinated notes.
The effective tax rate decreased to 14.6% in 2003 from 32.2% in 2002. The
decrease was driven by the effect of comparable (to 2002) tax benefit amounts of
depletion allowances and amortization of investment tax credits on a lower
income base in 2003.
35
Income before cumulative effect of changes in accounting principles
decreased $152 million, or 81%, to $35 million in 2003. The decline was driven
by the decrease in gross margin and the increase in interest expense, partially
offset by decreased SG&A expenses. The first quarter results reflected a $16
million (after tax) gain on the settlement of outstanding counterparty default
events and $11 million (after tax) in severance charges. Net pension and
postretirement benefit costs reduced net income by $9 million in 2003 and by $6
million in 2002.
North America Energy Delivery
- -----------------------------
Financial Results
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
Operating revenues............................................ $ 1,127 $ 838
------- -------
Costs and expenses:
Cost of energy sold and delivery fees.................... 430 180
Operating costs.......................................... 211 185
Depreciation and amortization............................ 87 79
Selling, general and administrative expenses............. 84 92
Franchise and revenue-based taxes ....................... 74 79
Other income ............................................ (3) (1)
Other deductions......................................... 1 4
Interest income.......................................... (16) (11)
Interest expense and other charges ...................... 92 79
------- -------
Total costs and expenses............................. 960 686
------- -------
Income before income taxes.................................... 167 152
Income tax expense............................................ 57 51
------- -------
Net income ................................................... $ 110 $ 101
======= =======
- -----------------
The North America Energy Delivery segment includes the electricity
transmission and distribution (T&D) business of Oncor Electric Delivery
Company (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.
36
North America Energy Delivery
- -----------------------------
Segment Highlights
Three Months Ended
March 31,
---------------------
2003 2002
-------- ------
Operating statistics
Delivered electricity volumes (GWh).............................. 23,908 23,586
Retail gas distribution volumes (Billion cubic feet-Bcf):
Residential.................................................... 45 41
Commercial..................................................... 24 22
Industrial and electric generation............................. 2 3
------ -------
Total gas sales.............................................. 71 66
====== =======
Pipeline transportation volumes (Bcf)............................ 86 102
====== =======
Retail gas distribution customers and electric points of
delivery (end of period and in thousands):
Retail gas distribution customers.............................. 1,475 1,459
Electric points of delivery.................................... 2,914 2,868
Operating revenues (millions of dollars)
Electricity distribution:
North America Energy........................................... 377 $ 416
Non-affiliated retail electric providers....................... 129 78
------ ------
Total ....................................................... 506 494
------ ------
Retail gas distribution:
Residential.................................................... 401 223
Commercial..................................................... 183 98
Industrial and electric generation............................. 10 8
----- ------
Subtotal .................................................... 594 329
Pipeline transportation.......................................... 16 12
Other revenues, net of eliminations.............................. 11 3
----- ------
Total retail gas distribution and pipeline transportation.... 621 344
----- ------
Total operating revenues......................................... $1,127 $ 838
===== ======
37
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Operating revenues for the North America Energy Delivery segment
increased $289 million, or 34%, to $1.1 billion in 2003. Gas delivery revenues
increased $277 million, or 81%, to $621 million, due to a 98% increase in
average gas cost passed on to customers and 8% higher distribution volumes,
primarily reflecting much colder weather in the quarter. Growth in the retail
gas customer count was 1%. Electricity delivery revenues increased $12 million,
or 2%, to $506 million, primarily reflecting increased disconnect/reconnect fees
due to greater competition-related customer switching activities and 1.6%
additional points of delivery.
Gross Margin
Three Months Ended
March 31,
----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues........................................ $ 1,127 100% $ 838 100%
Costs and expenses:
Cost of gas sold..................................... 430 38% 180 21%
Operating costs...................................... 211 19% 185 22%
Depreciation and amortization related to T&D assets.. 84 7% 77 9%
------- ----- ------- ------
Gross margin.............................................. $ 402 36% $ 396 48%
======= ===== ======= ======
Gross margin increased $6 million, or 2%, to $402 million in 2003.
The increase primarily reflects the impact in the gas business of higher volumes
and base distribution rate increases, partially offset by higher operating
costs, largely in the electricity delivery business. The increase in operating
costs of $26 million, or 14%, to $211 million was driven by higher transmission
costs paid to other utilities, increased pension and other postretirement
benefit costs and higher overhead feeder maintenance and tree trimming costs.
Depreciation and amortization (including amounts shown in the gross
margin table above), increased $8 million, or 10%, to $87 million. The increase
reflected investments to support growth and normal replacements of delivery
facilities.
SG&A expenses decreased by $8 million, or 9%, to $84 million due
primarily to lower employee-related and outside consulting expenses arising from
cost reduction initiatives implemented in late 2002, partially offset by higher
bad debt expense on increased gas delivery revenues.
Franchise and revenue-based taxes decreased $5 million, or 6%, to $74
million in 2003 reflecting lower local gross receipts taxes. Due to the lag
in timing between revenues and the corresponding gross receipts tax expense, the
gas business is expected to report increased gross receipts tax in future
periods.
Other deductions decreased by $3 million to $1 million reflecting
charges in 2002 related to sold business.
Interest income increased $5 million, or 45%, to $16 million due to
an increase in the reimbursement from North America Energy for higher carrying
costs on regulatory assets.
Interest expense and other charges rose by $13 million, or 16%, to
$92 million. Oncor's expense rose $18 million, while TXU Gas had a decrease of
$5 million. Of the change, $2 million was due to higher average debt levels and
$11 million was due to higher average rates. The higher average interest rates
reflected issuances by Oncor of higher rate long-term debt to replace lower rate
advances from affiliates.
The effective income tax rate of 34.1% in 2003 was comparable to the
33.6% effective rate in 2002, with no significant offsetting items.
38
Income from continuing operations increased $9 million, or 9%, to
$110 million, reflecting an increase in the gas business of $19 million,
partially offset by a decline in the electricity business of $10 million. The
performance in the gas business reflected the higher gross margin and lower
interest expense. The decline in the electricity business was driven by higher
interest expense. Net pension and postretirement benefit costs reduced net
income by $11 million in 2003 and $6 million in 2002.
Australia
- ---------
Financial Results
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
Operating revenues....................................... $ 225 $ 212
------- -------
Costs and expenses:
Cost of energy sold and delivery fees............... 95 72
Operating costs..................................... 21 19
Depreciation and amortization....................... 19 15
Selling, general and administrative expenses........ 18 14
Franchise and revenue-based taxes .................. - -
Other income ....................................... - -
Other deductions.................................... 1 2
Interest income..................................... (1) -
Interest expense and other charges ................. 34 29
------- -------
Total costs and expenses........................ 187 151
------- -------
Income before income taxes .............................. 38 61
Income tax expense....................................... 11 10
------- -------
Net income .............................................. $ 27 $ 51
======= =======
39
Australia
- ----------
Segment Highlights
Three Months Ended
March 31,
-------------------
2003 2002
-------- ------
Operating Statistics
Retail electricity sales volumes (GWh).................... 1,868 1,408
Retail gas sales volumes (Bcf)........................... 11 10
Wholesale electricity sales volumes (GWh)................. 414 553
Retail customers and points of delivery (end of period
and in thousands):
Electric............................................. 559 534
Gas.................................................. 463 430
------ ------
Total customers............................ 1,022 964
====== ======
Electricity distribution points of delivery.......... 552 538
Gas distribution points of delivery.................. 469 455
------ ------
Total points of delivery................... 1,021 993
====== ======
Operating revenues (millions of dollars)
Retail electric:
Residential.......................................... $ 55 $ 43
Commercial and industrial............................ 80 46
------ ------
Total........................................ 135 89
------ ------
Electricity delivery...................................... 12 8
------ ------
Retail gas sales:
Residential.......................................... 15 7
Commercial and industrial............................ 27 22
------ ------
Total........................................ 42 29
------ ------
Gas distribution.......................................... 6 5
Wholesale electric revenues............................... 10 11
Wholesale electric portfolio management activities and
other revenue........................................... 20 70
------ ------
Total operating revenues..................... $ 225 $ 212
====== ======
40
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
The Australia segment's operating revenues increased $13 million, or
6%, to $225 million in 2003. The revenue comparison reflected a $28 million
favorable effect of changes in foreign currency exchange rates, offset by the
impact of a $30 million gain in 2002 on the termination of a power contract.
Retail electricity sales rose $26 million on a 33% volume increase, primarily
due to new commercial/industrial accounts and warmer summer weather, and $4
million from higher average pricing. These benefits were partially offset by
lower results from portfolio management activities due to lower wholesale prices
and decreased price volatility.
Gross Margin
Three Months Ended
March 31,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 225 100% $ 212 100%
Cost and expenses:
Cost of energy sold and delivery fees............. 95 42% 72 34%
Operating costs................................... 21 9% 19 9%
Depreciation and amortization related to operating
assets........................................ 17 8% 14 7%
------- ----- ------- ------
Gross margin........................................... $ 92 41% $ 107 50%
======= ===== ======= ======
Australia's gross margin declined $15 million, or 14%, to $92 million
in 2003. On a local currency basis, margins declined 24%. Excluding the impact
of the power contract termination, gross margin on a local currency basis rose
6%, driven by increased gross margins in the retail electric business associated
with increased volumes and prices, partially offset by unfavorable portfolio
management activity. Operating costs were unchanged on a local currency basis.
Depreciation and amortization related to operating assets increased $3 million,
or 7% on a local currency basis, reflecting expenditures for expansion in
electricity delivery and production assets, as well as computer software costs
related to the development of competitive markets. Mark-to-market accounting for
commodity contracts decreased revenues and gross margin by $4 million in 2003,
compared to an increase of $27 million in 2002 (as compared to accounting on a
settlement basis).
Australia's SG&A expenses rose $4 million, or 15% on a local currency
basis, reflecting increased staffing expenses to support retail competition
activities in newly competitive markets.
Australia's interest expense and other charges increased $5 million,
or 17%, to $34 million in 2003. In local currency, interest expense and other
charges declined 2%, reflecting lower debt levels.
The effective tax rate was 28.9% in 2003 compared to 16.4% in 2002,
reflecting the non-taxable nature of the 2002 contract termination gain.
Australia's net income declined $24 million, or 47%, to $27 million
in 2003. In local currency, Australia's net income declined 54%. This decline in
net income was driven by the effect of the contract termination gain in 2002.
Net pension and postretirement benefit costs reduced net income by less than $1
million in 2003 and 2002.
41
COMPREHENSIVE INCOME - Continuing Operations
Foreign currency translation adjustments from continuing operations
for the three months ended March 31, 2003 and 2002, were gains of $55 million
and $31 million, respectively, primarily reflecting the movement in exchange
rates between the US dollar and the Australian dollar. These adjustments have no
tax effects.
The minimum pension liability adjustment for the three months ended
March 31, 2003 was related to the consolidation of Pinnacle, which had
previously recorded a minimum pension liability adjustment of $9 million ($6
million after-tax) (See Note 1 to Financial Statements for further discussion of
Pinnacle). The minimum pension liability represents the difference between the
excess of the accumulated benefit obligation over the plan's assets and the
liability reflected in the balance sheet. The recording of the liability did not
affect TXU Corp.'s financial covenants in any of its credit agreements.
The effects of cash flow hedges in other comprehensive income were as
follows:
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
Net change in fair value of hedges - gains/(losses):
Commodities........................................ $ (79) $ (40)
Financing - foreign exchange and interest rates.... (29) 9
-------- -------
(108) (31)
Losses/(gains) realized in earnings:
Commodities........................................ 48 (5)
Financing - foreign exchange and interest rates.... 33 20
------- -------
81 15
Net effect.................................. $ (27) $ (16)
======== ========
FINANCIAL CONDITION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s Annual Report on Form 10-K for the year ended December
31, 2002 (2002 Form 10-K). No significant changes or events that might affect
the financial condition of TXU Corp. have occurred subsequent to year-end other
than as disclosed herein.
Cash Flows -- Cash flows provided by operating activities for the
three months ended March 31, 2003, were $926 million compared to $446 million
for 2002. The increase in cash flows provided by operating activities in 2003 of
$480 million reflected a number of factors. The principal drivers of the
increase were the receipt of an income tax refund of $616 million, primarily
related to tax benefits associated with the write-off of the investment in
Europe, and improved working capital (accounts receivable, accounts payable and
inventories) of $192 million, reflecting the reduction of billing delays
experienced during the transition to competition in 2002. In addition, $73
million in net margin deposits were received from counterparties. These were
partially offset by lower cash earnings (net income adjusted for the significant
noncash reconciling items identified in the statement of cash flows) of $342
million and payments of $102 million related to counterparty default events and
the termination and liquidation of those outstanding positions.
Cash flows used in financing activities for 2003 were $484 million,
primarily reflecting net repayment of debt. Issuances of debt securities totaled
$1.3 billion and retirements of debt and reduction of notes payable to banks
totaled $1.7 billion, net of redemption deposit payments (restricted cash), as
TXU Corp. established permanent financing to replace the credit facilities drawn
down in the foruth quarter of 2002 to enhance liquidity. Cash dividends paid on
common shares approximated $40 million in 2003 and $159 million in 2002.
42
Cash flows used in investing activities totaled $190 million in 2003
and $279 million during 2002. Capital expenditures declined to $228 million in
2003 from $272 million in 2002 as a result of lower developmental spending.
Capital expenditures are expected to total $1.1 billion in 2003. Other investing
activities in 2003 provided $25 million, reflecting net proceeds from
retirements of property, plant and equipment and the effect of higher cash upon
the consolidation of Pinnacle.
Depreciation and amortization expense reported in the statement of
cash flows exceeds the amount reported in the statement of income by $19
million. This difference 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.
Financing Activities
Capitalization -- The capitalization ratios of TXU Corp. at March
31, 2003, consisted of 7.5% equity-linked debt securities, 3.3% exchangeable
subordinated notes, 59.0% other long-term debt, less amounts due currently, 2.7%
trust securities, 1.0% preferred stock of subsidiaries, 1.6% preference stock
and 24.9% common stock equity. Not reflected in these ratios is restricted cash
of $72 million included in current assets that is held in trust for the
defeasance of long-term debt.
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 for offering pursuant to Rule 415 under the Securities Act
of 1933.
Credit Facilities -- At March 31, 2003, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of approximately $1.0
billion and commercial paper (in Australia) of $24 million. Weighted average
interest rates on short-term borrowings were 2.84% and 2.60% at March 31, 2003
and December 31, 2002, respectively.
During the first quarter of 2003, $1.3 billion in outstanding short-term
borrowings were repaid with proceeds from the issuance of long-term debt in
March 2003 and cash flows from operations.
43
At March 31, 2003, TXU Corp. and its subsidiaries had credit facilities
(some of which provide for long-term borrowings) as follows:
At March 31, 2003
--------------------------------------------------
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 $ 152 $ 500 $ 348
364-Day Senior Secured Credit Facility December 2003 Oncor 150 -- -- 150
Five-Year Revolving Credit Facility February 2005 US Holdings 1,400 371 -- 1,029
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 -- 500 --
------- ------ ------ ------
Total North America $ 3,050 $ 523 $1,000 $1,527
Senior Facility (a) October 2004 TXU Australia $ 1,052 $ -- $ 850 $ 198
Working Capital Facility October 2003 TXU Australia 60 -- 18 42
Standby Facility (a) December 2003 TXU Australia 20 -- -- --
------- ------ ------ ------
Total Australia $ 1,132 $ -- $ 868 $ 240
(a) Commercial paper borrowings totaling $24 million at March 31, 2003 were
supported by the Standby Facility ($20 million) and the Senior Facility ($4
million).
In April 2003, all outstanding cash borrowings under the North America
credit facilities were repaid. A new $450 million revolving credit facility was
established for TXU Energy and Oncor that matures on February 25, 2005. The new
facility will be used for working capital and other general corporate purposes,
including commercial paper backup and letters of credit, and replaces the $1
billion 364-day revolving credit facility that expired in April 2003. Up to $450
million of letters of credit may be issued under the facility.
In connection with the restructuring of the North America credit facilities
of TXU Corp. and its subsidiaries in April 2003:
o Oncor cancelled its undrawn $150 million secured 364-day credit
facility that was scheduled to expire in December 2003.
o US Holdings replaced TXU Corp. as the borrower under the $500
million three-year revolving credit facility. Concurrently, the
facility was reduced to $400 million and TXU Corp. entered into
additional separate revolving credit facilities of $45 million and
$55 million, each of which expires on May 1, 2005.
o US Holdings' $1.4 billion five-year revolving credit facility was
amended. Among other things, the amendment increased the amount of
letters of credit allowed to be issued under the facility to $1
billion from $500 million.
44
As a result of the repayments and other activities discussed above, TXU
Corp. and its North America subsidiaries' credit facilities as of May 13, 2003
were as follows:
At May 13, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
Five-Year Revolving Credit Facility February 2005 US Holdings $ 1,400 $ 377 $ -- $1,023
Revolving Credit Facility February 2005 TXU Energy, Oncor 450 -- -- 450
Three-Year Revolving Credit Facility May 2005 US Holdings 400 -- -- 400
Revolving Credit Facility May 2005 TXU Corp. 55 -- -- 55
Revolving Credit Facility May 2005 TXU Corp. 45 -- -- 45
------- ------ ------ ------
Total North America $ 2,350 $ 377 $ -- $1,973
Australia's credit facilities were not affected by the above refinancings.
In addition to providing back-up of commercial paper issuance by TXU Energy
and Oncor, the North American facilities above are for general corporate and
working capital purposes, including providing collateral support for TXU Energy
portfolio management activities. At March 31, 2003 and May 13, 2003, there was
no outstanding commercial paper under these programs.
Long-Term Debt -- During the three months ended March 31, 2003, TXU
Corp. and its subsidiaries issued, redeemed, reacquired or made scheduled
principal payments on long-term debt as follows:
Issuances Retirements
--------- -----------
TXU Corp.:
Other long-term debt ..................... $ - $ 48
Oncor:
First mortgage bonds...................... - 235
Medium term notes......................... - 15
TXU Gas:
Senior notes.............................. - 125
TXU Energy:
Fixed rate senior notes................... 1,250 -
Pollution control revenue bonds........... 44 44
TXU Australia:
Long-term debt............................ 23 97
Other........................................... - 1
------ ------
Total.................................... $1,317 $ 565
====== ======
See Note 4 to Financial Statements for further detail of debt
issuance and retirements.
Pinnacle consolidation -- See Note 1 to Financial Statements for a
discussion of the debt and other balance sheet impacts from the consolidation of
Pinnacle.
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 March 31, 2003, TXU Energy
(through certain subsidiaries), Oncor and TXU Gas are qualified
45
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 March 31,
2003, $1.2 billion face amount of receivables were sold to TXU Receivables
Company under the program in exchange for cash of $302 million and $907 million
in subordinated notes, with $5 million of losses on sales for the three months
ended March 31, 2003 that principally represents the interest costs on the
underlying financing. These losses approximated 6% of the cash proceeds from the
sale of undivided interests in accounts receivable on an annualized basis.
Funding under the program decreased from $406 million at December 31, 2002 to
$302 million at March 31, 2003 primarily due to reserve requirements which apply
factors from the prior 12-month period in determining the current period
reserve. This period reflects the billing and collection delays previously
experienced as a result of new systems and processes in TXU Energy and the
Electric Reliability Council of Texas (ERCOT) for clearing customers switching
and billing data upon the transition to competition.
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 amended to allow receivables that are 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
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 all
originators and the 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 and the financial institutions do not
waive such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds during
the first quarter of 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 billing delays have been resolved but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios into 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 and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
46
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 $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
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 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 March 31, 2003, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its subsidiaries
contain provisions that are specifically affected by changes in credit ratings
and also include cross default provisions. The material cross default 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.
Credit Rating Provisions
------------------------
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 March 31, 2003). 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 $135 million at March 31, 2003) 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.
47
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 $180 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. As of
March 31, 2003, based on current market conditions, the maximum TXU Energy would
post for these transactions is $267 million. Of this amount, $217 million
relates to an arrangement that would require that TXU Energy 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 $166 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
$32 million.
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.
TXU Australia has several contracts that may require additional
guarantees or cash collateral totaling approximately $66 million if its credit
rating was downgraded to below investment grade, or if there was a material
adverse change in its financial condition.
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.
TXU Corp.'s $45 million and $55 million revolving facilities, which provide
back-up for any Oncor and TXU Energy commercial paper issuances, contain a cross
default provision with respect to any default by TXU Corp. or any US subsidiary
thereof in respect of any indebtedness in a principal amount in excess of $50
million. A default by TXU Australia would not trigger the cross default
provision contained in these facilities.
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
$1.4 billion US Holdings five-year revolving credit facility, the $400 million
US Holdings credit facility, the $68.1 million US Holdings letter of credit
reimbursement and credit facility agreement and $102 million of TXU Mining
Company LP (TXU Mining) senior notes (which have a $1 million threshold).
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess of $50 million or more would result
in a cross default for such party under the TXU Energy/Oncor $450 million
48
revolving credit facility. Under this 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, 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, but not as to TXU Energy.
A default or similar event under the terms of TXU Energy's exchangeable
subordinated notes (or any security of TXU Energy or its subsidiaries issued
directly or indirectly upon the conversion, exchange or extension (in whole or
in part) of such notes) that results in the acceleration (or other mandatory
repayment prior to the maturity date) of such notes or such other security or
the failure to pay such notes or such other security at maturity would result in
a default under TXU Energy's $1.25 billion senior unsecured notes.
TXU Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust ($135 million outstanding at March 31, 2003) and Pinnacle's 8.83%
Senior Secured Notes due 2004 ($810 million outstanding at March 31, 2003)
contain cross default provisions relating to a failure to pay principal or
interest on indebtedness of TXU Corp. or TXU Communications Ventures Company (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 $124 million that would terminate upon the default of
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
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.
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 and related
transaction costs. The regulatory 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. The first issuance
is expected to be made later in 2003.
Equity -- 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 flows 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 and preferred stock (stated capital). The write-off in 2002 of TXU
Corp.'s investment in TXU Europe resulted in negative surplus as of December 31,
2002. 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 was
reclassified from stated capital to additional paid-in capital, resulting in
surplus of $4.78 billion at March 31, 2003.
Additional paid-in capital includes $109 million and $111 million of
discount on the 9% Fixed Enchangeable Subordinated Notes of TXU Energy at March
31, 2003 and December 31, 2002, respectively.
49
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables
COMMITMENTS AND CONTINGENCIES
See Note 7 to Financial Statements for a discussion of contingencies. There
were no material changes in cash commitments from those disclosed in the 2002
Form 10-K.
REGULATION AND RATES
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 and has
become final.
Excess Mitigation Credit -- Beginning in 2002, Oncor began
implementing an excess stranded cost mitigation credit designed to result in a
$350 million, plus interest, reduction to T&D rates charged to retail electric
providers (REPs) applied over a two-year period. The actual amount of this
credit is expected to exceed $350 million as delivery volumes are anticipated to
be higher currently than initially estimated. The resulting net earnings
reduction for the year 2003 is expected to be approximately $15 million
after-tax, after consideration of the portion of the credit reflected in
TXU Energy's results as an affiliated REP.
Regulatory Asset Securitization -- 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 power
consumption 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.
Fuel Cost Recovery -- The Settlement also provides that US Holdings
will not seek to recover its unrecovered fuel costs that 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 -- 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
50
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 reduce bad debt expense
in 2003.
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
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 -- 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%. Under amended Commission rules,
effective in March 2003, 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 5% (10% if the petition is filed after November 15 of any year) from
the level used to set the previous price-to-beat fuel factor rate.
Oncor -- Under Commission rules, transmission service providers are
allowed to update transmission rates on an annual basis to reflect changes in
invested capital. On March 27, 2003, Oncor filed with the Commission requesting
an interim update of its previously approved wholesale transmission rates. The
estimated increase in annual revenues related to this request is approximately
$28.4 million. The Commission approved Oncor's requested interim transmission
rates as filed and the new rates were effective on May 9, 2003.
Australia -- The distribution tariffs for electricity until December
31, 2005, and for gas until December 31, 2007, are 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 gas
distribution tariffs are to increase by 0.8% plus Consumer Price Index (CPI)
increase. The electricity distribution tariffs are to increase by the CPI, less
1% each year.
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.
51
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.
CHANGES IN ACCOUNTING STANDARDS
See Note 1 to Financial Statements for discussion of changes in
accounting standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed
in 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 any projected outcome contained in
any forward-looking statement in this report, include:
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 US 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
policy and regulatory 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 also subject to changes in laws, governmental policy and
regulatory actions in Australia.
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. 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.
TXU Corp. is not guaranteed any rate of return on its capital
investments in unregulated businesses. TXU Corp. markets and trades power,
including power from its own 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 market 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.
52
TXU Corp.'s US regulated businesses are subject to cost-of-service
regulation and annual earnings oversight. Oncor's rates are regulated by the
Commission based on an analysis of Oncor's costs, as reviewed and approved in a
regulatory proceeding. As part of the regulatory settlement plan, TXU Corp. has
agreed not to seek to increase its distribution rates prior to 2004. Thus, the
rates TXU Corp. is allowed to charge may or may not match its related costs and
allowed return on invested capital of any given time. While rate reguatlion is
premised on the full recovery of prudently incurred costs and a resonable rate
of return on invested capital, there can be no assurance that the Commission
will judge all of TXU Corp.'s costs to have been prudently incurred or that the
regulatory process in which rates are determined will always result in rates
that will produce a full recovery of TXU Corp.'s costs and the return on
invested capital allowed by the Commission.
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 illiquidity in the wholesale power 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 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.
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 in the 2002 Form 10-K.
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.
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
53
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 Note 18 to Financial
Statements included in the 2002 Form 10-K. ERCOT market participants are also
exposed to risks that another ERCOT market participant may default in its
obligations to pay ERCOT for power taken in the ancillary services market, in
which case such costs, to the extent not offset by posted security and other
protections available to ERCOT, may be allocated to various non-defaulting ERCOT
market participants.
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.
In addition, as discussed elsewhere in this Quarterly Report on Form
10-Q and in TXU Corp.'s 2002 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. 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.
54
Insurance, warranties or performance guarantees may not cover all or
any 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.
Current plans to meet cost reduction targets assume that TXU Corp.
will be able to lower bad debt expense, the achievement of which could be
affected by factors outside of TXU Corp.'s control, including weather, changes
in regulations, and economic and market conditions.
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. Furthermore, a shut-down or failure
at any other nuclear plant could cause regulators to require a shut-down
or reduced availability at Comanche Peak.
o Regulatory Risk - The Nuclear Regulatory Commission (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.
TXU Corp. will be required to apply a credit to its electricity
delivery charges (retail clawback) to REPs in Oncor's service territory
beginning in 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 territory 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 territory less the number
of new retail electric customers TXU Corp. serves in other areas of Texas. As of
March 31, 2003, 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.
55
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.
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.
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.
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 of the other Texas retail
electric markets. 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.
56
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 fuel 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.
TXU Corp. provides commodity and value-added energy management
services to the large commercial and industrial 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.
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 headroom. 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.
Additionally, in Texas, TXU Corp. is dependent on unaffiliated T&D
utilities for reading of its cusomers' 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.
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.
Under the Commission's 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 numbers of such customers are significant and
TXU Corp. is delayed in terminating electric service to those customers, its
results of opeations may be adversely affected.
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.
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
57
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 ERCOT market area where TXU Corp. has
facilities will likely increase the competitiveness of the wholesale power
market in that region. In addition, the market value of TXU Corp.'s power
production and/or energy transportation facilities may be significantly reduced.
Also, 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 and to pay dividends 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.
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, would
likely increase its capital costs. 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 prolonged 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.
A lack of necessary capital and cash reserves could adversely impact
the evaluation of TXU Corp.'s credit worthiness by counterparties and rating
agencies. Further, concerns on the part of counterparties regarding TXU Corp.'s
liquidity and credit could limit its portfolio management activities.
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
58
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-nine 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 Euorpe, including the administration proceeding, 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.
The market price of TXU Corp.'s common stock has been volatile in
the past, 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.
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.
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 risks discussed above under
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS and factors contained in the
Forward-Looking Statements section of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in TXU Corp.'s 2002
Form 10-K, that could cause the actual results of TXU Corp. to differ materially
from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which
such statement is made, and 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.
59
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed below, the information required hereunder is not
significantly different from the information set forth in Item 7A. Quantitative
and Qualitative Disclosures About Market Risk included in TXU Corp.'s 2002 Form
10-K and is therefore not presented herein.
COMMODITY PRICE RISK
Value at Risk (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.
March 31, December 31,
2003 2002
---- ----
Period-end MtM VaR:
-------------------
North America Energy........................ $ 28.1 $23.2
Australia .................................. $ 16.0 $13.4
Average MtM VaR:
----------------
North America Energy........................ $31.9 $ 38.0
Australia .................................. $15.8 $ 14.8
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.
March 31, December 31,
2003 2002
---- ----
Period- end Portfolio VaR:
-------------------------
North America Energy................... $187.0 $143.5
Australia ............................. $ 21.8 $ 21.9
Average VaR:
-----------
North America Energy (a)............... $178.2 N/A
Australia.............................. $ 21.5 $22.8
(a) For the year 2002, there was no average Portfolio VaR information
available.
Other Risk Measures -- The metrics appearing below provide
information regarding the effect of energy price risk on earnings and cash flow
of TXU Energy. 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.
60
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 6-month holding period under normal market conditions. The
following CFaR calculation is based on a contract settlement period of six
months.
March 31, December 31,
2003 2002
---------- -----------
EaR ............................ $ 32.2 $ 27.7
CFaR ........................... $ 86.6 $177.5
INTEREST RATE RISK
See Note 4 to Financial Statements for a discussion of the issuance
of new fixed rate debt and retirement of fixed rate debt since December 31,
2002.
Item 4. 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 quarterly 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 or in other factors that could significantly affect internal controls
subsequent to their evaluation.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In October, November and December 2002 and January 2003, at least
twenty-nine 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 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.
61
On April 28, 2003, a lawsuit was filed by William J. Murray, a former
employee of TXU Portfolio Management Company LP (TXU Portfolio Management), in
the United States District Court for the Northern District of Texas, Dallas
Division, against TXU Corp., TXU Energy Company LLC (TXU Energy) and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of the Sarbanes
Oxley-Act of 2002 (Sarbanes-Oxley) arising from plaintiff's employment
termination and claims for breach of contract relating to payment of certain
bonuses. Plaintiff seeks back pay, payment of bonuses and alternatively,
reinstatement or future compensation, including bonuses. TXU Corp. believes the
plaintiff's claims are without merit. The plaintiff was terminated as the result
of a reduction in force, not as a reaction to any concerns the plaintiff had
expressed and plaintiff was not in a position with TXU Portfolio Management such
that he had knowledge or information that would qualify the plaintiff to
evaluate TXU Corp.'s financial statements or assess the adequacy of TXU Corp.'s
financial disclosures. Thus, TXU Corp. does not believe that there is any merit
to the plaintiff's claims under Sarbanes-Oxley. Accordingly, TXU Corp., TXU
Energy and TXU Portfolio Management intend to vigorously defend the litigation.
While TXU Corp., TXU Energy and TXU Portfolio Management dispute the plaintiff's
claims, like any litigation, TXU Corp. is unable to predict the outcome of this
litigation or the possible loss in the event of an adverse judgment.
62
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TXU Corp. held a Special Meeting of Shareholders on February 14, 2003. The
following item was presented to shareholders with the following results:
Votes
Votes Withheld or
For Against Abstentions
----------- ------------ -----------
Approval of the reduction of
TXU Corp.'s stated capital........ 262,834,564 4,214,754 1,739,648
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
10(a) TXU Australia Employee Share Plan Rules, established
December 31, 2001.
10(b) Deferred Componsation Plan for Outside Directors of
TXU Corp., effective July 1, 2002.
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information.
99(a) Condensed Statements of Consolidated Income-Twelve Months Ended
March 31, 2003.
99(b) Section 906 Certification of Chief Executive Officer.
99(c) Section 906 Certification of Chief Financial Officer.
(b) Reports on Form 8-K filed since December 31, 2002:
Date of Report Item Reported
February 25, 2003 Item 5. Other Events and Regulation FD Disclosure
April 30, 2003 Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
May 1, 2003 Item 9. Regulation FD Disclosure (Being Provided Under Item 12)
Item 7. Financial Statements and Exhibits
May 1, 2003 Item 7. Exhibits
(Form 8-K/A)
63
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ Biggs C. Porter
--------------------------------
Biggs C. Porter
Controller and Principal
Accounting Officer
Date: May 15, 2003
64
TXU CORP.
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in 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 quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Erle Nye
------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
65
TXU CORP.
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF CFO
I, H. Dan Farell, Executive Vice President and Chief Financial Officer
of TXU Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU
Corp.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in 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 quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Dan Farell
--------------------------------------------
Signature: Dan Farell
Title: Executive Vice President and Chief
Financial Officer
66