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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 31, 2003
TXU US HOLDINGS COMPANY
(for TXU Energy Company LLC)
(Exact Name of Registrant as Specified in its Charter)
TEXAS 1-11668 75-1837355
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code - (214) 812-4600
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TABLE OF CONTENTS
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PAGE
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Item 5. OTHER EVENTS AND REGULATION FD DISCLOSURE................................................. 1
TXU Energy Company LLC Financial information
Condensed Statements of Consolidated Income and 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
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 17
Controls and Procedures .................................................................. 36
Item 7. FINANCIAL STATEMENTS AND EXHIBITS......................................................... 36
SIGNATURE......................................................................................... 37
CERTIFICATIONS.................................................................................... 38
Current reports on Form 8-K that contain financial information of TXU Energy
Company LLC 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 US Holdings Company will provide copies
of current reports not posted on the website upon request.
(i)
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
TXU ENERGY COMPANY LLC
TXU US Holdings Company (US Holdings), is providing the following
quarterly financial information and management's discussion and analysis of
financial condition and results of operations to meet the ongoing needs of
customers, counterparties and others for financial information concerning its
unregulated energy business, TXU Energy Company LLC (TXU Energy).
FORWARD-LOOKING STATEMENTS
This report and other presentations made by US Holdings with respect to
TXU Energy contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Although US Holdings
believes that in making such statements its expectations are based on reasonable
assumptions, any such statement involves uncertainties and is qualified in its
entirety by reference to the risks discussed herein under "Management's
Discussion and Analysis of Financial Condition and Results of Operations - 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 US Holdings' Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 (2002 Form 10-K)
and in Item 5. Other Events and Regulation FD Disclosure included in US
Holdings' Current Report on Form 8-K as filed for TXU Energy for the year ended
December 31, 2002 on February 26, 2003 (TXU Energy 2002 Form 8-K) among others,
that could cause the actual results of TXU Energy to differ materially from
those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and US Holdings undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for US
Holdings to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause the actual results of TXU Energy to differ materially from those contained
in any forward-looking statement.
1
TXU ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
(millions of dollars)
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 accounting change................................. 35 187
Cumulative effect of changes in accounting principles, net of tax benefit(Note 2).... (58) --
------ ------
Net income(loss).................................................................... $ (23) $ 187
====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
(millions of dollars)
Net income (loss)................................................................... $ (23) $ 187
------- ------
Other comprehensive income (loss)--
Cash flow hedge activity, net of tax effects:
Net change in fair values (net of tax benefit
of $42 and $23)....................................................... (78) (43)
Amounts realized in earnings during the period (net of tax
expense of $26 and benefit of $1)..................................... 49 (3)
------ ------
Total......................................................................... (29) (46)
------ ------
Comprehensive income (loss)........................................................ $ (52) $ 141
====== ======
See Notes to Financial Statements.
2
TXU ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
(millions of dollars)
Cash flows -- operating activities:
Income before cumulative effect of changes in accounting principles............... $ 35 $ 187
Adjustments to reconcile income to cash provided by operating activities:
Depreciation and amortization................................................... 129 137
Deferred income taxes and investment tax credits-- net ......................... 7 (21)
Net unrealized loss from mark-to-market valuation of commodity contracts........ 23 146
Net gain from sales of assets................................................... (6) --
Changes in operating assets and liabilities....................................... 30 14
------ ------
Cash provided by operating activities.................................. 218 463
------ ------
Cash flows -- financing activities:
Issuances of securities ........................................................ 1,294 --
Retirements/repurchases of securities:
Long-term debt................................................................ (44) (123)
Change in advances-- affiliates................................................. (1,337) (20)
Dividends paid to parent........................................................ (200) (200)
Change in notes payable-- banks................................................. (282) --
Decrease in note payable to Oncor Electric Delivery Company..................... (52) --
Debt premium, discount, financing, and reacquisition expenses................... (24) (2)
------ ------
Cash used in financing activities...................................... (645) (345)
------ ------
Cash flows -- investing activities:
Capital expenditures............................................................ (59) (87)
Proceeds from sale of assets ................................................... 13 --
Nuclear fuel ................................................................... -- (10)
Other .......................................................................... 4 (9)
------ ------
Cash used in investing activities...................................... (42) (106)
------ ------
Net change in cash and cash equivalents............................................. (469) 12
Cash and cash equivalents-- beginning balance....................................... 603 20
----- ------
Cash and cash equivalents-- ending balance.......................................... $ 134 $ 32
===== ======
See Notes to Financial Statements.
3
TXU ENERGY COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
-------- ------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 134 $ 603
Advances to affiliates........................................................... 8 --
Accounts receivable - trade...................................................... 1,402 1,331
Inventories...................................................................... 273 298
Commodity contract assets........................................................ 1,472 1,298
Other current assets............................................................. 118 180
------- -------
Total current assets.......................................................... 3,407 3,710
Investments........................................................................ 462 462
Property, plant and equipment - net................................................. 10,541 10,127
Goodwill............................................................................ 533 533
Commodity contract assets........................................................... 337 476
Cash flow hedges and other derivative assets........................................ 43 14
Other noncurrent assets............................................................. 157 108
------- -------
Total assets.................................................................. $15,480 $15,430
======= =======
LIABILITIES AND MEMBER INTERESTS
Current liabilities:
Notes payable - banks............................................................ $ -- $ 282
Long-term debt due currently..................................................... 73 73
Advances from affiliates......................................................... -- 1,329
Due to Oncor Electric Delivery Company........................................... 118 170
Accounts payable:
Affiliates (principally Oncor Electric Delivery Company)...................... 248 248
Accounts payable - trade...................................................... 887 754
Commodity contract liabilities................................................... 1,377 1,138
Accrued taxes.................................................................... 72 164
Other current liabilities........................................................ 507 555
------- -------
Total current liabilities..................................................... 3,282 4,713
Accumulated deferred income taxes................................................... 1,886 1,931
Investment tax credits............................................................. 372 376
Commodity contract liabilities...................................................... 248 320
Cash flow hedges and other derivative liabilities................................... 219 150
Other noncurrent liabilities and deferred credits................................... 1,393 852
Due to Oncor Electric Delivery Company.............................................. 437 437
Long-term debt, less amounts due currently.......................................... 3,622 2,378
Contingencies (Note 5)
Member interests (Note 4)........................................................... 4,021 4,273
------- -------
Total liabilities and member interests........................................ $15,480 $15,430
======= =======
See Notes to Financial Statements.
4
TXU ENERGY COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - TXU Energy Company LLC (TXU Energy) is a
wholly-owned subsidiary of TXU US Holdings Company (US Holdings), which is a
wholly-owned subsidiary of TXU Corp. TXU Energy is an energy company that
engages in power production (electricity generation), wholesale energy sales,
retail energy sales and related services, and portfolio management, including
risk management and certain trading activities. TXU Energy is managed as a
single, integrated energy business; consequently, there are no separate
reportable business segments.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Energy 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 of TXU Energy included in
the Form 8-K filed by US Holdings on February 26, 2003 for the year ended
December 31, 2002 (TXU Energy 2002 Form 8-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 TXU Energy 2002 Form 8-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, are stated in millions of US dollars unless otherwise indicated. Certain
previously reported amounts have been reclassified to conform to current
classifications.
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
these two changes in accounting standards, TXU Energy 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 Energy has not
recognized origination gains on commercial/industrial retail contracts in 2003.
For the three months ended March 31, 2002, TXU Energy 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." The adoption of SFAS No. 145 did not result in a
reclassification for the three months ended March 31, 2002.
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 TXU Energy's results of
operations for the three months ended March 31, 2003.
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
5
the fair value of guarantees upon issuance or modification after December 31,
2002. The interpretation also requires expanded disclosures of guarantees (see
Note 5 under Guarantees). The adoption of FIN No. 45 did not materially impact
TXU Energy's 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 Energy is
evaluating the potential impact on its financial position and results of
operations.
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 principle 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.
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 Energy, 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 Energy
had previously recorded as depreciation expense and $26 million (reflected in
other noncurrent liabilities) of unrealized net gains associated with the
decommissioning trust.
6
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 non-current liabilities and deferred credits.. (528)
Increase in accumulated deferred income taxes................... (3)
Increase in noncurrent assets................................... 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 the adoption of SFAS No.
143 and $6 million of accretion during the period.
With respect to nuclear decommissioning costs, TXU Energy believes that
the adoption of SFAS No. 143 results primarily in timing differences in the
recognition of legal asset retirement costs that it is currently recovering, as
Oncor Electric Delivery Company (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 Energy'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 $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. FINANCING ARRANGEMENTS
Credit Facilities -- During the first quarter of 2003, $282 million in
outstanding short-term borrowings at December 31, 2002, were repaid with
proceeds from the issuance of long-term debt in March 2003 and cash flows from
operations.
At March 31, 2003, US Holdings 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
------- ------ ------ ------
Total US Holdings $ 2,550 $ 523 $ 500 $1,527
======= ====== ======= ======
In April 2003, all outstanding borrowings under the North America credit
facilities of TXU Corp. and its subsidiaries 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.
7
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 TXU Corp.'s
$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.
As a result of the repayments and other activities mentioned above, US
Holdings and its consolidated 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
------- ------ ------ ------
Total US Holdings $ 2,250 $ 377 $ -- $1,873
In addition to providing back-up for commercial paper issuances by TXU
Energy and Oncor, the facilities above are for general corporate and working
capital purposes, including providing collateral support for TXU Energy's
portfolio management activities. At March 31 and May 13, 2003, there was no
outstanding commercial paper under these programs.
8
Long-Term Debt -- At March 31, 2003 and December 31, 2002, the long-term
debt of TXU Energy and its consolidated subsidiaries consisted of the following:
March 31, December 31,
--------- ------------
2003 2002
---- ----
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(a)..................................... 39 39
5.400% Fixed Series 1994B due May 1, 2029(a)..................................... 39 39
5.400% Fixed Series 1995A due April 1, 2030(a)................................... 50 50
5.050% Fixed Series 1995B due June 1, 2030(a).................................... 118 118
4.800% Fixed Series 1999A due April 1, 2033(a)................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034(a)............................... 16 16
7.700% Fixed Series 1999C due March 1, 2032(a)................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030(a)................................. 121 121
4.750% Fixed Series 2001B due May 1, 2029(a)..................................... 19 19
5.750% Fixed Series 2001C due May 1, 2036(a)..................................... 274 274
4.250% Fixed Series 2001D due May 1, 2033(a)..................................... 271 271
1.500% Floating Taxable Series 2001F due December 31, 2036(b).................... 39 39
1.500% Floating Taxable Series 2001G due December 31, 2036(b).................... 72 72
1.360% Floating Taxable Series 2001H due December 31, 2036(b).................... 31 31
1.310% Floating Taxable Series 2001I due December 31, 2036(b).................... 63 63
1.250% Floating Series 2002A due May 1, 2037(b).................................. 61 61
6.750% Fixed Series 2003A due April 1, 2038(a).................................. 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(a)..................................... 91 91
5.750% Fixed Series 2001B due May 1, 2030(a)..................................... 107 107
4.000% Fixed Series 2001C due May 1, 2028(a)..................................... 70 70
1.500% Floating Taxable Series 2001D due December 31, 2036(b).................... 12 12
1.360% Floating Taxable Series 2001E due December 31, 2036(b).................... 45 45
Trinity River Authority of Texas:
4.900% Fixed Series 2000A due May 1, 2028(a)..................................... 14 14
5.000% Fixed Series 2001A due May 1, 2027(a)..................................... 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................................................. (270) (264)
------- -------
Total........................................................................ 3,695 2,451
------- -------
Less amounts due currently....................................................... 73 73
------- -------
Total Long-Term Debt...................................................... $ 3,622 $ 2,378
======= =======
NOTES:
-----
(a)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.
(b)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.
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, 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.
9
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
7.70%, 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.
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.
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 Company (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, $992 million face amount of TXU Energy's receivables were sold to TXU
Receivables Company under the program in exchange for cash of $247 million and
$740 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 $352 million at December 31,
2002 to $247 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 Energy's 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.
10
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 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 Energy 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 Energy and
its subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Energy 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 Energy 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 Energy or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Energy 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 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 would result in a
cross-default for such party under the TXU Energy/Oncor $450 million revolving
11
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 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.
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 Energy and its subsidiaries have other arrangements, including
interest rate agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
4. MEMBERS' INTERESTS
On November 15, 2002, TXU Energy approved a cash distribution of $200
million that was paid to US Holdings on January 2, 2003. On February 12, 2003,
TXU Energy approved a cash distribution of $200 million that was paid on April
1, 2003. On May 7, 2003, TXU Energy approved a cash distribution of $175 million
to be paid on July 1, 2003.
5. CONTINGENCIES
Guarantees -- TXU Energy 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.
Residual value guarantees in operating leases -- TXU Energy 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 $211 million with an estimated
residual recovery of approximately $148 million. The average life of the lease
portfolio is approximately nine years.
Shared saving guarantees -- TXU Energy Solutions Company LP, a subsidiary
of TXU Energy, 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 Energy 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 Energy 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.
12
TXU Energy 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.
Other - US Holdings has entered into contracts with public agencies to
purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $16 million at 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 7.00%. US Holdings is required to
make periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US
Holdings is obligated to pay certain variable costs of operating and
maintaining the reservoirs. US Holdings has assigned to a municipality all 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 US Holdings. US Holdings is, however,
contingently liable in the unlikely event of default by the municipality. TXU
Energy is entitled to the benefits of these contracts and has agreed to
indemnify US Holdings for obligations under these contracts.
Legal Proceedings -- In September 1999, Quinque Operating Company
(Quinque) filed suit in the State District Court of Stevens County, Kansas
against over 200 gas pipeline companies, including TXU Gas (named in the
litigation as ENSERCH Corporation). The suit was removed to federal court;
however, a motion to remand the case back to Kansas State District Court was
granted in January 2001, and the case is now pending in Stevens County, Kansas.
The plaintiffs amended their petition to join TXU Fuel Company (TXU Fuel), a
subsidiary of TXU Energy, as a defendant in this litigation. Quinque has
dismissed its claims and a new lead plaintiff has filed an amended petition in
which the plaintiffs seek to represent a class consisting of all similarly
situated gas producers, overriding royalty owners, working interest owners and
state taxing authorities either from whom defendants had purchased natural gas
or who received economic benefit from the sale of such gas since January 1,
1974. The petition alleges that the defendants have mismeasured both the volume
and heat content of natural gas delivered into their pipelines resulting in
underpayments to plaintiffs. On April 10, 2003, the District Court entered an
order denying the plaintiffs' motion seeking certification of a class. No amount
of damages has been specified in the petition with respect to TXU Gas or TXU
Fuel, and neither TXU Gas nor TXU Fuel has purchased natural gas from the named
plaintiffs in the litigation. While TXU Gas and TXU Fuel are unable to estimate
any possible loss or predict the outcome of this case, TXU Gas and TXU Fuel
believe these claims are without merit and intend to vigorously defend this
suit.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management Company LP (TXU Portfolio Management), a subsidiary of TXU
Energy, in the United States District Court for the Northern District of 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 Energy 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 Energy 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, TXU Energy is unable to
predict the outcome of this litigation or the possible loss in the event of an
adverse judgment.
TXU Energy is involved in various legal and administrative proceedings,
the ultimate resolution of which should not have a material effect upon its
financial position, results of operations or cash flows.
13
6. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Other income
Net gain on sale of businesses...................... $ 6 $ --
Lignite coal royalties.............................. -- 2
Other............................................... 2 --
------ -------
Total other income.............................. $ 8 $ 2
====== =======
Other deductions
Equity losses of unconsolidated subsidiaries........ $ -- $ 1
Other............................................... 2 2
------ -------
Total other deductions.......................... $ 2 $ 3
====== =======
Interest Expense and Related Charges --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Interest...................................................... $ 73 $ 60
Amortization of deferred debt costs........................... 6 1
Capitalized interest.......................................... (2) (2)
------ ------
Total interest expense and other related charges......... $ 77 $ 59
====== ======
Accounts Receivable -- At March 31, 2003 and December 31, 2002, accounts
receivable are stated net of uncollectible accounts of $66 million and $71
million, respectively.
Accounts receivable included $450 million and $489 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 Energy 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
Capitalized software.............. $232 $90 $142 $220 $78 $142
Land easements.................... 11 8 3 12 9 3
Mineral rights and other.......... 31 20 11 31 20 11
---- ---- ---- ---- ---- ----
Total........................... $274 $118 $156 $263 $107 $156
==== ==== ==== ==== ==== ====
Aggregate TXU Energy amortization expense for intangible assets, excluding
goodwill, was $9 million for the three months ended March 31, 2003 and 2002.
14
At March 31, 2003 and December 31, 2002, goodwill of $533 million was
stated net of accumulated amortization of $60 million.
Commodity Contract Assets-- At March 31, 2003 and December 31, 2002,
current and noncurrent commodity contract assets totaling $1.8 billion are
stated net of applicable credit (collection) and performance reserves totaling
$38 million and $43 million, respectively. Performance reserves are provided for
direct, incremental costs to settle the contracts.
Inventories by Major Category --
March 31, December 31,
2003 2002
----------- -----------
Materials and supplies........................................................ $ 173 $ 171
Fuel stock.................................................................... 64 70
Gas stored underground........................................................ 36 57
------- ------
Total inventories........................................................ $ 273 $ 298
======= ======
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 was stated net of accumulated depreciation and
amortization of $7.2 billion and $7.3 billion, respectively.
Derivatives and Hedges -- TXU Energy 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 $81 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 (which would otherwise exist) is
mitigated through the use of cash flow hedges.
Affiliate Transactions -- The following represent the significant
affiliate transactions of TXU Energy:
o TXU Energy records interest expense payable to Oncor with respect to
Oncor's generation-related regulatory assets that are subject to
securitization. The interest expense reimburses Oncor for the interest
expense Oncor incurs on that portion of its debt associated with the
generation-related regulatory assets. For the three months ended March
31, 2003 and March 31, 2002, this interest expense totaled $12 million
and $6 million, respectively.
o Under the terms of the regulatory settlement plan approved by the
Commission, Oncor expects to issue securitization bonds in the
principal amount of $1.3 billion. The incremental income taxes Oncor
will pay on the increased delivery fees to be charged to Oncor's
customers related to the bonds will be reimbursed by TXU Energy.
Therefore, TXU Energy's financial statements reflect a $437 million
non-interest bearing payable to Oncor that will be extinguished as
Oncor pays the related income taxes.
o In addition, TXU Energy has a note payable to Oncor related to the excess
mitigation credit established in accordance with the regulatory
settlement plan. Oncor has implemented the $350 million credit, plus
interest, as a reduction of its fees charged to REPs, including
TXU Energy, for a two-year period beginning January 1, 2002.
The principal and interest payments on the note payable reimburse Oncor
for the lower delivery fees billed to REPs. For the three months
ended March 31, 2003 and March 31, 2002, the principal payments made on
the note payable totaled $52 million and $14 million, respectively, and
the interest expense totaled $3 million and $6 million, respectively.
15
The principal balance of the note payable was $125 million at
March 31, 2003, $118 million of which is classified as due to Oncor and
$7 million of which is in accounts payable. The actual amount of the
excess mitigation credit is expected to exceed $350 million as delivery
volumes are anticipated to be higher than initially estimated. As a
result, TXU Energy's delivery fees for the three months ended
March 31, 2003 include $7 million in increased excess mitigation credit
amounts due Oncor.
o Average daily short-term advances from affiliates during the three
months ended March 31, 2003 were $1.3 billion and interest expense
incurred on the advances was $8 million. The weighted average
interest rate on the advances for the three months ended March 31, 2003
was 2.33%. Average daily short-term advances to affiliates during the
first three months ended March 31, 2002 were $215 million and interest
income on these advances was $2 million. The weighted average interest
rate on the advances for the three months ended March 31, 2002 was
3.19%.
o TXU Energy incurs electricity delivery fees charged by Oncor.
For the three months ended March 31, 2003 and 2002, these
fees were $377 million and $416 million, respectively.
o TXU Business Services Company, a subsidiary of TXU Corp., charges TXU
Energy for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For the three months ended March 31,
2003 and 2002, these costs totaled $61 million and $71 million,
respectively, and are reported in selling, general and administrative
expenses.
o TXU Energy receives payments from TXU Gas, a subsidiary of TXU Corp.,
under a service agreement that began in 2002 covering customer billing
and customer support services provided for TXU Gas. These revenues
totaled $7 million each for the three months ended March 31, 2003 and
2002 and are reported in other revenues.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS No. 143, which was a noncash transaction.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU Energy Company LLC (TXU Energy) is a wholly-owned subsidiary of TXU US
Holdings Company (US Holdings), which is a wholly-owned subsidiary of TXU Corp.
TXU Energy engages in power production (electricity generation), wholesale
energy sales, retail energy sales and related services, portfolio management,
including risk management and certain trading activities.
The term "TXU Energy" refers to TXU Energy and/or its consolidated
subsidiaries, depending on the context.
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 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 and in thousands - number of
meters) .......................................................... 2,701 2,756
Three Months Ended
March 31,
2003 2002
---- ----
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 energy portfolio management activities.................... 91 (63)
Other revenues....................................................... 46 (29)
------ ------
Total operating revenues......................................... $1,806 $1,799
====== ======
Weather (average for service area)
Percent of normal:
Cooling degree days............................................. 50.0% 94.1%
Heating degree days............................................. 106.6% 101.5%
- -----------------------
Weather data is obtained from Meterlogix, a private company that collects
weather data from reporting stations of the National Oceanic and Atmospheric
Administration (a federal agency under the US Department of Commerce).
17
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Operating revenues for TXU Energy 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 in
the current period, 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.
The following table analyzes TXU Energy'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.
18
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 selling, general and administrative (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 average 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.
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.
19
COMMODITY CONTRACT 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. The net decrease,
excluding "cumulative effect of change in accounting principle" and "other
activity" as described below, of $23 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/(liabilities) at December 31, 2002.. $ 316
Cumulative effect of change in accounting principle (1) ..................... (75)
Settlements of positions included in the opening balance (2) ................ (56)
Unrealized mark-to-market valuations of positions held at end of period (3).. 33
Other activity (4)........................................................... (34)
------
Balance of net commodity contract assets at March 31, 2003 ........... $ 184
======
(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) Represents net option premiums paid/(received) in the current period and
the sale of certain retail commercial and industrial gas operations.
These activities have no effect on unrealized mark-to-market valuations.
As a result of guidance 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 Energy 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 periods' earnings is $232 million. The
offsetting net liability of $48 million included in the March 31, 2003 balance
consists of unamortized net option premiums received. 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 Maturity in
less than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years 5 years Total
---------------------- ------------ ------------ ------------ --------- -----
Prices actively quoted.. $ 4 $ (1) $ -- $ -- $ 3
Prices provided by other
external sources...... 96 60 11 2 169
Prices based on models.. 46 14 -- -- 60
---- ---- ---- ---- ----
Total................... $146 $ 73 $ 11 $ 2 $232
==== ==== ==== ==== ====
Percentage of total .... 63% 31% 5% 1% 100%
As the above table indicates, approximately 94% 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. The "prices provided by
other external sources" category represents forward commodity positions at
locations for which over-the-counter (OTC) broker quotes are available. OTC
quotes for power and natural gas generally extend through 2005 and 2010,
respectively. 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
Energy 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.
20
COMPREHENSIVE INCOME
During the first three months of 2003 and 2002, changes in the fair value
of derivatives effective as cash flow hedges reflected losses of $120 million
($78 million after-tax) and $66 million ($43 million after-tax), respectively.
Losses were primarily due to decreases in the fair value of commodity hedges.
During the first three months of 2003 and 2002, other comprehensive income
hedge losses recognized in income were $75 million ($49 million after-tax) and
gains of $4 million ($3 million after-tax), respectively, primarily related to
commodity hedges.
FINANCIAL CONDITION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations in US Holdings' Current Report on Form 8-K as filed for TXU Energy
for the year ended December 31, 2002 on February 26, 2003 (TXU Energy 2002 Form
8-K). No significant changes or events that might affect the financial condition
of TXU Energy have occurred subsequent to year-end other than as disclosed
herein.
Cash Flows -- Cash flows provided by operating activities for the first
three months of 2003 were $218 million compared to $463 million for 2002. The
decrease in cash flows provided by operating activities in 2003 of $245 million,
or 53%, reflected lower cash earnings of $261 million (net income adjusted for
the significant noncash reconciling items identified in the statement of cash
flows) and payments of $102 million related to counterparty default events and
the termination and liquidation of those outstanding positions. This is
partially offset by favorable working capital changes and the net receipt of $73
million in margin deposits from counterparties. A net working capital (accounts
receivable, accounts payable and inventories) improvement of approximately $33
million reflects lower unbilled retail accounts receivable due to the resolution
of most billing issues experienced in 2002 as a result of the transition to
competition.
Cash flows used in financing activities for 2003 were $645 million
compared to $345 million required for the first three months of 2002.
Debt-related activities in 2003 provided cash of approximately $1.25 billion,
reflecting issuance of senior notes in a private offering, to establish
permanent financing to replace the credit facilities drawn down in the fourth
quarter of 2002 to enhance liquidity. Retirements of long-term debt required
$123 million in 2002. Repayment of borrowings from affiliates required
approximately $1.3 billion in 2003. Cash distributions to US Holdings totaled
$200 million in 2003 and in 2002. Repayment of credit facilities required $282
million in 2003.
Cash flows used in investing activities were $42 million in 2003 compared
to $106 million in 2002. Capital expenditures declined to $59 million in 2003
from $87 million in 2002, driven by lower development spending. Proceeds from
the sale of certain retail commercial and industrial gas operations provided $13
million in 2003.
Depreciation and amortization expense reported in the statement of cash
flows exceeds the amount reported in the statement of income by $16 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 ratios of TXU Energy's long-term debt (less amounts
due currently) to long-term debt (less amounts due currently) plus members'
interests at March 31, 2003 and December 31, 2002 were 47.4% and 35.8%,
respectively. Long-term debt includes TXU Energy's $750 million exchangeable
subordinated notes (net of unamortized discount balance of $262 million and $264
at March 31, 2003 and December 31, 2002, respectively.) Members' interests
include $266 million of original non-cash capital contribution related to the
issuance of such notes.
21
During the first quarter of 2003, $282 million in outstanding short-term
borrowings at December 31, 2002, were repaid with proceeds from the issuance of
long-term debt in March 2003 and cash flows from operations.
At March 31, 2003, US Holdings 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
------- ------ ------ ------
Total US Holdings $ 2,550 $ 523 $ 500 $1,527
======= ====== ======= ======
In April 2003, all outstanding borrowings under the North America credit
facilities of TXU Corp. and its subsidiaries 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 TXU Corp.'s
$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.
As a result of the repayments and other activities mentioned above, US
Holdings and its consolidated 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
------- ------ ------ ------
Total US Holdings $ 2,250 $ 377 $ -- $1,873
In addition to providing back-up for commercial paper issuances by TXU
Energy and Oncor, the facilities above are for general corporate and working
capital purposes, including providing collateral support for TXU Energy's
portfolio management activities. At March 31 and May 13, 2003, there was no
outstanding commercial paper under these programs.
22
Long-term Debt -- During the three months ended March 31, 2003, TXU Energy
issued, redeemed, reacquired or made scheduled principal payments on long-term
debt as follows:
Issuances Retirements
--------- -----------
TXU Energy:
Fixed rate senior notes.................... $1,250 $ --
Pollution control revenue bonds............ 44 44
------ ------
$1,294 $ 44
====== ======
See Note 3 to Financial Statements for further detail of debt issuance and
retirements, financing arrangements, and capitalization.
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 Company (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, $992 million face amount of TXU Energy's receivables were sold to TXU
Receivables Company under the program in exchange for cash of $247 million and
$740 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 $352 million at December 31,
2002 to $247 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 Energy's 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.
23
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 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.
Credit Ratings -- The current credit ratings for TXU Corp., US Holdings
and TXU Energy are presented below:
TXU Corp. US Holdings TXU Energy
---------------- ---------------- ---------------
(Senior Unsecured)(Senior Unsecured)(Senior Unsecured)
S&P............. BBB- BBB- BBB
Moody's......... Ba1 Baa3 Baa2
Fitch........... BBB- BBB- BBB
Moody's currently maintains a negative outlook for TXU Corp. and a stable
outlook for US Holdings and TXU Energy. Fitch Rating (Fitch) currently maintains
a stable outlook for each such entity. 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 Energy 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 Energy and
its subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Energy 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.
24
Other agreements of TXU Energy 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 Energy or its subsidiaries.
Credit Rating Provisions
------------------------
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.
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 $209 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.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Energy 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 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 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.
25
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 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.
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 Energy and its subsidiaries have other arrangements, including
interest rate agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables.
COMMITMENTS AND CONTINGENCIES
See Note 5 to Financial Statements for a discussion of contingencies.
There were no material changes in cash commitments from those disclosed in the
TXU Energy 2002 Form 8-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 transmission and distribution (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 than initially estimated. The resulting net earnings
reduction for the year 2003 is currently 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
26
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 (POLR) -- In August 2002, the Commission adopted
new rules that significantly changed POLR service. Under the new POLR rules,
instead of being transferred to the POLR, non-paying residential and small
non-residential customers served by affiliated REPs are subject to
disconnection. Non-paying residential and small non-residential customers served
by non-affiliated REPs are transferred to the affiliated REP. Non-paying large
non-residential customers can be disconnected by any REP if the customer's
contract does not preclude it. Thus, within the new POLR framework, the POLR
provides electric service only to customers who request POLR service, whose
selected REP goes out of business, or who are transferred to the POLR by other
REPs for reasons other than non-payment. No later than October 1, 2004, the
Commission must decide whether all REPs should be permitted to disconnect all
non-paying customers. The new POLR rules are expected to reduce bad debt expense
in 2003.
Fuel Factor -- 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.
Summary -- Although TXU Energy 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 Energy's operations,
financial results and financial condition, and could cause TXU Energy's actual
results or outcomes to differ materially from any projected outcomes contained
in any forward-looking statement in this report, include:
27
TXU Energy'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 Energy will need to adapt to these
changes and may face increasing competitive pressure.
TXU Energy's businesses are subject to changes in laws (including the
Federal Power Act, as amended, the Public Utility Regulatory Act, as amended,
the Public Utility Regulatory Policies Act of 1978, as amended, and the Atomic
Energy Act, as amended; and changing governmental policy and regulatory actions
(including those of the Commission, the Federal Energy Regulatory Commission,
and the U.S. Nuclear Regulatory Commission (NRC)) with respect to matters
including, but not limited to, operation of nuclear power facilities,
construction and operation of other power generation facilities, decommissioning
costs, and present or prospective wholesale and retail competition.
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 Energy 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 Energy is subject to
audit and reversal of its tax positions by the Internal Revenue Service and
other taxing authorities.
TXU Energy is not guaranteed any rate of return on its capital investments
in its unregulated businesses. TXU Energy markets and trades power, including
power from its own production facilities, as part of its wholesale energy sales
business and portfolio management operation. TXU Energy'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.
Some of the fuel for TXU Energy'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 Energy can obtain for power
sales may not change at the same rate as changes in fuel costs. In addition, TXU
Energy markets and trades natural gas and other energy related commodities, and
volatility in these markets may affect TXU Energy'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 Energy'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 and local energy, environmental and other regulation
and legislation.
All but one of TXU Energy'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
Energy's base-load plant is dependent in significant part upon the price of gas.
TXU Energy cannot fully hedge the risk associated with dependency on gas because
of the expected useful life of TXU Energy's power production assets and the size
of its position relative to market liquidity.
28
To manage its financial exposure related to commodity price fluctuations,
TXU Energy 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 Energy 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 Energy 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 Energy has unhedged positions,
fluctuating commodity prices can impact TXU Energy's results of operations and
financial position, either favorably or unfavorably. For additional information
regarding the accounting treatment for TXU Energy's hedging and portfolio
management activities, see Note 2 to Financial Statements in the TXU Energy 2002
Form 8-K.
Although TXU Energy 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 Energy 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 Energy's portfolio management activities, TXU
Energy has guaranteed or indemnified the performance of a portion of the
obligations of its portfolio management subsidiaries. Some of these guarantees
and indemnities are for fixed amounts, others have a fixed maximum amount and
others do not specify a maximum amount. The obligations underlying certain of
these guarantees and indemnities are recorded on TXU Energy's consolidated
balance sheet as both current and noncurrent commodity contract liabilities.
These obligations make up a significant portion of these line items. TXU Energy
might not be able to satisfy all of these guarantees and indemnification
obligations if they were to come due at the same time.
TXU Energy's portfolio management activities are exposed to the risk that
counterparties which owe TXU Energy 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 Energy
might be forced to acquire alternative hedging arrangements or honor the
underlying commitment at then-current market prices. In such event, TXU Energy
might incur losses in addition to amounts, if any, already paid to the
counterparties. For information regarding TXU Energy's credit risk, see Note 13
to the TXU Energy 2002 Form 8-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 Energy's long-term debt are 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 Energy's long-term ratings, particularly below investment grade, borrowing
costs would increase and its potential pool of investors and funding sources
would likely decrease.
Most of TXU Energy's large customers, suppliers and counterparties require
sufficient creditworthiness in order to enter into transactions. If TXU Energy's
ratings were to decline to below investment grade, costs to operate the power
business 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 Energy.
29
In addition, as discussed elsewhere in this Current Report on Form 8-K and
in TXU Energy's 2002 Form 8-K, the terms of certain financing and other
arrangements of US Holdings and TXU Energy 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 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 Energy'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 Energy 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 Energy'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 Energy could be subject to additional costs and/or
the write-off of its investment in the project or improvement.
Insurance, warranties or performance guarantees may not cover any or all
of the lost revenues or increased expenses, including the cost of replacement
power. Likewise, TXU Energy'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 Energy will
be able to lower its bad debt expense, the achievement of which could be
affected by factors outside of TXU Energy's control, including weather, changes
in regulations, and economic and market conditions.
The ownership and operation of nuclear facilities, including TXU Energy'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 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 Energy's resources, including insurance coverage.
30
TXU Energy will be required to make payments (retail clawback) to Oncor
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 the
historical service territories of US Holdings and TXU SESCO Company (TXU SESCO)
is committed to be served by REPs other than TXU Energy. Under the Settlement
Plan, if the 40% test is not met and a payment is required, the amount of these
payments would be $90 multiplied by the number of residential or small
commercial customers, as the case may be, that TXU Energy serves on January 1,
2004, in the historical service territories of US Holdings and TXU SESCO less
the number of new retail electric customers TXU Energy serves in other areas of
Texas. As of March 31, 2003, TXU Energy had approximately 2.7 million
residential and small commercial customers in the historical service territories
of US Holdings and TXU SESCO. Based on assumptions and estimates regarding the
number of customers expected in and out of territory, TXU Energy 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 Energy is subject to extensive environmental regulation by
governmental authorities. In operating its facilities, TXU Energy is required to
comply with numerous environmental laws and regulations, and to obtain numerous
governmental permits. TXU Energy may incur significant additional costs to
comply with these requirements. If TXU Energy 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 Energy or its
facilities, and future changes in environmental laws and regulations could
occur, including potential regulatory and enforcement developments related to
air emissions.
TXU Energy 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 Energy 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
Energy's older facilities it may be uneconomical for TXU Energy to install the
necessary equipment, which may cause TXU Energy to shut down those facilities.
In addition, TXU Energy 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 Energy may obtain, or be required to provide, indemnification against
certain environmental liabilities. Another party could fail to meet its
indemnification obligations to TXU Energy.
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 Energy began to provide retail electric services to
all customers of US Holdings and TXU SESCO who did not take action to select
another REP.
TXU Energy will not be permitted to offer electricity to residential and
small commercial customers in the historical service territories of US Holdings
and TXU SESCO 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 Energy. Because TXU Energy
will not be able to compete for residential and small commercial customers on
the basis of price in the historical service territories of US Holdings and TXU
SESCO, TXU Energy 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 Energy's cost to produce power, TXU Energy 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 Energy'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.
31
Other REPs will be allowed to offer electricity to TXU Energy'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 Energy's retail electric operations in the historical
service territories of US Holdings and TXU SESCO will be largely dependent upon
the amount of headroom available to TXU Energy and the competitive REPs in TXU
Energy's price-to-beat rate. Since headroom is dependent, in part, on power
purchase costs, TXU Energy does not know nor can it estimate the amount of
headroom that it or other REPs will have in TXU Energy'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 Energy
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 Energy may lose customers to competitive
REPs.
In April 2002, pursuant to Commission rules, TXU Energy 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
Energy's price-to-beat rates for residential and small commercial customers by
slightly less than 5%. In January 2003, TXU Energy filed a request with the
Commission to increase the fuel factor component of its price-to-beat rates
based upon significant increases in the market price of natural gas. This
request was approved on March 5, 2003. The fuel factor increase went into effect
for the billing cycle that began March 6, 2003. As a result, average monthly
residential bills will rise approximately 12%. In March 2003, the Commission
amended its rules to require that natural gas prices increase more than 5% (10%
if the petition is filed after November 15 of any year) before allowing
petitions for adjustments to the fuel factor component. There is no assurance
that TXU Energy'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 Energy 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 Energy or any other REP can
offer to provide services to these customers at any negotiated price. TXU Energy
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 Energy to be its provider may subsequently
decide to switch to another provider.
In most retail electric markets outside the historical service territories
of US Holdings and TXU SESCO, TXU Energy'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 Energy 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 Energy 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 Energy. If there is
inadequate margin in these retail electric markets, it may not be profitable for
TXU Energy to enter these markets.
TXU Energy depends on T&D facilities owned and operated by Oncor and other
utilities to deliver the electricity it produces and sells to consumers, as well
as to other REPs. If transmission capacity is inadequate, TXU Energy'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
Energy expects to have a significant number of customers inside these
constrained areas. The cost to provide service to these customers may exceed the
cost to service other customers, resulting in lower gross margin. In addition,
any infrastructure failure that interrupts or impairs delivery of electricity to
TXU Energy's customers could negatively impact the satisfaction of its customers
with its service.
32
Additionally, in some areas of Texas, TXU Energy is dependent on
nonaffiliated T&D utilities for the reading of its customers' energy meters. TXU
Energy 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 Energy 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 Energy 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
Energy's underlying cost to obtain the commodities or services, its results of
operations would be adversely affected. TXU Energy will encounter similar risks
in selling bundled services that include non-energy-related services, such as
facilities management, and the like. In some cases, TXU Energy has little, if
any, prior experience in selling these non-energy-related services.
Under the Commission's rules, as an affiliated REP, TXU Energy 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
Energy is delayed in terminating electric service to those customers, its
results of operations 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 Energy 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
technologies to compete effectively with electricity production from traditional
power plants like TXU Energy'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 Energy has
facilities will likely increase the competitiveness of the wholesale power
market in that region. In addition, the market value of TXU Energy'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 Energy's facilities. Changes in technology could also alter the channels
through which retail electric customers buy electricity.
TXU Energy 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 Energy is a holding company and conducts its operations primarily
through wholly-owned subsidiaries. Substantially all of TXU Energy's
consolidated assets are held by these subsidiaries. Accordingly, TXU Energy'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 Energy in the form of distributions, loans or
advances, and repayment of loans or advances from TXU Energy.
Because TXU Energy 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 Energy'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 Energy 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 Energy.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact TXU Energy's ability
to sustain and grow its businesses, which are capital intensive, and would
likely increase its capital costs. TXU Energy 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 Energy's access to the
financial markets could be adversely impacted by various factors, such as:
33
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 Energy's credit or a reduction in TXU Energy's
credit ratings or the credit ratings of TXU Corp. or TXU Corp.'s
other subsidiaries;
o extreme volatility in TXU Energy's markets that increases margin or
credit requirements;
o a material breakdown in TXU Energy'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 Energy's business
that restrict TXU Energy's ability to access its liquidity facilities.
A lack of necessary capital and cash reserves could adversely impact the
evaluation of TXU Energy's creditworthiness by counterparties and rating
agencies. Further, concerns on the part of counterparties regarding TXU Energy'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
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 Energy 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 Energy's
financial condition or access to the capital markets. Additionally, it is
unclear what laws and regulations may develop, and TXU Energy 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 Energy 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 Europe, including the administration
proceeding, might result in lawsuits by the creditors of or others associated
with TXU Europe Limited. Such current and potential legal proceedings could
result in payments of judgment or settlement amounts. Since TXU Corp. is a
holding company, any substantial costs relating to these matters would likely be
funded in whole or in part using cash generated by its subsidiaries, including
TXU Energy.
TXU Energy is an indirect, wholly-owned subsidiary of TXU Corp. and a
direct, wholly-owned subsidiary of US Holdings. TXU Corp. and US Holdings are
not obligated to provide any loans, further equity contributions or other
funding to TXU Energy or any of its subsidiaries. TXU Energy must compete with
all of TXU Corp.'s and US Holdings' other subsidiaries for capital and other
resources.
As a member of this corporate group, TXU Energy operates within policies,
including dividend and affiliate lending policies, established by TXU Corp.
These policies may influence the operations and cash reserves of TXU Energy in a
manner that is unfavorable to creditors of TXU Energy.
The issues and associated risks and uncertainties described above are not
the only ones TXU Energy may face. Additional issues may arise or become
material as the energy industry evolves.
34
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 the TXU Energy 2002
Form 8-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
(MtM) 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.
March 31, December 31,
2003 2002
---- ----
Period-end MtM VaR ....................... $28.1 $23.2
Average MtM VaR .......................... $31.9 $38.0
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 MtM and accrual positions.
March 31, December 31,
2003 2002
--------- -----------
Period-end Portfolio VaR ................. $187.0 $143.5
Average Portfolio VaR (a) ................ $178.2 N/A
(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.
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.
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
35
INTEREST RATE RISK
See Note 3 to Financial Statements for discussion of the issuances of new
fixed rate debt and retirements of fixed rate debt since December 31, 2002.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Energy'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
Energy's management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective. There were no significant changes in TXU Energy's internal controls
or in other factors that could significantly affect internal controls subsequent
to their evaluation.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99(a) Section 906 Certification of Chief Executive Officer.
99(b) Section 906 Certification of Chief Financial Officer.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU US HOLDINGS COMPANY
By /s/ Biggs C. Porter
-----------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: May 20, 2003
37
TXU US HOLDINGS COMPANY
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 US Holdings
Company (the "Company"), certify that:
1. I have reviewed this current report on Form 8-K of the Company related to
TXU Energy Company LLC's ("TXU Energy") quarterly information (quarterly
report);
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 TXU Energy as of, and for, the period presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for TXU Energy and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to TXU Energy, 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 TXU Energy'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 Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to TXU Energy's auditors and 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 TXU Energy's ability to record,
process, summarize and report financial data and have identified for TXU
Energy'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 TXU Energy's internal controls;
and
6. The Company'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 20, 2003
/s/ Erle Nye
------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
38
TXU US HOLDINGS COMPANY
Certificate Pursuant To Section 302
of Sarbanes-Oxley Act of 2002
CERTIFICATION OF PFO
I, H. Dan Farell, Principal Financial Officer of TXU US Holdings Company
(the "Company"), certify that:
1. I have reviewed this current report on Form 8-K of the Company related to
TXU Energy Company LLC's ("TXU Energy") quarterly information (quarterly
report);
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 TXU Energy as of, and for, the period presented in this quarterly
report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for TXU Energy and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to TXU Energy, 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 TXU Energy'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 Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to TXU Energy's auditors and 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 TXU Energy's ability to record,
process, summarize and report financial data and have identified for TXU
Energy'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 TXU Energy's internal controls;
and
6. The Company'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 20, 2003
/s/ H. Dan Farell
-----------------------------------
Signature: H. Dan Farell
Title: Principal Financial Officer
39