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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
--OR--
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission Exact Name of Registrant as Specified in its Charter; I.R.S. Employer
File Number Address of Principal Executive Offices; and Telephone Number Identification No.
- ----------- ------------------------------------------------------------ ------------------
1-12833 Texas Utilities Company 75-2669310
(doing business as TXU Corp.)
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
---------- ------------------- ------------------------
Texas Utilities Company Common Stock, without par value New York Stock Exchange
The Chicago Stock Exchange
The Pacific Exchange
Growth Prides New York Stock Exchange
Income Prides New York Stock Exchange
TXU Capital I, a subsidiary of 7.25% Cumulative Trust Preferred Capital Securities New York Stock Exchange
Texas Utilities Company
TXU Capital II, a subsidiary of 8.70% Trust Originated Preferred Securities New York Stock Exchange
Texas Utilities Company
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Texas Utilities Company Common Stock held by non-
affiliates, based on the last reported sale price on the NYSE composite tape on
March 14, 2000: $7,043,528,301.
Common Stock outstanding at March 14, 2000: 263,926,119 shares, without par
value
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A, which
will be filed with the Commission on or about March 30, 2000, are incorporated
by reference into Part III of this report.
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TABLE OF CONTENTS
Page
____
PART I
Item 1. BUSINESS.......................................................... 1
LEGAL ENTITIES
TXU Corp. and Subsidiaries....................................... 1
TXU Electric Company and Subsidiaries............................ 3
TXU Gas Company and Subsidiaries................................. 3
TXU International Holdings Limited and Subsidiaries.............. 4
TXU Energy Industries Company and Subsidiaries................... 5
COMPETITIVE STRATEGY.............................................. 6
OPERATING SEGMENTS
US Electric...................................................... 8
US Gas........................................................... 18
US Energy Marketing.............................................. 22
Europe........................................................... 23
Australia........................................................ 32
Other Businesses................................................. 38
ENVIRONMENTAL MATTERS............................................. 39
Item 2. PROPERTIES........................................................ 43
Item 3. LEGAL PROCEEDINGS................................................. 46
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 47
EXECUTIVE OFFICERS OF TXU CORP.............................................. 48
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 49
Item 6. SELECTED FINANCIAL DATA........................................... 49
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 50
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 50
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 50
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 50
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 50
Item 11. EXECUTIVE COMPENSATION............................................ 50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................ 50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................... 51
APPENDIX A - Financial Information of Texas Utilities Company and Subsidiaries
APPENDIX B - TXU Corp. Exhibits to 1999 Form 10-K
i
PART I
Item 1. BUSINESS
LEGAL ENTITIES
--------------
TXU CORP. AND SUBSIDIARIES
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
TXU Corp.'s principal subsidiaries, with their current and former names
where applicable, are as follows:
Current Name Former Name
- ------------ -----------
TXU Electric Company Texas Utilities Electric Company
TXU Gas Company ENSERCH Corporation
TXU Lone Star Pipeline, a division Lone Star Pipeline Company, a division
of TXU Gas Company of ENSERCH Corporation
TXU Gas Distribution, a division Lone Star Gas Company, a division
of TXU Gas Company of ENSERCH Corporation
TXU Processing Company Enserch Processing, Inc
TXU Energy Trading Company Enserch Energy Services, Inc.
TXU International Holdings Limited TU International Holdings Limited
TXU Europe Limited TXU Eastern Holdings Limited
TXU Europe Group plc Eastern Group plc
TXU Europe Energy Trading Eastern Power Energy Trading
Limited Limited
Eastern Electricity plc No change
TXU Europe Power Limited Eastern Generation Limited
Eastern Natural Gas Limited No change
TXU Australia Holdings (Partnership)
Limited Partnership No change
TXU Australia Pty. Ltd. Texas Utilities Australia Pty. Ltd.
Eastern Energy Limited No change
Kinetik Energy Pty. Ltd. No change
Westar Pty. Ltd. No change
TXU Energy Industries Company Texas Energy Industries, Inc.
TXU SESCO Company Southwestern Electric Service Company
TXU Fuel Company Texas Utilities Fuel Company
TXU Mining Company Texas Utilities Mining Company
TXU Communications Company Lufkin-Conroe Communications Co.
TXU Energy Services Company Texas Utilities Integrated
Solutions, Inc.
TXU Business Services Company Texas Utilities Services Inc.
1
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses. TXU Corp. is the successor to TEI, the holding
company for the US businesses prior to the August 5, 1997 acquisition of TXU
Gas. TEI was organized in 1945 and, prior to August 5, 1997, was known as Texas
Utilities Company.
At December 31, 1999, TXU Corp. and its direct and indirect wholly-owned
subsidiaries had 21,934 full-time employees.
Mergers and Acquisitions
- ------------------------
Certain comparisons in this report have been affected by the February 1999
acquisition of the gas retail business of Kinetik Energy and the gas
distribution operations of Westar, the May 1998 acquisition of The Energy Group
PLC (TEG), the former holding company of TXU Europe Group, the August 1997
acquisition of TXU Gas, and the November 1997 acquisition of TXU Communications
Company (TXU Communications). Each of these acquisitions was accounted for as
a purchase business combination. The results of operations of each acquired
company are included in the consolidated financial statements of TXU Corp. only
for the periods subsequent to their respective dates of acquisition.
In March 1998, TXU Corp. made an offer for all the ordinary shares of TEG.
TXU Corp.'s offer for TEG was declared unconditional on May 19, 1998, which was
determined to be the date TXU Corp. acquired TEG. By the end of August 1998,
TXU Corp. had acquired all of TEG's outstanding shares. Immediately prior to
being acquired by TXU Corp., TEG completed the sale of its US and Australian
coal business and US energy marketing operations. Through a series of capital
transactions subsequent to its formation on February 5, 1998, TXU Europe Group
became an indirect subsidiary of TXU Europe.
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia.
TXU Corp. will pursue potential investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and are likely to enhance the long-term return to its shareholders.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. It is the fourth-largest Spanish energy company and is based in the
Asturias region in northern Spain. Hidrocantabrico has approximately 520,000
electricity customers and over 115,000 natural gas customers. It also has over
2,100 MW of installed generating capacity with a generation market share of
approximately 7%. TXU Europe and Hidrocantabrico also are partners in Synergia
Trading, S.A., an equally-owned joint venture which trades energy in the Spanish
market.
The offer is subject to a number of conditions, including, among others,
authorization by the CNMV, or Spanish Securities Exchange, approval by European
Union competition authorities and TXU Europe acquiring sufficient shares such
that it would hold at least 51% of Hidrocantabrico after the transaction is
completed. The transaction is expected to close in the second quarter of 2000.
On March 13, 2000, TXU Corp. announced that it had entered into an
agreement to acquire Fort Bend Communication Companies, Inc. (FBCC) based in
Katy, Texas, near Houston. FBCC is a privately-held company that provides
comprehensive communications services in Fort Bend, Harris, Waller and Brazoria
counties in Texas. It has 41,000 access lines in its regulated local exchange
territory and 4,000 competitive access lines in adjacent areas in and near
Houston. The transaction is expected to close in the second quarter of 2000.
2
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
Income Statement
Balance Sheet (average for periods
(at December 31,) ended December 31,)
---------------- --------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- -------
UK pounds sterling (Pounds) $1.6165 $1.6554 $1.6214 $1.6616 --
Australian dollars (A$) $0.6507 $0.6123 $0.6432 $0.6313 $0.7443
TXU ELECTRIC COMPANY AND SUBSIDIARIES
TXU Electric is an electric utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy solely within the State
of Texas. TXU Electric's service area is located in the north central, eastern
and western parts of Texas, with a population estimated at 6.1 million - about
one-third of the population of Texas. Electric service is provided to
approximately 2.6 million customers in 92 counties and 370 incorporated
municipalities, including the Dallas-Fort Worth metropolitan area. The area is
a diversified commercial and industrial center with substantial banking,
insurance, communications, electronics, aerospace, petrochemical and specialized
steel manufacturing, and automotive and aircraft assembly. The territory served
includes major portions of the oil and gas fields in the Permian Basin and East
Texas, as well as substantial farming and ranching sections of the State. TXU
Electric is the principal operating entity in the US Electric business segment.
For energy sales and operating revenues contributed by each customer
classification, see US Electric segment below.
At December 31, 1999, TXU Electric had 7,868 full-time employees. Some of
these employees provide services to other subsidiaries of TXU Corp., the cost of
which is billed to those subsidiaries.
TXU GAS COMPANY AND SUBSIDIARIES
TXU Gas is an integrated company focused on natural gas. Its major business
operations consist of the gathering, processing, transmission and distribution
of natural gas and the marketing of natural gas and electricity through the
following divisions and companies.
TXU Lone Star Pipeline, a partially rate-regulated division of TXU Gas,
owns and operates interconnected natural-gas transmission lines, underground
storage reservoirs, compressor stations and related properties, all within
Texas. With a system consisting of approximately 7,400 miles of transmission and
gathering pipelines in Texas, TXU Lone Star Pipeline is one of the largest
pipelines in the US. Through these facilities, it transports natural gas to
distribution systems of TXU Gas Distribution and other customers. Rates for the
services provided to TXU Gas Distribution are regulated by the Railroad
Commission of Texas (RRC), while rates for services to other customers are
generally established by competitively negotiated contracts.
TXU Gas Distribution, a partially rate-regulated division of TXU Gas, owns
and operates natural gas distribution systems and related properties. One of
the largest gas distribution companies in the US and the largest in Texas, TXU
Gas Distribution provides service through over 24,000 miles of distribution
mains. Through these facilities, it purchases, distributes and sells natural
gas to over 1.4 million residential, commercial and industrial customers in
approximately 560 cities and towns, including the 11-county Dallas-Fort Worth
Metroplex. TXU Gas Distribution also transports natural gas to end users within
its distribution system as market opportunities require. The distribution
service rates that TXU Gas Distribution charges its residential and commercial
customers are
3
established by the municipal governments of the cities and towns served with the
RRC having appellate jurisdiction. The majority of TXU Gas Distribution's
residential and commercial gas customers use gas for heating, and their needs
are directly affected by the mildness or severity of the heating season.
However, approximately 70% of TXU Gas Distribution's residential and commercial
volumes are subject to weather normalization adjustments. Sales to electric-
generation customers are affected by the mildness or severity of both cooling
and heating seasons.
TXU Processing Company (TXU Processing), a wholly-owned subsidiary of TXU
Gas, gathers and processes natural gas to remove impurities and extract natural
gas liquids for sale and sells the natural gas remaining after processing. TXU
Gas has recently sold or is selling a number of assets that no longer align with
its long-term strategy. In March 2000, TXU Gas announced that it had entered
into a contract for the sale of substantially all of the assets of TXU
Processing.
TXU Energy Trading Company (TXU Energy Trading), a wholly-owned subsidiary
of TXU Gas, is a wholesale and retail marketer of natural gas and electricity
throughout the US. Its primary natural gas markets, both retail and wholesale,
are in Texas, the Northeast, the Midwest and the West Coast. TXU Energy
Trading's marketing activities typically consist of (i) contracting to purchase
specific volumes of gas from producers, pipelines and other suppliers at various
points of receipt, (ii) aggregating gas supplies and arranging for the
transportation of these gas supplies, (iii) negotiating to sell specific volumes
of gas over a specified period of time to other wholesale marketers and end
users, (iv) trading gas volumes to optimize storage facilities and other asset
management strategies and (v) providing related risk-management services to its
customers. TXU Energy Trading makes physical sales of electricity in the
wholesale market throughout the US excluding the area of the Electric
Reliability Council of Texas (ERCOT).
At December 31, 1999, TXU Gas and its direct and indirect wholly-owned
subsidiaries had 1,486 full-time employees.
TXU INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
TXU International Holdings, an indirect subsidiary of TXU Corp., is a
holding company whose subsidiaries are engaged in international energy
generation, purchase, distribution and sales, and international gas operations.
Its primary holding companies in Europe and Australia are TXU Europe and TXU
Australia. Through its subsidiaries, TXU International Holdings owns TXU Europe
Group, one of the largest integrated electricity and gas groups in the UK and
the principal operating entity in the Europe operating segment, Eastern Energy,
an electric utility which is the principal operating company in the Australia
operating segment, and the gas retail and distribution operations of
Westar/Kinetik Energy in Australia (acquired in February 1999).
TXU Europe Group's principal business operations are electricity networks
and energy businesses in the UK and throughout other parts of Europe. TXU
Europe's major business operations are conducted through the following
subsidiaries of TXU Europe Group:
(i) TXU Europe Energy Trading Limited (TXU Europe Energy Trading), which
coordinates and manages for TXU Europe Group and for other parties
the price and volume risks associated with generation, electricity
and gas retail businesses;
(ii) Eastern Electricity plc (Eastern Electricity), one of the largest
retailers of electricity in the UK, and Eastern Energy Limited, which
supplies electricity outside the authorized area served by Eastern
Electricity;
(iii) TXU Europe Power Limited (TXU Europe Power), one of the largest
generators of electricity in the UK; and
(iv) Eastern Natural Gas Limited (Eastern Natural Gas), one of the largest
retail suppliers of natural gas in the UK.
4
At December 31, 1999, TXU Europe Group had 6,341 full-time employees.
In January 1999 TXU Corp., created TXU Australia to hold, either directly
or indirectly, all of its Australian investments. Prior to this time, TXU Corp.
principally conducted business in Australia through TXU Australia Pty. Ltd. TXU
Australia indirectly owns TXU Australia Pty. Ltd. Subsidiaries of TXU Australia
purchase, distribute, trade and retail electricity and natural gas, primarily in
the State of Victoria, Australia. TXU Australia's core businesses are conducted
through three principal operating companies:
(i) Eastern Energy, which purchases, distributes, trades and retails
electricity to approximately 500,000 customers, mainly in Victoria;
(ii) Westar, which distributes natural gas to approximately 400,000
customers in central and west Victoria; and
(iii) Kinetik Energy, which sells natural gas to approximately 400,000
customers in Victoria.
At December 31, 1999 TXU Australia had 2,249 full-time employees.
In 1998, TXU International Holdings acquired TXU Lone Star Gas
International, Inc. (LSGI) from TEI. LSGI is currently focused in the Mexico
Federal District and its operations consist primarily of ownership in gas
distribution systems.
TXU ENERGY INDUSTRIES COMPANY AND SUBSIDIARIES
TEI is a holding company for certain subsidiaries engaged in or supporting
the purchase, transmission, distribution and sale of electric energy,
telecommunications, retail energy services, power development, and other
businesses.
TXU SESCO Company (TXU SESCO) is engaged in the purchase, transmission,
distribution and sale of electric energy in ten counties in the eastern and
central parts of Texas with a population estimated at 127,000.
TXU Fuel Company (TXU Fuel) owns a natural gas pipeline system; acquires,
stores and delivers fuel gas; and provides other fuel services, at cost, for the
generation of electric energy by TXU Electric.
TXU Mining Company (TXU Mining) owns, leases and operates fuel production
facilities for the surface mining and recovery of lignite, at cost, for the
generation of electric energy by TXU Electric.
TXU Communications Company (TXU Communications) is the parent company of
TXU Communications Telephone Company, TXU Communications Transport Company and
its subsidiaries, and TXU Communications Telecom Services Company. TXU
Communications Telephone Company is an independent local exchange carrier which
has provided regulated telephone services to its customers for 100 years and has
over 113,000 access lines. It also provides access services to a number of
interexchange carriers who provide long-distance services. TXU Communications
Telecom Services Company provides Internet access, cellular mobile telephones,
radio paging services and private branch exchange service to local customers, as
well as interexchange long-distance service, with a primary focus on business
customers. TXU Communications Transport Company owns fiber optic cable systems
that provide high capacity bandwidth to customers.
TXU Communications Holding Company provides access to advanced
telecommunications technology, primarily for TXU Corp.'s expected expansion of
the energy services business. In December 1999, TXU Communications Holdings
sold its 20% ownership interest in the partnerships that operate PrimeCo
Personal Communications LP's Texas business to the other partners for $357
million.
TXU Energy Services Company is an unregulated company providing retail
energy services. It bundles energy-related products and services for selected
market segments.
5
TXU Business Services Company (TXU Business Services) provides financial,
accounting, information technology, environmental, customer, procurement and
personnel services and other administrative services, at cost, to TXU Corp. and
its other subsidiaries. TXU Business Services acts as transfer agent, registrar
and dividend paying agent with respect to the common stock of TXU Corp., the
preferred stock and preferred trust securities of TXU Electric and TXU Gas,
transfer agent and registrar for the preferred securities of TXU Corp. and as
agent for participants under TXU Corp.'s Direct Stock Purchase and Dividend
Reinvestment Plan.
TXU Properties Company (TXU Properties) owns, leases and manages real and
personal properties, primarily TXU Corp.'s corporate headquarters.
Basic Resources Inc. was organized for the purpose of developing natural
resources, primarily energy sources, and other business opportunities.
TXU Development Company develops and finances independent electric power
plant and cogeneration facilities.
COMPETITIVE STRATEGY
--------------------
TXU Corp. has developed a strategy designed to achieve operations of
significant scale in selected regions by integrating and leveraging its
capabilities across multiple products and services. TXU Corp. plans to enhance
its leading position in electric, gas, and related services in Texas; develop
broad-based energy and related businesses in other US regions determined by TXU
Corp. to be promising; build on its substantial, broad-based position in the UK
and Australia and its developing position in continental Europe; and build on
customer relationships through retail energy and related services. TXU Corp.'s
strategy involves establishing upstream positions (electric generation through
ownership or contracts and gas supply through producing assets or contracts) and
downstream retail customer relationships. TXU Corp. manages and leverages the
knowledge and value from these positions through effective portfolio management
and trading capabilities that manage the risk and enhance the value of existing
positions while adjusting the portfolio as needed to address market conditions.
6
OPERATING SEGMENTS
------------------
TXU Corp. has five reportable operating segments:
(1) US Electric - operations involving the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas (primarily TXU Electric, TXU
SESCO, TXU Fuel and TXU Mining operations);
(2) US Gas - operations involving the gathering, processing, transmission
and distribution of natural gas and selling of natural gas liquids in Texas
(primarily TXU Lone Star Pipeline, TXU Gas Distribution and TXU Processing);
(3) US Energy Marketing - operations involving purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US and parts of Canada (primarily TXU Energy
Trading);
(4) Europe - operations involving the generation, purchase, distribution
and sale of electricity and the purchase and sale of natural gas primarily in
the UK, with additional energy interests throughout the rest of Europe
(primarily TXU Europe Group);
(5) Australia - operations involving the purchase, distribution, trading
and retailing of electricity and natural gas, primarily in the State of
Victoria, Australia (primarily TXU Australia); and
Other - non-segment operations consisting of telecommunications, retail
energy services, international gas operations (other than Europe and Australia),
power development and other energy development activities.
Financial information required hereunder is set forth in Note 15 to
Financial Statements.
7
US ELECTRIC SEGMENT
GENERAL
US Electric operations are engaged in the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas.
Operating Statistics
Years Ended December 31
1999 1998 1997
---- ---- ----
ELECTRIC ENERGY GENERATED AND PURCHASED
(Gigawatt-hours - GWh)
Generated - net station output.............. 94,575 97,574 91,298
Purchased and net interchange............... 12,620 12,205 11,980
-------- -------- --------
Net generated and purchased........ 107,195 109,779 103,278
Company use, losses, and unaccounted for.... 6,647 6,637 6,255
-------- -------- --------
Total electric energy sales........ 100,548 103,142 97,023
======== ======== ========
ELECTRIC ENERGY SALES (GWh)
Residential................................. 35,612 37,299 33,967
Commercial.................................. 30,015 29,617 27,602
Industrial.................................. 24,915 25,313 24,785
Government and municipal.................... 6,640 6,652 6,170
-------- -------- --------
Total general business............. 97,182 98,881 92,524
Other electric utilities.................... 3,366 4,261 4,499
-------- -------- --------
Total electric energy sales........ 100,548 103,142 97,023
======== ======== ========
OPERATING REVENUES (millions)
Base rate revenues
Residential............................ $ 2,074 $ 2,192 $ 2,025
Commercial............................. 1,355 1,327 1,256
Industrial............................. 587 593 593
Government and municipal............... 326 324 301
-------- -------- --------
Total general business............. 4,342 4,436 4,175
Other electric utilities............... 105 121 139
-------- -------- --------
Total base rate revenues........... 4,447 4,557 4,314
Fuel........................................ 1,688 1,788 1,697
Transmission service........................ 148 126 114
Other....................................... 72 70 51
-------- -------- --------
Subtotal........................... 6,355 6,541 6,176
Earnings in excess of earnings cap.......... (92) -- --
-------- -------- --------
Total operating revenues........... $ 6,263 $ 6,541 $ 6,176
======== ======== ========
ELECTRIC CUSTOMERS (end of year - in thousands).. 2,612 2,544 2,483
DEGREE DAYS (average for service area)
Percent of normal:
Cooling................................ 114% 130% 94%
Heating................................ 70% 89% 106%
8
Electric Industry Restructuring -- Legislation was passed during the 1999
session of the Texas Legislature that will restructure the electric utility
industry in Texas (1999 Restructuring Legislation). Among other matters, the
legislation continues the stipulation in Docket 18490 that earnings in excess of
the earnings cap be used as mitigation to the cost of nuclear production assets
(see Note 13 to Financial Statements); authorizes competition in the retail and
generation markets for electricity beginning January 1, 2002; provides for the
recovery of generation-related and purchased power related stranded costs and
generation-related regulatory assets; requires reductions in nitrogen oxide
(NOx) and sulfur dioxide (SO2) emissions; requires a rate freeze for all retail
customers until January 1, 2002 and certain rate reductions for residential and
small commercial customers for up to five years thereafter; and sets certain
limits on capacity owned and controlled by power generation companies. Certain
provisions of the 1999 Restructuring Legislation may be subject to different
interpretation. By September 1, 2000, each electric utility must separate from
its regulated activities its customer energy services business activities that
are otherwise already widely available in the competitive market. By January 1,
2002, each electric utility must separate ("unbundle") its business into the
following units: a power generation company, a retail electric provider and a
transmission and distribution company or separate transmission and distribution
companies. A power generation company generates electricity that is intended to
be sold at wholesale. In general, a power generation company may not own a
transmission or distribution facility and may not have a certificated service
area. A retail electric provider sells electric energy to retail customers and
may not own or operate generation assets. A transmission and distribution (T&D)
company may only own or operate facilities to transmit or distribute
electricity. On or before April 1, 2000, each electric utility must file with
the Public Utility Commission of Texas (PUC) a separation of its costs into
competitive and regulated components, proposed tariffs for its proposed T&D
utility, and in initial estimate of its generation-related stranded costs.
In October 1999, TXU Electric filed a petition with the PUC for a financing
order (Docket No. 21527) to securitize $1.65 billion of its generation-related
regulatory assets and other qualified costs in accordance with the 1999
Restructuring Legislation. TXU Electric would issue transition bonds
securitizing a component of future revenues. The proceeds received by TXU
Electric are to be used solely for the purposes of retiring utility debt and
equity. On March 1, 2000, the PUC rejected TXU Electric's request for
securitization of the $1.65 billion and authorized securitization of only $357
million. TXU Electric believes this ruling is inconsistent with the 1999
Restructuring Legislation and announced that it will pursue an appeal to the
Travis County, Texas District Court following the receipt of a final order
evidencing such ruling from the PUC. TXU Electric expects that any difference
between the $1.65 billion and the amount finally authorized will continue to be
deferred until securitization of generation-related assets is addressed in 2002.
TXU Electric is unable to predict the outcome of these proceedings.
On January 10, 2000, TXU Electric filed with the PUC its business
separation plan as required by the 1999 Restructuring Legislation. This plan
describes how TXU Electric proposes to separate the provision of competitive
energy services from its regulated business activities by September 1, 2000 and
how it plans to unbundle its business. Only the T&D functions will continue to
be regulated. An independent organization certified by the PUC will oversee
transmission system planning and reliability in the State of Texas. Beginning
January 1, 2002, retail electric customers in Texas will be able to select their
electricity providers.
Generation
- ----------
Generating Units --At December 31, 1999, TXU Electric owned or leased and
operated 80 electric generating units with an aggregate net generating
capability of 21,080 megawatts (MW). (See Item 2. Properties).
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. These plants have an
aggregate generating capacity of 3,116 MW, or approximately 15% of TXU
Electric's generating capacity. Any gain on the sale of these plants will be
recorded as a regulatory liability and applied against TXU Electric's generation
assets that may become stranded costs under provisions of the 1999 Restructuring
Legislation, see Note 3 to Financial Statements. TXU Electric plans to sell the
plants, together with all associated assets, including land, lakes, water
rights, air permits, emission allowances and fuel transportation contracts. TXU
Electric anticipates entering into a tolling agreement with the new owners to
receive the capacity and energy from these plants for a portion of the peak load
season of 2001, and purchasing any remaining requirements on the open market.
TXU Electric anticipates completion of the plant sales by the end of 2000.
9
Electricity Peak Load and Generation Capability -- The electricity peak
load and net generation capability for TXU Electric is contained in the
following table. For TXU SESCO, peak load was 263 MW on August 26, 1999. TXU
SESCO generates no electric energy.
TXU Electric's net capability, peak load and reserve, in MW, at the time of
peak were as follows during the years indicated:
Electricity
Peak Load (a)
------------------------
Increase Firm
Net Over Peak
Year Capability Amount Prior Year Load Reserve (b)
- ---- ---------- ------ ----------- ------ -----------
1999..... 22,858 (c) 21,748 1.7% 20,724 2,134
1998..... 22,579 (d) 21,383 5.1% 20,351 2,228
1997..... 22,449 (e) 20,351 3.5% 19,229 3,220
- ----------------
(a) The 1999 peak load occurred on August 26. TXU Electric's peak load includes
interruptible load at the time of peak of 1,024 MW in 1999, 1,032 MW in
1998 and 1,122 MW in 1997.
(b) Amount of net capability in excess of firm peak load at the time of peak.
(c) Included in net capability is 1,778 MW of firm purchased capacity.
(d) Included in net capability is 1,499 MW of firm purchased capacity.
(e) Included in net capability is 1,224 MW of firm purchased capacity.
The peak load changes for 1999 as compared to 1998, as well as the
peak load changes for 1998 as compared to 1997, resulted primarily from customer
growth and increased usage due to hotter-than-normal weather. The peak load
change for 1997, compared to the prior year, resulted primarily from customer
growth and weather factors. TXU Electric expects to continue to purchase
capacity in the future from various sources. (See Fuel Supply and Purchased
Power and Note 14 to Financial Statements.) Firm peak load (excluding
interruptible contracts) increases over the next two years are expected to
average approximately 2.6% annually, after consideration of load management
programs.
Resource Estimates --Changes in utility regulation and legislation at
the federal and state levels, such as the Public Utility Regulatory Policy Act
of 1978 (PURPA), the National Energy Policy Act of 1992 (Energy Policy Act) and,
most recently, the 1999 Restructuring Legislation for the electric industry in
Texas have significantly changed the way utilities plan for new resources. The
1999 Restructuring Legislation incorporates sweeping changes for electric
utilities operating in Texas by opening up the generation portion of the
business to competition. Beginning January 1, 2002, retail electric customers
in Texas will be able to select their electricity providers. Thus, each retail
electric provider will be responsible for providing generation resources to its
customers.
Because of these competitive forces TXU Electric will be purchasing
some of its energy requirements needed to serve customer loads through resource
contracts with third-party suppliers. Thus, for planning purposes, TXU Electric
can no longer readily identify the ownership and types of resources needed to
serve its customers prior to the actual selection of the resource contracts.
TXU Electric will fill some of its resource needs through load management and
renewable resources. It does not expect to have difficulty filling the
remainder of its requirements from purchased power.
TXU Electric has secured resources for the years 2000 and 2001 from
various suppliers through short-term (two years or less) purchased power
contracts. (See Fuel Supply and Purchased Power.) Additional resource needs
required for 2002 and beyond will be acquired in the competitive energy
marketplace.
10
Retail competition in Texas will be effective on January 1, 2002 for
customers of investor-owned electric utilities. At that time, by law, TXU
Electric and TXU SESCO must lower their current retail rates charged to
residential and small commercial customers in their service areas to rates that
are 6% lower than the rates that were in effect on January 1, 1999. This is
known as the "price to beat," meaning that competitors will try to beat this
price to attract new customers. This rate is frozen for residential and small
commercial customers for three years, with respect to each class of service,
until 40% of the electric power consumed by customers in that class or segment
is supplied by competing Retail Electric Providers (REPs). On January 1, 2005,
TXU Electric and TXU SESCO will be able to lower its retail rates to compete
directly with other REPs, but must continue to offer the "price to beat" through
December 31, 2006. Electric retail rates will then be driven by market forces
and will no longer be regulated.
Fuel Supply And Purchased Power -- Net input during 1999 totaled
107,195 GWh of which 94,575 GWh were generated by TXU Electric. Average fuel
and purchased power cost (excluding capacity charges) per kilowatt-hour (kWh) of
net input were 1.82 cents for 1999, 1.78 cents for 1998 and 1.85 cents for 1997,
respectively. A comparison of TXU Electric's resource mix for net kWh input
and the unit cost per million British thermal units (Btu) of fuel during the
last three years is as follows:
Mix for Net Unit Cost
kWh Input Per Million Btu
--------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
Fuel for Electric Generation:
Gas/Oil (a)................. 34.3% 36.7% 32.9% $2.59 $2.39 $2.80
Lignite/Coal (b)............ 38.5 36.5 38.9 1.03 1.03 1.04
Nuclear..................... 16.4 16.4 17.1 0.57 0.59 0.57
----- ----- -----
Total/Weighted Average Fuel Cost.. 89.2 89.6 88.9 $1.56 $1.52 $1.62
Purchased Power (c)............... 10.8 10.4 11.1
----- ----- -----
Total............................. 100.0% 100.0% 100.0%
===== ===== =====
- ----------------------
(a) Fuel oil was an insignificant component of total fuel and purchased power
requirements.
(b) Lignite/coal cost per ton to TXU Electric was $13.30 in 1999, $13.47 in
1998 and $13.55 in 1997.
(c) Excludes power purchased by TXU Electric's affiliate, TXU SESCO, from TXU
Electric: 1999 - 0 GWh; 1998 - 267 GWh ; and 1997 -548 GWh . Includes TXU
Electric purchases from TXU SESCO: 1999 - 6.1 GWh; 1998 - 6.3 GWh; and 1997
- 5.2 GWh.
In 1999, the US Electric segment purchased a net of 12,620 GWh or
approximately 11.8% of its energy requirements. TXU Electric and TXU SESCO had
available 2,080 MW of firm purchased capacity under contract and a full
requirements contract to meet the needs of TXU SESCO. TXU Electric received
energy in 1999 under purchased power contracts for energy from wind turbines
equivalent to approximately 41 MW. The wind generation facilities include eight
of the largest commercial wind turbines in the world, rated at 1.65 MW each.
TXU Electric expects to acquire additional amounts of purchased resources in the
future to adequately and reliably accommodate its customers' electrical needs.
Such resources will be acquired in accordance with the requirements of the Texas
Public Utility Regulatory Act, as amended (PURA) and the PUC Substantive Rules.
Beginning January 1, 2002, the acquisition of resources will generally not be
subject to regulation by the PUC. For information concerning future resource
requirements, see Electricity Peak Load and Generation Capability.
TXU Electric and TXU SESCO are unable to predict: (i) whether or not
problems may be encountered in the future in obtaining the fuel and purchased
power each will require, (ii) the effect upon operations of any difficulty
either of them may experience in protecting rights to fuel and purchased power
now under contract, or (iii) the costs of future fuel and purchased power and to
what extent they will be recoverable. (See Regulation and Rates.)
Gas/Oil --Fuel gas for units at eighteen of the principal generating
stations of TXU Electric, having an aggregate net gas/oil capability of 12,955
MW, was provided during 1999 by TXU Fuel. TXU Fuel supplied approximately 12% of
such fuel gas requirements under contracts with producers at the wellhead and
88% under contracts with commercial suppliers.
11
Fuel oil can be stored at seventeen of the principally gas-fueled
generating stations. At December 31, 1999, TXU Electric had fuel oil storage
capacity sufficient to accommodate approximately 6.1 million barrels of oil and
had approximately 2.3 million barrels of oil in inventory.
TXU Fuel has acquired supplies of gas from producers at the wellhead under
contracts expiring at intervals through 2008. As gas production under these
contracts declines and contracts expire, new contracts are expected to be
negotiated to replenish or augment such supplies. TXU Fuel has negotiated gas
purchase contracts, with terms ranging from one to ten years, with a number of
commercial suppliers. Additionally, TXU Fuel has entered into a number of
short-term gas purchase contracts with other commercial suppliers at spot market
prices. In general, these spot gas purchase contracts require both the buyer
and seller to purchase and deliver the gas on negotiated terms during the
agreed-upon delivery period. In the past, curtailments of gas deliveries have
been experienced during periods of winter peak gas demand; however, such
curtailments have been of relatively short duration, have had a minimal impact
on operations and generally have required utilization of fuel oil and gas
storage inventories to replace the gas curtailed. No curtailments were
experienced during 1999.
TXU Fuel owns and operates an intrastate natural gas pipeline system that
extends from the gas-producing area of the Permian Basin in West Texas to the
East Texas gas fields and southward to the Gulf Coast area. This system
includes a one-half undivided interest in a 36-inch pipeline that extends 391
miles from the Permian Basin area to a point of termination south of the Dallas-
Fort Worth area. Additionally, TXU Fuel owns a 39% undivided interest in
another 36-inch pipeline connecting to this pipeline and extending 58 miles
eastward to one of TXU Fuel's underground gas storage facilities. TXU Fuel also
owns and operates approximately 1,500 miles of various smaller capacity lines
that are used to gather and transport natural gas from other gas-producing
areas. The pipeline facilities of TXU Fuel form an integrated network through
which fuel gas is gathered and transported to certain TXU Electric generating
stations for use in the generation of electric energy.
TXU Fuel also owns and operates three underground gas storage facilities
with a usable capacity of 26.9 billion cubic feet (Bcf), with approximately 14.3
Bcf of gas in inventory at December 31, 1999. Gas stored in these facilities
currently can be withdrawn for use during periods of peak demand to meet
seasonal and other fluctuations or curtailment of deliveries by gas suppliers.
Under normal operating conditions, up to 400 million cubic feet can be withdrawn
each day for a ten-day period, with withdrawals at lower rates thereafter. One
of these gas storage facilities, the Worsham-Steed facility located in Jack
County, Texas will be retired after withdrawal of the economically recoverable
gas.
Lignite/Coal --Lignite is used as the primary fuel in two units at the Big
Brown generating station (Big Brown), three units at the Monticello generating
station (Monticello), three units at the Martin Lake generating station (Martin
Lake), and one unit at the Sandow generating station (Sandow), having an
aggregate net capability of 5,825 MW. TXU Electric's lignite units have been
constructed adjacent to surface minable lignite reserves. TXU Electric owns in
fee or has under lease an estimated 465 million tons of proven reserves
dedicated to the Big Brown, Monticello and Martin Lake generating stations. TXU
Electric also owns in fee or has under lease in excess of 229 million tons of
proven reserves not dedicated to specific generating stations. TXU Mining
operates owned and/or leased equipment to remove the overburden and recover the
lignite. One of TXU Electric's lignite units, Sandow Unit 4, is fueled from
lignite deposits owned by Alcoa, which furnishes fuel at no cost to TXU Electric
for that portion of energy generated from such unit that is equal to the amount
of energy delivered to Alcoa.
Lignite production operations at Big Brown, Monticello and Martin Lake are
accompanied by an extensive reclamation program that returns the land to
productive uses such as wildlife habitats, commercial timberland and pasture
land. For information concerning federal and state laws with respect to surface
mining, see Environmental Matters.
TXU Electric supplements its lignite fuel at Big Brown, Monticello and
Martin Lake with western coal from the Powder River Basin (PRB) in Wyoming. The
coal is purchased from three suppliers under two or three year contracts and is
transported from the PRB to TXU Electric's generating plants by railcar under
three contracts that range in length from two to seven years.
12
TXU Electric began supplementing its lignite fuel by utilizing western coal
at Monticello in 1996, at Martin Lake in November 1999 and at Big Brown in
January 2000. Construction of a rail spur into Big Brown to facilitate the
delivery of western coal was completed in January 2000, six months earlier than
anticipated.
Nuclear --TXU Electric owns and operates two nuclear-fueled generating
units at the Comanche Peak nuclear powered electric generating station (Comanche
Peak), each of which is designed for a net capability of 1,150 MW.
The nuclear fuel cycle requires the mining and milling of uranium ore to
provide uranium oxide concentrate (U3O8), the conversion of U3O8 to uranium
hexafluoride (UF6), the enrichment of the UF6 and the fabrication of the
enriched uranium into fuel assemblies. TXU Electric has on hand, or has
contracted for, the raw materials and services it expects to need for its
nuclear units through future years as follows: uranium (2001), conversion
(2003), enrichment (2014), and fabrication (2011). Although TXU Electric cannot
predict the future availability of uranium and nuclear fuel services, TXU
Electric does not currently expect to have difficulty obtaining U3O8 and the
services necessary for its conversion, enrichment and fabrication into nuclear
fuel for years later than those shown above.
The Nuclear Waste Policy Act of 1982, as amended (NWPA), provides for the
development by the Department of Energy (DOE) of interim storage and permanent
disposal facilities for spent nuclear fuel and/or high level radioactive waste
materials. In January 1998, the DOE did not meet its obligation to begin
accepting spent nuclear fuel. The DOE continues to maintain its position that
no obligation to begin acceptance of spent nuclear fuel exists despite multiple
industry initiated lawsuits challenging that position and a US Court of Appeals
decision that such obligation exists. TXU Electric is unable to predict what
impact, if any, the DOE's delay will have on TXU Electric's future operations.
Under provisions of the NWPA, funding for the program is provided by a one-mill
per kWh fee currently levied on electricity generated and sold from nuclear
reactors, including the Comanche Peak units.
TXU Electric's onsite spent nuclear fuel storage capability is sufficient
to accommodate the operation of Comanche Peak through the year 2017, while fully
maintaining the capability to off-load the core of one of the nuclear-fueled
generating units. Additional approval from the Nuclear Regulatory Commission
(NRC) will be required to utilize this full storage capability. TXU Electric is
currently pursuing options for utilizing a larger portion of the full storage
capability, subject to approval by the NRC.
Transmission
- ------------
In 1995, TXU Electric became the first utility in Texas to functionally
unbundle, or separate, its transmission operations into a business unit. The
unit operates independently within the larger company and has the flexibility to
adapt to changing market and regulatory forces. It is now one of the key
components of the US Electric business segment. TXU Electric and TXU SESCO are
members of ERCOT, an intrastate network of investor-owned entities,
cooperatives, public entities, non-utility generators and power marketers.
ERCOT is the regional reliability coordinating organization for member electric
power systems in Texas, the Independent System Operator (ISO) of the
interconnected transmission system of those systems, and is responsible for
ensuring equal access to transmission service by all wholesale market
participants in the ERCOT region.
The function of the transmission business is to provide non-discriminatory
wholesale open access to TXU Electric's transmission facilities through business
practices consistent with the standard of conduct rules enacted by the PUC. The
transmission system transverses almost 200,000 square miles of Texas and
consists of over 13,000 circuit miles of transmission line and over 900
substations.
The transmission business supports the operation of the ERCOT ISO and all
ERCOT members, as well as TXU Electric's responsibilities and obligations to its
wholesale and retail customers. The transmission business unit has planning,
design, construction, operation and maintenance responsibility for the
transmission grid and for the load serving substations.
Services are provided under tariffs approved by the PUC and the Federal
Energy Regulatory Commission (FERC). Transmission service offers the use of the
transmission system for delivery of power over facilities operating at 60,000
volts and above. Transformation service offers the use of substation assets to
transform voltage
13
to below 60,000 volts. Other services offered by the transmission business
include: static and dynamic scheduling and miscellaneous services such as system
impact studies, facilities studies, and maintenance of substations and
transmission lines owned by other parties.
The transmission business is participating with the ISO and other ERCOT
utilities to plan, design and obtain regulatory approval for and construct new
transmission lines necessary to increase bulk power transfer capability and to
remove existing limitations on the ERCOT transmission grid.
The principal generating facilities of TXU Electric and load centers of TXU
Electric and TXU SESCO are connected by 4,133 circuit miles of 345-kilovolt (kV)
transmission lines and 9,754 circuit miles of 138- and 69-kV transmission lines.
TXU SESCO is connected to TXU Electric by three 138-kV lines, ten 69-kV lines
and three lines at distribution voltage.
TXU Electric is connected by six 345-kV lines to Reliant Energy Company; by
three 345-kV, eight 138-kV and nine 69-kV lines to West Texas Utilities Company;
by two 345-kV and eight 138-kV lines to the Lower Colorado River Authority; by
four 345-kV and eight 138-kV lines to the Texas Municipal Power Agency; by one
asynchronous High Voltage Direct Current (HVDC) interconnection to Southwestern
Electric Power Company; and at several points with smaller systems operating
wholly within Texas.
Distribution
- ------------
The TXU Electric distribution system supplies electricity to approximately
2.6 million customers (including approximately 2.3 million residential customers
and 304,000 commercial and industrial businesses). On average, TXU Electric has
added approximately 47,000 customers to its system each year for the last
several years and over 68,000 in 1999. The electric distribution business
consists of the ownership, management, construction, maintenance and operation
of the distribution network within TXU Electric's certificated service area.
TXU Electric's distribution network receives electricity from the
transmission grid through power distribution substations and distributes
electricity to end users and wholesale customers through approximately 2,800
distribution feeders.
The TXU Electric distribution network consists of approximately 52,500
miles of overhead primary conductors, 21,650 miles of overhead secondary and
street light conductors, 10,700 miles of underground primary conductors and
6,067 miles of underground secondary and street light conductors. The majority
of the distribution system operates at 25-kV and 12.5-kV.
REGULATION AND RATES
TXU Corp. is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, TXU Corp. and all of its subsidiary companies are
exempt from the provisions of such Act, except Section 9(a)(2) which relates to
the acquisition of securities of public utility companies and Section 33 which
relates to the acquisition of foreign (non-US) utility companies.
TXU Electric and TXU SESCO are subject to various federal, state and local
regulations. (See discussion below and Environmental Matters.) TXU Electric
and TXU SESCO believe that they are not public utilities as defined in the
Federal Power Act and have been advised by their counsel that they are not
subject to general regulation under such Act.
The PUC has original jurisdiction over electric rates and service in
unincorporated areas and those municipalities that have ceded original
jurisdiction to the PUC and has exclusive appellate jurisdiction to review the
rate and service orders and ordinances of municipalities. Generally, PURA
prohibits the collection of any rates or charges (including charges for fuel) by
a public utility that does not have the prior approval of the PUC.
14
TXU Electric is subject to the jurisdiction of the NRC with respect to
nuclear power plants. NRC regulations govern the granting of licenses for the
construction and operation of nuclear power plants and subject such plants to
continuing review and regulation.
Docket 9300 -- The PUC's final order (Order) in connection with TXU
Electric's January 1990 rate increase request (Docket 9300) was ultimately
reviewed by the Supreme Court of Texas. As a result, an aggregate of $909
million of disallowances with respect to TXU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to TXU Electric's earnings, has been remanded to the District Court
with instructions that it be remanded to the PUC for reconsideration on the
basis of a prudent investment standard. On remand, the PUC also was required to
reevaluate the appropriate level of TXU Electric's construction work in progress
included in rate base in light of its financial condition at the time of the
initial hearing. In connection with the settlement of Docket 18490, proceedings
in the remand of Docket 9300 have been stayed. TXU Electric cannot predict the
outcome of the reconsideration of the Order on remand by the PUC.
Docket 18490 -- The PUC approved the non-unanimous stipulation filed on
December 17, 1997 by TXU Electric, together with the General Counsel of the PUC,
the Office of Public Utility Counsel and various other parties interested in TXU
Electric's rates and services. The stipulation, modified to incorporate changes
made by the PUC, resulted in base rate credits beginning January 1, 1998, of 4%
for residential customers, 2% for general service secondary customers and 1% for
all other retail customers, and additional base rate credits for residential
customers of 1.4% beginning January 1, 1999. Certain parties that did not sign
the stipulation have appealed the PUC's approval by filing suit in state
district court. TXU Electric cannot predict the outcome of these appeals.
In accordance with the stipulation, from January 1, 1998 through June 30,
1999, earnings in excess of the earnings cap were recorded as additional
depreciation of nuclear production assets, and a reclassification of
depreciation expense was made from T&D to nuclear production assets. As
discussed in Notes 2 and 3 to Financial Statements, application of Statement of
Financial Accounting Standards (SFAS) No. 71 to the generation portion of TXU
Electric's business was discontinued as of June 30, 1999. Effective July 1,
1999, earnings in excess of the earnings cap imposed by the 1999 Restructuring
Legislation were recorded as a reduction of revenues, and a corresponding
regulatory liability recorded. Upon final PUC determination, the regulatory
liability associated with earnings in excess of the earnings cap will be applied
against TXU Electric's stranded generation assets as determined under the 1999
Restructuring Legislation's market valuation criteria or refunded to customers.
Additionally, effective July 1, 1999, TXU Electric ceased the
reclassification of T&D depreciation expense to nuclear production assets.
Instead, an amount equal to T&D depreciation expense for the period was recorded
as a regulatory asset, which will be amortized as it is recovered through the
Distribution portion of the business. An equivalent amount was recorded as a
regulatory liability which will be applied against TXU Electric's stranded
generation assets as determined under the 1999 Restructuring Legislation's
market valuation criteria or refunded to customers.
Fuel Cost Recovery Rule -- Pursuant to a PUC rule, the recovery of TXU
Electric's eligible fuel costs is provided through fixed fuel factors. The rule
allows a utility's fuel factor to be revised upward or downward every six
months, according to a specified schedule. A utility is required to petition to
make either surcharges or refunds to ratepayers, together with interest based on
a twelve-month average of prime commercial rates, for any material cumulative
under- or over-recovery of fuel costs. If the cumulative difference of the
under- or over-recovery, plus interest, exceeds 4% of the annual estimated fuel
costs most recently approved by the PUC, it will be deemed to be material.
Final reconciliation of fuel costs must be made either in a reconciliation
proceeding, which may cover no more than three years and no less than one year,
or in a general rate case. In a final reconciliation, a utility has the burden
of proving that fuel costs under review were reasonable and necessary to provide
reliable electric service, that it has properly accounted for its fuel-related
revenues, and that fuel prices charged to the utility by an affiliate were
reasonable and necessary and not higher than prices charged for similar items by
such affiliate to other affiliates or nonaffiliates. For generating utilities
like TXU Electric, through August 31, 1999, the rule provided for recovery of
purchased power capacity costs through a power cost recovery factor with respect
to purchases from qualifying
15
facilities, to the extent such costs were not otherwise included in base rates.
Pursuant to the 1999 Restructuring Legislation, the Power Cost Recovery Factor
will be frozen between September 1, 1999 and January 1, 2000. The energy-related
costs of such purchases continue to be included in the fixed fuel factor. TXU
Electric's last fuel reconciliation proceeding (Docket 20285) covered eligible
fuel and purchased power expenses incurred during the period July 1, 1995
through June 30, 1998, amounting to a total of $5.04 billion, of which $52
million was disallowed.
COMPETITION
General -- The Energy Policy Act addresses a wide range of energy issues and
is intended to increase competition in electric generation and broaden access to
electric transmission systems. In addition, PURA impacts the PUC and its
regulatory practices and encourages increased competition in the wholesale
electric utility industry in Texas, and the 1999 Restructuring Legislation will
restructure the industry and introduce competition in the Texas retail and
generation market beginning January 1, 2002. Although TXU Corp. is unable to
predict the ultimate impact of these and any other related regulations or
legislation on the US Electric segment companies' operations, it believes that
such actions are consistent with the trend toward increased competition in the
energy industry.
The 1999 Restructuring Legislation will restructure the electric utility
industry in Texas. Among other matters, the 1999 Restructuring Legislation
authorizes competition in the retail and generation markets for electricity
beginning January 1, 2002; provides for the recovery of generation-related and
purchased power related stranded costs and generation-related regulatory assets;
requires reductions in NO\\x\\ and SO\\2\\ emissions; requires a rate freeze for
all customers until January 1, 2002 and certain rate reductions for residential
and small commercial customers for up to five years thereafter; and sets certain
limits on capacity owned and controlled by power generation companies. Project
teams have been established to prepare US Electric segment companies for a
competitive environment. These teams are comprised of resources from all facets
of TXU Corp.'s business. These teams continue to formulate short- and long-term
strategies to address implementation of the 1999 Restructuring Legislation.
As legislative, regulatory, economic and technological changes occur, the
energy and utility industries are faced with increasing pressure to become more
competitive while adhering to regulatory requirements. The level of competition
is affected by a number of variables, including price, reliability of service,
the cost of energy alternatives, new technologies and governmental regulations.
As a result of the shift in emphasis toward greater competition, large and
small industry participants are offering energy services and energy-related
products that are both economically and environmentally attractive to customers.
In Texas, aggressive marketing of competitive prices by rural electric
cooperatives, municipally-owned electric systems, and other energy providers
not subject to the traditional governmental regulation experienced by the
utility industry has intensified competition within the state's wholesale
markets in multi-certificated areas, and retail customer markets.
US Electric segment companies are aggressively managing their operating costs
and capital expenditures through streamlined business processes and are
developing and implementing strategies to address an increasingly competitive
environment.
Furthermore, there is increasing pressure on utilities to reduce costs,
including the cost of power, and to tailor energy services to the specific needs
of customers. Such competitive pressures among electric utility and non-utility
power producers could result in the loss of some retail energy services
customers. Amounts invested by TXU Electric in certain of its assets could
become stranded costs, which are investments and commitments that may not be
recoverable from customers as a result of competitive pricing. The PUC's latest
available estimate for TXU Electric's potentially stranded retail costs ranged
from a projected excess of net book value over market value of $5.8 billion to a
projected excess of market value over net book value of $3.8 billion. In
response to competitive pressures, many utilities are implementing significant
restructuring and re-engineering initiatives designed to make them more
competitive. Since the implementation of an Operations Review and Cost
Reduction program in April 1992, the US Electric segment companies have
continued to take steps to reduce costs by streamlining business
16
processes and operating practices. (For information pertaining to the effects of
competition on the treatment of certain regulatory assets and liabilities, see
Note 3 to Financial Statements.)
Wholesale Competition -- Federal legislation such as the PURPA and the Energy
Policy Act, as well as initiatives in various states, encourage wholesale
competition among electric utility and non-utility power producers. Together
with increasing customer demand for lower-priced electricity and other energy
services, these measures have accelerated the industry's movement toward a more
competitive pricing and cost structure.
Amendments to PURA made during the 1995 session of the Texas legislature also
allow for wholesale pricing flexibility. While wholesale rates for electric
utilities are not deregulated, wholesale tariffs or contracts with charges less
than approved rates but greater than the utility's marginal cost may be approved
by the regulatory authority upon application by the utility. In the wholesale
power market, TXU Electric and TXU SESCO compete with a variety of utilities and
other suppliers, some of which are willing and able to sell at rates below US
Electric segment companies' standard wholesale power service rate as approved by
the PUC. As directed by the 1999 Restructuring Legislation (see Note 3 to
Financial Statements), beginning in January 2002, wholesale rates will no longer
be regulated. TXU Corp. is unable to predict the extent of future competitive
developments in the wholesale market or what impact, if any, such developments
may have on its operations.
Open-Access Transmission -- At the federal level, the FERC issued Order No.
888 in April 1996, which requires all FERC-jurisdictional electric public
utilities to offer third parties wholesale transmission services under an open-
access tariff. In May 1997, TXU Electric filed with the FERC a modification of
its tariff governing service to, from and over certain HVDC interconnections
between ERCOT and the Southwest Power Pool, which, in October 1997, was accepted
by the FERC with minor modifications.
In August 1999, the Texas Court of Appeals issued a judgement declaring
invalid PUC rules governing open-access wholesale transmission service. These
rules, adopted in February 1996, guaranteed open-access wholesale transmission
service by electric utilities in ERCOT to other utilities and non-utility power
suppliers, and established a rate formula to determine access charges for the
transmission of wholesale electricity. In its decision, the court concluded
that the PUC lacks the statutory authority to establish transmission access
rates, and therefore rendered the transmission rules invalid. Several
interested parties and the PUC filed motions for rehearing with the Court of
Appeals, asking the court to reverse its decision and to recognize the PUC's
authority to set wholesale transmission rates in ERCOT. In January 2000, a
judgment was rendered on the motions for rehearing by the Texas Court of
Appeals, declaring that certain subsections of the open-access rules are
invalid, while still concluding that the PUC lacks statutory authority to
establish transmission access rates. TXU Electric is unable to predict the
impact of this judgment on open-access transmission rates at this time.
Customers -- There are no individually significant customers upon which TXU
Electric's or TXU SESCO's business or results of operations are highly
dependent.
17
US GAS SEGMENT
GENERAL
US Gas operations are engaged in the gathering, processing, transmission and
distribution of natural gas and selling of related natural gas liquids within
Texas.
Operating Statistics
Years Ended December 31
1999 1998 1997*
---- ---- -----
SALES VOLUMES
Gas distribution (Billion cubic feet - Bcf):
Residential................................... 68 77 33
Commercial.................................... 45 49 21
Industrial and electric generation............ 4 4 3
------ ------ ------
Total gas distribution.................. 117 130 57
====== ====== ======
Pipeline transportation (Bcf)..................... 551 599 255
Gas liquids (million barrels)..................... 6 6 3
OPERATING REVENUES (millions)
Gas distribution:
Residential................................... $ 402 $ 437 $ 206
Commercial.................................... 212 225 109
Industrial and electric generation............ 20 20 15
------ ------ ------
Total gas distribution.................. 634 682 330
Pipeline transportation.......................... 116 121 58
Gas liquids...................................... 86 64 36
Other revenues, less intra-segment eliminations.. 41 (3) 4
------ ------ ------
Total operating revenues................. $ 877 $ 864 $ 428
====== ====== ======
GAS DISTRIBUTION CUSTOMERS
(end of year - in thousands)..................... 1,407 1,379 1,355
HEATING DEGREE DAYS (% of normal)...................... 70% 89% 119%
* For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.0 Bcf.
Daily spot contracts raise this availability level to meet additional peak-day
needs.
During 1999, the average daily demand of TXU Gas Distribution's residential
and commercial customers was 0.3 Bcf. TXU Gas Distribution's greatest daily
demand in 1999 was on January 3, when the arithmetic-mean temperature was 27
degrees Fahrenheit and sales to its customers reached 1.7 Bcf.
Gas Supply -- TXU Gas Distribution's gas supply consists of contracts for the
purchase of specific reserves, contracts not related to specific reserves or
fields, and gas in storage. The total available gas supply as of January 1, 2000
was 148 Bcf, which is approximately 1.2 times TXU Gas Distribution's purchases
during 1999. Of this total, 64 Bcf are specific reserves and 32 Bcf are working
gas in storage. Management has calculated that 52 Bcf are committed to TXU Gas
Distribution under gas supply contracts not related to specific reserves or
fields. In 1999,
18
TXU Gas Distribution's gas requirements were purchased from approximately 183
independent producers, marketers and pipeline companies.
TXU Gas Distribution has sufficient storage working gas capacity and gas in
storage to meet its peak-day requirements. TXU Gas Distribution utilizes the
services of seven gas storage fields owned by TXU Lone Star Pipeline, all of
which are located in Texas. These fields have an optimal working gas capacity
of 43.7 Bcf and a storage withdrawal capacity of up to 1.3 Bcf per day.
TXU Gas Distribution has historically maintained a contractual right to
curtail, which is designed to achieve the highest load factor possible in the
use of the pipeline system while ensuring continuous and uninterrupted service
to residential and commercial customers. Under the program, industrial
customers negotiate their own rates and relative priorities of service.
Interruptible service contracts include the right to curtail gas deliveries up
to 100% according to a priority plan. The last sales curtailment for TXU Gas
Distribution occurred in 1990 and lasted only 30 hours.
Estimates of gas supplies and reserves are not necessarily indicative of TXU
Gas Distribution's ability to meet current or anticipated market demands or
immediate delivery requirements because of factors such as the physical
limitations of gathering and transmission systems, the duration and severity of
cold weather, the availability of gas reserves from its suppliers, the ability
to purchase additional supplies on a short-term basis and actions by federal and
state regulatory authorities. Curtailment rights provide TXU Gas Distribution
flexibility to meet the human-needs requirements of its customers on a firm
basis. Priority allocations and price limitations imposed by federal and state
regulatory agencies, as well as other factors beyond the control of TXU Gas
Distribution, may affect its ability to meet the demands of its customers.
TXU Gas Distribution buys gas under long-term and short-term intrastate
contracts in order to ensure reliable supply to its customers. Many of these
contracts require minimum purchases of gas. The estimated gas demand, which
assumes normal weather conditions, significantly exceeds the minimum purchase
obligations of these contracts for the year 2000 and thereafter.
The TXU Gas Distribution supply program is designed to contract for new
supplies of gas and to recontract targeted expiring sources. In addition to
being heavily concentrated in the established gas-producing areas of central,
northern and eastern Texas, TXU Lone Star Pipeline's intrastate pipeline system
also extends into or near the major producing areas of the Texas Gulf Coast and
the Delaware and Val Verde Basins of West Texas. Nine basins located in Texas
are estimated to contain a substantial portion of the nation's remaining onshore
natural gas reserves. TXU Lone Star Pipeline's pipeline system provides access
to all of these basins. TXU Lone Star Pipeline is well situated to receive large
volumes into its system at the major hubs, such as Katy and Waha, as well as
from storage facilities where TXU Gas Distribution maintains high delivery
capabilities.
REGULATION AND RATES
TXU Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial consumers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.
The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the RRC and
provides for full recovery of the actual cost of gas delivered, including out-
of-period costs such as gas purchase contract settlement costs. The
distribution service rates TXU Gas Distribution charges its residential and
commercial customers are established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction.
19
TXU Gas Distribution employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting to
about $7.5 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 1999 in addition to about $2.5 million granted in 1998.
Rate cases supporting an additional $8.3 million in annualized revenue increases
were pending in a number of cities as of December 31, 1999. The $8.3 million of
annualized revenue increases includes $6.3 million for the general rate increase
filed for in August 1999 by TXU Gas Distribution in the cities of Dallas,
University Park, Highland Park and Cockrell Hill, Texas. On February 23, 2000,
the City of Dallas denied the rate increase. Similar action is expected in the
other cities. TXU Gas Distribution intends to appeal this action to the RRC,
which has the power to review and overturn the denial, and seek in excess of $9
million in rate relief. TXU Gas is unable to predict the outcome of the appeal.
Weather normalization adjustment clauses have been approved by 315 cities
served by TXU Gas Distribution, representing 70% of TXU Gas Distribution's
residential and commercial sales volumes. These clauses allow rates to be
adjusted to reflect the impact of warmer- or colder-than-normal weather during
the winter months, minimizing the impact of variations in weather on TXU Gas
Distribution's earnings.
TXU Gas Distribution's sales to industrial customers are provided under rates
reflected in standard rate schedules and contracts. Transportation services to
industrial and electric-generation customers are provided under competitively
negotiated contracts. Industrial customers also have standard rate schedules
for transportation services. Regulatory authorities in Texas have jurisdiction
to revise, review and regulate rates to industrial and electric-generation
customers but, historically, have not actively exercised this jurisdiction
because of the existing competitive market. Sales contracts with these
customers permit automatic adjustment on a monthly basis for the full amount of
increases or decreases in the cost of gas.
Under a settlement of the RRC rate inquiry approved in June 1998, TXU Gas
Distribution agreed to credit residential and commercial customers with $18
million to be spread over the next two heating seasons thereafter. The final
order approving the stipulation found that all gas costs flowed through TXU Gas
Distribution's monthly gas cost adjustment clause prior to October 31, 1997 were
just, reasonable, and necessary. As a part of the final order, the RRC required
an audit of an amount that TXU Gas Distribution credited to residential and
commercial customers under a previous voluntary stipulation. The audit report
sent to TXU Gas Distribution on December 16, 1998 indicated that an additional
$7.3 million should be credited to residential and commercial customers. TXU
Gas believes that the additional amount noted in the audit report was included
in the $18 million settlement, but it is unable to predict the outcome of the
audit process.
Gas Utilities Docket No. 8935 -- TXU Gas Distribution filed an application
with the RRC in February 1999 to modify the gas cost adjustment provision of the
city gate rate tariff approved in November 1997. The modification allows for a
more accurate recovery of the gas cost from TXU Gas Distribution's residential
and commercial customers. The case was settled, and a final order recognizing
the settlement was issued in August 1999. The final order allows TXU Gas
Distribution to recover from, or return to, city gate customers under- or over-
recovered gas cost resulting from cycle billing in accordance with TXU Gas
Distribution's proposed methodology. This applies to under- and over-recovered
gas costs occurring over the twelve month periods ended June 1999 and June 2000.
TXU Gas Distribution was also directed to file a revised gas cost adjustment
tariff with the RRC by January 15, 2000 to address the cycle billing issue and
other gas cost recovery issues. A revised tariff was filed with the RRC on
January 14, 2000, but by agreement of the parties and RRC staff, further
proceedings on the revised gas cost adjustment clause have been postponed to
July 2000.
In October 1999, TXU Lone Star Pipeline filed with the RRC a Statement of
Intent to change the city gate rate for gas transported for subsequent
distribution to residential and commercial customers. The filing requests a
general increase in annual revenues of approximately $20 million. Action on
this request is anticipated in the second quarter of 2000. TXU Lone Star
Pipeline is unable to predict the outcome of this case.
20
COMPETITION
Customer sensitivity to energy prices and the availability of competitively
priced gas in the non-regulated markets continue to cause competition in the
electric-generation and industrial-user markets. Natural gas faces varying
degrees of competition from electricity, coal, natural gas liquids, oil and
other refined products throughout TXU Gas Distribution's service territory.
Pipeline systems of other companies, both intrastate and interstate, extend into
or through the areas in which TXU Gas Distribution's markets are located,
creating competition from other sellers of natural gas. Competitive pressure
from other pipelines and alternative fuels has caused a decline in sales by TXU
Gas Distribution to industrial and electric-generation customers. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.
TXU Lone Star Pipeline is the sole transporter of natural gas to TXU Gas
Distribution's distribution systems. TXU Lone Star Pipeline competes with other
pipelines in Texas to transport natural gas to new and existing industrial and
power generation facilities as well as off-system markets. These businesses are
highly competitive.
Open Access -- TXU Lone Star Pipeline has been an open access transporter
under Section 311 of the Natural Gas Policy Act of 1978 (NGPA) on its intrastate
transmission facilities since July 1988. Such transportation is performed
pursuant to Section 311(a)(2) of the NGPA and is subject to an exemption from
the jurisdiction of the FERC under the Natural Gas Act, pursuant to Section 601
of the NGPA.
Customers --There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
21
US ENERGY MARKETING SEGMENT
GENERAL
US Energy Marketing operations are engaged in purchasing and selling natural
gas and electricity and providing risk management services for the energy
industry throughout the US, other than within ERCOT.
Operating Statistics
Years Ended December 31
1999 1998 1997*
------ ------- ------
TRADING VOLUMES
Gas (Bcf).................... 1,102 1,115 292
Electric (GWh)............... 6,544 16,268 --
OPERATING REVENUES (millions)... $2,983 $ 3,199 $ 859
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
TXU Energy Trading is headquartered in Houston, Texas, and its primary
natural gas markets, both retail and wholesale, are in Texas, the Northeast, the
Midwest and the West Coast. Other than within ERCOT, TXU Energy Trading engages
in the physical purchase and sale of electricity in the wholesale markets
throughout the US and is also engaged in power retail marketing, primarily in
the Northeast region of the country.
In the course of providing comprehensive energy products and services to its
diversified client base, TXU Energy Trading engages in energy price risk
management activities. In addition to the purchase and sale of physical
commodities, TXU Energy Trading enters into futures contracts; swap agreements,
where settlement is based on the difference between a fixed and floating (index
based) price for the underlying commodity; exchange traded options; over-the-
counter options, which are settled in cash or in the physical delivery of the
underlying commodity; exchange-of-futures-for-physical transactions; energy
exchange transactions; storage activities; and other contractual arrangements.
TXU Energy Trading may buy and sell certain of these instruments to manage its
exposure to price risk from existing contractual commitments as well as other
energy-related assets and liabilities. It may also enter into contracts to take
advantage of arbitrage opportunities. In order to manage its exposure to the
price risk associated with these instruments, TXU Energy Trading has established
trading policies and limits and revalues its exposures daily against these
benchmarks. TXU Energy Trading also periodically reviews these policies to
ensure they are responsive to changing market and business conditions.
TXU Energy Trading's business is not specifically seasonal; however, the
results of its operations are affected by price volatility in the underlying
commodity markets. Price volatility in both natural gas and electric power is
largely a result of supply and demand factors driven by weather conditions and
physical constraints in the deliverability of these commodities. Arbitrage
opportunities resulting from this price volatility are often greatest in the
late summer, early fall and winter months for natural gas and the summer months
for electricity.
COMPETITION
TXU Energy Trading pursues opportunities to manage risks for non-affiliated
companies. As electricity markets are deregulated and natural gas markets
continue to evolve following the implementation of the 1992 Order 636 of the
FERC, additional opportunities are created in the broader, more active trading
markets and in the markets serving non-regulated customers. This highly
competitive market demands that a wide array of services be offered, including
term contracts with interruptible and firm deliveries, risk management,
aggregation of supply, nominations, scheduling of deliveries and asset
optimization strategies for both transportation capacity and storage.
The activities of TXU Energy Trading continue to be developed. The strategy
is to build system infrastructure and merchant trading capabilities in
preparation for a deregulated electric industry in Texas.
Customers -- There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
22
EUROPE SEGMENT
GENERAL
European operations are engaged in the generation, purchase, distribution and
sale of electricity and the production purchase and sale of natural gas
primarily in the UK, with additional energy interests throughout the rest of
Europe.
Operating Statistics
Year Ended December 31
1999 1998*
---- ----
SALES VOLUMES
Electric (Gigawatt-hours - GWh)
Industrial and commercial........................... 19,698 15,459
Residential......................................... 16,726 7,826
------- -------
Total electric................................ 36,424 23,285
======= =======
Units Distributed (GWh).................................. 33,120 19,249
Gas (Billion cubic feet - Bcf)
Industrial and commercial........................... 77 51
Residential......................................... 49 21
------- -------
Total gas..................................... 126 72
======= =======
Wholesale Energy Sales
Electricity generated and sold to the Pool (GWh).... 78,950 51,060
Gas (Bcf)........................................... 447 148
OPERATING REVENUES (millions)
Electric
Industrial and commercial........................ $ 1,357 $ 1,146
Residential...................................... 1,676 839
------- -------
Total electric operating revenues............. 3,033 1,985
------- -------
Distribution........................................ 657 395
------- -------
Gas
Industrial and commercial........................ 247 125
Residential...................................... 318 135
------- -------
Total gas operating revenues.................. 565 260
------- -------
Wholesale energy sales.............................. 2,168 1,199
Other............................................... 191 102
Less intra-segment revenues......................... (524) (340)
------- -------
Total operating revenues...................... $ 6,090 $ 3,601
======= =======
CUSTOMERS (end of year - in thousands)
Electric............................................ 2,931 3,211
Gas................................................. 805 777
* For the period from acquisition (May 19, 1998) to December 31, 1998.
23
Traditionally, the electric industry in the UK, including distribution,
transmission and generation, has been highly regulated. Throughout England and
Wales, electricity power stations, together with the transmission and
distribution systems, constitute a single integrated network. Privatization of
the UK electricity industry has opened the market to new participants. Each
participant must be licensed to generate, transmit or supply electricity.
Almost all electricity generated in England and Wales must be sold to and
purchased from the wholesale trading market for electricity, commonly known as
the Pool. Prices for electricity are set by the Pool for each half hour based
on bids of generators and a complex set of calculations that matches supply and
demand.
The electric operations of TXU Europe Group are highly seasonal with a
substantial proportion of its profits earned in the winter months. The purchase
price for electricity in each half hour varies according to total demand, the
amount of generation capacity available but not needed and the prices bid by
generators. Consequently, the purchase price tends to be highest during mid-
week afternoons in winter, when demand is highest, or in late fall, when a
significant number of power stations undergo scheduled maintenance. Purchase
prices are generally lowest during summer months. Seasonal variations in
results are likely to continue under revised trading arrangements that are due
to be introduced during 2000.
Energy Retail
- -------------
TXU Europe Group has integrated its electricity and gas retailing operations
into a single energy business. The electricity retailing business involves the
sale to customers of electricity that is purchased from the UK's electricity
wholesale trading market (the Pool). Pool price risk is managed on behalf of
the retail business by TXU Europe Energy Trading. The energy business is
charged a regulated price by transmission and distribution companies, including
Eastern Electricity, for the physical delivery of electricity.
Eastern Electricity supplies electricity to customers in all sectors of the
market and is one of the largest retailers of electricity in England and Wales.
Eastern Electricity's service area, which covers approximately 20,300 square
kilometers in the east of England and parts of north London, was one of four
areas in the first group to be fully opened for competition. At December 31,
1999, Eastern Electricity supplied electricity to approximately 2.9 million
customers. Industrial and commercial customers accounted for approximately 45%
of Eastern Electricity's retail sales revenues.
Eastern Natural Gas is one of the largest suppliers of natural gas in the UK.
At December 31, 1999, TXU Europe Group's market share by volume was estimated at
approximately 3.9% of gas delivered to the competitive market, which is the
industrial and commercial market. At December 31, 1999, it was supplying
775,000 customers in the UK, ranging from residential households to large
industrial companies.
In June 1999, TXU Europe Group announced details of a program to restructure
the energy retailing business in order to be more cost effective in the
competitive energy markets. This program resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group is seeking new ways to access the energy markets and to form
more partnerships with the objective of reducing costs, improving access to
customers and capitalizing on emerging new markets like the Internet.
Energy Management and Generation
- --------------------------------
TXU Europe Power is one of the largest generators of electricity in the UK.
Its share of total UK generating capacity is approximately 9.4%. It currently
owns, operates or has an interest in ten power stations in the UK. TXU Europe
Power also owns Nedalo (UK) Limited, the largest supplier of small electrical
combined heat and power plants, which are those with generating capacity of less
than 1.5 MW.
24
UK Generation Facilities
TXU Europe Group's current portfolio of power stations is predominately a mix
of combined cycle gas turbine and coal-fired stations. It represents both
plants which run throughout most of the year and plants which run only during
periods of high demand. TXU Europe Group's portfolio of power stations provides
flexibility in managing the price and volume risks of its energy contracts and
has enabled TXU Europe Group to diversify its fuel supply risk. Information on
TXU Europe Group's interests in power stations in the UK is set out in Item 2.
Properties.
Non-UK Generation Facilities
Czech Republic. TXU Europe Group has an interest of approximately 84% in
--------------
Teplarny Brno, a district heating and generation company based in Brno, the
second largest city in the Czech Republic. Teplarny Brno owns oil and gas-fired
plants that are capable of generating approximately 1,000 MW of energy in the
form of steam and hot water, which is sold principally to industrial and
residential customers. It also owns a 169 kilometer pipeline network for
distributing heat to customers' premises. Teplarny Brno also has an electricity
generation capacity of approximately 97 MW. The output is sold to the regional
electricity company. A combined cycle gas turbine plant is currently undergoing
final commissioning and will provide 86 MW of additional heat capacity and 95 MW
of additional electricity generating capacity.
Poland. TXU Europe Group has a 49% interest in Zamosc Energy Company, a
------
joint venture with the Polish regional distribution company, Zamejska Korporacja
Energetyczna SA, which was established to develop power plants in southeast
Poland. A 125 MW combined cycle gas turbine project is being developed at
Jaraslaw.
Finland. In November 1999, TXU Europe Group formed a joint venture company,
-------
called TXU Nordic Energy, with certain shareholders of Pohjolan Voima Oy (PVO),
Finland's second largest electricity generator. TXU Nordic Energy is entitled
to the output from approximately 584 MW of PVO's thermal generating capacity and
most of a wholesale trading business owned by the industrial shareholders of
PVO. TXU Europe Group has an 81% share of the joint venture.
Other Projects
In December 1998, TXU Europe Group received government consent to build a 215
MW combined heat and power plant to provide heat and power to Shotton Paper on
Deeside. The power station will be built by ABB Alsthom with completion due in
2001.
The UK government imposes an obligation on electricity suppliers to purchase
a portion of their requirements from renewable energy sources under the non-
fossil fuel obligation levy plan. Renewable energy sources are those that are
not currently consumed faster than they are replenished. Renewable energy
sources in this scheme include solar and wind power. In April 1999 TXU Europe
announced that a one MW wind turbine in Northern Ireland had successfully
completed tests and had begun generating electricity. As of December 31, 1999,
TXU Europe Group had entered into development agreements in the UK for 110 MW
installed capacity of on-shore wind projects under power purchase contracts that
are awaiting planning consents from local authorities. An agreement outlining
the main terms has been signed with joint developers for up to 100 MW of on-
shore wind power in Portugal and 75 MW of electricity to be produced from forest
waste with a further 12MW from small hydro schemes in the UK. Additional
opportunities for renewable energy projects and large and small scale combined
heat and power plants are being actively considered, together with other
conventional generating projects.
25
Portfolio Management/Energy Trading
- -----------------------------------
Typically, holders of public electricity supply licenses issued under the UK
Electricity Act 1989 of Great Britain (Electricity Act) in connection with
supply and distribution within their authorized area are exposed to risk, as
they are obliged to supply electricity to their customers at stable prices but
have to purchase almost all the electricity necessary to supply those customers
from the Pool at prices that are constantly changing. The ownership of
generating assets provides a natural hedge against these risks; the use of
financial instruments like contracts for differences provide another hedging
alternative.
TXU Europe Energy Trading coordinates TXU Europe Group's activities in
managing risk. It provides support to TXU Europe Group's energy retail
activities, taking into account its energy purchases and sales and its contract
portfolios, including TXU Europe Group's generating assets and natural gas
production interests. TXU Europe Energy Trading is responsible for setting the
level of bids into the Pool for the output of each of TXU Europe Group's
generating stations, other than Barking and the combined heat and power plants.
TXU Europe Energy Trading uses this method to coordinate the operation of TXU
Europe Group's generating stations with TXU Europe Group's fuel contract
position and its retail and wholesale energy sales portfolios to TXU Europe
Group's best advantage. It also coordinates the operation of TXU Europe Group's
generating stations, taking into consideration the relative prices in the energy
markets. TXU Europe Energy Trading also earns revenue by providing risk
management services to other energy retailers to assist in managing their
Pool/market price risk.
TXU Europe Energy Trading manages TXU Europe Group's financial exposure to
fluctuations in electricity prices by:
(i) Managing its portfolio of contracts for differences;
(ii) Bidding both price and volume for TXU Europe Group's generation output,
other than for the Barking plant and the combined heat and power plants,
into the Pool for each half hour of the day; and
(iii) Deciding with the electricity retailing division of TXU Europe Group on
the volume and pricing of sales in the competitive and ex-franchise
markets.
The overall electricity position for each half hour of the day is monitored
by TXU Europe Energy Trading with the goal of optimizing electricity purchases
and sales positions through the use of generation facilities, long and short-
term retail sales contracts and appropriate financial instruments. The overall
gas position is monitored in a similar way with additional opportunities
presented through the operation of gas-fired power stations, storage facilities
and the use of gas assets which are the source of electricity. Together, the
overall electricity and gas positions are managed by reference to risk exposure
limits that are monitored by a risk management team within TXU Europe Group.
The risk management team verifies that the trading instruments employed have
been approved for use by TXU Europe Energy Trading and carries out credit checks
on current and proposed counterparties. TXU Europe Group's ability to manage
that risk in the future will depend, in part, on the terms of its supply
contracts, the continuation of an adequate market for hedging instruments and
the performance of its generating and gas assets which are the source of
electricity.
In order to help meet the expected needs of its natural gas wholesale and
retail customers, including TXU Europe Group's power stations, TXU Europe Group
has entered into a variety of gas purchase contracts. As of December 31, 1999,
the commitments under long-term purchase contracts amounted to an estimated
(Pounds)1.1 billion ($1.8 billion), covering periods of up to 15 years. Firm
sales commitments, including estimated power station usage at the same date
amounted to an estimated (Pounds)3.0 billion ($4.8 billion) covering periods up
to 17 years.
TXU Europe Energy Trading also purchases coal, oil and natural gas for TXU
Europe Group's UK power stations and has equity interests in four natural gas-
producing fields in the North Sea. In July 1999, TXU Europe Group significantly
expanded its North Sea gas interests through the purchase of all of BHP
Petroleum's assets in the Southern North Sea. The acquisition of Monument Oil's
interest in the Johnson field in the North Sea was
26
completed in December 1999. Further acquisitions in December 1999 increased TXU
Europe Group's interest in the Johnston field to 64.2%.
The energy management business also trades on the Nord Pool, the electricity
trading market in Scandinavia, and has recently acquired access to 140 MW of
hydro output in Norway for 55 years. This agreement also provides for TXU
Europe Group to acquire an additional 47MW of hydropower in Norway. In Spain,
TXU Europe Group has acquired a 5% minority shareholding in Hidroelectrica del
Cantabrico, S.A. It has created a 50/50 joint venture trading company with
Hidroelectrica del Cantabrico, S.A., Synergia Trading S.A., covering the Iberian
peninsula.
In September 1999, the energy management business established an office in
Geneva, Switzerland, which will coordinate European energy management and
development projects.
Electricity Networks
- --------------------
UK
TXU Europe Group's electricity networks business consists of the ownership,
management and operation of the electricity distribution network within TXU
Europe Group's authorized area. TXU Europe Group receives electricity in
England and Wales from The National Grid Company plc (National Grid). TXU
Europe Group then distributes electricity to end users connected to TXU Europe
Group's power lines.
Almost all electricity customers in TXU Europe Group's authorized area,
whether franchise or competitive, are connected to and dependent upon TXU Europe
Group's distribution system. TXU Europe Group distributes approximately 33,000
GWh of electricity annually to over three million customers, representing more
than seven million people. The distribution by TXU Europe Group of electricity
in its authorized area is regulated by its public electricity supply license,
which, other than in exceptional circumstances, is due to remain in effect until
at least 2025.
TXU Europe Group receives electricity from National Grid at 21 supply points
within its authorized area and three points in the authorized areas of
neighboring regional electricity companies. Most of this electricity is
received at 132 kilovolts. It is then distributed to customers through TXU
Europe Group's system of approximately 35,000 kilometers of overhead lines,
55,000 kilometers of underground cable and numerous transformers and circuit
breakers, through a series of interconnected networks operating at successively
lower voltages. TXU Europe Group also receives electricity directly from
generating stations located in its authorized area and, from time to time, from
customers' own generating plants and connections with neighboring regional
electricity companies.
Most of the revenue from use of the distribution system is from TXU Europe
Group's electricity retail operations. The rest is derived from holders of
second tier supply licenses in respect of the delivery of electricity to their
customers located in TXU Europe Group's authorized area.
The distribution charges levied by subsidiaries of TXU Europe Group and the
other regional electricity companies consist of charges for use of the system
and charges for other services outside the scope of the price control, including
connection charges. Distribution and supply charges are regulated by conditions
in TXU Europe Group's public electricity supply license, which sets out a
formula for determining the maximum average charge per unit distributed in any
year. Most of the charges for the use of the distribution system are subject to
distribution price controls. See Regulation and Rates below.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced
27
that it had cleared plans for the creation of the joint venture for competition
law purposes. A separate application for regulatory clearance has been submitted
to the Office of Gas and Electricity Markets (OFGEM). The joint venture will
begin operations once these clearances are obtained, which may be as early as
April 2000. By the time the joint venture starts operations, it is expected that
the combined workforce will have been reduced by approximately 400. It is
anticipated that the workforce currently engaged by Eastern Energy and London
Electricity plc, will be further reduced by at least a similar number during the
joint venture's first 18 months of operations. Primarily as a result of the
creation of this joint venture, TXU Europe is expected to record a restructuring
charge of approximately $50 million in the first half of 2000. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
Czech Republic
At December 31, 1999, TXU Europe Group had a 16.3% minority interest in
Severomoravska Energetika a.s., a Czech electricity distribution and supply
company. As of March 1, 2000 the interest has been increased to 21.9%.
Finland
TXU Europe Group announced in May 1999 that it had agreed to make an
investment in Savon Voima Oy (SVO), a regional electricity distributor in
central Finland. The investment was a purchase of approximately 40% of SVO's
share capital. SVO is currently owned by 29 local municipalities. There are
put options exercisable by the municipalities which if exercised would
automatically give TXU Europe Group a controlling stake. The purchase is part
of TXU Europe Group's overall strategy to manage a flexible Scandinavian energy
portfolio and to develop TXU Europe Groups's Scandinavian businesses working
with local partners. The purchase was completed in December 1999.
REGULATION AND RATES
The electricity industry in the UK, including TXU Europe Group, is subject to
regulation under, among other things, the Electricity Act and UK and European
Union (EU) environmental legislation. TXU Europe Group is also subject to
existing UK and EU legis