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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
-- OR --
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------
Commission File Number 1-12833
TXU CORP.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Common Stock outstanding at August 9, 2002: 278,374,601 shares, without par
value.
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TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2002 and 2001.................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2002 and 2001.................... 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2002 and 2001.............................. 3
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001.................................. 4
Notes to Financial Statements........................................ 5
Independent Accountants' Report...................................... 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................. 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................... 41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................... 42
SIGNATURE.............................................................................. 44
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- --------- ----------- ----------
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
Operating revenues................................................. $ 7,205 $ 6,127 $ 15,302 $ 14,502
---------- --------- ----------- ----------
Operating expenses
Energy purchased for resale, fuel consumed and
delivery costs.................................................. 5,385 4,252 11,573 10,759
Operation and maintenance........................................ 857 789 1,667 1,493
Depreciation and other amortization.............................. 232 248 472 505
Goodwill amortization............................................ -- 54 -- 109
Taxes other than income.......................................... 179 200 361 382
---------- --------- ----------- ----------
Total operating expenses................................ 6,653 5,543 14,073 13,248
---------- --------- ----------- ----------
Operating income................................................... 552 584 1,229 1,254
Other income....................................................... 27 85 38 117
Other deductions................................................... 28 24 56 59
Interest income.................................................... 11 36 23 73
Interest expense and other charges
Interest......................................................... 281 355 564 736
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU Corp. obligated........................................... 7 7 15 15
Subsidiary obligated.......................................... 3 20 5 39
Preferred stock dividends of subsidiaries........................ 4 4 7 7
Distributions on preferred securities of subsidiary perpetual
trust of TXU Europe........................................... 3 3 7 7
Allowance for borrowed funds used during
construction and capitalized interest......................... (4) (7) (7) (12)
---------- --------- ----------- ----------
Total interest expense and other charges................ 294 382 591 792
---------- --------- ----------- ----------
Income before income taxes and extraordinary items................. 268 299 643 593
Income tax expense................................................. 67 92 170 185
---------- --------- ----------- ----------
Income before extraordinary items.................................. 201 207 473 408
Extraordinary items, net of tax effect............................. -- -- (17) --
---------- --------- ----------- ----------
Net income......................................................... 201 207 456 408
Preference stock dividends......................................... 6 6 11 11
---------- --------- ----------- ----------
Net income available for common stock.............................. $ 195 $ 201 $ 445 $ 397
========== ========= =========== ==========
Average shares of common stock outstanding (millions).............. 269 256 267 257
Per share of common stock:
Basic and diluted earnings
Income before extraordinary items.............................. $ 0.73 $ 0.78 $ 1.73 $ 1.55
Extraordinary items, net of tax effect........................ $ -- $ -- $ (0.06) $ --
Net income available for common stock......................... $ 0.73 $ 0.78 $ 1.67 $ 1.55
Dividends declared............................................... $ 0.60 $ 0.60 $ 1.20 $ 1.20
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- --------- ----------- ----------
MILLIONS OF DOLLARS
Net income................................................... $ 201 $ 207 $ 456 $ 408
---------- --------- ----------- ----------
Other comprehensive income (loss)--
Net change during period, net of tax effects
Cumulative foreign currency translation adjustments....... 280 9 250 (247)
Investments classified as available for sale:
Unrealized holding gains (net of tax expense of $24) -- -- -- 55
Reclassification of net gain realized on sale of
investments to other income (net of tax benefit of
$21 and $22).......................................... -- (50) -- (52)
Cash flow hedges:
Cumulative transition adjustment as of January 1,
2001 (net of tax benefit of $58)...................... -- -- -- (132)
Net change in fair value of derivatives
(net of tax benefit of $84, $17, $90 and $40) (176) (47) (175) (89)
Amounts realized in earnings during the period
(net of tax expense of $52, $49, $50 and $52)......... 124 113 117 119
---------- --------- ----------- ----------
Total............................................ 228 25 192 (346)
---------- --------- ----------- ----------
Comprehensive income......................................... $ 429 $ 232 $ 648 $ 62
========== ========= =========== ==========
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
MILLIONS OF DOLLARS
Cash flows - operating activities
Net income......................................................................... $ 456 $ 408
Adjustments to reconcile net income to cash provided by operating activities:
Loss on extraordinary items ..................................................... 17 --
Depreciation and amortization ................................................... 534 675
Deferred income taxes and investment tax credits - net ......................... (16) 102
Gains from sale of assets....................................................... (13) (88)
Net effect of unrealized mark-to-market valuation gains.......................... (10) (183)
Equity in losses of affiliates and joint ventures................................ 16 24
Other............................................................................ 31 28
Changes in operating assets and liabilities........................................ (712) (374)
----------- -----------
Cash provided by operating activities...................................... 303 592
----------- -----------
Cash flows - financing activities
Issuances of securities:
Long-term debt................................................................... 2,462 1,125
Common stock..................................................................... 605 1
Retirements/repurchases of securities:
Long-term debt................................................................... (2,390) (1,386)
Common stock..................................................................... -- (44)
Change in notes payable:
Commercial paper................................................................. 383 204
Banks............................................................................ (1,609) (346)
Cash dividends paid:
Common stock..................................................................... (318) (309)
Preference stock................................................................. (11) (11)
Debt premium, discount, financing and reacquisition expenses....................... (85) (12)
----------- -----------
Cash used in financing activities.......................................... (963) (778)
----------- -----------
Cash flows - investing activities
Capital expenditures............................................................... (573) (796)
Acquisitions of businesses ........................................................ (204) (217)
Proceeds from sale of assets....................................................... 1,347 630
Nuclear fuel ...................................................................... (50) (11)
Other.............................................................................. (8) (118)
----------- -----------
Cash provided by (used in) investing activities............................ 512 (512)
----------- -----------
Effect of exchange rates on cash and cash equivalents................................ 2 (45)
----------- -----------
Net change in cash and cash equivalents.............................................. (146) (743)
Cash and cash equivalents - beginning balance........................................ 1,161 1,039
----------- -----------
Cash and cash equivalents - ending balance........................................... $ 1,015 $ 296
=========== ===========
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
MILLIONS OF DOLLARS
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 1,015 $ 1,161
Accounts receivable........................................................... 3,487 2,643
Inventories-- at average cost................................................. 563 522
Prepayments................................................................... 275 370
Commodity contract assets..................................................... 1,462 1,680
Other current assets.......................................................... 229 308
----------- ------------
Total current assets.................................................... 7,031 6,684
----------- ------------
Investments
Restricted cash............................................................... 525 520
Other investments............................................................. 1,672 1,586
Property, plant and equipment-- net............................................. 20,864 22,480
Goodwill........................................................................ 7,326 7,247
Regulatory assets-- net......................................................... 1,729 1,679
Commodity contract assets....................................................... 915 795
Cash flow hedges and other derivative assets.................................... 352 448
Deferred debits and other assets................................................ 982 881
----------- ------------
Total assets............................................................ $ 41,396 $ 42,320
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable:
Commercial paper.......................................................... $ 1,124 $ 853
Banks..................................................................... 914 2,369
Long-term debt due currently.................................................. 1,295 1,308
Accounts payable.............................................................. 2,609 2,466
Commodity contract liabilities................................................ 1,280 1,545
Other current liabilities..................................................... 1,599 1,440
----------- ------------
Total current liabilities................................................ 8,821 9,981
----------- ------------
Accumulated deferred income taxes............................................... 3,428 3,796
Investment tax credits.......................................................... 464 479
Commodity contract liabilities.................................................. 573 521
Cash flow hedges and other derivative liabilities............................... 500 317
Other deferred credits and noncurrent liabilities............................... 2,515 2,221
Long-term debt, less amounts due currently...................................... 15,376 16,173
Mandatorily redeemable, preferred securities of subsidiary trusts,
each holding solely junior subordinated debentures of the obligated company
TXU Corp. obligated....................................................... 368 368
Subsidiary obligated...................................................... 147 147
Preferred securities of subsidiary perpetual trust of TXU Europe................ 150 150
Preferred stock of subsidiaries
Not subject to mandatory redemption........................................ 190 190
Subject to mandatory redemption............................................ 21 21
Contingencies (Note 7)
Shareholders' equity (Note 4)................................................... 8,843 7,956
----------- ------------
Total liabilities and shareholders' equity............................... $ 41,396 $ 42,320
=========== ============
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Corp. is a global energy services company that engages in electricity
generation, wholesale energy trading and risk management, retail energy sales,
energy delivery, other energy-related services and, through a joint venture,
telecommunications services. TXU Corp. is a holding company whose principal
United States (US) operations are conducted through TXU US Holdings Company (US
Holdings, formerly TXU Electric Company) and TXU Gas Company (TXU Gas). TXU
Corp.'s principal international operations are conducted through TXU Europe
Limited (TXU Europe) and TXU Australia Holdings Limited Partnership (TXU
Australia).
BUSINESS RESTRUCTURING - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses effective January 1, 2002. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan as approved by the Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
. its electric transmission and distribution (T&D) assets to Oncor Electric
Delivery Company (Oncor), which is a utility regulated by the Commission
and a wholly-owned subsidiary of US Holdings,
. its electric power generation assets to subsidiaries of TXU Energy
Company LLC (TXU Energy), which is the new competitive business and a
wholly-owned subsidiary of US Holdings, and
. its retail customers to a subsidiary retail electric provider (REP) of
TXU Energy.
The T&D assets of TXU SESCO Company, a subsidiary of TXU Corp., also were
transferred to Oncor. In addition, as of January 1, 2002, US Holdings acquired
the following businesses from within the TXU Corp. system and transferred them
to TXU Energy: the REP of TXU SESCO Company; the wholesale trading and risk
management operations and the unregulated commercial and industrial retail gas
business of TXU Gas; and the energy management services businesses and other
affiliates of TXU Corp., including the fuel procurement and coal mining
businesses that service the generation operations.
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (2001 Form 10-K). Following TXU Corp.'s reorganization as of
January 1, 2002, TXU Corp. realigned its operations into three reportable
segments: North America Energy, North America Energy Delivery and International
Energy. (See Note 8 for further information concerning reportable business
segments.)
BUSINESS ACQUISITIONS AND DISPOSITIONS - On July 1, 2002, TXU Europe
acquired a majority interest in Braunschweiger Versorgungs-Aktiengesellschaft
(BVAG), an electricity, gas, heating and water supplier for 210,000 residential,
commercial and industrial customers in the German city of Braunschweig. BVAG was
a wholly-owned subsidiary of Stadtwerke Braunschweig. TXU Europe acquired 74.9%
of BVAG and three minority interest investments for $430 million in cash. Under
the terms of the acquisition agreement, Stadtwerke Braunschweig has the right
until January 1, 2006 to sell its remaining 25.1% ownership interest in BVAG to
TXU Europe for $128 million. In July 2002, TXU Europe sold one of the three
minority interests acquired as part of the BVAG acquisition for $28 million.
BVAG reported revenues of $277 million for the year ended December 31, 2001.
On April 24, 2002, TXU Energy acquired a cogeneration and wholesale energy
production business in New Jersey for $36 million in cash. The acquisition
included a 122 megawatt combined-cycle power production facility and various
contracts, including electric supply and gas transportation agreements. This
transaction represented TXU Energy's first investment outside of Texas and
reflected its strategy of diversifying its portfolio of assets.
5
On March 1, 2002, TXU Europe acquired the United Kingdom (UK) energy retail
and trading business of Amerada Hess for $168 million in cash. The business
includes over 400,000 residential energy and telecommunication accounts, a
commercial and industrial natural gas retail operation with 63 billion cubic
feet (Bcf) in annual sales volumes and wholesale gas marketing operations.
Estimated revenues for the business acquired were $1.3 billion for the year
ended December 31, 2001. The process of determining the fair value of assets and
liabilities of Amerada Hess has not been completed.
In January 2002, TXU Europe completed the sale of its UK electricity
distribution (networks) business, including its 50% interest in the 24seven
joint venture, to London Electricity Group plc (LE Group) for $1.8 billion,
consisting of net cash proceeds of $712 million (used to repay debt) and the
assumption by LE Group of $1.1 billion aggregate principal amount of debt. TXU
Europe recorded a loss on the sale of $125 million ($88 million after-tax),
after transaction costs, in the fourth quarter of 2001.
GENERATION PLANT ACQUISITIONS AND DISPOSITIONS - On May 31, 2002, TXU
Energy acquired a 260 megawatt combined-cycle power production facility in
northwest Texas through a settlement agreement which dismissed a lawsuit
previously filed related to the plant, and included a nominal cash payment. TXU
Energy previously purchased all of the electrical output of this plant under a
long-term contract.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek generating plants in the Dallas-Fort Worth area with total plant
capacity of 2,334 megawatts for $443 million in cash, including the assumption
of an above-market tolling agreement with a fair value of $190 million reflected
in other liabilities. The tolling agreement provides for TXU Energy to purchase
power during summer months for the next five years. A pretax gain on the sale of
$146 million, net of the effects of the above-market tolling agreement, was
deferred and included in other liabilities, and will be recognized during summer
months over the five-year term of the tolling agreement.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The condensed consolidated financial statements of
TXU Corp. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142 "Goodwill and Other Intangible Assets" discussed below, on the same
basis as the audited financial statements included in its 2001 Form 10-K. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with US GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The results of
operations for an interim period may not give a true indication of results for a
full year. Certain previously reported amounts have been reclassified to conform
to current classifications. All dollar amounts in the financial statements and
tables in the notes, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
CHANGES IN ACCOUNTING STANDARDS - SFAS No. 142 became effective for TXU
Corp. on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units, and the discontinuance of goodwill amortization. The
amortization of TXU Corp.'s existing goodwill ($220 million annually) ceased
effective January 1, 2002.
In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. TXU Corp. has completed
the transitional impairment test, the results of which indicated no impairment
of goodwill.
6
The table below reflects what reported income before extraordinary items
and net income (including basic and diluted earnings per share amounts) would
have been in the 2001 periods, exclusive of goodwill amortization expense
recognized in those periods compared to the 2002 periods.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- -------- --------- ---------
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
Reported income before extraordinary items........... $ 201 $ 207 $ 473 $ 408
Add back: goodwill amortization..................... -- 54 -- 109
--------- -------- --------- ---------
Adjusted income before extraordinary items........... 201 261 473 517
Extraordinary items, net of tax effect.............. -- -- (17) --
--------- -------- --------- ---------
Adjusted net income.................................. 201 261 456 517
Preference stock dividends........................... 6 6 11 11
--------- -------- --------- ---------
Adjusted net income available for common stock....... $ 195 $ 255 $ 445 $ 506
========= ======== ========= =========
Basic and diluted earnings per share:
Reported income before extraordinary items........... $ 0.73 $ 0.78 $ 1.73 $ 1.55
Add back: goodwill amortization..................... -- 0.21 -- 0.42
--------- -------- --------- ---------
Adjusted income before extraordinary items........... 0.73 0.99 1.73 1.97
Extraordinary items, net of tax effect............... -- -- (0.06) --
--------- -------- --------- ---------
Adjusted net income available for common stock....... $ 0.73 $ 0.99 $ 1.67 $ 1.97
========= ======== ========= =========
Exclusive of goodwill amortization expense, for the years ended December
31, 2001, 2000 and 1999, net income available for common stock would have been
$875 million, $1.109 billion and $1.176 billion, respectively, and earnings per
share would have been $3.37, $4.21 and $4.22, respectively.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Corp. on January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. SFAS No. 143 also requires additional disclosures. TXU
Corp. will change its reporting for nuclear decommissioning costs to conform to
the new standard, as well as conform its accounting for all other asset
retirement obligations to the new standard.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Corp. on January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale, and resolves significant implementation issues related to SFAS No. 121.
The adoption of SFAS No. 144 by TXU Corp. has not affected its financial
position or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", was issued in April 2002 and
will be effective for TXU Corp. on January 1, 2003. One of the provisions of
this statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", whereby any gain or loss on the early extinguishment of
debt that was classified as an extraordinary item in prior periods in accordance
with SFAS No. 4 shall be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions".
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and will be effective for TXU Corp. on
January 1, 2003. SFAS No. 146 requires that a liability for costs associated
with an exit or disposal activity be recognized only when the liability is
incurred and measured initially at fair value.
In June 2002, the Emerging Issues Task Force (EITF) reached a consensus on
certain aspects of Issue 02-3, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities", regarding the presentation of trading
activities in the statement of income. The new rules require all trading
contracts, whether or not physically settled, to be recorded net upon
settlement, rather than gross as a sale and cost of sale. TXU Corp. has
historically recorded financial contracts net, but has recorded those contracts
that provide for physical delivery gross upon settlement. The change will be
effective with third quarter 2002 reporting and
7
requires reclassification of prior periods. TXU has not yet determined the
amount of the reclassifications; however, implementation of the new rules is
expected to result in a significant reduction in TXU Corp.'s operating revenues
and energy purchased for resale. The required reclassifications will have no
impact on TXU Corp.'s previously reported gross margin, net income or cash
provided by operating activities.
For accounting standards not yet adopted or implemented, TXU Corp. is
evaluating the potential impact on its financial position and results of
operations.
EARNINGS PER SHARE - Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
period reported. Diluted earnings per share include the effect of potential
issuances of common shares resulting from the assumed exercise of all
outstanding stock options and settlement of dilutive forward stock purchase
agreements. TXU Corp. has outstanding certain instruments that may be settled
with common stock that are considered in computing diluted earnings per share.
The number of shares of common stock added to the average shares outstanding for
the purpose of calculating diluted earnings per share was 785,108 and 236,935
for the three months ended June 30, 2002 and 2001, respectively, and 607,615 and
215,969 for the six months ended June 30, 2002 and 2001, respectively.
TXU Corp. also has outstanding certain common stock forward purchase
contracts related to the equity-linked debt securities issued in 1998 that will
be settled with common stock in August 2002. On August 13, 2002, a remarketing
of the debt component of the equity-linked debt securities did not occur as
contemplated by its terms. As a result, TXU Corp. will retain and cancel a
portion of the associated notes in satisfaction of the holders' obligations
under the common stock forward purchase contracts (see Note 3). Assuming this
event would have occurred at the beginning of the periods, 7,855,126 and
8,043,588 shares of common stock would have been added to the average shares
outstanding for purposes of calculating diluted earnings per share, resulting in
diluted earnings per share of $0.72 and $1.65 for the three-month and six-month
periods ended June 30, 2002, respectively.
3. FINANCING ARRANGEMENTS
CREDIT FACILITIES - At June 30, 2002, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) available as
follows:
CREDIT FACILITIES AT
JUNE 30, 2002
---------------------------------
FACILITY
FACILITY EXPIRATION DATE BORROWERS LIMIT OUTSTANDING AVAILABLE
- -------- --------------- ----------------------- -------- ----------- ---------
364-Day Revolving Credit Facility (a)..... April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ -- $
Revolving Credit Facility B(b)............ February 2005 TXU Corp., US Holdings 1,400 --
Three-Year Revolving Credit Facility (c).. May 2005 TXU Corp. 500 150
-------- -----------
Total (d)............................... 2,900 150 $ 1,087
Credit Facility........................... August 2002 TXU Corp. 365 365 --
Revolving Credit Facility -
Tranche A (e)........................... November 2006 TXU Europe 1,226 999 227
Senior Facility........................... October 2004 TXU Australia 883 821 62
Commercial Paper Facility................. N/A TXU Australia 123 123 --
Working Capital Facilities ............... N/A TXU Australia 56 -- 56
(a) As of June 30, 2002, letters of credit outstanding under this agreement
totaled $57 million, which reduced the available capacity by that amount.
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
Short-term liquidity needs of TXU Gas are expected to be funded through
advances from affiliates. TXU Corp. was removed as a borrower under this
facility effective July 31, 2002. As of June 30, 2002, letters of credit
outstanding under this agreement totaled $482 million, which reduced the
available capacity by that amount.
(c) The $150 million of borrowings outstanding at June 30, 2002 was repaid on
July 29, 2002.
(d) Supports commercial paper borrowings. Available balance is net of
commercial paper borrowing of $1.124 billion and outstanding letters of
credit.
(e) As of June 30, 2002, the outstanding borrowings under the Revolving Credit
Facility and the associated interest rates were as follows: (euro)574
million ($569 million) at 4.12% per annum, 700 million Norwegian kroner
(NOK) ($93 million) at 7.86% per annum, and (pound)220 million ($337
million) at 4.73% per annum, all classified as long-term debt.
8
In July 2002, US Holdings entered into a $400 million credit facility that
terminates no later than November 30, 2002.
In May 2002, TXU Corp. entered into a $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
will be used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
April 22, 2003. This facility will be used for working capital and general
corporate purposes. Up to $1.0 billion of letters of credit may be issued under
the facility. This facility and the $500 million three-year revolving credit
facility described above replaced the TXU Corp. and US Holdings $1.4 billion
364-day revolving credit facility that expired in April 2002.
During the second quarter of 2002, each of TXU Energy and Oncor began
selling commercial paper to fund its short-term liquidity requirements. The new
commercial paper programs allow TXU Energy and Oncor to sell up to $2.4 billion
and $1.0 billion of commercial paper, respectively, limited to an aggregate of
$2.4 billion. The new credit facilities discussed above (the $500 million
three-year revolving credit facility and the $1.0 billion 364-day revolving
credit facility) and the existing $1.4 billion credit facility that expires in
2005 (Revolving Credit Facility B above) provide back-up for outstanding
commercial paper under the TXU Energy and Oncor programs. TXU Energy and Oncor
do not expect to sell commercial paper that, in the aggregate, is in excess of
aggregate available capacity under the back-up credit facilities. TXU Corp. has
discontinued its commercial paper program.
TXU Europe has a Euro term loan facility with a commercial bank available
only to fund its investment in the Atro Oyj Nordic joint venture. At June 30,
2002, there was (euro)50 million ($50 million) outstanding under this facility
at an annual interest rate based on Euribor of 4.4%.
LONG-TERM DEBT - TXU Europe also has a (euro)2.0 billion ($2.0 billion)
Euro Medium Term Note program, under which TXU Europe may from time to time
issue notes in various currencies. As of June 30, 2002, a total of (pound)576
million ($883 million) was outstanding under the program at an average rate of
7.53%.
On August 8, 2002, Oncor redeemed all its 8.5% First Mortgage Bonds due
August 1, 2024 and all its 8.875% First Mortgage Bonds due February 1, 2022, in
aggregate principal amounts of $115 million and $112 million, respectively. In
July 2002, TXU Energy redeemed at par the remaining $635 million principal
amount of its floating rate debentures due May 20, 2003. Oncor and TXU Energy
funded the redemptions through the issuance of commercial paper, advances from
affiliates and cash from operations.
In June 2002, TXU Corp. issued 8.8 million equity-linked debt securities
(corporate units) with an aggregate stated amount of $440 million. Net proceeds
of $427 million were used for working capital and other general corporate
purposes, including repayment of commercial paper and to provide advances to
subsidiaries. Each of the corporate units initially consists of an unsecured $50
note and a contract to purchase from TXU Corp. its common stock in the future.
Quarterly distributions on the corporate units will include interest on the
notes at the annual rate of 5.8% and contract adjustment payments payable by TXU
Corp. at the annual rate of 2.325%. The contracts require the investors to
purchase TXU Corp. common stock based on a range of prices ($51.15 to $62.9145)
at the settlement date of May 16, 2006.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of senior
secured notes in two series in a private placement. One series of $700 million
is due May 1, 2012 and bears an interest rate of 6.375%, and the other series of
$500 million is due May 1, 2032 and bears an interest rate of 7.0%. Each series
is initially secured by an equal principal amount of Oncor's first mortgage
bonds; however, the lien of those bonds may be released in certain
circumstances. Proceeds from the issuance were used by Oncor to repay advances
from US Holdings. US Holdings used the repayments from Oncor to repay advances
from TXU Energy and TXU Corp. TXU Energy used the repayments to redeem $865
million principal amount of floating rate debentures due May 20, 2003, and TXU
Corp. used the repayments to repay $335 million of short-term borrowings.
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy to refund a similar principal amount of pollution control revenue
bonds.
9
During the first quarter of 2002, TXU Corp. redeemed $114 million of senior
notes with rates ranging from 5.52% to 10.58% that were originally due from 2002
to 2010, resulting in an extraordinary loss of $17 million (net of income tax
benefit of $9 million). Also, TXU Mining redeemed $70 million of its 6.875%
senior notes due 2005 and $53 million of its 7.0% senior notes due 2003.
In January 2002, in connection with TXU Europe's sale of its UK networks
business, $1.1 billion of debt ($500 million due 2004, $286 million due 2012 and
$286 million due 2025) was assumed by the purchaser.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The second of two common stock forward purchase contracts will be settled on
August 16, 2002, on which date TXU Corp. expects to issue approximately 8.4
million shares of common stock to the holders of these equity-linked securities.
TXU Corp. expects to receive approximately $111 million in cash upon settlement
of common stock forward purchase contracts. TXU Corp. will retain and cancel
approximately $238 million of the 6.5% Series E Notes in satisfaction of the
obligations under the common stock forward purchase contracts of holders that
did not settle their contracts with cash. Holders of the remaining Series E
Notes will have the right to have their Series E Notes repaid on September 3,
2002. Cash received from settlements of common stock forward purchase contracts
discussed above is expected to be used to make any such repayments. The Series E
Notes which remain outstanding will bear interest at 4.05% per annum from August
16, 2002 through maturity on August 16, 2004.
As of June 30, 2002, the secured long-term debt of TXU Corp. and its
consolidated subsidiaries consisted of $3.3 billion of Oncor's first mortgage
bonds and senior secured notes that are secured by a lien on substantially all
of Oncor's tangible electric T&D property, and $532 million of various other
long-term debt secured by liens on utility plant and other assets in North
America and Europe. TXU Corp.'s long-term debt obligations are not guaranteed or
secured by affiliates. The credit facilities discussed above and the TXU Corp.
6% notes due 2002 to 2004 ($219 million outstanding at June 30, 2002) contain
cross default provisions with a $50 million threshold. A cross default of this
magnitude would cause the maturity of outstanding balances under the credit
facilities and the notes to be accelerated.
The terms of certain financing arrangements of TXU Corp. and its
consolidated subsidiaries contain financial covenants that require maintenance
of specified fixed charge coverage ratios, shareholders' equity to total
capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. As of June 30, 2002, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp.'s subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At June 30, 2002, there were no restrictions on the
payment of dividends under these provisions.
LEASES - In February 2002, TXU Corp. sold its interest in its headquarters
building in Dallas, Texas for $145 million. Simultaneously with the sale of the
property, TXU Corp. entered into a twenty-year lease obligation for the
property. At the end of the initial twenty-year term of the lease, TXU Corp. has
the right, but not the obligation, to renew the lease for three ten-year renewal
terms under which rents will be paid based on then-existing market conditions.
The sale was treated as a financing.
SALE OF RECEIVABLES - TXU Corp., through its subsidiaries, has certain
facilities to provide financing through customer accounts receivable. All of the
facilities continually sell customer accounts receivable or undivided interests
therein to financial institutions on an ongoing basis to replace those accounts
receivable that have been collected.
Certain subsidiaries of TXU Corp. sell customer accounts receivable to a
wholly-owned bankruptcy remote subsidiary of TXU Corp. (TXU Receivables Company)
which sells undivided interests in accounts receivable it purchases to financial
institutions. As of January 1, 2002, the facility includes TXU Energy Retail
Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas as qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of
10
June 30, 2002, TXU Corp. and its subsidiaries had sold $1.248 billion face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $600 million and $636 million in subordinated notes, with $12
million of losses on sales for the six months ended June 30, 2002 principally
representing the interest on the underlying financing. These losses approximated
4% of the cash proceeds from the receivables sales on an annualized basis. If
the program terminates, cash flows to TXU Corp. and its subsidiaries would
temporarily stop until the undivided interests of the financial institutions
were repurchased. The level of cash flows would normalize in approximately 16 to
31 days. TXU Business Services, a subsidiary of TXU Corp., services the
purchased receivables and is paid a market based servicing fee by TXU
Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent TXU Corp.'s and its subsidiaries' retained interests in the
transferred receivables and are recorded at book value, net of allowances for
bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
TXU Europe has facilities with a commercial bank whereby certain
subsidiaries of TXU Europe may sell an undivided interest in up to (pound)300
million ($460 million) of electricity and gas receivables and borrow up to an
aggregate of (pound)175 million ($268 million), collateralized by future
receivables, through a short-term note issue agreement. The program has an
overall limit of (pound)300 million ($460 million). As of June 30, 2002, TXU
Europe had sold (pound)205 million ($314 million) face amount of receivables
under the program. In addition, TXU Europe had borrowed (pound)95 million ($146
million), collateralized by future receivables of that amount, which is
reflected as notes payable on the balance sheet. For the six months ended June
30, 2002, debt securitization discounts, which are reflected in interest
expense, were (pound)5 million ($7 million) and interest on the short-term loans
was (pound)1 million ($1 million). The short-term loans bear interest at an
annual rate based on commercial paper rates plus a margin, which was 4.35% at
June 30, 2002.
4. SHAREHOLDERS' EQUITY
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
------------- --------------
Shareholders' equity:
Preference stock.............................................. $ 300 $ 300
------------- --------------
Common stock without par value:
Authorized shares-- 1,000,000,000
Outstanding shares: June 30, 2002 -- 278,238,854 and
December 31, 2001--265,140,087............................ 7,134 6,560
Retained earnings............................................. 1,984 1,863
Accumulated other comprehensive loss.......................... (575) (767)
------------- --------------
Total common stock equity................................. 8,543 7,656
------------- --------------
Total shareholders' equity................................ $ 8,843 $ 7,956
============= ==============
In June 2002, TXU Corp. issued in a public offering 11.8 million shares of
its common stock. Net proceeds of $585 million from the sale were used for
working capital and other general corporate purposes, including the repayment of
commercial paper and to provide advances to subsidiaries.
TXU Corp. recorded, as a reduction to common stock equity, the present
value of the contract adjustment payments and a portion of the costs,
aggregating approximately $37 million, in connection with the issuance of
equity-linked debt securities in June 2002. A liability was recorded for the
contract adjustment payments and will be reduced as the contract adjustment
payments are made. TXU Corp. has the right to defer the contract adjustment
payments, but any such election will subject TXU Corp. to restrictions on the
payment of dividends on and redemption of outstanding shares of common stock.
TXU Corp. has no plans to defer these contract adjustment payments.
At the annual shareholders' meeting on May 10, 2002, shareholders voted to
amend the Restated Articles of Incorporation, which gave the board of directors
the ability to split the common stock of TXU Corp. on or before December 31,
2003 if the board of directors so elects.
11
5. TRUST SECURITIES
TXU CORP. OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES (TRUST ASSETS) OF TXU CORP. OR RELATED SUBSIDIARY (TRUST SECURITIES)
- -- The statutory business trust subsidiaries had Trust Securities and Trust
Assets outstanding as follows:
TRUST SECURITIES TRUST ASSETS MATURITY
------------------------------------------------- ----------------------- --------
UNITS (000'S) AMOUNT AMOUNT
----------------------- ----------------------- -----------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2002 2001 2002 2001 2002 2001
-------- ------------ -------- ------------ -------- ------------
TXU CORP.
TXU Corp. Capital I
(7.25% Series)........... 9,200 9,200 $ 223 $ 223 $ 237 $ 237 2029
TXU Corp. Capital II
(8.7% Series)............ 6,000 6,000 145 145 155 155 2034
-------- ------------ -------- ------------
Total TXU Corp.......... 368 368 392 392
TXU GAS
TXU Gas Capital I
(Floating Rate Trust
Securities)(a).......... 150 150 147 147 155 155 2028
-------- ------------ -------- ------------
Total................... $ 515 $ 515 $ 547 $ 547
======== ============ ======== ============
(a) Floating rate is determined quarterly based on LIBOR. Related interest
rate swaps effectively fix the rates at 6.629% on $100 million and at
6.444% on $50 million to July 1, 2003.
Each parent company owns the common Trust Securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's Trust Securities.
6. REGULATION AND RATES
On December 31, 2001, US Holdings filed a settlement plan with the
Commission, which was approved by the Commission on June 20, 2002. On August 5,
2002, the Commission issued a financing order, pursuant to the settlement plan,
authorizing the issuance of securitization bonds. The Commission's approval of
the settlement plan is subject to appeal. TXU Corp. is unable to predict when
any appeal process related to the Commission's approval of the settlement plan
would be concluded or its outcome. If the Commission's approval is upheld, the
settlement plan resolves all major pending issues related to US Holdings'
transition to competition and will supersede certain ongoing proceedings that
are related to the 1999 Restructuring Legislation. The settlement plan does not
remove regulatory oversight of Oncor's business nor does it eliminate TXU
Energy's price-to-beat rates and related possible fuel adjustments. TXU Corp.
recorded the effects of the settlement plan at December 31, 2001, which
consisted primarily of adjustments to carrying values of assets and liabilities
as of that date affected by the settlement. The projected impact on 2002 and
beyond include the effects of settling prior fuel costs, limiting the retail
clawback and eliminating the wholesale clawback (discussed in previous
disclosures). For additional discussion of the settlement plan and related
items, see Note 4 to Financial Statements in TXU Corp.'s 2001 Form 10-K.
In April 2002, TXU Energy filed a request with the Commission to increase
the fuel factor component of its price-to-beat rates. The request, if approved,
would increase price-to-beat rates for residential and small commercial
customers by approximately 5%. Under Commission rules, affiliated REPs of
utilities are allowed to petition the Commission for an increase in the fuel
factor component of its price-to-beat rates if the average price of natural gas
futures increases more than 4% from the level used to set the previous
price-to-beat fuel
12
factor rate. On May 29, 2002, an administrative law judge issued a proposal for
decision for consideration by the Commission. TXU Energy is unable to predict
the outcome of this proceeding.
7. COMMITMENTS AND CONTINGENCIES
POWER PURCHASE CONTRACTS -- US Holdings and TXU Europe have various power
purchase contracts requiring the payment of annual capacity fees. Including
contracts entered into subsequent to 2001 year-end, future capacity payments
under existing agreements are estimated as follows:
July 1 through December 31, 2002....... $ 503
2003................................... 796
2004................................... 654
2005................................... 623
2006................................... 563
Thereafter............................. 1,717
-------
Total capacity payments....... $ 4,856
=======
Commitments under long-term gas purchase contracts and coal contracts at
June 30, 2002 were not materially different than those set forth in Note 9 to
Financial Statements in TXU Corp.'s 2001 Form 10-K.
LEGAL PROCEEDINGS -- On November 29, 2001, various subsidiaries of Enron
Corporation (Enron) went into Administration (bankruptcy) in the UK. Prior to
Enron's going into Administration, TXU Europe Energy Trading (TXUEET) had
certain energy purchase and sales contracts with Enron, which had been entered
into in the ordinary course of business. The terms of these contracts provided
that they terminated automatically upon a party going into Administration. Also,
on November 29, 2001 just prior to Enron going into Administration, TXUEET
received a notice from Enron purporting to terminate these contracts for cause.
TXUEET and the Administrator have had discussions regarding potential claims
relating to contract termination; in February 2002 TXUEET applied to the High
Court in London for permission to seek a judicial determination regarding
contract termination and, in March 2002, Enron filed an action in the High Court
relating to interpretation of certain other contractual provisions. For the more
expeditious and economic resolution of the issue of the contract termination,
TXUEET and Enron agreed in May 2002 to Enron initiating proceedings in the High
Court to enable the parties to seek a judicial determination regarding contract
termination, which action would supersede the previous actions. In June 2002,
Enron initiated such action and asked for a declaration that Enron is entitled
to payment of the net present value of the contracts or alternatively the market
value of the contracts, both for undetermined amounts, or alternatively, relief
from forfeiture of the contracts, for an undetermined amount, or in the further
alternative, restitution or relief from forfeiture of (pound)55 million ($84
million) previously paid by Enron to TXUEET for value under the contracts. While
the outcome of this matter cannot be predicted, TXUEET believes, consistent with
the advice of external legal advisors in the UK, that the attempted termination
of the contracts by Enron was without substance. Accordingly, TXUEET believes
any related claims by Enron are without merit and intends to vigorously defend
this suit.
In addition to the above, TXU Corp. and its subsidiaries are involved in
various other legal and administrative proceedings, the ultimate resolution of
which, in the opinion of each, is not expected to have a material effect upon
its financial position, results of operations or cash flows.
FINANCIAL GUARANTEES -- US Holdings has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $19 million at June 30,
2002, and interest on bonds issued by the agencies to finance the reservoirs
from which the water is supplied. The bonds mature at various dates through 2011
and have interest rates ranging from 5.5% to 7%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings, of $4 million annually
for the years 2002 through 2003, $7 million for 2004 and $1 million for each of
2005 and 2006. In addition, US Holdings is obligated to pay certain variable
costs of operating and maintaining the reservoirs. US Holdings has assigned to a
municipality all contract rights and obligations of US Holdings in connection
with $30 million remaining principal amount of bonds at June 30, 2002, issued
for similar purposes which had previously been guaranteed by US Holdings. US
Holdings would, however, be contingently liable in the event of default by the
municipality.
13
TXU Europe has guaranteed up to $110 million at June 30, 2002 of certain
liabilities that may be incurred and payable by the purchasers of the US and
Australian coal business and US energy marketing operations of TXU Europe's
predecessor, which were sold in 1998 prior to acquisition of the predecessor by
TXU Corp. These guarantees are with respect to the Peabody Holding Company
Retirement Plan for Salaried Employees, the Powder River Coal Company Retirement
Plan and the Peabody Coal UMWA Retirement Plan, subject to certain specified
conditions.
OBLIGATIONS WITH RESPECT TO INVESTMENTS IN PARTNERSHIPS AND OTHER
UNCONSOLIDATED ENTITIES -- TXU Corp. has a 50% voting interest in Pinnacle One
Partners, L.P. (Pinnacle or joint venture), a joint venture with third-party
investors. TXU Corp.'s investment in Pinnacle is accounted for using the equity
method. Assets of the joint venture are not TXU Corp.'s and are not available to
pay creditors of TXU Corp. Pinnacle's principal investment is in TXU
Communications Ventures Company (TXU Communications). TXU Communications
operates a diversified telecommunications business, including regulated
incumbent local exchange carriers, a competitive telecommunications service
provider and a fiber optic transport business.
In connection with its formation, Pinnacle issued $810 million in senior
secured notes due August 15, 2004. The notes are secured by all of Pinnacle's
assets, including its shares of TXU Communications. Total proceeds (net of
transaction costs), including the $150 million received from third-party
investors, were used to make a $600 million cash distribution to TXU Corp. and
fund a trust with $336 million. The principal and interest on the trust funds is
being used to pay interest on the senior secured notes and distributions to the
third-party investors. The trust invested in TXU Corp. debt securities. At June
30, 2002, the trust held $219 million principal amount of TXU Corp. debt
securities.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring in 2004, of which $148 million was outstanding and
included in investments in TXU Corp.'s balance sheet as of June 30, 2002. In
addition, TXU Corp. has made and may make future capital contributions to
Pinnacle to fund a portion of TXU Communications' capital expenditures. TXU
Corp. also provides administrative services to Pinnacle and its affiliates at
cost.
In connection with the Pinnacle transaction, TXU Corp. issued 810,000
shares of Mandatorily Convertible Single Reset Preference Stock, Series C
(Series C Preference Stock) to Pinnacle One Share Trust, a consolidated trust
(Share Trust). The Series C Preference Stock is convertible into common stock of
TXU Corp. In the event of:
a) a default by Pinnacle in connection with its $810 million of senior
secured notes,
b) a decline in the market price of TXU Corp. common stock below $21.93
per share for ten consecutive trading days coupled with a decline in
the credit rating for TXU Corp.'s unsecured, senior long-term
obligations to or below BB by Standard & Poor's (S&P) or Fitch
Ratings (Fitch) or Ba by Moody's Investors Service Inc. (Moody's), or
c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity through the sale of its
shares of TXU Communications or the sale of assets of TXU
Communications,
TXU Corp. would be required to sell equity or otherwise raise proceeds
sufficient to repay Pinnacle's senior secured notes. If TXU Corp. did not raise
sufficient proceeds, the Share Trust could be required to sell some or all of
the Series C Preference Stock. The dividend rate and conversion price of the
Series C Preference Stock would be reset at the time of sale to generate
proceeds sufficient to redeem the senior secured notes. TXU Corp. expects that
it would be able to sell equity or debt securities to satisfy its contingent
obligations to repay Pinnacle's debt.
Had TXU Corp. been required to consolidate Pinnacle at June 30, 2002, TXU
Corp.'s debt would have increased by approximately $609 million. TXU Corp. does
not believe that a consolidation of Pinnacle would have had a material impact on
its liquidity or financial condition.
14
Equity losses in the joint venture were $12 million and $13 million for the
three months ended June 30, 2002 and 2001, respectively, and $24 million and $27
million for the six months ended June 30, 2002 and 2001, respectively. TXU
Corp.'s investment in Pinnacle was negative $170 million as of June 30, 2002,
classified in other deferred credits and noncurrent liabilities in the
consolidated balance sheet.
8. SEGMENT INFORMATION
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s 2001 Form 10-K. As a result of TXU Corp.'s
reorganization as of January 1, 2002, TXU Corp. realigned its operations into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. Prior period amounts have been restated to conform to
the new segments.
NORTH AMERICA ENERGY -- operations involving the generation of electricity,
wholesale energy trading and risk management, and retail energy sales and
services in the US and parts of Canada. The segment consists of all operations,
other than the T&D business, of the former US Electric segment and the former US
Energy segment;
NORTH AMERICA ENERGY DELIVERY -- operations involving the transmission and
distribution of electricity and the purchase, transmission, distribution and
sale of natural gas in Texas. The segment consists of the T&D operations of the
former US Electric segment and the operations of the former US Gas segment; and
INTERNATIONAL ENERGY -- operations involving the generation of electricity,
wholesale energy trading and risk management, retail energy sales and services
in Europe and Australia, and electricity and gas distribution and gas storage in
Australia. The segment consists of the operations of the former Europe and
Australia segments.
CORPORATE AND OTHER -- operations consisting primarily of general corporate
expenses, equity earnings or losses of unconsolidated affiliates, including the
telecommunications joint venture, and interest on debt at the TXU Corp. level.
Affiliated revenues represent intercompany service charges.
The prior year financial information for the North America Energy segment
and the electric delivery operations included in the North America Energy
Delivery segment includes information derived from the historical financial
statements of US Holdings. Reasonable allocation methodologies were used to
unbundle the financial statements of US Holdings between its generation and T&D
operations. Allocation of revenues reflected consideration of return on invested
capital, which continues to be regulated for the T&D operations. US Holdings
maintained expense accounts for each of its component operations. Costs of
energy and expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate common expenses, assets and liabilities between US Holdings'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
TXU Energy incurs an electricity delivery fee charged by Oncor, which TXU
Energy includes in billings to its customers. This fee is reflected in TXU
Energy's revenues and cost of energy for the three months and six months ended
June 30, 2002. For comparability purposes, electricity delivery fees have been
included in the North America Energy segment's revenues and cost of energy for
the three and six months ended June 30, 2001. The North America Energy segment's
gross margin is not affected by the inclusion of these electricity delivery
fees.
15
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001* 2002 2001*
----------- --------- ----------- ---------
Operating revenues -
North America Energy............. $ 3,533 $ 2,964 $ 7,029 $ 7,080
North America Energy Delivery.... 254 255 673 940
International Energy............. 3,392 2,873 7,545 6,418
Corporate and other.............. 26 35 55 64
----------- --------- ----------- ---------
Consolidated.................. $ 7,205 $ 6,127 $ 15,302 $ 14,502
=========== ========= =========== =========
Affiliated revenues -
North America Energy ............ $ 10 $ 4 $ 17 $ 5
North America Energy Delivery.... 403 445 822 920
International Energy............. -- -- -- --
Corporate and other.............. 126 132 245 243
Eliminations..................... (539) (581) (1,084) (1,168)
----------- --------- ----------- ---------
Consolidated.................. $ -- $ -- $ -- $ --
=========== ========= =========== =========
Net income (loss) -
North America Energy ............ $ 176 $ 178 $ 356 $ 300
North America Energy Delivery.... 41 4 142 70
International Energy............. 33 86 82 161
Corporate and other.............. (49) (61) (124) (123)
----------- --------- ----------- ---------
Consolidated.................. $ 201 $ 207 $ 456 $ 408
=========== ========= =========== =========
----------
*The North America Energy and North America Energy Delivery segments were
created as a result of the deregulation of the electric utility industry in
Texas, which became effective January 1, 2002. The North America Energy
segment includes the generation and certain retail operations of US
Holdings, the wholesale trading and risk management operations and
unregulated commercial and industrial retail gas business of TXU Gas and
other energy-related businesses of TXU Corp. The North America Energy
Delivery segment includes the electric T&D business of US Holdings and TXU
SESCO Company and the natural gas pipeline and distribution operations of
TXU Gas.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy and North
America Energy Delivery segments after giving effect to the US Holdings
restructuring transactions and allocations described above and in Note 1.
Had the North America Energy and North America Energy Delivery segments
existed as separate segments, their results of operations and financial
positions could have differed materially from those reflected above.
Additionally, future results of the North America Energy and North America
Energy Delivery segments' operations and financial positions could differ
materially from the historical information presented.
16
9. SUPPLEMENTARY FINANCIAL INFORMATION
REGULATED VERSUS UNREGULATED OPERATIONS --
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
--------- -------- -------- --------
Operating revenues
Regulated........................................... $ 295 $ 4,762 $ 750 $ 10,556
Unregulated......................................... 6,910 1,365 14,552 3,946
--------- -------- -------- --------
Total operating revenues....................... 7,205 6,127 15,302 14,502
--------- -------- -------- --------
Operating expenses
Energy purchased for resale - regulated............. 95 388 307 1,198
Energy purchase for resale - unregulated............ 4,855 3,214 10,501 8,177
Fuel consumed - regulated........................... -- 521 -- 1,089
Fuel consumed - unregulated......................... 435 129 765 295
Operation and maintenance - regulated............... 212 396 416 764
Operation and maintenance - unregulated............. 645 393 1,251 729
Depreciation and amortization....................... 232 302 472 614
Taxes other than income............................. 179 200 361 382
--------- -------- -------- --------
Total operating expenses....................... 6,653 5,543 14,073 13,248
--------- -------- -------- --------
Operating income........................................ $ 552 $ 584 $ 1,229 $ 1,254
========= ======== ======== ========
OTHER INCOME AND DEDUCTIONS --
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
--------- -------- -------- --------
Other income
Gain on sale of businesses and other properties............ $ 15 $ 3 $ 16 $ 14
Gain on sale of marketable securities...................... -- 73 -- 73
Equity in earnings of unconsolidated entities.............. 6 1 9 3
Dividends from cost investments and marketable securities -- 6 -- 11
Other...................................................... 6 2 13 16
--------- -------- -------- --------
Total other income.................................... $ 27 $ 85 $ 38 $ 117
========= ======== ======== ========
Other deductions
Loss on sale of properties................................. $ 1 $ 1 $ 1 $ 3
Equity in losses of unconsolidated entities................ 12 13 25 27
Other...................................................... 15 10 30 29
--------- -------- -------- --------
Total other deductions................................ $ 28 $ 24 $ 56 $ 59
========= ======== ======== ========
REGULATORY ASSETS AND LIABILITIES -- Included in regulatory assets - net
are regulatory assets of $2.2 billion and regulatory liabilities of $424 million
at June 30, 2002, and regulatory assets of $2.2 billion and regulatory
liabilities of $474 million at December 31, 2001. Regulatory assets of $2.0
billion at June 30, 2002 and December 31, 2001 were not earning a return. Of the
assets not earning a return, $1.8 billion are expected to be recovered through
the issuance of securitization bonds within the next two years pursuant to the
regulatory settlement plan approved by the Commission. (See Note 6 for further
discussion of the settlement plan.) The remaining regulatory assets have a
weighted average remaining recovery period of 14 to 31 years.
ACCOUNTS RECEIVABLE -- At June 30, 2002 and December 31, 2001, accounts
receivable were stated net of uncollectible accounts of $188 million and $96
million, respectively. Accounts receivable included $1.2 billion and $617
million of unbilled revenues at June 30, 2002 and December 31, 2001,
respectively.
17
INVENTORIES BY MAJOR CATEGORY--
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
Materials and supplies.................................................... $ 237 $ 233
Fuel stock................................................................ 162 131
Gas stored underground.................................................... 164 158
----------- ------------
Total inventories................................................. $ 563 $ 522
=========== ============
PROPERTY, PLANT AND EQUIPMENT--
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
North America Energy:
Production........................................................ $ 16,541 $ 16,627
Nuclear fuel (net of accumulated amortization of $819 and $787)... 164 146
Reserve for regulatory disallowances.............................. (836) (836)
North America Energy Delivery:
Transmission...................................................... 1,982 1,979
Distribution...................................................... 6,217 6,110
Gas distribution and pipeline..................................... 1,734 1,677
General........................................................... 817 578
Other..................................................................... 246 328
----------- ------------
Total............................................................. 26,865 26,609
Less accumulated depreciation............................................. 9,565 9,397
----------- ------------
Net of accumulated depreciation................................... 17,300 17,212
Construction work in progress............................................. 568 608
----------- ------------
Net North America property, plant and equipment................... 17,868 17,820
International Energy:
Europe - Electric and other (net of accumulated depreciation of
$403 and $514)................................................... 1,233 3,062
Australia - Electric and gas distribution and generation (net of
accumulated depreciation of $331 and $267)....................... 1,763 1,598
----------- ------------
Net property, plant and equipment................................. $ 20,864 $ 22,480
=========== ============
Capitalized software costs of $541 million at June 30, 2002 and $352
million at December 31, 2001 were included in property, plant and equipment.
Amortization expense of $31 million and $53 million relating to these software
costs was recorded for the three and six months ended June 30, 2002,
respectively.
GOODWILL -- At June 30, 2002 and December 31, 2001, goodwill was stated net
of accumulated amortization of $708 million and $710 million, respectively.
DERIVATIVES AND HEDGES -- During the first six months of 2002, existing
accounting hedges of anticipated sales from baseload generation in North America
Energy became less effective due to changes in Electric Reliability Council of
Texas (ERCOT) market rules and conditions. TXU Corp. experienced net hedge
ineffectiveness of $26 million and $34 million, reported as a loss in revenues,
for the three and six months ended June 30, 2002, respectively, primarily
related to these contracts. Accounting hedges of interest rate and foreign
exchange risk remained highly effective during the period.
18
As of June 30, 2002, it is expected that $20 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
SUPPLEMENTAL CASH FLOW INFORMATION -- Noncash transactions for the six
months ended June 30, 2002 included $1.1 billion of debt assumed by the
purchaser of the UK networks business.
19
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries as of June 30, 2002, and the related condensed statements
of consolidated income and of comprehensive income for the three-month and
six-month periods ended June 30, 2002 and 2001 and the condensed statements of
consolidated cash flows for the six-month periods ended June 30, 2002 and 2001.
These financial statements are the responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as of December 31, 2001, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report, dated January 31, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 2 to the Notes to Financial Statements, TXU Corp. changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets".
DELOITTE & TOUCHE LLP
Dallas, Texas
August 13, 2002
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS
TXU Corp. is a global energy services company that engages in electricity
generation, wholesale energy trading and risk management, retail energy sales,
energy delivery, other energy-related services and, through a joint venture,
telecommunications services.
In connection with the restructuring of the Texas electric industry,
certain businesses of TXU Corp. were reorganized as of January 1, 2002, into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. (See Note 8 to Financial Statements for information
concerning reportable business segments.)
Certain segment comparisons in this report have been affected by the
restructuring of TXU Corp.'s US business in connection with deregulation of the
Texas electricity market, TXU Europe's sale of its UK networks business and its
50% interest in the 24seven joint venture operation on January 18, 2002, as well
as the discontinuance of goodwill amortization under new accounting rules.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars, unless they were determined using exchange
rates on the date of a specific event:
INCOME STATEMENTS
(AVERAGE RATES)
------------------------------------------------------
BALANCE SHEETS THREE MONTHS SIX MONTHS
-------------------------- ENDED JUNE 30, ENDED JUNE 30,
JUNE 30, DECEMBER 31, ------------------------ ------------------------
2002 2001 2002 2001 2002 2001
-------- ------------ -------- -------- -------- ---------
UK pounds sterling ((pound)) $ 1.5328 $ 1.4515 $ 1.4624 $ 1.4228 $ 1.4451 $ 1.4413
Australian dollars (A$) $ 0.5637 $ 0.5115 $ 0.5513 $ 0.5142 $ 0.5352 $ 0.5233
Euro ((euro)) $ 0.9921 $ 0.8860 $ 0.9195 $ 0.8747 $ 0.8985 $ 0.8995
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
TXU Corp.'s operating revenues increased $1.1 billion, or 18%, to $7.2
billion in 2002. Revenue growth in the North America Energy segment of $575
million was driven by higher wholesale trading volumes in the deregulated ERCOT
power market. Revenue growth in the International Energy segment of $519 million
was primarily due to increased wholesale sales volumes and the impact of
acquisitions. Revenues in the North America Energy Delivery segment declined $43
million.
Gross margin (operating revenue less energy purchased for resale, fuel
consumed and delivery costs) decreased $55 million, or 3%, to $1.8 billion in
2002. The decline was driven by the International Energy segment, which
reflected lower wholesale prices and increased retail competition in the UK.
Higher margins in the North America Energy segment reflected improved results in
the wholesale business. Consolidated revenues and gross margins in 2002 were
positively impacted by a $152 million net effect of mark-to-market valuations of
commodity positions, compared to a positive impact of $136 million in 2001.
Operation and maintenance expense increased $68 million, or 9%, to $857
million in 2002. The increase was driven by the North America Energy segment,
reflecting increased infrastructure costs associated with expanded retail
support and wholesale trading and risk management activities and higher bad debt
expense, all due in large part to the deregulation of the Texas electricity
market. Total net pension and postretirement benefit costs increased $14 million
in 2002.
21
Other operating expenses (depreciation and other amortization, goodwill
amortization and taxes other than income) decreased $91 million, or 18%, to $411
million in 2002, primarily reflecting a $54 million impact from the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142. Lower depreciation expense was driven by the UK operations, reflecting the
networks business sale in early 2002 and generation plant dispositions in the
latter part of 2001. Taxes other than income declined due to the effect of lower
natural gas prices on operating revenues, on which these taxes are assessed.
Operating income decreased $32 million, or 5%, to $552 million in 2002,
reflecting lower gross margin and higher operation and maintenance expense,
partially offset by the discontinuance of goodwill amortization and lower
depreciation expense.
Other income decreased $58 million to $27 million in 2002. The decrease was
due primarily to a gain of $73 million in the 2001 period on the sale of an
investment in a Spanish power company.
Interest income declined $25 million, or 69%, to $11 million in 2002, due
largely to lower interest rates, lower interest-bearing balances of restricted
cash in Europe, and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation in North America in 2001.
Interest expense and other charges decreased $88 million, or 23%, to $294
million in 2002, reflecting lower debt levels and lower interest rates.
The effective income tax rate was 25.0% in 2002 compared to 30.8% in 2001.
The change was driven by the effect of the discontinuance of nondeductible
goodwill amortization.
Net income available for common stock decreased $6 million, or 3%, to $195
million in 2002. The decrease in net income reflected decreases in the
International Energy and North America Energy segments of $53 million and $2
million, respectively, partially offset by an increase in the North America
Energy Delivery segment of $37 million. These performances are discussed below
under Segments. The net loss in Corporate and other activities declined $12
million, primarily representing lower interest expense. Net pension and
postretirement benefit costs reduced net income by $16 million in 2002 and $7
million in 2001.
Earnings per share decreased $0.05, or 6%, to $0.73 per share in 2002, of
which $0.03 per share was due to a 5% increase in average shares outstanding. As
discussed above, net income performance in 2002 benefited from the absence of
goodwill amortization ($54 million, or $0.21 per share, in 2001). This effect
was largely offset by the gain on the sale of an investment in a Spanish power
company in 2001 ($51 million after-tax, or $0.20 per share).
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
TXU Corp.'s operating revenues increased $800 million, or 6%, to $15.3
billion in 2002. Revenue growth in the International Energy segment of $1.1
billion was primarily due to increased wholesale trading volumes and the impact
of acquisitions, partially offset by the loss of revenues from the UK networks
business which was sold in early 2002. Revenues declined in the North America
Energy Delivery segment by $365 million due primarily to lower natural gas
prices. Revenues in the North America Energy segment fell by $39 million.
Gross margin decreased $14 million, or less than 1%, to $3.7 billion in
2002. The gross margin decrease reflected a decline in the International Energy
segment due primarily to lower wholesale margins, partially offset by higher
margins in the North America Energy segment due to improved results in wholesale
operations and the retail electric business. Consolidated revenues and gross
margins in 2002 were positively impacted by a $10 million net effect of
mark-to-market valuations of commodity positions, compared to a positive impact
of $183 million in 2001.
Operation and maintenance expense increased $174 million, or 12%, to $1.7
billion in 2002. The increase was driven by the North America Energy segment,
reflecting increased infrastructure costs associated with expanded retail
support and wholesale trading and risk management activities and higher bad debt
expense, all due in large part to the deregulation of the Texas electricity
market. Total net pension and postretirement benefit costs increased $23 million
in 2002.
22
Other operating expenses decreased $163 million, or 16%, to $833 million in
2002, primarily reflecting a $109 million impact from the discontinuance of
goodwill amortization pursuant to the adoption of SFAS No. 142. Lower
depreciation expense was driven by the UK operations, reflecting the sale of the
networks business in early 2002 and generation plant dispositions in the latter
part of 2001. Taxes other than income declined due to the effect of lower
natural gas prices on operating revenues, on which these taxes are assessed.
Operating income decreased $25 million to $1.2 billion in 2002, reflecting
lower gross margin and higher operation and maintenance expense, partially
offset by the discontinuance of goodwill amortization and lower depreciation
expense.
Other income decreased $79 million to $38 million in 2002. The decrease was
due primarily to a gain of $73 million in the 2001 period on the sale of an
investment in a Spanish power company.
Other deductions decreased $3 million, or 5%, to $56 million in 2002. This
line item includes equity losses in the telecommunications joint venture ($24
million in 2002 and $27 million in 2001).
Interest income declined $50 million, or 68%, to $23 million in 2002, due
largely to lower interest rates, lower interest-bearing balances of restricted
cash in Europe, and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation in North America in 2001.
Interest expense and other charges decreased $201 million, or 25%, to $591
million in 2002, reflecting lower interest rates and lower debt levels.
The effective income tax rate before the extraordinary loss was 26.4% in
2002 compared to 31.2% in 2001. The change was driven by the effect of the
discontinuance of nondeductible goodwill amortization.
Net income available for common stock increased $48 million, or 12%, to
$445 million in 2002. Net income growth reflected increases in the North America
Energy and North America Energy Delivery segments of $56 million and $72
million, respectively, partially offset by a decline in the International Energy
segment of $79 million. These performances are discussed below under Segments.
The net loss in Corporate and other activities increased $1 million, reflecting
an extraordinary loss of $17 million (net of income tax benefit of $9 million)
related to the early extinguishment of debt, offset by lower interest expense.
Net pension and postretirement benefit costs reduced net income by $30 million
in 2002 and $15 million in 2001.
Earnings per share rose $0.12, or 8%, to $1.67 per share in 2002. Results
for 2002 included the extraordinary loss of $0.06 per share. Earnings per share
in 2002 declined $0.06 per share due to a 4% increase in average shares
outstanding. As discussed above, net income performance in 2002 benefited from
the absence of goodwill amortization ($109 million, or $0.42 per share, in
2001). This effect was partially offset by the gain on the sale of an investment
in a Spanish power company in 2001 ($51 million after-tax, or $0.20 per share).
23
COMMODITY CONTRACT AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the six months ended June 30, 2002. The net increase, excluding
"other activity" as described below, of $10 million represents the net favorable
effect of mark-to-market accounting on earnings for the six months ended June
30, 2002 ($152 million net favorable effect for the three months ended June 30,
2002).
Balance of net commodity contract assets/(liabilities) at December 31, 2001..... $ 409
Settlements of positions included in the opening balance (1).................... (165)
Unrealized mark-to-market valuations of positions held at end of period (2)..... 175
Other activity (3).............................................................. 105
-----
Balance of net commodity contract assets/(liabilities) at June 30, 2002......... $ 524
=====
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of December 31, 2001.
(2) Includes unrealized gains of $34 million recognized upon origination of
certain contracts in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". There were no significant
changes in fair value attributable to changes in valuation techniques.
(3) Includes initial values of positions assumed in acquisitions or involving
the receipt or payment of cash, such as option premiums, and amortization
of such positions originating in prior periods. Also includes
reclassifications of commodity contract assets and liabilities, including
$71 million of liabilities to Enron reclassified to other current
liabilities, and the impact of currency translation adjustments. These
activities have no effect on unrealized mark-to-market valuations.
The above table includes all commodity contracts that are marked to market
in net income, for both trading and non-trading purposes.
Of the net commodity contract asset balance above at June 30, 2002, the
amount representing unrealized mark-to-market net gains that have been
recognized in current and prior years' earnings is $546 million. The offsetting
net liability of $22 million included in the June 30, 2002 balance consists of
the initial values, net of amortization, of positions assumed in acquisitions or
involving the receipt or payment of cash, including option premiums. The
following table presents the unrealized mark-to-market balance at June 30, 2002
scheduled by contractual settlement dates of the underlying positions (in
millions).
MATURITY DATES OF UNREALIZED NET MARK-TO-MARKET BALANCES AT JUNE 30,2002
------------------------------------------------------------------------
MATURITY LESS MATURITY IN
THAN MATURITY OF MATURITY OF EXCESS OF
SOURCE OF FAIR VALUE 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
------------- ----------- ----------- ----------- -------
Prices actively quoted......... $ 44 $ (20) $ -- $ -- $ 24
Prices provided by other
external sources.............. 168 145 27 8 348
Prices based on models......... 41 67 41 25 174
------------- ----------- ----------- ----------- -------
Total.......................... $ 253 $ 192 $ 68 $ 33 $ 546
============= =========== =========== =========== =======
Percentage of total............ 46% 35% 13% 6% 100%
As the above table indicates, approximately 81% of the unrealized
mark-to-market valuations at June 30, 2002 mature within three years. This is
reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2004 in the US and in certain
European markets through 2011. The "prices provided by other external sources"
category represents forward commodity positions at locations for which
over-the-counter (OTC) broker quotes are available. OTC quotes for natural gas
and power generally extend through 2010 and 2005, respectively, in the US, and
2011 in Europe. This category also includes values of large commercial and
industrial (C&I) retail sales contracts. The "prices based on models" category
contains the value of all non-exchange traded options, valued using industry
accepted option pricing models. In addition, this category contains other
contractual arrangements which may have both forward and option components. In
many instances, these contracts can be broken down into their component parts
and modeled by TXU Corp. as simple forwards and options based on prices actively
quoted. As the modeled value
24
is ultimately the result of a combination of prices from two or more different
instruments, it has been included in this category.
ENERGY TRADING ACTIVITIES
TXU Corp. and TXU Energy have responded to inquiries from the Federal
Energy Regulatory Commission (FERC), the Commission and the SEC regarding "wash
trades" in electric and gas trading markets in the US. In their reports to the
FERC, the Commission, and the SEC, TXU Corp. and TXU Energy have reported that
during the period of inquiry from January 1, 2000 to the present, based on the
different definitions and geographic areas specified by the respective agencies,
zero, two, and eight transactions, respectively, had some of the characteristics
of "wash trades". Revenue associated with the transactions reported was 0.002%
and 0.046% of TXU Corp.'s reported revenue for 2000 and the first six months of
2002, respectively. None of these transactions were entered into for the purpose
of inflating revenues, trading volumes or market prices, and these transactions
do not require restatement of revenues.
SEGMENTS
NORTH AMERICA ENERGY
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2002 2001* 2002 2001*
--------- -------- -------- --------
Operating revenues....................................... $ 3,543 $ 2,968 $ 7,046 $ 7,085
--------- -------- -------- --------
Operating expenses
Energy purchased for resale, fuel consumed and
delivery costs.................................... 2,720 2,281 5,370 5,842
Operation and maintenance.......................... 367 237 725 445
Depreciation and amortization...................... 103 105 217 206
Taxes other than income............................ 54 28 113 55
--------- -------- -------- --------
Total operating expenses.................... 3,244 2,651 6,425 6,548
--------- -------- -------- --------
Operating income......................................... 299 317 621 537
Other income ............................................