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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( / ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / No____
---
Common Stock outstanding at November 8, 2002: 287,136,570 shares, without par
value.
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2002 and 2001 ............... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Nine Months Ended September 30, 2002 and 2001 ............... 2
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2002 and 2001 ......................... 3
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 .............................. 4
Notes to Financial Statements ......................................... 5
Independent Accountants' Report ....................................... 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............ 59
Item 4. Controls and Procedures ............................................... 60
Part II. Other Information
Item 1. Legal Proceedings ..................................................... 61
Item 6. Exhibits and Reports on Form 8-K ...................................... 62
Signature ........................................................................... 63
Certifications ...................................................................... 64
(i)
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars, Except per Share Amounts
Operating revenues (Note 2) ..................................................... $ 4,276 $ 3,967 $ 11,925 $ 12,393
-------- -------- -------- --------
Operating expenses
Energy purchased for resale,fuel consumed and delivery costs (Note 2) ......... 2,384 1,903 6,303 6,586
Operation and maintenance ..................................................... 853 1,011 2,516 2,502
Depreciation and other amortization ........................................... 244 245 716 750
Goodwill amortization ......................................................... -- 56 -- 165
Taxes other than income ....................................................... 173 195 534 577
-------- -------- -------- --------
Total operating expenses ................................................... 3,654 3,410 10,069 10,580
-------- -------- -------- --------
Operating income ................................................................ 622 557 1,856 1,813
Other income .................................................................... 33 10 65 125
Other deductions ................................................................ 31 60 86 119
Interest income ................................................................. 8 48 31 121
Interest expense and other charges .............................................. 301 384 892 1,176
-------- -------- -------- --------
Income from continuing operations before income taxes and
extraordinary items .......................................................... 331 171 974 764
Income tax expense (benefit) .................................................... 104 (168) 274 17
-------- -------- -------- --------
Income from continuing operations before extraordinary items .................... 227 339 700 747
Loss on discontinued operations, net of tax effect (Note 1) ..................... (15) -- (15) --
Extraordinary items, net of tax effect .......................................... (1) -- (18) --
-------- -------- -------- --------
Net income ...................................................................... 211 339 667 747
Preference stock dividends ...................................................... 5 5 16 16
-------- -------- -------- --------
Net income available for common stock ........................................... $ 206 $ 334 $ 651 $ 731
======== ======== ======== ========
Average shares of common stock outstanding (millions) ........................... 282 260 272 258
Per share of common stock:
Basic and diluted earnings
Income from continuing operations before extraordinary items .................. $ 0.78 $ 1.28 $ 2.52 $ 2.83
Loss on discontinued operations, net of tax effect ............................ $ (0.05) $ -- $ (0.05) $ --
Extraordinary items, net of tax effect ........................................ $ -- $ -- $ (0.07) $ --
Net income available for common stock ......................................... $ 0.73 $ 1.28 $ 2.40 $ 2.83
Dividends declared ............................................................. $ 0.60 $ 0.60 $ 1.80 $ 1.80
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Income from continuing operations before extraordinary items ................... $ 227 $ 339 $ 700 $ 747
----- ----- ----- -----
Other comprehensive income (loss)--
Net change during period, net of tax effects
Cumulative foreign currency translation adjustments .................... 47 127 297 (120)
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 $22) ........... - - - (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 $25, $19, $122 and $58) .................. (61) (43) (236) (132)
Amounts realized in earnings during the period
(net of tax expense of $5, $14, $64 and $65) .................... 27 36 144 155
----- ----- ----- -----
Total ................................................... 13 120 205 $(226)
----- ----- ----- -----
Comprehensive income from continuing operations ................................ 240 459 905 521
----- ----- ----- -----
Loss on discontinued operations, net of tax effect ............................. (15) - (15) -
Extraordinary items, net of tax effect ......................................... (1) - (18) -
----- ----- ----- -----
Comprehensive income ........................................................... $ 224 $ 459 $ 872 $ 521
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
2002 2001
---- ----
Millions of Dollars
Cash flows - operating activities
Net income .................................................................. $ 667 $ 747
Adjustments to reconcile net income to cash provided by operating activities:
Loss on discontinued operations, net of tax effect ...................... 15 --
Extraordinary items, net of tax effect .................................. 18 --
Depreciation and amortization ........................................... 791 1,011
Deferred income taxes and investment tax credits - net .................. 140 (265)
Loss/(Gain) from sales of assets ....................................... (30) 148
Net effect of unrealized mark-to-market valuation gains ................. (43) (341)
Equity in losses of affiliates and joint ventures ....................... 32 36
Other ................................................................... 45 116
Changes in operating assets and liabilities .................................. (682) 155
------- -------
Cash provided by operating activities .......................... 953 1,607
------- -------
Cash flows - financing activities
Issuances of securities:
Long-term debt ........................................................... 3,842 1,580
Common stock ............................................................. 717 353
Retirements/repurchases of securities:
Long-term debt ........................................................... (3,761) (2,285)
Common stock ............................................................. -- (44)
Change in notes payable:
Commercial paper ......................................................... 284 (352)
Banks .................................................................... (1,859) 55
Cash dividends paid:
Common stock ............................................................. (496) (463)
Preference stock ......................................................... (16) (16)
Debt premium, discount, financing and reacquisition expenses ................. (107) (21)
------- -------
Cash used in financing activities .............................. (1,396) (1,193)
------- -------
Cash flows - investing activities
Capital expenditures ......................................................... (840) (1,186)
Acquisitions of businesses ................................................... (606) (230)
Proceeds from sale of assets ................................................. 1,354 755
Nuclear fuel ................................................................. (51) (11)
Other ........................................................................ (47) (62)
------- -------
Cash used in investing activities ............................... (190) (734)
------- -------
Effect of exchange rates on cash and cash equivalents ............................ 65 (12)
------- -------
Net change in cash and cash equivalents .......................................... (568) (332)
Cash and cash equivalents - beginning balance .................................... 1,161 1,039
------- -------
Cash and cash equivalents - ending balance ....................................... $ 593 $ 707
======= =======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS Millions of Dollars
Current assets
Cash and cash equivalents ............................................................. $ 593 $ 1,161
Accounts receivable ................................................................... 3,057 2,555
Inventories -- at average cost ........................................................ 571 522
Prepayments ........................................................................... 255 370
Commodity contract assets ............................................................. 1,779 1,680
Other current assets .................................................................. 307 253
------- -------
Total current assets .......................................................... 6,562 6,541
------- -------
Investments
Restricted cash ....................................................................... 633 520
Other investments ..................................................................... 1,691 1,586
Property, plant and equipment -- net ........................................................ 20,949 22,480
Goodwill .................................................................................... 7,671 7,247
Regulatory assets -- net .................................................................... 1,817 1,734
Commodity contract assets ................................................................... 1,106 795
Cash flow hedges and other derivative assets ................................................ 458 448
Deferred debits and other assets ............................................................ 957 881
------- -------
Total assets .................................................................. $41,844 $42,232
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable
Commercial paper .............................................................. $ 1,144 $ 853
Banks ......................................................................... 509 2,369
Long-term debt due currently .......................................................... 1,695 1,308
Accounts payable ...................................................................... 2,447 2,466
Commodity contract liabilities ........................................................ 1,563 1,545
Other current liabilities ............................................................. 1,644 1,440
------- -------
Total current liabilities ..................................................... 9,002 9,981
------- -------
Accumulated deferred income taxes ........................................................... 3,500 3,708
Investment tax credits ...................................................................... 459 479
Commodity contract liabilities .............................................................. 722 521
Cash flow hedges and other derivative liabilities ........................................... 672 317
Other deferred credits and noncurrent liabilities ........................................... 2,508 2,221
Long-term debt, less amounts due currently .................................................. 14,830 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 8)
Shareholders' equity (Note 5) ............................................................... 9,275 7,956
------- -------
Total liabilities and shareholders' equity .................................... $41,844 $42,232
======= =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS
TXU Corp. is an energy services company that engages in electricity
generation, wholesale energy sales, trading and risk management activities,
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 Australia Holdings Limited Partnership (TXU Australia) and have also
been conducted through TXU Europe Limited (TXU Europe).
Exit of TXU Europe Business - In October 2002, TXU Corp. made a
determination to exit its TXU Europe business. See Note 3 regarding recent
events related to TXU Europe.
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). Concurrent with 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, effective with reporting of 2002 results. (See Note 9 for further
information concerning reportable business segments.)
Discontinued Operations -- TXU Corp. intends to sell its 60% interest in a
gas distribution business in Mexico and recorded a charge of $15 million
after-tax in the third quarter of 2002 to write-down its investment in the
business. The charge was reported as discontinued operations.
5
Business Acquisitions and Dispositions -- On October 21, 2002, TXU Europe
sold certain of its operations, including the retail electric and gas business
in the United Kingdom (UK) and certain generation plants in the UK, to Powergen
UK plc (Powergen), a unit of Germany's E.ON AG, for approximately $2.1 billion
in cash. See Note 3 regarding recent events related to TXU Europe.
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.
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 price 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 is being
recognized in other income 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 reclassifications made in accordance with the Emerging
Issues Task Force (EITF) Issue 02-3, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" and 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.
The financial information of TXU Europe has been included in the
consolidated results of TXU Corp. on the basis that TXU Europe was a continuing
operation of TXU Corp. as of September 30, 2002. However, as a result of the
events subsequent to September 30, 2002, TXU Corp. has made a determination to
exit the TXU Europe operations. TXU Corp. expects to report the results of TXU
Europe as discontinued operations beginning in the fourth quarter of 2002.
Changes in Accounting Standards -- In June 2002, the EITF reached a
consensus on certain aspects of Issue 02-3 regarding the presentation of trading
activities in the statement of income. The new rules were effective for TXU
Corp. on July 1, 2002, and require that all trading contracts, whether or not
physically settled, 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. Prior period amounts have been reclassified to conform to this new
reporting requirement. The table below summarizes the impact on TXU Corp.'s
operating revenues and energy purchased for resale, fuel consumed and delivery
costs of the new reporting requirements. Transactions affected by the new
reporting requirements represent contracts that provided for physical delivery
but were settled financially without delivery, as well as contracts physically
settled but classified as trading activities. The new reporting requirements
have no impact on TXU Corp.'s gross margin, net income or cash provided by
operating activities.
6
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Millions of Dollars
Operating revenues before reclassification ........................... $9,582 $6,603 $24,884 $21,105
Less: Energy purchased for resale, fuel consumed and delivery
costs netted with revenues ..................................... 5,306 2,636 12,959 8,712
------ ------ ------- -------
Operating revenues after reclassification ............................ $4,276 $3,967 $11,925 $12,393
====== ====== ======= =======
Energy purchased for resale, fuel consumed and delivery costs
before reclassification ....................................... $7,690 $4,539 $19,262 $15,298
Less: Energy purchased for resale, fuel consumed and delivery
costs netted with revenues ..................................... 5,306 2,636 12,959 8,712
------ ------ ------- -------
Energy purchased for resale, fuel consumed and delivery costs
after reclassification ......................................... $2,384 $1,903 $ 6,303 $ 6,586
====== ====== ======= =======
On October 25, 2002, the EITF rescinded EITF Consensus No. 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only contracts that are derivatives under SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities" will be subject to
mark-to-market accounting. Trading contracts that may not be derivatives under
SFAS No. 133 consist primarily of gas storage, power tolling, full requirements
and capacity contracts. This new accounting rule will be effective for new
contracts entered into after October 25, 2002. The cumulative effect of the
change on all existing contracts will be recorded no later than the first
quarter of 2003. TXU Corp. has not determined the impact this change in
accounting method will have on its results of operations.
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 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It established a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. TXU Corp. completed the
transitional impairment test in the second quarter of 2002, the results of which
indicated no impairment of goodwill. The annual impairment test date will be as
of October 1 each year.
The table below reflects what reported income from continuing operations
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.
7
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Millions of Dollars, Except per Share Amounts
Reported income from continuing operations ..................... $ 227 $ 339 $ 700 $ 747
Add back: goodwill amortization ............................... -- 56 -- 165
-------- -------- -------- ---------
Adjusted income from continuing operations ..................... 227 395 700 912
Loss on discontinued operations, net of tax effect ............. (15) -- (15) --
Extraordinary items, net of tax effect ......................... (1) -- (18) --
-------- -------- -------- ---------
Adjusted net income ............................................ 211 395 667 912
Preference stock dividends ..................................... 5 5 16 16
-------- -------- -------- ---------
Adjusted net income available for common stock.................. $ 206 $ 390 $ 651 $ 896
======== ======== ======== =========
Basic and diluted earnings per share:
Reported income from continuing operations ..................... $ 0.78 $ 1.28 $ 2.52 $ 2.83
Add back: goodwill amortization ............................... -- 0.22 -- 0.64
-------- -------- -------- ---------
Adjusted income from continuing operations ..................... 0.78 1.50 2.52 3.47
Loss on discontinued operations, net of tax effect ............. (0.05) -- (0.05) --
Extraordinary items, net of tax effect ......................... -- -- (0.07) --
-------- -------- -------- ---------
Adjusted net income available for common stock-basic ........... $ 0.73 $ 1.50 $ 2.40 $ 3.47
======== ======== ======== =========
Adjusted net income available for common stock-diluted ......... $ 0.73 $ 1.49 $ 2.40 $ 3.47
======== ======== ======== =========
SFAS No. 143, "Accounting for Asset Retirement Obligations," will be
effective 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 effective with 2003 reporting.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective 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, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued 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 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." 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 will 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 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.
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 137,485 and 275,556
for the three months ended September 30, 2002 and 2001, respectively, and
215,429 and 248,233 for the nine months ended September 30, 2002 and 2001,
respectively.
8
During 2002, TXU Corp. also had outstanding certain common stock forward
purchase contracts related to the equity-linked debt securities issued in 1998
that were 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. retained and canceled
a portion ($238 million) of the associated notes in satisfaction of the holders'
obligations under the common stock forward purchase contracts (see Note 4).
3. SUBSEQUENT EVENTS RELATED TO TXU EUROPE
Difficult Operating Environment in the UK -- On October 4, 2002, TXU Corp.
announced that it was reducing earnings expectations for 2002 and 2003 due
primarily to continued pressure on operating results in the UK. A significant
decrease in wholesale power prices and low price volatility, due in part to
milder than normal weather, had led to continuing declines in profitability and
cash flows from TXU Europe's upstream electricity generation assets and
short-term wholesale trading activities. In addition, TXU Europe's ability to
enter into structured transactions (long-term trades) had been considerably
reduced because of depressed market activity and lack of available
counterparties due to energy sector-wide credit concerns. A significant portion
of TXU Europe's retail power load in the UK was satisfied with long-term
agreements that obligated TXU Europe to purchase power at prices considerably in
excess of current wholesale market prices. These comparatively high power
purchase costs, combined with increased competition and associated customer
attrition, had resulted in reduced profitability and cash flows from TXU
Europe's retail electric business. TXU Europe's planned actions to address the
situation included restructuring the power purchase agreements and physical
generation positions in the UK, ceasing acquisition and other developmental
activities, reducing administrative costs and enhancing retail margins.
Market Reaction and TXU Corp.'s Response -- Prior to TXU Corp.'s October 4
announcement, concerns were already prevalent in US financial markets regarding
financial performance of the US energy sector. Subsequent to TXU Corp.'s October
4 announcement, concerns also arose in the financial markets regarding the
liquidity of TXU Corp.'s North American and Australian operations.
TXU Corp. has taken the following actions to address the US financial
markets' concern about liquidity and to strengthen its credit position:
. Reduced its common stock dividend by 80 percent to an annual indicated
rate of $.50 per share effective with the dividend payable in January
2003
. Significantly reduced planned capital expenditures in all its
businesses
. Reversed previous plans to support TXU Europe with up to $700 million
in capital contributions
. Eliminated by amendment the cross-default provision in a US financing
arrangement that would have been triggered by a TXU Europe default
(TXU Australia's financing arrangements have no cross-default
provision that would have been triggered by a TXU Europe default.)
. Drew $2.6 billion in cash on its US revolving credit facilities
. On October 30, 2002, entered into a commitment for a secured credit
facility of up to $1 billion at Oncor. The facility is intended to
fund interim refinancings of approximately $700 million of maturities
should market conditions not support a timely, cost effective
refinancing. The balance will be available for general corporate
purposes at Oncor.
The actions to reduce the common stock dividend and capital expenditures
will result in estimated annual cash savings of $850 to $950 million, which is
intended to be used for debt reduction.
Following the announcement of these actions, between October 4 and October
14, 2002, the major credit rating agencies downgraded TXU Europe's credit
ratings to below investment grade. Credit ratings for TXU Corp and its US and
Australian subsidiaries remain investment grade.
Impact of Credit Rating Downgrades on TXU Europe -- The downgrades of
credit ratings to below investment grade have resulted in a number of potential
demands on TXU Europe's liquidity. These demands are in certain cases at the
discretion of TXU Europe's counterparties and include additional cash or letter
of credit collateral requirements and repayment of indebtedness under various
financing and other contractual
9
arrangements. Certain of these collateral requirements relate to wholesale
trading, further limiting these activities. In addition, events of default have
occurred under certain of these arrangements, and several financing agreements
contain cross-default provisions that accelerate repayment of borrowings. The
effect of these developments on liquidity is significant, and TXU Europe has
entered into negotiations with its creditors regarding these matters.
Sale of Certain TXU Europe Operations-- On October 14, 2002, TXU Corp.
announced that TXU Europe was offering for sale all or portions of its business.
Such action effectively represented a determination by TXU Corp. to exit all of
its operations in Europe.
On October 21, 2002, TXU Europe sold certain of its operations to Powergen,
a unit of Germany's E.ON AG, for approximately $2.1 billion ((pound)1.37
billion) in cash.
Concurrently, Powergen terminated the accounts receivable securitization
program, under which TXU Europe had been selling its trade accounts receivable,
for approximately $390 million ((pound)250 million), effectively buying back the
receivables from the participating financial institution.
The operations sold include: (a) the retail electric and gas business in
the UK, consisting of 5.3 million residential, commercial and industrial
customers, and (b) three power plants representing a total of 2.9 gigawatts of
coal-fired generation capacity and a combined heat and power plant, all in the
UK. The sale and purchase agreement also provides for the transfer of
approximately 1,900 employees in the UK to Powergen and the assumption by
Powergen of the associated pension obligations.
After the sale, TXU Europe continues to retain: (a) its energy trading
assets and liabilities; (b) several long-term power purchase agreements in the
UK; (c) operations in Germany consisting of a national retail energy provider
with 200,000 customers, as well as majority interests in two businesses
providing power, gas, heating and water services: the city utility in Kiel (51%
owned) with 250,000 customers and the city utility in Braunschweig (74.9% owned)
with 210,000 customers; (d) operations in Scandinavia consisting of an 80% owned
wholesale power business in Finland, selling over four terawatt hours of
electricity annually, a 45% interest in an electricity distribution business in
Finland with access to 90,000 customers and a retail energy business with 80,000
customers in Norway; and (e) two combined heat and power plants in the UK and
interests in various renewable energy projects, mostly wind farms.
TXU Europe and its subsidiaries have not entered into formal administration
processes in the UK (similar to bankruptcy proceedings in the US). However,
consistent with UK law, these remaining operations are being managed by the
directors of TXU Europe for the benefit of the creditors of TXU Europe and its
subsidiaries. The sales proceeds discussed above, as well as any other proceeds
that may be realized, will not be available to TXU Corp.
In consideration of the above events and changes in circumstances regarding
TXU Corp.'s control of the operating activities of TXU Europe, TXU Corp. is
required to perform an impairment test of goodwill and other assets of TXU
Europe, in accordance with accounting rules. TXU Corp. expects to record an
estimated charge of approximately $4.2 billion in the fourth quarter of 2002,
consisting primarily of the write-off of its investment in TXU Europe ($3.7
billion as of September 30, 2002). The charge also includes the write-off of
receivables due from TXU Europe and amounts previously recorded in other
comprehensive income, consisting primarily of the cumulative translation loss
associated with TXU Europe, as well as certain anticipated income tax and other
obligations related to the exiting of the European operations. This charge is
before consideration of any income tax deduction with respect to the tax basis
($3.4 billion) of TXU Corp.'s investment in TXU Europe, as well as certain
income tax contingencies, as such matters continue to be under review. TXU Corp.
has no intention to continue to fund the operations or any obligations of TXU
Europe beyond its investment balance.
10
The following condensed consolidated pro forma financial information of
TXU Corp. has been prepared to give effect to the exiting of the TXU Europe
operations:
Nine Months Ended
September 30,
--------------------
2002 2001
------ --------
Millions of Dollars,
Except Per
Share Amounts
Operating revenues ............................................................. $7,873 $ 7,896
Operating income ............................................................... $1,651 $ 1,528
Income from continuing operations before extraordinary items ................... $ 703 $ 557
Per share (after preference stock dividends)-- basic and diluted ............ $ 2.53 $ 2.10
Previous TXU Europe 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, for $400 million in cash. In March 2002, TXU Europe acquired the
UK energy retail and trading business of Amerada Hess, which included 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, for $168 million in
cash.
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 the networks business of $125 million ($88
million after-tax), after transaction costs, in the fourth quarter of 2001.
11
4. FINANCING ARRANGEMENTS
TN41 Credit Facilities -- TXU Corp. and its US and Australian
subsidiaries have credit facilities (some of which provide for long-term
borrowings) available as follows:
Credit Facilities
---------------------------------------------------------
At September 30, 2002 At November 5, 2002(a)
--------------------- ----------------------
Letters Letters
Authorized Facility of Cash of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Credit Borrowings
- -------- --------------- --------- ------- ------ ---------- ------ ----------
(Millions of dollars)
364-Day Revolving Credit Facility April 2003 US Holdings,
TXU Energy,
Oncor $ 1,000 $ 81 $ -- $ 88 $ 912
Five-Year Revolving Credit Facility(b) February 2005 US Holdings 1,400 462 -- 461 939
Three-Year Revolving Credit Facility May 2005 TXU Corp. 500 350 -- 500
Standby Liquidity Facility November 2002 US Holdings 400 -- -- -- 400
Standby Liquidity Facility November 2002 US Holdings,
TXU Energy,
Oncor 400 -- -- -- 400
------- ------ -------- ------ -------
Total US (c) $ 3,700 $ 543 $ 350 $ 549 $ 3,151
Senior Facility October 2004 TXU Australia $ 962 $ -- $ 815 $ -- $ 879
Working Capital Facility October 2002 TXU Australia 54 -- -- -- --
------- ------ -------- ------ -------
Total Australia (d) $ 1,016 $ -- $ 815 $ -- $ 879
(a) On October 15, 2002, US Holdings and TXU Energy borrowed approximately
$2.6 billion in cash against their available credit facilities. These
funds and other available cash will be used, in part, to repay
outstanding commercial paper. (See Note 3 - Subsequent Events Related
to TXU Europe.)
(b) In February 2002, TXU Gas was removed as a borrower under this
facility. TXU Corp. was removed as a borrower under this facility
effective July 31, 2002.
(c) Supported commercial paper borrowings.
(d) Supports commercial paper borrowings, which were $63 million and $36
million at September 30, 2002 and November 5, 2002, respectively.
On October 30, 2002, Oncor entered into a commitment for a
secured credit facility of up to $1 billion. The facility is intended
to fund interim refinancings of approximately $700 million of maturing
secured debt should market conditions not support a timely, cost
effective refinancing. The balance will be available for general
corporate purposes at Oncor.
In July 2002, US Holdings entered into the $400 million Standby
Liquidity Facility that terminates no later than November 30, 2002. In
August 2002, US Holdings, TXU Energy and Oncor entered into the joint
$400 million Standby Liquidity Facility that also expires November 30,
2002. Borrowings of $800 million against these facilities are expected
to be repaid no later than the expiration date.
In May 2002, TXU Corp. entered into the $500 million three-year
revolving credit facility with a group of banks that terminates May 1,
2005. This facility is used for working capital and general corporate
purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into the
joint $1.0 billion 364-day revolving credit facility with a group of
banks that terminates in April 2003 but can be extended for one year.
This facility is 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.
In the second quarter of 2002, each of TXU Energy and Oncor began
issuing commercial paper to fund its short-term liquidity
requirements. The commercial paper programs allow each of TXU Energy
and Oncor to issue up to $2.4 billion and $1.0 billion of commercial
paper, respectively. At September 30, 2002, each of the US credit
facilities listed above provided back-up for outstanding commercial
paper under the Oncor and TXU
12
Energy programs. The TXU Corp. commercial paper program was discontinued in July
2002, and at that time, TXU Corp. was removed as a borrower under the $1.4
billion Five-Year Revolving Credit Facility. As of September 30, 2002, total
outstanding commercial paper under these programs was $1.1 billion. Concurrent
with events in October 2002, as described in Note 3, US commercial paper markets
became inaccessible. Existing borrowings under the program are being repaid upon
maturity. Commercial paper borrowings are expected to resume as market concerns
regarding the liquidity of TXU Corp. and its US subsidiaries are mitigated.
All of the credit facilities discussed above, with the exception of the
Oncor commitment dated October 30, 2002, are included in the credit facilities
table above. Excluded from the credit facilities table is the revolving credit
facility of TXU Europe. As of September 30, 2002, the outstanding borrowings
under this facility were (pound)673 million ($1,051 million). (See Note 3
regarding subsequent events related to TXU Europe.)
Long-Term Debt -- At September 30, 2002 and December 31, 2001, total
long-term debt of TXU Europe included in the balance sheet was $4.7 billion and
$5.7 billion, respectively. (See Note 3 for further discussion.)
On October 15, 2002, TXU Gas exercised its right to redeem $200 million
aggregate principal amount of Putable Asset Term Securities (PATS notes) that
would have matured on October 15, 2012 for a cash premium of $35 million ($23
million after-tax), which will be recognized as an extraordinary debt
extinguishment loss by TXU Corp. in the fourth quarter of 2002. TXU Gas used
cash advances from TXU Corp. and cash on hand to fund the redemption of the PATS
notes.
On October 1, 2002, TXU Corp. paid off $125 million of notes at maturity.
In August 2002, Oncor issued $1.0 billion aggregate principal amount of
unsecured debentures in two series in a private placement with registration
rights. One series of $200 million is due September 1, 2007 and bears interest
at the rate of 5%, and the other series of $800 million is due September 1, 2022
and bears interest at the rate of 7%. Proceeds from the issuance were used by
Oncor to repay advances from affiliates and commercial paper.
In August 2002, Oncor redeemed all of its 8.5% First Mortgage Bonds due
August 1, 2024 and all of its 8.875% First Mortgage Bonds due February 1, 2022,
in aggregate principal amounts of $115 million and $112 million, respectively.
In June 2002, Oncor redeemed all of its 8% First Mortgage Bonds due June 1, 2002
in the aggregate principal amount of $147 million, and in February 2002, Oncor
redeemed all of its 8.125% First Mortgage Bonds due February 1, 2002 in the
aggregate principal amount of $150 million. 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 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The first of two common stock forward purchase contracts was settled on August
16, 2001 with the issuance of 7.5 million shares of common stock for $351
million in cash. The second of two common stock forward purchase contracts was
settled on August 16, 2002, on which date TXU Corp. issued approximately 8.4
million shares of common stock to the holders of these equity-linked securities.
TXU Corp. received approximately $111 million in cash upon settlement of common
stock forward purchase contracts. In addition, TXU Corp. retained and canceled
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 $109 million of Series E
Notes had their notes repaid by TXU Corp. on September 3, 2002. The Series E
Notes that remain outstanding (approximately $2.2 million principal amount) bear
interest at 4.05% per annum from August 16, 2002 through maturity on August 16,
2004.
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
13
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 holders 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 with registration
rights. One series of $700 million is due May 1, 2012 and bears interest at the
annual rate of 6.375%, and the other series of $500 million is due May 1, 2032
and bears interest at the annual rate of 7%. 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.
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 Company LP 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 TXU Europe's debt ($500 million due 2004, $286 million
due 2012 and $286 million due 2025) was assumed by the purchaser.
As of September 30, 2002, the aggregate secured long-term debt of TXU
Corp. and its consolidated subsidiaries consisted of $3.1 billion of Oncor's
first mortgage bonds and senior secured notes that are secured by a lien on
substantially all of its tangible electric T&D property, and $596 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.
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 -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of September 30, 2002, TXU Energy
Retail Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas are
qualified originators of accounts receivable under the program. TXU Receivables
Company may sell up to an aggregate of $600 million in undivided interests in
the receivables purchased from the originators under the program. As of
September 30, 2002, $1.25 billion face amount of receivables were sold to TXU
Receivables Company under the program in exchange for cash of $600 million and
$632 million in subordinated notes, with $18 million of losses on sales for the
nine months ended September 30, 2002 principally representing the interest on
the underlying financing. These losses approximated 4% of the cash proceeds from
the sale of undivided interests in accounts receivable on an annualized basis.
Upon termination, cash flows to the originators would be delayed as collections
of sold receivables were used by TXU Receivables Company to repurchase the
undivided interests of the financial institutions instead of purchasing new
receivables. The level of cash flows would normalize in approximately 16 to 31
days. TXU Business Services, 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
14
TXU Receivables Company represent TXU Corp.'s subsidiaries' retained interests
in the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
5. SHAREHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------- ------------
Shareholders' equity:
Preference stock .................................................... $ 300 $ 300
------- -------
Common stock without par value:
Authorized shares -- 1,000,000,000
Outstanding shares: September 30, 2002 -- 286,779,225 and
December 31, 2001 -- 265,140,087 ............................ 7,516 6,560
Retained earnings ................................................... 2,021 1,863
Accumulated other comprehensive loss ................................ (562) (767)
------- -------
Total common stock equity ................................. 8,975 7,656
------- -------
Total shareholders' equity ................................ $ 9,275 $ 7,956
======= =======
On October 12, 2002, TXU Corp. declared a common stock dividend of $0.125
per share, payable on January 2, 2003, which represents an 80% reduction from
the previous dividend rate. The decrease was in response to concerns regarding
the liquidity of TXU Corp. and its US and Australian subsidiaries. See Note 3 to
Financial Statements regarding recent events related to TXU Europe. TXU Corp.
paid quarterly dividends of $0.60 a share in April 2002, July 2002 and October
2002. Future dividends may vary and are subject to consideration of TXU Corp.'s
operating cash flow levels, capital expenditure needs and other business
conditions existing at the time.
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.
In connection with the issuance of equity-linked debt securities in June
2002, 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 $48 million. 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.
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 was settled on August
16, 2002, on which date TXU Corp. issued 8,395,800 shares of common stock to the
holders of these equity-linked securities, resulting in an increase to
shareholders' equity of approximately $350 million. See Note 4.
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 September 30, 2002, there were no restrictions on
the payment of dividends under these provisions.
6. 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:
15
Trust Securities Trust Assets Maturity
------------------------------------------------------------- ----------------------------- --------
Units (000's) Amount Amount
---------------------------- ----------------------------- -----------------------------
September 30, December 31, September 30, December 31, September 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.
7. REGULATION AND RATES
Regulatory Settlement Plan -- (For additional discussion of the
settlement plan and related items, see Note 4 to Financial Statements in
TXU Corp.'s Annual Report on Form 10-K for the fiscal year ended December
31, 2001.) 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 transition (securitization)
bonds with a principal amount of $1.3 billion. The Commission's order
approving the settlement plan and the financing order were appealed by
certain nonsettling parties in five separate dockets in Travis County,
Texas District Court in August 2002. The court has consolidated these
dockets into one, and a hearing on the merits is scheduled for February 4,
2003. US Holdings is unable to predict when the appeal process related to
the Commission's approval of the settlement plan and the financing order
will be concluded or the 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 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.
The principal and interest on the securitization bonds would be secured
by payments from retail customers to provide recovery of generation-related
regulatory assets and other qualified costs. These regulatory assets have a
carrying value of approximately $1.8 billion. Once the bonds are issued,
the full amount of the regulatory assets will be amortized to expense by
Oncor over the life of the bonds. Any amount of the $1.8 billion which is
in excess of the future cash flows from the customer payments to service
the bonds will be expensed at the time such shortfall, if any, is
determined. Assuming the bonds were issued at the present time and
considering current interest rates, the amount of the regulatory asset
carrying value would exceed the cash flows from the bonds by approximately
$130 million.
TXU Energy --Under Commission rules, affiliated REPs of utilities are
allowed to petition the Commission for an increase in the fuel factor
component of their price-to-beat rates if the average price of natural gas
futures increases more than 4% from the level used to set the previous
price-to-beat fuel factor rate. In April 2002, TXU Energy filed a request
with the Commission to increase the fuel factor component of its
price-to-beat rates. On August 23, 2002, the Commission approved the fuel
factor increase. The fuel factor
16
increase was implemented for the billing month beginning on August 26, 2002.
Average residential customers using 1,000 KWh saw an increase of just under 5%
in their monthly electric bills.
TXU Energy is the current provider of last resort (POLR) for residential
and small non-residential customers in all areas of the Electric Reliability
Council of Texas (ERCOT), where customer choice is available except in its
incumbent service areas, and is the POLR for large non-residential customers in
its incumbent service area. TXU Energy's current POLR contract ends on December
31, 2002. On August 22, 2002, the Commission adopted new rules that
significantly changed POLR service. Under the new POLR rules, effective
September 24, 2002, residential and small non-residential customers served by
affiliated REPs and all large non-residential customers could be subject to
disconnection for non-payment rather than being transferred to a POLR provider.
Also effective on September 24, 2002, non-affiliated REPs ceased transferring
non-paying customers to the POLR provider, and instead began transferring them
to the affiliated REP. Within the new POLR framework, the POLR only provides
electric service to customers who request POLR service, whose selected REP goes
out of business, or who are transferred to the POLR by other REPs for reasons
other than non-payment. This limited POLR service will be provided by certified
REPs for a two-year period beginning January 1, 2003, and will be selected
through a competitive bid process. If no bids are submitted or all bids are
rejected, a lottery will be conducted to select a POLR to serve residential,
small non-residential customers and large non-residential customers. Only the
affiliated REP and the POLR can disconnect residential and small non-residential
customers for non-payment under the revised rules. Large non-residential
customers can be disconnected by any REP if the customer's contract allows for
it. The Commission will consider whether all REPs should be able to disconnect
non-paying customers and will make a determination by October 1, 2004.
TXU Gas -- TXU Gas employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. During the first nine
months of 2002, rate cases supporting $56 million in annualized revenue
increases have been filed in 147 cities. Settlements have been reached with 73
of these cities for annual increases aggregating $9 million. Rate cases have
been withdrawn from 23 cities, and 51 cities have declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the Railroad Commission of Texas (RRC),
which represents $25 million of annualized revenue increases. Pertaining to this
appeal, a settlement in principal has been reached for $7.5 million. TXU Gas
will dismiss its appeal at the RRC after the 51 cities pass rate ordinances
approving the settlement. These settlements adjusted other aspects of the TXU
Gas tariffs. The total impact of the 2002 rate settlements and associated tariff
adjustments is $22 million. In July 2001 and August 2001, TXU Gas filed two
cases, a gas cost review, and a gas cost reconciliation, covering the period
between November 1997 and June 2001, seeking to recover $29 million of
under-recovered gas costs. On August 6, 2002 a settlement was approved by the
RRC authorizing TXU Gas to recover $18 million of this amount, which has been
recovered through a surcharge, while $11 million in under-recovered gas costs
remains pending. On August 30, 2002, TXU Gas filed the city gate gas cost
reconciliation for the twelve month ended period June 30, 2002 with the RRC.
During this period TXU Gas over-recovered its gas cost by $24 million, which is
being refunded from October 2002 through June 2003. The refund has no material
impact on the net income of TXU Gas.
TXU Australia -- TXU Australia's electricity distribution tariffs are
effective until at least December 31, 2005, and TXU Australia's gas distribution
tariffs are effective until December 31, 2002. The Essential Services Commission
(formerly the Office of the Regulator General) issued a price determination for
the five-year period from 2003 to 2007 on October 3, 2002. According to the
determination, TXU Australia's gas distribution tariffs are to be increased
slightly for 2003. Each subsequent year, the tariffs are to increase by 0.5%
after Consumer Price Index increases.
In Victoria and New South Wales, Australia, all electricity customers have
had the option to choose their retailer since January 2002. Retail gas customers
in Victoria were able to transfer retailers effective October 2002. The
Victorian government regulates retail energy prices for incumbent providers and
has approved a price increase for TXU Australia's electricity retail customers
for 2002. TXU Australia has submitted an application with the Victorian
government, which has subsequently referred the application to the Essential
Services Commission, with respect to a price increase for 2003 for TXU
Australia's retail gas customers.
In the State of South Australia, a phase-in schedule for the introduction
of competition for electric and gas customers has been established. The market
is currently competitive for electric customers with annual usage above 0.16
GWh, and the market for residential customers becomes competitive beginning
January 2003. TXU
17
Australia intends to enter the residential market in 2003, subject to the proper
implementation of market systems and the final decision by the South Australian
Regulator regarding regulated prices for incumbent retailers in South Australia.
8. COMMITMENTS AND CONTINGENCIES
Power Purchase Contracts -- US Holdings has entered into 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:
October 1 through December 31, 2002 ............ $ 57
2003 ........................................... 259
2004 ........................................... 163
2005 ........................................... 147
2006 ........................................... 117
Thereafter ..................................... 17
-------
Total capacity payments ................ $ 760
=======
Commitments for power purchase contracts related to TXU Europe are not
included in the table above. (See Note 3 regarding recent events related to TXU
Europe.)
Commitments under long-term gas purchase contracts and coal contracts at
September 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 -- In October and November 2002, at least twenty
separate lawsuits were filed in the United States District Court for the
Northern District of Texas, and one in the United States District Court for the
Eastern District of Texas, against TXU Corp., Erle Nye and Michael J. McNally.
Some of the lawsuits also name former officer David W. Biegler as a defendant;
however, based on the alleged class period, Mr. Biegler is inappropriately named
as a defendant. The plaintiffs seek to represent classes of certain purchasers
of TXU Corp. common stock during specified class periods ranging from January
31, 2002 to October 11, 2002. No class or classes have been certified. The
complaints allege violations of the provisions of Section 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended,
relating to alleged materially false and misleading statements, including
statements in prospectuses related to the offering by TXU Corp. of its
equity-linked securities and common stock in June 2002. The individual named
defendants are current or former officers and/or directors of TXU Corp. While
TXU Corp. believes the claims are without merit and intends to vigorously defend
these lawsuits, it is unable to estimate any possible loss or predict the
outcome of the actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp., in the 116th Judicial District Court of
Dallas County, Texas against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of duties of loyalty and
good faith. The individual named defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of the action.
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas against TXU Corp. and Erle Nye alleging
negligence, negligent mispresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs allege the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages have been specified. TXU Corp. expects to remove
this case to federal court and to seek to have it consolidated with the cases
pending in the Northern District of Texas, Dallas Division. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
the action.
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, $16 million at September
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
18
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 September 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.
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.
Following is a summary of the Pinnacle ownership structure:
. Pinnacle is a limited partnership, with the sole general partnership
interest of 0.5% being owned by Pinnacle One GP, and with two similar
49.75% limited partnership interests each being owned by TXU
Investment Company, a subsidiary of TXU Corp., and Zenith, an
unaffiliated statutory business trust with a bank as its trustee,
. Pinnacle One GP is equally owned by Zenith and TXU Investment Company,
. Pinnacle One GP is managed by a Board of Managers consisting of six
individuals, with three Managers being appointed by each owner, and
. Notwithstanding the rights of Zenith to appoint half of Pinnacle One
GP's Managers and to help selecting its officers, all of the current
managers and officers of Pinnacle One GP, with the exception of one
lower level officer, are directly affiliated with TXU Corp.
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 assets
is being used to pay interest on the senior secured notes and distributions to
the third-party investors. The trust assets consist of TXU Corp. debt securities
with a principal amount of $178 million at September 30, 2002.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring in 2004, of which $150 million was outstanding and
included in investments in TXU Corp.'s balance sheet as of September 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 certain 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 S&P or Fitch Ratings
(Fitch) or Ba2 by Moody's, or
c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity (August 2004) 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
19
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.
Had TXU Corp. been required to consolidate Pinnacle at September 30, 2002,
TXU Corp.'s debt would have increased by approximately $648 million. TXU Corp.
does not believe that a consolidation of Pinnacle would have had a material
impact on its liquidity.
Equity losses in the joint venture were $16 million and $14 million for the
three months ended September 30, 2002 and 2001, respectively, and $40 million
and $41 million for the nine months ended September 30, 2002 and 2001,
respectively. TXU Corp.'s investment in Pinnacle was negative $180 million as of
September 30, 2002, classified in other deferred credits and noncurrent
liabilities in the consolidated balance sheet.
Retail Clawback -- The legislation passed by the Texas Legislature to
restructure the electric utility industry in Texas included a provision to
incent affiliated REPs of utilities to actively compete for customers outside
their traditional service areas. Under this provision, if TXU Energy retains
more than 60% of its former residential and small business customers after the
first two years of competition, a retail clawback amount would be applied as a
reduction of Oncor's delivery rates over a two-year period beginning January 1,
2004. The amounts of the retail clawback will be equal to the number of
residential and small business customers retained by TXU Energy in its
traditional service area as of January 1, 2004 less the number of new customers
added outside that service area as of that date, multiplied by $90. The
calculation will be done separately for each of the residential and small
business classes. The $90 amount is in accordance with the settlement plan
approved by the Commission and subject to appeals filed as discussed in Note 7.
The ultimate effect of the retail clawback on the results of TXU Corp. cannot be
reasonably estimated at this time.
9. 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 following segments.
North America Energy - operations involving the generation of electricity,
wholesale sales, trading and risk management activities, 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. (See Note 3 regarding recent events
related to TXU Europe.)
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
20
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.
Effective January 1, 2002, TXU Energy incurs electricity delivery fees
charged by Oncor and other T&D utilities, which TXU Energy includes in billings
to its large C&I customers. For residential and small business customers, the
price-to-beat rates include a delivery component, but such billed amounts are
not necessarily equivalent to delivery fees incurred by TXU Energy. These fees
are reflected in TXU Energy's revenues and cost of energy for the three months
and nine months ended September 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 nine months ended
September 30, 2001. The North America Energy segment's gross margin is not
materially affected by the inclusion of these electricity delivery fees.
21
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2002 2001* 2002 2001*
------ ----- ------ -----
Operating revenues -
North America Energy .............. $ 2,420 $2,351 $ 6,236 $ 6,163
North America Energy Delivery ..... 694 770 2,189 2,630
International Energy .............. 1,592 1,429 4,714 5,044
Corporate and other ............... 148 155 448 462
Eliminations ...................... (578) (738) (1,662) (1,906)
------- ------ ------- -------
Consolidated ................ $ 4,276 $3,967 $11,925 $12,393
======= ====== ======= =======
Regulated revenues included in
operating revenues -
North America Energy .............. $ -- $2,273 $ -- $ 5,965
North America Energy Delivery ..... 694 770 2,189 2,630
International Energy .............. 22 126 57 387
Corporate and other ............... 23 23 68 80
Eliminations ...................... (451) (608) (1,276) (1,529)
------- ------ ------- -------
Consolidated ................. $ 288 $2,584 $ 1,038 $ 7,533
======= ====== ======= =======
Affiliated revenues included in
operating revenues -
North America Energy .............. $ 12 $ 1 $ 29 $ 6
North America Energy Delivery ..... 446 608 1,268 1,528
Corporate and other ............... 120 129 365 372
Eliminations ...................... (578) (738) (1,662) (1,906)
------- ------ ------- -------
Consolidated ................. $ -- $ -- $ -- $ --
======= ====== ======= =======
Net income (loss) -
North America Energy .............. $ 223 $ 267 $ 579 567
North America Energy Delivery ..... 78 83 220 153
International Energy .............. (13) 51 69 212
Corporate and other ............... (77) (62) (201) (185)
------- ------ ------- -------
Consolidated ................ $ 211 $ 339 $ 667 $ 747
======= ====== ======= =======
-----------------
*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, wholesale sales, trading and risk management activities, an
unregulated commercial and industrial retail gas business and other
energy-related businesses. 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 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.
22
10. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Operating revenues
Regulated ................................................. $ 288 $ 2,584 $ 1,038 $ 7,533
Unregulated ............................................... 3,988 1,383 10,887 4,860
-------- -------- -------- --------
Total operating revenues ............................. 4,276 3,967 11,925 12,393
-------- -------- -------- --------
Operating expenses
Energy purchased for resale - regulated ................... 79 493 386 1,691
Energy purchase for resale - unregulated .................. 1,741 805 4,588 2,906
Fuel consumed - regulated ................................. -- 504 -- 1,593
Fuel consumed - unregulated ............................... 564 101 1,329 396
Operation and maintenance - regulated ..................... 170 386 582 1,148
Operation and maintenance - unregulated ................... 683 625 1,934 1,354
Depreciation and amortization ............................. 244 301 716 915
Taxes other than income ................................... 173 195 534 577
-------- -------- -------- --------
Total operating expenses ............................. 3,654 3,410 10,069 10,580
-------- -------- -------- --------
Operating income .............................................. $ 622 $ 557 $ 1,856 $ 1,813
======== ======== ======== ========
The operations of the North America Energy segment are included above as
unregulated, as the Texas market is now open to competition. However, retail
pricing to residential and small business customers in its traditional service
area continues to be subject to certain price controls as discussed in Note 7.
Other Income and Deductions --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Other income
Gain on sale of businesses and other properties ........... $ 20 $ -- $ 33 $ 87
Gain on sale of marketable securities ..................... -- -- -- 3
Equity in earnings of unconsolidated entities ............. -- 3 9 6
Dividends from cost investments and marketable securities . -- 2 -- 10
Other ..................................................... 13 5 23 19
------- -------- -------- --------
Total other income ................................... $ 33 $ 10 $ 65 $ 125
======= ======== ======== ========
Other deductions
Loss on sale of properties ................................ $ 2 $ 12 $ 2 $ 15
Equity in losses of unconsolidated entities ............... 17 15 42 42
Regulatory asset write-off ................................ - 21 - 21
Other ..................................................... 12 12 42 41
------- -------- -------- --------
Total other deductions ............................... $ 31 $ 60 $ 86 $ 119
======= ======== ======== ========
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $2.2 billion and regulatory liabilities of $361 million
at September 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 September 30, 2002 and at December 31, 2001 were not earning a
return. Of the assets not earning a return, $1.8 billion is expected to be
recovered over the term of the securitization bonds pursuant to the regulatory
settlement plan approved by the Commission. (See Note 7 for further discussion
of the settlement plan.) The remaining regulatory assets have an average
remaining recovery period of 14 to 31 years.
Accounts Receivable -- At September 30, 2002 and December 31, 2001,
accounts receivable were stated net of uncollectible accounts of $194 million
and $96 million, respectively. Accounts receivable included $980 million and
$617 million of unbilled revenues at September 30, 2002 and December 31, 2001,
respectively.
23
Inventories by Major Category --
September 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Materials and supplies ...................... $247 $233
Fuel stock .................................. 157 131
Gas stored underground ...................... 167 158
---- ----
Total inventories ................... $571 $522
==== ====
Property, Plant and Equipment --
September 30,
2002 December 31,
(Unaudited) 2001
------------ -----------
North America Energy:
Production ...................................................................... $16,475 $16,627
General ......................................................................... 470 242
Nuclear fuel (net of accumulated amortization of $836 and $787) ................. 148 146
Reserve for regulatory disallowances ............................................ (836) (836)
North America Energy Delivery:
Transmission .................................................................... 2,053 1,979
Distribution .................................................................... 6,297 6,110
Gas distribution and pipeline ................................................... 1,757 1,677
General ......................................................................... 435 430
Other ................................................................................... 285 234
------- -------
Total ........................................................................... 27,084 26,609
Less accumulated depreciation ........................................................... 9,758 9,397
------- -------
Net of accumulated depreciation ................................................ 17,326 17,212
Construction work in progress ........................................................... 527 608
------- -------
Net North America property, plant and equipment ................................ 17,853 17,820
International Energy:
Europe - Electric and other (net of accumulated depreciation of $423 and $514) . 1,390 3