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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
-- OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Exact Name of Registrant as Specified in its
Charter; State of Incorporation; Address of
Commission Principal Executive Offices; and Telephone I.R.S. Employer
File Number Number Identification No.
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1-12833 TXU Corp. 75-2669310
a Texas Corporation
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
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TXU Corp. Common Stock, without par value, New York Stock Exchange
and Preference Stock Purchase The Chicago Stock Exchange
Rights The Pacific Exchange
Corporate Units New York Stock Exchange
Income Prides New York Stock Exchange
TXU Capital I, 7.25% Cumulative Trust New York Stock Exchange
a subsidiary Preferred Capital
of TXU Corp. Securities
TXU Capital II,
a subsidiary 8.70% Trust Originated New York Stock Exchange
of TXU Corp. Preferred Securities
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
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Aggregate market value of TXU Corp. Common Stock held by non-affiliates, based
on the last reported sale price on the NYSE composite tape on June 28, 2002, the
last trading date of the registrant's most recently completed second fiscal
quarter: $14,297,623,496
Common Stock outstanding at March 5, 2003: 322,141,937 shares, without par
value
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission on or about April 3, 2003, are incorporated by
reference into Part III of this report.
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TABLE OF CONTENTS
Page
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PART I
Items 1. and 2. BUSINESS and PROPERTIES............................................................... 1
TXU CORP. AND SUBSIDIARIES................................................................... 1
ELECTRIC RESTRUCTURING ...................................................................... 2
COMPETITIVE STRATEGY......................................................................... 5
OPERATING SEGMENTS........................................................................... 5
North America Energy ...................................................................... 6
North America Energy Delivery.............................................................. 11
Australia.................................................................................. 16
ENVIRONMENTAL MATTERS........................................................................ 19
Item 3. LEGAL PROCEEDINGS............................................................................ 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 22
EXECUTIVE OFFICERS OF TXU CORP. ...................................................................... 22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................................................... 24
Item 6. SELECTED FINANCIAL DATA...................................................................... 24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................................ 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................................................... 25
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 25
Item 11. EXECUTIVE COMPENSATION....................................................................... 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 26
PART IV
Item 14. CONTROLS AND PROCEDURES...................................................................... 26
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................. 27
APPENDIX A - Financial Information of TXU Corp. and Subsidiaries
APPENDIX B - TXU Corp. Exhibits to 2002 Form 10-K
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request.
i
PART I
Items 1. and 2. BUSINESS and PROPERTIES
TXU CORP. AND SUBSIDIARIES
--------------------------
TXU Corp., a Texas corporation, was formed in 1997 as a holding company
and is the successor to TXU Energy Industries Company (TEI), the holding
company for the TXU Corp. system prior to the 1997 acquisition of ENSERCH
Corporation (renamed TXU Gas Company). TEI, formerly known as Texas Utilities
Company, was organized in 1945.
Use of the term "TXU Corp.," unless otherwise noted or indicated by the
context, refers to TXU Corp., a holding company, and its consolidated
subsidiaries.
TXU Corp. is an energy company that engages in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, energy delivery, and, through a joint venture,
telecommunications services. TXU Corp. is one of the largest energy services
companies in the world with $10 billion in revenue and $31 billion of assets.
TXU Corp. owns or leases over 20,400 megawatts of power generation and sells
130 terawatt hours of electricity and 207 billion cubic feet of natural gas
annually. TXU Corp. delivers or sells energy to approximately 5 million
residential, commercial and industrial customers in the United States (US) and
Australia. At December 31, 2002, TXU Corp. and its subsidiaries had
approximately 14,600 full-time employees.
TXU Corp.'s principal 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 (Partnership) Limited Partnership (TXU Australia). In
October 2002, TXU Corp. made a determination to exit its operations in Europe,
which were conducted through TXU Europe Limited (TXU Europe). See Note 3 to
Financial Statements for information related to TXU Europe.
Legislation passed during the 1999 session of the Texas Legislature
restructured the electric utility industry in Texas and provided for a
transition to increased competition in the generation and retail sale of
electricity (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 on October 31, 2001 by the Public Utility Commission of Texas (the
Commission), as of January 1, 2002, US Holdings transferred:
o its electric transmission and distribution (T&D) operations to Oncor
Electric Delivery Company (Oncor), which is a utility regulated by the
Commission and a wholly-owned subsidiary of US Holdings,
o its power generation operations to subsidiaries of TXU Energy Company LLC
(TXU Energy), which is the new competitive business and a wholly-owned
subsidiary of US Holdings, and
o its retail customers to a subsidiary retail electric provider (REP) of TXU
Energy.
See further discussion of the 1999 Restructuring Legislation below.
The following is a description of the business of TXU Corp. and its
principal subsidiaries.
US Holdings, TXU Energy and Oncor -- US Holdings is a holding company for
TXU Energy and Oncor. TXU Energy serves more than 2.7 million retail electric
customers (1) and owns, or leases and operates
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(1) All numbers of electric customers are based on the number of meters.
1
19,140 megawatts of power generating capacity. Oncor owns and operates
96,847 miles of electric distribution lines and 14,137 miles of electric
transmission lines. The businesses transferred to TXU Energy and Oncor effective
January 1, 2002, together comprised the integrated electric utility business
conducted by US Holdings prior to that date. In addition, as of January 1, 2002,
TXU Energy acquired the following businesses from within the TXU Corp. system:
the REP of TXU SESCO Company; the portfolio management operations and the
unregulated commercial/industrial retail gas business of TXU Gas; and the energy
management services businesses and other affiliates of TXU Corp., including the
fuel supply and coal mining businesses that primarily service the generation
operations. Also, the T&D business of TXU SESCO Company was transferred to
Oncor. The operating assets of TXU Energy and Oncor are located principally in
the north-central, eastern and western parts of Texas.
US Holdings and its subsidiaries operate within the Electric Reliability
Council of Texas (ERCOT) system. ERCOT is an intrastate network of
investor-owned entities, cooperatives, public entities, non-utility generators
and power marketers. ERCOT is the regional reliability coordinating organization
for member electricity systems in Texas, the Independent System Operator of the
interconnected transmission system of those systems, and is responsible for
ensuring equal access to transmission service by all wholesale market
participants in the ERCOT region.
TXU Gas -- an integrated company engaged in the purchase, transmission,
distribution and sale of natural gas in the north-central, eastern and western
parts of Texas. TXU Gas serves more than 1.4 million retail gas customers and
owns and operates 26,000 miles of gas distribution mains and 6,800 miles of gas
transportation and gathering pipelines. Divisions of TXU Gas include TXU Gas
Distribution, one of the largest retail gas distribution companies in the United
States and the largest in Texas, and TXU Lone Star Pipeline, which provides
transportation services to gas distribution companies, electric generation
plants, end use industrial customers, and through-system shippers, as owner and
operator of interconnected natural gas transportation and gathering lines,
underground storage reservoirs, compressor stations and related properties, all
within Texas.
TXU Australia -- a holding company for TXU Corp.'s Australian operations.
Its principal operating subsidiaries include TXU Electricity Limited, which
purchases, distributes, retails and wholesales electricity in the State of
Victoria, Australia and purchases and retails electricity to commercial and
industrial customers in the State of South Australia; TXU Networks (Gas) Pty.
Ltd., which distributes natural gas in Victoria; and TXU Pty. Ltd., which
retails natural gas in Victoria. TXU Electricity Limited serves over 567,000
customers, principally in the state of Victoria, including suburban Melbourne,
the second-largest city in Australia. TXU Networks (Gas) Pty. Ltd. has over
466,000 supply points. TXU Pty. Ltd. retails natural gas to approximately
471,000 customers. TXU Australia also owns the only underground natural gas
storage facility in Victoria and operates the 1,280 megawatt Torrens Island
power station in South Australia.
TXU Business Services Company (TXU Business Services) -- a provider of
certain financial, accounting, information technology, environmental,
procurement, personnel and other administrative services, at cost, to TXU Corp.
and its other subsidiaries. TXU Business Services acts as transfer agent,
registrar and dividend paying agent with respect to the common stock and
preference stock of TXU Corp., and the preferred stock of US Holdings. TXU
Business Services also acts as dividend paying agent for the preferred stock of
TXU Gas and as agent for participants under TXU Corp.'s Direct Stock Purchase
and Dividend Reinvestment Plan.
In addition, TXU Corp. owns a 50% interest in Pinnacle One Partners, L.P.,
a joint venture that owns TXU Communications Ventures Company (TXU
Communications). TXU Communications operates an established incumbent local
exchange carrier serving residential and business customers in East Texas and
certain suburbs of Houston, Texas. TXU Communications offers its customers a
comprehensive package of telecommunications services, including local, long
distance, dial-up internet, digital subscriber line, and network and data
services. TXU Communications currently has approximately 169,000 access lines.
ELECTRIC RESTRUCTURING
----------------------
Restructuring Legislation -- Under the 1999 Restructuring Legislation,
discussed above, each electric utility was required to separate (unbundle) by
January 1, 2002 its business activities into a power generation company (PGC), a
retail electric provider (REP), and a transmission and distribution (T&D)
utility or separate T&D utilities. Unbundled T&D utilities within ERCOT, such as
Oncor, remain regulated by the Commission.
2
Beginning January 1, 2002, REPs affiliated with T&D utilities began
charging residential and small commercial customers located in their historical
service territories rates that are 6% less than the rates that were in effect on
January 1, 1999, as adjusted for fuel factor changes ("price-to-beat rate"). TXU
Energy, as a REP affiliated with a T&D utility, may not charge prices to such
customers that are different from the price-to-beat rate until the earlier of
January 1, 2005 or the date on which 40% of the electricity consumed by
customers in those respective customer classes is supplied by competing REPs.
Thereafter, TXU Energy may offer rates different from the price-to-beat rate,
but it must also continue to make the price-to-beat, adjusted for fuel factor
changes, available for residential and small commercial customers until January
1, 2007. REPs must be certified by the Commission. TXU Energy has received
appropriate REP certifications from the Commission.
Also, beginning January 1, 2002, PGCs that are affiliated with T&D
utilities may charge unregulated prices in connection with ERCOT wholesale power
transactions. Estimated costs associated with PGC nuclear power plant
decommissioning obligations continue to be recovered as a nonbypassable T&D
charge over the life of the plant. Each affiliated PGC owning 400 megawatts (MW)
or more of installed generating capacity must offer each year at auction
entitlements to at least 15% of such capacity. The obligation of an affiliated
PGC to sell capacity entitlements at auction continues until the earlier of
January 1, 2007 or the date on which 40% of the electricity consumed by
residential and small commercial customers of the PGC's affiliated REP is
supplied by competing REPs. PGCs must be registered with the Commission. TXU
Energy has filed appropriate PGC registrations with the Commission.
The 1999 Restructuring Legislation also provided for the recovery of
generation-related regulatory assets (regulatory assets) and generation-related
and purchased power-related costs that are in excess of market value (stranded
costs). It provided means for electric utilities to mitigate stranded costs
during the rate freeze period that preceded unbundling. Unmitigated stranded
costs would be finally determined in a 2004 "true-up" proceeding relying
principally upon market-based asset valuations. Regulatory assets and
unmitigated stranded costs can be recovered through the issuance of transition
(securitization) bonds or imposition of a competition transition charge.
Further, a REP would also be required to reconcile and credit to its
affiliated T&D utility (and the T&D utility to credit T&D customers), as a
so-called retail clawback, any positive difference between the price-to-beat
rate, reduced by the nonbypassible delivery charge, and the prevailing market
price of electricity during the same time period to the extent the price-to-beat
rate exceeded the market price of electricity. This reconciliation is not
required for the applicable customer class if 40% of the electricity consumed by
customers in that class is supplied by competing REPs before January 1, 2004. If
a retail clawback reconciliation is required, the 1999 Restructuring Legislation
provided that the amount credited cannot exceed an amount equal to the number of
residential or small commercial customers served by a T&D utility that are
buying electricity from the affiliated REP at the price-to-beat rate on January
1, 2004, minus the number of new customers obtained outside the historical
service territory, multiplied by $150. (The calculation of this credit was
altered for TXU Energy in connection with the Settlement Plan discussed below.)
Regulatory Settlement Plan -- On December 31, 2001, US Holdings filed a
settlement plan (Settlement Plan) with the Commission. It resolved all major
pending issues related to US Holdings' transition to competition pursuant to the
1999 Restructuring Legislation. The settlement (Settlement) provided for in the
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement was approved by the Commission in June 2002. In August 2002, the
Commission issued a financing order, pursuant to the Settlement Plan,
authorizing the issuance of securitization bonds relating to recovery of
regulatory assets. The Commission's order approving the Settlement Plan and the
financing order were appealed by certain nonsettling parties to the Travis
County, Texas District Court in August 2002. In January 2003, US Holdings
concluded a settlement of these appeals and they were dismissed. Thus, the
Settlement became final.
3
The major elements of the Settlement are:
Excess Mitigation Credit and Appeal Related to T&D Rates -- Beginning in
2002, Oncor began implementing an excess stranded cost mitigation credit in the
amount of $350 million, plus interest, applied over a two-year period as a
reduction to T&D rates charged to REPs. In June 2001, the Commission had issued
an interim order that addressed Oncor's charges for T&D service when retail
competition would begin. Among other things, that interim order, and subsequent
final order issued in October 2001, required Oncor to reduce rates over the
period from 2002-2008. The Commission's decision was appealed by US Holdings to
the Travis County, Texas District Court. Finalization of the Settlement means US
Holdings' appeal has been dismissed. Also, in July 2001, the staff of the
Commission had notified US Holdings and the Commission that it disagreed with US
Holdings' computation of the level of earnings in excess of the regulatory
earnings cap for calendar year 2000. In August 2001, the Commission issued an
order adopting the staff position. US Holdings appealed this matter to the
Travis County, Texas District Court, which affirmed the Commission's order and
US Holdings then appealed that decision to the Third District Court of Appeals
in Austin, Texas. This appeal has now been dismissed.
Regulatory Asset Securitization -- In October 1999, US Holdings filed an
application with the Commission for a financing order to permit the issuance by
a special purpose entity of $1.65 billion of securitization bonds. In May 2000,
the Commission signed an order rejecting such request and authorized only $363
million of such bonds. US Holdings filed an appeal with the Travis County, Texas
District Court and in September 2000, the Court issued a judgment that reversed
part of the Commission's order and affirmed other aspects of the Commission's
order. US Holdings and various other parties appealed this judgment directly to
the Supreme Court of Texas and in June 2001, it issued a ruling; in October
2001, it remanded the case to the Commission, which consolidated it into the
Settlement Plan proceeding. In accordance with the Settlement, Oncor received a
financing order authorizing it to issue securitization bonds in the aggregate
principal amount of $1.3 billion to recover regulatory assets and other
qualified costs. The Settlement provides that there can be an initial issuance
of securitization bonds in the amount of up to $500 million, followed by a
second issuance of the remainder after 2003. The Settlement resolves all issues
related to regulatory assets and liabilities.
Retail Clawback -- If, as currently expected, TXU Energy retains more than
60% of its historical residential and small commercial customers after the first
two years of competition, the amount of the retail clawback credit will be equal
to the number of residential and small commercial customers retained by TXU
Energy in its historical service territory on January 1, 2004, less the number
of new customers TXU Energy has added outside of its historical service
territory as of January 1, 2004, multiplied by $90. This determination will be
made separately for the residential and small commercial classes. The credit, if
any, will be applied to T&D rates charged by Oncor to REPs, including TXU
Energy, over a two-year period beginning January 1, 2004. Under the settlement
agreement, TXU Energy will make a compliance filing with the Commission
reflecting customer count as of January, 2004. In the fourth quarter of 2002,
TXU Energy recorded a $185 million ($120 million after-tax) charge for the
retail clawback, which represents the current best estimate of the amount to be
funded to Oncor over the two-year period.
Stranded Cost Resolution -- TXU Energy's stranded costs, not including
regulatory assets, are fixed at zero. Accordingly, it will not have to conduct
the stranded cost true-up in 2004 provided for in the 1999 Restructuring
Legislation. In addition, the Settlement resulted in a resolution of the
regulatory disallowance of amounts related to US Holdings' repurchase of
minority owner interests in the Comanche Peak nuclear generating station. The
Commission's final order in connection with US Holdings' January 1990 rate
increase request had been ultimately reviewed by the Supreme Court of Texas, and
an aggregate of $909 million of disallowances with respect to US Holdings'
reacquisitions of minority owners' interests in Comanche Peak, which had
previously been recorded as a charge to earnings, was remanded to the District
Court and then to the Commission for reconsideration. As a result of the
Settlement, the parties have moved to dismiss this remand. The Settlement also
precludes recovery by US Holdings of certain environmental improvement costs.
Fuel Cost Recovery -- The Settlement also provides that US Holdings will
not seek to recover its unrecovered fuel costs which existed at December 31,
2001. Also, it will not conduct a final fuel cost reconciliation, which would
have covered the period from July 1998 until the beginning of competition in
January 2002.
4
Provider of Last Resort -- Through calendar year 2002, TXU Energy was the
provider of last resort (POLR) for residential and small non-residential
customers in those areas of ERCOT where customer choice was available outside
its historical service territory and was the POLR for large non-residential
customers in its historical service territory. TXU Energy's POLR contract
expired on December 31, 2002. However, in August 2002, the Commission adopted
new rules that significantly changed POLR service. Under the new POLR rules,
instead of being transferred to the POLR, non-paying residential and small
non-residential customers served by affiliated REPs are subject to
disconnection. Non-paying residential and small non-residential customers served
by non-affiliated REPs are transferred to the affiliated REP. Non-paying large
non-residential customers can be disconnected by any REP if the customer's
contract does not preclude it. Thus, within the new POLR framework, the POLR
provides electric service only to customers who request POLR service, whose
selected REP goes out of business, or who are transferred to the POLR by other
REPs for reasons other than non-payment. No later than October 1, 2004, the
Commission must decide whether all REPs should be permitted to disconnect all
non-paying customers. The new POLR rules are expected to result in reduced bad
debt expense beginning in 2003.
COMPETITIVE STRATEGY
--------------------
TXU Corp. has developed a strategy designed to achieve operations of
significant scale in selected regions which optimize a portfolio of assets,
capabilities and customer relationships across multiple products and services.
TXU Corp. plans to enhance its leading position in retail and wholesale electric
and gas sales and related services and transmission and delivery in Texas; and
build on its substantial, broad-based position in Australia. TXU Corp.'s
strategy involves establishing upstream positions (electricity generation
through ownership or contracts and gas supply through purchase contracts,
pipeline access to multiple supply sources and storage assets) and downstream
retail customer relationships. TXU Corp. uses the knowledge gained from and the
value of these positions through effective portfolio management capabilities to
manage the risk and enhance the value of existing positions while adjusting the
portfolio as needed to address market conditions. TXU Corp. intends to focus on
operational excellence in its current operations, cost reduction customer
retention and debt reduction to strengthen its balance sheet and support future
growth. TXU Corp. intends for its energy delivery business to continue to be a
leader in the efficient and reliable transmission and distribution of energy.
OPERATING SEGMENTS
------------------
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. In October 2002,
TXU Corp. discontinued its operations in Europe. Those operations of TXU Europe
that have not been sold are being managed for the benefit of its creditors
through administration (similar to bankruptcy) proceedings in the United
Kingdom. (See Note 3 to Financial Statements.) The International Energy segment
has been renamed and consists solely of operations in Australia. (See Note 17 to
Financial Statements for further information concerning reportable business
segments.)
North America Energy - operations, principally in the competitive Texas
market, involving power production, wholesale energy sales, retail energy sales
and services, as well as portfolio management, including risk management and
certain trading activities.
North America Energy Delivery - largely regulated operations in Texas
involving the transmission and distribution of electricity and the purchase,
transportation, distribution and sale of natural gas.
Australia - operations, principally in Victoria and South Australia,
involving power production, wholesale energy sales, retail energy sales and
services in largely competitive markets, portfolio management and gas storage,
as well as regulated electricity and gas distribution.
5
NORTH AMERICA ENERGY SEGMENT
The North America Energy segment was 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 is an integrated operation
that engages in power production, wholesale energy sales, retail energy sales
and related services and portfolio management activities, primarily in the state
of Texas. The North America Energy segment's operations are conducted
principally through TXU Energy and its following subsidiaries: TXU Generation
Holdings Company LLC; TXU Portfolio Management Company LP; TXU Energy Retail
Company LP; TXU Energy Solutions Company LP; TXU Fuel Company; and two coal
mining subsidiaries.
TXU Energy is one of the largest competitive retailers of energy in the
US. Regulatory restructuring in Texas has resulted in competitive markets within
the state, thus presenting additional opportunities for growth accompanied by
the introduction of competitive pressures.
TXU Energy's strategy is to focus on operational excellence, customer
retention and low risk growth from core operations in Texas. TXU Energy intends
to accomplish this through the operation of a single, integrated energy business
managing a portfolio of assets, capabilities and customer relationships. TXU
Energy's portfolio of assets includes 19,140 MW of owned or leased power
generating capacity, approximately 2,700 MW of power generating capacity under
power purchase contracts and over 2.7 million retail electric customers. Early
in 2002, TXU Energy intended to enhance its significant business portfolio in
Texas through expansion into other regions in North America. However, the slowed
pace of deregulation, the weaker economy, reduced liquidity in power markets and
reduced developmental capital spending have resulted in TXU Energy delaying
those growth objectives until competitive and regulatory environments develop
and economic factors improve. TXU Energy is currently implementing plans to
reduce operating costs.
TXU Energy's power generating facilities provide TXU Energy with the
capability to supply a significant portion of the wholesale power market demand
in Texas, particularly the North Texas market, at competitive production costs.
As part of TXU Energy's integrated business portfolio, much of the low cost
power generation is available to supply the power demands of its retail
customers and other competitive REPs.
TXU Energy's portfolio management operation is responsible for managing
the risks inherent in TXU Energy's portfolio of businesses and providing supply
structuring, pricing and risk management services in connection with TXU
Energy's unregulated retail energy activities. The portfolio management
operation also is responsible for the commodity price risk management of the
fuel supply needs of TXU Energy's generating plants as well as the dispatch and
sale of power from those plants.
Power Production
The power fleet in Texas consists of 22 owned or leased plants with
generating capacity fueled as follows: 2,300 MW nuclear; 5,837 MW coal/lignite;
and 10,881 MW gas/oil. TXU Energy has adequate power capacity to supply its
retail customer base from its power fleet and purchases from third parties. TXU
Energy believes that a key competitive advantage is its ability to produce
electricity at low variable costs. The power generating plants and other
important properties of TXU Energy are located primarily on land owned in fee
simple.
TXU Energy completed the acquisition of the Pedricktown, New Jersey
co-generation facility and wholesale energy production business in April 2002.
The acquisition included a 122 MW combined-cycle power production facility and
various contracts, including electric supply and gas transportation agreements.
In May 2002, TXU Energy acquired a 260 MW combined-cycle power production
facility in northwest Texas through a settlement agreement which dismissed a
lawsuit previously filed related to the plant. TXU Energy previously purchased
all of the electrical output of this plant under a long-term contract.
In April 2002, TXU Energy completed the sale of its Handley and Mountain
Creek power generating plants (total plant capacity of 2,334 MW). The Handley
plant consists of five natural gas-fueled generating units with a total plant
capacity of 1,441 MW. The Mountain Creek plant consists of five natural
gas-fueled generating units with a total plant capacity of 893 MW. The
transaction included a power purchase and tolling agreement for TXU Energy to
purchase power during the summer months through 2006. TXU Energy from time to
6
time may sell additional assets to reduce its position in the Texas market, to
provide funds for other investments and to reduce debt.
TXU Energy has been active in adding renewable energy to its portfolio.
TXU Energy is one of the largest purchasers of wind-generated, renewable energy
in Texas and the US. TXU Energy currently purchases renewable energy from over
382 MW of wind projects located in West Texas. TXU Energy expects to continue to
add additional renewable supplies as commercial opportunities become available.
Capacity Auction -- To encourage competition in the ERCOT region, each PGC
with 400 MW or more of installed generating capacity that is unbundled from an
integrated electric utility in Texas is required to sell at auction entitlements
to 15% of the output of its installed generating capacity. The obligation of an
affiliated PGC to sell capacity entitlements at auction continues until the
earlier of January 1, 2007 or the date on which 40% of the electricity consumed
by residential and small commercial customers initially transferred to the PGC's
affiliated REP on January 1, 2002 is supplied by competing REPs. This capacity
auction allows market participants to purchase power either through purchases in
the wholesale power markets or through mandated capacity auctions. A REP cannot
purchase entitlements sold by its affiliated PGC in mandated capacity auctions.
The first auction in Texas was held in September 2001. There was significant
interest in the entitlements being auctioned, and the auction of two-year,
one-year and monthly entitlements required to be sold was successful. The second
and third auctions were held in March and July of 2002, respectively. TXU Energy
sold the monthly entitlements required at each of these auctions. The October
2002 auction offered one-year and monthly entitlements for 2003 only. Not all of
the entitlements offered in the October auction were sold; however, TXU Energy
will re-offer these unsold entitlements in subsequent auctions to be held
through 2003.
Nuclear production assets -- TXU Energy owns and operates two
nuclear-fueled electricity generating units at the Comanche Peak plant, each of
which is designed for a capacity of 1,150 MW.
TXU Energy has on hand, or has contracted for, services it expects to need
for its nuclear units through the years indicated: conversion (2003), enrichment
(2005), and fabrication (2011). TXU Energy is currently evaluating bids for the
purchase of uranium for 2003, which is readily available on the open market. TXU
Energy does not anticipate any difficulties procuring raw materials and services
beyond these dates.
TXU Energy's onsite spent nuclear fuel storage capability is sufficient to
accommodate the operation of Comanche Peak through the year 2017, while
maintaining the capability to off-load the core of one of the nuclear-fueled
generating units.
Under current regulatory licenses, nuclear decommissioning activities are
projected to begin in 2030 for Comanche Peak Unit 1 and 2033 for Unit 2 and
common facilities. Since January 1, 2002, projected decommissioning costs are
being recovered from Oncor's customers through a non-bypassable charge based
upon a 1997 site-specific study, adjusted for changes in the value of trust fund
assets, through rates placed into effect under the 2001 Unbundled Cost of
Service filing.
Lignite/Coal production assets -- Lignite is used as the primary fuel for
two units at the Big Brown generating plant, three units at the Monticello
generating plant, three units at the Martin Lake generating plant, and one unit
at the Sandow generating plant, having an aggregate capacity of 5,837 MW. TXU
Energy's lignite units have been constructed adjacent to surface minable lignite
reserves. TXU Energy owns in fee or has under lease proven reserves dedicated to
the Big Brown, Monticello and Martin Lake generating plants. TXU Energy utilizes
owned and/or leased equipment to remove the overburden and recover the lignite.
Approximately 77% of the fuel used at TXU Energy's lignite plants in 2002 was
supplied from owned or leased lignite.
TXU Energy supplements its lignite fuel at Big Brown, Monticello and
Martin Lake with western coal from the Powder River Basin (PRB) in Wyoming. The
coal is purchased from multiple suppliers under contracts of various lengths and
is transported from the PRB to TXU Energy's generating plants by railcar.
Approximately 23% of the fuel used at TXU Energy's lignite plants in 2002 was
supplied from western coal under these contracts. Based on its current usage,
which includes the use of western coal to supplement its lignite reserves, TXU
Energy believes that it has sufficient lignite reserves and access to western
coal resources for its generating needs in the foreseeable future.
7
Gas/Oil production assets -- TXU Energy has eighteen gas/oil fueled plants
(including Pedricktown, New Jersey) with a capacity of 11,003 MW. Gas/oil fuel
requirements for 2002 were provided through a mix of contracts with producers at
the wellhead and contracts with commercial suppliers. Fuel oil can be stored at
15 of the principally gas-fueled generating plants. At January 1, 2003, TXU
Energy had fuel oil storage capacity sufficient to accommodate approximately 5.5
million barrels of oil and had approximately 0.9 million barrels of oil in
inventory. A significant portion of the gas/oil generating plants have the
ability to switch between gas and fuel oil.
TXU Energy owns and operates an intrastate natural gas pipeline system
with approximately 1,900 miles of pipeline facilities which extends from the
gas-producing area of the Permian Basin in West Texas to the East Texas gas
fields and southward to the Gulf Coast area. The pipeline facilities were
originally built to serve US Holdings' generating plants. In keeping with the
deregulation principles, this network now offers transportation and storage
service to TXU Energy as well as third parties at a competitive price.
TXU Energy also owns and operates two underground gas storage facilities
with a usable capacity of 14.0 billion cubic feet (Bcf). TXU Energy holds a
portion of this storage capacity for use during periods of peak demand to meet
seasonal and other fluctuations or interruption of deliveries by gas suppliers.
Under normal operating conditions, up to 400 million cubic feet can be withdrawn
each day for a ten-day period, with withdrawals at lower rates thereafter.
Products and Services
On January 1, 2002, all of US Holdings' over 2.7 million retail electric
service customers in Texas who did not choose a different REP automatically
became customers of TXU Energy. TXU Energy's historical service territory is
located in the north-central, eastern and western parts of Texas, with an
estimated population in excess of 7 million, about one-third of the population
of Texas. TXU Energy provides electric service in that service territory to
customers in 92 counties and 370 incorporated municipalities, including Dallas,
Fort Worth, Arlington, Irving, Plano, Waco, Mesquite, Rowlett, Grand Prairie,
Wichita Falls, Odessa, Midland, Carrollton, Tyler, Richardson and Killeen. The
area is a diversified commercial and industrial center with substantial banking,
insurance, telecommunications, electronics, aerospace, petrochemical and
specialized steel manufacturing, and automotive and aircraft assembly. The
territory served includes major portions of the oil and gas fields in the
Permian Basin and East Texas, as well as substantial farming and ranching
sections of the state. TXU Energy also provides retail electric service in other
areas of ERCOT now open to competition.
TXU Energy's wholesale power sales are conducted through its portfolio
management activities that are designed to integrate a portfolio of assets,
capabilities and customer relationships. See Portfolio Management below. In
February 2002, TXU Energy was awarded 1,000 MW of load in the New Jersey
Statewide Basic Generation Service Electricity Supply Auction. However, plans
for further expansion outside of Texas have been delayed until competitive and
regulatory environments develop and economic factors improve.
TXU Energy's natural gas operation in Texas includes pipelines, storage
facilities, well-head production contracts, transportation agreements, storage
leases, retail and wholesale customers and supply to gas fired generation
plants. Service is primarily provided to TXU Energy's generation operations.
Third party service, which is expected to increase in coming years, comprised
approximately 15% of revenue for the pipeline system in 2002. TXU Energy's
portfolio management operation integrates various techniques and resources to
maximize value and manage the risks inherent in this natural gas operation. The
main goal of portfolio management, in this regard, is to reduce costs and
improve gross margin associated with the assets through storage, transportation
and exchange and production contracts. Portfolio management must take into
account market pricing, operational constraints and existing obligations in
order to determine the best blend of resources.
Portfolio Management
The portfolio management operation integrates, manages and creates value
from TXU Energy's extensive portfolio of retail and production assets,
capabilities and customer relationships. Specifically, portfolio management
ensures supply availability and manages associated operating costs, provides
competitively priced power, and maximizes the value of physical assets, capital
and technological infrastructure to monitor, evaluate and anticipate gas and
electric commodity market trends relating to fundamental supply, market demand
and Texas deregulation. TXU Energy uses these capabilities to optimize the cash
flows and earnings of its deregulated Texas portfolio. TXU Energy also offers
similar portfolio management services to non-affiliated third parties.
8
TXU Energy enters into both financial contracts as well as contracts that
provide for physical delivery related to the purchase and sale of electricity
and gas primarily in the wholesale markets in Texas and to a limited extent in
selected regions elsewhere in North America. Competitive markets demand that a
number of services be offered, including term contracts with interruptible and
firm deliveries, risk management, aggregation of supply, nominations, scheduling
of deliveries for both gas transportation capacity and gas storage, as well as
power generating facilities. In the course of providing these comprehensive
portfolio management services to its customer base, TXU Energy engages in energy
price risk management activities. TXU Energy enters into short- and long-term
physical contracts, financial contracts that are traded on exchanges and
"over-the-counter" and bilateral contracts with customers. Speculative trading
activities represent a small fraction of TXU Energy's portfolio management
activities.
TXU Energy manages its exposure to price risk from existing contractual
commitments as well as other energy related assets and liabilities within
established transactional policies and limits. TXU Energy ensures best practices
in risk management and risk control by employing proven principles used by
financial institutions. These controls have been structured so that they are
practical in application and consistent with stated business objectives.
Portfolio management revalues TXU Energy's exposures daily using integrated
energy systems to capture value and mitigate the portfolio management risks. A
risk management forum meets regularly to ensure that transactional practices
comply with its prior approval of commodities, instruments, exchanges and
markets. Transactional risks are monitored and limits are enforced to comply
with established TXU Corp. policy requirements. Risk assessment is segregated
and operated separately from compliance and enforcement to ensure independence,
accountability and integrity of actions. TXU Corp. has a strict disciplinary
program to address any violations of its risk management policy requirements.
TXU Energy also periodically reviews these policies to ensure they are
responsive to changing market and business conditions. These policies are
designed to protect earnings, cash flows and credit ratings. For information
regarding TXU Energy's risk management policies, please read MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
"Financial Condition, Liquidity and Capital Resources - Quantitative and
Qualitative Disclosures about Market Risk-Risk Oversight."
Competition
Texas -- Deregulation of the electric utility industry in Texas, effective
January 1, 2002, allows retail consumers of independent operating utilities in
the ERCOT region to choose a REP, which purchases its power from competing power
producers. All customer switching is conducted through ERCOT, which acts as a
clearinghouse and enforcement agent. Texas is one of the fastest growing states
in the nation with a diverse and resilient economy and, as a result, has
attracted several competitors into the retail electricity market. TXU Energy, as
an active participant in this competitive market, is marketing its services in
Texas to add new customers and to retain its existing customers.
According to the latest data provided by the Commission (September 2002),
customers at over 400,000 locations across ERCOT had elected to switch providers
within their historical service territory. This number represents approximately
7% of all customers in ERCOT areas open to customer choice. Since December 2000,
the Commission has certified a total of 54 REPs and while some have dropped out,
competition has remained strong.
TXU Energy believes that the scale derived from a large retail portfolio
provides the platform for a profitable operation by, among other things,
reducing the cost of service and billing per customer. TXU Energy emphasizes its
identification with the TXU brand and reputation. TXU Energy uses a value
pricing approach by customizing its products to each customer segment with
service enhancements that are known to be valued by customers in those segments.
With its approach, TXU Energy intends to achieve substantially higher customer
loyalty and enhanced profit margins, while reducing the costs associated with
customers frequently switching suppliers.
TXU Energy has invested in customer related infrastructure and uses its
customer relationships, technology operating platforms, marketing, customer
service operations and customer loyalty to actively compete to retain its
initial customer base and to add customers.
9
Because Texas began restructuring its wholesale electricity business in
1995, new generation was encouraged to enter the state. As a result, there have
been approximately 60 new power plants added in the state since that time,
providing the state with ample power resources. Capacity margins for ERCOT,
based upon existing capacity and planned capacity with interconnection
agreements, are expected to be 24% in 2003 and remain at or above 20% for the
next several years. New gas-fired capacity is generally more efficient to
operate than existing gas/oil-fired capacity due to technological advances.
However, base-load nuclear, lignite and coal plants have lower variable
production costs than even new gas-fired plants at current annual average market
gas prices. Due to the higher variable operating and fuel costs of its
gas/oil-fired units, as compared to its lignite/ coal and nuclear units,
production from TXU Energy's gas/oil units is more susceptible to being
displaced by the more efficient units being constructed. This positions TXU
Energy's gas/oil units to run during intermediate and peak load periods when
prices are higher and provides more opportunities for hedging activities and
increased market liquidity.
TXU Energy believes that the ERCOT region presents an attractive
competitive electric service market due to the following factors:
o gas-fired plants are expected to set the price of generation during a
substantial portion of the year, providing an opportunity for TXU Energy to
benefit from its nuclear and lignite/coal units fuel cost advantages;
o peak demand is expected to grow at an average rate of 2.8% per year;
o it is a sizeable market with over 57 gigawatts (GW) of peak demand and 33
GW of average demand; and
o there is no mandatory power pool structure.
Outside Texas -- Deregulation, although proceeding well in Texas, has not
had similar success in other parts of the U.S. Federal legislation such as the
Public Utility Regulatory Policy Act of 1978 and the Energy Policy Act, as well
as initiatives in various states, were enacted to encourage wholesale
competition among electric utility and non-utility power producers. Together
with increasing customer demand for lower priced electricity and other energy
services, these measures were expected to have accelerated the industry's
movement toward a more competitive pricing and cost structure.
Many states, faced with this increasing pressure from legislative bodies
(federal and state) to become more competitive while adhering to certain
continued regulatory requirements, along with changing economic conditions and
rapid technological changes, put forth deregulation plans that have since been
deferred or changed. The result is delayed deregulation. New entry by retailers
as well as by merchant generators in states other than Texas has been slowed.
The continued uncertainty regarding regional transmission organizations, (the
Federal Energy Regulatory Commission's (FERC's) Order 2000) and more recently
FERC's Notice of Proposed Rulemaking regarding Standard Market Design have
delayed the opening of new retail markets and decreased the economic viability
for merchant generation.
Nature of Competition -- The level of competition in the energy industry
is affected by a number of variables, including price, reliability of service,
the cost of energy alternatives, new technologies and governmental regulations.
TXU Energy competes with other energy providers based on the ability to
aggregate supplies at competitive prices from different sources and locations
and to efficiently utilize transportation from third-party pipelines and
transmission from electric utilities. These operations also compete against
other energy marketers on the basis of their relative skills, financial position
and credit. Competition means energy customers, wholesale energy suppliers and
transporters may seek financial guarantees and other assurances that their
energy contracts will be satisfied. As pricing information becomes increasingly
available in the energy business and when deregulation in the electricity
markets begins to revive, the power generation and portfolio management
operations of TXU Energy may experience greater competition.
10
Customers -- There are no individually significant unaffiliated customers
upon which TXU Energy's business or results of operations are highly dependent.
Regulation and Rates
TXU Corp. is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, TXU Corp. and all of its subsidiary companies are
exempt from the provisions of such Act, except Section 9(a)(2) which relates to
the acquisition of securities of public utility companies and Section 33 which
relates to the acquisition of foreign (non-US) utility companies.
TXU Energy is subject to various federal, state and local regulations.
(See discussion below and Environmental Matters.)
TXU Energy is an exempt wholesale generator under the Federal Power Act
and is subject to the jurisdiction of the Nuclear Regulatory Commission (NRC)
with respect to its nuclear power plant. NRC regulations govern the granting of
licenses for the construction and operation of nuclear power plants and subject
such plants to continuing review and regulation. TXU Energy also holds a power
marketer license from FERC.
NORTH AMERICA ENERGY DELIVERY SEGMENT
The North America Energy Delivery segment consists primarily of the
electricity transmission and distribution operations of Oncor and the
purchasing, transportation, distribution and retail sales operations of TXU Gas.
North America Energy Delivery provides the delivery of essential services of
electricity and gas safely, reliably and economically to end-use customers.
Electric Transmission
Oncor's electric transmission business is responsible for the real-time
safe and reliable operations of its transmission network. These responsibilities
consist of the construction and maintenance of transmission facilities and the
monitoring, controlling and dispatching of high-voltage electricity within
Oncor's control area.
Oncor is a member of ERCOT, and the transmission business actively
supports the operation of ERCOT and all market participants. The transmission
business participates with ERCOT and other member utilities to plan, design and
obtain regulatory approval for construction of new transmission lines necessary
to increase bulk power transfer capability and to remove existing limitations
and constraints on the ERCOT transmission grid.
Transmission revenues are provided under tariffs approved by the
Commission and FERC. Network transmission revenues are provided from the use of
the transmission power lines for delivery of power over facilities operating at
60,000 volts and above. Transformation service revenues are provided from the
use of distribution substation facilities that transform power from high-voltage
transmission to distribution voltages below 60,000 volts. Other services offered
by the transmission business include, but are not limited to: system impact
studies, facilities studies and maintenance of substations and transmission
lines owned by other non-retail parties.
The principal generating facilities of TXU Energy, certain non-utility
generators and the load centers of Oncor are connected by 4,522 circuit miles of
345-kilovolt (kV) transmission lines and 9,615 circuit miles of 138- and 69-kV
transmission lines.
Oncor is connected by eight 345-kV lines to CenterPoint Energy (formerly
Reliant Energy Inc.); by four 345-kV, eight 138-kV and nine 69-kV lines to
American Electric Power Company; by two 345-kV and eight 138-kV lines to the
Lower Colorado River Authority; by four 345-kV and nine 138-kV lines to the
Texas Municipal Power Agency; by two asynchronous High Voltage Direct Current
interconnections to American Electric Power Company in the Southwest Power Pool;
and at several points with smaller systems operating wholly within Texas.
11
Electric Distribution
Oncor's electricity distribution business is responsible for the overall
safe and efficient operations of distribution facilities, including power
delivery, power quality and system reliability. The Oncor distribution system
supplies electricity to over 2.9 million points of delivery. The electricity
distribution business consists of the ownership, management, construction,
maintenance and operation of the distribution network within Oncor's
certificated service area. Over the past five years, the number of Oncor's
distribution system premises served has been growing an average of more than 2%
a year.
The 2.7 million formerly regulated electricity customers (retail customers
who purchase and consume electricity) are free to choose from REP's who compete
for their business. However, the REP's are now Oncor's customers. The changed
character of customers, however, does not mean that the safe and reliable
delivery of dependable power is any less critical to Oncor's success. Service
quality, safety and reliability are of paramount importance to retail providers,
their customers, and Oncor. Oncor intends to continue to build on its inherited
tradition of low cost and high performance.
Oncor's distribution system receives electricity from the transmission
system through power distribution substations and distributes electricity to end
users and wholesale customers through 2,914 distribution feeders.
The Oncor distribution network consists of 55,178 miles of overhead
primary conductors, 22,073 miles of overhead secondary and street light
conductors, 12,264 miles of underground primary conductors and 7,332 miles of
underground secondary and street light conductors. The majority of the
distribution system operates at 25-kV and 12.5-kV.
Most of Oncor's power lines have been constructed over lands of others
pursuant to easements or along public highways, streets and right-of-ways as
permitted by law. Substantially all of Oncor's transmission and distribution
systems are subject to liens under its mortgage indentures.
Competition - Electric Delivery
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals which held that the pricing provisions of
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated, and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997 through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO Company are named defendants in both suits. TXU is unable
to predict the outcome of any litigation related to this matter.
Customers -- Oncor's transmission customers consist of municipalities,
electric cooperatives and other distribution companies. Oncor's distribution
customers consist of approximately 35 REPs in Oncor's certified service area,
including a subsidiary REP of TXU Energy. Revenues from TXU Energy represent the
substantial majority of Oncor's revenues. There are no individually significant
unaffiliated customers upon which Oncor's business or results are highly
dependent.
12
Regulation and Rates - Electric Delivery
Regulatory Proceedings Affecting Restructuring -- See Electric
Restructuring above for a description of the various regulatory proceedings
relating to the restructuring of the Texas electric industry.
Oncor is subject to various federal, state and local regulations. (See
Environmental Matters below for information on environmental matters affecting
Oncor.) As its operations are wholly within Texas, Oncor believes that it is not
a public utility as defined in the Federal Power Act and has been advised by its
counsel that it is not subject to general regulation under such Act.
The Commission has original jurisdiction over transmission rates and
services and over distribution rates and services in unincorporated areas and
those municipalities that have ceded original jurisdiction to the Commission and
has exclusive appellate jurisdiction to review the rate and service orders and
ordinances of municipalities. Generally, the Public Utility Regulatory Act has
prohibited the collection of any rates or charges by a public utility that does
not have the prior approval of the Commission.
Gas Delivery
Service Area -- TXU Lone Star Pipeline, a partially rate-regulated
division of TXU Gas, owns and operates interconnected natural gas transmission
lines, five underground storage reservoirs, 20 compressor stations and related
properties, all within Texas. TXU Lone Star Pipeline also owns a sixth
underground storage reservoir that is currently being depleted for possible
retirement. With a system consisting of approximately 6,800 miles of
transmission and gathering pipelines in Texas, TXU Lone Star Pipeline is one of
the largest pipelines in the US. Through these facilities, it transports natural
gas to distribution systems of TXU Gas Distribution, a division of TXU Gas, and
other customers. Rates for the services provided to TXU Gas Distribution are
regulated by the Railroad Commission of Texas (RRC), while rates for services to
other customers are generally established by competitively negotiated contracts.
The gas transmission and distribution lines of TXU Gas Distribution and TXU Lone
Star Pipeline have been constructed over lands of others pursuant to easements
or along public highways, streets and rights-of-way as permitted by law.
TXU Gas Distribution provides service through over 26,000 miles of
distribution mains. Through these facilities, it purchases, distributes and
sells natural gas to over 1.4 million residential, commercial and industrial
customers in approximately 550 cities and towns, including the 11-county
Dallas-Fort Worth Metroplex. TXU Gas Distribution also transports natural gas to
end users within its distribution system as market opportunities allow. The
distribution service rates that TXU Gas Distribution charges its residential and
commercial customers are generally established by the municipal governments of
the cities and towns served, with the RRC having appellate, or in some
instances, primary jurisdiction. Sales to electric generation customers are
affected by the mildness or severity of both cooling and heating seasons.
Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.2 Bcf.
Daily purchases on the spot market raise this availability level to meet
additional peak-day needs.
TXU Gas Distribution's peak-day demand in 2002 was on March 2, when sales
to its customers reached approximately 2.1 Bcf. During 2002 the average daily
demand of TXU Gas Distribution's residential and commercial customers was 0.4
Bcf.
TXU Gas Distribution has historically maintained a contractual right to
interrupt load, which is designed to achieve the highest load factor possible in
the use of the pipeline system while ensuring continuous and uninterrupted
service to residential and commercial customers. Interruptible service contracts
include the right to curtail gas deliveries up to 100% according to a priority
plan.
Estimates of natural gas supplies and reserves are not necessarily
indicative of TXU Gas Distribution's ability to meet current or anticipated
market demands or immediate delivery requirements because of factors such as the
physical limitations of gathering, storage and transmission systems, the
duration and severity of cold weather, the availability of gas reserves from its
suppliers, the ability to purchase additional supplies on a short-term basis and
actions by federal and state regulatory authorities. Curtailment rights provide
13
TXU Gas Distribution flexibility to meet the human-needs requirements of its
customers on a firm basis. Priority allocations imposed by federal and state
regulatory agencies, as well as other factors beyond the control of TXU Gas
Distribution, may affect its ability to meet the demands of its customers.
Gas Supply -- TXU Gas Distribution's natural gas supply consists of
contracts for the purchase of specific reserves, contracts not related to
specific reserves or fields, and natural gas in storage. The total planned
natural gas supply as of January 1, 2003 is 148 Bcf, which is approximately
seven percent less than TXU Gas Distribution's actual supply during 2002. TXU
Gas Distribution has approximately 18 Bcf committed under contracts with
specific reserves, 31 Bcf in working gas in storage and 50 Bcf committed under
gas supply contracts not related to specific reserves or fields. In 2002, TXU
Gas Distribution's natural gas requirements were purchased from approximately 93
independent producers, marketers and pipeline companies.
TXU Gas Distribution manages its storage working gas inventory and storage
deliverability along with other purchased gas to meet its peak-day requirements.
TXU Gas Distribution utilizes the services of five natural gas storage fields
owned by TXU Lone Star Pipeline, all of which are located in Texas. These fields
have an optimal working gas capacity of more than 39 Bcf and a storage
withdrawal deliverability of up to 1.2 Bcf per day.
TXU Gas Distribution buys natural gas under long-term and short-term
intrastate contracts, many of which require minimum purchases of gas. The
estimated natural gas demand, which assumes normal weather conditions,
significantly exceeds the minimum purchase obligations of these contracts for
the year 2003 and thereafter.
The TXU Gas Distribution supply program is designed to contract for new
supplies of natural gas and to recontract targeted expiring sources. In addition
to being heavily concentrated in the established natural gas-producing areas of
central, northern and eastern Texas, TXU Lone Star Pipeline's intrastate
pipeline system also extends into or near the major producing areas of the Texas
Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins
located in Texas are estimated to contain a substantial portion of the nation's
remaining onshore natural gas reserves. TXU Lone Star Pipeline's pipeline system
provides access to all of these basins. TXU Lone Star Pipeline is well situated
to receive large volumes into its system at the major hubs, such as Katy and
Waha, as well as from storage facilities where TXU Gas Distribution maintains
high delivery capabilities.
Competition - Gas Delivery
Customer sensitivity to energy prices and the availability of
competitively priced natural gas in the unregulated markets continue to cause
competition in the electricity generation and industrial user markets. Natural
gas faces varying degrees of competition from electricity, coal, natural gas
liquids, oil and other refined products throughout TXU Gas Distribution's
service territory. Pipeline systems of other companies, both intrastate and
interstate, extend into or through the areas in which TXU Gas Distribution's
markets are located, creating competition from other sellers of natural gas. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.
TXU Lone Star Pipeline is the sole transporter of natural gas to TXU Gas
Distribution's distribution systems. TXU Lone Star Pipeline competes with other
pipelines in Texas to transport natural gas to new and existing industrial and
power generation facilities as well as off-system markets. These businesses are
highly competitive.
Open Access- Transmission -- TXU Lone Star Pipeline has been an open
access transporter under Section 311 of the Natural Gas Policy Act of 1978
(NGPA) on its intrastate transmission facilities since July 1988. Such
transportation is performed pursuant to Section 311(a)(2) of the NGPA and is
subject to an exemption from the jurisdiction of the FERC under the Natural Gas
Act, pursuant to Section 601 of the NGPA.
Customers -- There are no individually significant unaffiliated customers
upon which the segment's business or results of operations are highly dependent.
14
Regulation and Rates - Gas Delivery
TXU Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial consumers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.
The city gate rate for the cost of natural gas TXU Gas Distribution
ultimately delivers to residential and commercial customers is established by
the RRC and provides for full recovery of the actual cost of gas delivered,
including out-of-period costs such as gas purchase contract settlement costs.
The distribution service rates TXU Gas Distribution charges its residential and
commercial customers are established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction.
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million. In July 2001 and August 2001, TXU Gas
filed two cases, a gas cost review and a gas cost reconciliation, covering the
period between November 1997 and June 2001, seeking to recover $29 million of
under-recovered gas costs. On August 6, 2002, a settlement was approved by the
RRC authorizing TXU Gas to recover $18 million of this amount, which has been
recovered through a surcharge, while $11 million in under-recovered gas costs
remains pending. On August 30, 2002, TXU Gas filed the city gate gas cost
reconciliation for the twelve-month period ended June 30, 2002 with the RRC.
During this period, TXU Gas over-recovered its gas cost by $24 million, which is
being refunded from October 2002 through June 2003. The refund has no material
impact on the net income of TXU Gas.
TXU Gas Distribution sells to industrial customers under standard rate
schedules that permit automatic adjustment on a monthly basis for the full
amount of increases or decreases in the cost of natural gas. Transportation
services to industrial and electricity generation customers are provided under
both standard tariffs and competitively negotiated contracts.
Oncor Utility Solutions
Oncor Utility Solutions (North America) Company and Oncor Utility
Solutions (Texas) Company (collectively, "Utility Solutions"), both wholly-owned
subsidiaries of TXU Gas, were launched in late 2001 to provide unregulated
utility asset management services for cooperatives, and municipally-owned and
investor-owned utilities throughout North America. Electric, gas, water and
wastewater utilities may choose from Utility Solutions' menu of services ranging
from a complete turnkey solution to selected services such as work management,
resource management, strategic planning, design, maintenance and construction.
Utility Solutions leverages TXU Corp.'s existing economies of scale, asset
management processes, technologies and personnel to deliver cost savings and
reliability improvements to client network systems.
15
AUSTRALIA SEGMENT
TXU Australia provides its products and services, primarily in the States
of Victoria and South Australia, through its two main operating divisions:
Energy Delivery Business and Energy Business.
Energy Delivery Business
TXU Australia's Energy Delivery Business engages principally in managing
the distribution of electricity to 549,000 connection points in the eastern
suburbs of Melbourne and in rural areas in eastern Victoria, and the
distribution of natural gas to 466,000 supply points located in the western
suburbs of Melbourne and in rural towns in western Victoria.
TXU Australia manages an electricity network of approximately 26,000 miles
of distribution lines over an area of approximately 31,000 square miles, and a
gas network of approximately 5,000 miles of pipelines over approximately 800
square miles in its territory.
Energy Business
TXU Australia's Energy Business involves the managing of retail and
wholesale activities in TXU Australia's energy markets, predominantly in
Victoria and South Australia.
Retail Activities -- The business involves selling energy and related
services. TXU Australia's customers include industrial, commercial and
residential customers in Victoria. Since the introduction of competition to the
residential markets in Victoria for electricity in January 2002 and for gas in
October 2002, TXU Australia has marketed product options to the residential and
business mass-markets focusing on energy plans tailored to suit individual
lifestyles and specific business types. Customers are also given a choice to
combine the separate electricity and gas bills they receive from TXU Australia
into a single bill. TXU Australia has also promoted to the customers an option
to supplement their existing electricity supply with electricity generated from
renewable sources.
TXU Australia also sells energy to industrial and commercial customers in
South Australia as well as, on a smaller scale, to customers in New South Wales,
Queensland and the Australian Capital Territory.
Electricity and gas sales are seasonal to the extent that annual peaks
generally occur in summer months for electricity and in winter months for gas.
TXU Australia has electricity retail licenses in Victoria, New South
Wales, South Australia, Queensland and the Australian Capital Territory, and gas
retail licenses in Victoria, New South Wales and South Australia.
The state of Victoria regulates retail energy prices for incumbent
retailers and has granted an average rise of 9% in gas prices for TXU
Australia's gas retail customers beginning in 2003. The state has also
determined an electricity price decrease of 4% effective April 1, 2003, for TXU
Australia's electric retail customers, and has replaced the Special Power
Payment (a $A118 million subsidy to all eligible electricity customers in the
state of Victoria, introduced at the beginning of 2002) with the Network Tariff
Rebate (a $A57 million subsidy to be introduced in April 2003). The combined
effect results in an average 3.1% price increase for TXU Australia's electric
customers effective April 1, 2003.
Wholesale Activities -- The wholesale business involves wholesale
purchases of energy, generation of electricity, portfolio management, including
risk management and certain trading activities, management of capacity
requirements and gas processing and storage.
In the National Electricity Market (NEM) comprising Victoria, New South
Wales, South Australia, Australian Capital Territory, Queensland, and Tasmania,
generators producing over 30 MW are required to offer all of their electricity
output for sale through the wholesale market. Holders of retail electricity
licenses are required to participate in and comply with rules established by the
wholesale market operators. Each electricity provider is required to purchase
most of its electricity needs from NEM. Generation in South Australia is
16
primarily undertaken by a small number of generators. South Australia also
imports some of its electricity through interconnectors from Victoria.
TXU Australia operates a gas-powered generation plant at Torrens Island,
South Australia, through a long-term lease. The output from this plant is sold
into the NEM. The plant acts as the marginal generator in South Australia during
most periods.
Victoria's current gas supplies are sourced predominantly from Esso/BHPP.
Victoria is the only Australian state that has a gas spot market. Each gas
retailer in Victoria, including TXU Australia, must specify the injections
(volumes and prices) it is willing to make from its supply sources, prior to any
spot market trading day. Any imbalance on a spot market trading day between its
injections and the demands of its customers with counterparties in the Victorian
spot market is automatically settled, based on the volume and price bids
submitted prior to that day. South Australia's current gas supplies are sourced
from the South Australia Cooper Basin Joint Venture.
Gas in Australia is sourced primarily through long-term contracts. TXU
Australia has entered into long-term gas supply arrangements with gas producers
to meet the demands of its customers and of its Torrens Island generation plant.
Long-term arrangements are also made to manage pipeline and peak gas delivery
capacity for the Australian operations.
TXU Australia owns and operates an underground gas storage facility near
Port Campbell in western Victoria. The facility processes raw gas and stores
processed gas. This facility provides TXU Australia with the strategic advantage
of having ready access to an alternative supply of natural gas at times of peak
demand, and also enables TXU Australia to offer gas processing and storage
services to market customers.
In addition to the purchase and sale of physical products and services,
TXU Australia enters into financial contracts and hedging arrangements, within
approved risk limits, to manage its energy price risk exposure in various energy
markets, and to maintain the optimum capacity and output of its physical assets.
TXU Australia has an option agreement with AES Ecogen, which owns 966 MW
of gas-fired generation that is typically used during peak periods of demand for
electricity in Victoria. The agreement provides TXU Australia with the option to
enter into contracts with AES Ecogen that require the exchange of cash for the
difference between the amounts specified in the agreement and the then current
spot price of electricity. TXU Australia also has an agreement to supply gas to
AES Ecogen for 20 years. The AES Ecogen power stations were sold to Ecogen Power
Pty Ltd. in December 2002. The sale process was completed on February 14, 2003.
The sale of the power stations will have no impact on the existing contractual
arrangements with TXU Australia.
Competition - Australia
Retail Activities -- In Victoria and New South Wales, the residential
electricity markets have been competitive since January 2002, and the
residential gas markets have been competitive in New South Wales since January
2002 and in Victoria since October 2002. The residential energy prices are still
regulated and determined by the government bodies of the respective States of
Victoria and New South Wales. More particularly, the New South Wales government
operates a fund that redistributes excess profits among generators and energy
retailers. The fund, in effect, limits the pool price risk for the state's
incumbent retailers.
In Victoria, TXU Australia, being the third largest retailer of energy to
the residential market, has been active in marketing to residential customers.
As a result, the general level of customer switching has increased across the
state, and TXU Australia's customer levels have increased. In New South Wales,
the level of customer switching is of a lesser magnitude.
In South Australia, the residential energy market has been competitive
since January 2003. TXU Australia intends to enter this market during 2003,
subject to the proper implementation of a market transfer system. TXU Australia
has also been successful in acquiring commercial and industrial customers in the
competitive South Australia market.
Wholesale Activities -- With its current asset position, TXU Australia
maintains flexibility in the upstream energy market in most major states.
17
Upstream gas supply has a limited number of major suppliers in each state
of Australia. Therefore, the market price volatility has been relatively low to
date. New sources of gas supply are expected in the future with new reserves and
pipelines being developed. TXU Australia has a one-third interest in a joint
venture to construct a gas pipeline from Port Campbell, Victoria to Adelaide,
South Australia.
Customers -- There are no individually significant customers upon which
the segment's business or results of operations are highly dependent.
Regulation and Rates - Australia
Gas and Electricity -- Entities operating in the gas and electricity
industries in Victoria operate under several legislative acts, regulations and
legal documents that form the regulatory framework, which is outlined below.
Gas Industry Act 2001 and Electricity Industry Act 2000, as amended --
These Acts are the primary legislation governing the reformed gas and
electricity industries in Victoria. They complement the national regulatory
framework (see National Access Regime below).
Essential Services Act 2001 -- This Act establishes the Essential Services
Commission (ESC) which assumes the role of the previous regulator, the Office of
the Regulator-General (ORG). The ESC came into effect on January 1, 2002.
Simultaneously, the ORG Act has been repealed and subsumed by this Act.
Essential Services Commission Act 2001 -- This Act, established in late
2001, primarily sets out the responsibilities and the power of the ESC. The ESC,
being an independent economic regulator, has the responsibility to regulate
prescribed essential utility services supplied by the electricity, gas, water,
ports, grain handling and rail freight industries. It has the power to issue
licenses for the generation, transmission, distribution and retailing of gas and
electricity in Victoria and to regulate tariffs.
National Access Regime
Gas Industry -- TXU Australia's gas pipelines are subject to the Gas
Pipelines Access Law and the National Third Party Access Code for Natural Gas
Pipeline System. However, TXU Australia has an existing access arrangement
approved by the ESC. TXU Australia's revisions to its access arrangement's terms
and conditions, including tariffs for the further five-year period commencing
January 1, 2003, were approved on December 2, 2002. The access arrangement
provides for distribution services in accordance with the Distribution Code and
will charge for these services in accordance with the tariffs set out in the
access arrangement.
Electric Industry -- NEM is a wholesale market for the sale of electricity
that is combined with an open access regime for the use of physical electricity
networks within the participating states of Australia. The NEM currently
operates a wholesale electricity pool into which all electricity output from
generators within Victoria, New South Wales and South Australia is centrally
pooled and scheduled to meet the electricity demand of those states. Each
electricity provider is required to purchase electricity either through a pool
or through another provider who has purchased that electricity from a pool.
TXU Australia is registered as a market customer for the purposes of the
market established under the National Electricity Code, and purchases its power
requirements from the NEM. It manages its risk of exposure to high prices in
this market, however, by entering into hedging arrangements with electricity
market generators.
The distribution tariffs for electricity until December 31, 2005, and for
gas until December 31, 2007, were determined by the ESC. According to the
determination, the gas distribution tariffs are to increase by 2.2% for 2003.
Each subsequent year, the tariffs are to increase by 0.8% plus the Consumer
Price Index increase.
18
ENVIRONMENTAL MATTERS
---------------------
US
TXU Corp. and its US subsidiaries are subject to various federal, state
and local regulations dealing with air and water quality and related
environmental matters.
Air -- Under the Texas Clean Air Act, the Texas Commission on
Environmental Quality (TCEQ) has jurisdiction over the permissible level of air
contaminant emissions from, and permitting requirements for, generating, mining
and gas delivery facilities located within the State of Texas. The New Jersey
Department of Environmental Protection has jurisdiction over the emissions from
TXU Energy's generation facility in New Jersey. In addition, the new source
performance standards of the Environmental Protection Agency (EPA) promulgated
under the Federal Clean Air Act, as amended (Clean Air Act), which have also
been adopted by the TCEQ, are applicable to certain generating units. TXU
Energy's generation plants and mining equipment and TXU Gas' facilities operate
in compliance with applicable regulations, permits and emission standards
promulgated pursuant to these Acts.
The Clean Air Act includes provisions which, among other things, place
limits on the sulfur dioxide (SO2) emissions produced by certain generation
plants. In addition to the new source performance standards applicable to SO2,
the Clean Air Act requires that fossil-fueled plants have sufficient SO2
emission allowances and meet certain Nitrous Oxide (NOx) emission standards. TXU
Energy's generation plants meet the SO2 allowance requirements and NOx emission
rates.
In December 2000, the EPA published a notice that it intends to regulate
the emissions of hazardous air pollutants, including mercury, from fossil
fuel-fired power plants in the future. Regulations on mercury are expected to be
proposed in 2003, issued in 2004 and become effective in 2007. TXU Energy is
unable to predict the effects of these regulations. In addition, in 1999, the
EPA promulgated National Emissions Standards for Hazardous Air Pollutants that
apply to certain TXU Gas facilities. The EPA has also issued rules for
controlling regional haze; the impact of these rules is unknown at this time
because the TCEQ has not yet implemented the regional haze requirements.
The Bush Administration will address greenhouse gas emissions through a
recently announced greenhouse gas emissions intensity reduction policy. The Bush
Administration and EPA have proposed the Clear Skies initiative calling for
additional reductions of SO2, NOx, and mercury from electricity generation
facilities over a 15-year period. TXU Energy is unable to predict the impact of
the Bush Administration proposal or related legislation.
Major air pollution control provisions of the 1999 Restructuring
Legislation require a 50% reduction in NOx emissions from "grandfathered"
electric utility generation plants and a 25% reduction in SO2 emissions from
"grandfathered" electric utility generation plants by May 1, 2003. The
"grandfathered" plants must also obtain permits. This legislation also provides
for an "opt-in" of permitted plants as an alternative to achieve the same
reductions, and recovery of reasonable environmental improvement costs as
stranded costs upon approval by the Commission (see Stranded Cost Resolution
within ELECTRIC RESTRUCTURING section above). All permits required by the 1999
Restructuring Legislation have been obtained and TXU Energy has initiated a
construction program to install control equipment to achieve the required
reductions.
In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities, other than electric utility generation plants apply
for permits. TXU Energy, TXU Gas and Oncor anticipate that the permits can be
obtained for their "grandfathered" facilities without significant effects on the
costs for operating these facilities.
The TCEQ has also adopted revisions to its State Implementation Plan rules
that require an 89% reduction in NOx emissions from electric utility generation
plants in the Dallas-Fort Worth ozone non-attainment area and a 51% reduction in
NOx emissions from electric utility generation plants in East and Central Texas.
The cost of compliance will be reduced due to emission trading provisions in the
rules.
Water -- The TCEQ, the EPA and the RRC have jurisdiction over water
discharges (including storm water) from all domestic facilities. TXU Energy's,
TXU Gas' and Oncor's facilities are presently in compliance with applicable
19
state and federal requirements relating to discharge of pollutants into the
water. TXU Energy, TXU Gas and Oncor hold all required waste water discharge
permits from the TCEQ and the RRC for facilities in operation and have applied
for or obtained necessary permits for facilities under construction. TXU Energy,
TXU Gas and Oncor believe they can satisfy the requirements necessary to obtain
any required permits or renewals. Recent changes to federal rules pertaining to
Spill Prevention, Control and Countermeasure Plans for oil-filled electrical
equipment and bulk storage facilities for oil will require updating of certain
plans and facilities. TXU Gas and Oncor are unable to predict at this time the
impact of these changes. Clean Water Act Section 316(b) regulations pertaining
to existing water intake structures are being developed by the EPA with
publication scheduled for early 2004. TXU Energy is unable to predict at this
time the impacts of these regulations.
Other -- Diversion, impoundment and withdrawal of water for cooling and
other purposes are subject to the jurisdiction of the TCEQ. TXU Energy possesses
all necessary permits for these activities from the TCEQ for its present
operations.
Treatment, storage and disposal of solid and hazardous waste are regulated
at the state level under the Texas Solid Waste Disposal Act (Texas Act) and at
the federal level under the Resource Conservation and Recovery Act of 1976, as
amended, (RCRA) and the Toxic Substances Control Act (TSCA). The EPA has issued
regulations under the RCRA and TSCA, and the TCEQ and the RRC have issued
regulations under the Texas Act applicable to TXU Energy, TXU Gas' and Oncor's
facilities. TXU Energy has registered solid waste disposal sites and has
obtained or applied for such permits as are required by such regulations.
Under the federal Low-Level Radioactive Waste Policy Act of 1980, as
amended, the State of Texas is required to provide, either on its own or jointly
with other states in a compact, for the disposal of all low-level radioactive
waste generated within the state. The State of Texas has agreed to a compact
with the States of Maine and Vermont for a disposal facility that would be
located in Texas. That compact was ratified by Congress and signed by the
President in 1998. The State of Texas had proposed to license a disposal site in
Hudspeth County, Texas, but in October 1998 the TCEQ denied that license
application. No appeal was taken from the denial of the license application, and
that denial is now final. The nature and extent of future efforts by the State
of Texas to provide for a disposal site are presently uncertain. TXU Energy
intends to continue to ship low-level waste material off-site for as long as an
alternative disposal site is available. Should existing off-site disposal become
unavailable, the low-level waste material will be stored on-site. TXU Energy's
on-site storage capacity is expected to be adequate until other off-site
facilities become available.
AUSTRALIA
TXU Australia is subject to various Australian federal and state
environmental regulations, the most significant of which are the Victorian
Environmental Protection Act of 1970 and the South Australian Environment
Protection Act of 1993. Both Acts regulate, in particular, the discharge of
waste into air, land and water, site contamination, the emission of noise and
waste management. Both Acts also established their respective state
Environmental Protection Authorities (Australia EPA) and grant the Australia EPA
a wide range of powers to control and prevent environmental pollution.
The Torrens Island electricity generation plant in South Australia has a
license to carry out activities of environmental significance including the
discharge of warm cooling water into the marine environment, subject to certain
conditions. The conditions relate to temperature rise limit, temperature
monitoring and reporting obligations to the Australia EPA. TXU Australia has
complied with its license conditions.
In Victoria, no licenses or works approvals from the Australia EPA are
currently required for activities undertaken by TXU Networks. TXU Gas Storage
has a license to carry out activities of environmental significance including
discharges to air and water subject to certain conditions. TXU Australia has
complied with its license conditions.
Through past acquisitions, TXU Australia was allocated certain properties
that are contaminated. Liabilities totaling $7 million (A$12 million) have been
recorded for estimated costs of land reclamation and site restoration at these
properties. These costs may change if the extent of contamination is different
than testing indicated at the time of initial limited reviews. Under the Acts,
the Australia EPA has the power to order TXU Australia to incur such costs to
remedy the contamination of land. TXU Australia also recorded a $5 million (A$9
million) liability for land remediation costs for its Torrens Island plant.
20
Item 3. LEGAL PROCEEDINGS
In October, November and December 2002 and January 2003, at least
twenty-five lawsuits were filed in or removed to the United States District
Court for the Northern District of Texas, and two in the United States District
Court for the Eastern District of Texas, against TXU Corp., Erle Nye and Michael
J. McNally. Some of the lawsuits also name former officer David W. Biegler as a
defendant; however, based on the alleged class period, Mr. Biegler is
inappropriately named as a defendant. The plaintiffs seek to represent classes
of certain purchasers of TXU Corp. common and preferred stock during specified
class periods ranging from January 31, 2002 to October 11, 2002. No class or
classes have been certified. The complaints allege violations of the provisions
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and Sections 11 and 12 of the Securities
Act of 1933, as amended (Securities Act), relating to alleged materially false
and misleading statements, including statements in prospectuses related to the
offering by TXU Corp. of its equity-linked securities and common stock in May
and June 2002. The named individual defendants are current or former officers
and/or directors of TXU Corp. While TXU Corp. believes the claims are without
merit and intends to vigorously defend these lawsuits, it is unable to estimate
any possible loss or predict the outcome of these actions.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of this action.
On October 30, 2002, a lawsuit was filed in the 191st Judicial District
Court of Dallas County, Texas against TXU Corp. and Erle Nye alleging
negligence, negligent misrepresentation, fraud and statutory fraud. On November
12, 2002, the lawsuit was amended and the plaintiffs alleged the same claims on
behalf of themselves and a putative class of persons or entities similarly
situated. No amount of damages has been specified. TXU Corp. has removed this
case to the United States District Court for the Northern District of Texas to
have it consolidated with the other cases described above pending in that court.
While TXU Corp. believes the claim is without merit and intends to vigorously
defend the lawsuit, it is unable to estimate any possible loss or predict the
outcome of this action.
On November 26, 2002, a lawsuit was filed in the United States District
Court for the Northern District of Texas against TXU Corp. and the directors of
TXU Corp. asserting claims under the Employee Retirement Income Security Act
(ERISA) on behalf of a putative class of participants in various employee
benefit plans of TXU Corp. The plaintiff seeks to represent a class of
participants in such plans during the period between January 31, 2002 and
October 11, 2002 based on factual allegations substantially the same as the
other cases described above pending in the United States District Court for the
Northern District of Texas. The complaint has not yet been served on the
defendants and, therefore, the defendants have not yet responded thereto. While
TXU Corp. believes the claim is without merit and intends to vigorously defend
the lawsuit, it is unable to estimate any possible loss or predict the outcome
of this action.
In November and December 2002, two lawsuits were filed in the 191st and
116th Judicial District Courts of Dallas County, Texas against TXU Corp., Erle
Nye, Michael J. McNally, Biggs Porter and the directors of TXU Corp. asserting a
claim under Section 11 of the Securities Act on behalf of purchasers of TXU
Corp.'s equity linked debt securities issued in June 2002. These cases have been
removed from the United States District Court for the Northern District of Texas
and transferred to the court with jurisdiction of the consolidated cases
described above. The plaintiffs have filed motions to remand the cases to state
district court. The defendants intend to file a motion to have these cases
consolidated with the other cases described above pending in such court. While
TXU Corp. believes the claims are without merit and intends to vigorously defend
these lawsuits, it is unable to estimate any possible loss or predict the
outcome of these actions.
21
On February 28, 2003, a lawsuit was filed in the United States District
Court for the Northern District of Texas, Dallas Division, against TXU Corp.,
the directors of TXU Corp., Peter B. Tinkham, Diane J. Kubin, Robert L. Turpin
and other former unidentified members of the TXU Thrift Plan Committee asserting
claims under ERISA on behalf of a putative class of participants and
beneficiaries of the TXU Thrift Plan. The plaintiff seeks to represent a class
of participants in such plan during the period between November 23, 2001 through
October 11, 2002. The complaint has not yet been served on the defendants and,
therefore, the defendants have not yet responded thereto. While TXU Corp.
believes the claim is without merit and intends to vigorously defend the
lawsuit, it is unable to estimate any possible loss or predict the outcome of
this action.
General -- In addition to the above, TXU Corp. and its US and Australian
subsidiaries are involved in various other legal and administrative proceedings
the ultimate resolution of which, in the opinion of each, should not have a
material effect upon their financial position, results of operations or cash
flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF TXU CORP.
Positions and Date First Elected
Offices Presently to Present Offices
Held (Current Term (Current Term
Expires Expires Business Experience
Name of Officer Age on May 16, 2003) on May 16, 2003) (Preceding Five Years)
- ---------------------- ------- --------------------- ---------------------- -------------------------------
Erle Nye 65 Chairman of the May 23, 1997 Chairman of the Board and
Board and Chief Chief Executive of TXU
Executive Corp., Oncor Electric
Delivery, TXU Energy, TXU
Gas and TXU US Holdings.
T. L. Baker 57 Executive Vice February 21, 2003 Executive Vice President of
President TXU Corp. and Vice Chairman
of Oncor and TXU Gas; prior
thereto, President of Oncor
and TXU Gas; prior thereto,
President of TXU Electric
Company; prior thereto,
President, Electric Service
Division of TXU Electric
Company, TXU Gas Distribution
Division of TXU Gas (TXU Gas
Distribution) and TXU SESCO.
Barbara B. Curry 49 Executive Vice September 14, 2000 Executive Vice President of
President TXU Corp.; prior thereto,
Executive Vice President of
TXU Business Services.
Brian N. Dickie 47 Executive Vice May 14, 1999 Executive Vice President of
President TXU Corp. and President of
TXU Energy; prior thereto,
Executive Vice President of
TXU Corp. and President of
TXU Energy Group; prior
thereto, President and
Chief Operating Officer of
BoozoAllen & Hamilton,
Inc.; prior thereto,
President, Worldwide
Commercial Business of
BoozoAllen & Hamilton, Inc.
22
EXECUTIVE OFFICERS OF TXU CORP. (CONT)
Positions and Date First Elected
Offices Presently to Present Offices
Held (Current Term (Current Term
Expires Expires Business Experience
Name of Officer Age on May 16, 2003) on May 16, 2003) (Preceding Five Years)
- ---------------------- ------- --------------------- ---------------------- -------------------------------
H. Dan Farell 53 Executive Vice February 21, 2003 Executive Vice President and
President and Chief Chief Financial Officer of
Financial Officer TXU Corp. and President of
TXU Gas, Distribution
Division of TXU Gas and TXU
Lone Star Pipeline; prior
thereto, President of
Distribution Division of
TXU Gas and Oncor; prior
thereto, Executive Vice
President of TXU Electric,
TXU Gas Distribution and
TXU SESCO; prior thereto,
Chairman of the Board of
TXU Electricity Limited and
Managing Director of TXU
Australia.
Michael J. McNally 48 Executive Vice May 23, 1997 Executive Vice President of
President TXU Corp. and TXU US
Holdings; prior thereto,
Executive Vice President
and Chief Financial Officer
of TXU Corp.
Eric H. Peterson 42 Executive Vice May 9, 2002 Executive Vice President and
President and General Counsel of TXU
General Counsel Corp.; prior thereto,
Senior Vice-President and
General Counsel for DTE
Energy; prior thereto,
partner at Worsham,
Forsythe & Wooldridge.
There is no family relationship between any of the above-named Executive
Officers.
23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TXU Corp.'s common stock is listed on the New York, Chicago and Pacific
stock exchanges (symbol: TXU). The price range of the common stock of TXU Corp.,
as reported by Bloomberg, and the dividends paid during each of the calendar
quarters of 2002 and 2001 were as follows:
Price Range Dividends Paid
----------------------------------------- --------------
Quarter Ended 2002 2001 2002 2001
- ------------- ------------------ ------------------- ---- ----
High Low High Low
---- --- ---- ---
March 31......................... $55.20 $46.27 $44.13 $34.81 $ .60 $ .60
June 30.......................... 57.05 48.81 49.74 39.60 .60 .60
September 30..................... 51.85 33.65 50.00 43.25 .60 .60
December 31...................... 40.99 10.10 49.97 43.11 .60 .60
----- -----
$2.40 $2.40
===== =====
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 capital market
concerns regarding the liquidity of TXU Corp. and its US and Australian
subsidiaries. Under Texas law, TXU Corp. may only declare dividends out of
surplus, which is statutorily defined as total shareholders' equity less the
book value of common stock (stated capital). The write-off of TXU Corp.'s
investment in TXU Europe resulted in negative surplus. Texas law permits,
subject to the receipt of shareholder approval, the reclassification of stated
capital into surplus. TXU Corp. received such shareholder approval of this
reclassification in a special meeting of shareholders held February 14, 2003.
Accordingly, approximately $8.0 billion will be reclassified from stated capital
to additional paid-in capital, resulting in an increase of surplus in the same
amount.
TXU Corp., or its predecessor TEI, have declared common stock dividends
payable in cash in each year since TEI's incorporation in 1945. The Board of
Directors of TXU Corp., at its February 2003 meeting, declared a quarterly
dividend of $0.125 a share, payable April 1, 2003 to shareholders of record on
March 7, 2003. Future dividends may vary depending upon TXU Corp.'s profit
levels, operating cash flow levels and capital requirements as well as financial
and other business conditions existing at the time.
The number of record holders of the common stock of TXU Corp. as of
February 28, 2003 was 68,910.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for TXU Corp. is set forth under
Selected Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for TXU Corp. is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TXU Corp. is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for TXU Corp. is set forth under
Statement of Responsibility, Independent Auditors' Report, Statements of
Consolidated Income, Statements of Consolidated Comprehensive Income, Statements
of Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Shareholders' Equity and Notes to Financial Statements included in
Appendix A to this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is found under the heading Election
of Directors in the definitive proxy statement t