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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;
Commission State of Incorporation; Address of Principal I.R.S. Employer
File Number Executive Offices; and Telephone Number Identification No.
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1-11668 TXU US Holdings Company 75-1837355
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:
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Name of Each Exchange on
Title of Each Class Which Registered
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Depositary Shares, Series A, each representing 1/4 New York Stock Exchange
of a share of $7.50 Cumulative Preferred Stock,
without par value
Depositary Shares, Series B, each representing 1/4 New York Stock Exchange
of a share of $7.22 Cumulative Preferred Stock,
without par value
Securities registered pursuant to Section 12(g) of the Act: Preferred Stock,
without par value
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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 No X
-- --
Aggregate market value of TXU US Holdings Common Stock held by
non-affiliates: None
ommon Stock outstanding at March 26, 2003: TXU US Holdings Company -
52,817,862 shares, without par value
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DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
PART I ----
Items 1. and 2. BUSINESS and PROPERTIES............................................................ 1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES............................................ 1
ELECTRIC RESTRUCTURING.............................................................. 2
COMPETITIVE STRATEGY................................................................ 4
OPERATING SEGMENTS.................................................................. 4
Energy......................................................................... 4
Electric Delivery.............................................................. 4
ENVIRONMENTAL MATTERS............................................................... 12
Item 3. LEGAL PROCEEDINGS.......................................................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................. 14
Item 6. SELECTED FINANCIAL DATA.................................................................... 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................... 14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 14
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................. 14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................... 15
Item 11. EXECUTIVE COMPENSATION................................................................... 17
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 28
Item 14. CONTROLS AND PROCEDURES.................................................................. 29
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 29
APPENDIX A - Financial Information A-1
APPENDIX B - TXU US Holdings Company Exhibits for 2002 Form 10-K B-1
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU US Holdings Company are made available to
the public, free of charge, on the TXU Corp. website at http://www.txucorp.com,
shortly after they have been filed with the Securities and Exchange Commission.
TXU US Holdings Company will provide copies of current reports not posted on the
website upon request.
i
PART I
Items 1. and 2. BUSINESS and PROPERTIES
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
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As of January 1, 2002, TXU US Holdings Company (US Holdings, formerly TXU
Electric Company) is a holding company for TXU Energy Company LLC (TXU Energy)
and Oncor Electric Delivery Company (Oncor). US Holdings is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. Prior to January 1, 2002, US
Holdings was a regulated, integrated utility company directly engaged in the
generation, purchase, transmission, distribution and sale of electric energy in
the north-central, eastern and western parts of Texas.
Use of the term "US Holdings", unless otherwise noted or indicated by the
context, refers to US Holdings, a holding company, and/or its consolidated
subsidiaries.
US Holdings, through its TXU Energy and Oncor subsidiaries, engages in
power production (electricity generation), wholesale energy sales, retail energy
sales and related services, portfolio management, including risk management and
certain trading activities, and the delivery of electricity. US Holdings is one
of the largest energy services companies in the United States (US) with $8
billion in revenue and $24 billion of assets. US Holdings owns or leases and
operates 19,140 megawatts of power generation and sells 120 terawatt hours of
electricity annually. US Holdings sells energy to over 2.7 million residential,
commercial and industrial customers. At December 31, 2002, US Holdings and its
subsidiaries had approximately 10,021 full-time employees.
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
(Commission), as of January 1, 2002, US Holdings transferred:
o its electric transmission and distribution (T&D) operations to 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, 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.
The T&D assets of TXU SESCO Company, a subsidiary of TXU Corp., also were
transferred to Oncor. In addition, as of January 1, 2002, US Holdings acquired
the following businesses from within the TXU Corp. system and transferred them
to TXU Energy: the REP of TXU SESCO Company; operations involving certain risk
management and energy trading activities and the unregulated commercial and
industrial (C&I) retail gas operations of TXU Gas Company (TXU Gas); and the
energy management services businesses and other affiliates of TXU Corp.,
including the fuel procurement and coal mining businesses that service the
generation operations.
See further discussion of the 1999 Restructuring Legislation below.
The following is a description of the business of US Holdings and its
principal subsidiaries.
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 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; operations involving certain
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1 All numbers of electric customers are based on the number of meters.
1
risk management and energy trading activities and the unregulated
commercial/industrial retail gas business of TXU Gas Company (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 electric power systems in Texas and 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.
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
REP, and a T&D utility or separate T&D utilities. Unbundled T&D utilities within
ERCOT, such as Oncor, remain regulated by the Commission.
Beginning January 1, 2002, REPs affiliated with T&D utilities began
charging residential and small commercial customers located in their historical
service territory 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 (Oncor), 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 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 nonbypassable 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.)
2
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.
The major elements of the Settlement are:
Excess Mitigation Credit and Appeals Related to T&D Rates -- 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 (representing
such customers of US Holdings and TXU SESCO Company as of January 1, 2002) 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. The Settlement also precludes recovery by US Holdings of certain
environmental improvement costs. 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
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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, this remand has been dismissed.
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.
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.
Through a competitive bid process, the Commission selected a POLR to serve
for a two-year term beginning January 1, 2003, for several areas within Texas.
In areas for which no bids were submitted, the Commission selected the POLR by
lottery. TXU Energy did not bid to be POLR, but was designated POLR through
lottery for small business and residential customers in certain West Texas
service areas and for small business customers in the Houston service area.
COMPETITIVE STRATEGY
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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.
US Holdings plans to enhance its leading position in retail and wholesale
electric sales and related services and electricity transmission and delivery in
Texas. US Holdings' strategy involves establishing upstream positions
(electricity generation through ownership or contracts and pipeline access to
multiple supply sources and storage assets) and downstream retail customer
relationships. US Holdings 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. US Holdings intends to focus on operational
excellence in its current operations, cost reductions, customer retention and
debt reductions to strengthen its balance sheet and support future growth. US
Holdings intends for its electric delivery business to continue to be a leader
in the efficient and reliable transmission and distribution of electricity.
OPERATING SEGMENTS
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Prior to January 1, 2002, US Holdings had no separate reportable
operating segments. As a result of TXU Corp.'s reorganization as of January 1,
2002 (see discussion in Note 1 to Financial Statements under "Business
Restructuring"), US Holdings realigned its operations into two reportable
segments: Energy and Electric Delivery. Prior period amounts have been restated
to conform to the new segments.
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.
Electric Delivery - regulated operations in Texas involving the
transmission and distribution of electricity.
4
Reasonable allocation methodologies were used to unbundle the financial
statements of US Holdings between its generation and T&D operations. Allocation
of revenues reflected consideration of return on invested capital, which
continues to be regulated for the T&D operations. US Holdings maintained expense
accounts for each of its component operations. Costs of energy and expenses
related to operations and maintenance and depreciation and amortization, as well
as assets, such as property, plant and equipment, materials and supplies and
fuel, were specifically identified by component operation and disaggregated.
Various allocation methodologies were used to disaggregate common expenses,
assets and liabilities between US Holdings' generation and T&D operations.
Interest and other financing costs were determined based upon debt allocated.
Allocations reflected in the financial information for 2001 and 2000 did not
necessarily result in amounts reported in individual line items that are
comparable to actual results in 2002. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
ENERGY
The Energy segment was created as a result of the deregulation of the
electric utility industry in Texas, which became effective January 1, 2002. The
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 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 megawatts of owned or leased power
generating capacity, approximately 2,700 megawatts 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 megawatts nuclear; 5,837 megawatts
coal/lignite; and 10,881 megawatts 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 megawatt combined-cycle power production facility
5
and various contracts, including electric supply and gas transportation
agreements. In May 2002, TXU Energy acquired a 260 megawatt combined-cycle power
production facility in northwest Texas through a settlement agreement which
dismissed a lawsuit previously filed related to the plant. 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 megawatts). The
Handley plant consists of five natural gas-fueled generating units with a total
plant capacity of 1,441 megawatts. The Mountain Creek plant consists of five
natural gas-fueled generating units with a total plant capacity of 893
megawatts. 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 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 megawatts 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 megawatts 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 megawatts.
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 negotiating 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 with the Commission.
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.
6
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.
Gas/Oil Production Assets -- TXU Energy has eighteen gas/oil fueled plants
(including Pedricktown, New Jersey) with a capacity of 11,003 megawatts. 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
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 megawatts 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.
7
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.
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 -
"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
8
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.
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 US. 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
of 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
9
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.
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 under "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.
ELECTRIC DELIVERY
The Electric Delivery segment consists primarily of the electricity
transmission and distribution operations of Oncor. Electric Delivery provides
the essential service of delivering electricity 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.
10
Electric Distribution
Oncor's electricity distribution business is responsible for the overall
safe and efficient operation 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 REPs who compete
for their business. However, the REPs 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 REPs, 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.
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. For the year ended December 31, 2002, delivery fee
revenues from TXU Energy represented approximately 80% of Oncor's revenues.
There are no individually significant unaffiliated customers upon which Oncor's
business or results are highly dependent.
Regulation and Rates
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
(PURA) has prohibited the collection of any rates or charges by a public utility
that does not have the prior approval of the Commission.
Open-Access Transmission -- At the state level, the PURA, 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.
11
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. US Holdings
is unable to predict the outcome of any litigation related to this matter.
ENVIRONMENTAL MATTERS
---------------------
US Holdings and its 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 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. 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 the 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 and Oncor anticipate that the permits can be obtained
for their "grandfathered" facilities without significant effects on the costs
for operating these facilities.
12
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 and the EPA have jurisdiction over water discharges
(including storm water) from all domestic facilities. TXU Energy's and Oncor's
facilities are presently in compliance with applicable state and federal
requirements relating to discharge of pollutants into the water. TXU Energy and
Oncor hold all required waste water discharge permits from the TCEQ for
facilities in operation and have applied for or obtained necessary permits for
facilities under construction. TXU Energy 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 plants and facilities. Oncor
is 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 has issued regulations under
the Texas Act applicable to TXU Energy 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.
Item 3. LEGAL PROCEEDINGS
In September 1999, Quinque Operating Company (Quinque) filed suit in the
State District Court of Stevens County, Kansas against over 200 gas pipeline
companies, including TXU Gas (named in the litigation as ENSERCH Corporation).
The suit was removed to federal court; however, a motion to remand the case back
to Kansas State District Court was granted in January 2001, and the case is now
pending in Stevens County, Kansas. The plaintiffs amended their petition to join
TXU Fuel Company (TXU Fuel), a subsidiary of TXU Energy, as a defendant in this
litigation. Quinque has dismissed its claims and a new lead plaintiff has filed
an amended petition in which the plaintiffs seek to represent a class consisting
of all similarly situated gas producers, overriding royalty owners, working
interest owners and state taxing authorities either from whom defendants had
purchased natural gas or who received economic benefit from the sale of such gas
since January 1, 1974. No class has been certified. The petition alleges that
the defendants have mismeasured both the volume and heat content of natural gas
delivered into their pipelines resulting in underpayments to plaintiffs. No
amount of damages has been specified in the petition with respect to TXU Gas or
TXU Fuel. While TXU Gas and TXU Fuel are unable to estimate any possible loss or
predict the outcome of this case, TXU Gas and TXU Fuel believe these claims are
without merit and intend to vigorously defend this suit.
On November 21, 2000, the City of Denton, Texas and other Texas cities
filed suit in the 134th Judicial District Court of Dallas County, Texas against
TXU Gas, US Holdings and TXU Corp. The petition alleges claims for breach of
contract, negligent representation, fraudulent inducement of contract, breach of
duty of good faith and fair dealing and unjust enrichment related to the
13
defendants' alleged exclusion of certain revenues from the cities' franchise fee
base. No specified damages have been alleged. All of the plaintiff cities have
now executed a settlement agreement to settle this suit. Such resolution will
not have a material effect on US Holdings' financial position, results of
operations or cash flows.
Also see discussion above under "Regulation and Rates."
General -- US Holdings and its subsidiaries are involved in various 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.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of US Holdings' common stock is owned by TXU Corp. Reference is made
to Note 9 to Financial Statements regarding limitations upon payment of
dividends on common stock of US Holdings.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for US Holdings 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 US Holdings 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 US Holdings is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for US Holdings 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.
14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Identification of Directors, business experience and other
directorships:
Other Positions and
Offices Presently Date First Elected as Present Principal Occupation or
Held With US Holdings Director Employment and Principal
(Current Term Expires (Current Term Expires Business (Preceding Five Years),
Name of Director Age in May 2003) in May 2003) Other Directorships
- ------------------ ---- ----------------------- --------------------- --------------------------------------
Michael J. McNally 48 None February 16, 1996 Executive Vice President of TXU Corp.
; prior thereto, Executive Vice
President and Chief Financial
Officer of TXU Corp. and Executive
Vice President of US Holdings;
other directorships: Oncor, TXU
Energy, TXU Gas and TXU Europe
Limited.
Erle Nye 65 Chairman of the Board September 17, 1982 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., Oncor, TXU
Energy, TXU Gas and US Holdings;
other directorships: TXU Corp.,
Oncor, TXU Energy, TXU Gas and TXU
Europe Limited.
Eric H. Peterson 42 None November 1, 2002 Executive Vice President and General
Counsel of TXU Corp.; prior
thereto, Senior Vice President and
General Counsel of DTE Energy;
prior thereto, Partner in the law
firm of Worsham, Forsythe &
Wooldridge; other directorships:
Oncor, TXU Energy and TXU Gas.
R. A Wooldridge 65 None January 1, 2002 Partner in the law firm of Hunton &
Williams; other directorships:
Oncor, TXU Energy, TXU Gas and TXU
Europe Limited.
Directors of US Holdings receive no compensation in their capacity as Directors.
15
Identification of Executive Officers and business experience:
Positions and Offices Date First Elected to
Presently Held Present Offices
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age in May 2003) in May 2003) (Preceding Five Years)
- ---------------- ---- ---------------------- ----------------------- ------------------------------------
Erle Nye 65 Chairman of the Board February 20, 1987 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., Oncor,
TXU Energy,TXU Gas and US Holdings.
H. Dan Farell 53 Executive Vice March 26, 2003 Executive Vice President and Chief
President Financial Officer of TXU Corp.
and Executive Vice President of
US Holdings; prior thereto,President
of TXU Gas and TXU Gas Distribution;
prior thereto, President of TXU Gas
Distribution and Oncor Distribution;
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.
Brian N. Dickie 48 President, TXU Energy December 12, 2001 Executive Vice President of 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
Booz Allen & Hamilton, Inc.;
prior thereto, President,
Worldwide Commercial Business of
Booz Allen & Hamilton, Inc.
T. L. Baker 57 Vice Chairman, Oncor November 4, 2002 Executive Vice President of 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 of Electric Service
Division of TXU Electric Company,
TXU Gas Distribution and TXU
SESCO.
M. S. Greene 57 President, Oncor November 4, 2000 President of Oncor; prior thereto,
President of TXU Lone Star
Pipeline and Transmission
Division of Oncor; prior thereto,
Executive Vice President of TXU
Fuel and TXU Mining.
There is no family relationship between any of the above-named Directors and
Executive Officers.
16
Item 11. EXECUTIVE COMPENSATION
US Holdings (the Company) and its affiliates have paid or awarded
compensation during the last three calendar years to the executive officers
named in the Summary Compensation Table for services in all capacities. Amounts
reported in the Table as Bonus and LTIP Payouts for any calendar year reflect
the performance of the individual and TXU Corp. in prior periods. Accordingly,
amounts reported as Bonus in 2002 reflect performance in 2001 and amounts
reported as LTIP Payouts in 2002 reflect performance for the three years ended
in March 2002. Information relating to compensation provided in 2003 based on
performance in 2002 is contained in the footnotes to the Table and in the
Organization and Compensation Committee Report which follows the footnotes.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------------------- --------------------------------------
Awards Payouts
------------------------ ------------
Other Restricted Securities All Other
Annual Stock Underlying LTIP Compen-
Name and Salary Bonus Compen-sation Awards Options/ Payouts sation
Principal Position Year ($) ($) (6) ($) ($) (7) SARs (#) ($) (8) ($) (9)
- ------------------------- ------ ---------- ---------- ------------ ---------- ------------ ------------ -----------
Erle Nye (1) (10).... 2002 1,037,500 1,950,000 --- 236,250 --- 4,286,400 299,985
Chairman of the Board 2001 964,583 475,000 --- 694,375 --- 519,747 222,658
and Chief Executive 2000 950,000 380,000 --- 593,750 --- 399,793 218,101
of the Company
Brian N. Dickie (2) (10) 2002 856,667 625,000 --- 193,500 --- 1,071,600 122,629
President, TXU Energy 2001 823,333 252,500 --- 441,500 --- --- 83,229
2000 779,167 240,000 --- 420,000 --- --- 64,672
Michael J. McNally (3) 2002 581,667 500,000 --- 132,750 --- 1,430,624 90,695
(10)Executive Vice 2001 523,333 200,000 --- 321,500 --- 264,327 62,847
President 2000 466,667 150,000 --- 262,500 --- 190,094 129,159
of the Company
T. L. Baker (4) (10). 2002 495,000 500,000 --- 112,500 --- 1,109,770 119,960
Vice Chairman, Oncor 2001 449,167 125,000 --- 230,750 --- 111,800 89,374
2000 399,167 125,000 --- 219,500 --- 93,968 84,152
M. S. Greene (5) (10) 2002 326,667 200,000 --- 73,800 --- 351,516 82,420
President, Oncor 2001 311,667 81,500 --- 153,500 --- 18,659 62,710
2000 283,333 75,000 --- 142,500 --- 6,021 59,487
- -------------------------
(1) Compensation amounts represent compensation paid by TXU Corp.
(2) Mr. Dickie was elected President of TXU Energy effective December 12,
2001. Compensation amounts represent compensation paid by TXU Energy.
(3) Mr. McNally was elected Executive Vice President of the Company
effective January 1, 2002. Compensation amounts represent compensation
paid by TXU Business Services.
(4) Mr. Baker was elected Vice Chairman of Oncor effective November 4,
2002. Compensation amounts represent compensation paid by Oncor.
(5) Mr. Greene was elected President of Oncor effective November 4, 2002.
Compensation amounts represent compensation paid by Oncor.
(6) Amounts reported as Bonus in the Summary Compensation Table are
attributable principally to the named executive officers' participation
in the TXU Annual Incentive Plan (AIP). Amounts reported for 2002
resulted from performance in 2001; no AIP awards for 2002 performance
were provided in 2003 to any officers. Under the current terms of the
AIP, target incentive awards ranging from 20% to 75% of base salary,
and a maximum award of 100% of base salary, are established. The
percentage of the target or maximum actually awarded, if any, is
dependent upon the attainment of performance measurement criteria
established in advance by TXU Corp.'s Organization and Compensation
Committee (Committee), as well as the Committee's evaluation of the
participant's and TXU Corp.'s performance. Amounts reported for Mr. Nye
17
as Bonus also include amounts provided in his employment contract as
discussed in footnote (10) and an additional bonus of $750,000 awarded
in February 2002 in recognition of his contributions to TXU Corp.'s
performance in 2001.
(7) Amounts reported as Restricted Stock Awards in the Summary Compensation
Table are attributable to the named officer's participation in the
Deferred and Incentive Compensation Plan (DICP). Participants in the
DICP may defer a percentage of their base salary not to exceed a
maximum percentage determined by the Committee for each plan year and
in any event not to exceed 15% of the participant's base salary. Salary
deferred under the DICP is included in amounts reported as Salary in
the Summary Compensation Table. TXU Corp. makes a matching award
(Matching Award) equal to 150% of the participant's deferred salary.
Prior to 2002, one-half of any AIP award (Incentive Award) was deferred
and invested under the DICP. Matching Awards are subject to forfeiture
under certain circumstances. Under the DICP, a trustee purchases TXU
Corp. common stock with an amount of cash equal to each participant's
deferred salary and Matching Award, and accounts are established for
each participant containing performance units (Units) equal to such
number of common shares. DICP investments, including reinvested
dividends, are restricted to TXU Corp. common stock, and the value of
each unit credited to participants' accounts equals the value of a
share of TXU Corp. common stock and is at risk based on the performance
of the stock. On the expiration of the five year maturity period, the
value of the participant's maturing accounts are paid in cash based
upon the then current value of the Units; provided, however, that in no
event will a participant's account be deemed to have a cash value which
is less than the sum of such participant's deferral together with 6%
per annum interest compounded annually. Participants may elect to defer
amounts that would otherwise mature under the DICP, under and subject
to the provisions of the Salary Deferral Program (SDP) as discussed in
footnote (9). The maturity period is waived if the participant dies or
becomes totally and permanently disabled and may be extended under
certain circumstances.
Matching Awards that have been made under the DICP are included under
Restricted Stock Awards in the Summary Compensation Table. As a result
of these awards, undistributed Matching Awards and Incentive Awards
made in prior years under DICP provisions that are no longer effective
and dividends reinvested thereon, the number and market value at
December 31, 2002 of such Units (each of which is equal to one share of
common stock) held in the DICP accounts for Messrs. Nye, Dickie,
McNally, Baker and Greene were 61,832 ($1,155,022), 32,994 ($616,328),
23,966 ($447,685), 19,607 ($366,259) and 13,170 ($246,016),
respectively.
(8) Amounts reported as LTIP Payouts in the Summary Compensation Table are
attributable to the vesting and distribution of performance-based
restricted stock awards under the Long-Term Incentive Compensation Plan
(LTICP) and the distribution during the year of earnings on salaries
previously deferred under the DICP.
The LTICP is a comprehensive, stock-based incentive compensation plan
providing for common stock-based awards, including performance-based
restricted stock. Outstanding awards, as of December 31, 2002, of
performance-based restricted stock to the named executive officers may
vest at the end of a three-year performance period and provide for an
ultimate distribution of from 0% to 200% of the number of the shares
initially awarded, based on TXU Corp.'s total return to shareholders
over such three-year period compared to the total returns provided by
the companies comprising the Standard & Poor's Electric Utilities
Index. Dividends on restricted shares are reinvested in TXU Corp.
common stock and are paid in cash upon release of the restricted
shares. Under the terms of the LTICP, the maximum amount of any award
that may be paid in any one year to any of the named executive officers
is the fair market value of 100,000 shares of TXU Corp.'s common stock
determined as of the first day of such calendar year. The portion of
any award that, based on such limitation, cannot be fully paid in any
year is deferred until a subsequent year when it can be paid. For 2002,
based on TXU Corp. achieving the 5th highest total return to
shareholders of the returns provided by the companies comprising the
Standard & Poor's Electric Utilities Index over the three-year period
ending March 31, 2002, Messrs. Nye, Dickie, McNally, Baker and Greene
each received 200% of the restricted shares awarded in May of 1999,
which stock was valued at $4,286,400, $1,071,600, $1,393,080,
$1,071,600 and $321,480, respectively.
Amounts reported also include earnings distributed during the year on
salaries previously deferred under the DICP for Messrs. McNally, Baker
and Greene of $37,544, $38,170 and $30,036, respectively.
18
As a result of restricted stock awards under the LTICP, and reinvested
dividends thereon, the number of shares of restricted stock and the
market value of such shares at December 31, 2002 held for Messrs. Nye,
Dickie, McNally, Baker and Greene were 376,431 ($7,031,731), 48,613
($908,091), 86,008 ($1,606,629), 68,207 ($1,274,107) and 22,620
($422,542), respectively.
As noted, salaries deferred under the DICP are included in amounts
reported as Salary in the Summary Compensation Table. Amounts shown in
the table below represent the number of shares purchased under the DICP
with those deferred salaries for 2002 and the number of shares awarded
under the LTICP.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Deferred and Incentive
Compensation Plan (DICP) Long-Term Incentive Compensation Plan (LTICP)
-------------------------- ----------------------------------------------------------
Number of Performance Performance
Shares, or Other Number of or Other
Units or Period Until Shares, Units Period Until Estimated Future Payouts
Other Maturation or Other Maturation or --------------------------
Name Rights(#) or Payout Right (#) Payout Minimum (#) Maximum (#)
- ----------------- ---------- ------------ ---------- ----------- ----------- -----------
Erle Nye........... 2,877 5 Years 150,000 3 Years 0 300,000
Brian N. Dickie.... 2,356 5 Years 18,000 3 Years 0 36,000
Michael J. McNally. 1,616 5 Years 40,000 3 Years 0 80,000
T. L. Baker........ 1,370 5 Years 40,000 3 Years 0 80,000
M. S. Greene....... 899 5 Years 9,000 3 Years 0 18,000
(9) Amounts reported as All Other Compensation in the Summary Compensation
Table are attributable to the named executive officer's participation
in certain plans and as otherwise described in this footnote.
Under the TXU Thrift Plan (Thrift Plan) all eligible employees of TXU
Corp. and any of its participating subsidiaries may invest a portion of
their regular salary or wages in common stock of TXU Corp., or in a
variety of selected mutual funds. Under the Thrift Plan, TXU Corp.
matches a portion of an employee's contributions. Currently, TXU
Corp.'s matching contribution is 75% of the first 6% of the employee's
contribution for employees covered under the traditional defined
benefit component of the TXU Retirement Plan, and 100% of the first 6%
of the employee's contribution for employees covered under the cash
balance component of the TXU Retirement Plan. All matching
contributions are invested in common stock of TXU Corp. The amounts
reported under All Other Compensation in the Summary Compensation Table
include these matching amounts which, for Messrs. Nye, Dickie, McNally,
Baker and Greene were $12,000, $9,000, $9,000, $9,000 and $9,000,
respectively, during 2002.
Under the Salary Deferral Plan (SDP) each employee of TXU Corp. and its
participating subsidiaries whose annual salary is equal to or greater
than an amount established under the SDP ($106,030 for the program year
beginning January 1, 2002) may elect to defer up to 50% of annual base
salary, and/or up to 100% of any bonus or incentive award and certain
maturing DICP awards, for a period of seven years, for a period ending
with the retirement of such employee, or for a combination thereof. TXU
Corp. makes a matching award, subject to forfeiture under certain
circumstances, equal to 100% of up to the first 8% of salary deferred
under the SDP; provided that employees who first become eligible to
participate in the SDP on or after January 1, 2002, who are also
eligible, or become eligible, to participate in the DICP, are not
eligible to receive any SDP matching award. Salaries and bonuses
deferred under the SDP are included in amounts reported under Salary
and Bonus, respectively, in the Summary Compensation Table. Deferrals
are credited with earnings or losses based on the performance of
investment alternatives under the SDP selected by each participant. At
the end of the applicable maturity period, the trustee for the SDP
distributes the deferrals and the applicable earnings in cash as a lump
sum or in annual installments. TXU Corp. is financing the retirement
option portion of the SDP through the purchase of corporate-owned life
insurance on the lives of participants. The proceeds from such
insurance are expected to allow TXU Corp. to fully recover the cost of
the retirement option. During 2002, matching awards, which are included
under All Other Compensation in the Summary Compensation Table, were
made for Messrs. Nye, Dickie, McNally, Baker and Greene in the amounts
of $103,000, $85,467, $57,667, $49,200 and $40,733, respectively.
19
Under the TXU Split-Dollar Life Insurance Program (Insurance Program)
split-dollar life insurance policies are purchased for eligible
corporate officers of TXU Corp. and its participating subsidiaries. The
death benefit of the participants' insurance policies are equal to two,
three or four times their annual Insurance Program compensation
depending on their category. Individuals who first became eligible to
participate in the Insurance Program after October 15, 1996, vest in
the policies issued under the Insurance Program over a six-year period.
TXU Corp. pays the premiums for the policies and has received a
collateral assignment of the policies equal in value to the sum of all
of its insurance premium payments. Although the Insurance Program is
terminable at any time, it is designed so that if it is continued, TXU
Corp. will fully recover all of the insurance premium payments it has
made either upon the death of the participant or, if the assumptions
made as to policy yield are realized, upon the later of 15 years of
participation or the participant's attainment of age 65. During 2002,
the economic benefit derived by Messrs. Nye, Dickie, McNally, Baker and
Greene from the term insurance coverage provided and the interest
foregone on the remainder of the insurance premiums paid by the Company
amounted to $184,985, $28,162, $24,028, $61,760 and $32,687,
respectively.
(10) TXU Corp. has entered into employment agreements with Messrs. Nye,
Dickie, McNally, Baker and Greene as hereinafter described in this
footnote.
Effective June 1, 2002, TXU Corp. entered into a new employment
agreement with Mr. Nye, which supersedes his previous employment
agreement. The new agreement provides for an initial term expiring May
31, 2005, and a secondary term expiring May 31, 2007. During the
initial term, Mr. Nye will continue to serve as TXU Corp.'s Chairman of
the Board and Chief Executive until such time as his successor is
elected at which time Mr. Nye may continue as TXU Corp.'s Chairman of
the Board and/or in such other executive position as he and TXU Corp.
may mutually agree upon. During the secondary term, Mr. Nye will
continue as an employee of TXU Corp. or, with TXU Corp.'s approval, he
may retire and serve TXU Corp. in a consulting capacity through the
expiration of the secondary term. Mr. Nye will, during the initial
term, be entitled to a minimum annual base salary of $1,050,000,
eligibility for an annual bonus under the terms of the AIP, and minimum
annual restricted stock awards of 40,000 shares under the LTICP. The
agreement also provides for a special one-time bonus of $1,000,000 in
consideration for his entering into the new agreement. Such bonus is
payable in equal annual installments over a five year period. During
the secondary term, Mr. Nye will be entitled to an annual base salary
equal to 75% of his base salary prior to expiration of the initial term
and eligibility for a prorated bonus under the terms of the AIP for the
2005 AIP plan year. The agreement also provides Mr. Nye with certain
benefits following his retirement, including administrative support,
annual medical examinations and financial planning services. The
agreement also reconfirms TXU Corp.'s prior agreement to fund the
retirement benefit to which Mr. Nye will be entitled under TXU Corp.'s
supplemental retirement plan. Additionally, the agreement entitles Mr.
Nye to certain severance benefits in the event he dies, becomes
disabled, is terminated without cause or resigns or retires with TXU
Corp.'s approval during the term of the agreement, including the base
salary and annual incentive awards he would have received; continued
payment of the remaining special bonus annual installment payments; a
payment in lieu of foregone and forfeited incentive compensation; and
health care benefits. The agreement also provides for compensation and
benefits under certain circumstances following a change-in-control of
TXU Corp. during the initial term, including a payment equal to the
greater of three times his annualized base salary and target bonus or
the total base salary and bonus he would have received for the
remainder of the term of the agreement; any unpaid portion of the
special bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits; and a tax gross-up payment to
offset any excise tax which may result from such change-in-control
payments.
TXU Corp. entered into a new employment agreement with Mr. Dickie,
effective December 3, 2002, which supersedes and replaces his previous
employment agreement. The agreement provides for the continued service
of Mr. Dickie through May 31, 2005 (Term). Under the terms of the
agreement, Mr. Dickie will, during the Term, be entitled to a minimum
annual base salary of $860,000, eligibility for an annual bonus under
the AIP, and minimum annual restricted stock awards of 15,000 shares
under the LTICP. The agreement also provides for certain special
retirement compensation. The agreement provides for certain severance
benefits in the event Mr. Dickie resigns during the Term, including a
payment equal to annual base salary and target bonus, payments for
otherwise forfeited incentive compensation, and health care benefits.
The agreement entitles Mr. Dickie to certain severance benefits in the
event he is terminated without cause during the Term, including a
payment equal to the greater of the base salary and target bonus that
Mr. Dickie would have received for the remainder of the Term or annual
base salary and target bonus; a payment in lieu of foregone and
forfeited incentive compensation; and health care benefits. The
agreement also provides for compensation and benefits under certain
circumstances following a change-in-control of TXU Corp. during the
Term, including a payment equal to three times his annualized base
salary and target bonus; a payment in lieu of foregone and forfeited
incentive compensation; health care benefits; and a tax gross-up
payment to offset any excise tax which may result from such
change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. McNally
effective July 1, 2000. The agreement, as amended, provides for the
continued service by Mr. McNally through June 30, 2004 (Term). Under
the terms of the agreement, Mr. McNally will, during the Term, be
entitled to a minimum annual base salary of $500,000, eligibility for
an annual bonus under the terms of the AIP, and minimum annual
restricted stock awards of 20,000 shares under the LTICP. The agreement
entitles Mr. McNally to certain severance benefits in the event he is
terminated without cause during the Term, including a payment equal to
the greater of his annual base salary and target bonus, or the total
20
amount of base salary and target bonuses he would have received for the
remainder of the Term; a payment in lieu of foregone and forfeited
incentive compensation; and health care benefits. The agreement also
provides for compensation and benefits under certain circumstances
following a change-in-control of TXU Corp. during the Term, including a
payment equal to three times his annualized base salary and target
bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits; and a tax-gross-up payment to
offset any excise tax which may result from such change-in-control
payments.
TXU Corp. entered into an employment agreement with Mr. Baker effective
July 1, 2000. The agreement, as amended, provides for the continued
service by Mr. Baker through June 30, 2004 (Term). Under the terms of
the agreement, Mr. Baker will, during the Term, be entitled to a
minimum annual base salary of $420,000, eligibility for an annual bonus
under the terms of the AIP, and minimum restricted stock awards of
12,000 shares under the LTICP. The agreement entitles Mr. Baker to
certain severance benefits in the event he is terminated without cause
during the Term, including a payment equal to the greater of his
annualized base salary and target bonus, or the total amount of base
salary and target bonuses he would have received for the remainder of
the Term; a payment in lieu of foregone and forfeited incentive
compensation; and health care benefits. The agreement also provides for
compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the Term, including a payment
equal to three times his annualized base salary and target bonus; a
payment in lieu of foregone and forfeited incentive compensation;
health care benefits and a tax gross-up payment to offset any excise
tax which may result from such change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. Greene
effective July 1, 2000. The agreement, as amended, provides for the
continued service by Mr. Greene through June 30, 2004 (Term). Under the
terms of the agreement, Mr. Greene will, during the Term, be entitled
to a minimum annual base salary of $300,000, eligibility for an annual
bonus under the terms of the AIP, and minimum restricted stock awards
of 5,000 shares under the LTICP. The agreement entitles Mr. Greene to
certain severance benefits in the event he is terminated without cause
during the Term, including a payment equal to the greater of his
annualized base salary and target bonus, or the total amount of base
salary and target bonuses he would have received for the remainder of
the Term; a payment in lieu of foregone and forfeited incentive
compensation; and health care benefits. The agreement also provides for
compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the Term, including a payment
equal to three times his annualized base salary and target bonus; a
payment in lieu of foregone and forfeited incentive compensation;
health care benefits and a tax gross-up payment to offset any excise
tax which may result from such change-in-control payments.
TXU Corp. and its participating subsidiaries maintain retirement plans
(Retirement Plan), which are qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (Code). The Retirement Plan contains
both a traditional defined benefit component and a cash balance component.
Annual retirement benefits under the traditional defined benefit component,
which applied during 2002 to each of the named officers other than Mr. Nye, are
computed as follows: for each year of accredited service up to a total of 40
years, 1.3% of the first $7,800, plus 1.5% of the excess over $7,800, of the
participant's average annual earnings during his or her three years of highest
earnings. The Retirement Plan also contains a cash balance component, which
covers all employees who first become eligible to participate in the Retirement
Plan on or after January 1, 2002, and employees previously covered under the
traditional defined benefit component who, during a one-time election period in
21
2001 (and for certain employees covered by collective bargaining agreements,
during other specifically negotiated election periods) elected to convert the
actuarial equivalent of their accrued traditional defined benefit to the cash
balance plan component. Mr. Nye elected to convert to the cash balance plan
during the 2001 election period. Under the cash balance component, hypothetical
accounts are established for participants and credited with monthly contribution
credits equal to a percentage of the participant's compensation (3.5%, 4.5%,
5.5% or 6.5% depending on the participant's combined age and years of accredited
service) and interest credits based on the average yield of the 30-year Treasury
bond for the 12 months ending November 30 of the prior year. Amounts reported
under Salary for the named executive officers in the Summary Compensation Table
approximate earnings as defined under the traditional defined benefit component
of the Retirement Plan without regard to any limitations imposed by the Code.
Benefits paid under the traditional defined benefit component of the Retirement
Plan are not subject to any reduction for Social Security payments but are
limited by provisions of the Code. Based on benefits accrued under the cash
balance component of the Retirement Plan as of December 31, 2002, the estimated
annual benefit payable to Mr. Nye under such component at normal retirement age
is $1,138,269. As of December 31, 2002, years of accredited service under the
Retirement Plan for Messrs. Nye, Dickie, McNally, Baker and Greene were 40, 4,
6, 32, and 32, respectively.
TXU PENSION PLAN TABLE
Years of Service
------------------------------------------------------------------------------------------
Remuneration 20 25 30 35 40
------------------ -------------- ---------------- ------------------ ----------------- -----------------
$ 50,000 $ 14,688 $ 18,360 $ 22,032 $ 25,704 $ 29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
1,800,000 539,688 674,610 809,532 944,454 1,079,376
2,000,000 599,688 749,610 899,532 1,049,454 1,199,376
TXU Corp.'s supplemental retirement plan (Supplemental Plan) provides
for the payment of retirement benefits, which would otherwise be limited by the
Code or the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the Supplemental Plan,
retirement benefits are calculated in accordance with the same formula used
under the qualified plan, except that, with respect to calculating the portion
of the Supplemental Plan benefit attributable to service under the defined
benefit component of the Retirement Plan, earnings also include AIP awards (for
2002, 100% of the AIP award, and for 2001 and 2000, 50% of the AIP awards, are
reported under Bonus for the named officers in the Summary Compensation Table).
The table set forth above illustrates the total annual benefit payable at
retirement under the Retirement Plan inclusive of benefits payable under the
Supplemental Plan, prior to any reduction for earlier-than-normal or a
contingent beneficiary option which may be selected by participants.
The following report and performance graph are presented herein for
information purposes only. This information is not required to be included
herein and shall not be deemed to form a part of this report to be "filed" with
the Securities and Exchange Commission. The report set forth hereinafter is the
report of the Organization and Compensation Committee of the Board of Directors
of TXU Corp. and is illustrative of the methodology utilized in establishing the
compensation of executive officers of US Holdings. References in the report to
the "Company" are references to TXU Corp. and references to "this proxy
statement" are references to TXU Corp.'s proxy statement in connection with TXU
Corp.'s 2003 annual meeting of shareholders.
22
ORGANIZATION AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors
(Committee) is responsible for reviewing and establishing the compensation of
the executive officers of the Company. The Committee consists of directors of
the Company who are not employees or former employees of the Company and is
chaired by J. E. Oesterreicher. The Committee has directed the preparation of
this report and has approved its content and submission to the shareholders.
As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation plans
should align executive compensation with returns to shareholders with due
consideration accorded to balancing both long-term and short-term objectives.
The overall compensation program should provide for an appropriate and
competitive balance between base salaries and performance-based annual and
long-term incentives. The Committee has determined that, as a matter of policy
to be implemented over time, the base salaries of the officers will be
established around the median, or 50th percentile, of the base salaries provided
by comparable energy companies, or other relevant market, and that opportunities
for total direct compensation (defined as the sum of base salaries, annual
incentives and long-term incentives) to reach the 75th percentile, or above, of
such market or markets will be provided through annual and long-term
performance-based incentive compensation plans. Such compensation principles and
practices have allowed, and should continue to allow, the Company to attract,
retain and motivate its key executives.
In furtherance of these policies, nationally recognized compensation
consultants have been retained to assist the Committee in its periodic reviews
of compensation and benefits provided to officers. The consultants' evaluations
include comparisons to comparable utilities and energy companies as well as to
general industry with respect both to the level and composition of officers'
compensation.
The compensation of the o