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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- --
Common Stock outstanding at May 12, 2003: 46,567,862 shares, without par value.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income -
Three Months Ended March 31, 2003 and 2002.................................. 1
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2003 and 2002.................................. 2
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002........................................ 3
Notes to Financial Statements............................................... 4
Independent Accountants' Report............................................. 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 44
Item 4. Controls and Procedures..................................................... 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 46
Item 6. Exhibits and Reports on Form 8-K............................................. 47
SIGNATURE ..................................................................................... 48
CERTIFICATIONS................................................................................. 49
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. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
------------------
2003 2002
---- ----
(millions of dollars)
Operating revenues............................................................... $1,932 $ 1,877
------ -------
Costs and expenses:
Cost of energy sold and delivery fees......................................... 838 525
Operating costs............................................................... 366 314
Depreciation and amortization................................................. 182 183
Selling, general and administrative expenses.................................. 193 277
Franchise and revenue-based taxes............................................. 93 100
Other income.................................................................. (9) (3)
Other deductions.............................................................. 1 3
Interest income............................................................... (5) (1)
Interest expense and other charges............................................ 151 105
------- -------
Total costs and expenses.................................................. 1,810 1,503
------ -------
Income before income taxes and cumulative effect of changes in accounting
principles..................................................................... 122 374
Income tax expense............................................................... 33 121
------- -------
Income before cumulative effect of changes in accounting principles.............. 89 253
Cumulative effect of changes in accounting principles,
net of tax benefit (Note 2)................................................... (58) -
------ -------
Net income....................................................................... 31 253
Preferred stock dividends........................................................ 2 2
------ -------
Net income available for common stock............................................ $ 29 $ 251
====== =======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
(millions of dollars)
Net income ....................................................................... $ 31 $ 253
------ -------
Other comprehensive income (loss)--
Cash flow hedge activity, net of tax effects:
Net change in fair value of derivatives (net of tax benefit of $42 and $23).. (78) (42)
Amounts realized in earnings during the period (net of tax expense
of $26 and benefit of $1)................................................ 49 (3)
----- ------
Total............................................................... (29) (45)
------ ------
Comprehensive income.............................................................. $ 2 $ 208
====== ======
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
2003 2002
---- ----
(millions of dollars)
Cash flows -- operating activities:
Income before cumulative effect of changes in accounting principles.............. $ 89 $ 253
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization................................................. 201 207
Deferred income taxes and investment tax credits-- net ....................... 50 12
Net unrealized loss from mark-to-market valuation of commodity contracts...... 23 146
Net gain from sales of assets................................................. (6) -
Reduction in regulatory liability............................................. (42) (13)
Changes in operating assets and liabilities...................................... (140) (320)
------ ------
Cash provided by operating activities................................. 175 285
------ ------
Cash flows -- financing activities:
Issuances of securities ......................................................... 1,294 --
Retirements/repurchases of securities:
Long-term debt................................................................. (294) (328)
Preferred stock of subsidiaries, subject to mandatory redemption............... (4) -
Change in advances-- affiliates.................................................. 702 256
Change in notes payable-- banks.................................................. (1,304) -
Dividends paid to parent......................................................... (250) -
Preferred stock dividends paid................................................... (2) (2)
Redemption deposits applied to debt retirements.................................. 138 -
Debt premium, discount, financing, and reacquisition expenses.................... (33) (2)
------ ------
Cash provided by (used in) financing activities....................... 247 (76)
------ ------
Cash flows -- investing activities:
Capital expenditures............................................................. (182) (228)
Proceeds from sale of assets .................................................... 13 --
Nuclear fuel .................................................................... -- (10)
Other ........................................................................... 13 8
------ ------
Cash used in investing activities..................................... (156) (230)
------ ------
Net change in cash and cash equivalents............................................ 266 (21)
Cash and cash equivalents-- beginning balance...................................... 1,508 55
------ -------
Cash and cash equivalents-- ending balance......................................... $ 1,774 $ 34
======= =======
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $1,774 $1,508
Restricted cash..................................................................... 72 210
Accounts receivable-- trade......................................................... 1,484 1,386
Inventories ........................................................................ 312 338
Commodity contract assets........................................................... 1,472 1,298
Other current assets................................................................ 171 213
------ -----
Total current assets.......................................................... 5,285 4,953
------ -----
Investments:
Restricted cash..................................................................... 69 68
Other investments................................................................... 489 491
Property, plant and equipment-- net................................................... 16,646 16,183
Goodwill.............................................................................. 558 558
Net regulatory assets................................................................. 1,749 1,630
Commodity contract assets............................................................. 337 476
Cash flow hedges and other derivative assets.......................................... 43 14
Other noncurrent assets............................................................... 141 146
------- ------
Total assets.................................................................. $25,317 $24,519
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from affiliates............................................................ $1,234 $ 787
Notes payable-- banks............................................................... 500 1,804
Long-term debt due currently........................................................ 147 397
Accounts payable-- trade............................................................ 952 820
Commodity contract liabilities...................................................... 1,377 1,138
Accrued taxes....................................................................... 100 303
Other current liabilities........................................................... 670 724
------- -------
Total current liabilities..................................................... 4,980 5,973
------- -------
Accumulated deferred income taxes..................................................... 3,230 3,227
Investment tax credits................................................................ 445 450
Commodity contract liabilities........................................................ 248 320
Cash flow hedges and other derivative liabilities..................................... 219 150
Other noncurrent liabilities and deferred credits..................................... 1,618 1,063
Long-term debt, less amounts due currently............................................ 7,858 6,613
Preferred stock subject to mandatory redemption....................................... 17 21
Contingencies (Note 5)
Shareholders' equity (Note 4)......................................................... 6,702 6,702
------- -------
Total liabilities and shareholders' equity.................................... $25,317 $24,519
======= =======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- TXU US Holdings Company (US Holdings) 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. US Holdings has two reportable business segments: TXU
Energy and Oncor. See discussion of reportable business segments in Note 6.
The term "US Holdings" refers to US Holdings and/or its consolidated
subsidiaries, depending on the context.
Basis of Presentation -- The condensed consolidated financial statements
of US Holdings and its subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and, except for the rescission of Emerging Issues Task Force (EITF) Issue
No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities," the adoption of Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" and the
adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" discussed below,
on the same basis as the audited financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 2002 (2002 Form 10-K.) In
the opinion of management, all other adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of operations and
financial position have been included therein. All intercompany items and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with US GAAP have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Because the
consolidated interim financial statements do not include all of the information
and footnotes required by US GAAP, they should be read in conjunction with the
audited financial statements and related notes included in the 2002 Form 10-K.
The results of operations for an interim period may not give a true indication
of results for a full year. All dollar amounts in the financial statements and
tables in the notes, are stated in millions of US dollars unless otherwise
indicated. Certain previously reported amounts have been reclassified to conform
to current classifications.
Changes in Accounting Standards -- In October 2002, the EITF rescinded
EITF Issue No. 98-10, which required mark-to-market accounting for all trading
activities. SFAS No. 143, became effective on January 1, 2003. As a result of
the implementation of these two accounting standards, US Holdings recorded a
cumulative effect of changes in accounting principles as of January 1, 2003.
(See Note 2 for a discussion of the impacts of these two accounting standards.)
As a result of guidance provided in EITF Issue No. 02-3, "Issues Involved
in Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities", US Holdings has not
recognized origination gains on commercial/industrial retail contracts in 2003.
For the three months ended March 31, 2002, US Holdings had recognized $13
million in origination gains on such contracts.
SFAS No. 145 became effective on January 1, 2003. One of the provisions of
this statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." The adoption of SFAS No. 145 did not result in a
reclassification for the three months ended March 31, 2002.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," became effective on January 1, 2003. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
only when the liability is incurred and measured initially at fair value. The
adoption of SFAS No. 146 did not materially impact US Holdings' results of
operations for the three months ended March 31, 2003.
4
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" requires recording
the fair value of guarantees upon issuance or modification after December 31,
2002. The interpretation also requires expanded disclosures of guarantees (see
Note 5 under Guarantees). The adoption of FIN No. 45 did not materially impact
US Holdings' results of operations for the three months ended March 31, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for existing variable interest entities in the
quarter ending September 30, 2003 and immediately for any new variable interest
entities.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," was issued in April 2003 and becomes effective on June 30,
2003. SFAS No. 149 clarifies the definition of a derivative and the treatment in
the statement of cash flows when a derivative contains a financing component.
For accounting standards not yet adopted or implemented, US Holdings is
evaluating the potential impact on its financial position and results of
operations.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for the three months ended
March 31, 2003 for changes in accounting principles effective January 1, 2003:
Charge from rescission of EITF Issue No. 98-10, net of tax effect of $34 million.... $(63)
Credit from adoption of SFAS No. 143, net of tax effect of $3 million............... 5
----
Total net charge.................................................................. $(58)
====
On October 25, 2002, the EITF rescinded EITF Issue No. 98-10, which
required mark-to-market accounting for all trading activities. Pursuant to this
rescission, only financial instruments that are derivatives under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," will be subject
to mark-to-market accounting. Financial instruments that may not be derivatives
under SFAS No. 133, but were marked-to-market under EITF Issue No. 98-10,
consist primarily of gas transportation and storage agreements, power tolling,
full requirements and capacity contracts. This new accounting rule was effective
for new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) has been reported by TXU Energy
as a cumulative effect of a change in accounting principles in the first quarter
of 2003. Of the total, $75 million reduced net commodity contract assets and
liabilities and $22 million reduced inventory that had previously been marked
to market as a trading position. The cumulative effect adjustment represents the
net gains previously recognized for these contracts under mark-to-market
accounting.
SFAS No. 143 became effective on January 1, 2003. SFAS No. 143 requires
entities to record the fair value of a legal liability for an asset retirement
obligation in the period of its inception. For US Holdings, such liabilities
relate to nuclear generation plant decommissioning, land reclamation related
to lignite mining and removal of lignite plant treatment facilities.
The liability is recorded at its net present value with a corresponding
increase in the carrying value of the related long-lived asset. The liability
is accreted each period, representing the time value of money, and
the capitalized cost is depreciated over the remaining useful life of the
related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million which was previously (reflected in accumulated depreciation)
US Holdings had previously recorded as depreciation expense and $26 million
(reflected in other noncurrent liabilities) of unrealized net gains associated
with the decommissioning trust.
5
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS No. 143:
Increase in property, plant and equipment - net................. $488
Increase in other non-current liabilities and deferred credits.. (528)
Increase in accumulated deferred income taxes................... (3)
Increase in regulatory assets-- net............................. 48
----
Cumulative effect of change in accounting principles............ $ 5
====
The asset retirement liability at March 31, 2003 was $560 million,
comprised of the $554 million liability as a result of the adoption of SFAS No.
143 and $6 million of accretion during the period.
With respect to nuclear decommissioning costs, US Holdings believes that
the adoption of SFAS No. 143 results primarily in timing differences in the
recognition of legal asset retirement costs that TXU Energy is currently
recovering, as Oncor recovers regulated decommissioning fees from retail
electric providers on behalf of TXU Energy and will be deferring such
differences as part of the regulatory cost-recovery process.
On a pro forma basis, prior to deregulation in January 2002, US Holdings'
earnings for the years ended December 31, 2001 and 2000 would not have been
impacted by the adoption of SFAS No. 143. Assuming SFAS No. 143 had been adopted
at the beginning of the periods, earnings for the year ended December 31, 2002
and the three months ended March 31, 2002 would have increased $6.5 million and
$1.5 million, respectively, and the liability for asset retirement obligations
as of December 31, 2001, March 31, 2002, and December 31, 2002, would have been
$522 million, $531 million and $554 million, respectively.
3. FINANCING ARRANGEMENTS
Credit Facilities -- At March 31, 2003, US Holdings had outstanding
short-term borrowings consisting of advances from affiliates of $1.2 billion and
bank borrowings of $500 million. Weighted average interest rates on short-term
borrowings were 2.39% and 2.44% at March 31, 2003 and December 31, 2002,
respectively.
During the first quarter of 2003, $1.3 billion in outstanding short-term
borrowings at December 31, 2002, were repaid with proceeds from the issuance of
long-term debt in March 2003 and cash flows from operations.
At March 31, 2003, US Holdings and its subsidiaries had credit facilities
(some of which provide for long-term borrowings) as follows:
At March 31, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
364-Day Revolving Credit Facility April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ 152 $ 500 $ 348
364-Day Senior Secured Credit Facility December 2003 Oncor 150 -- -- 150
Five -Year Revolving Credit Facility February 2005 US Holdings 1,400 371 -- 1,029
------- ------ ------ ------
Total US Holdings $ 2,550 $ 523 $ 500 $1,527
======= ====== ======= ======
In April 2003, all outstanding borrowings under the North America
credit facilities of TXU Corp. and its subsidiaries were repaid. A new $450
million revolving credit facility was established for TXU Energy and Oncor, that
matures on February 25, 2005. The new facility will be used for working capital
and other general corporate purposes, including commercial paper backup and
letters of credit, and replaces the $1 billion 364-day revolving credit facility
that expired in April 2003. Up to $450 million of letters of credit may be
issued under the facility.
6
In connection with the restructuring of the North America credit
facilities of TXU Corp. and its subsidiaries in April 2003:
o Oncor cancelled its undrawn $150 million secured 364-day credit facility
that was scheduled to expire in December 2003.
o US Holdings replaced TXU Corp. as the borrower under TXU Corp.'s
$500 million three-year revolving credit facility. Concurrently,
the facility was reduced to $400 million and TXU Corp. entered
into additional separate revolving credit facilities of $45
million and $55 million, each of which expires on May 1, 2005.
o US Holdings' $1.4 billion five-year revolving credit facility was
amended. Among other things, the amendment increased the amount of
letters of credit allowed to be issued under the facility to $1
billion from $500 million.
As a result of the repayments and other activities mentioned above, US
Holdings and its consolidated subsidiaries' credit facilities as of May 13, 2003
were as follows:
At May 13, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
Five-Year Revolving Credit Facility February 2005 US Holdings $ 1,400 $ 377 $ -- $1,023
Revolving Credit Facility February 2005 TXU Energy, Oncor 450 -- -- 450
Three-Year Revolving Credit Facility May 2005 US Holdings 400 -- -- 400
------- ------ ------ ------
Total US Holdings $ 2,250 $ 377 $ -- $1,873
In addition to providing back-up of commercial paper issuance by TXU
Energy and Oncor, the facilities above are for general corporate and working
capital purposes, including providing collateral support for TXU Energy
portfolio management activities. At March 31 and May 13, 2003, there was no
outstanding commercial paper under these programs.
7
Long-Term Debt -- At March 31, 2003 and December 31, 2002, the long-term
debt of US Holdings and its consolidated subsidiaries consisted of the
following:
March 31, December31,
--------- -----------
2003 2002
---- ----
TXU Energy
- ----------
Pollution Control Revenue Bonds:
Brazos River Authority:
Floating Taxable Series 1993 due June 1, 2023.......................................... $ -- $ 44
4.900% Fixed Series 1994A due May 1, 2029(b)........................................... 39 39
5.400% Fixed Series 1994B due May 1, 2029(b)........................................... 39 39
5.400% Fixed Series 1995A due April 1, 2030(b)......................................... 50 50
5.050% Fixed Series 1995B due June 1, 2030(b).......................................... 118 118
4.800% Fixed Series 1999A due April 1, 2033(b)......................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034(b)..................................... 16 16
7.700% Fixed Series 1999C due March 1, 2032(b)......................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030(b)....................................... 121 121
4.750% Fixed Series 2001B due May 1, 2029(b)........................................... 19 19
5.750% Fixed Series 2001C due May 1, 2036(b)........................................... 274 274
4.250% Fixed Series 2001D due May 1, 2033(b)........................................... 271 271
1.500% Floating Taxable Series 2001F due December 31, 2036(c).......................... 39 39
1.500% Floating Taxable Series 2001G due December 31, 2036(c).......................... 72 72
1.360% Floating Taxable Series 2001H due December 31, 2036(c).......................... 31 31
1.310% Floating Taxable Series 2001I due December 31, 2036(c).......................... 63 63
1.250% Floating Series 2002A due May 1, 2037(c)........................................ 61 61
6.750% Fixed Series 2003A due April 1, 2038(b)........................................ 44 --
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021............................................. 51 51
5.500% Fixed Series 2001A due May 1, 2022(b)........................................... 91 91
5.750% Fixed Series 2001B due May 1, 2030(b)........................................... 107 107
4.000% Fixed Series 2001C due May 1, 2028(b)........................................... 70 70
1.500% Floating Taxable Series 2001D due December 31, 2036(c).......................... 12 12
1.360% Floating Taxable Series 2001E due December 31, 2036(c).......................... 45 45
Trinity River Authority of Texas:
4.900% Fixed Series 2000A due May 1, 2028(b)........................................... 14 14
5.000% Fixed Series 2001A due May 1, 2027(b)........................................... 37 37
Other:
7.000% Fixed Senior Notes - TXU Mining Company LP due May 1, 2003...................... 72 72
6.875% Fixed Senior Notes - TXU Mining Company LP due August 1, 2005................... 30 30
9.000% Fixed Exchangeable Subordinated Notes due November 22, 2012..................... 750 750
6.125% Fixed Senior Notes due March 15, 2008........................................... 250 --
7.000% Fixed Senior Notes due March 15, 2013........................................... 1,000 --
Capital lease obligations.............................................................. 10 10
Other.................................................................................. 8 8
Unamortized premium and discount....................................................... (270) (264)
------ -----
Total TXU Energy .................................................................. 3,695 2,451
------ -----
US Holdings
- -----------
7.170% Fixed Senior Debentures due August 1, 2007...................................... 10 10
9.556% Fixed Notes due in bi-annual installments through December 4, 2019.............. 73 73
8.254% Fixed Notes due in quarterly installments through December 31, 2021............. 67 68
2.150% Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037(a).. 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037............. 8 8
------ ------
Total US Holdings ................................................................. 159 160
------ ------
8
March 31, December 31,
--------- -----------
2003 2002
---- ----
Oncor
- ------
9.530% Fixed Medium Term Secured Notes due January 30, 2003............................ -- 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003........................... -- 11
6.750% Fixed First Mortgage Bonds due March 1, 2003.................................... -- 133
6.750% Fixed First Mortgage Bonds due April 1, 2003.................................... 70 70
8.250% Fixed First Mortgage Bonds due April 1, 2004.................................... 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004.................................. 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005..................................... 92 92
7.875% Fixed First Mortgage Bonds due March 1, 2023.................................... 224 224
8.750% Fixed First Mortgage Bonds due November 1, 2023................................. -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.................................... 133 133
7.625% Fixed First Mortgage Bonds due July 1, 2025..................................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025.................................. 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012...................................... 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032...................................... 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015................................. 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033................................. 350 350
5.000% Fixed Debentures due September 1, 2007.......................................... 200 200
7.000% Fixed Debentures due September 1, 2022.......................................... 800 800
Unamortized premium and discount and fair value adjustments............................ (32) (35)
------ -------
Total Oncor....................................................................... 4,151 4,399
------ -------
Total US Holdings consolidated........................................................ 8,005 7,010
Less amount due currently............................................................. 147 397
------ -------
Total Long-Term Debt............................................................. $ 7,858 $ 6,613
======= =======
NOTES:
------
(a) Interest rates in effect at March 31, 2003.
(b) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such
date, a new interest rate and interest rate period will be reset for
the bonds.
(c) Interest rates in effect at March 31, 2003. These series are in a
flexible or weekly rate mode and are classified as long-term as they
are supported by long-term irrevocable letters of credit. Series in
the flexible mode will be remarketed for periods of less than
270 days.
In early March 2003, TXU Energy issued $1.25 billion aggregate principal
amount of senior unsecured notes in two series in a private placement with
registration rights. One series in the amount of $250 million is due March 15,
2008, and bears interest at the annual rate of 6.125%, and the other series in
the amount of $1 billion is due March 15, 2013, and bears interest at the annual
rate of 7%. Net proceeds from the issuance were used for general corporate
purposes, including the repayment of borrowings under credit facilities.
In March 2003, Oncor redeemed all ($103 million principal amount) of its
First Mortgage and Collateral Trust Bonds, 8.75% Series due November 1, 2023, at
104.01% of the principal amount thereof, plus accrued interest to the redemption
date.
In March 2003, Oncor redeemed all ($133 million principal amount) of its
First Mortgage Bonds, 6.75% Series, at the maturity date for par value plus
accrued interest. A restricted cash deposit of $138 million was utilized to fund
the redemption.
In March 2003, the Brazos River Authority issued $44 million aggregate
principal amount of pollution control revenue bonds for TXU Energy. The bonds
will bear interest at the annual rate of 6.75% until the mandatory tender date
of April 1, 2013. On April 1, 2013, the bonds will be remarketed. Proceeds from
the issuance of the bonds were used to refund the entire principal amount of
Brazos River Authority Series 1993 pollution control revenue bonds due June 1,
2023.
In March 2003, the Brazos River Authority Series 1999B and 1999C pollution
control revenue bonds (aggregate principal amount of $66 million) were converted
from a floating rate mode to a multiannual mode at annual rates of 6.75% and
7.70%, respectively. These rates will remain in effect until 2013 at which time
they will be remarketed and the 1999C bonds will be callable.
9
In April 2003, the Brazos River Authority Series 1999A pollution control
revenue bonds were remarketed. The bonds now bear interest at a fixed annual
rate of 7.70% and are callable beginning on April 1, 2013 at a price of 101%
until March 31, 2014 and at 100% thereafter.
In April 2003, Oncor redeemed all ($70 million principal amount) of its
First Mortgage Bonds, 6.75% Series, at the maturity date for par value plus
accrued interest. The remaining restricted cash deposit of $72 million was
utilized to fund the redemption.
On May 1, 2003, $72 million principal amount of the 7% TXU Mining Company
LP (TXU Mining) fixed rate senior notes were repaid on maturity.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary of TXU Corp., which sells undivided interests in accounts receivable
it purchases to financial institutions. As of March 31, 2003, TXU Energy
(through certain subsidiaries), Oncor and TXU Gas Company (TXU Gas) are
qualified originators of accounts receivable under the program. TXU Receivables
Company may sell up to an aggregate of $600 million in undivided interests in
the receivables purchased from the originators under the program. As of March
31, 2003, $1.043 billion face amount of US Holdings' receivables were sold to
TXU Receivables Company under the program in exchange for cash of $260 million
and $778 million in subordinated notes, with $5 million of losses on sales for
the three months ended March 31, 2003 that principally represents the interest
costs on the underlying financing. These losses approximated 6% of the cash
proceeds from the sale of undivided interests in accounts receivable on an
annualized basis. Funding under the program decreased from $368 million at
December 31, 2002 to $260 million at March 31, 2003 primarily due to reserve
requirements which apply factors from the prior 12-month period in determining
the current period reserve. This period reflects the billing and collection
delays previously experienced as a result of new systems and processes in TXU
Energy and the Electric Reliability Council of Texas (ERCOT) for clearing
customers switching and billing data upon the transition to competition.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services Company, a subsidiary of TXU
Corp., services the purchased receivables and is paid a market based servicing
fee by TXU Receivables Company. The subordinated notes receivable from TXU
Receivables Company represent US Holdings' subsidiaries' retained interests in
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was amended to allow receivables that are 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
Contingencies Related to Receivables Program -- Although TXU Receivables
Company expects to be able to pay its subordinated notes from the collections of
purchased receivables, these notes are subordinated to the undivided interests
of the financial institutions in those receivables, and collections might not be
sufficient to pay the subordinated notes. The program may be terminated if
either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB- by
Standard & Poor's (S&P) or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination.
10
The delinquency and dilution ratios exceeded the relevant thresholds during
the first quarter of 2003, but waivers were granted. These ratios were affected
by issues related to the transition to deregulation. Certain billing and
collection delays arose due to implementation of new systems and processes
within TXU Energy and ERCOT for clearing customer switching and billing data.
The billing delays have been resolved but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios into consistent compliance with the program.
Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivable under the program. If all originators and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
The accounts receivable program also contains a cross-default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross-default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of US Holdings and its
consolidated subsidiaries contain financial covenants that require maintenance
of specified fixed charge coverage ratios, shareholders' equity to total
capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. TXU Energy's exchangeable subordinated notes also limit its
incurrence of additional indebtedness unless a leverage ratio and interest
coverage test are met on a pro forma basis. As of March 31, 2003, US Holdings
and its subsidiaries were in compliance with all such applicable covenants.
Certain financing and other arrangements of US Holdings and its
subsidiaries contain provisions that are specifically affected by changes in
credit ratings and also include cross default provisions. The material cross
default provisions are described below.
Other agreements of US Holdings and its subsidiaries, including some of
the credit facilities discussed above, contain terms pursuant to which the
interest rates charged under the agreements may be adjusted depending on the
credit ratings of US Holdings or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of US Holdings and its subsidiaries contain
provisions that would result in an event of default if there is a failure under
other financing arrangements to meet payment terms or to observe other covenants
that would result in an acceleration of payments due. Such provisions are
referred to as "cross default" provisions.
TXU Corp.'s $45 million and $55 million revolving facilities, which
provide back-up for any Oncor and TXU Energy commercial paper issuances, contain
a cross default provision with respect to any default by TXU Corp. or any US
subsidiary thereof in respect of any indebtedness in a principal amount in
excess of $50 million.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross-default under the
$1.4 billion US Holdings five-year revolving credit facility, the $400 million
US Holdings credit facility, the $68.1 million US Holdings letter of credit
reimbursement and credit facility agreement and $102 million of TXU Mining
senior notes (which have a $1 million threshold).
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess of $50 million or more would result
in a cross-default for such party under the TXU Energy/Oncor $450 million
revolving credit facility. Under this credit facility, a default by TXU Energy
or any subsidiary thereof would cause the maturity of outstanding balances under
such facility to be accelerated as to TXU Energy, but not as to Oncor. Also,
under this credit facility, a default by Oncor or any subsidiary thereof would
cause the maturity of outstanding balances to be accelerated under such facility
as to Oncor, but not as to TXU Energy.
11
A default or similar event under the terms of TXU Energy's exchangeable
subordinated notes (or any security of TXU Energy or its subsidiaries issued
directly or indirectly upon the conversion, exchange or extension (in whole or
in part) of such notes) that results in the acceleration (or other mandatory
repayment prior to the maturity date) of such notes or such other security or
the failure to pay such notes or such other security at maturity would result in
a default under TXU Energy's $1.25 billion senior unsecured notes.
TXU Energy has entered into certain mining and equipment leasing
arrangements aggregating $124 million that would terminate upon the default of
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
TXU Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if TXU Energy were to
default under an obligation in respect of borrowings in excess of thresholds
stated in the contracts, which thresholds vary.
US Holdings and its subsidiaries have other arrangements, including
interest rate and currency swap agreements and leases with cross default
provisions, the triggering of which would not result in a significant effect on
liquidity.
4. SHAREHOLDERS' EQUITY
March 31, December 31,
2003 2002
--------- -----------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption......... $ 115 $ 115
------ ------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: March 31, 2003
and December 31, 2002-- 52,817,862 ...................... 2,514 2,514
Retained earnings............................................. 4,290 4,261
Accumulated other comprehensive loss.......................... (217) (188)
------ ------
Total common stock equity........................... 6,587 6,587
------ ------
Total shareholders' equity.......................... $6,702 $6,702
====== ======
On November 15, 2002, US Holdings declared a cash dividend of $250 million
which was paid to TXU Corp. on January 2, 2003. On April 1, 2003, US Holdings
repurchased 6,250,000 shares of its common stock from TXU Corp. and TXU Energy
Industries Company, the holders of all of its outstanding common stock, for a
purchase price of $40.00 per share.
5. CONTINGENCIES
Guarantees -- US Holdings has entered into contracts that contain
guarantees to outside parties that could require performance or payment under
certain conditions. These guarantees have been grouped based on similar
characteristics and are described in detail below.
Project development guarantees -- In 1990, US Holdings repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. US Holdings is making principal and interest payments to the
co-op in an amount sufficient for the co-op to make payments on its
12
indebtedness. US Holdings guaranteed the co-op's payments, and in the event that
the co-op fails to make its payments on the indebtedness, the US government
would assume the co-op's rights under the agreement, and such payments would
then be owed directly by US Holdings. At March 31, 2003, the balance of the
indebtedness was $140 million with maturities of principal and interest
extending to December 2021. The indebtedness is secured by a lien on the
purchased facilities.
Residual value guarantees in operating leases -- US Holdings is the lessee
under various operating leases that obligate it to guarantee the residual values
of the leased facilities. At March 31, 2003, the aggregate maximum amount of
residual values guaranteed was approximately $275 million with an estimated
residual recovery of approximately $211 million. The average life of the lease
portfolio is approximately nine years.
Shared saving guarantees -- US Holdings has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In aggregate, the average annual savings has exceeded
the annual savings guaranteed. The maximum potential annual payout is
approximately $9 million and the maximum total potential payout is approximately
$56 million. The fair value of guarantees issued during the three months ended
March 31, 2003 was $1.8 million with a maximum potential payout of $42 million.
The average remaining life of the portfolio is approximately five years.
Standby letters of credit -- US Holdings has entered into various
agreements that require letters of credit for financial assurance purposes.
Approximately $523 million of letters of credit were outstanding at March 31,
2003, to support existing floating rate pollution control revenue bond debt of
approximately $432 million. The letters of credit are available to fund the
payment of such debt obligations. These letters of credit have expiration dates
in 2003 and 2004; however, US Holdings intends to provide from either existing
or new facilities for the extension, renewal or substitution of these letters of
credit to the extent required for such floating rate debt or their remarketing
as fixed rate debt. In April 2003, approximately $173 million of the $523
million of letters of credit referenced above were terminated as a result of the
refinancing of approximately $110 million of floating rate pollution control
revenue bonds.
US Holdings has outstanding letters of credit in the amount of $111
million to support portfolio management margin requirements in the normal
course of business. As of March 31, 2003, approximately 78% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the second year.
Other - US Holdings has entered into contracts with public agencies to
purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $16 million at March 31, 2003,
and interest on bonds issued by the agencies to finance the reservoirs from
which the water is supplied. The bonds mature at various dates through 2011 and
have interest rates ranging from 5.50% to 7.00%. US Holdings is required to
make periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US
Holdings is obligated to pay certain variable costs of operating and
maintaining the reservoirs. US Holdings has assigned to a municipality all its
contract rights and obligations in connection with $19 million remaining
principal amount of bonds at March 31, 2003, issued for similar purposes, which
had previously been guaranteed by US Holdings. US Holdings is, however,
contingently liable in the unlikely event of default by the municipality.
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. 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. On April 10, 2003, the District Court entered an
order denying the plaintiffs' motion seeking certification of a class. No amount
13
of damages has been specified in the petition with respect to TXU Gas or TXU
Fuel, and neither TXU Gas nor TXU Fuel have purchased natural gas from the named
plaintiffs in the litigation. 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 April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management Company LP (TXU Portfolio Management), in the United States
District Court for the Northern District of Texas, Dallas Division, against TXU
Corp., TXU Energy and TXU Portfolio Management. Plaintiff asserts claims under
Section 806 of the Sarbanes Oxley-Act of 2002 (Sarbanes-Oxley) arising from
plaintiff's employment termination and claims for breach of contract relating to
payment of certain bonuses. Plaintiff seeks back pay, payment of bonuses and
alternatively, reinstatement or future compensation, including bonuses. US
Holdings believes the plaintiff's claims are without merit. The plaintiff was
terminated as the result of a reduction in force, not as a reaction to any
concerns the plaintiff had expressed and plaintiff was not in a position with
TXU Portfolio Management such that he had knowledge or information that would
qualify the plaintiff to evaluate TXU Corp.'s financial statements or assess the
adequacy of TXU Corp.'s financial disclosures. Thus, US Holdings does not
believe that there is any merit to the plaintiff's claims under Sarbanes-Oxley.
Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management intend to
vigorously defend the litigation. While TXU Corp., TXU Energy and TXU Portfolio
Management dispute the plaintiff's claims, like any litigation, US Holdings is
unable to predict the outcome of this litigation or the possible loss in the
event of an adverse judgment.
US Holdings is involved in various legal and administrative proceedings,
the ultimate resolution of which should not have a material effect upon its
financial position, results of operations or cash flows.
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that 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.
6. SEGMENT INFORMATION
US Holdings has two reportable business segments: TXU Energy and Oncor.
TXU Energy (formerly Energy segment) - consists of operations which are
principally in the competitive Texas market, and involving power production,
wholesale energy sales, retail energy sales and services, and portfolio
management, including risk management and certain trading activities.
Oncor (formerly Electric Delivery segment) - consists of regulated
operations in Texas involving the transmission and distribution of
electricity.
Effective with reporting for the three months ended March 31, 2003,
results for the TXU Energy segment exclude expenses incurred by the US Holdings
holding company in order to present the segment on the same basis as the
separate reporting for TXU Energy Company LLC and as results of the business are
evaluated by management. The activities of the holding company consist primarily
of servicing of approximately $160 million of debt. Prior year amounts are
presented on the revised basis.
14
Three Months Ended
March 31,
-----------------
2003 2002
---- ----
Operating revenues:
TXU Energy ..................................................... $ 1,806 $ 1,799
Oncor .......................................................... 506 494
Eliminations ................................................... (380) (416)
------- -------
Consolidated ............................................. $ 1,932 $ 1,877
======= =======
Regulated revenues included in operating revenues:
TXU Energy ..................................................... $ -- $ --
Oncor .......................................................... 506 494
Eliminations ................................................... (377) (416)
------- -------
Consolidated ............................................. $ 129 $ 78
======= =======
Affiliated revenues included in operating revenues:
TXU Energy ..................................................... $ 3 $ --
Oncor .......................................................... 377 416
Eliminations ................................................... (380) (416)
------- -------
Consolidated ............................................. $ -- $ --
======= =======
Income before cumulative effect of changes in accounting principles:
TXU Energy ..................................................... $ 35 $ 187
Oncor .......................................................... 61 71
Other .......................................................... (7) (5)
------- -------
Consolidated ............................................. $ 89 $ 253
======= =======
7. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended
March 31,
----------------------
2003 2002
---- ----
Operating revenues:
Regulated ....................................................... $ 506 $ 494
Unregulated ..................................................... 1,806 1,799
Intercompany sales eliminations - regulated ..................... (377) (416)
Intercompany sales eliminations - unregulated ................... (3) --
------- -------
Total operating revenues ................................... 1,932 1,877
------- -------
Costs and operating expenses:
Cost of energy sold and delivery fees - unregulated* ............ 838 525
Operating costs - regulated ..................................... 173 152
Operating costs - unregulated ................................... 193 162
Depreciation and amortization - regulated ....................... 69 64
Depreciation and amortization - unregulated ..................... 113 119
Selling, general and administrative expenses - regulated ........ 49 57
Selling, general and administrative expenses - unregulated ...... 144 220
Franchise and revenue-based taxes - regulated ................... 60 66
Franchise and revenue-based taxes - unregulated ................. 33 34
Other income .................................................... (9) (3)
Other deductions ................................................ 1 3
Interest income ................................................. (5) (1)
Interest expense and other charges .............................. 151 105
------- -------
Total costs and expenses ................................... 1,810 1,503
------- -------
Income before income taxes .......................................... $ 122 $ 374
======= =======
* Includes cost of fuel consumed of $413 million in 2003 and $259 million
in 2002. The balance represents energy purchased for resale and
delivery fees.
The operations of the TXU Energy segment are included above as
unregulated, as the Texas market is now open to competition. However, retail
pricing to residential and small business customers in its historical service
territory continues to be subject to certain price controls.
15
Other Income and Deductions --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Other income:
Net gain on sale of businesses.......................... $ 6 $ -
Lignite coal royalties.................................. - 2
Allowance for funds used during construction............ 1 1
Other.............................................. 2 -
-------- --------
Total other income.................................. $ 9 $ 3
======== ========
Other deductions:
Equity in losses of unconsolidated subsidiaries......... $ - $ 1
Other.............................................. 1 2
-------- --------
Total other deductions.............................. $ 1 $ 3
======== ========
Interest Expense and Related Charges --
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Interest...................................................... $ 146 $ 103
Amortization of deferred debt costs........................... 8 5
Allowance for borrowed funds used during construction
and capitalized interest.................................. (3) (3)
------ -----
Total interest expense and other related charges...... $ 151 $ 105
===== =====
Regulatory Assets and Liabilities --
March 31, December 31,
2003 2002
---- ----
Regulatory Assets:
Generation-related regulatory assets subject to securitization. $1,652 $1,652
Securities reacquisition costs................................. 125 124
Recoverable deferred income taxes-- net........................ 77 76
Other regulatory assets........................................ 115 46
------- ------
Total regulatory assets.................................... 1,969 1,898
------- ------
Regulatory Liabilities:
Liability related to excess mitigation credit.................. 125 170
ITC and protected excess deferred taxes........................ 95 98
------- ------
Total regulatory liabilities............................... 220 268
------- ------
Net regulatory assets...................................... $1,749 $1,630
====== ======
Included above are assets of $1.8 billion at March 31, 2003 and December
31, 2002, that were not earning a return. Of the assets not earning a return,
$1.652 billion is expected to be recovered over the term of the securitization
bonds expected to be issued by Oncor in 2003 and 2004 pursuant to the regulatory
settlement plan approved by the Commission. All other regulatory assets
have a remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of March 31, 2003 was $57 million
related to nuclear decommissioning liabilities. (See Note 2 for a discussion of
the accounting impact of recording asset retirement obligations.)
16
Restricted Cash -- At March 31, 2003, approximately $72 million of the net
proceeds from Oncor's issuance of senior secured notes in December 2002 remained
in a trust to pay interest and principal of First Mortgage Bonds of Oncor due on
April 1, 2003, and was reported in current assets on the balance sheet. Other
restricted cash included $69 million as collateral for letters of credit issued
and was reported in investments on the balance sheet.
Accounts Receivable -- At March 31, 2003 and December 31, 2002, accounts
receivable are stated net of allowance for uncollectible accounts of $67 million
and $72 million, respectively.
Accounts receivable included $467 million and $505 million of unbilled
revenues at March 31, 2003 and December 31, 2002, respectively.
Intangible Assets -- SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for US Holdings on January 1, 2002. SFAS No. 142 requires,
among other things, the allocation of goodwill to reporting units based upon the
current fair value of the reporting units, and the discontinuance of goodwill
amortization. SFAS No. 142 also requires additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
As of March 31, 2003 As of December 31, 2002
------------------------------ ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
Amortized intangible assets (included in
property, plant and equipment):
Capitalized software.............. $380 $148 $232 $368 $131 $237
Land easements.................... 179 61 118 180 61 119
Mineral rights and other.......... 31 20 11 31 20 11
------ ------ ------ ------ ------ ------
Total....................... $590 $229 $361 $579 $212 $367
==== ==== ==== ==== ==== ====
Aggregate US Holdings amortization expense for intangible assets was $15
million for the three months ended March 31, 2003 and 2002, respectively.
At March 31, 2003 and December 31, 2002, goodwill of $558 million was
stated net of accumulated amortization of $67 million.
Commodity Contracts -- At March 31, 2003 and December 31, 2002, current
and noncurrent commodity contract assets totaling $1.8 billion are stated net of
applicable credit (collection) and performance reserves totaling $38 million and
$43 million, respectively. Performance reserves are provided for direct,
incremental costs to settle the contracts.
Inventories by Major Category --
March 31, December 31,
2003 2002
-------- ---------
Materials and supplies...................................... $212 $ 211
Fuel stock.................................................. 64 70
Gas stored underground...................................... 36 57
------ -------
Total inventories....................................... $312 $ 338
==== =====
Inventories were reduced by $22 million as a result of the rescission of
EITF Issue No. 98-10 as discussed in Note 2.
Property, plant and equipment -- At March 31, 2003 and December 31, 2002,
property, plant and equipment was stated net of accumulated depreciation and
amortization of approximately $10.4 billion.
17
As of March 31, 2003, substantially all of Oncor's electric utility
property and equipment (with a net book value of $6.1 billion) was pledged as
collateral for Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- US Holdings experienced net hedge
ineffectiveness of $6 million, reported as a gain in revenues, for the three
months ended March 31, 2003.
As of March 31, 2003, it is expected that $82 million of after-tax net
losses accumulated in other comprehensive income primarily related to
commodities hedges will be reclassified into earnings during the next twelve
months. This amount represents the projected value of the hedges over the next
twelve months relative to what would be recorded if the hedge transactions had
not been entered into. The amount expected to be reclassified is not a
forecasted loss incremental to normal operations, but rather it demonstrates the
extent to which volatility in earnings (which would otherwise exist) is
mitigated through the use of cash flow hedges.
Affiliate Transactions -- The following represent significant affiliate
transactions of US Holdings:
Average daily short-term advances from affiliates during the first three
months of 2003 and 2002 were $869 million and $1.3 billion, respectively, and
interest expense incurred on the advances was $5 million and $11 million,
respectively. The average interest rates for the first three months of 2003 and
2002 were 2.33% and 3.09%, respectively.
TXU Business Services Company, a subsidiary of TXU Corp., charges US
Holdings for certain financial, accounting, information technology,
environmental, procurement and personnel services and other administrative
services at cost. For the first three months of 2003 and 2002, these costs
totaled $89 million and $105 million, respectively, and are included in selling,
general and administrative expenses.
US Holdings charges TXU Gas, a subsidiary of TXU Corp., for customer and
administrative services. For the first three months of 2003 and 2002, these
charges totaled $15 million and $14 million, respectively, and are largely
reported as a reduction in selling, general and administrative expenses.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS No. 143, which was a noncash transaction.
18
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company and subsidiaries (US Holdings) as of March 31, 2003, and the
related condensed statements of consolidated income, comprehensive income and
cash flows for the three-month periods ended March 31, 2003 and 2002. These
financial statements are the responsibility of US Holdings' management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of US
Holdings as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report (which includes an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 142), dated February 14, 2003 (and March 19, 2003 as to
Note 18 therein), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 2 to the Notes to Financial Statements, US Holdings changed
its method of accounting for asset retirement obligations in 2003 in connection
with the adoption of Statement of Financial Accounting Standards No. 143, "Asset
Retirement Obligations" and changed its method for accounting for certain
contracts with the rescission of Emerging Issues Task Force Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 2003
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
TXU US Holdings Company (US Holdings) 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.
US Holdings engages, through TXU Energy, in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, as well as, through Oncor in the transmission and
distribution (T&D) of electricity.
US Holdings' consolidated operations consist of its TXU Energy and Oncor
business segments and the activity of the holding company, which consists
primarily of servicing approximately $160 million in debt.
The term "US Holdings" refers to US Holdings and/or its consolidated
subsidiaries, depending on the context.
Dollar amounts in the following tables are stated in millions of US
dollars, unless otherwise noted.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Reference is made to comparisons of results by business segment following
the discussion of consolidated results presented below.
US Holdings' operating revenues increased $55 million, or 3%, to $1.9
billion in 2003. The revenue growth reflected an increase in the Oncor segment
of $12 million, or 2%, and a nominal increase in the TXU Energy segment of $7
million. The balance of the revenue growth, $36 million, reflected a lower
intercompany sales elimination between the two segments, as sales by the Oncor
segment to unaffiliated retail electric providers (REPs) have increased with the
opening of the Texas market to competition on January 1, 2002. Revenue growth in
the Oncor segment was driven by increased disconnect/reconnect fees, due to
greater competition-related customer switching activities, and growth in points
of delivery. Revenue performance in the TXU Energy segment reflected lower large
commercial/industrial retail sales due to declines in volume and pricing offset
by favorable results from portfolio management activities and increased
wholesale pricing and sales volumes.
Gross Margin
Three Months Ended
March 31,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
Operating revenues..................................... $ 1,932 100% $ 1,877 100%
Cost and expenses:
Cost of energy sold and delivery fees............. 838 43% 525 28%
Operating costs................................... 366 19% 314 17%
Depreciation and amortization related to operating
assets........................................ 168 9% 163 9%
------- ----- ------- ------
Gross margin........................................... $ 560 29% $ 875 46%
======= ===== ======= ======
20
Gross margin decreased $315 million, or 36%, to $560 million in 2003. This
decline was driven by the TXU Energy segment, reflecting lower volumes and
prices in the large commercial/industrial retail electric business, as well as
the effect of higher natural gas costs on fuel and purchased power costs, and
higher operating costs, partially offset by favorable results from portfolio
management activities. Mark-to-market accounting for commodity contracts reduced
revenues and gross margin by $23 million in 2003 (as compared to accounting on a
settlement basis), and reduced results by $146 million in 2002. Operating costs
rose $52 million, or 17%, to $366 million primarily due to employee severance
cost, higher pension and postemployment costs, increased insurance expenses,
higher operating costs in the small strategic retail services business and
higher transmission costs paid to other utilities.
Effective with the second quarter of 2003, TXU Energy expects to adjust
depreciation rates related to its generation facilities, based on a review of
the remaining depreciable lives of its generation fleet. This change in estimate
is anticipated to result in a reduction of approximately $50 million in annual
depreciation expense and is due primarily to an extension in the estimated
useful life of its nuclear generation facility of approximately 11 years (to
2041), partially offset by higher depreciation expense in lignite and gas
facilities.
Selling, general and administrative (SG&A) expense decreased $84 million,
or 30%, to $193 million in 2003. The decrease was driven by the TXU Energy
segment and reflected lower bad debt expense and cost reduction initiatives. Bad
debt expense declined primarily due to the favorable resolution of most billing
issues experienced in 2002 in connection with the transition to competition in
Texas. Cost reductions, primarily lower staffing and related administrative
expenses, were initiated in response to the completion of the transition to
competition in Texas, the industry-wide decline in portfolio management
activities and the expected deferral of deregulation of energy markets in other
states. The effects of these cost reduction initiatives were partially offset by
employee severance costs and higher computer software costs and marketing
expenses. Favorable comparisons of SG&A expenses are expected to continue over
the balance of 2003.
Franchise and revenue-based taxes decreased $7 million, or 7%, to $93
million due primarily to lower retail revenues on which gross receipts taxes are
based.
Other income increased $6 million to $9 million in 2003, primarily
reflecting a net $6 million gain on the sale of certain retail commercial and
industrial gas operations.
Other deductions decreased $2 million to $1 million in 2003 due primarily
to lower equity losses from an unconsolidated investment.
Interest income increased $4 million to $5 million in 2003, primarily
reflecting higher cash balances on hand as credit facilities were drawn down in
the fourth quarter of 2002 to enhance liquidity.
Interest expense and other charges increased $46 million, or 44%, to $151
million in 2003. The increase reflects $32 million due to higher average debt
levels resulting from funds drawn under the credit facilities, $10 million
increase due to higher average interest rates resulting from the replacement of
short-term debt with permanent financing, including credit line fees and $4
million increase due to the amortization of discount on the TXU Energy
exchangeable subordinated notes.
The effective income tax rate was 27.0% in 2003 compared to 32.4% in 2002.
The decrease was driven by the effect of comparable (to 2002) tax benefit
amounts of depletion allowances and amortization of investment tax credits on a
lower income base in 2003.
Income before cumulative effect of changes in accounting principles
declined $164 million, or 65%, to $89 million in 2003. This performance
reflected a decline of $152 million, or 81%, to $35 million in the TXU Energy
segment driven by the decreased gross margin and higher interest expense,
partially offset by decreased SG&A expenses, and a decline of $10 million, or
14%, to $61 million in the Oncor segment. TXU Energy's 2003 results also
reflected a $16 million (after tax) gain, primarily reported in revenues, on the
settlement of outstanding counterparty default events and $11 million (after
tax) in severance charges. Net pension and postretirement benefit costs reduced
net income by $17 million in 2003 and $10 million in 2002.
21
The cumulative effect of changes in accounting principles, representing an
after-tax charge of $58 million, reflects the rescission of Emerging Issues Task
Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," and the adoption of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." See Note 2 to Financial Statements for further discussion.
COMMODITY CONTRACT AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the three months ended March 31, 2003. The net decrease,
excluding "cumulative effect of change in accounting principle" and "other
activity" as described below, of $23 million represents the net unfavorable
effect of mark-to-market accounting on earnings for the three months ended
March 31, 2003. This effect represents the difference between earnings under
mark-to-market accounting versus accounting for gains and losses upon
settlement of the contracts.
Balance of net commodity contract assets/(liabilities) at December 31, 2002... $ 316
Cumulative effect of change in accounting principle (1) ...................... (75)
Settlements of positions included in the opening balance (2) ................. (56)
Unrealized mark-to-market valuations of positions held at end of period (3)... 33
Other activity (4)............................................................ (34)
------
Balance of net commodity contract assets at March 31, 2003 ................... $ 184
======
(1) Represents a portion of the pre-tax cumulative effect of the rescission of
EITF Issue No. 98-10. (See Note 2 to Financial Statements).
(2) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the period.
(3) There were no significant changes in fair value attributable to changes
in valuation techniques.
(4) Represents net option premiums paid/(received) in the
current period and the sale of certain retail commercial and
industrial gas operations. These activities have no effect on
unrealized mark-to-market valuations.
As a result of guidance in EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities," US Holdings has not
recognized origination gains on commercial/industrial retail contracts in 2003.
(See Note 1 to Financial Statements.)
Maturity Table -- Of the net commodity contract asset balance above at
March 31, 2003, the amount representing unrealized mark-to-market net gains that
have been recognized in current and prior periods' earnings is $232 million. The
offsetting net liability of $48 million included in the March 31, 2003 balance
consists of unamortized net option premiums received. The following table
presents the unrealized mark-to-market balance at March 31, 2003 scheduled by
contractual settlement dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at March 31, 2003
---------------------------------------------------------------------------
Maturity Maturity in
less than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years 5 years Total
---------------------- ------------ ------------ ------------ --------- -----
Prices actively quoted.. $ 4 $ (1) $ -- $ -- $ 3
Prices provided by other
external sources...... 96 60 11 2 169
Prices based on models.. 46 14 -- -- 60
---- ---- ---- ---- ----
Total................... $146 $ 73 $ 11 $ 2 $232
==== ==== ==== ==== ====
Percentage of total .... 63% 31% 5% 1% 100%
As the above table indicates, approximately 94% of the unrealized
mark-to-market valuations at March 31, 2003 mature within three years. This is
reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
22
contracts with active quotes available through 2005. The "prices provided by
other external sources" category represents forward commodity positions at
locations for which over-the-counter (OTC) broker quotes are available. OTC
quotes for power and natural gas generally extend through 2005 and 2010,
respectively. The "prices based on models" category contains the value of all
non-exchange traded options, valued using industry accepted option pricing
models. In addition, this category contains other contractual arrangements,
which may have both forward and option components. In many instances, these
contracts can be broken down into their component parts and modeled by US
Holdings as simple forwards and options based on prices actively quoted. As the
modeled value is ultimately the result of a combination of prices from two or
more different instruments, it has been included in this category.
SEGMENTS
Financial Results
TXU Energy
- ----------
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
Operating revenues..................................... $ 1,806 $ 1,799
------- -------
Costs and expenses:
Cost of energy sold and delivery fees............................ 1,218 941
Operating costs.................................................. 193 162
Depreciation and amortization.................................... 113 119
Selling, general and administrative expenses..................... 144 220
Franchise and revenue-based taxes................................ 28 30
Other income..................................................... (8) (2)
Other deductions................................................ 2 3
Interest income.................................................. (2) (9)
Interest expense and other charges............................... 77 59
------- -------
Total costs and expenses .................................... 1,765 1,523
------- -------
Income before income taxes and cumulative effect of changes in
accounting principles.............................................. 41 276
Income tax expense.................................................. 6 89
------- -------
Income before cumulative effect of changes in accounting principles.. $ 35 $ 187
======= =======
23
Segment Highlights
Three Months Ended
March 31,
-------------------
2003 2002
---- ----
Operating statistics
Retail electric sales volumes (Gigawatt hours-- GWh)................... 19,398 22,386
Wholesale electric sales volumes (GWh)................................. 7,451 6,199
Retail electric customers (end of period and in thousands - number of
meters).............................................................. 2,701 2,756
Three Months Ended
March 31,
---------------------
2003 2002
---- ----
Operating revenues (millions of dollars)
Retail electric:
Residential........................................................... $ 684 $ 695
Commercial and industrial............................................. 748 1,050
----- ------
Total........................................................ 1,432 1,745
----- -----
Wholesale electric .................................................... 237 146
Wholesale energy portfolio management activities...................... 91 (63)
Other revenues......................................................... 46 (29)
------ ------
Total operating revenues..................................... $1,806 $1,799
====== ======
Weather (average for service area)
Percent of normal:
Cooling degree days....................................... 50.0% 94.1%
Heating degree days....................................... 106.6% 101.5%
- -----------------------
Weather data is obtained from Meterlogix, a private company that collects
weather data from reporting stations of the National
Oceanic and Atmospheric Administration (a federal agency under the US
Department of Commerce).
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
Effective with reporting for the three months ended March 31, 2003,
results for the TXU Energy segment exclude expenses incurred by the US Holdings
holding company in order to present the segment on the same basis as the
separate reporting for TXU Energy Company LLC and as results of the business are
evaluated by management. The activities of the holding company consist primarily
of servicing of approximately $160 million of debt. Prior year amounts are
presented on the revised basis.
Operating revenues for the TXU Energy segment increased a nominal $7
million to $1.8 billion in 2003. Retail electric revenues declined $313 million,
or 18%, to $1.4 billion, reflecting a $233 million reduction due to lower
volumes and an $80 million reduction due to lower average prices. A 13% decline
in overall retail electric sales volumes was primarily due to the effects of
increased competitive activity in the large commercial and industrial segment of
the market. The price variance primarily reflects lower average commercial and
industrial prices, reflecting the effect of large customers remaining on
regulated or "standard offer" rates, some into the second quarter of 2002, while
evaluating competitive offers before contracting at new, lower rates. Wholesale
electric revenues increased $91 million, or 62%, to $237 million reflecting a
$61 million increase due to higher average prices and a $30 million increase due
to higher volumes. Higher wholesale electric prices reflect significantly higher
natural gas costs. The increase in wholesale electric volumes reflected a
partial shift in the large commercial and industrial customer base from retail
to wholesale services. Wholesale portfolio management activities posted a net
improvement of $154 million due to the effect of favorable price movements on
commodity contract positions.
24
Gross Margin
Three Months Ended
March 31,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 1,806 100% $ 1,799 100%
Cost and expenses:
Cost of energy sold and delivery fees............. 1,218 67% 941 52%
Operating costs................................... 193 11% 162 9%
Depreciation and amortization related to operating
assets........................................ 102 6% 101 6%
------- ----- ------- ------
Gross margin........................................... $ 293 16% $ 595 33%
======= ===== ======= ======
Gross margin decreased $302 million, or 51%, to $293 million in 2