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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 JUNE 30, 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 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Common Stock outstanding at August 8, 2003: 321,995,885 shares, without par
value.
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TABLE OF CONTENTS
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PAGE
----
Glossary .......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2003 and 2002.............................. 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2003 and 2002............................. 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2003 and 2002........................................ 3
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002............................................ 4
Notes to Financial Statements.................................................. 5
Independent Accountants' Report................................................ 30
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... 70
Item 4. Controls and Procedures....................................................... 73
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 73
Item 4. Submission of Matters to a Vote of Security Holders .......................... 75
Item 6. Exhibits and Reports on Form 8-K ............................................. 76
SIGNATURE........................................................................................... 77
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. and its subsidiaries are made
available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU Corp. will provide copies of current reports not
posted on the website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........Legislation that restructured the electric
utility industry in Texas to provide for
competition
2002 Form 10-K........................TXU Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2002
Commission............................Public Utility Commission of Texas
EITF..................................Emerging Issues Task Force
EITF 98-10 ...........................EITF Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and
Risk Management Activities"
EITF 01-8.............................EITF Issue No. 01-8, "Determining Whether
an Arrangement Contains a Lease"
EITF 02-3 ............................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"
ERCOT.................................Electric Reliability Council of Texas
FIN...................................Financial Accounting Standards Board
Interpretation
FIN 45................................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"
FIN 46................................FIN No. 46, "Consolidation of Variable
Interest Entities"
Fitch.................................Fitch Ratings, Ltd.
GWh...................................gigawatt-hours
IRS...................................Internal Revenue Service
Moody's...............................Moody's Investors Services, Inc.
NRC...................................United States Nuclear Regulatory
Commission
Oncor.................................Oncor Electric Delivery Company
Pinnacle..............................Pinnacle One Partners, L.P., the
telecommunications business reported as
discontinued operations and formerly
a joint venture
POLR..................................provider of last resort
REPs..................................retail electric providers
RRC...................................Railroad Commission of Texas
S&P...................................Standard & Poor's, a division of the
McGraw Hill Companies
Sarbanes-Oxley........................Sarbanes -Oxley Act of 2002
SEC...................................United States Securities and Exchange
Commission
Settlement............................regulatory settlement agreed to by the
Commission in 2002
Settlement Plan.......................regulatory settlement plan filed with the
Commission in December 2001
SFAS..................................Statement of Financial Accounting
Standards
SFAS 123..............................SFAS No. 123, "Accounting for Stock-Based
Compensation"
ii
SFAS 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SFAS 143..............................SFAS No. 143, "Accounting for Asset
Retirement Obligations"
SFAS 145..............................SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment
of FASB Statement 13, and Technical
Corrections"
SFAS 146..............................SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal
Activities"
SFAS 148..............................SFAS No. 148, "Accounting for Stock-Based
Compensation-- Transition and Disclosure"
SFAS 149..............................SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and
Hedging Activities"
SFAS 150..............................SFAS No. 150, "Accounting for Certain
Financial Instruments with
Characteristics of both Liabilities
and Equity"
SG&A..................................selling, general and administrative
T&D...................................transmission and distribution
TXU Australia.........................TXU Australia Holdings (Partnership)
Limited Partnership
TXU Corp..............................refers to TXU Corp. or TXU Corp. and its
consolidated subsidiaries, depending on
context
TXU Energy............................TXU Energy Company LLC
TXU Europe............................TXU Europe Limited
TXU Fuel..............................TXU Fuel Company
TXU Gas...............................TXU Gas Company
TXU Mining............................TXU Mining Company LP
TXU Portfolio Management..............TXU Portfolio Management Company LP
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................TXU US Holdings Company
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2003 2002 2003 2002
-------- -------- ------- ------
(millions of dollars, except per share amounts)
Operating revenues................................................... $2,672 $2,505 $5,471 $4,958
------ ------ ----- ------
Costs and expenses:
Cost of energy sold and delivery fees............................. 1,176 983 2,563 1,783
Operating costs.................................................. 426 402 851 767
Depreciation and amortization..................................... 208 213 432 433
Selling, general and administrative expenses...................... 269 330 516 668
Franchise and revenue-based taxes................................. 120 117 231 235
Other income...................................................... (23) (19) (34) (26)
Other deductions.................................................. 7 12 24 59
Interest income................................................... (10) (7) (19) (15)
Interest expense and other charges................................ 248 217 496 433
----- ----- ----- -----
Total costs and expenses...................................... 2,421 2,248 5,060 4,337
----- ----- ----- -----
Income from continuing operations before income taxes and cumulative effect
of changes in accounting principles.............................. 251 257 411 621
Income tax expense................................................... 74 79 118 186
----- ----- ----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles............................... 177 178 293 435
Income (loss) on discontinued operations, net of tax effect (Note 3). (66) 23 (79) 21
Cumulative effect of changes in accounting principles, net of tax benefit
(Note 2).......................................................... - - (58) -
----- ----- ----- -----
Net income .......................................................... 111 201 156 456
Preference stock dividends........................................... 6 6 11 11
----- ----- ----- -----
Net income available for common stock................................ $ 105 $ 195 $ 145 $ 445
===== ===== ===== =====
Average shares of common stock outstanding (millions):
Basic............................................................. 321 269 321 267
Diluted........................................................... 378 269 378 267
Per share of common stock:
Basic earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles.............................. $ .54 $ .64 $ .88 $ 1.59
Income (loss) on discontinued operations, net of tax effect..... (.21) .09 (.25) .08
Cumulative effect of changes in accounting principles,
net of tax benefit............................................ - - (.18) -
Net income available for common stock........................... .33 .73 .45 1.67
Diluted earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles.............................. $ .49 $ .64 $ .82 $ 1.59
Income (loss) on discontinued operations, net of tax effect..... (.18) .09 (.22) .08
Cumulative effect of changes in accounting principles,
net of tax benefit............................................ - - (.15) -
Net income available for common stock........................... .31 .73 .45 1.67
Dividends declared............................................... .125 .600 .250 1.200
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before cumulative effect
of changes in accounting principles................................... $ 177 $ 178 $ 293 $ 435
----- ----- ----- -----
Other comprehensive income (loss), net of tax effects:
Cumulative foreign currency translation adjustments.................... 106 42 161 73
Cash flow hedges-
Net change in fair value of derivatives (net of tax benefit
of $37, $46, $93 and $64).......................................... (76) (88) (184) (119)
Amounts realized in earnings during the period
(net of tax expense of $36, $12, $78 and $19)....................... 72 27 153 42
----- ----- ----- -----
Total............................................................. 102 (19) 130 (4)
----- ----- ----- -----
Comprehensive income from continuing operations.............................. 279 159 423 431
Comprehensive income from discontinued operations:
Income (loss) on discontinued operations, net of tax effect.............. (66) 23 (79) 21
Minimum pension liability adjustments (net of tax benefit of $3)......... - - (6) -
Cumulative foreign currency translation adjustment....................... - 238 - 177
Cash flow hedges (net of tax expense of $4 and $8)....................... - 9 - 19
----- ----- ----- -----
Total.............................................................. (66) 270 (85) 217
----- ----- ----- -----
Cumulative effect of changes in accounting principles, net of tax benefit..... - - (58) -
----- ----- ----- -----
Comprehensive income......................................................... $ 213 $ 429 $ 280 $ 648
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------
2003 2002
---- ----
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before cumulative effect of
changes in accounting principles............................................. $ 293 $ 435
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by operating activities:
Depreciation and amortization ............................................... 470 467
Deferred income taxes and investment tax credits - net ...................... 87 (6)
Net gain from sale of assets................................................ (20) (13)
Net unrealized gain from mark-to-market valuations of commodity contracts.... (27) (6)
Net equity loss from unconsolidated affiliates and joint ventures............ 16 24
Recovery of gas costs........................................................ 34 67
Reduction in regulatory liability............................................ (78) (41)
Changes in operating assets and liabilities..................................... 667 (315)
------ -----
Cash provided by operating activities.................................... 1,442 612
------ -----
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 1,317 1,846
Common stock................................................................. 8 605
Retirements/repurchases of securities:
Long-term debt............................................................... (761) (1,677)
Preferred stock of subsidiary, subject to mandatory redemption............... (4) -
Change in notes payable:
Commercial paper............................................................. 11 383
Banks........................................................................ (2,299) (517)
Cash dividends paid:
Common stock................................................................. (80) (318)
Preference stock............................................................. (11) (11)
Redemption deposit applied to debt retirements.................................. 210 -
Debt premium, discount, financing and reacquisition expenses.................... (53) (81)
------ -----
Cash provided by (used in) financing activities.......................... (1,662) 230
------ -----
Cash flows - investing activities:
Capital expenditures............................................................ (458) (502)
Acquisitions of businesses..................................................... (150) (36)
Proceeds from sale of assets................................................... 15 444
Nuclear fuel ................................................................... (35) (50)
Other........................................................................... 14 (43)
------ ------
Cash used in investing activities........................................ (614) (187)
------ -----
Effect of exchange rates on cash and cash equivalents............................. 8 (16)
Cash used by discontinued operations.............................................. (15) (595)
------ -----
Net change in cash and cash equivalents........................................... (841) 44
Cash and cash equivalents - beginning balance..................................... 1,574 216
------ -----
Cash and cash equivalents - ending balance........................................ $ 733 $ 260
====== =====
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
--------- -------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents..................................................... $ 733 $ 1,574
Restricted cash............................................................... - 210
Accounts receivable-- trade................................................... 1,529 1,696
Income taxes receivable....................................................... 33 488
Inventories................................................................... 522 493
Commodity contract assets..................................................... 1,366 1,298
Assets of telecommunications holding company.................................. 145 -
Other current assets.......................................................... 233 263
------ ------
Total current assets................................................... 4,561 6,022
------ ------
Investments:
Restricted cash............................................................... 111 96
Other investments............................................................. 640 757
Property, plant and equipment-- net............................................. 20,467 19,642
Goodwill and other unamortized intangible assets................................ 1,723 1,588
Regulatory assets-- net........................................................ 1,880 1,772
Commodity contract assets....................................................... 646 657
Cash flow hedges and other derivative assets.................................... 160 150
Other noncurrent assets......................................................... 336 332
Telecommunications assets held for sale......................................... 670 -
------- -------
Total assets........................................................... $31,194 $31,016
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper........................................................... $ 33 $ 18
Banks...................................................................... 8 2,306
Long-term debt due currently.................................................. 743 958
Accounts payable-- trade...................................................... 1,083 1,054
Commodity contract liabilities................................................ 1,198 1,138
Liabilities of telecommunications holding company............................. 854 -
Other current liabilities..................................................... 1,073 1,209
------ ------
Total current liabilities.............................................. 4,992 6,683
------ ------
Accumulated deferred income taxes and investment tax credits.................... 4,322 4,060
Commodity contract liabilities.................................................. 554 520
Cash flow hedges and other derivative liabilities............................... 363 220
Other noncurrent liabilities and deferred credits............................... 2,298 2,144
Long-term debt, less amounts due currently...................................... 12,563 11,597
Telecommunications liabilities held for sale.................................... 121 --
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of the obligated company:
TXU Corp. obligated........................................................ 368 368
Subsidiary obligated....................................................... 147 147
Preferred stock of subsidiaries:
Not subject to mandatory redemption........................................ 190 190
Subject to mandatory redemption............................................ 17 21
Contingencies (Note 7)
Shareholders' equity (Note 6)................................................... 5,259 5,066
------ ------
Total liabilities and shareholders' equity............................. $31,194 $31,016
======= =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- TXU Corp. is an energy company that engages
in power production (electricity generation), wholesale energy sales, retail
energy sales and related services, portfolio management, including risk
management and certain trading activities, energy delivery and, through a
business held for sale and formerly a joint venture, telecommunications
services. TXU Corp. is a holding company with its US operations conducted
through US Holdings and TXU Gas. US Holdings is also a holding company with its
principal operations conducted through TXU Energy and Oncor. TXU Corp.'s
principal international operations are conducted through TXU Australia.
Discontinued Businesses - Prior to October 2002, TXU Corp. also
conducted international operations through TXU Europe. The consolidated
financial statements for 2002 and discussion of results of operations of TXU
Corp. reflect the reclassification of the TXU Europe business as discontinued
operations (see Note 3 for information about discontinued operations).
With respect to the telecommunications business, Pinnacle, in May
2003, TXU Corp. acquired for $150 million in cash the interests it did not
previously own from the joint venture partner under a put/call agreement, which
had been executed in late February 2003, and finalized a formal plan to dispose
of the telecommunications business by sale. Accordingly, effective with
reporting for the second quarter of 2003, activities of Pinnacle since March 1,
2003 are reported as discontinued operations. TXU Corp. had used the equity
method of accounting for its investment in Pinnacle until March 1, 2003 when the
business was consolidated as a result of the execution of the put/call
agreement. Accounting rules provide that businesses accounted for under the
equity method should not be reported as discontinued operations; therefore,
results prior to March 1, 2003 are reported in other deductions in the statement
of income, consistent with prior reporting. (Also see Note 3.)
Basis of Presentation -- The condensed consolidated financial
statements of TXU Corp. have been prepared in accordance with US GAAP and on the
same basis as the audited financial statements included in its 2002 Form 10-K,
except for the discontinuance of the telecommunications business and the
adoption of the following new accounting rules: EITF 02-3, SFAS 143, and SFAS
145, all discussed below.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. 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 SEC. 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, except per share amounts, are stated in millions of US
dollars unless otherwise indicated. Certain previously reported amounts have
been reclassified to conform to current classifications.
Effective April 1, 2003, the estimates of the depreciable lives of the
Comanche Peak nuclear generating plant and several gas generation plants were
extended to better reflect the useful lives of the assets. At the same time,
depreciation rates were increased on lignite and gas generation facilities to
reflect investments in emissions control equipment. The net impact of these
changes was a reduction in depreciation expense of $13 million (pre-tax) and an
increase in income from continuing operations of $8 million ($0.02 per diluted
share) in the three- and six-month periods ended June 30, 2003.
5
Income Taxes -- TXU Energy and the holders of its 9% Exchangeable
Subordinated Notes due 2012 (which were converted on July 1, 2003 to preferred
membership interests in TXU Energy, see Note 4), characterize the notes as
preferred equity interests for federal and state income tax purposes with the
result that TXU Energy is treated as a partnership for such purposes.
Changes in Accounting Standards -- In October 2002, the EITF, through
EITF 02-3, rescinded EITF 98-10, which required mark-to-market accounting for
all trading activities. SFAS 143, regarding asset retirement obligations, became
effective on January 1, 2003. As a result of the implementation of these two
accounting standards, TXU Corp. 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 02-3, TXU Corp. has not
recognized origination gains on commercial/industrial retail contracts in 2003.
For the three- and six-month periods ended June 30, 2002, TXU Corp. had
recognized $21 million and $34 million in origination gains on such contracts,
respectively.
SFAS 145, regarding classification of items as extraordinary, 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." As required by the standard, the results for the six months ended June
30, 2002 reflect a reclassification of a previously reported (in the first
quarter of 2002) extraordinary loss of $17 million (after-tax) on the early
extinguishment of debt to other deductions ($26 million) and income tax expense
($9 million), as the loss does not meet the criteria of an extraordinary item as
defined by Accounting Principles Board Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
As a result of the implementation of SFAS 145 as of January 1, 2003,
the previously reported after-tax losses on the early extinguishment of debt of
$41 million in the year ended December 31, 2002 and $97 million in the year
ended December 31, 2001 (as described in the Notes to Financial Statements in
the 2002 Form 10-K) will be reclassified from extraordinary items to other
deductions and income tax expense in income from continuing operations as such
losses do not meet the criteria of an extraordinary item. There is no effect on
net income as a result of the implementation of SFAS 145.
This reclassification decreases basic and fully diluted income from
continuing operations before extraordinary loss per share by $0.15 and $0.38 for
the years ended December 31, 2002 and 2001, respectively, and decreases the
extraordinary loss, per share, by the same amounts.
SFAS 146, regarding exit costs, became effective on January 1, 2003.
SFAS 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 146 did not materially impact
results of operations for the six months ended June 30, 2003.
SFAS 148 was issued in December 2002. TXU Corp. adopted the
disclosure requirements of SFAS 148 effective December 31, 2002. This statement
provides transition alternatives when companies adopt fair value accounting for
stock-based compensation. TXU Corp. accounts for certain of its stock-based
compensation plans, including stock options, using the intrinsic value method.
TXU Corp. does not currently issue stock options, and only approximately 26,000
previously issued options remain outstanding at June 30, 2003. Had compensation
expense for these stock-based compensation plans been determined based upon the
fair value methodology prescribed under SFAS 123, TXU Corp.'s net income and per
share amounts would not have been materially different from reported amounts.
FIN 45 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 7 under Guarantees). The adoption
of FIN 45 did not materially impact results of operations for the six months
ended June 30, 2003.
FIN 46 was issued in January 2003. FIN 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. TXU Corp. is evaluating the potential impact
of FIN 46 on its financial position.
6
SFAS 149 was issued in April 2003 and became effective for contracts
entered into or modified after June 30, 2003. SFAS 149 clarifies what contracts
may be eligible for the normal purchase and sale exception, the definition of a
derivative and the treatment in the statement of cash flows when a derivative
contains a financing component. TXU Corp. is evaluating the potential impact of
SFAS 149 on its financial position and results of operations.
SFAS 150 was issued in May 2003 and became effective June 1, 2003 for
new financial instruments and July 1, 2003 for existing financial instruments.
SFAS 150 requires that certain mandatorily redeemable preferred securities (see
Note 5) be classified as liabilities beginning July 1, 2003. TXU Corp. is
evaluating the potential impact of SFAS 150 on its financial position.
EITF 01-8 was issued in May 2003 and is effective prospectively for
arrangements that are new, modified or committed to beginning July 1, 2003. This
guidance may require that certain types of arrangements be accounted for as
leases, including tolling and power supply contracts, take-or-pay contracts and
service contracts involving the use of specific property and equipment. TXU
Corp. is evaluating the potential impact of the adoption of EITF 01-8 on its
financial position and results of operations.
Earnings Per Share -- Basic earnings per share applicable to common
stock are based on the weighted average number of common shares outstanding
during the quarter. Diluted earnings per share include the effect of all
potential issuances of common shares under certain debt securities and other
arrangements. For the three months and six months ended June 30, 2003, the $750
million of 9% Exchangeable Subordinated Notes issued by TXU Energy in November
2002 were dilutive and were included in the calculation of diluted earnings per
share. Assuming these securities were converted to common stock at the beginning
of the period at the exercise price of $13.1242 per share, 57.1 million more
shares would have been issued and net income would have increased by $13.2
million and $26.3 million for the three months and six months ended June 30,
2003, respectively, representing the after-tax interest savings on the notes.
Additional dilution of earnings per share would result from
approximately 7.0 million shares and 18.0 million shares of common stock
issuable in connection with equity-linked debt securities issued in 2002 and
2001, respectively, if the average of the closing price per share of TXU Corp.
common stock on each of the twenty consecutive trading days ending on the third
day immediately preceding the end of a reporting period is above the strike
price of $62.91 and $55.68 per share, for the respective issuances.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for the six months
ended June 30, 2003 for changes in accounting principles effective January 1,
2003:
Charge from rescission of EITF 98-10, net of tax effect of $34 million.... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million......... 5
----
Total net charge............................................ $(58)
====
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF
98-10, which required mark-to-market accounting for all trading activities.
Pursuant to this rescission, only financial instruments that are derivatives
under SFAS 133 will be subject to mark-to-market accounting. Financial
instruments that may not be derivatives under SFAS 133, but were
marked-to-market under EITF 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 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.
7
SFAS 143 became effective on January 1, 2003. SFAS 143 requires
entities to record the fair value of a legal liability for an asset retirement
obligation in the period of its inception. For TXU Corp., such liabilities
relate to nuclear generation plant decommissioning, land reclamation related to
lignite mining and removal of lignite plant ash 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 (previously reflected in accumulated depreciation) TXU Corp. had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................ $488
Increase in other noncurrent 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 June 30, 2003 was $564 million,
comprised of a $554 million liability as a result of adoption of SFAS 143 and
$18 million of accretion during the first six months of 2003 reduced by $8
million in reclamation payments.
With respect to nuclear decommissioning costs, TXU Corp. believes
that the adoption of SFAS 143 results primarily in timing differences in the
recognition of asset retirement costs that TXU Energy is currently recovering,
as Oncor recovers regulated decommissioning fees from REPs on behalf of TXU
Energy, and will be deferring such differences as part of the regulatory
cost-recovery process.
On a pro forma basis, assuming SFAS 143 had been adopted at the
beginning of the periods, income from continuing operations for the six months
ended June 30, 2002 would have increased by $4 million after-tax and the
liability for asset retirement obligations as of June 30, 2002, would have been
$538 million.
8
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial
information of TXU Europe and the telecommunications business reported as
discontinued operations:
Europe Telecommunications
--------------------------- --------------------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2003 June 30, 2003
------------- ------------- ------------- -------------
Operating revenues......................... $1,184 $2,694 $ 52 $ 68
------ ------ ------ ------
Operating costs and expenses............... 1,086 2,531 48 69
Other deductions-- net..................... 7 10 - 1
Interest income............................ (4) (10) (2) (3)
Interest expense and other charges......... 83 166 20 26
------ ----- ------ ------
Income (loss) before income taxes.......... 12 (3) (14) (25)
Income tax expense (benefit)............... (11) (24) 53 52
------ ----- ------ ------
Income (loss) from discontinued operations. $ 23 $ 21 $ (67) $ (77)
====== ===== ====== ======
The loss from the telecommunications business for the three and six
months ended June 30, 2003 includes a deferred income tax provision of $60
million on the excess of the carrying value of the investment in the business
over the tax basis.
Legal, audit and administrative accruals related to TXU Europe were
reduced by $1 million after-tax in the three months ended June 30, 2003,
resulting in a net year to date expense of $3 million ($2 million after-tax).
The following details the telecommunications assets and liabilities
held for sale on TXU Corp.'s balance sheet as of June 30, 2003:
Current assets....................................... $ 66
Investments.......................................... 36
Plant, property, and equipment....................... 231
Goodwill............................................. 317
Accumulated deferred income tax asset................ 16
Other noncurrent assets.............................. 4
------
Telecommunications assets held for sale....... $ 670
======
Current liabilities.................................. $ 72
Noncurrent liabilities............................... 49
------
Telecommunications liabilities held for sale. $ 121
======
The following details the assets and liabilities of the telecommunications
holding company on TXU Corp.'s balance sheet as of June 30, 2003:
Investments (a)...................................... $ 135
Other assets......................................... 10
------
Assets of telecommunications holding company..... $ 145
======
Notes payable and other debt (a)..................... $ 825
Other liabilities.................................... 29
------
Liabilities of telecommunications holding company $ 854
======
(a) Investments represents Pinnacle Overfund Trust, a trust established to
fund interest payments on $810 million in notes payable of the holding
company. The trust's assets consist of TXU Corp. debt (reported in
long-term debt due currently). Upon sale of the business, expected to
occur by June 30, 2004, the notes will be repaid and the remaining TXU
Corp. debt and the trust will be cancelled.
9
4. FINANCING ARRANGEMENTS
Credit Facilities -- At June 30, 2003, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of approximately $8 million
and commercial paper of $33 million (all in Australia).
At June 30, 2003, TXU Corp. and its subsidiaries had credit
facilities (some of which provide for long-term borrowings) as follows:
At June 30, 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 $ 391 $ -- $1,009
Revolving Credit Facility February 2005 TXU Energy, Oncor 450 21 -- 429
Three-Year Revolving Credit Facility May 2005 US Holdings 400 -- -- 400
Revolving Credit Facilities May 2005 TXU Corp. 100 -- -- 100
------- ------ ------ ------
Total North America $ 2,350 $ 412 $ -- $1,938
======= ====== ====== ======
Senior Facility (a) October 2004 TXU Australia $ 1,167 $ -- $ 943 $ 208
Working Capital Facility October 2003 TXU Australia 66 -- 6 60
Standby Facility (a) December 2003 TXU Australia 17 -- -- --
------- ------ ------ ------
Total Australia $ 1,250 $ -- $ 949 $ 268
======= ====== ====== ======
(a) Commercial paper borrowings totaling $33 million at June 30, 2003 were
supported by the Standby Facility ($17 million) and the Senior Facility
($16 million).
In August 2003, TXU Corp. entered into a $500 million 5-year
revolving credit facility with LOC 2003 Trust, a special purpose, wholly-owned
subsidiary of TXU Corp. (LOC Trust). LOC Trust, in turn, entered into a $500
million 5-year secured credit facility with a group of lenders. TXU Corp.
intends to capitalize LOC Trust with approximately $525 million of cash, which
will be invested by the lenders in permitted investments as directed by LOC
Trust. LOC Trust's assets, including the investments, will constitute collateral
for the benefit of the lenders to secure issuances of letters of credit or
loans, and will be owned by LOC Trust. During the term of the facility, LOC
Trust will be required to maintain collateral in an amount equal to 105% of the
commitments under the secured facility. Upon capitalization of LOC Trust, TXU
Corp. may request up to $500 million of letters of credit or up to $250 million
of loans from LOC Trust, subject in aggregate to its $500 million commitment,
for the benefit of TXU Corp. and its subsidiaries, which may be provided through
issuances of letters of credit or loans by the lenders. LOC Trust's assets are
not available to satisfy claims of creditors of TXU Corp. or its subsidiaries.
However, LOC Trust may terminate all or a portion of the secured facility at any
time and request the release of any collateral not required to secure
outstanding letters of credit from the lenders.
Through April 2003, $2.3 billion in outstanding cash borrowings as of
December 31, 2002 under the North America credit facilities were repaid, and the
facilities were restructured. A $450 million revolving credit facility was
established for TXU Energy and Oncor that matures on February 25, 2005. This
facility will be used for working capital and other general corporate purposes,
including 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.
This facility, as well as others available to TXU Corp., will
provide back-up for any future issuance of commercial paper by TXU Energy and
Oncor. At June 30, 2003, there was no outstanding commercial paper under the
North America credit facilities.
10
In connection with the restructuring of the North America credit
facilities of TXU Corp., 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 the $500
million three-year revolving credit facility. Concurrently, the
facility was reduced to $400 million, and TXU Corp. entered into
additional credit facilities totaling $100 million, which were
cancelled in August 2003.
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.
11
Long-Term Debt-- At June 30, 2003 and December 31, 2002, the long-term
debt of TXU Corp. and its consolidated subsidiaries consisted of the following:
June 30, December 31,
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(a)........................................ -- 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a).......... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)........ 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a)....... 118 118
7.700% Fixed Series 1999A due April 1, 2033......................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1, 2013(a).. 16 16
7.700% Fixed Series 1999C due March 1, 2032......................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030, remarketing date April 1, 2004(a).... 121 121
4.750% Fixed Series 2001B due May 1, 2029, remarketing date November 1, 2006(a)..... 19 19
5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011(a)..... 274 274
4.250% Fixed Series 2001D due May 1, 2033, remarketing date November 1, 2003(a)..... 271 271
1.150% Floating Taxable Series 2001F due December 31, 2036(b)....................... 39 39
1.150% Floating Taxable Series 2001G due December 31, 2036(b)....................... 72 72
1.070% Floating Taxable Series 2001H due December 31, 2036(b)....................... 31 31
1.020% Floating Taxable Series 2001I due December 31, 2036(b)....................... 63 63
1.050% Floating Series 2002A due May 1, 2037(b)..................................... 61 61
6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013(a)...... 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, remarketing date November 1, 2011(a)..... 91 91
5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011(a)..... 107 107
4.000% Fixed Series 2001C due May 1, 2028, remarketing date November 1, 2003(a)..... 70 70
1.150% Floating Taxable Series 2001D due December 31, 2036(b)....................... 12 12
1.070% Floating Taxable Series 2001E due December 31, 2036(b)....................... 45 45
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................... -- 14
5.000% Fixed Series 2001A due May 1, 2027, remarketing date November 1, 2006(a)..... 37 37
Other:
7.000% Fixed Senior Notes - TXU Mining due May 1, 2003.............................. -- 72
6.875% Fixed Senior Notes - TXU Mining 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............................................................................... 7 8
Unamortized premium and discount.................................................... (108) (110)
------- -------
Total TXU Energy ............................................................... 3,731 2,605
------- -------
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
2.110% Floating Rate Junior Subordinated Debentures, Series D due January 30,
2037(c)............................................................................. 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037.......... 8 8
------- -------
Total US Holdings .............................................................. 159 160
------- -------
12
June 30, 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
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................................................. (32) (35)
-------- -------
Total Oncor.................................................................. 4,081 4,399
------- -------
TXU Gas
6.250% Fixed Notes due January 1, 2003........................................... -- 125
6.375% Fixed Notes due February 1, 2004.......................................... 150 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008 (a)...................... 125 125
Unamortized fair value adjustments............................................... 1 1
------- -------
Total TXU Gas ............................................................... 426 551
------- -------
TXU Australia
5.555% Floating Notes due October 30, 2003(d).................................... 20 17
5.055% Floating Notes due September 21, 2007(d).................................. 184 155
5.752% Floating Note, Tranche A Facility due October 26, 2004(d)................. 27 23
5.685% Floating Note, Tranche A Facility due October 26, 2004(d)................. 83 142
5.603% Floating Note, Tranche B Facility due October 26, 2004(d)................. 133 113
5.740% Floating Note, Tranche B Facility due October 26, 2004(d)................. 40 34
5.620% Floating Note, Tranche B Facility due October 26, 2004(d)................. 73 62
5.735% Floating Note, Tranche B Facility due October 26, 2004(d)................. 87 73
5.832% Floating Note, Tranche C Facility due October 26, 2004(d)................. 367 311
5.935% Floating Note, Tranche C Facility due October 26, 2004(d)................. 133 113
7.000% Fixed Medium Term Notes due September 22, 2005............................ 133 113
5.190% Floating Senior Notes due December 1, 2006(d)............................. 241 203
5.433% Floating Senior Notes due December 1, 2016(c)............................. 82 70
Unamortized premium and discount and fair value adjustments...................... 53 99
------- -------
Total TXU Australia.......................................................... 1,656 1,528
------- -------
13
June 30, December 31,
2003 2002
---- ------
Corporate and Other
6.375% Fixed Senior Notes Series B due October 1, 2004........................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008........................... 200 200
5.520% Fixed Senior Notes Series D due August 16, 2003........................... 323 323
4.050% Fixed Senior Notes Series E due August 16, 2004........................... 2 2
6.375% Fixed Senior Notes Series J due June 15, 2006............................. 800 800
4.750% Fixed Senior Notes Series K due November 16, 2006 (equity-linked),
remarketing date November 16, 2004............................................... 500 500
5.450% Fixed Senior Notes Series L due November 16, 2007 (equity-linked),
remarketing date November 16, 2005............................................... 500 500
5.800% Fixed Senior Notes Series M due May 16, 2008 (equity-linked), remarketing
date May 16, 2006................................................................ 440 440
6.000% Fixed Telecom Overfund Trust Debt due bi-annually through August 15, 2004. 135 178
11.98% Floating Notes due monthly through October 31, 2007 (c)................... 3 4
8.820% Building Financing due bi-annually through February 11, 2022.............. 135 140
Unamortized premium and discount................................................. 40 50
------- -------
Total Corporate and Other................................................... 3,253 3,312
------- -------
Total TXU Corp. consolidated..................................................... 13,306 12,555
Less amount due currently........................................................ 743 958
------- -------
Total long-term debt............................................................. $12,563 $11,597
======= =======
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such
date, the interest rate and interest rate period will be reset for
the bonds.
(b) Interest rates in effect at June 30, 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.
(c) Interest rates in effect at June 30, 2003.
(d) Interest rates fixed by swaps at June 30, 2003.
In July 2003, TXU Corp. issued $525 million of floating rate
convertible senior notes due 2033 in a private placement. The notes bear
regular interest at an annual floating rate equal to 3-month LIBOR, determined
quarterly, plus 150 basis points, and payable in arrears quarterly commencing
October 15, 2003. The initial interest rate is 2.60563%. The notes will bear
additional contingent interest during periods after July 15, 2008 if the
average trading price of the notes for a specified period exceeds 120% of the
principal amount of the notes. The notes will have an initial conversion rate
of 28.9289 shares of TXU Corp. common stock per $1,000 principal amount of
notes, which equates to an initial conversion price of $34.5675 per share. The
conversion rate is subject to adjustments in certain circumstances, including a
change in the amount of quarterly cash dividends per share on TXU Corp. common
stock from the current rate of $0.125 per share. The notes will be convertible
at the conversion rate, as adjusted, until maturity if (1) during any fiscal
quarter the market price of TXU Corp. common stock is above $41.481 per share
for a specified period; (2) TXU Corp. calls the notes for redemption;
(3) the trading price of the notes falls below 95% of the conversion value of
the notes for a specified period; or (4) certain specified corporate
transactions occur. Should the holders elect to convert the notes, TXU Corp.
has the option to settle the conversion in cash, common stock or a combination
of both. The notes will be redeemable by TXU Corp. at par, plus accrued and
unpaid interest and contingent interest, if any, beginning July 15, 2008.
The holders will be entitled to require TXU Corp. to purchase the notes at par,
plus accrued and unpaid interest and contingent interest, if any, on
July 15, 2008, July 15, 2013, July 15, 2018, July 15, 2023 and July 15, 2028.
Other than on July 15, 2008, upon a holder's election to require a repurchase,
TXU Corp. may elect to pay the purchase price in cash, common stock, or a
combination of both. With certain exceptions, the holders will be entitled to
require TXU Corp. to repurchase the notes if a person or group acquires more
than 50% of TXU Corp.'s common equity or if there is a merger, sale of assets
or other transaction that results in TXU Corp.'s common stockholders owning
less than 50% of the surviving entity.
14
In July 2003, TXU Energy exercised its right to exchange its $750
million 9% Exchangeable Subordinated Notes due November 22, 2012 for
exchangeable preferred membership interests with identical economic and other
terms. These securities are convertible into TXU Corp. common stock at an
exercise price of $13.1242. The market price of TXU Corp. common stock on June
30, 2003 was $22.45. As disclosed in the 2002 Form 10-K, any exchange of these
securities into common stock would result in a proportionate write-off of the
related unamoritzed discount as a charge to earnings. If all the securities
had been exchanged into common stock on June 30, 2003, the pre-tax charge would
have been $107 million.
In July 2003, the Brazos River Authority issued $39 million
aggregate principal amount of Series 2003B pollution control revenue bonds for
TXU Energy. The bonds will bear interest at an annual rate of 6.30% until
maturity in 2032. Proceeds from the issuance of the bonds were used to refund
the entire principal amount of Brazos River Authority Taxable Series 2001F
variable rate pollution control revenue bonds due December 31, 2036. The Sabine
River Authority also issued $12 million aggregate principal amount of Series
2003A pollution control revenue bonds for TXU Energy. The bonds will bear
interest at an annual rate of 5.80% until maturity in 2022. Proceeds from the
issuance of these bonds were used to refund the entire principal amount of
Sabine River Authority Taxable Series 2001D pollution control revenue bonds due
December 31, 2036.
In May 2003, the Brazos River Authority Series 1994A and the Trinity
River Authority Series 2000A pollution control revenue bonds (aggregate
principal amount of $53 million) were purchased upon mandatory tender. In July
2003, the bonds were remarketed and converted from a floating rate mode to a
multiannual mode at an annual rate of 3.00% and 6.25%, respectively. The rate on
the 1994A bonds will remain in effect until their mandatory tender date of May
1, 2005, at which time they will be remarketed. The rate on the 2000A bonds will
remain in effect until their maturity in 2028.
In May 2003, $72 million principal amount of the 7% TXU Mining fixed
rate senior notes were repaid at maturity.
In April 2003, Oncor repaid all ($70 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 $72 million was utilized to fund
the maturity.
In April 2003, the Brazos River Authority Series 1999A pollution
control revenue bonds, with an aggregate principal amount of $111 million, 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 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. The rate on the 1999B bonds will remain in effect
until 2013 at which time they will be remarketed. The rate on the 1999C bonds is
fixed to maturity in 2032, however they become callable in 2013.
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 an 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 repay the entire principal
amount of Brazos River Authority Series 1993 pollution control revenue bonds due
June 1, 2023.
In March 2003, Oncor repaid 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 maturity.
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, 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 TXU Corp.'s North America
credit facilities. In August 2003, TXU Energy entered into interest rate swap
transactions to effectively convert $500 million of the notes to floating
interest rates.
15
In January 2003, TXU Gas redeemed, at par value, $125 million
principal amount of its 6.25% Notes at maturity.
Australia -- At June 30, 2003, TXU Australia had A$505 million ($337
million) in medium-term notes outstanding, of which interest and principal
payments associated with A$475 million ($317 million) were guaranteed under an
insurance policy. The medium-term notes have three tranches consisting of fixed
and variable rates of which A$30 million ($20 million) is due October 2003 and
the remainder is due between September 2005 and September 2007.
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 June 30, 2003, TXU Energy (through
certain subsidiaries), Oncor and TXU Gas are qualified originators of accounts
receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. The June 30, 2003 financial statements
reflect the sale of $1.2 billion face amount of receivables to TXU Receivables
Company under the program in exchange for cash of $540 million and $615 million
in subordinated notes, with $11 million of losses on sales for the six months
ended June 30, 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 increased $70 million for the six month period ended
June 30, 2003 primarily due to reserve requirements that were reduced through a
temporary amendment in recognition of improving collection trends. Higher loss
reserve requirements in previous periods reflected the billing and collection
delays previously experienced as a result of new systems and processes in TXU
Energy and ERCOT for clearing customers' switching and billing data upon the
transition to competition. Funding increases or decreases under the program are
reflected as operating cash flow activity.
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 TXU Corp.'s subsidiaries' retained interests in
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
In August 2003, the program was amended to extend the term to July
2004, as well as to extend the period providing temporarily higher delinquency
and default compliance ratios through December 31, 2003. The program was also
amended to coincide with the credit facilities' covenants by removing investment
grade credit ratings as a requirement of an eligible originator and substituting
maintenance of fixed charge coverage ratios and debt to capital ratios as
requirements of an eligible originator. In June 2003, the program was amended to
provide temporarily higher delinquency and default compliance ratios and
temporary relief from the loss reserve formula. The June amendment reflected the
billing and collection delays previously experienced as a result of new systems
and processes in TXU Energy and ERCOT for clearing customers' switching and
billing data upon the transition to competition.
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:
16
1) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
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. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months 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 customers' 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 POLR rules by the 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 the originators are required
to maintain specified fixed charge coverage and leverage ratios (or supply a
parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate. Prior to the August 2003 amendment
extending the program, originator eligibility was predicated on the maintenance
of an investment grade credit rating.
Financial Covenants, Credit Rating Provisions and Cross Default
Provisions -- The terms of certain financing arrangements of TXU Corp. 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 preferred membership
interests (formerly 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 June 30, 2003, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. 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 TXU Corp., 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
TXU Corp. or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Corp. 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.
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 million US Holdings letter of credit
reimbursement and credit facility agreement and $30 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.
17
A default or similar event under the terms of the TXU Energy
preferred membership interests (formerly subordinated notes) that results in the
acceleration (or other mandatory repayment prior to the mandatory redemption
date) of such security or the failure to pay such security at the mandatory
redemption date would result in a default under TXU Energy's $1.25 billion
senior unsecured notes.
TXU Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust ($135 million outstanding at June 30, 2003) and Pinnacle's 8.83%
Senior Secured Notes due 2004 ($810 million outstanding at June 30, 2003)
contain cross default provisions relating to a failure to pay principal or
interest on indebtedness of TXU Corp. or TXU Communications Ventures Company (in
the case of the 8.83% Senior Secured Notes due 2004) in a principal amount of
$50 million or above.
TXU Energy has entered into certain mining and equipment leasing
arrangements aggregating $127 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.
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.
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.
A default by TXU Gas or any of its material subsidiaries on
indebtedness of $25 million or more would result in a cross default under the
$300 million TXU Gas senior notes due 2004 and 2005.
A default by TXU Corp. on indebtedness of $50 million or more would
result in a cross default under the new $500 million five-year revolving credit
facility.
TXU Corp. and its subsidiaries have other arrangements, including
interest rate swap agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
18
5. PREFERRED STOCK OF SUBSIDIARIES AND TRUST SECURITIES
Preferred Stock - In July 2003, US Holdings redeemed all of the
shares of its $7.98 series, $7.50 series and $7.22 series of preferred stock not
subject to mandatory redemption and the shares of its $6.98 series of preferred
stock subject to mandatory redemption for an aggregate principal amount of $91
million.
TXU Corp. or Subsidiary Obligated, Mandatorily Redeemable, Preferred
Securities of Subsidiary Trusts, Each Holding Solely Junior Subordinated
Debentures of TXU Corp. or Related Subsidiary (Trust Securities) -- The
statutory business trust subsidiaries had Trust Securities and trust assets
outstanding as follows:
Trust Securities
---------------------------------------------- Trust Assets Maturity
Units (000's) Amount Amount
--------------------- ---------------------- -----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
TXU Corp.
- ---------
TXU Corp. Capital I
(7.25% Series)..... 9,200 9,200 $ 223 $ 223 $237 $237 2029
TXU Corp. Capital II
(8.70% Series)..... 6,000 6,000 145 145 155 155 2034
------ ------ ----- ----- ---- ----
Total TXU Corp..... 15,200 15,200 368 368 392 392
------ ------ ----- ----- ---- ----
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(a).... 150 150 147 147 155 155 2028
------ ------ ----- ----- ---- ----
Total.............. 15,350 15,350 $ 515 $ 515 $547 $547
====== ====== ===== ===== ==== ====
(a) Interest rate swaps effectively fixed the rate on $100 million of the TXU
Gas Floating Rate Trust Securities at 6.629% and at 6.444% on the remaining
$50 million of the Trust Securities to July 1, 2003. TXU Corp. elected not
to renew these swaps and will pay variable interest rates on these Trust
Securities based on the three-month LIBOR rate plus a margin of 135 basis
points.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's securities.
6. SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
------- ------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption........... $ 300 $ 300
------ ------
Common stock without par value:
Authorized shares: 1,000,000,000
Outstanding shares: June 30, 2003 -- 321,908,423
and December 31, 2002-- 321,974,000 ....................... 12 7,995
Additional paid in capital...................................... 8,097 111
Retained deficit................................................ (2,834) (2,900)
Accumulated other comprehensive loss............................ (316) (440)
------- -------
Total common stock equity.................................. 4,959 4,766
------ ------
Total shareholders' equity............................... $5,259 $5,066
====== ======
Under Texas law, TXU Corp. may only declare dividends out of surplus,
which is statutorily defined as total shareholders' equity less the book value
of common stock and preferred stock (stated capital). The write-off in 2002 of
19
TXU Corp.'s investment in TXU Europe resulted in negative surplus as of December
31, 2002. Texas law permits, subject to the receipt of shareholder approval, the
reclassification of stated capital into surplus. TXU Corp. received such
shareholder approval of this reclassification in a special meeting of
shareholders held February 14, 2003. Accordingly, approximately $8.0 billion was
reclassified from stated capital to additional paid-in capital, resulting in
surplus of $4.95 billion at June 30, 2003.
Additional paid-in capital includes $107 million and $111 million of
discount on the 9% Exchangeable Subordinated Notes of TXU Energy at June 30,
2003 and December 31, 2002, respectively. These notes were exchanged into
preferred membership interests in July 2003 and continue to be exchangeable into
TXU Corp. common stock.
The Board of Directors of TXU Corp., at its February 2003 meeting,
declared a quarterly dividend of $0.125 a share, payable April 1, 2003, to
shareholders of record on March 7, 2003. At its May 2003 meeting, the Board of
Directors of TXU Corp. declared a quarterly dividend of $0.125 a share, payable
on July 1, 2003, to shareholders of record on June 6, 2003. Future dividends may
vary depending upon TXU Corp.'s profit levels, operating cash flows and capital
requirements as well as financial and other business conditions existing at the
time.
An Oncor mortgage restricts its payment of dividends to the amount
of its retained earnings. Certain other debt instruments and preferred
securities of TXU Corp.'s subsidiaries contain provisions that restrict payment
of dividends during any interest or distribution payment deferral period or
while any payment default exists. At June 30, 2003, there were no restrictions
on the payment of dividends under these provisions.
7. CONTINGENCIES
Guarantees -- TXU Corp. 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, TXU Corp. 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. TXU Corp. is making principal and interest payments to the co-op
in an amount sufficient for the co-op to make payments on its indebtedness. TXU
Corp. 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 TXU Corp. At June 30, 2003, the balance of the indebtedness was $139
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 -- TXU Corp. is the
lessee under various operating leases that obligate it to guarantee the residual
values of the leased facilities. At June 30, 2003, the aggregate maximum amount
of residual values guaranteed was approximately $303 million with an estimated
residual recovery of approximately $221 million. The average life of the lease
portfolio is approximately seven years.
Shared saving guarantees -- TXU Corp. 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 $8 million and the maximum total potential payout is approximately
$56 million. During the three months ended June 30, 2003 no shared savings
contracts were executed. The average remaining life of the portfolio is
approximately nine years.
Letters of credit -- TXU Corp. has entered into various agreements
that require letters of credit for financial assurance purposes. Approximately
$350 million of letters of credit were outstanding at June 30, 2003 to support
existing floating rate pollution control revenue bond debt of approximately $323
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, TXU Corp. 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
July 2003, approximately $56 million of the $350 million of letters of credit
referenced above were terminated as a result of the refinancing of approximately
$51 million of floating rate pollution control revenue bonds.
20
TXU Corp. has outstanding letters of credit in the amount of $118
million to support portfolio management margin requirements in the normal
course of business. As of June 30, 2003, approximately 73% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the second year.
TXU Corp. has an outstanding letter of credit in the amount of $37
million as support for a subordinated loan to a joint venture related to a
pipeline construction project in Australia. The obligation expires on January
31, 2005.
TXU Australia has outstanding letters of credit in the amount of
approximately $70 million, of which $57 million is to allow for participation
in the electricity and gas spot markets, $12 million is to provide credit
support for the shipping of gas and $1 million for miscellaneous credit support
requirements. Although the average life of these guarantees is for
approximately one year, the obligation to provide guarantees is ongoing based
on TXU Australia's continued participation in the electricity and gas spot
markets and its ability to ship gas on the SEA Gas pipeline.
Surety bonds -- TXU Corp. has outstanding surety bonds of
approximately $60 million to support performance under various subsidiary
construction contracts in the normal course of business. The term of the surety
bond obligations is approximately two years.
Other --TXU Corp. 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 June 30, 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%. TXU Corp. is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to TXU Corp. In addition, TXU Corp.
is obligated to pay certain variable costs of operating and maintaining the
reservoirs. TXU Corp. has assigned to a municipality all its contract rights
and obligations in connection with $19 million remaining principal amount of
bonds at June 30, 2003, issued for similar purposes, which had previously been
guaranteed by TXU Corp. TXU Corp. is, however, contingently liable in the
unlikely event of default by the municipality.
In 1992, a discontinued engineering and construction business of TXU
Gas completed construction of a plant, the performance of which is warranted by
TXU Gas through 2008. The maximum contingent liability under the guarantee is
approximately $96 million. No claims have been asserted under the guarantee and
none are anticipated.
Income Tax Contingencies -- On its US federal income tax return for
calendar year 2002, TXU Corp. claimed a deduction related to the worthlessness
of TXU Corp.'s investment in TXU Europe, the tax benefit of which is now
expected, as reported in the first quarter of 2003, to be $983 million. The
estimate at year-end 2002 of the tax benefit was $1.2 billion. While TXU Corp.
believes that its tax reporting for the TXU Europe write-off was proper, there
is a risk that the IRS could challenge TXU Corp.'s position regarding this
deduction. As reported in the first quarter, TXU Corp. has not recognized in
book income any tax benefit for the TXU Europe deduction. In the first quarter
of 2003, TXU Corp. received a cash refund of $527 million related to the
deduction, which may be repaid in the future, with interest, should TXU Corp.
not prevail in its position.
Legal Proceedings -- In October, November and December 2002 and
January 2003, a number of lawsuits were filed in, removed to or transferred to
the United States District Court for the Northern District of Texas against TXU
Corp., and certain of its officers. These lawsuits have all been consolidated
and lead plaintiffs have been appointed by the Court. On July 21, 2003, the lead
plaintiffs filed an amended consolidated complaint naming Erle Nye, Michael J.
McNally, V.J. Horgan and Brian N. Dickie and directors Derek C. Bonham, J.S.
Farrington, William M. Griffin, Kerney Laday, Jack E. Little, Margaret N. Maxey,
J.E. Oesterreicher, Herbert H. Richardson and Charles R. Perry, as defendants.
The plaintiffs seek to represent classes of certain purchasers of TXU Corp.
common and equity-linked debt during a proposed class period from April 26, 2001
to October 11, 2002. No class or classes have been certified. The complaint
alleges violations of the provisions of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended
(Securities Act), relating to alleged materially false and misleading
statements, including statements in prospectuses related to the offering by
TXU Corp. of its equity-linked securities and common stock in May and June 2002.
The named individual defendants are current or former officers and/or directors
of TXU Corp. While TXU Corp. believes the claims are without merit and intends
to vigorously defend this lawsuit, it is unable to estimate any possible loss
or predict the outcome of this action.
21
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas, against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law. Therefore, TXU Corp. is unable to estimate any
possible loss or predict the outcome of this action.
On November 26, 2002, a lawsuit was filed in the United States
District Court for the Northern District of Texas against TXU Corp. and the
directors of TXU Corp. asserting claims under the Employee Retirement Income
Security Act (ERISA) on behalf of a putative class of participants in various
employee benefit plans of TXU Corp. The plaintiff seeks to represent a class of
participants in such plans during the period between January 31, 2002, and
October 11, 2002, based on factual allegations substantially the same as the
other cases described above pending in the United States District Court for the
Northern District of Texas. While TXU Corp. believes the claims are without
merit and intends to vigorously defend the lawsuit, it is unable to estimate any
possible loss or predict the outcome of this action.
On February 28, 2003, a lawsuit was filed in the United States
District Court for the Northern District of Texas, Dallas Division, against TXU
Corp., the directors of TXU Corp., Peter B. Tinkham, Diane J. Kubin, Robert L.
Turpin and other former unidentified members of the TXU Thrift Plan Committee
asserting claims under ERISA on behalf of a putative class of participants and
beneficiaries of the TXU Thrift Plan. The plaintiff seeks to represent a class
of participants in such plan during the period between November 23, 2001 through
October 11, 2002. While TXU Corp. believes the claim is without merit and
intends to vigorously defend the lawsuit, it is unable to estimate any possible
loss or predict the outcome of this action.
On March 18, 2003, a lawsuit was filed in the United States District
Court of Texas against TXU Corp., Erle Nye, H. Jarrell Gibbs, Peter B. Tinkham,
Robert L. Turpin and Diane J. Kubin asserting claims under ERISA on behalf of a
putative class of participants and beneficiaries of the TXU Thrift Plan. The
plaintiff seeks to represent a class of participants in such plan during the
period between January 31, 2002 and the present. This ERISA suit is being
consolidated with the other two ERISA suits filed on November 26, 2002 and
February 28, 2003, respectively. While TXU Corp. believes the claim is without
merit and intends to vigorously defend the lawsuit, it is unable to estimate any
possible loss or predict the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of 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
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. TXU Corp. 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, TXU Corp. 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, TXU
Corp. is unable to predict the outcome of this litigation or the possible loss
in the event of an adverse judgment.
22
On July 7, 2003, a lawsuit was filed by Texas Commercial Energy
(TCE) in the United States District Court for the Southern District of Texas,
Corpus Christi Division, against TXU Energy and certain of its subsidiaries, as
well as various other wholesale market participants doing business in ERCOT,
claiming generally that defendants engaged in market manipulation, in violation
of antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. On August 6, 2003, the complaint was amended
to omit one of the other defendants. TXU Corp. believes that it has not
committed any violation of the antitrust laws and the Commission's investigation
of the market conditions in late February 2003 has not resulted in any findings
adverse to TXU Energy. Accordingly, TXU Corp. believes that TCE's claims against
TXU Energy and its subsidiary companies are without merit and intends to
vigorously defend the lawsuit. As with any litigation of this nature, TXU Corp.
is unable to estimate any possible loss or predict the outcome of this action.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in
the United States District Court for the Eastern District of Texas, Lufkin
Division, against TXU Corp. and TXU Portfolio Management, asserting generally
that defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This lawsuit was not served on TXU Corp.
until mid-July 2003. This action is brought by an individual, alleged to be a
retail consumer of electricity, on behalf of herself and as a proposed
representative of a putative class of retail purchasers of electricity that are
similarly situated. TXU Corp. believes that the Plaintiff likely lacks standing
to assert any antitrust claims against TXU Corp. or TXU Portfolio Management,
and that defendants have not violated antitrust laws or other laws as claimed by
the Plaintiff. Therefore, TXU Corp. believes that plaintiff's claims are without
merit and plans to vigorously defend the lawsuit. As with any litigation of this
nature, however, TXU Corp. is unable to estimate any possible loss or predict
the outcome of this action.
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