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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 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Common Stock outstanding at August 8, 2003: 41,255,362 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 and Comprehensive Income -
Three and Six Months Ended June 30, 2003 and 2002............................. 1
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2003 and 2002...................................... 2
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002........................................... 3
Notes to Financial Statements................................................. 4
Independent Accountants' Report............................................... 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 52
Item 4. Controls and Procedures......................................................... 55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 55
Item 6. Exhibits and Reports on Form 8-K................................................ 56
SIGNATURE...................................................................................... 57
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU US Holdings Company 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 US Holdings Company 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 US Holdings Company'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
Moody's...............................Moody's Investors Services, Inc.
NRC...................................United States Nuclear Regulatory
Commission
Oncor.................................Oncor Electric Delivery Company
POLR..................................provider of last resort
REPs..................................retail electric providers
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 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SFAS 143..............................SFAS No. 143, "Accounting for Asset
Retirement Obligations"
ii
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 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 Energy............................TXU Energy Company LLC
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...........................refers to TXU US Holdings Company or
TXU US Holdings Company and its
consolidated subsidiaries, depending on
the context
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- ----------------
2003 2002 2003 2002
----- ---- ------ ----
(millions of dollars)
Operating revenues....................................................... $2,180 $2,119 $4,112 $3,996
------ ------ ------ ------
Costs and expenses:
Cost of energy sold and delivery fees................................. 932 787 1,770 1,312
Operating costs....................................................... 361 344 727 658
Depreciation and amortization......................................... 163 174 345 357
Selling, general and administrative expenses.......................... 201 269 394 546
Franchise and revenue-based taxes..................................... 87 94 180 194
Other income.......................................................... (17) (14) (26) (17)
Other deductions...................................................... 2 2 3 5
Interest income....................................................... (4) - (9) (1)
Interest expense and other charges.................................... 157 105 308 210
------ ------ ------ ------
Total costs and expenses.......................................... 1,882 1,761 3,692 3,264
------ ------ ------ ------
Income before income taxes and cumulative effect of changes in accounting
principles............................................................. 298 358 420 732
Income tax expense....................................................... 97 114 130 235
------ ------ ------ ------
Income before cumulative effect of changes in accounting principles...... 201 244 290 497
Cumulative effect of changes in accounting principles, net of tax benefit
(Note 2)............................................................... - - (58) -
------ ------ ------ ------
Net income .............................................................. 201 244 2 232 497
Preference stock dividends............................................... 2 3 4 5
------ ------ ------ ------
Net income available for common stock.................................... $ 199 $ 241 $ 228 $ 492
====== ====== ====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- --------------
2003 2002 2003 2002
------ ------ ------ -----
(millions of dollars)
Net income............................................................... $ 201 $ 244 $ 232 $ 497
------ ------ ------ ------
Other comprehensive income (loss), net of tax effects:
Cash flow hedge activity -
Net change in fair value of derivatives (net of tax benefit of $11,
$36, $53 and $60).................................................
Amounts realized in earnings during the period (net of tax benefit (20) (68) (98) (111)
of $12, $-, $39 and $2)........................................... 23 (1) 72 (3)
------ ------ ------ ------
Total............................................................... 3 (69) (26) (114)
------ ------ ------- ------
Comprehensive income..................................................... $ 204 $ 175 $ 206 $ 383
====== ====== ====== ======
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------
2003 2002
---- ----
(millions of dollars)
Cash flows -- operating activities:
Income before cumulative effect of changes in accounting principles....... $ 290 $ 497
Adjustments to reconcile income before cumulative effect of changes in
accounting principles to cash provided by operating activities:
Depreciation and amortization........................................... 382 404
Deferred income taxes and investment tax credits-- net ................. 116 25
Net unrealized (gain) loss from mark-to-market valuation of commodity
contracts............................................................. (33) 12
Net gain from sales of assets........................................... (21) (12)
Reduction in regulatory liability....................................... (78) (41)
Changes in operating assets and liabilities............................... 19 (434)
------- -------
Cash provided by operating activities............................... 675 451
------- -------
Cash flows -- financing activities:
Issuances of long-term debt .............................................. 1,294 1,261
Retirements/repurchases of securities:
Long-term debt.......................................................... (490) (1,402)
Preferred stock of subsidiary, subject to mandatory redemption.......... (5) -
Change in advances-- affiliates........................................... 199 (686)
Change in notes payable-- banks........................................... (1,804) 938
Repurchase of common stock................................................ (250) -
Dividends paid to parent.................................................. (250) (427)
Preferred stock dividends paid............................................ (4) (5)
Redemption deposits applied to debt retirements........................... 210 -
Debt premium, discount, financing, and reacquisition expenses............. (37) (24)
------- -------
Cash used in financing activities................................... (1,137) (345)
------- -------
Cash flows -- investing activities:
Capital expenditures...................................................... (350) (415)
Acquisition of a business................................................. - (36)
Proceeds from sale of assets ............................................. 15 443
Nuclear fuel.............................................................. (35) (50)
Other..................................................................... 6 (66)
------- -------
Cash used in investing activities................................... (364) (124)
------- -------
Net change in cash and cash equivalents...................................... (826) (18)
Cash and cash equivalents -- beginning balance............................... 1,508 55
------- -------
Cash and cash equivalents -- ending balance.................................. $ 682 $ 37
======= =======
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
------ -----------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 682 $ 1,508
Restricted cash.......................................................... - 210
Accounts receivable -- trade............................................. 1,193 1,386
Inventories ............................................................. 359 338
Commodity contract assets................................................ 1,366 1,298
Other current assets..................................................... 173 213
------- -------
Total current assets................................................ 3,773 4,953
------- -------
Investments:
Restricted cash.......................................................... 69 68
Other investments........................................................ 514 491
Property, plant and equipment -- net........................................ 16,672 16,183
Goodwill.................................................................... 558 558
Regulatory assets -- net.................................................... 1,770 1,630
Commodity contract assets................................................... 393 476
Cash flow hedges and other derivative assets................................ 62 14
Other noncurrent assets..................................................... 153 146
------- -------
Total assets........................................................ $23,964 $24,519
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from affiliates................................................. $ 736 $ 787
Notes payable -- banks................................................... - 1,804
Long-term debt due currently............................................. 105 397
Accounts payable -- trade................................................ 871 820
Commodity contract liabilities........................................... 1,198 1,138
Accrued taxes............................................................ 153 303
Other current liabilities................................................ 672 724
------- -------
Total current liabilities........................................... 3,735 5,973
------- -------
Accumulated deferred income taxes........................................... 3,280 3,227
Investment tax credits...................................................... 439 450
Commodity contract liabilities.............................................. 304 320
Cash flow hedges and other derivative liabilities........................... 227 150
Other noncurrent liabilities and deferred credits........................... 1,593 1,063
Long-term debt, less amounts due currently.................................. 7,715 6,613
Preferred stock subject to mandatory redemption............................. 17 21
Contingencies (Note 6)
Shareholders' equity (Note 5)............................................... 6,654 6,702
------- -------
Total liabilities and shareholders' equity.......................... $23,964 $24,519
======= =======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business --US Holdings is a holding company for TXU
Energy and Oncor. US Holdings is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. US Holdings has two reportable business segments: TXU Energy and
Oncor. See discussion of reportable business segments in Note 7.
Basis of Presentation -- The condensed consolidated financial
statements of US Holdings 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 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 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 net income of $8 million in the three- and six-months ended June 30,
2003.
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 3), 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, US Holdings recorded a cumulative effect of changes in
accounting principles as of January 1, 2003. (See Note 2 for a discussion of the
impacts of these two accounting standards.)
As a result of guidance provided in EITF 02-3, US Holdings has not
recognized origination gains on commercial/industrial retail contracts in 2003.
For the three- and six-month periods ended June 30, 2002, US Holdings 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." The adoption of SFAS 145 does not result in a reclassification of results
for the six months ended June 30, 2002.
As a result of the implementation of SFAS No. 145 as of January 1, 2003,
the previously reported annual after-tax losses on the early extinguishment
of debt of $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 was no effect on net income as a result of the
implementation of SFAS No. 145.
4
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.
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 6 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. The adoption of FIN 46 is not expected to
materially impact financial position or results of operations.
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. US Holdings 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 be
classified as liabilities beginning July 1, 2003. US Holdings 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. US
Holdings is evaluating the potential impact of the adoption of EITF 01-8 on its
financial position and results of operations.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for the 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.
5
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 US Holdings, 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) US Holdings 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, US Holdings 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.
3. FINANCING ARRANGEMENTS
Credit Facilities -- At June 30, 2003, US Holdings had outstanding
short-term borrowings consisting of advances from affiliates of $736 million. At
December 31, 2002 outstanding short-term bank borrowings were $1.8 billion and
advances from affiliates were $787 million. Weighted average interest rates on
short-term borrowings were 3.07% and 2.44% at June 30, 2003 and December 31,
2002, respectively.
6
At June 30, 2003, US Holdings had credit facilities 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
------- ------ ------ ------
Total North America $ 2,250 $ 412 $ -- $1,838
======= ====== ====== ======
Through April 2003, $1.8 billion in outstanding cash borrowings as of
December 31, 2002 under the 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 US Holdings, 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
credit facilities.
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.
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.
7
Long-Term Debt -- At June 30, 2003 and December 31, 2002, the
long-term debt of US Holdings 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.................................................... (259) (264)
------ ------
Total TXU Energy ............................................................... 3,580 2,451
------ ------
US Holdings
7.170% Fixed Senior Debentures due August 1, 2007................................... 10 10
9.556% Fixed Notes due in bi-annual installments through December 4, 2019........... 73 73
8.254% Fixed Notes due in quarterly installments through December 31, 2021.......... 67 68
2.110% 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
------ ------
8
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
------- -------
Total US Holdings consolidated................................................... 7,820 7,010
Less amount due currently........................................................ 105 397
------- -------
Total long-term debt............................................................. $ 7,715 $ 6,613
======= =======
- ----------------------
(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.
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 unamortized 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 $259 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.
9
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.
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 $1.1 billion face amount of US Holdings' receivables to TXU
Receivables Company under the program in exchange for cash of $494 million and
$563 million in subordinated notes, with $10 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 $47 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 cash provided by or used in operating activities.
10
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:
1) each 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). Prior to the August 2003
amendment extending the program, originator eligibility was predicated on the
maintenance of an investment grade credit rating. 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.
Financial Covenants, Credit Rating Provisions and Cross Default
Provisions -- The terms of certain financing arrangements of US Holdings 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, US Holdings and its subsidiaries were in
compliance with all such applicable covenants.
11
Certain financing and other arrangements of US Holdings contain
provisions that are specifically affected by changes in credit ratings and also
include cross default provisions. The material cross default provisions are
described below.
Other agreements of US Holdings, including some of the credit
facilities discussed above, contain terms pursuant to which the interest rates
charged under the agreements may be adjusted depending on the credit ratings of
US Holdings or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of US Holdings 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.
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 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.
US Holdings 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.
12
4. 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 principle amount of $91
million.
5. SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
--------- -----------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption......... $ 115 $ 115
------ ------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: June 30, 2003 -- 46,567,862
and December 31, 2002-- 52,817,862 ................. 2,264 2,514
Retained earnings............................................. 4,489 4,261
Accumulated other comprehensive loss.......................... (214) (188)
------ ------
Total common stock equity........................... 6,539 6,587
------ ------
Total shareholders' equity.......................... $6,654 $6,702
====== ======
On July 1, 2003, US Holdings repurchased 5,312,500 shares of its
common stock for $212.5 million and on April 1, 2003, US Holdings repurchased
6,250,000 shares of its common stock for $250 million. On November 15, 2002, US
Holdings declared a cash dividend of $250 million which was paid to TXU Corp. on
January 2, 2003.
An Oncor mortgage restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of US Holdings 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.
6. CONTINGENCIES
Guarantees -- US Holdings has entered into contracts that contain
guarantees to outside parties that could require performance or payment under
certain conditions. These guarantees have been grouped based on similar
characteristics and are described in detail below.
Project development guarantees -- In 1990, US Holdings repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. US Holdings is making principal and interest payments to the
co-op in an amount sufficient for the co-op to make payments on its
indebtedness. US Holdings guaranteed the co-op's payments, and in the event that
the co-op fails to make its payments on the indebtedness, the US government
would assume the co-op's rights under the agreement, and such payments would
then be owed directly by US Holdings. At 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 -- US Holdings 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 $279 million with an estimated
residual recovery of approximately $210 million. The average life of the lease
portfolio is approximately six years.
Shared saving guarantees -- US Holdings has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In aggregate, the average annual savings has exceeded
the annual savings guaranteed. The maximum potential annual payout is
approximately $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.
13
Letters of credit -- US Holdings 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, US Holdings intends to provide from either existing or new facilities
for the extension, renewal or substitution of these letters of credit to the
extent required for such floating rate debt or their remarketing as fixed rate
debt. In 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.
US Holdings 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.
Surety bonds -- US Holdings 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 --US Holdings has entered into contracts with public agencies
to purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $16 million at 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%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US Holdings
is obligated to pay certain variable costs of operating and maintaining the
reservoirs. US Holdings has assigned to a municipality all its contract rights
and obligations in connection with $19 million remaining principal amount of
bonds at June 30, 2003, issued for similar purposes, which had previously been
guaranteed by US Holdings. US Holdings is, however, contingently liable in the
unlikely event of default by the municipality.
Legal Proceedings
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.
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
14
conditions in late February 2003. On August 6, 2003, the complaint was amended
to omit one of the other defendants. US Holdings 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, US Holdings 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, US
Holdings 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. US Holdings 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, US Holdings believes that plaintiff's
claims are without merit and plans to vigorously defend the lawsuit. As with any
litigation of this nature, however, US Holdings 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, 2002, the Supreme Court of Texas issued a mandate
affirming the judgment of the Court of Appeals that held that the pricing
provisions of the Commission's open access wholesale transmission rules, which
had mandated the use of a particular rate setting methodology, were invalid
because they exceeded the statutory authority of the Commission. On January 10,
2002, Reliant Energy Incorporated and the City Public Service Board of San
Antonio each filed lawsuits in the Travis County, Texas, District Court against
the Commission and each of the entities to whom they had made payments for
transmission service under the invalidated pricing rules for the period January
1, 1997, through August 31, 1999, seeking declaratory orders that, as a result
of the application of the invalid pricing rules, the defendants owe unspecified
amounts. US Holdings and TXU SESCO Company are named defendants in both suits.
US Holdings is unable to predict the outcome of any litigation related to this
matter.
General -- US Holdings is involved in various other legal and
administrative proceedings, the ultimate resolution of which should not have a
material effect upon its financial position, results of operations or cash
flows.
7. SEGMENT INFORMATION
US Holdings has two reportable business segments: TXU Energy and
Oncor.
TXU Energy (formerly Energy segment) - consists of operations, which
are principally in the competitive Texas market, involving power production,
wholesale energy sales, retail energy sales and services, and portfolio
management, including risk management and certain trading activities.
Oncor (formerly Electric Delivery segment) - consists of regulated
operations in Texas involving the transmission and distribution of electricity.
15
Effective with reporting for 2003, results for the TXU Energy segment
exclude expenses incurred by the US Holdings holding company in order to present
the segment on the same basis as the separate reporting for TXU Energy and as
the results of the business are evaluated by management. The activities of the
holding company consist primarily of servicing approximately $160 million of
debt. Prior year amounts are presented on the revised basis.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues:
TXU Energy.......................................... $ 2,045 $ 2,019 $ 3,851 $ 3,818
Oncor............................................... 486 500 992 994
Eliminations........................................ (351) (400) (731) (816)
------- ------- ------- -------
Consolidated.................................. $ 2,180 $ 2,119 $ 4,112 $ 3,996
======= ======= ======= =======
Regulated revenues included in operating revenues:
TXU Energy.......................................... $ -- $ -- $ -- $ --
Oncor............................................... 486 500 992 994
Eliminations........................................ (349) (397) (726) (813)
------- ------- ------- -------
Consolidated.................................. $ 137 $ 103 $ 266 $ 181
======= ======= ======= =======
Affiliated revenues included in operating revenues:
TXU Energy.......................................... $ 2 $ 3 $ 5 $ 3
Oncor............................................... 349 397 726 813
Eliminations........................................ (351) (400) (731) (816)
------- ------- ------- -------
Consolidated.................................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Income before cumulative effect of changes in accounting
principles:
TXU Energy.......................................... $ 154 $ 183 $ 189 $ 370
Oncor............................................... 52 65 113 136
Other............................................... (5) (4) (12) (9)
------- ------- ------- -------
Consolidated.................................. $ 201 $ 244 $ 290 $ 497
======= ======= ======= =======
16
8. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues:
Regulated.................................................. $ 486 $ 500 $ 992 $ 994
Unregulated................................................ 2,045 2,019 3,851 3,818
Intercompany sales eliminations - regulated................ (349) (397) (726) (813)
Intercompany sales eliminations - unregulated.............. (2) (3) (5) (3)
------ ------- -------- -------
Total operating revenues.............................. 2,180 2,119 4,112 3,996
------ ------- ------- -------
Costs and operating expenses:
Cost of energy sold and delivery fees - unregulated*........ 932 787 1,770 1,312
Operating costs - regulated................................. 176 167 349 319
Operating costs - unregulated............................... 185 177 378 339
Depreciation and amortization - regulated................... 68 67 137 131
Depreciation and amortization - unregulated................. 95 107 208 226
Selling, general and administrative expenses - regulated.... 48 53 97 110
Selling, general and administrative expenses - unregulated.. 153 216 297 436
Franchise and revenue-based taxes - regulated............... 60 62 120 128
Franchise and revenue-based taxes - unregulated............. 27 32 60 66
Other income................................................ (17) (14) (26) (17)
Other deductions............................................ 2 2 3 5
Interest income............................................. (4) - (9) (1)
Interest expense and other charges.......................... 157 105 308 210
------ ------- ------- -------
Total costs and expenses............................... 1,882 1,761 3,692 3,264
------ ------- ------- -------
Income before income taxes and cumulative effect of changes
in accounting principles....................................$ 298 $ 358 $ 420 $ 732
====== ======= ======= =======
* Includes cost of fuel consumed of $423 million and $358 million for the
three months ended June 30, 2003 and 2002, and $836 million and $617
million for the six months ended June 30, 2003 and 2002, respectively.
The balance represents energy purchased for resale and delivery fees.
The operations of the TXU Energy segment are included above as
unregulated, as the Texas market is open to competition. However, retail pricing
to residential and small business customers in its historical service territory
continues to be subject to transitional regulatory provisions.
Other Income and Deductions --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Other income:
Net gain on sale of properties and businesses........... $ 15 $ 12 $ 21 $ 12
Lignite coal royalties.................................. -- -- -- 2
Allowance for funds used during construction............ 1 1 2 2
Other................................................... 1 1 3 1
------ ------ ------ ------
Total other income.................................. $ 17 $ 14 $ 26 $ 17
====== ====== ====== ======
Other deductions:
Equity in losses of unconsolidated subsidiaries......... $ -- $ -- $ -- $ 1
Loss on retirement of debt.............................. 1 1 1 1
Other................................................... 1 1 2 3
------ ------ ------ ------
Total other deductions.............................. $ 2 $ 2 $ 3 $ 5
====== ====== ====== ======
17
Interest Expense and Other Charges --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Interest...................................................... $ 152 $ 105 $ 298 $ 208
Amortization of deferred debt costs........................... 7 3 15 8
Allowance for borrowed funds used during construction
and capitalized interest.................................. (2) (3) (5) (6)
-------- -------- -------- -------
Total interest expense and other charges................ $ 157 $ 105 $ 308 $ 210
======== ======== ========= =======
Regulatory Assets and Liabilities --
June 30, December 31,
2003 2002
---- ----
Regulatory Assets:
Generation-related regulatory assets subject to securitization. $1,652 $1,652
Securities reacquisition costs................................. 124 124
Recoverable deferred income taxes -- net....................... 78 76
Other regulatory assets........................................ 99 46
------ ------
Total regulatory assets.................................... 1,953 1,898
------ ------
Regulatory Liabilities:
Liability related to excess mitigation credit.................. 91 170
Investment tax credit and protected excess deferred taxes...... 92 98
------ ------
Total regulatory liabilities............................... 183 268
------ ------
Net regulatory assets...................................... $1,770 $1,630
====== ======
Included above are assets of $1.8 billion at June 30, 2003 and
December 31, 2002, that were not earning a return. Of the assets not earning a
return, $1.652 billion is expected to be recovered over the term of the
securitization bonds expected to be issued by Oncor in the third quarter of 2003
and the first half of 2004 pursuant to the regulatory Settlement Plan. All other
regulatory assets have a remaining recovery period of 15 to 48 years.
Included in other regulatory assets as of June 30, 2003 was $41
million related to nuclear decommissioning liabilities.
Restricted Cash -- As of June 30, 2003, all of the restricted cash of
$210 million from the net proceeds of Oncor's issuance of senior secured notes
in December 2002 had been used to repay the interest and principal of Oncor's
first mortgage bonds due March and April 2003. The remaining restricted
cash reported in investments on the balance sheet as of June 30, 2003,
included $69 million held as collateral for letters of credit issued.
Accounts Receivable -- At June 30, 2003 and December 31, 2002,
accounts receivable of $1.2 billion and $1.4 billion are stated net of allowance
for uncollectible accounts of $65 million and $72 million, respectively. During
the six months ended 2003, bad debt expense was $37 million, account write-offs
were $42 million and other activity decreased the allowance for uncollectible
accounts by $2 million.
Accounts receivable included $573 million and $505 million of
unbilled revenues at June 30, 2003 and December 31, 2002, respectively.
Intangible Assets -- SFAS No. 142, "Goodwill and Other Intangible
Assets," became effective for US Holdings on January 1, 2002. SFAS No. 142
requires, among other things, the allocation of goodwill to reporting units
based upon the current fair value of the reporting units, and the discontinuance
of goodwill amortization. SFAS No. 142 also requires additional disclosures
regarding intangible assets (other than goodwill) that are amortized or not
amortized:
18
As of June 30, 2003 As of December 31, 2002
------------------------------ ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ------ ------- ------------ -----
Amortized intangible assets (included in
property, plant and equipment):
Capitalized software.............. $387 $160 $227 $368 $131 $237
Land easements.................... 171 63 108 180 61 119
Mineral rights and other.......... 31 20 11 31 20 11
---- ---- ---- ---- ---- ----
Total....................... $589 $243 $346 $579 $212 $367
==== ==== ==== ==== ==== ====
Amortization expense for intangible assets was $29 million for the
six months ended June 30, 2003 and 2002.
At June 30, 2003 and December 31, 2002, goodwill of $558 million was
stated net of previously recorded accumulated amortization of $67 million.
Commodity Contracts -- At June 30, 2003 and December 31, 2002,
current and noncurrent commodity contract assets totaling $1.8 billion are
stated net of applicable credit (collection) and performance reserves totaling
$30 million and $43 million, respectively. Performance reserves are provided for
direct, incremental costs to settle the contracts.
Inventories by Major Category --
June 30, December 31,
2003 2002
--------- ---------
Materials and supplies...................................................... $ 210 $ 211
Fuel stock.................................................................. 68 70
Gas stored underground...................................................... 81 57
----- -----
Total inventories....................................................... $ 359 $ 338
===== =====
Inventories reflect a $22 million reduction as a result of the
rescission of EITF 98-10 as discussed in Note 2.
Property, Plant and Equipment -- As of June 30, 2003 and December 31,
2002, property, plant and equipment of $16.7 billion and $16.2 billion is stated
net of accumulated depreciation and amortization of $10.5 billion and $10.4
billion, respectively.
As of June 30, 2003, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.2 billion) was
pledged as collateral for Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- US Holdings experienced net hedge
ineffectiveness of $8 million and $14 million, reported as a gain in revenues,
for the three and six months ended June 30, 2003, respectively. For the three
and six months ended June 30, 2002, net hedge ineffectiveness of $25 million and
$33 million, respectively, was reported as a loss in revenues. Hedge
ineffectiveness is primarily related to hedges of anticipated sales from
baseload generation.
As of June 30, 2003, it is expected that $79 million of after-tax net
losses accumulated in other comprehensive income, primarily related to
commodities hedges, will be reclassified into earnings during the next twelve
months. This amount represents the projected value of the hedges over the next
twelve months relative to what would be recorded if the hedge transactions had
not been entered into. The amount expected to be reclassified is not a
forecasted loss incremental to normal operations, but rather it demonstrates the
extent to which volatility in earnings and cash flows (which would otherwise
exist) is mitigated through the use of cash flow hedges.
19
Affiliate Transactions -- The following represent significant
affiliate transactions of US Holdings:
Average daily short-term advances from affiliates during the three
months ended June 30, 2003 and 2002 were $966 million and $1.3 billion,
respectively, and interest expense incurred on the advances was $8 million and
$9 million, respectively. Average daily short-term advances from affiliates
during the six months ended June 30, 2003 and 2002 were $917 million and $1.3
billion, respectively, and interest expense incurred on the advances was $13
million and $20 million, respectively. The average interest rates for the three
months ended June 30, 2003 and 2002 were 3.07% and 2.25%, respectively. The
average interest rates for the six months ended June 30, 2003 and 2002 were 2.7%
and 2.92%, respectively.
TXU Business Services Company, a subsidiary of TXU Corp., charges US
Holdings for certain financial, accounting, information technology,
environmental, procurement and personnel services and other administrative
services at cost. For the three months ended June 30, 2003 and 2002, these costs
totaled $86 million and $109 million, respectively, and for the six months ended
June 30, 2003 and 2002 totaled $175 million and $214 million, respectively.
These costs are reported in SG&A expenses.
US Holdings charges TXU Gas, a subsidiary of TXU Corp., for customer
and administrative services. For the three months ended June 30, 2003 and 2002,
these charges totaled $14 million and $15 million, respectively, and for the six
months ended June 30, 2003 and 2002 totaled $29 million for both periods. These
charges are largely reported as a reduction in SG&A expenses.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS 143, which were noncash in nature.
20
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company and subsidiaries (US Holdings) as of June 30, 2003, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and six-month periods ended June 30, 2003 and 2002 and the
condensed statements of consolidated cash flows for the six-month periods ended
June 30, 2003 and 2002. These financial statements are the responsibility of
US Holdings' management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit in accordance with auditing
standards generally accepted in the United States of America, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of US
Holdings as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report (which includes an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 142), dated February 14, 2003 (and March 19, 2003 as to
Note 18 therein), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 2 to the Notes to Financial Statements, US Holdings changed
its method of accounting for asset retirement obligations in 2003 in connection
with the adoption of Statement of Financial Accounting Standards No. 143, "Asset
Retirement Obligations" and changed its method of accounting for certain
contracts with the rescission of Emerging Issues Task Force Issue 98-10
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."
DELOITTE & TOUCHE LLP
Dallas, Texas
August 12, 2003
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
US Holdings is a holding company for TXU Energy and Oncor. US Holdings
is a wholly-owned subsidiary of TXU Corp., a Texas corporation.
US Holdings engages, through TXU Energy, in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, as well as, through Oncor, in the transmission and
distribution of electricity.
US Holdings' consolidated operations consist of its TXU Energy and
Oncor business segments and the activity of the holding company, which consists
primarily of servicing approximately $160 million in debt.
Dollar amounts in the following tables are stated in millions of US
dollars, unless otherwise noted.
RESULTS OF OPERATIONS
Consolidated
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
- -----------------------------------------------------------------------------
Reference is made to comparisons of results by business segment
following the discussion of consolidated results presented below.
US Holdings' operating revenues increased $61 million, or 3%, to $2.2
billion in 2003. The revenue growth reflected an increase in the TXU Energy
segment of $26 million and a decrease in the Oncor segment of $14 million, or
3%. Revenue performance in the TXU Energy segment reflected higher average
pricing, partially offset by the effect of lower sales volumes and lower results
from portfolio management activities, which included realized and unrealized
gains and losses on hedging transactions. The decline in revenues in the Oncor
segment reflected higher unbilled revenues in 2002 resulting from billing issues
associated with the transition to competition, as previously disclosed. This
decline was partially offset by higher fees associated with increased
disconnect/reconnect activities and higher transmission tariffs. Consolidated
revenue growth also reflected a $48 million reduction in the intercompany sales
elimination, reflecting lower sales by Oncor to TXU Energy as sales to
non-affiliated REPs increased.
Gross Margin
Three Months Ended
June 30,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 2,180 100% $ 2,119 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 932 43% 787 37%
Operating costs................................... 361 16% 344 16%
Depreciation and amortization related to operating
assets........................................ 152 7% 166 8%
------- ----- ------- ------
Gross margin........................................... $ 735 34% $ 822 39%
======= ===== ======= ======
Gross margin is considered a key operating metric as it measures the
effect of changes in sales volumes and pricing versus the direct variable and
fixed costs of energy sold, whether generated or purchased, as well as the costs
to deliver energy.
The depreciation and amortization expense included in gross margin
excludes $11 million and $8 million of such expense for the three months ended
June 30, 2003 and 2002, respectively, that is not directly related to generation
and delivery property, plant and equipment.
22
Gross margin decreased $87 million, or 11%, to $735 million in 2003.
This decline was driven by the TXU Energy segment, reflecting lower sales
volumes, primarily in the large commercial/industrial business. Higher average
pricing was largely offset by higher costs of energy sold and lower results from
portfolio management activities. Mark-to-market accounting for commodity
contracts increased revenues and gross margin by $56 million in 2003 (as
compared to accounting on a settlement basis), and increased results by $134
million in 2002. Operating costs rose $17 million, or 5%, to $361 million
primarily due to higher transmission costs paid to other utilities and the
timing of repair and maintenance expenses.
A decrease in depreciation and amortization (including amounts shown
in the gross margin table above) of $11 million, or 6%, to $163 million
reflected adjusted depreciation rates related to TXU Energy's generation fleet
primarily from an extension of the estimated depreciable life of the nuclear
generation facility, to better reflect its useful life, partially offset by the
effect of investments in energy delivery facilities to support growth and normal
replacements of equipment.
SG&A expense decreased $68 million, or 25%, to $201 million in 2003.
The decrease was driven by the TXU Energy segment and reflected lower levels of
bad debt expense, reflecting reduction in the billing and collection delays
experienced in 2002 in connection with the transition to competition and cost
reductions, primarily lower staffing and related administrative expenses,
initiated in response to the completion of the transition to competition in
Texas, the industry-wide decline in portfolio management activities and the
expected deferral of deregulation of energy markets in other states. SG&A
expenses were also favorably impacted by lower activity in the small strategic
retail services business. Favorable comparisons of SG&A expenses are expected to
continue over the balance of 2003.
Franchise and revenue-based taxes decreased $7 million, or 7%, to $87
million due primarily to lower retail revenues on which gross receipts taxes are
based.
Other income increased $3 million to $17 million in 2003. Gains on
sales of properties and business were $15 million in 2003, including a net $3
million gain on the sale of certain retail commercial and industrial gas
operations, and $12 million in 2002.
Interest income of $4 million in 2003 reflected higher cash balances
on hand as credit facilities were drawn down in the fourth quarter of 2002 to
enhance liquidity.
Interest expense and other charges increased $52 million, or 50%, to
$157 million in 2003. The increase reflects $38 million due to higher average
interest rates resulting in part from the refinancing of short-term borrowings
with higher-rate long-term debt, $9 million due to higher average debt levels
reflecting actions taken to ensure ample liquidity and $5 million due to higher
amortization of debt discounts, primarily related to the TXU Energy exchangeable
subordinated notes.
The effective income tax rate was 32.6% in 2003 compared to 31.8% in
2002. The increase was driven by higher state income tax accruals.
Net income declined $43 million, or 18%, to $201 million in 2003.
This performance reflected a decline of $29 million, or 16%, to $154 million in
the TXU Energy segment driven by the decreased gross margin and higher interest
expense, partially offset by decreased SG&A expenses and depreciation. Net
income in the Oncor segment declined $13 million, or 20%, to $52 million due to
lower revenues and higher interest expense. Net pension and postretirement
benefit costs, reported in operating costs and SG&A expenses, reduced net income
by $17 million in 2003 and $10 million in 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
Reference is made to comparisons of results by business segment
following the discussion of consolidated results presented below.
23
US Holdings' operating revenues increased $116 million, or 3%, to
$4.1 billion in 2003. The revenue growth reflected an increase in the TXU Energy
segment of $33 million, or 1%, and a nominal decrease in the Oncor segment of $2
million. Revenues in the TXU Energy segment reflected higher average pricing and
higher results from portfolio management activities largely offset by the effect
of lower sales volumes. The decline in revenues in the Oncor segment reflected
higher unbilled revenues in 2002 resulting from billing issues associated with
the transition to competition, as previously disclosed. This decline was
partially offset by higher fees associated with increased disconnect/reconnect
activities and higher transmission tariffs. Consolidated revenue growth also
reflected an $87 million reduction in the intercompany sales elimination,
reflecting lower sales by Oncor to TXU Energy as sales to non-affiliated
REPs increased.
Gross Margin
Six Months Ended
June 30,
-----------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 4,112 100% $ 3,996 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,770 43% 1,312 33%
Operating costs................................... 727 17% 658 16%
Depreciation and amortization related to operating
assets........................................ 320 8% 329 8%
------- ----- ------- ------
Gross margin........................................... $ 1,295 32% $ 1,697 43%
======= ===== ======= ======
The depreciation and amortization expense included in gross margin
excludes $25 million and $28 million of such expense for the six months ended
June 30, 2003 and 2002, respectively, that is not directly related to generation
and delivery property, plant and equipment.
Gross margin decreased $402 million, or 24%, to $1.3 billion in 2003.
This decline was driven by the TXU Energy segment, reflecting higher costs of
energy sold, which was partially offset by higher average pricing and higher
portfolio management results, as well as the effect of lower sales volumes.
Mark-to-market accounting for commodity contracts increased revenues and gross
margin by $33 million in 2003 (as compared to accounting on a settlement basis),
and decreased revenues and gross margin by $12 million in 2002. Operating costs
rose $69 million, or 10%, to $727 million primarily due to employee severance
costs, higher pension and postemployment costs, increased insurance expenses,
higher operating costs in the small strategic retail services business and
higher transmission costs paid to other utilities.
Depreciation and amortization (including amounts shown in the gross margin
table above) decreased $12 million, or 3%, to $345 million reflecting adjusted
depreciation rates related to TXU Energy's generation fleet, primarily from an
extension of the estimated depreciable life of the nuclear generation facility,
to better reflect its useful life, partially offset by the