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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 SEPTEMBER 30, 2003
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
---- -----
Common Stock outstanding at November 7, 2003: 323,889,698 shares,
without par value.
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TABLE OF CONTENTS
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PAGE
----
Glossary .......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2003 and 2002............... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Nine Months Ended September 30, 2003 and 2002.............. 2
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2003 and 2002......................... 3
Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002.............................. 4
Notes to Financial Statements......................................... 5
Independent Accountants' Report....................................... 31
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 72
Item 4. Controls and Procedures.............................................. 75
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 76
Item 6. Exhibits and Reports on Form 8-K .................................... 77
SIGNATURE.................................................................................. 79
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. and its subsidiaries are made
available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU Corp. will provide copies of current reports not
posted on the website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........Legislation that restructured the electric
utility industry in Texas to provide for
competition
2002 Form 8-K.........................the Form 8-K of TXU Corp. filed
September 23, 2003, reflecting the impact
of adopting SFAS 145 on the financial
information reported in the 2002
Form 10-K
2002 Form 10-K........................TXU Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2002
Commission............................Public Utility Commission of Texas
EITF..................................Emerging Issues Task Force
EITF 98-10 ...........................EITF Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and
Risk Management Activities"
EITF 01-8.............................EITF Issue No. 01-8, "Determining Whether
an Arrangement Contains a Lease"
EITF 02-3 ............................EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held
for Trading Purposes and Contracts
Involved in Energy Trading and Risk
Management Activities"
EITF 03-11............................EITF Issue No. 03-11, `Reporting Realized
Gains and Losses on Derivative Instruments
That Are Subject to FASB Statement
No. 133 and Not "Held for Trading
Purposes" As Defined in EITF No. 02-3'
ERCOT.................................Electric Reliability Council of Texas
FASB..................................Financial Accounting Standards Board, the
designated organization in the private
sector for establishing standards for
financial accounting and reporting.
FIN...................................Financial Accounting Standards Board
Interpretation
FIN 45................................FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees,
Including Indirect Guarantees of
Indebtedness of Others - an Interpretation
of FASB Statements No. 5, 57,
and 107 and Rescission of FIN No. 34"
FIN 46................................FIN No. 46, "Consolidation of Variable
Interest Entities"
Fitch.................................Fitch Ratings, Ltd.
GWh...................................gigawatt-hours
IRS...................................Internal Revenue Service
Moody's...............................Moody's Investors Services, Inc.
NRC...................................United States Nuclear Regulatory
Commission
Oncor.................................Oncor Electric Delivery Company, a
subsidiary of US Holdings
Pinnacle..............................Pinnacle One Partners, L.P., the
telecommunications business reported as
discontinued operations and formerly a
joint venture
POLR..................................provider of last resort of electricity to
certain customers under the Commission
rules interpreting the 1999
Restructuring Legislation
Price-to-beat rate....................residential and small commercial
customer electricity rates established by
the Commission in the restructuring of
the Texas market and required to be
charged in a REP's historical service
territories until January 1, 2005 or
when 40% of the electricity consumed by
such customer classes is supplied by
competing REPs, adjusted periodically for
changes in fuel costs
ii
REPs..................................retail electric providers
RRC...................................Railroad Commission of Texas
S&P...................................Standard & Poor's, a division of the
McGraw Hill Companies
Sarbanes-Oxley........................Sarbanes -Oxley Act of 2002
SEC...................................United States Securities and Exchange
Commission
Settlement............................regulatory settlement agreed to by the
Commission in 2002
Settlement Plan.......................regulatory settlement plan filed with the
Commission in December 2001
SFAS..................................Statement of Financial Accounting
Standards
SFAS 123..............................SFAS No. 123, "Accounting for Stock-Based
Compensation"
SFAS 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SFAS 140..............................SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and
Extinguishments of Liabilities a
replacement of FASB Statement 125"
SFAS 142..............................SFAS No. 142, "Goodwill and Other
Intangible Assets"
SFAS 143..............................SFAS No. 143, "Accounting for Asset
Retirement Obligations"
SFAS 145..............................SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of
FASB Statement 13, and Technical
Corrections"
SFAS 146..............................SFAS No. 146, "Accounting for Costs
Associated with Exit or
Disposal Activities"
SFAS 148..............................SFAS No. 148, "Accounting for Stock-Based
Compensation-- Transition and Disclosure"
SFAS 149..............................SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging
Activities"
SFAS 150..............................SFAS No. 150, "Accounting for Certain
Financial Instruments with
Characteristics of both
Liabilities and Equity"
SG&A..................................selling, general and administrative
T&D...................................transmission and distribution
TXU Australia.........................TXU Australia Holdings (Partnership)
Limited Partnership, a subsidiary of
TXU Corp.
TXU Corp..............................refers to TXU Corp. or TXU Corp. and its
consolidated subsidiaries, depending
on context
TXU Energy............................TXU Energy Company LLC, a subsidiary of
US Holdings
TXU Europe............................TXU Europe Limited, a subsidiary of
TXU Corp.
TXU Fuel..............................TXU Fuel Company, a subsidiary of
TXU Energy
TXU Gas...............................TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining............................TXU Mining Company LP, a subsidiary of
TXU Energy
TXU Portfolio Management..............TXU Portfolio Management Company LP, a
subsidiary of TXU Energy
TXU SESCO.............................TXU SESCO Company, a subsidiary of
TXU Energy which serves as a REP in ten
counties in the eastern and central
parts of Texas
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................TXU US Holdings Company, a subsidiary of
TXU Corp.
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- ------- ------- ------
(millions of dollars, except per share amounts)
Operating revenues...................................................... $3,136 $2,918 $8,607 $7,876
Costs and expenses:
Cost of energy sold and delivery fees................................ 1,342 1,279 3,905 3,062
Operating costs...................................................... 418 407 1,273 1,187
Depreciation and amortization........................................ 223 220 655 653
Selling, general and administrative expenses......................... 280 320 799 975
Franchise and revenue-based taxes.................................... 104 108 335 343
Other income......................................................... (26) (20) (66) (46)
Other deductions..................................................... 13 23 36 82
Interest income...................................................... (6) (6) (25) (21)
Interest expense and related charges................................. 240 214 736 647
----- ----- ----- -----
Total costs and expenses......................................... 2,588 2,545 7,648 6,882
----- ----- ----- -----
Income from continuing operations before income taxes and cumulative effect
of changes in accounting principles................................. 548 373 959 994
Income tax expense...................................................... 175 118 293 304
----- ----- ----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles.................................. 373 255 666 690
Income (loss) on discontinued operations, net of tax effect (Note 3).... 24 (44) (55) (23)
Cumulative effect of changes in accounting principles, net of tax
benefit (Note 2)....................................................... - - (58) -
----- ----- ------ -----
Net income ............................................................. 397 211 553 667
Preference stock dividends.............................................. 5 5 16 16
----- ----- ----- -----
Net income available for common stock................................... $ 392 $ 206 $ 537 $ 651
===== ===== ===== =====
Average shares of common stock outstanding (millions):
Basic................................................................ 322 282 321 272
Diluted.............................................................. 379 282 378 272
Per share of common stock:
Basic earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles................................. $ 1.14 $ .88 $2.02 $ 2.48
Income (loss) on discontinued operations, net of tax effect........ .08 (.15) (.17) (.08)
Cumulative effect of changes in accounting principles, net of
tax benefit...................................................... - - (.18) -
----- ----- ----- -----
Net income available for common stock.............................. $ 1.22 $ .73 $1.67 $ 2.40
===== ===== ===== =====
Diluted earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles................................ $ 1.01 $ .88 $1.82 $2.48
Income (loss) on discontinued operations, net of tax effect....... .06 (.15) (.15) (0.08)
Cumulative effect of changes in accounting principles, net of
tax benefit..................................................... - - (.15) -
----- ----- ----- -----
Net income available for common stock............................. $ 1.07 $ .73 $1.52 $2.40
====== ===== ===== =====
Dividends declared............................................... .125 .60 .375 1.80
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before cumulative effect
of changes in accounting principles.......................... $ 373 $ 255 $ 666 $ 690
Other comprehensive income (loss), net of tax effects:
Cumulative foreign currency translation adjustments.......... 19 (29) 180 44
Cash flow hedges-
Net change in fair value of derivatives (net of tax
benefit of $11, $42, $104 and $114)...................... (20) (95) (204) (214)
Amounts realized in earnings during the period
(net of tax expense of $33, $10, $111 and $36)........... 64 32 217 74
----- ----- ----- -----
Total.................................................. 63 (92) 193 (96)
----- ------ ----- ------
Comprehensive income from continuing operations................... 436 163 859 594
Comprehensive income from discontinued operations:
Income (loss) on discontinued operations, net of tax effect.. 24 (44) (55) (23)
Minimum pension liability adjustments (net of tax benefit
of $3)..................................................... - - (6) -
Cumulative foreign currency translation adjustment........... - 76 - 253
Cash flow hedges (net of tax expense of $12 and $21)......... - 29 - 48
----- ----- ----- -----
Total.................................................. 24 61 (61) 278
Cumulative effect of changes in accounting principles, net of
tax benefit..................................................... - - (58) -
----- ----- ------ -----
Comprehensive income........................................ $ 460 $ 224 $ 740 $ 872
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
2003 2002
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before cumulative effect of
changes in accounting principles.......................................... $ 666 $ 690
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by
operating activities:
Depreciation and amortization ............................................... 712 715
Deferred income taxes and investment tax credits - net ...................... 118 169
Net gain from sale of assets................................................ (39) (30)
Net unrealized gain from mark-to-market valuations of commodity contracts.... (15) (6)
Net equity loss from unconsolidated affiliates and joint ventures............ 18 40
Adjustments related to gas cost recovery..................................... 47 67
Reduction in regulatory liability............................................ (125) (112)
Reduction in retail clawback accrual......................................... (19) -
Asset impairment charge...................................................... - 11
Changes in operating assets and liabilities..................................... 674 (505)
------ -----
Cash provided by operating activities.................................... 2,037 1,039
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 2,449 2,868
Common stock................................................................. 27 717
Retirements/repurchases of securities:
Long-term debt............................................................... (1,705) (2,707)
Preferred stock of subsidiary................................................ (91) -
Change in notes payable:
Commercial paper............................................................. 11 284
Banks........................................................................ (2,301) (693)
Cash dividends paid:
Common stock................................................................. (120) (481)
Preference stock............................................................. (16) (16)
Redemption deposit applied to debt retirements.................................. 210 -
Debt premium, discount, financing and reacquisition expenses.................... (27) (77)
Other financing costs........................................................... - (30)
------ -----
Cash used in financing activities........................................ (1,563) (135)
Cash flows - investing activities:
Capital expenditures............................................................ (640) (733)
Acquisitions of businesses...................................................... (150) (36)
Proceeds from sale of assets.................................................... 19 445
Nuclear fuel ................................................................... (45) (51)
Investment in collateral trust ................................................. (525) -
Other........................................................................... (17) (25)
------- -----
Cash used in investing activities........................................ (1,358) (400)
Effect of exchange rates on cash and cash equivalents............................. - (6)
Cash used by discontinued operations.............................................. (39) (601)
------- ------
Net change in cash and cash equivalents........................................... (923) (103)
Cash and cash equivalents - beginning balance..................................... 1,574 216
------ -----
Cash and cash equivalents - ending balance........................................ $ 651 $ 113
====== =====
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
--------- -------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents................................................... $ 651 $ 1,574
Restricted cash............................................................. - 210
Accounts receivable-- trade................................................. 1,332 1,696
Income taxes receivable..................................................... 36 488
Inventories................................................................. 546 493
Commodity contract assets................................................... 746 1,298
Assets of telecommunications holding company (Note 3)....................... 103 -
Other current assets........................................................ 272 263
----- ------
Total current assets................................................. 3,686 6,022
Investments:
Restricted cash............................................................. 643 96
Other investments........................................................... 658 757
Property, plant and equipment-- net........................................... 20,464 19,642
Goodwill and other unamortized intangible assets.............................. 1,737 1,588
Regulatory assets-- net...................................................... 1,934 1,772
Commodity contract assets..................................................... 461 657
Cash flow hedges and other derivative assets.................................. 145 150
Other noncurrent assets....................................................... 371 332
Telecommunications assets held for sale (Note 3).............................. 670 -
------- -------
Total assets......................................................... $30,769 $31,016
======= =======
LIABILITIES, PREFERRED INTERESTS
AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper......................................................... $ 34 $ 18
Banks.................................................................... 6 2,306
Long-term debt due currently................................................ 402 958
Accounts payable-- trade.................................................... 891 1,054
Commodity contract liabilities.............................................. 550 1,138
Liabilities of telecommunications holding company (Note 3).................. 695 -
Other current liabilities................................................... 1,094 1,209
------- -------
Total current liabilities............................................ 3,672 6,683
Accumulated deferred income taxes and investment tax credits.................. 4,374 4,060
Commodity contract liabilities................................................ 404 520
Cash flow hedges and other derivative liabilities............................. 279 220
Other noncurrent liabilities and deferred credits............................. 2,350 2,144
Telecommunications liabilities held for sale (Note 3)......................... 133 --
Long-term debt, less amounts due currently.................................... 12,596 11,597
------ ------
Total liabilities.................................................... 23,808 25,224
Preferred securities of subsidiaries (Note 5)................................. 1,272 726
Contingencies (Note 7)
Shareholders' equity (Note 6):
Preferred stock - not subject to mandatory redemption....................... 300 300
Common stock without par value: Authorized shares: 1,000,000,000
Outstanding shares: September 30, 2003 - 323,802,730
and December 31, 2002 - 321,974,000.................................... 25 7,995
Additional paid in capital.................................................. 8,097 111
Retained deficit............................................................ (2,480) (2,900)
Accumulated other comprehensive loss........................................ (253) (440)
-------- --------
Total common stock equity............................................ 5,389 4,766
------- -------
Total shareholders' equity........................................... 5,689 5,066
------- -------
Total liabilities, preferred interests and shareholders' equity...... $30,769 $31,016
======= =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- TXU Corp. is an energy company that engages in
power production (electricity generation), wholesale energy sales, retail energy
sales and related services, portfolio management, including risk management and
certain trading activities, energy delivery and, through a business held for
sale and formerly a joint venture, telecommunications services. TXU Corp. is a
holding company with its US operations conducted through US Holdings and TXU
Gas. US Holdings is also a holding company with its principal operations
conducted through TXU Energy and Oncor. TXU Corp.'s principal international
operations are conducted through TXU Australia.
Discontinued Businesses - Prior to October 2002, TXU Corp. also conducted
international operations through TXU Europe. The consolidated financial
statements for 2002 and discussion of results of operations of TXU Corp. reflect
the reclassification of the TXU Europe business as discontinued operations (see
Note 3 for information about discontinued operations).
With respect to the telecommunications business, Pinnacle, in May 2003 TXU
Corp. acquired, for $150 million in cash, the interests it did not previously
own from the joint venture partner under a put/call agreement, which had been
executed in late February 2003, and finalized a formal plan to dispose of the
telecommunications business by sale. Accordingly, effective with reporting for
the second quarter of 2003, activities of Pinnacle since March 1, 2003 are
reported as discontinued operations. TXU Corp. had used the equity method of
accounting for its investment in Pinnacle until March 1, 2003 when the business
was consolidated as a result of the execution of the put/call agreement.
Accounting rules provide that businesses accounted for under the equity method
should not be reported as discontinued operations; therefore, results prior to
March 1, 2003 are reported in other deductions in the statement of income,
consistent with prior reporting. (Also see Note 3.)
Basis of Presentation -- The condensed consolidated financial statements
of TXU Corp. have been prepared in accordance with US GAAP and on the same basis
as the audited financial statements included in its 2002 Form 10-K, except for
the discontinuance of the telecommunications business and the adoption of the
following new accounting rules: EITF 02-3, SFAS 143, SFAS 145 (the effects of
which have been reflected in the 2002 Form 8-K filed September 23, 2003) and
SFAS 150, all discussed below.
In the opinion of management, all other adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. All intercompany
items and transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted
pursuant to the rules and regulations of the 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 8-K. The
results of operations for an interim period may not give a true indication of
results for a full year. Certain previously reported amounts have been
reclassified to conform to current classifications.
All dollar amounts in the financial statements and tables in the notes,
except per share amounts, are stated in millions of US dollars unless otherwise
indicated.
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 $25 million (pre-tax) and an
increase in net income of $16 million ($0.04 per diluted share) in the
nine-months ended September 30, 2003.
Changes in Accounting Standards -- In October 2002, the EITF, through EITF
02-3, rescinded EITF 98-10, which required mark-to-market accounting for all
trading activities. SFAS 143, regarding asset retirement obligations, became
effective on January 1, 2003. As a result of the implementation of these two
accounting standards, TXU Corp. recorded a cumulative effect of changes in
accounting principles as of January 1, 2003. (See Note 2 for a discussion of the
impacts of these two accounting standards.)
5
As a result of guidance provided in EITF 02-3, TXU Corp. has not
recognized origination gains on commercial and industrial retail contracts in
2003. For the three- and nine-month periods ended September 30, 2002, TXU Corp.
recognized $2 million and $36 million in origination gains on such contracts,
respectively.
SFAS 145, regarding classification of items as extraordinary, became
effective on January 1, 2003. One of the provisions of this statement is the
rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt." As required by the standard, the results for the nine months ended
September 30, 2002 reflect a reclassification of a previously reported
extraordinary loss of $18 million (after-tax) on the early extinguishment of
debt to other deductions ($28 million) and income tax expense ($10 million), as
the loss does not meet the criteria of an extraordinary item as defined by
Accounting Principles Board Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." There is no effect
on net income as a result of the implementation of SFAS 145.
This reclassification decreases basic and fully diluted income from
continuing operations before extraordinary loss per share by $0.07 for the nine
months ended September 30, 2002 and decreases the extraordinary loss, per share,
by the same amount.
SFAS 146 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 impact results of operations for the nine months
ended September 30, 2003.
SFAS 148 was issued in December 2002. TXU Corp. adopted the disclosure
requirements of SFAS 148 effective December 31, 2002. This statement provides
transition alternatives when companies adopt fair value accounting for
stock-based compensation. TXU Corp. accounts for stock-based compensation plans,
including stock options, using the intrinsic value method. TXU Corp. does not
currently issue stock options, and only 23,674 previously issued options remain
outstanding at September 30, 2003. Had compensation expense for these
stock-based compensation plans been determined based upon the fair value
methodology prescribed under SFAS 123, TXU Corp.'s net income and per share
amounts would not have been materially different from reported amounts.
FIN 45 was issued in November 2002 and requires recording the fair value
of guarantees upon issuance or modification after December 31, 2002. The
interpretation also requires expanded disclosures of guarantees (see Note 7
under Guarantees). The adoption of FIN 45 did not impact results of operations
for the nine months ended September 30, 2003.
FIN 46, which was issued in January 2003, provides guidance related to
identifying variable interest entities and determining whether such entities
should be consolidated. On October 8, 2003, the FASB decided to defer
implementation of FIN 46 until the fourth quarter of 2003. This deferral only
applies to variable interest entities that existed prior to February 1, 2003.
The adoption of FIN 46 did not and is not expected to impact 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. Also, EITF 03-11 became effective October 1,
2003 and, among other things, discussed the nature of certain power contracts.
As a result of the issuance of SFAS 149 and EITF 03-11, certain commodity
contract hedges are expected to be replaced with another type of hedge that is
subject to effectiveness testing. The adoption of these changes did not impact
results of operations for the nine months ended September 30, 2003.
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 mandatorily redeemable preferred securities be classified as
liabilities beginning July 1, 2003. A FASB Staff Position (FSP 150-3) issued
November 7, 2003 defers the applicability of SFAS 150 to the
mandatorily redeemable preferred securities of subsidiary trusts. The
September 30, 2003 balance sheet reflects the classification of certain
preferred securities of subsidiaries subject to mandatory redemption as
liabilities (see Note 5). In accordance with SFAS 150, those securities were
not reclassified on the balance sheet at December 31, 2002.
6
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 requires 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. The adoption of
this change did not impact results of operations for the nine months ended
September 30, 2003.
Earnings Per Share -- Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
quarter. Diluted earnings per share include the effect of all potential
issuances of common shares under certain debt securities and other arrangements.
For the three months and nine months ended September 30, 2003, the $750 million
of 9% Exchangeable Preferred Membership Interests in TXU Energy (originally
issued as subordinated notes in November 2002) were dilutive and were included
in the calculation of diluted earnings per share. Assuming these securities were
converted to TXU Corp. common stock at the beginning of the period at the
exercise price of $13.1242 per share, 57.1 million more shares would have been
issued and net income would have increased by $13 million and $40 million for
the three months and nine months ended September 30, 2003, respectively,
representing the after-tax interest savings on the preferred membership
interests.
In July 2003, TXU Corp. issued $525 million of floating rate convertible
senior notes convertible into 15.2 million shares of TXU Corp. common stock (see
Note 4). For the three months and nine months ended September 30, 2003, these
notes had no effect on the calculation of earnings per share as the market price
of TXU Corp. common stock was below the $41.48 per share trigger price for the
quarter.
Additional dilution of earnings per share would result from approximately
7.0 million shares and 18.0 million shares of common stock issuable in
connection with equity-linked debt securities issued in 2002 and 2001,
respectively, if the average of the closing price per share of TXU Corp. common
stock on each of the twenty consecutive trading days ending on the third day
immediately preceding the end of a reporting period is above the strike price of
$62.91 and $55.68 per share, for the respective issuances.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for the nine months ended
September 30, 2003 for changes in accounting principles effective January 1,
2003:
Charge from rescission of EITF 98-10, net of tax effect of $34 million..... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million.......... 5
----
Total net charge............................................ $(58)
====
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10,
which required mark-to-market accounting for all trading activities. Pursuant to
this rescission, only financial instruments that are derivatives under SFAS 133
will be subject to mark-to-market accounting. Financial instruments that may not
be derivatives under SFAS 133, but were marked-to-market under EITF 98-10,
consist primarily of gas transportation and storage agreements, power tolling,
full requirements and capacity contracts. This new accounting rule was effective
for new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) has been reported as a
cumulative effect of a change in accounting principles in the first quarter of
2003. Of the total, $75 million reduced net commodity contract assets and
liabilities and $22 million reduced inventory that had previously been
marked-to-market as a trading position. The cumulative effect adjustment
represents the net gains previously recognized for these contracts under
mark-to-market accounting.
7
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For TXU Corp., such liabilities relate to
nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) TXU Corp. had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................. $488
Increase in other noncurrent liabilities and deferred credits... (528)
Increase in accumulated deferred income taxes................... (3)
Increase in regulatory assets - net............................. 48
----
Cumulative effect of change in accounting principles.... $ 5
====
The asset retirement liability at September 30, 2003 was $569 million,
comprised of a $554 million liability as a result of adoption of SFAS 143 and
$27 million of accretion during the first nine months of 2003 reduced by $12
million in reclamation payments.
With respect to nuclear decommissioning costs, TXU Corp. believes that the
adoption of SFAS 143 results primarily in timing differences in the recognition
of asset retirement costs that TXU Energy is currently recovering through the
regulatory process.
On a pro forma basis, assuming SFAS 143 had been adopted at the beginning
of the periods, income from continuing operations for the nine months ended
September 30, 2002 would have increased by $7 million after-tax and the
liability for asset retirement obligations as of September 30, 2002, would have
been $546 million.
3. DISCONTINUED OPERATIONS
Income (loss) from discontinued operations was comprised of results from
the following discontinued businesses or businesses to be sold:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Telecommunications business................................. $ 24 $ - $ (53) $ -
Europe(a)................................................... - (29) (2) (8)
Mexico...................................................... - (15) - (15)
----- ------ ----- ------
Income (loss) from discontinued operations.................. $ 24 $ (44) $ (55) $ (23)
===== ====== ====== ======
(a) Includes legal, audit and administrative accruals related to TXU Europe of
$2 million for the nine months ended September 30, 2003.
8
Results of discontinued operations - The following summarizes the
historical consolidated financial information of TXU Europe and the
telecommunications business reported as discontinued operations:
Europe Telecommunications
---------------------------- ------------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2002 2003 2003
---- ---- ---- ----
Operating revenues.......................... $1,358 $4,052 $ 49 $ 117
Operating costs and expenses................ 1,321 3,852 41 110
Other (income) deductions-- net............. (4) 6 8 8
Interest income............................. (5) (15) (2) (4)
Interest expense and related charges........ 89 255 19 45
------ ----- ------ ------
Income (loss) before income taxes........... (43) (46) (17) (42)
Income tax (benefit) expense................ (14) (38) (41) 11
------- ------ ------- ------
Income (loss) from discontinued operations.. $ (29) $ (8) $ 24 $ (53)
====== ===== ====== =======
The income tax benefit of $41 million reported in the results of the
telecommunications business for the three months ended September 30, 2003
reflects a $37 million benefit from a change in the estimated tax basis of
the business.
TXU Corp. intends to sell its 60% interest in a gas distribution business
in Mexico and recorded a charge of $15 million (after taxes of $8 million) in
the third quarter of 2002 to write-down its investment in the business.
Balance sheet - The following details the telecommunications assets and
liabilities held for sale as of September 30, 2003:
Current assets......................................... $ 56
Investments............................................ 36
Plant, property, and equipment......................... 233
Goodwill............................................... 317
Accumulated deferred income tax asset.................. 23
Other noncurrent assets................................ 5
------
Telecommunications assets held for sale......... $ 670
======
Current liabilities.................................... $ 83
Noncurrent liabilities................................. 50
------
Telecommunications liabilities held for sale... $ 133
======
9
The following details the assets and liabilities of the telecommunications
holding company as of September 30, 2003:
Investments (a)...................................... $ 91
Other assets......................................... 12
------
Assets of telecommunications holding company..... $ 103
======
Notes payable and other debt (a)..................... $ 687
Other liabilities.................................... 8
------
Liabilities of telecommunications holding company $ 695
======
(a) Investments represents Pinnacle Overfund Trust, a trust established to
fund interest payments on notes payable of the holding company. The
notes payable outstanding totaled $810 million at December 31, 2002 and
$670 million at September 30, 2003. The trust's assets consist of TXU
Corp. debt (reported in long-term debt due currently). Upon sale of the
business, expected to occur in the first quarter of 2004, the remaining
notes outstanding will be repaid and the remaining TXU Corp. debt and
the trust will be canceled. During the nine months ended September 30,
2003, TXU Corp. repurchased $140 million of the notes payable and made
scheduled payments of $86 million on the debt held by the Overfund
Trust. In November 2003, TXU Corp. repurchased $110 million of the
notes payable.
4. FINANCING ARRANGEMENTS
Credit Facilities -- At September 30, 2003, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of approximately $6 million
and commercial paper of $34 million (all in Australia). At December 31, 2002,
TXU Corp. had outstanding short-term borrowings consisting of bank borrowings of
approximately $2.3 billion (predominantly all in the US) at a weighted average
interest rate of 2.6% and commercial paper of $18 million (all in Australia).
At September 30, 2003, TXU Corp. and its subsidiaries had credit
facilities (some of which provide for long-term borrowings) as follows:
At September 30, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- --------- ----- ------ ---------- ------------
(b)
Five-Year Revolving Credit Facility February 2005 US Holdings $ 1,400 $ 266 $ -- $1,134
Revolving Credit Facility February 2005 TXU Energy, Oncor 450 4 -- 446
Three-Year Revolving Credit Facility May 2005 US Holdings (a) 400 -- -- 400
Five-Year Revolving Credit Facility August 2008 TXU Corp. 500 -- -- 500
------- ------ ------ ------
Total US $ 2,750 $ 270 $ -- $2,480
======= ====== ====== ======
Senior Facility (b) October 2004 TXU Australia $ 1,185 $ -- $ 931 $ 237
Working Capital Facility October 2003 TXU Australia 67 -- 6 61
Standby Facility (b) December 2003 TXU Australia 17 -- -- --
------- ------ ------ ------
Total Australia $ 1,269 $ -- $ 937 $ 298
======= ====== ====== ======
(a) previously TXU Corp.
(b) Commercial paper borrowings totaling $34 million at September 30, 2003 were
supported by the Standby Facility ($17 million) and the Senior Facility
($17 million).
Through April 2003, TXU Corp. and its US subsidiaries repaid $2.3 billion
in cash borrowings outstanding as of December 31, 2002 under available credit
facilities.
In August 2003, TXU Corp. entered into a $500 million 5-year revolving
credit facility with LOC 2003 Trust, a special purpose, wholly-owned subsidiary
of TXU Corp. (LOC Trust). LOC Trust, in turn, entered into a $500 million 5-year
secured credit facility with a group of lenders. TXU Corp. capitalized LOC Trust
with approximately $525 million of cash, which the lenders have invested in
permitted investments as directed by LOC Trust. LOC Trust's assets, including
10
the investments, constitute collateral for the benefit of the lenders to secure
issuances of letters of credit or loans, and are owned by LOC Trust. During the
term of the facility, LOC Trust is required to maintain collateral in an amount
equal to 105% of the commitments under the secured facility. TXU Corp. may
request up to $500 million of letters of credit or up to $250 million of loans
from LOC Trust, subject in the aggregate to its $500 million commitment, for the
benefit of TXU Corp. and its subsidiaries, which may be provided through
issuances of letters of credit or loans by the lenders. LOC Trust's assets are
not available to satisfy claims of creditors of TXU Corp. or its subsidiaries.
However, LOC Trust may terminate all or a portion of the secured facility at any
time and request the release of any collateral not required to secure
outstanding letters of credit or loans, if any, from the lenders. LOC Trust is
included in the consolidated financial statements of TXU Corp. solely to comply
with GAAP.
In April 2003, the $450 million revolving credit facility was established
for TXU Energy and Oncor. This facility will be used for working capital and
other general corporate purposes, including letters of credit, and replaced a $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.
Since December 31, 2002, TXU Corp. elected to cancel $250 million in other
US credit facility capacity in response to changing liquidity needs.
The US Holdings, TXU Energy and Oncor facilities provide back-up for any
future issuance of commercial paper by TXU Energy and Oncor. At September 30,
2003, there was no such outstanding commercial paper.
The $1.4 billion facility provides for up to $1.0 billion in letters of
credit.
11
Long-Term Debt -- At September 30, 2003 and December 31, 2002, the
long-term debt of TXU Corp. and its consolidated subsidiaries consisted of the
following:
September 30, December 31,
2003 2002
------------- -----------
TXU Energy
----------
Pollution Control Revenue Bonds:
Brazos River Authority:
Floating Taxable Series 1993 due June 1, 2023....................................... $ -- $ 44
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a).......... 39 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
Floating Taxable Series 2001F due December 31, 2036................................. -- 39
1.170% Floating Taxable Series 2001G due December 1, 2036(b)........................ 72 72
1.120% Floating Taxable Series 2001H due December 1, 2036(b)........................ 31 31
1.120% Floating Taxable Series 2001I due December 1, 2036(b)........................ 63 63
1.150% 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 --
6.300% Fixed Series 2003B due July 1, 2032.......................................... 39 --
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
Floating Taxable Series 2001D due December 31, 2036................................. -- 12
1.120% Floating Taxable Series 2001E due December 31, 2036(b)....................... 45 45
5.800% Fixed Series 2003A due July 1, 2022.......................................... 12 --
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................... 14 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
6.125% Fixed Senior Notes due March 15, 2008........................................ 250 --
7.000% Fixed Senior Notes due March 15, 2013........................................ 1,000 --
Capital lease obligations........................................................... 12 10
Other............................................................................... 7 8
Unamortized premium and discount and fair value adjustments......................... 17 (110)
------ -----
Total TXU Energy ............................................................... 3,161 2,605
12
September 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
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. -- 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
2.260% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2007.............................................................. 103 --
4.030% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2010.............................................................. 122 --
4.950% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2013.............................................................. 130 --
5.420% Fixed Series 2003 Transition Bonds due in bi-annual installments through
August 15, 2015................................................................ 145 --
Unamortized premium and discount................................................. (31) (35)
------- -------
Total Oncor.................................................................. 4,225 4,399
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........ 72 73
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 67 68
1.910% 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 ........................................................... 158 160
TXU Gas
- -------
6.250% Fixed Notes due January 1, 2003........................................... -- 125
6.375% Fixed Notes due February 1, 2004.......................................... 150 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008 (a)...................... 125 125
Unamortized fair value adjustments............................................... 1 1
------- -------
Total TXU Gas ............................................................... 426 551
TXU Australia
- -------------
5.505% Floating Notes due October 30, 2003(d).................................... 20 17
5.365% Floating Notes due September 21, 2007(d).................................. 186 155
Floating Note, Tranche A Facility due October 26, 2004(d)........................ -- 23
5.685% Floating Note, Tranche A Facility due October 26, 2004(d)................. 84 142
5.820% Floating Note, Tranche B Facility due October 26, 2004(d)................. 136 113
5.650% Floating Note, Tranche B Facility due October 26, 2004(d)................. 41 34
5.830% Floating Note, Tranche B Facility due October 26, 2004(d)................. 75 62
5.835% Floating Note, Tranche B Facility due October 26, 2004(d)................. 88 73
6.030% Floating Note, Tranche C Facility due October 26, 2004(d)................. 373 311
6.030% Floating Note, Tranche C Facility due October 26, 2004(d)................. 135 113
7.000% Fixed Medium Term Notes due September 22, 2005............................ 135 113
6.700% Fixed Senior Notes due December 1, 2006(d)(f)............................. 243 203
5.433% Fixed Senior Notes due December 1, 2016(f)................................ 84 70
Unamortized premium and discount and fair value adjustments...................... 41 99
------- -------
Total TXU Australia.......................................................... 1,641 1,528
13
September 30, December 31,
2003 2002
---- ----
Corporate and Other
- -------------------
6.375% Fixed Senior Notes Series B due October 1, 2004........................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008........................... 200 200
Fixed Senior Notes Series D due August 16, 2003.................................. -- 323
4.050% Fixed Senior Notes Series E due August 16, 2004........................... 2 2
6.375% Fixed Senior Notes Series J due June 15, 2006............................. 800 800
4.750% Fixed Senior Notes Series K due November 16, 2006 remarketing date
August 16, 2004(e)............................................................ 500 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(e)............................................................ 500 500
5.800% Fixed Senior Notes Series M due May 16, 2008 remarketing date
February 16, 2006(e).......................................................... 440 440
6.000% Fixed Telecom Overfund Trust Debt due bi-annually through August 15, 2004
(see Note 3).................................................................. 91 178
9.000% Floating Notes due monthly through October 31, 2007(c).................... 3 4
8.820% Building Financing due bi-annually through February 11, 2022.............. 130 140
2.606% Floating Convertible Senior Notes due July 15, 2033....................... 525 --
Unamortized premium and discount and fair value adjustments...................... 21 50
------- -------
Total Corporate and Other................................................... 3,387 3,312
------- -------
Total TXU Corp. consolidated..................................................... 12,998 12,555
Less amount due currently........................................................ 402 958
------- -------
Total long-term debt............................................................. $12,596 $11,597
======= =======
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at September 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 September 30, 2003.
(d) Interest rates fixed by swaps.
(e) Equity-linked.
(f) US Dollar denominated debt. Interest rates swapped to floating
through a cross-currency fair value hedge in Australia.
In November 2003, the Brazos River Authority Series 2001D pollution
control revenue bonds (aggregate principal amount of $271 million) were
remarketed and converted from a multiannual mode to a weekly rate mode, and the
Sabine River Authority Series 2001C pollution control revenue bonds (aggregate
principal amount of $70 million) were purchased upon mandatory tender. TXU Corp.
intends to remarket these bonds in the first quarter of 2004.
In October 2003, the Brazos River Authority issued $72 million aggregate
principal amount of Series 2003C pollution control revenue bonds and $31 million
aggregate principal amount of Series 2003D pollution control revenue bonds for
TXU Energy. The Series 2003C bonds will bear interest at an annual rate of 6.75%
until maturity in 2038. The Series 2003D bonds will bear interest at an annual
rate of 5.40% until their mandatory tender date in 2014, at which time they will
be remarketed. Proceeds from the issuance of the Series 2003C and Series 2003D
bonds were used to refund the $72 million aggregate principal amount of Brazos
River Authority Taxable Series 2001G and the $31 million aggregate principal
amount of Series 2001H variable rate pollution control revenue bonds, both due
December 1, 2036. The Sabine River Authority also issued $45 million aggregate
principal amount of Series 2003B pollution control revenue bonds for TXU Energy.
The Series 2003B bonds will bear interest at an annual rate of 6.15% until
maturity in 2022, however they become callable in 2013. Proceeds from the
issuance of the Series 2003B bonds were used to refund the $45 million aggregate
principal amount of Sabine River Authority Taxable Series 2001E variable rate
pollution control revenue bonds due December 1, 2036.
In August 2003, Oncor's wholly-owned, special purpose bankruptcy-remote
subsidiary, Oncor Electric Delivery Transition Bond Company LLC, issued $500
million aggregate principal amount of transition (securitization) bonds in
accordance with the Settlement and a financing order. The bonds were issued in
four classes that require bi-annual interest and principal installment payments
beginning in 2004 through specified dates in 2007 through 2015. The transition
bonds bear interest at fixed annual rates ranging from 2.26% to 5.42%. Oncor
used the proceeds to retire the $224 million aggregate principal amount of the
7 7/8% First Mortgage Bonds due March 1, 2023 and $133 million principal amount
of the 7 7/8% First Mortgage Bonds due April 1, 2024, as well as to repurchase
outstanding common shares from its parent, US Holdings, in the amount of $125
million. The Settlement and a financing order provide for a second issuance of
$800 million expected to be completed in the first quarter of 2004.
14
In August 2003, TXU Corp. redeemed the full $323 million principal amount
of its 5.52% Series D Senior Notes, at the maturity date, for par value.
In July 2003, TXU Corp. issued $525 million of floating rate convertible
senior notes due 2033 in a private placement with registration rights. The notes
bear regular interest at an annual floating rate equal to 3-month LIBOR,
determined quarterly, plus 150 basis points, and are payable in arrears
quarterly commencing October 15, 2003. The initial interest rate is 2.60563%.
The notes will bear additional contingent interest during periods after July 15,
2008 if the average trading price of the notes for a specified period exceeds
120% of the principal amount of the notes. The notes will have an initial
conversion rate of 28.9289 shares of TXU Corp. common stock per $1,000 principal
amount of notes, which equates to an initial conversion price of $34.5675 per
share. The conversion rate is subject to adjustments in certain circumstances,
including a change in the amount of quarterly cash dividends per share on TXU
Corp. common stock from the current rate of $0.125 per share. The notes will be
convertible at the conversion rate, as adjusted, until maturity if (1) during
any fiscal quarter the market price of TXU Corp. common stock is above $41.481
per share for a specified period; (2) TXU Corp. calls the notes for redemption;
(3) the trading price of the notes falls below 95% of the conversion value of
the notes for a specified period; or (4) certain specified corporate
transactions occur. Should the holders elect to convert the notes, TXU Corp. has
the option to settle the conversion in cash, common stock or a combination of
both. The notes will be redeemable by TXU Corp. at par, plus accrued and unpaid
interest and contingent interest, if any, beginning July 15, 2008. The holders
will be entitled to require TXU Corp. to purchase the notes at par, plus accrued
and unpaid interest and contingent interest, if any, on July 15, 2008, July 15,
2013, July 15, 2018, July 15, 2023 and July 15, 2028. Other than on July 15,
2008, upon a holder's election to require a repurchase, TXU Corp. may elect to
pay the purchase price in cash, common stock, or a combination of both. With
certain exceptions, the holders will be entitled to require TXU Corp. to
repurchase the notes if a person or group acquires more than 50% of TXU Corp.'s
common equity or if there is a merger, sale of assets or other transaction that
results in TXU Corp.'s common stockholders owning less than 50% of the surviving
entity.
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. (See
Note 5.)
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 $39 million
aggregate 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 $12 million aggregate 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 remarketing date of May 1,
2005. 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.
15
In April 2003, Oncor repaid the $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 $44 million principal amount of
Brazos River Authority Series 1993 pollution control revenue bonds due June 1,
2023.
In March 2003, Oncor repaid the $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 credit facilities. In
August 2003, TXU Energy entered into interest rate swap transactions through
2013, which are being accounted for as fair value hedges, to effectively convert
$500 million of the notes to floating interest rates.
In January 2003, TXU Gas redeemed, at par value, $125 million principal
amount of its 6.25% Notes at maturity.
Australia -- At September 30, 2003, TXU Australia had A$505 million ($342
million) in medium-term notes outstanding, of which interest and principal
payments associated with A$475 million ($322 million) were guaranteed under an
insurance policy. The medium-term notes have three tranches consisting of fixed
and variable rates of which A$30 million ($20 million) is due October 2003 and
the remainder is due between September 2005 and September 2007.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions. In September 2003, the maximum amount of undivided
interests that could be sold by TXU Receivables Company was increased by $100
million to $700 million. In November 2003, this amount decreased to $600
million.
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid that was funded by the sale of the
undivided interests.
16
The discount from face amount on the purchase of receivables funds a
servicing fee paid by TXU Receivables Company to TXU Business Services Company,
a direct subsidiary of TXU Corp., as well as program fees paid by TXU
Receivables Company to the financial institutions. The servicing fee, which
totaled $7 million and $6 million for the nine month periods ended September 30,
2003 and 2002, respectively, compensates TXU Business Services Company for its
services as collection agent, including maintaining the detailed accounts
receivable collection records. The program fees paid to financial institutions,
which consist primarily of interest costs on the underlying financing, were $8
million and $11 million for the nine-month periods ending September 30, 2003 and
2002, respectively, and approximated 2.4% of the average funding under the
program on an annualized basis in each period; these fees represent the net
incremental costs of the program to the originators and are reported in SG&A
expenses.
The September 30, 2003 balance sheet reflects funding under the program of
$700 million, through sale of undivided interests in receivables by TXU
Receivables Company, related to $1.5 billion face amount of trade accounts
receivable of TXU Energy, TXU Gas and Oncor. Funding under the program increased
$229 million for the nine month period ended September 30, 2003, primarily due
to the program capacity increase of $100 million and the effect of improved
collection trends. Funding under the program for the nine month period ended
September 30, 2002 increased $100 million. Funding increases or decreases under
the program are reflected as operating cash flow activity in the statement of
cash flows.
Upon termination of the program, cash flows to TXU Corp. would be delayed
as collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
In June 2003, the program was amended to provide temporarily higher
delinquency and default compliance ratios and temporary relief from the loss
reserve formula, which allowed for increased funding under the program. 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. 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.
Contingencies Related to Sale of 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) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or
deemed uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to deregulation. Certain
billing and collection delays arose due to implementation of new systems and
processes within TXU Energy and ERCOT for clearing customers' switching and
billing data. The billing delays have been resolved but, while improving, the
lagging collection issues continue to impact the ratios. The implementation of
new POLR rules by the Commission and strengthened credit and collection policies
and practices have brought the ratios into consistent compliance with the
program.
17
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate. Prior to the August 2003 amendment
extending the program, originator eligibility was predicated on the maintenance
of an investment grade credit rating.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp. contain financial
covenants that require maintenance of specified fixed charge coverage ratios,
shareholders' equity to total capitalization ratios and leverage ratios and/or
contain minimum net worth covenants. TXU Energy's preferred membership interests
(formerly subordinated notes) also limit its incurrence of additional
indebtedness unless a leverage ratio and interest coverage test are met on a pro
forma basis. As of September 30, 2003, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. contain provisions
that are specifically affected by changes in credit ratings and also include
cross default provisions. The material cross default provisions are described
below.
Other agreements of TXU Corp., including some of the credit facilities
discussed above, contain terms pursuant to which the interest rates charged
under the agreements may be adjusted depending on the credit ratings of TXU
Corp. or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Corp. contain provisions that would
result in an event of default if there were 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 (which is no longer outstanding as of October 1, 2003) 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 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 by TXU Corp. on indebtedness of $50 million or more would result
in a cross default under the new $500 million five-year revolving credit
facility.
A default or similar event under the terms of the TXU Energy preferred
membership interests (formerly subordinated notes) that results in the
acceleration (or other mandatory repayment prior to the mandatory redemption
date) of such security or the failure to pay such security at the mandatory
redemption date would result in a default under TXU Energy's $1.25 billion
senior unsecured notes.
TXU Corp.'s 6% Notes due 2003 to 2004, which are held by the Pinnacle
Overfund Trust, and Pinnacle's 8.83% Senior Secured Notes due 2004, reported in
liabilities of the telecommunications holding company (see Note 3), contain
cross default provisions relating to a failure to pay principal or interest on
indebtedness of TXU Corp. or TXU Communications Ventures Company (in the case of
the 8.83% Senior Secured Notes due 2004) in a principal amount of $50 million or
above.
18
TXU Energy has entered into certain mining and equipment leasing
arrangements aggregating $122 million that would terminate upon the default of
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
TXU Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if TXU Energy were to
default under an obligation in respect of borrowings in excess of thresholds
stated in the contracts, which thresholds vary.
A default by TXU Gas or any of its material subsidiaries on indebtedness
of $25 million or more would result in a cross default under the $300 million
TXU Gas senior notes due 2004 and 2005.
TXU Corp. and its subsidiaries have other arrangements, including interest
rate swap agreements and leases with cross default provisions, the triggering of
which would not result in a significant effect on liquidity.
5. PREFERRED INTERESTS OF SUBSIDIARIES
Subsidiary preferred securities outstanding were as follows:
September 30, December 31,
2003 2002
------- ------
Classified as a liability: (a)
Preferred stock of US Holdings........................... $ 7 $ -
====== ======
Classified as preferred interests:
Exchangeable preferred membership interests of TXU Energy,
net of
$106 unamortized discount........................... $ 644 $ -
Preferred securities of subsidiary trusts................ 515 515
Preferred stock of TXU Gas............................... 75 75
Preferred stock of US Holdings........................... 38 136
------ ------
Total.................................................... $1,272 $ 726
====== ======
(a) Reported in other current liabilities.
See Note 1 for a discussion of the change in balance sheet classification
of these securities as a result of the adoption of SFAS 150.
19
Mandatorily Redeemable, Preferred Securities of Subsidiary Trusts, Each
Holding Solely Junior Subordinated Debentures of TXU Corp. or TXU Gas (Trust
Securities) -- Statutory business trusts have been established as wholly-owned
financing subsidiaries of TXU Corp. and TXU Gas. The trusts have issued
preferred interests in the form of Trust Securities, and the assets of the
trusts consist solely of Junior Subordinated Debentures of TXU Corp. or TXU Gas,
as presented below:
Trust Securities Maturity
---------------------------------------------------- Trust Assets --------
Units (000's) Amount Amount
------------------------ ------------------------- --------------------
September December 31, September December 31, September December
30, 30, 30, 31, 30, 31,
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
TXU Corp.
- ---------
TXU Corp. Capital I
(7.25% Series)........ 9,200 9,200 $ 223 $ 223 $237 $237 2029
TXU Corp. Capital II
(8.70% Series)........ 6,000 6,000 145 145 155 155 2034
------ ------ ----- ----- ---- ----
Total TXU Corp........ 15,200 15,200 368 368 392 392
------ ------ ----- ----- ---- ----
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(a)....... 150 150 147 147 155 155 2028
------ ------ ----- ----- ---- ----
Total................. 15,350 15,350 $ 515 $ 515 $547 $547
====== ====== ===== ===== ==== ====
(a) Interest rate swaps effectively fixed the rate on $100 million of the TXU
Gas Floating Rate Trust Securities at 6.629% and at 6.444% on the remaining
$50 million of the Trust Securities to July 1, 2003. TXU Corp. elected not
to renew these swaps and will pay variable interest rates on these Trust
Securities based on the three-month LIBOR rate plus a margin of 135 basis
points.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's securities.
Exchangeable Preferred Membership Interests of TXU Energy - 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 per
share. The market price of TXU Corp. common stock on September 30, 2003 was
$23.56. 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
September 30, 2003, the pre-tax charge would have been $106 million. These
securities are considered not to be mandatorily redeemable under SFAS 150
because of the exchangeability provision.
Preferred Stock of US Holdings - In July 2003, US Holdings redeemed all of
the shares of its $7.98 series, $7.50 series and $7.22 series of preferred stock
not subject to mandatory redemption and the shares of its $6.98 series of
preferred stock subject to mandatory redemption for an aggregate principal
amount of $91 million. In September 2003, US Holdings called all of its $6.375
mandatorily redeemable preferred stock for redemption, and on October 1, 2003
all of these shares were redeemed for an aggregate principal amount of $7
million.
6. SHAREHOLDERS' EQUITY
Under Texas law, TXU Corp. may only declare dividends out of surplus,
which is statutorily defined as total shareholders' equity less the book value
of common stock and preferred stock (stated capital). The write-off in 2002 of
TXU Corp.'s investment in TXU Europe resulted in negative surplus as of December
31, 2002. Texas law permits, subject to the receipt of shareholder approval, the
reclassification of stated capital into surplus. TXU Corp. received such
shareholder approval of this reclassification in a special meeting of
shareholders held February 14, 2003. Accordingly, approximately $8.0 billion was
reclassified from stated capital to additional paid-in capital, resulting in
surplus of $5.4 billion at September 30, 2003.
20
Additional paid-in capital includes $111 million related to the discount
at issuance on the 9% Exchangeable Subordinated Notes of TXU Energy at September
30, 2003 and December 31, 2002, respectively. These notes were exchanged into
preferred membership interests of TXU Energy in July 2003 (see Note 4) and
continue to be exchangeable into TXU Corp. common stock.
The Board of Directors of TXU Corp., at its February 2003 meeting,
declared a quarterly dividend of $0.125 a share, payable April 1, 2003, to
shareholders of record on March 7, 2003. At its May 2003 meeting, the Board of
Directors of TXU Corp. declared a quarterly dividend of $0.125 a share, payable
on July 1, 2003, to shareholders of record on June 6, 2003. At its August 2003
meeting, the Board of Directors of TXU Corp. declared a quarterly dividend of
$0.125 a share, payable on October 1, 2003, to shareholders of record on
September 5, 2003. Future dividends may vary depending upon TXU Corp.'s profit
levels, operating cash flows and capital requirements as well as financial and
other business conditions existing at the time.
Certain debt instruments and preferred securities of TXU Corp. contain
provisions that restrict payment of dividends during any interest or
distribution payment deferral period or while any payment default exists. An
Oncor mortgage restricts the payment of dividends to the amount of Oncor's
retained earnings. At September 30, 2003, TXU Corp. was in compliance with these
provisions.
7. CONTINGENCIES
Guarantees -- TXU Corp. has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Project development guarantees -- In 1990, TXU Corp. repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. TXU Corp. is making principal and interest payments to the co-op
in an amount sufficient for the co-op to make payments on its indebtedness. TXU
Corp. guaranteed the co-op's payments, and in the event that the co-op fails to
make its payments on the indebtedness, the US government would assume the
co-op's rights under the agreement, and such payments would then be owed
directly by TXU Corp. At September 30, 2003, the balance of the indebtedness was
$139 million with maturities of principal and interest extending to December
2021. The indebtedness is secured by a lien on the purchased facilities.
Residual value guarantees in operating leases -- TXU Corp. is the lessee
under various operating leases, entered into prior to January 1, that obligate
it to guarantee the residual values of the leased facilities. At September 30,
2003, the aggregate maximum amount of residual values guaranteed was
approximately $294 million with an estimated residual recovery of approximately
$214 million. The average life of the lease portfolio is approximately seven
years.
Shared saving guarantees -- TXU Corp. has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In aggregate, the average annual savings have 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 September 30, 2003, no shared savings
contracts were executed. The average remaining life of the portfolio is
approximately nine years.
Letters of credit -- TXU Corp. has entered into various agreements that
require letters of credit for financial assurance purposes. Approximately $294
million of letters of credit were outstanding at September 30, 2003 to support
existing floating rate pollution control revenue bond debt of approximately $271
million. The letters of credit are available to fund the payment of such debt
obligations. These letters of credit have expiration dates in 2003 and 2004;
however, TXU Corp. intends to provide from either existing or new facilities for
the extension, renewal or substitution of these letters of credit to the extent
required for such floating rate debt or their remarketing as fixed rate debt.
21
TXU Corp. has outstanding letters of credit in the amount of $32 million
to support portfolio management margin requirements in the normal course of
business. As of September 30, 2003, approximately 81% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the second year.
TXU Corp. has an outstanding letter of credit in the amount of $24 million
as support for a subordinated loan to a joint venture related to a pipeline
construction project in Australia. The obligation expires on January 31, 2005.
TXU Australia has outstanding letters of credit in the amount of
approximately $101 million, of which $89 million is to allow for participation
in the electricity and gas spot markets, $12 million is to provide credit
support for the shipping of gas and $1 million is for miscellaneous credit
support requirements. Although the average life of these guarantees is for
approximately one year, the obligation to provide guarantees is ongoing based
on TXU Australia's continued participation in the electricity and gas spot
markets and its ability to ship gas on the SEA Gas pipeline.
Surety bonds -- TXU Corp. has outstanding surety bonds of approximately
$59 mi