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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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 333-108876
TXU Energy Company LLC
A Delaware Limited Liability Company I.R.S. Employer Identification
No. 75-2967817
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
----------------------------
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 No X
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of November 7, 2003, all outstanding members interests in TXU Energy Company
LLC were held by TXU US Holdings Company.
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TABLE OF CONTENTS
PAGE
----
Glossary .......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income-
Three and Nine Months Ended September 30, 2003 and 2002....................... 1
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2003 and 2002................................. 2
Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002...................................... 3
Notes to Financial Statements................................................. 4
Independent Accountants' Report............................................... 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 41
Item 4. Controls and Procedures...................................................... 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 43
Item 6. Exhibits and Reports on Form 8-K ............................................ 44
SIGNATURE.......................................................................................... 45
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Energy Company LLC 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 Energy Company LLC 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.........................US Holdings' Current Report on Form 8-K
filed on February 26, 2003 for TXU Energy
with respect to its financial information
for the year ended December 31, 2002, and
Form 8-K filed September 16, 2003 to
reflect the impact of adopting SFAS 145 on
the financial information reported in the
Form 8-K filed on February 26, 2003
2002 Form 10-K........................TXU US Holdings Company's Annual Report on
Form 10-K for the year ended
December 31, 2002
Commission............................Public Utility Commission of Texas
EITF..................................Emerging Issues Task Force
EITF 98-10 ...........................EITF Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading
and Risk Management Activities"
EITF 01-8.............................EITF Issue No. 01-8, "Determining Whether
an Arrangement Contains a Lease"
EITF 02-3 ............................EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts
Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk
Management Activities"
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
Issue 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
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
S&P...................................Standard & Poor's, a division of the
McGraw Hill Companies
Sarbanes-Oxley........................Sarbanes-Oxley Act of 2002
SEC...................................United States Securities and Exchange
Commission
Settlement............................regulatory settlement agreed to by the
Commission in 2002
Settlement Plan.......................regulatory settlement plan filed with the
Commission in December 2001
SFAS..................................Statement of Financial Accounting
Standards
SFAS 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SFAS 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 149..............................SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and
Hedging Activities"
SFAS 150..............................SFAS No. 150, "Accounting for Certain
Financial Instruments with
Characteristics of both Liabilities
and Equity"
SG&A..................................selling, general and administrative
T&D...................................transmission and distribution
TXU Energy............................refers to TXU Energy Company LLC or
TXU Energy Company LLC and its
consolidated subsidiaries, depending on
the context
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
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 ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
---- ---- ---- ----
(millions of dollars)
Operating revenues................................................... $2,453 $2,420 $6,304 $6,238
Costs and expenses:
Cost of energy sold and delivery fees............................. 1,543 1,536 4,043 3,662
Operating costs.................................................. 171 183 550 536
Depreciation and amortization..................................... 100 116 308 342
Selling, general and administrative expenses...................... 168 199 465 623
Franchise and revenue-based taxes................................. 29 27 84 83
Other income...................................................... (20) (18) (44) (33)
Other deductions.................................................. 8 3 13 8
Interest income................................................... - - (3) (8)
Interest expense and related charges.............................. 83 46 246 154
------ ------ ------ ------
Total costs and expenses...................................... 2,082 2,092 5,662 5,367
------ ------ ------ ------
Income before income taxes and cumulative effect of changes
in accounting principles......................................... 371 328 642 871
Income tax expense................................................... 122 101 204 274
------ ------ ------ ------
Income before cumulative effect of changes in accounting principles.. 249 227 438 597
Cumulative effect of changes in accounting principles,
net of tax benefit (Note 2) ........................................ - - (58) -
------ ------ ------ ------
Net income........................................................... $ 249 $ 227 $ 380 $ 597
====== ====== ====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
(millions of dollars)
Net income............................................................. $ 249 $ 227 $ 380 $ 597
Other comprehensive income (loss), net of tax effects:
Cash flow hedge activity--
Net change in fair value of derivatives (net of tax benefit
of $11, $33, $63 and $79)........................................ (20) (60) (118) (146)
Amounts realized in earnings during the period
(net of tax expense of $24, $7, $63 and $5....................... 46 13 117 10
----- ----- ----- -----
Total......................................................... 26 (47) (1) (136)
----- ----- ----- -----
Comprehensive income................................................... $ 275 $ 180 $ 379 $ 461
===== ===== ===== =====
See Notes to Financial Statements.
1
TXU ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------
2003 2002
---- ----
(millions of dollars)
Cash flows -- operating activities:
Income before cumulative effect of changes in accounting principles................ $ 438 $ 597
Adjustments to reconcile income before cumulative effect of changes
in accounting principles to cash provided by operating activities:
Depreciation and amortization.................................................... 356 384
Deferred income taxes and investment tax credits-- net .......................... 31 46
Net unrealized (gain) loss from mark-to-market valuation of commodity contracts.. (34) 4
Net gain from sales of assets.................................................... (40) (30)
Retail clawback accrual.......................................................... (19) -
Changes in operating assets and liabilities......................................... 295 (104)
-------- --------
Cash provided by operating activities........................................ 1,027 897
Cash flows -- financing activities:
Issuances of long-term debt ........................................................ 1,400 61
Retirements/repurchases of long-term debt........................................... (222) (1,683)
Change in advances-- affiliates..................................................... (1,580) 359
Dividends paid to parent............................................................ (575) (577)
Change in notes payable-- banks..................................................... (282) 979
Decrease in note payable to Oncor Electric Delivery Company......................... (161) (133)
Debt premium, discount, financing, and reacquisition expenses....................... (31) (7)
-------- --------
Cash used in financing activities............................................ (1,451) (1,001)
Cash flows -- investing activities:
Capital expenditures................................................................ (123) (203)
Acquisition of a business .......................................................... - (36)
Proceeds from sale of assets ....................................................... 19 443
Nuclear fuel........................................................................ (45) (51)
Other............................................................................... (9) (25)
-------- --------
Cash provided by (used in) investing activities.............................. (158) 128
-------- --------
Net change in cash and cash equivalents............................................... (582) 24
Cash and cash equivalents-- beginning balance......................................... 603 20
------- -------
Cash and cash equivalents-- ending balance............................................ $ 21 $ 44
======= =======
See Notes to Financial Statements.
2
TXU ENERGY COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
------------- -------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 21 $ 603
Advances to affiliates........................................... 251 --
Accounts receivable - trade...................................... 923 1,331
Inventories...................................................... 322 298
Commodity contract assets........................................ 746 1,298
Other current assets............................................. 170 180
---------- -----------
Total current assets........................................... 2,433 3,710
Investments......................................................... 499 462
Property, plant and equipment - net................................. 10,417 10,127
Goodwill............................................................ 533 533
Commodity contract assets........................................... 222 476
Cash flow hedges and other derivative assets........................ 66 14
Other noncurrent assets............................................. 162 108
---------- ----------
Total assets................................................... $ 14,332 $ 15,430
========== ==========
LIABILITIES AND MEMBERS' INTERESTS
Current liabilities:
Notes payable - banks............................................ $ - $ 282
Long-term debt due currently..................................... 1 73
Advances from affiliates......................................... - 1,329
Accounts payable - trade:
Affiliates (principally Oncor Electric Delivery Company)....... 302 248
All other...................................................... 648 754
Notes or other liabilities due Oncor Electric Delivery Company... 20 170
Commodity contract liabilities................................... 550 1,138
Accrued taxes.................................................... 245 164
Other current liabilities........................................ 472 555
---------- ----------
Total current liabilities...................................... 2,238 4,713
---------- ----------
Accumulated deferred income taxes................................... 1,936 1,931
Investment tax credits.............................................. 364 376
Commodity contract liabilities...................................... 149 320
Cash flow hedges and other derivative liabilities................... 169 150
Notes or other liabilities due Oncor Electric Delivery Company...... 426 437
Other noncurrent liabilities and deferred credits................... 1,320 852
Long-term debt, less amounts due currently.......................... 3,160 2,378
Exchangeable preferred membership interests, net of $256 discount... 494 -
---------- ----------
Total liabilities.............................................. 10,256 11,157
---------- ----------
Contingencies (Note 5)
Members' interests (Note 4):
Capital account.................................................. 4,242 4,438
Accumulated other comprehensive income (loss).................... (166) (165)
---------- ----------
Total members' interests...................................... 4,076 4,273
---------- ----------
Total liabilities and members' interests....................... $ 14,332 $ 15,430
========== ==========
See Notes to Financial Statements.
3
TXU ENERGY COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - TXU Energy is a wholly-owned subsidiary of US
Holdings, which is a wholly-owned subsidiary of TXU Corp. TXU Energy is an
energy company that engages in power production (electricity generation),
wholesale energy sales, retail energy sales and related services, and portfolio
management, including risk management and certain trading activities. TXU Energy
is managed as a single, integrated energy business; consequently, there are no
separate reportable business segments.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Energy have been prepared in accordance with US GAAP and on the same
basis as the audited financial statements included in its 2002 Form 8-K, except
for the adoption of the following new accounting rules: EITF 02-3, SFAS 143,
SFAS 145 (the effects of which have been reflected on an annual basis in a Form
8-K filed September 16, 2003) and SFAS 150, all discussed below.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. All intercompany
items and transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted
pursuant to the rules and regulations of the SEC. Because the consolidated
interim financial statements do not include all of the information and footnotes
required by US GAAP, they should be read in conjunction with the audited
financial statements and related notes included in the 2002 Form 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 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 and an increase
in net income of $16 million for the nine-month period 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 Energy recorded a cumulative effect of changes in
accounting principles as of January 1, 2003. (See Note 2 for a discussion of the
impacts of these two accounting standards.)
As a result of guidance provided in EITF 02-3, TXU Energy 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 Energy
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".
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.
4
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 5
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. In July 2003, TXU Energy exercised its right
to exchange its $750 million 9% Exchangeable Subordinated Notes due 2012 for
exchangeable preferred membership interests with identical economic and other
terms (see Note 3). Because the exchangeability feature of these preferred
securities provides for the holders to exchange the securities with TXU Corp.
for TXU Corp. common stock, the securities are deemed to be mandatorily
redeemable by TXU Energy. Therefore, in accordance with SFAS 150, the securities
(net of $256 million in unamortized discount) are classified as liabilities
effective with reporting for the third quarter of 2003.
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.
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.
5
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For TXU Energy, 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 Energy 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 Energy 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 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. FINANCING ARRANGEMENTS
Credit Facilities -- At September 30, 2003, credit facilities available to
TXU Corp. and its US subsidiaries were as follows:
At September 30, 2003
--------------------------------------------------
Authorized Facility Letters of Cash
Facility Expiration Date Borrowers Limit Credit Borrowings Availability
- -------- --------------- ---------- -------- ---------- ---------- -------------
Five-Year Revolving Credit Facility February 2005 US Holdings $ 1,400 $ 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 $ 2,750 $ 270 $ -- $2,480
======= ====== ====== ======
- ---------
(a) previously TXU Corp.
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.
6
In August 2003, TXU Corp. entered into the $500 million 5-year revolving
credit facility that provides for up to $500 million in letters of credit or up
to $250 million of loans ($500 million in the aggregate).
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.
7
Long-Term Debt -- At September 30, 2003 and December 31, 2002, the long-term
debt of TXU Energy and its consolidated subsidiaries consisted of the following
September 30, December 31,
2003 2002
---- ----
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 (c)........... -- 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 (264)
------- -------
Total TXU Energy ............................................................ $ 3,161 $ 2,451
Less amount due currently........................................................ 1 73
------- -------
Total long-term debt............................................................. $ 3,160 $ 2,378
======= =======
(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) In July 2003, TXU Energy exercised its right to exchange its $750 million
9% Exchangeable Subordinated Notes due 2012 for exchangeable preferred
membership interests with identical economic and other terms.
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
Energy intends to remarket these bonds in the first quarter of 2004.
8
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 July 2003, TXU Energy exercised its right to exchange its $750 million
9% Exchangeable Subordinated Notes due November 22, 2012 for exchangeable
preferred membership interests with identical economic and other terms. These
securities are convertible into TXU Corp. common stock at an exercise price of
$13.1242. The market price of TXU Corp. common stock on 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 $256 million. (See Note 1
regarding classification of these securities under SFAS 150.)
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.
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.
9
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, 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.
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, TXU
Energy and other 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.
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 compensates
TXU Business Services Company for its services as collection agent, including
maintaining the detailed accounts receivable collection records. TXU Business
Services Company charges the affiliated businesses for its servicing costs, net
of the servicing fee income. The program fees paid to financial institutions,
which consist primarily of interest costs on the underlying financing, were $7
million and $9 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 fee amounts represent the
net incremental costs of the program to TXU Energy and are reported in SG&A
expenses.
The September 30, 2003 balance sheet reflects funding under the program of
$626 million, through sale of undivided interests in receivables by TXU
Receivables Company, related to $1.3 billion face amount of TXU Energy trade
accounts receivable. Funding under the program increased $197 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 $234 million. Funding increases or decreases under the program are
reflected as cash provided by or used in operating activities in the statement
of cash flows.
Upon termination of the program, cash flows to TXU Energy 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. The
trade accounts receivable balances on TXU Energy's balance sheets represent the
face amount of the receivables less the funding under the program and allowances
for uncollectible accounts.
10
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.
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 Energy 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 Energy and its subsidiaries were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Energy 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 Energy, 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
Energy or its subsidiaries.
11
Cross Default Provisions
Certain financing arrangements of TXU Energy 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 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.
TXU Energy and its subsidiaries have other arrangements, including
interest rate swap agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
12
4. MEMBERS' INTERESTS
On August 8, 2003, TXU Energy approved a cash distribution of $175 million
to be paid to US Holdings on October 1, 2003. On May 7, 2003, TXU Energy
approved a cash distribution of $175 million that was paid to US Holdings on
July 1, 2003. On February 12, 2003, TXU Energy approved a cash distribution of
$200 million that was paid to US Holdings on April 1, 2003. On November 15,
2002, TXU Energy approved a cash distribution of $200 million that was paid to
US Holdings on January 2, 2003.
5. CONTINGENCIES
Guarantees -- TXU Energy 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.
Residual value guarantees in operating leases -- TXU Energy is the lessee
under various operating leases, entered into prior to January 1, 2003, 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 $211 million with an estimated residual recovery of
approximately $143 million. The average life of the lease portfolio is
approximately seven years.
Debt obligations of the parent -- TXU Energy has provided a guarantee of
the obligations under TXU Corp.'s financing lease (approximately $130 million at
September 30, 2003) for its headquarters building.
Shared saving guarantees -- TXU Energy 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 Energy 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 Energy 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.
TXU Energy 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.
Surety bonds -- TXU Energy has outstanding surety bonds of approximately
$34 million to support performance under various contracts in the normal course
of business. The term of the surety bond obligations is approximately two
years.
Legal Proceedings On July 7, 2003, a lawsuit was filed by Texas Commercial
Energy (TCE) in the United States District Court for the Southern District of
Texas, Corpus Christi Division, against TXU Energy and certain of its
subsidiaries, as well as various other wholesale market participants doing
business in ERCOT, claiming generally that defendants engaged in market
manipulation, in violation of antitrust and other laws, primarily during the
period of extreme weather conditions in late February 2003. On August 6, 2003,
the complaint was amended to omit one of the other defendants. On September 12,
2003, the TXU defendants filed a motion to dismiss the lawsuit, which is set for
hearing on January 23, 2004. TXU Energy believes that it has not committed any
violation of the antitrust laws and the Commission's investigation of the market
conditions in late February 2003 has not resulted in any findings adverse to TXU
Energy. Accordingly, TXU Energy believes that TCE's claims against TXU Energy
and its subsidiary companies are without merit and intends to vigorously defend
the lawsuit. TXU Energy is unable to estimate any possible loss or predict the
outcome of this action.
13
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., TXU Energy and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management
intend to vigorously defend the litigation. While TXU Corp., TXU Energy and TXU
Portfolio Management dispute the plaintiff's claims, TXU Corp. is unable to
predict the outcome of this litigation or the possible loss in the event of an
adverse judgment.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This lawsuit was not served on TXU Corp.
until mid-July 2003. This action is brought by an individual, alleged to be a
retail consumer of electricity, on behalf of herself and as a proposed
representative of a putative class of retail purchasers of electricity that are
similarly situated. On September 15, 2003, defendants filed a motion to dismiss
the lawsuit and a motion to transfer the case to the Northern District of Texas,
Dallas Division. TXU Energy believes that the plaintiff lacks standing to assert
any antitrust claims against TXU Energy or TXU Portfolio Management, and that
defendants have not violated antitrust laws or other laws as claimed by the
plaintiff. Therefore, TXU Energy believes that plaintiff's claims are without
merit and plans to vigorously defend the lawsuit. TXU Energy is unable to
estimate any possible loss or predict the outcome of this action.
General - TXU Energy is involved in various other legal and administrative
proceedings, the ultimate resolution of which should not have a material effect
upon its financial position, results of operations or cash flows.
14
6. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Other income:
Net gain on sale of properties and businesses. $ 19 $ 18 $ 40 $ 30
Lignite coal royalties........................ - - - 2
Other......................................... 1 - 4 1
------ ------ ------ ------
Total other income......................... $ 20 $ 18 $ 44 $ 33
====== ====== ====== ======
Other deductions:
Equity losses of unconsolidated subsidiaries.. $ - $ - $ - $ 2
Loss on retirement of debt.................... 1 - 1 1
Asset write-off in strategic retail services
business.................................... 5 - 5 -
Expenses related to canceled construction
projects.................................... 2 2 4 5
Other......................................... - 1 3 -
------ ------ ------ ------
Total other deductions..................... $ 8 $ 3 $ 13 $ 8
====== ====== ====== ======
Interest Expense and Related Charges --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest......................................... $ 79 $ 47 $ 234 $ 155
Amortization of deferred debt costs.............. 6 1 17 4
Capitalized interest............................. (2) (2) (5) (5)
------ ------ ------ ------
Total interest expense and related charges.... $ 83 $ 46 $ 246 $ 154
====== ====== ====== ======
Accounts Receivable -- At September 30, 2003 and December 31, 2002,
accounts receivable of $923 million and $1.3 billion are stated net of an
allowance for uncollectible accounts of $73 million and $71 million,
respectively. During the nine months ended September 30, 2003, bad debt expense
was $70 million, account write-offs were $64 million and other activity
decreased the allowance for uncollectible accounts by $4 million. See Note 3
regarding sale of receivables.
Accounts receivable included $425 million and $489 million of unbilled
revenues at September 30, 2003 and December 31, 2002, respectively.
15
Intangible Assets -- SFAS 142 became effective for TXU Energy on January
1, 2002. SFAS 142 requires, among other things, the allocation of goodwill to
reporting units based upon the current fair value of the reporting units, and
the discontinuance of goodwill amortization. SFAS 142 also requires additional
disclosures regarding intangible assets (other than goodwill) that are amortized
or not amortized:
As of September 30, 2003 As of December 31, 2002
------------------------------- ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ----
Amortized intangible assets (included in
property, plant and equipment):
Capitalized software............... $ 242 $ 104 $ 138 $ 220 $ 78 $ 142
Land easements..................... 11 8 3 12 9 3
Mineral rights and other........... 31 21 10 31 20 11
----- ----- ----- ----- ----- -----
Total............................ $ 284 $ 133 $ 151 $ 263 $ 107 $ 156
===== ===== ===== ===== ===== =====
Aggregate TXU Energy amortization expense for intangible assets was $26
million and $29 million for the nine months ended September 30, 2003 and 2002,
respectively. At September 30, 2003, the weighted-average useful lives of
capitalized software, land easements and mineral rights and other were 6 years,
58 years and 40 years, respectively.
At September 30, 2003 and December 31, 2002, goodwill of $533 million was
stated net of previously recorded accumulated amortization of $60 million.
Commodity Contracts -- At September 30, 2003 and December 31, 2002,
current and noncurrent commodity contract assets totaling $968 million and $1.8
billion, respectively, are stated net of applicable credit (collection) and
performance reserves totaling $21 million and $43 million, respectively.
Performance reserves are provided for direct, incremental costs to settle the
contracts.
Inventories by Major Category --
September 30, December 31,
2003 2002
---- ----
Materials and supplies................. $ 184 $ 171
Fuel stock............................. 75 70
Gas stored underground................. 63 57
------- -------
Total inventories................ $ 322 $ 298
======= =======
Inventories reflected a $22 million reduction as a result of the
rescission of EITF 98-10 as discussed in Note 2.
Property, Plant and Equipment -- At September 30, 2003 and December 31,
2002, property, plant and equipment of $10.4 billion and $10.1 billion is stated
net of accumulated depreciation and amortization of $7.5 billion and $7.3
billion, respectively.
Derivatives and Hedges -- TXU Energy experienced net hedge ineffectiveness
gains of $10 million and $24 million, reported in revenues, for the three and
nine months ended September 30, 2003, respectively. For the three and nine
months ended September 30, 2002, net hedge ineffectiveness losses of $7 million
and $40 million, respectively, were reported in revenues. Hedge ineffectiveness
is primarily related to hedges of anticipated sales from baseload generation.
As of September 30, 2003, it is expected that $70 million of after-tax net
losses accumulated in other comprehensive income, primarily related to
commodities hedges, will be reclassified into earnings during the next twelve
months. This amount represents the projected value of the hedges over the next
twelve months relative to what would be recorded if the hedge transactions had
not been entered into. The amount expected to be reclassified is not a
forecasted loss incremental to normal operations, but rather it demonstrates the
extent to which volatility in earnings and cash flows (which would otherwise
exist) is mitigated through the use of cash flow hedges.
16
Affiliate Transactions -- The following represent significant affiliate
transactions of TXU Energy:
TXU Energy incurs electricity delivery fees charged by Oncor. For the
three months ended September 30, 2003 and 2002, these fees were $441 million and
$438 million, respectively. For the nine months ended September 30, 2003 and
2002, these fees were $1.2 billion and $1.3 billion, respectively.
TXU Energy reimburses Oncor for the interest expense Oncor incurs on that
portion of its debt associated with Oncor's generation-related regulatory
assets. For the three months ended September 30, 2003 and 2002, this interest
expense totaled $12 million and $6 million, respectively. For the nine months
ended September 30, 2003 and 2002, this interest expense totaled $36 million and
$17 million, respectively. This expense is reported in interest expense and
related charges.
Under the terms of the Settlement Plan, in August 2003 Oncor issued $500
million of securitization bonds due 2009-2017 and expects to issue another $800
million in the first quarter of 2004. The incremental income taxes Oncor will
pay on the increased delivery fees to be charged to Oncor's customers related to
the bonds will be reimbursed by TXU Energy. Therefore, TXU Energy's financial
statements reflect a $437 million non-interest bearing payable to Oncor ($11
million of which is reported as due currently) that will be extinguished as
Oncor pays the related income taxes.
In addition, TXU Energy has a note payable to Oncor related to the excess
mitigation credit established in accordance with the Settlement Plan. Oncor has
implemented the $350 million credit, plus interest, as a credit applied to
delivery fees billed to REPs, including TXU Energy, for a two-year period ending
December 31, 2003. At September 30, 2003, the balance of the note payable was $9
million (reported as due currently). The principal and interest payments on the
note payable reimburse Oncor for the credit applied to receivables from REPs.
For the three months ended September 30, 2003 and 2002, the principal payments
made on the note payable totaled $62 million and $86 million, respectively, and
the interest expense totaled $1 million and $5 million, respectively. For the
nine months ended September 30, 2003 and 2002, the principal payments made on
the note payable totaled $161 million and $133 million, respectively, and the
interest expense totaled $6 million and $17 million, respectively.
TXU Energy receives payments from TXU Gas, a subsidiary of TXU Corp.,
under a service agreement that began in 2002 covering customer billing and
customer support services provided for TXU Gas. These payments totaled $8
million for the three months ended September 30, 2003 and 2002, and $22 million
for the nine months ended September 30, 2003 and 2002, and are reported as other
revenues.
TXU Business Services Company, a subsidiary of TXU Corp., charges TXU
Energy for certain financial, accounting, information technology, environmental,
procurement and personnel services and other administrative services at cost.
For the three months ended September 30, 2003 and 2002, these costs totaled $54
million and $68 million, respectively. For the nine months ended September 30,
2003 and 2002, these costs totaled $173 million and $211 million, respectively.
The costs are reported in SG&A expenses.
Average daily short-term advances from affiliates during the three months
ended September 30, 2003 and 2002 were $47 million and $544 million,
respectively, and interest expense incurred was $0.3 million and $3 million,
respectively. The weighted average interest rate for the three months ended
September 30, 2003 and 2002, was 2.86% and 2.11%, respectively. For the nine
months ended September 30, 2003 and 2002, average advances were $500 million and
$228 million, respectively, and interest expense incurred was $9 million and $4
million, respectively. The weighted average interest rate for the nine months
ended September 30, 2003 and 2002 was 2.76% and 2.69%, respectively.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS 143, which are noncash in nature.
See Note 3 for a discussion of the exchange of TXU Energy's subordinated
notes for preferred membership interests, which was a noncash transaction.
17
INDEPENDENT ACCOUNTANTS' REPORT
TXU Energy Company LLC:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Energy Company LLC and subsidiaries (TXU Energy) as of September 30, 2003, and
the related condensed statements of consolidated income and of comprehensive
income for the three-month and nine-month periods ended September 30, 2003 and
2002, and the condensed statements of consolidated cash flows for the nine-month
periods ended September 30, 2003 and 2002. These financial statements are the
responsibility of TXU Energy's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit in accordance with auditing
standards generally accepted in the United States of America, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Energy as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and member interests for the year then
ended (not presented herein); and in our report (which includes explanatory
paragraphs related to the adoption of Statement of Financial Accounting
Standards Nos. 142 and 145), dated February 14, 2003 (and September 12, 2003 as
to Note 2 therein), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 1 to the Notes to Financial Statements, TXU Energy changed
its method of accounting for asset retirement obligations in 2003 in connection
with the adoption of Statement of Financial Accounting Standards No. 143, "Asset
Retirement Obligations", changed its method of accounting for certain contracts
with the rescission of Emerging Issues Task Force Issue 98-10 "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities", and
changed its method of classifying mandatorily redeemable preferred securities in
connection with the adoption of Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity."
DELOITTE & TOUCHE LLP
Dallas, Texas
November 11, 2003
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU Energy is a wholly-owned subsidiary of US Holdings, which is a
wholly-owned subsidiary of TXU Corp. TXU Energy is an energy company that
engages in power production (electricity generation), wholesale energy sales,
retail energy sales and related services, and portfolio management, including
risk management and certain trading activities. TXU Energy is managed as a
single, integrated energy business; consequently, there are no separate
reportable business segments.
Dollar amounts in the following tables are stated in millions of US
dollars, unless otherwise noted.
RESULTS OF OPERATIONS
Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
Operating statistics:
Retail electric sales volumes (GWh) ........................ 23,450 27,394 62,652 72,551
Wholesale electric sales volumes (GWh)...................... 10,677 9,255 26,512 22,569
------- ------- ------- -------
Total electric sales volumes (GWh)....................... 34,127 36,649 89,164 95,120
======= ======= ======= =======
Retail electric customers (end of period & in
thousands-number of meters)................................. 2,617 2,763
Operating revenues (millions of dollars):
Retail electric:
Residential........................................... $ 1,139 $ 1,093 $ 2,631 $ 2,569
Commercial and industrial ............................ 847 839 2,427 2,720
------- ------- ------- -------
Total........................................... 1,986 1,932 5,058 5,289
Wholesale electric ......................................... 406 302 924 657
Portfolio management activities............................. 16 152 169 201
Other revenues.............................................. 45 34 153 91
------- ------- ------- -------
Total operating revenues......................... $ 2,453 $ 2,420 $ 6,304 $ 6,238
======= ======= ======= =======
Weather (average for service territory)
Percent of normal:
Cooling degree days............................... 99.0% 99.8% 101.0% 102.1%
Heating degree days............................... -% -% 102.6% 98.8%
- ----------------------
Weather data is obtained from Meteorlogix, an independent company that
collects weather data from reporting stations of the National Oceanic and
Atmospheric Administration (a federal agency under the US Department of
Commerce).
19
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
- ---------------------------------------------------------------------
Operating revenues increased $33 million, or 1%, to $2.5 billion in 2003.
Retail and wholesale electric revenues increased $158 million, or 7%, to $2.4
billion, reflecting a $312 million increase due to higher average prices,
partially offset by a $154 million reduction due to lower sales volumes. The
$312 million favorable price variance reflects increased price-to-beat rates,
due to approved fuel factor increases, higher pricing in the commercial and
industrial business and increased wholesale prices, all resulting from higher
natural gas costs. The $154 million unfavorable volume variance reflects a 7%
decline in total sales volumes on a 14% decline in retail electric sales volumes
due to increased competitive activity, primarily in the commercial and
industrial segment of the market, partially offset by a 15% increase in
wholesale electric volumes, reflecting a partial shift in the commercial and
industrial customer base from retail to wholesale services. Residential and
small business customer counts at September 30, 2003 declined 3% from year-end
2002. Results from portfolio management activities declined $136 million. Such
results include realized and unrealized gains and losses from risk management
activities, and the decline reflects the effect of market price movements on
commodity contracts entered into to hedge exposures.
Gross Margin
Three Months Ended
September 30,
------------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 2,453 100% $ 2,420 100%
Costs and expenses:
Cost of energy sold and delivery fees.............. 1,543 63% 1,536 63%
Operating costs.................................... 171 7% 183 8%
Depreciation and amortization related to
generation assets.............................. 90 4% 107 4%
------- --- ------- ---
Gross margin........................................... $ 649 26% $ 594 25%
======= === ======= ===
Gross margin is considered a key operating metric as it measures the
effect of changes in sales volumes and pricing versus the variable and
fixed costs of energy sold, whether generated or purchased.
The depreciation and amortization expense reported in the gross margin
amounts above excludes $10 million and $9 million of such expense for the three
months ended September 30, 2003 and 2002, respectively, that is not directly
related to generation property, plant and equipment.
Gross margin increased $55 million, or 9%, to $649 million in 2003. The
increase reflected higher average retail and wholesale sales prices, partially
offset by higher average costs of energy sold, lower portfolio management
results and the effect of volume declines. Increased costs of energy sold were
driven by higher natural gas prices. As nuclear generation is the lowest
marginal cost source of power production, average cost of energy sold was
unfavorably impacted by approximately $20 million due to an outage at the
nuclear generation facility to repair a reactor coolant water pump. Higher
average costs of energy sold were largely offset by a net reduction of $19
million in the retail clawback accrual principally because competition in the
small commercial segment of retail operations has resulted in TXU Energy not
retaining more than 60% of its historical power consumption in this segment.
Accordingly, TXU Energy does not expect to fund the related retail clawback
credit under the Settlement Plan. Mark-to-market accounting for commodity
contracts increased revenues and gross margin by $1 million in 2003 and by $8
million in 2002 (as compared to accounting on a settlement basis).
Operating costs decreased $12 million, or 7%, to $171 million in 2003 due
primarily to timing of repair and maintenance expenses. Depreciation and
amortization related to generation assets decreased $17 million, or 16%, to $90
million in 2003. Of the decrease, $12 million represented the effect of adjusted
depreciation rates related to the generation fleet, effective with second
quarter reporting. The adjusted rates reflect an extension in the estimated
depreciable life of the nuclear generation facility of approximately 11 years
(to 2041) to better reflect its useful life, partially offset by higher
depreciation rates for lignite and gas facilities to reflect investments in
emissions equipment made in recent years.
20
A decrease in depreciation and amortization (including amounts shown in
the gross margin table above) of $16 million, or 14%, to $100 million in 2003
was driven primarily by the adjusted depreciation rates related to TXU Energy's
generation fleet as discussed above.
SG&A expenses declined $31 million, or 16%, to $168 million in 2003. This
decrease reflected approximately $16 million of nonrecurring costs incurred in
2002 related to the transition to competition and $18 million in lower costs in
the strategic retail services business with the scaling-back of its operations,
partially offset by $8 million in higher bad debt expense.
Franchise and revenue-based taxes increased $2 million, or 7%, to $29
million in 2003 reflecting an increase in state franchise taxes.
Other income increased $2 million to $20 million in 2003. Other income in
both periods included $18 million of amortization of a gain on the sale of two
generation plants in 2002.
Other deductions increased $5 million to $8 million in 2003. The 2003
amount included $5 million in charges related to the scaling-back of the
strategic retail services business.
Interest expense and related charges increased $37 million, or 80%, to $83
million in 2003. The increase reflects $29 million due to higher average rates,
$3 million due to higher average debt levels and $5 million in amortization of
the discount on the exchangeable subordinated notes issued by TXU Energy in
November 2002. (The notes were subsequently exchanged by TXU Energy for
exchangeable preferred membership interests.) Higher average rates were due in
part to replacement of short-term borrowings with higher rate long-term debt.
The effective income tax rate increased to 32.9% in 2003 from 30.8% in
2002. The increase was primarily due to adjustments recorded in 2002 arising
from the reconciliation of the final 2001 federal income tax return to the
previously recorded estimated tax provision.
Income before cumulative effect of changes in accounting principles
increased $22 million, or 10%, to $249 million in 2003. The increase was driven
by the higher gross margin and the decreased SG&A expenses, partially offset by
the increase in interest expense. Net pension and postretirement benefit costs
reduced net income by $9 million in 2003 and $4 million in 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
- ------------------------------------------------------------------
Operating revenues increased $66 million, or 1%, to $6.3 billion in 2003.
Retail and wholesale electric revenues increased $36 million, or 1%, to $6
billion, reflecting a $408 million increase due to higher average prices
partially offset by a $372 million reduction due to lower sales volumes. The
$408 million favorable price variance reflects increased price-to-beat rates,
due to approved fuel factor increases, higher pricing in the commercial and
industrial business and increased wholesale prices, all resulting from higher
natural gas costs. The $372 million unfavorable volume variance reflects a 6%
decline in total sales volumes on a 14% decline in retail electric sales volumes
due to the effects of increased competitive activity, primarily in the
commercial and industrial segment of the market, partially offset by a 17%
increase in wholesale electric volumes reflecting a partial shift in the
commercial and industrial customer base from retail to wholesale services.
Residential and small business customer counts at September 30, 2003 declined 3%
from year-end 2002. Results from portfolio management activities declined $32
million. Such results include realized and unrealized gains and losses from risk
management activities, and the decline reflects the effect of market price
movements on commodity contracts entered into to hedge exposures. Other revenues
increased $62 million, reflecting increased activity related to a previously
existing contract in the small strategic retail services business, higher late
fees on accounts receivable and increased pipeline transportation and other
service revenues.
21
Gross Margin
Nine Months Ended
September 30,
------------------------------------------------
% of % of
2003 Revenue 2002 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 6,304 100% $ 6,238 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 4,043 64% 3,662 59%
Operating costs................................... 550 9% 536 8%
Depreciation and amortization related to
generation assets.............................. 279 4% 310 5%
------- --- ------- ---
Gross margin........................................... $ 1,432 23% $ 1,730 28%
======= === ======= ===
The depreciation and amortization expense included in gross margin
excludes $29 million and $32 million of such expense for the nine months ended
September 30, 2003 and 2002, respectively, that is not directly related to
generation property, plant and equipment.
Gross margin decreased $298 million, or 17%, to $1.4 billion in 2003. The
decrease reflected increased average costs of energy sold and lower retail sales
volumes, partially offset by higher average retail and wholesale sales prices.
Increased energy costs were driven by higher natural gas prices. As nuclear
generation is the lowest marginal cost source of power production, average cost
of energy sold was unfavorably impacted by approximately $45 million due to
outages in May and July of 2003 due to a lightning strike on the transmission
system and pump repairs, respectively. Higher average costs of energy sold were
partially offset by a net reduction of $19 million in the retail clawback
accrual as discussed above. Mark-to-market accounting for commodity contracts
increased revenues and gross margin by $34 million in 2003 and decreased results
by $4 million in 2002 (as compared to accounting on a settlement basis).
Operating costs rose $14 million, or 3%, to $550 million reflecting
increased activity related to a previously existing contract in the strategic
retail services business. Depreciation and amortization related to generation
assets decreased $31 million, or 10%, to $279 million. Of this decline, $25
million represented the effect of adjusted depreciation rates related to TXU
Energy's generation fleet as discussed above.
A decrease in depreciation and amortization (including amounts shown in
the gross margin table above) of $34 million, or 10%, to $308 million in 2003
reflected adjusted depreciation rates related to TXU Energy's generation fleet
as discussed above.
SG&A expenses declined $158 million, or 25%, to $465 million in 2003. This
decrease reflected cost reductions, primarily lower staffing and related
administrative expenses, totaling approximately $70 million and reflecting the
completion of the transition to competition in Texas and the industry-wide
decline in portfolio management activities, as well as $20 million from the
scaling-back of the strategic retail services operations. Lower SG&A expenses
also reflected $53 million in lower bad debt expense, due to the effect of
billing and collection delays experienced in 2002 in connection with the
transition to competition and initiatives implemented in 2003 to reduce such
expenses.
Other income increased by $11 million to $44 million in 2003. Other income
in both periods included $30 million of amortization of a gain on the sale of
two generation plants in 2002. The 2003 period also included a $9 million gain
on the sale of certain retail commercial and industrial gas operations.
Other deductions increased by $5 million, or 63%, to $13 million in 2003.
The 2003 amount included $5 million in charges related to the scaling-back of
the strategic retail services business. Other deductions in both years included
storage and other incidental expenses related to two canceled generation plant
construction projects.
Interest income declined by $5 million, or 63%, to $3 million in 2003
primarily due to lower average advances to affiliates.
Interest expense and related charges increased $92 million, or 60%, to
$246 million in 2003. The increase reflects $63 million due to higher average
22
interest rates and fees, $14 million due to higher average debt levels and $15
million in amortization of the discount on the exchangeable subordinated notes
issued in 2002. (The notes were subsequently exchanged by TXU Energy for
exchangeable preferred membership interests.) Higher average rates were due in
part to replacement of short-term borrowings with higher rate long-term debt.
The effective income tax rate of 31.8% in 2003 was comparable to the 31.5%
rate in 2002, reflecting the effect of the federal tax return related adjustment
recorded in 2002, as discussed above, largely offset by the effect of comparable
lignite depletion on lower pretax earnings in 2003.
Income before cumulative effect of changes in accounting principles
decreased $159 million, or 27%, to $438 million in 2003. The decline was driven
by the decrease in gross margin and the increase in interest expense, partially
offset by decreased SG&A and depreciation and amortization expenses. Net pension
and postretirement benefit costs reduced net income by $27 million in 2003 and
by $15 million in 2002.
COMMODITY CONTRACTS AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the nine months ended September 30, 2003. The net increase,
excluding "cumulative effect of change in accounting principle" and "other
activity" as described below, of $34 million represents the net favorable effect
of mark-to-market accounting on earnings for the nine months ended September 30,
2003. This effect represents the difference between earnings under
mark-to-market accounting versus accounting for gains and losses upon settlement
of the contracts.
Balance of net commodity contract assets at December 31, 2002......... $ 316
Cumulative effect of change in accounting principle (1) .............. (75)
Settlements of positions included in the opening balance (2) ......... (99)
Unrealized mark-to-market valuations of positions held at end
of period (3) ..................................................... 133
Other activity (4).................................................... (6)
-----
Balance of net commodity contract assets at September 30, 2003 ....... $ 269
=====
- ---------------------
(1) Represents a portion of the pre-tax cumulative effect of the
rescission of EITF 98-10 (see Note 2 to Financial Statements).
(2) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the period.
(3) There were no significant changes in fair value attributable to changes
in valuation techniques.
(4) Includes the initial values of positions involving the receipt or
payment of cash, such as option premiums, the amortization of such
values and the sale of certain retail commercial and industrial gas
operations. These activities have no effect on unrealized
mark-to-market valuations.
As a result of guidance provided in EITF 02-3, TXU Energy has not
recognized origination gains on commercial/industrial retail contracts in 2003.
(See Note 1 to Financial Statements.)
23
Maturity Table -- Of the net commodity contract asset balance above at
September 30, 2003, the amount representing unrealized mark-to-market net gains
that have been recognized in current and prior years' earnings is $291 million.
The offsetting net liability of $22 million included in the September 30, 2003
balance consists of unamortized net option premiums received. The following
table presents the unrealized mark-to-market balance at September 30, 2003,
scheduled by contractual settlement dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at September 30, 2003
-------------------------------------------------------------------------------
Maturity less Maturity in
than Maturity of Maturity of Excess of
Source of fair value 1 year 1-3 years 4-5 years 5 years Total
- -------------------- ------------ ----------- ----------- ------------- -----
Prices actively quoted........... $ 7 $ 10 $ - $ - $ 17
Prices provided by other
external sources............. 204 60 3 (1) 266
Prices based on models........... (6) 10 4 - 8
---- ---- --- ---- -----
Total............................ $205 $ 80 $ 7 $ (1) $ 291
==== ==== === ==== =====
Percentage of total fair value... 70% 28% 2% 0% 100%
As the above table indicates, approximately 98% of the unrealized
mark-to-market valuations at September 30, 2003 mature within three years. This
is reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2006. The "prices provided by
other external sources" category represents forward commodity positions at
locations for which over-the-counter broker quotes are available.
Over-the-counter quotes for power and natural gas generally extend through 2005
and 2010, respectively. The "prices based on models" category contains the value
of all non-exchange traded options, valued using industry accepted option
pricing models. In addition, this category contains other contractual
arrangements which may have both forward and option components. In many
instances, t