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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes _X__ No___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ____ No __X__
Common Stock outstanding at November 7, 2003: 2,062,768 Class A shares, without
par value and 39,192,594 Class B shares, without par value.
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TABLE OF CONTENTS
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PAGE
----
Glossary....................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income -
Three and 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............................................... 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 53
Item 4. Controls and Procedures......................................................... 56
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 56
Item 6. Exhibits and Reports on Form 8-K................................................ 56
SIGNATURE ..................................................................................... 59
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU US Holdings Company and its subsidiaries
are made available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU US Holdings Company will provide copies of current
reports not posted on the website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........legislation that restructured the
electric utility industry in Texas to
provide for competition
2002 Form 10-K........................TXU US Holdings Company's Annual Report
on Form 10-K for the year ended
December 31, 2002
Commission............................Public Utility Commission of Texas
EITF..................................Emerging Issues Task Force
EITF 98-10 ...........................EITF Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and
Risk Management Activities"
EITF 01-8.............................EITF Issue No. 01-8, "Determining Whether
an Arrangement Contains a Lease"
EITF 02-3 ............................EITF Issue No. 02-3, "Issues Involved in
Accounting for Derivative Contracts Held
for Trading Purposes and Contracts
Involved in Energy Trading and Risk
Management Activities"
EITF 03-11............................EITF Issue No. 03-11,`Reporting Realized
Gains and Losses on Derivative
Instruments That Are Subject to FASB
Statement No.133 and Not "Held for
Trading Purposes" As Defined in EITF
No.02-3'
ERCOT.................................Electric Reliability Council of Texas
FASB..................................Financial Accounting Standards Board,
the designated organization in the private
sector for establishing standards of
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
Moody's...............................Moody's Investors Services, Inc.
NRC...................................United States Nuclear Regulatory
Commission
Oncor.................................Oncor Electric Delivery Company, a
subsidiary of TXU US Holdings
POLR..................................provider of last resort of electricity
to certain customers under the
Commission rules interpreting the 1999
Restructuring Legislation
Price-to-beat rates...................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
REPs..................................retail electric providers
ii
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
Extinguishment of Liabilities - a
Replacement of FASB Statement No. 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
Liabilities and Equity"
SG&A..................................selling, general and administrative
T&D...................................transmission and distribution
TXU Energy............................TXU Energy Company LLC, a REP subsidiary
of US Holdings
TXU Fuel..............................TXU Fuel Company, a subsidiary of TXU
Energy
TXU Gas...............................TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining............................TXU Mining Company LP, a subsidiary of TXU
Energy
TXU Portfolio Management..............TXU Portfolio Management Company LP, a
subsidiary of TXU Energy
TXU SESCO.............................TXU SESCO Company, a subsidiary of TXU
Energy, which serves as a REP in ten
counties in the eastern and central parts
of Texas
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................refers to TXU US Holdings Company or TXU
US Holdings Company and its consolidated
subsidiaries, depending on the context
iii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
----- ---- ----- ----
(millions of dollars)
Operating revenues....................................................... $2,622 $2,536 $6,734 $6,532
Costs and expenses:
Cost of energy sold and delivery fees................................. 1,100 1,095 2,870 2,407
Operating costs....................................................... 345 356 1,072 1,027
Depreciation and amortization......................................... 178 182 523 539
Selling, general and administrative expenses.......................... 216 250 610 783
Franchise and revenue-based taxes..................................... 88 95 268 289
Other income.......................................................... (21) (19) (47) (36)
Other deductions...................................................... 10 3 13 8
Interest income....................................................... (2) - (11) (1)
Interest expense and related charges.................................. 151 104 459 314
------ ------ ------ ------
Total costs and expenses.......................................... 2,065 2,066 5,757 5,330
------ ------ ------ ------
Income before income taxes and cumulative effect of changes in accounting
principles............................................................. 557 470 977 1,202
Income tax expense....................................................... 186 150 316 385
------ ------ ------ ------
Income before cumulative effect of changes in accounting principles...... 371 320 661 817
Cumulative effect of changes in accounting principles, net of tax benefit
(Note 2) ............................................................. - - (58) -
----- ----- ----- -----
Net income .............................................................. 371 320 603 817
Preferred stock dividends................................................ 1 2 5 7
------ ------ ------ ------
Net income available for common stock.................................... $ 370 $ 318 $ 598 $ 810
====== ====== ====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------ -----
(millions of dollars)
Net income............................................................... $ 371 $ 320 $ 603 $ 817
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, (20) (60) (118) (171)
$33,$63 and $92)......................................................
Amounts realized in earnings during the period (net of tax expense
of $24, $7, $63 and $5)........................................... 45 13 117 10
------ ------ ------ ------
Total............................................................... 25 (47) (1) (161)
------ ------ ------ ------
Comprehensive income..................................................... $ 396 $ 273 $ 602 $ 656
====== ====== ====== ======
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
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....... $ 661 $ 817
Adjustments to reconcile income before cumulative effect of changes in
accounting principles to cash provided by operating activities:
Depreciation and amortization........................................... 577 599
Deferred income taxes and investment tax credits-- net ................. 140 167
Net unrealized (gain) loss from mark-to-market valuation of
commodity contracts................................................... (34) 4
Net gain from sales of assets........................................... (40) (30)
Reduction in regulatory liability....................................... (125) (112)
Retail clawback accrual................................................. (19) -
Changes in operating assets and liabilities............................... 159 (477)
------- -------
Cash provided by operating activities............................... 1,319 968
Cash flows -- financing activities:
Issuances of long-term debt .............................................. 1,900 2,261
Retirements/repurchases of securities:
Long-term debt.......................................................... (899) (2,265)
Preferred stock......................................................... (91) -
Change in advances -- affiliates.......................................... (246) (1,022)
Change in notes payable -- banks.......................................... (1,804) 1,082
Repurchase of common stock................................................ (463) -
Dividends paid to parent.................................................. (250) (677)
Preferred stock dividends paid............................................ (5) (7)
Redemption deposits applied to debt retirements........................... 210 -
Debt premium, discount and reacquisition expenses......................... (58) (49)
------- -------
Cash used in financing activities................................... (1,706) (677)
Cash flows -- investing activities:
Capital expenditures...................................................... (480) (591)
Acquisition of a business................................................. - (36)
Proceeds from sale of assets.............................................. 19 443
Nuclear fuel.............................................................. (45) (51)
Other..................................................................... (12) (66)
------- -------
Cash used in investing activities................................... (518) (301)
------- -------
Net change in cash and cash equivalents...................................... (905) (10)
Cash and cash equivalents-- beginning balance................................ 1,508 55
------- -------
Cash and cash equivalents-- ending balance................................... $ 603 $ 45
======= =======
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2003 2002
------- --------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 603 $1,508
Restricted cash............................................................ - 210
Accounts receivable -- trade................................................ 988 1,386
Inventories ............................................................... 361 338
Commodity contract assets.................................................. 746 1,298
Other current assets....................................................... 214 213
------- -------
Total current assets................................................ 2,912 4,953
Investments:
Restricted cash............................................................ 75 68
Other investments.......................................................... 525 491
Property, plant and equipment -- net.......................................... 16,624 16,183
Goodwill...................................................................... 558 558
Regulatory assets -- net...................................................... 1,835 1,630
Commodity contract assets..................................................... 222 476
Cash flow hedges and other derivative assets.................................. 66 14
Other noncurrent assets....................................................... 175 146
------- -------
Total assets....................................................... $22,992 $24,519
======= =======
LIABILITIES, PREFERRED INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from affiliates................................................... $ 291 $ 787
Notes payable -- banks...................................................... - 1,804
Long-term debt due currently............................................... 128 397
Accounts payable -- trade.................................................. 713 820
Commodity contract liabilities............................................. 550 1,138
Accrued taxes.............................................................. 352 303
Other current liabilities.................................................. 637 724
------- -------
Total current liabilities.......................................... 2,671 5,973
Accumulated deferred income taxes............................................. 3,347 3,227
Investment tax credits........................................................ 434 450
Commodity contract liabilities................................................ 149 320
Cash flow hedges and other derivative liabilities............................. 169 150
Other noncurrent liabilities and deferred credits............................. 1,553 1,063
Long-term debt, less amounts due currently.................................... 7,416 6,613
Exchangeable preferred membership interests of TXU Energy, net of $256
discount (Note 1).......................................................... 494 -
------- -------
Total liabilities................................................. 16,233 17,796
Preferred stock subject to mandatory redemption (Note 4)..................... - 21
Contingencies (Note 6)
Shareholders' equity (Note 5):
Preferred stock not subject to mandatory redemption (Note 4)................ 38 115
Common stock without par value (Note 5):
Class A - Authorized shares: September 30, 2003 -- 9,000,000 and December
31, 2003 -- 180,000,00, 0utstanding shares: September 30, 2003 --
2,062,768 and December 31, 2003 -- 52,817,862.......................... 102 2,514
Class B - Authorized shares: September 30, 2003 -- 171,000,000,
0utstanding shares: September 30, 2003 -- 39,192,594.................. 1,949 --
Retained earnings........................................................... 4,859 4,261
Accumulated other comprehensive loss........................................ (189) (188)
------- -------
Total common stock equity................................................ 6,721 6,587
------- -------
Total shareholders' equity............................................. 6,759 6,702
------- -------
Total liabilities, preferred interests and shareholders' equity...... $22,992 $24,519
======= =======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- US Holdings is a holding company for TXU Energy
and Oncor. US Holdings is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. US Holdings engages, through TXU Energy, in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, as well as, through Oncor, in the transmission and
distribution of electricity. US Holdings' consolidated operations consist of its
TXU Energy and Oncor business segments and the activities of the holding
company, which consists primarily of servicing approximately $160 million in
debt. See discussion of reportable business segments in Note 7.
Basis of Presentation -- The condensed consolidated financial statements
of US Holdings have been prepared in accordance with US GAAP and on the same
basis as the audited financial statements included in its 2002 Form 10-K, except
for the effect of adopting of the following new accounting rules: EITF 02-3,
SFAS 143, SFAS 145 and SFAS 150, all discussed below.
In the opinion of management, all other adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations and financial position have been included therein. All intercompany
items and transactions have been eliminated in consolidation. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with US GAAP have been omitted
pursuant to the rules and regulations of the SEC. Because the consolidated
interim financial statements do not include all of the information and footnotes
required by US GAAP, they should be read in conjunction with the audited
financial statements and related notes included in the 2002 Form 10-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, US Holdings recorded a cumulative effect of changes in
accounting principles as of January 1, 2003. (See Note 2 for a discussion of the
impacts of these two accounting standards.)
As a result of guidance provided in EITF 02-3, US Holdings has not
recognized origination gains on commercial and industrial retail contracts in
2003. For the three- and nine-month periods ended September 30, 2002, US
Holdings 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".
4
As a result of the implementation of SFAS 145 as of January 1, 2003, the
previously reported annual after-tax losses on the early extinguishment of debt
of $97 million in the year ended December 31, 2001 (as described in the Notes to
Financial Statements in the 2002 Form 10-K) will be reclassified from
extraordinary items to other deductions and income tax expense in income from
continuing operations as such losses do not meet the criteria of an
extraordinary item. There was no effect on net income as a result of the
implementation of SFAS 145.
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.
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 6
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. As a result of the implementation of SFAS
150, the September 30, 2003 balance sheet reflects the classification of $7
million of preferred stock subject to mandatory redemption as a liability (see
Note 4). 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 September 30, 2003 balance sheet
reflects the classification of these securities (net of $256 million in
unamortized discount) as liabilities.
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.
5
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.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For US Holdings, such liabilities relate to
nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) US Holdings had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net.................. $488
Increase in other noncurrent liabilities and deferred credits.... (528)
Increase in accumulated deferred income taxes.................... (3)
Increase in regulatory assets - net.............................. 48
----
Cumulative effect of change in accounting principles............. $ 5
====
The asset retirement liability at 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, US Holdings believes that
the adoption of SFAS 143 results primarily in timing differences in the
recognition of asset retirement costs that TXU Energy is currently recovering
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.
6
3. FINANCING ARRANGEMENTS
At September 30, 2003, US Holdings had outstanding short-term borrowings
consisting of advances from affiliates of $291 million. At December 31, 2002,
outstanding short-term bank borrowings were $1.8 billion and advances from
affiliates were $787 million. Weighted average interest rates on short-term
borrowings were 2.87% and 2.44% at September 30, 2003 and December 31, 2002,
respectively.
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.
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 US Holdings and its consolidated subsidiaries consisted of the
following
September 30, December 31,
2003 2002
---- ----
TXU Energy
----------
Pollution Control Revenue Bonds:
Brazos River Authority:
Floating Taxable Series 1993 due June 1, 2023.................................... $ -- $ 44
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a)....... 39 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a)....... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)..... 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a).... 118 118
7.700% Fixed Series 1999A due April 1, 2033...................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1,
2013(a)....................................................................... 16 16
7.700% Fixed Series 1999C due March 1, 2032...................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030, remarketing date April 1, 2004(a). 121 121
4.750% Fixed Series 2001B due May 1, 2029, remarketing date November 1, 2006(a).. 19 19
5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011(a).. 274 274
4.250% Fixed Series 2001D due May 1, 2033, remarketing date November 1, 2003(a).. 271 271
Floating Taxable Series 2001F due December 31, 2036.............................. -- 39
1.170% Floating Taxable Series 2001G due December 1, 2036(b)..................... 72 72
1.120% Floating Taxable Series 2001H due December 1, 2036(b)..................... 31 31
1.120% Floating Taxable Series 2001I due December 1, 2036(b)..................... 63 63
1.150% Floating Series 2002A due May 1, 2037(b).................................. 61 61
6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013(a)... 44 --
6.300% Fixed Series 2003B due July 1, 2032....................................... 39 --
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021....................................... 51 51
5.500% Fixed Series 2001A due May 1, 2022, remarketing date November 1, 2011(a).. 91 91
5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011(a).. 107 107
4.000% Fixed Series 2001C due May 1, 2028, remarketing date November 1, 2003(a).. 70 70
Floating Taxable Series 2001D due December 31, 2036.............................. -- 12
1.120% Floating Taxable Series 2001E due December 31, 2036(b).................... 45 45
5.800% Fixed Series 2003A due July 1, 2022....................................... 12 --
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................ 14 14
5.000% Fixed Series 2001A due May 1, 2027, remarketing date November 1, 2006(a).. 37 37
Other:
7.000% Fixed Senior Notes - TXU Mining due May 1, 2003........................... -- 72
6.875% Fixed Senior Notes - TXU Mining due August 1, 2005........................ 30 30
9.000% Fixed Exchangeable Subordinated Notes due November 22, 2012 (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
8
September 30, December 31,
2003 2002
---- ----
Oncor
- -----
9.530% Fixed Medium Term Secured Notes due January 30, 2003...................... -- 4
9.700% Fixed Medium Term Secured Notes due February 28, 2003..................... -- 11
6.750% Fixed First Mortgage Bonds due March 1, 2003.............................. -- 133
6.750% Fixed First Mortgage Bonds due April 1, 2003.............................. -- 70
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
7.875% Fixed First Mortgage Bonds due March 1, 2023.............................. -- 224
8.750% Fixed First Mortgage Bonds due November 1, 2023........................... -- 103
7.875% Fixed First Mortgage Bonds due April 1, 2024.............................. -- 133
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
2.260% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2007.............................................................. 103 --
4.030% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2010.............................................................. 122 --
4.950% Fixed Series 2003 Transition Bonds due in bi-annual installments through
February 15, 2013.............................................................. 130 --
5.420% Fixed Series 2003 Transition Bonds due in bi-annual installments through
August 15, 2015................................................................ 145 --
Unamortized premium and discount................................................. (31) (35)
------- -------
Total Oncor.................................................................. 4,225 4,399
US Holdings
- -----------
7.170% Fixed Senior Debentures due August 1, 2007................................ 10 10
9.556% Fixed Notes due in bi-annual installments through December 4, 2019........ 72 73
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 67 68
1.910% Floating Rate Junior Subordinated Debentures, Series D due January 30,
2037(c)........................................................................ 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037....... 8 8
------- -------
Total US Holdings ........................................................... 158 160
Total US Holdings consolidated................................................... 7,544 7,010
Less amount due currently........................................................ 128 397
------- -------
Total long-term debt............................................................. $ 7,416 $ 6,613
======= =======
- -------------------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at September 30, 2003. These series are in a
flexible or weekly rate mode and are classified as long-term as they are
supported by long-term irrevocable letters of credit. Series in the
flexible mode will be remarketed for periods of less than 270 days.
(c) Interest rates in effect at September 30, 2003.
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. US
Holdings intends to remarket these bonds in the first quarter of 2004.
In October 2003, the Brazos River Authority issued $72 million aggregate
principal amount of Series 2003C pollution control revenue bonds and $31 million
aggregate principal amount of Series 2003D pollution control revenue bonds for
TXU Energy. The Series 2003C bonds will bear interest at an annual rate of 6.75%
9
until maturity in 2038. The Series 2003D bonds will bear interest at an annual
rate of 5.40% until their mandatory tender date in 2014, at which time they will
be remarketed. Proceeds from the issuance of the Series 2003C and Series 2003D
bonds were used to refund the $72 million aggregate principal amount of Brazos
River Authority Taxable Series 2001G and the $31 million aggregate principal
amount of Series 2001H variable rate pollution control revenue bonds, both due
December 1, 2036. The Sabine River Authority also issued $45 million aggregate
principal amount of Series 2003B pollution control revenue bonds for TXU Energy.
The Series 2003B bonds will bear interest at an annual rate of 6.15% until
maturity in 2022, however they become callable in 2013. Proceeds from the
issuance of the Series 2003B bonds were used to refund the $45 million aggregate
principal amount of Sabine River Authority Taxable Series 2001E variable rate
pollution control revenue bonds due December 1, 2036.
In August 2003, Oncor's wholly-owned, special purpose bankruptcy-remote
subsidiary, Oncor Electric Delivery Transition Bond Company LLC, issued $500
million aggregate principal amount of transition (securitization) bonds in
accordance with the Settlement and a financing order. The bonds were issued in
four classes that require bi-annual interest and principal installment payments
beginning in 2004 through specified dates in 2007 through 2015. The transition
bonds bear interest at fixed annual rates ranging from 2.26% to 5.42%. Oncor
used the proceeds to retire the $224 million aggregate principal amount of the 7
7/8% First Mortgage Bonds due March 1, 2023 and $133 million principal amount of
the 7 7/8% First Mortgage Bonds due April 1, 2024, as well as to repurchase
outstanding common shares from its parent, US Holdings, in the amount of $125
million. The Settlement and financing order provide for a second issuance of
$800 million expected to be completed in the first quarter of 2004.
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, Oncor repaid the $70 million principal amount of its First
Mortgage Bonds, 6.75% Series, at the maturity date for par value plus accrued
interest. A restricted cash deposit of $72 million was utilized to fund the
maturity.
10
In April 2003, the Brazos River Authority Series 1999A pollution control
revenue bonds, with an aggregate principal amount of $111 million, were
remarketed. The bonds now bear interest at a fixed annual rate of 7.70% and are
callable beginning on April 1, 2013 at a price of 101% until March 31, 2014 and
at 100% thereafter.
In March 2003, the Brazos River Authority Series 1999B and 1999C pollution
control revenue bonds (aggregate principal amount of $66 million) were converted
from a floating rate mode to a multiannual mode at annual rates of 6.75% and
7.70%, respectively. The rate on the 1999B bonds will remain in effect until
2013 at which time they will be remarketed. The rate on the 1999C bonds is fixed
to maturity in 2032, however they become callable in 2013.
In March 2003, the Brazos River Authority issued $44 million aggregate
principal amount of pollution control revenue bonds for TXU Energy. The bonds
will bear interest at an annual rate of 6.75% until the mandatory tender date of
April 1, 2013. On April 1, 2013, the bonds will be remarketed. Proceeds from the
issuance of the bonds were used to repay the $44 million principal amount of
Brazos River Authority Series 1993 pollution control revenue bonds due June 1,
2023.
In March 2003, Oncor repaid the $133 million principal amount of its First
Mortgage Bonds, 6.75% Series, at the maturity date for par value plus accrued
interest. A restricted cash deposit of $138 million was utilized to fund the
maturity.
In March 2003, Oncor redeemed all ($103 million principal amount) of its
First Mortgage and Collateral Trust Bonds, 8.75% Series due November 1, 2023, at
104.01% of the principal amount thereof, plus accrued interest to the redemption
date.
In March 2003, TXU Energy issued $1.25 billion aggregate principal amount
of senior unsecured notes in two series in a private placement with registration
rights. One series in the amount of $250 million is due March 15, 2008, and
bears interest at the annual rate of 6.125%, and the other series in the amount
of $1 billion is due March 15, 2013, and bears interest at the annual rate of
7%. Net proceeds from the issuance were used for general corporate purposes,
including the repayment of borrowings under TXU Corp.'s credit facilities. In
August 2003, TXU Energy entered into interest rate swap transactions through
2013, which are being accounted for as fair value hedges, to effectively convert
$500 million of the notes to floating interest rates.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp., including TXU Energy, Oncor and TXU Gas
(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,
11
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 $8 million and $10 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 US Holdings and
are reported in SG&A expenses.
The September 30, 2003 balance sheet reflects funding under the program of
$667 million, through sale of undivided interests in receivables by TXU
Receivables Company, related to $1.4 billion face amount of US Holdings
trade accounts receivable. Funding under the program increased $220 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 $141 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 US Holdings 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 US Holdings' balance sheets
represent the face amount of its receivables less the funding under the program
and allowances for uncollectible accounts.
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.
12
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 US Holdings
contain financial covenants that require maintenance of specified fixed charge
coverage ratios, shareholders' equity to total capitalization ratios and
leverage ratios and/or contain minimum net worth covenants. TXU Energy's
preferred membership interests (formerly subordinated notes) also limit its
incurrence of additional indebtedness unless a leverage ratio and interest
coverage test are met on a pro forma basis. As of September 30, 2003,
US Holdings and its subsidiaries were in compliance with all such applicable
covenants.
Certain financing and other arrangements of US Holdings contain provisions
that are specifically affected by changes in credit ratings and also include
cross default provisions. The material cross default provisions are described
below.
Other agreements of US Holdings, including some of the credit facilities
discussed above, contain terms pursuant to which the interest rates charged
under the agreements may be adjusted depending on the credit ratings of US
Holdings or its subsidiaries.
Cross Default Provisions
------------------------
Certain financing arrangements of US Holdings contain provisions that
would result in an event of default if there 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
13
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease would terminate.
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
TXU Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if TXU Energy were to
default under an obligation in respect of borrowings in excess of thresholds
stated in the contracts, which thresholds vary.
US Holdings and its subsidiaries have other arrangements, including
interest rate swap agreements and leases with cross default provisions, the
triggering of which would not result in a significant effect on liquidity.
4. PREFERRED STOCK
September 30, December 31,
2003 2002
------------ -----------
Not Subject to Mandatory Redemption:
- ------------------------------------
$4.00 to $5.08 dividend rate series....... $38 $ 38
$7.98 series.............................. -- 26
$7.50 series ............................. -- 30
$7.22 series ............................. -- 21
--- ----
Total.................................. $38 $115
=== ====
Subject to Mandatory Redemption:
- --------------------------------
$6.98 series.............................. $-- $ 11
$6.375 series............................. 7 10
--- ----
Total.................................. $ 7 $ 21
=== ====
As a result of the adoption of SFAS 150 on July 1, 2003 (see Note 1), US
Holdings' preferred stock subject to mandatory redemption of $7 million has been
classified in the balance sheet at September 30, 2003 in liabilities (other
current liabilities). The preferred stock not subject to mandatory redemption
remains classified in shareholders' equity.
In September 2003, US Holdings called its mandatorily redeemable preferred
stock for redemption, and on October 1, 2003, those shares were redeemed for an
aggregate principal amount of $7 million.
In July 2003, US Holdings redeemed all of the shares of its $7.98 series,
$7.50 series and $7.22 series of preferred stock not subject to mandatory
redemption and the shares of its $6.98 series of preferred stock subject to
mandatory redemption for an aggregate amount of $91 million.
5. SHAREHOLDERS' EQUITY
In August 2003, the Articles of Incorporation of TXU Holdings were amended
to create two new classes of common stock: Class A common stock with voting
rights and Class B common stock without voting rights. All the shares of Class A
common stock and 5% of the shares of Class B common stock are held by TXU Corp.,
and 95% of the shares of Class B common stock are held by TXU Investments LLC, a
wholly-owned, direct subsidiary of TXU Corp.
On July 1, 2003, US Holdings repurchased 5,312,500 shares of its common
stock for $212.5 million and on April 1, 2003, US Holdings repurchased 6,250,000
shares of its common stock for $250 million. On November 15, 2002, US Holdings
declared a cash dividend of $250 million, which was paid to TXU Corp. on January
2, 2003.
14
The legal form of cash distributions to TXU Corp. has been both common
stock repurchases and the payment of dividends. For accounting purposes, the
cash distributions in the form of share repurchases are recorded as a return of
capital.
Certain debt instruments and preferred securities of US Holdings contain
provisions that restrict payment of dividends during any interest or
distribution payment deferral period or while any payment default exists. An
Oncor mortgage restricts the payment of dividends to the amount of Oncor's
retained earnings. At September 30, 2003, US Holdings was in compliance with
these provisions.
6. CONTINGENCIES
Guarantees -- US Holdings has entered into contracts that contain
guarantees to outside parties that could require performance or payment under
certain conditions. These guarantees have been grouped based on similar
characteristics and are described in detail below.
Residual value guarantees in operating leases -- US Holdings is the lessee
under various operating leases, entered into prior to January 1, that obligate
it to guarantee the residual values of the leased facilities. At September 30,
2003, the aggregate maximum amount of residual values guaranteed was
approximately $272 million with an estimated residual recovery of approximately
$204 million. The average life of the lease portfolio is approximately six
years.
Shared saving guarantees -- US Holdings has guaranteed that certain
customers will realize specified annual savings resulting from energy management
services it has provided. In aggregate, the average annual savings 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 -- US Holdings 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, US Holdings intends to provide from either existing or new facilities
for the extension, renewal or substitution of these letters of credit to the
extent required for such floating rate debt or their remarketing as fixed rate
debt.
US Holdings 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 -- US Holdings has outstanding surety bonds of approximately
$57 million to support performance under various contracts in the normal course
of business. The term of the surety bond obligations is approximately two
years.
Other -- US Holdings has entered into contracts with public agencies to
purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $13 million at September 30,
2003, and interest on bonds issued by the agencies to finance the reservoirs
from which the water is supplied. The bonds mature at various dates through 2011
and have interest rates ranging from 5.50% to 7%. US Holdings is required to
make periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US Holdings
is obligated to pay certain variable costs of operating and maintaining the
reservoirs. US Holdings has assigned to a municipality all its contract rights
and obligations in connection with $19 million remaining principal amount of
bonds at September 30, 2003, issued for similar purposes, which had previously
been guaranteed by US Holdings. US Holdings is, however, contingently liable in
the event of default by the municipality.
15
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. US Holdings believes that it has not committed any
violation of the antitrust laws and the Commission's investigation of the market
conditions in late February 2003 has not resulted in any findings adverse to TXU
Energy. Accordingly, US Holdings believes that TCE's claims against TXU Energy
and its subsidiary companies are without merit and intends to vigorously defend
the lawsuit. US Holdings is unable to estimate any possible loss or predict the
outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., TXU Energy and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management
intend to vigorously defend the litigation. While TXU Corp., TXU Energy and TXU
Portfolio Management dispute the plaintiff's claims, 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. US Holdings believes that the plaintiff lacks standing to
assert any antitrust claims against US Holdings or TXU Portfolio Management, and
that defendants have not violated antitrust laws or other laws as claimed by the
plaintiff. Therefore, US Holdings believes that plaintiff's claims are without
merit and plans to vigorously defend the lawsuit. US Holdings is unable to
estimate any possible loss or predict the outcome of this action.
Open-Access Transmission -- At the state level, the Texas Public Utility
Regulatory Act, as amended, requires owners or operators of transmission
facilities to provide open access wholesale transmission services to third
parties at rates and terms that are non-discriminatory and comparable to the
rates and terms of the utility's own use of its system. The Commission has
adopted rules implementing the state open access requirements for utilities that
are subject to the Commission's jurisdiction over transmission services, such as
Oncor.
On January 3, 2002, the Supreme Court of Texas issued a mandate affirming
the judgment of the Court of Appeals that held that the pricing provisions of
16
the Commission's open access wholesale transmission rules, which had mandated
the use of a particular rate setting methodology, were invalid because they
exceeded the statutory authority of the Commission. On January 10, 2002, Reliant
Energy Incorporated and the City Public Service Board of San Antonio each filed
lawsuits in the Travis County, Texas, District Court against the Commission and
each of the entities to whom they had made payments for transmission service
under the invalidated pricing rules for the period January 1, 1997, through
August 31, 1999, seeking declaratory orders that, as a result of the application
of the invalid pricing rules, the defendants owe unspecified amounts. US
Holdings and TXU SESCO Company are named defendants in both suits. Effective as
of October 3, 2003, a global settlement among all parties to these lawsuits has
been reached. The settlement was not material to US Holdings' financial position
or results of operation, and requires that these suits be dismissed with
prejudice.
General -- US Holdings is involved in various other legal and
administrative proceedings, the ultimate resolution of which should not have a
material effect upon its financial position, results of operations or cash
flows.
7. SEGMENT INFORMATION
US Holdings has two reportable business segments: TXU Energy and Oncor.
TXU Energy (formerly Energy segment) - consists of operations, which are
principally in the competitive Texas market, involving power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, and portfolio management, including risk management and
certain trading activities.
Oncor (formerly Electric Delivery segment) - consists of regulated
operations in Texas involving the transmission and distribution of electricity.
Effective with reporting for 2003, results for the TXU Energy segment
exclude expenses incurred by the US Holdings holding company in order to present
the segment on the same basis as the separate reporting for TXU Energy and as
the results of the business are evaluated by management. The activities of the
holding company consist primarily of servicing approximately $160 million of
debt. Prior year amounts are presented on the revised basis.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------- -------
Operating revenues:
TXU Energy.......................................... $ 2,453 $ 2,420 $ 6,304 $ 6,238
Oncor............................................... 613 557 1,605 1,551
Eliminations........................................ (444) (441) (1,175) (1,257)
------- ------- ------- -------
Consolidated.................................. $ 2,622 $ 2,536 $ 6,734 $ 6,532
======= ======= ======= =======
Regulated revenues included in operating revenues:
TXU Energy.......................................... $ -- $ -- $ -- $ --
Oncor............................................... 613 557 1,605 1,551
Eliminations........................................ (440) (438) (1,166) (1,251)
------- ------- ------- -------
Consolidated.................................. $ 173 $ 119 $ 439 $ 300
======= ======= ======= =======
Affiliated revenues included in operating revenues:
TXU Energy.......................................... $ 4 $ 3 $ 9 $ 6
Oncor............................................... 440 438 1,166 1,251
Eliminations........................................ (444) (441) (1,175) (1,257)
------- ------- ------- -------
Consolidated.................................. $ -- $ -- $ -- $ --
======= ======= ======= =======
Income before cumulative effect of changes in
accounting principles:
TXU Energy.......................................... $ 249 $ 227 $ 438 $ 597
Oncor............................................... 126 96 239 232
Other............................................... (4) (3) (16) (12)
------- ------- ------- -------
Consolidated.................................. $ 371 $ 320 $ 661 $ 817
======= ======= ======= =======
17
8. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Operating revenues:
Regulated........................................... $ 613 $ 557 $ 1,605 $ 1,551
Unregulated......................................... 2,453 2,420 6,304 6,238
Intercompany sales eliminations - regulated......... (440) (438) (1,166) (1,251)
Intercompany sales eliminations - unregulated....... (4) (3) (9) (6)
------- ------- ------- -------
Total operating revenues....................... 2,622 2,536 6,734 6,532
Costs and operating expenses:
Cost of energy sold and delivery fees
- unregulated*.................................... 1,100 1,095 2,870 2,407
Operating costs - regulated......................... 175 174 524 493
Operating costs - unregulated....................... 170 182 548 534
Depreciation and amortization - regulated........... 78 66 215 197
Depreciation and amortization - unregulated......... 100 116 308 342
Selling, general and administrative expenses
- regulated....................................... 47 50 144 160
Selling, general and administrative expenses
- unregulated..................................... 169 200 466 623
Franchise and revenue-based taxes - regulated....... 63 67 183 195
Franchise and revenue-based taxes - unregulated..... 25 28 85 94
Other income........................................ (21) (19) (47) (36)
Other deductions.................................... 10 3 13 8
Interest income..................................... (2) - (11) (1)
Interest expense and related charges................ 151 104 459 314
------- ------- ------- -------
Total costs and expenses....................... 2,065 2,066 5,757 5,330
------- ------- ------- -------
Income before income taxes and cumulative effect of
changes in accounting principles.................... $ 557 $ 470 $ 977 $ 1,202
======= ======= ======= =======
- --------------------------
* Includes cost of fuel consumed of $402 million and $419 million for the
three months ended September 30, 2003 and 2002, and $1,238 million and
$1,036 million for the nine months ended September 30, 2003 and 2002,
respectively. The balance represents energy purchased for resale and
delivery fees.
The operations of the TXU Energy segment are included above as
unregulated, as the Texas market is open to competition. However, retail pricing
to residential and small business customers in its historical service territory
continues to be subject to transitional regulatory provisions.
Other Income and Deductions --
Three Months Ended 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
Equity portion of allowance for funds used during
construction .......................................... 1 1 3 3
Other................................................... 1 - 4 1
------ ------ ------ ------
Total other income.................................. $ 21 $ 19 $ 47 $ 36
====== ====== ====== ======
Other deductions:
Equity in losses of unconsolidated subsidiaries......... $ - $ 1 $ - $ 2
Loss on retirement of debt.............................. 1 - 1 1
Asset write-off in strategic retail services business... 5 - 5 -
Premium on redemption of preferred stock................ 3 - 3 -
Expenses related to canceled construction projects...... 2 2 4 5
Other................................................... (1) - - -
------ ------ ------ ------
Total other deductions.............................. $ 10 $ 3 $ 13 $ 8
====== ====== ====== ======
18
Interest Expense and Related charges --
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Interest...................................................... $ 146 $ 104 $ 444 $ 312
Amortization of deferred debt costs........................... 8 3 23 11
Allowance for borrowed funds used during construction
and capitalized interest.................................. (3) (3) (8) (9)
----- ----- ----- -----
Total interest expense and related charges..... $ 151 $ 104 $ 459 $ 314
===== ===== ===== =====
Regulatory Assets and Liabilities --
September 30, December 31
2003 2002
---- ----
Regulatory Assets:
Generation-related regulatory assets subject to securitization. $1,170 $1,652
Generation-related regulatory assets-securitized............... 494 -
Securities reacquisition costs................................. 123 124
Recoverable deferred income taxes -- net........................ 81 76
Other regulatory assets........................................ 97 46
------ ------
Total regulatory assets.................................... 1,965 1,898
Regulatory Liabilities:
Liability related to excess mitigation credit.................. 39 170
Investment tax credit and protected excess deferred taxes...... 91 98
------ ------
Total regulatory liabilities............................... 130 268
------ ------
Net regulatory assets...................................... $1,835 $ 1,630
====== ======
Included above are assets of $1.8 billion at September 30, 2003 and
December 31, 2002, that were not earning a return. Of the assets not earning a
return, $1.7 billion is expected to be recovered over the term of the
securitization bonds issued by Oncor in August 2003 and expected to be issued in
the first quarter of 2004 pursuant to the Settlement and a financing order. All
other regulatory assets have a remaining recovery period of 12 to 49 years.
Included in other regulatory assets as of September 30, 2003 was $43
million related to nuclear decommissioning liabilities.
Restricted Cash -- As of September 30, 2003, all of the restricted cash of
$210 million from the net proceeds of Oncor's issuance of senior secured notes
in December 2002 had been used to pay the interest and principal of Oncor's
first mortgage bonds due March and April 2003. The remaining restricted cash
reported in investments on the balance sheet as of September 30, 2003, included
$69 million held as collateral for outstanding letters of credit and $6 million
held by the trustee in connection with the transition bonds issued by Oncor in
August 2003.
Accounts Receivable -- At September 30, 2003 and December 31, 2002,
accounts receivable of $1.0 billion and $1.4 billion are stated net of allowance
for uncollectible accounts of $74 million and $72 million, respectively. During
the nine months ended September 30, 2003, bad debt expense was $71 million,
account write-offs were $65 million and other activity decreased the allowance
for uncollectible accounts by $4 million.
Accounts receivable included $449 million and $505 million of unbilled
revenues at September 30, 2003 and December 31, 2002, respectively.
19
Intangible Assets -- SFAS 142 became effective for US Holdings 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
-------- ------------ ---- ------- ------------ ----
Intangible assets subject to amortization
(included in property, plant and
equipment):
Capitalized software.............. $ 391 $171 $ 220 $368 $131 $237
Land easements.................... 176 66 110 180 61 119
Mineral rights and other.......... 31 21 10 31 20 11
----- ---- ----- ---- ---- ----
Total....................... $ 598 $258 $ 340 $579 $212 $367
===== ==== ===== ==== ==== ====
Amortization expense for intangible assets was $46 million and $45 million
for the nine months ended September 30, 2003 and 2002, respectively. At
September 30, 2003, the remaining average useful lives of capitalized software,
land easements and mineral rights noted above were 6 years, 69 years and 40
years, respectively.
At September 30, 2003 and December 31, 2002, goodwill of $558 million was
stated net of previously recorded accumulated amortization of $67 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...................................................... $ 223 $211
Fuel stock.................................................................. 75 70
Gas stored underground...................................................... 63 57
----- ----
Total inventories....................................................... $ 361 $338
===== ====
Inventories reflect a $22 million reduction as a result of the rescission
of EITF 98-10 as discussed in Note 2.
Property, Plant and Equipment -- As of September 30, 2003 and December 31,
2002, property, plant and equipment of $16.6 billion and $16.2 billion is stated
net of accumulated depreciation and amortization of $10.7 billion and $10.4
billion, respectively.
As of September 30, 2003, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.2 billion) was
pledged as collateral for Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- US Holdings experienced net hedge
ineffectiveness of $10 million and $24 million, reported as a gain 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 of $7
million and $40 million, respectively, was reported as a loss in revenues. Hedge
ineffectiveness is primarily related to hedges of anticipated sales from
baseload generation.
20
As of September 30, 2003, it is expected that $71 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.
Affiliate Transactions -- The following represent significant affiliate
transactions of US Holdings:
Average daily short-term advances from affiliates during the three months
ended September 30, 2003 and 2002 were $702 million and $575 million,
respectively, and interest expense incurred on the advances was $4 million and
$3 million, respectively. Average daily short-term advances from affiliates
during the nine months ended September 30, 2003 and 2002 were $845 million and
$1.1 billion, respectively, and interest expense incurred on the advances was
$17 million and $23 million, respectively. The average interest rates for the
three months ended September 30, 2003 and 2002 were 2.86% and 2.11%,
respectively. The average interest rates for the nine months ended September 30,
2003 and 2002 were 2.76% and 2.43%, respectively.
TXU Business Services Company, a subsidiary of TXU Corp., charges US
Holdings for certain financial, accounting, information technology,
environmental, procurement and personnel services and other administrative
services at cost. For the three months ended September 30, 2003 and 2002, these
costs totaled $79 million and $105 million, respectively, and for the nine
months ended September 30, 2003 and 2002 totaled $254 million and $319 million,
respectively. These costs are reported in SG&A expenses.
US Holdings charges TXU Gas for customer and administrative services at
cost. For the three months ended September 30, 2003 and 2002, these charges
totaled $14 million and $16 million, respectively, and for the nine months ended
September 30, 2003 and 2002 totaled $43 million and $45 million, respectively.
These charges are largely reported as a reduction in SG&A expenses.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS 143, which were noncash in nature. See Note 3 for discussion of
the exchange of TXU Energy subordinated notes for preferred membership
interests, which was a noncash transaction.
21
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company and subsidiaries (US Holdings) as of 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 US Holdings' management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit in accordance with auditing
standards generally accepted in the United States of America, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of US
Holdings as of December 31, 2002, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report (which includes an
explanatory paragraph related to the adoption of Statement of Financial
Accounting Standards No. 142), dated February 14, 2003 (and March 19, 2003 as to
Note 18 therein), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 1 to the Notes to Financial Statements, US Holdings changed
its method of accounting for asset retirement obligations in 2003 in connection
with the adoption of Statement of Financial Accounting Standards No. 143, "Asset
Retirement Obligations," 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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Description of Business -- US Holdings is a holding company for TXU Energy
and Oncor. US Holdings is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. US Holdings engages, through TXU Energy, in power production
(electricity generation), wholesale energy sales, retail energy sales and
related services, portfolio management, including risk management and certain
trading activities, as well as, through Oncor, in the transmission and
distribution of electricity. US Holdings' consolidated operations consist of its
TXU Energy and Oncor business segments and the activities of the holding
company, which consists primarily of servicing approximately $160 million in
debt. See discussion of reportable business segments in Note 7.
Dollar amounts in the following tables are stated in millions of US
dollars, unless otherwise noted.
RESULTS OF OPERATIONS
Consolidated US Holdings
- ------------------------
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
- --------------------------------------------------------------------
Reference is made to comparisons of results by business segment following
the discussion of consolidated results presented below. The business segment
comparisons provide additional det