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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
-- OR--
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12833
TXU Corp.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2669310
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street Dallas, TX 75201-3411 (214) 812-4600
(Address of Principal Executive Offices)(Zip Code) (Registrant's Telephone
Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
- ---------- ------------------- -------------------------
TXU Corp. Common Stock, New York Stock Exchange
without par value, and The Chicago Stock Exchange
Preference Stock Purchase The Pacific Exchange
Rights
Corporate Units New York Stock Exchange
Income Prides New York Stock Exchange
TXU Capital I, a 7.25% Cumulative Trust New York Stock Exchange
subsidiary of Preferred Capital
TXU Corp. Securities
TXU Capital II, a 8.70% Trust Originated New York Stock Exchange
subsidiary of Preferred Securities
TXU Corp.
Securities registered pursuant to Section 12(g) of the Act: None
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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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
--- ----
Aggregate market value of TXU Corp. Common Stock held by non-affiliates, based
on the last reported sale price on the NYSE composite tape on June 30, 2003, the
last trading date of the registrant's most recently completed second fiscal
quarter: $7,201,312,654
Common Stock outstanding at March 8,2004: 323,995,756 shares, without par value
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A,
to be filed with the Commission on or about April 5, 2004, are
incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
Page
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Glossary ............................................................... iii
PART I
Items 1. and 2. BUSINESS and PROPERTIES................................ 1
TXU CORP. AND SUBSIDIARIES..................................... 1
TEXAS ELECTRIC INDUSTRY RESTRUCTURING ......................... 2
STRATEGIC INITIATIVES.......................................... 4
OPERATING SEGMENTS............................................. 4
Energy ..................................................... 4
Energy Delivery............................................. 9
Australia................................................... 13
ENVIRONMENTAL MATTERS.......................................... 16
Item 3. LEGAL PROCEEDINGS.............................................. 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 21
EXECUTIVE OFFICERS OF TXU CORP.......................................... 21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 22
Item 6. SELECTED FINANCIAL DATA........................................ 22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 23
Item 9A. CONTROLS AND PROCEDURES........................................ 23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.................................................. 23
Item 11. EXECUTIVE COMPENSATION....................................... 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 24
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES....................... 25
i
Page
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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 25
APPENDIX A - Financial Information of TXU Corp. and Subsidiaries
APPENDIX B - Exhibits to 2003 Form 10-K
APPENDIX C - Audited Financial Statements of Pinnacle One Partners, L.P.
and Subsidiaries as of December 31, 2002 and 2001
Note for Annual Report to Shareholders - This 2003 Form 10-K, except for
Appendix B and Appendix C, is being included in its entirety in TXU Corp.'s 2003
annual report to shareholders in accordance with Regulation 14A of the proxy
rules. Copies of Appendix B and Appendix C will be provided upon written
request.
Appendix C contains the audited financial statements for the years ended
December 31, 2002 and 2001 of Pinnacle, a telecommunications joint venture in
which, prior to May 2003, TXU Corp. had a 50% voting interest. In May 2003, TXU
Corp. acquired the interests it did not previously own from the joint venture
partner under a put/call agreement, which had been executed in late February
2003, and finalized a formal plan to dispose of the telecommunications business
by sale. (See Notes 3 and 17 to Financial Statements.) For the year ended
December 31, 2002, Pinnacle was an unconsolidated entity, the financial
statements of which are required to be filed pursuant to the provisions of Rule
3-09 of Regulation S-X because of the significance of financial results related
to Pinnacle as compared to TXU Corp.'s consolidated financial results for the
2002 period.
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request. In addition, in accordance with new corporate governance rules of the
New York Stock Exchange, TXU Corp. has provided, on the TXU Corp. website, (a)
its corporate governance guidelines, (b) its code of conduct for employees,
officers and directors, and (c) charters of the Committees of the board of
directors including the Audit, Nominating and Governance and Organization and
Compensation Committees. Printed copies of corporate governance documents which
are posted on the TXU Corp. website are also available to any shareholder upon
request to the Secretary of TXU Corp., 1601 Bryan Street, Dallas, Texas
75201-3411.
ii
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........Legislation that restructured the electric
utility industry in Texas to provide for
competition
2002 Form 8-K.........................the Form 8-K of TXU Corp. filed
September 23, 2003, reflecting the impact
of adopting SFAS 145 on the financial
information reported in the 2002 Form 10-K
2002 Form 10-K........................TXU Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2002
2003 Form 10-K........................TXU Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2003
APB Opinion 30........................Accounting Principles Board Opinion No.30,
"Reporting the Results of Operations -
Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events
and Transactions."
Bcf...................................billion cubic feet
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"
EPA...................................Environmental Protection Agency
ERCOT.................................Electric Reliability Council of Texas, the
Independent System Operator and the
regional reliability coordinator of the
various electricity systems within Texas
ERISA.................................Employee Retirement Income Security Act
FASB..................................Financial Accounting Standards Board, the
designated organization in the private
sector for establishing standards for
financial accounting and reporting.
FERC..................................Federal Energy Regulatory Commission
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.
FSP ..................................FASB Staff Position (new interpretations
of standards issued by the staff of the
FASB)
iii
GWh...................................gigawatt-hours
historical service territory..........US Holdings' historical service territory,
largely in north Texas, at the time of
entering competition on January 1, 2002.
IRS...................................Internal Revenue Service
kv....................................kilovolts
Moody's...............................Moody's Investors Services, Inc.
MW....................................megawatts
NRC...................................United States Nuclear Regulatory
Commission
Oncor.................................refers to Oncor Electric Delivery Company,
a subsidiary of US Holdings, and/or its
consolidated bankruptcy remote financing
subsidiary, Oncor Electric Delivery
Transition Bond Company LLC, depending on
context
Pinnacle..............................Pinnacle One Partners, L.P., the holding
company for the telecommunications
business and formerly a joint venture
POLR..................................provider of last resort of electricity to
certain customers under the Commission
rules interpreting the 1999 Restructuring
Legislation
Price-to-beat rate....................residential and small business customer
electricity rates established by the
Commission in the restructuring of the
Texas market that are 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, and required to be available
to those customers until January 1, 2007
REP...................................retail electric provider
RRC...................................Railroad Commission of Texas
S&P...................................Standard & Poor's, a division of the
McGraw Hill Companies
Sarbanes-Oxley........................Sarbanes - Oxley Act of 2002
SEC...................................United States Securities and Exchange
Commission
Settlement Plan.......................regulatory settlement plan that received
final approval by the Commission in
January 2003
SFAS..................................Statement of Financial Accounting
Standards issued by the FASB
SFAS 4................................SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt"
SFAS 34...............................SFAS No. 34, "Capitalization of Interest
Cost"
SFAS 71...............................SFAS No. 71, "Accounting for the Effect
of Certain Types of Regulation"
SFAS 87...............................SFAS No. 87, "Employers' Accounting for
Pensions"
SFAS 101..............................SFAS No. 101, "Regulated Enterprises -
Accounting for the Discontinuance of the
Application of FASB Statement No. 71."
SFAS 106..............................SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than
Pensions"
SFAS 109..............................SFAS No. 109, "Accounting for Income
Taxes"
SFAS 121..............................SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of"
SFAS 123..............................SFAS No. 123, "Accounting for Stock-Based
Compensation"
SFAS 132..............................Revised SFAS No. 132, "Employers'
Disclosures about Pensions and
Postretirement Benefits"
SFAS 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
iv
SFAS 140..............................SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and
Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 142..............................SFAS No. 142, "Goodwill and Other
Intangible Assets"
SFAS 143..............................SFAS No. 143, "Accounting for Asset
Retirement Obligations"
SFAS 144..............................SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived
Assets"
SFAS 145..............................SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of
FASB Statement 13, and Technical
Corrections"
SFAS 146..............................SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal
Activities"
SFAS 148..............................SFAS No. 148, "Accounting for Stock-Based
Compensation-- Transition and Disclosure"
SFAS 149..............................SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging
Activities"
SFAS 150..............................SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics
of Both Liabilities and Equity"
SG&A..................................selling, general and administrative
SOP 98-1..............................American Institute of Certified Public
Accountants Statement of Position 98-1,
"Accounting for the Cost of Computer
Software Developed or Obtained for
Internal Use"
TCEQ..................................Texas Commission on Environmental Quality
TXU Australia.........................refers to TXU Australia Group Pty Ltd, a
subsidiary of TXU Corp., and/or its
consolidated subsidiaries, depending on
context
TXU Business Services.................TXU Business Services Company, a
subsidiary of TXU Corp.
TXU Communications....................TXU Communications Ventures Company, a
subsidiary of Pinnacle
TXU Corp..............................refers to TXU Corp., a holding company,
and/or its consolidated subsidiaries,
depending on context
TXU Energy............................refers to TXU Energy Company LLC, a
subsidiary of US Holdings, and/or its
consolidated subsidiaries, depending on
context
TXU Europe............................TXU Europe Limited, a former subsidiary of
TXU Corp.
TXU Fuel..............................TXU Fuel Company, a subsidiary of TXU
Energy
TXU Gas...............................TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining............................TXU Mining Company LP, a subsidiary of TXU
Energy
TXU Portfolio Management..............TXU Portfolio Management Company LP, a
subsidiary of TXU Energy
TXU SESCO.............................TXU SESCO Company, a subsidiary of TXU
Energy, which serves as a REP in ten
counties in the eastern and central parts
of Texas
UK....................................United Kingdom
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................TXU US Holdings Company, a subsidiary of
TXU Corp.
v
PART I
Items 1. and 2. BUSINESS and PROPERTIES
TXU CORP. AND SUBSIDIARIES
---------------------------
TXU Corp., a Texas corporation, was formed in 1997 as a holding company
and is the successor to TXU Energy Industries Company (TEI), the holding company
for the TXU Corp. system prior to the 1997 acquisition of ENSERCH Corporation
(now TXU Gas). TEI, formerly known as Texas Utilities Company, was organized in
1945.
TXU Corp. engages in power production (electricity generation), retail
and wholesale sales of electricity and natural gas, and the transmission and
distribution of electricity and natural gas. In the competitive energy
operations, TXU Corp. engages in hedging and risk management activities. TXU
Corp. is one of the largest energy services companies in the US and Australia
with $11 billion in revenue and over $31 billion of assets as of December 31,
2003. TXU Corp. owns or leases over 20,400 megawatts of power generation and for
2003 sold 128 terawatt hours of electricity and 206 billion cubic feet of
natural gas. TXU Corp. delivers or sells energy to over 5 million residential,
commercial and industrial customers in the US and Australia. At December 31,
2003, TXU Corp. had approximately 14,235 full-time employees.
TXU Corp.'s principal US operations are conducted through US Holdings
(formerly TXU Electric Company) and TXU Gas. US Holdings' operations are
conducted through TXU Energy and Oncor. TXU Corp.'s principal international
operations are conducted through TXU Australia. In 2002, TXU Corp. exited its
operations in Europe, which were conducted through TXU Europe. See Note 3 to
Financial Statements for information related to TXU Europe.
US Holdings, TXU Energy and Oncor -- US Holdings is a holding company
for TXU Energy and Oncor. As a result of the 1999 Restructuring Legislation,
which set into motion the deregulation of the electric industry in Texas,
effective January 1, 2002, TXU Corp.'s integrated electric utility business was
disaggregated and its operations were transferred to TXU Energy and Oncor. TXU
Energy serves 2.6 million retail electric customers and owns, or leases and
operates 19,140 megawatts of power generating capacity. Oncor owns and operates
98,286 miles of electric distribution lines and 14,180 miles of electric
transmission lines. In addition, as of January 1, 2002, certain other businesses
within the TXU Corp. system were transferred to TXU Energy, including TXU Gas'
hedging and risk management business and its unregulated retail
commercial/industrial (business) gas supply operation, as well as the fuel
transportation and coal mining subsidiaries of TXU Corp. that primarily service
the generation operations. The operating assets of TXU Energy and Oncor are
located principally in the north-central, eastern and western parts of Texas.
US Holdings and its subsidiaries operate primarily within the ERCOT
system. ERCOT is an intrastate network of investor-owned entities, cooperatives,
public entities, non-utility generators and power marketers. ERCOT is the
regional reliability coordinating organization for member electricity systems in
Texas, the Independent System Operator of the interconnected transmission system
of those systems, and is responsible for ensuring equal access to transmission
service by all wholesale market participants in the ERCOT region.
TXU Gas is a largely regulated company engaged in the purchase,
transmission, distribution and sale of natural gas in the north-central, eastern
and western parts of Texas, and also provides utility asset management services.
TXU Gas serves more than 1.4 million retail gas customers and owns and operates
26,431 miles of gas distribution mains, 6,162 miles of gas transportation and
gathering pipelines and underground storage reservoirs with 40 Bcf of capacity.
TXU Gas also provides transportation services to gas distribution companies,
electricity generation plants, end-use industrial customers and through-system
shippers.
Australia -- TXU Australia is a holding company for TXU Corp.'s
Australian operations. Its principal operating subsidiaries include TXU
Electricity Limited, which purchases, distributes and sells electricity in
wholesale and retail markets in the State of Victoria and purchases and sells
electricity and gas in wholesale and retail markets in the State of South
Australia; TXU Networks (Gas) Pty. Ltd., which distributes natural gas through
481,307 supply points in Victoria; and TXU Pty. Ltd., which sells natural gas to
approximately 480,000 retail customers in Victoria. TXU Electricity Limited
sells electricity to approximately 582,000 retail customers
1
and delivers electricity to 559,558 supply points, principally in the state of
Victoria, including suburban Melbourne, the second-largest city in Australia.
TXU Australia also conducts portfolio management, which includes hedging and
risk management activities. TXU Australia owns the only underground natural gas
storage facility in Victoria and operates the 1280-megawatt Torrens Island
generation plant in South Australia. TXU Australia also owns a 33.3% interest in
a joint venture that owns and operates a gas transmission pipeline in Victoria
and South Australia.
TXU Corp. is considering various options with respect to the
capitalization of TXU Australia to support its continuing growth, including a
local initial public offering of additional stock by TXU Australia. TXU Corp.
expects to retain a majority interest in TXU Australia after any such offering.
Other -- TXU Business Services is a provider of certain financial,
accounting, information technology, environmental, procurement, personnel and
other administrative services, at cost, to TXU Corp. and its other subsidiaries.
TXU Business Services acts as transfer agent, registrar and dividend paying
agent with respect to the common stock and preference stock of TXU Corp., and
the preferred stock of US Holdings. TXU Business Services also acts as dividend
paying agent for the preferred stock of TXU Gas and as agent for participants
under TXU Corp.'s Direct Stock Purchase and Dividend Reinvestment Plan.
In May 2003, TXU Corp. acquired the interests it did not already
own in a telecommunications joint venture (Pinnacle) that operates an
established incumbent local exchange carrier serving residential and business
customers in East Texas and certain suburbs of Houston, Texas. The business
provides local, long distance, dial-up internet, digital subscriber line and
network and data services, and has approximately 168,000 access lines. In May
2003, TXU Corp. finalized a plan to dispose of the business by sale.
Accordingly, activities of Pinnacle since March 1, 2003 are reported as
discontinued operations. (See Note 3 to Financial Statements for further
discussion.) In January 2004, TXU Corp. entered into an agreement to sell the
telecommunications business for $527 million. The sale is expected to be
completed in the first half of 2004, pending regulatory approvals.
TEXAS ELECTRIC INDUSTRY RESTRUCTURING
-------------------------------------
RESTRUCTURING LEGISLATION
As a result of the 1999 Restructuring Legislation, on January 1, 2002,
TXU Corp. disaggregated (unbundled) its Texas electric utility business into a
power generation company, a retail electric provider (REP) and an electricity
transmission and distribution (delivery) utility. Unbundled electricity
delivery utilities within ERCOT, such as Oncor, remain regulated by the
Commission.
Effective January 1, 2002, REPs affiliated with electricity delivery
utilities are required to charge residential and small business customers
located in their historical service territories "price-to-beat" rates
established by the Commission. TXU Energy, as a REP affiliated with an
electricity delivery utility, could not charge prices to customers in either of
those classes in the historical service territory that are different from the
price-to-beat rate, adjusted for fuel factor changes, until the earlier of
January 1, 2005 or the date on which 40% of the electricity consumed by
customers in that class is supplied by competing REPs. Thereafter,
TXU Energy may offer rates different from the price-to-beat rate to customers in
that class, but it must also continue to make the price-to-beat rate available
for residential and small business customers until January 1, 2007. Twice a
year, affiliated REPs may request that the Commission adjust the fuel factor
component of the price-to-beat rate based on changes in the market price of
natural gas.
In December 2003, the Commission found that TXU Energy
had met the 40% requirement to be allowed to offer alternatives to the
price-to-beat rate for small business customers in the historical service
territory.
Under amended Commission rules, effective in April 2003,
affiliated REPs of utilities are allowed to petition the Commission for an
increase in the fuel factor component of their price-to-beat rates if the
average price of natural gas futures increases more than 5% (10% if the
petition is filed after November 15 of any year) from the level used to set the
existing price-to-beat fuel factor rate.
-- In January 2003, TXU Energy filed a request with the Commission under
the prior rules to increase the fuel factor component of its
price-to-beat rates. This request was approved and became effective in
early March 2003. As a result, average monthly residential bills rose
approximately 12%. Appeals of the Commission's order have been filed
and are currently pending in the Travis County, Texas District Court.
2
-- On July 23, 2003, TXU Energy filed another request with the Commission
to increase the fuel factor component of its price-to-beat rates. This
request was approved and became effective in late August 2003. As a
result, average monthly residential bills rose approximately 4%.
Appeals of the Commission's order have been filed and are currently
pending in the Travis County, Texas District Court.
Also, effective January 1, 2002, power generation companies
affiliated with electricity delivery utilities may charge unregulated prices in
connection with ERCOT wholesale power transactions. Estimated costs associated
with nuclear power plant decommissioning obligations continue to be recovered by
Oncor as an electricity delivery charge over the life of the plant.
REGULATORY SETTLEMENT PLAN
On December 31, 2001, US Holdings filed a Settlement Plan with
the Commission. It resolved all major pending issues related to US Holdings'
transition to competition pursuant to the 1999 Restructuring Legislation. The
Settlement Plan does not remove regulatory oversight of Oncor's business nor
does it eliminate TXU Energy's price-to-beat rates and related fuel adjustments.
The Settlement Plan became final and non-appealable in January 2003.
The major elements of the Settlement Plan are:
Excess Mitigation Credit -- Over the two-year period
ended December 31, 2003, Oncor implemented a stranded cost excess mitigation
credit in the amount of $389 million (originally estimated to be $350 million),
plus $26 million in interest, applied as a reduction to delivery rates charged
to all REPs, including TXU Energy. The credit was funded by TXU Energy.
Regulatory Asset Securitization -- US Holdings received a
financing order authorizing the issuance of securitization bonds in the
aggregate principal amount of up to $1.3 billion to recover regulatory asset
stranded costs and other qualified costs. Accordingly, Oncor Electric Delivery
Transition Bond Company LLC, a bankruptcy remote financing subsidiary of Oncor,
issued an initial $500 million of securitization bonds in 2003 and is expected
to issue approximately $790 million in the first half of 2004. The principal
and interest on the bonds is recoverable through a delivery fee surcharge
(transition charge) to all REPs, including TXU Energy.
Retail Clawback Credit -- A retail clawback credit related to
residential customers was implemented in January 2004. The amount of
the credit is equal to the number of residential customers retained by TXU
Energy in the historical service territory on January 1, 2004,less the number of
new residential customers TXU Energy has added outside of the historical service
territory as of January 1, 2004, multiplied by $90. The estimated credit of $173
million will be applied to delivery rates charged by Oncor to all REPs,
including TXU Energy, over a two-year period. TXU Energy funds the credit
provided by Oncor. As the amount of the credit will be based on numbers of
customers over the related two-year period, the liability is subject to further
adjustments.
Stranded Costs and Fuel Cost Recovery -- TXU Energy's
stranded costs, not including regulatory assets, are fixed at zero. US Holdings
will not seek to recover its unrecovered fuel costs which existed at
December 31, 2001. Also, it will not conduct a final fuel cost reconciliation,
which would have covered the period from July 1998 until the beginning of
competition in January 2002.
PROVIDER OF LAST RESORT
Through 2002, TXU Energy was the POLR for residential and
small business customers in those areas of ERCOT where customer choice was
available outside the historical service territory and was the POLR for large
business customers in the historical service territory. Under new POLR rules
effective in September 2002, instead of being transferred to the POLR,
non-paying residential and small business customers served by affiliated REPs
are subject to disconnection. Non-paying residential and small business
customers served by non-affiliated REPs are transferred to the affiliated REP.
Non-paying large business customers can be disconnected by any REP if the
customer's contract does not preclude it. Thus, within the new POLR
3
framework, the POLR provides electric service only to customers who request POLR
service, whose selected REP goes out of business, or who are transferred to the
POLR by other REPs for reasons other than non-payment. No later than October 1,
2004, the Commission is expected to decide whether all REPs should be permitted
to disconnect non-paying customers.
Through a competitive bid process, the Commission selected a
POLR to serve for a two-year term beginning January 1, 2003, for several areas
within Texas. In areas for which no bids were submitted, the Commission selected
the POLR by lottery. TXU Energy did not bid to be the POLR, but was designated
POLR through lottery for residential and small business customers in certain
West Texas service areas and for small business customers in the Houston service
area.
STRATEGIC INITIATIVES
---------------------
TXU Corp.'s key strategic initiatives include:
o Capitalize on market leadership positions in Texas and Australia
through development of sales, marketing and customer service
programs and initiatives designed to attract and retain business
and residential customers.
o Strengthen the balance sheet through aggressive management of
cash flows and debt reduction.
o Refine portfolio management activities to more effectively manage
effects of changes in energy prices and imbalances in supply and
demand.
o Pursue industry-leading cost competitiveness through operating
efficiency enhancements and exiting of marginal operations.
OPERATING SEGMENTS
------------------
TXU Corp. has aligned its operations into three reportable segments:
Energy, Energy Delivery and Australia. (See Note 19 to Financial Statements
for further information concerning reportable business segments.)
Energy -- operations principally in the competitive Texas
market involving power production, retail and wholesale energy sales, and
portfolio management, which includes hedging and risk management activities.
Energy Delivery -- largely regulated operations in Texas
involving the transmission and distribution of electricity and the purchase,
transportation, distribution and sale of natural gas.
Australia -- operations principally in Victoria and South
Australia involving power production, retail and wholesale energy sales in
largely competitive markets, portfolio management including hedging and risk
management activities, and natural gas transportation and storage, as well as
regulated electricity and natural gas distribution.
ENERGY SEGMENT
The Energy segment was created as a result of the deregulation
of the electric utility industry in Texas, which became effective January 1,
2002. The Energy segment is an integrated operation that engages in power
production, retail and wholesale energy sales and portfolio management
activities, primarily in the state of Texas. The Energy segment's operations are
conducted principally through TXU Energy and its following subsidiaries: TXU
Generation Company LP, TXU Portfolio Management Company LP; TXU Energy Retail
Company LP; TXU Fuel Company; and two coal mining subsidiaries.
TXU Energy serves 2.6 million retail electric customers, of which
2.4 million are in the historical service territory. This territory, which
is located in the north-central, eastern and western parts of Texas, has an
estimated population in excess of 7 million, about one-third of the population
of Texas, and comprises 92 counties and 370 incorporated municipalities,
including Dallas/Fort Worth and surrounding suburbs, as well as Waco,
Wichita Falls, Odessa, Midland, Tyler and Killeen. The Dallas/Fort Worth area
is a diversified commercial and industrial center with substantial banking,
insurance, telecommunications, electronics, aerospace,
4
petrochemical and specialized steel manufacturing, and automotive and aircraft
assembly. The historical service territory served includes major portions of the
oil and gas fields in the Permian Basin and East Texas, as well as substantial
farming and ranching sections of the state. TXU Energy also provides retail
electric service in other areas of ERCOT now open to competition, including the
Houston and Corpus Christi areas.
Texas is one of the fastest growing states in the nation
and is considered by many to be one of the more successful deregulated energy
markets in the U.S. As a result, competition is expected to continue to
increase.
POWER PRODUCTION
TXU Energy's power generating facilities provide TXU Energy
with the capability to supply a significant portion of the wholesale power
market demand in Texas, particularly in the North Texas market, at competitive
production costs. As part of TXU Energy's integrated business portfolio, much of
the low cost nuclear powered and lignite/coal-fired (base load) generation is
available to supply the power demands of its retail customers and other
competitive REPs.
The power fleet in Texas consists of 22 owned or leased plants with
generating capacity fueled as follows: 2,300 MW nuclear; 5,837 MW coal/lignite;
and 10,881 MW gas/oil. TXU Energy supplies its retail customer base from its
power fleet as well as through long-term power supply agreements and purchases
in the wholesale markets. The power generating plants and other important
properties of TXU Energy are located primarily on land owned in fee simple. TXU
Energy has sold and may from time to time sell generation assets to reduce its
position in the Texas market and provide funds for other investments or to
reduce debt.
TXU Energy is one of the largest purchasers of wind-generated
energy in Texas and the US. TXU Energy currently purchases energy from over
579 MW of wind projects located in West Texas. TXU Energy expects to continue to
add additional wind generation to its portfolio as commercial opportunities
become available.
Nuclear-Powered Production Assets -- TXU Energy owns and operates
two nuclear-fueled electricity generation units at the Comanche Peak plant, each
of which is designed for a capacity of 1,150 MW.
TXU Energy has on hand, or has contracted for, enrichment services
through mid-2006 and fabrication services through 2011 for its nuclear units.
TXU Energy is finalizing supply contracts for the purchase of uranium and
conversion to meet its needs through mid-2006 and does not anticipate any
problems in completing the contracts. TXU Energy does not anticipate any
difficulties procuring raw materials and services beyond these dates.
TXU Energy's onsite spent nuclear fuel storage capability is
sufficient to accommodate the operation of Comanche Peak through the year 2017,
while maintaining the capability to off-load the core of one of the
nuclear-fueled generating units.
Under current regulatory licenses, nuclear decommissioning
activities are projected to begin in 2030 for Comanche Peak Unit 1 and 2033 for
Unit 2 and common facilities. Since January 1, 2002, projected decommissioning
costs are being recovered from Oncor's customers through a delivery charge based
upon a 1997 site-specific study, adjusted for changes in the value of trust fund
assets, through rates placed into effect under the 2001 Unbundled Cost of
Service filing.
The Comanche Peak nuclear-powered generation units were originally
estimated to have a useful life of 40 years, based on the life of the operating
licenses granted by the NRC. Over the last several years, the NRC has granted
20-year extensions to the initial 40-year terms for several commercial power
reactors. Based on these extensions and current expectations of industry
practice, the useful life of the Comanche Peak nuclear-powered generation units
is now estimated to be 60 years. TXU Corp. expects to file a license extension
request in accordance with timingn and other provisions established by the NRC.
(See Note 1 to Financial Statements under Property, Plant and Equipment, for a
discussion of the change in depreciable lives for accounting purposes).
Lignite/Coal -Fired Production Assets -- Lignite is used as the
primary fuel for two units at the Big Brown generating plant, three units at the
Monticello generating plant, three units at the Martin Lake generating plant,
and one unit at the Sandow generating plant, having an aggregate capacity of
5,837 MW. TXU Energy's lignite units have been constructed adjacent to surface
minable lignite reserves. TXU Energy owns in fee simple or has under lease
proven reserves dedicated to the Big Brown, Monticello and Martin Lake
generating plants.
5
TXU Energy utilizes owned and/or leased equipment to remove
the overburden and recover the lignite. Approximately 75% of the fuel used at
TXU Energy's lignite plants in 2003 was supplied from owned or leased lignite.
TXU Energy supplements its lignite fuel at Big Brown, Monticello and
Martin Lake with western coal from the Powder River Basin in Wyoming. The coal
is purchased from multiple suppliers under contracts of various lengths and is
transported from the Powder River Basin to TXU Energy's generating plants by
railcar. Approximately 25% of the fuel used at TXU Energy's lignite plants in
2003 was supplied from western coal under these contracts. Based on its current
usage, which includes the use of western coal to supplement its lignite
reserves, TXU Energy believes that it has sufficient lignite reserves and access
to western coal resources for its generating needs in the foreseeable future.
Gas/Oil-Fired Production Assets -- TXU Energy has eighteen
gas/oil-fueled plants, including a plant located in Pedricktown, New Jersey,
with an aggregate capacity of 11,003 MW. A significant portion of the gas/oil
generating plants have the ability to switch between gas and fuel oil. Gas/oil
fuel requirements for 2003 were provided through a mix of contracts with
producers at the wellhead and contracts with commercial suppliers. Fuel oil can
be stored at 15 of the principally gas-fueled generating plants. At January 1,
2004, TXU Energy had fuel oil storage capacity sufficient to accommodate
approximately 5.5 million barrels of oil and had approximately one million
barrels of oil in inventory.
Capacity Auction -- To encourage competition in the ERCOT region,
each power generation company owning 400 MW or more of installed generating
capacity must annually offer to sell at auction entitlements to 15% of the
output of its installed generating capacity. Such auction sales cannot be to
an affiliated REP. The obligation of TXU Energy to sell capacity entitlements at
auction continues until the earlier of January 1, 2007 or the date the
Commission determines that 40% or more of the electric power consumed by
residential and small business customers within the affiliated delivery utility
certificated service area before the onset of customer choice is provided by
non-affiliated REPs. The October 2002 auction offered one-year and monthly
entitlements for 2003 only. Not all of the entitlements offered in
the October auction were sold; however, TXU Energy did re-offer these unsold
entitlements in subsequent auctions held in November 2002 and throughout 2003.
In 2003, TXU Energy held capacity auctions in March, July and August for 2003
capacity, and in September and November for 2004 capacity. TXU Energy met its
capacity auction obligations for 2003. The next auctions for the remaining 2004
capacity obligations are scheduled for March and July 2004.
NATURAL GAS OPERATIONS
TXU Energy's natural gas operations in Texas include pipelines,
storage facilities, well-head production contracts, transportation agreements
and storage leases. Natural gas is purchased for internal use in the generation
of power, as well as for sale in wholesale markets and to large business
customers. Transportation services are provided to TXU Energy's generation
operations and third parties. Because of the correlation of natural gas and
power prices, TXU Energy's natural gas operations provide opportunities to hedge
its margins on power sales.
TXU Energy owns and operates an intrastate natural gas pipeline
system with approximately 1,900 miles of pipeline facilities which extends from
the gas-producing area of the Permian Basin in West Texas to the East Texas gas
fields and southward to the Gulf Coast area. The pipeline facilities were
originally built solely to serve US Holdings' generating plants. In keeping with
deregulation principles, this network now offers transportation service to third
parties at competitive prices.
TXU Energy also owns and operates two underground gas storage
facilities with a usable capacity of 14.0 Bcf. TXU Energy holds a portion of
this storage capacity for use during periods of peak demand to meet seasonal
and other fluctuations or interruption of deliveries by gas suppliers. Under
normal operating conditions, up to 400 million cubic feet can be withdrawn each
day for a ten-day period, with withdrawals at lower rates thereafter.
6
RETAIL
Regulatory restructuring in Texas has resulted in competitive
markets within the state, thus presenting additional opportunities for growth
accompanied by the introduction of competitive pressures. Texas is one of the
fastest growing states in the nation with a diverse and resilient economy and,
as a result, has attracted a number of competitors into the retail electricity
market. TXU Energy, as an active participant in this competitive market, is
marketing its services in Texas to add new customers and to retain its existing
customers.
Based on the latest data provided by ERCOT (November 2003),
approximately 14% of all customers in ERCOT areas open to customer choice had
elected to switch providers At the present time, 53 REPs are certified to
compete within the state of Texas.
TXU Energy believes that the scale derived from a large retail
portfolio provides the platform for a profitable operation by, among other
things, reducing the costs of service and billing per customer. TXU Energy
emphasizes its identification with the TXU brand and reputation. TXU Energy uses
a value pricing approach by customizing its products to each customer segment
with service enhancements that are known to be valued by customers in those
segments. With its approach, TXU Energy intends to achieve substantially higher
customer loyalty and enhanced profit margins, while reducing the costs
associated with customers frequently switching suppliers.
TXU Energy has invested in customer-related infrastructure and uses
its customer relationships, technology operating platforms, marketing, customer
service operations and customer loyalty to actively compete to retain its
customer base and to add customers.
PORTFOLIO MANAGEMENT
Portfolio management refers to risk management and value creation
activities undertaken to balance customer demand for energy with the supply of
energy in an economically efficient and effective manner. Retail and wholesale
demand is generally greater than volumes that can be supplied by TXU Energy's
base load production. Portfolio management acts to provide additional supply
balancing through TXU Energy's gas/oil-fired generation or purchases of power.
The portfolio management operation manages the commodity volume and price risks
inherent in TXU Energy's generation and sales operations through supply
structuring, pricing and risk management activities. Risk management activities
include hedging both future power sales and purchases of fuel supplies for the
generation plants. The portfolio management operation also is responsible for
the efficient dispatch of power from its generation plants.
In its risk management activities, TXU Energy enters into physical
delivery contracts, financial contracts that are traded on exchanges and
"over-the-counter" and bilateral contracts with customers. Physical delivery
contracts relate to the purchase and sale of electricity and gas primarily in
the wholesale markets in Texas and to a limited extent in select Northeast
markets in North America. TXU Energy's risk management activities consist
largely of hedging transactions, with speculative trading representing a small
fraction of such activity.
TXU Energy manages its exposure to price risk within established
transactional policies and limits. TXU Energy targets best practices in risk
management and risk control by employing proven principles used by financial
institutions. These controls have been structured so that they are practical in
application and consistent with stated business objectives. Portfolio management
revalues TXU Energy's exposures daily using integrated energy systems to capture
value and mitigate risks. A risk management forum meets regularly to ensure that
transactional practices comply with its prior approval of commodities,
instruments, exchanges and markets. Transactional risks are monitored and limits
are enforced to comply with established TXU Corp. policy requirements. Risk
assessment is segregated and operated separately from compliance and enforcement
to ensure independence, accountability and integrity of actions. TXU Corp. has a
strict disciplinary program to address any violations of its risk management
policy requirements. TXU Energy also periodically reviews these policies to
ensure they are responsive to changing market and business conditions. These
policies are designed to protect earnings, cash flows and credit ratings.
7
COMPETITIVE STRATEGY
TXU Energy's strategy is to defend and build its customer base in
the competitive Texas market and to accomplish this through the operation of a
single, integrated energy business managing a portfolio of assets. Achieving
operational excellence, more cost efficient processes and enhanced credibility
and reputation are all critical elements for executing on that strategy.
TXU Energy will continue to focus on sustaining its leading
position in the Texas market and being in position to move quickly toward
capturing new opportunities outside of Texas as they arise.
One of TXU Energy's key competitive strengths is its ability to
produce electricity at low variable costs in a market in which power prices are
set by gas-fired generation. New gas-fired capacity, while generally more
efficient to operate than existing gas/oil-fired capacity due to technological
advances, is subject to the volatility and increasing cost of natural gas fuel.
On the other hand, base load nuclear and lignite/coal plants have lower variable
production costs than even new gas-fired plants at current average market gas
prices. Another competitive strength for TXU Energy is the diversity of its
generation fleet. Due to the higher variable operating and fuel costs of its
gas/oil-fired units, as compared to its lignite/coal and nuclear units,
production from TXU Energy's gas/oil units is more susceptible to being
displaced by the more efficient units being constructed. This positions TXU
Energy's gas/oil units to run during intermediate and peak load periods when
prices are higher and provides more opportunities for hedging activities and
increased market liquidity.
Retail competition has remained steady in Texas with several large
participants broadly extending their marketing across all customer segments and
all geographic areas of competition. TXU Energy has successfully executed
similar marketing programs while retaining the majority of its incumbent
residential customer base.
TXU Energy believes that the ERCOT region presents an attractive
competitive electric service market due to the following factors:
o gas-fired plants are expected to set the price of generation during a
substantial portion of the year, providing an opportunity for TXU
Energy to benefit from its nuclear and lignite/coal units' fuel cost
advantages;
o peak demand is expected to grow at an average rate of approximately 3%
per year;
o it is a sizeable market with approximately 62 gigawatts (GW) of peak
demand and approximately 35 GW of average demand; and
o there is no mandatory power pool structure.
Reserve margins for ERCOT, based upon existing capacity and
planned capacity with interconnection agreements, are expected to be 29% in
2004, 25% in 2005, 22% in 2006, 18% in 2007, and 15% in 2008.
Outside Texas -- Energy industry restructuring, although
proceeding well in Texas, has not had similar success in other parts of the U.S.
As early as 2000, optimism for national legislation and increased opening of
competitive markets began to alter the strategy of many industry participants.
The establishment of Regional Transmission Organizations and open access for
both wholesale and retail customers were on the horizon. Together with
increasing customer demand for lower priced electricity and other energy
services, these measures were expected to have accelerated the industry's
movement toward a more competitive pricing and cost structure.
Many states, faced with this increasing pressure from legislative
bodies (federal and state) to become more competitive while adhering to certain
continued regulatory requirements, along with changing economic conditions and
rapid technological changes, put forth deregulation plans that have since been
deferred or changed. The result is delayed restructuring. New entry by retailers
as well as by merchant generators in states other than Texas has been slowed.
The continued uncertainty regarding many FERC policies as well as Federal
legislation have delayed the opening of new retail markets and decreased the
economic viability for merchant generation.
8
Customers -- There are no individually significant customers upon
which TXU Energy's business or results of operations are highly dependent.
REGULATION AND RATES
See Texas Electric Industry Restructuring above for a description
of the significant regulatory provisions relating to the deregulation of the
Texas electric industry.
TXU Corp. is a holding company as defined in the Public Utility
Holding Company Act of 1935. However, TXU Corp. and all of its subsidiary
companies are exempt from the provisions of such Act, except Section 9(a)(2)
which relates to the acquisition of securities of public utility companies and
Section 33 which relates to the acquisition of foreign (non-US) utility
companies.
TXU Energy is an exempt wholesale generator under the Federal
Power Act and is subject to the jurisdiction of the NRC with respect to its
nuclear power plant. NRC regulations govern the granting of licenses for the
construction and operation of nuclear power plants and subject such plants to
continuing review and regulation. TXU Energy also holds a power marketer license
from FERC.
See discussion at the end of this Item for environmental
regulations and related matters.
ENERGY DELIVERY SEGMENT
The Energy Delivery segment consists primarily of the
electricity transmission and distribution operations of Oncor and the
purchasing, transportation, distribution and retail sales operations of TXU Gas.
Energy Delivery provides the essential service of delivering energy safely,
reliably and economically to end-use customers through its distribution systems.
Operating assets of the segment are located principally in the north-central,
eastern and western parts of Texas.
ELECTRICITY TRANSMISSION
Oncor's electricity transmission business is responsible for the
safe and reliable operations of its transmission network and substations. These
responsibilities consist of the construction and maintenance of transmission
facilities and substations and the monitoring, controlling and dispatching of
high-voltage electricity over Oncor's transmission facilities in coordination
with ERCOT.
Oncor is a member of ERCOT, and the transmission business
actively supports the operations of ERCOT and market participants. The
transmission business participates with ERCOT and other member utilities to
plan, design, construct and operate new transmission lines, with regulatory
approval, necessary to maintain reliability, increase bulk power transfer
capability and to minimize limitations and constraints on the ERCOT transmission
grid.
Transmission revenues are provided under tariffs approved by
either the Commission or, to a small degree, FERC. Network transmission revenues
compensate Oncor for delivery of power over transmission facilities operating at
60,000 volts and above. Transformation service revenues compensate Oncor for
substation facilities that transform power from high-voltage transmission to
distribution voltages below 60,000 volts. Other services offered by the
transmission business include, but are not limited to: system impact studies,
facilities studies and maintenance of substations and transmission lines owned
by other non-retail parties.
Oncor's transmission facilities include 4,502 circuit miles of
345-kilovolt transmission lines and 9,678 circuit miles of 138- and 69-kV
transmission lines. Also, 43 generating plants totaling 33,260 megawatts are
directly connected to Oncor's transmission system, and 693 distribution
substations are served from Oncor's transmission system.
Oncor is connected by eight 345-kV lines to CenterPoint Energy;
by four 345-kV (one of which is an asynchronous high voltage direct current
interconnection to American Electric Power Company in the Southwest Power Pool),
eight 138-kV and thirteen 69-kV lines to American Electric Power Company; by
four 345-kV and eighteen 138-kV lines and three 69-kV lines to the Lower
Colorado River Authority; by seven 345-kV and nine 138-kV lines to the Texas
Municipal Power Agency; and at several points with smaller systems operating
wholly within Texas.
9
ELECTRICITY DISTRIBUTION
Oncor's electricity distribution business is responsible for the
overall safe and efficient operation of distribution facilities; including power
delivery, power quality and system reliability. The Oncor distribution system
supplies electricity to over 2.9 million points of delivery. The electricity
distribution business consists of the ownership, management, construction,
maintenance and operation of the distribution system within Oncor's certificated
service area. Over the past five years, the number of Oncor's distribution
system premises served has been growing an average of 2% per year.
Oncor's distribution system receives electricity from the
transmission system through substations and distributes electricity to end users
and wholesale customers through 2,944 distribution feeders.
The Oncor distribution system consists of 55,472 miles of
overhead primary conductors, 22,076 miles of overhead secondary and street light
conductors, 12,936 miles of underground primary conductors and 7,802 miles of
underground secondary and street light conductors. The majority of the
distribution system operates at 25-kV and 12.5-kV.
Most of Oncor's power lines have been constructed over lands of
others pursuant to easements or along public highways, streets and right-of-ways
as permitted by law.
CUSTOMERS-- ELECTRICITY DELIVERY
Oncor's transmission customers consist of municipalities,
electric cooperatives and other distribution companies. Oncor's distribution
customers consist of approximately 43 REPs in Oncor's certified service area,
including subsidiary REPs of TXU Energy. For the year ended December 31, 2003,
delivery fee revenues from TXU Energy represented approximately 71% of Oncor's
revenues. There are no individually significant unaffiliated customers upon
which Oncor's business or results are highly dependent.
Since January 1, 2002, the retail customers who purchase and
consume electricity and are connected to Oncor's system have been free to choose
their electricity supplier from REPs who compete for their business. The changed
character of electric service, however, does not mean that the safe and reliable
delivery of dependable power is any less critical to Oncor's success. Service
quality, safety and reliability are of paramount importance to REPs, electricity
customers, and Oncor. Oncor intends to continue to build on its inherited
tradition of low cost and high performance.
REGULATION AND RATES - ELECTRICITY DELIVERY
See Texas Electric Industry Restructuring above for a description
of the significant regulatory provisions relating to the deregulation of the
Texas electric industry.
As its operations are wholly within Texas, Oncor believes that it
is not a public utility as defined in the Federal Power Act and has been advised
by its counsel that it is not subject to general regulation under such Act.
The Commission has original jurisdiction over transmission rates
and services and over distribution rates and services in unincorporated areas
and in those municipalities that have ceded original jurisdiction to the
Commission and has exclusive appellate jurisdiction to review the rate and
service orders and ordinances of municipalities. Generally, the Public Utility
Regulatory Act (PURA) prohibits the collection of any rates or charges by a
public utility that do not have the prior approval of the Commission.
At the state level, PURA, 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.
Provisions of the 1999 Restructuring legislation allow Oncor to
annually update its transmission rates to reflect changes in invested capital.
These provisions encourage investment in the transmission system to help ensure
reliability and efficiency by allowing for timely recovery of and return on new
transmission investments.
10
See discussion at the end of this Item for environmental regulations
and related matters.
GAS DELIVERY
Gas Transmission -- TXU Gas owns and operates interconnected natural
gas transmission lines, five underground storage reservoirs, 20 compressor
stations and related properties, all within Texas. With a system consisting of
6,162 miles of transmission and gathering lines in Texas, TXU Gas is one of the
largest pipeline operators in the US. Through these facilities, it transports
natural gas to its distribution system and other customers. Rates for
transmission services are regulated by the RRC. The gas transmission and
distribution lines of TXU Gas have been constructed over lands of others
pursuant to easements or along public highways, streets and rights-of-way as
permitted by law.
Gas Distribution -- TXU Gas provides service through over 26,431
miles of distribution mains. TXU Gas purchases, distributes and sells natural
gas to over 1.4 million residential and business customers in approximately 550
cities and towns, including the 11-county Dallas/Ft. Worth metropolitan area.
The distribution service rates that TXU Gas charges its residential and business
customers have been generally established by the municipal governments of the
cities and towns served, with the RRC having appellate, or in some instances,
primary jurisdiction. The majority of TXU Gas' residential and business
customers use natural gas for heating, and their needs are directly affected by
the mildness or severity of the heating season.
TXU Gas estimates its peak-day availability of natural gas supply
from its long-term contracts, short-term contracts and withdrawals from
underground storage to be 2.2 Bcf. Daily purchases on the spot market raise this
availability level to meet additional peak-day needs. TXU Gas' peak-day demand
in 2003 was on February 24, 2003, when sales to its customers reached
approximately 1.9 Bcf. During 2003, the average daily demand of TXU Gas'
residential and business customers was 0.4 Bcf.
TXU Gas has historically maintained a contractual right to
interrupt transportation load, which is designed to achieve the highest load
factor possible in the use of the pipeline system while ensuring continuous and
uninterrupted service to residential and business customers.
Estimates of natural gas supplies and reserves are not necessarily
indicative of TXU Gas' ability to meet current or anticipated market demands or
immediate delivery requirements because of factors such as the physical
limitations of gathering, storage and transmission systems, the duration and
severity of cold weather, the availability of gas reserves from its suppliers,
the ability to purchase additional supplies on a short-term basis and actions by
federal and stateregulatory authorities. Curtailment rights provide TXU Gas
flexibility to meet the human-needs requirements of its customers on a firm
basis. Priority allocations imposed by federal and state regulatory agencies, as
well as other factors beyond the control of TXU Gas, may affect its ability to
meet the demands of its customers.
Gas Supply -- TXU Gas' natural gas supply consists of contracts for
the purchase of specific reserves, contracts not related to specific reserves or
fields, and natural gas in storage. The total planned natural gas supply as of
January 1, 2004 is 150 Bcf, which is approximately 1 percent more than TXU Gas'
actual supply during 2003. TXU Gas has approximately 17 Bcf committed under
contracts with specific reserves, 30 Bcf in working gas in storage and 41 Bcf
committed under gas supply contracts not related to specific reserves or fields.
In 2003, TXU Gas' natural gas requirements were purchased from approximately 76
independent producers, marketers and pipeline companies.
TXU Gas manages its storage working gas inventory and storage
deliverability along with other purchased gas to meet its peak-day requirements.
TXU Gas utilizes the services of five natural gas storage fields operated within
its pipeline system, all of which are located in Texas. These fields have a
working gas capacity of more than 38 Bcf and a storage withdrawal deliverability
of up to 1.2 Bcf per day.
TXU Gas buys natural gas under long-term and short-term contracts,
some of which require minimum purchases of gas. The estimated natural gas
demand, which assumes normal weather conditions, significantly exceeds the
minimum purchase obligations of these contracts for the year 2004 and
thereafter.
The TXU Gas distribution supply program is designed to contract for
new supplies of natural gas and to recontract targeted expiring sources. In
addition to being heavily concentrated in the established natural gas-producing
11
areas of central, northern and eastern Texas, TXU Gas' intrastate pipeline
system also extends into or near the major producing areas of the Texas Gulf
Coast and the Delaware and Val Verde Basins of West Texas. Nine basins located
in Texas are estimated to contain a substantial portion of the nation's
remaining onshore natural gas reserves. TXU Gas' pipeline system provides access
to all of these basins. TXU Gas is well situated to receive large volumes into
its pipeline system at the major hubs, such as Katy and Waha, as well as from
storage facilities where TXU Gas maintains high delivery capabilities.
Competition -- Customer sensitivity to energy prices and the
availability of competitively priced natural gas continue to cause competition
in the electricity generation and industrial user markets. Natural gas faces
varying degrees of competition from electricity, coal, natural gas liquids, oil
and other refined products throughout the TXU Gas distribution service
territory. Pipeline systems of other companies, both intrastate and interstate,
extend into or through the areas in which TXU Gas' markets are located, creating
competition from other sellers and transporters of natural gas. TXU Gas intends
to maintain its focus on customer satisfaction and the creation of new
value-added services for its customers in order to remain its customers'
supplier of choice. TXU Gas provides services to its electricity generation and
industrial customers under regulated tariffs and responds to this competition by
offering service under negotiated rates when a positive margin can be
maintained.
TXU Gas is the sole transporter of natural gas to its distribution
system. TXU Gas competes with other pipelines in Texas to transport natural gas
to electricity generation and industrial user facilities as well as off-system
markets. These businesses are highly competitive.
Customers -- There are no individually significant customers upon
which TXU Gas' business or results of operations are highly dependent.
Regulation and Rates - Gas Delivery
- -----------------------------------
TXU Gas is wholly intrastate in character and performs distribution
utility operations and pipeline transportation services in the State of Texas
subject to regulation, respectively, by municipalities in Texas and the RRC. The
RRC has original jurisdiction over the charge for the transportation of gas by
TXU Gas to its distribution system for sale to TXU Gas' residential and business
consumers. TXU Gas owns no certificated interstate transmission facilities
subject to the jurisdiction of the FERC under the Natural Gas Act, has no sales
for resale under the rate jurisdiction of the FERC and does not perform any
transportation service that is subject to FERC jurisdiction under the Natural
Gas Act.
The city gate rate for the cost of natural gas TXU Gas ultimately
delivers to residential and business customers is established by the RRC and
provides for full recovery of the actual cost of gas delivered. The cities
served by TXU Gas have original jurisdiction over the distribution rate TXU Gas
charges its residential and business customers, subject to appellate
jurisdiction of the RRC.
TXU Gas employs a continuing program of rate review for all classes
of customers in its regulatory jurisdictions. In May 2003, TXU Gas filed, for
the first time, a system-wide rate case for the distribution and pipeline
operations. The case was filed in all 437 incorporated cities served by the
distribution operations, and at the RRC for the pipeline business and for
unincorporated areas served by the distribution operations. The TXU Gas filing
requested an annual revenue increase of $69.5 million or 7.24%. All 437 cities
took action on the case within their statutory time frame, and TXU Gas has
appealed these actions to the RRC. Twelve parties have intervened in the case.
Based on the current procedural schedule, TXU Gas expects a final order from the
RRC in the second quarter of 2004.
TXU Gas sells natural gas to industrial customers under standard
regulated rate schedules that permit automatic adjustment on a periodic basis
for the full amount of increases or decreases in the cost of natural gas.
Transportation services to electricity generation and other industrial
customers are provided under both regulated tariffs and competitively
negotiated contracts.
TXU Gas has been an open access transporter under Section 311 of the
Natural Gas Policy Act of 1978 (NGPA) on its intrastate transmission facilities
since July 1988. Such transportation is performed pursuant to Section 311(a)(2)
of the NGPA and is subject to an exemption from the jurisdiction of the FERC
under the Natural Gas Act, pursuant to Section 601 of the NGPA.
12
See discussion at the end of this Item for environmental
regulations and related matters.
ONCOR UTILITY SOLUTIONS
This operation consists of wholly-owned subsidiaries
of TXU Gas that offer unregulated utility asset management services for
cooperatives and municipally-owned and investor-owned utilities located in
North America. Electric, gas, water and wastewater utilities may choose from
Oncor Utility Solutions' menu of services ranging from a complete turnkey
solution to selected services such as work management, resource management,
strategic planning, design, maintenance and construction. Oncor Utility
Solutions leverages TXU Corp.'s existing economies of scale, asset management
processes, technologies and personnel to deliver cost savings and reliability
improvements to client network systems.
AUSTRALIA SEGMENT
TXU Australia provides its products and services primarily in the
States of Victoria and South Australia through its two main operating divisions:
Energy Delivery Business and Energy Business.
There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
COMPETITIVE STRATEGY
TXU Australia's portfolio approach to growth has provided TXU
Australia with a number of competitive advantages associated with economies of
scale, dual fuel benefits and risk diversification. TXU Australia is a major
provider of multiple energy solutions in the Victorian and South Australian
energy markets.
Since 1995, TXU Australia has assembled its portfolio of assets and
capabilities with a mix of regulated earnings and assets in the Energy Delivery
Business, and a portfolio of physical and contractual, upstream and downstream
capabilities in the Energy Business.
The Australian energy market presents TXU Australia with significant
opportunities for growth. Growth opportunities in the Energy Delivery Business
will be pursued in the framework of building on TXU Australia's developed core
skills and capabilities. Growth opportunities in the Energy Business will be
pursued in the framework of maintaining a mix of upstream and downstream
physical and financial positions and managing the risks of imbalances between
these positions.
ENERGY DELIVERY BUSINESS
TXU Australia's Energy Delivery Business engages principally in managing
the distribution of electricity to 559,558 connection points in the eastern
suburbs of Melbourne and in rural areas in eastern Victoria, and the
distribution of natural gas to 481,307 supply points located in the western
suburbs of Melbourne and in rural towns in western Victoria.
TXU Australia manages an electricity network of approximately 27,250
miles of distribution lines over an area of approximately 50,000 square miles,
and a gas network of approximately 5,100 miles of pipelines over approximately
1,250 square miles in its territory.
The tariffs chargeable by TXU Australia for the distribution of
electricity and gas are regulated by the Victorian Essential Services
Commission. Electricity distribution tariffs were last determined in 2001 and
are due to be redetermined in 2006 for at least five more years. Gas
distribution tariffs were last determined in 2003 and are due to be redetermined
in 2008 for at least five more years. The gas distribution tariffs increased
by 2.2% for 2003. Each subsequent year, the tariffs are to increase by 0.8% plus
the Consumer Price Index increase. The current regulatory framework, as
administered by the Essential Services Commission, has been in place since 1995
for electricity and since 1998 for gas. TXU Australia expects that this
regulatory framework will continue to evolve.
13
ENERGY BUSINESS
TXU Australia's Energy Business comprises a portfolio of assets involved
in the generation of electricity, transportation and storage of gas, purchase of
electricity and gas, and the sale of electricity and gas to wholesale and retail
customers, primarily in Victoria and South Australia. This portfolio enhances
the ability of the Energy Business to manage the risks normally associated with
the stand-alone operation of a retail, generation or wholesale energy business,
including price fluctuation, supply shortage and overproduction risks, in order
to optimize performance.
TXU Australia manages its portfolio of wholesale contracts, physical
generation capability and retail positions to manage exposure to price risks.
Its generation assets, gas storage capability and electricity hedging contracts
provide the ability to enhance price spike protection for TXU Australia's retail
customer base, and also provide TXU Australia with an ability to offer risk
management products to others in the market.
In May 2000, TXU Australia acquired the business of the South
Australian electricity generator Optima Energy Pty Ltd, which included a
100-year prepaid lease of the Torrens Island Power Station (Torrens Island).
The Torrens Island site is located near Adelaide and offers room for
plant expansion. The power station consists of two plants with a total of
eight gas-fired steam turbines with a combined capacity of 1,280 MW. Torrens
Islands has the potential to operate in each of the peaking, intermediate and
base load markets in South Australia.
TXU Australia has a 20-year option agreement, which began in 1999,
with Ecogen Energy Pty. Ltd. (Ecogen), which owns 966 MW of gas fired generation
that is typically used during peak periods of demand for electricity in
Victoria. The agreement provides TXU Australia with the ability to enter into
hedge contracts with Ecogen, at TXU Australia's option, that require the
exchange of cash for the difference between the amount specified in the contract
and the then current spot price of electricity. TXU Australia also has an
agreement to supply gas to Ecogen until April 30, 2019. The option agreement
provides a hedge against TXU Australia's cost of electricity and also enables
TXU Australia to offer price protection services to other electricity retailers.
TXU Australia owns an underground gas storage facility near Port
Campbell in southwest Victoria. The facility, which was commissioned in
August 1999, has a storage capacity of approximately 11 Bcf and has a withdrawal
capacity of 0.3 Bcf per day. The underground gas storage facility is connected
to the principal Victorian gas transmission system and the SEA Gas pipeline
effective January 2004.
The underground gas storage facility provides TXU Australia with the
ability to manage its gas supply requirements beyond the flexibility inherent
under the gas supply contracts and to manage its exposure to price volatility
in the gas spot market.
TXU Australia currently owns a 33.3% joint venture interest in
SEA Gas. SEA Gas is a gas transmission pipeline from the underground gas storage
facility to Adelaide in South Australia. TXU Australia entered into a 15-year
foundation shipper contract with SEA Gas to ship gas from the underground gas
storage facility to Torrens Island and the gas distribution system in South
Australia.
Retail Electricity
- ------------------
TXU Australia's primary retail electric markets at present are
Victoria and South Australia. With the introduction of full retail competition,
customers in Victoria, South Australia and New South Wales now have the right to
choose their energy providers. TXU Australia has retailing licenses to sell
electricity to competitive customers in Victoria, New South Wales, Queensland,
South Australia and the Australian Capital Territory.
Customer Base -- 89% of TXU Australia's retail electric customers are
residential customers. The remaining customer base is diverse and includes
businesses in the mining, transportation and chemicals industries. Approximately
85% of TXU Australia's retail electric customers are connected to the
distribution network owned by the Energy Delivery Business.
14
Regulation -- As an original incumbent retailer in Victoria, TXU
Australia can publish new retail electricity prices at any time in a government
publication, with the new prices applying two months after their publication.
However, the Victorian Electricity Industry Act 2000 reserves power to the
Victorian government until December 2004 to cap the prices at which
electricity is sold to low-volume Victorian customers (i.e., those consuming
less than 160 MWh per year) if it does not approve of the published prices.
Retail electricity prices, primarily in Victoria, increased 3.1% in
2003 compared to 2002. The increase reflected a 4% decrease in the capped price
that was more than offset by reduced government subsidies that are passed on to
customers through distribution fees. Further changes to the subsidies are under
consideration by the Victorian government.
At the end of October 2003, TXU Australia published electricity price
increases to apply to low- volume customers beginning January 1, 2004.
Following its review of these newly published prices, the government has
determined the allowed price increases for the next four years as follows: 2004,
1.5%; for subsequent years, the rates will be based on CPI plus (or minus) a
margin ranging from 1.5% to 0.5%.
Low-volume customers have the choice of being subject to regulated
pricing or accepting a market-based offer from TXU Australia or a competing
retailer.
Competition -- At present, with the exception of Queensland,
participants in the National Electric Market have introduced full retail
competition for electricity consumers. These participants are Victoria, New
South Wales, South Australia and Queensland.
Electricity Supply Arrangements -- The National Electric Market
is a wholesale market for the sale of electricity that is combined with an open
access regime for the use of physical electricity networks within the
participating states of Australia. The National Electric Market currently
operates a wholesale electricity pool into which all electricity output from
generators within Victoria, New South Wales and South Australia is centrally
pooled and scheduled to meet the electricity demand of those states. Each
electricity provider is required to purchase electricity either through a pool
or through another provider that has purchased that electricity from a pool.
Retail Gas
- ----------
TXU Australia's primary gas retail market at present is Victoria.
It also has retail licenses to supply gas to customers in South Australia, New
South Wales and the Australian Capital Territory.
Customer Base -- 96% of TXU Australia's retail gas customers are
residential customers and the remaining 4% are business customers. The
portfolio of business customers currently served by TXU Australia includes food,
manufacturing, chemicals, paper, health, hospitality and recreation.
Regulation -- As with electricity, TXU Australia can publish new gas
prices at any time in a government publication, with the new prices applying two
months after their publication. However, the Victorian Gas Industry Act 2001
reserves powers to the Victorian government until August 31, 2004, to
cap the prices at which gas is sold to low volume Victorian customers.
In 2002, the Victorian government exercised its power in respect of
low-volume gas customers for 2003. TXU Australia was allowed to increase its
prices by an average of 9% beginning January 4, 2003. Customers have the choice
of accepting either low-volume customer pricing or a market-based offer from
TXU Australia or a competing retailer.
At the end of October 2003, TXU Australia published gas price
increases to apply to low volume customers beginning January 1, 2004. Following
its review of these newly published prices, the Victorian government has
determined the allowed price increases as follows: 2004: 5%; for subsequent
years: the increases will equate to the Consumer Price Index.
Competition -- At present, the Victorian and New South Wales gas
retail markets are fully competitive. South Australia's business customers
are also fully competitive and its residential customers are expected to become
competitive in mid-2004.
15
Gas Supply Arrangements -- Approximately 90% of Victoria's current gas
requirements are sourced predominantly from Esso/BHP. This gas is supplied by
Esso/BHP to Gascor Pty Ltd under a contract entered into before privatization of
the gas industry in Victoria and which runs until 2009. Upon privatization of
the Victorian gas industry, Gascor Pty Ltd's entitlements under the contract
were allocated among the three new retailers, including TXU Australia. TXU
Australia has entitlements to approximately 47 Bcf per year. On
September 15, 2003, Gascor Pty Ltd was acquired by the three retailers in equal
shares, but this had no material impact on the entitlement of the retailers to
gas.
Gas requirements for Torrens Island are currently sourced from
Victoria through the SEA Gas pipeline from contracts primarily with Esso/BHP.
Supply of gas to Torrens Island is supplemented by gas supply from the Cooper
Basin in South Australia under a contract with Terra Gas Trader Pty Ltd., which
runs until 2011.
TXU Australia expects to conclude negotiations in 2004 for the
supply of approximately 853 Bcf from Esso/BHP to meet anticipated demand
requirements.
ENVIRONMENTAL MATTERS
---------------------
US
TXU Corp. is subject to extensive environmental regulation by
governmental authorities. In operating its facilities, TXU Corp. is
required to comply with numerous environmental laws and regulations, and to
obtain numerous governmental permits and approvals. If TXU Corp. fails to
comply with these requirements, it could be subject to civil or criminal
liability and fines. Existing environmental laws and regulations could be
revised or reinterpreted and new laws and regulations could be adopted or
become applicable to TXU Corp. or its facilities, including potential regulatory
and enforcement developments related to air emissions.
TXU Corp. may not be able to obtain or maintain all required
environmental regulatory approvals. If there is a delay in obtaining any
required environmental regulatory approvals or if TXU Corp. fails to obtain,
maintain or comply with the terms of any such approval, the operation of its
facilities could be stopped or become subject to additional costs. Further, at
some of TXU Corp.'s older facilities, including base load lignite and coal
plants, it may be uneconomical for TXU Corp. to install the necessary compliance
equipment, which may cause TXU Corp. to shut down those facilities.
In addition, TXU Corp. may be responsible for any on-site
liabilities associated with the environmental condition of facilities that it
has acquired, developed, or which have been used by vendors regardless of when
the liabilities arose and whether they are known or unknown. In connection with
acquisitions and sales of assets, TXU Corp. may obtain, or be required to
provide, indemnification against certain environmental liabilities. Another
party could fail to meet its indemnification obligations to TXU Corp.
Air -- Under the Texas Clean Air Act, the TCEQ has jurisdiction
over the permissible level of air contaminant emissions from, and the
requirements for issuing permits for, electricity generation, mining and gas
delivery facilities located within the State of Texas. The New Jersey Department
of Environmental Protection has jurisdiction over the emissions from TXU
Energy's generation facility in New Jersey. In addition, the new source
performance standards of the EPA promulgated under the Federal Clean Air Act, as
amended (Clean Air Act), are being implemented by the TCEQ, and are applicable
to certain electricity generation facilities and ancillary equipment. TXU
Energy's generation plants and mining equipment and TXU Gas'facilities operate
in compliance with applicable regulations, permits and emission standards
promulgated pursuant to these acts.
The Clean Air Act includes provisions which, among other things,
place limits on the sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions
produced by certain generation plants. In addition to the new source
performance standards applicable to SO2 and NOx, the Clean Air Act requires that
fossil-fueled plants have sufficient SO2 emission allowances and meet certain
NOx emission standards. TXU Energy's generation plants meet the SO2 allowance
requirements and NOx emission rates. In addition, the EPA recently proposed new
requirements calling for electricity generation facilities in 28 states and the
District of Columbia to further reduce emissions of NOx and SO2, with the first
phase beginning January 1, 2010. TXU Corp. will be required to make additional
emissions reductions and incur associated costs under this proposal if it is
finalized in its current form.
16
In January 2004, the EPA issued a proposed rule to regulate
mercury emissions from power plants with the expectation that a final rule will
be issued by December 2004 with an implementation date in 2008. Two different
regulatory approaches are considered in the announcement and the final form of
the rule is unknown. It is likely that some costs, which could be material, will
be incurred for installation of additional control equipment and for facility
operations and maintenance.
In addition, in 1999, the EPA promulgated National Emissions
Standards for Hazardous Air Pollutants that apply to certain TXU Gas facilities.
The EPA has also issued rules for controlling regional haze; the impact of these
rules is unknown at this time because the TCEQ has not yet implemented the
regional haze requirements.
The Bush Administration is addressing greenhouse gas emissions
through its greenhouse gas emissions intensity reduction Climate VISION program.
The Bush Administration and EPA have proposed the Clear Skies legislative
initiative calling for reductions of SO2, NOx, and mercury from electricity
generation facilities over a 15-year period. Some legislative proposals for
additional regulation of SO2, NOx, mercury and carbon dioxide recently have been
considered at the federal level and it is expected that additional similar
proposals will be made in the future. TXU Corp. continues to participate in a
voluntary greenhouse gas emission reduction program and since 1995 has reported
the results of its program annually to the U.S. Department of Energy. TXU Corp.
is also participating in a new voluntary electric utility industry sector
climate change initiative in partnership with the Department of Energy.
TXU Corp. continues to assess the financial and operational risks posed by
future regulatory or policy changes pertaining to greenhouse gas emissions and
multiple emissions, but because these proposals are in the formative stages,
TXU Corp. is unable to predict their future impacts on the financial condition
and operations of TXU Corp.
Major air pollution control provisions of the 1999 Restructuring
Legislation required a 50% reduction in NOx emissions and a 25% reduction in SO2
emissions from "grandfathered" electric utility generation plants. The first
compliance period is for the year beginning May 1, 2003 through April 30, 2004.
TXU Energy has obtained all permits required for the "grandfathered" plants by
the 1999 Restructuring Legislation and has completed a construction program to
install control equipment to achieve the required reductions. TXU Corp.
anticipates that it will be in compliance with the requirements at the end of
the first compliance period.
In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities, other than electric utility generation plants,
apply for permits. TXU Energy, TXU Gas and Oncor anticipate that the permits
can be obtained for almost all of their "grandfathered" facilities without
significant effects on the costs of operating these facilities. It may be
necessary at one TXU Gas facility to spend approximately $6 million in the near
future to comply with this requirement.
The TCEQ has also adopted revisions to its State Implementation
Plan (SIP) rules that require an 89% reduction in NOx emissions from electricity
generation plants in the Dallas-Fort Worth ozone non-attainment area and a 51%
reduction in NOx emissions from electricity generation plants in East and
Central Texas. Full compliance is required by May 1, 2005. TXU Energy has
already made significant NOx emissions reductions to achieve the 51% reduction
requirements of the 1999 Restructuring Legislation, but anticipates that
additional reductions and/or modifications in plant operations will be required
to achieve the 89% reductions called for in the SIP rules. Additionally, the
TCEQ is expected to propose new SIP rules in 2004 to deal with 1-hour and
8-hour ozone standards. These rules could require further NOx emissions
reductions from certain TXU Energy facilities.
Water -- The TCEQ, the EPA and the RRC have jurisdiction over
water discharges (including storm water)from all domestic facilities. Facilities
of TXU Energy, TXU Gas and Oncor are presently in compliance with applicable
state and federal requirements relating to discharge of pollutants into the
water. TXU Energy, TXU Gas and Oncor hold all required waste water discharge
permits from the TCEQ and the RRC for facilities in operation and have applied
for or obtained necessary permits for facilities under construction. TXU Energy,
TXU Gas and Oncor believe they can satisfy the requirements necessary to obtain
any required permits or renewals. Recent changes to federal rules pertaining
to Spill Prevention, Control and Countermeasure Plans for oil-filled electrical
equipment and bulk storage facilities for oil will require updating of certain
facilities. TXU Gas and Oncor are unable to predict at this time the impact of
these changes. Clean Water Act Section 316(b) regulations pertaining to existing
water intake structures are being developed by the EPA with publication
scheduled for early 2004. TXU Energy is unable to predict at this time the
impacts of these regulations.
17
Other -- Diversion, impoundment and withdrawal of water for
cooling and other purposes are subject to the jurisdiction of the TCEQ. TXU
Energy possesses all necessary permits for these activities from the TCEQ for
its present operations.
Treatment, storage and disposal of solid and hazardous waste are
regulated at the state level under the Texas Solid Waste Disposal Act and at the
federal level under the Resource Conservation and Recovery Act of 1976, as
amended, and the Toxic Substances Control Act. The EPA has issued regulations
under the Resource Conservation and Recovery Act of 1976 and the Toxic
Substances Control Act, and the TCEQ and the RRC have issued regulations under
the Texas Solid Waste Disposal Act applicable to facilities of TXU Energy, TXU
Gas and Oncor. TXU Energy has registered solid waste disposal sites and has
obtained or applied for such permits as are required by such regulations.
Under the federal Low-Level Radioactive Waste Policy Act of 1980,
as amended, the State of Texas is required to provide, either on its own or
jointly with other states in a compact, for the disposal of all low-level
radioactive waste generated within the state. The State of Texas has agreed to
a compact with the States of Maine and Vermont for a disposal facility that
would be located in Texas. That compact was ratified by Congress and signed by
the President in 1998. The State of Texas had proposed to license a disposal
site in Hudspeth County, Texas, but in October 1998, the TCEQ denied that
license application. In 2003, the State of Texas enacted legislation allowing a
private entity to be licensed to accept low-level radioactive waste for
disposal. TXU Energy intends to continue to ship low-level waste material
off-site for as long as an alternative disposal site is available. Should
existing off-site disposal become unavailable, the low-level waste material will
be stored on-site. TXU Energy's on-site storage capacity is expected to be
adequate until other off-site facilities become available. (See Power
Production - Nuclear Production Assets above.)
Environmental Capital Expenditures-- Capital expenditures for
TXU Energy's environmental projects were $27 million in 2003 and are expected to
be about $14 million in 2004. In 2003, Oncor's capital expenditures for
environmental matters totaled $2 million and TXU Gas' capital expenditures
totaled $220 thousand.
AUSTRALIA
TXU Australia is subject to various Australian federal and state
environmental regulations, the most significant of which are the Victorian
Environmental Protection Act of 1970 and the South Australian Environment
Protection Act of 1993. Both acts regulate, in particular, the discharge of
waste into air, land and water, site contamination, the emission of noise and
waste management. Both acts also established their respective state
Environmental Protection Authorities (Australia EPA) and grant the Australia EPA
a wide range of powers to control and prevent environmental pollution.
The Torrens Island electricity generation plant in South Australia
has a license to carry out activities of environmental significance, including
the discharge of warm cooling water into the marine environment, subject to
certain conditions. The conditions relate to temperature rise limit, temperature
monitoring and reporting obligations to the Australia EPA. TXU Australia has
complied with its license conditions.
In Victoria, no licenses or works approvals from the Australia EPA
are currently required for activities undertaken by the electricity delivery
operations. The gas storage operation has a license to carry out activities of
environmental significance including discharges to air and water subject to
certain conditions. TXU Australia has complied with its license conditions.
Through past acquisitions, TXU Australia holds certain properties
that are contaminated. Liabilities totaling $10 million have been recorded for
estimated costs of land reclamation and site restoration at these properties.
These costs may change if the extent of contamination is different than testing
indicated at the time of initial limited reviews. The Australia EPA has the
power to order TXU Australia to incur such costs to remedy the contamination of
land. TXU Australia also recorded a $7 million liability for land remediation
costs for its Torrens Island plant.
18
Item 3. LEGAL PROCEEDINGS
Legal Proceedings -- On October 9, 2003, a lawsuit was filed in the
Supreme Court of the State of New York, County of New York, against TXU Corp.,
by purported beneficial owners of approximately 39% of certain TXU Corp. equity-
linked securities issued in October 2001. The common stock purchase contracts
that are a part of these securities require the holders to purchase TXU Corp.
common stock on specified dates in 2004 and 2005 at prices that are above the
current market price of TXU Corp. common stock. The plaintiffs seek a
declaratory judgment that (a) a termination event has occurred under the common
stock purchase contract as a result of the administration of TXU Europe and,
therefore, that plaintiffs are not required to purchase TXU Corp. common stock
pursuant to the contracts and (b) an event of default has occurred under the
indenture for the senior notes that constitute a part of these equity linked
securities. Plaintiffs also seek an injunction requiring TXU Corp. to give
notice that a termination event under the common stock purchase contract has
occurred. TXU Corp. disputes plaintiffs' allegations and believes that
plaintiffs' interpretation of the common stock purchase contract and indenture
is inconsistent with the clear language of these agreements and is contrary to
applicable law. Therefore, TXU Corp. believes the claims are completely without
merit and intends to vigorously defend the lawsuit. On November 13, 2003, TXU
Corp. filed a motion to dismiss the action, and oral argument was held on
January 26, 2004. The court has not yet ruled on the motion, therefore,
TXU Corp. is unable to estimate any possible loss or predict the outcome of this
action.
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. An amended complaint was filed on February 3,
2004 that joined additional, unaffiliated defendants. Three retail electric
providers have filed motions for leave to intervene in the action alleging
claims substantially identical to TCE's. In addition, approximately 25 purported
former customers of TCE have filed a motion to intervene in the action alleging
claims substantially identical to TCE's, both on their own behalf and on behalf
of a putative class of all former customers of TCE. TXU Corp. believes that it
has not committed any violation of the antitrust laws and the Commission's
investigation of the market conditions in late February 2003 has not resulted in
any findings adverse to TXU Energy. Accordingly, TXU Corp. believes that TCE's
and the interveners' claims against TXU Energy and its subsidiary companies are
without merit and TXU Energy and its subsidiaries intend to vigorously defend
the lawsuit. TXU Corp. 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.
In November 2002 and February and March 2003, three lawsuits were
filed in the United States District Court for the Northern District of Texas
asserting claims under the Employee Retirement Income Security Act (ERISA) on
behalf of a putative class of participants in and beneficiaries of various
employee benefit plans of TXU Corp. These ERISA lawsuits have been consolidated,
and a consolidated complaint was filed on February 3, 2004 against TXU Corp.,
the directors of TXU Corp., Erle Nye, Peter B. Tinkham, Kirk R. Oliver,
Biggs C. Porter, Diane J. Kubin, Barbara B. Curry and Richard Wistrand. The
plaintiffs seek to represent a class of participants in such employee benefit
plans during the period between April 26, 2001 and July 11, 2002. While TXU
Corp. believes the claims are without merit and intends to vigorously defend
the lawsuit, it is unable to estimate any possible loss or predict the outcome
of this consolidated action.
19
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 case has been transferred to the
Beaumont Division of the Eastern District of Texas. This action is brought by
an individual, alleged to be a retail consumer of electricity, on behalf of
herself and as a proposed representative of a putative class of retail
purchasers of electricity that are similarly situated. On September 15, 2003,
defendants filed a motion to dismiss the lawsuit and a motion to transfer the
case to the Northern District of Texas, Dallas Division. TXU Corp. believes that
the plaintiff lacks standing to assert any antitrust claims against TXU Corp. or
TXU Portfolio Management, and that defendants have not violated antitrust laws
or other laws as claimed by the plaintiff. Therefore, TXU Corp. believes that
plaintiff's claims are without merit and plans to vigorously defend the lawsuit.
TXU Corp. is unable to estimate any possible loss or predict the outcome of this
action.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas, against TXU Corp., Erle Nye, Michael J. McNally,
David W. Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E.
Little, Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert
H. Richardson. The plaintiff alleges breach of fiduciary duty, abuse of
control, mismanagement, waste of corporate assets, and breach of the duties
of loyalty and good faith. The named individual defendants are current or
former officers and/or directors of TXU Corp. No amount of damages has been
specified. Furthermore, plaintiffs in such suit have failed to make a demand
upon the directors as is required by law, and this case is currently stayed.
Therefore, TXU Corp. is unable to estimate any possible loss or predict the
outcome of this action.
In October, November and December 2002 and January 2003, a number
of lawsuits were filed in, removed to or transferred to the United States
District Court for the Northern District of Texas against TXU Corp., and certain
of its officers. These lawsuits have all been consolidated and lead plaintiffs
have been appointed by the Court. On July 21, 2003, the lead plaintiffs filed an
amended consolidated complaint naming Erle Nye, Michael J. McNally, V.J. Horgan
and Brian N. Dickie and directors Derek C. Bonham, J.S. Farrington, William M.
Griffin, Kerney Laday, Jack E. Little, Margaret N. Maxey, J.E. Oesterreicher,
Herbert H. Richardson and Charles R. Perry, as defendants. The plaintiffs seek
to represent classes of certain purchasers of TXU Corp. common stock and
equity-linked debt securities during a proposed class period from April 26, 2001
to October 11, 2002. No class or classes have been certified. The complaint
alleges violations of the provisions of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended
(Securities Act), relating to alleged materially false and misleading
statements, including statements in prospectuses related to the offering by
TXU Corp. of its equity-linked debt securities and common stock in May and June
2002. On September 24, 2003, TXU Corp. and its officer and director defendants
filed a motion to dismiss to plaintiffs' Amended Complaint. The plaintiffs have
filed their response to the motion and the defendants have filed their reply
brief, however, the court has not yet ruled on the motion to dismiss. The named
individual defendants are current or former officers and/or directors of TXU
Corp. While TXU Corp. believes the claims are without merit and intends to
vigorously defend this lawsuit, it is unable to estimate any possible loss or
predict the outcome of this action.
Other Contingencies - In October 2003, the former directors and
officers of TXU Europe Limited and subsidiaries that are now in administration
(collectively TXU Europe), who include current and former officers of TXU Corp.
and subsidiary companies, received notices from certain creditors and the
administrators of TXU Europe of various claims or potential claims relating to
losses incurred by creditors, including claims for alleged omissions from a
securities offering document and alleged breaches by directors of their English
law duties as directors of these companies in failing to minimize the potential
losses to the creditors of TXU Europe. Under the terms of the indemnification
agreements and bylaw and charter provisions that provide for indemnification of
corporate officers and directors, TXU Corp. or one of its subsidiaries will be
obligated to indemnify these persons from these and similar claims, unless it is
determined that the corporate officer's acts were committed in bad faith, were
the result of active and deliberate dishonesty or that the corporate officer
personally gained a financial profit to which he was not legally entitled.
Similar claims have been asserted directly against TXU Corp., as well. TXU Corp.
believes that these claims are without merit and intends to vigorously defend
any such claims if they are ultimately asserted.
General -- In addition to the above, TXU Corp. is involved in
various other legal and administrative proceedings the ultimate resolution of
which, in the opinion of TXU Corp., should not have a material effect, upon its
financial position, results of operations or cash flows.
20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF TXU CORP.
Positions and Date First Elected
Offices Presently to Present Offices
Held (Current Term (Current Term
Expires Expires Business Experience
Name of Officer Age on May 21, 2004) on May 21, 2004) (Preceding Five Years)
- ---------------------- ------- --------------------- ---------------------- -------------------------------
Erle Nye 66 Chairman of the February 23, 2004 Chairman of the Board of TXU Corp.;
Board prior thereto, Chairman of the
Board and Chief Executive of
TXU Corp.
C. John Wilder 45 President and Chief February 23, 2004 President and Chief Executive of
Executive TXU Corp.; prior thereto, Executive
Vice President and Chief Financial
Officer of Entergy Corporation.
T. L. Baker 58 Executive Vice February 21, 2003 Executive Vice President of TXU Corp.
President and President and Chief Executive
of TXU Energy; prior there