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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 1-11668
TXU US Holdings Company
(Exact Name of Registrant as Specified in its Charter)
Texas 75-1837355
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Preferred Stock,
without par value
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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
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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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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Aggregate market value of TXU US Holdings Common Stock held by non-affiliates:
None
Common Stock outstanding at March 12, 2004: 2,062,768 Class A shares, without
par value and 39,192,594 Class B shares, without par value.
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DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
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Glossary ii
PART I
Items 1.and 2. BUSINESS and PROPERTIES .................................... 1
TXU US HOLDINGS COMPANY AND SUBSIDIARIES....................... 1
TEXAS ELECTRIC INDUSTRY RESTRUCTURING.......................... 2
OPERATING SEGMENTS............................................. 3
TXU Energy.................................................. 3
Oncor....................................................... 8
ENVIRONMENTAL MATTERS.......................................... 10
Item 3. LEGAL PROCEEDINGS................................................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 13
Item 6. SELECTED FINANCIAL DATA........................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 13
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 13
Item 9A. CONTROLS AND PROCEDURES........................................... 13
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.................... 14
Item 11. EXECUTIVE COMPENSATION............................................ 16
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 27
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 28
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................ 28
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K... 29
APPENDIX A - Financial Information of TXU US Holdings A-1
APPENDIX B -Exhibits to 2003 Form 10-K B-1
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU US Holdings Company are made available to
the public, free of charge, on the TXU Corp. website at http://www.txucorp.com,
shortly after they have been filed with the Securities and Exchange Commission.
TXU US Holdings Company will provide copies of current reports not posted on the
website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation........Legislation that restructured the electric
utility industry in Texas to provide for
competition
2002 Form 8-K.........................US Holdings' Current Report on Form 8-K
filed on February 26, 2003 for TXU Energy
with respect to its financial information
for the year ended December 31, 2002, and
Form 8-K filed September 16, 2003 to
reflect the impact of adopting SFAS 145 on
the financial information reported in the
Form 8-K filed on February 26, 2003
2002 Form 10-K........................US Holdings' Annual Report on Form 10-K
for the year ended December 31, 2002
2003 Form 10-K........................TXU Energy'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 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.
ii
GWh...................................gigawatt-hours
historical service territory..........US Holdings historical service territory
at the time of entering competition on
January 1, 2002
IRS...................................Internal Revenue Service
kV....................................kilovolt
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
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
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 132..............................SFAS No. 132, "Employers' Disclosures
about Pensions and Postretirement
Benefits"
SFAS 133..............................SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
SFAS 140..............................SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and
Extinguishments of Liabilities a
replacement of FASB Statement 125"
SFAS 142..............................SFAS No. 142, "Goodwill and Other
Intangible Assets"
iii
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 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 Business Services.................TXU Business Services Company, a
subsidiary of TXU Corp.
TXU Corp..............................refers to TXU Corp. 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 Fuel..............................TXU Fuel Company, a subsidiary of TXU
Energy
TXU Gas...............................TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining............................TXU Mining Company LP, a subsidiary of TXU
Energy
TXU Portfolio Management..............TXU Portfolio Management Company LP, a
subsidiary of TXU Energy
TXU SESCO.............................TXU SESCO Company, a subsidiary of TXU
Energy, which serves as a REP in ten
counties in the eastern and central parts
of Texas
US....................................United States of America
US GAAP...............................accounting principles generally accepted
in the US
US Holdings...........................TXU US Holdings Company, a subsidiary of
TXU Corp.
iv
PART I
Items 1. and 2. BUSINESS and PROPERTIES
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
----------------------------------------
US Holdings (formerly TXU Electric Company) is a holding company for TXU
Energy and Oncor. US Holdings is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. Prior to January 1, 2002, US Holdings was a regulated, integrated
utility company directly engaged in the generation, purchase, transmission,
distribution and sale of electric energy in the north-central, eastern and
western parts of Texas.
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. At December 31, 2003, US Holdings and its
subsidiaries had approximately 9,384 full-time employees, including 2,049 in a
collective bargaining unit.
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.
TEXAS ELECTRIC INDUSTRY RESTRUCTURING
-------------------------------------
RESTRUCTURING LEGISLATION
Business Restructuring - The 1999 Restructuring Legislation restructured
the electric utility industry in Texas and provided for a transition to
competition in the generation and retail sale of electricity. TXU Corp.
disaggregated its electric utility business, as required by the legislation, and
restructured certain of its US businesses as of January 1, 2002 resulting in two
new business operations:
o Oncor - a utility regulated by the Commission that holds electricity
transmission and distribution assets and engages in electricity
delivery services.
o TXU Energy - a competitive business that holds the power generation
assets and engages in wholesale and retail energy sales and
hedging/risk management activities.
The relationships of these entities and their rights and obligations with
respect to their collective assets and liabilities are contractually described
in a master separation agreement executed in December 2001.
The operating assets of Oncor and TXU Energy are located principally in
the north-central, eastern and western parts of Texas.
A settlement of outstanding issues and other proceedings related to
implementation of the 1999 Restructuring Legislation received final approval by
the Commission in January 2003. See Note 15 for further discussion.
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 that primarily service the generation operations.
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.
1
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.
-- 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, such as TXU
Energy, 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 in January 2003.
Some of 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 fees 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 its 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 fees 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 power usage during the related two-year
period, the liability is subject to future 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 costs reconciliation, which would have covered the
period from July 1998 until the beginning of competition in January 2002.
2
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 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 all 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.
OPERATING SEGMENTS
------------------
US Holdings has aligned its operations into two reportable segments: TXU
Energy and Oncor. (See Note 17 to Financial Statements for further information
concerning reportable business segments.)
TXU Energy - operations principally in the competitive Texas market
involving power production (electricity generation) and retail and wholesale
sales of electricity and natural gas. TXU Energy engages in hedging and risk
management activities to mitigate commodity price risk.
Oncor - regulated operations in Texas involving the transmission and
distribution of electricity.
Effective with reporting for 2003, results for the TXU Energy segment
exclude expenses incurred by the US Holdings holding company in order to present
the segment on the same basis as the separate reporting for TXU Energy and as
the results of the business are evaluated by management. The activities of the
holding company consist primarily of servicing approximately $160 million of
debt. Prior year amounts are presented on the revised basis.
TXU ENERGY
TXU Energy's operations are conducted principally through the 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 US Holdings' 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, 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 US.
As a result, competition is expected to continue to increase.
3
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 Energy. expects to file a license extension
request in accordance with timing 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 or has under lease proven
reserves dedicated to the Big Brown, Monticello and Martin Lake generating
plants. 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
4
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 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.
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.
5
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 Energy policy requirements. Risk
assessment is segregated and operated separately from compliance and enforcement
to ensure independence, accountability and integrity of actions. TXU Energy 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.
6
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.
7
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.
US Holdings is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, US Holdings 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.
ONCOR
The Oncor segment consists primarily of the electricity transmission and
distribution operations of Oncor. Oncor provides the essential service of
delivering electricity safely, reliably and economically to end-use customers
through its distribution system.
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.
8
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
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
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.
9
ENVIRONMENTAL MATTERS
---------------------
US Holdings is subject to extensive environmental regulation by
governmental authorities. In operating its facilities, US Holdings is required
to comply with numerous environmental laws and regulations, and to obtain
numerous governmental permits and approvals. If US Holdings 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 US Holdings or its facilities, including potential regulatory and enforcement
developments related to air emissions.
US Holdings 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 US Holdings 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 US Holdings' older facilities, including base load lignite and coal
plants, it may be uneconomical for US Holdings to install the necessary
compliance equipment, which may cause US Holdings to shut down those facilities.
In addition, US Holdings may be responsible for any on-site liabilities
associated with the environmental condition of facilities that it has acquired
or developed regardless of when the liabilities arose and whether they are known
or unknown. In connection with acquisitions and sales of assets, US Holdings may
obtain, or be required to provide, indemnification against certain environmental
liabilities. Another party could fail to meet its indemnification obligations to
US Holdings.
Air -- Under the Texas Clean Air Act, the TCEQ has jurisdiction over the
permissible level of air contaminant emissions from, and permitting requirements
for, generating, 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 generating units and ancillary equipment.
TXU Energy's generation plants and mining equipment 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. TXU Energy will
be required to make additional emissions reductions and incur associated costs
under this proposal if it is finalized in its current form.
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.
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.
10
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 Energy 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 Energy is
also participating in a new voluntary electric utility industry sector climate
change initiative in partnership with the Department of Energy. TXU Energy
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 Energy
is unable to predict their future impacts on the financial condition and
operations of TXU Energy.
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. US Holdings fully
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 and Oncor anticipate that the permits can be obtained
for their "grandfathered" facilities without significant effects on the costs of
operating these facilities.
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 and the EPA have jurisdiction over water discharges
(including storm water) from all domestic facilities. Facilities of TXU Energy
and Oncor are presently in compliance with applicable state and federal
requirements relating to discharge of pollutants into the water. TXU Energy and
Oncor hold all required waste water discharge permits from the TCEQ for
facilities in operation and have applied for or obtained necessary permits for
facilities under construction. TXU Energy 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. Oncor is 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.
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 have issued regulations under the Texas Solid Waste Disposal
Act applicable to facilities of TXU Energy and Oncor. TXU Energy has registered
solid waste disposal sites and has obtained or applied for such permits as are
required by such regulations.
11
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. Oncor's capital expenditures for environmental
matters were $2 million in 2003.
Item 3. LEGAL PROCEEDINGS
On July 7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in
the United States District Court for the Southern District of Texas, Corpus
Christi Division, against TXU Energy and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. 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 the
behalf of a punitive basis of all former customers of TCE. US Holdings believes
that it has not committed any violation of the antitrust laws and the
Commission's investigation of the market conditions in late February 2003 has
not resulted in any findings adverse to TXU Energy. Accordingly, US Holdings
believes that TCE's 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. US Holdings is unable to estimate any
possible loss or predict the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., TXU Energy and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management
intend to vigorously defend the litigation. While TXU Corp., TXU Energy and TXU
Portfolio Management dispute the plaintiff's claims, TXU Corp. is unable to
predict the outcome of this litigation or the possible loss in the event of an
adverse judgment.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. Due to the death of the federal district
judge in Lufkin, 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.
12
General -- In addition to the above, US Holdings is involved in various
other legal and administrative proceedings the ultimate resolution of which, in
the opinion of each, should not have a material effect upon its financial
position, results of operations or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable. All of US Holdings' common stock is owned by TXU Corp.
Reference is made to Note 10 to Financial Statements regarding limitations upon
payment of dividends on common stock of US Holdings.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for US Holdings is set forth under
Selected Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for US Holdings is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for US Holdings is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for US Holdings is set forth under
Statement of Responsibility, Independent Auditors' Report, Statements of
Consolidated Income, Statements of Consolidated Comprehensive Income, Statements
of Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Shareholders' Equity and Notes to Financial Statements included in
Appendix A to this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of US Holdings' management, including the principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect as of December 31,
2003. Based on the evaluation performed, US Holdings' management, including the
principal executive officer and principal financial officer, concluded that the
disclosure controls and procedures were effective.
There have been no significant changes in US Holdings' internal controls
over financial reporting for its continuing operations that have occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, US Holdings' internal controls over financial
reporting.
13
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Identification of Directors, business experience and other
directorships:
Other Positions and
Offices Presently Date First Elected as Present Principal Occupation or
Held With US Holdings Director Employment and Principal
(Current Term Expires (Current Term Expires Business (Preceding Five Years),
Name of Director Age in May 2004) in May 2004) Other Directorships
- ----------------------------------------------------- ------------------------- -----------------------------------------
H. Dan Farell 54 Executive Vice May 16, 2003 Executive Vice President and Chief
President and Chief Financial Officer of TXU Corp.;
Financial Officer prior thereto, President of TXU
Gas; prior thereto, President of
TXU Electric; prior thereto,
Executive Vice President of TXU
Electric; other directorships:
Oncor, Oncor Electric Delivery
Transition Bond Company LLC, TXU
Energy and TXU Gas.
Michael J. McNally 49 None February 16, 1996 Executive Vice President of TXU
Corp.; prior thereto, Executive
Vice President and Chief Financial
Officer of TXU Corp.; other
directorships: Oncor, TXU Energy
and TXU Gas.
Eric H. Peterson 43 None November 1, 2002 Executive Vice President and General
Counsel of TXU Corp.; prior
thereto, Senior Vice President and
General Counsel of DTE Energy;
prior thereto, partner in the law
firm of Worsham, Forsythe &
Wooldridge; other directorships:
Oncor, Oncor Electric Delivery
Transition Bond Company LLC, TXU
Energy and TXU Gas.
C. John Wilder 45 Chairman of the Board March 15, 2004 President and Chief Executive of TXU
and Chief Executive Corp.; prior thereto, Executive
Vice President and Chief Financial
Officer of Entergy Corporation;
other directorships: TXU Corp., Oncor,
Oncor Electric Delivery Transition
Bond Company LLC, TXU Energy and
TXU Gas.
Directors of US Holdings receive no compensation in their capacity as Directors.
14
Identification of Executive Officers and business experience:
Positions and Offices Date First Elected to
Presently Held Present Offices
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age in May 2004) in May 2004) (Preceding Five Years)
- -------------------- -------- ----------------------- ----------------------- ---------------------------------------
C.John Wilder 45 Chairman of the Board March 15, 2004 President and Chief Executive of
and Chief Executive TXU Corp.; prior thereto,
Executive Vice President and
Chief Financial Officer of
Entergy Corporation.
H. Dan Farell 54 Executive Vice March 15, 2004 Executive Vice President and Chief
President and Chief Financial Officer of TXU Corp.;
Financial Officer prior thereto, President of TXU Gas;
prior thereto, President of TXU Electric;
prior thereto, Executive Vice President
of TXU Electric.
T. L. Baker 58 President and Chief March 15, 2004 Executive Vice President of TXU Corp. and
Executive, TXU Energy President and Chief Executive of
TXU Energy; prior thereto, Executive
Vice President of TXU Corp. and President
of TXU Energy; prior thereto, Vice
Chairman of Oncor and TXU Gas; prior therto,
President of TXU Electric Company; prior
thereto, President, Electric Service
Division of TXU Electric Company and TXU Gas
Distribution Division of TXU Gas.
M. S. Greene 58 Vice Chairman and March 15, 2004 Vice Chairman and Chief Executive
Chief Executive, Oncor of Oncor and TXU Gas; prior
thereto, Vice Chairman of Oncor and
TXU Gas; prior thereto, President of
Oncor; prior thereto, President of
TXU Lone Star Pipeline and Transmission
Division of TXU Electric; prior thereto,
Executive Vice President of TXU
Fuel.
R. D. Trimble 55 President, Oncor August 4, 2003 President of Oncor; prior thereto,
Senior Vice President of Oncor; prior
thereto, Senior Vice President of Oncor
and TXU Gas Distribution Division of TXU
Gas; prior thereto, Senior Vice
President of US Holdings.
There is no family relationship between any of the above-named Directors and
Executive Officers.
15
Item 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
US Holdings (the Company) and its affiliates have paid and awarded
compensation during the last three calendar years to the executive officers
named in the Summary Compensation Table for services in all capacities. Amounts
reported in the Table as Bonus and LTIP Payouts for any calendar year reflect
the performance of the individual and TXU Corp. in prior periods. Information
relating to compensation provided in 2004 based on performance in 2003 is
contained in the Organization and Compensation Committee Report on Executive
Compensation.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
----------------------------------- ---------------------------------------
Awards Payouts
------------------------- ------------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Awards Options/ Payouts sation
Principal Position Year ($) ($)(7) ($) ($)(8) SARs (#) ($)(9) ($)(10)
- ------------------------- ------ ---------- ---------- ---------- ----------- ------------ ------------ ----------
Erle Nye (1) (11)..... 2003 966,667 0 --- 213,750 --- 1,531 482,911
Chairman of the Board 2002 1,037,500 1,950,000 --- 236,250 --- 4,286,400 299,985
and Chief Executive 2001 964,583 475,000 --- 694,375 --- 519,747 222,658
of the Company
H. Dan Farell (2)(11).. 2003 366,667 0 --- 84,375 --- 12,683 62,236
Executive Vice 2002 323,333 180,000 --- 73,125 --- 349,638 64,258
President of the 2001 304,583 80,500 --- 151,375 --- 61,290 47,455
Company
T.L. Baker (3)(11).... 2003 516,667 0 --- 112,500 --- 17,047 114,620
President, TXU 2002 495,000 500,000 --- 112,500 --- 1,109,770 119,960
Energy Company LLC 2001 449,167 125,000 --- 230,750 --- 111,800 89,374
M.S.Greene (4)(11).... 2003 341,708 98,400 --- 73,800 --- 12,683 77,110
Vice Chairman, Oncor 2002 326,667 200,000 --- 73,800 --- 351,516 82,420
2001 311,667 81,500 --- 153,500 --- 18,659 62,710
R. D. Trimble (5)(11). 2003 216,625 62,100 --- 46,575 --- 7,965 42,922
President, Oncor 2002 205,667 90,252 --- 46,575 --- 233,343 42,946
2001 195,250 42,500 --- 87,275 --- 12,191 35,023
Brian N. Dickie (6)(11) 2003 585,278 0 --- 193,500 --- 0 1,394,210
President, TXU Energy 2002 856,667 625,000 --- 193,500 --- 1,071,600 122,629
Company LLC 2001 823,333 252,500 --- 441,500 --- 0 83,229
(until August 8, 2003)
- -----------------------
(1) Compensation amounts represent compensation paid by TXU Corp.
(2) Compensation amounts represent compensation paid by Oncor and, beginning
February 21, 2003, TXU Business Services Company.
(3) Mr. Baker was elected President of TXU Energy effective August 8, 2003.
Compensation amounts represent compensation paid by Oncor and, beginning
August 8, 2003, TXU Energy.
(4) Compensation amounts represent compensation paid by Oncor.
(5) Compensation amounts represent compensation paid by Oncor.
(6) Mr. Dickie resigned as President of TXU Energy effective August 8, 2003.
Compensation amounts represent compensation paid by TXU Energy.
16
(7) Amounts reported as Bonus in the Summary Compensation Table are
attributable principally to the named executive officers' participation in
the TXU Annual Incentive Plan (AIP). No AIP awards for 2002 performance
were provided in 2003 to any officers. Under the terms of the AIP
effective in 2003, target incentive awards ranging from 20% to 75% of base
salary, with a maximum award of 100% of base salary, are established. The
percentage of the target or maximum actually awarded, if any, is dependent
upon the attainment of per share net income goals established in advance
by the Organization and Compensation Committee (Committee), as well as the
Committee's evaluation of the participant's and TXU Corp.'s performance.
The amounts reported as Bonus for Messrs. Greene and Trimble represent
special bonuses awarded in February 2003 in recognition of their
significant contributions in their areas of responsibility.
(8) Amounts reported as Restricted Stock Awards in the Summary Compensation
Table are attributable to the named officer's participation in the
Deferred and Incentive Compensation Plan (DICP). Participants in the DICP
may defer a percentage of their base salary not to exceed a maximum
percentage determined by the Committee for each plan year and in any event
not to exceed 15% of the participant's base salary. Salary
deferred under the DICP is included in amounts reported as Salary in the
Summary Compensation Table. TXU Corp. makes a matching award (Matching
Award) equal to 150% of the participant's deferred salary. Prior to 2002,
one-half of any AIP award (Incentive Award) was deferred and invested
under the DICP. Matching Awards are subject to forfeiture under certain
circumstances. Under the DICP, a trustee purchases TXU Corp. common stock
with an amount of cash equal to each participant's deferred salary and
Matching Award, and accounts are established for each participant
containing performance units (Units) equal to such number of common
shares. DICP investments, including reinvested dividends, are restricted
to TXU Corp. common stock, and the value of each unit credited to
participants' accounts equals the value of a share of TXU Corp. common
stock and is at risk based on the performance of the stock. On the
expiration of the five year maturity period, the value of the
participant's maturing accounts are paid in cash based upon the then
current value of the Units; provided, however, that in no event will a
participant's account be deemed to have a cash value which is less than
the sum of such participant's deferrals together with 6% per annum
interest compounded annually. Participants may elect to defer amounts that
would otherwise mature under the DICP, under and subject to the provisions
of the Salary Deferral Program (SDP) as discussed in footnote (10). The
maturity period is waived if the participant dies or becomes totally and
permanently disabled and may be extended under certain circumstances.
Matching Awards that have been made under the DICP are included under
Restricted Stock Awards in the Summary Compensation Table. As a result of
these awards, undistributed Matching and Incentive Awards made in prior
years and dividends reinvested thereon, the number and market value at
December 31, 2003 of such Units (each of which is equal to one share of
common stock) held in the DICP accounts for Messrs. Nye, Farell, Baker,
Greene, Trimble and Dickie were 61,320 ($1,454,510), 13,628 ($323,256),
19,484 ($462,160), 13,145 ($311,799), 8,175 ($193,911) and 35,896
($851,453), respectively.
(9) Amounts reported as LTIP Payouts in the Summary Compensation Table for
2003 reflect earnings distributed during the year on salaries previously
deferred under the DICP. Amounts reported for 2002 and 2001 also include
the vesting and distribution of performance-based restricted stock awards
under the Long-Term Incentive Compensation Plan (LTICP). For the LTICP
cycle ending in 2003, no awards were earned.
The LTICP is a comprehensive, stock-based incentive compensation plan
providing for common stock-based awards, including performance-based
restricted stock. Outstanding awards, as of December 31, 2003, of
performance-based restricted stock to the named executive officers may
vest at the end of a two-year or three-year performance period, depending
on the award, and provide for an ultimate distribution of from 0% to 200%
of the number of the shares initially awarded, based on TXU Corp.'s total
return to shareholders over such performance period compared to the total
returns provided by the companies comprising the Standard & Poor's 500
Electric Utilities Index. Dividends on restricted shares are reinvested in
TXU Corp. common stock and are paid in cash upon release of the restricted
shares. Under the terms of the LTICP, the maximum amount of any award that
may be paid in any one year to any of the named executive officers is the
fair market value of 100,000 shares of TXU Corp.'s common stock determined
as of the first day of such calendar year. The portion of any award that,
based on such limitation, cannot be fully paid in any year is deferred
until a subsequent year when it can be paid. Based on TXU Corp.'s total
return to shareholders over the three-year period ending March 31, 2003
compared to the returns provided by the companies comprising the Standard
& Poor's 500 Electric Utilities Index, all of the performance-based
restricted shares awarded in May 2000 were forfeited.
17
As a result of restricted stock awards under the LTICP, and reinvested
dividends thereon, the number of shares of restricted stock and the market
value of such shares at December 31, 2003 held for Messrs. Nye, Farell,
Baker, Greene, Trimble and Dickie were 459,405 ($10,897,087), 48,594
($1,152,650), 136,681 ($3,242,073), 53,702 ($1,273,811), 21,743 ($515,744)
and 66,047 ($1,566,635), respectively.
As noted, salaries deferred under the DICP are included in amounts
reported as Salary in the Summary Compensation Table. Amounts shown in the
table below represent the number of shares purchased under the DICP with
such deferred salaries for 2003 and the number of shares awarded under the
LTICP.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Deferred and Incentive
Compensation Plan
(DICP) Long-Term Incentive Compensation Plan (LTICP)
---------------------------- --------------------------------------------------------------
Number of Performance Number of Performance
Shares, or Other Shares, or Other
Units or Period Until Units or Period Until
Other Maturation or Other Maturation or Estimated Future Payouts
Name Rights (#) Payout Rights (#) Payout Minimum (#) Maximum (#)
---- ---------- ------ ---------- ------ ----------- -----------
Erle Nye.......... 7,888 5 Years 80,000 2 Years 0 160,000
80,000 3 Years 0 160,000
H. Dan Farell.... 3,113 5 Years 16,000 2 Years 0 32,000
16,000 3 Years 0 32,000
T. L. Baker....... 4,151 5 Years 40,000 2 Years 0 80,000
40,000 3 Years 0 80,000
M. S. Greene...... 2,724 5 Years 18,000 2 Years 0 36,000
18,000 3 Years 0 36,000
R. D. Trimble..... 1,719 5 Years 7,000 2 Years 0 14,000
7,000 3 Years 0 14,000
Brian N. Dickie... 7,140 5 Years 30,000 2 Years 0 60,000
30,000 3 Years 0 60,000
(10) Amounts reported as All Other Compensation in the Summary Compensation
Table are attributable to the named executive officer's participation in
certain plans and as otherwise described in this footnote.
Under the TXU Thrift Plan (Thrift Plan) all eligible employees of TXU
Corp. and any of its participating subsidiaries may invest a portion of
their regular salary or wages in common stock of TXU Corp., or in a
variety of selected mutual funds. Under the Thrift Plan, TXU Corp. matches
a portion of an employee's contributions. TXU Corp.'s matching
contribution is 75% of the first 6% of the employee's contribution for
employees covered under the traditional defined benefit component of the
TXU Retirement Plan, and 100% of the first 6% of the employee's
contribution for employees covered under the cash balance component of the
TXU Retirement Plan. All matching contributions are invested in common
stock of TXU Corp. The amounts reported under All Other Compensation in
the Summary Compensation Table include these matching amounts which, for
Messrs. Nye, Farell, Baker, Greene, Trimble and Dickie were $12,000,
$9,000, $9,000, $9,000, $7,727 and $8,691, respectively, during 2003.
Under the Salary Deferral Program (SDP) each employee of TXU Corp. and its
participating subsidiaries whose annual salary is equal to or greater than
an amount established under the SDP ($107,930 for the program year
beginning January 1, 2003) may elect to defer up to 50% of annual base
salary, and/or up to 100% of any bonus or incentive award and certain
maturing DICP awards, for a period of seven years, for a period ending
with the retirement of such employee, or for a combination thereof. TXU
Corp. makes a matching award, subject to forfeiture under certain
circumstances, equal to 100% of up to the first 8% of salary deferred
18
under the SDP; provided that employees who first become eligible to
participate in the SDP on or after January 1, 2002, who are also eligible,
or become eligible, to participate in the DICP, are not eligible to
receive any SDP matching awards. Salaries and bonuses deferred under the
SDP are included in amounts reported under Salary and Bonus, respectively,
in the Summary Compensation Table. Deferrals are credited with earnings or
losses based on the performance of investment alternatives under the SDP
selected by each participant. At the end of the applicable maturity
period, the trustee for the SDP distributes the deferrals and the
applicable earnings in cash as a lump sum or in annual installments. TXU
Corp. is financing the retirement option portion of the SDP through the
purchase of corporate-owned life insurance on the lives of participants.
The proceeds from such insurance are expected to allow TXU Corp. to fully
recover the cost of the retirement option. During 2003, matching awards,
which are included under All Other Compensation in the Summary
Compensation Table, were made for Messrs. Nye, Farell, Baker, Greene,
Trimble and Dickie in the amounts of $77,333, $29,333, $41,333, $34,367,
$17,440 and $46,822, respectively. Under the TXU Split-Dollar Life
Insurance Program (Insurance Program) split-dollar life insurance policies
are purchased for eligible corporate officers of TXU Corp. and its
participating subsidiaries. The eligibility provisions of the Insurance
Program were modified in 2003 so that no new participants will be added
after December 31, 2003. The death benefit of participants' insurance
policies are equal to two, three or four times their annual Insurance
Program compensation depending on their officer category. Individuals who
first became eligible to participate in the Insurance Program after
October 15, 1996, vest in the policies issued under the Insurance Program
over a six-year period. TXU Corp. pays the premiums for the policies and
has received a collateral assignment of the policies equal in value to the
sum of all of its insurance premium payments; provided that, with respect
to executive officers, premium payments made after August 1, 2002, are
made on a non-split-dollar life insurance basis and TXU Corp.'s rights
under the collateral assignment are limited to premium payments made prior
to August 1, 2002. Although the Insurance Program is terminable at any
time, it is designed so that if it is continued, TXU Corp. will fully
recover all of the insurance premium payments covered by the collateral
assignments either upon the death of the participant or, if the
assumptions made as to policy yield are realized, upon the later of 15
years of participation or the participant's attainment of age 65. During
2003, the economic benefit derived by Messrs. Nye, Farell, Baker, Greene,
Trimble and Dickie from the term insurance coverage provided and the
interest foregone on the remainder of the insurance premiums paid by
TXU Corp. amounted to $193,578, $23,903, $64,287, $33,743, $17,755
and $31,792, respectively.
The amount reported as All Other Compensation for Mr. Nye for 2003
includes $200,000 as provided for in his employment agreement as discussed
in footnote (11).
The amount reported as All Other Compensation for 2003 for Mr. Dickie
includes a severance payment of $1,306,905 as provided for in his
employment agreement as discussed in footnote (11).
(11) TXU Corp. has entered into employment agreements with Messrs. Nye, Farell,
Baker, Greene, Trimble and Dickie as hereinafter described in this
footnote.
Effective June 1, 2002, TXU Corp. entered into a new employment agreement
with Mr. Nye, which superseded his previous employment agreement. The new
agreement provides for an initial term expiring May 31, 2005, and a
secondary term expiring May 31, 2007. During the initial term, Mr. Nye
will continue to serve as TXU Corp.'s Chairman of the Board and Chief
Executive until such time as his successor is elected at which time Mr.
Nye may continue as TXU Corp.'s Chairman of the Board and/or in such other
executive position as he and TXU Corp. may mutually agree upon. During the
secondary term, Mr. Nye will continue as an employee of TXU Corp. or, with
TXU Corp.'s approval, he may retire and serve TXU Corp. in a consulting
capacity through the expiration of the secondary term. Mr. Nye will,
during the initial term, be entitled to a minimum annual base salary of
$1,050,000, eligibility for an annual bonus under the terms of the AIP,
and minimum annual restricted stock awards of 40,000 shares under the
LTICP. The agreement also provides for a special payment of $1,000,000 in
consideration for his entering into the new agreement which amount is
payable in equal annual installments over a five year period. During the
secondary term, Mr. Nye will be entitled to an annual base salary equal to
75% of his base salary prior to expiration of the initial term and
eligibility for a prorated bonus under the terms of the AIP for the 2005
AIP plan year. The agreement also provides Mr. Nye with certain benefits
following his retirement, including administrative support, annual medical
examinations and financial planning services. The agreement also
reconfirms TXU Corp.'s prior agreement to fund the retirement benefit to
which Mr. Nye will be entitled under TXU Corp.'s supplemental retirement
19
plan. Additionally, the agreement entitles Mr. Nye to certain severance
benefits in the event he dies, becomes disabled, is terminated without
cause or resigns or retires with TXU Corp.'s approval during the term of
the agreement, including the base salary and annual incentive awards he
would have received; continued payment of the remaining special award
installments; a payment in lieu of foregone and forfeited incentive
compensation; and health care benefits. The agreement also provides for
compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the initial term, including a
payment equal to the greater of three times his annualized base salary and
target bonus or the total base salary and bonus he would have received for
the remainder of the term of the agreement; any unpaid portion of the
special bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits; and a tax gross-up payment to offset
any excise tax which may result from such change-in-control payments.
TXU Business Services Company entered into an employment agreement with
Mr. Farell effective February 28, 2003. The agreement provides for the
continued service by Mr. Farell through February 28, 2006 (Term). Under
the terms of the agreement, Mr. Farell will, during the Term, be entitled
to a minimum annual base salary of $375,000 and to participate in all
employee benefit plans to the extent he is eligible by virtue of his
employment with TXU Corp. The agreement entitles Mr. Farell to certain
severance benefits in the event he is terminated without cause during the
Term, including a payment equal to the greater of his annualized base
salary and target bonus, or the total amount of base salary and target
bonuses he would have received for the remainder of the Term; a payment in
lieu of forfeited incentive compensation; and health care benefits. The
agreement also provides for compensation and benefits under certain
circumstances following a change-in-control of TXU Corp. during the Term,
including a payment equal to three times his annualized base salary and
target bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits and a tax gross-up payment to offset
any excise tax which may result from such change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. Baker effective
July 1, 2000. The agreement, as amended, provides for the continued
service by Mr. Baker through February 28, 2006 (Term). Under the terms of
the agreement, Mr. Baker will, during the Term, be entitled to a minimum
annual base salary of $420,000, eligibility for an annual bonus under the
terms of the AIP, and minimum restricted stock awards of 12,000 shares
under the LTICP. The agreement entitles Mr. Baker to certain severance
benefits in the event he is terminated without cause during the Term,
including a payment equal to the greater of his annualized base salary and
target bonus, or the total amount of base salary and target bonuses he
would have received for the remainder of the Term; a payment in lieu of
foregone and forfeited incentive compensation; and health care benefits.
The agreement also provides for compensation and benefits under certain
circumstances following a change-in-control of TXU Corp. during the Term,
including a payment equal to three times his annualized base salary and
target bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits and a tax gross-up payment to offset
any excise tax which may result from such change-in-control payments.
TXU Corp. entered into an employment agreement with Mr. Greene effective
July 1, 2000. The agreement, as amended, provides for the continued
service by Mr. Greene through June 30, 2006 (Term). Under the terms of the
agreement, Mr. Greene will, during the Term, be entitled to a minimum
annual base salary of $300,000, eligibility for an annual bonus under the
terms of the AIP, and minimum restricted stock awards of 5,000 shares
under the LTICP. The agreement entitles Mr. Greene to certain severance
benefits in the event he is terminated without cause during the Term,
including a payment equal to the greater of his annualized base salary and
target bonus, or the total amount of base salary and target bonuses he
would have received for the remainder of the Term; a payment in lieu of
foregone and forfeited incentive compensation; and health care benefits.
The agreement also provides for compensation and benefits under certain
circumstances following a change-in-control of TXU Corp. during the Term,
including a payment equal to three times his annualized base salary and
target bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits and a tax gross-up payment to offset
any excise tax which may result from such change-in-control payments.
Oncor entered into an employment agreement with Mr. Trimble effective
March 12, 2003. The agreement provides for the continued service by Mr.
Trimble through March 12, 2006 (Term). Under the terms of the agreement,
Mr. Trimble will, during the Term, be entitled to a minimum annual base
salary of $207,000 and to participate in all employee benefit plans to the
extent he is eligible by virtue of his employment. The agreement entitles
Mr. Trimble to certain severance benefits in the event he is terminated
without cause during the Term, including a payment equal to the greater of
his annualized base salary and target bonus, or the total amount of base
salary and target bonuses he would have received for the remainder of the
Term; a payment in lieu of forfeited incentive compensation; and health
care benefits. The agreement also provides for compensation and benefits
under certain circumstances following a change-in-control of TXU Corp.
during the Term, including a payment equal to three times his annualized
base salary and target bonus; a payment in lieu of foregone and forfeited
incentive compensation; health care benefits and a tax gross-up payment to
offset any excise tax which may result from such change-in-control
payments.
20
Mr. Dickie resigned his employment with TXU Energy effective August 8,
2003. TXU Corp. had previously entered into an employment agreement with
Mr. Dickie, effective December 3, 2002, which had superseded and replaced
his previous employment agreement. Under the terms of the agreement, Mr.
Dickie was entitled during the term, which would have expired May 31,
2005, to a minimum annual base salary of $860,000, eligibility for an
annual bonus under the AIP, minimum annual restricted stock awards of
15,000 shares under the LTICP, and certain special retirement
compensation. Under the terms of the agreement, Mr. Dickie received
certain severance benefits upon his resignation, including a payment equal
to his annual base salary and target bonus, payments for otherwise
forfeited incentive compensation, and health care benefits.
TXU Corp. and its participating subsidiaries maintain a retirement plan
(Retirement Plan), which is qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (Code). The Retirement Plan contains
both a traditional defined benefit component and a cash balance component.
Annual retirement benefits under the traditional defined benefit component,
which applied during 2003 to each of the named officers other than Mr. Nye, are
computed as follows: for each year of accredited service up to a total of 40
years, 1.3% of the first $7,800, plus 1.5% of the excess over $7,800, of the
participant's average annual earnings during his or her three years of highest
earnings. The cash balance component covers all employees who first become
eligible to participate in the Retirement Plan on or after January 1, 2002, and
employees previously covered under the traditional defined benefit component who
elected to convert the actuarial equivalent of their accrued traditional defined
benefit to the cash balance plan component. Mr. Nye elected to convert to the
cash balance component. Under the cash balance component, hypothetical accounts
are established for participants and credited with monthly contribution credits
equal to a percentage of the participant's compensation (3.5%, 4.5%, 5.5% or
6.5% depending on the participant's combined age and years of accredited
service) and interest credits based on the average yield of the 30-year Treasury
bond for the 12 months ending November 30 of the prior year. Amounts reported
under Salary for the named executive officers in the Summary Compensation Table
approximate earnings as defined under the traditional defined benefit component
of the Retirement Plan without regard to any limitations imposed by the Code.
Benefits paid under the traditional defined benefit component of the Retirement
Plan are not subject to any reduction for Social Security payments but are
limited by provisions of the Code. Based on benefits accrued under the cash
balance component of the Retirement Plan as of December 31, 2003, the estimated
annual benefit payable in the form of a straight-life annuity as of that date
for Mr. Nye is $1,259,968. As of December 31, 2003, years of accredited service
under the Retirement Plan for Messrs. Nye, Farell, Baker, Greene, Trimble and
Dickie were 40, 29, 33, 33, 30 and 7, respectively.
PENSION PLAN TABLE
Years of Service
----------------------------------------------------------------------------------------
Remuneration 20 25 30 35 40
- ---------------------- ------------- -------------- ------------- ---------------- ---------------
$ 50,000 $14,688 $ 18,360 $22,032 $25,704 $29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
1,800,000 539,688 674,610 809,532 944,454 1,079,376
2,000,000 599,688 749,610 899,532 1,049,454 1,199,376
TXU Corp.'s supplemental retirement plan (Supplemental Plan) provides
for the payment of retirement benefits, which would otherwise be limited by the
Code or the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the Supplemental Plan,
retirement benefits are calculated in accordance with the same formula used
under the qualified plan, except that, with respect to calculating the portion
of the Supplemental Plan benefit attributable to service under the traditional
defined benefit component of the Retirement Plan, ear