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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2669310
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ----
Common Stock outstanding at May 4, 2004: 323,846,653 shares, without par value.
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TABLE OF CONTENTS
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PAGE
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GLOSSARY........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2004 and 2003....................................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three Months Ended March 31, 2004 and 2003...................................... 2
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2004 and 2003....................................... 3
Condensed Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003............................................. 4
Notes to Financial Statements.................................................... 5
Independent Accountants' Report.................................................... 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 58
Item 4. Controls and Procedures ....................................................... 60
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 60
Item 2. Changes in Securities and Use of Proceeds........................................ 61
Item 6. Exhibits and Reports on Form 8-K ................................................ 61
SIGNATURE.......................................................................................... 64
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request.
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
2003 Form 10-K................................. TXU Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2003
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 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"
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of 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 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ Gigawatt-hours
historical service territory................... US Holdings' historical service territory, largely in north
Texas, at the time of entering competition on January 1, 2002
IRS............................................ Internal Revenue Service
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, or Oncor and its consolidated bankruptcy remote
financing subsidiary, Oncor Electric Delivery Transition
Bond Company LLC, depending on context
ii
Pinnacle....................................... Pinnacle One Partners, L.P., the holding company for the
telecommunications business and formerly a joint venture
price-to-beat rate............................. residential and small business customer electricity rates
established by the Commission in the restructuring of the
Texas market that are required to be charged in a REP's
historical service territories until January 1, 2005 or when
40% of the electricity consumed by such customer classes is
supplied by competing REPs, adjusted periodically for
changes in fuel costs, and required to be available to those
customers until January 1, 2007
REP............................................ retail electric provider
RRC............................................ Railroad Commission of Texas
S&P............................................ Standard & Poor's, a division of the McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
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 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS 150....................................... SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity"
SG&A........................................... selling, general and administrative
TXU Australia.................................. refers to TXU Australia Group Pty Ltd, a subsidiary of TXU
Corp., and/or its consolidated subsidiaries, depending on
context
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Communications............................. TXU Communications Ventures Company, a subsidiary of Pinnacle
TXU Corp. ..................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Energy..................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
TXU Europe..................................... TXU Europe Limited, a former subsidiary of TXU Corp.
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining..................................... TXU Mining Company LP, a subsidiary of TXU Energy
iii
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of TXU
Energy
UK............................................. United Kingdom
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iv
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2004 2003
-------- ------
(millions of dollars,
except per share
amounts)
Operating revenues............................................................ $2,992 $2,760
Costs and expenses:
Cost of energy sold and delivery fees...................................... 1,412 1,365
Operating costs........................................................... 417 414
Depreciation and amortization.............................................. 235 223
Selling, general and administrative expenses............................... 282 246
Franchise and revenue-based taxes.......................................... 108 111
Other income............................................................... (9) (13)
Other deductions........................................................... 19 17
Interest income............................................................ (5) (10)
Interest expense and related charges....................................... 237 247
----- -----
Total costs and expenses............................................... 2,696 2,600
----- -----
Income from continuing operations before income taxes and cumulative effect
of changes in accounting principles....................................... 296 160
Income tax expense............................................................ 95 45
----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles........................................ 201 115
Loss from discontinued operations, net of tax benefit (Note 3)................ (19) (12)
Cumulative effect of changes in accounting principles, net of tax benefit (Note 2) -- (58)
----- -----
Net income ................................................................... $ 182 $ 45
Preference stock dividends ................................................... 5 5
----- -----
Net income available to common shareholders................................... $ 177 $ 40
Average shares of common stock outstanding (millions):
Basic...................................................................... 323 321
Diluted.................................................................... 380 378
Per share of common stock:
Basic earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles....................................... $ 0.62 $0.36
Preference stock dividends............................................... (0.01) (0.02)
Loss from discontinued operations, net of tax benefit.................... (0.06) (0.04)
Cumulative effect of changes in accounting principles, net of tax benefit -- (0.17)
Net income available to common shareholders.............................. 0.55 0.13
Diluted earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles....................................... $ 0.57 $0.34
Preference stock dividends............................................... (0.01) (0.02)
Loss from discontinued operations, net of tax benefit................... (0.06) (0.03)
Cumulative effect of changes in accounting principles, net of tax benefit -- (0.15)
Net income available to common shareholders.............................. 0.50 0.14
Dividends declared........................................................ 0.125 0.125
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------
2004 2003
------ ------
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before cumulative
effect of changes in accounting principles................................ $ 201 $ 115
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustment .................................. 7 55
Minimum pension liability adjustments (net of tax expense of $1 and
benefit of $3)........................................................... 1 (6)
Cash flow hedges:
Net change in fair value of derivatives (net of tax benefit of
$41 and $56)........................................................ (81) (108)
Amounts realized in earnings during the period (net of tax expense of
$10 and $42)........................................................ 20 81
------ -----
Total............................................................. (53) 22
------ -----
Comprehensive income from continuing operations............................... 148 137
Comprehensive loss from discontinued operations, net of tax benefit........... (19) (12)
Cumulative effect of changes in accounting principles, net of tax benefit..... -- (58)
------ -----
Comprehensive income.......................................................... $ 129 $ 67
====== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
2004 2003
------ -------
(millions of
dollars)
Cash flows - operating activities:
Income from continuing operations before cumulative effect of
changes in accounting principles.............................................. $ 201 $ 115
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by operating
activities:
Depreciation and amortization ............................................... 254 246
Deferred income taxes and investment tax credits - net ...................... 76 --
Net gain from sale of assets................................................ -- (6)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 3 21
Net equity loss from unconsolidated affiliates and joint ventures............ -- 15
Adjustments related to gas cost recovery..................................... 8 (39)
Reduction in regulatory liability............................................ -- (42)
Changes in operating assets and liabilities..................................... (74) 617
----- ------
Cash provided by operating activities.................................... 468 927
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 759 1,317
Common stock................................................................. 8 4
Retirements/repurchases of securities:
Long-term debt............................................................... (1,429) (565)
Preferred securities of subsidiary, subject to mandatory redemption.......... -- (4)
Change in notes payable:
Commercial paper............................................................. (30) 5
Banks........................................................................ 116 (1,286)
Cash dividends paid:
Common stock................................................................. (40) (40)
Preference stock............................................................. (5) (5)
Redemption deposit applied to debt retirements.................................. -- 138
Debt premium, discount, financing and reacquisition expenses.................... (24) (47)
----- ------
Cash used in financing activities........................................ (645) (483)
Cash flows - investing activities:
Capital expenditures............................................................ (189) (228)
Proceeds from sale of assets.................................................... 1 13
Nuclear fuel.................................................................... (47) --
Other........................................................................... 12 25
----- ------
Cash used in investing activities........................................ (223) (190)
----- ------
Effect of exchange rates on cash and cash equivalents............................. 3 2
Cash contributions to discontinued operations..................................... (37) (4)
----- ------
Net change in cash and cash equivalents........................................... (434) 252
Cash and cash equivalents - beginning balance..................................... 875 1,574
----- ------
Cash and cash equivalents - ending balance........................................ $ 441 $1,826
===== ======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
--------- ------------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents....................................................... $ 441 $ 875
Restricted cash................................................................. 9 12
Accounts receivable -- trade.................................................... 1,338 1,369
Inventories..................................................................... 530 599
Commodity contract assets....................................................... 1,057 959
Assets of telecommunications holding company.................................... -- 110
Other current assets............................................................ 341 333
-------- --------
Total current assets..................................................... 3,716 4,257
Investments:
Restricted cash................................................................. 580 582
Other investments............................................................... 736 705
Property, plant and equipment -- net.............................................. 20,900 20,920
Goodwill.......................................................................... 1,835 1,829
Regulatory assets -- net.......................................................... 1,823 1,837
Commodity contract assets......................................................... 413 362
Cash flow hedges and other derivative assets...................................... 75 123
Other noncurrent assets........................................................... 380 411
Assets held for sale.............................................................. 600 660
-------- --------
Total assets............................................................. $ 31,058 $ 31,686
======== ========
LIABILITIES, PREFERRED SECURITIES OF SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper............................................................. $ 7 $ 39
Banks........................................................................ 175 58
Long-term debt due currently.................................................... 451 677
Accounts payable -- trade....................................................... 1,101 1,042
Commodity contract liabilities.................................................. 997 913
Liabilities of telecommunications holding company............................... -- 603
Other current liabilities....................................................... 1,232 1,339
-------- --------
Total current liabilities................................................ 3,963 4,671
Accumulated deferred income taxes................................................. 3,916 3,939
Investment tax credits............................................................ 426 430
Commodity contract liabilities.................................................... 359 318
Cash flow hedges and other derivative liabilities................................. 343 267
Long-term debt held by subsidiary trusts.......................................... 546 546
All other long-term debt, less amounts due currently.............................. 12,368 12,324
Other noncurrent liabilities and deferred credits................................. 2,295 2,370
Liabilities held for sale......................................................... 92 143
-------- --------
Total liabilities........................................................ 24,308 25,008
Preferred securities of subsidiaries (Note 6)..................................... 761 759
Contingencies (Note 8)
Shareholders' equity (Note 7):
Preferred stock - not subject to mandatory redemption........................... 300 300
Common stock without par value: Authorized shares: 1,000,000,000
Outstanding shares: 324,001,906 and 323,883,092.............................. 34 48
Additional paid-in capital................................................... 8,097 8,097
Retained deficit............................................................. (2,361) (2,498)
Accumulated other comprehensive loss......................................... (81) (28)
-------- --------
Total common stock equity................................................... 5,689 5,619
-------- --------
Total shareholders' equity................................................ 5,989 5,919
-------- --------
Total liabilities, preferred securities of subsidiaries and
shareholders' equity................................................... $ 31,058 $ 31,686
======== ========
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - TXU Corp. engages in power production
(electricity generation), retail and wholesale sales of electricity and natural
gas, and the transmission and distribution of electricity and natural gas. In
the competitive energy operations, TXU Corp. engages in hedging and risk
management activities. TXU Corp. is a holding company that conducts its US
operations through US Holdings and TXU Gas. US Holdings is also a holding
company that conducts its principal operations through TXU Energy and Oncor. TXU
Corp.'s principal international operations are conducted through TXU Australia.
Strategic Initiatives - As previously reported, on February 23, 2004, C.
John Wilder was named president and chief executive of TXU Corp. Mr. Wilder was
formerly executive vice president and chief financial officer of Entergy
Corporation. Mr. Wilder has been reviewing the operations of TXU Corp. and has
formulated certain strategic initiatives and continues to develop others.
Areas to be reviewed include:
o Performance in competitive markets, including profitability in new
markets
o Cost structure, including organizational alignments and headcount
o Management of natural gas price risk and cost effectiveness of the
generation fleet
o Non-core business activities
On April 26, 2004, TXU Corp. announced the following series of
transactions, as well as various performance improvement initiatives as follows:
o TXU Australia will be sold to Singapore Power Ltd. for $3.7 billion,
including $1.7 billion of assumed debt and $2.0 billion in cash. The
transaction must be cleared by the Australian Competition and Consumer
Commission and is expected to close in the third quarter of 2004.
o TXU Corp. also agreed to sell the assets of TXU Fuel Company, the gas
transportation subsidiary of TXU Energy, to Energy Transfer Partners,
L.P. for $500 million in cash. As part of the transaction, TXU Energy
will have an eight-year transportation agreement with the new owner to
transport gas to TXU Energy's generation plants. The transaction is
expected to close on June 1, 2004, subject to review under the
Hart-Scott-Rodino Act.
o TXU Corp. also announced its intent to sell TXU Gas. It is expected
that any transaction would be closed by the end of 2004, and the sales
price is expected to approximate book value.
o The anticipated net proceeds from these sales transactions allow for
the repurchase of preferred membership interests (as described
immediately below).
o On April 26, 2004, TXU Corp. repurchased all $750 million outstanding
principal amount of TXU Energy's Exchangeable Preferred Membership
Interests at a price of $1.8 billion funded initially by borrowings
under available credit facilities. The transaction will result in
savings of $68 million in annual cash distributions and the elimination
of 57.1 million diluted common shares. The transaction will also result
in a reduction in additional paid-in capital of approximately $815
million. This amount represents the excess of the $1.8 billion
repurchase amount over the carrying amount of the security, net of
approximately $380 million in deferred income tax benefits arising from
the transaction. The carrying amount of the security is the $750
million principal amount less a $102 million remaining unamortized
discount. The $815 million charge to paid-in capital will reduce net
income available to common shareholders, in the same manner as
TXU Corp.'s existing preference share dividends.
5
o TXU Corp. anticipates performance improvements as a result of various
strategic initiatives, including reduced administrative support costs,
increased base load (nuclear and coal-fired) generation plant output
and improved operating results in markets outside the historical
service territory. In the first quarter of 2004, TXU Corp. recorded a
$17 million ($11 million after-tax) charge, reported in other
deductions, consisting of $16 million for accrued severance benefits
and $1 million in asset writedowns related to these initiatives.
The review of TXU Corp.'s operations and formulation of strategic
initiatives is ongoing. The phases of the plan expected to result in unusual
charges are anticipated to be largely completed within one year. Upon completion
of each phase of the plan, TXU Corp. expects to fully describe the actions
intended to improve the financial performance of its operations.
TXU Corp. expects to report TXU Australia and TXU Gas as discontinued
operations beginning in the second quarter.
Facility Closings -- On March 29, 2004, TXU Energy announced it will
permanently retire eight gas-fired operating units due to electric industry
market conditions in Texas. TXU Energy will also temporarily close four other
gas-fired units and place them under evaluation for retirement. The 12 units
represent a total of 1,471 MW, or more than 13 percent, of TXU Energy's
gas-fired generation capacity in Texas. A majority of the 12 units were
designated as "peaking units" and operated only during the summer for many years
and have operated only sparingly during the last two years. Most of the units
were built in the 1950s. TXU Energy also determined that it will close its
Winfield North Monticello lignite mine in Texas later this year as it is no
longer economical to operate. The mine closure will result in the need to
purchase coal to fuel the adjacent generation facility. A total charge of $8
million ($5 million after-tax) was recorded in the first quarter for production
employee severance costs and impairments related to the various facility
closures.
Discontinued Businesses - In April 2004, TXU Corp. sold its
telecommunications business for $527 million. The business was formerly a joint
venture and has been consolidated since March 1, 2003.
In December 2003, TXU Energy finalized a formal plan to sell its strategic
retail services business, which is engaged principally in providing energy
management services.
In January 2004, TXU Corp. sold its small natural gas distribution
business in Mexico for $11 million.
The condensed consolidated financial statements for all periods presented
reflect the reclassification of the results of these businesses (for the periods
they were consolidated) as discontinued operations.
See Note 3 for more detailed information about discontinued operations.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Corp. have been prepared in accordance with US GAAP and on the same basis
as the audited financial statements included in its 2003 Form 10-K, except for
the changes in estimates of depreciable lives of assets discussed below. In the
opinion of management, all other adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of operations and
financial position have been included therein. All intercompany items and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with US GAAP have been omitted pursuant to the
rules and regulations of the SEC. Because the condensed consolidated interim
financial statements do not include all of the information and footnotes
required by US GAAP, they should be read in conjunction with the audited
financial statements and related notes included in the 2003 Form 10-K. The
results of operations for an interim period may not give a true indication of
results for a full year.
All dollar amounts in the financial statements and tables in the notes,
except per share amounts, are stated in millions of US dollars unless otherwise
indicated.
Depreciation of Energy Production Facilities -- Effective January 1, 2004,
the estimates of the depreciable lives of lignite-fired generation facilities
6
were extended an average of nine years to better reflect the useful lives of the
assets, and depreciation rates for the Comanche Peak nuclear generating plant
were decreased as a result of an increase in the estimated lives of boiler and
turbine generator components of the plant by an average of five years. The net
impact of these changes was a reduction in depreciation expense of $12 million
($8 million after-tax or $0.02 per diluted share) in the three months ended
March 31, 2004.
Effective April 1, 2003, the estimates of the depreciable lives of the
Comanche Peak nuclear generating plant and several gas generation plants were
extended to better reflect the useful lives of the assets. At the same time,
depreciation rates were increased on lignite and gas generation facilities to
reflect additional investments in equipment. The net impact of these changes was
an additional reduction in depreciation expense of $12 million ($8 million
after-tax or $0.02 per diluted share) in the three months ended March 31, 2004.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first quarter of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. FASB Staff Position 106-1,
issued in January 2004, allowed for, but did not require, deferral of the
accounting for the effects of the Medicare Act. TXU Corp. elected not to defer
accounting for the federal subsidy under the Medicare Act and recognized a $1.9
million net reduction in postretirement benefit expense in the 2003 financial
statements. For the three months ended March 31, 2004, the effect of adoption of
the Medicare Act was a reduction of approximately $7 million in TXU Corp.'s
postretirement benefit costs.
Earnings Per Share -- Basic earnings per share available to common
shareholders are based on the weighted average number of common shares
outstanding during the quarter. Diluted earnings per share include the effect of
all potential issuances of common shares under certain securities and employee
incentive arrangements. For the three months ended March 31, 2004 and 2003, the
$750 million of 9% Exchangeable Preferred Membership Interests in TXU Energy
were dilutive, and the related effects were included in the calculation of
diluted earnings per share. Assuming these securities were converted to TXU
Corp. common stock at the beginning of the periods at the exercise price of
$13.1242 per share, 57.1 million more shares would have been issued and net
income would have increased by $13 million for each of the three months ended
March 31, 2004 and 2003, representing the after-tax distributions on the
preferred membership interests and amortization of the related discount.
Additional dilution of earnings per share would result from approximately
7.0 million shares and 18.0 million shares of common stock issuable in
connection with equity-linked debt securities issued in 2002 and 2001,
respectively, if the average of the closing price per share of TXU Corp. common
stock on each of the twenty consecutive trading days ending on the third day
immediately preceding the end of a reporting period was above the strike price
of $62.91 and $55.68 per share for the respective issuances. For the three
months ended March 31, 2004 and 2003, these securities had no effect on the
calculation of earnings per share as the market price of TXU Corp. common stock
was below these strike prices.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for 2003 of changes in
accounting principles effective January 1, 2003:
Charge from rescission of EITF 98-10, net of tax effect of $34 million..... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million.......... 5
----
Total net charge...................................................... $(58)
====
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10,
which required mark-to-market accounting for all trading activities. Pursuant to
this rescission, only financial instruments that are derivatives under SFAS 133
are subject to mark-to-market accounting. Financial instruments that may not be
derivatives under SFAS 133, but were marked-to-market under EITF 98-10, consist
primarily of gas transportation and storage agreements, power tolling, full
requirements and capacity contracts. This new accounting rule was effective for
7
new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For TXU Corp., such liabilities primarily relate
to nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) TXU Corp. had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................ $488
Increase in other noncurrent liabilities and deferred credits.. (528)
Increase in accumulated deferred income taxes.................. (3)
Increase in regulatory assets - net............................ 48
----
Cumulative effect of change in accounting principles........... $ 5
====
The asset retirement liability at March 31, 2004 was $605 million,
comprised of a $599 million liability as of December 31, 2003, $10 million of
accretion during the three months ended March 31, 2004, reduced by $4 million in
reclamation payments.
With respect to nuclear decommissioning costs, for TXU Corp. the adoption
of SFAS 143 results in timing differences in the recognition of asset retirement
costs that are being recovered through the regulatory process.
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial information
of the various businesses reported as discontinued operations for the three
months ended March 31:
Strategic
Retail
Telecom Mexico Services Europe Total
------- ------ --------- ------ -----
2004
Operating revenues...................... $ 45 $ 4 $ 5 $ -- $ 54
Operating costs and expenses............ 38 4 5 -- 47
Other deductions (income) -- net........ 16 -- (1) -- 15
Interest income......................... (1) -- -- -- (1)
Interest expense and related charges.... 13 -- -- -- 13
------- ------ ------- ------- -------
Income (loss) before income taxes....... (21) -- 1 -- (20)
Income tax benefit ..................... (5) (1) 1 -- (5)
Charge related to exit (after-tax)...... -- 2 2 -- 4
------- ------ ------- ------- -------
Loss from discontinued operations.... $ (16) $ (1) $ (2) $ -- $ (19)
======= ======= ======= ======= =======
8
Strategic
Retail
Telecom Mexico Services Europe Total
------- ------ --------- ------ -----
2003
Operating revenues...................... $ 16 $ 23 $ 15 $ -- $ 54
Operating costs and expenses............ 22 24 14 -- 60
Other deductions (income) -- net........ -- (1) -- -- (1)
Interest income......................... (1) -- -- -- (1)
Interest expense and related charges.... 6 -- -- -- 6
------- ------ -------- ------- -------
Income (Loss) before income taxes....... (11) -- 1 -- (10)
Income tax benefit...................... (1) -- -- -- (1)
Charge related to exit (after-tax)...... -- -- -- 3 3
------- ------ -------- ------- -------
Income (loss) from discontinued
operations........................... $ (10) $ -- $ 1 $ (3) $ (12)
======= ====== ======== ======= =======
The strategic retail services operations were previously reported in the
Energy segment. The telecommunications and Mexico operations were previously
reported in corporate and other activity. The Europe operations were
previously reported in the former International segment.
TXU Europe -- In 2002, TXU Corp. wrote off its investment in TXU Europe,
without recording a tax benefit. On its federal income tax return for calendar
year 2002, TXU Corp. claimed a deduction related to the worthlessness of TXU
Corp.'s investment in TXU Europe. While TXU Corp. believes that its tax
reporting of the write-off was proper, there is a risk that the IRS could
challenge TXU Corp.'s position regarding this deduction. The issue is currently
under examination by the IRS, and TXU Corp. is uncertain whether the IRS will
challenge it's position. If TXU Corp.'s position is sustained, it would
recognize the $983 million tax benefit in income with a corresponding increase
in shareholders' equity.
A portion of the 2002 worthlessness deduction related to TXU Corp.'s
investment in TXU Europe will reverse due to the forgiveness of TXU Europe's
debt, which is expected to occur upon final resolution of the UK administration
process. Reported earnings will not be affected by this reversal as a deferred
tax liability was previously recorded; however, an estimated $200 million in
taxes is expected to be paid in 2005 as a result of the debt forgiveness. The
timing of the tax payment assumes the UK administration proceedings are resolved
in 2004.
Telecommunications -- In April 2004, TXU Corp. sold its telecommunications
business (TXU Communications) for $524 million in cash and $3 million of assumed
debt. In March 2004, TXU Corp. redeemed the remaining outstanding $560 million
senior notes of the Pinnacle telecommunications holding company. For balance
sheet presentation purposes, the Pinnacle trust established to fund interest
payments on the senior notes has been netted with the TXU Corp. debt that
comprises the trust's assets. The remaining assets and liabilities of Pinnacle
are not material and have been classified in other current assets and
liabilities. The business was formerly a joint venture and has been consolidated
since March 1, 2003.
Strategic Retail Services -- In December 2003, TXU Energy finalized a
formal plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. TXU Energy is in the
process of negotiating sales of these operations to various parties.
Mexico -- In January 2004, TXU Corp. completed the sale of its
majority-owned gas distribution operations in Mexico for $11 million in notes
receivable and recorded an after-tax loss of $2 million.
Balance sheet - The following details the assets and liabilities held for
sale as of March 31, 2004:
March 31, 2004
----------------------------------
Strategic
Retail
Telecom Services Total
------- -------- -----
Current assets.............................................. $ 22 $ 3 $ 25
Investments................................................. 37 6 43
Goodwill.................................................... 299 -- 299
Property, plant and equipment............................... 228 3 231
Other noncurrent assets..................................... 2 -- 2
------- ------ --------
Assets held for sale.................................... $ 588 $ 12 $ 600
======= ====== ========
Current liabilities......................................... $ 26 $ -- $ 26
Accumulated deferred income taxes........................... 18 -- 18
Noncurrent liabilities...................................... 48 -- 48
------- ------ --------
Liabilities held for sale................................... $ 92 $ -- $ 92
======= ====== ========
9
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At March 31, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $175 million at a
weighted average interest rate of 2.67% and commercial paper of $7 million (in
Australia). At December 31, 2003, TXU Corp. had outstanding short-term
borrowings consisting of bank borrowings of $58 million and commercial paper of
$39 million (all in Australia).
Credit Facilities -- At March 31, 2004, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) as follows:
At March 31, 2004
-----------------------------------------------
Expiration Authorized Facility Letters of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- --------------------------- -------------- ------------ -------- ---------- ---------- ------------
Five-Year Revolving Credit
Facility February 2005 US Holdings $ 1,400 $ -- $ -- $1,400
TXU Energy,
Revolving Credit Facility February 2005 Oncor 450 -- 75 375
Three-Year Revolving Credit
Facility May 2005 US Holdings 400 -- 100 300
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 462 -- 38
------- ------ ------ ------
Total US $ 2,750 $ 462 $ 175 $2,113
======= ====== ====== ======
Three-Year Senior Facility February 2007 TXU Australia $ 415 $ - $ 415 $ -
Five-Year Senior Facility February 2009 TXU Australia 415 - 335 80
Working Capital Facility February 2005 TXU Australia 57 - - 57
Standby Facility (a) December 2004 TXU Australia 7 - - -
------- ------ ------ ------
Total Australia $ 894 $ - $ 750 $ 137
======= ====== ====== ======
(a) Commercial paper borrowings totaling $7 million at March 31, 2004 were
supported by the Standby Facility.
In February 2004, TXU Australia entered into a $415 million Senior
Facility maturing in February 2007 and a $415 million Senior Facility maturing
in February 2009. Proceeds from borrowings under these new facilities were used
to repay borrowings under the previous Senior Facility ($899 million facility
limit at December 31, 2003).
TXU Corp.'s $500 million 5-year revolving credit facility is with LOC 2003
Trust, a special purpose, wholly-owned subsidiary of TXU Corp. (LOC Trust). LOC
Trust, in turn, has a $500 million 5-year secured credit facility with a group
of lenders. TXU Corp. capitalized LOC Trust with approximately $525 million of
cash, which the lenders have invested in permitted investments as directed by
LOC Trust. This investment in LOC Trust is reflected on TXU Corp.'s balance
sheet as restricted cash (see Note 11). LOC Trust's assets, including the
investments, constitute collateral for the benefit of the lenders to secure
issuances of letters of credit or loans, and are owned by LOC Trust. LOC Trust
is included in the consolidated financial statements of TXU Corp. solely to
comply with US GAAP.
The US Holdings, TXU Energy and Oncor facilities provide back-up for any
future issuance of commercial paper by TXU Energy or Oncor. At March 31, 2004,
there was no such outstanding commercial paper.
On April 26, 2004, three new additional credit facilities (364-day credit
facilities expiring in April 2005) were established in connection with the
strategic initiatives announced by TXU Corp. (See Note 1). Borrowings under
these new facilities ($1.7 billion) and an additional $200 million in borrowings
by US Holdings under its existing five-year facility were used by TXU Corp. to
provide bridge financing for the repurchase of TXU Energy's 9% exchangeable
preferred membership interests. Borrowings under the new credit facilities will
be repaid with proceeds from the sales transactions described in Note 1. If the
sales transactions do not close as anticipated, these borrowings will need to be
refinanced. Amounts borrowed and repaid under the facility may not be
re-borrowed. The terms of these new additional credit facilities are as follows:
10
At April 30, 2004
------------------------------------------------
Expiration Authorized Facility Letters of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- ------------------------ ----------- ----------- -------- ---------- ---------- -------------
364-day Credit Facility April 2005 TXU Corp. $ 700 $ -- $ 700 $ --
364-day Credit Facility April 2005 TXU Energy 1,000 -- 785 215
364-day Credit Facility April 2005 TXU Gas 300 -- 185 115
------- ------ ------ ------
Total $ 2,000 $ -- $1,670 $ 330
======= ====== ====== ======
In April 2004, the $175 million in borrowings under the Revolving Credit
Facility and the Three Year Revolving Credit Facility were repaid with proceeds
from TXU Corp.'s sale of its telecommunications business.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of March 31, 2004, the maximum
amount of undivided interests that could be sold by TXU Receivables Company was
$600 million.
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests. The balance of the subordinated notes
payable was $505 million at March 31, 2004.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities, as
well as a servicing fee paid by TXU Receivables Company to TXU Business Services
Company, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $3 million for the three-month periods ending March 31, 2004 and
2003 and approximated 2.1% and 3.6% for the first quarter of 2004 and 2003,
respectively, of the average funding under the program on an annualized basis;
these fees represent the net incremental costs of the program to the originators
and are reported in SG&A expenses. The servicing fee, which totaled
approximately $2 million for the first quarters of 2004 and 2003, compensates
TXU Business Services Company for its services as collection agent, including
maintaining the detailed accounts receivable collection records.
The March 31, 2004 balance sheet reflects $1.1 billion face amount of
trade accounts receivable of TXU Energy, TXU Gas and Oncor, reduced by $600
million of undivided interests sold by TXU Receivables Company. Funding under
the program was unchanged for the three months ended March 31, 2004. Funding
under the program for the three months ended March 31, 2003 decreased $119
million. Funding increases or decreases under the program are reflected as
operating cash flow activity in the statement of cash flows. The carrying amount
of the retained interests in the accounts receivable approximated fair value due
to the short-term nature of the collection period.
11
Activities of TXU Receivables Company for the three months ended March 31,
2004 and 2003 were as follows:
Three Months Ended March 31,
----------------------------
2004 2003
-------- -------
(millions of dollars)
Cash collections on accounts receivable...................................... $ 2,199 $2,038
Face amount of new receivables purchased..................................... (2,193) (1,803)
Discount from face amount of purchased receivables........................... 5 5
Program fees paid............................................................ (3) (3)
Servicing fees paid.......................................................... (2) (2)
Increase (decrease) in subordinated notes payable............................ (6) (116)
------- ------
TXU Corp.'s operating cash flows (provided) used under the program...... $ - $ 119
======= ======
Upon termination of the program, cash flows to TXU Corp. would be delayed
as collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or
deemed uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within TXU Energy and ERCOT for clearing customers' switching and
billing data. The billing delays have been largely resolved. Strengthened credit
and collection policies and practices have brought the ratios into consistent
compliance with the program requirement.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
12
Long-Term Debt -- At March 31, 2004 and December 31, 2003, the long-term
debt of TXU Corp. and its consolidated subsidiaries consisted of the following:
March 31, December 31,
2004 2003
---- ----
TXU Energy
----------
Pollution Control Revenue Bonds:
Brazos River Authority:
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a)....... $ 39 $ 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a)....... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)..... 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a).... 118 118
7.700% Fixed Series 1999A due April 1, 2033...................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1,
2013(a)........................................................................ 16 16
7.700% Fixed Series 1999C due March 1, 2032...................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030, remarketing date April 1, 2004(a). 121 121
4.750% Fixed Series 2001B due May 1, 2029, remarketing date November 1, 2006(a).. 19 19
5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011(a).. 274 274
1.100% Floating Series 2001D due May 1, 2033..................................... 271 271
1.110% Floating Taxable Series 2001I due December 1, 2036(b)..................... 63 63
1.120% Floating Series 2002A due May 1, 2037(b).................................. 61 61
6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013(a)... 44 44
6.300% Fixed Series 2003B due July 1, 2032....................................... 39 39
6.750% Fixed Series 2003C due October 1, 2038.................................... 72 72
5.400% Fixed Series 2003D due October 1, 2029, remarketing date October 1,
2014(a)........................................................................ 31 31
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021....................................... 51 51
5.500% Fixed Series 2001A due May 1, 2022, remarketing date November 1, 2011(a).. 91 91
5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011(a).. 107 107
5.800% Fixed Series 2003A due July 1, 2022....................................... 12 12
6.150% Fixed Series 2003B due August 1, 2022..................................... 45 45
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................ 14 14
5.000% Fixed Series 2001A due May 1, 2027, remarketing date November 1, 2006(a).. 37 37
Other:
6.875% Fixed Senior Notes - TXU Mining due August 1, 2005........................ 30 30
6.125% Fixed Senior Notes due March 15, 2008..................................... 250 250
7.000% Fixed Senior Notes due March 15, 2013(c).................................. 1,000 1,000
Capital lease obligations........................................................ 12 13
Other............................................................................ 2 8
Fair value adjustments related to interest rate swaps............................ 22 11
Unamortized discount............................................................. -- (2)
------- ------
Total TXU Energy ............................................................ 3,091 3,085
Oncor
- -----
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized discount............................................................. (26) (30)
Oncor Electric Delivery Transition Bond Company LLC (h)
- -------------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2007.............................................................. 95 103
4.030% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2010.............................................................. 122 122
4.950% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2013.............................................................. 130 130
5.420% Fixed Series 2003 Bonds due in bi-annual installments through
August 15, 2015................................................................ 145 145
------- -------
Total Oncor................................................................... 4,222 4,226
13
March 31, December 31,
2004 2003
---- ----
US Holdings
- -----------
7.170% Fixed Senior Debentures due August 1, 2007................................ 10 10
9.580% Fixed Notes due in bi-annual installments through December 4, 2019........ 70 70
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 66 67
1.910% Floating Rate Junior Subordinated Debentures, Series D due January 30,
2037(d)........................................................................ 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037....... 8 8
------- -------
Total US Holdings ........................................................... 155 156
TXU Gas
- -------
6.375% Fixed Notes due February 1, 2004.......................................... -- 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008, remarketing date
July 1, 2005 (a)............................................................... 125 125
Unamortized valuation adjustment................................................. 1 1
------- -------
Total TXU Gas ............................................................... 276 426
TXU Australia
- -------------
5.940% Floating Notes due September 21, 2007(e).................................. 169 206
5.940% Floating Notes due September 21, 2007..................................... 38 --
6.400% Floating Note, Tranche A Facility due February 26, 2009(e)................ 93 --
6.400% Floating Note, Tranche A Facility due February 26, 2009................... 1 --
6.280% Floating Note, Tranche A Facility due February 26, 2009(e)................ 75 --
6.340% Floating Note, Tranche A Facility due February 26, 2009(e)................ 113 --
6.340% Floating Note, Tranche A Facility due February 26, 2009................... 15 --
6.250% Floating Note, Tranche A Facility due February 26, 2009(e)................ 38 --
6.350% Floating Note, Tranche B Facility due February 26, 2007(e)................ 311 --
6.210% Floating Note, Tranche B Facility due February 26, 2007(e)................ 80 --
6.210% Floating Note, Tranche B Facility due February 26, 2007................... 21 --
6.350% Floating Note, Tranche B Facility due February 26, 2007................... 2 --
6.395% Floating Note, Tranche A Facility due October 26, 2004.................... -- 75
6.318% Floating Note, Tranche A Facility due October 26, 2004.................... -- 93
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 150
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 37
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 187
6.600% Floating Note, Tranche C Facility due October 26, 2004.................... -- 150
7.000% Fixed Medium Term Notes due September 22, 2005............................ 151 150
6.090% Fixed Senior Notes due December 1, 2006(g) (e)............................ 250 250
6.340% Fixed Senior Notes due December 1, 2016(g)................................ 100 100
7.290% Fixed Senior Notes due December 1, 2013(g)................................ 57 57
7.280% Fixed Senior Notes due December 1, 2013(g) (e)............................ 243 243
Fair value adjustments related to interest rate swaps............................ 22 17
------- -------
Total TXU Australia.......................................................... 1,779 1,715
TXU Corp.
- --------
6.375% Fixed Senior Notes Series B due October 1, 2004........................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008........................... 200 200
4.050% Fixed Senior Notes Series E due August 16, 2004........................... 2 2
6.375% Fixed Senior Notes Series J due June 15, 2006(c).......................... 800 800
4.750% Fixed Senior Notes Series K due November 16, 2006 remarketing date
August 16, 2004(f)............................................................. 500 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(f)............................................................. 500 500
5.800% Fixed Senior Notes Series M due May 16, 2008 remarketing date
February 16, 2006(f)........................................................... 440 440
6.000% Fixed Pinnacle Overfund Trust Debt due bi-annually through August 15, 2004 -- 91
8.820% Building Financing due bi-annually through February 11, 2022.............. 125 130
2.620% Floating Convertible Senior Notes due July 15, 2033(d).................... 525 525
Fair value adjustments related to interest rate swaps............................ 31 32
Unamortized discount............................................................. (2) (2)
------- -------
Total TXU Corp.............................................................. 3,296 3,393
------- -------
Total TXU Corp. consolidated........................................................ 12,819 13,001
Less amount due currently........................................................... 451 677
------- -------
Total long-term debt................................................................ $12,368 $12,324
======= =======
- ---------------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at March 31, 2004. These series are in a
flexible or weekly rate mode and are classified as long-term as they are
supported by long-term irrevocable letters of credit. Series in the
flexible mode will be remarketed for periods of less than 270 days.
(c) Interest rates swapped to floating on $100 million principal amount.
(d) Interest rates in effect at March 31, 2004.
(e) Interest rates fixed by swaps.
(f) Equity-linked.
(g) US Dollar denominated debt. Interest rates swapped to floating through a
cross-currency fair value hedge in Australia.
(h) These bonds are nonrecourse to Oncor.
14
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds (aggregate principal amount of $121 million) were purchased upon
mandatory tender.
Long-term borrowings under TXU Australia's credit facilities expiring in
2005 were repaid by long-term borrowings under its new credit facilities
expiring in 2007 and 2009, as discussed above. Other reductions of debt
represent repayments at maturity.
Fair Value Hedges -- In March 2004, fixed-to-variable interest rate swaps
related to $400 million of debt were settled for a gain of $18 million ($12
million in cash received as of March 31, 2004). The gain will be amortized to
offset interest expense over the remaining life of the debt. Also in March 2004,
TXU Corp. entered into interest rate swap transactions through 2006, which are
being accounted for as fair value hedges, to effectively convert $400 million of
its fixed rate notes to floating interest rates.
Transactions in April 2004 included settlement of fixed-to-variable
interest rate swaps related to $100 million of debt for a gain of $3.5 million,
which will be amortized over the remaining life of the debt, and the effective
conversion of $2.1 billion of fixed rate debt to variable rates through swaps
expiring through 2013.
5. LONG-TERM DEBT HELD BY SUBSIDIARY TRUSTS
Statutory business trusts have been established as wholly-owned financing
subsidiaries of TXU Corp. and TXU Gas. The assets of the trusts consist solely
of Junior Subordinated Debentures issued by TXU Corp. or TXU Gas, and the trusts
have issued preferred interests, as presented below:
Trust Assets (Long-Term Debt
Trust Preferred Interests of TXU Corp. or TXU Gas)
----------------------------- -----------------------------
March 31, December 31, March 31, December 31,
2004 2003 2004 2003
---------- ------------ ---------- ------------
TXU Corp.
- ---------
Capital I Trust
(9.2 million units of 7.25% Series due
2029).............................. $ 223 $ 223 $ 237 $ 237
Capital II Trust
(6.0 million units of 8.70% Series due
2034).............................. 145 145 154 154
------- ------ -------- -------
Total............................... 368 368 391 391
TXU Gas
- -------
Capital I Trust
(150 thousand units of Floating Rate
Series due 2028)................... 147 147 155 155
------- ------ -------- -------
Total................................ $ 515 $ 515 $ 546 $ 546
======= ====== ======== =======
TXU Corp. and TXU Gas, as the parent companies, own the subsidiary trusts'
common interests, which are reported in investments in the balance sheet, and
each has effectively issued a full and unconditional guarantee of its trusts'
preferred interests.
As a result of the adoption of FIN 46 in the fourth quarter of 2003, the
subsidiary trusts have been deconsolidated. TXU Corp.'s balance sheet reflects
the $546 million of long-term debt held by the trust and an investment in the
trust of $31 million, instead of the former presentation of $515 million of
preferred interests of subsidiaries.
On April 24, 2004, TXU Corp. redeemed all of the 7 1/4% Junior
Subordinated Debentures, Series A, at an amount equal to 100% of the outstanding
principal amount plus accrued and unpaid interest, for a total of $238 million.
With the proceeds, the TXU Corp. Capital I Trust redeemed all of the outstanding
7 1/4% Cumulative Trust Preferred Capital Securities due 2029 at an amount equal
to $25 per trust security plus accumulated and unpaid distributions, for a total
of $231 million.
15
6. PREFERRED SECURITIES OF SUBSIDIARIES
Preferred securities of consolidated subsidiaries consist of the
following:
March 31, December 31,
2004 2003
--------- -----------
Exchangeable preferred membership interests of TXU Energy,
net of $102 and $104 unamortized discount.............. $ 648 $ 646
Preferred stock of TXU Gas............................... 75 75
Preferred stock of US Holdings........................... 38 38
------ ------
Total.................................................... $ 761 $ 759
====== ======
Exchangeable Preferred Membership Interests of TXU Energy -- In July 2003,
TXU Energy exercised its right to exchange its $750 million 9% Exchangeable
Subordinated Notes issued in November 2002 and due November 2012 for
exchangeable preferred membership interests with identical economic and other
terms. The preferred membership interests bear distributions at the annual rate
of 9% and permit the deferral of such distributions. The preferred membership
interests may be exchanged at the option of the holders, subject to certain
restrictions, at any time for up to approximately 57 million shares of TXU Corp.
common stock at an exchange price of $13.1242 per share. The number of shares of
TXU Corp. common stock that may be issuable upon the exercise of the exchange
right is determined by dividing the aggregate liquidation value of preferred
membership interests to be exchanged by the exchange price. The exchange price
and the number of shares to be issued are subject to anti-dilution adjustments.
At issuance of the notes that were exchanged for the preferred membership
interests, TXU Corp. recognized a discount on the securities of $111 million,
with a corresponding credit to additional paid-in capital, which represented the
excess of the market value of TXU Corp. common stock on the transaction date
over the exchange price applied to the number of issuable shares. This discount
is being amortized to interest expense and related charges over the term of the
securities. As a result, the effective distribution rate on the preferred
membership interests is 11.5%. These preferred membership interests are
considered not to be mandatorily redeemable under SFAS 150 because of the
exchangeability provision. On April 26, 2004, TXU Corp. repurchased these
securities as discussed in Note 1.
Preferred Stock of TXU Gas -- At March 31, 2004, TXU Gas had 75,000 shares
of Adjustable Rate Series F Preferred Stock outstanding (2,000,000 total shares
authorized) which is entitled upon liquidation to the stated value of $1,000 per
share. The preferred stock series is the underlying preferred stock for
depositary shares that were issued to the public. Each depositary share of $25
per share, represents one-fortieth of a share of underlying preferred stock. The
dividend rate is determined quarterly, in advance, based on US Treasury rates
and was 4.50% at March 31, 2004. The preferred stock is not mandatorily
redeemable.
Preferred Stock of US Holdings -- At March 31, 2004, US Holdings had
379,000 shares of cumulative, preferred stock without par value outstanding with
dividend rates ranging from $4.00 to $5.08 per share. The preferred stock can be
redeemed at prices ranging from $101.70 per share to $112.00 per share. The
preferred stock is not mandatorily redeemable.
7. SHAREHOLDERS' EQUITY
The Board of Directors of TXU Corp., at its February 2004 meeting,
declared a quarterly dividend of $0.125 a share, payable April 1, 2004, to
shareholders of record on March 5, 2004. Future dividends may vary depending
upon TXU Corp.'s profit levels, operating cash flows and capital requirements as
well as financial and other business conditions existing at the time.
Certain debt instruments, preference, preferred and other securities of
TXU Corp. and its subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At March 31, 2004, TXU Corp. was in compliance with
these provisions. An Oncor mortgage restricts the payment of dividends to the
amount of Oncor's retained earnings.
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8. CONTINGENCIES
Request from CFTC - In October 2003, TXU Corp. received an informal
request for information from the US Commodity Futures Trading Commission (CFTC)
seeking voluntary production of information concerning disclosure of price and
volume information furnished by TXU Portfolio Management Company LP, a
subsidiary of TXU Energy, to energy industry publications. The request seeks
information for the period from January 1, 1999 to October 2003. TXU Corp. has
cooperated with the CFTC, and is in the process of completing its response to
such information request. TXU Corp. believes that TXU Portfolio Management
Company LP has not engaged in any reporting of price or volume information that
would in any way justify any action by the CFTC.
In a similar, but unrelated matter, on April 13, 2004, the CFTC issued a
subpoena requiring TXU Corp. to produce information about storage of natural
gas, including TXU Corp.'s weekly and monthly storage report submissions to the
Energy Information Administration. This request seeks information for the period
of October 31, 2003 through January 2, 2004. TXU Corp. intends to cooperate with
the CFTC, and believes that TXU Gas and TXU Fuel have not engaged in any
activity that would justify action by the CFTC.
Guarantees -- TXU Corp. has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Project development guarantees -- In 1990, US Holdings repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. US Holdings is making principal and interest payments to the
co-op in an amount sufficient for the co-op to make payments on its
indebtedness. US Holdings guaranteed the co-op's payments, and in the event that
the co-op fails to make its payments on the indebtedness, the US government
would assume the co-op's rights under the agreement, and such payments would
then be owed directly by US Holdings. At March 31, 2004, the balance of the
indebtedness was $136 million with maturities of principal and interest
extending to December 2021. The indebtedness is secured by a lien on the
purchased facilities.
Residual value guarantees in operating leases -- TXU Corp. is the lessee
under various operating leases, entered into prior to January 1, 2003 that
obligate it to guarantee the residual values of the leased facilities. At March
31, 2004, the aggregate maximum amount of residual values guaranteed was
approximately $277 million with an estimated residual recovery of approximately
$165 million. The average life of the lease portfolio is approximately nine
years.
Shared saving guarantees -- As part of the operations of the strategic
retail services business, which TXU Energy intends to sell (see Note 3), TXU
Energy has guaranteed that certain customers will realize specified annual
savings resulting from energy management services it has provided. In aggregate,
the average annual savings have exceeded the annual savings guaranteed. The
maximum potential annual payout is approximately $8 million and the maximum
total potential payout is approximately $56 million. No guarantees were issued
during the three months ended March 31, 2004 that required recording a
liability. The fair value of guarantees recorded as of March 31, 2004 was $1.8
million with a maximum potential payout of $42 million. The average remaining
life of the portfolio is approximately nine years. These guarantees will be
transferred or eliminated as part of expected transactions for the sale of the
strategic retail services business.
Letters of credit -- TXU Energy has entered into various agreements that
require letters of credit for financial assurance purposes. Approximately $403
million of letters of credit were outstanding at March 31, 2004 to support
existing floating rate pollution control revenue bond debt of approximately $395
million. The letters of credit are available to fund the payment of such debt
obligations. These letters of credit have expiration dates through 2008.
US Holdings has outstanding letters of credit in the amount of $12 million
for miscellaneous credit support requirements. Although the average life of the
letters of credit is for approximately one year, the obligation to provide
guarantees is ongoing.
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TXU Energy has outstanding letters of credit in the amount of $33 million
to support hedging and risk management margin requirements in the normal course
of business. As of March 31, 2004, approximately 82% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the next six years.
TXU Gas has an outstanding letter of credit in the amount of $14 million
issued in connection with its state-wide rate case. The letter of credit has an
expiration date of December 31, 2004.
TXU Corp. has an outstanding letter of credit in the amount of $10 million
as support for a subordinated loan to the SEA Gas joint venture pipeline
project in Australia. The obligation expires on January 31, 2005.
TXU Australia has outstanding letters of credit in the amount of
approximately $108 million, of which $92 million is to allow for participation
in the electricity and gas spot markets, $14 million is to provide credit
support for the shipping of gas and $2 million is for miscellaneous credit
support requirements. Although the average life of these guarantees is for
approximately one year, the obligation to provide guarantees is ongoing based
on TXU Australia's continued participation in the electricity and gas spot
markets and its ability to ship gas on the SEA Gas pipeline.
Surety bonds -- TXU Corp. has outstanding surety bonds of approximately
$53 million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
Other -- US Holdings has entered into contracts with public agencies to
purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $12 million at March 31, 2004,
and interest on bonds issued by the agencies to finance the reservoirs from
which the water is supplied. The bonds mature at various dates through 2011 and
have interest rates ranging from 5.50% to 7%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US Holdings
is obligated to pay certain variable costs of operating and maintaining the
reservoirs. US Holdings has assigned to a municipality all its contract rights
and obligations in connection with $8 million remaining principal amount of
bonds at March 31, 2004, issued for similar purposes, which had previously been
guaranteed by US Holdings. US Holdings is, however, contingently liable in the
event of default by the municipality.
In 1992, a discontinued engineering and construction business of TXU Gas
completed construction of a plant, the performance of which is warranted by TXU
Gas through 2008. The maximum contingent liability under the guarantee is
approximately $106 million. No claims have been asserted under the guarantee and
none are anticipated.
Income Tax Contingencies -- On its US federal income tax return for
calendar year 2002, TXU Corp. claimed a deduction related to the worthlessness
of TXU Corp.'s investment in TXU Europe, the tax benefit of which is estimated
to be $983 million (assuming the deduction is sustained on audit). While TXU
Corp. believes that its tax reporting for the TXU Europe write-off was proper,
there is a risk that the IRS could challenge TXU Corp.'s position regarding this
deduction. Accordingly, TXU Corp. has not recognized in book income any tax
benefit for the TXU Europe deduction. In the first quarter of 2003, TXU Corp.
received a cash refund of $527 million related to the deduction, which may be
repaid in the future, with interest, should TXU Corp. not prevail in its
position. This issue is currently under examination by the IRS. (Also see Note
3.)
Legal Proceedings -- On October 9, 2003, a lawsuit was filed in the
Supreme Court of the State of New York, County of New York, against TXU Corp.,
by purported beneficial owners of approximately 42% of certain TXU Corp.
equity-linked securities issued in October 2001. The common stock purchase
contracts that are a part of these securities require the holders to purchase
TXU Corp. common stock on specified dates in 2004 and 2005 at prices that are
above the current market price of TXU Corp. common stock. The plaintiffs seek a
declaratory judgment that (a) a termination event has occurred under the common
stock purchase contract as a result of the administration of TXU Europe and,
therefore, that plaintiffs are not required to purchase TXU Corp. common stock
pursuant to the contracts and (b) an event of default has occurred under the
indenture for the senior notes that constitute a part of these equity linked
18
securities. Plaintiffs also seek an injunction requiring TXU Corp. to give
notice that a termination event under the common stock purchase contract has
occurred. TXU Corp. disputes plaintiffs' allegations and believes that
plaintiffs' interpretation of the common stock purchase contract and indenture
is inconsistent with the clear language of these agreements and is contrary to
applicable law. On March 15, 2004, the court granted TXU Corp.'s Motion to
Dismiss and entered a judgment dismissing the litigation. The plaintiffs
appealed the dismissal of the lawsuit. On May 7, 2004, TXU Corp. announced it
had reached an agreement with the plaintiffs, under which TXU Corp. repurchased
the $423 million principal amount of the securities for approximately $404
million, that will result in the dismissal of this lawsuit.
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 in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers have filed motions for leave to intervene in the action alleging
claims substantially identical to TCE's. In addition, approximately 25 purported
former customers of TCE have filed a motion to intervene in the action alleging
claims substantially identical to TCE's, both on their own behalf and on behalf
of a putative class of all former customers of TCE. A hearing on these motions
is scheduled for May 20, 2004. TXU Corp. believes that it has not committed any
violation of the antitrust laws and the Commission's investigation of the market
conditions in late February 2003 has not resulted in any findings adverse to TXU
Energy. Accordingly, TXU Corp. believes that TCE's and the interveners' claims
against TXU Energy and its subsidiary companies are without merit and TXU Energy
and its subsidiaries intend to vigorously defend the lawsuit. TXU Corp. is
unable to estimate any possible loss or predict the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., TXU Energy and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management
intend to vigorously defend the litigation. While TXU Corp., TXU Energy and TXU
Portfolio Management dispute the plaintiff's claims, TXU Corp. is unable to
predict the outcome of this litigation or the possible loss in the event of an
adverse judgment.
In November 2002 and February and March 2003, three lawsuits were filed in
the United States District Court for the Northern District of Texas asserting
claims under the Employee Retirement Income Security Act (ERISA) on behalf of a
putative class of participants in and beneficiaries of various employee benefit
plans of TXU Corp. These ERISA lawsuits have been consolidated, and a
consolidated complaint was filed in February 2004 against TXU Corp., the
directors of TXU Corp., Erle Nye, Peter B. Tinkham, Kirk R. Oliver, Biggs C.
Porter, Diane J. Kubin, Barbara B. Curry and Richard Wistrand. On February 10,
2004, the plaintiffs filed its motion for and memorandum in support of class
certification. Discovery is ongoing. The plaintiffs seek to represent a class of
participants in such employee benefit plans during the period between April 26,
2001 and July 11, 2002. While TXU Corp. believes the claims are without merit
and intends to vigorously defend the lawsuit, it is unable to estimate any
possible loss or predict the outcome of this consolidated action.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This case was transferred to the Beaumont
Division of the Eastern District of Texas and subsequently transferred on March
24, 2004 to the Northern District of Texas, Dallas Division. 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 which is pending before the
court. TXU Corp. believes that the plaintiff lacks standing to assert any
19
antitrust claims against TXU Corp. or TXU Portfolio Management, and that
defendants have not violated antitrust laws or other laws as claimed by the
plaintiff. Therefore, TXU Corp. believes that plaintiff's claims are without
merit and plans to vigorously defend the lawsuit. TXU Corp. is unable to
estimate any possible loss or predict the outcome of this action.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas, against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law, and this case is currently stayed. Therefore,
TXU Corp. is unable to estimate any possible loss or predict the outcome of this
action.
In October, November and December 2002 and January 2003, a number of
lawsuits were filed in, removed to or transferred to the United States District
Court for the Northern District of Texas against TXU Corp., and certain of its
officers. These lawsuits have all been consolidated and lead plaintiffs have
been appointed by the Court. On July 21, 2003, the lead plaintiffs filed an
amended consolidated complaint naming Erle Nye, Michael J. McNally, V.J. Horgan
and Brian N. Dickie and directors Derek C. Bonham, J.S. Farrington, William M.
Griffin, Kerney Laday, Jack E. Little, Margaret N. Maxey, J.E. Oesterreicher,
Herbert H. Richardson and Charles R. Perry, as defendants. The plaintiffs seek
to represent classes of certain purchasers of TXU Corp. common stock and
equity-linked debt securities during a proposed class period from April 26, 2001
to October 11, 2002. No class or classes have been certified. The complaint
alleges violations of the provisions of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended
(Securities Act), relating to alleged materially false and misleading
statements, including statements in prospectuses related to the offering by TXU
Corp. of its equity-linked debt securities and common stock in May and June
2002. On September 24, 2003, TXU Corp. and its officer and director defendants
filed a motion to dismiss to plaintiffs' Amended Complaint. The plaintiffs have
filed their response to the motion and the defendants have filed their reply
brief, however, the court has not yet ruled on the motion to dismiss. The named
individual defendants are current or former officers and/or directors of TXU
Corp. While TXU Corp. believes the claims are without merit and intends to
vigorously defend this lawsuit, it is unable to estimate any possible loss or
predict the outcome of this action.
Other Contingencies -- In October 2003, the former directors and officers
of TXU Europe Limited and subsidiaries that are now in administration
(collectively TXU Europe), who include current and former officers of TXU Corp.
and subsidiary companies, received notices from certain creditors and the
administrators of TXU Europe of various claims or potential claims relating to
losses incurred by creditors, including claims for alleged omissions from a
securities offering document and alleged breaches by directors of their English
law duties as directors of these companies in failing to minimize the potential
losses to the creditors of TXU Europe. Under the terms of the indemnification
agreements and bylaw and charter provisions that provide for indemnification of
corporate officers and directors, TXU Corp. or one of its subsidiaries will be
obligated to indemnify these persons from these and similar claims, unless it is
determined that the corporate officer's acts were committed in bad faith, were
the result of active and deliberate dishonesty or that the corporate officer
personally gained a financial profit to which he was not legally entitled.
Similar claims have been asserted directly against TXU Corp., as well. TXU Corp.
believes that these claims are without merit and intends to vigorously defend
any such claims if they are ultimately asserted.
General -- In addition to the above, TXU Corp. and its US and Australian
subsidiaries are involved in various other legal and administrative proceedings
in the normal course of business the ultimate resolution of which, in the
opinion of each, should not have a material effect upon their financial
position, results of operations or cash flows.
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9. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Net pension and other postretirement benefit costs recognized during the
three months ended March 31, 2004 and 2003 are comprised of the following: