Back to GetFilings.com
===============================================================================
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 JUNE 30, 2004
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
---------------------
Commission File Number 1-12833
TXU Corp.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2669310
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (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 August 4, 2004: 296,809,603 shares, without
par value.
===============================================================================
TABLE OF CONTENTS
- ---------------------------------------------------------------------------------------------------------------
PAGE
-----
GLOSSARY........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2004 and 2003................................ 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2004 and 2003............................... 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2004 and 2003.......................................... 3
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003.............................................. 4
Notes to Financial Statements.................................................... 5
Report of Independent Registered Public Accounting Firm.......................... 30
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 68
Item 4. Controls and Procedures.......................................................... 70
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 70
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. 71
Item 4. Submission of Matters to a Vote of Security Holders.............................. 72
Item 6. Exhibits and Reports on Form 8-K ................................................ 72
SIGNATURE.......................................................................................... 75
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 retail 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"
Electric Delivery.............................. refers to TXU Electric Delivery Company (formerly Oncor
Electric Delivery Company), a subsidiary of US Holdings, or
Electric Delivery and its consolidated bankruptcy remote
financing subsidiary, TXU Electric Delivery Transition Bond
Company LLC (formerly Oncor Electric Delivery Transition
Bond Company LLC), depending on context
Energy......................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
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 retail competition on January
1, 2002
IRS............................................ Internal Revenue Service
ii
Moody's........................................ Moody's Investors Services, Inc.
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
Pinnacle....................................... Pinnacle One Partners, L.P., formerly 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, formerly 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, formerly a subsidiary
of Pinnacle
TXU Corp....................................... refers to TXU Corp., a holding company, 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 Energy
iii
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of 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 Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars, except per share
amounts)
Operating revenues................................................. $2,296 $2,149 $4,421 $4,064
Costs and expenses:
Cost of energy sold and delivery fees........................... 1,013 936 1,920 1,777
Operating costs................................................. 379 336 719 688
Depreciation and amortization................................... 178 167 369 352
Selling, general and administrative expenses.................... 295 207 511 407
Franchise and revenue-based taxes............................... 86 92 171 188
Other income.................................................... (16) (18) (25) (27)
Other deductions................................................ 438 5 457 23
Interest income................................................. (2) (7) (6) (16)
Interest expense and related charges............................ 174 201 358 403
------ ------ ------ ------
Total costs and expenses.................................... 2,545 1,919 4,474 3,795
------ ------ ------ ------
Income (loss) from continuing operations before income taxes,
extraordinary gain and cumulative effect of changes in
accounting principles............................................ (249) 230 (53) 269
Income tax expense (benefit)....................................... (157) 70 (94) 75
------ ------ ------ ------
Income (loss) from continuing operations before extraordinary gain
and cumulative effect of changes in accounting principles........ (92) 160 41 194
Income (loss) from discontinued operations, net of tax benefit
(Note 3).......................................................... 330 (49) 380 20
Extraordinary gain, net of tax (Note 4)............................ 16 -- 16 --
Cumulative effect of changes in accounting principles, net of tax
benefit (Note 2)................................................. -- -- -- (58)
------ ------ ------ ------
Net income ........................................................ $ 254 $ 111 $ 437 $ 156
Exchangeable preferred membership interest buyback premium (Note 1) 849 -- 849 --
Preference stock dividends ........................................ 5 6 11 11
------ ------ ------ ------
Net income (loss) available to common shareholders................. $ (600) $ 105 $ (423) $ 145
Average shares of common stock outstanding (millions):
Basic........................................................... 320 321 322 321
Diluted......................................................... 320 378 322 378
Per share of common stock:
Basic earnings:
Income (loss) from continuing operations before extraordinary
gain and cumulative effect of changes in
accounting principles....................................... $ (0.29) $ 0.50 $ 0.13 $0.60
Income (loss) from discontinued operations, net of tax effect. 1.03 (0.15) 1.18 0.06
Extraordinary gain, net of tax................................ 0.05 -- 0.05 --
Cumulative effect of changes in accounting principles......... -- -- -- (0.18)
Exchangeable preferred membership interest buyback premium.... (2.65) -- (2.64) --
Preference stock dividends.................................... (0.01) (0.02) (0.04) (0.03)
Net income (loss) available to common shareholders............ (1.87) 0.33 (1.32) 0.45
Diluted earnings:
Income (loss) from continuing operations before extraordinary
gain and cumulative effect of changes in accounting principles $ (0.29) $ 0.45 $ 0.13 $0.58
Income (loss) from discontinued operations, net of tax effect. 1.03 (0.13) 1.18 0.05
Extraordinary gain, net of tax................................ 0.05 -- 0.05 --
Cumulative effect of changes in accounting principles, net of
tax benefit........................................................ -- -- -- (0.15)
Exchangeable preferred membership interest buyback premium.... (2.65) -- (2.64) --
Preference stock dividends.................................... (0.01) (0.01) (0.04) (0.03)
Net income (loss) available to common shareholders............ (1.87) 0.31 (1.32) 0.45
Dividends declared............................................. 0.125 0.125 0.250 0.250
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Components related to continuing operations:
Income (loss) from continuing operations before
extraordinary gain and cumulative effect of
changes in accounting principles................................ $(92) $ 160 $ 41 $ 194
Other comprehensive income (loss), net of tax effects:
Cash flow hedges:
Net change in fair value of derivatives (net of tax
benefit of $2, $23, $36 and $71)............................ (1) (43) (63) (132)
Amounts realized in earnings during the period
(net of tax (expense) benefit of $2, $(25), $(3) and $59).. (4) 46 8 109
---- ----- ----- -----
Total.................................................... (5) 3 (55) (23)
---- ----- ----- -----
Comprehensive income (loss) related to continuing
operations...................................................... (97) 163 (14) 171
Components related to discontinued operations:
Income (loss) from discontinued operations, net of tax.......... 330 (49) 380 20
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustment ........................ (111) 106 (104) 161
Minimum pension liability adjustments (net of tax
(expense) benefit of $(3) and $--, $(3) and $3).............. 5 -- 6 (6)
Cash flow hedges:
Net change in fair value of derivatives (net
of tax (expense) benefit of $(7), $14, $--
and $22)................................................... 17 (33) (2) (52)
Amounts realized in earnings during the period
(net of tax (expense) benefit of $9, $(11), $6 and
$(19))..................................................... (21) 26 (13) 44
---- ----- ----- -----
Total.................................................... (110) 99 (113) 147
---- ----- ----- -----
Comprehensive income (loss) related to discontinued
operations...................................................... 220 (50) 267 167
Extraordinary gain, net of tax....................................... 16 -- 16 --
Cumulative effect of changes in accounting principles, net of tax
benefit............................................................ -- -- -- (58)
---- ----- ----- -----
Comprehensive income................................................. $139 $ 213 $ 269 $ 280
---- ----- ----- -----
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------
2004 2003
------ ------
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before extraordinary gain and cumulative
effect of changes in accounting principles.................................... $ 41 $ 194
Adjustments to reconcile income from continuing operations before
extraordinary gain and cumulative effect of changes in accounting
principles to cash provided by operating activities:
Depreciation and amortization ............................................... 400 389
Deferred income taxes and investment tax credits - net ...................... (143) 55
Loss on early extinguishment of debt......................................... 49 --
Asset writedown charges...................................................... 189 --
Net (gain) loss from sale of assets......................................... 15 (21)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 31 (47)
Net equity (income) loss from unconsolidated affiliates and joint ventures... (1) 17
Reduction in regulatory liability............................................ (1) (78)
Changes in operating assets and liabilities..................................... (93) 729
---- ------
Cash provided by operating activities.................................... 487 1,238
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 790 1,293
Common stock................................................................. 18 8
Retirements/repurchases of securities:
Long-term debt held by subsidiary trusts..................................... (237) --
Equity-linked debt securities................................................ (427) --
Other long-term debt......................................................... (1,069) (664)
Exchangeable preferred membership interests.................................. (750) --
Preferred securities of subsidiary, subject to mandatory redemption.......... -- (4)
Common stock................................................................. (978) --
Change in notes payable:
Banks........................................................................ 2,675 (2,303)
Cash dividends paid:
Common stock................................................................. (80) (80)
Preference stock............................................................. (11) (11)
Premium paid for redemption of exchangeable preferred membership interests...... (1,093) --
Redemption deposit applied to debt retirements.................................. -- 210
Debt premium, discount, financing and other reacquisition expenses.............. 3 (52)
------ ------
Cash used in financing activities........................................ (1,159) (1,603)
Cash flows - investing activities:
Capital expenditures............................................................ (355) (358)
Disposition of businesses....................................................... 991 15
Acquisition of telecommunications partner's interest............................ -- (150)
Nuclear fuel.................................................................... (47) (35)
Other........................................................................... 19 5
----- -----
Cash provided by (used in) investing activities.......................... 608 (523)
----- -----
Cash contributions from (to) discontinued operations............................. (74) 65
----- -----
Net change in cash and cash equivalents........................................... (138) (823)
Cash and cash equivalents - beginning balance..................................... 829 1,514
----- ------
Cash and cash equivalents - ending balance........................................ $ 691 $ 691
===== ======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
----------- -------------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents..................................................... $ 691 $ 829
Restricted cash............................................................... 23 12
Accounts receivable-- trade................................................... 1,232 1,108
Inventories................................................................... 343 419
Commodity contract assets..................................................... 596 548
Assets of telecommunications holding company.................................. -- 110
Other current assets.......................................................... 466 298
------- -------
Total current assets................................................... 3,351 3,324
Investments:
Restricted cash............................................................... 584 582
Other investments............................................................. 630 632
Property, plant and equipment-- net............................................. 16,589 16,803
Goodwill........................................................................ 542 558
Regulatory assets-- net........................................................ 1,907 1,872
Commodity contract assets....................................................... 142 109
Cash flow hedge and other derivative assets..................................... 34 88
Other noncurrent assets......................................................... 244 218
Assets held for sale............................................................ 6,079 7,111
------- -------
Total assets........................................................... $30,102 $31,297
LIABILITIES, PREFERRED SECURITIES OF SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable-- banks......................................................... $ 2,675 $ --
Long-term debt due currently.................................................. 534 678
Accounts payable-- trade...................................................... 1,051 784
Commodity contract liabilities................................................ 550 502
Liabilities of telecommunications holding company............................. -- 603
Other current liabilities..................................................... 1,482 1,191
------- -------
Total current liabilities.............................................. 6,292 3,758
Accumulated deferred income taxes............................................... 2,407 3,620
Investment tax credits.......................................................... 417 430
Commodity contract liabilities.................................................. 101 47
Cash flow hedge and other derivative liabilities................................ 349 240
Long-term debt held by subsidiary trusts........................................ 309 546
All other long-term debt, less amounts due currently............................ 10,463 10,608
Other noncurrent liabilities and deferred credits............................... 2,675 2,403
Liabilities held for sale....................................................... 2,620 2,967
------- -------
Total liabilities...................................................... 25,633 24,619
Preferred securities of subsidiaries (Note 6)................................... 113 759
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: 297,100,503 and 323,883,092............................ 60 48
Additional paid-in capital................................................. 6,343 8,097
Retained deficit........................................................... (2,151) (2,498)
Accumulated other comprehensive loss....................................... (196) (28)
------- -------
Total common stock equity................................................. 4,056 5,619
------- -------
Total shareholders' equity.............................................. 4,356 5,919
------- -------
Total liabilities, preferred securities of subsidiaries and
shareholders' equity................................................. $30,102 $31,297
======= =======
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. is a holding company that conducts its
operations through US Holdings and TXU Gas. The TXU Gas business is held for
sale. US Holdings is also a holding company that conducts its operations through
Energy and Electric Delivery. Energy engages in power production (electricity
generation), retail and wholesale sales of electricity and natural gas, and
commodity hedging and risk management activities. Electric Delivery engages in
regulated electricity transmission and distribution operations.
Strategic Initiatives and Other Actions - 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 being 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; and
o Non-core business activities.
As discussed immediately below, the effects of the implementation of the
strategic initiatives as well as other actions taken to date have resulted in
total charges of $428 million ($285 million after-tax) in the second quarter of
2004 and $445 million ($296 million after-tax) year-to-date, reported in other
deductions, related to asset writedowns, employee severance, debt extinguishment
losses and litigation. In addition, TXU Corp. has incurred consulting and
professional fees related to the strategic initiatives totaling $23 million ($15
million after-tax) in the second quarter of 2004, reported largely in SG&A
expenses, and nonrecurring contractual executive compensation expense of $38
million in the second quarter and $52 million year-to-date (both without tax
benefit), also reported in SG&A expenses. Finally, a $75 million income tax
credit was recorded to recognize a portion of the tax benefit arising from the
TXU Europe write-off.
Charges recorded in the three-month and six-month periods ended June 30,
2004 and 2003 reported in other deductions are detailed in Note 11.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, TXU Corp. entered into a services agreement with a
subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini), a
new company initially providing business process support services to TXU Corp.,
but immediately implementing a plan to offer similar services to other utility
companies. Under the ten-year agreement, over 2,500 employees transferred from
subsidiaries of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base
support services performed by Capgemini for a fixed fee include information
technology, customer call center, billing, human resources, supply chain and
certain accounting activities.
TXU Corp. received, a 2.9% limited partnership interest in Capgemini in
exchange for the asset license described below. TXU Corp. has the right to sell
all its interest in the partnership to Cap Gemini America Inc. for $200 million,
plus TXU Corp.'s share of Capgemini's undistributed earnings, upon expiration of
the agreement, or earlier upon the occurrence of certain unexpected events. Cap
Gemini North America Inc. has the right to purchase TXU Corp.'s 2.9% limited
partnership interest in Capgemini under the same terms and conditions. The
partnership interest has been recorded at an initial value of $2.9 million.
5
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use TXU Corp.'s information
technology assets, consisting primarily of capitalized software. A portion of
the software was in development and had not yet been placed in service by TXU
Corp. As a result of outsourcing its information technology activities, TXU
Corp. no longer intends to develop the majority of these projects and from
TXU's perspective the software is abandoned. The agreements with Capgemini do
not require that any software in development be completed and placed in service.
Consequently, the previously capitalized balance for these software projects was
written off in the second quarter of 2004, resulting in a charge of $110 million
($72 million after-tax), reported in other deductions. The ten-year term of the
asset license agreement establishes the useful life of the remaining assets,
totaling $255 million, and depreciation and amortization for the assets were
revised accordingly as of the contribution date.
Subject to certain terms and conditions, Cap Gemini North American, Inc.
and its parent Cap Gemini S.A., have guaranteed the performance and payment
obligations of Capgemini under the service agreements, as well as the payment of
$200 million in connection with TXU Corp.'s right to sell its partnership
interest to Cap Gemini North America, Inc. upon expiration of the arrangement.
Also as part of the agreements, TXU Corp. agreed to indemnify Capgemini
for severance costs incurred by Capgemini for former TXU Corp. employees
terminated within 18 months of their transfer to Capgemini. Accordingly, TXU
Corp. recorded a $40 million ($26 million after-tax) charge for severance
expense in the second quarter of 2004, which represents a reasonable estimate of
the indemnity and is reported in other deductions. In addition, TXU Corp.
committed to pay up to $25 million for costs associated with transitioning the
outsourced activities to Capgemini. The transition costs are expected to be
recorded by TXU Corp. during the remainder of 2004.
The transfer of employees to Capgemini triggered a curtailment with
respect to TXU Corp.'s pension and other post-employment benefit plans. In the
second quarter of 2004, TXU Corp. recorded a net pre-tax curtailment charge of
$3 million, reported in other deductions, related to these plans.
On July 1, 2004, TXU Corp. loaned Capgemini $25 million for working
capital purposes pursuant to a promissory note that bears interest at a
market-based annual rate of 4% and matures on July 1, 2019.
Sale of TXU Australia
---------------------
On July 30, 2004, TXU Corp. completed the sale of TXU Australia to
Singapore Power Ltd. for $3.6 billion, including $1.7 billion of assumed debt
and $1.9 billion in cash. The intent to sell the business had been previously
disclosed. The pre-tax gain related to the sale is approximately $375 million.
The transaction was cleared by the Australian Competition and Consumer
Commission on July 20, 2004. The results of TXU Australia are reported as
discontinued operations as discussed in Note 3.
Sale of TXU Fuel Company
------------------------
On June 2, 2004, TXU Corp. completed the sale of the assets of TXU Fuel
Company, the gas transportation subsidiary of Energy, to Energy Transfer
Partners, L.P. for $500 million in cash. The intent to sell the business had
been previously disclosed. The assets of TXU Fuel Company consisted of
approximately 1,900 miles of intrastate pipeline and a total system capacity of
1.3 Bcf/day. As part of the transaction, Energy entered into a market-price
based transportation agreement with the new owner to transport gas to Energy's
generation plants. Because of the continuing involvement in the business through
the transportation agreement, the pre-tax gain related to the sale of $377
million will be recognized over the eight-year life of the transportation
agreement and the business has not been accounted for as a discontinued
operation. The pre-tax gain is net of $16 million of Energy goodwill allocated
to TXU Fuel Company.
Sale of TXU Gas
---------------
On June 17, 2004, TXU Corp. announced that TXU Gas signed a definitive
agreement with Atmos Energy Corporation (Atmos) pursuant to which Atmos will
acquire the operations of TXU Gas for $1.925 billion in cash. The intent to sell
the business had been previously disclosed. The transaction is expected to close
by the end of the year, subject to the satisfaction of customary closing
conditions and Atmos obtaining limited state regulatory approvals. The results
of TXU Gas are reported as discontinued operations as discussed in Note 3.
6
Recognition of Income Tax Benefits
----------------------------------
On its US federal income tax return for calendar year 2002, TXU Corp.
claimed an ordinary loss 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). Due to a number of
uncertainties regarding the proper tax treatment of the worthlessness loss, no
portion of the tax benefit related to TXU Corp.'s 2002 write-off of its
investment in TXU Europe was recognized in income in prior periods. As discussed
immediately below, $711 million of the tax benefit was recognized in the second
quarter of 2004.
In June 2004, the IRS issued a preliminary notice of proposed adjustment
proposing to disallow the 2002 worthlessness deduction and treat the
worthlessness as a capital loss (deductible only against capital gains).
Accordingly, in the second quarter of 2004, TXU Corp. recorded a tax benefit in
income of $711 million related to the utilization of a portion of the TXU Europe
worthlessness deduction. The tax benefit recognized reflects utilization of the
capital loss deduction against capital gains reported for 2002 and the 1999-2001
carryback periods and the capital gains on the 2004 sales of the TXU Australia,
TXU Fuel Company and telecommunications businesses. The benefit recognized also
included $213 million for certain items related to TXU Europe expected to be
sustained as ordinary deductions as a result of the preliminary notice.
Benefits arising from the resolution of uncertainty regarding utilization
of deductions in the year of the TXU Europe write-off or in a prior year are
reported in discontinued operations. Benefits arising from resolution of
uncertainty regarding utilization of deductions in subsequent years are
classified in the same manner as the source of the income resulting in the
recognition of the benefits. Accordingly, of the total $711 million benefit, $75
million was reported in continuing operations as this amount relates to the
capital gain arising from the sale of TXU Fuel Company, the historical
operations of which have been classified as continuing operations. Additional
tax benefits may be recognized in future periods to the extent capital gains are
realized.
See Note 8 for discussion of income tax contingencies related to TXU
Europe and other matters.
Generation Facility Closures and Inventory Write-Down
-----------------------------------------------------
In March 2004, Energy announced the planned permanent retirement,
completed in the second quarter of 2004, of eight gas-fired operating units due
to electric industry market conditions in Texas. Energy also temporarily closed
four other gas-fired units and placed them under evaluation for retirement. The
12 units represent a total of 1,471 MW, or more than 13%, of 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 1950's. 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 of 2004, reported in other
deductions, for production employee severance costs ($7 million) and impairments
related to the various facility closures ($1 million).
As part of Energy's review of its generation asset portfolio, during the
second quarter of 2004, Energy completed a review of its spare parts and
equipment inventory to determine the appropriate level of such inventory. The
review included nuclear, coal and gas-fired generation-related facilities. As a
result of this review, Energy recorded a charge of $79 million ($51 million
after-tax), reported in other deductions, to reflect excess inventory on hand
and to write down carrying values to scrap values.
Impairment of New Jersey Generation Facility
--------------------------------------------
In the second quarter of 2004, Energy initiated a plan to sell the
Pedricktown, New Jersey 122 MW power production facility and exit the related
power supply and gas transportation agreements. Accordingly, Energy recorded an
impairment charge of $26 million ($17 million after-tax) to write down the
facility to estimated fair market value. The results of the business are
reported in discontinued operations as discussed in Note 3.
7
Organizational Realignment and Headcount Reductions
---------------------------------------------------
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, TXU Corp. recorded severance charges
totaling $53 million ($34 million after-tax), reported in other deductions.
Debt and Capital Management Program
-----------------------------------
In April 2004, TXU Corp. repurchased Energy's exchangeable preferred
membership interests with a liquidation amount of $750 million for $1.85 billion
(including transaction costs). The excess of the purchase price over the
carrying value of the securities, net of $384 million in income tax benefits
recorded as a deferred tax asset, was recorded as a charge to additional paid-in
capital in the amount of $849 million. The carrying value of the securities was
$617 million, which is the liquidation amount of $750 million net of $102
million in unamortized discount and $31 million in unamortized debt issuance
costs, both recorded at the time of issuance of the securities in November 2002.
The charge to additional paid-in capital is accounted for in a manner similar to
TXU Corp.'s preference share dividends, resulting in a reduction in net income
available to common shareholders.
In the second quarter of 2004, TXU Corp. repurchased $427 million carrying
amount of equity-linked debt securities for $404 million. The repurchase was in
connection with a settlement of related litigation and resulted in total charges
of $34 million ($28 million after-tax), reported in other deductions,
essentially representing the premium for the debt component of the securities
and an additional repurchase premium. The repurchase also resulted in a credit
to additional paid-in capital of $57 million, which represented the holder's
out-of-the-money fair market value of the related equity purchase contracts. An
additional credit to additional paid-in capital of $18 million was recorded to
reverse the remaining liability for future contract adjustment payments to
holders of the securities. At the time of issuance of the securities, TXU Corp.
had recorded a liability for the present value of the contract adjustment
payments with an offsetting reduction to common stock equity.
On June 30, 2004, TXU Corp. repurchased 20 million shares of its
outstanding common stock through an accelerated share repurchase agreement at an
initial price of $39.86 per share. The 20 million shares repurchased under the
program are subject to a future contingent purchase price adjustment based on
the volume-weighted average price during the actual repurchase period by the
broker-dealer that executed the repurchase transaction.
Also in the second quarter of 2004, TXU Corp. repurchased at par $231
million principal amount of 7.25% notes held by subsidiary trusts and $118
million principal amount of 6.375% senior notes for $125 million. These
transactions resulted in losses on retirement of debt totaling $15 million ($10
million after-tax), reported in other deductions.
TXU Corp. also repurchased approximately $179 million of its equity
securities in open market purchases during the second quarter of 2004 and $193
million year-to-date. Shares purchased on the open market totaled 4.9 million in
the second quarter of 2004 and 5.4 million year-to-date.
See Notes 4, 5, and 6 for further detail of debt issuances and
retirements, financing arrangements and debt held by unconsolidated subsidiary
trusts.
Litigation Accrual
------------------
During the second quarter of 2004, management assessed the progress and
status of matters in litigation as described in Note 8 and recorded an accrual
of $100 million ($65 million after-tax), reported in other deductions, for the
expected resolution of certain cases.
8
Discontinued Businesses - Note 3 presents detailed information regarding
the discontinued TXU Australia, TXU Gas and New Jersey generation operations, as
well as previously disclosed discontinued businesses. 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.
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 and the
presentation of certain components as discontinued. 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.
Certain reclassifications have been made to conform prior period data to
the current period presentation. All dollar amounts in the financial statements
and tables in the notes, except per share amounts, are stated in millions of
dollars unless otherwise indicated.
Depreciation of Energy Production Facilities -- Effective January 1, 2004,
the estimates of the depreciable lives of lignite-fired generation facilities
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
and $22 million ($8 million and $14 million after-tax) in the three and six
months, respectively, ended June 30, 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) in the six months ended June 30, 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 six months of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. TXU Corp. is accounting for the
effects of the Medicare Act in accordance with FASB Staff Position 106-2,
For the three and six months ended June 30, 2004, the effect of adoption of the
Medicare Act was a reduction of approximately $7 million and $14 million,
respectively, in TXU Corp.'s postretirement benefit costs.
Extraordinary gain -- An extraordinary gain of $16 million (net of tax of
$9 million) in 2004 represents an increase in the carrying value of Electric
Delivery's regulatory asset subject to securitization. The second and final
tranche of the securitization bonds was issued in June 2004. The increase in the
related regulatory asset is due to the effect of higher interest rates on the
bonds and therefore increased amounts to be recovered from REPs through delivery
fee surcharges to service the bonds.
9
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. The exchangeable preferred membership interests in
Energy were anti-dilutive for the period they were outstanding in 2004, prior to
TXU Corp.'s repurchase of these securities. However, the premium paid to buy
back these securities reduced basic and diluted earnings per share available for
common stock by $2.64 and $2.65 for the three and six months ended June 30,
2004, respectively. 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 million more shares for each of the three and six months ended June
30, 2003, respectively, would have been issued and net income would have
increased by $13 million and $26 million, respectively, representing the
after-tax distributions on the exchangeable preferred membership interests and
amortization of the related discount.
Additional dilutive shares would result from approximately 7 million
shares and 10 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 equal to or above the threshold appreciation
price of $62.91 and $55.68 per share for the respective issuances. For the three
and six months ended June 30, 2004 and 2003, the market price of TXU Corp.
common stock was below these prices.
Shares issuable under the $525 million convertible senior notes are not
reflected in dilutive shares because TXU Corp. intends to settle any conversion
in cash.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for 2003, reported in the
first quarter, 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
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.
10
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 June 30, 2004 was $607 million,
comprised of a $599 million liability as of December 31, 2003, $20 million of
accretion during the six months ended June 30, 2004, reduced by $12 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:
Three Months Ended June 30, 2004
-----------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Total
------- --------- -------- ---- ------- -----
Operating revenues............................... $ 216 $ 333 $ 4 $ 8 $ 8 $ 569
Operating costs and expenses..................... 286 294 5 9 11 605
Other deductions (income)-- net.................. 85 5 10 -- -- 100
Interest income.................................. -- (1) -- -- (4) (5)
Interest expense and related charges............. 8 38 -- -- 5 51
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes...... (163) (3) (11) (1) (4) (182)
Income tax expense (benefit) .................... (40) (2) (3) -- (4) (49)
----- ----- ----- ----- ----- -----
Operating income (loss) (123) (1) (8) (1) -- (133)
Charges related to exit (after-tax).............. (35) (117) (1) (17) (3) (173)
Recognition of tax benefits...................... -- -- -- -- -- 636
----- ----- ----- ----- ----- -----
Income (loss) from discontinued operations.... $(158) $(118) $ (9) $ (18) $ (3) $ 330
===== ===== ===== ===== ===== =====
Six Months Ended June 30, 2004
----------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Total
------- --------- --------- --------- ------- ------ ------
Operating revenues........................ $ 724 $ 689 $ 10 $ 19 $ 54 $ 4 $1,500
Operating costs and expenses.............. 726 561 12 22 49 4 1,374
Other deductions (income)-- net........... 88 4 10 -- 16 -- 118
Interest income........................... -- (2) -- -- (5) -- (7)
Interest expense and related charges...... 15 84 -- -- 19 -- 118
----- ----- ----- ----- ----- ----- -----
Operating income (loss) before income
taxes.................................. (105) 42 (12) (3) (25) -- (103)
Income tax expense (benefit) ............. (20) 11 (5) (1) (8) (1) (24)
----- ----- ----- ----- ----- ----- -----
Operating income (loss) (85) 31 (7) (2) (17) 1 (79)
Charges related to exit (after-tax)....... (35) (117) (4) (17) (2) (2) (177)
Recognition of tax benefits............... -- -- -- -- -- -- 636
----- ----- ----- ----- ----- ----- -----
Income (loss) from discontinued
operations........................... $(120) $ (86) $ (11) $ (19) $ (19) $ (1) $ 380
===== ===== ===== ===== ===== ===== =====
11
Three Months Ended June 30, 2003
-------------------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Europe Total
------- --------- --------- -------- ------- ------ ------ -----
Operating revenues.............. $ 198 $ 274 $ 28 $ 5 $ 52 $ 26 $ -- $ 583
Operating costs and expenses.... 208 203 26 7 48 27 -- 519
Other deductions (income)-- net. -- (6) -- -- -- (1) -- (7)
Interest income................. -- (2) -- -- (2) -- -- (4)
Interest expense and related
charges...................... 11 37 -- -- 20 -- -- 68
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................. (21) 42 2 (2) (14) -- -- 7
Income tax expense (benefit) ... (8) 11 1 (1) (6) -- -- (3)
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (13) 31 1 (1) (8) -- -- 10
Charge related to exit
(after-tax).................. -- -- -- -- (58) -- (1) (59)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
discontinued operations.... $ (13) $ 31 $ 1 $ (1) $ (66) $ -- $ (1) $ (49)
===== ===== ===== ===== ===== ===== ===== =====
Six Months Ended June 30, 2003
------------------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Europe Total
------- --------- --------- -------- ------- ------ ------ -----
Operating revenues.............. $ 820 $ 499 $ 43 $ 8 $ 68 $ 50 $ -- $1,488
Operating costs and expenses.... 743 355 41 11 69 52 -- 1,271
Other deductions (income)-- net. (2) (10) -- -- 1 (1) -- (12)
Interest income................. (1) (3) -- -- (3) -- -- (7)
Interest expense and related
charges...................... 21 71 -- -- 26 -- -- 118
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................. 59 86 2 (3) (25) (1) -- 118
Income tax expense (benefit) ... 20 24 1 (1) (8) -- -- 36
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) 39 62 1 (2) (17) (1) -- 82
Charge related to exit
(after-tax).................. -- -- -- -- (60) -- (2) (62)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
discontinued operations.... $ 39 $ 62 $ 1 $ (2) $ (77) $ (1) (2) $ 20
===== ===== ===== ===== ===== ===== ==== =====
The TXU Gas business was previously reported in the Energy Delivery (now
Electric Delivery) segment. The TXU Australia business was previously reported
in its own segment. The Pedricktown business and the strategic retail services
operations were previously reported in the Energy segment. The
telecommunications and Mexico operations were previously reported in corporate
and other activities.
Recognition of Tax Benefits - As discussed in Note 1, in connection with
an IRS preliminary notice of proposed adjustment, in the second quarter of 2004,
TXU Corp. recognized income tax benefits arising from the utilization of the
previously unrecognized TXU Europe 2002 worthlessness deduction. The $636
million of tax benefits recognized in discontinued operations relate primarily
to capital gains generated in prior years as well as the capital gains arising
from the sales of TXU Communications and TXU Australia, which can be offset by
the TXU Europe deduction.
TXU Gas - In the second quarter of 2004, TXU Corp. finalized a formal plan
to sell the business and in June 2004 announced that TXU Gas had signed a
definitive agreement to sell the operations for $1.925 billion in cash.
Results of TXU Gas for the second quarter of 2004 reflect an after-tax
charge of $99 million to reserve for disallowed regulatory and other assets
pursuant to a May 2004 regulatory ruling in connection with the previously
disclosed system-wide distribution rate case. TXU Gas has filed a motion for
rehearing with the regulatory authority.
In June 2004, the IRS Appeals Office rejected TXU Gas' appeal of proposed
adjustments to 1993 income tax returns of ENSERCH Corporation, the acquired
predecessor of TXU Gas. Additional reserves deemed required by TXU Gas for this
matter totaled $47 million, and in accordance with acquisition accounting rules,
$17 million was recorded as an expense in the second quarter of 2004 (as a tax
provision) and $30 million was recorded as additional goodwill.
12
In consideration of the additional goodwill amount recorded and the
current best estimate of the net proceeds from the expected sale of the business
and the expected carrying value of the assets to be sold under the definitive
sales agreement, a goodwill impairment charge of $35 million (pre and after-tax)
was recorded in the second quarter of 2004.
TXU Australia - In the second quarter of 2004, TXU Corp. finalized a
formal plan to sell the business and on July 30, 2004 the business was sold for
$1.9 billion in cash and $1.7 billion of assumed debt. The pre-tax gain on the
sale is approximately $375 million.
Results of TXU Australia for the second quarter of 2004 include an income
tax charge of $117 million to establish a deferred tax liability for the excess
of the carrying value over the tax basis of the investment in the business, in
accordance with accounting rules, as a result of the decision to sell the
business.
Pedricktown - In the second quarter of 2004, Energy initiated a plan to
sell the Pedricktown, New Jersey 122 MW power production facility and exit the
related power supply and gas transportation agreements. Accordingly, results for
the second quarter of 2004 include a $17 million after-tax charge to write down
the facility to estimated fair market value.
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. The business
was formerly a joint venture and has been consolidated since March 1, 2003.
Strategic Retail Services -- In December 2003, Energy finalized a formal
plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. Energy expects to
substantially complete the sales of these operations to various parties by
year-end 2004. Results in 2004 reflect a $9 million (6 million after-tax)
charge recorded in the second quarter to settle a contract dispute.
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 June 30, 2004:
June 30, 2004
---------------------------------------------------------
Strategic
Retail
Gas Australia Services Pedricktown Total
------- --------- ---------- ----------- ------
Current assets........................... $ 164 $ 350 $ 3 $ 2 $ 519
Investments.............................. -- 82 2 -- 84
Goodwill................................. 300 890 -- -- 1,190
Property, plant and equipment............ 1,624 2,211 1 15 3,851
Other noncurrent assets.................. -- 435 -- -- 435
------ ------- ------ ------ -------
Assets held for sale................ $2,088 $ 3,968 $ 6 $ 17 $ 6,079
====== ======= ====== ====== =======
Current liabilities...................... $ 105 $ 245 $ -- $ 4 $ 354
Accumulated deferred income taxes........ -- 162 -- -- 162
Long-term debt, less amounts due currently -- 1,642 -- -- 1,642
Noncurrent liabilities................... 113 345 -- 4 462
------ ------- ------ ------ -------
Liabilities held for sale........... $ 218 $ 2,394 $ -- $ 8 $ 2,620
====== ======= ====== ====== =======
4. FINANCING ARRANGEMENTS
Short-term Borrowings-- At June 30, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $2.7 billion at a
weighted average interest rate of 2.70%. At December 31, 2003, TXU Corp. had no
outstanding short-term borrowings.
13
Credit Facilities-- At June 30, 2004, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) as follows:
- ----------------------------------- ------------ ---------------- ----------------------------------------------
At June 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 Energy 1,000 -- 1,000 --
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
364-day Credit Facility April 2005 TXU Gas 300 -- 300 --
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Energy, Electric
364-day Credit Facility June 2005 Delivery 600 -- -- 600
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Three-Year Revolving Credit Energy, Electric
Facility June 2007 Delivery 1,400 -- 675 725
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 465 -- 35
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit Energy,Electric
Facility June 2009 Delivery 500 -- -- 500
------- ------ ------ ------
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Total $5,000 $ 465 $2,675 $1,860
====== ====== ====== ======
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
In June 2004, US Holdings, Energy and Electric Delivery replaced $2.25
billion of credit facilities scheduled to mature in 2005 with $2.5 billion of
credit facilities maturing in June 2005, 2007 and 2009. These new facilities are
used for working capital and general corporate purposes and provide back-up for
any future issuances of commercial paper by Energy or Electric Delivery. At June
30, 2004, there was no such commercial paper outstanding.
In April 2004, three credit facilities totaling $2.0 billion (364-day
credit facilities expiring in April 2005) were established to provide bridge
financing for the repurchase of Energy's exchangeable preferred membership
interests. At June 30, 2004, these three credit facilities were fully drawn. In
July 2004, these facilities were repaid with the proceeds from Energy's issuance
of $800 million floating rate senior notes and part of the proceeds from the TXU
Australia sale and subsequently terminated.
TXU Corp.'s $500 million five-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 five-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.
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 June 30, 2004, $543 million
of undivided interests had been sold by TXU Receivables Company of the maximum
amount of $600 million. Effective June 30, 2004, the program was extended
through June 28, 2005. As part of the extension, the maximum amount available
under the program was increased to $700 million in recognition of seasonal power
sales. It is expected that a similar downward seasonal adjustment will be made
in the fall. Additionally, the extension allows for increased availability of
funding through a credit ratings-based reduction of customer deposits previously
used to reduce the amount of undivided interests that could be sold. Undivided
interests will now be reduced by 100% of the customer deposits for a Baa3/BBB-
rating; 50% for a Baa2/BBB rating; and zero % for a Baa1/BBB+ and above rating
(based on each originator's credit rating).
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
14
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 $433 million at June 30, 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, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $6 million and $7 million for the six-month periods ending June
30, 2004 and 2003 and approximated 2.1% and 3.6% for the first six months 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 $3 million and $4 million for the first six months of 2004
and 2003, respectively, compensates TXU Business Services for its services as
collection agent, including maintaining the detailed accounts receivable
collection records.
The June 30, 2004 balance sheet reflects $976 million face amount of trade
accounts receivable of Energy, Electric Delivery and TXU Gas, reduced by $543
million of undivided interests sold by TXU Receivables Company. Funding under
the program decreased $57 million for the six months ended June 30, 2004.
Funding under the program for the six months ended June 30, 2003 increased $69
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.
Activities of TXU Receivables Company for the six months ended June 30,
2004 and 2003 were as follows:
Six Months
Ended June 30,
--------------------
2004 2003
------ ------
Cash collections on accounts receivable............................................ $ 4,200 $ 4,142
Face amount of new receivables purchased........................................... (4,065) (3,802)
Discount from face amount of purchased receivables................................. 9 11
Program fees paid.................................................................. (6) (7)
Servicing fees paid................................................................ (3) (4)
Increase (decrease) in subordinated notes payable.................................. (78) (409)
------- -------
TXU Corp.'s operating cash flows (provided) used under the program................. $ 57 $ (69)
======= =======
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.
15
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 Energy and ERCOT for clearing customers' switching and billing
data. 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.
Long-Term Debt -- At June 30, 2004 and December 31, 2003, the long-term
debt of TXU Corp. and its consolidated subsidiaries consisted of the following:
June 30, December 31,
2004 2003
--------- ------------
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
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
1.140% Floating Series 2001D due May 1, 2033.................................. 271 271
1.380% Floating Taxable Series 2001I due December 1, 2036(b).................. 63 63
1.100% 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% TXU Mining Fixed Senior Notes due August 1, 2005.......................... 30 30
6.125% Fixed Senior Notes due March 15, 2008(c).................................. 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............................ (4) 11
Unamortized discount............................................................. -- (2)
------ ------
Total Energy ................................................................ 2,944 3,085
Electric Delivery
- -----------------
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. -- 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(c)............................. 700 700
16
June 30, December 31,
2004 2003
--------- ------------
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(c)................................. 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized discount............................................................. (26) (30)
TXU Electric Delivery Transition Bond Company LLC(e)
- ---------------------------------------------------
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
3.520% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2009.............................................................. 279 --
4.810% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2012.............................................................. 221 --
5.290% Fixed Series 2004 Bonds due in bi-annual installments through
May 15, 2016................................................................. 290 --
------ ------
Total TXU Electric Delivery Transition Bond Company LLC....................... 1,282 500
------ ------
Total Electric Delivery....................................................... 4,912 4,226
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
1.979% 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
------ ------
Total TXU Gas ............................................................... 275 426
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(c)........................ 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).......................... 683 800
4.750% Fixed Senior Notes Series K due November 16, 2006 remarketing date
August 16, 2004(f)............................................................... 288 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(f)............................................................... 288 500
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
2.640% Floating Convertible Senior Notes due July 15, 2033(d).................... 525 525
Fair value adjustments related to interest rate swaps............................ (13) 32
Unamortized discount............................................................. (2) (2)
------- -------
Total TXU Corp.............................................................. 2,711 3,393
Total TXU Corp. consolidated........................................................ 10,997 11,286
Less amount due currently........................................................... 534 678
------- -------
Total long-term debt................................................................ $10,463 $10,608
======= =======
(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 June 30, 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 an aggregate $2.5 billion principal
amount.
(d) Interest rates in effect at June 30, 2004.
(e) These bonds are nonrecourse to Electric Delivery.
(f) Equity-linked.
In July 2004, Energy issued $800 million of floating rate senior notes in
a private placement offering. The net proceeds of $798 million were used to
repay, in part, borrowings outstanding under its fully drawn $1.0 billion 364
day credit facility. The Notes will bear interest at an annual rate equal to
3-month LIBOR, reset quarterly, plus 0.78% and will mature on January 17, 2006.
17
In July 2004, Energy announced its intent to redeem at par value $101
million of Brazos River Authority Pollution Control Revenue Bonds by September
2004, before their scheduled maturity pursuant to terms in the bond documents
that provide for redemption at par upon the occurrence of certain events.
In June 2004, Electric Delivery's wholly-owned, special purpose
bankruptcy-remote subsidiary, TXU Electric Delivery Transition Bond Company LLC,
issued $790 million aggregate principal amount of transition (securitization)
bonds in accordance with a settlement agreement with the Commission and a
financing order related to the transition to competition. The bonds were issued
in three classes that require bi-annual interest and principal installment
payments beginning in November 2004 through specified dates in 2009 through
2016. The transition bonds bear interest at fixed annual rates ranging from
3.52% to 5.29%. Electric Delivery used the proceeds to retire, subsequent to
June 30, 2004, two series of mortgage bonds with an aggregate principal amount
of $393 million due in 2025 and repurchase shares of common stock from its
parent for $375 million. As a result of the retirement of these two series of
mortgage bonds, Electric Delivery will be able to release the liens on its
outstanding senior secured notes, making them rank equally with Electric
Delivery's other senior unsecured debt. No decision has been made as to the
timing of such release.
In May 2004, TXU Corp. repurchased approximately 8.5 million units of
equity-linked debt securities with a carrying value of $427 million for a cash
repurchase price of $404 million. The repurchase of the securities resulted in a
pre-tax charge to earnings of $34 million and a credit (increase) to additional
paid-in capital of $75 million. See Note 1 for additional discussion.
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds with an aggregate principal amount of $121 million were purchased
upon mandatory tender. Energy intends to remarket these bonds at a later date.
Other retirements of long-term debt in 2004 totaling $388 million
represent payments at scheduled maturity dates.
Fair Value Hedges -- In April 2004, fixed-to-variable interest rate swaps
related to $100 million of debt were settled for a gain of $3.5 million, which
will be amortized to offset interest expense over the remaining life of the
debt. Also in April 2004, $2.1 billion of fixed rate debt was effectively
converted to variable rates through interest rate swap transactions, accounted
for as fair value hedges, expiring through 2013.
In March 2004, fixed-to-variable interest rate swaps related to $400
million of debt were settled for a gain of $18 million, which will be amortized
to offset interest expense over the remaining life of the debt. Also in March
2004, $400 million of fixed rate notes were effectively converted to variable
rates through interest rate swap transactions, accounted for as fair value
hedges, expiring through 2006.
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)
---------------------------- -----------------------------
June 30, December 31, June 30, December 31,
2004 2003 2004 2003
-------- ------------ -------- -------------
TXU Corp.
- ---------
Capital I Trust
(9.2 million units of 7.25% Series
due 2029).......................... $ -- $ 223 $ -- $ 237
Capital II Trust
(6.0 million units of 8.70% Series
due 2034)........................... 145 145 154 154
------ ----- ------- --------
Total............................... 145 368 154 391
TXU Gas
- -------
Capital I Trust
(150 thousand units of Floating Rate
Series due 2028)................... 147 147 155 155
------- ------ ------- -------
Total............................... $ 292 $ 515 $ 309 $ 546
======= ====== ======= =======
18
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.
The subsidiary trusts have been deconsolidated since the adoption of FIN
46 in the fourth quarter of 2003. TXU Corp.'s balance sheet at December 31, 2003
reflected 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.
In April 2004, TXU Corp. redeemed all of the 7.25% 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. The TXU
Corp. Capital I Trust used the proceeds to redeem all of the outstanding 7.25%
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.
Under the current definitive sales agreement, TXU Gas would be required to
provide for the satisfaction of its junior subordinated debentures and the
related trust securities prior to closing the sale of TXU Gas' operations.
6. PREFERRED SECURITIES OF SUBSIDIARIES
Preferred securities of consolidated subsidiaries consist of the
following:
June 30, December 31,
2004 2003
Exchangeable preferred membership interests of Energy,
net of $104 unamortized discount....................... $ -- $ 646
Preferred stock of TXU Gas............................... 75 75
Preferred stock of US Holdings........................... 38 38
------ ------
Total.................................................... $ 113 $ 759
====== ======
Exchangeable Preferred Membership Interests of Energy -- In
April 2004, TXU Corp. repurchased these securities as discussed in Note 1.
Preferred Stock of TXU Gas -- At June 30, 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 4.5% at June 30, 2004. The preferred stock is not mandatorily
redeemable. Under the current definitive sales agreement, TXU Gas would be
required to redeem the preferred stock upon closing the sale of TXU Gas'
operations.
Preferred Stock of US Holdings -- At June 30, 2004, US Holdings had
379,231 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 May 2004 meeting, declared a
quarterly dividend of $0.125 a share, payable July 1, 2004, to shareholders of
record on June 4, 2004. Future dividends may vary and are subject to
consideration of TXU Corp.'s operating cash flow levels 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