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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
_____________________
Commission File Number 333-108876
TXU Energy Company LLC
A Delaware Limited Liability Company 75-2967817
(State of Organization) (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 No X
--- ---
As of August 10, 2004, all outstanding common membership interests in TXU Energy
Company LLC were held by TXU US Holdings Company.
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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 Condensed Financial Statements...................................... 5
Report of Independent Registered Public Accounting Firm...................... 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 44
Item 4. Controls and Procedures...................................................... 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 46
Item 6. Exhibits and Reports on Form 8-K ............................................ 47
SIGNATURE.......................................................................................... 49
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Energy Company LLC and its subsidiaries are
made available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU Energy Company LLC 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................................. Energy'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, 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, theIndependent System
Operator and the regional reliability coordinator of various
electricity systems within Texas
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
Moody's........................................ Moody's Investors Services, Inc.
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
ii
price-to-beat rate............................. residential and small business customer electricity rates
established by the Commission in the restructuring of the Texas
market that are required to be charged in a REP's historical service
territories until January 1, 2005 or when 40% of the electricity
consumed by such customer classes is supplied by competing REPs,
adjusted periodically for changes in fuel costs, and required to
be available to those customers until January 1, 2007
REP............................................ retail electric provider
S&P............................................ Standard & Poor's, a division of The McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
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 Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining..................................... TXU Mining Company LP, a subsidiary of Energy
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of Energy
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.
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Operating revenues................................................... $2,115 $2,016 $4,072 $3,806
Costs and expenses:
Cost of energy sold and delivery fees............................. 1,348 1,282 2,603 2,498
Operating costs.................................................. 200 162 366 341
Depreciation and amortization..................................... 88 94 185 206
Selling, general and administrative expenses...................... 163 149 307 292
Franchise and revenue-based taxes................................. 27 28 53 55
Other income...................................................... (12) (16) (13) (24)
Other deductions.................................................. 261 2 281 5
Interest income................................................... (7) (1) (8) (3)
Interest expense and related charges.............................. 93 87 172 163
------ ------ ------ ------
Total costs and expenses...................................... 2,161 1,787 3,946 3,533
------ ------ ------ ------
Income (loss) from continuing operations before income taxes and
cumulative effect of changes in accounting principles.............. (46) 229 126 273
Income tax expense (benefit)......................................... (27) 75 27 83
Income (loss) from continuing operations before cumulative effect
of changes in accounting principles............................... (19) 154 99 190
Loss from discontinued operations, net of tax benefit (Note 3)....... (27) - (30) (1)
Cumulative effect of changes in accounting principles, net of
tax benefit (Note 2) ............................................. - - - (58)
------ ------ ------ ------
Net income (loss).................................................... $ (46) $ 154 $ 69 $ 131
====== ====== ====== ======
See Notes to Financial Statements
1
TXU ENERGY COMPANY LLC
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 cumulative effect
of changes in accounting principles............................... $ (19) $ 154 $ 99 $ 190
Other comprehensive income (loss), net of tax effects :
Cash flow hedge activity--
Net change in fair value of derivatives (net of tax benefit of
$13, $11, $44 and $53)....................................... (17) (20) (75) (98)
Amounts realized in earnings during the period (net of tax
expense of $5, $13, $8 and $39)............................. 7 23 12 72
----- ----- ----- ----
Total......................................................... (10) 3 (63) (26)
----- ----- ----- ----
Comprehensive income (loss) related to continuing operations........ (29) 157 36 164
Comprehensive loss related to discontinued operations............... (27) - (30) (1)
Cumulative effect of changes in accounting principles.................. - - - (58)
----- ----- ----- -----
Comprehensive income (loss)............................................ $ (56) $ 157 $ 6 $ 105
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU ENERGY COMPANY LLC
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 cumulative effect of
changes in accounting principles.............................................. $ 99 $ 190
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by
operating activities:
Depreciation and amortization ............................................... 215 237
Deferred income taxes and investment tax credits - net ...................... 58 40
Asset writedown charges...................................................... 188 -
Net gain from sale of assets................................................ (12) (21)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 31 (47)
Changes in operating assets and liabilities..................................... (15) 212
------ ------
Cash provided by operating activities.................................... 564 611
------ ------
Cash flows - financing activities:
Issuances of long-term debt..................................................... - 1,294
Retirements/repurchases of debt................................................. (127) (170)
Increase (decrease) in notes payable to banks................................... 1,675 (282)
Net change in advances from affiliates.......................................... (1,647) (1,355)
Distribution paid to parent..................................................... (350) (400)
Decrease in note payable to TXU Electric Delivery Company....................... - (99)
Debt premium, discount, financing and reacquisition expenses.................... (2) (28)
------ ------
Cash used in financing activities........................................ (451) (1,040)
------ ------
Cash flows - investing activities:
Capital expenditures............................................................ (105) (104)
Nuclear fuel.................................................................... (48) (35)
Proceeds from sale of assets.................................................... - 15
Other........................................................................... 26 (3)
------ ------
Cash used in investing activities........................................ (127) (127)
------ ------
Cash used by discontinued operations.............................................. (2) -
------ ------
Net change in cash and cash equivalents........................................... (16) (556)
Cash and cash equivalents - beginning balance..................................... 18 603
------ ------
Cash and cash equivalents - ending balance........................................ $ 2 $ 47
====== ======
See Notes to Financial Statements.
3
TXU ENERGY COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
----------- -------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 2 $ 18
Advances to affiliates........................................... 1,970 289
Accounts receivable - trade...................................... 1,103 943
Inventories...................................................... 310 386
Commodity contract assets........................................ 596 548
Other current assets............................................. 303 225
---------- ----------
Total current assets........................................... 4,284 2,409
---------- ----------
Investments......................................................... 579 479
Property, plant and equipment - net................................. 9,894 10,345
Goodwill............................................................ 517 533
Commodity contract assets........................................... 142 109
Cash flow hedge and other derivative assets......................... 34 88
Assets held for sale................................................ 23 59
Other noncurrent assets............................................. 138 127
---------- ----------
Total assets................................................... $ 15,611 $ 14,149
========== ==========
LIABILITIES AND MEMBERSHIP INTERESTS
Current liabilities:
Notes payable - banks............................................ $ 1,675 $ -
Long-term debt due currently..................................... 1 1
Accounts payable - trade:
Affiliates (principally TXU Electric Delivery Company)......... 293 211
All other...................................................... 944 713
Notes or other liabilities due TXU Electric Delivery Company..... 19 13
Commodity contract liabilities................................... 550 502
Accrued taxes.................................................... 228 277
Other current liabilities........................................ 629 564
---------- - ---------
Total current liabilities...................................... 4,339 2,281
---------- ----------
Accumulated deferred income taxes................................... 1,913 1,965
Investment tax credits.............................................. 349 360
Commodity contract liabilities...................................... 101 47
Cash flow hedge and other derivative liabilities.................... 242 140
Notes or other liabilities due to TXU Electric Delivery Company..... 418 424
Other noncurrent liabilities and deferred credits................... 1,213 1,341
Long-term debt, less amounts due currently.......................... 2,943 3,084
Preferred membership interests, held by TXU Corp. at June 30,
2004, net of discount of $246 and $253 (Note 4)................... 504 497
Liabilities held for sale........................................... 8 11
---------- ----------
Total liabilities.............................................. 12,030 10,150
---------- ----------
Contingencies (Note 6)
Membership interests (Note 5):
Capital account.................................................. 3,754 4,109
Accumulated other comprehensive loss............................. (173) (110)
---------- ----------
Total membership interests.................................... 3,581 3,999
---------- ----------
Total liabilities and membership interests..................... $ 15,611 $ 14,149
========== ==========
See Notes to Financial Statements.
4
TXU ENERGY COMPANY LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - Energy is a subsidiary of US Holdings, which is
a subsidiary of TXU Corp. Energy engages in power production (electricity
generation), retail and wholesale sales of electricity and natural gas, and
engages in commodity hedging and risk management activities. Energy is currently
managed as an integrated business; consequently, there are no reportable
business segments.
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 $257 million ($167 million after-tax) in the second quarter of
2004 and $274 million ($178 million after-tax) year-to-date, reported in other
deductions, related to asset writedowns and employee severance.
Charges recorded in the three-month and six-month periods ended June 30,
2004 and 2003 reported in other deductions are detailed in Note 7.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Energy entered into a service 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 TXU Corp. employees
(including approximately 1,100 from Energy) transferred to Capgemini effective
July 1, 2004. Outsourced base support services performed by Capgemini for a
fixed fee include information technology, customer call center, billing and
collections, human resources, supply chain and certain accounting activities.
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use Energy'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
Energy, and as a result of outsourcing its information technology activities,
Energy no longer intends to develop the majority of these projects and from
Energy'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 $109 million
($71 million after-tax), reported in other deductions. The remaining assets,
totaling $134 million, were transferred to a subsidiary of TXU Corp. at book
value, which subsidiary holds the investment in Capgemini, in exchange for an
interest in that subsidiary, which such interest is accounted for by Energy
on the equity method.
Also as part of the services 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, Energy recorded a $27 million ($18 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. The charge
includes an allocation of severance related to TXU Business Services Company
employees. In addition, TXU Corp. committed to pay up to $25 million for costs
associated with transitioning the outsourced activities to Capgemini. The
transition costs applicable to Energy are expected to be recorded during the
remainder of 2004.
5
Transfer and Sale of TXU Fuel Company
--------------------------------------
On April 30, 2004, Energy distributed the assets of TXU Fuel Company, its
gas transportation subsidiary, to US Holdings at book value, including $16
million of allocated goodwill (see Note 5). On June 2, 2004, US Holdings
completed the sale of the assets of TXU Fuel Company 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.
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.
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, Energy 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, Energy recorded severance charges
totaling $43 million ($28 million after-tax), reported in other deductions.
Preferred Membership Interests
------------------------------
In April 2004, TXU Corp. purchased from the holders Energy's preferred
membership interests with a liquidation value of $750 million. Energy's carrying
amount of the security, which remains outstanding, is the $750 million
liquidation amount less an approximate $246 million remaining unamortized
discount and $31 million in unamortized debt issuance costs.
See Note 4 for further detail of financing arrangements.
6
Discontinued Businesses - Note 3 presents detailed information regarding
the discontinued New Jersey generation operations, as well as a previously
disclosed discontinued business. 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 Energy 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 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 $3 million and $6 million,
respectively, in Energy's postretirement benefit costs.
7
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 Energy, 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) Energy had previously
recorded as depreciation expense and $26 million (reflected in other noncurrent
liabilities) of unrealized net gains associated with the decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net.................. $488
Increase in other noncurrent liabilities and deferred credits... (528)
Increase in accumulated deferred income taxes.................... (3)
Increase in affiliated receivable................................ 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 Energy the adoption of
SFAS 143 results in timing differences in the recognition of asset retirement
costs that are being recovered through the regulatory process.
8
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 Six Months Ended June 30, 2004
---------------------------------- ------------------------------------
Strategic Strategic
Retail Retail
Services Pedricktown Total Services Pedricktown Total
-------- ----------- ----- --------- ----------- -----
Operating revenues........................ $ 4 $ 8 $ 12 $ 10 $ 19 $ 29
Operating costs and expenses.............. 5 9 14 12 22 34
Other deductions (income) - net........... 10 - 10 10 - 10
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes (11) (1) (12) (12) (3) (15)
Income tax expense (benefit).............. (3) - (3) (5) (1) (6)
Operating income (loss)................... (8) (1) (9) (7) (2) (9)
Charge related to exit (after-tax)........ (1) (17) (18) (4) (17) (21)
----- ----- ----- ----- ----- -----
Income (loss) from discontinued operations $ (9) $ (18) $ (27) $ (11) $ (19) $ (30)
----- ----- ----- ----- ----- -----
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
---------------------------------- -----------------------------------
Strategic Strategic
Retail Retail
Services Pedricktown Total Services Pedricktown Total
-------- ----------- ----- --------- ----------- -----
Operating revenues........................ $ 28 $ 5 $ 33 $ 43 $ 8 $ 51
Operating costs and expenses.............. 26 7 33 41 11 52
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes 2 (2) - 2 (3) (1)
Income tax expense (benefit).............. 1 (1) - 1 (1) -
Operating income (loss)................... 1 (1) - 1 (2) (1)
----- ----- ----- ----- ----- -----
Income (loss) from discontinued operations $ 1 $ (1) $ - $ 1 $ (2) $ (1)
----- ----- ----- ----- ----- -----
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.
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 for 2004 reflect a $9 million ($6 million after-tax)
charge recorded in the second quarter to settle a contract dispute.
Balance sheet - The following details the assets and liabilities held for
sale:
June 30, 2004
----------------------------------
Strategic
Retail
Services Pedricktown Total
-------- ----------- -----
Current assets........................................... $ 3 $ 2 $ 5
Investments.............................................. 2 - 2
Property, plant and equipment............................ 1 15 16
----- ----- -----
Total............................................... $ 6 $ 17 $ 23
===== ===== =====
Current liabilities...................................... $ - $ 4 $ 4
Noncurrent liabilities................................... - 4 4
----- ----- -----
Total............................................... $ - $ 8 $ 8
===== ===== =====
9
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At June 30, 2004, Energy had outstanding
short-term borrowings consisting of bank borrowings of $1.7 billion at a
weighted average interest rate of 3.01%. At December 31, 2003, Energy had no
outstanding short-term borrowings.
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, Energy entered into a $1.0 billion, 364-day credit
facility. At June 30, 2004, the facility was fully drawn and borrowings had been
advanced to affiliates. In July 2004, this facility was repaid with proceeds
from Energy's issuance of $800 million floating rate senior notes and advances
from affiliates and subsequently terminated.
TXU Corp.'s $500 million five-year revolving credit facility provides for
up to $500 million in letters of credit and/or up to $250 million of loans ($500
million in the aggregate). To the extent capacity is available under this
facility; it may be made available to US Holdings, Energy or Electric Delivery
for borrowings, letters of credit or other purposes.
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,
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, $445 million
of undivided interests in Energy's accounts receivable had been sold by TXU
Receivables Company. Effective June 30, 2004, the program was extended through
June 28, 2005. 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 deposit 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
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.
10
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 $4 million and $6 million for the six-month periods ending June
30, 2004 and 2003, respectively, 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 Energy and are reported in SG&A expenses. The servicing fee,
which totaled approximately $2 million and $3 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 $801 million face amount of trade
accounts receivable reduced by $445 million of undivided interests sold by TXU
Receivables Company. Funding under the program decreased $59 million for the six
months ended June 30, 2004. Funding under the program for the six months ended
June 30, 2003 increased $36 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 related to Energy 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...................................... $ 3,035 $3,068
Face amount of new receivables purchased..................................... (2,903) (2,698)
Discount from face amount of purchased receivables........................... 6 9
Program fees paid............................................................ (4) (6)
Servicing fees paid.......................................................... (2) (3)
Increase (decrease) in subordinated notes payable............................ (73) (406)
------- ------
Energy's operating cash flows (provided) used under the program......... $ 59 $ (36)
======= ======
Upon termination of the program, cash flows to Energy would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within 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.
11
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 Energy and its consolidated subsidiaries consisted of the following:
June 30, December 31,
2004 2003
---------- -------------
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
Less amount due currently................................................................ 1 1
------ ------
Total long-term debt..................................................................... $2,943 $3,084
====== ======
(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 $750 million principal
amount.
12
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.
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 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.
Fair Value Hedges -- At June 30, 2004, $750 million 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 August 2004,
fixed-to-variable swaps related to $500 million of such debt were settled for a
gain of $412 thousand, which will be amortized to offset interest expense over
the remaining life of the related debt.
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. 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 also be amortized to offset
interest expense over the remaining life of the debt.
Preferred Membership Interests -- In July 2003, Energy exercised its right
to exchange its $750 million 9% Exchangeable Subordinated Notes issued in
November 2002 and due November 2012 for exchangeable preferred membership
interests with identical economic and other terms. The preferred membership
interests bear distributions at the annual rate of 9% and permit the deferral of
such distributions. The holders of the preferred membership interests had the
option to exchange these interests at any time, subject to certain restrictions,
for up to approximately 57 million shares of TXU Corp. common stock at an
exchange price of $13.1242 per share. At issuance of the notes that were
subsequently exchanged for the preferred membership interests, Energy recognized
a capital contribution from TXU Corp. and a corresponding discount on the
securities of $266 million, which represented the value of the exchange right as
TXU Corp. granted an irrevocable right to exchange the securities for TXU Corp.
common stock. This discount is being amortized to interest expense and related
charges over the term of the securities. As a result, the effective distribution
rate on the preferred membership interests is 16.2%. In April 2004, TXU Corp.
purchased these mandatorily redeemable securities from the holders, as discussed
in Note 1, and as a result the securities effectively represent Energy debt held
by TXU Corp.
5. MEMBERSHIP INTERESTS
In November 2003, Energy approved a cash distribution of $175 million
which was paid to US Holdings in January 2004. In February 2004, Energy approved
a cash distribution of $175 million which was paid to US Holdings in April 2004.
In June 2004, Energy approved a cash distribution of $175 million which was paid
to US Holdings in July 2004.
13
The following table presents the changes in Membership Interests for the
six months ended June 30, 2004:
----------------------------------------------------------------------------------------
Accumulated
Other Total
Capital Comprehensive Membership
Accounts Gain (Loss) Interests
----------------------------------------------------------------------------------------
Balance at December 31, 2003............... $4,109 $(110) $3,999
--------------------------------------------------------------------------- -------------
Distributions paid to parent........... (350) -- (350)
----------------------------------------------------------------------------------------
Net income............................. 69 -- 69
----------------------------------------------------------------------------------------
Cash flow hedges....................... -- (63) (62)
----------------------------------------------------------------------------------------
Transfer of TXU Fuel Company ownership. (73) -- (73)
----------------------------------------------------------------------------------------
Other.................................. (1) -- (2)
----------------------------------------------------------------------------------------
Balance at June 30, 2004................... $3,754 $(173) $3,581
----------------------------------------------------------------------------------------
6. CONTINGENCIES
Request from CFTC - In October 2003, TXU Corp. received an informal
request for information from the US Commodity Futures Trading Commission (CFTC)
seeking voluntary production of information concerning disclosure of price and
volume information furnished by TXU Portfolio Management, a subsidiary of
Energy, to energy industry publications. The request sought information for the
period from January 1, 1999 to October 2003. TXU Corp. cooperated with the CFTC,
and complied with its request for such information. On May 12, 2004, TXU Corp.
received notice from the CFTC that the CFTC had closed its investigation of TXU
Corp. and its subsidiaries related to disclosure of price and volume
information.
In a similar, but unrelated matter, on April 13, 2004, the CFTC issued a
subpoena requiring TXU Corp. to produce information about storage of natural
gas, including weekly and monthly storage reports to the Energy Information
Administration submitted by TXU Fuel Company and TXU Gas. This request seeks
information for the period of October 31, 2003 through January 2, 2004. TXU
Corp. has cooperated with the CFTC by producing the requested information and
believes that TXU Gas and TXU Fuel Company have not engaged in any activity that
would justify action against them by the CFTC.
Guarantees -- Energy has entered into contracts that contain guarantees to
outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Residual value guarantees in operating leases -- Energy is the lessee
under various operating leases, entered into prior to January 1, 2003 that
obligate it to guarantee the residual values of the leased facilities. At June
30, 2004, the aggregate maximum amount of residual values guaranteed was
approximately $196 million with an estimated residual recovery of approximately
$100 million. The average life of the lease portfolio is approximately seven
years.
Debt obligations of the parent-- Energy has provided a guarantee of the
obligations under TXU Corp.'s finance lease (approximately $125 million at June
30, 2004) for its headquarters building.
Shared saving guarantees -- As part of the operations of the strategic
retail services business, which Energy intends to sell (see Note 3), Energy has
guaranteed that certain customers will realize specified annual savings
resulting from energy management services it has provided. In aggregate, the
average annual savings have exceeded the annual savings guaranteed. The maximum
potential annual payout is approximately $6 million and the maximum total
potential payout is approximately $49 million. No guarantees were issued during
the six months ended June 30, 2004 that required recording a liability. The fair
value of guarantees recorded as of June 30, 2004 was $1.8 million with a maximum
potential payout of $42 million. The average remaining life of the portfolio is
approximately nine years. These guarantees will be transferred or eliminated as
part of expected transactions for the sale of the strategic retail services
business.
14
Letters of credit -- Energy has entered into various agreements that
require letters of credit for financial assurance purposes. Approximately $403
million of letters of credit were outstanding at June 30, 2004 to support
existing floating rate pollution control revenue bond debt of approximately $395
million. The letters of credit are available to fund the payment of such debt
obligations. These letters of credit expire in 2008.
Energy has outstanding letters of credit in the amount of $50 million to
support hedging and risk management margin requirements in the normal course of
business. As of June 30, 2004, approximately 77% of the obligations supported
by these letters of credit mature within one year, and substantially all of the
remainder mature in the next six years.
Surety bonds -- Energy has outstanding surety bonds of approximately $29
million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
Legal Proceedings -- On July 7, 2003, a lawsuit was filed by Texas
Commercial Energy (TCE) in the United States District Court for the Southern
District of Texas, Corpus Christi Division, against Energy and certain of its
subsidiaries, as well as various other wholesale market participants doing
business in ERCOT, claiming generally that defendants engaged in market
manipulation, in violation of antitrust and other laws, primarily during the
period of extreme weather conditions in late February 2003. An amended complaint
was filed in February 2004 that joined additional, unaffiliated defendants.
Three retail electric providers filed motions for leave to intervene in the
action alleging claims substantially identical to TCE's. In addition,
approximately 25 purported former customers of TCE have filed a motion to
intervene in the action alleging claims substantially identical to TCE's, both
on their own behalf and on behalf of a putative class of all former customers of
TCE. A hearing on these motions was conducted May 20, 2004 during which the
Court stated that it intended to enter an order dismissing the antitrust claims
and an order was entered on June 24, 2004. TCE has indicated that it intends to
appeal the dismissal, however, Energy believes the dismissal of the antitrust
claims was proper and that it has not committed any violation of the antitrust
laws. Further, the Commission's investigation of the market conditions in late
February 2003 has not resulted in any findings adverse to Energy. Accordingly,
Energy believes that TCE's and the interveners' claims against Energy and its
subsidiary companies are without merit and Energy and its subsidiaries intend to
vigorously defend the lawsuit on appeal. Energy is, however, unable to estimate
any possible loss or predict the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., Energy and TXU Portfolio
Management. The Court has set this case for trial on April 4, 2005 and discovery
in the case is proceeding. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., Energy and TXU Portfolio Management
intend to vigorously defend the litigation. TXU Corp., Energy and TXU Portfolio
Management dispute the plaintiff's claims.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This case was transferred to the Beaumont
Division of the Eastern District of Texas and on March 24, 2004 subsequently
transferred to the Northern District of Texas, Dallas Division. This action is
brought by an individual, alleged to be a retail consumer of electricity, on
behalf of herself and as a proposed representative of a putative class of retail
purchasers of electricity that are similarly situated. Defendants have filed a
motion to dismiss the lawsuit which is pending before the court; however, as a
result of the dismissal of the antitrust claims in the litigation described
above brought by TCE, the parties have agreed to stay this litigation until the
appeal in the TCE case has been decided. TXU Corp. believes that the plaintiff
lacks standing to assert any antitrust claims against TXU Corp. or TXU Portfolio
15
Management, and that defendants have not violated antitrust laws or other laws
as claimed by plaintiff. Therefore, TXU Corp. believes that plaintiff's claims
are without merit and plans to vigorously defend the lawsuit. TXU Corp. is,
however, unable to estimate any possible loss or predict the outcome of this
action.
General -- In addition to the above, Energy and its subsidiaries are
involved in various other legal and administrative proceedings in the normal
course of business the ultimate resolution of which, in the opinion of each,
should not have a material effect upon their financial position, results of
operations or cash flows.
7. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Other income:
Net gain on sale of properties and businesses....... $ 11 $ 15 $ 12 $ 21
Other............................................... 1 1 1 3
------ ------ ------ ------
Total other income............................... $ 12 $ 16 $ 13 $ 24
====== ====== ====== ======
Other deductions:
Software write-off.................................. $ 109 $ - $ 109 $ -
Employee severance charges.......................... 70 - 86 -
Spare parts inventory writedown..................... 79 - 79 -
Expenses related to canceled construction projects.. 2 1 4 2
Other............................................... 1 1 3 3
------ ------ ------ ------
Total other deductions........................... $ 261 $ 2 $ 281 $ 5
====== ====== ====== ======
Interest Expense and Related Charges --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2004 2003 2004 2003
------ ------ ------ ------
Interest (a)......................................... $ 71 $ 83 $ 129 $ 155
Distributions on preferred membership interests (b).. 17 - 34 -
Amortization of debt issuance costs.................. 6 6 12 11
Capitalized interest................................. (1) (2) (3) (3)
------ ------ ------ ------
Total interest expense and related charges........ $ 93 $ 87 $ 172 $ 163
====== ====== ====== ======
(a) Included in interest for the three and six months ended June 30, 2003 is
$17 million and $34 million, respectively, related to the exchangeable
subordinated notes that were exchanged for preferred membership interests
in July 2003.
(b) In April 2004, TXU Corp. purchased from the holders Energy's preferred
membership interests, and subsequent to this purchase, Energy has paid
distributions on the preferred membership interests to TXU Corp.
Affiliate Transactions - The following represent the significant affiliate
transactions of Energy:
o Energy incurs electricity delivery fees charged by Electric
Delivery. For the three months ended June 30, 2004 and 2003, these fees
totaled $332 million and $349 million, respectively. For the six months
ended June 30, 2004 and 2003, these fees totaled $681 million and $726
million, respectively.
o Energy records interest expense payable to Electric Delivery
with respect to Electric Delivery's generation-related regulatory
assets that are subject to securitization. The interest expense
reimburses Electric Delivery for the interest expense Electric Delivery
incurs on that portion of its debt associated with the
generation-related regulatory assets. For the three months ended June
30, 2004 and 2003, this interest expense totaled $14 million and $12
million, respectively. For the six months ended June 30, 2004 and 2003,
this interest expense totaled $26 million and $24 million,
respectively.
o Under the terms of the settlement plan, Electric Delivery
issued an initial $500 million of securitization bonds in 2003 and
issued $790 million in June 2004. The incremental income taxes Electric
Delivery will pay on the increased delivery fees to be charged to
Electric Delivery's customers related to the bonds will be reimbursed
by Energy. Therefore, Energy's financial statements reflect a $437
million non-interest bearing payable to Electric Delivery ($19 million
of which is due currently) that will be extinguished as Electric
Delivery pays the related income taxes.
16
o Average daily short-term advances to affiliates during the three months
ended June 30, 2004 was $1 billion and average daily short-term
advances from affiliates during the three months ended June 30, 2003
was $139 million. Interest income earned on the advances for the three
months ended June 30, 2004 was $7 million and interest expense incurred
on the advances for the three months ended June 30, 2003 was
$1 million. The weighted average interest rate for the three months
ended June 30, 2004 and 2003 was 2.85% and 3.07%, respectively.
Average daily short-term advances to affiliates during the six months
ended June 30, 2004 were $620 million and average daily short-term
advances from affiliates during the six months ended June 30, 2003 was
$730 million. Interest income earned on the advances for the six months
ended June 30, 2004 was $9 million and interest expense incurred on the
advances for the six months ended June 30, 2003 was $9 million. The
weighted average interest rate for the six months ended June 30, 2004
and 2003 was 2.85% and 2.83%, respectively.
o TXU Business Services charges Energy for financial,
accounting, information technology, environmental, procurement and
personnel services and other administrative services at cost. For the
three months ended June 30, 2004 and 2003, these costs totaled $83
million and $58 million, respectively, and are primarily included in
SG&A expenses. For the six months ended June 30, 2004 and 2003, these
costs totaled $134 million and $119 million, respectively.
o Energy receives payments from TXU Gas under a service
agreement that began in 2002 covering customer billing and customer
support services provided for TXU Gas. These revenues totaled $8
million and $7 million for the three months ended June 30, 2004 and
2003, respectively, and are included in other revenues. These revenues
totaled $15 million and $14 million for the six months ended June 30,
2004 and 2003, respectively, and are included in other revenues.
o Energy records the amount owed by Electric Delivery for the
future costs of decommissioning the Comanche Peak nuclear facility as a
non-current asset. Funds for decommissioning are collected monthly from
Electric Delivery. Realized gains and other earnings on the nuclear
decommissioning trust holdings reduce the non-current asset. As of June
30, 2004, the balance of the noncurrent asset related to the Comanche
Peak nuclear facility asset retirement obligation was $37 million.
Retirement Plan And Other Postretirement Benefits - Energy is a
participating employer in the TXU Retirement Plan, a defined benefit pension
plan sponsored by TXU Corp. Energy also participates with TXU Corp. and other
affiliated subsidiaries of TXU Corp. to offer health care and life insurance
benefits to eligible employees and their eligible dependents upon the retirement
of such employees. The allocated net periodic pension cost and net periodic
postretirement benefits cost other than pensions applicable to Energy was $15
million for each of the three month periods ended June 30, 2004 and 2003 and $31
million and $29 million for the six months ended June 30, 2004 and 2003,
respectively.
At June 30, 2004, Energy estimates that its total contributions to the
pension plan and other postretirement benefit plans for the remainder of 2004
will not be materially different than previously disclosed in the 2003 Form
10-K.
Accounts Receivable -- At June 30, 2004 and December 31, 2003, accounts
receivable of $1.1 billion and $943 million are stated net of allowance for
uncollectible accounts of $40 million and $51 million, respectively. During the
six months ended June 30, 2004, bad debt expense was $47 million, account
write-offs were $68 million and other activity increased the allowance for
uncollectible accounts by $10 million. During the six months ended June 30,
2003, bad debt expense was $36 million, account write-offs were $36 million and
other activity decreased the allowance for uncollectible accounts by $7 million.
Allowances related to receivables sold are reported in current liabilities and
totaled $29 million and $39 million at June 30, 2004 and December 31, 2003,
respectively.
Accounts receivable included $406 million and $388 million of unbilled
revenues at June 30, 2004 and December 31, 2003, respectively.
17
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of June 30, 2004 As of December 31, 2003
----------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Intangible assets subject to amortization
included in property, plant and equipment:
Capitalized software placed in service.... $ 3 $ 1 $ 2 $ 241 $ 112 $ 129
Land easements............................ 2 1 1 11 8 3
Mineral rights and other.................. 30 22 8 31 22 9
----- ----- ----- ----- ----- -----
Total................................... $ 35 $ 24 $ 11 $ 283 $ 142 $ 141
===== ===== ===== ===== ===== =====
Aggregate Energy amortization expense for intangible assets for the three
months ended June 30, 2004 and 2003 was $6 million and $8 million, respectively.
Aggregate Energy amortization expense for intangible assets for the six months
ended June 30, 2004 and 2003 was $20 million and $17 million, respectively. At
June 30, 2004, the weighted average useful lives of capitalized software, land
easements and mineral rights and other were 6 years, 59 years and 40 years,
respectively.
During the second quarter of 2004, Energy transferred information
technology assets totaling $134 million, consisting primarily of capitalized
software, to a subsidiary of TXU Corp. at book value. See Note 1 for further
discussion.
Goodwill of $517 million and $453 million at June 30, 2004 and
December 31, 2003, respectively, was stated net of previously recorded
accumulated amortization of $60 million. Energy transferred $16 million of
goodwill to US Holdings in connection with the transfer of TXU Fuel Company to
US Holdings on April 30, 2004.
Commodity Contracts -- At June 30, 2004 and December 31, 2003, current and
noncurrent commodity contract assets, arising largely from mark-to-market
accounting, totaled $738 million and $657 million, respectively, and are stated
net of applicable credit (collection) and performance reserves totaling $19
million and $18 million, respectively. Performance reserves are provided for
direct, incremental costs to settle the contracts. Current and non-current
commodity contract liabilities totaled $651 million and $549 million at June 30,
2004 and December 31, 2003, respectively.
Inventories by Major Category --
June 30, December 31,
2004 2003
----------- ------------
Materials and supplies.................................................... $ 129 $ 225
Fuel stock................................................................ 84 78
Gas stored underground.................................................... 97 83
------- -------
Total inventories................................................... $ 310 $ 386
======= =======
As described in Note 1, Energy recorded a charge of $79 million ($51
million after-tax) to write down spare parts and equipment inventory.
Property, Plant and Equipment -- At June 30, 2004 and December 31, 2003,
property, plant and equipment of $9.9 billion and $10.3 billion is stated net of
accumulated depreciation and amortization of $7.4 billion and $7.6 billion,
respectively.
Derivatives and Hedges -- Energy experienced net hedge ineffectiveness of
$5 million and $17 million, reported as a loss in revenues, for the three and
six months ended June 30, 2004. For the three and six months ended June 30,
2003, there was no net hedge ineffectiveness. These losses related primarily to
hedges of anticipated power sales.
18
The net effect of unrealized mark-to-market ineffectiveness accounting,
which includes the above amounts as well as the effect of reversing unrealized
gains and losses recorded in previous periods to offset realized gains and
losses in the current period, totaled $2 million and $17 million in net losses
for the three and six months ended June 30, 2004, respectively, and $8 million
and $14 million in net gains for the three and six months ended June 30, 2003,
respectively.
As of June 30, 2004, it is expected that $57 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. Of this amount, $51 million relates to
commodities hedges and $6 million relates to financing-related hedges. This
amount represents the projected value of the hedges over the next twelve months
relative to what would be recorded if the hedge transactions had not been
entered into. The amount expected to be reclassified is not a forecasted loss
incremental to normal operations, but rather it demonstrates the extent to which
volatility in earnings and cash flows (which would otherwise exist) is mitigated
through the use of cash flow hedges.
Supplemental Cash Flow Information -- See Note 2 for the effects of
adopting SFAS 143, which were noncash in nature. The transfer of TXU Fuel
Company ownership as discussed in Note 5 was noncash in nature.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TXU Energy Company LLC:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Energy Company LLC and subsidiaries (Energy) as of June 30, 2004, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and six-month periods ended June 30, 2004 and 2003, and the
condensed statements of consolidated cash flows for the six-month periods ended
June 30, 2004 and 2003. These interim financial statements are the
responsibility of Energy's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Energy as of December 31, 2003, and the related statements of consolidated
income, comprehensive income, cash flows and membership interests for the year
then ended (not presented herein); and in our report (which includes an
explanatory paragraph related to the rescission of Emerging Issues Task Force
Issue No. 98-10), dated March 11, 2004, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 12, 2004
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
Energy is a subsidiary of US Holdings, which is a subsidiary of TXU Corp.
Energy engages in power production (electricity generation), retail and
wholesale sales of electricity and natural gas, and engages in commodity hedging
and risk management activities.
Energy currently has no reportable segments, however, management intends
to realign its operations into two core business segments consisting of Power
(the electricity production business) and Energy (the retail energy business)
effective with reporting for the first quarter of 2005.
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.
Energy anticipates performance improvements as a result of various
strategic initiatives, including lower administrative support costs, more
efficient and cost-effective utilization of generation-related assets and
increased return on investments. 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 $257 million ($167 million after-tax)
in the second quarter of 2004 and $274 million ($178 million after-tax)
year-to-date, reported in other deductions, related to asset writedowns and
employee severance.
Charges recorded in the three-month and six-month periods ended June 30,
2004 and 2003 reported in other deductions are detailed in Note 7 to Financial
Statements.
The review of Energy's operations and formulation of strategic
initiatives is ongoing, and additional charges are expected. The phases of the
plan resulting in the charges to date are anticipated to be largely completed
within one year. Upon completion of each phase of the plan, Energy expects to
fully describe the actions intended to improve the financial performance of its
operations. Certain of the strategic initiatives described below could result in
additional material changes that Energy is currently unable to predict. In
addition, other new strategic initiatives are likely to be undertaken that could
also materially affect Energy's financial results.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Energy entered into a service 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 TXU Corp. employees
(including approximately 1,100 from Energy) transferred to Capgemini effective
July 1, 2004. Outsourced base support services performed by Capgemini for a
fixed fee include information technology, customer call center, billing and
collections, human resources, supply chain and certain accounting activities.
Energy expects that the Capgemini arrangement will result in lower costs and
improved service levels.
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use Energy'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
Energy. As a result of outsourcing its information technology activities, Energy
no longer intends to develop of the majority of these projects and from Energy'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 $109 million
($71 million after-tax), reported in other deductions. The remaining assets,
totaling $134 million, were transferred to a subsidiary of TXU Corp. at book
value, which subsidiary holds the investment in Capgemini, in exchange for an
interest in that subsidiary, which such interest is accounted for by Energy on
the equity method.
21
Also as part of the services 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, Energy recorded a $27 million ($18 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. The charge
includes an allocation of severance related to TXU Business Services Company
employees. In addition, TXU Corp. committed to pay up to $25 million for costs
associated with transitioning the outsourced activities to Capgemini. The
transition costs applicable to Energy are expected to be recorded during the
remainder of 2004.
Transfer and Sale of TXU Fuel Company
-------------------------------------
On April 30, 2004, Energy distributed the assets of TXU Fuel Company,
its gas transportation subsidiary, to US Holdings at book value, including $16
million of allocated goodwill. On June 2, 2004, US Holdings completed the sale
of the assets of TXU Fuel Company 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.
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 will also temporarily
closed four other gas-fired units and place them under evaluation for
retirement. The 12 units represent a total of 1,471 MW, or more than 13%, 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). Should final decisions be
reached, additional charges of approximately $68 million ($44 million after-tax)
would be incurred during the remainder of 2004 associated with future
generation-related facility closures.
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, management 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 the facility
down to estimated fair market value. The results of the business are reported in
discontinued operations as discussed in Note 3 to the Financial Statements.
22
Organizational Realignment and Headcount Reductions
----------------------------------------------------
Energy intends to realign its operations into two core business segments
consisting of:
o Power - the electricity production business; and
o Energy - the retail energy business.
Processes are currently being developed to report operating results of
the Power and Energy business segments, taking into consideration the effects of
the expected formation of the energy marketing and trading joint venture. (Only
operating results for consolidated Energy are provided in this report.) Results
are expected to be reported under the new segment alignment no later than the
first quarter of 2005.
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, Energy 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, Energy recorded severance charges
totaling $43 million ($28 million after-tax), reported in other deductions.
Investment in New Trading Entity
--------------------------------
Energy and Credit Suisse First Boston (USA), Inc. have entered into a
memorandum of understanding to establish a 50/50 investment in an entity that
would become the exclusive energy marketing and trading vehicle for both parties
in North America. The new entity will market and trade power, natural gas and
other energy-related commodities in North America. The new entity is expected to
begin operations in late 2004.
Strategic Review of Nuclear Assets
----------------------------------
Energy announced its intent to undertake a strategic review of its
nuclear assets, comprised of two electricity generating units at Comanche Peak,
each with a capacity of 1,150 MW. The objectives of this strategic review are to
evaluate potential means to reduce the cost risk of outages of these low
marginal cost facilities and improve the long-term availability and certainty of
electricity supply for Energy's customers.
Preferred Membership Interests
------------------------------
In April 2004, TXU Corp. purchased from the holders Energy's preferred
membership interests with a liquidation value of $750 million. Energy's carrying
amount of the security, which remains outstanding, is the $750 million
liquidation amount less an approximate $246 million remaining unamortized
discount and $31 million in unamortized debt issuance costs.
See Note 4 to Financial Statements for further detail of financing
arrangements.
Consolidation of Real Estate
----------------------------
Currently, TXU Corp. owns or leases more than 1.7 million square feet in
various management and support office locations, far more than its anticipated
needs, which are approximately 20% of that total. TXU Corp. is exploring
alternatives to reduce current office space and consolidate into a location that
will enable better employee communication and collaboration and cost
effectiveness. Implementation of these initiatives may result in charges for
E