Back to GetFilings.com
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------------------
Commission File Number 1-11668
TXU US Holdings Company
Texas 75-1837355
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
-----------------------
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
--- ----
Common Stock outstanding at August 10, 2004: 2,062,768 Class A shares, without
par value and 39,192,594 Class B shares, without par value.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- ---------------------------------------------------------------------------------------------------------------
PAGE
----
Glossary .......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income-
Three and Six Months Ended June 30, 2004 and 2003............................ 1
Condensed Statements of Consolidated Comprehensive Income-
Three and Six Months Ended June 30, 2004 and 2003............................ 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2004 and 2003...................................... 3
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003.......................................... 4
Notes to Condensed Financial Statements...................................... 5
Report of Independent Registered Public Accounting Firm...................... 25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 60
Item 4. Controls and Procedures...................................................... 62
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 63
Item 6. Exhibits and Reports on Form 8-K ............................................ 63
SIGNATURE.......................................................................................... 66
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU US Holdings Company 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 US Holdings Company will provide copies of current
reports not posted on the website upon request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation................. Legislation that restructured the electric utility industry
in Texas to provide for retail competition
2003 Form 10-K................................. US Holdings' 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, the Independent
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 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
ii
NRC............................................ United States Nuclear Regulatory Commission
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.................................... refers to TXU US Holdings Company, a subsidiary of TXU
Corp., and /or its consolidated subsidiaries, depending on
context
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY
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................................................... $2,297 $2,151 $4,426 $4,067
------ ------ ------ ------
Costs and expenses:
Cost of energy sold and delivery fees............................. 1,009 931 1,913 1,768
Operating costs.................................................. 378 339 719 690
Depreciation and amortization..................................... 171 162 357 344
Selling, general and administrative expenses...................... 218 198 409 387
Franchise and revenue-based taxes................................. 85 88 170 181
Other income...................................................... (18) (17) (20) (26)
Other deductions.................................................. 280 1 299 3
Interest income................................................... (6) (4) (8) (9)
Interest expense and related charges.............................. 154 156 299 308
----- ----- ----- -----
Total costs and expenses...................................... 2,271 1,854 4,138 3,646
----- ----- ----- -----
Income from continuing operations before income taxes, extraordinary
gain and cumulative effect of changes in accounting principles..... 26 297 288 421
Income tax expense (benefit)......................................... (5) 96 77 130
------ ----- ----- -----
Income from continuing operations before extraordinary gain and
cumulative effect of changes in accounting principles.............. 31 201 211 291
Loss from discontinued operations, net of tax benefit (Note 3)....... (27) - (30) (1)
Extraordinary gain, net of tax....................................... 16 - 16 -
Cumulative effect of changes in accounting principles, net of
tax benefit (Note 2) .............................................. - - - (58)
----- ----- ----- ------
Net income........................................................... $ 20 $ 201 $ 197 $ 232
Preferred stock dividends............................................ - 2 1 4
----- ----- ----- -----
Net income available for common stock $ 20 $ 199 $ 196 $ 228
----- ----- ----- -----
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY
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 from continuing operations before extraordinary gains and
cumulative effect of changes in accounting principle................... $ 31 $ 201 $ 211 $ 291
----- ---- ----- -----
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).......................................... 8 24 13 73
----- ----- ----- -----
Total.......................................................... (9) 4 (62) (25)
------ ----- ------ ------
Comprehensive income (loss) related to continuing operations................. 22 205 149 266
Comprehensive loss related to discontinued operations........................ (27) - (30) (1)
Extraordinary gain net of tax................................................ 16 - 16 -
Cumulative effect of changes in accounting principle, net of tax benefits.... - - - (58)
----- ----- ----- -----
Comprehensive income (loss).................................................. $ 11 $ 205 $ 135 $ 207
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------
2004 2003
------ ------
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before extraordinary gain and cumulative
effect of changes in accounting principles.................................... $ 211 $ 291
Adjustments to reconcile income from continuing operations before
extraordinary gain and cumulative effect of changes in accounting principles
to cash provided by operating activities:
Depreciation and amortization ............................................... 387 381
Deferred income taxes and investment tax credits - net ...................... (70) 115
Asset writedown charges...................................................... 189 -
Net gain from sale of assets................................................ (18) (21)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 31 (47)
Increase (reduction) in regulatory liability................................. 1 (78)
Changes in operating assets and liabilities..................................... 27 35
------ ------
Cash provided by operating activities.................................... 758 676
------ ------
Cash flows - financing activities:
Issuances of long-term debt..................................................... 790 1,294
Retirements/repurchases of securities:
Long-term debt............................................................... (235) (490)
Preferred stock of subsidiary, subject to mandatory redemption............... - (5)
Common stock................................................................. - (250)
Change in advances - affiliates................................................. (2,793) 199
Dividends paid to parent........................................................ (425) (250)
Change in notes payable - banks................................................. 1,675 (1,804)
Preferred stock dividends paid.................................................. (1) (4)
Redemption deposits applied to debt retirements................................. - 210
Debt premium, discount, financing and reacquisition expenses.................... (15) (36)
------- -------
Cash provided by (used in) financing activities.......................... (1,004) (1,136)
------- -------
Cash flows - investing activities:
Capital expenditures............................................................ (354) (350)
Nuclear fuel.................................................................... (48) (35)
Proceeds from sale of business.................................................. 495 15
Other........................................................................... 20 4
------ ------
Cash provided by (used) in investing activities.......................... 113 (366)
------ -------
Cash contributions to discontinued operations..................................... (2) -
------- ------
Net change in cash and cash equivalents........................................... (135) (826)
Cash and cash equivalents - beginning balance..................................... 806 1,508
------ ------
Cash and cash equivalents - ending balance........................................ $ 671 $ 682
====== ======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
------- --------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 671 $ 806
Restricted cash................................................................ 23 12
Advances to affiliates......................................................... 2,314 -
Accounts receivable-- trade.................................................... 1,178 1,001
Inventories.................................................................... 340 415
Commodity contract assets...................................................... 596 548
Other current assets........................................................... 347 258
------ ------
Total current assets...................................................... 5,469 3,040
Investments:
Restricted cash................................................................ 14 13
Other investments.............................................................. 653 510
Property, plant and equipment-- net............................................... 16,283 16,677
Goodwill.......................................................................... 542 558
Regulatory assets-- net........................................................... 1,907 1,872
Commodity contract assets......................................................... 142 109
Cash flow hedge and other derivative assets....................................... 34 88
Assets held for sale.............................................................. 23 60
Other noncurrent assets........................................................... 174 143
------ ------
Total assets........................................................... $25,241 $23,070
======= =======
LIABILITIES, PREFERRED INTERESTS AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from affiliates....................................................... $ - $ 691
Notes payable-- banks.......................................................... 1,675 -
Long-term debt due currently................................................... 197 249
Accounts payable-- trade....................................................... 1,102 775
Commodity contract liabilities................................................. 550 502
Accrued taxes.................................................................. 491 414
Other current liabilities...................................................... 860 784
------ ------
Total current liabilities................................................. 4,875 3,415
Accumulated deferred income taxes................................................. 3,222 3,403
Investment tax credits............................................................ 415 428
Commodity contract liabilities.................................................... 101 47
Cash flow hedge and other derivative liabilities.................................. 242 140
Liabilities held for sale......................................................... 8 11
Other noncurrent liabilities and deferred credits................................. 1,820 1,592
Long-term debt, less amounts due currently........................................ 7,814 7,217
Preferred membership interests, held by TXU Corp. at June 30, 2004, net
of discount of $246 and $253 (Note 4)........................................... 504 497
------ ------
Total liabilities......................................................... 19,001 16,750
Contingencies (Note 6)
Shareholders' equity and preferred interests (Note 5):
Preferred stock - not subject to mandatory redemption (Note 5).................. 38 38
Common stock without par value (Note 5):
Class A - Authorized shares: - 9,000,000, Outstanding shares:-- 2,062,768.... 102 102
Class B - Authorized shares: - 171,000,000, Outstanding shares-- 39,192,594.. 1,949 1,949
Retained earnings............................................................... 4,348 4,366
Accumulated other comprehensive loss............................................ (197) (135)
------- -------
Total common stock equity.................................................... 6,202 6,282
------ ------
Total shareholders' equity and preferred interests......................... 6,240 6,320
------- ------
Total liabilities, preferred interests and shareholders' equity.......... $25,241 $23,070
======= =======
See Notes to Financial Statements.
4
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business -- US Holdings is a subsidiary of TXU Corp. and is
a holding company that conducts its principal operations through Energy and
Electric Delivery. Energy engages in power production (electricity generation),
retail and wholesale sales of electricity and natural gas, and commodity hedging
and risk management activities. Electric Delivery engages in regulated
electricity transmission and distribution operations. (See Note 7 for more
information on 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 $276 million ($180 million after-tax) in the second quarter of
2004 and $293 million ($191 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 8.
Capgemini Energy Agreement
On May 17, 2004, Energy and Electric Delivery each 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 1,300 from US Holdings) 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 US Holdings' 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 US
Holdings, and as a result of outsourcing its information technology activities,
US Holdings no longer intends to develop the majority of these projects and from
US Holdings' perspective the software is abandoned. The agreements with
Capgemini do not require that any software in development be completed and
placed in service. Consequently, the previously capitalized balance for these
software projects was written off in the second quarter of 2004, resulting in a
charge of $110 million ($72 million after-tax), reported in other deductions.
The remaining assets, totaling $191 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 US Holdings on the equity method.
5
Also as part of the agreements, TXU Corp. agreed to indemnify Capgemini
for severance costs incurred by Capgemini for former TXU Corp. employees
terminated within 18 months of their transfer to Capgemini. Accordingly, US
Holdings recorded a $38 million ($25 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 US Holdings 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. 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. Because of the continuing involvement in the business through
the transportation agreement, the pre-tax gain related to the sale of $377
million will be recognized over the eight-year life of the transportation
agreement and the business has not been accounted for as a discontinued
operation. The pre-tax gain is net of $16 million of Energy goodwill allocated
to TXU Fuel Company.
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.
6
Organizational Realignment and Headcount Reductions
----------------------------------------------------
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, US Holdings recorded severance
charges totaling $50 million ($33 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.
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 US Holdings 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.
7
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 $6 million and $12 million,
respectively, in Holding's postretirement benefit costs.
Extraordinary gain -- An extraordinary gain of $16 million (net of tax of
$9 million) in 2004 represents an increase in the carrying value of Electric
Delivery's regulatory asset subject to securitization. The second and final
tranche of the securitization bonds was issued in June 2004. The increase in the
related regulatory asset, with a carrying value of $1.7 billion, is due to the
effect of higher interest rates on the bonds and therefore increased amounts to
be recovered from REPs through delivery fee surcharges to service the bonds.
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 US Holdings, 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) US Holdings had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
8
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................. $488
Increase in other noncurrent liabilities and deferred credits... (528)
Increase in accumulated deferred income taxes................... (3)
Increase in regulatory assets - net............................. 48
----
Cumulative effect of change in accounting principles............ $ 5
====
The asset retirement liability at June 30, 2004 was $607 million,
comprised of a $599 million liability as of December 31, 2003, $20 million of
accretion during the six months ended June 30, 2004, reduced by $12 million in
reclamation payments.
With respect to nuclear decommissioning costs, for US Holdings the
adoption of SFAS 143 results in timing differences in the recognition of asset
retirement costs that are being recovered through the regulatory process.
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial information
of the various businesses reported as discontinued operations:
Three Months Ended June 30, 2004 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 (previously
reported in the Energy segment) 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 (previously reported in the
Energy segment), 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.
9
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
===== ===== =====
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At June 30, 2004, US Holdings had outstanding
short-term borrowings consisting of bank borrowings of $1.7 billion at a
weighted average interest rate of 3.01% and advances from affiliates of $2.3
billion at a weighted average interest rate of 2.86%. At December 31, 2003, US
Holdings had outstanding short-term advances from affiliates of $691 million at
a weighted average interest rate of 2.92%.
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.
10
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, $496 million
of undivided interests in US Holdings' 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.
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 $5 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 US Holdings 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 $892 million face amount of trade
accounts receivable of Energy and Electric Delivery, reduced by $496 million of
undivided interests sold by TXU Receivables Company. Funding under the program
decreased $51 million for the six months ended June 30, 2004. Funding under the
program for the six months ended June 30, 2003 increased $31 million. Funding
increases or decreases under the program are reflected as operating cash flow
activity in the statement of cash flows. The carrying amount of the retained
interests in the accounts receivable approximated fair value due to the
short-term nature of the collection period.
11
Activities of TXU Receivables Company related to US Holdings 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...................................... $ 3,316 $3,227
Face amount of new receivables purchased..................................... (3,194) (2,863)
Discount from face amount of purchased receivables........................... 7 9
Program fees paid............................................................ (5) (6)
Servicing fees paid.......................................................... (2) (3)
Increase (decrease) in subordinated notes payable............................ (71) (395)
------- ------
US Holdings' operating cash flows (provided) used under the program..... $ 51 $ (31)
======= =======
Upon termination of the program, cash flows to US Holdings 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.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure, by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
12
Long-Term Debt -- At June 30, 2004 and December 31, 2003, the long-term
debt of US Holdings and its consolidated subsidiaries consisted of the
following:
June 30, December 31,
2004 2003
--------- -------------
Energy
------
Pollution Control Revenue Bonds:
Brazos River Authority:
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a).......... $ 39 $ 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a).......... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)........ 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a)....... 118 118
7.700% Fixed Series 1999A due April 1, 2033......................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1, 2013(a).. 16 16
7.700% Fixed Series 1999C due March 1, 2032......................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030, remarketing date April 1, 2004(a).... -- 121
4.750% Fixed Series 2001B due May 1, 2029, remarketing date November 1, 2006(a)..... 19 19
5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011(a)..... 274 274
1.140% Floating Series 2001D due May 1, 2033........................................ 271 271
1.380% Floating Taxable Series 2001I due December 1, 2036(b)........................ 63 63
1.100% Floating Series 2002A due May 1, 2037(b)..................................... 61 61
6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013(a)...... 44 44
6.300% Fixed Series 2003B due July 1, 2032.......................................... 39 39
6.750% Fixed Series 2003C due October 1, 2038....................................... 72 72
5.400% Fixed Series 2003D due October 1, 2029, remarketing date October 1, 2014(a).. 31 31
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021.......................................... 51 51
5.500% Fixed Series 2001A due May 1, 2022, remarketing date November 1, 2011(a)..... 91 91
5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011(a)..... 107 107
5.800% Fixed Series 2003A due July 1, 2022.......................................... 12 12
6.150% Fixed Series 2003B due August 1, 2022........................................ 45 45
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................... 14 14
5.000% Fixed Series 2001A due May 1, 2027, remarketing date November 1, 2006(a)..... 37 37
Other:
6.875% TXU Mining Fixed Senior Notes due August 1, 2005................................ 30 30
6.125% Fixed Senior Notes due March 15, 2008(c)........................................ 250 250
7.000% Fixed Senior Notes due March 15, 2013(c)........................................ 1,000 1,000
Capital lease obligations.............................................................. 12 13
Other.................................................................................. 2 8
Fair value adjustments related to interest rate swaps.................................. (4) 11
Unamortized discount................................................................... -- (2)
------- ------
Total Energy ...................................................................... 2,944 3,085
Electric Delivery
8.250% Fixed First Mortgage Bonds due April 1, 2004.................................... -- 100
6.250% Fixed First Mortgage Bonds due October 1, 2004.................................. 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005..................................... 92 92
7.625% Fixed First Mortgage Bonds due July 1, 2025..................................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025.................................. 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012(c)................................... 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032...................................... 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015................................. 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033................................. 350 350
5.000% Fixed Debentures due September 1, 2007(c)....................................... 200 200
7.000% Fixed Debentures due September 1, 2022.......................................... 800 800
Unamortized discount................................................................... (26) (30)
13
June 30, December 31,
2004 2003
---------- -------------
TXU Electric Delivery Transition Bond Company LLC (e)
- -----------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through February 15, 2007... 95 103
4.030% Fixed Series 2003 Bonds due in bi-annual installments through February 15, 2010... 122 122
4.950% Fixed Series 2003 Bonds due in bi-annual installments through February 15, 2013... 130 130
5.420% Fixed Series 2003 Bonds due in bi-annual installments through August 15, 2015..... 145 145
3.520% Fixed Series 2004 Bonds due in bi-annual installments through November 15, 2009... 279 --
4.810% Fixed Series 2004 Bonds due in bi-annual installments through November 15, 2012... 221 --
5.290% Fixed Series 2004 Bonds due in bi-annual installments through May 15, 2016........ 290 --
------ ------
Total TXU Electric Delivery Transition Bond Company LLC............................... 1,282 500
------- ------
Total Electric Delivery............................................................... 4,912 4,226
US Holdings
7.170% Fixed Senior Debentures due August 1, 2007........................................ 10 10
9.580% Fixed Notes due in bi-annual installments through December 4, 2019................ 70 70
8.254% Fixed Notes due in quarterly installments through December 31, 2021............... 66 66
1.979% Floating Rate Junior Subordinated Debentures, Series D due January 30, 2037(d).... 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037............... 8 8
------ ------
Total US Holdings ................................................................... 155 155
Total US Holdings consolidated............................................................... 8,011 7,466
Less amount due currently.................................................................... 197 249
------ ------
Total long-term debt......................................................................... $7,814 $7,217
====== ======
- --------------
(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 $1.7 billion principal
amount.
(d) Interest rates in effect at June 30, 2004.
(e) These bonds are nonrecourse to Electric Delivery.
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 June 2004, Electric Delivery's wholly-owned, special purpose
bankruptcy-remote subsidiary, TXU Electric Delivery Transition Bond Company LLC,
issued $790 million aggregate principal amount of transition (securitization)
bonds in accordance with a settlement agreement with the Commission and a
financing order related to the transition to competition. The bonds were issued
in three classes that require bi-annual interest and principal installment
payments beginning in November 2004 through specified dates in 2009 through
2016. The transition bonds bear interest at fixed annual rates ranging from
3.52% to 5.29%. Electric Delivery used the proceeds to retire, subsequent to
June 30, 2004, two series of mortgage bonds with an aggregate principal amount
of $393 million due in 2025 and to repurchase shares of common stock from US
Holdings for $375 million. US Holdings used the proceeds it received to repay
short-term borrowings. As a result of the retirement of these two series of
mortgage bonds, Electric Delivery will be able to release the liens on its
outstanding senior secured notes, making them rank equally with Electric
Delivery's other senior unsecured debt. No decision has been made as to the
timing of such release.
14
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds with an aggregate principal amount of $121 million were purchased
upon mandatory tender. Energy intends to remarket these bonds at a later date.
Other retirements of long-term debt in 2004 totaling $115 million
represent payments at scheduled maturity dates.
Fair Value Hedges -- At June 30, 2004, $1.65 billion of fixed rate debt
was effectively converted to variable rates through interest rate swap
transactions, accounted for as fair value hedges, expiring through 2013. In
August 2004, fixed-to-variable swaps related to $1.2 billion of such debt were
settled for a gain of $8 million, 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 related 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. SHAREHOLDERS' EQUITY
At June 30, 2004, US Holdings had 379,231 shares of cumulative, preferred
stock without par value outstanding with dividend rates ranging from $4.00 to
$5.08 per share. The preferred stock can be redeemed at prices ranging from
$101.70 per share to $112.00 per share. The preferred stock is not mandatorily
redeemable.
The holders of preferred stock of US Holdings have no voting rights except
for changes to the articles of incorporation that would change the rights or
preferences of such stock, authorize additional shares of stock or create an
equal or superior class of stock. They have the right to vote for the election
of directors only if certain dividend arrearages exist.
The legal form of cash distributions to TXU Corp. has been both common
stock repurchases and the payment of dividends. For accounting purposes, the
cash distributions in the form of share repurchases are recorded as a return of
capital.
Certain debt instruments and preferred securities of US Holdings and its
subsidiaries contain provisions that restrict payment of dividends during any
interest or distribution payment deferral period or while any payment default
exists. An Electric Delivery mortgage restricts the payment of dividends to the
amount of Electric Delivery's retained earnings. At June 30, 2004, US Holdings
and its subsidiaries were in compliance with these provisions.
15
US Holdings declared a cash dividend of $212 million to TXU Corp. in
November 2003 which was paid in January 2004. In February 2004, US Holdings
declared a dividend of $212.5 million which was paid to TXU Corp. in April 2004.
In June 2004, US Holdings declared a dividend of $175 million which was paid to
TXU Corp. in July 2004.
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 -- US Holdings has entered into contracts that contain
guarantees to outside parties that could require performance or payment under
certain conditions. These guarantees have been grouped based on similar
characteristics and are described in detail below.
Project development guarantees -- In 1990, US Holdings repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. US Holdings is making principal and interest payments to the
co-op in an amount sufficient for the co-op to make payments on its
indebtedness. US Holdings guaranteed the co-op's payments, and in the event that
the co-op fails to make its payments on the indebtedness, the US government
would assume the co-op's rights under the agreement, and such payments would
then be owed directly by US Holdings. At June 30, 2004, the balance of the
indebtedness was $135 million with maturities of principal and interest
extending to December 2021. The indebtedness is secured by a lien on the
purchased facilities.
Residual value guarantees in operating leases -- US Holdings 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 $246 million with an estimated residual recovery of approximately
$150 million. The average life of the lease portfolio is approximately six
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.
16
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.
US Holdings has outstanding letters of credit in the amount of $12 million
for miscellaneous credit support requirements. Although the average life of the
letters of credit is for approximately one year, the obligation to provide
guarantees is ongoing.
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 -- US Holdings has outstanding surety bonds of approximately
$30 million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
Other -- US Holdings has entered into contracts with public agencies to
purchase cooling water for use in the generation of electric energy and has
agreed, in effect, to guarantee the principal, $12 million at June 30, 2004, and
interest on bonds issued by the agencies to finance the reservoirs from which
the water is supplied. The bonds mature at various dates through 2011 and have
interest rates ranging from 5.50% to 7%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings. In addition, US Holdings
is obligated to pay certain variable costs of operating and maintaining the
reservoirs. US Holdings has assigned to a municipality all its contract rights
and obligations in connection with $8 million remaining principal amount of
bonds at June 30, 2004, issued for similar purposes, which had previously been
guaranteed by US Holdings. US Holdings is, however, contingently liable in the
event of default by the municipality.
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 US Holdings.
Accordingly, US Holdings 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. US Holdings 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,
17
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
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, US Holdings 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.
18
7. SEGMENT INFORMATION
US Holdings operations are aligned into two reportable segments: Energy
and Electric Delivery.
Energy - consists of operations, which are principally in the competitive
Texas market, involving power production (electricity generation), retail and
wholesale energy sales and portfolio management, which includes hedging and risk
management activities.
Electric Delivery - consists of operations, which are regulated and
involve the transmission and distribution of electricity in Texas.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. US Holdings evaluates
performance based on income from continuing operations before extraordinary
items and cumulative effect of changes in accounting principles. US Holdings
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices.
The business segments provide services or sell products to each other.
Such sales are made at prices comparable with those received from nonaffiliated
customers for similar products or services. No customer provided more than 10%
of consolidated revenues.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Operating revenues:
Energy............................................................ $2,115 $2,016 $4,072 $3,806
Electric Delivery................................................. 518 486 1,041 992
Other............................................................. 3 - 5 -
Eliminations...................................................... (339) (351) (692) (731)
------ ------ ------ ------
Consolidated.................................................... $2,297 $2,151 $4,426 $4,067
====== ====== ====== ======
Regulated revenues included in operating revenues:
Energy............................................................ $ - $ - $ - $ -
Electric Delivery................................................. 518 486 1,041 992
Eliminations...................................................... (335) (349) (685) (726)
------ ------ ------ ------
Consolidated.................................................... $ 183 $ 137 $ 356 $ 266
====== ====== ====== ======
Affiliated revenues included in operating revenues:
Energy............................................................ $ 3 $ 2 $ 5 $ 5
Electric Delivery................................................. 335 349 685 726
Other............................................................. 1 - 2 -
Eliminations...................................................... (339) (351) (692) (731)
------ ------ ------ ------
Consolidated.................................................... $ - $ - $ - $ -
====== ====== ====== ======
Income (loss) from continuing operations before extraordinary gain and
cumulative effect of changes in accounting principles:
Energy............................................................ $ (19) $ 154 $ 99 $ 190
Electric Delivery................................................. 47 52 113 113
Other............................................................. 3 (5) (1) (12)
------ ------ ------ ------
Consolidated.................................................... $ 31 $ 201 $ 211 $ 291
====== ====== ====== ======
19
8. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- ----
(millions of dollars)
Operating revenues:
Regulated......................................................... $ 518 $ 486 $1,041 $ 992
Unregulated....................................................... 2,118 2,016 4,077 3,806
Intercompany sales eliminations - regulated....................... (335) (349) (685) (726)
Intercompany sales eliminations - unregulated..................... (4) (2) (7) (5)
----- ----- ----- -----
Total operating revenues...................................... 2,297 2,151 4,426 4,067
----- ----- ----- -----
Costs and operating expenses:
Cost of energy sold and delivery fees - unregulated*.............. 1,009 931 1,913 1,768
Operating costs - regulated...................................... 181 176 356 349
Operating costs - unregulated..................................... 197 163 363 341
Depreciation and amortization - regulated......................... 83 68 170 137
Depreciation and amortization - unregulated....................... 88 94 187 207
Selling, general and administrative expenses - regulated.......... 54 48 102 97
Selling, general and administrative expenses - unregulated........ 164 150 307 290
Franchise and revenue-based taxes - regulated..................... 58 60 117 120
Franchise and revenue-based taxes - unregulated................... 27 28 53 61
Other income...................................................... (18) (17) (20) (26)
Other deductions.................................................. 280 1 299 3
Interest income................................................... (6) (4) (8) (9)
Interest expense and related charges.............................. 154 156 299 308
----- ----- ----- -----
Total costs and expenses........................................ 2,271 1,854 4,138 3,646
----- ----- ----- -----
Income from continuing operations before income taxes, extraordinary
gain and cumulative effect of changes in accounting principles....... $ 26 $ 297 $ 288 $ 421
===== ===== ===== =====
Includes cost of fuel consumed of $242 million and $423 million for the three
months ended June 30, 2004 and 2003, respectively, and $462 million and $837
million for the six months ended June 30, 2004 and 2003, respectively. The
balance in each period represents energy purchased for resale and delivery fees.
The operations of the Energy segment are included above as unregulated, as
the Texas market is open to competition. However, retail pricing to residential
customers in its historical service territory continues to be subject to
transitional regulatory provisions.
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....... $ 16 $ 15 $ 17 $ 21
Equity portion of allowance for funds used during
construction.................................... - 1 1 2
Other............................................... 2 1 2 3
------ ------ ------ ------
Total other income............................... $ 18 $ 17 $ 20 $ 26
====== ====== ====== ======
Other deductions:
Software write-off.................................. $ 110 $ - $ 110 $ -
Employee severance charges.......................... 88 - 103 -
Spare parts inventory writedown..................... 79 - 79 -
Expenses related to canceled construction projects.. 2 1 4 2
Transaction-related fees............................ - - 1 -
Other .............................................. 1 - 2 1
------ ------ ------ ------
Total other deductions........................... $ 280 $ 1 $ 299 $ 3
====== ====== ====== ======
20
Interest Expense and Related Charges --
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- ------
Interest ............................................. $ 132 $ 152 $ 255 $ 298
Distributions on preferred membership interest
in Energy (a)...................................... 17 - 34 -
Amortization of debt discounts, premiums
and issuance cost.................................. 7 7 15 15
Allowance for borrowed funds used during construction
and capitalized interest........................... (2) (3) (5) (5)
------ ------ ------ ------
Total interest expense and related charges...... $ 154 $ 156 $ 299 $ 308
====== ====== ====== ======
(a) Included in interest for the three months 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.
Regulatory Assets and Liabilities --
June 30, December 31,
2004 2003
--------- -------------
Regulatory Assets
Generation-related regulatory assets recoverable by securitization bonds.... $1,669 $1,654
Securities reacquisition costs.............................................. 122 121
Recoverable deferred income taxes-- net..................................... 99 96
Other regulatory assets..................................................... 107 95
----- -----
Total regulatory assets................................................. 1,997 1,966
Regulatory Liabilities
Investment tax credit and protected excess deferred taxes.................. 84 88
Over-collection of transition bond (securitization) revenues................ 6 6
----- -----
Total regulatory liabilities............................................ 90 94
----- -----
Net regulatory assets................................................. $1,907 $1,872
====== ======
Included in net regulatory assets are assets of $121 million at June 30,
2004 that are earning a return. The regulatory assets, other than those subject
to securitization, have a remaining recovery period of 15 to 47 years.
Included in other regulatory assets as of June 30, 2004 was $37 million
related to nuclear decommissioning liabilities.
Restricted Cash -- At June 30, 2004, TXU Electric Delivery Transition
Bond Company LLC had $23 million of restricted cash, representing collections
from customers that secure its securitization bonds and may only be used to
service its debt and pay its expenses.
Retirement Plan And Other Postretirement Benefits - US Holdings is a
participating employer in the TXU Retirement Plan, a defined benefit pension
plan sponsored by TXU Corp. US Holdings 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 US
Holdings was $26 million for each of the three month periods ended June 30, 2004
and 2003, respectively, and $54 million and $53 million for the six months ended
June 30, 2004 and 2003, respectively.
The outsourcing transaction on July 1, 2004, (See Note 1 to Financial
Statements) caused a partial termination of the retirement plan, which combined
with a change in discount rate is expected to reduce pension and other
postretirement cost for the remainder of 2004.
21
At June 30, 2004, US Holdings 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.
Affiliate Transactions -- The following represent significant affiliate
transactions of US Holdings:
o Average daily short-term advances to affiliates during the three
months ended June 30, 2004 was $911 million and the average
daily short-term advances from affiliates during the three months
ended June 30, 2003 was $966 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 $8 million. The weighted average interest
rate was 2.85% and 3.07% for the three months ended June 30, 2004 and
2003, respectively. Average daily short-term advances to
affiliates during the six months ended June 30, 2004 was $218 million
and the average daily short-term advances from affiliates during
six months ended June 30, 2003 was $917 million. Interest income
earned on the advances for the six months ended June 30, 2004 was $3
million and interest expense incurred on the advances for the six
months ended June 30, 2003 was $13 million. The weighted
average interest rate was 2.85% and 2.7% for the six months ended
June 30, 2004 and 2003, respectively.
o TXU Business Services charges US Holdings for certain 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 $124
million and $86 million, respectively, and are primarily included in
SG&A expenses. For the six months ended June 30, 2004 and 2003, these
costs totaled $203 million and $175 million, respectively.
o US Holdings charges TXU Gas for meter reading and certain customer and
administrative support services. For the three months ended June 30,
2004 and 2003, these charges totaled $13 million and $14 million,
respectively, and are largely reported as a reduction in operation and
maintenance expenses. For the six months