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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 SEPTEMBER 30, 2004
-- OR --
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2669310
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No X
--- ---
Common Stock outstanding at November 3, 2004: 291,200,409 shares, without
par value.
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TABLE OF CONTENTS
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PAGE
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GLOSSARY........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2004 and 2003.......................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Nine Months Ended September 30, 2004 and 2003.......................... 2
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2004 and 2003.................................... 3
Condensed Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003......................................... 4
Notes to Financial Statements.................................................... 5
Report of Independent Registered Public Accounting Firm.......................... 33
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 78
Item 4. Controls and Procedures ....................................................... 80
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................... 80
Item 6. Exhibits......................................................................... 81
SIGNATURE.......................................................................................... 82
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request. The information on TXU Corp.'s website shall not be deemed a part of,
or incorporated by reference into, this report on Form 10-Q.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation................. Legislation that restructured the electric utility industry
in Texas to provide for retail competition
2003 Form 10-K................................. TXU Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2003
Bcf............................................ billion cubic feet
Commission..................................... Public Utility Commission of Texas
EITF........................................... Emerging Issues Task Force
EITF 98-10 .................................... EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities"
EITF 02-3 ..................................... EITF Issue No. 02-3, "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities"
Electric Delivery.............................. refers to TXU Electric Delivery Company (formerly Oncor
Electric Delivery Company), a subsidiary of US Holdings, or
Electric Delivery and its consolidated bankruptcy remote
financing subsidiary, TXU Electric Delivery Transition Bond
Company LLC (formerly Oncor Electric Delivery Transition
Bond Company LLC), depending on context
Energy......................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of various electricity systems within Texas
ERISA.......................................... Employee Retirement Income Security Act
FASB........................................... Financial Accounting Standards Board, the designated
organization in the private sector for establishing
standards for financial accounting and reporting
FERC........................................... Federal Energy Regulatory Commission
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ gigawatt-hours
Historical service territory................... US Holdings' historical service territory, largely in north
Texas, at the time of entering retail competition on January
1, 2002
IRS............................................ Internal Revenue Service
ii
Moody's........................................ Moody's Investors Services, Inc.
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
Pinnacle....................................... Pinnacle One Partners, L.P., formerly the holding company
for the telecommunications business and formerly a joint
venture
price-to-beat rate............................. residential and small business customer electricity rates
established by the Commission in the restructuring of the
Texas market that are required to be charged in a REP's
historical service territories until January 1, 2005 or when
40% of the electricity consumed by such customer classes is
supplied by competing REPs, adjusted periodically for
changes in fuel costs, and required to be available to those
customers until January 1, 2007
REP............................................ retail electric provider
RRC............................................ Railroad Commission of Texas
S&P............................................ Standard & Poor's, a division of the McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 133....................................... SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS 150....................................... SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity"
SG&A........................................... selling, general and administrative
TXU Australia.................................. refers to TXU Australia Group Pty Ltd, formerly a subsidiary
of TXU Corp., and/or its consolidated subsidiaries,
depending on context
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Communications............................. TXU Communications Ventures Company, formerly a subsidiary
of Pinnacle
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Europe..................................... TXU Europe Limited, a former subsidiary of TXU Corp.
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining..................................... TXU Mining Company LP, a subsidiary of Energy
iii
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of Energy
UK............................................. United Kingdom
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iv
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars, except per share amounts)
Operating revenues.................................................... $2,743 $2,615 $7,178 $6,691
Costs and expenses:
Cost of energy sold, including delivery fees....................... 1,134 1,102 3,053 2,879
Operating costs.................................................... 337 336 1,057 1,025
Depreciation and amortization...................................... 210 183 579 535
Selling, general and administrative expenses....................... 280 227 805 644
Franchise and revenue-based taxes.................................. 94 92 265 280
Other income....................................................... (48) (23) (73) (49)
Other deductions................................................... 20 7 477 30
Interest income.................................................... (14) (5) (20) (20)
Interest expense and related charges............................... 163 194 521 597
------ ------ ------ ------
Total costs and expenses....................................... 2,176 2,113 6,664 5,921
------ ------ ------ ------
Income from continuing operations before income taxes, extraordinary
gain and cumulative effect of changes in accounting principles.... 567 502 514 770
Income tax expense.................................................... 187 169 92 243
------ ------ ------ ------
Income from continuing operations before extraordinary gain and
cumulative effect of changes in accounting principles.............. 380 333 422 527
Income from discontinued operations, net of tax benefit (Note 3)...... 287 64 666 84
Extraordinary gain, net of tax (Note 1)............................... - - 16 -
Cumulative effect of changes in accounting principles, net of tax
benefit (Note 2).................................................. - - - (58)
------ ------ ------ -------
Net income ........................................................... $ 667 $ 397 $1,104 $ 553
Exchangeable preferred membership interest buyback premium (Note 1)... - - 849 -
Preference stock dividends ........................................... 5 5 16 16
------ ------ ------ ------
Net income available to common shareholders........................... $ 662 $ 392 $ 239 $ 537
====== ====== ====== ======
Average shares of common stock outstanding (millions):
Basic.............................................................. 295 322 313 321
Diluted............................................................ 295 379 313 378
Per share of common stock:
Basic earnings:
Income from continuing operations before extraordinary gain and
cumulative effect of changes in accounting principles......... $ 1.30 $ 1.04 $ 1.36 $1.64
Income from discontinued operations, net of tax effect.......... 0.97 0.20 2.13 0.26
Extraordinary gain, net of tax.................................. - - 0.05 -
Cumulative effect of changes in accounting principles, net of
tax benefit................................................... - - - (0.18)
Exchangeable preferred membership interest buyback premium...... - - (2.72) -
Preference stock dividends...................................... (0.02) (0.02) (0.05) (0.05)
Net income available to common shareholders..................... 2.25 1.22 0.77 1.67
Diluted earnings (Note 1):
Income from continuing operations before extraordinary gain and
cumulative effect of changes in accounting principles......... $ 0.39 $ 0.91 $ 0.50 $1.49
Income from discontinued operations, net of tax effect.......... 0.97 0.17 2.13 0.22
Extraordinary gain, net of tax.................................. - - 0.05 -
Cumulative effect of changes in accounting principles, net of - - - -
tax benefit.................................................. (0.15)
Exchangeable preferred membership interest buyback premium...... - - (2.72) -
Preference stock dividends...................................... (0.02) (0.01) (0.05) (0.04)
Net income available to common shareholders..................... 1.34 1.07 (0.09) 1.52
Dividends declared................................................ 0.125 0.125 0.375 0.375
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before
extraordinary gain and cumulative effect of
changes in accounting principles......................... $380 $ 333 $ 422 $527
Other comprehensive income (loss), net of tax effects:
Cash flow hedges:
Net change in fair value of derivatives (net of tax
benefit of $5, $13, $41 and $83).................... (10) (23) (73) (155)
Amounts realized in earnings during the period
(net of tax expense of $8, $27 , $12 and $87) 16 53 24 162
---- ----- ----- -----
Total............................................. 6 30 (49) 7
---- ----- ------ -----
Comprehensive income related to continuing operations...... 386 363 373 534
Components related to discontinued operations:
Income from discontinued operations, net of tax.......... 287 64 666 84
Other comprehensive (loss) income, net of tax effects:
Foreign currency translation adjustment ................. (41) 19 (145) 180
Minimum pension liability adjustments (net of tax
(expense) benefit of $- and $-, $(4) and $3).......... 1 - 7 (6)
Cash flow hedges:
Net change in fair value of derivatives (net
of tax (expense) benefit of $(1), $(2), $-
and $21)............................................ 2 3 - (49)
Amounts realized in earnings during the period
(net of tax expense of $6, $6 , $- and $24)......... 13 11 - 55
---- ----- ----- -----
Total............................................. (25) 33 (138) 180
----- ----- ------ -----
Comprehensive income related to discontinued operations... 262 97 528 264
Extraordinary gain, net of tax................................ - - 16 -
Cumulative effect of changes in accounting principles, net of
tax benefit................................................. - - - (58)
---- ----- ----- ------
Comprehensive income.......................................... $648 $ 460 $ 917 $ 740
==== ===== ===== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Nine Months Ended
September 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......................................... $ 422 $ 527
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 ..................................................... 627 591
Deferred income taxes and investment tax credits - net ............................ (96) 72
Loss on early extinguishment of debt............................................... 54 -
Asset writedown charges............................................................ 189 -
Net gain from sale of assets...................................................... (65) (40)
Net effect of unrealized mark-to-market valuations of commodity contracts.......... 46 (58)
Net equity loss from unconsolidated affiliates and joint ventures.................. 2 18
Reduction in regulatory liability.................................................. (1) (125)
Reduction in retail clawback accrual............................................... - (19)
Changes in operating assets and liabilities........................................... (94) 844
------ ------
Cash provided by operating activities.......................................... 1,084 1,810
Cash flows - financing activities:
Issuances of securities:
Long-term debt..................................................................... 1,590 2,425
Common stock....................................................................... 9 27
Retirements/repurchases of securities:
Long-term debt held by subsidiary trusts........................................... (237) -
Equity-linked debt securities...................................................... (423) -
Other long-term debt............................................................... (1,826) (1,585)
Exchangeable preferred membership interests........................................ (750) -
Preferred securities of subsidiary, subject to mandatory redemption................ - (91)
Common stock....................................................................... (1,226) -
Change in notes payable:
Banks.............................................................................. 565 (2,305)
Cash dividends paid:
Common stock....................................................................... (120) (120)
Preference stock................................................................... (16) (16)
Premium paid for redemption of exchangeable preferred membership interests............ (1,102) -
Redemption deposit applied to debt retirements........................................ - 210
Debt premium, discount, financing and other reacquisition expenses.................... (42) (26)
------ ------
Cash used in financing activities.............................................. (3,578) (1,481)
Cash flows - investing activities:
Capital expenditures.................................................................. (543) (489)
Disposition of businesses............................................................. 2,805 18
Acquisition of telecommunications partner's interest.................................. - (150)
Nuclear fuel.......................................................................... (46) (45)
Investment in collateral trust........................................................ - (525)
Other................................................................................. 183 (12)
------ -------
Cash provided by (used in) investing activities................................ 2,399 (1,203)
------ -------
Effect of exchange rate changes on cash and cash equivalents.......................... - 1
Cash contributions to discontinued operations........................................... (142) (19)
------- -------
Net change in cash and cash equivalents................................................. (237) (892)
Cash and cash equivalents - beginning balance........................................... 829 1,513
------ ------
Cash and cash equivalents - ending balance........................................ $ 592 $ 621
====== ======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
------------- --------------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents.................................................. $ 592 $ 829
Restricted cash............................................................ 29 12
Accounts receivable -- trade............................................... 1,086 1,063
Inventories................................................................ 330 419
Commodity contract assets.................................................. 707 548
Assets of telecommunications holding company............................... - 110
Other current assets....................................................... 483 303
-------- -------
Total current assets................................................ 3,227 3,284
Investments:
Restricted cash............................................................ 579 582
Other investments.......................................................... 675 632
Property, plant and equipment -- net......................................... 16,488 16,803
Goodwill..................................................................... 542 558
Regulatory assets -- net.................................................... 1,922 1,872
Commodity contract assets.................................................... 229 109
Cash flow hedge and other derivative assets.................................. 24 88
Other noncurrent assets...................................................... 301 214
Assets held for sale......................................................... 2,161 7,155
-------- -------
Total assets........................................................ $ 26,148 $31,297
======== =======
LIABILITIES, PREFERRED SECURITIES OF SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- banks..................................................... $ 565 $ -
Long-term debt held by subsidiary trusts due currently..................... 154 -
All other long-term debt due currently..................................... 1,704 678
Accounts payable -- trade.................................................. 910 790
Commodity contract liabilities............................................. 545 502
Liabilities of telecommunications holding company.......................... - 603
Other current liabilities.................................................. 1,759 1,242
-------- -------
Total current liabilities........................................... 5,637 3,815
Accumulated deferred income taxes............................................ 2,241 3,599
Investment tax credits....................................................... 413 430
Commodity contract liabilities............................................... 309 47
Cash flow hedge and other derivative liabilities............................. 226 240
Long-term debt held by subsidiary trusts, less amounts due currently......... 155 546
All other long-term debt, less amounts due currently......................... 9,394 10,608
Other noncurrent liabilities and deferred credits............................ 2,682 2,382
Liabilities held for sale.................................................... 258 2,952
-------- -------
Total liabilities................................................... 21,315 24,619
Preferred securities of subsidiaries (Note 6)................................ 113 759
Contingencies (Note 8)
Shareholders' equity (Note 7):
Preference stock - not subject to mandatory redemption..................... 300 300
Common stock without par value: Authorized shares: 1,000,000,000
Outstanding shares: 291,722,227 and 323,883,092......................... 63 48
Additional paid-in capital.............................................. 6,095 8,097
Retained deficit........................................................ (1,523) (2,498)
Accumulated other comprehensive loss.................................... (215) (28)
--------- -------
Total common stock equity.............................................. 4,420 5,619
-------- -------
Total shareholders' equity........................................... 4,720 5,919
-------- -------
Total liabilities, preferred securities of subsidiaries and
shareholders' equity.............................................. $ 26,148 $31,297
======== =======
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - TXU Corp. is a holding company conducting its
operations principally through its Energy and Electric Delivery subsidiaries.
Energy is engaged in electricity generation and retail and wholesale energy
sales. Electric Delivery engages in regulated electricity transmission and
distribution operations. On October 1, 2004, TXU Corp. and Atmos Energy
Corporation completed a merger by division (the TXU Gas transaction) in which
Atmos Energy Corporation acquired TXU Gas' operations for approximately
$1.905 billion in cash. See "TXU Gas Transaction" below.
Strategic Initiatives and Other Actions - Mr. C. John Wilder, who was
named president and chief executive of TXU Corp. in February 2004, and senior
management have been reviewing the operations of TXU Corp. and have formulated
certain strategic initiatives and continue 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 below, implementation of the strategic initiatives as well as
other actions taken to date have resulted in the following effects on income
from continuing operations before extraordinary gain:
o TXU Corp. has recorded total charges of $19 million ($12 million
after-tax) in the third quarter of 2004 and $469 million ($311
million after-tax) year-to-date, reported largely in other
deductions, related to asset writedowns, employee severance, debt
extinguishment losses and litigation.
o In addition, TXU Corp. has incurred consulting and professional fees
related to the strategic initiatives totaling $15 million ($10
million after-tax) in the third quarter of 2004 and $34 million ($22
million after-tax) year-to-date, reported in SG&A expenses, and
nonrecurring contractual executive compensation expense of $52
million year-to-date (without tax benefit), also reported in SG&A
expenses.
o A $75 million income tax benefit was recorded in the second quarter
of 2004 to recognize a portion of the previously reserved tax
benefit associated with the write-off of TXU Europe. Such
recognition was triggered by the tax effects of the sale of the
assets of TXU Fuel Company.
o In the third quarter of 2004, TXU Corp. recorded gains on the
disposition of Energy properties totaling $18 million ($12
million after-tax), reported in other income.
Additional effects of the strategic initiatives, including the
dispositions of TXU Australia and TXU Gas and additional tax benefits related to
the write-off of the investment in TXU Europe, are reflected in results from
discontinued operations.
Charges recorded in the three-month and nine-month periods ended September
30, 2004 and 2003 reported in other deductions are detailed in Note 12.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, TXU Corp. entered into a services agreement with a
subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini), a
new company initially providing business process support services to TXU Corp.,
but immediately implementing a plan to offer similar services to other utility
companies. Under the ten-year agreement, over 2,500 employees transferred from
subsidiaries of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base
support services performed by Capgemini for a fixed fee, subject to adjustment
for volumes or other factors, include information technology, customer call
center, billing and collections, human resources, supply chain and certain
accounting activities.
5
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use TXU Corp.'s information
technology assets, consisting primarily of capitalized software. A portion of
the software was in development and had not yet been placed in service by TXU
Corp. As a result of outsourcing its information technology activities, TXU
Corp. no longer intends to develop the majority of these projects and from TXU
Corp.'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 carrying value of these software projects was written off,
resulting in a charge of $109 million ($71 million after-tax) for the nine
months ended September 30, 2004, reported in other deductions, essentially all
of which was recorded in the second quarter of 2004. TXU Corp. expects to rely
on Capgemini or other third parties for future enhancements and modifications to
the software in use at the time of the transaction.
TXU Corp. received a 2.9% limited partnership interest in Capgemini in
exchange for the asset license described above. TXU Corp. has the right to sell
(the "put option") all its interest in the partnership and the software to Cap
Gemini America Inc. for $200 million, plus TXU Corp.'s share of Capgemini's
undistributed earnings, upon expiration of the services agreement, or earlier
upon the occurrence of certain unexpected events. Cap Gemini North America Inc.
has the right to purchase TXU Corp.'s 2.9% limited partnership interest in
Capgemini under the same terms and conditions. The partnership interest has been
recorded at an initial value of $2.9 million and is being accounted for on the
cost method.
TXU Corp. has recorded the fair value of the put option as a noncurrent
asset largely offset by a reduction to the carrying value of the software, in
accordance with the accounting principles related to sales and licensing of
internally developed software described in AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The remaining balance of the software is being amortized over the
estimated remaining lives.
Also as part of the agreements, TXU Corp. agreed to indemnify Capgemini
for severance costs incurred by Capgemini for former TXU Corp. employees
terminated within 18 months of their transfer to Capgemini. Accordingly, TXU
Corp. recorded a $40 million ($26 million after-tax) charge for severance
expense in the second quarter of 2004, which represents a reasonable estimate of
the indemnity and is reported in other deductions. In addition, TXU Corp.
committed to pay up to $25 million for costs associated with transitioning the
outsourced activities to Capgemini. The transition costs are expected to be
largely recorded by TXU Corp. during the fourth quarter of 2004.
Subject to certain terms and conditions, Cap Gemini North America, Inc.
and its parent, Cap Gemini S.A., have guaranteed the performance and payment
obligations of Capgemini under the service agreements, as well as the payment of
$200 million in connection with the put option.
The transfer of employees to Capgemini triggered a curtailment with
respect to TXU Corp.'s pension and other post-employment benefit plans. In the
second quarter of 2004, TXU Corp. recorded a net pre-tax curtailment charge of
$3 million, reported in other deductions, related to these plans. The
curtailment required a remeasurement of liabilities under the plans as of the
employee transfer date. The estimated effect of the employee transfers, combined
with changes in the discount rate and other assumptions, was a reduction in
pension and other postretirement expenses of approximately $36 million on an
annualized basis effective July 1, 2004.
On July 1, 2004, TXU Corp. loaned Capgemini $25 million for working
capital purposes pursuant to a promissory note that bears interest at a
market-based annual rate of 4% and matures on July 1, 2019.
Sale of TXU Australia
---------------------
On July 30, 2004, TXU Corp. completed the sale of TXU Australia to
Singapore Power Ltd. for $3.6 billion, including $1.7 billion of assumed debt
and $1.9 billion in cash. The cash proceeds were used to repay short-term
borrowings. A gain on sale of $367 million ($239 million after-tax) was recorded
in the third quarter of 2004. The results of TXU Australia and the gain on sale
are reported as discontinued operations as discussed in Note 3.
6
Sale of TXU Fuel Company
------------------------
On June 2, 2004, TXU Corp. completed the sale of the assets of TXU Fuel
Company, the gas transportation subsidiary of Energy, to Energy Transfer
Partners, L.P. for $500 million in cash. The cash proceeds were used to repay
short-term borrowings. 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.
TXU Gas Transaction
-------------------
On October 1, 2004, Atmos Energy Corporation and TXU Gas completed a
merger by division, which resulted in the disposition of the operations of TXU
Gas for $1.905 billion in cash. The intent to dispose of the operations had been
previously disclosed. A pre-tax loss on the transaction of approximately $58
million is now expected, and this amount was recorded as a goodwill impairment
charge in the third quarter of 2004. This amount includes the effect of $19
million in discontinued depreciation expense in accordance with accounting rules
for assets held for sale. The balance of the loss reflects changes in the terms
of the transaction agreement and refinements of previous estimates. The results
of TXU Gas, as well as goodwill impairment charges recorded, are reported as
discontinued operations as discussed in Note 3.
On October 1, 2004, prior to the close of the TXU Gas transaction, TXU Gas
irrevocably deposited with the applicable trustees an aggregate of approximately
$450 million (principal and interest) for the legal defeasance of all of its
outstanding debt securities. A portion of this deposit was used to redeem the
$154 million principal amount of Floating Rate Junior Subordinated Debentures
on October 31, 2004. The remaining amount of this deposit will be used to redeem
the $125 million principal amount of the Remarketed Reset Notes on July 1, 2005,
and to repay the $150 million principal amount of the 7.125% Notes at maturity
on June 15, 2005. In addition, on October 1, 2004, prior to the close of the
TXU Gas transaction, TXU Gas irrevocably deposited with a Texas bank
approximately $75 million for the redemption of all of its outstanding preferred
stock. On November 5, 2004, all of the outstanding shares of TXU Gas'
preferred stock with a liquidation value of $75 million were redeemed.
Recognition of Income Tax Benefits
----------------------------------
On its US federal income tax return for calendar year 2002, TXU Corp.
claimed an ordinary loss deduction related to the worthlessness of TXU Corp.'s
investment in TXU Europe, the tax benefit of which is estimated to be $983
million (assuming the deduction is sustained on audit). Due to a number of
uncertainties regarding the proper tax treatment of the worthlessness loss, no
portion of the tax benefit related to TXU Corp.'s 2002 write-off of its
investment in TXU Europe was recognized in income prior to the second quarter of
2004.
In June 2004, the IRS issued a preliminary notice of proposed adjustment
proposing to disallow the 2002 worthlessness deduction and treat the
worthlessness as a capital loss (deductible only against capital gains).
Accordingly, in the second quarter of 2004, TXU Corp. recorded a tax benefit in
income of $711 million related to the utilization of a portion of the
worthlessness deduction. The tax benefit recognized reflects utilization of the
capital loss deduction against capital gains reported for 2002 and the 1999-2001
carryback periods and the capital gains on the 2004 sales of the TXU Australia,
TXU Fuel Company and the telecommunications businesses. The benefit recognized
also included $215 million for certain items related to the write-off of TXU
Corp.'s investment in TXU Europe expected to be sustained as ordinary deductions
as a result of the preliminary notice.
7
As a result of the TXU Gas transaction on October 1, 2004, TXU Corp.
expects to realize a capital gain for tax purposes. As a result of this gain,
TXU Corp. recognized an estimated tax benefit in the third quarter of 2004
related to the utilization of a portion of the 2002 worthlessness deduction
arising from the write-off of the TXU Europe investment. In addition, during the
third quarter of 2004, TXU Corp. revised certain estimates of capital gains and
ordinary deductions impacting the worthlessness deduction utilization. The net
tax benefit recognized in 2004 with respect to the write-off of the investment
in TXU Europe totals $76 million in the third quarter and $787 million
year-to-date.
Benefits arising from the resolution of uncertainty regarding utilization
of deductions in the year the TXU Europe investment was written-off or in a
prior year are reported in discontinued operations. Benefits arising from
resolution of uncertainty regarding utilization of deductions in subsequent
years are classified in the same manner as the source of the income resulting in
the recognition of the benefits. Accordingly, of the total $787 million
year-to-date benefit, $75 million was reported in continuing operations in the
second quarter of 2004 as this amount relates to the capital gain arising from
the sale of the assets of TXU Fuel Company, the historical operations of which
have been classified as continuing operations.
See Note 8 for discussion of income tax contingencies related to TXU
Europe and other matters.
Facility Closures and Other Actions Related to Generation Operations
--------------------------------------------------------------------
In the third quarter of 2004, Energy recorded gains totaling $18 million
($12 million after-tax) related to the sale of undeveloped land. The gains are
reported in other income.
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 and the
impairment charge are reported in discontinued operations as discussed in Note
3.
As part of Energy's review of its generation asset portfolio, 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, in the second quarter of 2004 to reflect excess inventory on hand
and to write down carrying values to scrap values.
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 represented 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 would close its
Winfield North Monticello lignite mine in Texas, and such closure has been
completed, as it is no longer economical to operate when compared to the cost of
purchasing 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 pre-tax) and impairments related to the various facility closures ($1
million pre-tax).
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,
which has been largely completed. Accordingly, in the second quarter of 2004,
TXU Corp. recorded severance charges totaling $53 million ($34 million
after-tax), reported in other deductions.
8
Liability and Capital Management
---------------------------------
As part of its debt and capital management program, on September 15, 2004,
TXU Corp. announced cash tender offers for certain outstanding equity-linked
debt securities and convertible notes. In October 2004, as a result of the
tender offers, TXU Corp. repurchased the following securities:
o 7,485,592, or 64.9%, of its outstanding Corporate Units for a
purchase price of $52.28 per Corporate Unit, including $187 million
principal amount of outstanding Series L Senior Notes, which were a
component of the purchased Corporate Units;
o 5,117,962, or 58.2%, of its outstanding Income PRIDES for $52.39 per
Income PRIDE, including $256 million principal amount of outstanding
Series M Senior Notes, which were a component of the purchased
Income PRIDES; and
o $482 million principal amount, or 91.8%, of its outstanding Floating
Rate Convertible Senior Notes due 2033, for $1,593.65 per $1,000
principal amount of Convertible Senior Notes. TXU Corp. intends to
settle any future conversion of the remaining outstanding notes in
common stock.
On August 16, 2004, the TXU Corp. Series K Senior Notes (aggregate
principal outstanding of $288 million) were remarketed. TXU Corp. participated
as an investor in the remarketing and purchased for retirement $238 million
principal amount of the notes for $241 million, resulting in a charge of $4
million ($3 million after-tax). The remaining $50 million principal amount
outstanding bears a new interest rate of 4.446% and matures in November 2006.
On September 28, 2004, portions of the Brazos River Authority Pollution
Control Revenue Refunding Bonds related to the Twin Oak facility were redeemed
at par as follows: $57 million of Series 2001C; $21 million of Series 2003C; $16
million of Series 2002A; $4 million of series 1995B; and $3 million of Series
2001D.
In the second quarter of 2004, TXU Corp. repurchased $427 million carrying
amount ($423 million principal amount and $4 million in deferred costs) of
equity-linked debt securities for $404 million. The repurchase was in connection
with a settlement of related litigation and resulted in total charges of $34
million ($28 million after-tax), reported in other deductions, essentially
representing the premium for the debt component of the securities and an
additional repurchase premium. The repurchase also resulted in a credit to
additional paid-in capital of $57 million, which represented the holder's
out-of-the-money fair market value of the related equity purchase contracts. An
additional credit to additional paid-in capital of $18 million was recorded to
reverse the remaining liability for future contract adjustment payments to
holders of the securities. At the time of issuance of the securities, TXU Corp.
had recorded a liability for the present value of the contract adjustment
payments with an offsetting reduction to common stock equity.
In June 2004, TXU Corp. repurchased 20 million shares of its outstanding
common stock through an accelerated share repurchase agreement at an initial
price of $39.86 per share. As of September 30, 2004, the broker-dealer that
executed the repurchase transaction had completed the process of purchasing an
equal amount of shares in the open market, and TXU Corp. paid a purchase price
adjustment of $7 million based upon the actual cost of the shares repurchased by
such broker-dealer.
Also in the second quarter of 2004, TXU Corp. repurchased at par $237
million principal amount of 7.25% notes held by subsidiary trusts and $118
million principal amount of 6.375% senior notes for $125 million. These
transactions resulted in debt extinguishment losses totaling $15 million ($10
million after-tax), reported in other deductions.
In April 2004, TXU Corp. repurchased Energy's exchangeable preferred
membership interests with a liquidation amount of $750 million for $1.85 billion
(including transaction costs). The excess of the purchase price over the
carrying value of the securities, net of $384 million in income tax benefits
recorded as a deferred tax asset, was recorded as a charge to additional paid-in
capital in the amount of $849 million. The carrying value of the securities was
$617 million, which is the liquidation amount of $750 million net of $102
million in unamortized discount and $31 million in unamortized debt issuance
costs, both recorded at the time of issuance of the securities in November 2002.
The charge to additional paid-in capital is accounted for in a manner similar to
TXU Corp.'s preference share dividends, resulting in a reduction in net income
available to common shareholders.
9
TXU Corp. also repurchased 5.7 million of its common shares on the open
market for approximately $240 million during the third quarter of 2004, and 11.1
million shares for $434 million year-to-date.
See Notes 4, 5, and 6 for further detail of debt issuances and
retirements, financing arrangements and debt held by unconsolidated subsidiary
trusts.
Litigation Accrual
------------------
During the second quarter of 2004, management assessed the progress and
status of matters in litigation as described in Note 8 and recorded an accrual
of $100 million ($65 million after-tax), reported in other deductions, for the
expected resolution of certain cases.
Discontinued Businesses - Note 3 presents detailed information regarding
the TXU Australia, TXU Gas and other discontinued businesses. The condensed
consolidated financial statements for all periods presented reflect the
reclassification of the results of these businesses (for the periods they were
consolidated) as discontinued operations.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Corp. have been prepared in accordance with US GAAP and on the same basis
as the audited financial statements included in its 2003 Form 10-K, except for
the changes in estimates of depreciable lives of assets discussed below and the
presentation of certain operations 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.
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 nine months ended September 30, 2004, the effect of adoption of
the Medicare Act was a reduction of approximately $7 million and $22 million,
respectively, in TXU Corp.'s postretirement benefit costs.
Certain reclassifications have been made to conform prior period data to
the current period presentation. All dollar amounts in the financial statements
and tables in the notes, except per share amounts, are stated in millions of
dollars unless otherwise indicated.
Depreciation of Energy Production Facilities -- Effective January 1, 2004,
the estimates of the depreciable lives of lignite-fired generation facilities
were extended an average of nine years to better reflect the useful lives of the
assets, and depreciation rates for the Comanche Peak nuclear generating plant
were decreased as a result of an increase in the estimated lives of boiler and
turbine generator components of the plant by an average of five years. The net
impact of these changes was a reduction in depreciation expense of $11 million
and $33 million ($7 million and $21 million after-tax) in the three and nine
months, respectively, ended September 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 nine months ended September 30, 2004.
10
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 nine months of 2004.
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 $1.6 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.
Earnings Per Share -- Basic earnings per share available to common
shareholders are based on the weighted average number of common shares
outstanding during the quarter. Diluted earnings per share include the effect of
all potential issuances of common shares. Diluted earnings per share for the
third quarter and year-to-date 2004 reflect a reduction in earnings of $268
million or $0.91 per share for the quarter and $0.86 per share year-to-date
related to the $525 million principal amount Convertible Senior Notes. The
dilution arises because the conversion trigger price of $41.48 was reached in
the third quarter of 2004. Because of TXU Corp.'s stated intent to settle the
conversion in cash, the calculation of diluted earnings per share reflects a
reduction in earnings to reflect the assumed after-tax settlement expense based
on the fair market value of the embedded conversion option at September 30,
2004. Also see above discussion of the tender offer for these notes.
The exchangeable preferred membership interests in Energy were
anti-dilutive in 2004 for the period prior to TXU Corp.'s repurchase of these
securities in April 2004. However, the premium paid to buy back these securities
reduced earnings available for common stock by $849 million or $2.72 per share
for the nine months ended September 30, 2004. Assuming these securities were
converted to TXU Corp. common stock at the beginning of the periods at the
exercise price of $13.1242 per share, 57 million more shares for each of the
three and nine months ended September 30, 2003, respectively, would have been
issued and net income would have increased by $13 million and $26 million,
respectively, representing the after-tax distributions on the exchangeable
preferred membership interests and amortization of the related discount.
Additional dilutive shares would have resulted from approximately 7
million shares and 10 million shares of common stock issuable in connection with
equity-linked debt securities issued in 2002 and 2001, respectively, if the
average of the closing price per share of TXU Corp. common stock on each of the
twenty consecutive trading days ending on the third day immediately preceding
the end of a reporting period was equal to or above the threshold appreciation
price of $62.91 and $55.68 per share for the respective issuances. For the three
and nine months ended September 30, 2004 and 2003, the market price of TXU Corp.
common stock was below these prices. See discussion above under "Debt and
Capital Management" regarding repurchases of these securities.
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
11
new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For TXU Corp., such liabilities primarily relate
to nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) TXU Corp. had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................ $488
Increase in other noncurrent liabilities and deferred credits.. (528)
Increase in accumulated deferred income taxes.................. (3)
Increase in regulatory assets - net............................ 48
----
Cumulative effect of change in accounting principles........... $ 5
====
The asset retirement liability at September 30, 2004 was $610 million,
comprised of a $599 million liability as of December 31, 2003 and $30 million of
accretion during the nine months ended September 30, 2004, reduced by $19
million in reclamation payments.
With respect to nuclear decommissioning costs, for TXU Corp. the adoption
of SFAS 143 results in timing differences in the recognition of asset retirement
costs that are being recovered through the regulatory process.
12
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial information
of the businesses reported as discontinued operations:
Three Months Ended September 30, 2004
------------------------------------------------------------
Strategic
TXU TXU Retail Pedrick-
Gas Australia Services town Telecom Total
------- --------- --------- -------- ------- ------
Operating revenues............................... $ 186 $ 146 $ 3 $ 8 $ - $ 343
Operating costs and expenses..................... 168 108 4 8 - 288
Other deductions (income) -- net................. 3 (7) - - - (4)
Interest income.................................. - - - - - -
Interest expense and related charges............. 8 12 - - - 20
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes...... 7 33 (1) - - 39
Income tax expense (benefit) .................... (1) 16 1 - - 16
------ ----- ----- ----- ----- -----
Operating income (loss).......................... 8 17 (2) - - 23
Credits (charges) related to exit (after-tax).... (58) 244 (1) - 3 188
Recognition of tax benefits...................... - - - - - 76
----- ----- ----- ----- ----- -----
Income (loss) from discontinued operations.... $ (50) $ 261 $ (3) $ - $ 3 $ 287
====== ===== ====== ===== ===== =====
Nine Months Ended September 30, 2004
------------------------------------------------------------------------
Strategic
TXU TXU Retail Pedrick-
Gas Australia Services town Telecom Mexico Total
----- --------- -------- -------- ------- ------ ------
Operating revenues..................... $ 910 $ 835 $ 13 $ 27 $ 54 $ 4 $1,843
Operating costs and expenses........... 894 670 16 30 49 4 1,663
Other deductions (income) -- net....... 91 (3) 10 - 16 - 114
Interest income........................ - (2) - - (5) - (7)
Interest expense and related charges... 23 96 - - 19 - 138
----- ----- ----- ----- ----- ----- -----
Operating income (loss) before income
taxes............................... (98) 74 (13) (3) (25) - (65)
Income tax expense (benefit) .......... (21) 27 (4) (1) (8) (1) (8)
------ ----- ------ ------ ------ ------ ------
Operating income (loss)................ (77) 47 (9) (2) (17) 1 (57)
Credits (charges) related to exit
(after-tax)......................... (93) 127 (5) (17) 1 (2) 11
Recognition of tax benefits............ - - - - - - 712
----- ----- ----- ----- ----- ----- -----
Income (loss) from discontinued
operations........................ $(170) $ 174 $ (14) $ (19) $ (16) $ (1) $ 666
====== ===== ====== ====== ====== ====== =====
Three Months Ended September 30, 2003
----------------------------------------------------------------------
Strategic
TX Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Total
------- --------- -------- ---- ------- ------ -----
Operating revenues.............. $ 174 $ 321 $ 11 $ 10 $ 49 $ 22 $ 587
Operating costs and expenses.... 173 233 8 10 40 22 486
Other deductions (income) -- net. 1 (2) 4 - 8 - 11
Interest income................. - (1) - - (2) - (3)
Interest expense and related
charges...................... 9 36 - - 19 - 64
----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................. (9) 55 (1) - (16) - 29
Income tax expense (benefit) ... (3) 9 - - (4) - 2
------ ----- ----- ----- ------ ----- -----
Operating income (loss) (6) 46 (1) - (12) - 27
Credit related to exit
(after-tax).................. - - - - 37 - 37
----- ----- ----- ----- ----- ----- -----
Income (loss) from
discontinued operations.... $ (6) $ 46 $ (1) $ - $ 25 $ - $ 64
====== ===== ====== ===== ===== ===== =====
13
Nine Months Ended September 30, 2003
-------------------------------------------------------------------------------
Strategic
TXU TXU Retail Pedrick-
Gas Australia Services town Telecom Mexico Europe Total
----- --------- --------- -------- ------- ------- ------- ------
Operating revenues................ $ 993 $ 820 $ 54 $ 18 $ 117 $ 72 $ - $2,074
Operating costs and expenses...... 913 587 49 21 110 74 - 1,754
Other deductions (income) -- net.. (1) (12) 4 - 8 (2) - (3)
Interest income................... (1) (4) - - (5) - - (10)
Interest expense and related
charges........................ 31 107 - - 45 1 - 184
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................... 51 142 1 (3) (41) (1) - 149
Income tax expense (benefit)...... 18 34 1 (1) (11) (1) - 40
----- ----- ----- ------ ------ ------ ----- -----
Operating income (loss) 33 108 - (2) (30) - - 109
Charges related to exit
(after-tax)................... - - - - (23) - (2) (25)
----- ----- ----- ----- ------ ----- ------ ------
Income (loss) from
discontinued operations..... $ 33 $ 108 $ - $ (2) $ (53) $ - (2) $ 84
===== ===== ===== ====== ====== ===== ====== =====
The TXU Gas business was previously reported in the Energy Delivery (now
Electric Delivery) segment. The TXU Australia business was previously reported
in its own segment. The Pedricktown business and the strategic retail services
operations were previously reported in the Energy segment. The
telecommunications and Mexico operations were previously reported in corporate
and other activities.
Recognition of Tax Benefits - As discussed in Note 1, in connection with
an IRS preliminary notice of proposed adjustment issued in June 2004, TXU Corp.
has recognized income tax benefits arising from the utilization of the
previously unrecognized 2002 worthlessness deduction related to the write-off of
the investment in TXU Europe. The $712 million of tax benefits recognized in
discontinued operations relate primarily to capital gains generated in prior
years as well as the capital gains arising from the sales of TXU Communications,
TXU Australia, and TXU Gas, which can be offset by the 2002 worthlessness
deduction.
TXU Australia - On July 30, 2004, TXU Corp. completed the sale of TXU
Australia to Singapore Power Ltd. for $3.6 billion, including $1.7 billion of
assumed debt and $1.9 billion in cash. A gain on sale of $367 million ($239
million after-tax) was recorded in the third quarter of 2004.
Results of TXU Australia for the nine months ended September 30, 2004
include an income tax charge of $112 million to establish a deferred tax
liability for the excess of the carrying value of the investment in the business
over the related tax basis, in accordance with accounting rules, as a result of
the decision to sell the business.
TXU Gas - On October 1, 2004, Atmos Energy Corporation and TXU Gas
completed a merger by division, which resulted in the disposition of the
operations of TXU Gas for $1.905 billion in cash. The intent to dispose of the
operations had been previously disclosed. A pre-tax loss on the transaction of
approximately $58 million is now expected, and this amount was recorded as a
goodwill impairment charge in the third quarter of 2004. This amount includes
the effect of $19 million in discontinued depreciation expense in accordance
with accounting rules for assets held for sale. The balance of the loss reflects
changes in the terms of the transaction agreement and refinements of previous
estimates. Electric Delivery will continue to provide meter reading and shared
facilities services to Atmos Energy Corporation under a transition services
agreement.
Results of TXU Gas for year-to-date 2004 reflect an after-tax charge of
$99 million in the second quarter to reserve for disallowed regulatory and other
assets pursuant to a May 2004 regulatory ruling in connection with the
previously disclosed system-wide distribution rate case. TXU Gas has filed a
motion for rehearing with the regulatory authority.
In June 2004, the IRS Appeals Office rejected TXU Gas' appeal of proposed
adjustments to 1993 income tax returns of ENSERCH Corporation, the acquired
predecessor of TXU Gas. Additional reserves deemed required by TXU Gas for this
matter totaled $47 million, and in accordance with acquisition accounting rules,
$17 million was recorded as an expense in the second quarter of 2004 (as a tax
provision) and $30 million was recorded as additional goodwill.
14
In consideration of the additional goodwill amount recorded and the best
estimate at that time of the net proceeds from the expected sale of the business
and the expected carrying value of the assets to be sold under the definitive
sales agreement, a goodwill impairment charge of $35 million (pre and after-tax)
was recorded in the second quarter of 2004.
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 included a $17 million after-tax charge to write down
the facility to estimated fair market value.
Telecommunications -- In April 2004, TXU Corp. sold its telecommunications
business (TXU Communications) for $524 million in cash and $3 million of assumed
debt. In March 2004, TXU Corp. redeemed the remaining outstanding $560 million
senior notes of the Pinnacle telecommunications holding company. The business
was formerly a joint venture and was consolidated from March 1, 2003 through the
sale date.
Strategic Retail Services -- In December 2003, Energy finalized a formal
plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. Energy expects to
substantially complete the sales of these operations to various parties by
year-end 2004. Results in 2004 reflect a $9 million ($6 million after-tax)
charge recorded in the second quarter to settle a contract dispute.
Mexico -- In January 2004, TXU Corp. completed the sale of its
majority-owned gas distribution operations in Mexico for $11 million in notes
receivable and recorded an after-tax loss of $2 million.
Balance sheet - The following details the assets and liabilities held for
sale as of September 30, 2004:
Strategic
Retail
TXU Gas Services Pedricktown Total
------- -------- ----------- -----
Current assets........................... $ 221 $ 4 $ 2 $ 227
Investments.............................. - 2 - 2
Goodwill................................. 246 - - 246
Property, plant and equipment............ 1,662 3 16 1,681
Other noncurrent assets.................. 5 - - 5
------ ------ ------ -------
Assets held for sale................ $2,134 $ 9 $ 18 $ 2,161
====== ====== ====== =======
Current liabilities...................... $ 100 $ - $ 4 $ 104
Noncurrent liabilities................... 150 - 4 154
------ ------ ------ -------
Liabilities held for sale........... $ 250 $ - $ 8 $ 258
====== ====== ====== =======
15
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At September 30, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings under the three-year
revolving credit facility of $565 million at a weighted average interest rate of
4.27%. At December 31, 2003, TXU Corp. had no outstanding short-term borrowings.
Credit Facilities -- At September 30, 2004, TXU Corp. had credit
facilities (some of which provide for long-term borrowings) as follows:
- ----------------------------------------------------------------------------------------------------------------
At September 30, 2004
----------------------------------------------
Maturity Authorized Facility Letters of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
364-day Credit Facility June 2005 Energy, Electric $ 600 $ 80 $ - $ 520
Delivery
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Three-Year Revolving Credit Energy,Electric
Facility June 2007 Delivery 1,400 - 565 835
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 429 - 71
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit Energy,Electric
Facility June 2009 Delivery 500 - - 500
------ ------ ------ --------
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Total $3,000 $ 509 $ 565 $ 1,926
====== ====== ====== =======
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
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 for Energy and Electric Delivery maturing in June 2005, 2007
and 2009. These 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 September 30, 2004, there was no such commercial
paper outstanding.
In April 2004, three credit facilities totaling $2.0 billion (364-day
credit facilities expiring in April 2005) were established to provide bridge
financing for the repurchase of Energy's exchangeable preferred membership
interests. In July 2004, borrowings under these facilities were repaid with the
proceeds from Energy's issuance of $800 million floating rate senior notes and
part of the proceeds from the TXU Australia sale and the facilities were
subsequently terminated.
TXU Corp.'s $500 million five-year revolving credit facility is with LOC
2003 Trust, a special purpose, wholly-owned subsidiary of TXU Corp. (LOC Trust).
LOC Trust, in turn, has a $500 million five-year secured credit facility with a
group of lenders. TXU Corp. capitalized LOC Trust with approximately $525
million of cash, which the lenders have invested in permitted investments as
directed by LOC Trust. This investment in LOC Trust is reflected on TXU Corp.'s
balance sheet as restricted cash (see Note 12). LOC Trust's assets, including
the investments, constitute collateral for the benefit of the lenders to secure
issuances of letters of credit or loans, and are owned by LOC Trust. LOC Trust
is included in the consolidated financial statements of TXU Corp. solely to
comply with US GAAP.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). Funding under the program as of
September 30, 2004 was $700 million, the maximum amount allowed. Effective June
30, 2004, the program was extended through June 28, 2005. As part of the
extension, the maximum amount available under the program was increased from
$600 million to $700 million in recognition of seasonal power sales.
Additionally, the extension allows for increased availability of funding through
a credit ratings-based reduction (based on each originator's credit rating) of
customer deposits previously used to reduce the amount of undivided interests
that could be sold. Undivided interests will now be reduced by 100% of the
customer deposits for a Baa3/BBB- rating; 50% for a Baa2/BBB rating; and zero %
for a Baa1/BBB+ and above rating. Effective as of August 31, 2004, in order to
consummate the TXU Gas transaction, TXU Receivables Company repurchased from the
funding entities the receivables that related to TXU Gas, as an originator, and
subsequently assigned those receivables back to TXU Gas, terminating TXU Gas'
participation in the receivables program.
16
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests. The balance of the subordinated notes
payable was $396 million at September 30, 2004.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities, as
well as a servicing fee paid by TXU Receivables Company to TXU Business
Services, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $8 million and $9 million for the nine-month periods ending
September 30, 2004 and 2003 and approximated 1.9% and 2.5% for the first nine
months of 2004 and 2003, respectively, of the average funding under the program
on an annualized basis; these fees represent the net incremental costs of the
program to the originators and are reported in SG&A expenses. The servicing fee,
which totaled approximately $5 million and $6 million for the first nine 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 September 30, 2004 balance sheet reflects $1.1 billion face amount of
trade accounts receivable of Energy and Electric Delivery, reduced by $700
million of undivided interests sold by TXU Receivables Company. Funding under
the program increased $100 million for the nine months ended September 30, 2004.
Funding under the program for the nine months ended September 30, 2003 increased
$229 million. Funding increases or decreases under the program are reflected as
operating cash flow activity in the statement of cash flows. The carrying amount
of the retained interests in the accounts receivable approximated fair value due
to the short-term nature of the collection period.
Activities of TXU Receivables Company for the nine months ended September
30, 2004 and 2003 were as follows:
Nine Months
Ended September 30,
---------------------
2004 2003
------ ------
Cash collections on accounts receivable............................................ $ 6,419 $ 6,349
Face amount of new receivables purchased........................................... (6,404) (6,300)
Discount from face amount of purchased receivables................................. 13 15
Program fees paid.................................................................. (8) (9)
Servicing fees paid................................................................ (5) (6)
Increase (decrease) in subordinated notes payable.................................. (115) (278)
-------- --------
Operating cash flows provided to TXU Corp. under the program....................... $ (100) $ (229)
======= =======
Upon termination of the program, cash flows to TXU Corp. would be delayed
as collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
17
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.
Long-Term Debt -- At September 30, 2004 and December 31, 2003, the
long-term debt of TXU Corp. consisted of the following:
September 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)....... 114 118
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)..... 217 274
1.464% Floating Series 2001D due May 1, 2033........................................ 268 271
1.730% Floating Taxable Series 2001I due December 1, 2036(b)........................ 63 63
1.436% Floating Series 2002A due May 1, 2037(b)..................................... 45 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....................................... 52 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........................................ 1,000 1,000
2.380% Floating Rate Senior Notes due January 17, 2006.............................. 800 --
Capital lease obligations........................................................... 9 13
Other............................................................................... 1 8
Fair value adjustments related to interest rate swaps............................... 17 11
Unamortized discount............................................................... -- (2)
------- -----
Total Energy ................................................................... 3,661 3,085
18
September 30, December 31,
2004 2003
------------- -------------
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
7.375% Fixed First Mortgage Bonds due October 1, 2025.................................... -- 178
6.375% Fixed Senior Secured Notes due May 1, 2012........................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032........................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015................................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033................................... 350 350
5.000% Fixed Debentures due September 1, 2007(c)......................................... 200 200
7.000% Fixed Debentures due September 1, 2022............................................ 800 800
Unamortized discount..................................................................... (19) (30)
TXU Electric Delivery Transition Bond Company LLC(e)
- ---------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through February 15, 2007.... 80 103
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................................ 1,267 500
------ -------
Total Electric Delivery................................................................ 4,511 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................ 65 67
2.494% 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 .................................................................... 154 156
TXU Gas
- -------
6.375% Fixed Notes due February 1, 2004................................................... -- 150
7.125% Fixed Notes due June 15, 2005...................................................... 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008, remarketing date July 1, 2005(a). 125 125
Unamortized valuation adjustment.......................................................... -- 1
------- -------
Total TXU Gas......................................................................... 275 426
TXU Corp.
- --------
6.375% Fixed Senior Notes Series B due October 1, 2004.................................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008(c)................................. 200 200
4.050% Fixed Senior Notes Series E due August 16, 2004.................................... -- 2
6.375% Fixed Senior Notes Series J due June 15, 2006(c)................................... 683 800
4.446% Fixed Senior Notes Series K due November 16, 2006 (f).............................. 50 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(f)...................................................................... 288 500
5.800% Fixed Senior Notes Series M due May 16, 2008 remarketing date
February 16, 2006(f).................................................................... 440 440
6.000% Fixed Pinnacle Overfund Trust Debt due bi-annually through August 15, 2004......... -- 91
8.820% Building Financing due bi-annually through February 11, 2022....................... 120 130
3.100% Floating Convertible Senior Notes due July 15, 2033(d)............................. 525 525
Fair value adjustments related to interest rate swaps..................................... 17 32
Unamortized discount...................................................................... (1) (2)
------- -------
Total TXU Corp....................................................................... 2,497 3,393
------- -------
Total TXU Corp. consolidated................................................................ 11,098 11,286
Less amount due currently................................................................... 1,704 678
------- -------
Total long-term debt....................................................................... $ 9,394 $10,608
======= =======
- ------------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at September 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 $1.3 billion principal
amount.
(d) Interest rates in effect at September 30, 2004.
(e) These bonds are nonrecourse to Electric Delivery.
(f) Equity-linked.
19
See discussion under "Debt and Capital Management Program" in Note 1
regarding debt retirement activity.
As a result of the cash tender offers for certain debt securities and the
legal defeasance of TXU Gas debt securities in October 2004 as discussed in Note
1, $1.2 billion principal amount of debt was classified as long-term debt due
currently in the September 30, 2004 balance sheet.
In July 2004, Energy issued $800 million of floating rate senior notes in
a private placement offering with registration rights. 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, which was subsequently terminated.
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 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 two series of
mortgage bonds with an aggregate principal amount of $393 million due in 2025
and 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.
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds with an aggregate principal amount of $121 million were purchased
upon mandatory tender. Energy intends to remarket these bonds at a later date.
Other retirements of long-term debt in 2004 totaling $388 million
represent payments at scheduled maturity dates.
Fair Value Hedges -- TXU Corp. uses fair value hedging strategies to
manage its exposure to fixed interest rates on long-term debt. At September 30,
2004, $1.3 billion of fixed rate debt was effectively converted to variable
rates through interest rate swap transactions, expiring through 2008. These
swaps qualified for and have been designated as fair value hedges using the
short-cut method of hedge accounting provided by SFAS 133, as such, the company
assumes that changes in the value of the derivative are perfectly offset by
changes in the value of the debt; therefore, there is no hedge ineffectiveness
recognized.
In August 2004, fixed-to-variable swaps related to $1.2 billion 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.
20
5. LONG-TERM DEBT HELD BY SUBSIDIARY TRUSTS
Statutory business trusts have been established as wholly-owned financing
subsidiaries of TXU Corp. and TXU Gas. The assets of the trusts consist solely
of Junior Subordinated Debentures issued by TXU Corp. or TXU Gas, and the trusts
have issued preferred interests, as presented below:
Trust Assets (Long-Term Debt
Trust Preferred Interests of TXU Corp. or TXU Gas)
------------------------------ -----------