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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 333-108876
TXU Energy Company LLC
A Delaware Limited Liability Company 75-2967817
(State of Organization) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ----
As of November 9, 2004, all outstanding common membership interests in TXU
Energy Company LLC were held by TXU US Holdings Company.
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TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------------------------
PAGE
----
Glossary .......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three and 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 Condensed Financial Statements..................................... 5
Report of Independent Registered Public Accounting Firm..................... 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 47
Item 4. Controls and Procedures...................................................... 49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 50
Item 6. Exhibits...................................................................... 50
SIGNATURE.......................................................................................... 51
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Energy Company LLC and its subsidiaries are
made available to the public, free of charge, on the TXU Corp. website at
http://www.txucorp.com, shortly after they have been filed with the Securities
and Exchange Commission. TXU Energy Company LLC will provide copies of current
reports not posted on the website upon request. 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................................. Energy's Annual Report on Form 10-K for the year ended
December 31, 2003
Bcf............................................ billion cubic feet
Commission..................................... Public Utility Commission of Texas
EITF........................................... Emerging Issues Task Force
EITF 98-10 .................................... EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities"
EITF 02-3 ..................................... EITF Issue No. 02-3, "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities"
Electric Delivery.............................. refers to TXU Electric Delivery Company, formerly Oncor
Electric Delivery Company, a subsidiary of US Holdings,
or Electric Delivery and its consolidated bankruptcy
remote financing subsidiary, TXU Electric Delivery
Transition Bond Company LLC, depending on context
Energy......................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of various electricity systems within
Texas
FASB........................................... Financial Accounting Standards Board, the designated
organization in the private sector for establishing
standards for financial accounting and reporting
FERC........................................... Federal Energy Regulatory Commission
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ gigawatt-hours
Historical service territory................... US Holdings' historical service territory, largely in north
Texas, at the time of entering retail competition on January
1, 2002
Moody's........................................ Moody's Investors Services, Inc.
ii
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
price-to-beat rate............................. residential and small business customer electricity rates
established by the Commission in the restructuring of the Texas
market that are required to be charged in a REP's historical
service territories until January 1, 2005 or when 40% of the
electricity consumed by such customer classes is supplied
by competing REPs, adjusted periodically for changes in
fuel costs, and required to be available to those
customers until January 1, 2007
REP............................................ retail electric provider
S&P............................................ Standard & Poor's, a division of The McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 133....................................... SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS 150....................................... SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity"
SG&A........................................... selling, general and administrative
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining..................................... TXU Mining Company LP, a subsidiary of Energy
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of Energy
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU ENERGY COMPANY LLC
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2004 2003 2004 2003
(millions of dollars)
Operating revenues................................................... $2,517 $2,437 $6,589 $6,243
------ ------ ------ ------
Costs and expenses:
Cost of energy sold, including delivery fees...................... 1,556 1,539 4,157 4,037
Operating costs.................................................. 145 164 513 506
Depreciation and amortization..................................... 83 100 268 306
Selling, general and administrative expenses...................... 182 166 491 456
Franchise and revenue-based taxes................................. 28 29 80 84
Other income...................................................... (36) (20) (50) (43)
Other deductions.................................................. 20 4 301 9
Interest income................................................... (13) (1) (21) (3)
Interest expense and related charges.............................. 91 83 263 246
----- ----- ----- -----
Total costs and expenses...................................... 2,056 2,064 6,002 5,598
----- ----- ----- -----
Income from continuing operations before income taxes and cumulative
effectof changes in accounting principles......................... 461 373 587 645
Income tax expense................................................... 152 123 179 205
----- ----- ----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles............................... 309 250 408 440
Loss from discontinued operations, net of tax benefit (Note 3)....... (3) (1) (33) (2)
Cumulative effect of changes in accounting principles, net of
tax benefit (Note 2) ............................................. - - - (58)
----- ----- ----- ------
Net income........................................................... $ 306 $ 249 $ 375 $ 380
===== ===== ===== =====
See Notes to Financial Statements
1
TXU ENERGY COMPANY LLC
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 cumulative effect of
changes in accounting principles.................................... $ 309 $ 250 $ 408 $ 440
----- ---- ----- -----
Other comprehensive income (loss), net of tax effects :
Cash flow hedge activity--
Net change in fair value of derivatives (net of tax benefit of
$2, $11, $46 and $63)........................................... (12) (20) (87) (118)
Amounts realized in earnings during the period (net of tax
expense of $3, $24, $11 and $63)................................ 8 46 20 117
----- ----- ----- -----
Total........................................................... (4) 26 (67) (1)
------ ----- ------ ------
Comprehensive income related to continuing operations................. 305 276 341 439
Comprehensive loss related to discontinued operations................. (3) (1) (33) (2)
Cumulative effect of changes in accounting principles, net of
tax benefit........................................................... - - - (58)
----- ----- ----- ------
Comprehensive income..................................................... $ 302 $ 275 $ 308 $ 379
===== ===== ===== =====
See Notes to Financial Statements.
2
TXU ENERGY COMPANY LLC
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 cumulative effect of
changes in accounting principles.............................................. $ 408 $ 440
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by
operating activities:
Depreciation and amortization ............................................... 315 356
Deferred income taxes and investment tax credits - net ...................... 17 30
Asset writedown charges...................................................... 186 -
Net gain from sale of assets................................................ (48) (40)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 46 (58)
Retail clawback accrual...................................................... - (19)
Loss on early extinguishment of debt......................................... 1 1
Net equity loss from unconsolidated affiliates and joint ventures............ 7 -
Changes in operating assets and liabilities..................................... (144) 319
------ ------
Cash provided by operating activities.................................... 788 1,029
------ ------
Cash flows - financing activities:
Issuances of long-term debt..................................................... 800 1,400
Retirements/repurchases of debt................................................. (229) (222)
Increase (decrease) in notes payable to banks................................... 565 (282)
Net change in advances from affiliates.......................................... (1,201) (1,580)
Distribution paid to parent..................................................... (525) (575)
Decrease in note payable to TXU Electric Delivery Company....................... - (161)
Debt premium, discount, financing and reacquisition expenses.................... (15) (30)
------ ------
Cash used in financing activities........................................ (605) (1,450)
------ ------
Cash flows - investing activities:
Capital expenditures............................................................ (149) (123)
Nuclear fuel.................................................................... (46) (45)
Proceeds from sale of assets.................................................... 19 19
Other........................................................................... 20 (9)
------ ------
Cash used in investing activities........................................ (156) (158)
------ ------
Cash used by discontinued operations.............................................. (40) (3)
------ ------
Net change in cash and cash equivalents........................................... (13) (582)
Cash and cash equivalents - beginning balance..................................... 18 603
------ ------
Cash and cash equivalents - ending balance........................................ $ 5 $ 21
====== ======
See Notes to Financial Statements.
3
TXU ENERGY COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
---------- ---------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 5 $ 18
Advances to affiliates........................................ 1,524 289
Accounts receivable - trade................................... 989 943
Inventories................................................... 296 386
Commodity contract assets..................................... 707 548
Other current assets.......................................... 317 225
---------- ----------
Total current assets........................................ 3,838 2,409
---------- ----------
Investments...................................................... 522 479
Property, plant and equipment - net.............................. 9,833 10,345
Goodwill......................................................... 517 533
Commodity contract assets........................................ 229 109
Cash flow hedge and other derivative assets...................... 24 88
Assets held for sale............................................. 27 59
Other noncurrent assets.......................................... 200 127
---------- ----------
Total assets................................................ $ 15,190 $ 14,149
========== ==========
LIABILITIES AND MEMBERSHIP INTERESTS
Current liabilities:
Notes payable - banks......................................... $ 565 $ -
Long-term debt due currently.................................. 31 1
Accounts payable - trade:
Affiliates (principally TXU Electric Delivery Company)...... 243 211
All other................................................... 844 712
Notes or other liabilities due TXU Electric Delivery Company.. 30 13
Commodity contract liabilities................................ 545 502
Accrued taxes................................................. 163 292
Other current liabilities..................................... 549 564
---------- ----------
Total current liabilities................................... 2,970 2,295
---------- ----------
Accumulated deferred income taxes................................ 1,892 1,950
Investment tax credits........................................... 346 360
Commodity contract liabilities................................... 309 47
Cash flow hedge and other derivative liabilities................. 218 140
Notes or other liabilities due to TXU Electric Delivery Company.. 407 424
Other noncurrent liabilities and deferred credits................ 1,193 1,342
Long-term debt, less amounts due currently....................... 3,630 3,084
Preferred membership interests, held by TXU Corp. at September 30,
2004, net of discount of $242 and $253 (Note 4)............... 508 497
Liabilities held for sale........................................ 8 11
---------- ----------
Total liabilities........................................... 11,481 10,150
---------- ----------
Contingencies (Note 6)
Membership interests (Note 5):
Capital account............................................... 3,886 4,109
Accumulated other comprehensive loss.......................... (177) (110)
----------- -----------
Total membership interests.................................. 3,709 3,999
---------- ----------
Total liabilities and membership interests.................. $ 15,190 $ 14,149
========== ==========
See Notes to Financial Statements.
4
TXU ENERGY COMPANY LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - Energy is a subsidiary of US Holdings, which is
a subsidiary of TXU Corp. Energy is engaged in electricity generation and retail
and wholesale energy sales and hedging and risk management operations. Energy
is currently managed as an integrated business; consequently, there are no
reportable business segments.
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 total charges of $8 million ($5
million after-tax) in the third quarter of 2004 and $284 million ($185 million
after-tax) year-to-date, substantially all reported in other deductions, related
to asset writedowns and employee severance. In the third quarter of 2004, Energy
recorded gains on the disposition of properties, principally undeveloped land,
totaling $18 million ($12 million after-tax), reported in other income.
Charges recorded in the three-month and nine-month periods ended September
30, 2004 and 2003 reported in other deductions are detailed in Note 8.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Energy 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 TXU Corp. employees
(including approximately 1,100 from Energy) transferred to Capgemini effective
July 1, 2004. Outsourced base support services performed by Capgemini for a
fixed fee, 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.
As part of the agreement, Capgemini was provided a royalty-free
right, under an asset license arrangement, to use information technology assets,
consisting primarily of capitalized software. A portion of the software was in
development and had not yet been placed in service by Energy. As a result of
outsourcing its information technology activities, Energy no longer intends to
develop the majority of these projects and from Energy's perspective the
software is abandoned. The agreements with Capgemini do not require that any
software in development be completed and placed in service. Consequently, the
carrying value of these software projects was written off, resulting in a charge
of $107 million ($70 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. The remaining assets were transferred to a subsidiary
of TXU Corp. at book value in exchange for an interest in that subsidiary. Such
interest is accounted for by Energy on the equity method, and Energy recorded
equity losses (representing depreciation expense) of $7 million in the third
quarter of 2004, reported in other deductions.
The TXU Corp. subsidiary received a 2.9% limited partnership interest in
Capgemini in exchange for the asset license described above. Energy and Electric
Delivery have the right to sell (the "put option") their interest in the
subsidiary to Cap Gemini America Inc. for $200 million, plus the subsidiary'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 Energy's and Electric
Delivery's interests 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.
5
Energy has recorded its share of the fair value of the put option as a
noncurrent asset largely offset by a reduction to the carrying value of the
software transferred to the subsidiary, 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."
Also as part of its agreement, TXU Corp. agreed to indemnify Capgemini for
severance costs incurred by Capgemini for former TXU Corp. employees terminated
within 18 months of their transfer to Capgemini. Accordingly, Energy recorded a
$27 million ($18 million after-tax) charge for severance expense in the second
quarter of 2004, which represents a reasonable estimate of the indemnity and is
reported in other deductions. The charge includes an allocation of severance
related to TXU Business Services Company employees. The transition costs
applicable to Energy are expected to be largely recorded during the fourth
quarter of 2004.
Transfer and Sale of TXU Fuel Company
--------------------------------------
On April 30, 2004, Energy distributed the assets of TXU Fuel Company, its
gas transportation subsidiary, to US Holdings at book value, including $16
million of allocated goodwill (see Note 5). On June 2, 2004, US Holdings
completed the sale of the assets of TXU Fuel Company to Energy Transfer
Partners, L.P. for $500 million in cash. The 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 business has not been
accounted for as a discontinued operation.
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).
6
Organizational Realignment and Headcount Reductions
---------------------------------------------------
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, Energy 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,
Energy recorded severance charges totaling $43 million ($28 million after-tax),
reported in other deductions.
Preferred Membership Interests
------------------------------
In April 2004, TXU Corp. purchased from the holders Energy's preferred
membership interests with a liquidation value of $750 million. Energy's carrying
amount of the security, which remains outstanding, is the $750 million
liquidation amount less $242 million remaining unamortized discount and $30
million in unamortized debt issuance costs.
Discontinued Businesses - Note 3 presents detailed information regarding
the discontinued New Jersey generation operations and the strategic retail
services business. The condensed consolidated financial statements for all
periods presented reflect the reclassification of the results of these
businesses as discontinued operations.
Basis of Presentation -- The condensed consolidated financial statements
of Energy have been prepared in accordance with US GAAP and on the same basis as
the audited financial statements included in its 2003 Form 10-K, except for the
changes in estimates of depreciable lives of assets discussed below and the
presentation of certain 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 $3 million and $8 million,
respectively, in Energy'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 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.
7
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.
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.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for 2003, reported in the
first quarter, of changes in accounting principles effective January 1, 2003:
Charge from rescission of EITF 98-10, net of tax effect of $34 million..... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million.......... 5
----
Total net charge...................................................... $(58)
====
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10,
which required mark-to-market accounting for all trading activities. Pursuant to
this rescission, only financial instruments that are derivatives under SFAS 133
are subject to mark-to-market accounting. Financial instruments that may not be
derivatives under SFAS 133, but were marked-to-market under EITF 98-10, consist
primarily of gas transportation and storage agreements, power tolling, full
requirements and capacity contracts. This new accounting rule was effective for
new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For Energy, such liabilities primarily relate to
nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) Energy had previously
recorded as depreciation expense and $26 million (reflected in other noncurrent
liabilities) of unrealized net gains associated with the decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net.................. $488
Increase in other noncurrent liabilities and deferred credits... (528)
Increase in accumulated deferred income taxes.................... (3)
Increase in affiliated receivable................................ 48
----
Cumulative effect of change in accounting principles............. $ 5
====
8
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 Energy the adoption of
SFAS 143 results in timing differences in the recognition of asset retirement
costs that are being recovered through the regulatory process.
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial information
of the businesses reported as discontinued operations:
Three Months Ended September 30, Nine Months Ended September 30,
2004 2004
---------------------------------- ----------------------------------
Strategic Strategic
Retail Retail
Services Pedricktown Total Services Pedricktown Total
-------- ----------- ------ --------- ----------- -----
Operating revenues........................ $ 3 $ 8 $ 11 $ 13 $ 27 $ 40
Operating costs and expenses.............. 4 8 12 16 30 46
Other deductions - net.................... - - - 10 - 10
----- ----- ----- ----- ----- -----
Operating loss before income taxes........ (1) - (1) (13) (3) (16)
Income tax expense (benefit).............. 1 - 1 (4) (1) (5)
----- ----- ----- ------ ------ ------
Operating loss............................ (2) - (2) (9) (2) (11)
Charges related to exit (after-tax)....... (1) - (1) (5) (17) (22)
------ ----- ------ ------ ------ ------
Loss from discontinued operations.... $ (3) $ - $ (3) $ (14) $ (19) $ (33)
------ ----- ------ ------ ------ ------
Three Months Ended September 30, Nine Months Ended September 30,
2003 2003
----------------------------------- ----------------------------------
Strategic Strategic
Retail Retail
Services Pedricktown Total Services Pedricktown Total
-------- ----------- ----- -------- ----------- -----
Operating revenues........................... $ 11 $ 10 $ 21 $ 54 $ 18 $ 72
Operating costs and expenses................. 8 10 18 49 21 70
Other deductions - net....................... 4 - 4 4 - 4
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes.. (1) - (1) 1 (3) (2)
Income tax expense (benefit)................. - - - 1 (1) -
----- ----- ----- ----- ------ -----
Operating loss............................... (1) - (1) - (2) (2)
------ ----- ------ ----- ------ ------
Loss from discontinued operations....... $ (1) $ - $ (1) $ - $ (2) $ (2)
------ ----- ------ ----- ------ ------
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.
Strategic Retail Services - In December 2003, Energy finalized a formal
plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. Energy expects to
substantially complete the sales of these operations to various parties by
year-end 2004. Results for 2004 reflect a $9 million ($6 million after-tax)
charge recorded in the second quarter to settle a contract dispute.
9
Balance sheet - The following details the assets and liabilities held for sale:
September 30, 2004
----------------------------------
Strategic
Retail
Services Pedricktown Total
-------- ----------- ------
Current assets........................................... $ 4 $ 2 $ 6
Investments.............................................. 2 - 2
Property, plant and equipment............................ 3 16 19
----- ----- -----
Assets held for sale................................ $ 9 $ 18 $ 27
===== ===== =====
Current liabilities...................................... $ - $ 4 $ 4
Noncurrent liabilities................................... - 4 4
----- ----- -----
Liabilities held for sale........................... $ - $ 8 $ 8
===== ===== =====
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At September 30, 2004, Energy 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, Energy 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
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Energy, Electric
364-day Credit Facility June 2005 Delivery $ 600 $ 80 $ - $ 520
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
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
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
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 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, Energy entered into a $1.0 billion, 364-day credit
facility. In July 2004, borrowings under this facility were repaid with proceeds
from Energy's issuance of $800 million floating rate senior notes and repayment
of advances to affiliates and the facility was subsequently terminated.
TXU Corp.'s $500 million five-year revolving credit facility provides for
up to $500 million in letters of credit and/or up to $250 million of loans ($500
million in the aggregate). To the extent capacity is available under this
facility, it may be made available to US Holdings, Energy or Electric Delivery
for borrowings, letters of credit or other purposes.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program,
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of September 30, 2004, $629
million of undivided interests in Energy's accounts receivable had been sold by
TXU Receivables Company. Effective June 30, 2004, the program was extended
through June 28, 2005. 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.
10
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities, as
well as a servicing fee paid by TXU Receivables Company to TXU Business
Services, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $7 million for each of 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 Energy and are reported in SG&A expenses. The servicing fee, which totaled
approximately $3 million and $4 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 $984 million face amount of
trade accounts receivable reduced by $629 million of undivided interests sold by
TXU Receivables Company. Funding under the program increased $125 million for
the nine months ended September 30, 2004. Funding under the program for the nine
months ended September 30, 2003 increased $198 million. Funding increases or
decreases under the program are reflected as operating cash flow activity in the
statement of cash flows. The carrying amount of the retained interests in the
accounts receivable approximated fair value due to the short-term nature of the
collection period.
Activities of TXU Receivables Company related to Energy for the nine
months ended September 30, 2004 and 2003 were as follows:
Nine Months
Ended September 30,
-------------------------
2004 2003
------ ------
Cash collections on accounts receivable...................................... $ 4,928 $4,933
Face amount of new receivables purchased..................................... (4,979) (4,862)
Discount from face amount of purchased receivables........................... 10 11
Program fees paid............................................................ (7) (7)
Servicing fees paid.......................................................... (3) (4)
Increase (decrease) in subordinated notes payable............................ (74) (268)
-------- -------
Operating cash flows provided to Energy under the program............... $ (125) $ (197)
======== =======
Upon termination of the program, cash flows to Energy would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
11
Contingencies Related to Sale of Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or
deemed uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within Energy and ERCOT for clearing customers' switching and billing
data. Strengthened credit and collection policies and practices have brought the
ratios into consistent compliance with the program requirement.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure, by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
12
Long-term Debt -- At September 30, 2004 and December 31, 2003, the
long-term debt of Energy and its consolidated subsidiaries consisted of the
following:
September 30, December 31,
2004 2003
------------ ------------
Pollution Control Revenue Bonds:
Brazos River Authority:
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a)........... $ 39 $ 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a)........... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)......... 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a)........ 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
Less amount due currently................................................................ 31 1
------- -------
Total long-term debt..................................................................... $ 3,630 $ 3,084
======= =======
- --------------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at 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 $250 million principal
amount.
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 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 bear interest at an annual rate equal to 3-month LIBOR, reset
quarterly, plus 0.78% and will mature on January 17, 2006.
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.
13
Fair Value Hedges -- Energy uses fair value hedging strategies to manage
its exposure to fixed interest rates on long-term debt. At September 30, 2004,
$250 million of fixed rate debt had been 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 $500 million debt were
settled for a gain of $394 thousand, which will be amortized to offset interest
expense over the remaining life of the related debt. In April 2004,
fixed-to-variable interest rate swaps related to $100 million of debt were
settled for a gain of $3.5 million, which will be amortized to offset interest
expense over the remaining life of the debt. In March 2004, fixed-to-variable
interest rate swaps related to $400 million of debt were settled for a gain of
$18 million, which will also be amortized to offset interest expense over the
remaining life of the related debt.
Preferred Membership Interests -- In July 2003, Energy exercised its right
to exchange its $750 million 9% Exchangeable Subordinated Notes issued in
November 2002 and due November 2012 for exchangeable preferred membership
interests with identical economic and other terms. The preferred membership
interests bear distributions at the annual rate of 9% and permit the deferral of
such distributions. The holders of the preferred membership interests had the
option to exchange these interests at any time, subject to certain restrictions,
for up to approximately 57 million shares of TXU Corp. common stock at an
exchange price of $13.1242 per share. At issuance of the notes that were
subsequently exchanged for the preferred membership interests, Energy recognized
a capital contribution from TXU Corp. and a corresponding discount on the
securities of $266 million, which represented the value of the exchange right as
TXU Corp. granted an irrevocable right to exchange the securities for TXU Corp.
common stock. This discount is being amortized to interest expense and related
charges over the term of the securities. As a result, the effective distribution
rate on the preferred membership interests is 16.2%. In April 2004, TXU Corp.
purchased these mandatorily redeemable securities from the holders, as discussed
in Note 1, and as a result the securities effectively represent Energy debt held
by TXU Corp.
5. MEMBERSHIP INTERESTS
In August 2004, Energy approved a cash distribution of $175 million which
was paid to US Holdings in October 2004. In June 2004, Energy approved a cash
distribution of $175 million which was paid to US Holdings in July 2004. In
February 2004, Energy approved a cash distribution of $175 million which was
paid to US Holdings in April 2004. In November 2003, Energy approved a cash
distribution of $175 million which was paid to US Holdings in January 2004.
The following table presents the changes in Membership Interests for the
nine months ended September 30, 2004:
Accumulated
Other Total
Capital Comprehensive Membership
Accounts Gain (Loss) Interests
-------- ------------- ---------
Balance at December 31, 2003................ $4,109 $(110) $3,999
Distributions paid to parent........... (525) - (525)
Net income............................. 375 - 375
Cash flow hedges....................... - (67) (67)
Transfer of TXU Fuel Company ownership. (73) - (73)
------- ----- -------
Balance at September 30, 2004.............. $3,886 $(177) $3,709
====== ====== ======
14
6. CONTINGENCIES
Request from Commodities Futures Trading Commission (CFTC) On April 13,
2004, the CFTC issued a subpoena requiring TXU Corp. to produce information
about storage of natural gas, including weekly and monthly storage reports to
the Energy Information Administration submitted by TXU Fuel Company and TXU Gas.
The request sought information for the period of October 31, 2003 through
January 2, 2004. TXU Corp. cooperated with the CFTC by producing the requested
information and believes that TXU Gas and TXU Fuel Company have not engaged in
any activity that would justify action against them by the CFTC. On August 30,
2004, the CFTC issued a press release confirming that its investigation, which
included the investigation regarding gas storage reports, had been closed, and
TXU Corp. has received nothing from the CFTC to indicate that the CFTC will take
any action against TXU Gas or TXU Fuel Company.
Guarantees -- Energy has entered into contracts that contain guarantees to
outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Residual value guarantees in operating leases -- Energy is the lessee
under various operating leases, entered into prior to January 1, 2003 that
obligate it to guarantee the residual values of the leased facilities. At
September 30, 2004, the aggregate maximum amount of residual values guaranteed
was approximately $195 million with an estimated residual recovery of
approximately $100 million. The average life of the lease portfolio is
approximately seven years.
Debt obligations of the parent-- Energy has provided a guarantee of the
obligations under TXU Corp.'s finance lease (approximately $120 million at
September 30, 2004) for its headquarters building.
Shared saving guarantees -- As part of the operations of the strategic
retail services business, which Energy intends to sell (see Note 3), Energy has
guaranteed that certain customers will realize specified annual savings
resulting from energy management services it has provided. In aggregate, the
average annual savings have exceeded the annual savings guaranteed. The maximum
potential annual payout is approximately $1 million and the maximum total
potential payout is approximately $6 million. No shared savings guarantees were
issued during the nine months ended September 30, 2004 that required recording a
liability. The average remaining life of the portfolio is approximately seven
years. These guarantees will be transferred or eliminated as part of expected
transactions for the sale of the strategic retail services business.
Letters of credit -- Energy has entered into various agreements that
require letters of credit for financial assurance purposes. Approximately $384
million of letters of credit were outstanding at September 30, 2004 to support
existing floating rate pollution control revenue bond debt of approximately $376
million. The letters of credit are available to fund the payment of such debt
obligations. These letters of credit expire in 2008.
Energy has outstanding letters of credit in the amount of $113 million to
support hedging and risk management margin requirements in the normal course of
business. As of September 30, 2004, approximately 84% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the next six years.
Surety bonds -- Energy has outstanding surety bonds of approximately $29
million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
Legal Proceedings -- On July 7, 2003, a lawsuit was filed by Texas
Commercial Energy (TCE) in the United States District Court for the Southern
District of Texas, Corpus Christi Division, against Energy and certain of its
subsidiaries, as well as various other wholesale market participants doing
business in ERCOT, claiming generally that defendants engaged in market
manipulation, in violation of antitrust and other laws, primarily during the
period of extreme weather conditions in late February 2003. An amended complaint
was filed in February 2004 that joined additional, unaffiliated defendants.
Three retail electric providers filed motions for leave to intervene in the
action alleging claims substantially identical to TCE's. In addition,
approximately 25 purported former customers of TCE filed a motion to intervene
in the action alleging claims substantially identical to TCE's, both on their
15
own behalf and on behalf of a putative class of all former customers of TCE. An
order granting Energy's Motion to Dismiss based on the filed rate doctrine was
entered on June 24, 2004. TCE has appealed the dismissal, however, Energy
believes the dismissal of the antitrust claims was proper and that it has not
committed any violation of the antitrust laws. Further, the Commission's
investigation of the market conditions in late February 2003 has not resulted in
any findings adverse to Energy. Accordingly, Energy believes that TCE's and the
interveners' claims against Energy and its subsidiary companies are without
merit and Energy and its subsidiaries intend to vigorously defend the lawsuit on
appeal. Energy is, however, unable to estimate any possible loss or predict the
outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., Energy and TXU Portfolio
Management. The Court has reset this case for trial on June 6, 2005 and
discovery in the case is proceeding. Plaintiff asserts claims under Section 806
of Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. Energy believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, Energy does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. TXU Corp., Energy and TXU Portfolio Management dispute the
plaintiff's claims and intend to vigorously defend the litigation.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This case was transferred to the Beaumont
Division of the Eastern District of Texas and on March 24, 2004 subsequently
transferred to the Northern District of Texas, Dallas Division. This action is
brought by an individual, alleged to be a retail consumer of electricity, on
behalf of herself and as a proposed representative of a putative class of retail
purchasers of electricity that are similarly situated. Defendants have filed a
motion to dismiss the lawsuit which is pending before the court; however, as a
result of the dismissal of the antitrust claims in the litigation described
above brought by TCE, the parties have agreed to stay this litigation until the
appeal in the TCE case has been decided. Energy believes that the plaintiff
lacks standing to assert any antitrust claims against TXU Corp. or TXU Portfolio
Management, and that defendants have not violated antitrust laws or other laws
as claimed by plaintiff. Therefore, Energy believes that plaintiff's claims
are without merit and plans to vigorously defend the lawsuit. Energy is,
however, unable to estimate any possible loss or predict the outcome of this
action.
General -- In addition to the above, Energy is involved in various other
legal and administrative proceedings in the normal course of business the
ultimate resolution of which, in the opinion of management, should not have a
material effect upon its financial position, results of operations or cash
flows.
7. DERIVATIVES AND HEDGES
As of September 30, 2004, it is expected that $68 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. Of this amount, $62 million relates to
commodity hedges and $6 million relates to financing-related hedges.
Energy experienced net hedge ineffectiveness of $4 million and $21
million, reported as a loss in revenues, for the three and nine months ended
September 30, 2004, respectively. For the three and nine months ended September
30, 2003, there were no hedge ineffectiveness losses.
The net effect of unrealized mark-to-market ineffectiveness accounting
(versus settlement accounting), which includes the above amounts as well as the
effect of reversing unrealized gains and losses recorded in previous periods to
offset realized gains and losses in the current period, totaled $3 million and
$20 million, respectively, in net losses for the three and nine months ended
September 30, 2004 and $10 and $24 million in net gains for the three and nine
months ended September 30, 2003.
16
8. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- ------
Other income:
Net gain on sale of properties and businesses. $ 35 $ 19 $ 48 $ 40
Other......................................... 1 1 2 3
------ ------ ------ ------
Total other income......................... $ 36 $ 20 $ 50 $ 43
====== ====== ====== ======
Other deductions:
Software write-off............................ $ (2) $ - $ 107 $ -
Employee severance charges.................... 3 - 89 -
Spare parts inventory writedown............... - - 79 -
Equity in losses of unconsolidated entities... 8 - 8 -
Expenses related to canceled construction
projects.................................... 1 2 5 4
Casualty loss (gas storage explosion)......... 5 - 5 -
Settlement of purchase power agreement........ 3 - 3 -
Loss on retirement of debt.................... 1 1 1 1
Other......................................... 1 1 4 4
------ ------ ------ ------
Total other deductions..................... $ 20 $ 4 $ 301 $ 9
====== ====== ====== ======
Severance Liability Related to Restructuring Activities
Energy
------
Liability for severance costs accrued as of June 30, 2004........... $ 84
Additions to liability.......................................... 3
Payments charged against liability.............................. (53)
----
Liability for severance costs accrued as of September 30, 2004... $ 34
=====
The above table excludes severance included in discontinued operations.
Interest Expense and Related Charges --
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2004 2003 2004 2003
-------- -------- -------- ------
Interest (a)....................................... $ 68 $ 62 $ 197 $ 217
Distributions on preferred membership interests (b) 17 17 51 17
Amortization of discount and debt issuance costs... 9 6 21 17
Capitalized interest............................... (3) (2) (6) (5)
------ ------ ------ ------
Total interest expense and related charges...... $ 91 $ 83 $ 263 $ 246
====== ====== ====== ======
(a) Included in interest for the nine months ended September 30, 2003 is $34
million related to the exchangeable subordinated notes that were exchanged
for preferred membership interests in July 2003.
(b) In April 2004, TXU Corp. purchased from the holders Energy's preferred
membership interests, and subsequent to this purchase, Energy has paid
distributions on the preferred membership interests to TXU Corp.
Affiliate Transactions - The following represent the significant affiliate
transactions of Energy:
o Energy incurs electricity delivery fees charged by Electric Delivery.
For the three months ended September 30, 2004 and 2003, these fees
totaled $417 million and $441 million, respectively. For the nine
months ended September 30, 2004 and 2003, these fees totaled $1.1
billion and $1.2 billion, respectively.
o Energy records interest expense to Electric Delivery with respect to
Electric Delivery's generation-related regulatory assets, which now
consists entirely of the securitization bonds. The interest expense
reimburses Electric Delivery for the interest expense Electric Delivery
incurs on that portion of its debt associated with the
generation-related regulatory assets. For the three months ended
September 30, 2004 and 2003, this interest expense totaled $15 million
and $12 million, respectively. For the nine months ended September 30,
2004 and 2003, this interest expense totaled $40 million and $36
million, respectively.
17
o Under the terms of the settlement plan, Electric Delivery issued an
initial $500 million of securitization bonds in 2003 and issued $790
million in June 2004. The incremental income taxes Electric Delivery
will pay on the increased delivery fees to be charged to Electric
Delivery's customers related to the bonds will be reimbursed by Energy.
Therefore, Energy's financial statements reflect a $437 million
non-interest bearing payable to Electric Delivery ($30 million of which
is due currently) that will be extinguished as Electric Delivery pays
the related income taxes.
o The average daily balances of short-term advances to affiliates during
the three months ended September 30, 2004 was $1.5 billion and average
daily short-term advances from affiliates during the three months ended
September 30, 2003 was $47 million. Interest income earned on the
advances for the three months ended September 30, 2004 was $10 million
and interest expense incurred on the advances for the three months
ended September 30, 2003 was $343 million. The weighted average
interest rate for the three months ended September 30, 2004 and
2003 was 2.62% and 2.86%, respectively. The average daily balances of
short-term advances to affiliates during the nine months ended
September 30, 2004 were $905 million and average daily short-term
advances from affiliates during the nine months ended September 30,
2003 was $500 million. Interest income earned on the advances for the
nine months ended September 30, 2004 was $19 million and interest
expense incurred on the advances for the nine months ended September
30, 2003 was $9 million. The weighted average interest rate for the
nine months ended September 30, 2004 and 2003 was 2.77% and 2.76%,
respectively.
o TXU Business Services charges Energy for financial, accounting,
environmental and other administrative services at cost. For the three
months ended September 30, 2004 and 2003, these costs totaled $10
million and $54 million, respectively, and are primarily included in
SG&A expenses. For the nine months ended September 30, 2004 and 2003,
these costs totaled $144 million and $173 million, respectively.
Effective July 1, 2004, under the ten year services agreement with
Capgemini several of the functions previously performed by TXU
Business Services are now provided by Capgemini. 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, human resources, supply
chain and certain accounting activities (See Note 1 for further
discussion).
o Energy received payments from TXU Gas under a service agreement that
began in 2002 and ended June 30, 2004 and covered customer billing and
customer support services provided for TXU Gas. These revenues totaled
$15 million and $22 million for the nine months ended September 30,
2004 and 2003, respectively, and are included in other revenues. On
October 1, 2004, TXU Corp. and Atmos Energy Corporation completed a
merger by division in which Atmos Energy Corporation acquired TXU Gas'
operations.
o Energy records the amount owed by Electric Delivery for the future
costs of decommissioning the Comanche Peak nuclear facility as a
non-current asset. Funds for decommissioning are collected monthly from
Electric Delivery. Realized gains and other earnings on the nuclear
decommissioning trust holdings reduce the non-current asset. As of
September 30, 2004, the balance of the noncurrent asset related to the
Comanche Peak nuclear facility asset retirement obligation was $42
million.
o In April 2004, TXU Corp. purchased from the holders Energy's
exchangeable preferred membership interests, and as a result Energy has
paid distributions to TXU Corp. on these securities, which remain
outstanding, since the purchase. Interest expense and related charges
associated with these securities, including amortization of the
related discount, totaled $21 million for the three months ended
September 30, 2004 and $37 million for the nine months ended
September 30, 2004 since the date of TXU Corp.'s purchase of
securities.
Pension and Other Postretirement Benefits -- Energy is a participating
employer in the TXU Retirement Plan, a defined benefit pension plan sponsored by
TXU Corp. Energy also participates with TXU Corp. and other affiliated
subsidiaries of TXU Corp. to offer health care and life insurance benefits to
eligible employees and their eligible dependents upon the retirement of such
employees. The allocated net periodic pension cost and net periodic
postretirement benefits cost other than pensions applicable to Energy was $12
million and $15 million for the three month periods ended September 30, 2004 and
2003, respectively and $43 million and $44 million for the nine months ended
September 30, 2004 and 2003, respectively.
The Capgemini outsourcing transaction on July 1, 2004, (see Note 1)
triggered a curtailment of the pension and postretirement plans and a
remeasurement of the related liabilities. The effects of the remeasurement,
which include an increase in the discount rate of 0.25%, as well as the Medicare
Act enacted in December 2003, have resulted in lower pension and postretirement
benefits expense.
18
Accounts Receivable -- At September 30, 2004 and December 31, 2003,
accounts receivable of $989 million and $943 million are stated net of allowance
for uncollectible accounts of $40 million and $51 million, respectively. During
the nine months ended September 30, 2004, bad debt expense was $76 million,
account write-offs were $90 million and other activity increased the allowance
for uncollectible accounts by $3 million. During the nine months ended September
30, 2003, bad debt expense was $68 million, account write-offs were $64 million
and other activity decreased the allowance for uncollectible accounts by $4
million. Allowances related to receivables sold are reported in current
liabilities and totaled $35 million and $39 million at September 30, 2004 and
December 31, 2003, respectively.
Accounts receivable included $406 million and $388 million of unbilled
revenues at September 30, 2004 and December 31, 2003, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of September 30, 2004 As of December 31, 2003
----------------------------- ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ ---- ------- ------------ ----
Intangible assets subject to amortization included
in property, plant and equipment:
Capitalized software placed in service
(unrelated to outsourced activities at
September 30, 2004)...................... $ 3 $ 1 $ 2 $ 241 $ 112 $ 129
Land easements............................ 2 1 1 11 8 3
Mineral rights and other.................. 30 22 8 31 22 9
----- ----- ----- ----- ----- -----
Total................................... $ 35 $ 24 $ 11 $ 283 $ 142 $ 141
===== ===== ===== ===== ===== =====
Aggregate Energy amortization expense for intangible assets for the three
months ended September 30, 2004 and 2003 was less than $1 million and $10
million, respectively. Aggregate Energy amortization expense for intangible
assets for the nine months ended September 30, 2004 and 2003 was $21 million and
$27 million, respectively. At September 30, 2004, the weighted average useful
lives of capitalized software, land easements and mineral rights and other were
5 years, 54 years and 40 years, respectively.
During the second quarter of 2004, Energy transferred information
technology assets, consisting primarily of capitalized software, to a
subsidiary of TXU Corp at book value. See Note 1 for further discussion.
Goodwill of $517 million and $533 million at September 30, 2004 and
December 31, 2003, respectively, was stated net of previously recorded
accumulated amortization of $60 million. Energy transferred $16 million of
goodwill to US Holdings in connection with the transfer of TXU Fuel Company to
US Holdings on April 30, 2004.
Commodity Contracts -- At September 30, 2004 and December 31, 2003,
current and noncurrent commodity contract assets, arising largely from
mark-to-market accounting, totaled $936 million and $657 million, respectively,
and are stated net of applicable credit (collection) and performance reserves
totaling $23 million and $18 million, respectively. Performance reserves are
provided for direct, incremental costs to settle the contracts. Current and
non-current commodity contract liabilities totaled $854 million and $549 million
at September 30, 2004 and December 31, 2003, respectively.
Inventories by Major Category --
September 30, December 31,
2004 2003
------- --------
Materials and supplies.................................................... $ 133 $ 225
Fuel stock................................................................ 79 78
Gas stored underground.................................................... 84 83
------- -------
Total inventories................................................... $ 296 $ 386
======= =======
19
As described in Note 1, Energy recorded a charge in the second quarter of
$79 million ($51 million after-tax) to write down spare parts and equipment
inventory.
Property, Plant and Equipment -- At September 30, 2004 and December 31,
2003, property, plant and equipment of $9.8 billion and $10.3 billion is stated
net of accumulated depreciation and amortization of $7.4 billion and $7.6
billion, respectively.
Supplemental Cash Flow Information -- See Note 1 regarding the effects of
Capgemini being provided a royalty-free right, under an asset license
arrangement, to use information technology assets, consisting primarily
of capitalized software, which were noncash in nature. See Note 2 for the
effects of adopting SFAS 143, which were noncash in nature. The transfer of TXU
Fuel Company ownership as discussed in Note 5 was noncash in nature.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TXU Energy Company LLC:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Energy Company LLC and subsidiaries (Energy) as of September 30, 2004, and the
related condensed statements of consolidated income and of comprehensive income
for the three-month and nine-month periods ended September 30, 2004 and 2003,
and the condensed statements of consolidated cash flows for the nine-month
periods ended September 30, 2004 and 2003. These interim financial statements
are the responsibility of Energy's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Energy as of December 31, 2003, and the related statements of consolidated
income, comprehensive income, cash flows and membership interests for the year
then ended (not presented herein); and in our report (which includes an
explanatory paragraph related to the rescission of Emerging Issues Task Force
Issue No. 98-10), dated March 11, 2004, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 12, 2004
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
Energy is a subsidiary of US Holdings, which is a subsidiary of TXU Corp.
Energy is engaged in electricity generation and retail and wholesale energy
sales.
Energy currently has no reportable segments, however, management intends
to realign its operations into two core business segments consisting of Power
(the electricity production business) and Energy (the retail and wholesale
energy sales and hedging and risk management operations) effective with
reporting for the first quarter of 2005.
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.
Energy anticipates performance improvements as a result of various
strategic initiatives, including lower administrative support costs, more
efficient and cost-effective utilization of generation-related assets and
increased return on investments. As discussed below, implementation of the
strategic initiatives as well as other actions taken to date have resulted in
total charges of $8 million ($5 million after-tax) in the third quarter of 2004
and $284 million ($185 million after-tax) year-to-date, substantially all
reported in other deductions, related to asset writedowns and employee
severance. In the third quarter of 2004, Energy recorded gains on the
disposition of properties, principally undeveloped land, totaling $18 million
($12 million after-tax), reported in other income.
Charges recorded in the three-month and nine-month periods ended September
30, 2004 and 2003 reported in other deductions are detailed in Note 8 to
Financial Statements.
The review of Energy's operations and formulation of strategic initiatives
is ongoing, and additional charges are expected. The phases of the plan
resulting in the charges to date are anticipated to be largely completed in
2004. Upon completion of each phase of the plan, Energy expects to fully
describe the actions intended to improve the financial performance of its
operations. Certain of the strategic initiatives described below could result in
additional material charges that Energy is currently unable to predict. In
addition, other new strategic initiatives are likely to be undertaken that could
also materially affect Energy's financial results.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, Energy entered into a 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 TXU Corp. employees
(including approximately 1,100 from Energy) transferred to Capgemini effective
July 1, 2004. Outsourced base support services performed by Capgemini for a
fixed fee, 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. Energy expects that
the Capgemini arrangement will result in lower costs and improved service
levels.
As part of the agreements, Capgemini was provided a royalty-free right,
under an asset license arrangement, to use information technology assets,
consisting primarily of capitalized software. A portion of the software was in
development and had not yet been placed in service by Energy. As a result of
outsourcing its information technology activities, Energy no longer intends to
develop the majority of these projects and from Energy's perspective the
software is abandoned. The agreements with Capgemini do not
22
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 $107 million ($70 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. The remaining assets were
transferred to a subsidiary of TXU Corp. at book value in exchange for an
interest in that subsidiary. Such interest is accounted for by Energy on the
equity method, and Energy recorded equity losses (representing depreciation
expense) of $8 million in the third quarter of 2004, reported in other
deductions.
The TXU Corp. subsidiary received a 2.9% limited partnership interest in
Capgemini in exchange for the asset license described above. Energy and Electric
Delivery have the right to sell (the "put option") their interest in the
subsidiary to Cap Gemini America Inc. for $200 million, plus the subsidiary'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 Energy's and Electric
Delivery's interests under the same terms and conditions. The partnership
interest in Capgemini has been recorded at an initial value of $2.9 million and
is being accounted for on the cost method.
Energy has recorded its share of the fair value of the put option as a
noncurrent asset largely offset by a reduction to the carrying value of the
software transferred to the subsidiary, 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."
Also as part of the services agreements, TXU Corp. agreed to indemnify
Capgemini for severance costs incurred by Capgemini for former TXU Corp.
employees terminated within 18 months of their transfer to Capgemini.
Accordingly, Energy recorded a $27 million ($18 million after-tax) charge for
severance expense in the second quarter of 2004, which represents a reasonable
estimate of the indemnity and is reported in other deductions. The charge
includes an allocation of severance related to TXU Business Services Company
employees. In addition, TXU Corp. committed to pay up to $25 million for costs
associated with transitioning the outsourced activities to Capgemini. The
transition costs applicable to Energy are expected to be largely recorded during
the fourth quarter of 2004.
Transfer and Sale of TXU Fuel Company
-------------------------------------
On April 30, 2004, Energy distributed the assets of TXU Fuel Company, its
gas transportation subsidiary, to US Holdings at book value, including $16
million of allocated goodwill. On June 2, 2004, US Holdings completed the sale
of the assets of TXU Fuel Company to Energy Transfer Partners, L.P. for $500
million in cash. The assets of TXU Fuel Company consisted of approximately 1,900
miles of intrastate pipeline