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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
--OR--
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission Exact Name of Registrant as Specified in its Charter; I.R.S. Employer
File Number Address of Principal Executive Offices; and Telephone Number Identification No.
- ----------- ------------------------------------------------------------ ------------------
1-12833 Texas Utilities Company 75-2669310
(doing business as TXU Corp.)
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Registrant Title of Each Class Which Registered
---------- ------------------- ------------------------
Texas Utilities Company Common Stock, without par value New York Stock Exchange
The Chicago Stock Exchange
The Pacific Exchange
Growth Prides New York Stock Exchange
Income Prides New York Stock Exchange
TXU Capital I, a subsidiary of 7.25% Cumulative Trust Preferred Capital Securities New York Stock Exchange
Texas Utilities Company
TXU Capital II, a subsidiary of 8.70% Trust Originated Preferred Securities New York Stock Exchange
Texas Utilities Company
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Texas Utilities Company Common Stock held by non-
affiliates, based on the last reported sale price on the NYSE composite tape on
March 14, 2000: $7,043,528,301.
Common Stock outstanding at March 14, 2000: 263,926,119 shares, without par
value
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A, which
will be filed with the Commission on or about March 30, 2000, are incorporated
by reference into Part III of this report.
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TABLE OF CONTENTS
Page
____
PART I
Item 1. BUSINESS.......................................................... 1
LEGAL ENTITIES
TXU Corp. and Subsidiaries....................................... 1
TXU Electric Company and Subsidiaries............................ 3
TXU Gas Company and Subsidiaries................................. 3
TXU International Holdings Limited and Subsidiaries.............. 4
TXU Energy Industries Company and Subsidiaries................... 5
COMPETITIVE STRATEGY.............................................. 6
OPERATING SEGMENTS
US Electric...................................................... 8
US Gas........................................................... 18
US Energy Marketing.............................................. 22
Europe........................................................... 23
Australia........................................................ 32
Other Businesses................................................. 38
ENVIRONMENTAL MATTERS............................................. 39
Item 2. PROPERTIES........................................................ 43
Item 3. LEGAL PROCEEDINGS................................................. 46
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 47
EXECUTIVE OFFICERS OF TXU CORP.............................................. 48
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 49
Item 6. SELECTED FINANCIAL DATA........................................... 49
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 50
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 50
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 50
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................... 50
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 50
Item 11. EXECUTIVE COMPENSATION............................................ 50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................ 50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................... 51
APPENDIX A - Financial Information of Texas Utilities Company and Subsidiaries
APPENDIX B - TXU Corp. Exhibits to 1999 Form 10-K
i
PART I
Item 1. BUSINESS
LEGAL ENTITIES
--------------
TXU CORP. AND SUBSIDIARIES
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
TXU Corp.'s principal subsidiaries, with their current and former names
where applicable, are as follows:
Current Name Former Name
- ------------ -----------
TXU Electric Company Texas Utilities Electric Company
TXU Gas Company ENSERCH Corporation
TXU Lone Star Pipeline, a division Lone Star Pipeline Company, a division
of TXU Gas Company of ENSERCH Corporation
TXU Gas Distribution, a division Lone Star Gas Company, a division
of TXU Gas Company of ENSERCH Corporation
TXU Processing Company Enserch Processing, Inc
TXU Energy Trading Company Enserch Energy Services, Inc.
TXU International Holdings Limited TU International Holdings Limited
TXU Europe Limited TXU Eastern Holdings Limited
TXU Europe Group plc Eastern Group plc
TXU Europe Energy Trading Eastern Power Energy Trading
Limited Limited
Eastern Electricity plc No change
TXU Europe Power Limited Eastern Generation Limited
Eastern Natural Gas Limited No change
TXU Australia Holdings (Partnership)
Limited Partnership No change
TXU Australia Pty. Ltd. Texas Utilities Australia Pty. Ltd.
Eastern Energy Limited No change
Kinetik Energy Pty. Ltd. No change
Westar Pty. Ltd. No change
TXU Energy Industries Company Texas Energy Industries, Inc.
TXU SESCO Company Southwestern Electric Service Company
TXU Fuel Company Texas Utilities Fuel Company
TXU Mining Company Texas Utilities Mining Company
TXU Communications Company Lufkin-Conroe Communications Co.
TXU Energy Services Company Texas Utilities Integrated
Solutions, Inc.
TXU Business Services Company Texas Utilities Services Inc.
1
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses. TXU Corp. is the successor to TEI, the holding
company for the US businesses prior to the August 5, 1997 acquisition of TXU
Gas. TEI was organized in 1945 and, prior to August 5, 1997, was known as Texas
Utilities Company.
At December 31, 1999, TXU Corp. and its direct and indirect wholly-owned
subsidiaries had 21,934 full-time employees.
Mergers and Acquisitions
- ------------------------
Certain comparisons in this report have been affected by the February 1999
acquisition of the gas retail business of Kinetik Energy and the gas
distribution operations of Westar, the May 1998 acquisition of The Energy Group
PLC (TEG), the former holding company of TXU Europe Group, the August 1997
acquisition of TXU Gas, and the November 1997 acquisition of TXU Communications
Company (TXU Communications). Each of these acquisitions was accounted for as
a purchase business combination. The results of operations of each acquired
company are included in the consolidated financial statements of TXU Corp. only
for the periods subsequent to their respective dates of acquisition.
In March 1998, TXU Corp. made an offer for all the ordinary shares of TEG.
TXU Corp.'s offer for TEG was declared unconditional on May 19, 1998, which was
determined to be the date TXU Corp. acquired TEG. By the end of August 1998,
TXU Corp. had acquired all of TEG's outstanding shares. Immediately prior to
being acquired by TXU Corp., TEG completed the sale of its US and Australian
coal business and US energy marketing operations. Through a series of capital
transactions subsequent to its formation on February 5, 1998, TXU Europe Group
became an indirect subsidiary of TXU Europe.
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia.
TXU Corp. will pursue potential investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and are likely to enhance the long-term return to its shareholders.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. It is the fourth-largest Spanish energy company and is based in the
Asturias region in northern Spain. Hidrocantabrico has approximately 520,000
electricity customers and over 115,000 natural gas customers. It also has over
2,100 MW of installed generating capacity with a generation market share of
approximately 7%. TXU Europe and Hidrocantabrico also are partners in Synergia
Trading, S.A., an equally-owned joint venture which trades energy in the Spanish
market.
The offer is subject to a number of conditions, including, among others,
authorization by the CNMV, or Spanish Securities Exchange, approval by European
Union competition authorities and TXU Europe acquiring sufficient shares such
that it would hold at least 51% of Hidrocantabrico after the transaction is
completed. The transaction is expected to close in the second quarter of 2000.
On March 13, 2000, TXU Corp. announced that it had entered into an
agreement to acquire Fort Bend Communication Companies, Inc. (FBCC) based in
Katy, Texas, near Houston. FBCC is a privately-held company that provides
comprehensive communications services in Fort Bend, Harris, Waller and Brazoria
counties in Texas. It has 41,000 access lines in its regulated local exchange
territory and 4,000 competitive access lines in adjacent areas in and near
Houston. The transaction is expected to close in the second quarter of 2000.
2
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
Income Statement
Balance Sheet (average for periods
(at December 31,) ended December 31,)
---------------- --------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- -------
UK pounds sterling (Pounds) $1.6165 $1.6554 $1.6214 $1.6616 --
Australian dollars (A$) $0.6507 $0.6123 $0.6432 $0.6313 $0.7443
TXU ELECTRIC COMPANY AND SUBSIDIARIES
TXU Electric is an electric utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy solely within the State
of Texas. TXU Electric's service area is located in the north central, eastern
and western parts of Texas, with a population estimated at 6.1 million - about
one-third of the population of Texas. Electric service is provided to
approximately 2.6 million customers in 92 counties and 370 incorporated
municipalities, including the Dallas-Fort Worth metropolitan area. The area is
a diversified commercial and industrial center with substantial banking,
insurance, communications, electronics, aerospace, petrochemical and specialized
steel manufacturing, and automotive and aircraft assembly. The territory served
includes major portions of the oil and gas fields in the Permian Basin and East
Texas, as well as substantial farming and ranching sections of the State. TXU
Electric is the principal operating entity in the US Electric business segment.
For energy sales and operating revenues contributed by each customer
classification, see US Electric segment below.
At December 31, 1999, TXU Electric had 7,868 full-time employees. Some of
these employees provide services to other subsidiaries of TXU Corp., the cost of
which is billed to those subsidiaries.
TXU GAS COMPANY AND SUBSIDIARIES
TXU Gas is an integrated company focused on natural gas. Its major business
operations consist of the gathering, processing, transmission and distribution
of natural gas and the marketing of natural gas and electricity through the
following divisions and companies.
TXU Lone Star Pipeline, a partially rate-regulated division of TXU Gas,
owns and operates interconnected natural-gas transmission lines, underground
storage reservoirs, compressor stations and related properties, all within
Texas. With a system consisting of approximately 7,400 miles of transmission and
gathering pipelines in Texas, TXU Lone Star Pipeline is one of the largest
pipelines in the US. Through these facilities, it transports natural gas to
distribution systems of TXU Gas Distribution and other customers. Rates for the
services provided to TXU Gas Distribution are regulated by the Railroad
Commission of Texas (RRC), while rates for services to other customers are
generally established by competitively negotiated contracts.
TXU Gas Distribution, a partially rate-regulated division of TXU Gas, owns
and operates natural gas distribution systems and related properties. One of
the largest gas distribution companies in the US and the largest in Texas, TXU
Gas Distribution provides service through over 24,000 miles of distribution
mains. Through these facilities, it purchases, distributes and sells natural
gas to over 1.4 million residential, commercial and industrial customers in
approximately 560 cities and towns, including the 11-county Dallas-Fort Worth
Metroplex. TXU Gas Distribution also transports natural gas to end users within
its distribution system as market opportunities require. The distribution
service rates that TXU Gas Distribution charges its residential and commercial
customers are
3
established by the municipal governments of the cities and towns served with the
RRC having appellate jurisdiction. The majority of TXU Gas Distribution's
residential and commercial gas customers use gas for heating, and their needs
are directly affected by the mildness or severity of the heating season.
However, approximately 70% of TXU Gas Distribution's residential and commercial
volumes are subject to weather normalization adjustments. Sales to electric-
generation customers are affected by the mildness or severity of both cooling
and heating seasons.
TXU Processing Company (TXU Processing), a wholly-owned subsidiary of TXU
Gas, gathers and processes natural gas to remove impurities and extract natural
gas liquids for sale and sells the natural gas remaining after processing. TXU
Gas has recently sold or is selling a number of assets that no longer align with
its long-term strategy. In March 2000, TXU Gas announced that it had entered
into a contract for the sale of substantially all of the assets of TXU
Processing.
TXU Energy Trading Company (TXU Energy Trading), a wholly-owned subsidiary
of TXU Gas, is a wholesale and retail marketer of natural gas and electricity
throughout the US. Its primary natural gas markets, both retail and wholesale,
are in Texas, the Northeast, the Midwest and the West Coast. TXU Energy
Trading's marketing activities typically consist of (i) contracting to purchase
specific volumes of gas from producers, pipelines and other suppliers at various
points of receipt, (ii) aggregating gas supplies and arranging for the
transportation of these gas supplies, (iii) negotiating to sell specific volumes
of gas over a specified period of time to other wholesale marketers and end
users, (iv) trading gas volumes to optimize storage facilities and other asset
management strategies and (v) providing related risk-management services to its
customers. TXU Energy Trading makes physical sales of electricity in the
wholesale market throughout the US excluding the area of the Electric
Reliability Council of Texas (ERCOT).
At December 31, 1999, TXU Gas and its direct and indirect wholly-owned
subsidiaries had 1,486 full-time employees.
TXU INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
TXU International Holdings, an indirect subsidiary of TXU Corp., is a
holding company whose subsidiaries are engaged in international energy
generation, purchase, distribution and sales, and international gas operations.
Its primary holding companies in Europe and Australia are TXU Europe and TXU
Australia. Through its subsidiaries, TXU International Holdings owns TXU Europe
Group, one of the largest integrated electricity and gas groups in the UK and
the principal operating entity in the Europe operating segment, Eastern Energy,
an electric utility which is the principal operating company in the Australia
operating segment, and the gas retail and distribution operations of
Westar/Kinetik Energy in Australia (acquired in February 1999).
TXU Europe Group's principal business operations are electricity networks
and energy businesses in the UK and throughout other parts of Europe. TXU
Europe's major business operations are conducted through the following
subsidiaries of TXU Europe Group:
(i) TXU Europe Energy Trading Limited (TXU Europe Energy Trading), which
coordinates and manages for TXU Europe Group and for other parties
the price and volume risks associated with generation, electricity
and gas retail businesses;
(ii) Eastern Electricity plc (Eastern Electricity), one of the largest
retailers of electricity in the UK, and Eastern Energy Limited, which
supplies electricity outside the authorized area served by Eastern
Electricity;
(iii) TXU Europe Power Limited (TXU Europe Power), one of the largest
generators of electricity in the UK; and
(iv) Eastern Natural Gas Limited (Eastern Natural Gas), one of the largest
retail suppliers of natural gas in the UK.
4
At December 31, 1999, TXU Europe Group had 6,341 full-time employees.
In January 1999 TXU Corp., created TXU Australia to hold, either directly
or indirectly, all of its Australian investments. Prior to this time, TXU Corp.
principally conducted business in Australia through TXU Australia Pty. Ltd. TXU
Australia indirectly owns TXU Australia Pty. Ltd. Subsidiaries of TXU Australia
purchase, distribute, trade and retail electricity and natural gas, primarily in
the State of Victoria, Australia. TXU Australia's core businesses are conducted
through three principal operating companies:
(i) Eastern Energy, which purchases, distributes, trades and retails
electricity to approximately 500,000 customers, mainly in Victoria;
(ii) Westar, which distributes natural gas to approximately 400,000
customers in central and west Victoria; and
(iii) Kinetik Energy, which sells natural gas to approximately 400,000
customers in Victoria.
At December 31, 1999 TXU Australia had 2,249 full-time employees.
In 1998, TXU International Holdings acquired TXU Lone Star Gas
International, Inc. (LSGI) from TEI. LSGI is currently focused in the Mexico
Federal District and its operations consist primarily of ownership in gas
distribution systems.
TXU ENERGY INDUSTRIES COMPANY AND SUBSIDIARIES
TEI is a holding company for certain subsidiaries engaged in or supporting
the purchase, transmission, distribution and sale of electric energy,
telecommunications, retail energy services, power development, and other
businesses.
TXU SESCO Company (TXU SESCO) is engaged in the purchase, transmission,
distribution and sale of electric energy in ten counties in the eastern and
central parts of Texas with a population estimated at 127,000.
TXU Fuel Company (TXU Fuel) owns a natural gas pipeline system; acquires,
stores and delivers fuel gas; and provides other fuel services, at cost, for the
generation of electric energy by TXU Electric.
TXU Mining Company (TXU Mining) owns, leases and operates fuel production
facilities for the surface mining and recovery of lignite, at cost, for the
generation of electric energy by TXU Electric.
TXU Communications Company (TXU Communications) is the parent company of
TXU Communications Telephone Company, TXU Communications Transport Company and
its subsidiaries, and TXU Communications Telecom Services Company. TXU
Communications Telephone Company is an independent local exchange carrier which
has provided regulated telephone services to its customers for 100 years and has
over 113,000 access lines. It also provides access services to a number of
interexchange carriers who provide long-distance services. TXU Communications
Telecom Services Company provides Internet access, cellular mobile telephones,
radio paging services and private branch exchange service to local customers, as
well as interexchange long-distance service, with a primary focus on business
customers. TXU Communications Transport Company owns fiber optic cable systems
that provide high capacity bandwidth to customers.
TXU Communications Holding Company provides access to advanced
telecommunications technology, primarily for TXU Corp.'s expected expansion of
the energy services business. In December 1999, TXU Communications Holdings
sold its 20% ownership interest in the partnerships that operate PrimeCo
Personal Communications LP's Texas business to the other partners for $357
million.
TXU Energy Services Company is an unregulated company providing retail
energy services. It bundles energy-related products and services for selected
market segments.
5
TXU Business Services Company (TXU Business Services) provides financial,
accounting, information technology, environmental, customer, procurement and
personnel services and other administrative services, at cost, to TXU Corp. and
its other subsidiaries. TXU Business Services acts as transfer agent, registrar
and dividend paying agent with respect to the common stock of TXU Corp., the
preferred stock and preferred trust securities of TXU Electric and TXU Gas,
transfer agent and registrar for the preferred securities of TXU Corp. and as
agent for participants under TXU Corp.'s Direct Stock Purchase and Dividend
Reinvestment Plan.
TXU Properties Company (TXU Properties) owns, leases and manages real and
personal properties, primarily TXU Corp.'s corporate headquarters.
Basic Resources Inc. was organized for the purpose of developing natural
resources, primarily energy sources, and other business opportunities.
TXU Development Company develops and finances independent electric power
plant and cogeneration facilities.
COMPETITIVE STRATEGY
--------------------
TXU Corp. has developed a strategy designed to achieve operations of
significant scale in selected regions by integrating and leveraging its
capabilities across multiple products and services. TXU Corp. plans to enhance
its leading position in electric, gas, and related services in Texas; develop
broad-based energy and related businesses in other US regions determined by TXU
Corp. to be promising; build on its substantial, broad-based position in the UK
and Australia and its developing position in continental Europe; and build on
customer relationships through retail energy and related services. TXU Corp.'s
strategy involves establishing upstream positions (electric generation through
ownership or contracts and gas supply through producing assets or contracts) and
downstream retail customer relationships. TXU Corp. manages and leverages the
knowledge and value from these positions through effective portfolio management
and trading capabilities that manage the risk and enhance the value of existing
positions while adjusting the portfolio as needed to address market conditions.
6
OPERATING SEGMENTS
------------------
TXU Corp. has five reportable operating segments:
(1) US Electric - operations involving the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas (primarily TXU Electric, TXU
SESCO, TXU Fuel and TXU Mining operations);
(2) US Gas - operations involving the gathering, processing, transmission
and distribution of natural gas and selling of natural gas liquids in Texas
(primarily TXU Lone Star Pipeline, TXU Gas Distribution and TXU Processing);
(3) US Energy Marketing - operations involving purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US and parts of Canada (primarily TXU Energy
Trading);
(4) Europe - operations involving the generation, purchase, distribution
and sale of electricity and the purchase and sale of natural gas primarily in
the UK, with additional energy interests throughout the rest of Europe
(primarily TXU Europe Group);
(5) Australia - operations involving the purchase, distribution, trading
and retailing of electricity and natural gas, primarily in the State of
Victoria, Australia (primarily TXU Australia); and
Other - non-segment operations consisting of telecommunications, retail
energy services, international gas operations (other than Europe and Australia),
power development and other energy development activities.
Financial information required hereunder is set forth in Note 15 to
Financial Statements.
7
US ELECTRIC SEGMENT
GENERAL
US Electric operations are engaged in the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas.
Operating Statistics
Years Ended December 31
1999 1998 1997
---- ---- ----
ELECTRIC ENERGY GENERATED AND PURCHASED
(Gigawatt-hours - GWh)
Generated - net station output.............. 94,575 97,574 91,298
Purchased and net interchange............... 12,620 12,205 11,980
-------- -------- --------
Net generated and purchased........ 107,195 109,779 103,278
Company use, losses, and unaccounted for.... 6,647 6,637 6,255
-------- -------- --------
Total electric energy sales........ 100,548 103,142 97,023
======== ======== ========
ELECTRIC ENERGY SALES (GWh)
Residential................................. 35,612 37,299 33,967
Commercial.................................. 30,015 29,617 27,602
Industrial.................................. 24,915 25,313 24,785
Government and municipal.................... 6,640 6,652 6,170
-------- -------- --------
Total general business............. 97,182 98,881 92,524
Other electric utilities.................... 3,366 4,261 4,499
-------- -------- --------
Total electric energy sales........ 100,548 103,142 97,023
======== ======== ========
OPERATING REVENUES (millions)
Base rate revenues
Residential............................ $ 2,074 $ 2,192 $ 2,025
Commercial............................. 1,355 1,327 1,256
Industrial............................. 587 593 593
Government and municipal............... 326 324 301
-------- -------- --------
Total general business............. 4,342 4,436 4,175
Other electric utilities............... 105 121 139
-------- -------- --------
Total base rate revenues........... 4,447 4,557 4,314
Fuel........................................ 1,688 1,788 1,697
Transmission service........................ 148 126 114
Other....................................... 72 70 51
-------- -------- --------
Subtotal........................... 6,355 6,541 6,176
Earnings in excess of earnings cap.......... (92) -- --
-------- -------- --------
Total operating revenues........... $ 6,263 $ 6,541 $ 6,176
======== ======== ========
ELECTRIC CUSTOMERS (end of year - in thousands).. 2,612 2,544 2,483
DEGREE DAYS (average for service area)
Percent of normal:
Cooling................................ 114% 130% 94%
Heating................................ 70% 89% 106%
8
Electric Industry Restructuring -- Legislation was passed during the 1999
session of the Texas Legislature that will restructure the electric utility
industry in Texas (1999 Restructuring Legislation). Among other matters, the
legislation continues the stipulation in Docket 18490 that earnings in excess of
the earnings cap be used as mitigation to the cost of nuclear production assets
(see Note 13 to Financial Statements); authorizes competition in the retail and
generation markets for electricity beginning January 1, 2002; provides for the
recovery of generation-related and purchased power related stranded costs and
generation-related regulatory assets; requires reductions in nitrogen oxide
(NOx) and sulfur dioxide (SO2) emissions; requires a rate freeze for all retail
customers until January 1, 2002 and certain rate reductions for residential and
small commercial customers for up to five years thereafter; and sets certain
limits on capacity owned and controlled by power generation companies. Certain
provisions of the 1999 Restructuring Legislation may be subject to different
interpretation. By September 1, 2000, each electric utility must separate from
its regulated activities its customer energy services business activities that
are otherwise already widely available in the competitive market. By January 1,
2002, each electric utility must separate ("unbundle") its business into the
following units: a power generation company, a retail electric provider and a
transmission and distribution company or separate transmission and distribution
companies. A power generation company generates electricity that is intended to
be sold at wholesale. In general, a power generation company may not own a
transmission or distribution facility and may not have a certificated service
area. A retail electric provider sells electric energy to retail customers and
may not own or operate generation assets. A transmission and distribution (T&D)
company may only own or operate facilities to transmit or distribute
electricity. On or before April 1, 2000, each electric utility must file with
the Public Utility Commission of Texas (PUC) a separation of its costs into
competitive and regulated components, proposed tariffs for its proposed T&D
utility, and in initial estimate of its generation-related stranded costs.
In October 1999, TXU Electric filed a petition with the PUC for a financing
order (Docket No. 21527) to securitize $1.65 billion of its generation-related
regulatory assets and other qualified costs in accordance with the 1999
Restructuring Legislation. TXU Electric would issue transition bonds
securitizing a component of future revenues. The proceeds received by TXU
Electric are to be used solely for the purposes of retiring utility debt and
equity. On March 1, 2000, the PUC rejected TXU Electric's request for
securitization of the $1.65 billion and authorized securitization of only $357
million. TXU Electric believes this ruling is inconsistent with the 1999
Restructuring Legislation and announced that it will pursue an appeal to the
Travis County, Texas District Court following the receipt of a final order
evidencing such ruling from the PUC. TXU Electric expects that any difference
between the $1.65 billion and the amount finally authorized will continue to be
deferred until securitization of generation-related assets is addressed in 2002.
TXU Electric is unable to predict the outcome of these proceedings.
On January 10, 2000, TXU Electric filed with the PUC its business
separation plan as required by the 1999 Restructuring Legislation. This plan
describes how TXU Electric proposes to separate the provision of competitive
energy services from its regulated business activities by September 1, 2000 and
how it plans to unbundle its business. Only the T&D functions will continue to
be regulated. An independent organization certified by the PUC will oversee
transmission system planning and reliability in the State of Texas. Beginning
January 1, 2002, retail electric customers in Texas will be able to select their
electricity providers.
Generation
- ----------
Generating Units --At December 31, 1999, TXU Electric owned or leased and
operated 80 electric generating units with an aggregate net generating
capability of 21,080 megawatts (MW). (See Item 2. Properties).
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. These plants have an
aggregate generating capacity of 3,116 MW, or approximately 15% of TXU
Electric's generating capacity. Any gain on the sale of these plants will be
recorded as a regulatory liability and applied against TXU Electric's generation
assets that may become stranded costs under provisions of the 1999 Restructuring
Legislation, see Note 3 to Financial Statements. TXU Electric plans to sell the
plants, together with all associated assets, including land, lakes, water
rights, air permits, emission allowances and fuel transportation contracts. TXU
Electric anticipates entering into a tolling agreement with the new owners to
receive the capacity and energy from these plants for a portion of the peak load
season of 2001, and purchasing any remaining requirements on the open market.
TXU Electric anticipates completion of the plant sales by the end of 2000.
9
Electricity Peak Load and Generation Capability -- The electricity peak
load and net generation capability for TXU Electric is contained in the
following table. For TXU SESCO, peak load was 263 MW on August 26, 1999. TXU
SESCO generates no electric energy.
TXU Electric's net capability, peak load and reserve, in MW, at the time of
peak were as follows during the years indicated:
Electricity
Peak Load (a)
------------------------
Increase Firm
Net Over Peak
Year Capability Amount Prior Year Load Reserve (b)
- ---- ---------- ------ ----------- ------ -----------
1999..... 22,858 (c) 21,748 1.7% 20,724 2,134
1998..... 22,579 (d) 21,383 5.1% 20,351 2,228
1997..... 22,449 (e) 20,351 3.5% 19,229 3,220
- ----------------
(a) The 1999 peak load occurred on August 26. TXU Electric's peak load includes
interruptible load at the time of peak of 1,024 MW in 1999, 1,032 MW in
1998 and 1,122 MW in 1997.
(b) Amount of net capability in excess of firm peak load at the time of peak.
(c) Included in net capability is 1,778 MW of firm purchased capacity.
(d) Included in net capability is 1,499 MW of firm purchased capacity.
(e) Included in net capability is 1,224 MW of firm purchased capacity.
The peak load changes for 1999 as compared to 1998, as well as the
peak load changes for 1998 as compared to 1997, resulted primarily from customer
growth and increased usage due to hotter-than-normal weather. The peak load
change for 1997, compared to the prior year, resulted primarily from customer
growth and weather factors. TXU Electric expects to continue to purchase
capacity in the future from various sources. (See Fuel Supply and Purchased
Power and Note 14 to Financial Statements.) Firm peak load (excluding
interruptible contracts) increases over the next two years are expected to
average approximately 2.6% annually, after consideration of load management
programs.
Resource Estimates --Changes in utility regulation and legislation at
the federal and state levels, such as the Public Utility Regulatory Policy Act
of 1978 (PURPA), the National Energy Policy Act of 1992 (Energy Policy Act) and,
most recently, the 1999 Restructuring Legislation for the electric industry in
Texas have significantly changed the way utilities plan for new resources. The
1999 Restructuring Legislation incorporates sweeping changes for electric
utilities operating in Texas by opening up the generation portion of the
business to competition. Beginning January 1, 2002, retail electric customers
in Texas will be able to select their electricity providers. Thus, each retail
electric provider will be responsible for providing generation resources to its
customers.
Because of these competitive forces TXU Electric will be purchasing
some of its energy requirements needed to serve customer loads through resource
contracts with third-party suppliers. Thus, for planning purposes, TXU Electric
can no longer readily identify the ownership and types of resources needed to
serve its customers prior to the actual selection of the resource contracts.
TXU Electric will fill some of its resource needs through load management and
renewable resources. It does not expect to have difficulty filling the
remainder of its requirements from purchased power.
TXU Electric has secured resources for the years 2000 and 2001 from
various suppliers through short-term (two years or less) purchased power
contracts. (See Fuel Supply and Purchased Power.) Additional resource needs
required for 2002 and beyond will be acquired in the competitive energy
marketplace.
10
Retail competition in Texas will be effective on January 1, 2002 for
customers of investor-owned electric utilities. At that time, by law, TXU
Electric and TXU SESCO must lower their current retail rates charged to
residential and small commercial customers in their service areas to rates that
are 6% lower than the rates that were in effect on January 1, 1999. This is
known as the "price to beat," meaning that competitors will try to beat this
price to attract new customers. This rate is frozen for residential and small
commercial customers for three years, with respect to each class of service,
until 40% of the electric power consumed by customers in that class or segment
is supplied by competing Retail Electric Providers (REPs). On January 1, 2005,
TXU Electric and TXU SESCO will be able to lower its retail rates to compete
directly with other REPs, but must continue to offer the "price to beat" through
December 31, 2006. Electric retail rates will then be driven by market forces
and will no longer be regulated.
Fuel Supply And Purchased Power -- Net input during 1999 totaled
107,195 GWh of which 94,575 GWh were generated by TXU Electric. Average fuel
and purchased power cost (excluding capacity charges) per kilowatt-hour (kWh) of
net input were 1.82 cents for 1999, 1.78 cents for 1998 and 1.85 cents for 1997,
respectively. A comparison of TXU Electric's resource mix for net kWh input
and the unit cost per million British thermal units (Btu) of fuel during the
last three years is as follows:
Mix for Net Unit Cost
kWh Input Per Million Btu
--------------------- -------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
Fuel for Electric Generation:
Gas/Oil (a)................. 34.3% 36.7% 32.9% $2.59 $2.39 $2.80
Lignite/Coal (b)............ 38.5 36.5 38.9 1.03 1.03 1.04
Nuclear..................... 16.4 16.4 17.1 0.57 0.59 0.57
----- ----- -----
Total/Weighted Average Fuel Cost.. 89.2 89.6 88.9 $1.56 $1.52 $1.62
Purchased Power (c)............... 10.8 10.4 11.1
----- ----- -----
Total............................. 100.0% 100.0% 100.0%
===== ===== =====
- ----------------------
(a) Fuel oil was an insignificant component of total fuel and purchased power
requirements.
(b) Lignite/coal cost per ton to TXU Electric was $13.30 in 1999, $13.47 in
1998 and $13.55 in 1997.
(c) Excludes power purchased by TXU Electric's affiliate, TXU SESCO, from TXU
Electric: 1999 - 0 GWh; 1998 - 267 GWh ; and 1997 -548 GWh . Includes TXU
Electric purchases from TXU SESCO: 1999 - 6.1 GWh; 1998 - 6.3 GWh; and 1997
- 5.2 GWh.
In 1999, the US Electric segment purchased a net of 12,620 GWh or
approximately 11.8% of its energy requirements. TXU Electric and TXU SESCO had
available 2,080 MW of firm purchased capacity under contract and a full
requirements contract to meet the needs of TXU SESCO. TXU Electric received
energy in 1999 under purchased power contracts for energy from wind turbines
equivalent to approximately 41 MW. The wind generation facilities include eight
of the largest commercial wind turbines in the world, rated at 1.65 MW each.
TXU Electric expects to acquire additional amounts of purchased resources in the
future to adequately and reliably accommodate its customers' electrical needs.
Such resources will be acquired in accordance with the requirements of the Texas
Public Utility Regulatory Act, as amended (PURA) and the PUC Substantive Rules.
Beginning January 1, 2002, the acquisition of resources will generally not be
subject to regulation by the PUC. For information concerning future resource
requirements, see Electricity Peak Load and Generation Capability.
TXU Electric and TXU SESCO are unable to predict: (i) whether or not
problems may be encountered in the future in obtaining the fuel and purchased
power each will require, (ii) the effect upon operations of any difficulty
either of them may experience in protecting rights to fuel and purchased power
now under contract, or (iii) the costs of future fuel and purchased power and to
what extent they will be recoverable. (See Regulation and Rates.)
Gas/Oil --Fuel gas for units at eighteen of the principal generating
stations of TXU Electric, having an aggregate net gas/oil capability of 12,955
MW, was provided during 1999 by TXU Fuel. TXU Fuel supplied approximately 12% of
such fuel gas requirements under contracts with producers at the wellhead and
88% under contracts with commercial suppliers.
11
Fuel oil can be stored at seventeen of the principally gas-fueled
generating stations. At December 31, 1999, TXU Electric had fuel oil storage
capacity sufficient to accommodate approximately 6.1 million barrels of oil and
had approximately 2.3 million barrels of oil in inventory.
TXU Fuel has acquired supplies of gas from producers at the wellhead under
contracts expiring at intervals through 2008. As gas production under these
contracts declines and contracts expire, new contracts are expected to be
negotiated to replenish or augment such supplies. TXU Fuel has negotiated gas
purchase contracts, with terms ranging from one to ten years, with a number of
commercial suppliers. Additionally, TXU Fuel has entered into a number of
short-term gas purchase contracts with other commercial suppliers at spot market
prices. In general, these spot gas purchase contracts require both the buyer
and seller to purchase and deliver the gas on negotiated terms during the
agreed-upon delivery period. In the past, curtailments of gas deliveries have
been experienced during periods of winter peak gas demand; however, such
curtailments have been of relatively short duration, have had a minimal impact
on operations and generally have required utilization of fuel oil and gas
storage inventories to replace the gas curtailed. No curtailments were
experienced during 1999.
TXU Fuel owns and operates an intrastate natural gas pipeline system that
extends from the gas-producing area of the Permian Basin in West Texas to the
East Texas gas fields and southward to the Gulf Coast area. This system
includes a one-half undivided interest in a 36-inch pipeline that extends 391
miles from the Permian Basin area to a point of termination south of the Dallas-
Fort Worth area. Additionally, TXU Fuel owns a 39% undivided interest in
another 36-inch pipeline connecting to this pipeline and extending 58 miles
eastward to one of TXU Fuel's underground gas storage facilities. TXU Fuel also
owns and operates approximately 1,500 miles of various smaller capacity lines
that are used to gather and transport natural gas from other gas-producing
areas. The pipeline facilities of TXU Fuel form an integrated network through
which fuel gas is gathered and transported to certain TXU Electric generating
stations for use in the generation of electric energy.
TXU Fuel also owns and operates three underground gas storage facilities
with a usable capacity of 26.9 billion cubic feet (Bcf), with approximately 14.3
Bcf of gas in inventory at December 31, 1999. Gas stored in these facilities
currently can be withdrawn for use during periods of peak demand to meet
seasonal and other fluctuations or curtailment of deliveries by gas suppliers.
Under normal operating conditions, up to 400 million cubic feet can be withdrawn
each day for a ten-day period, with withdrawals at lower rates thereafter. One
of these gas storage facilities, the Worsham-Steed facility located in Jack
County, Texas will be retired after withdrawal of the economically recoverable
gas.
Lignite/Coal --Lignite is used as the primary fuel in two units at the Big
Brown generating station (Big Brown), three units at the Monticello generating
station (Monticello), three units at the Martin Lake generating station (Martin
Lake), and one unit at the Sandow generating station (Sandow), having an
aggregate net capability of 5,825 MW. TXU Electric's lignite units have been
constructed adjacent to surface minable lignite reserves. TXU Electric owns in
fee or has under lease an estimated 465 million tons of proven reserves
dedicated to the Big Brown, Monticello and Martin Lake generating stations. TXU
Electric also owns in fee or has under lease in excess of 229 million tons of
proven reserves not dedicated to specific generating stations. TXU Mining
operates owned and/or leased equipment to remove the overburden and recover the
lignite. One of TXU Electric's lignite units, Sandow Unit 4, is fueled from
lignite deposits owned by Alcoa, which furnishes fuel at no cost to TXU Electric
for that portion of energy generated from such unit that is equal to the amount
of energy delivered to Alcoa.
Lignite production operations at Big Brown, Monticello and Martin Lake are
accompanied by an extensive reclamation program that returns the land to
productive uses such as wildlife habitats, commercial timberland and pasture
land. For information concerning federal and state laws with respect to surface
mining, see Environmental Matters.
TXU Electric supplements its lignite fuel at Big Brown, Monticello and
Martin Lake with western coal from the Powder River Basin (PRB) in Wyoming. The
coal is purchased from three suppliers under two or three year contracts and is
transported from the PRB to TXU Electric's generating plants by railcar under
three contracts that range in length from two to seven years.
12
TXU Electric began supplementing its lignite fuel by utilizing western coal
at Monticello in 1996, at Martin Lake in November 1999 and at Big Brown in
January 2000. Construction of a rail spur into Big Brown to facilitate the
delivery of western coal was completed in January 2000, six months earlier than
anticipated.
Nuclear --TXU Electric owns and operates two nuclear-fueled generating
units at the Comanche Peak nuclear powered electric generating station (Comanche
Peak), each of which is designed for a net capability of 1,150 MW.
The nuclear fuel cycle requires the mining and milling of uranium ore to
provide uranium oxide concentrate (U3O8), the conversion of U3O8 to uranium
hexafluoride (UF6), the enrichment of the UF6 and the fabrication of the
enriched uranium into fuel assemblies. TXU Electric has on hand, or has
contracted for, the raw materials and services it expects to need for its
nuclear units through future years as follows: uranium (2001), conversion
(2003), enrichment (2014), and fabrication (2011). Although TXU Electric cannot
predict the future availability of uranium and nuclear fuel services, TXU
Electric does not currently expect to have difficulty obtaining U3O8 and the
services necessary for its conversion, enrichment and fabrication into nuclear
fuel for years later than those shown above.
The Nuclear Waste Policy Act of 1982, as amended (NWPA), provides for the
development by the Department of Energy (DOE) of interim storage and permanent
disposal facilities for spent nuclear fuel and/or high level radioactive waste
materials. In January 1998, the DOE did not meet its obligation to begin
accepting spent nuclear fuel. The DOE continues to maintain its position that
no obligation to begin acceptance of spent nuclear fuel exists despite multiple
industry initiated lawsuits challenging that position and a US Court of Appeals
decision that such obligation exists. TXU Electric is unable to predict what
impact, if any, the DOE's delay will have on TXU Electric's future operations.
Under provisions of the NWPA, funding for the program is provided by a one-mill
per kWh fee currently levied on electricity generated and sold from nuclear
reactors, including the Comanche Peak units.
TXU Electric's onsite spent nuclear fuel storage capability is sufficient
to accommodate the operation of Comanche Peak through the year 2017, while fully
maintaining the capability to off-load the core of one of the nuclear-fueled
generating units. Additional approval from the Nuclear Regulatory Commission
(NRC) will be required to utilize this full storage capability. TXU Electric is
currently pursuing options for utilizing a larger portion of the full storage
capability, subject to approval by the NRC.
Transmission
- ------------
In 1995, TXU Electric became the first utility in Texas to functionally
unbundle, or separate, its transmission operations into a business unit. The
unit operates independently within the larger company and has the flexibility to
adapt to changing market and regulatory forces. It is now one of the key
components of the US Electric business segment. TXU Electric and TXU SESCO are
members of ERCOT, an intrastate network of investor-owned entities,
cooperatives, public entities, non-utility generators and power marketers.
ERCOT is the regional reliability coordinating organization for member electric
power systems in Texas, the Independent System Operator (ISO) of the
interconnected transmission system of those systems, and is responsible for
ensuring equal access to transmission service by all wholesale market
participants in the ERCOT region.
The function of the transmission business is to provide non-discriminatory
wholesale open access to TXU Electric's transmission facilities through business
practices consistent with the standard of conduct rules enacted by the PUC. The
transmission system transverses almost 200,000 square miles of Texas and
consists of over 13,000 circuit miles of transmission line and over 900
substations.
The transmission business supports the operation of the ERCOT ISO and all
ERCOT members, as well as TXU Electric's responsibilities and obligations to its
wholesale and retail customers. The transmission business unit has planning,
design, construction, operation and maintenance responsibility for the
transmission grid and for the load serving substations.
Services are provided under tariffs approved by the PUC and the Federal
Energy Regulatory Commission (FERC). Transmission service offers the use of the
transmission system for delivery of power over facilities operating at 60,000
volts and above. Transformation service offers the use of substation assets to
transform voltage
13
to below 60,000 volts. Other services offered by the transmission business
include: static and dynamic scheduling and miscellaneous services such as system
impact studies, facilities studies, and maintenance of substations and
transmission lines owned by other parties.
The transmission business is participating with the ISO and other ERCOT
utilities to plan, design and obtain regulatory approval for and construct new
transmission lines necessary to increase bulk power transfer capability and to
remove existing limitations on the ERCOT transmission grid.
The principal generating facilities of TXU Electric and load centers of TXU
Electric and TXU SESCO are connected by 4,133 circuit miles of 345-kilovolt (kV)
transmission lines and 9,754 circuit miles of 138- and 69-kV transmission lines.
TXU SESCO is connected to TXU Electric by three 138-kV lines, ten 69-kV lines
and three lines at distribution voltage.
TXU Electric is connected by six 345-kV lines to Reliant Energy Company; by
three 345-kV, eight 138-kV and nine 69-kV lines to West Texas Utilities Company;
by two 345-kV and eight 138-kV lines to the Lower Colorado River Authority; by
four 345-kV and eight 138-kV lines to the Texas Municipal Power Agency; by one
asynchronous High Voltage Direct Current (HVDC) interconnection to Southwestern
Electric Power Company; and at several points with smaller systems operating
wholly within Texas.
Distribution
- ------------
The TXU Electric distribution system supplies electricity to approximately
2.6 million customers (including approximately 2.3 million residential customers
and 304,000 commercial and industrial businesses). On average, TXU Electric has
added approximately 47,000 customers to its system each year for the last
several years and over 68,000 in 1999. The electric distribution business
consists of the ownership, management, construction, maintenance and operation
of the distribution network within TXU Electric's certificated service area.
TXU Electric's distribution network receives electricity from the
transmission grid through power distribution substations and distributes
electricity to end users and wholesale customers through approximately 2,800
distribution feeders.
The TXU Electric distribution network consists of approximately 52,500
miles of overhead primary conductors, 21,650 miles of overhead secondary and
street light conductors, 10,700 miles of underground primary conductors and
6,067 miles of underground secondary and street light conductors. The majority
of the distribution system operates at 25-kV and 12.5-kV.
REGULATION AND RATES
TXU Corp. is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, TXU Corp. and all of its subsidiary companies are
exempt from the provisions of such Act, except Section 9(a)(2) which relates to
the acquisition of securities of public utility companies and Section 33 which
relates to the acquisition of foreign (non-US) utility companies.
TXU Electric and TXU SESCO are subject to various federal, state and local
regulations. (See discussion below and Environmental Matters.) TXU Electric
and TXU SESCO believe that they are not public utilities as defined in the
Federal Power Act and have been advised by their counsel that they are not
subject to general regulation under such Act.
The PUC has original jurisdiction over electric rates and service in
unincorporated areas and those municipalities that have ceded original
jurisdiction to the PUC and has exclusive appellate jurisdiction to review the
rate and service orders and ordinances of municipalities. Generally, PURA
prohibits the collection of any rates or charges (including charges for fuel) by
a public utility that does not have the prior approval of the PUC.
14
TXU Electric is subject to the jurisdiction of the NRC with respect to
nuclear power plants. NRC regulations govern the granting of licenses for the
construction and operation of nuclear power plants and subject such plants to
continuing review and regulation.
Docket 9300 -- The PUC's final order (Order) in connection with TXU
Electric's January 1990 rate increase request (Docket 9300) was ultimately
reviewed by the Supreme Court of Texas. As a result, an aggregate of $909
million of disallowances with respect to TXU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to TXU Electric's earnings, has been remanded to the District Court
with instructions that it be remanded to the PUC for reconsideration on the
basis of a prudent investment standard. On remand, the PUC also was required to
reevaluate the appropriate level of TXU Electric's construction work in progress
included in rate base in light of its financial condition at the time of the
initial hearing. In connection with the settlement of Docket 18490, proceedings
in the remand of Docket 9300 have been stayed. TXU Electric cannot predict the
outcome of the reconsideration of the Order on remand by the PUC.
Docket 18490 -- The PUC approved the non-unanimous stipulation filed on
December 17, 1997 by TXU Electric, together with the General Counsel of the PUC,
the Office of Public Utility Counsel and various other parties interested in TXU
Electric's rates and services. The stipulation, modified to incorporate changes
made by the PUC, resulted in base rate credits beginning January 1, 1998, of 4%
for residential customers, 2% for general service secondary customers and 1% for
all other retail customers, and additional base rate credits for residential
customers of 1.4% beginning January 1, 1999. Certain parties that did not sign
the stipulation have appealed the PUC's approval by filing suit in state
district court. TXU Electric cannot predict the outcome of these appeals.
In accordance with the stipulation, from January 1, 1998 through June 30,
1999, earnings in excess of the earnings cap were recorded as additional
depreciation of nuclear production assets, and a reclassification of
depreciation expense was made from T&D to nuclear production assets. As
discussed in Notes 2 and 3 to Financial Statements, application of Statement of
Financial Accounting Standards (SFAS) No. 71 to the generation portion of TXU
Electric's business was discontinued as of June 30, 1999. Effective July 1,
1999, earnings in excess of the earnings cap imposed by the 1999 Restructuring
Legislation were recorded as a reduction of revenues, and a corresponding
regulatory liability recorded. Upon final PUC determination, the regulatory
liability associated with earnings in excess of the earnings cap will be applied
against TXU Electric's stranded generation assets as determined under the 1999
Restructuring Legislation's market valuation criteria or refunded to customers.
Additionally, effective July 1, 1999, TXU Electric ceased the
reclassification of T&D depreciation expense to nuclear production assets.
Instead, an amount equal to T&D depreciation expense for the period was recorded
as a regulatory asset, which will be amortized as it is recovered through the
Distribution portion of the business. An equivalent amount was recorded as a
regulatory liability which will be applied against TXU Electric's stranded
generation assets as determined under the 1999 Restructuring Legislation's
market valuation criteria or refunded to customers.
Fuel Cost Recovery Rule -- Pursuant to a PUC rule, the recovery of TXU
Electric's eligible fuel costs is provided through fixed fuel factors. The rule
allows a utility's fuel factor to be revised upward or downward every six
months, according to a specified schedule. A utility is required to petition to
make either surcharges or refunds to ratepayers, together with interest based on
a twelve-month average of prime commercial rates, for any material cumulative
under- or over-recovery of fuel costs. If the cumulative difference of the
under- or over-recovery, plus interest, exceeds 4% of the annual estimated fuel
costs most recently approved by the PUC, it will be deemed to be material.
Final reconciliation of fuel costs must be made either in a reconciliation
proceeding, which may cover no more than three years and no less than one year,
or in a general rate case. In a final reconciliation, a utility has the burden
of proving that fuel costs under review were reasonable and necessary to provide
reliable electric service, that it has properly accounted for its fuel-related
revenues, and that fuel prices charged to the utility by an affiliate were
reasonable and necessary and not higher than prices charged for similar items by
such affiliate to other affiliates or nonaffiliates. For generating utilities
like TXU Electric, through August 31, 1999, the rule provided for recovery of
purchased power capacity costs through a power cost recovery factor with respect
to purchases from qualifying
15
facilities, to the extent such costs were not otherwise included in base rates.
Pursuant to the 1999 Restructuring Legislation, the Power Cost Recovery Factor
will be frozen between September 1, 1999 and January 1, 2000. The energy-related
costs of such purchases continue to be included in the fixed fuel factor. TXU
Electric's last fuel reconciliation proceeding (Docket 20285) covered eligible
fuel and purchased power expenses incurred during the period July 1, 1995
through June 30, 1998, amounting to a total of $5.04 billion, of which $52
million was disallowed.
COMPETITION
General -- The Energy Policy Act addresses a wide range of energy issues and
is intended to increase competition in electric generation and broaden access to
electric transmission systems. In addition, PURA impacts the PUC and its
regulatory practices and encourages increased competition in the wholesale
electric utility industry in Texas, and the 1999 Restructuring Legislation will
restructure the industry and introduce competition in the Texas retail and
generation market beginning January 1, 2002. Although TXU Corp. is unable to
predict the ultimate impact of these and any other related regulations or
legislation on the US Electric segment companies' operations, it believes that
such actions are consistent with the trend toward increased competition in the
energy industry.
The 1999 Restructuring Legislation will restructure the electric utility
industry in Texas. Among other matters, the 1999 Restructuring Legislation
authorizes competition in the retail and generation markets for electricity
beginning January 1, 2002; provides for the recovery of generation-related and
purchased power related stranded costs and generation-related regulatory assets;
requires reductions in NO\\x\\ and SO\\2\\ emissions; requires a rate freeze for
all customers until January 1, 2002 and certain rate reductions for residential
and small commercial customers for up to five years thereafter; and sets certain
limits on capacity owned and controlled by power generation companies. Project
teams have been established to prepare US Electric segment companies for a
competitive environment. These teams are comprised of resources from all facets
of TXU Corp.'s business. These teams continue to formulate short- and long-term
strategies to address implementation of the 1999 Restructuring Legislation.
As legislative, regulatory, economic and technological changes occur, the
energy and utility industries are faced with increasing pressure to become more
competitive while adhering to regulatory requirements. The level of competition
is affected by a number of variables, including price, reliability of service,
the cost of energy alternatives, new technologies and governmental regulations.
As a result of the shift in emphasis toward greater competition, large and
small industry participants are offering energy services and energy-related
products that are both economically and environmentally attractive to customers.
In Texas, aggressive marketing of competitive prices by rural electric
cooperatives, municipally-owned electric systems, and other energy providers
not subject to the traditional governmental regulation experienced by the
utility industry has intensified competition within the state's wholesale
markets in multi-certificated areas, and retail customer markets.
US Electric segment companies are aggressively managing their operating costs
and capital expenditures through streamlined business processes and are
developing and implementing strategies to address an increasingly competitive
environment.
Furthermore, there is increasing pressure on utilities to reduce costs,
including the cost of power, and to tailor energy services to the specific needs
of customers. Such competitive pressures among electric utility and non-utility
power producers could result in the loss of some retail energy services
customers. Amounts invested by TXU Electric in certain of its assets could
become stranded costs, which are investments and commitments that may not be
recoverable from customers as a result of competitive pricing. The PUC's latest
available estimate for TXU Electric's potentially stranded retail costs ranged
from a projected excess of net book value over market value of $5.8 billion to a
projected excess of market value over net book value of $3.8 billion. In
response to competitive pressures, many utilities are implementing significant
restructuring and re-engineering initiatives designed to make them more
competitive. Since the implementation of an Operations Review and Cost
Reduction program in April 1992, the US Electric segment companies have
continued to take steps to reduce costs by streamlining business
16
processes and operating practices. (For information pertaining to the effects of
competition on the treatment of certain regulatory assets and liabilities, see
Note 3 to Financial Statements.)
Wholesale Competition -- Federal legislation such as the PURPA and the Energy
Policy Act, as well as initiatives in various states, encourage wholesale
competition among electric utility and non-utility power producers. Together
with increasing customer demand for lower-priced electricity and other energy
services, these measures have accelerated the industry's movement toward a more
competitive pricing and cost structure.
Amendments to PURA made during the 1995 session of the Texas legislature also
allow for wholesale pricing flexibility. While wholesale rates for electric
utilities are not deregulated, wholesale tariffs or contracts with charges less
than approved rates but greater than the utility's marginal cost may be approved
by the regulatory authority upon application by the utility. In the wholesale
power market, TXU Electric and TXU SESCO compete with a variety of utilities and
other suppliers, some of which are willing and able to sell at rates below US
Electric segment companies' standard wholesale power service rate as approved by
the PUC. As directed by the 1999 Restructuring Legislation (see Note 3 to
Financial Statements), beginning in January 2002, wholesale rates will no longer
be regulated. TXU Corp. is unable to predict the extent of future competitive
developments in the wholesale market or what impact, if any, such developments
may have on its operations.
Open-Access Transmission -- At the federal level, the FERC issued Order No.
888 in April 1996, which requires all FERC-jurisdictional electric public
utilities to offer third parties wholesale transmission services under an open-
access tariff. In May 1997, TXU Electric filed with the FERC a modification of
its tariff governing service to, from and over certain HVDC interconnections
between ERCOT and the Southwest Power Pool, which, in October 1997, was accepted
by the FERC with minor modifications.
In August 1999, the Texas Court of Appeals issued a judgement declaring
invalid PUC rules governing open-access wholesale transmission service. These
rules, adopted in February 1996, guaranteed open-access wholesale transmission
service by electric utilities in ERCOT to other utilities and non-utility power
suppliers, and established a rate formula to determine access charges for the
transmission of wholesale electricity. In its decision, the court concluded
that the PUC lacks the statutory authority to establish transmission access
rates, and therefore rendered the transmission rules invalid. Several
interested parties and the PUC filed motions for rehearing with the Court of
Appeals, asking the court to reverse its decision and to recognize the PUC's
authority to set wholesale transmission rates in ERCOT. In January 2000, a
judgment was rendered on the motions for rehearing by the Texas Court of
Appeals, declaring that certain subsections of the open-access rules are
invalid, while still concluding that the PUC lacks statutory authority to
establish transmission access rates. TXU Electric is unable to predict the
impact of this judgment on open-access transmission rates at this time.
Customers -- There are no individually significant customers upon which TXU
Electric's or TXU SESCO's business or results of operations are highly
dependent.
17
US GAS SEGMENT
GENERAL
US Gas operations are engaged in the gathering, processing, transmission and
distribution of natural gas and selling of related natural gas liquids within
Texas.
Operating Statistics
Years Ended December 31
1999 1998 1997*
---- ---- -----
SALES VOLUMES
Gas distribution (Billion cubic feet - Bcf):
Residential................................... 68 77 33
Commercial.................................... 45 49 21
Industrial and electric generation............ 4 4 3
------ ------ ------
Total gas distribution.................. 117 130 57
====== ====== ======
Pipeline transportation (Bcf)..................... 551 599 255
Gas liquids (million barrels)..................... 6 6 3
OPERATING REVENUES (millions)
Gas distribution:
Residential................................... $ 402 $ 437 $ 206
Commercial.................................... 212 225 109
Industrial and electric generation............ 20 20 15
------ ------ ------
Total gas distribution.................. 634 682 330
Pipeline transportation.......................... 116 121 58
Gas liquids...................................... 86 64 36
Other revenues, less intra-segment eliminations.. 41 (3) 4
------ ------ ------
Total operating revenues................. $ 877 $ 864 $ 428
====== ====== ======
GAS DISTRIBUTION CUSTOMERS
(end of year - in thousands)..................... 1,407 1,379 1,355
HEATING DEGREE DAYS (% of normal)...................... 70% 89% 119%
* For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.0 Bcf.
Daily spot contracts raise this availability level to meet additional peak-day
needs.
During 1999, the average daily demand of TXU Gas Distribution's residential
and commercial customers was 0.3 Bcf. TXU Gas Distribution's greatest daily
demand in 1999 was on January 3, when the arithmetic-mean temperature was 27
degrees Fahrenheit and sales to its customers reached 1.7 Bcf.
Gas Supply -- TXU Gas Distribution's gas supply consists of contracts for the
purchase of specific reserves, contracts not related to specific reserves or
fields, and gas in storage. The total available gas supply as of January 1, 2000
was 148 Bcf, which is approximately 1.2 times TXU Gas Distribution's purchases
during 1999. Of this total, 64 Bcf are specific reserves and 32 Bcf are working
gas in storage. Management has calculated that 52 Bcf are committed to TXU Gas
Distribution under gas supply contracts not related to specific reserves or
fields. In 1999,
18
TXU Gas Distribution's gas requirements were purchased from approximately 183
independent producers, marketers and pipeline companies.
TXU Gas Distribution has sufficient storage working gas capacity and gas in
storage to meet its peak-day requirements. TXU Gas Distribution utilizes the
services of seven gas storage fields owned by TXU Lone Star Pipeline, all of
which are located in Texas. These fields have an optimal working gas capacity
of 43.7 Bcf and a storage withdrawal capacity of up to 1.3 Bcf per day.
TXU Gas Distribution has historically maintained a contractual right to
curtail, which is designed to achieve the highest load factor possible in the
use of the pipeline system while ensuring continuous and uninterrupted service
to residential and commercial customers. Under the program, industrial
customers negotiate their own rates and relative priorities of service.
Interruptible service contracts include the right to curtail gas deliveries up
to 100% according to a priority plan. The last sales curtailment for TXU Gas
Distribution occurred in 1990 and lasted only 30 hours.
Estimates of gas supplies and reserves are not necessarily indicative of TXU
Gas Distribution's ability to meet current or anticipated market demands or
immediate delivery requirements because of factors such as the physical
limitations of gathering and transmission systems, the duration and severity of
cold weather, the availability of gas reserves from its suppliers, the ability
to purchase additional supplies on a short-term basis and actions by federal and
state regulatory authorities. Curtailment rights provide TXU Gas Distribution
flexibility to meet the human-needs requirements of its customers on a firm
basis. Priority allocations and price limitations imposed by federal and state
regulatory agencies, as well as other factors beyond the control of TXU Gas
Distribution, may affect its ability to meet the demands of its customers.
TXU Gas Distribution buys gas under long-term and short-term intrastate
contracts in order to ensure reliable supply to its customers. Many of these
contracts require minimum purchases of gas. The estimated gas demand, which
assumes normal weather conditions, significantly exceeds the minimum purchase
obligations of these contracts for the year 2000 and thereafter.
The TXU Gas Distribution supply program is designed to contract for new
supplies of gas and to recontract targeted expiring sources. In addition to
being heavily concentrated in the established gas-producing areas of central,
northern and eastern Texas, TXU Lone Star Pipeline's intrastate pipeline system
also extends into or near the major producing areas of the Texas Gulf Coast and
the Delaware and Val Verde Basins of West Texas. Nine basins located in Texas
are estimated to contain a substantial portion of the nation's remaining onshore
natural gas reserves. TXU Lone Star Pipeline's pipeline system provides access
to all of these basins. TXU Lone Star Pipeline is well situated to receive large
volumes into its system at the major hubs, such as Katy and Waha, as well as
from storage facilities where TXU Gas Distribution maintains high delivery
capabilities.
REGULATION AND RATES
TXU Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial consumers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.
The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the RRC and
provides for full recovery of the actual cost of gas delivered, including out-
of-period costs such as gas purchase contract settlement costs. The
distribution service rates TXU Gas Distribution charges its residential and
commercial customers are established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction.
19
TXU Gas Distribution employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting to
about $7.5 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 1999 in addition to about $2.5 million granted in 1998.
Rate cases supporting an additional $8.3 million in annualized revenue increases
were pending in a number of cities as of December 31, 1999. The $8.3 million of
annualized revenue increases includes $6.3 million for the general rate increase
filed for in August 1999 by TXU Gas Distribution in the cities of Dallas,
University Park, Highland Park and Cockrell Hill, Texas. On February 23, 2000,
the City of Dallas denied the rate increase. Similar action is expected in the
other cities. TXU Gas Distribution intends to appeal this action to the RRC,
which has the power to review and overturn the denial, and seek in excess of $9
million in rate relief. TXU Gas is unable to predict the outcome of the appeal.
Weather normalization adjustment clauses have been approved by 315 cities
served by TXU Gas Distribution, representing 70% of TXU Gas Distribution's
residential and commercial sales volumes. These clauses allow rates to be
adjusted to reflect the impact of warmer- or colder-than-normal weather during
the winter months, minimizing the impact of variations in weather on TXU Gas
Distribution's earnings.
TXU Gas Distribution's sales to industrial customers are provided under rates
reflected in standard rate schedules and contracts. Transportation services to
industrial and electric-generation customers are provided under competitively
negotiated contracts. Industrial customers also have standard rate schedules
for transportation services. Regulatory authorities in Texas have jurisdiction
to revise, review and regulate rates to industrial and electric-generation
customers but, historically, have not actively exercised this jurisdiction
because of the existing competitive market. Sales contracts with these
customers permit automatic adjustment on a monthly basis for the full amount of
increases or decreases in the cost of gas.
Under a settlement of the RRC rate inquiry approved in June 1998, TXU Gas
Distribution agreed to credit residential and commercial customers with $18
million to be spread over the next two heating seasons thereafter. The final
order approving the stipulation found that all gas costs flowed through TXU Gas
Distribution's monthly gas cost adjustment clause prior to October 31, 1997 were
just, reasonable, and necessary. As a part of the final order, the RRC required
an audit of an amount that TXU Gas Distribution credited to residential and
commercial customers under a previous voluntary stipulation. The audit report
sent to TXU Gas Distribution on December 16, 1998 indicated that an additional
$7.3 million should be credited to residential and commercial customers. TXU
Gas believes that the additional amount noted in the audit report was included
in the $18 million settlement, but it is unable to predict the outcome of the
audit process.
Gas Utilities Docket No. 8935 -- TXU Gas Distribution filed an application
with the RRC in February 1999 to modify the gas cost adjustment provision of the
city gate rate tariff approved in November 1997. The modification allows for a
more accurate recovery of the gas cost from TXU Gas Distribution's residential
and commercial customers. The case was settled, and a final order recognizing
the settlement was issued in August 1999. The final order allows TXU Gas
Distribution to recover from, or return to, city gate customers under- or over-
recovered gas cost resulting from cycle billing in accordance with TXU Gas
Distribution's proposed methodology. This applies to under- and over-recovered
gas costs occurring over the twelve month periods ended June 1999 and June 2000.
TXU Gas Distribution was also directed to file a revised gas cost adjustment
tariff with the RRC by January 15, 2000 to address the cycle billing issue and
other gas cost recovery issues. A revised tariff was filed with the RRC on
January 14, 2000, but by agreement of the parties and RRC staff, further
proceedings on the revised gas cost adjustment clause have been postponed to
July 2000.
In October 1999, TXU Lone Star Pipeline filed with the RRC a Statement of
Intent to change the city gate rate for gas transported for subsequent
distribution to residential and commercial customers. The filing requests a
general increase in annual revenues of approximately $20 million. Action on
this request is anticipated in the second quarter of 2000. TXU Lone Star
Pipeline is unable to predict the outcome of this case.
20
COMPETITION
Customer sensitivity to energy prices and the availability of competitively
priced gas in the non-regulated markets continue to cause competition in the
electric-generation and industrial-user markets. Natural gas faces varying
degrees of competition from electricity, coal, natural gas liquids, oil and
other refined products throughout TXU Gas Distribution's service territory.
Pipeline systems of other companies, both intrastate and interstate, extend into
or through the areas in which TXU Gas Distribution's markets are located,
creating competition from other sellers of natural gas. Competitive pressure
from other pipelines and alternative fuels has caused a decline in sales by TXU
Gas Distribution to industrial and electric-generation customers. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.
TXU Lone Star Pipeline is the sole transporter of natural gas to TXU Gas
Distribution's distribution systems. TXU Lone Star Pipeline competes with other
pipelines in Texas to transport natural gas to new and existing industrial and
power generation facilities as well as off-system markets. These businesses are
highly competitive.
Open Access -- TXU Lone Star Pipeline has been an open access transporter
under Section 311 of the Natural Gas Policy Act of 1978 (NGPA) on its intrastate
transmission facilities since July 1988. Such transportation is performed
pursuant to Section 311(a)(2) of the NGPA and is subject to an exemption from
the jurisdiction of the FERC under the Natural Gas Act, pursuant to Section 601
of the NGPA.
Customers --There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
21
US ENERGY MARKETING SEGMENT
GENERAL
US Energy Marketing operations are engaged in purchasing and selling natural
gas and electricity and providing risk management services for the energy
industry throughout the US, other than within ERCOT.
Operating Statistics
Years Ended December 31
1999 1998 1997*
------ ------- ------
TRADING VOLUMES
Gas (Bcf).................... 1,102 1,115 292
Electric (GWh)............... 6,544 16,268 --
OPERATING REVENUES (millions)... $2,983 $ 3,199 $ 859
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
TXU Energy Trading is headquartered in Houston, Texas, and its primary
natural gas markets, both retail and wholesale, are in Texas, the Northeast, the
Midwest and the West Coast. Other than within ERCOT, TXU Energy Trading engages
in the physical purchase and sale of electricity in the wholesale markets
throughout the US and is also engaged in power retail marketing, primarily in
the Northeast region of the country.
In the course of providing comprehensive energy products and services to its
diversified client base, TXU Energy Trading engages in energy price risk
management activities. In addition to the purchase and sale of physical
commodities, TXU Energy Trading enters into futures contracts; swap agreements,
where settlement is based on the difference between a fixed and floating (index
based) price for the underlying commodity; exchange traded options; over-the-
counter options, which are settled in cash or in the physical delivery of the
underlying commodity; exchange-of-futures-for-physical transactions; energy
exchange transactions; storage activities; and other contractual arrangements.
TXU Energy Trading may buy and sell certain of these instruments to manage its
exposure to price risk from existing contractual commitments as well as other
energy-related assets and liabilities. It may also enter into contracts to take
advantage of arbitrage opportunities. In order to manage its exposure to the
price risk associated with these instruments, TXU Energy Trading has established
trading policies and limits and revalues its exposures daily against these
benchmarks. TXU Energy Trading also periodically reviews these policies to
ensure they are responsive to changing market and business conditions.
TXU Energy Trading's business is not specifically seasonal; however, the
results of its operations are affected by price volatility in the underlying
commodity markets. Price volatility in both natural gas and electric power is
largely a result of supply and demand factors driven by weather conditions and
physical constraints in the deliverability of these commodities. Arbitrage
opportunities resulting from this price volatility are often greatest in the
late summer, early fall and winter months for natural gas and the summer months
for electricity.
COMPETITION
TXU Energy Trading pursues opportunities to manage risks for non-affiliated
companies. As electricity markets are deregulated and natural gas markets
continue to evolve following the implementation of the 1992 Order 636 of the
FERC, additional opportunities are created in the broader, more active trading
markets and in the markets serving non-regulated customers. This highly
competitive market demands that a wide array of services be offered, including
term contracts with interruptible and firm deliveries, risk management,
aggregation of supply, nominations, scheduling of deliveries and asset
optimization strategies for both transportation capacity and storage.
The activities of TXU Energy Trading continue to be developed. The strategy
is to build system infrastructure and merchant trading capabilities in
preparation for a deregulated electric industry in Texas.
Customers -- There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
22
EUROPE SEGMENT
GENERAL
European operations are engaged in the generation, purchase, distribution and
sale of electricity and the production purchase and sale of natural gas
primarily in the UK, with additional energy interests throughout the rest of
Europe.
Operating Statistics
Year Ended December 31
1999 1998*
---- ----
SALES VOLUMES
Electric (Gigawatt-hours - GWh)
Industrial and commercial........................... 19,698 15,459
Residential......................................... 16,726 7,826
------- -------
Total electric................................ 36,424 23,285
======= =======
Units Distributed (GWh).................................. 33,120 19,249
Gas (Billion cubic feet - Bcf)
Industrial and commercial........................... 77 51
Residential......................................... 49 21
------- -------
Total gas..................................... 126 72
======= =======
Wholesale Energy Sales
Electricity generated and sold to the Pool (GWh).... 78,950 51,060
Gas (Bcf)........................................... 447 148
OPERATING REVENUES (millions)
Electric
Industrial and commercial........................ $ 1,357 $ 1,146
Residential...................................... 1,676 839
------- -------
Total electric operating revenues............. 3,033 1,985
------- -------
Distribution........................................ 657 395
------- -------
Gas
Industrial and commercial........................ 247 125
Residential...................................... 318 135
------- -------
Total gas operating revenues.................. 565 260
------- -------
Wholesale energy sales.............................. 2,168 1,199
Other............................................... 191 102
Less intra-segment revenues......................... (524) (340)
------- -------
Total operating revenues...................... $ 6,090 $ 3,601
======= =======
CUSTOMERS (end of year - in thousands)
Electric............................................ 2,931 3,211
Gas................................................. 805 777
* For the period from acquisition (May 19, 1998) to December 31, 1998.
23
Traditionally, the electric industry in the UK, including distribution,
transmission and generation, has been highly regulated. Throughout England and
Wales, electricity power stations, together with the transmission and
distribution systems, constitute a single integrated network. Privatization of
the UK electricity industry has opened the market to new participants. Each
participant must be licensed to generate, transmit or supply electricity.
Almost all electricity generated in England and Wales must be sold to and
purchased from the wholesale trading market for electricity, commonly known as
the Pool. Prices for electricity are set by the Pool for each half hour based
on bids of generators and a complex set of calculations that matches supply and
demand.
The electric operations of TXU Europe Group are highly seasonal with a
substantial proportion of its profits earned in the winter months. The purchase
price for electricity in each half hour varies according to total demand, the
amount of generation capacity available but not needed and the prices bid by
generators. Consequently, the purchase price tends to be highest during mid-
week afternoons in winter, when demand is highest, or in late fall, when a
significant number of power stations undergo scheduled maintenance. Purchase
prices are generally lowest during summer months. Seasonal variations in
results are likely to continue under revised trading arrangements that are due
to be introduced during 2000.
Energy Retail
- -------------
TXU Europe Group has integrated its electricity and gas retailing operations
into a single energy business. The electricity retailing business involves the
sale to customers of electricity that is purchased from the UK's electricity
wholesale trading market (the Pool). Pool price risk is managed on behalf of
the retail business by TXU Europe Energy Trading. The energy business is
charged a regulated price by transmission and distribution companies, including
Eastern Electricity, for the physical delivery of electricity.
Eastern Electricity supplies electricity to customers in all sectors of the
market and is one of the largest retailers of electricity in England and Wales.
Eastern Electricity's service area, which covers approximately 20,300 square
kilometers in the east of England and parts of north London, was one of four
areas in the first group to be fully opened for competition. At December 31,
1999, Eastern Electricity supplied electricity to approximately 2.9 million
customers. Industrial and commercial customers accounted for approximately 45%
of Eastern Electricity's retail sales revenues.
Eastern Natural Gas is one of the largest suppliers of natural gas in the UK.
At December 31, 1999, TXU Europe Group's market share by volume was estimated at
approximately 3.9% of gas delivered to the competitive market, which is the
industrial and commercial market. At December 31, 1999, it was supplying
775,000 customers in the UK, ranging from residential households to large
industrial companies.
In June 1999, TXU Europe Group announced details of a program to restructure
the energy retailing business in order to be more cost effective in the
competitive energy markets. This program resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group is seeking new ways to access the energy markets and to form
more partnerships with the objective of reducing costs, improving access to
customers and capitalizing on emerging new markets like the Internet.
Energy Management and Generation
- --------------------------------
TXU Europe Power is one of the largest generators of electricity in the UK.
Its share of total UK generating capacity is approximately 9.4%. It currently
owns, operates or has an interest in ten power stations in the UK. TXU Europe
Power also owns Nedalo (UK) Limited, the largest supplier of small electrical
combined heat and power plants, which are those with generating capacity of less
than 1.5 MW.
24
UK Generation Facilities
TXU Europe Group's current portfolio of power stations is predominately a mix
of combined cycle gas turbine and coal-fired stations. It represents both
plants which run throughout most of the year and plants which run only during
periods of high demand. TXU Europe Group's portfolio of power stations provides
flexibility in managing the price and volume risks of its energy contracts and
has enabled TXU Europe Group to diversify its fuel supply risk. Information on
TXU Europe Group's interests in power stations in the UK is set out in Item 2.
Properties.
Non-UK Generation Facilities
Czech Republic. TXU Europe Group has an interest of approximately 84% in
--------------
Teplarny Brno, a district heating and generation company based in Brno, the
second largest city in the Czech Republic. Teplarny Brno owns oil and gas-fired
plants that are capable of generating approximately 1,000 MW of energy in the
form of steam and hot water, which is sold principally to industrial and
residential customers. It also owns a 169 kilometer pipeline network for
distributing heat to customers' premises. Teplarny Brno also has an electricity
generation capacity of approximately 97 MW. The output is sold to the regional
electricity company. A combined cycle gas turbine plant is currently undergoing
final commissioning and will provide 86 MW of additional heat capacity and 95 MW
of additional electricity generating capacity.
Poland. TXU Europe Group has a 49% interest in Zamosc Energy Company, a
------
joint venture with the Polish regional distribution company, Zamejska Korporacja
Energetyczna SA, which was established to develop power plants in southeast
Poland. A 125 MW combined cycle gas turbine project is being developed at
Jaraslaw.
Finland. In November 1999, TXU Europe Group formed a joint venture company,
-------
called TXU Nordic Energy, with certain shareholders of Pohjolan Voima Oy (PVO),
Finland's second largest electricity generator. TXU Nordic Energy is entitled
to the output from approximately 584 MW of PVO's thermal generating capacity and
most of a wholesale trading business owned by the industrial shareholders of
PVO. TXU Europe Group has an 81% share of the joint venture.
Other Projects
In December 1998, TXU Europe Group received government consent to build a 215
MW combined heat and power plant to provide heat and power to Shotton Paper on
Deeside. The power station will be built by ABB Alsthom with completion due in
2001.
The UK government imposes an obligation on electricity suppliers to purchase
a portion of their requirements from renewable energy sources under the non-
fossil fuel obligation levy plan. Renewable energy sources are those that are
not currently consumed faster than they are replenished. Renewable energy
sources in this scheme include solar and wind power. In April 1999 TXU Europe
announced that a one MW wind turbine in Northern Ireland had successfully
completed tests and had begun generating electricity. As of December 31, 1999,
TXU Europe Group had entered into development agreements in the UK for 110 MW
installed capacity of on-shore wind projects under power purchase contracts that
are awaiting planning consents from local authorities. An agreement outlining
the main terms has been signed with joint developers for up to 100 MW of on-
shore wind power in Portugal and 75 MW of electricity to be produced from forest
waste with a further 12MW from small hydro schemes in the UK. Additional
opportunities for renewable energy projects and large and small scale combined
heat and power plants are being actively considered, together with other
conventional generating projects.
25
Portfolio Management/Energy Trading
- -----------------------------------
Typically, holders of public electricity supply licenses issued under the UK
Electricity Act 1989 of Great Britain (Electricity Act) in connection with
supply and distribution within their authorized area are exposed to risk, as
they are obliged to supply electricity to their customers at stable prices but
have to purchase almost all the electricity necessary to supply those customers
from the Pool at prices that are constantly changing. The ownership of
generating assets provides a natural hedge against these risks; the use of
financial instruments like contracts for differences provide another hedging
alternative.
TXU Europe Energy Trading coordinates TXU Europe Group's activities in
managing risk. It provides support to TXU Europe Group's energy retail
activities, taking into account its energy purchases and sales and its contract
portfolios, including TXU Europe Group's generating assets and natural gas
production interests. TXU Europe Energy Trading is responsible for setting the
level of bids into the Pool for the output of each of TXU Europe Group's
generating stations, other than Barking and the combined heat and power plants.
TXU Europe Energy Trading uses this method to coordinate the operation of TXU
Europe Group's generating stations with TXU Europe Group's fuel contract
position and its retail and wholesale energy sales portfolios to TXU Europe
Group's best advantage. It also coordinates the operation of TXU Europe Group's
generating stations, taking into consideration the relative prices in the energy
markets. TXU Europe Energy Trading also earns revenue by providing risk
management services to other energy retailers to assist in managing their
Pool/market price risk.
TXU Europe Energy Trading manages TXU Europe Group's financial exposure to
fluctuations in electricity prices by:
(i) Managing its portfolio of contracts for differences;
(ii) Bidding both price and volume for TXU Europe Group's generation output,
other than for the Barking plant and the combined heat and power plants,
into the Pool for each half hour of the day; and
(iii) Deciding with the electricity retailing division of TXU Europe Group on
the volume and pricing of sales in the competitive and ex-franchise
markets.
The overall electricity position for each half hour of the day is monitored
by TXU Europe Energy Trading with the goal of optimizing electricity purchases
and sales positions through the use of generation facilities, long and short-
term retail sales contracts and appropriate financial instruments. The overall
gas position is monitored in a similar way with additional opportunities
presented through the operation of gas-fired power stations, storage facilities
and the use of gas assets which are the source of electricity. Together, the
overall electricity and gas positions are managed by reference to risk exposure
limits that are monitored by a risk management team within TXU Europe Group.
The risk management team verifies that the trading instruments employed have
been approved for use by TXU Europe Energy Trading and carries out credit checks
on current and proposed counterparties. TXU Europe Group's ability to manage
that risk in the future will depend, in part, on the terms of its supply
contracts, the continuation of an adequate market for hedging instruments and
the performance of its generating and gas assets which are the source of
electricity.
In order to help meet the expected needs of its natural gas wholesale and
retail customers, including TXU Europe Group's power stations, TXU Europe Group
has entered into a variety of gas purchase contracts. As of December 31, 1999,
the commitments under long-term purchase contracts amounted to an estimated
(Pounds)1.1 billion ($1.8 billion), covering periods of up to 15 years. Firm
sales commitments, including estimated power station usage at the same date
amounted to an estimated (Pounds)3.0 billion ($4.8 billion) covering periods up
to 17 years.
TXU Europe Energy Trading also purchases coal, oil and natural gas for TXU
Europe Group's UK power stations and has equity interests in four natural gas-
producing fields in the North Sea. In July 1999, TXU Europe Group significantly
expanded its North Sea gas interests through the purchase of all of BHP
Petroleum's assets in the Southern North Sea. The acquisition of Monument Oil's
interest in the Johnson field in the North Sea was
26
completed in December 1999. Further acquisitions in December 1999 increased TXU
Europe Group's interest in the Johnston field to 64.2%.
The energy management business also trades on the Nord Pool, the electricity
trading market in Scandinavia, and has recently acquired access to 140 MW of
hydro output in Norway for 55 years. This agreement also provides for TXU
Europe Group to acquire an additional 47MW of hydropower in Norway. In Spain,
TXU Europe Group has acquired a 5% minority shareholding in Hidroelectrica del
Cantabrico, S.A. It has created a 50/50 joint venture trading company with
Hidroelectrica del Cantabrico, S.A., Synergia Trading S.A., covering the Iberian
peninsula.
In September 1999, the energy management business established an office in
Geneva, Switzerland, which will coordinate European energy management and
development projects.
Electricity Networks
- --------------------
UK
TXU Europe Group's electricity networks business consists of the ownership,
management and operation of the electricity distribution network within TXU
Europe Group's authorized area. TXU Europe Group receives electricity in
England and Wales from The National Grid Company plc (National Grid). TXU
Europe Group then distributes electricity to end users connected to TXU Europe
Group's power lines.
Almost all electricity customers in TXU Europe Group's authorized area,
whether franchise or competitive, are connected to and dependent upon TXU Europe
Group's distribution system. TXU Europe Group distributes approximately 33,000
GWh of electricity annually to over three million customers, representing more
than seven million people. The distribution by TXU Europe Group of electricity
in its authorized area is regulated by its public electricity supply license,
which, other than in exceptional circumstances, is due to remain in effect until
at least 2025.
TXU Europe Group receives electricity from National Grid at 21 supply points
within its authorized area and three points in the authorized areas of
neighboring regional electricity companies. Most of this electricity is
received at 132 kilovolts. It is then distributed to customers through TXU
Europe Group's system of approximately 35,000 kilometers of overhead lines,
55,000 kilometers of underground cable and numerous transformers and circuit
breakers, through a series of interconnected networks operating at successively
lower voltages. TXU Europe Group also receives electricity directly from
generating stations located in its authorized area and, from time to time, from
customers' own generating plants and connections with neighboring regional
electricity companies.
Most of the revenue from use of the distribution system is from TXU Europe
Group's electricity retail operations. The rest is derived from holders of
second tier supply licenses in respect of the delivery of electricity to their
customers located in TXU Europe Group's authorized area.
The distribution charges levied by subsidiaries of TXU Europe Group and the
other regional electricity companies consist of charges for use of the system
and charges for other services outside the scope of the price control, including
connection charges. Distribution and supply charges are regulated by conditions
in TXU Europe Group's public electricity supply license, which sets out a
formula for determining the maximum average charge per unit distributed in any
year. Most of the charges for the use of the distribution system are subject to
distribution price controls. See Regulation and Rates below.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced
27
that it had cleared plans for the creation of the joint venture for competition
law purposes. A separate application for regulatory clearance has been submitted
to the Office of Gas and Electricity Markets (OFGEM). The joint venture will
begin operations once these clearances are obtained, which may be as early as
April 2000. By the time the joint venture starts operations, it is expected that
the combined workforce will have been reduced by approximately 400. It is
anticipated that the workforce currently engaged by Eastern Energy and London
Electricity plc, will be further reduced by at least a similar number during the
joint venture's first 18 months of operations. Primarily as a result of the
creation of this joint venture, TXU Europe is expected to record a restructuring
charge of approximately $50 million in the first half of 2000. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
Czech Republic
At December 31, 1999, TXU Europe Group had a 16.3% minority interest in
Severomoravska Energetika a.s., a Czech electricity distribution and supply
company. As of March 1, 2000 the interest has been increased to 21.9%.
Finland
TXU Europe Group announced in May 1999 that it had agreed to make an
investment in Savon Voima Oy (SVO), a regional electricity distributor in
central Finland. The investment was a purchase of approximately 40% of SVO's
share capital. SVO is currently owned by 29 local municipalities. There are
put options exercisable by the municipalities which if exercised would
automatically give TXU Europe Group a controlling stake. The purchase is part
of TXU Europe Group's overall strategy to manage a flexible Scandinavian energy
portfolio and to develop TXU Europe Groups's Scandinavian businesses working
with local partners. The purchase was completed in December 1999.
REGULATION AND RATES
The electricity industry in the UK, including TXU Europe Group, is subject to
regulation under, among other things, the Electricity Act and UK and European
Union (EU) environmental legislation. TXU Europe Group is also subject to
existing UK and EU legislation on competition and regulation in its gas
business. TXU Europe Group has all of the necessary franchises, licenses and
certificates required to enable it to conduct its businesses. In addition, part
of any profit on disposal of assets vested in TXU Europe Group at the time of
its privatization is subject to recovery by the UK Secretary of State for Trade
and Industry until March 31, 2000.
TXU Europe Group expects proposals with respect to utility regulation to be
part of legislation that will be introduced in 2000. The implementation of
utility regulation could result in significant changes to the existing
regulatory regime. There can be no assurance regarding the potential impact of
regulatory changes, if any, on TXU Europe Group.
Electricity Retailing -- Subject to specific exceptions, retail suppliers of
electricity in the "ex-franchise" market in the UK are required either to have a
public electricity supply license for an authorized area or to obtain a "second
tier" supply license. Public electricity supply license holders are required
under the Electricity Act to provide a supply of electricity upon request to any
premises in their authorized area, except in specified circumstances. Each
public electricity supply license holder is subject to various obligations under
its public electricity supply license. These include prohibitions on cross-
subsidies among its various regulated businesses and discrimination in respect
of the supply of customers. Each public electricity supply license holder is
also required to offer open access to its distribution network on non-
discriminatory terms. This obligation includes a requirement not to
discriminate between its own supply business and other users of its distribution
system. Public electricity supply license holders are subject to separate
controls on the tariffs to ex-franchise customers and in respect of distribution
charges. OFGEM has just completed its review of the distribution and supply
price controls.
28
Electricity Supply Price Regulation -- Supply charges in the "ex-franchise"
market are regulated by a maximum price control that applies directly to each
tariff in the residential and small business customer market and effectively
provides customers on these tariffs with price guarantees. On April 1, 1998,
TXU Europe Group's tariffs were reduced by 8.9%, before adjustments for
inflation. As provided in the formula, TXU Europe Group's tariffs were reduced
by a further 3%, before adjustments for inflation, beginning April 1, 1999.
There are no other changes in place for retail tariffs. On October 8, 1999,
OFGEM issued proposed price adjustments for the electricity supply businesses.
The final OFGEM report was issued at the end of November 1999, and accepted by
TXU Europe Group in December 1999. The supply price adjustments become
effective April 1, 2000. TXU Europe Group's directly controlled tariffs will be
reduced by an average of 7.1% beginning April 1, 2000 as required by the new
controls, giving rise to an estimated reduction in annual revenues of
approximately (Pounds)15 million ($24 million).
Gas Supply -- The natural gas supply activities of TXU Europe Group are
principally regulated by the Director General of Gas Supply under the UK Gas Act
1986, as amended by the UK Gas Act 1995 and by the conditions of TXU Europe
Group's gas licenses granted by the Director General of Gas Supply. Eastern
Natural Gas currently holds a gas supplier's license. TXU Europe Group's
natural gas supply business is not subject to price regulation. Subsidiaries of
TXU Europe Group currently hold a gas shipper's license, a public gas
transporter's and a gas operator's license.
Generation -- Unless covered by an exemption, all electricity generators
operating a power station in the UK are required to have generation licenses.
The conditions attached to a generation license in the UK require the holder,
among other things, to be a member of the Pool and to submit the output of the
power station's generating units or turbines for central dispatch. Failure to
comply with any of the generation license conditions may subject the licensee to
a variety of sanctions, including enforcement orders by the Director General of
Electricity Supply and license revocation if an enforcement order is not
complied with.
In the UK, each public electricity supply license currently limits the amount
of generation capacity in which each regional electricity company may hold an
interest without the prior consent of the Director General of Electricity
Supply. These "own-generation" limits currently restrict the participation by a
regional electricity company and its affiliates in generation to a level of
approximately 15% of the simultaneous maximum electricity demand in that
regional electricity company's authorized area at the time of privatization.
TXU Europe Group's limit is 1,000 MW. The Director General of Electricity
Supply stated in January 1996 that he would be prepared to consider a regional
electricity company's request to increase its own-generation capacity on the
condition that it accept explicit restrictions on the contracts it signs with
its own supply business. At a minimum, a regional electricity company would be
prohibited from entering into contracts to provide the additional own-generation
output to its franchise market. Following public consultation, the Director
General of Electricity Supply set out the basis on which consents for regional
electricity companies to acquire new generation capacity would be allowed. The
specific consent of the Director General of Electricity Supply to the leasing by
TXU Europe Group of approximately 6,000 MW of generating capacity from National
Power, plc and PowerGen plc was later confirmed by the Office of Electricity
Regulation covering England, Wales and Scotland and is not subject to the above-
noted supply business restrictions. TXU Europe Group received government
consent to build a combined heat and power plant at Shotton in December 1998 and
the acquisition of additional generation capacity at Dowlais has been approved
in principle by the Director General of Electricity Supply.
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply published new proposals for generation
licenses in order to promote fair competition in the generation and trading of
electricity. The proposals seek to ensure that generators with positions of
significant market power who are able to exert an upward influence on prices in
the pool should ensure that their prices closely reflect their costs and that
they do not take unfair advantage of any imperfections in the operation of the
Pool. The Director General has proposed that these restrictions should cease
one year after the introduction of the New Electricity Trading Arrangement
(NETA). TXU Europe has played an active part in these discussions and accepted
the proposals on February 7, 2000. However, five generators rejected the
proposals, and the matter has been referred to the UK competition commission.
TXU Europe does not anticipate that these proposals will have a material adverse
effect on revenues. The implementation of NETA, scheduled for introduction on
October 1, 2000, is also likely to lead to a number of modifications to
generation distribution, and retail electricity licenses.
29
Energy Trading -- TXU Europe Energy Trading is permitted by the Financial
Services Authority under the UK Financial Services Act 1986 to deal in contracts
for differences, including futures and options. A subsidiary of TXU Europe
Energy Trading is a joint holder of production licenses relating to its equity
interests in four North Sea natural gas fields.
Electricity Distribution Price Regulation -- A formula determines the maximum
average price per unit of electricity distributed, in pence per kilowatt hour,
that a regional electricity company is entitled to charge. This price, when
multiplied by the expected number of units to be distributed, determines the
expected distribution revenues of the regional electricity company for the
relevant year.
The formula permits regional electricity companies to retain part of their
additional revenues due to increased distribution of units and allows for a
pound sterling for pound sterling increase in operating profit for efficient
operations and reduction of expenses within a review period. In relation to the
next Distribution Price Control Formula review, scheduled to be implemented in
April 2000, the Director General of Electricity Supply may reduce any increase
in operating profit to the extent he determines it not to be a function of
efficiency savings and/or, if genuine efficiency savings have been made, he
determines that customers should benefit through lower prices in the future.
On August 12, 1999, OFGEM issued a draft report, updated on October 8, 1999,
and published in final form on December 2, 1999, proposing a range of
substantial net revenue reductions for the distribution businesses of all
regional electricity companies in the UK. The final proposals for Eastern
Electricity incorporated an initial reduction in allowed revenues for regulated
units of 28% from April 1, 2000 with further annual reductions of 3% per year
for the next four years. TXU Europe Limited and TXU Europe Group estimate that
the effect on revenues will be a reduction of about (Pounds)73 million ($120
million) in the year ending December 31, 2000 and of about (Pounds)100 million
($165 million) in the year ending December 31, 2001.
The Director General of Electricity Supply may propose amendments to the
Distribution Price Control Formula or any other terms of the license. In the
cases where a public electricity supply license holder is not willing to accept
modifications to the license conditions put forward by the Director General of
Electricity Supply, the normal process would be for the Director General of
Electricity Supply to refer the matter to Monopolies and Mergers Commission or,
after March 1, 2000, its replacement, the Competition Commission, for a
determination of whether continued operation without the proposed license
modifications is in the public interest.
COMPETITION
Electricity Retailing -- TXU Europe Group is an active participant in the
competitive UK electricity market. The competitive market is made up of
customers with maximum annual demand of more than 100 kW. It typically includes
large commercial and industrial users. As of December 31, 1999, this market
consisted of over 51,000 sites. TXU Europe Group estimates that this represents
a market size of approximately (Pounds)6 billion ($9.7 billion) per year based
upon electricity prices at that date. In addition, TXU Europe Group estimates
that more than 85% of these sites are outside its authorized area, and that over
60% of its electricity sales to the competitive market are to customers outside
its authorized area. TXU Europe Group had more than 13% of this market as of
March 31, 1999. In December 1999 TXU Europe Group's volume in this market
decreased as a result of a policy to accept business only when on profitable
terms.
30
Competition has been fully introduced for customers in all areas of Great
Britain. New entrants to the competitive market have been limited to British
Gas Trading Limited, Independent Energy and a small number of other companies.
TXU Europe Group competes nationally for residential and small business
customers and, by December 31, 1999, it was supplying 174,400 customers outside
its traditional service area and had agreed contracts with a further 19,000
residential customers. At the same date, approximately 446,000 customers in TXU
Europe Group's service area had transferred to other suppliers.
There is no assurance whether or not competition among suppliers of
electricity will adversely affect TXU Europe Group.
Natural Gas Retailing -- As a result of UK government action in recent years,
the UK retail gas supply market is open to competition. TXU Europe Group's main
competitors are Centrica plc (trading as British Gas) and the gas marketing arms
of some major oil companies. Further competition is provided by a number of
other electricity companies and smaller gas suppliers that are independent of
the major oil companies, which each have a minor presence in the market. TXU
Europe Group intends to maintain a significant share of this market through
high-quality customer service and competitive pricing.
Generation -- TXU Europe Group's mix of generating plants enables it to
operate in the sectors of the market for both plants that run throughout most of
the year and plants that run only during periods of high demand, and to spread
its fuel risks. The generation market will be affected by the outcome of the
review of energy sources by the UK government and the regulatory review of
electricity trading arrangements.
Electricity Networks -- At present, TXU Europe Group experiences little
competition in the operation of its electricity distribution system. In limited
circumstances, some customers may establish or increase capacity for their own
generation by becoming directly connected to National Grid or by establishing
their own generating capacity; they then avoid charges for the use of the
distribution system. TXU Europe Group does not currently consider this a
significant threat to its electricity networks business.
Customers -- There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
31
AUSTRALIA SEGMENT
GENERAL
Australian operations are engaged in the purchase, distribution, trading and
retailing of electricity and natural gas, primarily in the State of Victoria,
Australia.
Operating Statistics
Years Ended December 31
1999* 1998 1997
------ ------ ------
SALES VOLUMES
Electric (gigawatt-hours - GWh)
Residential..................... 2,543 2,468 2,410
Commercial...................... 1,410 1,346 1,250
Industrial...................... 1,556 1,399 1,530
------ ------ ------
Total electric.............. 5,509 5,213 5,190
====== ====== ======
Gas (billion cubic feet - Bcf)
Residential..................... 19 -- --
Commercial...................... 16 -- --
Industrial...................... 16 -- --
------ ------ ------
Total gas................... 51 -- --
====== ====== ======
OPERATING REVENUES (millions)
Electric
Residential..................... $ 188 $ 208 $ 223
Commercial...................... 97 88 112
Industrial...................... 80 65 95
------ ------ ------
Total electric.............. 365 361 430
------ ------ ------
Gas
Residential..................... 113 -- --
Commercial...................... 42 -- --
Industrial...................... 42 -- --
------ ------ ------
Subtotal.................... 197 -- --
Less agency and management
fees.......................... 67 -- --
------ ------ ------
Net gas revenues 130 -- --
------ ------ ------
Other.................................. 187 78 59
------ ------ ------
Total operating revenues.... $ 682 $ 439 $ 489
====== ====== ======
CUSTOMERS (end of year - in thousands)
Electric............................... 511 500 489
Gas.................................... 410 -- --
DEGREE DAYS
Cooling................................ 239 236 292
Heating................................ 1,199 1,387 1,360
*Volumes and revenues include Westar/Kinetik Energy from date of acquisition on
February 24, 1999.
Networks
- --------
The Networks business distributes electricity to approximately 500,000
supply points located in the eastern suburbs of Melbourne and in rural areas in
eastern Victoria, and natural gas to approximately 400,000 supply points located
in the western suburbs of Melbourne and in rural towns in western Victoria. It
also operates a Western Underground Gas Storage (WUGS) facility in western
Victoria.
32
Electricity -- Eastern Energy is the holder of an electricity distribution
license, which provides a right to distribute electricity within a defined
geographical area in accordance with a set of conditions that attach to the
license. Virtually all customers within Eastern Energy's service territory are
connected to its distribution network, whether electricity is purchased from
Eastern Energy or any other retail supplier. There is, however, open access to
the distribution network. Open access means that all retailers licensed to sell
electricity in Victoria have equal rights of access to the distribution network.
Eastern Energy has the right to charge network tariffs to the retailers who
access its network. These charges provide the primary revenue of its
electricity network.
Eastern Energy's distribution area covers approximately 31,000 square miles
from the outer eastern metropolitan suburbs of Melbourne to the eastern coastal
areas of Victoria and north to the New South Wales border. The distribution
service territory encompasses three of the four fastest-growing suburban areas
in Melbourne, Australia's second-largest city. Almost 60 percent of Eastern
Energy's customers live in suburban Melbourne.
Eastern Energy distributes electricity to approximately 500,000 customers in
a distribution territory with a population of approximately 1.2 million. The
region accounts for approximately 28% of Victoria's population and approximately
35% of its total territory. Eastern Energy's service territory has the fastest
population growth rate of the service territories of the five Victorian
distribution companies, and is expected to average an annual population growth
of approximately 1.5% for the next ten years. Eastern Energy's service
territory has a predominantly residential and commercial customer base, but also
includes a diverse range of industrial customers, including logging paper mills,
food manufacturers, electricity generators, dairy producers and other light
industry. Eastern Energy's distribution network consists of approximately
24,000 miles of distribution lines.
Gas -- Westar is the holder of a gas distribution license, which provides a
right to distribute gas within a defined geographical area in accordance with a
set of conditions that attach to the license. Westar charges retailers
(including Kinetik Energy) tariffs for providing distribution services. Under
the regulatory arrangements, the initial tariffs are subject to increase or
decrease based on a formula (CPI-X) based on the Consumer Price Index and a
multiplier that has been set through December 2002. TXU Australia also earns
revenue from other activities related to its distribution business, some of
which are regulated on a "fair and reasonable" basis.
Westar's gas distribution network includes approximately 4,800 miles of
pipelines over approximately 800 square miles in the western and northwestern
Melbourne metropolitan area, together with 19 rural localities in central and
western Victoria.
Westar's initial distribution territory covers part of both Kinetik Energy
and Ikon Energy's retail non-contestable agency areas. In addition, Westar
also transports gas for use by affiliates of Esso Resources Australia Ltd.
(Esso) and BHP Petroleum Pty Ltd. (BHPP) at sites within its distribution areas
pursuant to the terms of a gas transportation deed between the Gas and Fuel
Corporation (GASCOR), Esso and BHPP.
WUGS -- In November 1998, TXU Australia purchased the rights to construct and
operate an underground gas storage facility near Port Campbell in western
Victoria. Construction was completed in August 1999. It is expected to be fully
operational in 2000. It both processes raw gas and stores processed gas.
TXU Australia agreed to acquire three additional gas fields in the Port
Campbell area together with their remaining gas reserves. The acquisition
included the right and the obligation to build gas processing facilities to
process both TXU Australia's own gas and gas from other producers. Pursuant to
an Underground Storage, License and Sale Agreement with the State of Victoria,
WUGS is required to keep its business separate from the retail business of TXU
Australia and must not offer discriminatory terms in favor of related
businesses. WUG's customers are Kinetik Energy and other gas retailers for
storage services and gas producers for gas processing. WUGS provides TXU
Australia with the strategic advantage of having ready access to an alternative
supply of natural gas at times of peak demand.
33
Retail
- ------
The Retail business sells electricity to approximately 500,000 customers
located in the eastern suburbs of Melbourne and in rural areas in eastern
Victoria, and natural gas to approximately 400,000 customers located in the
northern suburbs and central business district of Melbourne and in rural towns
in the west of the State of Victoria.
Electricity -- Eastern Energy has retailing licenses to sell electricity to
contestable customers (those subject to competition) in Victoria, New South
Wales, Queensland, South Australia and the Australian Capital Territory. Eastern
Energy also holds an exclusive franchise to sell electricity to retail customers
with electricity loads of less than 160 MWh/year within the same geographic area
of Victoria as its distribution license. This franchise is in effect until
January 1, 2001, when all customers become able to purchase from retailers of
their choice.
Gas -- Kinetik Energy has a retail license, which gives it the exclusive
right to supply gas to approximately 400,000 non-contestable customers in its
geographic agency area, as agent for GASCOR. Its license also gives it the right
to supply gas to any customer in Victoria after contestability. The Victorian
Government has set a staggered timetable, by which different classes of
customers become contestable. The first stage of contestability began on
October 1, 1999 and the market will become fully contestable by September 1,
2001.
Large industrial and commercial customers that have individual sales
contracts have the option of terminating their contracts when they become
contestable, subject to paying all outstanding charges. The current portfolio
of business customers includes food manufacturing, chemicals, paper, health,
hospitality and recreation. Approximately 52% of Kinetik Energy's agency
customers are connected to Westar's distribution network, with the balance
connected to other distributors' systems.
Energy Trading
- --------------
The Energy Trading business manages electricity and gas supplies, including
purchasing gas and electricity, trading electricity (both physical and
derivatives) within approved risk limits, managing electricity hedging
agreements, and managing gas supplies from WUGS.
Electricity -- In the eastern Australia electricity supply industry,
generators producing over 30 MW are required to offer all of their energy output
for sale through the wholesale market. Holders of retail electricity licenses
are required to participate in and comply with rules established by the
wholesale market operators. TXU Australia and other distribution and retail
companies in Victoria purchase most of their electric energy needs from the
National Electricity Market.
Because the spot price of electric energy can vary substantially from time to
time, TXU Australia is exposed to the risk arising from the difference between
the fixed price at which they sell electricity and the variable price at which
they purchase electricity from the wholesale market. To manage this risk, it
enters into hedging contracts with electric energy generators and others to
manage exposure to such price fluctuations. TXU Australia also enters into
various derivative instruments for the purposes of arbitrage and trading in the
Australian energy market. The instruments include swaps, options, futures and
forwards.
In May 1999, Eastern Energy entered into a twenty-year option agreement with
AES Ecogen which owns 966 MW of gas-fired generation that is typically used
during peak periods of demand for electricity in Victoria. The agreement
provides Eastern Energy with the option to enter into contracts with AES Ecogen
that require the exchange of cash for the difference between the amounts
specified in the agreement and the then current spot price of electricity.
Eastern Energy made an initial option payment of A$200 million ($131 million)
and is required to make further future payments. Kinetik Energy also has an
agreement to supply gas to AES Ecogen for 20 years.
Gas -- Approximately 98% of Victoria's current gas supply of 158 Bcf per
annum is sourced from Esso Resources Australia Ltd and BHP Petroleum Pty Ltd. A
gas spot market opened in Victoria in April 1999. Kinetik Energy must specify
the injections (volume and price) it is willing to make from its supply sources,
and must settle
34
any imbalance between its injections and the demands of its customers with
counterparties in the spot market. Because of the dominant volume of the
Esso/BHPP supply source, market price volatility has been minimal to date.
REGULATION AND RATES
Gas and Electricity -- Entities operating in the gas and electricity
industries in Victoria operate under several legislative acts, regulations and
legal documents that form the regulatory framework. This regulatory framework is
outlined below.
Gas Industry Act 1994 and Electricity Industry Act 1993, as amended -- These
Acts are the primary legislation governing the reformed gas and electricity
industries in Victoria. They complement the national regulatory framework (see
National Access Regime below). They contain the provisions relating to the
privatization of the gas and electricity industries, establish the functions of
the key regulatory bodies in the industries and provide for the establishment of
the key regulatory instruments taking effect under the Acts, such as the Market
and System Operations Rules, the Victorian Gas Industry Tariff Order, the
Victorian Electricity Supply Industry Tariff Order and the distribution and
retail licenses. They also contain industry cross-ownership restrictions and
government emergency powers.
Office of the Regulator-General Act 1994 -- This Act establishes the Office
of the Regulator General (ORG), which has general regulatory authority over
regulated industries in Victoria, including gas and electricity. The ORG has the
power to issue licenses for the generation, transmission, distribution and
retailing of gas and electricity in Victoria, and regulates tariffs. It also
enforces and administers the various codes applicable to these licenses, and the
application of the Victorian Gas Industry Tariff Order and Victorian Electricity
Supply Industry Tariff Order. These two tariff orders regulate, among other
things, the prices that the distributors and retailers may charge. Until the
tariffs are reset, they may be varied (apart from the CPI - X formula) only to
allow for a pass through of certain new taxes, with the consent of the ORG. The
tariffs charged by retailers to non-contestable customers may also be varied,
with the consent of the ORG, in the case of certain force majeure events.
The distribution tariffs applying to Eastern Energy are effective until
December 31, 2000. The ORG plans to issue a determination of the maximum prices
for use of the electrical network for the period from January 2001 to at least
December 31, 2005. Maximum retail prices for remaining franchise electricity
customers, those with usage below 160MWh/year, are fixed by the Tariff Order
until December 31, 2000. Retail prices for non-franchise customers are subject
to competitive forces and are not regulated. All electricity retail prices are
scheduled to be deregulated beginning January 1, 2001.
The distribution tariffs applying to Westar are effective until December 31,
2002, at which time a price review process will occur prior to new tariffs being
approved by the ORG for the following five-year period. After the next rate
period, prices will be set for periods nominated by Westar and approved by the
ORG.
National Access Regime
Gas Industry -- On July 1, 1999, the national regulatory regime for
regulation of access to gas transmission and distribution systems was
implemented in Victoria. This regime is comprised of the Gas Pipelines Access
Law and the National Third Party Access Code for Natural Gas Pipeline System
(National Access Code).
Westar's pipelines transferred to it from GASCOR are subject to the National
Access Code. However, Westar has an existing access arrangement approved by the
ORG that applies until December 31, 2002, which is deemed to be an access
arrangement for the purposes of the National Access Code.
35
Westar's access arrangement provides that it will supply distribution
services in accordance with the Distribution Code. The access arrangement
further provides that Westar will charge for these services in accordance with
the tariffs for tariffed distribution services set out in the Victorian Gas
Industry Tariff Order. With the exception of extensions that service more than
5,000 customers, Westar's access arrangement will apply to any extensions or
expansions of the system. Pricing arrangements applicable to these extensions or
expansions are set out in the access arrangement.
Under the National Access Code, Westar is able to specify in an access
arrangement certain "fixed principles" that will apply to the pricing provisions
of its next access arrangement. The fixed principles that will apply to Westar's
next access arrangement, will apply for five years from January 1, 2003. They
are set out in the Victorian Gas Industry Tariff Order and include a requirement
for the regulator to:
(i) use CPI-X and not rate of return regulation;
(ii) ensure a fair sharing of efficiency gains between customers and the
distribution business;
(iii) consider the cost of supplying the services which the distributor
supplies; and
(iv) consider any relevant benchmarks in comparable private sector industries.
Electric Industry -- On December 13, 1998, the National Electricity Market
commenced operation in Australia. The National Electricity Market, operated by
the National Electricity Market Management Company (NEMMCO), is a wholesale
market for the sale of electricity which is combined with an open access regime
for the use of physical electricity networks within the participating states of
Australia.
The National Electricity Market currently operates a wholesale electricity
pool into which all electricity output from generators within Victoria, New
South Wales and South Australia is centrally pooled and scheduled to meet the
electricity demand of those States. NEMMCO matches the supply and demand
requirements among participants in the National Electricity Market. Generators
bid their electricity into the market, offering NEMMCO different prices for the
generation levels. In turn, market customers submit bids and quantities of
demand they wish to be scheduled. These are evaluated and watched with bids by
NEMMCO to minimize the cost of meeting demand and determine the electricity
price generators are paid for the electricity they sell into the market. The
clearing price is calculated at half hour intervals each day. It is often
referred to as the "spot price".
With limited exception, all electricity generated in Victoria must be traded
in an electricity pool. Thus, all significant generators are pool participants.
Each electricity supplier is required to purchase electricity either through a
pool, unless the electricity is purchased and consumed on the site of a
generating station or purchased from a generator too small to trade through a
pool or through another supplier who has purchased that electricity from a pool.
A contestable customer may also apply to NEMMCO to become a participant in a
pool. New participants will be admitted to a pool if they satisfy NEMMCO that
they have sufficient financial standing to meet their financial and other
obligations under the rules of such pool and that they will be able to maintain
compliance with the National Electricity Code.
Eastern Energy is registered as a market customer for the purposes of the
market established under the National Electricity Code, and purchases its power
requirements from the National Electricity Market. It manages its risk of
exposure to high prices in this market, however, by entering into hedging
arrangements with market generators.
36
COMPETITION
Electric Retail -- In July 1996, customers in Victoria with loads greater
than 750 MWh/year became contestable. In July 1998, customers with loads between
160 and 750 MWh/year became contestable. Together these two customer classes
accounted for approximately 49% of total Victorian volumes. In both cases, the
introduction of contestability was accompanied by the entry of several new
retailers into the market, significantly lower prices and switching between
retailers. Because of the low profitability of serving these customers, volume
retention has not been a priority to TXU Australia. The final class of
customers with loads below 160 MWh/year will become contestable in January 2001.
Based on information available from the experience of mass-market competition in
other industries and other countries, TXU Australia expects that the competition
will be less intense for these smaller customers.
Gas Retail -- Gas consumers, including new connections (except certain
affiliates of Esso and BHPP), are supplied by GASCOR and are not subject to
competition until the dates set out below:
Customer Load
Date (GJ/year)*
---- --------------------
Currently greater than 500,000
March 1, 2000 100,000-499,999
September 1, 2000 5,000-99,999
September 1, 2001 All others
* GJ =gigajoules. One gigajoule = approximately .92 Mcf.
Contestable customers will be able to choose their own gas retailer. TXU
Australia will cease to supply gas as an agent of GASCOR to customers who have
become contestable and will commence supplying contestable customers in its own
right with gas purchased from GASCOR and other sources.
On average, as competition was introduced in stages in Victoria, customers in
the early tranches of competition were less profitable to TXU Australia than
those in the later tranches. While the market is expected to be competitive, TXU
Australia does not expect the same intensity of competition in the early stages
as has been experienced in electricity in Victoria. The incumbent retailers have
a significant advantage over new retailers in their long-term supply contracts
with GASCOR. The final class of customers, with loads below 5,000 GJ/year, will
become contestable in September 2001. As with competition in the electric
industry, TXU Australia's expectation is that the competition will be less
intense for these smaller customers.
Customers -- There are no individually significant customers upon which the
segment's business or results of operations are highly dependent.
37
OTHER BUSINESSES
GENERAL
Other business operations consist of telecommunications, retail energy
services, international gas operations, power development and other energy
development activities. None of these operations is of such magnitude as to
constitute a segment. The telecommunications operations are the most
significant business within this group.
REGULATION AND RATES
TXU Communications is not subject to direct rate or service regulation.
However, its affiliates, TXU Communications Telephone Company and TXU
Communications Telecom Services Company, are regulated at both the state and
federal level. TXU Communications Telephone Company is a local exchange company
providing a variety of local and intrastate long-distance services. TXU
Communications Telephone Company is regulated in Texas by the PUC. This
regulation applies to the geographical areas served, the intrastate local and
long-distance rates and tariffs and the intrastate access services provided by
TXU Communications Telephone Company. Because TXU Communications Telephone
Company has elected to provide intrastate services under an incentive rate
regulation plan available under the PUC's enabling statute, intrastate rates are
subject to only limited regulation by the PUC. TXU Communications Telephone
Company is also regulated by the Federal Communications Commission (FCC),
primarily with respect to interstate access rates and services. TXU
Communications Telecom Services Company provides long-distance service in the
States of Texas and Louisiana as well as interstate long-distance service, which
is regulated by the FCC. Intrastate, interexchange service is regulated by the
respective state commissions. In Texas, regulation is limited to certification
to do business and the filing of rate sheets. The rates charged are not subject
to direct regulation by the PUC. In Louisiana, TXU Communications Telecom
Services Company is required to file rate tariffs, but rate regulation is
subject to maintaining rates for services within a "band" or range of rates set
by the Louisiana Public Service Commission. At the federal level, TXU
Communications Telecom Services Company's interstate long-distance rates are
filed in the form of rate sheets. The FCC does not establish rates for
interstate long-distance service, since such services are subject to competition
from a large number of interexchange long-distance service providers.
COMPETITION
TXU Communications's long-distance service at both the intrastate and
interstate level is subject to competition. Interexchange long-distance service
has been subject to competition for more than ten years. TXU Communications
Telecom Company competes with numerous interexchange carriers ranging from small
resellers to large, facilities-based carriers such as AT&T and MCI WorldCom.
While monitored by regulatory authorities, rates for these long-distance
services are largely market based and essentially have been deregulated.
Upon divestiture of the Bell System, the state was divided into long-distance
calling areas called Local Access Transport Areas (LATA's). IntraLATA equal
access was implemented January 1, 1999 so that customers may select a preferred
long distance carrier for their intraLATA calling needs. TXU Communications
Telephone Company has over 113,000 access lines and also provides intrastate
intraLATA long-distance service.
TXU Communications Telephone Company is also subject to, but to date has not
experienced significant levels of, local competition. It is too early to
predict whether significant local competition will emerge in TXU Communications
Telephone Company's service area.
38
ENVIRONMENTAL MATTERS
---------------------
US SEGMENTS
TXU and its US subsidiaries are subject to various federal, state and local
regulations dealing with air and water quality and related environmental
matters. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
Air -- Under the Texas Clean Air Act, the Texas Natural Resource Conservation
Commission (TNRCC) has jurisdiction over the permissible level of air
contaminant emissions from generating facilities located within the State of
Texas. In addition, the new source performance standards of the Environmental
Protection Agency (EPA) promulgated under the Federal Clean Air Act, as amended
(Clean Air Act), which have also been adopted by the TNRCC, are applicable to
certain generating units. TXU Electric's generating units have been built to
operate in compliance with applicable regulations and emission standards
promulgated pursuant to these Acts; however, due to variations in the quality
of the lignite fuel, operation of certain of the lignite-fueled generating
units at reduced loads is necessary from time to time in order for TXU Electric
to maintain compliance with these standards at these units. With these
occasional reduced loads, TXU Electric has achieved and continues to achieve
material compliance with the Clean Air Act's emission standards.
The Clean Air Act includes provisions which, among other things, place limits
on the SO2 emissions produced by generating units. In addition to the new
source performance standards applicable to SO2, the Clean Air Act required
that fossil-fueled plants meet certain SO2 emission allowances by 1995
(Phase I), and requires more restrictions on SO2 emission allowances by
2000 (Phase II). TXU Electric's generating units were not affected by the Phase
I requirements. The applicable Phase II requirements currently are met by 52
out of 56 TXU Electric generating units to which those requirements apply.
Because the SO2 emissions from the other four units are relatively low and
alternatives are available to enable these units to reduce SO2 emissions or
utilize compensatory reduction allowances achieved at other units, material
compliance with the applicable Phase II sulfur dioxide requirements is not
expected to have a significant impact on TXU Electric.
To meet these SO2 requirements, the Clean Air Act provides for the annual
allocation of SO2 emission allowances to utilities. Under the Clean Air
Act, utilities are permitted to transfer allowances within their own systems and
to buy or sell allowances from or to other utilities. The EPA grants a maximum
number of allowances annually to TXU Electric based on the amount of emissions
from units in operation during the period 1985 through 1987. TXU Electric
intends to utilize internal allocation of emission allowances within its system
and, if cost effective, may purchase additional emission allowances to enable
both existing and future electric generating units to meet the requirements of
the Clean Air Act. TXU Electric may also sell excess emission allowances. TXU
Electric is unable to predict the extent to which it may generate excess
allowances or will be able to acquire allowances from others if needed but does
not anticipate any significant problems in keeping emissions within its allotted
allowances.
TXU Electric's generating units meet the NOx limits currently required by
the Clean Air Act. The TNRCC and the EPA have proposed rules that will require
NOx emission reductions at TXU Electric's generating units in the Dallas-
Fort Worth area. Additionally, in 1996, TXU Electric elected for an early
opt-in under Phase I related to NOx limits for its coal-fired generating
units. This election locks in NOx limits for these generating units for a
ten-year period. The Clean Air Act also requires studies, which began in 1991,
by the EPA to assess the potential for toxic emissions from utility boilers.
TXU Electric is unable to predict either the results of such studies or the
effects of any subsequent regulations. Recently, the EPA issued proposed rules
for regional haze; the impact of these proposed rules, if adopted, is unknown at
this time.
39
In December 1997, the Conference of the Parties of the United Nations
Framework Convention on Climate Change adopted the Kyoto Protocol, which
specifies targets and timetables for certain countries to reduce greenhouse gas
emissions. TXU Electric is unable to predict whether the Kyoto Protocol will be
ratified by the United States Senate and to what extent, if any, such protocol
might impact TXU Electric.
In 1997, the Clean Air Act required some companies to submit Title V
Operating Permit applications for many of their facilities, including TXU
Electric's generating facilities. All required Title V Operating Permit
applications have been filed, and TXU Electric has received Title V Operating
Permits for many of its facilities. TXU Electric anticipates the approval of
all pending permit applications.
Major air pollution control provisions of the 1999 Restructuring Legislation
require a 50% reduction in NOx emissions from "grandfathered" electric utility
generating units and a 25% reduction in SO2 emissions from "grandfathered"
electric utility generating units. This legislation also provides for an "opt-
in" of permitted units as an alternative to achieve the same reductions, and
recovery of reasonable environmental improvement costs as stranded costs upon
approval by the PUC.
The TNRCC has also recently proposed revisions to its State Implementation
Plan (SIP) rules that would require an approximately 88% reduction in NOx
emissions from electric utility units in the Dallas-Fort Worth ozone non-
attainment area. The costs of SIP reductions are eligible for recovery as
stranded costs provided they satisfy the standards for recovery of environmental
improvement costs established by the 1999 Restructuring Legislation provisions.
Additional Clean Air Act regulations have been proposed and others are not
yet finalized by the EPA. TXU Electric believes that the requirements necessary
to be in compliance with additional EPA regulatory provisions probably can be
met as they are developed. Estimates for the capital requirements related to
the Clean Air Act are included in TXU Electric's estimated construction
expenditures. TXU Electric currently believes that if the rules and regulations
under the Clean Air Act are adopted as proposed, operating costs that will be
incurred under operating permits, new permit fee structures, capital
expenditures associated with equipment modifications to reduce emissions, or any
expenditures on monitoring equipment, in the aggregate, will not have a
materially adverse effect on TXU Electric's financial position, results of
operations or cash flows.
Water -- The TNRCC, the EPA and the RRC have jurisdiction over water
discharges (including storm water) from all domestic facilities. TXU Electric's
and TXU Gas' facilities are presently in compliance with applicable state and
federal requirements relating to discharge of pollutants into the water. TXU
Electric and TXU Gas have obtained all required waste water discharge permits
from the TNRCC, the EPA and the RRC for facilities in operation and have applied
for or obtained necessary permits for facilities under construction. TXU
Electric and TXU Gas believe they can satisfy the requirements necessary to
obtain any required permits or renewals.
Other -- Diversion, impoundment and withdrawal of water for cooling and other
purposes are subject to the jurisdiction of the TNRCC. TXU Electric possesses
all necessary permits for these activities from the TNRCC for its present
operations.
Treatment, storage and disposal of solid and hazardous waste are regulated at
the state level under the Texas Solid Waste Disposal Act (Texas Act) and at the
federal level under the Resource Conservation and Recovery Act of 1976, as
amended, (RCRA) and the Toxic Substances Control Act (TSCA). The EPA has issued
regulations under the RCRA and TSCA, and the TNRCC and the RRC have issued
regulations under the Texas Act applicable to TXU Electric's facilities. TXU
Electric has registered solid waste disposal sites and has obtained or applied
for such permits as are required by such regulations.
Under the federal Low-Level Radioactive Waste Policy Act of 1980, as amended,
the State of Texas is required to provide, either on its own or jointly with
other states in a compact, for the disposal of all low-level radioactive waste
generated within the state. The State of Texas has agreed to a compact with the
States of Maine and Vermont for a disposal facility that would be located in
Texas. That compact was ratified by Congress and signed by the President in
1998. The State of Texas had proposed to license a disposal site in Hudspeth
County, Texas, but in
40
October 1998 the TNRCC denied that license application. No appeal was taken from
the denial of the license application, and that denial is now final. The nature
and extent of future efforts by the State of Texas to provide for a disposal
site are presently uncertain. TXU Electric will continue to ship low-level waste
material off-site for as long as an alternative disposal site is available.
Should existing off-site disposal become unavailable, the low-level waste
material will be stored on-site. TXU Electric's on-site storage capacity is
expected to be adequate until other off-site facilities become available.
EUROPE
TXU Europe Group's businesses are subject to numerous regulatory requirements
with respect to the protection of the environment. The electricity generation
industry in the UK is subject to a framework of national and EU environmental
laws which regulate the construction, operation and decommissioning of
generating stations. Under these laws, each generating station operated by TXU
Europe Group is required to have an authorization which regulates its releases
into the environment and seeks to minimize pollution of the environment taken as
a whole, having regard to the best available techniques not entailing excessive
cost. These authorizations are issued by the Environment Agency which has the
responsibility for regulating the impact of TXU Europe Group's generating
stations on the environment. The principal laws which have environmental
implications for TXU Europe Group are the UK Electricity Act, the UK
Environmental Protection Act 1990 and the UK Environment Act 1995.
The UK Electricity Act requires TXU Europe Group to consider the preservation
of natural beauty and the conservation of natural and man-made features of
particular interest when it formulates proposals for development of power
stations with a capacity in excess of 50 MW or installation of overhead power
lines. Environmental assessments are required to be carried out in some cases,
including overhead line constructions at high voltages and generating station
developments. TXU Europe Group has produced Environmental Policy Statements and
Electricity Act Schedule 9 Statements which explain the manner in which it
complies with its environmental obligations.
TXU Europe Group has approximately 680 and 192 kilometers of underground
cables insulated with an oil-filled wrap which operate at 33-kV and 132-kV,
respectively. This type of cable is in common use by utilities in the UK and
parts of continental Europe. These cables generally supply substantial amounts
of electricity to large substations in urban areas and to large customers. Most
of TXU Europe Group's cables are between 30 and 50 years old. TXU Europe Group
operates these cables in accordance with the UK Environment Agency's Operating
Code for Fluid-Filled Cables, monitoring and repairing both gradual and
substantial leaks that arise through age deterioration and damage by a third
party. TXU Europe Group has a program to reduce oil leakage and minimize the
possibility of pollution to watercourses and ground water. This involves
establishing a more effective standard procedure for dealing with cable leaks
and implementation of an effective monitoring system. TXU Europe Group also has
a plan for gradual replacement and refurbishment of these cables with more
modern solid cables in the future. TXU Europe Group believes that its existing
monitoring systems and planned replacement and refurbishment program effectively
minimize the risk of major environmental incidents or additional replacement
expenditures. TXU Europe Group could incur significant expenditures if it were
required to replace its fluid-filled cables, other than in the ordinary course
of business, pursuant to new or existing legislation; however, TXU Europe Group
is not aware of any plans of any governmental authority to impose that kind of
requirement.
The principal EU Directive affecting atmosphere emissions to the environment
currently in force is the Large Combustion Plants Directive. The Large
Combustion Plants Directive required the UK to reduce from 1980 levels its
SO2 emissions from its existing plants by 60% by 2003 and NOx emissions by 30%
by 1998. The Large Combustion Plant National Plan is the mechanism by which the
Large Combustion Plants Directive has been implemented in the UK and sets annual
targets for reductions in emissions for the electricity industry. Discussions
are under way in the EU regarding an update of the Large Combustion Plants
Directive which will introduce tighter emission controls as well as national
limits for 2010. The UK government has recently made a review of energy sources
and electricity trading arrangements and has made proposals regarding new limits
for SO2 emissions to apply in the period to 2005. The government is expected to
propose tighter controls on NOx emissions in the near future. TXU Europe Group
is examining the economic and practical implications of fitting a flue gas
desulphurization plant to its West Burton station to reduce the sulphur output
of the plant; the flue would operate beginning in autumn 2003.
41
At a local level, the UK's Air Quality Strategy provides set targets for 2005
and places a duty on local authorities to review air quality with a view to
setting up action plans for management in places where targets are unlikely to
be met. When adverse meteorological conditions occur, some generating stations
might have to introduce measures to comply with these targets, which could
include installation of costly equipment or reduction of the operating level of
the stations.
The UK is a signatory to the Kyoto Protocol and this involves a 12% reduction
in carbon dioxide emissions by 2010 if the Protocol is ratified. The UK
government is proposing to introduce a tax on the business use of energy in
order to reduce energy consumption. TXU Europe Group is unable to predict what
impact any implementation of the Kyoto Protocol would have on it.
TXU Europe Group believes that it is currently in compliance with, has taken,
and intends to continue to take, measures to comply, in all material respects,
with the applicable law and government regulations for the protection of the
environment. There are no material legal or administrative proceedings pending
against TXU Europe Group with respect to any environmental matter.
All the regional electricity companies are obliged to obtain a specified
amount of generating capacity from renewable, or non-fossil fuel, sources.
Because electricity generated from renewable energy sources is generally more
expensive than electricity from fossil fuel plants, a non-fossil fuel obligation
levy has been instituted to reimburse the generators and the regional
electricity companies for the extra costs involved. The Director General of
Electricity Supply sets the rate of the non-fossil fuel obligation levy
annually. The current non-fossil fuel obligation levy is 0.9% of the value of
sales of electricity made in England and Wales and 0.8% of the value of sales of
electricity made in Scotland.
AUSTRALIA
TXU Australia is subject to various Australian federal and Victorian state
environmental regulations, the most significant of which is the Victorian
Environmental Protection Act of 1970 (VEPA). VEPA regulates, in particular, the
discharge of waste into air, land and water, site contamination, the emission of
noise and the storage, recycling and disposal of solid and industrial waste.
VEPA establishes the Environmental Protection Authority (Authority) and grants
the Authority a wide range of powers to control and prevent environmental
pollution. These powers include issuing approvals for construction of works,
which may cause noise or emissions to air, water or land, waste discharge
licenses and pollution abatement notices. No licenses or works approvals from
the Authority are currently required for activities undertaken by Eastern Energy
and Westar/Kinetik Energy. TXU Australia is in the process of applying for a
permit from the Authority to operate the Iona facility of WUGS.
Westar has certain properties that are contaminated. A liability of A$12
million ($8 million) for land reclamation in relation to properties that are
contaminated is recorded in the balance sheet. The liability is based on the
estimate of the land reclamation costs following limited site reviews and
testing. The cost of reclamation may increase if the extent of contamination is
worse than testing indicated at the time of reviews. Under the VEPA, the
Authority has the power, in certain circumstances, to order Westar to incur such
costs to remedy the contamination of land.
42
Item 2. PROPERTIES
US
The generating stations and other important units of property of TXU Electric
and TXU SESCO are located on lands owned primarily in fee simple. The greater
portion of the transmission and distribution lines of TXU Electric and TXU
SESCO, the gas gathering and transmission lines of TXU Fuel and the gas
gathering, transmission and distribution lines of TXU Gas Distribution and TXU
Lone Star Pipeline, have been constructed over lands of others pursuant to
easements or along public highways and streets as permitted by law. The gas
gathering lines of TXU Processing are not utility property and are primarily
constructed over lands of others pursuant to private easements. The rights of
the companies in the realty on which their properties are located are considered
by them to be adequate for their use in the conduct of their business. Minor
defects and irregularities customarily found in titles to properties of like
size and character may exist, but any such defects and irregularities do not
materially impair the use of the properties affected thereby. TXU Electric, TXU
SESCO, TXU Fuel, TXU Gas Distribution and TXU Lone Star Pipeline have the right
of eminent domain whereby they may, if necessary, perfect or secure titles or
gain access to privately held land used or to be used in their operations.
Utility plant of TXU Electric is generally subject to the lien of its mortgage.
TXU Corp. does not directly own utility plant or real property.
At December 31, 1999, TXU Electric owned or leased and operated the following
generating units:
Net
Electric Generating
Generating Capability
Units Fuel Source (MW) Percent
- ---------- ----------- ---------- -------
54 Natural Gas/Oil (a)............ 11,980(c) 56.9
9 Lignite/Coal................... 5,825 27.6
2 Nuclear........................ 2,300 10.9
15 Combustion Turbines (b)........ 975 4.6
------ -----
Total................. 21,080 100.0
====== =====
- ---------------------
(a) Twenty-four natural gas units are capable of operating on fuel oil for short
periods when gas supplies are interrupted or curtailed. In addition, five
natural gas units are capable of operating on fuel oil for extended periods.
This includes ten 2 MW diesel engine driven generators.
(b) Natural gas units leased and operated by TXU Electric. Such units are
capable of operating on fuel oil for extended periods.
(c) TXU Electric has announced plans to sell 17 natural gas-fired units at six
plants with an aggregate net generating capability of 3,116 MW.
At December 31, 1999, TXU Lone Star Pipeline operated approximately 7,400
miles of transmission and gathering lines and operated 22 compressor stations
having a total rated horsepower of approximately 76,000. TXU Lone Star Pipeline
also owned seven active gas storage fields, all located on its system in Texas.
At December 31, 1999, TXU Processing had interests in 13 processing plants, 10
of which were wholly-owned, and operated approximately 1,800 miles of gathering
lines. At December 31, 1999, TXU Gas Distribution operated over 24,000 miles of
distribution mains.
TXU Gas owns a five-building office complex in Dallas, containing
approximately 453,000 square feet of space that is occupied by TXU Gas and
affiliates.
43
EUROPE
Apart from its power stations, the principal properties owned or occupied by
TXU Europe continuing businesses are as follows:
Property Principal Use Site Area
- ---------------------------------- ----------------- -------------
The Adelphi, London Offices 14,905 sq.ft.
Wherstead Park, Wherstead, Ipswich Offices 80,000 sq. ft
Russell House Offices 94,000 sq. ft
Suffolk House Offices 44,000 sq. ft
Fison House Offices 24,000 sq. ft
Constantine House Offices 54,000 sq. ft
Bedford Offices and Depot 5.0 acres
Carterhatch Lane, Enfield Offices and Depot 4.0 acres
Milton, Cambridge Offices and Depot 22.0 acres
Rayleigh Offices and Depot 8.0 acres
Further information on TXU Europe Group's interests in power stations in the
UK is set out in the following table and discussed further below. In all cases,
installed generating capacity is equal to registered generating capacity except
for two units, which have registered generating capacities of 405 MW and 380 MW,
respectively, but installed generating capacities of 360 MW and 340 MW,
respectively.
Net
Electric Generating
Generating Capability
Units Fuel Source (MW) Percent
- ---------- ----------- ---------- -------
5 Coal fired......................... 5,949 87.1
3 Combined cycle gas turbine (a)..... 835 12.2
2 Combined heat and power............ 46 .7
----- -----
Total.............................. 6,830 100.0
===== =====
- ---------------------------------
(a) Includes TXU Europe Group's approximately 13.5% interest (135 MW) in a
1,000 MW plant.
West Burton, Rugeley B and Ironbridge. In June 1996, TXU Europe Group
-------------------------------------
assumed operational and commercial control, through a combination of lease and
outright purchase from National Power, of all of the assets and a portion of the
liabilities of the West Burton, Rugeley B and Ironbridge power stations. TXU
Europe Group holds a 99-year lease over the land, buildings and plant at each of
those power stations and has the right to purchase the freehold land after 50
years. Under the leases, TXU Europe Group is committed to make fixed payments
totaling (Pounds)738 million ($1,195 million), of which (Pounds)338 million
($547 million) was paid at commencement of the leases. The balance, together
with interest at 7.75%, is payable in 2001. Further payments of approximately
(Pounds)6 per MWh, indexed to inflation and linked to output levels from these
stations, are also payable to National Power through 2004. National Power has
agreed in principle with the Department of Trade and Industry to modify the
payment terms to reduce TXU Europe Group's output-linked payments by
(Pounds)1.50 per MWh for four months of the year. The specific terms of the
modification are not yet agreed. The new terms will not otherwise change TXU
Europe Group's obligations under the leases. The National Power leases are
capital leases.
44
Drakelow C and High Marnham. TXU Europe Group has leased the land,
---------------------------
buildings and plant at the Drakelow C and High Marnham power stations from
PowerGen for 99 years, under agreements entered into in July 1996. PowerGen is
responsible for decommissioning costs if TXU Europe Group decides to close these
stations during the term of the leases. TXU Europe Group is committed to fixed
payments totaling (Pounds)230 million ($373 million), subject to minor
adjustments if aggregate capacity is reduced. The payments, together with
interest, are being made in installments, over eight years beginning in 1996.
As with the National Power leases, further output-related payments of
approximately (Pounds)6 per MWh, indexed to inflation, are payable to PowerGen
for the first five years of operation by TXU Europe Group. On November 25,
1998, the UK Secretary of State for Trade and Industry confirmed that, as a
condition for allowing PowerGen to acquire East Midlands Electricity plc, he
would require that the output-related elements of these lease arrangements be
terminated 15 months early. Therefore there will be no further output-related
payments to PowerGen after March 2000.
AUSTRALIA
Eastern Energy's electricity distribution network is comprised primarily of
sub-transmission and distribution assets. It owns no generating or transmission
facilities. Eastern Energy's distribution system is interconnected with an
intrastate power network, comprised of the operator of the transmission system,
and each of the other distribution companies within Victoria. Eastern Energy
has entered into distribution system agreements with each of the distribution
businesses which share the boundaries of its distribution area to provide for
wheeling of electricity on behalf of those distribution businesses and for the
reciprocal provision of other distribution services.
Westar's gas distribution network comprises a diverse and widely spread
network of pipelines within a licensed distribution area. This network is
supplied from a number of supply points from a long-distance, high-pressure gas
transmission pipeline owned by a third party. Westar presently carries gas for
two retailers, Kinetik Energy and Ikon Energy who have retail franchise
customers in areas served by Westar.
OTHER
TXU Properties owns a 48-story office building in Dallas containing
approximately 1,027,000 square feet of space (Energy Plaza). TXU Properties
entered into a tenant agreement with TXU Business Services Company on behalf of
the other subsidiary companies that allows them to occupy certain office space
in Energy Plaza at market rates in effect when the agreements were entered into.
TXU Communications and its affiliates provide a full range of
telecommunications services over a variety of state of the art facilities. As
of December 31, 1999, TXU Communications's local exchange affiliate, TXU
Communications Telephone Company, has over 113,000 access lines and all calls
are switched by state of the art digital switches. TXU Communications Telecom
Services Company has a separate digital switch for providing long-distance
services.
TXU Communications's affiliate, TXU Communications Transport Company, owns
63% of East Texas Fiber Line, Inc. (ETFL). ETFL provides voice and data
capacity to interexchange carriers over its fiber optic lines. TXU
Communications Transport Company owns an additional three hundred route miles of
fiber optic lines and markets that capacity to interexchange carriers including
TXU Communications Telecom Company.
45
Item 3. LEGAL PROCEEDINGS
TXU Corp. and its subsidiaries are party to lawsuits arising in the ordinary
course of their business. TXU Corp. believes, based on its current knowledge
and the advice of counsel, that the ultimate resolution of all such lawsuits and
resulting claims would not have a material adverse effect on its financial
position, results of operation or cash flows.
US -- In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc. (EEX), TXU Corp., David W.
Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The
Gracy Fund sought to represent a class of certain purchasers of the common stock
of ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, TXU Gas,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and B.
K. Irani and sought to represent a certain class of purchasers of common stock
of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order consolidating the Gracy Fund and the Thorne
suits (Consolidated Action). In January 1999, the Gracy Fund et al. filed an
amended class action complaint in the Consolidated Action against EEX, TXU Gas,
David W. Biegler, Gary J. Junco, Thomas Hamilton, J. Philip McCormick, Fredrick
S. Addy and B. K. Irani. TXU Corp. and Erle Nye were omitted as defendants
pursuant to a tolling agreement. The individual-named defendants are current or
former officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions of
the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. No amount of
damages has been specified in the Consolidated Action. Defendants filed a joint
motion to dismiss in March 1999, and discovery has been stayed pending a ruling
on the motion to dismiss. TXU Gas is continuing to evaluate these claims and is
unable at this time to predict the outcome of this proceeding, but intends to
vigorously defend this suit.
UK -- In February 1997, the official government representative of pensioners
in the UK, the Pensions Ombudsman, made final determinations against National
Grid and its group trustees with respect to complaints by two pensioners in
National Grid's section of the Electricity Supply Pension Scheme relating to the
use of the pension fund surplus resulting from the March 31, 1992 actuarial
valuation of the National Grid section to meet costs arising from the payment of
pensions of early retirement upon reorganization or downsizing. These
determinations were set aside by the High Court on June 10, 1997, and the
arrangements made by National Grid and its group trustees in dealing with the
surplus were confirmed. The two pensioners appealed this decision, and judgment
has now been received. The judgment endorsed the Pensions Ombudsman's
determination that the corporation was not entitled to unilaterally deal with
any surplus. National Grid has made an appeal to the House of Lords, which
appeal is not likely to be heard until the fall of 2000. If a similar claim
were to be made against TXU Europe Group in relation to its use of actuarial
surplus in its section of the Electricity Supply Pension Scheme, it would
vigorously defend the action, ultimately through the courts. However, if a
determination were finally to be made against it and upheld in the courts, TXU
Europe Group could have a potential liability to repay to its section of the
Electricity Supply Pension Scheme an amount estimated by TXU Europe Group to be
up to (Pounds)45 million ($73 million), exclusive of any future applicable
interest charges.
46
On January 25, 1999, the Hindustan Development Corporation issued proceedings
in the Arbitral Tribunal in Delhi, India against TEG claiming damages of $413
million for breach of contract following the termination of a Joint Development
Agreement dated March 20, 1997 relating to the construction, development and
operation of a lignite based thermal power plant at Barsingsar, Rajasthan. TXU
Europe Limited is vigorously defending this claim.
In November 1998, five complaints were filed in the High Court of Justice in
London, Queens Bench Division, Commercial Court, against subsidiaries of TXU
Europe Group by five of their former sales agencies. The agencies claim a total
(Pounds)104 million ($168 million) arising from the summary termination for the
claimed fundamental breach of their respective contracts in April 1998. The
five agencies are claiming damages for failure to give reasonable notice and for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. TXU Europe
Group cannot predict the outcome of these claims and counterclaims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
47
EXECUTIVE OFFICERS OF TXU CORP.
--------------------------------------------------
Positions and Offices Date First Elected to
Presently Held Present Offices
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age May 12, 2000) May 12, 2000) (Preceding Five Years)
- ------------------ ---- --------------------- --------------------- ----------------------------------
Erle Nye 62 Chairman of the Board May 23, 1997 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., TXU
Electric and TXU Gas; prior
thereto, President and Chief
Executive of TXU Corp. and
Chairman of the Board and Chief
Executive of TXU Electric.
David W. Biegler 53 President and Chief August 5, 1997 President and Chief Operating Officer
Operating Officer of TXU Corp., TXU Electric and
TXU Gas; prior thereto Chairman,
President and Chief Executive
Officer of TXU Gas.
H. Jarrell Gibbs 62 Vice Chairman August 5, 1997 Vice Chairman of the Board of TXU
Corp. and TXU Gas; prior thereto,
President of TXU Electric and
prior thereto, Vice President and
Principal Financial Officer of
TXU Corp.
Michael J. McNally 45 Executive Vice May 23, 1997 Executive Vice President and Chief
President and Financial Officer of TXU Corp.;
Chief Financial prior thereto President,
Officer Transmission Division of TXU
Electric; prior thereto, Principal
of Enron Development Corporation;
prior thereto, Managing Director
Enron Capital and Trade
Resources.
Brian N. Dickie 44 Executive Vice President May 14, 1999 Executive Vice President of TXU
Corp. and President, Emerging
Business Group; prior thereto
President and Chief Operating
Officer of Booz.Allen &
Hamilton, Inc.; prior thereto
President, Worldwide Commercial
Business of Booz.Allen &
Hamilton, Inc.
There is no family relationship between any of the above-named Directors and
Executive Officers.
48
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TXU Corp.'s common stock is listed on the New York, Chicago and Pacific
stock exchanges (symbol: TXU). The price range of the common stock of TXU Corp.
on the composite tape, as reported by The Wall Street Journal and the dividends
paid for each of the calendar quarters of 1999 and 1998 were as follows:
Price Range Dividends Paid
-------------------------------------------------------------------------
Quarter Ended 1999 1998 1999 1998
- ------------- ---------------------- ---------------------- ------ ------
High Low High Low
-------- -------- -------- --------
March 31.......... $47.1875 $40.5625 $42.6250 $38.8125 $0.575 $0.55
June 30........... 45.7500 37.6250 42.1250 38.3750 0.575 0.55
September 30...... 43.6875 35.5000 47.1250 38.4375 0.575 0.55
December 31....... 40.0000 32.7500 48.0625 43.0000 0.575 0.55
------ -----
$2.300 $2.20
====== =====
TXU Corp., or its predecessor TEI, have declared common stock dividends
payable in cash in each year since TEI's incorporation in 1945. The Board of
Directors of TXU Corp., at its February 2000 meeting, declared a quarterly
dividend of $0.60 a share, payable April 3, 2000 to shareholders of record on
March 10, 2000. Future dividends may vary depending upon TXU Corp.'s profit
levels and capital requirements as well as financial and other conditions
existing at the time.
The number of record holders of the common stock of TXU Corp. as of March
14, 2000 was 82,065.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for TXU Corp. is set forth under Selected
Financial Data included in Appendix A to this report.
49
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for TXU Corp. is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Appendix A to this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TXU Corp. is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for TXU Corp. is set forth under Statement
of Responsibility, Independent Auditors' Reports, Statements of Consolidated
Income, Statements of Consolidated Comprehensive Income, Statements of
Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Common Stock Equity and Notes to Financial Statements included in
Appendix A to this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 6, 1999, TXU Europe, an indirect wholly owned subsidiary of TXU
Corp., appointed Deloitte & Touche as its principal accountants to audit its
financial statements for the year ended December 31, 1999. For further details
refer to TXU Corp. report on Form 8-K filed on August 12, 1999.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is found under the heading Election of
Directors in the definitive proxy statement to be filed by TXU Corp. with the
Securities and Exchange Commission (Commission) on or about March 30, 2000.
Additional information with respect to Executive Officers of TXU Corp. is found
at the end of Part I.
Item 11. EXECUTIVE COMPENSATION
Information with respect to this item is found under the heading Executive
Compensation in the definitive proxy statement to be filed by TXU Corp. with the
Commission on or about March 30, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is found under the headings Beneficial
Ownership of Common Stock of TXU Corp. in the definitive proxy statement filed
by TXU Corp. with the Commission on or about March 30, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) Documents filed as part of this Report:
Financial Statements (included in Appendix A to this report):
Selected Financial Data - Consolidated Financial and Operating Statistics............... A-2
Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... A-4
Statement of Responsibility............................................................. A-26
Independent Auditors' Reports........................................................... A-27
Statements of Consolidated Income for each of the three years in the
period ended December 31, 1999..................................................... A-28
Statements of Consolidated Comprehensive Income for each of the
three years in the period ended December 31, 1999.................................. A-29
Statements of Consolidated Cash Flows for each of the three years in
the period ended December 31, 1999................................................. A-30
Consolidated Balance Sheets, December 31, 1999 and 1998................................. A-31
Statements of Consolidated Common Stock Equity for each of the three years in
the period ended December 31, 1999................................................. A-33
Notes to Financial Statements........................................................... A-34
The consolidated financial statement schedules are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or notes
thereto.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 1999, are as follows:
Date of Report Item Reported
-------------- -------------
October 1, 1999 Item 5. Other Events
October 18, 1999 Item 5. Other Events
March 13, 2000 Item 5. Other Events
March 15, 2000 Item 5. Other Events
(c) Exhibits:
Included in Appendix B to this report.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Texas Utilities Company (doing business as TXU Corp.) has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TEXAS UTILITIES COMPANY
(doing business as TXU Corp.)
Date: March 17, 2000 By: /s/ ERLE NYE
------------------------------------
(Erle Nye, Chairman of the Board and
Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Texas
Utilities Company (doing business as TXU Corp.) and in the capacities and on the
date indicated.
Signature Title Date
--------- ----- ----
/s/ ERLE NYE Principal Executive
- ----------------------------- Officer and Director
(Erle Nye, Chairman of the
Board and Chief Executive)
/s/ MICHAEL J. McNALLY Principal Financial Officer
- -----------------------------
(Michael J. McNally, Executive
Vice President and Chief
Financial Officer)
/s/ JERRY W. PINKERTON Principal Accounting Officer
- -----------------------------
(Jerry W. Pinkerton, Controller)
/s/ DEREK C. BONHAM Director
- -----------------------------
(Derek C. Bonham)
/s/ J. S. FARRINGTON Director
- -----------------------------
(J. S. Farrington)
/s/ WILLIAM M. GRIFFIN Director March 17, 2000
- ------------------------------
(William M. Griffin)
/s/ KERNEY LADAY Director
- -----------------------------
(Kerney Laday)
/s/ MARGARET N. MAXEY Director
- -----------------------------
(Margaret N. Maxey)
/s/ JAMES A. MIDDLETON Director
- -----------------------------
(James A. Middleton)
/s/ J. E. OESTERREICHER Director
- -----------------------------
(J. E. Oesterreicher)
/s/ CHARLES R. PERRY Director
- -----------------------------
(Charles R. Perry)
/s/ HERBERT H. RICHARDSON Director
- -----------------------------
(Herbert H. Richardson)
52
Appendix A
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
December 31, 1999
Selected Financial Data - Consolidated Financial and Operating A-2
Statistics..........................................................
Management's Discussion and Analysis of Financial Condition and A-4
Results of Operations...............................................
Statement of Responsibility.......................................... A-25
Independent Auditors' Reports........................................ A-26
Financial Statements:
Statements of Consolidated Income.................................... A-28
Statements of Consolidated Comprehensive Income...................... A-29
Statements of Consolidated Cash Flows................................ A-30
Consolidated Balance Sheets.......................................... A-31
Statements of Consolidated Common Stock Equity....................... A-33
Notes to Financial Statements........................................ A-34
A-1
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL STATISTICS
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Millions of US Dollars, except ratios)
Total assets -- end of year..................................... $40,741 $39,507 $24,864 $21,376 $21,536
- ------------------------------------------------------------------------------------------------------------------
Property, plant & equipment -- gross -- end of year............. $33,890 $31,946 $26,578 $24,931 $24,912
Accumulated depreciation and amortization -- end of year..... 9,414 8,243 7,171 6,497 5,858
Reserve for regulatory disallowances -- end of year.......... 836 836 836 836 1,308
Construction expenditures..................................... 1,632 1,168 583 433 430
- ------------------------------------------------------------------------------------------------------------------
Capitalization -- end of year
Long-term debt, less amounts due currently..................... $16,325 $15,134 $ 8,759 $ 8,668 $ 9,175
Mandatorily redeemable, preferred securities of subsidiary
trusts, each holding solely junior subordinated debentures
of the obligated company (trust securities):
TXU Corp. obligated........................................ 368 223 -- -- --
Subsidiary obligated....................................... 971 969 875 381 381
Preferred stock of subsidiaries:
Not subject to mandatory redemption......................... 190 190 304 465 490
Subject to mandatory redemption............................. 21 21 21 238 263
Common stock equity............................................ 8,334 8,246 6,843 6,033 5,732
------- ------- ------- ------- -------
Total...................................................... $26,209 $24,783 $16,802 $15,785 $16,041
======= ======= ======= ======= =======
Capitalization ratios -- end of year (a)
Long-term debt, less amounts due currently..................... 62.3% 61.1% 52.1% 54.9% 57.2%
Trust securities............................................... 5.1 4.8 5.2 2.4 2.4
Preferred stock of subsidiaries................................ .8 .8 2.0 4.5 4.7
Common stock equity............................................ 31.8 33.3 40.7 38.2 35.7
------- ------- ------- ------- -------
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
Embedded interest cost on long-term debt -- end of year......... 7.0% 7.7% 7.9% 8.1% 8.4%
Embedded distribution cost on trust securities -- end of year... 7.1% 8.0% 8.3% 8.7% 8.6%
Embedded dividend cost on preferred stock of subsidiaries --
end of year (b).............................................. 8.4% 9.4% 9.2% 7.5% 7.4%
- ------------------------------------------------------------------------------------------------------------------
Net income (loss)............................................... $ 985 $ 740 $ 660 $ 754 $ (139)
Dividends declared on common stock.............................. $ 647 $ 597 $ 496 $ 456 $ 635
- ------------------------------------------------------------------------------------------------------------------
Common stock data
Shares outstanding -- average (millions)....................... 279 265 231 225 226
Shares outstanding -- end of year (millions)................... 276 282 245 225 226
Basic earnings (loss) per share................................ $ 3.53 $ 2.79 $ 2.86 $ 3.35 $ (0.61)
Diluted earnings (loss) per share.............................. $ 3.53 $ 2.79 $ 2.85 $ 3.35 $ (0.61)
Dividends declared per share................................... $ 2.325 $ 2.225 $ 2.125 $ 2.025 $ 2.81
Book value per share -- end of year............................ $ 30.15 $ 29.21 $ 27.90 $ 26.86 $ 25.38
Return on average common stock equity.......................... 11.9% 9.8% 10.3% 12.8% (2.3)%
Ratio of earnings to fixed charges.............................. 1.87 1.84 2.14 2.18 0.72
- ------------------------------------------------------------------------------------------------------------------
(a) Including the effect of restricted cash pledged against future lease
obligations that is included in other investments (See Note 16 to Financial
Statements), the capitalization ratios at December 31, 1999 consisted of
60.5% long-term debt, 5.4% trust securities, .8% preferred stock and 33.3%
common stock equity.
(b) Includes the unamortized balance of the loss on reacquired preferred stock
and associated amortization. The embedded dividend cost excluding the
effects of the loss on reacquired preferred stock is 6.2% for 1999, 5.9%
for 1998, 6.6% for 1997, 6.8% for 1996, and 6.9% for 1995.
Certain financial statistics were affected by the February 1999 acquisition of
Westar/Kinetik Energy, the May 1998 acquisition of The Energy Group PLC (TEG),
the November 1997 acquisition of TXU Communications Company, the August 1997
acquisition of TXU Gas Company and the December 1995 acquisition of Eastern
Energy Limited; and for the year 1995, were affected by recording of the
impairment of certain assets. Average shares outstanding (millions) assuming
dilution for 1998 and 1997 were 266 and 232, respectively. There were no
additional diluted shares for any of the other periods presented.
Certain previously reported financial statistics have been reclassified to
conform to current classifications.
A-2
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED OPERATING STATISTICS
Year Ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
SALES VOLUMES
Electric (gigawatt hours-GWh)
Residential...................................... 54,881 47,593 36,377 35,855 31,284
Commercial and industrial........................ 84,234 79,786 61,337 59,863 55,239
Other............................................ 3,366 4,261 4,499 4,626 3,580
-------- -------- -------- -------- -------
Total electric........................... 142,481 131,640 102,213 100,344 90,103
======== ======== ======== ======== =======
Gas (billion cubic feet - Bcf)
Residential...................................... 136 98 33 -- --
Commercial and industrial........................ 158 104 24 -- --
Pipeline transportation (Bcf)......................... 551 599 255 -- --
Gas liquids (million barrels)......................... 6 6 3 -- --
US energy marketing
Gas (Bcf)........................................ 1,102 1,115 292 -- --
Electric (GWh)................................... 6,544 16,268 -- -- --
Europe wholesale energy sales
Gas (Bcf)........................................ 447 148 -- -- --
Electric (GWh)................................... 78,950 51,060 -- -- --
OPERATING REVENUES (millions)
Electric
Residential...................................... $ 3,938 $ 3,239 $ 2,248 $ 2,252 $ 1,920
Commercial and industrial........................ 3,802 3,543 2,357 2,370 2,110
Other electric utilities......................... 105 121 139 146 118
US fuel (including over/under-recovered)......... 1,688 1,788 1,696 1,671 1,418
Transmission service............................. 148 126 114 -- --
Other............................................ 729 465 108 112 73
-------- -------- -------- -------- -------
Subtotal..................................... 10,410 9,282 6,662 6,551 5,639
Earnings in excess of earnings cap............... (92) -- -- -- --
-------- -------- -------- -------- -------
Total electric............................... 10,318 9,282 6,662 6,551 5,639
-------- -------- -------- -------- -------
Gas
Residential...................................... 833 572 206 -- --
Commercial and industrial........................ 563 370 124 -- --
-------- -------- -------- -------- -------
Subtotal..................................... 1,396 942 330 -- --
Agency and management fees....................... (67) -- -- -- --
-------- -------- -------- -------- -------
Net gas...................................... 1,329 942 330 -- --
-------- -------- -------- -------- -------
Pipeline transportation............................... 116 121 57 -- --
Gas liquids........................................... 86 64 36 -- --
US energy marketing................................... 2,983 3,199 859 -- --
Europe wholesale energy sales......................... 2,168 1,199 -- -- --
Other revenues, net of intercompany eliminations (a).. 118 (71) 2 -- --
-------- -------- -------- -------- -------
Total operating revenues....................... $ 17,118 $ 14,736 $ 7,946 $ 6,551 $ 5,639
======== ======== ======== ======== =======
CUSTOMERS (end of year -- in thousands)
Electric.............................................. 6,054 6,255 2,972 2,913 2,852
Gas................................................... 2,622 2,156 1,355 -- --
Telephone access lines................................ 113 105 97 -- --
- ---------------------------------
Certain previously reported operating statistics have been reclassified to
conform to current classifications. The operating statistics include the
operations of Westar/Kinetik Energy, TXU Europe, TXU Gas Company and Eastern
Energy from their respective dates of acquisition, February 1999, May 1998,
August 1997 and December 1995.
(a) Includes TXU Communications operations.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS, MERGERS AND ACQUISITIONS
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
TXU Corp.'s principal subsidiaries, with their current and former names where
applicable, are as follows:
Current Name Former Name
- ------------ -----------
TXU Electric Company Texas Utilities Electric Company
TXU Gas Company ENSERCH Corporation
TXU Lone Star Pipeline, a division of Lone Star Pipeline Company, a
division of TXU Gas Company ENSERCH Corporation
TXU Gas Distribution, a division of Lone Star Gas Company, a division
of TXU Gas Company ENSERCH Corporation
TXU Processing Company Enserch Processing, Inc
TXU Energy Trading Company Enserch Energy Services, Inc.
TXU International Holdings Limited TU International Holdings Limited
TXU Europe Limited TXU Eastern Holdings Limited
TXU Europe Group plc Eastern Group plc
TXU Europe Energy Trading Limited Eastern Power Energy Trading
Limited
Eastern Electricity plc No change
TXU Europe Power Limited Eastern Generation Limited
Eastern Natural Gas Limited No change
TXU Australia Holdings (Partnership)
Limited Partnership No change
TXU Australia Pty. Ltd. Texas Utilities Australia Pty. Ltd.
Eastern Energy Limited No change
Kinetik Energy Pty. Ltd. No change
Westar Pty. Ltd. No change
TXU Energy Industries Company Texas Energy Industries, Inc.
TXU SESCO Company Southwestern Electric Service Company
TXU Fuel Company Texas Utilities Fuel Company
TXU Mining Company Texas Utilities Mining Company
TXU Communications Company Lufkin-Conroe Communications Co.
TXU Energy Services Company Texas Utilities Integrated Solutions,
Inc.
TXU Business Services Company Texas Utilities Services Inc.
A-4
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses.
Certain comparisons in this report have been affected by TXU Corp.'s or its
subsidiaries acquisitions of Westar and Kinetik Energy in Australia (as
described below) in February 1999, The Energy Group PLC (TEG), the former
holding company of TXU Europe Group in May 1998, TXU Communications Company (TXU
Communications) in November 1997 and TXU Gas in August 1997. (See Note 15 to
Financial Statements for information concerning reportable segments.)
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia. The excess of the purchase consideration plus acquisition costs
over the net fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of A$751 million ($475
million), which is being amortized over 40 years.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
Income Statement
Balance Sheet (average for periods)
(at December 31,) ended December 31,)
---------------- ---------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- -------
UK pounds sterling ((Pounds)) $1.6165 $1.6554 $1.6214 $1.6616 --
Australian dollars (A$) $0.6507 $0.6123 $0.6432 $0.6313 $0.7443
RESULTS OF OPERATIONS
OVERVIEW
1999 versus 1998
Earnings for 1999 reflect continued strong results from US Electric
operations and a significant improvement from US Gas operations in spite of very
mild winter weather. Results for 1999 reflect a full year of operations of TXU
Europe and operations of Westar/Kinetik Energy from its February 1999
acquisition date, while the 1998 results included operations of TXU Europe from
its May 1998 acquisition date. Results for 1999 also benefited from the sale of
TXU Corp.'s 20% ownership interest in the partnerships that operate PrimeCo
Personal Communications LP (PrimeCo). Contributions from Australian operations
were lower in 1999 primarily due to very mild winter weather. The results of US
Energy Marketing operations were less than 1998 primarily due to lower gas
margins and in part to expenditures necessary to prepare for the opening of the
Texas electricity market to competition in 2002. See Notes 3 and 13 to
Financial Statements for a discussion of the 1999 Texas electric industry
restructuring legislation (1999 Restructuring Legislation). Year-to-year
comparisons of earnings per share were affected by the issuance in 1998 of 37.3
million shares of common stock for the acquisition of TEG and the repurchase of
6.1 million and .6 million of TXU Corp. common shares in 1999 and 1998,
respectively.
Net income for 1999 was $985 million ($3.53 per share) compared with $740
million ($2.79 per share) for 1998, a 33% improvement. Results for 1999 include
a $222 million pre-tax ($145 million after tax) non-recurring gain from the sale
of the 20% interest in PrimeCo, which is recorded in other income, a $52 million
pre-tax ($31 million after tax) fuel reconciliation settlement, and non-
recurring charges totaling $17 million after-tax in Australia primarily for
integration and acquisition-related costs. Results for 1998 included a non-
recurring gain from TXU Europe's renegotiation of a long-term gas contract and
non-recurring costs
A-5
associated with the acquisition of TEG, which offset to add $7 million to 1998
net income. Excluding these non-recurring items, 1999 net income was $888
million ($3.19 per share) compared with $733 million ($2.76 per share) for 1998.
From January 1, 1998 through June 30, 1999, earnings in excess of the
earnings cap were recorded as additional depreciation of nuclear production
assets. Effective July 1, 1999, following the 1999 Restructuring Legislation,
earnings in excess of the earnings cap were recorded as a reduction of revenues,
with a corresponding regulatory liability recorded. Mitigation as a result of
the earnings cap reduced net income by $90 million in 1999 and $143 million in
1998.
Additionally from January 1, 1998 through June 30, 1999, depreciation expense
was reclassified from transmission and distribution (T&D) to nuclear production
assets. Effective July 1, 1999, following the 1999 Restructuring Legislation,
T&D depreciation expense was no longer transferred to nuclear production assets;
instead an amount equivalent to T&D depreciation was recorded as a regulatory
asset, with an offsetting amount recorded as a regulatory liability. The
regulatory asset will be amortized as it is recovered through the Distribution
portion of the business, while the regulatory liabilities will be applied
against stranded generation assets. (See Note 13 to Financial Statements.)
Additional nuclear mitigation in 1999 was $336 million, including $144 million
to reduce earnings to the earnings cap, $95 million of depreciation expense
reclassified from T&D to nuclear production assets and an amount equivalent to
$97 million of T&D depreciation expense recorded as a regulatory asset. Since
January 1998, regular nuclear depreciation and additional nuclear mitigation
total approximately $1.3 billion.
In June 1999, TXU Electric reached an agreement with all intervening parties
to refund $52 million to consumers as part of a fuel reconciliation proceeding
with the Public Utility Commission of Texas (PUC). The refund, which was
recorded as a reduction of revenues, was approximately 1% of the $5.04 billion
spent by TXU Electric during the period from July 1, 1995 through June 30, 1998
for fuel to generate electricity and appeared as a one-time credit on customer
bills during the September 1999 billing cycle.
Excluding the $92 million reduction of revenues in 1999 as a result of
earnings in excess of the earnings cap and the $52 million fuel reconciliation
disallowance, operating revenues for 1999 were 17% higher than 1998. The
increase was primarily due to the inclusion of TXU Europe for a full period in
1999 and Westar/Kinetik Energy since acquisition in February 1999.
Total operating expenses for 1999 were 18% higher than 1998. Substantially
all of the increase was due to the inclusion of TXU Europe for a full period in
1999 and Westar/Kinetik Energy since acquisition, partially offset by less
mitigation depreciation recorded by TXU Electric in 1999 versus 1998.
Total interest expense and other charges were 13% higher in 1999 than in
1998. The increase was principally due to debt incurred and assumed in
connection with the acquisitions of the European operations and Westar/Kinetik
Energy, partially offset by the favorable impact of capital restructuring and
debt reduction programs.
The overall effective income tax rate for 1999 was 31% versus 41% for 1998.
The year 1999 benefited from the discontinuation of amortization of prior-period
flow-through amounts and other tax-related regulatory assets and liabilities of
TXU Electric as a result of the 1999 Restructuring Legislation, foreign tax
credits and other tax benefits associated with non-US operations, and the
reversal of a deferred tax asset valuation allowance as a result of a 1999
change in Internal Revenue Service (IRS) regulations. Partially offsetting
these favorable items was greater non-deductible goodwill amortization in 1999
as a result of acquisitions.
A-6
1998 versus 1997
Net income of $740 million ($2.79 per share) for 1998 increased approximately
12% from 1997 net income of $660 million ($2.86 per share), reflecting strong US
Electric sales growth, the effect of extremely hot summer weather in 1998 on US
Electric sales and capital cost reductions in US Electric operations. The
results also reflect the addition of TXU Europe, with especially strong fourth
quarter results, significant improvement in US Energy Marketing operations and
strong results from Australian operations. Partially offsetting was the impact
of the rate reduction settlement at TXU Electric that became effective January
1, 1998, and increased nuclear depreciation expense that reduced 1998 income by
$143 million. Results from US Gas operations were unfavorably impacted by mild
winter weather in both the first and fourth quarters of 1998.
Results for 1998 included a non-recurring gain from TXU Europe's
renegotiation of a long-term gas contract and non-recurring costs associated
with the acquisition of TEG, which offset to add $7 million to net income.
Results for 1997 included an $81 million Fuel Disallowance (including interest)
and a $10 million charge related to the sale of sulfur dioxide allowances, which
together reduced net income by $55 million. Excluding these non-recurring
items, 1998 net income was $733 million ($2.76 per share) compared with $715
million ($3.10 per share) for 1997.
Operating revenues increased 86% to $14.7 billion for 1998 compared with $7.9
billion in 1997. The increase in operating revenues was due primarily to the
inclusion of TXU Europe's revenues for the period following the acquisition, TXU
Gas revenues for the entire period and increased revenues from US Electric
operations.
Energy purchased for resale and fuel consumed in 1998 was more than double
1997 primarily due to the inclusion of TXU Europe for the period following
acquisition, the inclusion of TXU Gas for the entire year of 1998 as compared to
the period following acquisition in 1997, and an increase in energy sales and
gas usage for US Electric operations principally due to the hotter-than-normal
summer weather in 1998.
Total operating expenses, excluding energy purchased for resale and fuel
consumed, increased 58% for 1998 compared with 1997, with 55% of the increase
attributable to the inclusion of TXU Europe and 13% of the increase attributable
to TXU Gas since the merger. Most of the remaining increase was due to
increased depreciation expense as a result of the TXU Electric earnings cap.
Total interest expense and other charges, totaled approximately $1.4 billion
in 1998 versus $852 million in 1997. The year-to-year comparison was affected
by the debt incurred or assumed in connection with the 1998 acquisition of TEG
and the 1997 acquisition of TXU Gas, partially offset by favorable impacts of
capital restructuring and debt reduction programs.
The increase in the overall effective income tax rate from 1997 to 1998 was
due primarily to the effects of TXU Europe since acquisition along with the
impact of TXU Electric's amortization of prior-period flow-through amounts
related to additional depreciation on nuclear production assets in connection
with the rate reduction agreement. (See Note 13 to Financial Statements).
A-7
SEGMENTS
Revenues and net income by operating segment are shown below.
1999 1998 1997
---------------- ---------------- -----------------
Net Net Net
Income Income Income
Revenues (Loss) Revenues (Loss) Revenues (Loss)
-------- ------ -------- ------ -------- ------
(Millions)
US Electric.......... $ 6,263 $773 $ 6,541 $ 788 $6,176 $748
US Gas............... 877 3 864 (32) 428 (2)
US Energy Marketing.. 2,983 (25) 3,199 6 859 (12)
Europe............... 6,090 280 3,601 140 -- --
Australia............ 682 6 439 31 489 17
Other/Eliminations... 223 (52) 92 (193) (6) (91)
------- ---- ------- ----- ------ ----
Consolidated...... $17,118 $985 $14,736 $ 740 $7,946 $660
======= ==== ======= ===== ====== ====
US Electric
- -----------
Segment Highlights
1999 1998 1997
-------- -------- -------
Revenues (millions):
Base rate............................................ $ 4,447 $ 4,557 $ 4,314
Transmission service................................. 148 126 114
Fuel................................................. 1,740 1,788 1,776
Fuel disallowance/sale of sulfur dioxide allowances.. (52) -- (79)
Earnings in excess of earnings cap................... (92) -- --
Other................................................ 72 70 51
-------- -------- -------
Total operating revenues........................ $ 6,263 $ 6,541 $ 6,176
======== ======== =======
Electric energy sales (gigawatt-hours)....................... 100,548 103,142 97,023
Degree days (% of normal):
Cooling................................................ 114% 130% 94%
Heating................................................ 70% 89% 106%
Impact of earnings cap (millions):
Reduction of revenues.................................. $ 92 $ -- $ --
Additional nuclear depreciation........................ 52 170 --
Tax benefits........................................... (54) (27) --
-------- -------- -------
Net earnings reduction.......................... $ 90 $ 143 $ --
======== ======== =======
Operation and maintenance expenses (millions)................ $ 1,384 $ 1,335 $ 1,277
1999 versus 1998
Net income for the US Electric segment of $773 million for 1999 was 1.9%
lower than 1998. Comparisons of net income were impacted by both a fuel
reconciliation settlement that reduced 1999 net income by $31 million and a rate
settlement agreement that became effective in January 1998 and was modified by
the 1999 Restructuring Legislation, which reduced customer rates and introduced
an earnings cap. The net effect of TXU Electric's earnings cap reduced net
income by $90 million in 1999 and $143 million in 1998. Since January 1998,
regular nuclear depreciation and additional nuclear mitigation total
approximately $1.3 billion.
A-8
Excluding the reduction of revenues as a result of the earnings cap and the
fuel reconciliation disallowance, operating revenues for 1999 were 2.1% lower
than 1998. Revenues in 1999 were $160 million less than 1998 due to the impact
of the exceptionally hot summer weather in 1998. An additional reduction in
rates effective January 1, 1999 due to the 1998 rate settlement agreement was
somewhat offset by continued strong core retail sales and revenue growth.
Electric energy sales volumes for 1999 were 2.5% lower than 1998. Fuel revenues
for 1999 were slightly lower than in 1998, primarily as a result of lower energy
sales.
Operation and maintenance expenses for 1999 were 4% higher than 1998 largely
as a result of increased PUC third party transmission tariffs. Depreciation and
amortization expense was $109 million lower in 1999 versus 1998 primarily due to
less mitigation depreciation recorded in 1999. Mitigation depreciation recorded
in 1999 was $52 million versus $170 million in 1998.
The net decrease of $62 million in interest expense and other charges for
1999 compared to 1998 was primarily due to the reacquisition of long-term debt
and remarketing of certain debt to lower interest rates.
The effective income tax rate was lower in 1999 compared to 1998 due
primarily to the discontinuation of amortization of prior-period flow-through
amounts and other tax-related regulatory assets and liabilities resulting from
the impact of the 1999 Restructuring Legislation.
1998 versus 1997
Net income of $788 million for 1998 increased approximately 5% from 1997.
Results for 1997 were reduced by an $81 million fuel disallowance (including
interest) and a $10 million charge related to the sale of sulfur dioxide
allowances, which reduced net income by $55 million. Excluding the effect of
these items, 1998 net income decreased slightly from 1997. Results for 1998
were impacted by the rate reduction settlement approved by the PUC in April 1998
that became effective January 1, 1998, and increased nuclear depreciation net of
associated income taxes that reduced 1998 income by $143 million. These effects
were partially offset by continued strong sales growth and the effect of
exceptionally hot summer weather in 1998.
Operating revenues increased approximately 6% for 1998 as compared to 1997
primarily due to an increase in base rate electricity revenues due to the
exceptionally high summer temperatures and customer growth, partially offset by
the effect of the rate reduction settlement on base rate revenues. Electric
energy sales in gigawatt-hours (GWh) were approximately 6% higher in 1998 than
in 1997. Fuel revenue, excluding the fuel disallowance in 1997, increased
slightly in 1998 primarily due to increases in fuel costs driven by increased
energy sales.
Energy purchased for resale and fuel consumed increased approximately 2%
primarily due to increased energy sales, with increased gas usage partially
offset by decreased gas prices in 1998. Total operating expenses, excluding
energy purchased for resale and fuel consumed, increased 11% for 1998 compared
to 1997 largely as a result of higher marketing incentives, increased provision
for uncollectible accounts and increased reactive maintenance expenses,
partially offset by decreased employee-related costs. TXU Electric's rate
reduction settlement resulted in additional nuclear depreciation of $353 million
in 1998; $183 million was the result of the transfer of T&D depreciation, and
$170 million was the result of TXU Electric's earnings in excess of the earnings
cap. Taxes other than income increased in 1998 primarily due to higher state
and local gross receipt taxes.
Interest expense and other charges decreased 10% in 1998 compared with 1997.
Capital restructuring and debt reduction programs favorably affected the year-
to-year comparison. Distributions on trust securities and preferred stock
dividends decreased from 1997, reflecting 1998 reacquisitions.
A-9
The effective income tax rate for 1998 was higher than in 1997 due to the
impact of amortization of prior-period flow-through amounts, which increased due
to the accelerated depreciation on nuclear production assets in conjunction with
the rate reduction agreement.
US Gas
- --------
Segment Highlights
1999 1998 1997*
------- ------- -------
Gas distribution:
Sales volumes (billion cubic feet -Bcf).. 117 130 57
Margin (millions)........................ $ 301 $ 291 $ 117
Pipeline transportation:
Transportation volumes (Bcf)............. 551 599 255
Revenues (millions)...................... $ 116 $ 121 $ 58
Gas liquids:
Sales volumes (million barrels)......... 6 6 3
Average prices ($ per barrel)............ 14.32 10.69 14.53
Plant revenues (millions)................ $ 86 $ 64 $ 36
Heating degree days (% of normal).............. 70% 89% 119%
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
1999 versus 1998
The US Gas segment had net income of $3 million for 1999 compared with a net
loss of $32 million for 1998. Strong cost controls and improved margins
contributed to the results for 1999, as did after-tax gains totaling $8 million
from the sale of assets and a reversal of a deferred tax asset valuation
allowance as a result of a 1999 change in Internal Revenue Service regulations.
Operating revenues for 1999 increased by $13 million over 1998 primarily due
to higher gas processing revenues due to a 34% improvement in natural gas
liquids prices, partially offset by lower distribution and pipeline revenues
resulting from the very mild winter weather. Gas purchased for resale
declined by $18 million in 1999 because of lower demand. Higher gas processing
fees in 1999, primarily caused by higher natural gas liquids prices, were more
than offset by cost reductions in other operation and maintenance expenses.
Depreciation and other amortization expenses increased by $7 million primarily
due to increased distribution system depreciation. Taxes other than income
decreased by $7 million from 1998 to 1999 due to lower gas receipts taxes in
1999.
1998 versus 1997
The 1998 results for the US Gas segment represent a full year of operations,
while the 1997 period is from date of acquisition of TXU Gas (August 5, 1997) to
December 31, 1997. The segment had a net loss of $32 million for 1998 versus a
net loss of $2 million for the 1997 period.
Operating revenues were $864 million for 1998 compared with $428 million for
the 1997 period. Energy purchased for resale was $375 million in 1998 and $213
million in 1997, while other operating expenses totaled $454 million in 1998
versus $178 million for 1997. The segment had other income of $4 million,
interest expense of $78 million and an income tax benefit of $6 million for
1998. In the 1997 period, the segment had other income of $2 million, interest
expense of $35 million and income tax expense of $5 million.
A-10
Results for 1998 were impacted by mild winter weather, while heating degree
days were above normal for the 1997 period. Results for 1998 included goodwill
amortization of $21 million versus $8 million in the 1997 period.
US Energy Marketing
- --------------------
Segment Highlights
1999 1998 1997*
----- ------ -----
Trading volumes:
Gas (billion cubic feet).. 1,102 1,115 292
Electric (gigawatt-hours).. 6,544 16,268 --
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
1999 versus 1998
Results for 1999 for the US Energy Marketing Segment were down significantly
due to lower-than-expected gas margins, planned costs to develop infrastructure
capabilities and unusually high natural gas prices which affected the results
from retail marketing originations. The segment had a net loss of $25 million
for 1999 compared with net income of $6 million for 1998. Operating revenues
decreased by 7% from $3,199 million in 1998 to $2,983 million in 1999 primarily
due to management's decision to decrease electricity trading. Gross margin
decreased from $46 million in 1998 to $9 million in 1999. Other operating
expenses increased by 40% from $35 million in 1998 to $49 million in 1999 due in
part to costs related to developing middle and back office infrastructure
capabilities to prepare for the opening of the Texas electricity market to
competition in 2002. Results for 1999 included other income of $4 million
related to a pre-tax gain from the sale of commercial customer accounts.
1998 versus 1997
The 1998 results for the segment represent a full year of operations, while
the 1997 period is from the date of acquisition of TXU Gas (August 5, 1997) to
December 31, 1997. The segment contributed net income of $6 million in 1998 but
had a net loss of $12 million in the 1997 period.
Operating revenues were $3,199 million for 1998 versus $859 million for the
1997 period. Sales margin was $46 million in 1998 compared with a margin loss of
$1 million in the 1997 period. Other operating expenses totaled $35 million in
1998 compared with $16 million in the 1997 period.
The 1998 results reflect an increase in segment activity and margins, partly
due to the beginning of electricity trading in 1998, while the lower results in
the 1997 period were primarily the result of trading losses, inadequate system
infrastructure and costs associated with systems that were implemented at the
end of 1997.
A-11
Europe
- ------
Segment Highlights
1999 1998*
-------- --------
Sales volumes:
Electric (gigawatt-hours - GWh).......................... 36,424 23,285
Gas (billion cubic feet- Bcf)............................ 126 72
Units distributed (GWh).................................. 33,120 19,249
Wholesale energy sales:
Electricity generated and sold to the Pool (GWh) 78,950 51,060
Gas (Bcf) 447 148
1999 1998*
--------------- ---------------
Revenues (millions): (Pounds) $ (Pounds) $
Electric................................................... 1,869 3,033 1,196 1,985
Gas........................................................ 348 565 157 260
Distribution............................................... 405 657 238 395
Wholesale energy sales..................................... 1,336 2,168 721 1,199
Intra-segment eliminations and other....................... (205) (333) (147) (238)
------ ------ ------ ------
Total........................................... 3,753 6,090 2,165 3,601
====== ====== ====== ======
By segment (millions):
Energy retail.............................................. 1,548 2,512 1,036 1,723
Energy management and generation........................... 1,759 2,854 845 1,405
Networks................................................... 428 695 253 421
Other...................................................... 18 29 31 52
------ ------ ------ ------
Total............................................ 3,753 6,090 2,165 3,601
====== ====== ====== ======
* For the period from acquisition (May 19, 1998) to December 31, 1998.
1999 versus 1998
The 1999 results for the Europe segment represent a full year of operations,
while the 1998 period is from date of acquisition (May 19, 1998) to December 31,
1998. The 1998 period also includes the 22% equity in the net income of TEG for
the period March to May 19, 1998. The Europe segment contributed net income for
1999 of $280 million compared with $140 million in the 1998 period.
The Europe segment added (Pounds)3.8 billion ($6.1 billion) to 1999 operating
revenues versus (Pounds)2.2 billion ($3.6 million) in the 1998 period. Revenues
from energy retail operations for 1999 were (Pounds)1.5 billion ($2.5 billion)
compared with (Pounds)1.0 billion ($1.7 billion) in 1998. Volumes in the gas
residential market increased in 1999 as a result of the market being fully
opened to competition. Electricity volumes have decreased due to the loss of
industrial and commercial customers in the October 1999 contract round; however,
prices have improved. Revenues from the energy management and generation
operations for 1999 were (Pounds)1.8 billion ($2.9 billion) versus (Pounds)845
million ($1.4 billion) in the 1998 period. Increased operating volumes in the
gas portfolio have increased revenues, partially offset by lower revenues in the
electricity portfolio due to lower time-weighted Pool purchase prices (weighted
for time of day sales) and reduced volumes. Revenues from the networks business
for 1999 were (Pounds)428 million ($695 million) compared with (Pounds)253
million ($421 million) in the 1998 period. GWh's distributed increased by
approximately 3% year on year, and regulated prices increased approximately 1%
from April 1999. Other revenues were (Pounds)18 million ($29 million) in 1999,
which were primarily related to the metering business. In the 1998 period,
other revenues were (Pounds)31 million ($52 million) and included metering
revenues, revenues from the telecommunications business sold in December 1998
and revenues from the modular building business sold in February 1999.
A-12
Energy purchased for resale and fuel consumed for 1999 was (Pounds)2.2
billion ($3.6 billion) compared with (Pounds)1.3 billion ($2.2 billion) in the
1998 period. Operation and maintenance expenses for the full year of 1999 were
(Pounds)706 million ($1.1 billion) versus (Pounds)379 million ($628 million) in
the 1998 period. Depreciation and amortization, including goodwill
amortization, totaled (Pounds)260 million ($421 million) in 1999 compared with
(Pounds)144 million ($240 million) in 1998.
Interest expense for 1999 was (Pounds)347 million ($563 million) compared
with (Pounds)269 million ($447 million) in the 1998 period from the date of
acquisition. The segment had interest income of (Pounds)63 million ($102
million) in 1999 versus (Pounds)64 million ($106 million) in the 1998 period.
The effective tax rate for the Europe segment was 35% in 1999 versus 46% in
the 1998 period. The rate in 1999 benefited from foreign tax credits, while the
1998 period benefited from a 1% reduction in the UK statutory tax rate and
included income that was taxed at rates less than the statutory rate. Non-
deductible expenses related to capital leases and goodwill amortization also
affected both periods.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory clearance has
been submitted to the Office of Gas and Electricity Markets (OFGEM). The joint
venture will begin operations once these clearances are obtained, which may be
as early as April 2000. By the time the joint venture starts operations, it is
expected that the combined workforce will have been reduced by approximately
400. It is anticipated that the workforce currently engaged by Eastern Energy
and London Electricity plc, will be further reduced by at least a similar number
during the joint venture's first 18 months of operations. Primarily as a result
of the creation of this joint venture, TXU Europe is expected to record a
restructuring charge of approximately $50 million in 2000. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
In June 1999, TXU Europe Group announced details of a program to restructure
the energy retailing business in order to be more cost effective in the
competitive energy markets. This program resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group also is seeking new ways to access the energy markets and to
form more partnerships with the objective of reducing costs, improving access to
customers and capitalizing on emerging new markets like the Internet.
A-13
Australia
- ---------
Segment Highlights
1999* 1998 1997
----- ----- -----
Sales volumes:
Electric (Gigawatt-hours) 5,509 5,213 5,190
Gas (Billion cubic feet) 51 -- --
Degree days:
Cooling................... 239 236 292
Heating................... 1,199 1,387 1,360
1999* 1998 1997
------------ ------------ -----------
A$ $ A$ $ A$ $
Revenues (millions):
Electric................... 567 $365 571 361 577 430
Gas........................ 200 130 -- -- -- --
Other...................... 291 187 125 78 80 59
----- ---- ----- ----- ----- ----
Total............. 1,058 682 696 439 657 489
===== ==== ===== ===== ===== ====
*Includes results of Westar/Kinetik Energy from date of acquisition of
February 24, 1999.
1999 versus 1998
TXU Australia had net income of $6 million for 1999 compared with $31 million
for 1998. Results for 1999 were affected by very mild winter weather and non-
recurring charges totaling $17 million after-tax primarily for integration and
acquisition-related costs. Net income for 1999 includes the results of
Westar/Kinetik Energy from date of acquisition on February 24, 1999.
Operating revenues rose from A$696 million ($439 million) in 1998 to A$1,058
million ($682 million) in 1999, an increase of 52%. The increase is primarily
due to revenues from the Westar/Kinetik Energy gas distribution and retailing
businesses since acquisition, higher construction revenues and increased
external electricity network charges.
Energy purchased for resale increased from A$265 million ($167 million) in
1998 to A$415 million ($268 million) in 1999. The A$150 million ($101 million)
increase includes A$110 million ($71 million) of gas purchase and distribution
costs associated with Westar/Kinetik Energy, with the remainder of the increase
due to higher purchased electricity and distribution costs as a result of a 6%
increase in energy sold and higher electricity pool prices. Operation and
maintenance expenses increased from A$193 million ($121 million) in 1998 to
A$335 million ($216 million) in 1999 due to costs associated with the
Westar/Kinetik Energy gas business and increased expenditures related to the
construction businesses. Depreciation and amortization, including goodwill
amortization, increased from A$68 million ($43 million) to A$119 million ($77
million) in 1999 primarily due to the Westar/Kinetik Energy acquisition.
Interest expense and other charges increased from A$94 million ($59 million)
in 1998 to A$203 million ($131 million) in 1999 due to an increase in
outstanding debt resulting from the acquisition of Westar/Kinetik Energy and the
initial payment under the agreement with AES Ecogen.
The effective income tax rate for the Australia segment was impacted by non-
deductible goodwill amortization and other foreign permanent differences. The
statutory tax rate in Australia will decrease from 36% to 30% between 2000 and
2001. Accordingly, TXU Australia adjusted its deferred taxes to the 30% rate
and credited deferred tax expense for $3 million in 1999.
TXU Australia sold its construction and engineering business, Enetech, in
January 2000.
A-14
1998 versus 1997
Operating revenues were A$657 million ($489 million) in 1997 and A$696
million ($439 million) in 1998. Revenues denominated in Australian dollars
increased by 6% from 1997 to 1998 due to higher construction revenues,
reflecting the full year impact of the acquisition of Streamline, a former
maintenance division of Melbourne Water. The impact on TXU Corp. revenues was a
decrease of 10% as a result of the decline in the average exchange rate from
1997 to 1998. While electricity energy sales rose marginally in 1998,
electricity sales revenues decreased slightly, principally due to lower prices,
as further classes of electricity customers were free to choose their electric
supplier. Customers with loads in excess of 160 MWh/year but less than 750 MWh
per year were able to choose their electricity supplier effective July 1, 1998.
As of December 31, 1998, TXU Australia estimated that it had lost approximately
500 GWhs as a result of customers within its franchised area electing to choose
another energy retailer to supply their energy needs. This loss was net of
gains made during the same period by TXU Australia in acquiring customers from
other retailers in Victoria and New South Wales.
Energy purchased for resale decreased 10% from A$294 million ($219 million)
in 1997 to A$265 million ($167 million) in 1998 largely due to the phasing out
of the franchise fee charged by the Victorian Government in respect of the
customer base allocated to TXU Australia during the privatization of the
electricity industry. Operation and maintenance expense increased from A$154
million ($112 million) in 1997 to A$193 million ($121 million) in 1998 primarily
due to costs associated with increased construction activity for third parties.
The reduction in interest expense from A$97 million ($73 million) in 1997 to
A$94 million ($59 million) in 1998 was attributable to both a reduction in debt
and lower interest rates.
The effective income tax rate decreased from 54% in 1997 to 45% in 1998 due
to a reduction in non-deductible franchise fee payments.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows -- Cash flows provided by operating activities before changes in
operating assets and liabilities for 1999 were $2.6 billion compared with $2.3
billion and $1.6 billion for 1998 and 1997, respectively. Changes in operating
assets and liabilities used cash of $379 million and $338 million in 1999 and
1998, respectively, but provided $15 million in 1997. The increase in each year
is primarily due to the inclusion of TXU Europe results since acquisition in
1998 and for a full year in 1999.
Cash flows used for investing activities for the year ended December 31, 1999
totaled $3.1 billion, including $1.0 billion for the acquisition of
Westar/Kinetik Energy, compared with $4.3 billion, including $2.5 billion used
for the acquisition of TEG, for 1998 and $708 million for 1997. Construction
expenditures were $1.6 billion for 1999, compared with $1.2 billion and $583
million for 1998 and 1997, respectively, primarily resulting from the inclusion
of TXU Europe since acquisition in 1998 and for a full year in 1999.
In 1998, TXU Corp. acquired TEG for $7.4 billion, including $1.4 billion
assigned to common stock issued. In 1997, TXU Corp. acquired TXU Gas for $579
million and TXU Communications for $319 million, primarily through the issuance
of common stock.
A-15
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. Any gain on the sale
of these plants will be recorded as a regulatory liability and applied against
TXU Electric's generation assets that may become stranded costs under provisions
of the 1999 Restructuring Legislation. TXU Electric anticipates completion of
the plant sales by the end of 2000. In March 2000, TXU Gas announced that it had
entered into a contract for the sale of substantially all of the assets of TXU
Processing for approximately $105 million.
In 1999, TXU Europe contributed approximately (Pounds)190 million ($308
million) for an 81% ownership interest in the joint venture company with
Pohjolan Voima Oy (PVO), Finland's second largest electricity generator, and
approximately (Pounds)40 million ($65 million) for an approximately 40% stake in
Savon Voima Oy (SVO), Finland's seventh largest electricity distributor.
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million. Proceeds from the sale were
received in January 2000.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. The offer is subject to a number of conditions, including, among
others, authorization by the CNMV, or Spanish Securities Exchange, approval by
European Union competition authorities and TXU Europe acquiring sufficient
shares such that it would hold at least 51% of Hidrocantabrico after the
transaction is completed. The transaction is expected to close in the second
quarter of 2000.
TXU Europe's offer of 21.25 euros per share values the equity of
Hidrocantabrico at 2.4 billion euros ($2.3 billion). If the offer becomes
unconditional, TXU Europe intends to finance the acquisition through bank
borrowings and the issuance of preferred securities to its parent company, TXU
International Holdings. TXU International Holdings intends to fund the purchase
of the TXU Europe preferred securities through bank borrowings guaranteed by TXU
Corp.
On March 13, 2000, TXU Corp. announced that it had entered into an agreement
to acquire Fort Bend Communication Companies, Inc. (FBCC) based in Katy, Texas,
near Houston, in a transaction that values the stock of FBCC at approximately
$167 million. FBCC common and preferred stock will be exchanged for
approximately $90 million of TXU Corp. common stock and approximately $77
million in cash, subject to certain adjustments. The transaction is expected to
close in the second quarter of 2000.
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
Future Capital Requirements --TXU Corp.'s maintenance capital construction
expenditures are estimated at $1.1 billion for 2000. Approximately 65% is
planned for US Electric and Gas operations, 23% for operations in the UK and
continental Europe, and 12% for operations in Australia, telecommunications and
other activities. Additional expenditures may be made for development
activities.
TXU Corp. will pursue potential investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and will dispose of nonstrategic assets to allow redeployment of
resources into faster growing opportunities in an effort to enhance the long-
term return to its shareholders.
A-16
During 1999, TXU Corp.'s Board of Directors increased the common stock
repurchase limit to $1.6 billion, of which $478 million had been used as of
December 31, 1999 to purchase and retire a total of 11,953,751 shares of TXU
Corp.'s issued and outstanding common stock during the four years then ended. On
March 7, 2000, TXU Corp. repurchased approximately 12.4 million shares of its
common stock for approximately $408 million. The cost of the repurchased
shares, to the extent it exceeded the estimated amount received upon their
original issuance, has been charged to retained earnings.
TXU Europe Group received government consent to build a 215 MW combined heat
and power plant for which there is a commitment of (Pounds)117 million ($189
million), most of which falls due in 2001. In addition, estimated capital
expenditures on environmental control facilities are (Pounds)43 million ($70
million) in 2000, (Pounds)50 million ($81 million) in 2001, (Pounds)40 million
($65 million) in 2002, and (Pounds)35 million ($57 million) in 2003.
External funds of a permanent or long-term nature are obtained through the
issuance of common and preferred stock, TXU Corp. or subsidiary obligated,
mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of TXU Corp. or related subsidiary (trust
securities) and long-term debt by TXU Corp. The capitalization ratios of TXU
Corp. at December 31, 1999, consisted of approximately 62% long-term debt
(including equity-linked securities), 5% trust securities, 1% preferred stock
and 32% common stock equity. Restricted cash of $1.2 billion included in other
investments collateralizes certain TXU Europe capital lease obligations.
Offsetting the cash pledge against lease obligations, the capitalization ratios
consisted of 61% long-term debt, 5% trust securities, 1% preferred stock and 33%
common stock equity.
Issuances and Retirements -- During the year ended December 31, 1999, TXU
Corp. issued, redeemed, reacquired or made scheduled principal payments on
acquisition facilities, other long-term debt, preferred stock and trust
securities for cash, as follows:
Issuances Retirements
--------- -----------
TXU Electric:
Brazos River Authority Pollution Control Bonds $ 177 $ 177
First Mortgage Bonds -- 551
Other -- 3
TXU Europe:
Senior Notes 1,500 --
Term Facility 1,225 --
Acquisition Facilities -- 1,225
Revolving Credit Facility (Tranche B) 921 514
Other 306 749
TXU Australia Holdings:
Acquisition Facilities 926 --
Other 93 --
TXU Corp.:
TXU Capital II Trust Securities 150 --
Senior Notes 925 --
All Other Subsidiaries 3 240
------ ------
Total $6,226 $3,459
====== ======
In March 2000, TXU Europe issued $150 million of 9.75% Trust Originated
Preferred Securities.
See Notes to Financial Statements for further details concerning short-term
financing, long-term debt, trust securities and preferred stock of subsidiaries.
Early redemptions of preferred stock and long-term debt may occur from time to
time in amounts presently undetermined.
A-17
Financing Arrangements -- TXU Corp., TXU Electric, TXU Gas and other
subsidiaries of TXU Corp. may issue additional debt and equity securities as
needed, including the possible future sale: (i) by TXU Electric of up to $499
million principal amount of debt securities and up to $25 million of Cumulative
Preferred Stock, and (ii) by TXU Gas of up to $600 million aggregate principal
amount of debt securities and/or preferred securities of subsidiary trusts, all
of which are currently registered with the Securities and Exchange Commission
(SEC) for offering pursuant to Rule 415 under the Securities Act of 1933. In
addition, TXU Corp. may issue up to $340 million of debt securities and up to an
aggregate of $360 million of (i) debt securities, (ii) shares of its preference
stock, or (iii) preferred securities of subsidiary trusts.
At December 31, 1999, TXU Corp., TXU Electric and TXU Gas Company had joint
US dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
1999, TXU Corp. had no borrowings outstanding under these facilities. The US
Credit Agreements were amended and restated in February 2000 and have two
facilities. Facility A provides for short-term borrowings aggregating up to $1.4
billion outstanding at any one time at variable interest rates and terminates
February 23, 2001, but may be extended by up to one year. Facility B provides
for short-term borrowings aggregating up to $1.4 billion outstanding at any one
time at variable interest rates and terminates February 25, 2005. Facility B
also provides for the issuance of up to $300 million of letters of credit. TXU
Electric's and TXU Gas' borrowings under both facilities are limited to
aggregate amounts outstanding at any one time of $1.25 billion and $650 million,
respectively.
TXU Europe and a finance subsidiary have a joint sterling-denominated line of
credit (Sterling Credit Agreement) that provides for borrowings of up to
(Pounds)1.275 billion ($2.1 billion) and has two facilities which will terminate
on March 2, 2003. As of December 31, 1999, the amended Sterling Credit
Agreement had (Pounds)750 million ($1.2 billion) of borrowings outstanding under
the term facility at an interest rate of 6.55%, and approximately (Pounds)237
million ($384 million) of non-UK borrowings outstanding under Tranche B at a
weighted average interest rate of 5.61%.
Eastern Electricity has a separate revolving credit facility of up to
(Pounds)250 million ($404 million), terminating March 2, 2003, which provides
for short-term borrowings to be used for Eastern Electricity's general corporate
purposes. No borrowings were outstanding at December 31, 1999 under this
facility.
On December 15, 1999, TXU Europe commenced a 2.0 billion euro Euro Medium
Term Note (EMTN) Program. Under the EMTN Program, TXU Europe may from time to
time issue notes on a continuing basis to one or more dealers in a principal
outstanding amount not exceeding 2.0 billion euros. As of December 31, 1999, no
notes had been issued under this program. However, in March 2000, (Pounds)225
million ($364 million) of 7.25% Sterling Eurobonds due March 8, 2030, were
issued. On the same day, an interest rate swap was entered into that converts
the interest on the new Sterling Eurobond to a variable rate based on LIBOR for
the first five years. The effective interest rate after the swap was 5.862%.
TXU Electric has facilities with financial institutions whereby it is
entitled to sell and such financial institutions may purchase, on an ongoing
basis, undivided interests in customer accounts receivable representing up
to an aggregate of $500 million. TXU Gas has a similar facility for $100
million. TXU Europe has facilities with a third party whereby Eastern
Electricity may sell up to (Pounds)300 million ($486 million) of its electricity
receivables and a finance subsidiary may borrow up to an aggregate of
(Pounds)275 million ($445 million), collateralized by future receivables, with
an overall program limit of (Pounds)550 million ($891 million). Additional
receivables are continually sold to replace those collected. At December 31,
1999, accounts receivable of TXU Electric were reduced by $500 million, TXU Gas'
were reduced by $100 million and Eastern Electricity's were reduced by
(Pounds)224 million ($362 million) to reflect the sales of receivables under
their programs and (Pounds)177 million ($286 million) of short-term loans were
outstanding collateralized by future receivables.
A-18
Quantitative and Qualitative Disclosure About Market Risk
TXU Corp. and its subsidiaries enter into derivative instruments for non-
trading purposes in order to manage market risks related to changes in interest
rates, foreign currency exchange rates and commodity prices. TXU Corp. also
enters into derivative instruments and other contractual commitments for trading
purposes through its subsidiaries TXU Energy Trading, TXU Europe and TXU
Australia. See Note 11 to Financial Statements for further discussion of TXU
Corp's risk management activities.
INTEREST RATE RISK -- The table below provides information concerning TXU
Corp.'s financial instruments as of December 31, 1999 that are sensitive to
changes in interest rates, which include debt obligations, interest rate swaps
and trust securities. TXU Corp. has entered into interest rate swaps under
which it has agreed to exchange the difference between fixed-rate and variable-
rate interest amounts calculated with reference to specified notional principal
amounts at dates that generally coincide with interest payments. For trust
securities, the table presents cash flows based on December 31, 1999 book values
and the related weighted average rates by expected redemption date. Weighted
average variable rates are based on rates in effect at the reporting date.
Expected Maturity Date
--------------------------------------------------------
(Millions, except percents) 1999 1998
There- 1999 Fair 1998 Fair
2000 2001 2002 2003 2004 after Total Value Total Value
------ ------ ----- ------ ------ ------- -------- ---------- -------- ----------
Long-term Debt
(including
current maturities)
Fixed Rate.............. $1,261 $ 533 $ 852 $ 915 $1,496 $6,679 $11,736 $10,734 $11,318 $11,912
Average interest 6.78% 7.43% 7.09% 6.64% 7.33% 7.08% 7.06% -- 7.29% --
rate...............
Variable Rate.......... -- $1,378 $ 572 $1,598 -- $ 846 $ 4,394 $ 4,394 $ 3,503 $ 3,503
Average interest -- 6.50% 6.38% 6.34% -- 5.43% 6.22% -- 5.86% --
rate...............
Trust Securities*
Fixed rate.............. -- -- -- -- -- $1,095 $ 1,095 $ 977 $ 950 $ 987
Average interest rate -- -- -- -- -- 8.03% 8.03% -- 7.93% --
Variable rate.......... -- -- -- -- -- $ 244 $ 244 $ 235 $ 243 $ 249
Average interest rate -- -- -- -- -- 7.26% 7.26% -- 6.41% --
Interest Rate Swaps
(notional amounts)
Variable to Fixed....... $1,574 $ 738 $ 449 $ 250 -- $1,242 $ 4,253 $ 25 $ 2,274 $ (132)
Average to pay rate. 5.96% 6.72% 7.27% 6.81% -- 6.23% 6.36% -- 6.67% --
Average receive rate 6.13% 5.50% 5.18% 7.26% -- 5.33% 5.75% -- 5.49% --
Fixed to variable....... $ 425 -- $ 350 -- -- $1,500 $ 2,275 $ (94) $ 515 $ 46
Average pay rate..... 6.24% -- 6.73% -- -- 6.77% 6.67% -- 5.39% --
Average receive rate. 5.11% -- 6.15% -- -- 6.65% 6.29% -- 7.37% --
*TXU Corp. or subsidiary obligated mandatorily redeemable, preferred securities
of subsidiary trusts each holding solely junior subordinated debentures of TXU
Corp. or related subsidiary.
A-19
FOREIGN CURRENCY RISK -- TXU Corp. has exposure to foreign currency risks,
primarily with the pound sterling and the Australian dollar. TXU Europe and TXU
Australia have accessed the US capital markets and issued dollar denominated
obligations. TXU Corp. and its subsidiaries enter into currency swaps, options
and forwards, where appropriate, to manage foreign currency exposure. The
following table summarizes notional amounts at the contract exchange rates,
weighted-average contractual exchange rates and estimated fair value by contract
maturity for open contracts at December 31, 1999 and 1998:
Expected Maturity Date
--------------------------------------------------
(Millions, except exchange rates) 1999 1998
There- Fair Fair
2000 2001 2002 2003 2004 after Total Value Value
----- ----- ----- ----- ----- ------ ------- ----- -----
British pound sterling $ 135 $ 135 $ 483 $ 114 $ 114 $2,569 $3,550 $(37) $(57)
Average exchange rate $1.63 $1.63 $1.62 $1.63 $1.63 $ 1.72 $ 1.69 -- --
Australian dollar -- -- -- -- -- $ 350 $ 350 $ 30 $ 53
Average exchange rate -- -- -- -- -- $ 0.72 $ 0.72 -- --
ENERGY PRICE RISK-- Non-trading Activities -- In the UK and Australia,
electricity prices are established through power pools which are controlled
through an agreement with the licensed generators and suppliers in the case of
the UK, or by a statutory, independent corporation in the case of Australia. In
both cases, substantially all power generated must be sold into and purchased
from wholesale electricity trading pools. In order to manage the exposure to
fluctuations in electricity pool prices, both TXU Europe and TXU Australia enter
into both short- and long-term derivative instruments whereby the pool price is
fixed for an agreed-upon quantity and duration by reference to an agreed-upon
strike price. In the US, as a result of continued regulation, TXU Electric and
TXU Gas have minimal exposure to energy price risk, therefore, their use of
derivative instruments is limited.
UK --The hypothetical loss in fair value of TXU Europe Group's contracts for
differences, electricity forward agreements and other contracts in existence at
December 31, 1999 and 1998 entered into for non-trading purposes arising from a
10% adverse movement in future electricity prices is estimated at (Pounds)21
million ($34 million) and (Pounds)81 million ($134 million), respectively. This
loss is calculated by modeling the contracts against an internal forecast of
Pool prices using discounted cash flow techniques. The decrease in the
hypothetical market movement results from decreases in energy purchase
commitments during 1999.
Australia -- The hypothetical loss in fair value of TXU Australia's contracts
for differences, electricity forward agreements and other contracts in existence
at December 31, 1999 entered into for non-trading purposes arising from a 10%
adverse movement in future electricity prices is estimated at A$12 million ($8
million). This loss is calculated by modeling the contracts against an internal
forecast of Pool prices using discounted cash flow techniques.
ENERGY PRICE RISK -- Trading Activities -- TXU Corp. has further positioned
itself to provide comprehensive energy products and services to a diversified
client base in the US, Europe and Australia. In the US, TXU Energy Trading
continues to engage in risk management activities, including the purchase and
sale of physical commodities and entering into futures contracts, other forward
commitments, swap agreements, exchange traded options, over-the-counter options
which are net settled or physically settled, exchange-of-futures-for physical
transactions, energy exchange transactions, storage activities, and other
contractual arrangements.
In 1999, TXU Europe and TXU Australia began offering price risk management
services to customers through a variety of financial and other instruments
including contracts for differences (swaps), virtual power stations, written
options and forward contracts.
A-20
The trading subsidiaries all manage the market risk on a portfolio basis
within limitations imposed by their respective Boards of Directors and in
accordance with TXU Corp.'s overall risk management policies. Market risks are
monitored daily, utilizing appropriate mark-to-market methodologies, which value
the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions. Each entity uses various techniques and
methodologies that simulate forward price curves in their respective markets to
estimate the size and probability of changes in market value resulting from
price movements. These techniques include, but are not limited to, sensitivity
analyses. The use of these methodologies requires a number of key assumptions
including the selection of confidence levels, the holding period of the
positions, and the depth and applicability to future periods of historical price
information.
The portfolio subjects the entities to a number of risks and costs associated
with the future contractual commitments, including price risk, credit risk
associated with counter parties, product location (basis) differentials, market
liquidity. Each entity continuously monitors the valuation of identified risks
and adjusts the portfolio valuation based on present market conditions.
Reserves are established in recognition that certain risks exist until delivery
of energy has occurred, counterparties have fulfilled their financial
commitments and related financial instruments mature or are closed out. Price
and credit risk are further managed within the established trading policies and
limits established for each trading entity which are evaluated on a daily basis.
US -- TXU Energy Trading uses market-implied volatilities to determine its
exposure to market risk. Market risk is estimated as the potential loss in fair
value resulting from at least a 15% change in market factors, which may differ
from actual results. Using a two standard deviation change, the most adverse
change in fair value at December 31, 1999 and 1998, as a result of this
analysis, was a reduction of $2.3 million and $2.1 million, respectively.
UK -- The hypothetical loss in fair value of TXU Europe Group's contracts
for differences and other energy purchase contracts in existence at December 31,
1999 entered into for trading purposes arising from a 10% adverse movement in
future electricity prices is estimated at (Pounds)4 million ($6 million).
Australia -- The hypothetical loss in fair value of TXU Australia's trading
contracts and other energy purchase contracts in existence at December 31, 1999
entered into for trading purposes arising from a 10% adverse movement in future
electricity prices is estimated at A$31 million ($20 million).
Regulation and Rates
US -- Electric Industry Restructuring -- Project teams have been established
to prepare TXU Electric for a competitive environment. These teams are
comprised of resources from all facets of TXU Corp.'s business and formulate
short- and long-term strategy to address the implementation of the 1999
Restructuring Legislation. TXU Corp. continues to analyze the long-range
implications of the 1999 Restructuring Legislation on their respective
financial positions, results of operations and cash flows.
TXU Gas Distribution employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting to
about $7.5 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 1999. Rate cases supporting an additional $8.3 million in
annualized revenue increases were pending in a number of cities as of December
31, 1999. The $8.3 million of annualized revenue increases includes $6.3
million for the general rate increase filed for in August 1999 by TXU Gas
Distribution in the cities of Dallas, University Park, Highland Park and
Cockrell Hill, Texas. On February 23, 2000, the City of Dallas denied the rate
increase. Similar action is expected in the other cities. TXU Gas Distribution
intends to appeal this action to the RRC, which has the power to review and
overturn the denial, and seek in excess of $9 million in rate relief. TXU Gas
is unable to predict the outcome of the appeal.
A-21
In October 1999, TXU Lone Star Pipeline filed with the RRC a Statement of
Intent to change the city gate rate for gas transported for subsequent
distribution to residential and commercial customers. The filing requests a
general increase in annual revenues of approximately $20 million. Action on
this request is anticipated in the second quarter of 2000. TXU Lone Star
Pipeline is unable to predict the outcome of this case.
TXU Electric and certain other regulated subsidiaries of TXU Corp. have
several rate requests or refunds pending or on appeal, see Note 13 to Financial
Statements.
Europe -- The regulation of distribution and supply charges is currently
subject to review by OFGEM. Since the implementation of the initial price
controls in 1990, there have been two reviews of the supply price control.
These reviews have resulted in reduced distribution and supply prices, but
because related costs have also been reduced, the effect on TXU Europe has not
been material. In December 1999, OFGEM issued a final report, proposing a range
of substantial net revenue reductions for the distribution businesses of all
regional electricity companies in the UK. The final proposals for Eastern
Electricity incorporated an initial reduction in allowed revenues for regulated
units of 28% beginning April 1, 2000 with further annual reductions of 3% for
the next four years, adjusted for inflation. TXU Europe Limited and TXU Europe
Group estimate that the effect on distribution revenues will be a reduction of
about (Pounds)73 million ($118 million) in the year ending December 31, 2000
and of about (Pounds)100 million ($162 million) in the year ending December
31, 2001. The net impact on TXU Europe is less than these reductions, as a
portion of the reduction is a pass through of costs to the energy retail
business.
In November 1999, OFGEM issued a final report on price adjustments for the
electricity supply businesses. The final report was accepted by TXU Europe
Group in December 1999 and the supply price adjustments become effective April
1, 2000. The directly controlled tariffs will be reduced by an average of 7.1%
from April 1, 2000 as required by the new controls. TXU Europe estimates that
the effect on electricity supply revenues will be a reduction in annual revenues
of approximately (Pounds)15 million ($24 million).
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply published new proposals for generation
licenses in order to promote fair competition in the generation and trading of
electricity. The proposals seek to ensure that generators with positions of
significant market power who are able to exert an upward influence on prices in
the Pool ensure that their prices closely reflect their costs and that they do
not take unfair advantage of any imperfections in the operation of the Pool. The
Director General has proposed that these restrictions should cease one year
after the introduction of the New Electricity Trading Arrangements. TXU Europe
Limited has played an active part in these discussions and accepted the Director
General's proposals on February 7, 2000. However, five generators rejected
the proposals and the matter has been referred to the UK Competition Commission.
TXU Europe Limited does not anticipate that these new proposals will have a
material adverse effect on its revenues.
Australia -- TXU Australia is subject to regulation by the Office of the
Regulator General (ORG). The distribution tariffs applying to Eastern Energy
are effective until December 31, 2000. The ORG plans to issue by September 2000
a determination of the maximum prices for use of the electrical network for the
period from December 31, 2000 to at least December 31, 2005. TXU Australia is
not able to predict the outcome of this review or the impact on its financial
position or results of operations. There is a risk that the ORG could determine
pricing arrangements significantly below current levels.
Maximum retail prices for remaining franchise electricity customers, those
with usage below 160 MWh/year, are fixed by the Tariff Order until December 31,
2000. Retail prices for non-franchise customers are subject to competitive
forces and are not regulated. All electricity retail prices are scheduled to be
deregulated beginning January 1, 2001. TXU Australia is analyzing how the long-
range implications of the unregulated market will affect its financial position,
results of operations and cash flows, and is developing a strategy to address
these issues.
A-22
The distribution tariffs applying to Westar are effective until December 31,
2002, at which time a price review process will occur prior to new tariffs being
approved by the ORG for the next five-year period. After the next period,
prices will be set for periods nominated by Westar and approved by ORG. TXU
Australia is not able to predict the outcome of this review or the impact on its
financial position or results of operations.
Gas retail customers with loads above 460,000 Mcf/year are currently subject
to competition. All remaining customers will be able to choose their own gas
retailer by September 1, 2001. While the market is expected to be competitive,
TXU Australia does not expect the same intensity of competition in the early
stages of competition as has been experienced in electricity in Victoria. The
most profitable segment of the retail gas market in Victoria is the class of
customers with load below 4,600 Mcf/year, which will become contestable in
September 2001. As with competition in the electric industry, TXU Australia's
expectation is that the competition, and therefore the downward pressure on
margins, will be less intense for these smaller customers.
Although TXU Corp. cannot predict future regulatory or legislative actions
or any changes in economic and securities market conditions, no changes are
expected in trends or commitments, other than those discussed in this report,
which might significantly alter its basic financial position, results of
operations or cash flows. (See Note 14 to the Financial Statements.)
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" , as extended, is effective for
TXU Corp. beginning January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires the recognition of derivatives as either assets or liabilities in the
statement of financial position and the measurement of those instruments at fair
value. TXU Corp. is currently evaluating the impact the adoption of this
standard will have on its financial position and results of operations.
EUROPEAN MONETARY UNION (EMU)
Most of TXU Europe Group's income and expenditures are denominated in pounds
sterling or in the currencies of other countries which either are not eligible
or have not joined the first stage of the EMU. TXU Europe Limited therefore
does not expect the new currency of countries which participate in the EMU to
have a material impact on those operations for so long as the UK continues to
remain outside the EMU. TXU Europe has prepared its accounting systems to be
able to deal with the receipt of payments in euro's.
Year 2000 Issues
Beginning in 1996, a thorough and detailed program was undertaken throughout
the TXU Corp. System to address Year 2000 (Y2K) issues. TXU Australia initiated
a Y2K program in 1997. The focus was on information technology (IT) mainframe-
based application systems, IT related hardware, operating systems and desk top
software, and embedded systems such as process controls for energy production
and delivery and business-unit-owned applications. Applications and equipment
in each of these categories were inventoried and categorized based on
criticality to TXU Corp.'s business operations. Assessments of potential
impact due to Y2K issues were completed in 1999. Remediation and testing work
in each of these areas was completed by December 31, 1999. A further upgrade to
the Eastern Electricity billing system was performed on January 20, 2000 to
ensure that all mainframe billing systems would function correctly on February
29, 2000.
During the year 2000 rollover, the US, TXU Europe and TXU Australia customers
experienced no service interruptions due to computer hardware, software and
imbedded chips. A few minor problems occurred with internal systems, but these
were considered to be no more than normal system issues.
A-23
The total costs incurred to date associated with TXU Corp.'s Y2K efforts were
approximately $59 million. These costs reflect new, incremental costs and the
reallocation of resources in pre-existing maintenance budgets. These costs were
expensed as incurred and a total of approximately $5 million is expected to be
spent during the year 2000. There can be no assurance that these estimates will
not change as a result of the discovery of unexpected additional remediation
work.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. and its subsidiaries
(TXU Corp.) contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Although TXU Corp. believes
that in making any such statement its expectations are based on reasonable
assumptions, any such statement involves uncertainties and is qualified in its
entirety by reference to the following important factors, among others, that
could cause the actual results of TXU Corp. to differ materially from those
projected in such forward-looking statements: (i) prevailing governmental
policies and regulatory actions, including those of the Federal Energy
Regulatory Commission (FERC), the PUC, the Railroad Commission of Texas (RRC),
the Nuclear Regulatory Commission (NRC), the Office of the Regulator General of
Victoria, Australia, and the Office of Electricity Regulatory covering England,
Wales and Scotland (OFFER) in the UK with respect to allowed rates of return,
industry and rate structure, purchased power and investment recovery, operations
of nuclear generating facilities, acquisitions and disposal of assets and
facilities, operation and construction of plant facilities, decommissioning
costs, present or prospective wholesale and retail competition, changes in tax
laws and policies and changes in and compliance with environmental and safety
laws and policies, (ii) weather conditions and other natural phenomena, (iii)
unanticipated population growth or decline, and changes in market demand and
demographic patterns, (iv) competition for retail and wholesale customers, (v)
pricing and transportation of crude oil, natural gas and other commodities, (vi)
unanticipated changes in interest rates, rates of inflation or foreign exchange
rates, (vii) unanticipated changes in operating expenses and capital
expenditures, (viii) capital market conditions, (ix) competition for new energy
development opportunities, (x) legal and administrative proceedings and
settlements, (xi) inability of the various counterparties to meet their
obligations with respect to TXU Corp.'s financial instruments, (xii) changes in
technology used and services offered by TXU Corp., and (xiii) significant
changes in TXU Corp.'s relationship with its employees and the potential adverse
effects if labor disputes or grievances were to occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Corp. undertakes no obligation to update any forward-
looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time and it is not possible for TXU Corp. to
predict all of such factors, nor can it assess the impact of each such factor or
the extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
A-24
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of Texas Utilities Company (doing business as TXU Corp.) is
responsible for the preparation, integrity and objectivity of the consolidated
financial statements of TXU Corp. and its subsidiaries and other information
included in this report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. As
appropriate, the statements include amounts based on informed estimates and
judgments of management.
The management of TXU Corp. has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance with
management's authorization and financial records are reliable for preparing
consolidated financial statements. Management believes that the system of
control provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period. Key elements in this system include the
effective communication of established written policies and procedures,
selection and training of qualified personnel and organizational arrangements
that provide an appropriate division of responsibility. This system of control
is augmented by an ongoing internal audit program designed to evaluate its
adequacy and effectiveness. Management considers the recommendations of the
internal auditors and independent auditors concerning TXU Corp.'s system of
internal control and takes appropriate actions which are cost-effective in the
circumstances. Management believes that, as of December 31, 1999, TXU Corp.'s
system of internal control was adequate to accomplish the objectives discussed
herein.
The Board of Directors of TXU Corp. addresses its oversight responsibility
for the consolidated financial statements through its Audit Committee, which is
composed of directors who are not employees of TXU Corp. The Audit Committee
meets regularly with TXU Corp.'s management, internal auditors and independent
auditors to review matters relating to financial reporting, auditing and
internal control. To ensure auditor independence, both the internal auditors
and independent auditors have full and free access to the Audit Committee.
The independent auditing firm of Deloitte & Touche LLP is engaged to audit,
in accordance with generally accepted auditing standards, the consolidated
financial statements of TXU Corp. and its subsidiaries and to issue their report
thereon.
/s/ ERLE NYE /s/ D. W. BIEGLER
- ---------------------------------- ---------------------------------
Erle Nye, Chairman of the Board D. W. Biegler, President and
and Chief Executive Chief Operating Officer
/s/ BRIAN N. DICKIE /s/ PHILIP G. TURBERVILLE
- ---------------------------------- ---------------------------------
Brian N. Dickie, Philip G. Turberville,
Emerging Businesses Europe Chief Executive
Group President
/s/ MICHAEL J. McNALLY /s/ JERRY W. PINKERTON
- ---------------------------------- ---------------------------------
Michael J. McNally, Executive Vice Jerry W. Pinkerton, Controller and
President and Chief Financial Principal Accounting Officer
A-25
INDEPENDENT AUDITORS' REPORT
Texas Utilities Company:
We have audited the accompanying consolidated balance sheets of Texas Utilities
Company (doing business as TXU Corp.) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, cash flows and common stock equity for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of TXU Europe Limited, formerly known as TXU
Eastern Holdings Limited (a consolidated subsidiary) for the year ended December
31, 1998, which statements reflect total assets constituting 36% of consolidated
total assets and total revenues constituting 24% of consolidated total revenues
for that year. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for TXU Europe Limited, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of TXU Corp. and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 16, 2000
A-26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of TXU Europe Limited (formerly known
as TXU Eastern Holdings Limited) and Subsidiaries:
In our opinion, the consolidated balance sheet and the related statements of
consolidated income, of comprehensive income, of common stock equity and of cash
flows present fairly, in all material respects, the financial position of TXU
Europe Limited (formerly known as TXU Eastern Holdings Limited) and Subsidiaries
at December 31, 1998, and the results of their operations and their cash flows
for the period from formation (February 5, 1998) to December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards in the United Kingdom which do not differ
significantly with those in the United States and which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
London, England
March 3, 1999
A-27
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars, Except per Share Amounts
OPERATING REVENUES............................................. $17,118 $14,736 $7,946
------- ------- ------
OPERATING EXPENSES
Energy purchased for resale and fuel consumed............. 9,257 7,914 3,276
Operation and maintenance................................. 3,354 2,570 1,539
Depreciation and other amortization....................... 1,080 1,025 645
Goodwill amortization..................................... 191 122 21
Taxes other than income................................... 642 642 559
------- ------- ------
Total operating expenses............................ 14,524 12,273 6,040
------- ------- ------
OPERATING INCOME............................................... 2,594 2,463 1,906
OTHER INCOME (DEDUCTIONS) -- NET............................... 262 45 (49)
------- ------- ------
INCOME BEFORE INTEREST, OTHER CHARGES
AND INCOME TAXES.......................................... 2,856 2,508 1,857
------- ------- ------
INTEREST INCOME................................................ 134 139 32
INTEREST EXPENSE AND OTHER CHARGES
Interest.................................................. 1,456 1,300 763
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU obligated....................................... 18 -- --
Subsidiary obligated................................ 78 74 70
Preferred stock dividends of subsidiaries................. 14 16 28
Allowance for borrowed funds used during construction
and capitalized interest............................. (10) (9) (9)
------- ------- ------
Total interest expense and other charges............ 1,556 1,381 852
------- ------- ------
INCOME BEFORE INCOME TAXES..................................... 1,434 1,266 1,037
INCOME TAX EXPENSE............................................. 449 526 377
------- ------- ------
NET INCOME..................................................... $ 985 $ 740 $ 660
======= ======= ======
Average shares of common stock outstanding (millions).......... 279 265 231
Per share of common stock:
Basic earnings............................................ $3.53 $2.79 $2.86
Diluted earnings.......................................... $3.53 $2.79 $2.85
Dividends declared........................................ $2.325 $2.225 $2.125
See Notes to Financial Statements.
A-28
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
NET INCOME..................................................... $ 985 $ 740 $ 660
----- ----- -----
OTHER COMPREHENSIVE INCOME (LOSS) --
Net change during period, net of tax effects:
Foreign currency translation adjustments.................. (46) (67) (99)
Unrealized holding gains (losses) on investments.......... 34 (13) --
Minimum pension liability adjustments..................... 2 (6) --
----- ----- -----
Total............................................. (10) (86) (99)
----- ----- -----
COMPREHENSIVE INCOME........................................... $ 975 $ 654 $ 561
===== ===== =====
See Notes to Financial Statements.
A-29
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
CASH FLOWS -- OPERATING ACTIVITIES
Net income................................................................... $ 985 $ 740 $ 660
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel).......... 1,448 1,340 839
Deferred income taxes -- net............................................ 293 288 168
Investment tax credits -- net........................................... (23) (23) (23)
Gains from the sale of assets........................................... (251) (21) --
Reduction of revenues for earnings in excess of earnings cap............ 92 -- --
Other................................................................... 11 19 (5)
Changes in operating assets and liabilities:
Accounts receivable................................................ 423 (167) (442)
Inventories........................................................ 45 (29) (14)
Accounts payable................................................... (336) 317 334
Interest and taxes accrued......................................... (58) (24) 40
Other working capital.............................................. 189 (268) 90
Over/(under) - recovered fuel revenue -- net of deferred taxes..... (59) 26 (21)
Energy marketing risk management assets and liabilities............ (211) (4) (13)
Other -- net....................................................... (372) (189) 41
------- ------- -------
Cash provided by operating activities.......................... 2,176 2,005 1,654
------- ------- -------
CASH FLOWS -- FINANCING ACTIVITIES
Issuances of securities:
Acquisition and interim facilities...................................... 926 3,429 --
Other long-term debt.................................................... 5,150 2,310 823
Mandatorily redeemable, preferred securities of subsidiary trusts, each
holding solely junior subordinated debentures of the obligated company:
TXU obligated.................................................. 150 230 --
Subsidiary obligated........................................... -- 150 493
Common stock............................................................ 1 8 --
Retirements/repurchase of securities:
Acquisition and interim facilities..................................... (1,225) (2,183) --
Other long-term debt/obligations....................................... (2,234) (1,504) (1,573)
Preferred stock of subsidiaries........................................ -- (114) (553)
Subsidiary obligated, mandatorily redeemable, preferred securities of
subsidiary trusts, each holding solely junior subordinated debentures
of the obligated subsidiary....................................... -- (47) --
Common stock........................................................... (251) (25) (149)
Change in notes payable:
Commercial paper....................................................... (1,100) 1,311 1,102
Banks.................................................................. 99 242 (543)
Common stock dividends paid.................................................. (639) (573) (479)
Debt premium, discount, financing and reacquisition expenses................. (95) (215) (41)
------- ------- -------
Cash provided by (used in) financing activities................. 782 3,019 (920)
------- ------- -------
CASH FLOWS -- INVESTING ACTIVITIES
Acquisition of businesses (net of cash acquired of $20 in 1999, $3,265 in
1998 and $26 in 1997)...................................................... (1,013) (2,534) 5
Construction expenditures................................................... (1,632) (1,168) (583)
Nuclear fuel................................................................ (54) (51) (74)
Other....................................................................... (441) (587) (56)
------- ------- -------
Cash used in investing activities.............................. (3,140) (4,340) (708)
------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............................. (54) 68 2
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... (236) 752 28
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE.................................... 796 44 16
------- ------- -------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE....................................... $ 560 $ 796 $ 44
======= ======= =======
See Notes to Financial Statements.
A-30
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------------
1999 1998
---- ----
Millions of Dollars
PROPERTY, PLANT AND EQUIPMENT
United States (US):...............................................................
Electric...................................................................... $23,599 $23,131
Gas distribution and pipeline................................................. 1,378 1,212
Other......................................................................... 1,004 844
------- -------
Total.................................................................. 25,981 25,187
Less accumulated depreciation................................................. 8,159 7,426
------- -------
Net of accumulated depreciation....................................... 17,822 17,761
Construction work in progress................................................. 314 346
Nuclear fuel (net of accumulated amortization: 1999 -- $635; 1998 -- $549)... 171 201
Held for future use........................................................... 24 24
Reserve for regulatory disallowances.......................................... (836) (836)
------- -------
Net US property, plant and equipment................................... 17,495 17,496
Europe -- Electric and other (net of accumulated depreciation: 1999 -- $424; 1998
-- $147).......................................................................... 4,394 4,428
Australia -- Electric and gas distribution (net of accumulated depreciation: 1999
-- $196; 1998 -- $121)............................................................ 1,751 943
------- -------
Net property, plant and equipment...................................... 23,640 22,867
------- -------
INVESTMENTS
Goodwill (net of accumulated amortization: 1999 -- $345; 1998 -- $154)............ 7,516 6,830
Other investments................................................................. 2,876 2,482
------- -------
Total investments...................................................... 10,392 9,312
------- -------
CURRENT ASSETS
Cash and cash equivalents........................................................ 560 796
Accounts receivable (net of allowance for uncollectible accounts: 1999 -- $50;
1998 -- $50).................................................................... 1,492 1,887
Inventories -- at average cost:
Materials and supplies...................................................... 261 267
Fuel stock.................................................................. 230 276
Gas stored underground...................................................... 131 133
Energy marketing risk management assets........................................... 619 825
Deferred income taxes............................................................. 2 88
Other current assets.............................................................. 605 308
------- -------
Total current assets.................................................. 3,900 4,580
------- -------
OTHER ASSETS
Regulatory assets................................................................ 1,750 1,817
Long-term prepayments............................................................ 577 527
Deferred debits.................................................................. 482 404
------- -------
Total other assets.................................................... 2,809 2,748
------- -------
Total......................................................... $40,741 $39,507
======= =======
See Notes to Financial Statements.
A-31
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
December 31,
--------------------------
1999 1998
---- ----
Millions of Dollars
CAPITALIZATION
Common stock without par value................................................... $ 6,795 $ 6,940
Retained earnings................................................................ 1,691 1,448
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments.................................... (169) (123)
Unrealized holding gains (losses) on investments............................ 21 (13)
Minimum pension liability adjustments....................................... (4) (6)
------- -------
Total common stock equity........................................... 8,334 8,246
Preferred stock of subsidiaries:
Not subject to mandatory redemption.......................................... 190 190
Subject to mandatory redemption.............................................. 21 21
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of the obligated company:
TXU obligated........................................................ 368 223
Subsidiary obligated................................................. 971 969
Long-term debt, less amounts due currently...................................... 16,325 15,134
------- -------
Total capitalization................................................ 26,209 24,783
------- -------
CURRENT LIABILITIES
Notes payable:
Commercial paper............................................................. 1,903 2,055
Banks........................................................................ 1,385 896
Long-term debt due currently.................................................... 1,288 1,071
Accounts payable................................................................ 1,442 1,747
Energy marketing risk management liabilities.................................... 525 838
Dividends declared.............................................................. 172 164
Taxes accrued................................................................... 474 490
Interest accrued................................................................ 310 310
Other current liabilities....................................................... 898 698
------- -------
Total current liabilities.......................................... 8,397 8,269
------- -------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes............................................... 3,938 3,718
Investment tax credits.......................................................... 524 547
Other deferred credits and noncurrent liabilities............................... 1,673 2,190
------- -------
Total deferred credits and other noncurrent liabilities............ 6,135 6,455
------- -------
COMMITMENTS AND CONTINGENCIES (Note 14)
------- -------
Total......................................................... $40,741 $39,507
======= =======
See Notes to Financial Statements.
A-32
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
COMMON STOCK without par value-- authorized shares --
1,000,000,000
Balance at beginning of year........................... $6,940 $5,587 $4,787
Issued for acquisitions:
The Energy Group PLC (37,316,884 shares)........ -- 1,449 --
TXU Gas Company (15,861,272 shares)............. -- -- 565
TXU Communications Company (8,727,730 shares)... -- -- 317
Direct Stock Purchase and Dividend Reinvestment
Plan (198,184 shares)............................. -- 8 --
Issued for Conversion of Convertible Debentures
(77,963 shares)................................... -- 3 --
Issued for Long-Term Incentive Compensation Plan
(1999 -- 208,200 shares; 1998 -- 68,000 shares;
and 1997 -- 61,000 shares)...................... 6 4 3
Common stock repurchased and retired (1999 --
6,134,500 shares; 1998-- 565,771 shares; and
1997 -- 4,015,000 shares)....................... (152) (14) (91)
Treasury Stock -- Long-Term Incentive Plan Trusts... (4) (26) --
Equity-linked securities............................ -- (76) --
Special allocation to Thrift Plan by trustee........ 8 8 8
Other............................................... (3) (3) (2)
------ ------ ------
Balance at end of year ( 1999 -- 276,406,519 shares;
1998 -- 282,332,819 shares; and 1997 --
245,237,559 shares)............................... 6,795 6,940 5,587
------ ------ ------
RETAINED EARNINGS
Balance at beginning of year............................ 1,448 1,312 1,203
Net income......................................... 985 740 660
Dividends declared on common stock................. (647) (597) (496)
Common stock repurchased and retired............... (99) (11) (59)
LESOP dividend deduction tax benefit and other..... 4 4 4
------ ------ ------
Balance at end of year................................. 1,691 1,448 1,312
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year............................ (142) (56) 43
Change during the year.............................. (10) (86) (99)
------ ------ ------
Balance at end of year.................................. (152) (142) (56)
------ ------ ------
COMMON STOCK EQUITY......................................... $8,334 $8,246 $6,843
====== ====== ======
See Notes to Financial Statements.
A-33
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, MERGERS, ACQUISITIONS AND DISPOSITIONS
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited, (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc, (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses.
In May 1998, TXU Corp. acquired The Energy Group PLC (TEG), the former
holding company of TXU Europe Group for $7.4 billion. TXU Corp. recorded its
approximate 22% equity interest in the net income of TEG for the period from
March 1998 to May 19, 1998 and has accounted for TEG and TXU Europe Group as
consolidated subsidiaries since May 19, 1998. The excess of the purchase
consideration plus acquisition costs over the net fair value of tangible and
identifiable intangible assets acquired and liabilities assumed, reflecting
final purchases adjustments, resulted in goodwill of (Pounds)3.6 billion ($5.8
billion), which is being amortized over 40 years. The process of determining the
fair value of assets acquired, liabilities assumed and contingencies existing at
the acquisition date was completed in 1999 and resulted in an increase in
goodwill of approximately (Pounds)263 million ($425 million) over the
preliminary allocation, primarily due to refinement of estimates.
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia. The excess of the purchase consideration plus acquisition costs
over the net fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of A$751 million ($475
million), which is being amortized over 40 years.
Since the acquisition of Westar/Kinetik Energy was treated for accounting
purposes as a purchase business combination, no financial or other information
is presented for periods prior to the date of acquisition. Consolidated pro
forma income and earnings per share for the years ended December 31, 1999 and
1998, assuming the acquisition of Westar/Kinetik Energy had occurred at the
beginning of the periods, would not have differed significantly from reported
results.
Unaudited pro forma consolidated results assuming that the acquisition of TEG
in 1998 and ENSERCH Corporation (now TXU Gas) and Lufkin-Conroe Communications
(now TXU Communications) in 1997 had occurred at the beginning of each period
presented are as follows. Expenses of the acquisitions, the 22% equity in
earnings of TEG and a one-time windfall tax imposed on TEG have been eliminated.
On a pro forma basis for 1998 and 1997, respectively, revenues were $17.3
billion and $14.8 billion, net income was $849 million and $842
A-34
million, basic earnings per share of common stock were $3.01 and $2.95 and
diluted earnings per share were $3.01 and $2.94.
In November 1999, TXU Europe formed a joint venture with certain shareholders
of Pohjolan Voima Oy (PVO), Finland's second largest electricity generator. As
part of the transaction, TXU Europe contributed approximately (Pounds)190
million ($308 million) for an 81% ownership interest in the joint venture
company TXU Nordic Energy. The joint venture is entitled to the output from
approximately 584 megawatts (MW) of PVO's thermal generating capacity. In
addition, TXU Europe made an approximate 40% investment in Savon Voima Oy
(SVO), a regional electricity distributor in central Finland for approximately
(Pounds)40 million ($65 million).
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. These plants have an
aggregate generating capacity of 3,116 MW, or approximately 15% of TXU
Electric's generating capacity. Any gain on the sale of the plants will be
recorded as a regulatory liability and applied against TXU Electric's generation
assets that may become stranded costs under provisions of the electric utility
restructuring legislation passed by the 1999 Texas Legislature (1999
Restructuring Legislation). (See Note 3). TXU Electric plans to sell the
plants, together with all associated assets, including land, lakes, water
rights, air permits, emission allowances and fuel transportation contracts. TXU
Electric anticipates entering into a tolling agreement with the new owners to
receive the capacity and energy from these plants for a portion of the peak load
season of 2001 and purchasing any remaining requirements on the open market.
TXU Electric anticipates completion of the plant sales by the end of 2000.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory clearance has
been submitted to the Office of Gas and Electricity Markets (OFGEM). The joint
venture will begin operations once these clearances are obtained, which may be
as early as April 2000. By the time the joint venture starts operations, it is
expected that the combined workforce will have been reduced by approximately
400. It is anticipated that the workforce currently engaged by Eastern Energy
and London Electricity plc, will be further reduced by at least a similar number
during the joint venture's first 18 months of operations. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million, which resulted in a $222
million pre-tax gain ($145 million after-tax) and is recorded in other income.
Proceeds from the sale were received in January 2000 and have been reflected in
the December 31, 1999 balance sheet in Other Current Assets.
A-35
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of TXU Corp. and its majority owned subsidiaries, including its business trusts.
All intercompany items and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates are accounted for by the equity method.
Certain previously reported amounts have been reclassified to conform to current
classifications. All dollar amounts in the financial statements and notes to
financial statements, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
Use of Estimates -- The preparation of TXU Corp.'s financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense during the periods.
In the event estimates and/or assumptions prove to be different from actual
amounts, adjustments are made in subsequent periods to reflect more current
information. No material adjustments, other than those disclosed elsewhere
herein, were made to previous estimates during the current year.
System of Accounts -- The accounting records of TXU Electric are maintained
in accordance with the Federal Energy Regulatory Commission's (FERC) Uniform
System of Accounts as adopted by the Public Utility Commission of Texas (PUC).
TXU Gas Distribution Company (TXU Gas Distribution) and TXU Lone Star Pipeline
Company (TXU Lone Star Pipeline), divisions of TXU Gas, are subject to the
accounting requirements prescribed by the National Association of Regulatory
Utility Commissioners (NARUC). TXU Europe Group separately prepares regulatory
accounts under accounting requirements specified by the Office of Gas and
Electricity Markets.
Regulatory Assets and Liabilities --The financial statements of TXU Electric
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effect of Certain Types of Regulation." As a result of the
1999 Restructuring Legislation, the electricity generation portion of TXU
Electric's business no longer meets the criteria to apply SFAS No. 71. (See
Notes 3 and 13).
Property, Plant and Equipment -- US electric and gas utility plant is stated
at original cost less certain regulatory disallowances. The cost of property
additions to US electric (transmission, distribution and generation prior to
July 1, 1999) and gas utility plant includes labor and materials, applicable
overhead and payroll-related costs and an allowance for funds used during
construction (AFUDC). Other property, including non-US property, is stated at
cost.
Interest Capitalized and Allowance For Funds Used During Construction --
AFUDC is a cost accounting procedure whereby amounts based upon interest charges
on borrowed funds and a return on equity capital used to finance construction
are added to US utility plant.
Prior to July 1, 1999, TXU Electric capitalized AFUDC for all of its
expenditures for ongoing construction work in progress and nuclear fuel in
process not otherwise allowed in rate base by regulatory authorities. Because
of the 1999 Restructuring Legislation effective July 1, 1999, TXU Electric began
recording AFUDC only on T&D construction work in progress, and interest during
construction of generation assets has been capitalized as appropriate. For
1999, 1998 and 1997, TXU Electric used AFUDC rates of 9.0%, 8.0% and 7.9%,
respectively.
A-36
Depreciation of Property, Plant and Equipment -- Depreciation of TXU Corp.'s
property, plant and equipment is generally based upon an amortization of the
original cost of depreciable properties on a straight-line basis over the
estimated service lives of the properties. Depreciation also includes an amount
for decommissioning costs for TXU Electric's nuclear powered electric generating
station (Comanche Peak), which is being accrued over the lives of the units.
Consolidated depreciation as a percent of average depreciable property for TXU
Corp. approximated 3.6% for 1999, 3.0% for 1998 and 2.6% for 1997. The fair
value of the acquired UK power stations under capital lease is amortized to
expense ratably over the remaining estimated economic lives of the power
stations, which extend to 2018. The successful efforts method is used to
account for UK natural gas fields. Depletion is charged on a unit-of-production
basis.
Goodwill -- Goodwill represents the excess of the purchase price paid over
the estimated fair value of the assets acquired and liabilities assumed for each
company acquired and is being amortized over 40 years.
Valuation of long-lived assets -- TXU Corp. evaluates the carrying value of
goodwill and long-lived assets to be held and used when events and circumstances
warrant such a review. The carrying value of goodwill and long-lived asset is
considered impaired when the projected undiscounted cash flows are less than the
carrying value. In that event, a loss will be recognized based on the amount by
which the carrying value exceeds the fair market value. Fair market value is
determined primarily by available market valuations or, if applicable,
discounted cash flows.
Amortization of Nuclear Fuel and Refueling Outage Costs -- The amortization
of nuclear fuel in the reactors (net of regulatory disallowances) is calculated
on the units-of-production method and is included in nuclear fuel expense. TXU
Electric accrues a provision for costs anticipated to be incurred during the
next scheduled refueling outage for Comanche Peak as permitted by the PUC of
Texas.
Foreign Currency Translation -- The assets and liabilities of non-US
operations denominated in local currencies are translated at rates in effect at
year end. Revenues and expenses are translated at average rates for the
applicable periods. Generally, local currencies are considered to be the
functional currency, and adjustments resulting from such translation are
included in other comprehensive income, a separate component of common stock
equity.
Marketable Securities -- TXU Corp and subsidiaries classify all of their
marketable securities as available for sale. Available for sale securities are
carried at fair value with the unrealized gains and losses reported as a
component of accumulated other comprehensive income or loss in common stock
equity. Declines in fair value that are other than temporary are reflected in
income.
Derivative Instruments -- TXU Corp. and its subsidiaries participation in
derivative transactions, except for energy marketing activities, have been
designated primarily for hedging purposes and instruments are not held or issued
for trading purposes. Amounts paid or received under interest rate swap
agreements are accrued as interest rates change and are recognized over the life
of the agreements as adjustments to interest expense. The impact of changes in
the market value of the derivative instruments, or other contractual agreements
in connection with the wholesale purchases of electric energy by TXU Europe
Group and TXU Australia, which serve as hedges, are deferred until the related
transaction is completed.
Energy Marketing Activities --TXU Corp., through its energy marketing
subsidiaries, TXU Energy Trading Company, TXU Europe Energy Trading Limited and
TXU Australia, enters into a variety of transactions, involving physical
commodity and derivative instruments. TXU Corp. uses the mark-to-market method
of accounting for trading activities. (See Note 11.)
A-37
Revenues -- Electric and gas sales revenues are recognized when services are
provided to customers on the basis of periodic cycle meter readings and include
an estimated accrual for the value of electricity and gas provided from the
meter reading date to the end of the period. US electric and gas revenues
include billings under approved rates and adjustments under various mechanisms
to recover or refund the cost of fuel and purchased power costs that are above
or below the level included in base rates. (See Note 13 for a discussion of
Regulations and Rates.)
Income Taxes --TXU Corp. and its US subsidiaries file a consolidated
federal income tax return, and federal income taxes are allocated to
subsidiaries based upon their respective taxable income or loss. Investment tax
credits are amortized to income over the estimated service lives of the
properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities. Certain provisions of
SFAS No. 109 provide that regulated enterprises are permitted to recognize such
adjustments as regulatory tax assets or tax liabilities if it is probable that
such amounts will be recovered from, or returned to, customers in future rates.
Income Taxes on Undistributed Earnings of non-US Subsidiaries -- TXU Corp.
intends to reinvest the earnings of its non-US subsidiaries into those
businesses. Accordingly, no provision has been made for taxes which would be
payable if such earnings were to be repatriated.
Earnings Per Share -- Basic earnings per share applicable to common stock are
based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share include the effect of potential common shares
resulting from the assumed exercise of all outstanding stock options, settlement
of forward stock purchase agreements and conversion of the convertible
subordinated debentures of TXU Gas for the period outstanding (converted in
1998). For the years ended December 31, 1999, 1998 and 1997; 193,194; 677,269
and 999,492 shares, respectively, were added to the average shares outstanding.
For the years ended December 31, 1998 and 1997, $.9 million and $1.5 million
respectively, of after-tax interest expense was added to earnings applicable to
common stock for the purpose of calculating diluted earnings per share.
Consolidated Cash Flows -- For purposes of reporting cash and cash
equivalents, temporary cash investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents.
Changes in Accounting Standards -- SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as extended, is effective for TXU Corp.
beginning January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires the
recognition of derivatives as either assets or liabilities in the statement of
financial position and the measurement of those instruments at fair value. TXU
Corp. is currently evaluating the impact the adoption of this standard will have
on its financial position and results of operations.
A-38
3. ACCOUNTING IMPACT OF THE RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY IN
TEXAS
Electric Industry Restructuring -- The 1999 Restructuring Legislation, among
other matters, continues the stipulation in Docket 18490 that earnings in excess
of the earnings cap be used as mitigation to the cost of nuclear production
assets (see Note 13); authorizes competition in the retail and generation
markets for electricity beginning January 1, 2002; provides for the recovery of
generation-related and purchased power related stranded costs and generation-
related regulatory assets; requires reductions in nitrogen oxide and sulfur
dioxide emissions; requires a rate freeze for all retail customers until January
1, 2002 and certain rate reductions for residential and small commercial
customers for up to five years thereafter; and sets certain limits on capacity
owned and controlled by power generation companies. Certain provisions of the
1999 Restructuring Legislation may be subject to different interpretation. By
September 1, 2000, each electric utility must separate from its regulated
activities its customer energy services business activities that are otherwise
already widely available in the competitive market. By January 1, 2002, each
electric utility must separate ("unbundle") its business into the following
units: a power generation company, a retail electric provider and a T&D company
or separate T&D companies. A power generation company generates electricity
that is intended to be sold at wholesale. In general, a power generation
company may not own a T&D facility and may not have a certificated service area.
A retail electric provider sells electric energy to retail customers and may not
own or operate generation assets. A T&D company may only own or operate
facilities to transmit or distribute electricity.
Accounting Impact of the Restructuring -- Regulatory Assets and Liabilities -
---------------------------------
- - The financial statements of TXU Electric reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with SFAS No. 71. As
a result of the 1999 Restructuring Legislation, the electricity generation
portion of TXU Electric's business no longer meets the criteria to apply
regulatory accounting principles. Accordingly, application of SFAS No. 71 to
the generation portion of TXU Electric's business was discontinued as of June
30, 1999. TXU Electric's T&D operations continue to meet the criteria for
recognition of regulatory assets and liabilities. The 1999 Restructuring
Legislation provides for the recovery of net generation-related regulatory
assets existing at December 31, 1998. Such generation-related regulatory assets
will be amortized as recovered through the Distribution portion of the
business. In addition, fuel costs will be fully recoverable, subject to
regulatory review, during the transition period that extends to January 1, 2002.
As a result, management believes the economic benefit of all net regulatory
assets related to the generation business will be recovered.
Generation Production Assets -- TXU Electric anticipates that a portion of
-----------------------------
the cost of its generation production assets and power purchase contracts may be
identified as stranded costs under the legislation and become subject to a
future quantification of the economic value of such assets in 2004. The 1999
Restructuring Legislation provides that 100% of such stranded costs will be
recovered from customers. TXU Electric has performed an impairment analysis of
generation assets under the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires a company to forecast future net cash flows from operating
the asset, on an undiscounted basis excluding carrying costs, and to compare the
sum of those cash flows with the net carrying value of the asset. Under this
test, if the undiscounted net cash flows exceed the net carrying value, no
impairment exists for accounting purposes. TXU Electric has forecasted the net
cash flows of its generating assets and determined that the undiscounted net
cash flows exceed the net carrying value of those plants. Accordingly, for
accounting purposes, there is no impairment. Generation-related plant assets at
December 31, 1999 were approximately $9.7 billion, net of accumulated
depreciation.
Investment Tax Credits -- TXU Electric has unamortized deferred investment
----------------------
tax credits (ITCs) of approximately $426 million applicable to its generation
business. The unamortized ITCs are temporary differences under generally
accepted accounting principles for which a deferred income tax asset has been
recorded. Under regulatory accounting, a regulatory liability also has been
recorded. It is uncertain under applicable regulations whether, and to what
extent, the customers will ultimately benefit from the unamortized ITCs and/or
the related regulatory liability. Upon final determination by the PUC, TXU
Electric expects that the amount of unamortized
A-39
ITCs not applicable to customers will be amortized over the remaining life of
the generation plants. Also, upon final determination by the PUC, TXU Electric
expects that the regulatory liability related to the ITCs that is not applicable
to customers will be written off as an extraordinary credit to income.
4. SHORT-TERM FINANCING
At December 31, 1999, TXU Corp. had outstanding short-term borrowings
consisting of commercial paper of $1,903 million and bank borrowings of $1,385
million. During the years 1999 and 1998, TXU Corp.'s average amounts outstanding
for short-term borrowings, including amounts classified as long-term, were
$3,732 million and $3,131 million, respectively. Weighted average interest rates
on short-term borrowings were 6.04% and 6.46% at December 31, 1999 and 1998,
respectively.
At December 31, 1999, TXU Corp., TXU Electric and TXU Gas Company have joint
US dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
1999, TXU Corp. had no borrowings outstanding under these facilities. The US
Credit Agreements were amended in February 2000 and have two facilities.
Facility A provides for short-term borrowings aggregating up to $1.4 billion
outstanding at any one time at variable interest rates and terminates February
23, 2001, but may be extended by up to one year. Facility B provides for short-
term borrowings aggregating up to $1.4 billion outstanding at any one time at
variable interest rates and terminates February 25, 2005. Facility B also
provides for the issuance of up to $300 million of letters of credit. TXU
Electric's and TXU Gas' borrowings under both facilities are limited to an
aggregate amount outstanding at any one time of $1.25 billion and $650 million,
respectively.
An Eastern Electricity Revolving Credit Facility provides for short-term
borrowings for general corporate purposes of up to (Pounds)250 million ($404
million) outstanding at any one time and terminates March 2, 2003. No
borrowings were outstanding at December 31, 1999 under this facility.
TXU Australia bank borrowings at December 31, 1999 included a A$413 million
($269 million) Subordinated Acquisition Facility and a A$275 million ($179
million) Tranche A of the Senior Acquisition Facility related to the funding of
the acquisition of Westar/Kinetik Energy. The interest rates on these borrowings
at December 31, 1999 were 7.035% and 6.075%, respectively (See Note 5.)
Certain non-US subsidiaries had revolving credit agreements (denominated in
both foreign currencies and US dollars) aggregating approximately $106 million,
of which $83 million was outstanding at December 31, 1998. During 1999, all of
the facilities were repaid and terminated.
TXU Europe has a facility with a third party whereby it may borrow up to
(Pounds)275 million ($445 million), collateralized by future receivables of
Eastern Electricity, through a short-term note issue arrangement. At December
31, 1999, borrowings of (Pounds)177 million ($286 million) were outstanding
under this facility. These borrowings bear interest at an annual rate on
commercial paper rates plus 0.225%, which was 5.63% at December 31, 1999. The
program has an overall limit of (Pounds)550 million ($891 million), including a
(Pounds)300 million ($486 million) sale of receivables program (see Note 16).
At December 31, 1999, TXU Europe and TXU Finance (No. 2) Limited had a joint
sterling-denominated line of credit under a credit facilities agreement
(Sterling Credit Agreement). The Sterling Credit Agreement, as amended March
1999, includes a (Pounds)200 million ($323 million) revolving credit facility
(Tranche A) with a 364-day maturity. At December 31, 1999, there were no
borrowings outstanding under this facility. (See Note 5 for discussion of long-
term facilities.)
A-40
5. LONG-TERM DEBT
December 31,
------------------
1999 1998
-------- --------
First mortgage bonds, fixed rate (6.25% to 10.44% due 2001 to 2025)............. $ 2,254 $ 2,276
Pollution control series:
Brazos River Authority:
Fixed rate (3.7% to 7.875% due 2021 to 2033)............................. 863 902
Taxable series (6.090% due 2023) (a)..................................... 89 116
Variable rate (3.54% to 5.85% due 2022 to 2034) (b) (c).................. 466 400
Sabine River Authority of Texas:
Fixed rate (5.55% to 8.25% due 2020 to 2022)............................. 199 199
Variable rate (4.5% to 5.25% due 2022 to 2030) (c)....................... 182 182
Trinity River Authority of Texas:
Flexible rate (5.28% to 5.55% due 2022 to 2032) (c)...................... 51 51
Secured medium-term notes, fixed rate (6.41% to 9.7%, due 2001 to 2003).......... 159 315
Debt assumed for purchase of utility plant (d)................................... 148 151
TXU Electric Floating Rate Debentures due 2000 (5.474%).......................... -- 350
TXU Electric 7.17% Senior Debentures due 2007.................................... 300 300
TXU Europe:
Bonds (7.25% to 10.8% due 2004 to 2029)...................................... 2,058 1,935
Senior notes (6.15% to 6.75% due 2002 to 2009) (e)........................... 1,488 --
Rent factoring agreement (weighted average rate of 7.35%, due 1999 to 2001).. 307 708
Capital leases (See Note 14)................................................. 946 855
Other long-term debt......................................................... 611 679
Senior notes:
TXU Corp. (6.2% to 7.105% due through 2008).................................. 1,425 625
Various subsidiaries (6.25% to 22.755% due 2003 to 2016)..................... 1,062 1,279
TXU Gas Company Remarketed Reset Notes due 2008 (f).............................. 125 125
TXU Corp. Equity-linked securities (6.37% to 6.50% due 2003 and 2004) (i)........ 700 700
TXU Corp. 5.94% mandatory putable/remarketable securities (h).................... 375 375
Credit facilities:
TXU Australia (5.523% due 2001 and 6.275% due 2002)......................... 944 417
TXU Europe sterling credit facility (g)..................................... 1,596 1,324
TXU Corp.................................................................... -- 816
Other....................................................................... -- 82
Unamortized premium and discount and fair value adjustments...................... (23) (28)
------- -------
Total long-term debt, less amounts due currently.................... $16,325 $15,134
======= =======
- ----------------------------------------------
(a) Interest rates in effect at December 31, 1999 are presented. Taxable
pollution control series are in a flexible rate mode. Series 1991D bonds due
2021 are secured by an irrevocable letter of credit with maturities in
excess of one year. Series 1993 bonds due 2023 will be remarketed for
periods of less than 270 days and are secured by an irrevocable letter of
credit with maturities in excess of one year.
(b) Interest rates in effect at December 31, 1999 are presented. These series
are in a flexible mode with varying interest rates and, while in such mode,
will be remarketed for periods of less than 270 days and are secured by an
irrevocable letter of credit with maturities in excess of one year.
(c) Interest rates in effect at December 31, 1999 are presented. These series
are in a daily or multiannual mode with varying interest rates and are
supported by either municipal bond insurance policies and standby bond
purchase agreements or are secured by irrevocable letters of credit with
maturities in excess of one year.
(d) In 1990, TXU Electric purchased the ownership interest in Comanche Peak of
Tex-La Electric Cooperative of Texas, Inc. (Tex-La) and assumed debt of Tex-
La payable over approximately 32 years. The assumption is secured by a
mortgage on the acquired interest.
(e) TXU Europe has interest rate swaps in effect with an aggregate notional
amount of $1.5 billion that convert the fixed rate Senior Notes to a
floating rate based on LIBOR, which is 6.82% at December 31, 1999. These
swaps mature on the dates of the underlying notes.
(f) In July 1998, the interest rate was reset to a fixed rate of 6.56% payable
until July 1, 2005.
(g) Represents a Sterling Credit Agreement, which consists of a term loan of
$1.2 billion with an interest rate of 6.554% and four Tranche B Revolvers in
the total amount of $384 million with interest rates ranging from 4.041% to
7.134% at December 31, 1999. Interest rate swaps in place at December 31,
1999 convert a portion of the borrowings under the Sterling Credit Agreement
to fixed rates, with notional amounts of (Pounds)400 million ($647 million)
maturing 2001 at an average rate of 6.71% and (Pounds)400 million ($647
million) maturing in 2008 at an average rate of 6.45%.
(h) The notes are mandatorily putable to a dealer for remarketing on October 15,
2001. TXU Corp. will be required to repurchase the notes in the event they
are not remarketed.
(i) Equity-linked securities consist of senior notes initially sold with
purchase contracts under which the holder will purchase from TXU Corp. on
settlement dates in 2001 and 2002, a number of its shares of common stock
equal to a specified rate (based on a formula using the market price of TXU
Corp.'s common stock). TXU Corp. has 50 million authorized shares of serial
preference stock having a par value of $25 per share, none of which has been
issued.
A-41
TXU Electric's first mortgage bonds are secured by a mortgage and deed of
trust with a major financial institution. Electric plant of TXU Electric is
generally subject to the lien of its mortgage. Certain variable rate debt of
TXU Electric requires periodic remarketing. Because TXU Electric intends to
remarket these obligations, and has the ability to refinance if necessary, they
have been classified as long-term debt.
TXU Corp. has an interest rate swap on $125 million of its Floating Rate
Senior Notes maturing in 2000 that converts the interest rate to a fixed rate of
4.55%.
Europe -- The Sterling Credit Agreement, as amended in March 1999, provides
------
for borrowings of up to (Pounds)1.275 billion ($2.1 billion) in various
currencies with interest rates based on the prevailing rates in effect in the
countries in which the borrowings originate. The Sterling Credit Agreement has
two facilities: a (Pounds)750 million ($1.2 billion) term facility which will
terminate March 2, 2003 and a (Pounds)525 million ($849 million) revolving
credit facility which has a (Pounds)200 ($323 million) million 364-day tranche
(Tranche A - see Note 4) and a (Pounds)325 million ($525 million) tranche
(Tranche B) which terminates March 2, 2003. At December 31, 1999, the Sterling
Credit Agreement had (Pounds)750 million ($1.2 billion) of borrowings
outstanding under the term facility at an interest rate of 6.55% and (Pounds)237
million ($384 million) of borrowings in various currencies outstanding under
Tranche B at a weighted average interest rate of 5.61%.
TXU Europe Limited has various other interest rate swaps in addition to those
described in notes (e) and (g) in the table above on subsidiary borrowings and a
portfolio hedge with notional amounts aggregating (Pounds)408 million ($660
million) to swap floating rate interest to fixed rates. These swaps mature in
2000 through 2008 and have a weighted average fixed rate of 6.47%.
On December 15, 1999, TXU Europe commenced a 2.0 billion euros Euro Medium
Term Note Program. Under the Euro Medium Term Note Program, TXU Europe may from
time to time issue notes on a continuing basis to one or more dealers in a
principal outstanding amount not exceeding 2.0 billion euros. As of December
31, 1999, no notes have been issued under this program.
In May 1999, a subsidiary of TXU Europe issued $1.5 billion of Senior Notes.
Shortly thereafter, TXU Europe entered into various interest rate and currency
swaps that in effect changed the interest rate on the borrowings from fixed to
variable based on LIBOR and fixed the principal amount to be repaid in sterling.
On October 14, 1999, TXU Europe entered into additional swaps that in effect
changed the interest rate on the borrowings to a fixed rate payable in sterling.
In December 1999, the Senior Notes were exchanged in a transaction registered
with the US Securities and Exchange Commission for similar Senior Notes that
could be traded publicly in US markets.
Australia -- At December 31, 1999, TXU Australia had a A$1.1 billion ($716
---------
million) Senior Acquisition Facility with a group of banking institutions, and
TXU Australia and Eastern Energy had a A$413 million ($269 million)
Subordinated Acquisition Facility with a banking institution to fund the
acquisition of Westar/Kinetik Energy. The Senior Acquisition Facility is
composed of a A$275 million ($179 million) short-term facility (Tranche A- see
Note 4); a A$220 million ($143 million) revolving cash advance facility (Tranche
B); and a A$605 million ($394 million) term facility (Tranche C). In February
2000, Tranche A was extended to December 29, 2000 and the expiration of Tranche
B and Tranche C were extended to February 24, 2002. The Subordinated Acquisition
Facility expires June 30, 2000 (see Note 4). As of December 31, 1999, there was
A$1.5 billion ($984 million) outstanding under these facilities.
At December 31, 1999, TXU Australia had interest rate swaps denominated in
Australian dollars with an aggregate notional amount of A$2.3 billion ($1.5
billion) to swap floating rate interest to fixed rates at a weighted average
fixed rate of 6.34%. In addition, TXU Australia had interest rate swaps
denominated in US dollars with notional amounts of $250 million maturing in 2006
and $100 million maturing in 2016 to swap fixed rate interest to floating rates
(6.55% at December 31, 1999).
A-42
Sinking fund and maturity requirements for the years 2000 through 2004 under
long-term debt instruments in effect at December 31, 1999, were as follows:
Year
----
2000...................................... $1,288
2001...................................... 2,558
2002...................................... 1,427
2003...................................... 2,513
2004...................................... 1,496
6. TXU CORP. OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF TXU CORP. OR RELATED SUBSIDIARY (TRUST SECURITIES)
Statutory business trusts have been established as wholly-owned financing
subsidiaries (Trusts) of TXU Corp., TXU Electric and TXU Gas (parent companies)
for the purposes, in each case, of issuing trust securities and holding Junior
Subordinated Debentures issued by the Trust's parent company (Debentures). TXU
Corp. Capital I and II and TXU Electric Capital I and III Trust Securities have
a liquidation preference of $25 per unit, and TXU Electric Capital IV and V and
TXU Gas Capital I Trust Securities have a liquidation preference of $1,000 per
unit. The only assets of each Trust are Debentures of its parent company having
a principal amount set forth under "Trust Assets" in the table below. The
interest on Trust assets matches the distributions on the Trust Securities.
Each Trust will use interest payments received on the Debentures it holds to
make cash distributions on the Trust Securities it has issued.
The Trust Securities are subject to mandatory redemption upon payment of the
Debentures at maturity or upon redemption. The Debentures are subject to
redemption, in whole or in part at the option of the parent company, at 100% of
their principal amount plus accrued interest, after an initial period during
which they may not be redeemed and at any time upon the occurrence of certain
events. The carrying value of the Trust Securities is increased periodically to
equal the redemption amounts at the mandatory redemption dates with a
corresponding increase in Trust Securities distributions.
A-43
The statutory business trust subsidiaries of TXU Corp., TXU Electric and TXU
Gas had Trust Securities outstanding, as follows:
Trust Securities Trust Assets Maturity
--------------------------------------------- --------------------- --------
Units (000's) Amount Amount
---------------------- --------------------- ---------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Corp.
- ---------
TXU Corp. Capital I
(7.25% Series).......... 9,200 9,200 -- $ 223 $ 223 $ -- $ 237 $ 237 $ -- 2029
TXU Corp. Capital II
(8.7% Series)........... 6,000 -- -- 145 -- -- 155 -- -- 2034
------ ------ ------ ------ ------ ----- ------ ------ -----
Total TXU Corp...... 15,200 9,200 -- 368 223 -- 392 237 --
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Electric
- -------------
TXU Electric Capital I
(8.25% Series).......... 5,871 5,871 5,871 141 141 141 155 155 155 2030
TXU Electric Capital II
(9.00% Series).......... -- -- 1,991 -- -- 47 -- -- 52 --
TXU Electric Capital III
(8.00% Series).......... 8,000 8,000 8,000 194 194 194 206 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Securities)(a)........... 100 100 100 97 96 98 103 103 103 2037
TXU Electric Capital V
(8.175% Series).......... 400 400 400 392 392 395 412 412 412 2037
------ ------ ------ ------ ------ ----- ------ ------ -----
Total TXU Electric.. 14,371 14,371 16,362 824 823 875 876 876 928
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(b)............. 150 150 -- 147 146 -- 155 155 -- 2028
------ ------ ------ ------ ------ ----- ------ ------ -----
Total................ 29,721 23,721 16,362 $1,339 $1,192 $ 875 $1,423 $1,268 $ 928
====== ====== ====== ====== ====== ===== ====== ====== =====
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring 2002, effectively fixes the rate on the TXU Electric
Capital IV securities at 7.183%.
(b) Interest rate swaps effectively fix the rate on $100 million of the TXU Gas
Floating Rate Trust Securities at 6.629% and at 6.444% on the remaining $50
million of the Trust Securities to July 1, 2003.
Each parent company owns the trust securities issued by its subsidiary trust
and has effectively issued a full and unconditional guarantee of such trust's
securities.
A-44
7. PREFERRED STOCK OF SUBSIDIARIES OF TXU CORP.
Shares Outstanding Amount Redemption Price Per Share
Dividend Rate December 31, December 31, December 31, 1999
- ------------- ------------------- ------------------ ---------------------------
1999 1998 1999 1998
------- ------- ------ ------
Thousands of Shares
Not Subject to Mandatory Redemption:
- ------------------------------------
TXU Electric (cumulative, without par value, entitled upon liquidation to $100 a share: authorized 17,000,000 shares)
- ---------------------------------------------------------------------------------------------------------------------
$4.00 to $5.08 series............... 379 379 $ 38 $ 38 $101.79 to $112.00
7.98 series....................... 261 261 26 26 (b)
7.50 series (a)................... 308 308 30 30 (b)
7.22 series (a)................... 221 221 21 21 (b)
----- ----- ----- -----
Total....................... 1,169 1,169 115 115
----- ----- ----- -----
TXU Gas (entitled upon liquidation to stated value per share; authorized 2,000,000 shares)
- ------------------------------------------------------------------------------------------
Adjustable Rate Preferred Stock:....
Series F (c)...................... 75 75 75 75 1,000.00
----- ----- ----- -----
Total........................ 1,244 1,244 $ 190 $ 190
===== ===== ===== =====
TXU Electric -- Subject to Mandatory Redemption (d)
- ---------------------------------------------------
$6.98 series........................ 107 107 $ 11 $ 11 (b)
6.375 series...................... 100 100 10 10 (b)
----- ----- ----- -----
Total........................ 207 207 $ 21 $ 21
===== ===== ===== =====
- ------------------------------------
(a) The preferred stock series is the underlying preferred stock for depositary
shares that were issued to the public. Each depositary share represents one
quarter of a share of underlying preferred stock.
(b) Preferred stock series is not redeemable at December 31, 1999.
(c) Stated value $1,000 per share. The preferred stock series is the underlying
preferred stock for depositary shares that were issued to the public. Each
depositary share represents one-fortieth of a share for ($25 per share).
Dividend rates are determined quarterly, in advance, based on certain US
Treasury rates. At December 31, 1999, the Series F bears a dividend rate of
5.42%.
(d) TXU Electric is required to redeem at a price of $100 per share plus
accumulated dividends a specified minimum number of shares annually or semi-
annually on the initial/next dates shown below. These redeemable shares may
be called, purchased or otherwise acquired. Certain issues may not be
redeemed at the option of TXU Electric prior to 2003. TXU Electric may
annually call for redemption, at its option, an aggregate of up to twice the
number of shares shown below for each series at a price of $100 per share
plus accumulated dividends.
Minimum Redeemable Initial/Next Date of
Series Shares Mandatory Redemption
------- ----------------- --------------------
$ 6.98 50,000 annually July 1, 2003
6.375 50,000 annually October 1, 2003
The carrying value of preferred stock subject to mandatory redemption is
being increased periodically to equal the redemption amounts at the mandatory
redemption dates with a corresponding increase in preferred stock dividends.
A-45
8. COMMON STOCK EQUITY
TXU Corp. has a Direct Stock Purchase and Dividend Reinvestment Plan (DRIP),
an Employee's Thrift Plan of the Texas Utilities Company System (Thrift Plan)
and an Employee Stock Purchase and Savings Plan of ENSERCH (EN$AVE). During the
last three years, most of the requirements under the DRIP, Thrift Plan and
EN$AVE plans have been met through open market purchases of TXU Corp.'s common
stock. In 1998, approximately $8 million in common stock of TXU Corp. was
issued to the plans. No amounts of common stock were issued to the plans in
1999.
At December 31, 1999, the Thrift Plan had an obligation of $249 million
outstanding in the form of a note, which TXU Corp. purchased from the original
third-party lender and recorded as a reduction to common equity. At December 31,
1999, the Thrift Plan trustee held 4,902,009 shares of common stock (LESOP
Shares) of TXU Corp. under the leveraged employee stock ownership provision of
the Thrift Plan. LESOP Shares are held by the trustee until allocated to Thrift
Plan participants when required to meet TXU Corp.'s obligations under terms of
the Thrift Plan. The Thrift Plan uses dividends on the LESOP Shares held and
contributions from TXU Corp., if required, to repay interest and principal on
the note. Common stock equity increases at such time as LESOP Shares are
allocated to participants' accounts although shares of common stock outstanding
include unallocated LESOP Shares held by the trustee. Allocations to
participants' accounts in each of the years 1999, 1998, and 1997 increased
common stock equity by $8 million each year.
The Long-Term Incentive Compensation Plan is a comprehensive, stock-based
incentive compensation plan, providing for discretionary awards (Awards) of
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units,
bonus stock and other stock-based awards. The maximum number of shares of
common stock for which Awards may be granted under the plan is 2,500,000.
During 1999, 1998 and 1997, the Board of Directors authorized the award of
208,200, 68,000 and 61,000 shares, respectively, of restricted common stock,
which were issued subject to performance and vesting requirements over a three-
to five-year period.
TXU Europe offers a Long-Term Incentive Plan, a Sharesave and a Loyalty Award
Plan to eligible UK-based employees. TXU Corp. applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its employee
share plans. Compensation costs recorded for these plans was $15 million, $3
million and $344 thousand in 1999, 1998 and 1997, respectively. Had
compensation costs been determined based on SFAS 123, there would have been no
significant difference in the compensation expense recognized.
Effective with the Merger of TXU Gas with TXU Corp., outstanding options for
TXU Gas common stock were exchanged for options for 532,913 shares of TXU
Corp.'s common stock exercisable at prices ranging from $7.03 to $37.71 per
share, and TXU Gas was precluded from awarding further options. The estimated
fair value of these options of $3.2 million was accounted for as a part of the
cost of the acquisition. At December 31, 1999, 218,046 of these options
remained outstanding and exercisable.
At December 31, 1999, 31,331,993 shares of the authorized but unissued common
stock of TXU Corp. were reserved for issuance and sale pursuant to the above
plans, for equity-linked securities and for other purposes.
During 1999, TXU Corp.'s Board of Directors increased the common stock
repurchase limit to $1.6 billion, of which $478 million had been used as of
December 31, 1999 to purchase and retire a total of 11,953,751 shares of TXU
Corp.'s issued and outstanding common stock during the four years then ended.
The cost of the repurchased shares, to the extent it exceeded the estimated
amount received upon their original issuance, has been charged to retained
earnings.
A-46
At December 31, 1999, TXU Corp. had two equity purchase agreements with
separate financial institutions to purchase up to $200 million each of TXU
Corp.'s common stock. The timing and amount of these purchases are made at the
direction of management. The repurchase price is the weighted average price per
share the financial institutions paid plus commissions and interest. The
agreements expire in November and December 2000.
TXU Corp. has 50 million authorized shares of serial preference stock having
a par value of $25 per share, none of which has been issued.
Shareholders Rights Plan -- On February 19, 1999, the Board of Directors
adopted a shareholder rights plan pursuant to which shareholders were granted
rights to purchase one one-hundreth of a share of Series A Preference Stock
(Rights) for each share of TXU Corp.'s common stock held.
In the event that any person acquires more than 15% of TXU Corp.'s
outstanding common stock, the Right becomes exercisable, entitling each holder
(other than the acquiring person or group) to purchase that number of shares of
securities or other property of TXU Corp. having a market value equal to two
times the exercise price of the Right. If TXU Corp. were acquired in a merger
or other business combination, each Right would entitle its holder to purchase a
number of the acquiring company's common shares having a market value of two
times the exercise price of the Right. In either case, TXU Corp.'s Board of
Directors may choose to redeem the Rights before they become exercisable. TXU
Corp.'s Board declared a dividend of one Right for each outstanding share of
Common Stock. Rights were distributed to shareholders of record on March 1,
1999.
9. INCOME TAXES
The components of TXU Corp.'s provisions for income taxes are as follows:
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Current:
US Federal...................................... $ 110 $ 174 $ 182
State........................................... 17 29 40
Non-US.......................................... 19 72 --
----- ----- -----
Total......................................... 146 275 222
----- ----- -----
Deferred:
US Federal...................................... 170 208 175
State........................................... 18 1 (17)
Non-US.......................................... 138 65 20
----- ----- -----
Total......................................... 326 274 178
----- ----- -----
Investment tax credits............................ (23) (23) (23)
----- ----- -----
Total......................................... $ 449 $ 526 $ 377
===== ===== =====
A-47
Reconciliation of income taxes computed at the federal statutory rate to
provision for income taxes:
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
Income before income taxes:
Domestic.................................................. $1,016 $ 951 $1,002
Non-US.................................................... 418 315 35
------ ------ ------
Total............................................... 1,434 1,266 1,037
Preferred stock dividends of subsidiaries................. 14 16 28
------ ------ ------
Income before preferred stock dividends of subsidiaries... $1,448 $1,282 $1,065
====== ====== ======
Income taxes at the US federal statutory rate of 35%............ $ 507 $ 449 $ 373
Depletion allowance....................................... (25) (24) (22)
Amortization of investment tax credits.................... (23) (23) (23)
Amortization of tax rate difference....................... (7) (5) (7)
Allowance for funds used during construction.............. (2) (2) (2)
Amortization of prior flow-through amounts................ 2 66 37
State income taxes, net of federal tax benefit............ 22 19 15
Amortization of goodwill.................................. 55 43 7
Foreign tax credit........................................ (31) -- --
Foreign tax rate differences.............................. (21) (10) --
Valuation allowance reversal.............................. (10) -- --
Other..................................................... (18) 13 (1)
------ ------ ------
Provision for income taxes...................................... $ 449 $ 526 $ 377
====== ====== ======
Effective tax rate (on income before preferred stock dividends
of subsidiaries)........................................... 31% 41% 35%
TXU Corp. had net tax benefits from LESOP dividend deductions of $4.1
million, $3.7 million and $3.9 million in 1999, 1998 and 1997, respectively,
which were credited directly to retained earnings.
A-48
The components of TXU Corp.'s deferred tax assets and deferred tax
liabilities are as follows:
December 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Total Current Noncurrent Total Current Noncurrent
------- -------- ----------- ------- -------- -----------
Deferred Tax Assets
Unbilled revenues......................... $ 31 $ 31 $ -- $ 30 $ 30 $ --
Over/(under)-recovered fuel revenue....... (14) (14) -- 18 18 --
Unamortized investment tax credits........ 280 -- 280 293 -- 293
Impairment of assets...................... 76 -- 76 76 -- 76
Regulatory disallowance................... 120 -- 120 152 -- 152
Alternative minimum tax................... 639 -- 639 594 -- 594
Tax rate differences...................... 72 -- 72 62 -- 62
Employee benefits......................... 212 17 195 158 4 154
Net operating loss carryforwards.......... 109 14 95 147 -- 147
Mitigation and redirected depreciation.... 66 -- 66 -- -- --
Foreign tax loss carryforwards............ 119 -- 119 83 -- 83
Deferred benefits of state income taxes... 194 5 189 184 11 173
Leased assets............................. 506 -- 506 584 -- 584
Valuation allowance....................... (262) -- (262) (238) -- (238)
Other..................................... 300 15 285 338 25 313
Deferred state income taxes............... 68 2 66 61 5 56
------ ---- ------ ------ ---- ------
Total............................... 2,516 70 2,446 2,542 93 2,449
------ ---- ------ ------ ---- ------
Deferred Tax Liabilities
Depreciation differences and capitalized
construction costs.................... 4,943 -- 4,943 4,818 -- 4,818
Redemption of long-term debt.............. 136 -- 136 134 -- 134
Sale of partnership....................... 92 92 -- -- -- --
Recoverable redirected depreciation....... 51 -- 51 -- -- --
Deferred charges for state income taxes... 26 -- 26 22 -- 22
Unbilled income........................... 27 27 -- 17 17 --
Leased assets............................. 488 -- 488 553 -- 553
Other..................................... 375 9 366 301 -- 301
Deferred state income taxes............... 374 -- 374 339 -- 339
------ ---- ------ ------ ---- ------
Total............................... 6,512 128 6,384 6,184 17 6,167
------ ---- ------ ------ ---- ------
Net Deferred Tax Liability (Asset)........ $3,996 $ 58 $3,938 $3,642 $(76) $ 3,718
====== ==== ====== ====== ==== ======
December 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Net Net Net Net Net Net
Current Current Noncurrent Current Current Noncurrent
Asset Liability Liability Asset Liability Liability
------- --------- ---------- ------- --------- ----------
Summary of Deferred Income Taxes
US Federal.................... $ -- $ 42 $ 2,889 $83 $ -- $ 2,876
State......................... 2 -- 309 5 -- 283
United Kingdom................ -- -- 660 -- -- 531
Australia..................... -- 11 80 -- 12 28
Mexico........................ -- 7 -- -- -- --
------- ------- ------- ------- --------- -------
Total.................... $ 2 $ 60 $ 3,938 $88 $ 12 $ 3,718
======= ======= ======= ======= ========= =======
A-49
At December 31, 1999, TXU Corp. had $639 million of alternative minimum tax
credit carryforwards available to offset future tax payments. At December 31,
1999, TXU Gas had pre-merger net operating loss (NOL) carryforwards of $319
million that begin to expire in 2003. The NOL's can be used to offset future
taxable income. Due to a 1999 change in Internal Revenue Service (IRS)
regulations, TXU Gas fully expects to utilize all such NOL's prior to their
expiration date. Accordingly, a $10 million deferred tax asset valuation
allowance recorded in 1998 was reversed in 1999. TXU Gas utilized $101 million
of NOL's in 1999. At December 31, 1999, TXU Australia had $342 million and TXU
Europe Group had $51 million of tax loss carryforwards that can be used to
offset future taxable income in their respective jurisdictions. Such tax loss
carryforwards do not have expiration dates. TXU Europe Group has recorded a
valuation allowance of $262 million against the deferred tax assets related to
leased assets.
The IRS is currently auditing the consolidated Federal Income Tax returns
of TXU Corp. for the years 1994 through 1996. In management's opinion, an
adequate provision has been made for any future taxes that may be owed as a
result of this audit.
Separately, the TXU Gas consolidated income tax returns have been audited
and settled with the IRS through 1992. The IRS is currently auditing the years
1993 through 1997 and as yet, no notice of proposed adjustments has been issued.
TXU Gas has reached a tentative agreement with the IRS for the 1993 tax year,
which if approved, is not expected to have a material impact on TXU Corp.'s
financial position or results of operations. To the extent that adjustments to
income tax accounts for periods prior to the Merger are required as a result of
an IRS audit, the adjustment will be added to or deducted from goodwill.
10. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Most US employees are covered by various defined benefit pension plans
which provide benefits based on years of service and average earnings. In
addition, most US employees are eligible for voluntary participation in either
the Employees' Thrift Plan of the Texas Utilities Company System (Thrift Plan)
or the ENSERCH Corporation Employee Stock Purchase and Savings Plan (EN$AVE).
The plans are participant-directed defined contribution combination employee
stock ownership and profit sharing plans under Section 401(k) and 401(m) of the
Internal Revenue Code and are subject to the provisions of the Employee
Retirement Income Security Act of 1974. Under each of the plans, a participant
may invest, through pre-tax salary deferrals or after-tax payroll deductions, a
specified amount ranging from 1% to 16% of regular salary or wages. Employer
matching contributions as a percentage of participant contributions, up to 6% of
base pay, are at a rate of 40%, 50% or 60% depending on length of service.
Contributions to the Thrift Plan and EN$AVE aggregated $15 million for each of
the years ending December 31, 1999, 1998 and 1997.
During 1999, certain US employees were offered and accepted early
retirement and settlement options resulting in curtailment losses and settlement
gains. As a portion of these costs are recoverable, an offsetting regulatory
asset was recorded. Effects of the early retirement options applicable to
regulated business were recorded as regulatory assets.
TXU Europe Group participates in several defined benefit pension plans in
the UK which cover the majority of its employees. The benefits under these plans
are primarily based on years of credited service and final average compensation
levels as defined under the respective plan provisions. In the UK, the majority
of TXU Europe Group employees are members of the Electricity Supply Pension
Scheme (ESPS) which provides pensions of a defined benefit nature for employees
throughout the electricity supply industry. The ESPS operates on the basis that
there is no cross-subsidy between employers, and the financing of TXU Europe's
pension liabilities is, therefore, independent of the experience of other
participating employers. The assets of the ESPS are held in a separate trustee-
administered fund and consist principally of UK and European equities, UK
property holdings and cash. The pension cost relating to the TXU Europe Group
portion of the ESPS is assessed in accordance with the advice
A-50
of independent qualified actuaries using the projected unit method. The benefits
under these plans are primarily based on years of service and compensation
levels as defined under the respective plan provisions.
TXU Australia sponsors a defined contribution pension plan covering
employees hired after March 31, 1995. Employees may elect to contribute at 0%,
3% or 6% of their salary. TXU Australia's contributions were determined at a
rate of 10% of employees' salaries. TXU Australia sponsors two defined benefit
pension plans covering employees hired prior to March 31, 1995. The plan
benefits are based on the participants' contributions, number of years of
service and final average salaries. Employees may elect to contribute at rates
from 0% to 7.5% of their salaries. TXU Australia's contributions range from 0%
to 9.5% of participants' salaries depending upon the funding ratio of the plan
as calculated in accordance with the plan's contribution rules.
A-51
The projected benefit obligations and fair value of plan assets for the
pension plans with projected benefit obligations in excess of plan assets were
$31 million and $7 million, respectively, as of December 31, 1999 and $744
million and $718 million, respectively, as of December 31, 1998.
1999 1998 1997
----- ----- -----
Weighted-average assumptions:
Discount rate.......................................................... 8.25% 7.00% 7.25%
Expected return on plan assets......................................... 9.00% 9.00% 9.00%
Rate of compensation increase.......................................... 4.30% 4.30% 4.30%
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
Components of Net Pension Costs:
Service cost........................................................... $ 70 $ 53 $ 37
Interest cost.......................................................... 203 163 94
Expected return on assets.............................................. (252) (205) (107)
Amortization of unrecognized net transition asset...................... (1) (1) (1)
Amortization of unrecognized prior service cost........................ 4 4 4
Amortization of net gain............................................... -- (5) (5)
Recognized settlement gains............................................ (41) -- (30)
Recognized termination benefits loss................................... 60 -- 34
----- ----- -----
Net periodic pension cost.......................................... $ 43 $ 9 $ 26
===== ===== =====
Change in Pension Obligation:
Pension obligation at beginning of year................................ $ 3,331 $1,576
Service cost....................................................... 70 53
Interest cost...................................................... 203 163
Participant contributions.......................................... 18 10
Plan amendments.................................................... 31 12
Net transfer of obligations to other plans......................... (5) --
Actuarial (gain)/loss.............................................. (334) 193
Acquisitions....................................................... 22 1,429
Benefits paid...................................................... (176) (133)
Curtailments....................................................... 10 --
Settlements........................................................ (164) --
Special termination benefits....................................... 77 --
Currency exchange rate changes..................................... (33) 25
Other.............................................................. -- 3
------- -------
Pension obligation at end of year...................................... $ 3,050 $ 3,331
======= =======
Change in Plan Assets:
Fair value of assets at beginning of year.............................. $ 3,782 $ 1,794
Actual return on assets............................................ 349 188
Acquisitions....................................................... 25 1,832
Employer contributions............................................. 54 57
Participant contributions.......................................... 18 10
Net transfer of assets to other plans.............................. (5) --
Benefits paid...................................................... (175) (133)
Settlements........................................................ (159) --
Currency exchange rate changes..................................... (37) 34
------- -------
Fair value of assets at end of year.................................... $ 3,852 $ 3,782
======= =======
Funded Status:
Pension obligation..................................................... $(3,050) $(3,331)
Fair value of assets................................................... 3,852 3,782
Unrecognized net transition asset...................................... (3) (4)
Unrecognized prior service cost........................................ 56 42
Unrecognized net gain.................................................. (593) (199)
------- -------
(Accrued)/prepaid pension cost......................................... $ 262 $ 290
======= =======
Amounts Recognized in the Statement of Financial Position Consist of:
Prepaid pension cost................................................... $ 413 $ 433
Accrued benefit liability.............................................. (157) (151)
Intangible asset....................................................... 1 2
Accumulated other comprehensive income................................. 3 6
Accumulated deferred income taxes...................................... 2 --
------- -------
Net amount recognized............................................... $ 262 $ 290
======= =======
A-52
In addition to the retirement plans, the US subsidiaries offer certain health
care and life insurance benefits to substantially all of their employees and
their eligible dependents at retirement. Benefits received vary in level
depending on years of service and retirement dates.
1999 1998 1997
----- ----- -----
Weighted-average assumptions:
Discount rate............................................. 8.25% 7.00% 7.25%
Expected return on plan assets............................ 8.49% 8.13% 7.50%
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- ------
Components of Net Periodic Postretirement Benefit Costs:
Service cost.............................................. $ 24 $ 19 $ 12
Interest cost............................................. 47 42 43
Expected return on assets................................. (12) (10) (8)
Amortization of unrecognized net transition obligation.... 10 16 17
Amortization of unrecognized prior service cost........... 2 2 --
Amortization of net loss.................................. 5 2 2
Recognized curtailment loss............................... 24 -- 10
----- ----- -----
Net postretirement benefit cost...................... $ 100 $ 71 $ 76
===== ===== =====
Change in Postretirement Benefit Obligation:
Benefit obligation at beginning of year................... $ 702 $ 591
Service cost.......................................... 24 19
Interest cost......................................... 47 42
Participant contributions............................. 4 6
Actuarial (gain)/loss................................. (132) 83
Benefits paid......................................... (44) (39)
Curtailments.......................................... 19 --
----- -----
Benefit obligation at end of year......................... $ 620 $ 702
===== =====
Change in Plan Assets:
Fair value of assets at beginning of year................. $ 145 $ 112
Actual return on assets............................... 19 18
Employer contributions................................ 42 42
Participant contributions............................. 3 3
Benefits paid......................................... (32) (30)
----- -----
Fair value of assets at end of year....................... $ 177 $ 145
===== =====
Funded Status:
Benefit obligation........................................ $(620) $(702)
Fair value of assets...................................... 177 145
Unrecognized transition obligation........................ 130 146
Unrecognized prior service cost........................... 16 17
Unrecognized net (gain)/loss.............................. (4) 139
----- -----
Accrued postretirement benefit cost....................... $(301) $(255)
===== =====
A-53
The expected increase in costs of future benefits covered by the
postretirement benefit plans is projected using a health care cost trend
rate of 5% in 2000 and thereafter. A one percentage point increase in the
assumed health care cost trend rate in each future year would increase the
accumulated postretirement benefit obligation at December 31, 1999 by
approximately $64 million and other postretirement benefits cost for 1999 by
approximately $9.6 million.
11. DERIVATIVE INSTRUMENTS
TXU Corp. and its subsidiaries enter into derivative instruments,
including options, swaps, futures, forwards and other contractual commitments
for both non-trading and trading purposes. TXU Corp. and its domestic and
international subsidiaries enter into derivative instruments for non-trading
purposes in order to manage market risks related to changes in interest rates,
foreign currency exchange rates and commodity prices. Gains and losses on non-
trading derivative instruments effective as hedges are deferred and recorded as
a component of the underlying transaction when settled. TXU Corp. also enters
into derivative instruments and other contractual commitments for trading
purposes through its subsidiaries TXU Energy Trading, TXU Europe Energy Trading
and TXU Australia. Contracts entered into for trading purposes are recorded on a
mark-to-market basis with gains and losses recognized in earnings in the period
in which such valuation changes occur.
Non-Trading
Interest Rate Risk Management -- TXU Corp. and its subsidiaries enter into
interest rate swaps to manage exposures to the market risk inherent in fixed
rate debt securities and the cash flow risk inherent in variable rate
securities. The terms of each swap and the underlying hedged security are in
Notes 5 and 6.
Foreign Currency Risk Management -- TXU Corp. has exposure to foreign
currency risks, primarily with the pound sterling and the Australian dollar. TXU
Europe and TXU Australia have accessed the US capital markets and issued dollar
denominated obligations. TXU Corp. and its subsidiaries enter into currency
swaps, options and forwards, where appropriate, to manage foreign currency
exposures.
TXU Europe has entered into swaps in respect to the principal and semi-
annual interest payments on $500 million of bonds to swap from dollars to pounds
sterling. For the principal payments, TXU Europe entered into a forward foreign
currency contract to acquire $200 million and $300 million in October 2017 and
October 2027, respectively, for approximately (Pounds)218 million ($352
million). A foreign currency gain of (Pounds)92 million ($148 million) was
deferred at December 31, 1999. For interest payments on the $200 million 7.425%
notes due 2017 and the $300 million 7.55% notes due 2027, the contract sets the
exchange rate between pounds sterling and dollars at $1.605 and $1.6245,
respectively.
TXU Europe has entered into currency swaps that fix the $1.5 billion
principal amount and interest payments of the Senior Notes to be repaid in
pounds sterling at a weighted-average exchange rate between pounds sterling and
US dollars at $1.629.
TXU Australia maintains cross currency swaps for its US dollar denominated
debt. These swaps mature in December 2006 and December 2016 for $250 million
and $100 million, respectively. The maturity of these swaps coincides with the
maturity of the US dollar denominated debt.
Energy Price Risk Management -- In the UK and Australia, electricity prices
are established through power pools which are controlled through an agreement
with the licensed generators and suppliers in the case of the UK, or by a
statutory, independent corporation in the case of Australia. In both cases,
substantially all power must be sold into and purchased from the pools. In
order to manage the exposure to fluctuations in electricity pool prices, TXU
Europe and TXU Australia enter into both short- and long-term derivative
instruments whereby the pool price is fixed for an agreed-upon quantity and
duration by reference to an agreed-upon strike price. In the US, as a result
A-54
of continued regulation, TXU Electric and TXU Gas have minimal exposure to
energy price risk, therefore, their use of derivative instruments is limited.
At December 31, 1999, TXU Europe had non-trading derivative contracts
(including "virtual power station" agreements) outstanding covering 142 terawatt
hours (TWh), expiring from 2000 to 2010. Net gains (losses) are deferred under
these contracts until settled. TXU Europe's "virtual power station" agreements
with third parties, provide for a variety of payments based on a notional plant
capacity, fuel consumption and operating expenses in exchange for the receipt of
cash payments based on future pool prices and a notional output.
TXU Australia has entered into wholesale market contracts to cover most of
its forecasted load through the end of 2000. At December 31, 1999, these
contracts cover a notional volume of approximately 4.3 million MWh for the
period from January 2000 through 2001. Short-term contracts outstanding at
December 31, 1999 covered approximately 4.1 million MWh. Net losses deferred
under these contracts at December 31, 1999 were A$57 million ($37 million).
Trading
TXU Corp. has continued to position itself to provide comprehensive energy
products and services to a diversified client base in the US, Europe and
Australia. In the US, TXU Energy Trading continues to engage in price and basis
risk management activities, involving the purchase and sale of physical
commodities, and enters into futures contracts, forward commitments, swap
agreements with net settlement, exchange traded options, over-the-counter
options which are net settled or physically settled, exchange-of-futures-for
physical transactions, energy exchange transactions, storage activities, and
other contractual arrangements. In 1999, TXU Europe and TXU Australia began
offering price risk management services to customers through a variety of
financial and other instruments including contracts for differences (swaps),
virtual power stations, written options and forward contracts. These
transactions are primarily conducted with retail end-users, established energy
companies and major financial institutions.
The trading subsidiaries all manage the market risk on a portfolio basis
within limitations imposed by their respective Boards of Directors and in
accordance with TXU Corp.'s overall risk management policies. Market risks are
monitored daily, utilizing appropriate mark-to-market methodologies, which value
the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions. Each entity uses various techniques and
methodologies that simulate forward price curves in their respective markets to
estimate the size and probability of changes in market value resulting from
price movements. These techniques include, but are not limited to, sensitivity
analyses. The use of these methodologies requires a number of key assumptions
including the selection of confidence levels, the holding period of the
positions, and the depth and applicability to future periods of historical price
information.
The portfolio subjects the entities to a number of risks and costs associated
with the future contractual commitments, including price risk, credit risk
associated with counter parties, product location (basis) differentials, market
liquidity. Each entity continuously monitors the valuation of identified risks
and adjusts the portfolio valuation based on present market conditions.
Reserves are established in recognition that certain risks exist until delivery
of energy has occurred, counterparties have fulfilled their financial
commitments and related financial instruments mature or are closed out. Price
and credit risk are further managed through the established trading policies and
limits for each trading entity which are evaluated on a daily basis.
US -- The exposure of fixed price natural gas and electric power purchase and
sale commitments, and derivative financial instruments, including options,
swaps, futures and other contractual commitments, is based on a methodology that
uses a five-day holding period and a 95% confidence level. The notional amounts
and terms of the portfolio as of December 31, 1999 included financial
instruments that provide for fixed price receipts of 2,406 trillion British
thermal units equivalent (Tbtue) and fixed price payments of 2,836 Tbtue, with a
maximum term of
A-55
seven years. Additionally, sales and purchases commitments totaling 1,129 Tbtue,
with terms extending up to nine years, are included in the portfolio as of
December 31, 1999.
Europe -- At December 31, 1999, the outstanding notional quantity of
commodity instruments under contracts held for trading purposes was 118 TWh of
electricity for periods to 2015. In the gas retail business, TXU Europe is
subject to fluctuations in the gas spot market as it sells gas, primarily at
fixed prices, and manages the demand through a portfolio of gas purchase
contracts. This risk is also managed through the use of derivative instruments
including swaps and futures. There were no swaps or futures outstanding at
December 31, 1999. At December 31, 1999, TXU Europe had instruments outstanding
covering approximately 134 Bcf, expiring in 2003.
Australia -- At December 31, 1999, the outstanding notional quantity of
commodity instruments under contracts held for trading purposes was 209 GWh of
electricity for periods to 2002.
The fair value of open positions expiring within one year is included within
Risk Management Assets and Liabilities on the balance sheet, and the long-term
portion is included within Other Assets and Liabilities. Gross revenue and
expenses from physically settled transactions are included within Operating
Revenues and Operating Expenses, respectively. Financially settled
transactions along with unrealized gains and losses from changes in the fair
value of the open positions are included within Operating Revenues on a net
basis.
The following table displays the mark-to-market values of the energy trading
risk management assets and liabilities:
December 31, 1999 December 31, 1998
------------------------------ -------------------------------
Assets Liabities Net Assets Liabilities Net
-------- -------- -------- -------- --------- --------
Fair Value:
Current........................ $628 $525 $103 $832 $838 $ (6)
Noncurrent..................... 151 12 139 128 93 35
---- ---- ---- ---- ---- ---
Total.................... $779 $537 242 $960 $931 29
==== ==== ==== ====
Less reserves.................. 9 7
---- ---
Net of reserves.......... $233 $ 22
==== ===
Average Value For Year:
Total.......................... $648 $510 $138 $656 $617 $ 39
==== ==== ==== ====
Less reserves.................. 9 7
---- ---
Net of reserves.......... $129 $ 32
==== ===
TXU Corp. recorded net trading gains of $9 million, $38 million, and $2
million at TXU Energy Trading, TXU Europe and TXU Australia, respectively, in
1999. In 1998, TXU Energy Trading recorded a net trading gain of $46 million,
while TXU Europe and TXU Australia had no trading activity.
Credit Risk -- Credit risk relates to the risk of loss that TXU Corp. would
incur as a result of nonperformance by counterparties. TXU Corp. maintains
credit policies with regard to its counterparties that management believes
significantly minimize overall credit risk. TXU Corp. generally does not
obtain collateral to support the agreements but establishes credit limits and
monitors the financial viability of counterparties. In the event a
counterparty's credit rating declines, TXU Corp. may apply certain remedies, if
considered necessary. TXU Corp. believes the risk of nonperformance by
counterparties is minimal.
A-56
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of TXU Corp.'s
significant financial instruments were as follows:
December 31, 1999 December 31, 1998
--------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- -----------
On balance sheet assets (liabilities):
Long-term debt (including current maturities)*........................ $(16,641) $(15,638) $(15,332) $(15,926)
TXU Corp. or subsidiary obligated, mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely junior
subordinated debentures of TXU Corp. or related subsidiary....... (1,339) (1,212) (1,192) (1,236)
Preferred stock of subsidiary subject to mandatory redemption......... (21) (21) (21) (21)
LESOP note receivable................................................. 249 265 250 302
Off balance sheet assets (liabilities):
Financial guarantees.................................................. -- (623) -- (432)
Interest rate swaps................................................... -- (69) -- (86)
Currency swaps and forwards........................................... -- (7) -- (4)
Gas swaps............................................................. -- -- -- (3)
Contracts for differences, electricity forward agreements
and other energy contracts........................................ -- 139 -- 101
*Excludes capital leases.
The fair values of long-term debt and preferred stock subject to mandatory
redemption are estimated at the lesser of either the call price or the market
value as determined by quoted market prices, where available, or, where not
available, at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risk. The fair value
of trust securities is based on quoted market prices. The carrying amounts for
financial assets classified as current assets and the carrying amounts for
financial liabilities classified as current liabilities approximate fair value
due to the short maturity of such instruments.
Other investments, primarily include deposits in an external trust fund for
nuclear decommissioning of Comanche Peak, which is carried at market value, and
restricted cash held as collateral for certain leases, for which the carrying
value approximates the fair value due to the short maturity of these
instruments. The trust fund is invested primarily in fixed income debt and
equity securities, which are considered as available-for-sale. Any unrealized
gains or losses are treated as regulatory assets or regulatory liabilities,
respectively.
Common stock -- net has been reduced by the note receivable from the
trustee of the leveraged employee stock ownership provision of the Thrift Plan.
The fair value of such note is estimated at the lesser of TXU Corp.'s call price
or the present value of future cash flows discounted at rates consistent with
comparable maturities adjusted for credit risk.
A-57
The fair value of the financial guarantees are based on the present value
of the instruments' approximate cash flows discounted at the year-end risk free
rate for issues of comparable maturities adjusted for credit risk. Fair values
for off-balance sheet instruments (interest rate and currency swaps) are based
either on quotes or the cost to terminate the agreements. The fair values of
contracts for differences, electricity forward agreements and other energy
contracts are based upon a discounted cash flow analysis using estimates of
energy forward prices. The fair values of other financial instruments for which
carrying amounts and fair values have not been presented are not materially
different than their related carrying amounts.
13. REGULATION AND RATES
US -- Docket 9300 -- The PUC's final order (Order) in connection with TXU
Electric's January 1990 rate increase request (Docket 9300) was ultimately
reviewed by the Supreme Court of Texas. As a result, an aggregate of $909
million of disallowances with respect to TXU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to TXU Corp.'s earnings, has been remanded to the District Court
with instructions that it be remanded to the PUC for reconsideration on the
basis of a prudent investment standard. On remand, the PUC also was required to
reevaluate the appropriate level of TXU Electric's construction work in progress
included in the rate base in light of its financial condition at the time of the
initial hearing. In connection with the settlement of Docket 18490, proceedings
in the remand of Docket 9300 have been stayed. TXU Electric cannot predict the
outcome of the reconsideration of the Order on remand by the PUC.
Docket 18490 -- The PUC approved the non-unanimous stipulation filed on
December 17, 1997 by TXU Electric, together with the General Counsel of the PUC,
the Office of Public Utility Counsel (OPC) and various other parties interested
in TXU Electric's rates and services. The stipulation, modified to incorporate
changes made by the PUC, resulted in base rate credits beginning January 1,
1998, of 4% for residential customers, 2% for general service secondary
customers and 1% for all other retail customers, and additional base rate
credits for residential customers of 1.4% beginning January 1, 1999. Certain
parties that did not sign the stipulation have appealed the PUC's approval by
filing suit in state district court. TXU Electric cannot predict the outcome of
these appeals.
In accordance with the stipulation, from January 1, 1998 through June 30,
1999, earnings in excess of the earnings cap were recorded as additional
depreciation of nuclear production assets, and a reclassification of
depreciation expense was made from T&D to nuclear production assets. As
discussed in Note 3, application of regulatory accounting principles to the
generation portion of TXU Electric's business was discontinued as of June 30,
1999. Effective July 1, 1999, earnings in excess of the earnings cap imposed by
the 1999 Restructuring Legislation were recorded as a reduction of revenues,
with a corresponding regulatory liability recorded. Upon final PUC
determination, the regulatory liability associated with earnings in excess of
the earnings cap will be applied against TXU Electric's stranded generation
assets as determined under the 1999 Restructuring Legislation's market valuation
criteria or refunded to customers.
Additionally, effective July 1, 1999, TXU Electric ceased the
reclassification of T&D depreciation expense to nuclear production assets.
Instead, an amount equal to T&D depreciation expense for the period was recorded
as a regulatory asset, which will be amortized as it is recovered through the
Distribution portion of the business. An equivalent amount was recorded as a
regulatory liability which will be applied against TXU Electric's stranded
generation assets as determined under the 1999 Restructuring Legislation's
market valuation criteria or refunded to customers.
For 1999, TXU Electric recorded $52 million as additional depreciation of
nuclear production assets and $92 million as a reduction of revenues as a result
of earnings in excess of the earnings cap, compared with $170 million of
additional depreciation of nuclear production assets for the same period in
1998. In addition, depreciation expense of $95 million for the first six months
of 1999 was reclassified from T&D to nuclear production assets and a regulatory
asset of $97 million equivalent to T&D depreciation expense was recorded for the
last half of 1999 according to the accounting treatment discussed above. Also,
$50 million of Transmission redirected depreciation
A-58
has been reclassified as a regulatory asset to conform with the 1999
Restructuring Legislation. In 1998, depreciation expense of $183 million was
reclassified from T&D to nuclear production assets. Including deferred income
tax effects, mitigation reduced net income by $90 million in 1999 and $143
million in 1998.
Separation Costs -- On or before April 1, 2000, each electric utility must
file with the PUC a separation of its costs into competitive and regulated
components, proposed tariffs for its proposed T&D utility, and an initial
estimate of its generation-related stranded costs.
UK -- The prices that the energy retail business can charge in the ex-
franchise market are subject to a price control formula that sets a maximum
price. On October 8, 1999, OFGEM issued proposed price adjustments for the
electricity supply businesses. The final report of OFGEM was issued at the end
of November 1999, and accepted by TXU Europe Group in December 1999. The supply
price adjustments become effective April 1, 2000. TXU Europe Group's directly
controlled tariffs will be reduced by an average of 7.1% from April 1, 2000 as
required by the new controls, giving rise to an estimated reduction in annual
revenues of approximately (Pounds)15 million ($24 million).
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply published new proposals for generation
licenses in order to promote fair competition in the generation and trading of
electricity. The proposals seek to ensure that generators with positions of
significant market power who are able to exert an upward influence on prices in
the pool should ensure that their prices closely reflect their costs and that
they do not take unfair advantage of any imperfections in the operation of the
Pool. The Director General has proposed that these restrictions should cease
one year after the introduction of the New Electricity Trading Arrangement
(NETA). TXU Europe has played an active part in these discussions and accepted
the proposals on February 7, 2000. However, five generators rejected the
proposals and the matter has been referred to the UK competition commission.
TXU Europe does not anticipate that these proposals will have a material adverse
effect on revenues. The implementation of NETA, scheduled for introduction on
October 1, 2000, is also likely to lead to a number of modifications to
generation distribution, and retail electricity licenses.
The rate charged by the networks business in the UK are regulated by a
distribution price control formula. This formula is subject to periodic review
and adjustments. Based on the current distribution price control formula,
future increases in profit by the networks operations will depend upon unit
growth and productivity improvements. In his draft proposals for the
distribution price control review which were released in August 1999, adjusted
in October 1999 and published in final form on December 2, 1999, the regulator
proposed a substantial decrease in distribution prices charged by the networks
business in its service territory. The final proposals for Eastern Electricity
incorporated an initial reduction in allowed revenues for regulated units of 28%
from April 1, 2000 with further annual reductions of 3% per year for the next
four years, adjusted for inflation. The allowed revenues will be calculated
from a formula to be provided by OFGEM in the near future. However, TXU Europe
estimates that the effect on revenues will be a reduction of about (Pounds)73
million ($118 million) for the year ending December 31, 2000 and about
(Pounds)100 million ($162 million) for the year ended December 31, 2001.
A-59
14. COMMITMENTS AND CONTINGENCIES
Clean Air Act -- The Federal Clean Air Act, as amended (Clean Air Act)
includes provisions which, among other things, place limits on the sulfur
dioxide emissions produced by generating units. TXU Electric's capital
requirements have not been significantly affected by the requirements of the
Clean Air Act.
Purchased Power Contracts --TXU Electric and SESCO have entered into
purchased power contracts to purchase power from utilities and non-
utilities through the year 2005. These contracts provide for capacity payments
subject to performance standards and energy payments based on the actual power
taken under contract. Capacity payments under these contracts for the years
ended December 31, 1999, 1998 and 1997 were $235 million, $247 million and $240
million, respectively.
Assuming operating standards are achieved, future capacity payments under
US Electric segment agreements are estimated as follows:
Year
----
2000.............................................. $210
2001.............................................. 210
2002.............................................. 131
2003.............................................. 77
2004.............................................. 38
Thereafter........................................ 29
----
Total capacity payments........................ $695
====
TXU Europe Energy Trading has various contracts for which capacity payments
are required. Under the terms of these contracts, TXU Europe Energy Trading
will pay annual capacity fees of $348 million for 2000, $371 million for 2001,
$376 million for 2002, $402 million for 2003, $402 million for 2004 and $2.4
billion thereafter. In addition, TXU Europe Group will provide a (Pounds)200
million ($324 million) guarantee (declining over time) representing
approximately one year's capacity payment, with the counterparty providing a
(Pounds)20 million ($32 million) guarantee.
Coal Contracts -- In November 1998, TXU Europe Limited agreed to two coal
purchase agreements with a supplier, supplementing the 12 million tons TXU
Europe Limited had previously contracted to take from said supplier between 1998
and 2001. The first agreement is for 25 million tons in total between 1998 and
2003. The second agreement is for 21 million tons in total between 2003 and
2009. Total committed purchases under these contracts were approximately
(Pounds)1.3 billion ($2.1 billion) at December 31, 1999.
US Gas Purchase Contracts -- TXU Fuel Company and TXU Gas Distribution buy
gas under long-term and short-term intrastate contracts in order to assure
reliable supply to their customers. Many of these contracts require minimum
purchases ("take-or-pay") of gas. TXU Gas Distribution has made accruals for
payments that may be required for settlement of gas-purchase contract claims
asserted or that are probable of assertion. TXU Gas Distribution continually
evaluates its position relative to asserted and unasserted claims, above-market
prices or future commitments. Based on estimated gas demand, which assumes
normal weather conditions, requisite gas purchases of TXU Fuel, TXU Gas
Distribution and TXU Europe Group are expected to substantially satisfy their
purchase obligations for the year 2000 and thereafter.
Europe Gas Take-or-Pay Contracts -- TXU Europe is party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay" obligations
under which the buyer agrees to pay for a minimum quantity of gas in a year. In
order to help meet the expected needs of its wholesale and retail customers, TXU
Europe Limited has entered into a range of gas purchase contracts. At December
31, 1999 the commitments under long-term gas purchase contracts amounted to an
estimated (Pounds)1.1 billion ($1.8 billion) covering periods up to 15 years
forward. Management does not consider it likely, on the basis of TXU Europe's
current expectations of demand from its customers that any material payments
will become due for gas not taken.
A-60
Leases -- Subsidiaries have entered into operating leases covering various
facilities and properties including generating plants, combustion turbines,
transportation, mining equipment, data processing equipment and office space.
Certain of these leases contain renewal and purchase options and residual value
guarantee. Lease costs charged to operating expense for the years ended
December 31, 1999, 1998 and 1997 were $212 million, $243 million, $157 million,
respectively.
At December 31, 1999, future minimum lease payments under capital leases,
together with the present value of such minimum lease payments, and future
minimum lease commitments under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1999, were
as follows:
Capital Operating
Year Leases Leases
- ---- ------- ---------
2000............................................ $ 89 $ 117
2001............................................ 753 124
2002............................................ 36 112
2003............................................ 34 95
2004............................................ 32 89
Thereafter...................................... 322 472
------ ------
Total future minimum lease payments........ 1,266 $1,009
======
Less amounts representing interest.............. 231
------
Present value of future minimum lease payments.. 1,035
Less current portion............................ 89
------
Long-term capital lease obligation.............. $ 946
======
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (Pounds)6 per megawatt hour
(indexed from 1996 prices) linked to output levels from the stations are payable
for the first seven years of their operations by Eastern Electricity (operations
commenced in 1996). In accounting for the acquisition of TEG, a liability for
the estimated probable additional payments linked to output levels for coal-
fired generating stations was established. At December 31, 1999 and 1998, the
balance of the liability of (Pounds)291 million ($471 million) and (Pounds)412
million ($682 million), respectively, is included with capital lease
obligations.
Financial Guarantees --TXU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric
energy and has agreed, in effect, to guarantee the principal, $24 million at
December 31, 1999, and interest on bonds issued to finance the reservoirs from
which the water is supplied. The bonds mature at various dates through 2011 and
have interest rates ranging from 5-1/2% to 7%. TXU Electric is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to TXU Electric, of $4 million
annually for the years 2000 through 2003, and $7 million for 2004. Annual
payments made by TXU Electric, net of amounts assumed by a third party under
such contracts, for 1999, 1998 and 1997 were $4 million each year. In addition,
TXU Electric is obligated to pay certain variable costs of operating and
maintaining the reservoirs. TXU Electric has assigned to a municipality all
contract rights and obligations of TXU Electric in connection with $53
million remaining principal amount of bonds at December 31, 1999, issued for
similar purposes which had previously been guaranteed by TXU Electric. TXU
Electric is, however, contingently liable in the unlikely event of default
by the municipality.
TXU Europe has guaranteed up to (Pounds)68 million ($110 million) at
December 31, 1999 of certain liabilities that may be incurred and payable by the
purchasers of its US and Australian coal business and US energy marketing
operations sold in 1998 (Peabody Sale) with respect to the Peabody Holding
Company Retirement Plan for Salaried Employees, the Powder River Coal Company
Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject to certain
specified conditions.
A-61
Nuclear Insurance -- With regard to liability coverage, the Price-Anderson
Act (Act) provides financial protection for the public in the event of a
significant nuclear power plant incident. The Act sets the statutory limit of
public liability for a single nuclear incident currently at $9.5 billion and
requires nuclear power plant operators to provide financial protection for this
amount. As required, TXU Electric provides this financial protection for a
nuclear incident at Comanche Peak resulting in public bodily injury and
property damage through a combination of private insurance and industry-wide
retrospective payment plans. As the first layer of financial protection, TXU
Electric has purchased $200 million of liability insurance from American Nuclear
Insurers (ANI), which provides such insurance on behalf of a major stock
insurance company pool, Nuclear Energy Liability Insurance Association. The
second layer of financial protection is provided under an industry-wide
retrospective payment program called Secondary Financial Protection (SFP).
Under the SFP, each operating licensed reactor in the US is subject to an
assessment of up to $88 million, subject to increases for inflation every five
years, in the event of a nuclear incident at any nuclear plant in the US.
Assessments are limited to $10 million per operating licensed reactor per year
per incident. All assessments under the SFP are subject to a 3% insurance
premium tax which is not included in the amounts above.
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.1 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and
stable condition, to decontaminate it pursuant to a plan submitted to and
approved by the NRC before the proceeds can be used for plant repair or
restoration or to provide for premature decommissioning. TXU Electric maintains
nuclear decontamination and property damage insurance for Comanche Peak in the
amount of $4.0 billion, above which TXU Electric is self-insured. The
primary layer of coverage of $500 million is provided by Nuclear Electric
Insurance Limited (NEIL), a nuclear electric utility industry mutual insurance
company. The remaining coverage includes premature decommissioning coverage
and is provided by ANI in the amount of $500 million and additional insurance
from NEIL in the amount of $3.0 billion. TXU Electric is subject to a
maximum annual assessment from NEIL of $13.5 million in the event NEIL's losses
under this type of insurance for major incidents at nuclear plants participating
in these programs exceed the mutual's accumulated funds and reinsurance.
TXU Electric maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than twelve weeks
as a result of covered direct physical damage. The coverage provides for weekly
payments of $3.5 million for the first fifty-two weeks and $2.8 million for the
next 110 weeks for each outage, respectively, after the initial twelve
week-period. The total maximum coverage is $490 million per unit. The coverage
amounts applicable to each unit will be reduced to 80% if both units are out of
service at the same time as a result of the same accident. Under this coverage,
TXU Electric is subject to a maximum annual assessment of $4 million per year.
Nuclear Decommissioning and Disposal of Spent Fuel -- TXU Electric has
established a reserve, charged to depreciation expense and included in
accumulated depreciation, for the decommissioning of Comanche Peak, whereby
decommissioning costs are being recovered from customers over the life of the
plant and deposited in external trust funds (included in other investments). At
December 31, 1999, such reserve totaled $167 million, which includes an
accrual of $18 million for the year ended December 31, 1999. As of December
31, 1999, the market value of deposits in the external trust for
decommissioning of Comanche Peak was $244 million, including unrealized gains
of $78 million. Any difference between the market value of the external
trust fund and the decommissioning reserve, that represents unrealized
gains or losses of the trust fund, is treated as a regulatory asset or a
regulatory liability. Realized earnings on funds deposited in the external
trust are recognized in the reserve. Based on a site-specific study
completed during 1997 using the prompt dismantlement method and 1997
dollars, decommissioning costs for Comanche Peak Unit 1 and for Unit 2 and
common facilities were estimated to be $271 million and $404 million,
respectively.
A-62
Decommissioning activities are projected to begin in 2030 for Comanche Peak
Unit 1 and 2033 for Unit 2 and common facilities. TXU Electric is
recovering decommissioning costs based upon a 1992 site-specific study through
rates placed in effect under its January 1993 rate increase request. Actual
decommissioning costs are expected to differ from estimates due to changes in
the assumed dates of decommissioning activities, regulatory requirements,
technology and costs of labor, materials and equipment. In addition, the
marketable fixed income debt and equity securities in which assets of the
external trust are invested are subject to interest rate and equity price
sensitivity.
TXU Electric has a contract with the United States Department of Energy (DOE)
for the future disposal of spent nuclear fuel. The DOE has not begun
acceptance of spent nuclear fuel. TXU Electric's onsite spent nuclear fuel
storage capability is sufficient to accommodate the operation of Comanche Peak
through the year 2017, while fully maintaining the capability to off-load the
core of one of the nuclear-fueled generating units. Additional approval from
the NRC will be required to utilize this full storage capability. TXU Electric
is currently pursuing options for utilizing a larger portion of the full storage
capability, subject to approval by the NRC. TXU Electric is unable to predict
what impact, if any, the DOE delay will have on TXU Electric's future
operations. The disposal fee is at a cost to TXU Electric of one mill per
kilowatt-hour of Comanche Peak net generation and is included in nuclear fuel
expense.
UK -- In February 1997, the official government representative of pensioners
in the UK, the Pensions Ombudsman, made a final determination against the
National Grid and its group trustees with respect to complaints by two
pensioners in National Grid's section of the Electricity Supply Pension Scheme
relating to the use of the pension fund surplus resulting from the March 31,
1992 actuarial valuation of the National Grid section to meet certain costs
arising from the payment of pensions on early retirement upon reorganization or
downsizing. These determinations were set aside by the High Court on June 10,
1997, and the arrangements made by National Grid and its group trustees in
dealing with the surplus were confirmed. The two pensioners appealed this
decision, and judgment has now been received. The judgment endorsed the
Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid has made an appeal to the
House of Lords, although the case is not likely to be heard until the fourth
quarter of 2000. If a similar complaint were to be made against TXU Europe
Group in relation to its use of actuarial surplus in its section of the
Electricity Supply Pension Scheme, it would vigorously defend the action,
ultimately through the courts. However, if a determination were finally to be
made against it and upheld in the courts, TXU Europe Group could have a
potential liability to repay to its section of the Electricity Supply Pension
Scheme an amount estimated by TXU Europe Group to be up to (Pounds)45 million
($73 million), exclusive of any future applicable interest charges.
A-63
On January 25, 1999, the Hindustan Development Corporation issued proceedings
in the Arbitral Tribunal in Delhi, India against TEG claiming damages of $413
million for breach of contract following the termination of a Joint Development
Agreement dated March 20, 1997 relating to the construction, development and
operation of a lignite based thermal power plant at Barsingsar, Rajasthan. TXU
Europe Limited is vigorously defending this claim.
In November 1998, five complaints were filed in the High Court of Justice in
London, Queens Bench Division, Commercial Court, against subsidiaries of TXU
Europe Group by five of their former sales agencies. The agencies claim a total
(Pounds)104 million ($168 million) arising from the summary termination for the
claimed fundamental breach of their respective contracts in April 1998. The
five agencies are claiming damages for failure to give reasonable notice and for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. TXU Europe
Group cannot predict the outcome of these claims and counterclaims.
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the United
States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc., TXU Corp., David W. Biegler,
Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The Gracy
Fund sought to represent a class of certain purchasers of the common stock of
ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, TXU Gas,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and B.
K. Irani and sought to represent a certain class of purchasers of common stock
of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order consolidating the Gracy Fund and the Thorne
suits (Consolidated Action). In January 1999, the Gracy Fund et al. filed an
amended class action complaint in the Consolidated Action against EEX, TXU Gas,
David W. Biegler, Gary J. Junco, Thomas Hamilton, J. Philip McCormick, Fredrick
S. Addy and B. K. Irani. TXU Corp. and Erle Nye were omitted as defendants
pursuant to a tolling agreement. The individual named defendants are current or
former officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions of
the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. No amount of
damages has been specified in the Consolidated Action. Defendants filed a joint
motion to dismiss in March 1999, and discovery has been stayed pending a ruling
on the motion to dismiss. TXU Gas is continuing to evaluate these claims and is
unable at this time to predict the outcome of this proceeding, but intends to
vigorously defend this suit.
General -- In addition to the above, TXU Corp. and other subsidiaries are
involved in various other legal and administrative proceedings which, in the
opinion of each, should not have a material effect upon their financial
position, results of operations or cash flows.
A-64
15. SEGMENT INFORMATION
TXU Corp.'s five reportable operating segments are strategic business units
that offer different products and services or are geographically integrated.
They are managed separately because each business requires different marketing
strategies or is in a different geographic area.
(1) US Electric - operations involving the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas;
(2) US Gas - operations involving the gathering, processing, transmission
and distribution of natural gas and selling of natural gas liquids in Texas;
(3) US Energy Marketing - operations involving purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US and parts of Canada;
(4) Europe - operations involving the generation, purchase, distribution,
marketing and sale of electricity and the purchase and sale of natural gas
primarily in the UK, with additional energy interests throughout the rest of
Europe;
(5) Australia - operations involving the purchase, distribution, trading
and retailing of electricity and natural gas primarily in the State of Victoria,
Australia; and
Other - non-segment operations consisting of telecommunications, retail
energy services, international gas operations, power development and other
energy development activities.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Corp. evaluates
performance based on net income or loss. TXU Corp. accounts for intersegment
sales and transfers as if the sales or transfers were to third parties, that is,
at current market prices.
A-65
US
US US Energy All
Electric Gas Marketing Europe Australia Other Eliminations Consolidated
---------- -------- --------- --------- -------- --------- ----------- ----------
Trade Revenues -
1999.......... $ 6,263 $ 838 $2,981 $ 6,090 $ 682 $ 264 $ -- $17,118
1998.......... 6,541 822 3,198 3,601 439 135 -- 14,736
1997.......... 6,176 409 859 -- 489 13 -- 7,946
Affiliated Revenues -
1999.......... -- 39 2 -- -- 338 (379) --
1998.......... -- 42 1 -- -- 337 (380) --
1997.......... -- 19 -- -- -- -- (19) --
Depreciation and
Amortization (Including
Goodwill Amortization) -
1999.......... 650 82 2 421 77 39 -- 1,271
1998.......... 759 75 1 240 43 29 -- 1,147
1997.......... 580 29 1 -- 48 8 -- 666
Equity in Earnings
(Losses) of
Unconsolidated
Subsidiaries -
1999.......... -- (1) -- -- -- (14) -- (15)
1998.......... -- -- -- 4 -- (23) -- (19)
1997.......... -- -- -- -- -- (27) -- (27)
Interest Income -
1999.......... 3 1 1 102 -- 90 (63) 134
1998.......... 3 1 -- 106 -- 114 (85) 139
1997.......... 6 -- -- -- -- 47 (21) 32
Interest Expense and Other
Charges -
1999.......... 518 79 3 563 131 325 (63) 1,556
1998.......... 580 78 2 447 59 300 (85) 1,381
1997.......... 648 35 2 -- 73 115 (21) 852
Income Tax Expense
(Benefit) -
1999.......... 358 (3) (13) 153 (22) (24) -- 449
1998.......... 486 (6) 3 119 25 (101) -- 526
1997.......... 408 5 (6) -- 20 (50) -- 377
Net Income (Loss) -
1999.......... 773 3 (25) 280 6 (52) -- 985
1998.......... 788 (32) 6 140 31 (193) -- 740
1997.......... 748 (2) (12) -- 17 (91) -- 660
Investment in Equity
Investees -
1999.......... -- 1 -- -- -- 16 -- 17
1998.......... -- 4 -- -- -- 161 -- 165
1997.......... -- 6 -- -- -- 145 -- 151
Total Assets -
1999.......... 18,854 2,778 922 14,266 2,999 14,340 (13,418) 40,741
1998.......... 19,028 2,776 1,362 14,332 1,432 13,479 (12,902) 39,507
1997.......... 19,544 2,533 577 -- 1,436 9,242 (8,468) 24,864
Construction Expenditures -
1999.......... 562 153 1 624 171 121 -- 1,632
1998.......... 501 185 2 341 63 76 -- 1,168
1997.......... 450 56 1 -- 49 27 -- 583
A-66
16. SUPPLEMENTARY FINANCIAL INFORMATION
Sale of Receivables -- TXU Electric has facilities with financial
institutions whereby it is entitled to sell and such financial institutions may
purchase, on an ongoing basis, undivided interests in customer accounts
receivable representing up to an aggregate of $500 million. TXU Gas has a
similar facility for $100 million. TXU Europe has facilities with a third party
whereby Eastern Electricity may sell up to (Pounds)300 million ($486 million) of
its electricity receivables. Additional receivables are continually sold to
replace those collected. At December 31, 1999 and 1998, accounts receivable of
TXU Electric was reduced by $500 million and $450 million, respectively, and
accounts receivable of TXU Gas were reduced by $100 million to reflect the sales
of such receivables to financial institutions under such agreements. At
December 31, 1999, accounts receivable of Eastern Electricity were reduced by
(Pounds)224 million ($362 million) to reflect the sales of receivables under
this program.
Regulatory Assets and Liabilities --
December 31,
--------------
1999 1998
------ ------
Regulatory Assets
Securities reacquisition costs......................... $ 433 $ 434
Recoverable redirected depreciation.................... 146 --
Rate case costs........................................ 55 54
Litigation and settlement costs........................ 73 73
Voluntary retirement/severance program................ 122 105
Recoverable deferred income taxes -- net............... 1,562 1,624
Other regulatory assets................................ 114 101
------ ------
Total regulatory assets............................ 2,505 2,391
------ ------
Regulatory Liabilities
Liability to be applied to stranded generation assets.. 189 --
ITC and protected excess deferred taxes................ 392 420
Other regulatory liabilities........................... 101 81
Reserve for regulatory disallowances................... 73 73
------ ------
Total regulatory liabilities....................... 755 574
------ ------
Net regulatory assets.............................. $1,750 $1,817
====== ======
Restricted Cash -- At December 31, 1999, $660 million of the deposits
classified with investments has been used to cash-collateralize existing
future obligations of TXU Europe Group to certain banks in respect of the
funding of the leases of three power stations, and $511 million is matched to
lease obligations arising from a leasing arrangement on two other power
stations.
A-67
Supplemental cash flow information:
Year Ended December 31
---------------------------
1999 1998 1997
------- -------- --------
CASH PAYMENTS
Interest (net of amounts capitalized)..................... $1,478 $ 1,206 $ 700
Income taxes.............................................. 165 357 175
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Westar/Kinetik Energy (1999), TEG (1998),
TXU Gas and TXU Communications (1997):
Fair value of assets acquired....................... $ 681 $10,414 $ 2,033
Goodwill............................................ 475 5,412 1,005
Common stock issued, net of capitalized expenses.... -- (1,449) (892)
Loan notes payable.................................. (5) (141) --
Liabilities assumed................................. (118) (8,437) (2,125)
------ ------- -------
Cash used....................................... 1,033 5,799 21
Cash acquired....................................... (20) (3,265) (26)
------ ------- -------
Net cash used (provided)........................ $1,013 $ 2,534 $ (5)
====== ======= =======
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million and recognized a pre-tax gain
of $222 million, net of estimated selling costs of $7 million. Since the cash
proceeds from the sale were not received until January 2000, this non-cash
transaction has not been reflected within the 1999 Statements of Consolidated
Cash Flows.
Quarterly Information (unaudited) -- In the opinion of TXU Corp., the
information below includes all adjustments (constituting only normal recurring
accruals) necessary for a fair statement of such amounts. Quarterly results are
not necessarily indicative of expectations for a full year's operations because
of seasonal and other factors, including rate changes, variations in maintenance
and other operating expense patterns, and the charges for regulatory
disallowances. Certain quarterly information has been reclassified to conform to
the current year presentation.
Basic
Earnings
Consolidated Per Share of
Operating Revenues Operating Income Net Income Common Stock*
-------------------- ---------------- ------------------ ------------------
Quarter Ended 1999 1998 1999 1998 1999 1998 1999 1998
- ------------- ------- ------- ------ -------- -------- -------- -------- --------
March 31.................... $ 4,468 $ 2,500 $ 613 $ 426 $ 182 $ 127 $0.65 $0.52
June 30..................... 3,729 3,236 521 474 99 83 0.35 0.33
September 30................ 4,435 4,380 885 783 361 293 1.31 1.04
December 31................. 4,486 4,620 575 780 343 (1) 237 1.24 0.89
------- ------- ------ -------- -------- -------
$17,118 $14,736 $2,594 $2,463 $ 985 $ 740
======= ======= ====== ======== ======== =======
- -----------------------------------------
* The sum of the quarters may not equal annual earnings per share due to
rounding. Diluted earnings per share for the quarter ended March 31, 1998
was $0.51. All other quarters were not different from basic earnings per
share.
(1) Includes a $222 million pre-tax ($145 million after-tax) gain from the sale
of the 20% interest in PrimeCo.
A-68
17. SUBSEQUENT EVENTS (Unaudited)
In October 1999, TXU Electric filed a petition with the PUC for a financing
order (Docket No. 21527) to securitize $1.65 billion of its generation-related
regulatory assets and other qualified costs in accordance with the 1999
Restructuring Legislation. TXU Electric would issue transition bonds
securitizing a component of future revenues. The proceeds received by TXU
Electric are to be used solely for the purposes of retiring utility debt and
equity. On March 1, 2000, the PUC rejected TXU Electric's request for
securitization of the $1.65 billion and authorized securitization of only $357
million. TXU Electric believes this ruling is inconsistent with the 1999
Restructuring Legislation and announced that it will pursue an appeal to the
Travis County, Texas District Court following the receipt of a final order
evidencing such ruling from the PUC. TXU Electric expects that any difference
between the $1.65 billion and the amount finally authorized will continue to be
deferred until securitization of generation-related assets is addressed in 2002.
TXU Electric is unable to predict the outcome of these proceedings.
On December 15, 1999, TXU Europe commenced a 2.0 billion euro Euro Medium
Term Note (EMTN) Program. Under the EMTN Program, TXU Europe may from time to
time issue notes on a continuing basis to one or more dealers in a principal
outstanding amount not exceeding 2.0 billion euros. As of December 31, 1999, no
notes had been issued under this program. However, in March 2000, (Pounds)225
million ($364 million) of 7.25% Sterling Eurobonds due March 8, 2030, were
issued. On the same day, an interest rate swap was entered into that converts
the interest on the new Sterling Eurobond to a variable rate based on LIBOR for
the first five years. The effective interest rate after the swap was 5.862%.
Also in March 2000, TXU Europe issued $150 million of 9.75% Trust Originated
Preferred Securities.
From January 1, 2000 thru March 7, 2000, TXU Corp. repurchased
approximately 12.4 million shares of its common stock for approximately $408
million.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. The offer is subject to a number of conditions, including, among
others, authorization by the CNMV, or Spanish Securities Exchange, approval by
European Union competition authorities and TXU Europe acquiring sufficient
shares such that it would hold at least 51% of Hidrocantabrico after the
transaction is completed. The transaction is expected to close in the second
quarter of 2000.
TXU Europe's offer of 21.25 euros per share values the equity of
Hidrocantabrico at 2.4 billion euros ($2.3 billion). If the offer becomes
unconditional, TXU Europe intends to finance the acquisition through bank
borrowings and the issuance of preferred securities to its parent company, TXU
International Holdings. TXU International Holdings intends to fund the purchase
of the TXU Europe preferred securities through bank borrowings guaranteed by TXU
Corp.
On March 13, 2000, TXU Corp. announced that it had entered into an
agreement to acquire Fort Bend Communication Companies, Inc. (FBCC) based in
Katy, Texas, near Houston, in a transaction that values the stock of FBCC at
approximately $167 million. FBCC common and preferred stock will be exchanged
for approximately $90 million of TXU Corp. common stock and approximately $77
million in cash, subject to certain adjustments. The transaction is expected to
close in the second quarter of 2000.
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
A-69
TXU CORP. Exhibits to 1999 Form 10-K
APPENDIX B
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------------ ---------
2 333-12391 2(a) - Amended and Restated Agreement and Plan of Merger, dated as of April 13,
1996, among TXU Corp., TXU Gas Company and TXU Holding Company.
3(a) 333-12391 4(a) - Restated Articles of Incorporation of TXU Corp.
3(b) 333-45657 4(b) - Bylaws, as amended, of TXU Corp.
3(c) 1-12833 1 - Rights Agreement, dated as of February 19, 1999, between the
Form 8-A Company and The Bank of New York, which includes as
(filed February Exhibit A thereto the form of Statement of Resolution
26, 1999) Establishing the Series A Preference Stock, Exhibit B thereto the
form of a Right Certificate and Exhibit C thereto the Summary of
Rights to Purchase Series A Preference Stock.
4(a) 2-90185 4(a) - Mortgage and Deed of Trust, dated as of December 1, 1983, between
TXU Electric and Irving Trust Company (now The Bank of New York), Trustee.
4(a)(1) - Supplemental Indentures to Mortgage and Deed of Trust:
Number Dated
------ -----
2-90185 4(b) First April 1, 1984
2-92738 4(a)-1 Second September 1, 1984
2-97185 4(a)-1 Third April 1, 1985
2-99940 4(a)-1 Fourth August 1, 1985
2-99940 4(a)-2 Fifth September 1, 1985
33-01774 4(a)-2 Sixth December 1, 1985
33-9583 4(a)-1 Seventh March 1, 1986
33-9583 4(a)-2 Eighth May 1, 1986
33-11376 4(a)-1 Ninth October 1, 1986
33-11376 4(a)-2 Tenth December 1, 1986
33-11376 4(a)-3 Eleventh December 1, 1986
33-14584 4(a)-1 Twelfth February 1, 1987
33-14584 4(a)-2 Thirteenth March 1, 1987
33-14584 4(a)-3 Fourteenth April 1, 1987
33-24089 4(a)-1 Fifteenth July 1, 1987
33-24089 4(a)-2 Sixteenth September 1, 1987
33-24089 4(a)-3 Seventeenth October 1, 1987
33-24089 4(a)-4 Eighteenth March 1, 1988
33-24089 4(a)-5 Nineteenth May 1, 1988
33-30141 4(a)-1 Twentieth September 1, 1988
33-30141 4(a)-2 Twenty-first November 1, 1988
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-1 Twenty-third August 1, 1989
33-35614 4(a)-2 Twenty-fourth November 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-35614 4(a)-4 Twenty-six February 1, 1990
33-39493 4(a)-1 Twenty-seventh September 1, 1990
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-39493 4(a)-3 Twenty-ninth October 1, 1990
33-39493 4(a)-4 Thirtieth March 1, 1991
33-45104 4(a)-1 Thirty-first May 1, 1991
33-45104 4(a)-2 Thirty-second July 1, 1991
33-46293 4(a)-1 Thirty-third February 1, 1992
33-49710 4(a)-1 Thirty-fourth April 1, 1992
B-1
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------------ ---------
Number Dated
------ -----
33-49710 4(a)-2 Thirty-fifth April 1, 1992
33-49710 4(a)-3 Thirty-sixth June 1, 1992
33-49710 4(a)-4 Thirty-seventh June 1, 1992
33-57576 4(a)-1 Thirty-eighth August 1, 1992
33-57576 4(a)-2 Thirty-ninth October 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-57576 4(a)-4 Forty-first December 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-1 Forty-third April 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-64692 4(a)-3 Forty-fifth May 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
33-68100 4(a)-4 Forty-eighth November 1, 1993
33-68100 4(a)-5 Forty-ninth May 1, 1994
33-68100 4(a)-6 Fiftieth.... May 1, 1994
33-68100 4(a)-7 Fifty-first August 1, 1994
0-11442 99 Fifty-second April 1, 1995
Form 10-Q
(Quarter ended
March 31, 1995)
0-11442 99 Fifty-third June 1, 1995
Form 10-Q
(Quarter ended
June 30, 1995)
0-11442 4 Fifty-fourth October 1, 1995
Form 8-K (Dated
September 26,
1995)
0-11442 4(a) Fifty-fifth March 1, 1996
Form 10-Q
(Quarter ended
March 31, 1996)
0-11442 4(a) Fifty-sixth September 1, 1996
Form 10-Q
(Quarter ended
September 30,
1996)
33-83976 4(g) Fifty-seventh February 1, 1997
0-11442 4(b) Fifty -eighth July 1, 1997
Form 10-Q
(Quarter ended
June 30, 1997)
4(b) - Agreement to furnish certain debt instruments.
4(c) 33-68104 4(b)-17 - Deposit Agreement between TXU Electric and Chemical Bank,
dated as of August 4, 1993.
4(d) 0-11442 4(e) - Deposit Agreement between TXU Electric and Chemical Bank,
Form 10-K dated as of October 14, 1993.
(1993)
4(e) 0-11442 4(f) - Indenture (For Unsecured Subordinated Debt Securities
Form 10-K relating to Trust Securities), dated as of December 1, 1995,
(1995) between TXU Electric and The Bank of New York, as Trustee.
B-2
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------------ ---------
4(f) 0-11442 4(g) - Amended and Restated Trust Agreement, dated as of December
Form 10-K 12, 1995 between TXU Electric, as Depositor, and The Bank of New York,
(1995) The Bank of New York (Delaware) and the Administrative
Trustees thereunder as trustees for TXU Electric Capital I.
4(g) 0-11442 4(h) - Guarantee Agreement with respect to TXU Electric Capital I,
Form 10-K dated as of December 12, 1995, between TXU Electric, as
(1995) Guarantor, and The Bank of New York, as Trustee.
4(h) 0-11442 4(i) - Agreement as to Expenses and Liabilities, dated as of December
Form 10-K 12, 1995, between TXU Electric and TXU Electric Capital I.
(1995)
4(i) 0-11442 4(j) - Officer's Certificate, dated as of December 12, 1995,
Form 10-K establishing the terms of the Junior Subordinated Debentures
(1996) issued in connection with the preferred securities of TXU
Electric Capital I.
4(j) 0-11442 4(m) - Amended and Restated Trust Agreement, dated as of December 13, 1995,
Form 10-K between TXU Electric, as Depositor, The Bank of New York, The Bank of New
(1995) York (Delaware), and the Administrative Trustees thereunder, as Trustees
for TXU Electric Capital III.
4(k) 0-11442 4(n) - Guarantee Agreement with respect to TXU Electric Capital III,
Form 10-K dated as of December 13, 1995, between TXU Electric, as Guarantor, and The
(199% Bank of New York, as Trustee.
4(l) 0-11442 4(o) - Agreement as to Expenses and Liabilities, dated as of December 13, 1995,
Form 10-K between TXU Electric and TXU Electric Capital III.
(1995)
4(m) 0-11442 4(r) - Officer's Certificate, dated as of December 13, 1995, establishing the terms
Form 10-K of the Junior Subordinated Debentures issued in connection with the
(1996) preferred securities of TXU Electric Capital III.
4(n) 0-11442 4(s) - Amended and Restated Trust Agreement, dated as of January 30, 1997, between
Form 10-K TXU Electric, as Depositor, and The Bank of New York (Delaware), and the
(1996) Administrative Trustee as thereunder, as Trustees for TXU Electric Capital IV.
4(o) 0-11442 4(t) - Guarantee Agreement with respect to TXU Electric Capital IV, dated as of
Form 10-K January 30, 1997, between TXU Electric, as Guarantor and The Bank of New York,
(1996) as Trustee.
4(p) 0-11442 4(u) - Agreement as to Expenses and Liabilities, dated as of January 30, 1997,
Form 10-K between TXU Electric and TXU Electric Capital IV.
(1996)
4(q) 0-11442 4(v) - Officer's Certificate, dated as of January 30, 1997, establishing the terms of
Form 10-K the Junior Surbordinated Debentures issued in connection with preferred
(1996) securities of TXU Electric Capital IV.
B-3
Previously Filed*
---------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
4(r) 0-11442 4(w) - Amended and Restated Trust Agreement, dated as of January 30, 1997,
Form 10-K between TXU Electric, as Depositor, and The Bank of New York
(1996) (Delaware), and the Administrative Trustee thereunder.
4(s) 0-11442 4(x) - Guarantee Agreement with respect to TXU Electric Capital V, dated as
From 10-K of January 30, 1997, between TXU Electric, as Guarantor, and The
(1996) Bank of New York, as Trustee.
4(t) 0-11442 4(y) - Agreement as to Expenses and Liabilities, dated as of January 30,
(1996) 1997, between TXU Electric and TXU Electric Capital V.
4(u) 0-11442 4(z) - Officer's Certificate, dated as of January 30, 1997, establishing
(1996) the terms of the Junior Subordinated Debentures issued in
connection with the preferred securities of TXU Electric Capital V.
4(v) 333-45999 4(a) - Indenture, dated October 1, 1997, relating to TXU Corp.'s 6.20% Series A
Senior Notes and 6.20% Series A Exchange Notes (together, Series A Notes).
4(w) 333-45999 4(e) - Officers' Certificate establishing Series A Notes.
4(x) 333-45999 4(b) - Indenture, dated October 1, 1997, relating to TXU Corp.'s 6.375% Series B Senior
Notes and 6.375% Series B Exchange Notes (together, Series B Notes).
4(y) 333-45999 4(f) - Officer's Certificate establishing Series B Notes.
4(z) 0-12833 4(ff) - Indenture, dated January 1, 1998, relating to TXU Corp.'s 6.375% Series C Senior
Form 10-K Notes and 6.375% Series C Exchange Notes (together, Series C Notes).
(1997)
4(aa) 0-12833 4(hh) - Officers' Certificate establishing Series C Notes.
Form 10-K
(1997)
4(bb) 0-11442 4(a) - Indenture (For Unsecured Debt Securities), dated as of August 1, 1997, between
Form 10-Q TXU Electric and The Bank of New York.
(Quarter ended
Sept. 30, 1997)
4(cc) 0-11442 4(b) - Officer's Certificate establishing the TXU Electric 7.17% Debentures due
Form 10-Q August 1, 2007.
(Quarter ended
Sept. 30, 1997)
4(dd) 0-11422 99(a) - Officer's certificate establishing TXU Electric's Floating Rate debentures
Form 10-Q due April 24, 2000.
(Quarter ended
March 31, 1998)
4(ee) 0-12833 4(kk) - Indenture (For Unsecured Debt Securities), dated as of January 1, 1998,
Form 10-K between TXU Gas and The Bank of New York.
(1997)
4(ff) 0-12833 4(ll) - Officer's Certificate establishing the TXU Gas 6 1/4% Series A Notes
Form 10-K due January 1, 2003.
(1997)
4(gg) 0-12833 4(mm) - Officer's Certificate establishing the TXU Gas Remarketed Reset Notes
Form 10-K due January 1, 2008.
(1997)
4(hh) 33-45688 4.2 - Indenture, dated February 15, 1992, between TXU Gas Corporation and The First
National Bank of Chicago.
B-4
Previously Filed*
-----------------------------
With
File As
Exhibits Number Exhibit
- -------- -------- -------
4(ii) 0-12833 4(oo) - TXU Gas 7% Note due 1999, dated August 18, 1992.
Form 10-K
(1997)
4(jj) 0-12833 4(qq) - TXU Gas 6-3/8% Note due 2004, dated February 1, 1994.
Form 10-K
(1997)
4(kk) 0-12833 4(rr) - TXU Gas 7-1/8% Note due 2005, dated June 6, 1995.
Form 10-K
(1997)
4(ll) 1-12833 4(a) - Remarketing Agreement, dated as of January 30, 1998 and
Form 8-K form of Remarketing Agreement Supplement with respect to
(filed August 28, TXU Gas Remarketed Reset Notes.
1998)
4(mm) 1-12833 4(b) - Indenture, (For Unsecured Subordinated Debt Securities),
Form 8-K dated as of June 1, 1998, between TXU Gas and The Bank
(filed August 28, of New York, as Trustee.
1998)
4(nn) 1-12833 4(c) - Officer's Certificate, dated as of July 2, 1998, establishing
Form 8-K the terms of the TXU Gas Floating Rate Junior Subordinated
(filed August 28, Denbentures, issued in connection with the preferred securities TXU
1998) Gas Capital I.
4(oo) 1-12833 4(d) - Amended and Restated Trust Agreement, dated as of July 2,
Form 8-K 1998, between TXU Gas, as Depositor, and The Bank of
(filed August 28, New York, The Bank of New York (Delaware), and the
1998) Administrative trustees thereunder
4(pp) 1-12833 4(e) - Guarantee Agreement with respect to TXU Gas Capital I, dated as of July 2,
Form 8-K 1998, between TXU Gas, as Guarantor, and The Bank of New York, as Trustee.
(filed August 28,
1998)
4(qq) 1-12833 4(f) - Agreement as to Expenses and Liabilities, dated as of July 1,
Form 8-K 1998, between TXU Gas and TXU Gas Capital I.
(filed August 28,
1998)
4(rr) 1-12833 4(g) - Indenture (For Unsecured Debt Securities Series D and Series
Form 8-K E), dated as of July 1, 1998, between Company and the Bank of
(filed August 28, New York.
1998)
4(ss) 1-12833 4(h) - Officers' Certificate, dated July 22, 1998 establishing the terms
Form 8-K of the 6.37% Series D Senior Notes and the 6.50% Series E
(filed August 28, Senior Notes.
1998)
4(tt) 1-12833 4(i) - Purchase Contract Agreement, dated as of July 1, 1998,
Form 8-K between TXU Corp. and The Bank of New York with
(filed August 28, respect to TXU Corp.'s issuance of Feline PRIDES.
1998)
4(uu) 1-12833 4(j) - Pledge Agreement, dated as of July 1, 1998, among TXU
Form 8-K Corp., The Chase Manhattan Bank and The Bank of New
(filed August 28, York with respect to the Feline PRIDES.
1998)
B-5
Previously Filed*
---------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
4(vv) 1-12833 4(a) - Indenture, (For Unsecured Subordinated Debt Securities),
Form 8-K dated as of December 1, 1998, between TXU Corp. and The
(filed January 19, Bank of New York, as Trustee.
1999)
4(ww) 1-12833 4(b) - Officer's Certificate, dated as of December 30, 1998,
Form 8-K establishing the terms of TXU Corp.'s 7 1/4% Junior
(filed January 19, Subordinated Debentures, Series A issued in connection with the
preferred securities of TXU Capital I.
4(xx) 1-12833 4(c) - Amended and Restated Trust Agreement, dated as of
Form 8-K December 30, 1998, between TXU Corp., as Depositor, and
(filed January 19, The Bank of New York, The Bank of New York (Delaware),
1999) and the Administrative Trustees thereunder.
4(yy) 1-12833 4(d) - Guarantee Agreement with respect to TXU Capital I, dated
Form 8-K as of December 30, 1998, between TXU Corp., as Guarantor,
(filed January 19, and The Bank of New York, as Trustee.
1999)
4(zz) 1-12833 4(e) - Agreement as to Expenses and Liabilities, dated as of
Form 8-K December 30, 1998, between TXU Corp. and TXU Capital
(filed January 19, I.
1999)
4(aaa) 1-12833 4(a) - Indenture, (For Unsecured Debt Securities Series F), dated as
Form 10-Q of October 1, 1998, between TXU Corp. and The Bank of
(Quarter ended New York.
September 30, 1998)
4(bbb) 1-12833 4(b) - Officer's Certificate establishing the terms of TXU Corp.'s
Form 10-Q Mandatory Putable/Remarketable Securities (Series F Notes).
(Quarter ended
September 30, 1998)
4(ccc) 1-12833 4(c) - Remarketing Agreement relating to the Series F Notes.
Form 10-Q
(Quarter ended
September 30, 1998)
4(ddd) 1-12833 4(d) - Indenture (For Unsecured Debt Securities Series G), dated as
Form 10-Q of October 1, 1998, between TXU Corp. and The Bank of
(Quarter ended New York.
September 30, 1998)
4(eee) 1-12833 4(e) - Officer's Certificate establishing the terms of TXU
Form 10-Q Corp.'s Floating Rate Senior Notes.
(Quarter ended
September 30, 1998)
4(fff) 333-8008 and 4.1 - Indenture, dated as of October 16, 1997, among Energy Group
333-8008-1 Overseas B.V. (EGO), The Energy Group PLC and The Bank
of New York, as Trustee.
4(ggg) 333-8008 and 4.2 - Form of 7.375% Series B Guaranteed note of EGO Due 2017.
333-8008-1
4(hhh) 333-8008 and 4.3 - Form of 7.500% Series B Guaranteed note of EGO Due 2027.
333-8008-1
4(iii) - Officer's Certificate dated as of December 13, 1999 establishing
the terms of TXU Corp.'s 8.70% Junior Subordinated
Debentures, Series B, issued in connection with the preferred
securities of TXU Capital II.
B-6
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
4(jjj) - Amended and Restated Trust Agreement, dated as of December 13,
1999, between TXU Corp., as Depositor, and The Bank of New
York, The Bank of New York (Delaware), and the Administrative
Trustees thereunder.
4(kkk) - Guarantee Agreement with respect to TXU Capital II, dated as of
December 13, 1999, between TXU Corp., as Guarantor, and The
Bank of New York, as Trustee.
4(lll) - Agreement as to Expenses and Liabilities, dated as of December
13, 1999, between TXU Corp. and TXU Capital II.
4(mmm) 333-82307 4(a) - Indenture (For Unsecured Debt Securities) dated May 1, 1999,
and 333-82037-1 among TXU Eastern Funding Company (Funding), TXU Europe and the
Bank of New York.
4(nnn) 333-82307 4(b) - Officer's Certificate establishing 6.15% senior notes due May
and 333-82307-1 15, 2002 and 6.15% exchange senior notes due May 15, 2002, with
the forms of notes attached thereto.
4(ooo) 333-82307 4(c) - Officer's Certificate establishing 6.45% senior notes due May
and 333-82307-1 15, 2005 and 6.45% exchange senior notes due May 15, 2005, with
the forms of notes attached thereto.
4(ppp) 333-82307 4(d) - Officer's Certificate establishing 6.75% senior notes due May
and 333-82307-1 15, 2009 and 6.75% exchange senior notes due May 15, 2009, with
the forms of notes attached thereto.
4(qqq) 333-82307 4(f) - Deposit Agreement with respect to the senior notes and the
and 333-82307-1 exchange senior notes.
4(rrr) - Amended and Restated Trust Agreement, dated as of March 2, 2000,
among TXU Business Services Company, TXU Europe, TXU Europe
CP, Inc., and The Bank of New York, The Bank of New York
(Delaware), and the Administrative Trustees of TXU Europe
Capital I.
4(sss) - Amended and Restated Partnership Agreement of Limited
Partnership, dated as of March 2, 2000, of TXU Europe
Funding I., L.P.
4(ttt) - Preferred Trust Securities Guarantee, dated as of March 2, 2000,
between TXU Europe and The Bank of New York.
4(uuu) - Preferred Partnership Securities Guarantee, dated as of March 2,
2000, between TXU Europe and The Bank of New York.
4(vvv) - Indenture (for Unsecured Subordinated Debt Securities), dated as
of March 2, 2000, among Funding, TXU Europe and The Bank of
New York.
4(www) - Officer's certificate, dated as of March 2, 2000, establishing
the terms of the 9.75% Junior Subordinated Deferrable
Interest Debentures, Series A due March 2, 2020, in
connection with the preferred securities of Funding.
4(xxx) - Deposit Agreement, dated as of March 2, 2000, between the Bank
of New York and Funding.
4(yyy) - Indenture (for Unsecured Subordinated Debt Securities), dated as
of March 2, 2000, among TXU Europe Group, TXU Europe and The
Bank of New York.
4(zzz) - Officer's Certificate, dated as of March 2, 2000, establishing
the terms of the 9.75% Junior Subordinated Deferrable
Interest Debentures, Series A due March 2, 2020, in
connection with the preferred securities of TXU Europe Group.
4(A) - Deposit Agreement, dated as of March 2, 2000, between The Bank
of New York and TXU Europe Group PLC.
B-7
Previously Filed*
---------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
4(B) - Trust Deed relating to a (pound) 2,000,000 Euro Medium Term Note
Program (EMTN Program) between Funding, TXU Europe and the Law
Debenture Trust Corporation, dated December 15, 1999.
4(C) - Pricing supplement with respect to(pound)225,000,000 7.25 percent
Notes due 2030 issued pursuant to the EMTN program.
10(a)** 1-12833 10(a) - Deferred and Incentive Compensation Plan of the Texas Utilities
Form 10-Q Company System, as restated effective August 1, 1997.
(Quarter ended
March 31, 1999)
10(b)** 1-12833 10(b) - Restated Salary Deferral Program of the Texas Utilities Company
Form 10-Q System as restated effective April 1, 1998.
(Quarter ended
March 31, 1999)
10(c)** 1-12833 10(c) - Second Supplemental Retirement Plan for Employees of the
Form 10-Q Texas Utilities Company System, as restated effective August 11, 1998.
(Quarter ended
March 31, 1999)
10(d)** 1-3591 10(d) - Deferred Compensation Plan for Outside Directors of TXU Corp.,
Form 10-Q effective as of July 1, 1995.
(Quarter ended
June 30, 1995)
10(e)** 1-12833 10(e) - Long-Term Incentive Plan of the Texas Utilities Company
Form 10-Q System, dated as of June 6, 1998.
(Quarter ended
March 31, 1999)
10(f)** 1-12833 10(c) - Split Dollar Life Insurance Program of the Texas Utilities
Form 10-Q Company System, dated as of August 1, 1987.
(Quarter ended
March 31, 1999)
10(g)** 333-12391 10(f) - Employment Agreement between TXU Corp. and David W. Biegler.
10(h)** 1-3591 10(e) - Management Transition Agreement, dated as of May 19, 1995
Form 10-Q between TXU Corp. and J.S. Farrington.
(Quarter ended
June 30, 1995)
10(i)** 1-12833 10(g) - Description of Compensatory Arrangement with Derek Bonham.
Form 10-K
(1998)
10(j)** 1-3183 10.8 - TXU Gas Deferred Compensation Plan dated September 30, 1994
Form 10-K and Amendment No. 1 thereto dated March 28, 1995, Amendment
(1996) No. 2 dated January 1, 1996, Amendment No. 3 dated September 23, 1996,
Amendment No. 4 dated November 6, 1996 and Amendment No. 5 dated
February 18, 1997.
10(k)** 1-3183 10.9 - TXU Gas Deferred Compensation Trust dated September 30, 1994,
Form 10-K and Amendment No. 1 thereto effective January 1, 1996.
(1996)
10(l)** 1-3183 10.10 - TXU Gas Retirement Income Restoration Plan dated
Form 10-K December 28, 1990 (RIRP), and Amendment No. 1 thereto
(1996) dated September 30, 1994, Amendment No. 1-A dated February 13,
1996, and Amendment No. 2 effective January 1, 1996.
10(m)** 1-3183 10(g) - Amendments 3 and 4 dated May 5, 1997 and Amendment 5 dated
Form 10-K August 1, 1997, to the RIRP.
(1998)
B-8
Previously Filed*
---------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
10(n)** 1-3591 10(d) - Annual Incentive Plan of the Texas Utilities Company System.
Form 10-Q
(Quarter ended
June 30, 1995)
10(o) 1-11668 10(a) - 364 Day Second Amended and Restated Competitive Advance and
Form 10-K Revolving Credit Facility Agreement, dated as of February 25, 2000
(1999) among TXU Corp., TXU Electric, TXU Gas, Chase Bank of
Texas, National Association, as Administrative Agent and
certain banks listed therein and The Chase Manhattan Bank, as
Competitive Advance Facility Agent (US Facility A).
10(p) 1-11668 10(b) - Five-Year Second Amended and Restated Competitive Advance Form 10-K
Form 10-K and Revolving Credit Facility Agreement dated as of February 25, 2000
(1999) among TXU Corp. TXU Electric, TXU Gas, The Chase Manhattan Bank, as Competitive
Advance Facility Agent and Chase Bank of Texas, National Association, as
Administrative Agent and certain banks listed therein (US Facility B).
10(q) 1-12833 10(a) - Facilities Agreement for Credit Facilities, dated March 4, 1999,
Form 10-Q among TXU Europe Limited, TXU Finance (No. 2) Limited, TXU
(Quarter ended Acquisitions Limited, Chase Manhattan plc, Lehman Brothers
March 31, 1999) International (Europe) and Merrill Lynch Capital Corporation and
the other banks named therein.
12 - Computation of Ratio of Earnings to Fixed Charges and to Fixed
Charges and Preferred Dividends.
21 - Subsidiaries of TXU Corp.
23(a) - Consent of Counsel to TXU Corp.
23(b) - Consent of Deloitte & Touche LLP, Independent Auditors' for TXU Corp.
23(c) - Consent of PricewaterhouseCoopers, Independent Accountants
for TXU Europe Group.
27 - Financial Data Schedule for TXU Corp.
99(a) 1-3591 28(b) - Agreement, dated as of February 12, 1988, between TXU
Form 10-K Electric and Texas Municipal Power Agency.
(1987)
99(b) 33-55408 99(a) - Agreement, dated as of July 5, 1988, between TXU Electric and
Tex-La Electric Cooperative of Texas, Inc.
99(c) 33-23532 4(c)(i) - Trust Indenture, Security Agreement and Mortgage, dated as of December 1, 1987, as
supplemented by Supplement No. 1 thereto dated as of May 1, 1988 among the Lessor,
TXU Electric and the Trustee.
99(d) 33-24089 4(c)-1 - Supplement No. 2 to Trust Indenture, Security Agreement and
Mortgage, dated as of August 1, 1988.
99(e) 33-24089 4(e)-1 - Supplement No. 3 to Trust Indenture, Security Agreement and
Mortgage, dated as of August 1, 1988.
99(f) 0-11442 99(c) - Supplement No. 4 to Trust Indenture, Security Agreement and
Form 10-Q Mortgage, including form of Secured Facility Bond, 1993
(Quarter ended Series.
June 30, 1993)
99(g) 33-23532 4(d) - Lease Agreement, dated as of December 1, 1987 between the Lessor
and TXU Electric as supplemented by Supplement No. 1 thereto
dated as of May 20, 1988 between the Lessor and TXU Electric.
99(h) 33-24089 4(f) - Lease Agreement Supplement No. 2, dated as of August 18, 1988.
99(i) 33-24089 4(f)-1 - Lease Agreement Supplement No. 3, dated as of August 25, 1988.
B-9
Previously Filed*
---------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
99(j) 33-63434 4(d)(iv) - Lease Agreement Supplement No. 4, dated as of December 1, 1988.
99(k) 33-63434 4(d)(v) - Lease Agreement Supplement No. 5, dated as of June 1, 1989.
99(l) 0-11442 99(d) - Lease Agreement Supplement No. 6, dated as of July 1, 1993.
Form 10-Q
(Quarter ended
June 30, 1993)
99(m) 33-23532 4(e) - Participation Agreement dated as of December 1, 1987, as amended
by a Consent to Amendment of the Participation Agreement,
dated as of May 20, 1988, each among the Lessor, the Trustee,
the Owner Participant, certain banking institutions, Capcorp,
Inc. and TXU Electric.
99(n) 33-24089 4(g) - Consent to Amendment of the Participation Agreement, dated as of
August 18, 1988.
99(o) 33-24089 4(g)-1 - Supplement No. 1 to the Participation Agreement, dated as of
August 18, 1988.
99(p) 33-24089 4(g)-2 - Supplement No. 2 to the Participation Agreement, dated as of
August 18, 1988.
99(q) 33-63434 4(e)(v) - Supplement No. 3 to the Participation Agreement, dated as of
December 1, 1988.
99(r) 0-11442 99(e) - Supplement No. 4 to the Participation Agreement, dated as of
Form 10-Q June 17, 1993.
(Quarter ended
June 30, 1993)
99(s) 0-11442 4(b) - Supplement No. 1, dated October 25, 1995, to Trust
Form 10-Q Indenture, Security Agreement and Mortgage, dated as of
(Quarter ended December 1, 1989, among the Owner Trustee, TXU Electric
March 31, 1996) and the Indenture Trustee.
99(t) 0-11442 4(c) - Supplement No. 1, dated October 19, 1995, to Amended and Form
10-Q Restated Participation Agreement, dated as of November 28,
(Quarter ended 1989, among the Owner Trustee, The First National Bank of
March 31, 1996 Chicago, As Original Indenture Trustee, the Indenture Trustee, the Owner
Participant, Mesquite Power Corporation and TXU Electric.
99(aa) 1-12833 99(a) - Facility Agreement for (pound) 250,000,000 Revolving Credit
Form 10-Q Facility, dated May 21, 1998, among Eastern Electricity plc,
(Quarter ended and Chase Manhattan plc, Lehman Brothers International and
September 30, 1998) Merrill Lynch Capital Corporation as Joint Lead Arrangers, and The Chase
Manhattan Bank, Lehman Commercial Paper Inc. and Merrill Lynch Capital
Corporation as Underwriters.
99(bb) 1-12833 - Syndicated Facilities Agreement, dated February 24, 1999, among
(1998) TXU Australia Holdings (Partnership) Limited Partnership (the
Form-K Partnership), certain of its Australia affiliates (Borrowers)
and The Bank of America National Trust and Savings Association, Deutsche
Australia Limited, National Australia Bank Limited, Toronto Dominion Australia
Limited and the other Banks named therein (Banks).
99(cc) 1-12833 - Security Trust Deed, dated February 24, 1999, among the
(1998) Partnership, the Borrowers, TXU Corp. and the Banks.
Form 10-K
B-10
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
99(dd) 1-14576 3.10 - Deed of Assignment of Rents, dated as of October 28, 1996,
Form 20-F among Eastern Merchant Properties Limited (EMPL), Eastern
dated January 27, Group Finance Limited, Barclays Bank PLC (as agent)
1997 and the banks listed therein.
99(ee) 1-14576 3.11 - Standby Credit Facility Agreement, dated as of October 28,
Form 20-F, 1996, among EMPL and Eastern Merchant Generation
dated January 27, Limited (EMGL) (as borrowers), TXU Europe Group
1997 and TXU Europe Power Ltd. (TXU Europe Power) (as guarantors),
Eastern Electricity plc (EE), The Industrial Bank of Japan, Limited
(as arranger and agent), The Bank of Nova Scotia, the Dai-ichi Kangyo
Bank, Limited, The Royal Bank of Scotland plc and Societe Generale
(as co-arrangers), and the financial institutions listed
therein.
99(ff) 1-14576 3.12 - Guarantee and Indemnity Deed, dated as of October 28, 1996,
Form 20-F, among TXU Europe Group, TXU Europe Power, EE, Barclays
dated January 27, Bank PLC, Barclays De Zoete Wedd Limited, and the other banks
1997 listed therein.
99(gg) 1-14576 3.13 - Deferred Premium Settlement Deed, dated as of October 28,
Form 20-F, 1996 among EPML, EMGL, EE, The Industrial Bank of
dated January 27, Japan, Limited (as arranger and agent) and the banks and the
1997 participants listed therein.
99(hh) 333-8008 and 4.1 - Indenture, dated as of October 16, 1997, among Energy Group
333-8008-1 Overseas B.V. (EGO), The Energy Group PLC and The Bank
of New York, as Trustee.
99(ii) 333-8008 and 4.2 - Form of 7.375% Series B Guaranteed notes of EGO Due 2017.
333-8008-1
99(jj) 333-8008 and 4.3 - Form of 7.500% Series B Guaranteed notes of EGO Due 2027.
333-8008-1
99(kk) 333-82307 10(f)-2 - Amendment dated July 17, 1998 to the Guarantee and Indemnity
and 82307-1 Deed, dated as of October 28, 1996, among Eastern Group, TXU
Europe Power, EE, Barclays De Zoete Wedd Limited, and the other
banks listed therein.
99(ll) 333-82307 10(f)-3 - Amendment dated March 11, 1999 to the Guarantee and Indemnity
and 82307-1 Deed, dated as of October 28, 1996 (as amended and restated on
July 17, 1998), among Eastern Group, TXU Europe Power, EE, Barclays
Bank PLC, Barclays De Zoete Wedd Limited, and the other banks listed therein.
99(mm) 333-82307 10(g)-1 - Supplemental Agreement dated July 17, 1998 to the Standby
and 82307-1 Credit Facility dated October 28, 1996 among EMPL and EMGL (as
borrowers), Eastern Group and TXU Europe Power (as guarantors), EE,
Barclays Capital and The Royal Bank of Scotland plc (as arrangers),
The Bank of Nova Scotia, Bayerische Landesbank Girozentrale, The Dai-Ichi
Kangyo Bank, Limited, Den Danske Bank Aktieselskab, Nationsbank, N.A.,
Royal Bank of Canada Europe Limited, The Toronto-Dominion Bank and
Westdeutsche Landesbank Girozentrale (as co-arrangers), The Royal Bank
of Scotland plc (as agent), and the financial institutions listed
therein (Supplemental Agreement).
99(nn) 333-82307 10(g)-2 - Amendment dated March 11, 1999 to the Supplemental Agreement.
and 82307-1
99(oo) 333-82307 10(h) - Pooling and Settlement Agreement dated 30 March 1990, as
and 82307-1 amended as of 15 April 1999, among EE, National Grid Company plc and other
parties.
B-11
Previously Filed*
----------------------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
99(pp) 333-82307 10(i) - Master Connection and Use of System Agreement dated as
and 82307-1 of 30 March 1990 among the National Grid Company plc and its users
(including EE).
99(qq) 333-82307 10(j) - Lease of land and premises known as West Burton Ironbridge
and 82307-1 and Rugeley B Power Stations dated 27 June 1996 from National Power
PLC to EMPL and Eastern Group.
99(rr) 333-82307 10(k) - Sublease of land and premises known as West Burton, Iron bridge and
and 82307-1 Rugeley B Power Stations dated 27 June 1996 from National EMPL
to EMGL and Eastern.
99(ss) 333-82307 10(l) - Lease of commercial premises at High Marnham, Newark,
and 82307-1 Nottinghamshire dated 2 July 1996 between PowerGen plc and EMPL.
99(tt) 333-82307 10(m) - Underlease of commercial premises at High Marnham, Newark,
and 82307-1 Nottinghamshire dated 2 July 1996 between EMPL and EMGL.
99(uu) 333-82307 10(n) - Lease of commercial premises at Drakelow, Burton-on-Trent
and 82307-1 Staffordshire dated 2 July 1996 between PowerGen plc and EMPL.
99(vv) 333-82307 10(n) - Underlease of commercial premises at Drakelow, Burton-on-
and 82307-1 Trent, Staffordshire dated 2 July 1996 between EMPL and EMGL.
- -------------------------
* Incorporated herein by reference.
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
B-12