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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
-- OR --
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------
Commission File Number 1-12833
TXU CORP.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Common Stock outstanding at August 9, 2002: 278,374,601 shares, without par
value.
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TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2002 and 2001.................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2002 and 2001.................... 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2002 and 2001.............................. 3
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001.................................. 4
Notes to Financial Statements........................................ 5
Independent Accountants' Report...................................... 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................. 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................... 41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................... 42
SIGNATURE.............................................................................. 44
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- --------- ----------- ----------
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
Operating revenues................................................. $ 7,205 $ 6,127 $ 15,302 $ 14,502
---------- --------- ----------- ----------
Operating expenses
Energy purchased for resale, fuel consumed and
delivery costs.................................................. 5,385 4,252 11,573 10,759
Operation and maintenance........................................ 857 789 1,667 1,493
Depreciation and other amortization.............................. 232 248 472 505
Goodwill amortization............................................ -- 54 -- 109
Taxes other than income.......................................... 179 200 361 382
---------- --------- ----------- ----------
Total operating expenses................................ 6,653 5,543 14,073 13,248
---------- --------- ----------- ----------
Operating income................................................... 552 584 1,229 1,254
Other income....................................................... 27 85 38 117
Other deductions................................................... 28 24 56 59
Interest income.................................................... 11 36 23 73
Interest expense and other charges
Interest......................................................... 281 355 564 736
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU Corp. obligated........................................... 7 7 15 15
Subsidiary obligated.......................................... 3 20 5 39
Preferred stock dividends of subsidiaries........................ 4 4 7 7
Distributions on preferred securities of subsidiary perpetual
trust of TXU Europe........................................... 3 3 7 7
Allowance for borrowed funds used during
construction and capitalized interest......................... (4) (7) (7) (12)
---------- --------- ----------- ----------
Total interest expense and other charges................ 294 382 591 792
---------- --------- ----------- ----------
Income before income taxes and extraordinary items................. 268 299 643 593
Income tax expense................................................. 67 92 170 185
---------- --------- ----------- ----------
Income before extraordinary items.................................. 201 207 473 408
Extraordinary items, net of tax effect............................. -- -- (17) --
---------- --------- ----------- ----------
Net income......................................................... 201 207 456 408
Preference stock dividends......................................... 6 6 11 11
---------- --------- ----------- ----------
Net income available for common stock.............................. $ 195 $ 201 $ 445 $ 397
========== ========= =========== ==========
Average shares of common stock outstanding (millions).............. 269 256 267 257
Per share of common stock:
Basic and diluted earnings
Income before extraordinary items.............................. $ 0.73 $ 0.78 $ 1.73 $ 1.55
Extraordinary items, net of tax effect........................ $ -- $ -- $ (0.06) $ --
Net income available for common stock......................... $ 0.73 $ 0.78 $ 1.67 $ 1.55
Dividends declared............................................... $ 0.60 $ 0.60 $ 1.20 $ 1.20
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- --------- ----------- ----------
MILLIONS OF DOLLARS
Net income................................................... $ 201 $ 207 $ 456 $ 408
---------- --------- ----------- ----------
Other comprehensive income (loss)--
Net change during period, net of tax effects
Cumulative foreign currency translation adjustments....... 280 9 250 (247)
Investments classified as available for sale:
Unrealized holding gains (net of tax expense of $24) -- -- -- 55
Reclassification of net gain realized on sale of
investments to other income (net of tax benefit of
$21 and $22).......................................... -- (50) -- (52)
Cash flow hedges:
Cumulative transition adjustment as of January 1,
2001 (net of tax benefit of $58)...................... -- -- -- (132)
Net change in fair value of derivatives
(net of tax benefit of $84, $17, $90 and $40) (176) (47) (175) (89)
Amounts realized in earnings during the period
(net of tax expense of $52, $49, $50 and $52)......... 124 113 117 119
---------- --------- ----------- ----------
Total............................................ 228 25 192 (346)
---------- --------- ----------- ----------
Comprehensive income......................................... $ 429 $ 232 $ 648 $ 62
========== ========= =========== ==========
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
MILLIONS OF DOLLARS
Cash flows - operating activities
Net income......................................................................... $ 456 $ 408
Adjustments to reconcile net income to cash provided by operating activities:
Loss on extraordinary items ..................................................... 17 --
Depreciation and amortization ................................................... 534 675
Deferred income taxes and investment tax credits - net ......................... (16) 102
Gains from sale of assets....................................................... (13) (88)
Net effect of unrealized mark-to-market valuation gains.......................... (10) (183)
Equity in losses of affiliates and joint ventures................................ 16 24
Other............................................................................ 31 28
Changes in operating assets and liabilities........................................ (712) (374)
----------- -----------
Cash provided by operating activities...................................... 303 592
----------- -----------
Cash flows - financing activities
Issuances of securities:
Long-term debt................................................................... 2,462 1,125
Common stock..................................................................... 605 1
Retirements/repurchases of securities:
Long-term debt................................................................... (2,390) (1,386)
Common stock..................................................................... -- (44)
Change in notes payable:
Commercial paper................................................................. 383 204
Banks............................................................................ (1,609) (346)
Cash dividends paid:
Common stock..................................................................... (318) (309)
Preference stock................................................................. (11) (11)
Debt premium, discount, financing and reacquisition expenses....................... (85) (12)
----------- -----------
Cash used in financing activities.......................................... (963) (778)
----------- -----------
Cash flows - investing activities
Capital expenditures............................................................... (573) (796)
Acquisitions of businesses ........................................................ (204) (217)
Proceeds from sale of assets....................................................... 1,347 630
Nuclear fuel ...................................................................... (50) (11)
Other.............................................................................. (8) (118)
----------- -----------
Cash provided by (used in) investing activities............................ 512 (512)
----------- -----------
Effect of exchange rates on cash and cash equivalents................................ 2 (45)
----------- -----------
Net change in cash and cash equivalents.............................................. (146) (743)
Cash and cash equivalents - beginning balance........................................ 1,161 1,039
----------- -----------
Cash and cash equivalents - ending balance........................................... $ 1,015 $ 296
=========== ===========
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
MILLIONS OF DOLLARS
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 1,015 $ 1,161
Accounts receivable........................................................... 3,487 2,643
Inventories-- at average cost................................................. 563 522
Prepayments................................................................... 275 370
Commodity contract assets..................................................... 1,462 1,680
Other current assets.......................................................... 229 308
----------- ------------
Total current assets.................................................... 7,031 6,684
----------- ------------
Investments
Restricted cash............................................................... 525 520
Other investments............................................................. 1,672 1,586
Property, plant and equipment-- net............................................. 20,864 22,480
Goodwill........................................................................ 7,326 7,247
Regulatory assets-- net......................................................... 1,729 1,679
Commodity contract assets....................................................... 915 795
Cash flow hedges and other derivative assets.................................... 352 448
Deferred debits and other assets................................................ 982 881
----------- ------------
Total assets............................................................ $ 41,396 $ 42,320
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable:
Commercial paper.......................................................... $ 1,124 $ 853
Banks..................................................................... 914 2,369
Long-term debt due currently.................................................. 1,295 1,308
Accounts payable.............................................................. 2,609 2,466
Commodity contract liabilities................................................ 1,280 1,545
Other current liabilities..................................................... 1,599 1,440
----------- ------------
Total current liabilities................................................ 8,821 9,981
----------- ------------
Accumulated deferred income taxes............................................... 3,428 3,796
Investment tax credits.......................................................... 464 479
Commodity contract liabilities.................................................. 573 521
Cash flow hedges and other derivative liabilities............................... 500 317
Other deferred credits and noncurrent liabilities............................... 2,515 2,221
Long-term debt, less amounts due currently...................................... 15,376 16,173
Mandatorily redeemable, preferred securities of subsidiary trusts,
each holding solely junior subordinated debentures of the obligated company
TXU Corp. obligated....................................................... 368 368
Subsidiary obligated...................................................... 147 147
Preferred securities of subsidiary perpetual trust of TXU Europe................ 150 150
Preferred stock of subsidiaries
Not subject to mandatory redemption........................................ 190 190
Subject to mandatory redemption............................................ 21 21
Contingencies (Note 7)
Shareholders' equity (Note 4)................................................... 8,843 7,956
----------- ------------
Total liabilities and shareholders' equity............................... $ 41,396 $ 42,320
=========== ============
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Corp. is a global energy services company that engages in electricity
generation, wholesale energy trading and risk management, retail energy sales,
energy delivery, other energy-related services and, through a joint venture,
telecommunications services. TXU Corp. is a holding company whose principal
United States (US) operations are conducted through TXU US Holdings Company (US
Holdings, formerly TXU Electric Company) and TXU Gas Company (TXU Gas). TXU
Corp.'s principal international operations are conducted through TXU Europe
Limited (TXU Europe) and TXU Australia Holdings Limited Partnership (TXU
Australia).
BUSINESS RESTRUCTURING - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses effective January 1, 2002. In order to satisfy its obligations to
unbundle its business pursuant to the 1999 Restructuring Legislation and
consistent with its business separation plan as approved by the Public Utility
Commission of Texas (Commission), as of January 1, 2002, US Holdings
transferred:
. its electric transmission and distribution (T&D) assets to Oncor Electric
Delivery Company (Oncor), which is a utility regulated by the Commission
and a wholly-owned subsidiary of US Holdings,
. its electric power generation assets to subsidiaries of TXU Energy
Company LLC (TXU Energy), which is the new competitive business and a
wholly-owned subsidiary of US Holdings, and
. its retail customers to a subsidiary retail electric provider (REP) of
TXU Energy.
The T&D assets of TXU SESCO Company, a subsidiary of TXU Corp., also were
transferred to Oncor. In addition, as of January 1, 2002, US Holdings acquired
the following businesses from within the TXU Corp. system and transferred them
to TXU Energy: the REP of TXU SESCO Company; the wholesale trading and risk
management operations and the unregulated commercial and industrial retail gas
business of TXU Gas; and the energy management services businesses and other
affiliates of TXU Corp., including the fuel procurement and coal mining
businesses that service the generation operations.
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (2001 Form 10-K). Following TXU Corp.'s reorganization as of
January 1, 2002, TXU Corp. realigned its operations into three reportable
segments: North America Energy, North America Energy Delivery and International
Energy. (See Note 8 for further information concerning reportable business
segments.)
BUSINESS ACQUISITIONS AND DISPOSITIONS - On July 1, 2002, TXU Europe
acquired a majority interest in Braunschweiger Versorgungs-Aktiengesellschaft
(BVAG), an electricity, gas, heating and water supplier for 210,000 residential,
commercial and industrial customers in the German city of Braunschweig. BVAG was
a wholly-owned subsidiary of Stadtwerke Braunschweig. TXU Europe acquired 74.9%
of BVAG and three minority interest investments for $430 million in cash. Under
the terms of the acquisition agreement, Stadtwerke Braunschweig has the right
until January 1, 2006 to sell its remaining 25.1% ownership interest in BVAG to
TXU Europe for $128 million. In July 2002, TXU Europe sold one of the three
minority interests acquired as part of the BVAG acquisition for $28 million.
BVAG reported revenues of $277 million for the year ended December 31, 2001.
On April 24, 2002, TXU Energy acquired a cogeneration and wholesale energy
production business in New Jersey for $36 million in cash. The acquisition
included a 122 megawatt combined-cycle power production facility and various
contracts, including electric supply and gas transportation agreements. This
transaction represented TXU Energy's first investment outside of Texas and
reflected its strategy of diversifying its portfolio of assets.
5
On March 1, 2002, TXU Europe acquired the United Kingdom (UK) energy retail
and trading business of Amerada Hess for $168 million in cash. The business
includes over 400,000 residential energy and telecommunication accounts, a
commercial and industrial natural gas retail operation with 63 billion cubic
feet (Bcf) in annual sales volumes and wholesale gas marketing operations.
Estimated revenues for the business acquired were $1.3 billion for the year
ended December 31, 2001. The process of determining the fair value of assets and
liabilities of Amerada Hess has not been completed.
In January 2002, TXU Europe completed the sale of its UK electricity
distribution (networks) business, including its 50% interest in the 24seven
joint venture, to London Electricity Group plc (LE Group) for $1.8 billion,
consisting of net cash proceeds of $712 million (used to repay debt) and the
assumption by LE Group of $1.1 billion aggregate principal amount of debt. TXU
Europe recorded a loss on the sale of $125 million ($88 million after-tax),
after transaction costs, in the fourth quarter of 2001.
GENERATION PLANT ACQUISITIONS AND DISPOSITIONS - On May 31, 2002, TXU
Energy acquired a 260 megawatt combined-cycle power production facility in
northwest Texas through a settlement agreement which dismissed a lawsuit
previously filed related to the plant, and included a nominal cash payment. TXU
Energy previously purchased all of the electrical output of this plant under a
long-term contract.
On April 25, 2002, TXU Energy completed the sale of its Handley and
Mountain Creek generating plants in the Dallas-Fort Worth area with total plant
capacity of 2,334 megawatts for $443 million in cash, including the assumption
of an above-market tolling agreement with a fair value of $190 million reflected
in other liabilities. The tolling agreement provides for TXU Energy to purchase
power during summer months for the next five years. A pretax gain on the sale of
$146 million, net of the effects of the above-market tolling agreement, was
deferred and included in other liabilities, and will be recognized during summer
months over the five-year term of the tolling agreement.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The condensed consolidated financial statements of
TXU Corp. and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142 "Goodwill and Other Intangible Assets" discussed below, on the same
basis as the audited financial statements included in its 2001 Form 10-K. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with US GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The results of
operations for an interim period may not give a true indication of results for a
full year. Certain previously reported amounts have been reclassified to conform
to current classifications. All dollar amounts in the financial statements and
tables in the notes, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
CHANGES IN ACCOUNTING STANDARDS - SFAS No. 142 became effective for TXU
Corp. on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units, and the discontinuance of goodwill amortization. The
amortization of TXU Corp.'s existing goodwill ($220 million annually) ceased
effective January 1, 2002.
In addition, SFAS No. 142 requires completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. TXU Corp. has completed
the transitional impairment test, the results of which indicated no impairment
of goodwill.
6
The table below reflects what reported income before extraordinary items
and net income (including basic and diluted earnings per share amounts) would
have been in the 2001 periods, exclusive of goodwill amortization expense
recognized in those periods compared to the 2002 periods.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2002 2001 2002 2001
--------- -------- --------- ---------
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
Reported income before extraordinary items........... $ 201 $ 207 $ 473 $ 408
Add back: goodwill amortization..................... -- 54 -- 109
--------- -------- --------- ---------
Adjusted income before extraordinary items........... 201 261 473 517
Extraordinary items, net of tax effect.............. -- -- (17) --
--------- -------- --------- ---------
Adjusted net income.................................. 201 261 456 517
Preference stock dividends........................... 6 6 11 11
--------- -------- --------- ---------
Adjusted net income available for common stock....... $ 195 $ 255 $ 445 $ 506
========= ======== ========= =========
Basic and diluted earnings per share:
Reported income before extraordinary items........... $ 0.73 $ 0.78 $ 1.73 $ 1.55
Add back: goodwill amortization..................... -- 0.21 -- 0.42
--------- -------- --------- ---------
Adjusted income before extraordinary items........... 0.73 0.99 1.73 1.97
Extraordinary items, net of tax effect............... -- -- (0.06) --
--------- -------- --------- ---------
Adjusted net income available for common stock....... $ 0.73 $ 0.99 $ 1.67 $ 1.97
========= ======== ========= =========
Exclusive of goodwill amortization expense, for the years ended December
31, 2001, 2000 and 1999, net income available for common stock would have been
$875 million, $1.109 billion and $1.176 billion, respectively, and earnings per
share would have been $3.37, $4.21 and $4.22, respectively.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Corp. on January 1, 2003. SFAS No. 143 requires the
recognition of a fair value liability for any retirement obligation associated
with long-lived assets. SFAS No. 143 also requires additional disclosures. TXU
Corp. will change its reporting for nuclear decommissioning costs to conform to
the new standard, as well as conform its accounting for all other asset
retirement obligations to the new standard.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Corp. on January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale, and resolves significant implementation issues related to SFAS No. 121.
The adoption of SFAS No. 144 by TXU Corp. has not affected its financial
position or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", was issued in April 2002 and
will be effective for TXU Corp. on January 1, 2003. One of the provisions of
this statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", whereby any gain or loss on the early extinguishment of
debt that was classified as an extraordinary item in prior periods in accordance
with SFAS No. 4 shall be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions".
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and will be effective for TXU Corp. on
January 1, 2003. SFAS No. 146 requires that a liability for costs associated
with an exit or disposal activity be recognized only when the liability is
incurred and measured initially at fair value.
In June 2002, the Emerging Issues Task Force (EITF) reached a consensus on
certain aspects of Issue 02-3, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities", regarding the presentation of trading
activities in the statement of income. The new rules require all trading
contracts, whether or not physically settled, to be recorded net upon
settlement, rather than gross as a sale and cost of sale. TXU Corp. has
historically recorded financial contracts net, but has recorded those contracts
that provide for physical delivery gross upon settlement. The change will be
effective with third quarter 2002 reporting and
7
requires reclassification of prior periods. TXU has not yet determined the
amount of the reclassifications; however, implementation of the new rules is
expected to result in a significant reduction in TXU Corp.'s operating revenues
and energy purchased for resale. The required reclassifications will have no
impact on TXU Corp.'s previously reported gross margin, net income or cash
provided by operating activities.
For accounting standards not yet adopted or implemented, TXU Corp. is
evaluating the potential impact on its financial position and results of
operations.
EARNINGS PER SHARE - Basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
period reported. Diluted earnings per share include the effect of potential
issuances of common shares resulting from the assumed exercise of all
outstanding stock options and settlement of dilutive forward stock purchase
agreements. TXU Corp. has outstanding certain instruments that may be settled
with common stock that are considered in computing diluted earnings per share.
The number of shares of common stock added to the average shares outstanding for
the purpose of calculating diluted earnings per share was 785,108 and 236,935
for the three months ended June 30, 2002 and 2001, respectively, and 607,615 and
215,969 for the six months ended June 30, 2002 and 2001, respectively.
TXU Corp. also has outstanding certain common stock forward purchase
contracts related to the equity-linked debt securities issued in 1998 that will
be settled with common stock in August 2002. On August 13, 2002, a remarketing
of the debt component of the equity-linked debt securities did not occur as
contemplated by its terms. As a result, TXU Corp. will retain and cancel a
portion of the associated notes in satisfaction of the holders' obligations
under the common stock forward purchase contracts (see Note 3). Assuming this
event would have occurred at the beginning of the periods, 7,855,126 and
8,043,588 shares of common stock would have been added to the average shares
outstanding for purposes of calculating diluted earnings per share, resulting in
diluted earnings per share of $0.72 and $1.65 for the three-month and six-month
periods ended June 30, 2002, respectively.
3. FINANCING ARRANGEMENTS
CREDIT FACILITIES - At June 30, 2002, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) available as
follows:
CREDIT FACILITIES AT
JUNE 30, 2002
---------------------------------
FACILITY
FACILITY EXPIRATION DATE BORROWERS LIMIT OUTSTANDING AVAILABLE
- -------- --------------- ----------------------- -------- ----------- ---------
364-Day Revolving Credit Facility (a)..... April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ -- $
Revolving Credit Facility B(b)............ February 2005 TXU Corp., US Holdings 1,400 --
Three-Year Revolving Credit Facility (c).. May 2005 TXU Corp. 500 150
-------- -----------
Total (d)............................... 2,900 150 $ 1,087
Credit Facility........................... August 2002 TXU Corp. 365 365 --
Revolving Credit Facility -
Tranche A (e)........................... November 2006 TXU Europe 1,226 999 227
Senior Facility........................... October 2004 TXU Australia 883 821 62
Commercial Paper Facility................. N/A TXU Australia 123 123 --
Working Capital Facilities ............... N/A TXU Australia 56 -- 56
(a) As of June 30, 2002, letters of credit outstanding under this agreement
totaled $57 million, which reduced the available capacity by that amount.
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
Short-term liquidity needs of TXU Gas are expected to be funded through
advances from affiliates. TXU Corp. was removed as a borrower under this
facility effective July 31, 2002. As of June 30, 2002, letters of credit
outstanding under this agreement totaled $482 million, which reduced the
available capacity by that amount.
(c) The $150 million of borrowings outstanding at June 30, 2002 was repaid on
July 29, 2002.
(d) Supports commercial paper borrowings. Available balance is net of
commercial paper borrowing of $1.124 billion and outstanding letters of
credit.
(e) As of June 30, 2002, the outstanding borrowings under the Revolving Credit
Facility and the associated interest rates were as follows: (euro)574
million ($569 million) at 4.12% per annum, 700 million Norwegian kroner
(NOK) ($93 million) at 7.86% per annum, and (pound)220 million ($337
million) at 4.73% per annum, all classified as long-term debt.
8
In July 2002, US Holdings entered into a $400 million credit facility that
terminates no later than November 30, 2002.
In May 2002, TXU Corp. entered into a $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
will be used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day revolving credit facility with a group of banks that terminates
April 22, 2003. This facility will be used for working capital and general
corporate purposes. Up to $1.0 billion of letters of credit may be issued under
the facility. This facility and the $500 million three-year revolving credit
facility described above replaced the TXU Corp. and US Holdings $1.4 billion
364-day revolving credit facility that expired in April 2002.
During the second quarter of 2002, each of TXU Energy and Oncor began
selling commercial paper to fund its short-term liquidity requirements. The new
commercial paper programs allow TXU Energy and Oncor to sell up to $2.4 billion
and $1.0 billion of commercial paper, respectively, limited to an aggregate of
$2.4 billion. The new credit facilities discussed above (the $500 million
three-year revolving credit facility and the $1.0 billion 364-day revolving
credit facility) and the existing $1.4 billion credit facility that expires in
2005 (Revolving Credit Facility B above) provide back-up for outstanding
commercial paper under the TXU Energy and Oncor programs. TXU Energy and Oncor
do not expect to sell commercial paper that, in the aggregate, is in excess of
aggregate available capacity under the back-up credit facilities. TXU Corp. has
discontinued its commercial paper program.
TXU Europe has a Euro term loan facility with a commercial bank available
only to fund its investment in the Atro Oyj Nordic joint venture. At June 30,
2002, there was (euro)50 million ($50 million) outstanding under this facility
at an annual interest rate based on Euribor of 4.4%.
LONG-TERM DEBT - TXU Europe also has a (euro)2.0 billion ($2.0 billion)
Euro Medium Term Note program, under which TXU Europe may from time to time
issue notes in various currencies. As of June 30, 2002, a total of (pound)576
million ($883 million) was outstanding under the program at an average rate of
7.53%.
On August 8, 2002, Oncor redeemed all its 8.5% First Mortgage Bonds due
August 1, 2024 and all its 8.875% First Mortgage Bonds due February 1, 2022, in
aggregate principal amounts of $115 million and $112 million, respectively. In
July 2002, TXU Energy redeemed at par the remaining $635 million principal
amount of its floating rate debentures due May 20, 2003. Oncor and TXU Energy
funded the redemptions through the issuance of commercial paper, advances from
affiliates and cash from operations.
In June 2002, TXU Corp. issued 8.8 million equity-linked debt securities
(corporate units) with an aggregate stated amount of $440 million. Net proceeds
of $427 million were used for working capital and other general corporate
purposes, including repayment of commercial paper and to provide advances to
subsidiaries. Each of the corporate units initially consists of an unsecured $50
note and a contract to purchase from TXU Corp. its common stock in the future.
Quarterly distributions on the corporate units will include interest on the
notes at the annual rate of 5.8% and contract adjustment payments payable by TXU
Corp. at the annual rate of 2.325%. The contracts require the investors to
purchase TXU Corp. common stock based on a range of prices ($51.15 to $62.9145)
at the settlement date of May 16, 2006.
In May 2002, Oncor issued $1.2 billion aggregate principal amount of senior
secured notes in two series in a private placement. One series of $700 million
is due May 1, 2012 and bears an interest rate of 6.375%, and the other series of
$500 million is due May 1, 2032 and bears an interest rate of 7.0%. Each series
is initially secured by an equal principal amount of Oncor's first mortgage
bonds; however, the lien of those bonds may be released in certain
circumstances. Proceeds from the issuance were used by Oncor to repay advances
from US Holdings. US Holdings used the repayments from Oncor to repay advances
from TXU Energy and TXU Corp. TXU Energy used the repayments to redeem $865
million principal amount of floating rate debentures due May 20, 2003, and TXU
Corp. used the repayments to repay $335 million of short-term borrowings.
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy to refund a similar principal amount of pollution control revenue
bonds.
9
During the first quarter of 2002, TXU Corp. redeemed $114 million of senior
notes with rates ranging from 5.52% to 10.58% that were originally due from 2002
to 2010, resulting in an extraordinary loss of $17 million (net of income tax
benefit of $9 million). Also, TXU Mining redeemed $70 million of its 6.875%
senior notes due 2005 and $53 million of its 7.0% senior notes due 2003.
In January 2002, in connection with TXU Europe's sale of its UK networks
business, $1.1 billion of debt ($500 million due 2004, $286 million due 2012 and
$286 million due 2025) was assumed by the purchaser.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The second of two common stock forward purchase contracts will be settled on
August 16, 2002, on which date TXU Corp. expects to issue approximately 8.4
million shares of common stock to the holders of these equity-linked securities.
TXU Corp. expects to receive approximately $111 million in cash upon settlement
of common stock forward purchase contracts. TXU Corp. will retain and cancel
approximately $238 million of the 6.5% Series E Notes in satisfaction of the
obligations under the common stock forward purchase contracts of holders that
did not settle their contracts with cash. Holders of the remaining Series E
Notes will have the right to have their Series E Notes repaid on September 3,
2002. Cash received from settlements of common stock forward purchase contracts
discussed above is expected to be used to make any such repayments. The Series E
Notes which remain outstanding will bear interest at 4.05% per annum from August
16, 2002 through maturity on August 16, 2004.
As of June 30, 2002, the secured long-term debt of TXU Corp. and its
consolidated subsidiaries consisted of $3.3 billion of Oncor's first mortgage
bonds and senior secured notes that are secured by a lien on substantially all
of Oncor's tangible electric T&D property, and $532 million of various other
long-term debt secured by liens on utility plant and other assets in North
America and Europe. TXU Corp.'s long-term debt obligations are not guaranteed or
secured by affiliates. The credit facilities discussed above and the TXU Corp.
6% notes due 2002 to 2004 ($219 million outstanding at June 30, 2002) contain
cross default provisions with a $50 million threshold. A cross default of this
magnitude would cause the maturity of outstanding balances under the credit
facilities and the notes to be accelerated.
The terms of certain financing arrangements of TXU Corp. and its
consolidated subsidiaries contain financial covenants that require maintenance
of specified fixed charge coverage ratios, shareholders' equity to total
capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. As of June 30, 2002, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp.'s subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At June 30, 2002, there were no restrictions on the
payment of dividends under these provisions.
LEASES - In February 2002, TXU Corp. sold its interest in its headquarters
building in Dallas, Texas for $145 million. Simultaneously with the sale of the
property, TXU Corp. entered into a twenty-year lease obligation for the
property. At the end of the initial twenty-year term of the lease, TXU Corp. has
the right, but not the obligation, to renew the lease for three ten-year renewal
terms under which rents will be paid based on then-existing market conditions.
The sale was treated as a financing.
SALE OF RECEIVABLES - TXU Corp., through its subsidiaries, has certain
facilities to provide financing through customer accounts receivable. All of the
facilities continually sell customer accounts receivable or undivided interests
therein to financial institutions on an ongoing basis to replace those accounts
receivable that have been collected.
Certain subsidiaries of TXU Corp. sell customer accounts receivable to a
wholly-owned bankruptcy remote subsidiary of TXU Corp. (TXU Receivables Company)
which sells undivided interests in accounts receivable it purchases to financial
institutions. As of January 1, 2002, the facility includes TXU Energy Retail
Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas as qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of
10
June 30, 2002, TXU Corp. and its subsidiaries had sold $1.248 billion face
amount of receivables to TXU Receivables Company under the program in exchange
for cash of $600 million and $636 million in subordinated notes, with $12
million of losses on sales for the six months ended June 30, 2002 principally
representing the interest on the underlying financing. These losses approximated
4% of the cash proceeds from the receivables sales on an annualized basis. If
the program terminates, cash flows to TXU Corp. and its subsidiaries would
temporarily stop until the undivided interests of the financial institutions
were repurchased. The level of cash flows would normalize in approximately 16 to
31 days. TXU Business Services, a subsidiary of TXU Corp., services the
purchased receivables and is paid a market based servicing fee by TXU
Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent TXU Corp.'s and its subsidiaries' retained interests in the
transferred receivables and are recorded at book value, net of allowances for
bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the consolidated
balance sheet.
TXU Europe has facilities with a commercial bank whereby certain
subsidiaries of TXU Europe may sell an undivided interest in up to (pound)300
million ($460 million) of electricity and gas receivables and borrow up to an
aggregate of (pound)175 million ($268 million), collateralized by future
receivables, through a short-term note issue agreement. The program has an
overall limit of (pound)300 million ($460 million). As of June 30, 2002, TXU
Europe had sold (pound)205 million ($314 million) face amount of receivables
under the program. In addition, TXU Europe had borrowed (pound)95 million ($146
million), collateralized by future receivables of that amount, which is
reflected as notes payable on the balance sheet. For the six months ended June
30, 2002, debt securitization discounts, which are reflected in interest
expense, were (pound)5 million ($7 million) and interest on the short-term loans
was (pound)1 million ($1 million). The short-term loans bear interest at an
annual rate based on commercial paper rates plus a margin, which was 4.35% at
June 30, 2002.
4. SHAREHOLDERS' EQUITY
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
------------- --------------
Shareholders' equity:
Preference stock.............................................. $ 300 $ 300
------------- --------------
Common stock without par value:
Authorized shares-- 1,000,000,000
Outstanding shares: June 30, 2002 -- 278,238,854 and
December 31, 2001--265,140,087............................ 7,134 6,560
Retained earnings............................................. 1,984 1,863
Accumulated other comprehensive loss.......................... (575) (767)
------------- --------------
Total common stock equity................................. 8,543 7,656
------------- --------------
Total shareholders' equity................................ $ 8,843 $ 7,956
============= ==============
In June 2002, TXU Corp. issued in a public offering 11.8 million shares of
its common stock. Net proceeds of $585 million from the sale were used for
working capital and other general corporate purposes, including the repayment of
commercial paper and to provide advances to subsidiaries.
TXU Corp. recorded, as a reduction to common stock equity, the present
value of the contract adjustment payments and a portion of the costs,
aggregating approximately $37 million, in connection with the issuance of
equity-linked debt securities in June 2002. A liability was recorded for the
contract adjustment payments and will be reduced as the contract adjustment
payments are made. TXU Corp. has the right to defer the contract adjustment
payments, but any such election will subject TXU Corp. to restrictions on the
payment of dividends on and redemption of outstanding shares of common stock.
TXU Corp. has no plans to defer these contract adjustment payments.
At the annual shareholders' meeting on May 10, 2002, shareholders voted to
amend the Restated Articles of Incorporation, which gave the board of directors
the ability to split the common stock of TXU Corp. on or before December 31,
2003 if the board of directors so elects.
11
5. TRUST SECURITIES
TXU CORP. OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES (TRUST ASSETS) OF TXU CORP. OR RELATED SUBSIDIARY (TRUST SECURITIES)
- -- The statutory business trust subsidiaries had Trust Securities and Trust
Assets outstanding as follows:
TRUST SECURITIES TRUST ASSETS MATURITY
------------------------------------------------- ----------------------- --------
UNITS (000'S) AMOUNT AMOUNT
----------------------- ----------------------- -----------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2002 2001 2002 2001 2002 2001
-------- ------------ -------- ------------ -------- ------------
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 6,000 145 145 155 155 2034
-------- ------------ -------- ------------
Total TXU Corp.......... 368 368 392 392
TXU GAS
TXU Gas Capital I
(Floating Rate Trust
Securities)(a).......... 150 150 147 147 155 155 2028
-------- ------------ -------- ------------
Total................... $ 515 $ 515 $ 547 $ 547
======== ============ ======== ============
(a) Floating rate is determined quarterly based on LIBOR. Related interest
rate swaps effectively fix the rates at 6.629% on $100 million and at
6.444% on $50 million to July 1, 2003.
Each parent company owns the common Trust Securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's Trust Securities.
6. REGULATION AND RATES
On December 31, 2001, US Holdings filed a settlement plan with the
Commission, which was approved by the Commission on June 20, 2002. On August 5,
2002, the Commission issued a financing order, pursuant to the settlement plan,
authorizing the issuance of securitization bonds. The Commission's approval of
the settlement plan is subject to appeal. TXU Corp. is unable to predict when
any appeal process related to the Commission's approval of the settlement plan
would be concluded or its outcome. If the Commission's approval is upheld, the
settlement plan resolves all major pending issues related to US Holdings'
transition to competition and will supersede certain ongoing proceedings that
are related to the 1999 Restructuring Legislation. The settlement plan does not
remove regulatory oversight of Oncor's business nor does it eliminate TXU
Energy's price-to-beat rates and related possible fuel adjustments. TXU Corp.
recorded the effects of the settlement plan at December 31, 2001, which
consisted primarily of adjustments to carrying values of assets and liabilities
as of that date affected by the settlement. The projected impact on 2002 and
beyond include the effects of settling prior fuel costs, limiting the retail
clawback and eliminating the wholesale clawback (discussed in previous
disclosures). For additional discussion of the settlement plan and related
items, see Note 4 to Financial Statements in TXU Corp.'s 2001 Form 10-K.
In April 2002, TXU Energy filed a request with the Commission to increase
the fuel factor component of its price-to-beat rates. The request, if approved,
would increase price-to-beat rates for residential and small commercial
customers by approximately 5%. Under Commission rules, affiliated REPs of
utilities are allowed to petition the Commission for an increase in the fuel
factor component of its price-to-beat rates if the average price of natural gas
futures increases more than 4% from the level used to set the previous
price-to-beat fuel
12
factor rate. On May 29, 2002, an administrative law judge issued a proposal for
decision for consideration by the Commission. TXU Energy is unable to predict
the outcome of this proceeding.
7. COMMITMENTS AND CONTINGENCIES
POWER PURCHASE CONTRACTS -- US Holdings and TXU Europe have various power
purchase contracts requiring the payment of annual capacity fees. Including
contracts entered into subsequent to 2001 year-end, future capacity payments
under existing agreements are estimated as follows:
July 1 through December 31, 2002....... $ 503
2003................................... 796
2004................................... 654
2005................................... 623
2006................................... 563
Thereafter............................. 1,717
-------
Total capacity payments....... $ 4,856
=======
Commitments under long-term gas purchase contracts and coal contracts at
June 30, 2002 were not materially different than those set forth in Note 9 to
Financial Statements in TXU Corp.'s 2001 Form 10-K.
LEGAL PROCEEDINGS -- On November 29, 2001, various subsidiaries of Enron
Corporation (Enron) went into Administration (bankruptcy) in the UK. Prior to
Enron's going into Administration, TXU Europe Energy Trading (TXUEET) had
certain energy purchase and sales contracts with Enron, which had been entered
into in the ordinary course of business. The terms of these contracts provided
that they terminated automatically upon a party going into Administration. Also,
on November 29, 2001 just prior to Enron going into Administration, TXUEET
received a notice from Enron purporting to terminate these contracts for cause.
TXUEET and the Administrator have had discussions regarding potential claims
relating to contract termination; in February 2002 TXUEET applied to the High
Court in London for permission to seek a judicial determination regarding
contract termination and, in March 2002, Enron filed an action in the High Court
relating to interpretation of certain other contractual provisions. For the more
expeditious and economic resolution of the issue of the contract termination,
TXUEET and Enron agreed in May 2002 to Enron initiating proceedings in the High
Court to enable the parties to seek a judicial determination regarding contract
termination, which action would supersede the previous actions. In June 2002,
Enron initiated such action and asked for a declaration that Enron is entitled
to payment of the net present value of the contracts or alternatively the market
value of the contracts, both for undetermined amounts, or alternatively, relief
from forfeiture of the contracts, for an undetermined amount, or in the further
alternative, restitution or relief from forfeiture of (pound)55 million ($84
million) previously paid by Enron to TXUEET for value under the contracts. While
the outcome of this matter cannot be predicted, TXUEET believes, consistent with
the advice of external legal advisors in the UK, that the attempted termination
of the contracts by Enron was without substance. Accordingly, TXUEET believes
any related claims by Enron are without merit and intends to vigorously defend
this suit.
In addition to the above, TXU Corp. and its subsidiaries are involved in
various other legal and administrative proceedings, the ultimate resolution of
which, in the opinion of each, is not expected to have a material effect upon
its financial position, results of operations or cash flows.
FINANCIAL GUARANTEES -- US Holdings has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy
and has agreed, in effect, to guarantee the principal, $19 million at June 30,
2002, and interest on bonds issued by the agencies to finance the reservoirs
from which the water is supplied. The bonds mature at various dates through 2011
and have interest rates ranging from 5.5% to 7%. US Holdings is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to US Holdings, of $4 million annually
for the years 2002 through 2003, $7 million for 2004 and $1 million for each of
2005 and 2006. In addition, US Holdings is obligated to pay certain variable
costs of operating and maintaining the reservoirs. US Holdings has assigned to a
municipality all contract rights and obligations of US Holdings in connection
with $30 million remaining principal amount of bonds at June 30, 2002, issued
for similar purposes which had previously been guaranteed by US Holdings. US
Holdings would, however, be contingently liable in the event of default by the
municipality.
13
TXU Europe has guaranteed up to $110 million at June 30, 2002 of certain
liabilities that may be incurred and payable by the purchasers of the US and
Australian coal business and US energy marketing operations of TXU Europe's
predecessor, which were sold in 1998 prior to acquisition of the predecessor by
TXU Corp. These guarantees are 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.
OBLIGATIONS WITH RESPECT TO INVESTMENTS IN PARTNERSHIPS AND OTHER
UNCONSOLIDATED ENTITIES -- TXU Corp. has a 50% voting interest in Pinnacle One
Partners, L.P. (Pinnacle or joint venture), a joint venture with third-party
investors. TXU Corp.'s investment in Pinnacle is accounted for using the equity
method. Assets of the joint venture are not TXU Corp.'s and are not available to
pay creditors of TXU Corp. Pinnacle's principal investment is in TXU
Communications Ventures Company (TXU Communications). TXU Communications
operates a diversified telecommunications business, including regulated
incumbent local exchange carriers, a competitive telecommunications service
provider and a fiber optic transport business.
In connection with its formation, Pinnacle issued $810 million in senior
secured notes due August 15, 2004. The notes are secured by all of Pinnacle's
assets, including its shares of TXU Communications. Total proceeds (net of
transaction costs), including the $150 million received from third-party
investors, were used to make a $600 million cash distribution to TXU Corp. and
fund a trust with $336 million. The principal and interest on the trust funds is
being used to pay interest on the senior secured notes and distributions to the
third-party investors. The trust invested in TXU Corp. debt securities. At June
30, 2002, the trust held $219 million principal amount of TXU Corp. debt
securities.
TXU Corp. provides a $200 million revolving credit facility to TXU
Communications, expiring in 2004, of which $148 million was outstanding and
included in investments in TXU Corp.'s balance sheet as of June 30, 2002. In
addition, TXU Corp. has made and may make future capital contributions to
Pinnacle to fund a portion of TXU Communications' capital expenditures. TXU
Corp. also provides administrative services to Pinnacle and its affiliates at
cost.
In connection with the Pinnacle transaction, TXU Corp. issued 810,000
shares of Mandatorily Convertible Single Reset Preference Stock, Series C
(Series C Preference Stock) to Pinnacle One Share Trust, a consolidated trust
(Share Trust). The Series C Preference Stock is convertible into common stock of
TXU Corp. In the event of:
a) a default by Pinnacle in connection with its $810 million of senior
secured notes,
b) a decline in the market price of TXU Corp. common stock below $21.93
per share for ten consecutive trading days coupled with a decline in
the credit rating for TXU Corp.'s unsecured, senior long-term
obligations to or below BB by Standard & Poor's (S&P) or Fitch
Ratings (Fitch) or Ba by Moody's Investors Service Inc. (Moody's), or
c) Pinnacle's inability to raise sufficient cash to repay its senior
secured notes 120 days prior to maturity through the sale of its
shares of TXU Communications or the sale of assets of TXU
Communications,
TXU Corp. would be required to sell equity or otherwise raise proceeds
sufficient to repay Pinnacle's senior secured notes. If TXU Corp. did not raise
sufficient proceeds, the Share Trust could be required to sell some or all of
the Series C Preference Stock. The dividend rate and conversion price of the
Series C Preference Stock would be reset at the time of sale to generate
proceeds sufficient to redeem the senior secured notes. TXU Corp. expects that
it would be able to sell equity or debt securities to satisfy its contingent
obligations to repay Pinnacle's debt.
Had TXU Corp. been required to consolidate Pinnacle at June 30, 2002, TXU
Corp.'s debt would have increased by approximately $609 million. TXU Corp. does
not believe that a consolidation of Pinnacle would have had a material impact on
its liquidity or financial condition.
14
Equity losses in the joint venture were $12 million and $13 million for the
three months ended June 30, 2002 and 2001, respectively, and $24 million and $27
million for the six months ended June 30, 2002 and 2001, respectively. TXU
Corp.'s investment in Pinnacle was negative $170 million as of June 30, 2002,
classified in other deferred credits and noncurrent liabilities in the
consolidated balance sheet.
8. SEGMENT INFORMATION
At December 31, 2001, TXU Corp. had five reportable operating segments as
reflected in TXU Corp.'s 2001 Form 10-K. As a result of TXU Corp.'s
reorganization as of January 1, 2002, TXU Corp. realigned its operations into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. Prior period amounts have been restated to conform to
the new segments.
NORTH AMERICA ENERGY -- operations involving the generation of electricity,
wholesale energy trading and risk management, and retail energy sales and
services in the US and parts of Canada. The segment consists of all operations,
other than the T&D business, of the former US Electric segment and the former US
Energy segment;
NORTH AMERICA ENERGY DELIVERY -- operations involving the transmission and
distribution of electricity and the purchase, transmission, distribution and
sale of natural gas in Texas. The segment consists of the T&D operations of the
former US Electric segment and the operations of the former US Gas segment; and
INTERNATIONAL ENERGY -- operations involving the generation of electricity,
wholesale energy trading and risk management, retail energy sales and services
in Europe and Australia, and electricity and gas distribution and gas storage in
Australia. The segment consists of the operations of the former Europe and
Australia segments.
CORPORATE AND OTHER -- operations consisting primarily of general corporate
expenses, equity earnings or losses of unconsolidated affiliates, including the
telecommunications joint venture, and interest on debt at the TXU Corp. level.
Affiliated revenues represent intercompany service charges.
The prior year financial information for the North America Energy segment
and the electric delivery operations included in the North America Energy
Delivery segment includes information derived from the historical financial
statements of US Holdings. Reasonable allocation methodologies were used to
unbundle the financial statements of US Holdings between its generation and T&D
operations. Allocation of revenues reflected consideration of return on invested
capital, which continues to be regulated for the T&D operations. US Holdings
maintained expense accounts for each of its component operations. Costs of
energy and expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate common expenses, assets and liabilities between US Holdings'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
TXU Energy incurs an electricity delivery fee charged by Oncor, which TXU
Energy includes in billings to its customers. This fee is reflected in TXU
Energy's revenues and cost of energy for the three months and six months ended
June 30, 2002. For comparability purposes, electricity delivery fees have been
included in the North America Energy segment's revenues and cost of energy for
the three and six months ended June 30, 2001. The North America Energy segment's
gross margin is not affected by the inclusion of these electricity delivery
fees.
15
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001* 2002 2001*
----------- --------- ----------- ---------
Operating revenues -
North America Energy............. $ 3,533 $ 2,964 $ 7,029 $ 7,080
North America Energy Delivery.... 254 255 673 940
International Energy............. 3,392 2,873 7,545 6,418
Corporate and other.............. 26 35 55 64
----------- --------- ----------- ---------
Consolidated.................. $ 7,205 $ 6,127 $ 15,302 $ 14,502
=========== ========= =========== =========
Affiliated revenues -
North America Energy ............ $ 10 $ 4 $ 17 $ 5
North America Energy Delivery.... 403 445 822 920
International Energy............. -- -- -- --
Corporate and other.............. 126 132 245 243
Eliminations..................... (539) (581) (1,084) (1,168)
----------- --------- ----------- ---------
Consolidated.................. $ -- $ -- $ -- $ --
=========== ========= =========== =========
Net income (loss) -
North America Energy ............ $ 176 $ 178 $ 356 $ 300
North America Energy Delivery.... 41 4 142 70
International Energy............. 33 86 82 161
Corporate and other.............. (49) (61) (124) (123)
----------- --------- ----------- ---------
Consolidated.................. $ 201 $ 207 $ 456 $ 408
=========== ========= =========== =========
----------
*The North America Energy and North America Energy Delivery segments were
created as a result of the deregulation of the electric utility industry in
Texas, which became effective January 1, 2002. The North America Energy
segment includes the generation and certain retail operations of US
Holdings, the wholesale trading and risk management operations and
unregulated commercial and industrial retail gas business of TXU Gas and
other energy-related businesses of TXU Corp. The North America Energy
Delivery segment includes the electric T&D business of US Holdings and TXU
SESCO Company and the natural gas pipeline and distribution operations of
TXU Gas.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy and North
America Energy Delivery segments after giving effect to the US Holdings
restructuring transactions and allocations described above and in Note 1.
Had the North America Energy and North America Energy Delivery segments
existed as separate segments, their results of operations and financial
positions could have differed materially from those reflected above.
Additionally, future results of the North America Energy and North America
Energy Delivery segments' operations and financial positions could differ
materially from the historical information presented.
16
9. SUPPLEMENTARY FINANCIAL INFORMATION
REGULATED VERSUS UNREGULATED OPERATIONS --
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
--------- -------- -------- --------
Operating revenues
Regulated........................................... $ 295 $ 4,762 $ 750 $ 10,556
Unregulated......................................... 6,910 1,365 14,552 3,946
--------- -------- -------- --------
Total operating revenues....................... 7,205 6,127 15,302 14,502
--------- -------- -------- --------
Operating expenses
Energy purchased for resale - regulated............. 95 388 307 1,198
Energy purchase for resale - unregulated............ 4,855 3,214 10,501 8,177
Fuel consumed - regulated........................... -- 521 -- 1,089
Fuel consumed - unregulated......................... 435 129 765 295
Operation and maintenance - regulated............... 212 396 416 764
Operation and maintenance - unregulated............. 645 393 1,251 729
Depreciation and amortization....................... 232 302 472 614
Taxes other than income............................. 179 200 361 382
--------- -------- -------- --------
Total operating expenses....................... 6,653 5,543 14,073 13,248
--------- -------- -------- --------
Operating income........................................ $ 552 $ 584 $ 1,229 $ 1,254
========= ======== ======== ========
OTHER INCOME AND DEDUCTIONS --
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
--------- -------- -------- --------
Other income
Gain on sale of businesses and other properties............ $ 15 $ 3 $ 16 $ 14
Gain on sale of marketable securities...................... -- 73 -- 73
Equity in earnings of unconsolidated entities.............. 6 1 9 3
Dividends from cost investments and marketable securities -- 6 -- 11
Other...................................................... 6 2 13 16
--------- -------- -------- --------
Total other income.................................... $ 27 $ 85 $ 38 $ 117
========= ======== ======== ========
Other deductions
Loss on sale of properties................................. $ 1 $ 1 $ 1 $ 3
Equity in losses of unconsolidated entities................ 12 13 25 27
Other...................................................... 15 10 30 29
--------- -------- -------- --------
Total other deductions................................ $ 28 $ 24 $ 56 $ 59
========= ======== ======== ========
REGULATORY ASSETS AND LIABILITIES -- Included in regulatory assets - net
are regulatory assets of $2.2 billion and regulatory liabilities of $424 million
at June 30, 2002, and regulatory assets of $2.2 billion and regulatory
liabilities of $474 million at December 31, 2001. Regulatory assets of $2.0
billion at June 30, 2002 and December 31, 2001 were not earning a return. Of the
assets not earning a return, $1.8 billion are expected to be recovered through
the issuance of securitization bonds within the next two years pursuant to the
regulatory settlement plan approved by the Commission. (See Note 6 for further
discussion of the settlement plan.) The remaining regulatory assets have a
weighted average remaining recovery period of 14 to 31 years.
ACCOUNTS RECEIVABLE -- At June 30, 2002 and December 31, 2001, accounts
receivable were stated net of uncollectible accounts of $188 million and $96
million, respectively. Accounts receivable included $1.2 billion and $617
million of unbilled revenues at June 30, 2002 and December 31, 2001,
respectively.
17
INVENTORIES BY MAJOR CATEGORY--
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
Materials and supplies.................................................... $ 237 $ 233
Fuel stock................................................................ 162 131
Gas stored underground.................................................... 164 158
----------- ------------
Total inventories................................................. $ 563 $ 522
=========== ============
PROPERTY, PLANT AND EQUIPMENT--
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
North America Energy:
Production........................................................ $ 16,541 $ 16,627
Nuclear fuel (net of accumulated amortization of $819 and $787)... 164 146
Reserve for regulatory disallowances.............................. (836) (836)
North America Energy Delivery:
Transmission...................................................... 1,982 1,979
Distribution...................................................... 6,217 6,110
Gas distribution and pipeline..................................... 1,734 1,677
General........................................................... 817 578
Other..................................................................... 246 328
----------- ------------
Total............................................................. 26,865 26,609
Less accumulated depreciation............................................. 9,565 9,397
----------- ------------
Net of accumulated depreciation................................... 17,300 17,212
Construction work in progress............................................. 568 608
----------- ------------
Net North America property, plant and equipment................... 17,868 17,820
International Energy:
Europe - Electric and other (net of accumulated depreciation of
$403 and $514)................................................... 1,233 3,062
Australia - Electric and gas distribution and generation (net of
accumulated depreciation of $331 and $267)....................... 1,763 1,598
----------- ------------
Net property, plant and equipment................................. $ 20,864 $ 22,480
=========== ============
Capitalized software costs of $541 million at June 30, 2002 and $352
million at December 31, 2001 were included in property, plant and equipment.
Amortization expense of $31 million and $53 million relating to these software
costs was recorded for the three and six months ended June 30, 2002,
respectively.
GOODWILL -- At June 30, 2002 and December 31, 2001, goodwill was stated net
of accumulated amortization of $708 million and $710 million, respectively.
DERIVATIVES AND HEDGES -- During the first six months of 2002, existing
accounting hedges of anticipated sales from baseload generation in North America
Energy became less effective due to changes in Electric Reliability Council of
Texas (ERCOT) market rules and conditions. TXU Corp. experienced net hedge
ineffectiveness of $26 million and $34 million, reported as a loss in revenues,
for the three and six months ended June 30, 2002, respectively, primarily
related to these contracts. Accounting hedges of interest rate and foreign
exchange risk remained highly effective during the period.
18
As of June 30, 2002, it is expected that $20 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been entered into. The amount
expected to be reclassified is not a forecasted loss incremental to normal
operations, but rather it demonstrates the extent to which volatility in
earnings (which would otherwise exist) is mitigated through the use of cash flow
hedges.
SUPPLEMENTAL CASH FLOW INFORMATION -- Noncash transactions for the six
months ended June 30, 2002 included $1.1 billion of debt assumed by the
purchaser of the UK networks business.
19
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries as of June 30, 2002, and the related condensed statements
of consolidated income and of comprehensive income for the three-month and
six-month periods ended June 30, 2002 and 2001 and the condensed statements of
consolidated cash flows for the six-month periods ended June 30, 2002 and 2001.
These financial statements are the responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as of December 31, 2001, and the related statements of consolidated
income, comprehensive income, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report, dated January 31, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
As discussed in Note 2 to the Notes to Financial Statements, TXU Corp. changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets".
DELOITTE & TOUCHE LLP
Dallas, Texas
August 13, 2002
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS
TXU Corp. is a global energy services company that engages in electricity
generation, wholesale energy trading and risk management, retail energy sales,
energy delivery, other energy-related services and, through a joint venture,
telecommunications services.
In connection with the restructuring of the Texas electric industry,
certain businesses of TXU Corp. were reorganized as of January 1, 2002, into
three reportable segments: North America Energy, North America Energy Delivery
and International Energy. (See Note 8 to Financial Statements for information
concerning reportable business segments.)
Certain segment comparisons in this report have been affected by the
restructuring of TXU Corp.'s US business in connection with deregulation of the
Texas electricity market, TXU Europe's sale of its UK networks business and its
50% interest in the 24seven joint venture operation on January 18, 2002, as well
as the discontinuance of goodwill amortization under new accounting rules.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars, unless they were determined using exchange
rates on the date of a specific event:
INCOME STATEMENTS
(AVERAGE RATES)
------------------------------------------------------
BALANCE SHEETS THREE MONTHS SIX MONTHS
-------------------------- ENDED JUNE 30, ENDED JUNE 30,
JUNE 30, DECEMBER 31, ------------------------ ------------------------
2002 2001 2002 2001 2002 2001
-------- ------------ -------- -------- -------- ---------
UK pounds sterling ((pound)) $ 1.5328 $ 1.4515 $ 1.4624 $ 1.4228 $ 1.4451 $ 1.4413
Australian dollars (A$) $ 0.5637 $ 0.5115 $ 0.5513 $ 0.5142 $ 0.5352 $ 0.5233
Euro ((euro)) $ 0.9921 $ 0.8860 $ 0.9195 $ 0.8747 $ 0.8985 $ 0.8995
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
TXU Corp.'s operating revenues increased $1.1 billion, or 18%, to $7.2
billion in 2002. Revenue growth in the North America Energy segment of $575
million was driven by higher wholesale trading volumes in the deregulated ERCOT
power market. Revenue growth in the International Energy segment of $519 million
was primarily due to increased wholesale sales volumes and the impact of
acquisitions. Revenues in the North America Energy Delivery segment declined $43
million.
Gross margin (operating revenue less energy purchased for resale, fuel
consumed and delivery costs) decreased $55 million, or 3%, to $1.8 billion in
2002. The decline was driven by the International Energy segment, which
reflected lower wholesale prices and increased retail competition in the UK.
Higher margins in the North America Energy segment reflected improved results in
the wholesale business. Consolidated revenues and gross margins in 2002 were
positively impacted by a $152 million net effect of mark-to-market valuations of
commodity positions, compared to a positive impact of $136 million in 2001.
Operation and maintenance expense increased $68 million, or 9%, to $857
million in 2002. The increase was driven by the North America Energy segment,
reflecting increased infrastructure costs associated with expanded retail
support and wholesale trading and risk management activities and higher bad debt
expense, all due in large part to the deregulation of the Texas electricity
market. Total net pension and postretirement benefit costs increased $14 million
in 2002.
21
Other operating expenses (depreciation and other amortization, goodwill
amortization and taxes other than income) decreased $91 million, or 18%, to $411
million in 2002, primarily reflecting a $54 million impact from the
discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142. Lower depreciation expense was driven by the UK operations, reflecting the
networks business sale in early 2002 and generation plant dispositions in the
latter part of 2001. Taxes other than income declined due to the effect of lower
natural gas prices on operating revenues, on which these taxes are assessed.
Operating income decreased $32 million, or 5%, to $552 million in 2002,
reflecting lower gross margin and higher operation and maintenance expense,
partially offset by the discontinuance of goodwill amortization and lower
depreciation expense.
Other income decreased $58 million to $27 million in 2002. The decrease was
due primarily to a gain of $73 million in the 2001 period on the sale of an
investment in a Spanish power company.
Interest income declined $25 million, or 69%, to $11 million in 2002, due
largely to lower interest rates, lower interest-bearing balances of restricted
cash in Europe, and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation in North America in 2001.
Interest expense and other charges decreased $88 million, or 23%, to $294
million in 2002, reflecting lower debt levels and lower interest rates.
The effective income tax rate was 25.0% in 2002 compared to 30.8% in 2001.
The change was driven by the effect of the discontinuance of nondeductible
goodwill amortization.
Net income available for common stock decreased $6 million, or 3%, to $195
million in 2002. The decrease in net income reflected decreases in the
International Energy and North America Energy segments of $53 million and $2
million, respectively, partially offset by an increase in the North America
Energy Delivery segment of $37 million. These performances are discussed below
under Segments. The net loss in Corporate and other activities declined $12
million, primarily representing lower interest expense. Net pension and
postretirement benefit costs reduced net income by $16 million in 2002 and $7
million in 2001.
Earnings per share decreased $0.05, or 6%, to $0.73 per share in 2002, of
which $0.03 per share was due to a 5% increase in average shares outstanding. As
discussed above, net income performance in 2002 benefited from the absence of
goodwill amortization ($54 million, or $0.21 per share, in 2001). This effect
was largely offset by the gain on the sale of an investment in a Spanish power
company in 2001 ($51 million after-tax, or $0.20 per share).
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
TXU Corp.'s operating revenues increased $800 million, or 6%, to $15.3
billion in 2002. Revenue growth in the International Energy segment of $1.1
billion was primarily due to increased wholesale trading volumes and the impact
of acquisitions, partially offset by the loss of revenues from the UK networks
business which was sold in early 2002. Revenues declined in the North America
Energy Delivery segment by $365 million due primarily to lower natural gas
prices. Revenues in the North America Energy segment fell by $39 million.
Gross margin decreased $14 million, or less than 1%, to $3.7 billion in
2002. The gross margin decrease reflected a decline in the International Energy
segment due primarily to lower wholesale margins, partially offset by higher
margins in the North America Energy segment due to improved results in wholesale
operations and the retail electric business. Consolidated revenues and gross
margins in 2002 were positively impacted by a $10 million net effect of
mark-to-market valuations of commodity positions, compared to a positive impact
of $183 million in 2001.
Operation and maintenance expense increased $174 million, or 12%, to $1.7
billion in 2002. The increase was driven by the North America Energy segment,
reflecting increased infrastructure costs associated with expanded retail
support and wholesale trading and risk management activities and higher bad debt
expense, all due in large part to the deregulation of the Texas electricity
market. Total net pension and postretirement benefit costs increased $23 million
in 2002.
22
Other operating expenses decreased $163 million, or 16%, to $833 million in
2002, primarily reflecting a $109 million impact from the discontinuance of
goodwill amortization pursuant to the adoption of SFAS No. 142. Lower
depreciation expense was driven by the UK operations, reflecting the sale of the
networks business in early 2002 and generation plant dispositions in the latter
part of 2001. Taxes other than income declined due to the effect of lower
natural gas prices on operating revenues, on which these taxes are assessed.
Operating income decreased $25 million to $1.2 billion in 2002, reflecting
lower gross margin and higher operation and maintenance expense, partially
offset by the discontinuance of goodwill amortization and lower depreciation
expense.
Other income decreased $79 million to $38 million in 2002. The decrease was
due primarily to a gain of $73 million in the 2001 period on the sale of an
investment in a Spanish power company.
Other deductions decreased $3 million, or 5%, to $56 million in 2002. This
line item includes equity losses in the telecommunications joint venture ($24
million in 2002 and $27 million in 2001).
Interest income declined $50 million, or 68%, to $23 million in 2002, due
largely to lower interest rates, lower interest-bearing balances of restricted
cash in Europe, and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation in North America in 2001.
Interest expense and other charges decreased $201 million, or 25%, to $591
million in 2002, reflecting lower interest rates and lower debt levels.
The effective income tax rate before the extraordinary loss was 26.4% in
2002 compared to 31.2% in 2001. The change was driven by the effect of the
discontinuance of nondeductible goodwill amortization.
Net income available for common stock increased $48 million, or 12%, to
$445 million in 2002. Net income growth reflected increases in the North America
Energy and North America Energy Delivery segments of $56 million and $72
million, respectively, partially offset by a decline in the International Energy
segment of $79 million. These performances are discussed below under Segments.
The net loss in Corporate and other activities increased $1 million, reflecting
an extraordinary loss of $17 million (net of income tax benefit of $9 million)
related to the early extinguishment of debt, offset by lower interest expense.
Net pension and postretirement benefit costs reduced net income by $30 million
in 2002 and $15 million in 2001.
Earnings per share rose $0.12, or 8%, to $1.67 per share in 2002. Results
for 2002 included the extraordinary loss of $0.06 per share. Earnings per share
in 2002 declined $0.06 per share due to a 4% increase in average shares
outstanding. As discussed above, net income performance in 2002 benefited from
the absence of goodwill amortization ($109 million, or $0.42 per share, in
2001). This effect was partially offset by the gain on the sale of an investment
in a Spanish power company in 2001 ($51 million after-tax, or $0.20 per share).
23
COMMODITY CONTRACT AND MARK-TO-MARKET ACTIVITIES
The table below summarizes the changes in commodity contract assets and
liabilities for the six months ended June 30, 2002. The net increase, excluding
"other activity" as described below, of $10 million represents the net favorable
effect of mark-to-market accounting on earnings for the six months ended June
30, 2002 ($152 million net favorable effect for the three months ended June 30,
2002).
Balance of net commodity contract assets/(liabilities) at December 31, 2001..... $ 409
Settlements of positions included in the opening balance (1).................... (165)
Unrealized mark-to-market valuations of positions held at end of period (2)..... 175
Other activity (3).............................................................. 105
-----
Balance of net commodity contract assets/(liabilities) at June 30, 2002......... $ 524
=====
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of December 31, 2001.
(2) Includes unrealized gains of $34 million recognized upon origination of
certain contracts in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". There were no significant
changes in fair value attributable to changes in valuation techniques.
(3) Includes initial values of positions assumed in acquisitions or involving
the receipt or payment of cash, such as option premiums, and amortization
of such positions originating in prior periods. Also includes
reclassifications of commodity contract assets and liabilities, including
$71 million of liabilities to Enron reclassified to other current
liabilities, and the impact of currency translation adjustments. These
activities have no effect on unrealized mark-to-market valuations.
The above table includes all commodity contracts that are marked to market
in net income, for both trading and non-trading purposes.
Of the net commodity contract asset balance above at June 30, 2002, the
amount representing unrealized mark-to-market net gains that have been
recognized in current and prior years' earnings is $546 million. The offsetting
net liability of $22 million included in the June 30, 2002 balance consists of
the initial values, net of amortization, of positions assumed in acquisitions or
involving the receipt or payment of cash, including option premiums. The
following table presents the unrealized mark-to-market balance at June 30, 2002
scheduled by contractual settlement dates of the underlying positions (in
millions).
MATURITY DATES OF UNREALIZED NET MARK-TO-MARKET BALANCES AT JUNE 30,2002
------------------------------------------------------------------------
MATURITY LESS MATURITY IN
THAN MATURITY OF MATURITY OF EXCESS OF
SOURCE OF FAIR VALUE 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
------------- ----------- ----------- ----------- -------
Prices actively quoted......... $ 44 $ (20) $ -- $ -- $ 24
Prices provided by other
external sources.............. 168 145 27 8 348
Prices based on models......... 41 67 41 25 174
------------- ----------- ----------- ----------- -------
Total.......................... $ 253 $ 192 $ 68 $ 33 $ 546
============= =========== =========== =========== =======
Percentage of total............ 46% 35% 13% 6% 100%
As the above table indicates, approximately 81% of the unrealized
mark-to-market valuations at June 30, 2002 mature within three years. This is
reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2004 in the US and in certain
European markets through 2011. The "prices provided by other external sources"
category represents forward commodity positions at locations for which
over-the-counter (OTC) broker quotes are available. OTC quotes for natural gas
and power generally extend through 2010 and 2005, respectively, in the US, and
2011 in Europe. This category also includes values of large commercial and
industrial (C&I) retail sales contracts. The "prices based on models" category
contains the value of all non-exchange traded options, valued using industry
accepted option pricing models. In addition, this category contains other
contractual arrangements which may have both forward and option components. In
many instances, these contracts can be broken down into their component parts
and modeled by TXU Corp. as simple forwards and options based on prices actively
quoted. As the modeled value
24
is ultimately the result of a combination of prices from two or more different
instruments, it has been included in this category.
ENERGY TRADING ACTIVITIES
TXU Corp. and TXU Energy have responded to inquiries from the Federal
Energy Regulatory Commission (FERC), the Commission and the SEC regarding "wash
trades" in electric and gas trading markets in the US. In their reports to the
FERC, the Commission, and the SEC, TXU Corp. and TXU Energy have reported that
during the period of inquiry from January 1, 2000 to the present, based on the
different definitions and geographic areas specified by the respective agencies,
zero, two, and eight transactions, respectively, had some of the characteristics
of "wash trades". Revenue associated with the transactions reported was 0.002%
and 0.046% of TXU Corp.'s reported revenue for 2000 and the first six months of
2002, respectively. None of these transactions were entered into for the purpose
of inflating revenues, trading volumes or market prices, and these transactions
do not require restatement of revenues.
SEGMENTS
NORTH AMERICA ENERGY
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2002 2001* 2002 2001*
--------- -------- -------- --------
Operating revenues....................................... $ 3,543 $ 2,968 $ 7,046 $ 7,085
--------- -------- -------- --------
Operating expenses
Energy purchased for resale, fuel consumed and
delivery costs.................................... 2,720 2,281 5,370 5,842
Operation and maintenance.......................... 367 237 725 445
Depreciation and amortization...................... 103 105 217 206
Taxes other than income............................ 54 28 113 55
--------- -------- -------- --------
Total operating expenses.................... 3,244 2,651 6,425 6,548
--------- -------- -------- --------
Operating income......................................... 299 317 621 537
Other income ............................................ 13 -- 14 2
Other deductions......................................... 3 5 5 8
Interest income ......................................... 9 19 23 41
Interest expense and other charges....................... 61 66 130 135
--------- -------- -------- --------
Income before income taxes .............................. 257 265 523 437
Income tax expense....................................... 81 87 167 137
--------- -------- -------- --------
Net income............................................... $ 176 $ 178 $ 356 $ 300
========= ======== ======== ========
- ----------
*The North America Energy segment was created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The North America Energy segment includes the
generation and certain retail operations of US Holdings, the wholesale
trading and risk management operations and unregulated C&I retail gas
business of TXU Gas and other energy-related businesses of TXU Corp.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy segment
after giving effect to the US Holdings restructuring transactions and
allocations described in the Notes to Financial Statements. Had the North
America Energy segment existed as a separate segment, its results of
operations and financial position could have differed materially from
those reflected above. Additionally, future results of the North America
Energy segment's operations and financial position could differ materially
from the historical information presented.
25
SEGMENT HIGHLIGHTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2002 2001* 2002 2001*
--------- -------- ----------- --------
OPERATING STATISTICS:
Retail sales volumes:
Electric (gigawatt hours - GWh).................... 22,771 24,347 45,157 47,603
Large commercial and industrial gas (Bcf).......... 37 45 87 111
Wholesale energy sales volumes (physically settled):
Electric (GWh)..................................... 27,153 3,943 68,037 10,472
Gas (Bcf).......................................... 201 139 360 347
Customers (end of period and in thousands):
Electric........................................... 2,731 2,705
Gas................................................ 3 3
----------- --------
Total customers.............................. 2,734 2,708
Physical and financial wholesale trades:
Electric (GWh).................................... 462,298 118,620 1,044,913 133,596
Gas (Bcf).......................................... 5,160 2,360 9,773 3,701
OPERATING REVENUES (MILLION OF DOLLARS):
Electric:
Residential........................................ $ 781 $ 767 $ 1,476 $ 1,558
Commercial and industrial.......................... 831 1,065 1,881 2,013
Other.............................................. 41 7 13 7
--------- -------- ----------- --------
Total electric............................... 1,653 1,839 3,370 3,578
Large commercial and industrial gas...................... 156 266 363 772
Wholesale energy sales (gas and electric)................ 1,717 856 3,287 2,657
Other revenues........................................... 17 7 26 78
--------- -------- ----------- --------
Total operating revenues..................... $ 3,543 $ 2,968 $ 7,046 $ 7,085
========= ======== ----------- ========
Weather (average for service area)**
Percent of normal:
Cooling degree days.......................... 107% 110% 107% 106%
Heating degree days.......................... 69% 41% 99% 105%
- ----------
*See footnote on previous page.
** Weather data is obtained from Meterlogix, a private company that collects
weather data from reporting stations of the National Oceanic and Atmospheric
Administration (a federal agency under the US Department of Commerce).
The prior year financial information for the North America Energy segment
includes information derived from the historical financial statements of US
Holdings. Reasonable allocation methodologies were used to unbundle the
financial statements of US Holdings between its generation and T&D operations.
Allocation of revenues reflected consideration of return on invested capital,
which continues to be regulated for the T&D operations. US Holdings maintained
expense accounts for each of its component operations. Costs of energy and
expenses related to operations and maintenance and depreciation and
amortization, as well as assets, such as property, plant and equipment,
materials and supplies and fuel, were specifically identified by component
operation and disaggregated. Various allocation methodologies were used to
disaggregate common expenses, assets and liabilities between US Holdings'
generation and T&D operations. Interest and other financing costs were
determined based upon debt allocated. Had the unbundled operations of US
Holdings actually existed as separate entities in a deregulated environment,
their results of operations could have differed materially from those included
in the historical financial statements included herein.
TXU Energy incurs an electricity delivery fee charged by Oncor, which TXU
Energy includes in billings to its customers. This fee is reflected in TXU
Energy's revenues and cost of energy for the 2002 periods. For comparability
purposes, electricity delivery fees have been included in the North America
Energy segment's
26
revenues and cost of energy for the 2001 periods. The North America Energy
segment's gross margin is not affected by the inclusion of these electricity
delivery fees.
The North America Energy segment's operating revenues increased $575
million, or 19%, to $3.5 billion for the second quarter of 2002. Wholesale
energy sales increased $861 million, or 101%, to $1.7 billion, on increased
trading volumes in the deregulated ERCOT power market as well as higher gas
volumes traded, partially offset by lower gas prices. Retail electric revenues
declined $186 million, or 10%, to $1.7 billion, on a 6% decline in overall
volumes and lower average pricing. Lower volumes reflected increased competitive
activity in the large C&I market and milder weather. Lower average retail
electric pricing reflected lower regulatory mandated price-to-beat rates in 2002
for residential and small business customers. In addition to a lower base rate
component of the price-to-beat rate as compared to the 2001 base rate, the fixed
fuel factor component of the price-to-beat rate is lower than the fuel costs
incurred and recognized in revenues in 2001. Revenue from sales of natural gas
to large C&I retail customers declined $110 million, or 41%, on both lower
prices and volumes; sales volumes declined 18% as certain geographical markets
were exited.
Gross margin increased $136 million, or 20%, to $823 million for the second
quarter of 2002. The gross margin performance was driven by wholesale trading
and risk management activities. In retail electric operations, the effect of
lower commodity costs was largely offset by lower volumes and pricing. Revenues
and gross margin in 2002 were positively impacted by a $134 million net effect
of mark-to-market valuations of commodity positions, compared to a positive
impact of $84 million in 2001.
Net income for the segment declined $2 million, or 1%, to $176 million for
the second quarter of 2002. The decline was driven by growth in operating
expenses, partially offset by higher gross margin. Higher operation and
maintenance expense reflected increased staffing and other operating costs ($100
million) related to the development of retail sales operations and expansion of
trading and risk management activities and increased bad debt expense ($31
million), all largely due to the opening of the Texas electricity market to
competition. Higher bad debt expense reflected higher collection risks
associated with unbilled accounts receivable (discussed in "Liquidity and
Capital Resources - Cash Flows"). Taxes other than income rose due to state
gross receipts taxes that were allocated to the North America Energy Delivery
segment in 2001. Other income and deductions, net, increased from a loss of $5
million in the 2001 period to income of $10 million in the 2002 period, with the
2002 period reflecting amortization of the gain on the sale of two generating
plants. Interest income declined $10 million due to the recovery of
under-collected fuel revenue on which interest income had been accrued under
regulation. The effective tax rate decreased to 31.5% in 2002 from 32.8% in
2001, due primarily to lower state income taxes.
The North America Energy segment's operating revenues declined $39 million,
or 1%, to $7.0 billion for the first six months of 2002. Revenue from sales of
natural gas to large C&I retail customers declined $409 million, or 53%, on both
lower prices and volumes; sales volumes declined 22% as certain geographical
markets were exited. Retail electric revenues declined $208 million, or 6%, to
$3.4 billion, on a 5% decline in overall volumes and lower average pricing.
Lower volumes reflected increased competitive activity in the large C&I market
and milder weather. Lower average retail electric pricing reflected lower
regulatory mandated price-to-beat rates in 2002 for residential and small
business customers. The effect of the price-to-beat rates was mitigated by large
C&I retail electric pricing that remained near 2001 levels. Wholesale sales
increased $630 million, or 24%, to $3.3 billion, on increased trading volumes in
the deregulated ERCOT power market as well as higher gas volumes traded,
partially offset by lower gas prices.
Gross margin increased $433 million, or 35%, to $1.7 billion for the first
six months of 2002. This performance reflected improved wholesale trading and
risk management results and higher retail electric margins. Retail electric
operations reflected lower commodity costs and certain transitional margin
benefits related to electric deregulation, including the relative strength of
large C&I retail electric pricing. As these benefits have been largely realized
or are diminishing, gross margin as a percentage of revenues is expected to
decline, assuming all other factors impacting margin remain at current levels.
The effects of lower retail electric volumes and pricing partially offset the
above favorable items. Revenues and gross margin in 2002 were negatively
impacted by a $12 million net effect of mark-to-market valuations of commodity
positions, compared to a positive impact of $102 million in 2001.
Net income for the segment increased $56 million, or 19%, to $356 million
for the first six months of 2002. The improvement was driven by higher gross
margin, partially offset by growth in operating expenses. Higher operation and
maintenance expense reflected increased staffing and other operating costs ($184
million)
27
related to the development of retail sales operations and expansion of trading
and risk management activities and increased bad debt expense ($96 million), all
largely due to the opening of the Texas electricity market to competition.
Higher bad debt expense reflected higher collection risks associated with
unbilled accounts receivable (discussed in "Liquidity and Capital Resources -
Cash Flows"). Increased depreciation and amortization expense was primarily due
to expansion of office facilities and investments in computer systems. Taxes
other than income rose due to state gross receipts taxes that were allocated to
the North America Energy Delivery segment in 2001. Interest income declined $18
million due to the recovery of under-collected fuel revenue on which interest
income had been accrued under regulation. The effective tax rate was 31.9% in
2002 compared to 31.3% in 2001.
NORTH AMERICA ENERGY DELIVERY
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001* 2002 2001*
--------- -------- --------- --------
Operating revenues....................................... $ 657 $ 700 $ 1,495 $ 1,860
--------- -------- --------- --------
Operating expenses
Gas purchased for resale........................... 74 91 255 586
Operation and maintenance.......................... 258 282 498 534
Depreciation and amortization...................... 84 75 163 153
Taxes other than income............................ 116 164 230 310
--------- -------- --------- --------
Total operating expenses..................... 532 612 1,146 1,583
--------- -------- --------- --------
Operating income......................................... 125 88 349 277
Other income ............................................ 7 6 10 10
Other deductions......................................... 1 2 7 5
Interest income ......................................... 11 3 22 7
Interest expense and other charges....................... 81 90 161 183
--------- -------- --------- --------
Income before income taxes .............................. 61 5 213 106
Income tax expense....................................... 20 1 71 36
--------- -------- --------- --------
Net income............................................... $ 41 $ 4 $ 142 $ 70
========= ======== ========= ========
- ----------
*The North America Energy Delivery segment was created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The North America Energy Delivery segment
includes the electric T&D business of US Holdings and TXU SESCO Company
and the natural gas pipeline and distribution operations of TXU Gas.
Prior period data is included above for the purpose of providing
historical financial information about the North America Energy Delivery
segment after giving effect to the US Holdings restructuring transactions
and allocations described in the Notes to Financial Statements. Had the
North America Energy Delivery segment existed as a separate segment, its
results of operations and financial position could have differed
materially from those reflected above. Additionally, future results of the
North America Energy Delivery segment's operations and financial position
could differ materially from the historical information presented.
28
TA38 SEGMENT HIGHLIGHTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001* 2002 2001*
--------- -------- --------- --------
OPERATING STATISTICS:
Electric energy delivered (GWh).................................. 26,232 24,876 49,818 48,517
--------- -------- --------- --------
Gas distribution (Bcf):
Residential................................................ 10 8 51 54
Commercial................................................. 9 8 31 33
Industrial and electric generation......................... 1 2 4 5
--------- -------- --------- --------
Total gas sales...................................... 20 18 86 92
--------- -------- --------- --------
Pipeline transportation (Bcf).................................... 137 122 303 280
--------- -------- --------- --------
Gas distribution customers and electric points of delivery
(end of period and in thousands):
Gas distribution customers................................. 1,435 1,424
Electric points of delivery................................ 2,887 2,830
OPERATING REVENUES (MILLION OF DOLLARS):
Electric delivery:
North America Energy....................................... $ 397 $ 439 $ 813 $ 912
Non-affiliated............................................. 103 90 181 93
--------- -------- --------- --------
Total electric energy delivery....................... 500 529 994 1,005
--------- -------- --------- --------
Gas distribution:
Residential................................................ 76 83 299 503
Commercial................................................. 44 58 142 273
Industrial and electric generation......................... 5 12 13 38
--------- -------- --------- --------
Total gas............................................ 125 153 454 814
Pipeline transportation.......................................... 24 22 57 60
Other revenues, net of eliminations.............................. 9 (4) (9) (19)
--------- -------- --------- --------
Total gas distribution and pipeline transportation... 158 171 502 855
--------- -------- --------- --------
Intra-segment eliminations........................... (1) - (1) -
Total operating revenues............................. $ 657 $ 700 $ 1,495 $ 1,860
========= ======== ========= ========
- ----------
*See footnote on previous page.
The prior year financial information for the electric delivery operations
included in the North America Energy Delivery segment includes information
derived from the historical financial statements of US Holdings. Reasonable
allocation methodologies were used to unbundle the financial statements of US
Holdings between its generation and T&D operations. Allocation of revenues
reflected consideration of return on invested capital, which continues to be
regulated for the T&D operations. US Holdings maintained expense accounts for
each of its component operations. Costs of energy and expenses related to
operations and maintenance and depreciation and amortization, as well as assets,
such as property, plant and equipment, materials and supplies and fuel, were
specifically identified by component operation and disaggregated. Various
allocation methodologies were used to disaggregate common expenses, assets and
liabilities between US Holdings' generation and T&D operations. Interest and
other financing costs were determined based upon debt allocated. Had the
unbundled operations of US Holdings actually existed as separate entities in a
deregulated environment, their results of operations could have differed
materially from those included in the historical financial statements included
herein.
Operating revenues for the North America Energy Delivery segment decreased
$43 million, or 6%, to $657 million for the second quarter of 2002. Electric T&D
revenues decreased $29 million, or 5%, to $500 million, due primarily to lower
transmission revenues and the absence of off system sales and other revenues
that are earned by the REP beginning in 2002 and therefore reported in the North
America Energy segment in 2002. The decline in transmission revenues was due
primarily to lower regulatory rates. As discussed above, electric T&D revenues
in 2001 were determined using allocation methodologies. Gas delivery revenues
declined $13 million, or 8%, to $158 million. Lower natural gas prices more than
offset an increase of 11% in gas sales volumes due to cooler spring weather.
29
Gross margin for the segment relates only to the gas delivery business. The
electric T&D business does not buy and sell electricity; its revenues consist
primarily of T&D fees. Gross margin in the gas delivery business improved $4
million, or 5%, in 2002, due primarily to higher volumes.
Net income increased by $37 million to $41 million for the second quarter
of 2002. This performance reflected increased net income of $25 million in the
electric T&D business and a lower net loss in the gas delivery business of $12
million. The increase in electric T&D net income was driven by the effect of
state gross receipts taxes that are reflected in the North America Energy
segment effective 2002, interest income on regulatory-related assets charged by
the North America Energy Delivery segment to the North America Energy segment
effective 2002 and reduced interest expense due to lower rates and lower average
debt balances. The improvement in the gas delivery business was driven by the
higher gross margin and lower revenue-related taxes. The effective tax rate
increased to 32.7% in 2002 from 20.0% in 2001, due to the effects of several
immaterial items on a small pretax income base in 2001.
Operating revenues for the North America Energy Delivery segment decreased
$365 million, or 20%, to $1.5 billion for the first six months of 2002. Gas
delivery revenues declined $353 million, or 41%, to $502 million, reflecting
lower gas prices and lower sales volumes due to milder winter weather. Gas sales
volumes declined 7%. Electric T&D revenues decreased $11 million, or 1%, to $1.0
billion. Excluding the impact of lower transmission revenues, as well as the
absence of off system sales and other revenues that are earned by the REP
beginning in 2002 and therefore reported in the North America Energy segment in
2002, electric distribution revenues rose 4%, in line with an increase in
electric volumes delivered in the distribution operations. The decline in
transmission revenues was due primarily to lower regulatory rates.
Gross margin in the gas delivery business decreased $22 million, or 8%, for
the first six months of 2002. The decline in gross margin was primarily due to
lower sales volumes.
Net income increased by $72 million, or 103%, to $142 million for the first
six months of 2002. This performance reflected increased net income in the
electric T&D business, while gas delivery net income was unchanged from the
comparable 2001 period. The improvement in electric T&D operations was driven by
the effect of state gross receipts taxes that are reflected in the North America
Energy segment effective 2002, interest income on regulatory-related assets
charged by the North America Energy Delivery segment to the North America Energy
segment effective 2002 and reduced interest expense due to lower rates and lower
average debt balances. The effective tax rate was 33.3% in 2002 compared to
34.0% in 2001, due primarily to the discontinuance of nondeductible goodwill
amortization.
30
INTERNATIONAL ENERGY
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- -------- --------- --------
Operating revenues....................................... $ 3,392 $ 2,873 $ 7,545 $ 6,418
--------- -------- --------- --------
Operating expenses
Energy purchased for resale, fuel consumed and 2,985 2,300 6,723 5,197
delivery costs....................................
Operation and maintenance.......................... 221 255 439 487
Depreciation and amortization...................... 40 72 80 152
Goodwill amortization.............................. -- 47 -- 97
--------- -------- --------- --------
Total operating expenses.................... 3,246 2,674 7,242 5,933
--------- -------- --------- --------
Operating income......................................... 146 199 303 485
Other income ............................................ 5 78 8 96
Other deductions ........................................ 13 -- 21 15
Interest income ......................................... 4 18 10 36
Interest expense and other charges....................... 116 170 228 361
--------- -------- --------- --------
Income before income taxes .............................. 26 125 72 241
Income tax expense (benefit)............................. (7) 39 (10) 80
--------- -------- --------- --------
Net income............................................... $ 33 $ 86 $ 82 $ 161
========= ======== ========= ========
SEGMENT HIGHLIGHTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- -------- --------- --------
OPERATING STATISTICS:
Retail sales volumes:
Electric (GWh)....................................... 13,406 12,838 29,841 26,979
Gas (Bcf)............................................ 55 49 129 126
Wholesale energy sales (physically settled):
Electric (GWh)....................................... 30,559 25,495 68,216 45,619
Gas (Bcf)............................................ 560 348 1,036 739
Retail Customers (end of period and in thousands):
Electric............................................. 4,953 4,999
Gas.................................................. 2,108 1,698
Physical and financial wholesale trades:
Electric (GWh)...................................... 176,886 203,806 422,282 537,058
Gas (Bcf)............................................ 808 1,198 1,909 2,578
OPERATING REVENUES (MILLIONS OF DOLLARS):
Electric ............................................ $ 867 $ 812 $ 1,940 $ 1,834
Gas.................................................. 251 203 592 505
Wholesale energy sales............................... 1,873 1,605 4,347 3,450
Intra-segment eliminations and other................. 401 253 666 629
--------- -------- --------- --------
Total............................................ $ 3,392 $ 2,873 $ 7,545 $ 6,418
========= ======== ========= ========
31
The International Energy segment's operating revenues increased $519
million, or 18%, to $3.4 billion for the second quarter of 2002. Europe's
revenues rose $470 million, or 17%, primarily due to increased wholesale volumes
and the effect of acquisitions. Acquisitions of the UK gas retailing arm of
Amerada Hess in the first quarter of 2002 and the Ares Energie retail business
in Germany in mid-2001 contributed $205 million to the growth in revenues, which
was partially offset by a $46 million effect of the sale of the UK networks
business in 2002. Revenues in Australia increased $49 million, or 29%, primarily
due to an increase in electricity volumes and rates.
The International Energy segment's gross margin fell $166 million, or 29%,
to $407 million for the second quarter of 2002. Europe's gross margin declined
$184 million, or 38%, driven by the UK operations. Gross margin performance was
negatively impacted by a $105 million effect of the sale of the UK networks
business. The UK gross margin decline also reflected lower wholesale prices and
lack of price volatility that negatively impacted wholesale trading and risk
management results. Wholesale electricity and natural gas prices declined 22%
and 26%, respectively. The wholesale pricing environment also diminished
generation portfolio results. Retail operations in the UK were adversely
impacted by the effect of heightened competitive activity and resulting customer
attrition. Lower wholesale pricing did not fully benefit retail results as a
significant portion of retail load is satisfied with long-term power purchase
agreements with above-market pricing. Europe continues to focus on reducing its
UK generation and purchased power costs. In addition to plant sales and scaling
back generation, Europe intends to restructure certain of its long-term power
purchase agreements. While retail pricing exceeds costs under the purchase
agreements, continued weakness in wholesale pricing may intensify downward
pressure on retail pricing. Although not expected to continue, a sustained lack
of price volatility and lower wholesale prices could affect models used in asset
impairment testing. The effort to restructure the agreements, as discussed
above, is intended to mitigate these risks.
Europe's gross margins also reflected a positive $27 million net effect of
mark-to-market valuations of commodity contract positions, compared to a
positive impact of $53 million in 2001. Australia's gross margin rose $18
million, or 20%, reflecting higher retail pricing, partially offset by the
unfavorable impact of wholesale price movements on portfolio positions.
Australia had a $9 million negative net effect of mark-to-market valuations in
2002, compared to a $2 million negative effect in 2001.
Net income for the International Energy segment declined $53 million, or
62%, to $33 million for the second quarter of 2002. This decline reflected a
gain in 2001 on the sale of an investment in a Spanish power company ($51
million after-tax) and the effect of the disposal of the UK networks business
($34 million after-tax), partially offset by the cessation of goodwill
amortization ($47 million in 2001 with no tax effect). Europe posted net income
of $14 million in 2002, compared to net income of $31 million in 2001, after
adjusting for the above items. This performance reflected the lower gross
margin, partially offset by lower interest expense due largely to debt
reduction. Australia posted net income of $19 million in 2002 compared to $13
million in 2001. Australia's results were driven by the higher gross margin and
the discontinuance of goodwill amortization, partially offset by higher
operation and maintenance expense that reflected additional staffing costs to
support retail competition. The effective tax rate for the International Energy
segment was negative in 2002 compared to 31.2% in 2001, reflecting the
discontinuance of nondeductible goodwill amortization and the benefits from
foreign tax credits and other foreign permanent differences.
The International Energy segment's operating revenues increased $1.1
billion, or 18%, to $7.5 billion for the first six months of 2002. Europe's
revenue rose $1.0 billion, or 17%, primarily due to increased wholesale energy
trading and the effect of acquisitions. Acquisitions contributed $397 million to
the growth in revenues, which was partially offset by an $84 million effect of
the sale of the UK networks business in 2002. Revenues in Australia increased
$81 million, or 23%, primarily due to an increase in electricity volumes and
rates.
The International Energy segment's gross margin fell $399 million, or 33%,
to $822 million for the first six months of 2002. Europe's gross margin fell
$478 million, or 45%, driven by the UK operations. Gross margin performance was
negatively impacted by a $200 million effect of the sale of the networks
business. The UK gross margin decline also reflected lower wholesale prices and
lack of price volatility that negatively impacted wholesale trading and risk
management results. Wholesale electricity and natural gas prices declined 13%
and 11%, respectively. The wholesale pricing environment also diminished
generation portfolio results. Retail operations in the UK were adversely
impacted by the effect of heightened competitive activity and resulting customer
attrition. See discussion of cost reduction efforts in the second quarter
analysis above. Europe's gross margins also reflected a positive $4 million net
effect of mark-to-market valuations of
32
commodity positions, compared to a positive impact of $84 million in 2001.
Australia's gross margin rose $79 million, or 47%, reflecting higher retail
pricing and favorable wholesale price movements on portfolio positions.
Australia had a $18 million positive net effect of mark-to-market valuations in
2002, compared to a $3 million negative effect in 2001.
Net income for the International Energy segment declined $79 million, or
49%, to $82 million for the first six months of 2002. This decline reflected a
gain in 2001 on the sale of an investment in a Spanish power company ($51
million after-tax) and the effect of the disposal of the UK networks business
($66 million after-tax), partially offset by the cessation of goodwill
amortization ($97 million in 2001 with no tax effect). Europe posted net income
of $4 million in 2002, compared to net income of $111 million in 2001, after
adjusting for the above items. This performance reflected the lower gross
margin, partially offset by lower interest expense due largely to debt
reduction. Australia posted net income of $78 million in 2002, compared to net
income of $21 million in 2001. Australia's results were driven by the higher
gross margin and the discontinuance of goodwill amortization, partially offset
by higher operation and maintenance expense that reflected additional staffing
costs to support retail competition. The effective tax rate for the
International Energy segment was negative in 2002 compared to 33.2% in 2001,
reflecting the discontinuance of nondeductible goodwill amortization and the
benefits from foreign tax credits and other foreign permanent differences.
COMPREHENSIVE INCOME
Foreign currency translation adjustments for both the 2002 and 2001 periods
(gains of $279 million and $249 million for the three and six months ended June
30, 2002, respectively, and a gain of $9 million and a loss of $247 million for
the three and six months ended June 30, 2001, respectively), reflected the
movement in exchange rates between the US dollar and the UK pound sterling and
the Australian dollar.
TXU Corp. has historically used, and will continue to use, derivatives that
are effective in offsetting future cash flow volatility in interest rates,
currency exchange rates and energy commodity prices. The fair values of
derivatives that are effective as cash flow hedges are recorded as derivative
assets or liabilities with an offset in other comprehensive income. During the
first six months of 2002, negative changes in the fair value of effective cash
flow hedges were primarily driven by the strengthening of the UK pound sterling,
which decreased the value of UK hedges of dollar denominated debt. Amounts
realized in earnings were primarily due to the reversal of gains related to
dollar denominated debt in the UK. This debt is fully hedged.
The amounts included in other comprehensive income reflect the value of the
cash flow hedges, based on current market conditions, to be used in the future
to offset the impact on related payments of expected changes in prices. The
effects of the hedges will be recorded in the statement of income as the related
transactions are actually settled.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s 2001 Form 10-K. No significant changes or events that
might affect the financial condition of TXU Corp. have occurred subsequent to
year-end other than as disclosed herein.
CASH FLOWS -- Cash flows provided by operating activities for the first six
months of 2002 were $303 million compared to $592 million for 2001. The decrease
of $289 million, or 49%, reflected higher accounts receivable in 2002. Unbilled
accounts receivable in the US retail electric operations reflected an increase
of approximately $430 million related to the opening of the Texas electricity
market to competition. Of this amount, $355 million represented delayed billing
amounts, predominantly in large C&I accounts. These delays have been caused
primarily by temporary transition issues including customer switching and
billing, and new processes and systems within ERCOT and TXU Energy. The
remaining increase of $75 million in unbilled accounts receivable represented
the effect of the new ERCOT protocol that allows five days to clear meter-read
data through ERCOT.
33
The decline in cash provided by operating activities also reflected a
significant use of cash in Europe, which was due primarily to the difficult
operating environment described in Segments - International Energy.
Cash flows used in financing activities for 2002 were $963 million,
primarily reflecting the repayment of debt in Europe with the proceeds from the
sale of assets. Retirements and repurchases of debt securities totaled $2.4
billion, and issuances of debt securities and common stock totaled $2.5 billion
and $605 million, respectively, during the first six months of 2002. Premiums
paid to retire certain of the debt in the US in conjunction with the unbundling
of electric operations resulted in an extraordinary loss of $17 million
after-tax. Net redemptions of commercial paper and notes payable to banks
totaled $1.2 billion. Cash dividends paid were $329 million and $320 million for
2002 and 2001, respectively. An additional $1.1 billion of debt in the UK was
assumed by the purchaser of the UK networks business.
Cash flows provided by investing activities for 2002 were $512 million
compared to $512 million used for investing activities in 2001. Acquisitions in
2002, primarily Amerada Hess in the UK, were $168 million, compared to $217
million in 2001, primarily for the Stadtwerke Kiel acquisition in Germany.
Proceeds from the sale of assets (including $712 million from the UK networks
business, $443 million from the sale of two generating plants in Texas, and $192
million from the final payment from a UK generating plant sold in 2001) totaled
$1.4 billion in 2002 compared with $630 million in 2001. Capital expenditures
were $573 million for 2002, compared with $796 million for 2001.
ISSUANCES AND RETIREMENTS - During the six months ended June 30, 2002, TXU
Corp. and its subsidiaries issued, redeemed, reacquired or made scheduled
principal payments on long-term debt as follows:
ISSUANCES RETIREMENTS
--------- -----------
TXU Corp.:
Long-term debt................................. $ 585 $ 68
US Holdings:
First mortgage bonds........................... -- 297
Pollution control revenue bonds ............... 61 61
Medium term notes.............................. -- 55
Other long-term debt........................... 1,200 989
TXU Europe:
Revolving Credit Facility (Tranche A).......... 611 285
Other long-term debt........................... 5 428
TXU Australia:
Long-term debt................................. -- 121
All other subsidiaries............................... -- 86
--------- -----------
Total.......................................... $ 2,462 $ 2,390
========= ===========
On August 8, 2002, Oncor redeemed all its 8.5% First Mortgage Bonds due
August 1, 2024 and all its 8.875% First Mortgage Bonds due February 1, 2022, in
aggregate principal amounts of $115 million and $112 million, respectively. In
July 2002, TXU Energy redeemed at par the remaining $635 million principal
amount of its floating rate debentures due May 20, 2003. Oncor and TXU Energy
funded the redemptions through the issuance of commercial paper, advances from
affiliates and cash from operations.
In June 2002, TXU Corp. issued 8.8 million equity-linked debt securities
(corporate units) with an aggregate stated amount of $440 million. Net proceeds
of $427 million were used for working capital and other general corporate
purposes, including repayment of commercial paper and to provide advances to
subsidiaries. Each of the corporate units will initially consist of an unsecured
$50 note and a contract to purchase from TXU Corp. its common stock in the
future. Quarterly distributions on the corporate units will include interest on
the notes at the annual rate of 5.8% and contract adjustment payments payable by
TXU Corp. at the annual rate of 2.325%. The contracts require the investors to
purchase TXU Corp. common stock based on a range of prices ($51.15 to $62.9145)
at the settlement date of May 16, 2006.
34
In May 2002, Oncor issued $1.2 billion aggregate principal amount of senior
secured notes in two series in a private placement. One series of $700 million
is due May 1, 2012 and bears an interest rate of 6.375%, and the other series of
$500 million is due May 1, 2032 and bears an interest rate of 7.0%. Each series
is initially secured by an equal principal amount of Oncor's first mortgage
bonds; however, the lien of those bonds may be released in certain
circumstances. Proceeds from the issuance were used by Oncor to repay advances
from US Holdings. US Holdings used the repayments from Oncor to repay advances
from TXU Energy and TXU Corp. TXU Energy used the repayments to redeem $865
million principal amount of floating rate debentures due May 20, 2003, and TXU
Corp. used the repayments to repay $335 million of short-term borrowings.
Also in May 2002, the Brazos River Authority issued $61 million principal
amount of weekly reset floating rate pollution control revenue refunding bonds
for TXU Energy to refund a similar principal amount of pollution control revenue
bonds.
During the first quarter of 2002, TXU Corp. redeemed $114 million of senior
notes with rates ranging from 5.52% to 10.58% that were originally due from 2002
to 2010, resulting in an extraordinary loss of $17 million (net of income tax
benefit of $9 million). Also, TXU Mining redeemed $70 million of its 6.875%
senior notes due 2005 and $53 million of its 7.0% senior notes due 2003.
In January 2002, in connection with TXU Europe's sale of its UK networks
business, $1.1 billion of debt ($500 million due 2004, $286 million due 2012 and
$286 million due 2025) was assumed by the purchaser.
TXU Europe also has a (euro)2.0 billion ($2.0 billion) Euro Medium Term
Note program, under which TXU Europe may from time to time issue notes in
various currencies. As of June 30, 2002, a total of (pound)576 million ($883
million) was outstanding under the program at an average rate of 7.53%.
In 1998, TXU Corp. issued $700 million of equity-linked debt securities,
which consisted of a debt component and common stock forward purchase contracts.
The second of two common stock forward purchase contracts will be settled on
August 16, 2002, on which date TXU Corp. expects to issue approximately 8.4
million shares of common stock to the holders of these equity-linked securities.
TXU Corp. expects to receive approximately $111 million in cash upon settlement
of common stock forward purchase contracts. TXU Corp. will retain and cancel
approximately $238 million of the 6.5% Series E Notes in satisfaction of the
obligations under the common stock forward purchase contracts of holders that
did not settle their contracts with cash. Holders of the remaining Series E
Notes will have the right to have their Series E Notes repaid on September 3,
2002. Cash received from settlements of common stock forward purchase contracts
discussed above is expected to be used to make any such repayments. The Series E
Notes which remain outstanding will bear interest at 4.05% per annum from August
16, 2002 through maturity on August 16, 2004.
As of June 30, 2002, the secured long-term debt of TXU Corp. and its
consolidated subsidiaries consisted of $3.3 billion of Oncor's first mortgage
bonds and senior secured notes that are secured by a lien on substantially all
of Oncor's tangible electric T&D property, and $532 million of various other
long-term debt secured by liens on utility plant and other assets in North
America and Europe. TXU Corp.'s long-term debt obligations are not guaranteed or
secured by affiliates. The credit facilities discussed below and the TXU Corp.
6% notes due 2002 to 2004 ($219 million outstanding at June 30, 2002) contain
cross-default provisions with a $50 million threshold. A cross default of this
magnitude would cause the maturity of outstanding balances under the credit
facilities and the notes to be accelerated.
35
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp.'s subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At June 30, 2002, there were no restrictions on the
payment of dividends under these provisions.
EQUITY -- In June 2002, TXU Corp. issued in a public offering 11.8 million
shares of its common stock. Net proceeds of $585 million from the sale were used
for working capital and other general corporate purposes, including the
repayment of commercial paper and to provide advances to subsidiaries. See
discussion above regarding 8.4 million common shares expected to be issued in
connection with equity-linked debt securities.
At the annual shareholders' meeting on May 10, 2002, shareholders voted to
amend the Restated Articles of Incorporation, which gave the board of directors
the ability to split the common stock of TXU Corp. on or before December 31,
2003 if the board of directors so elects.
TXU Corp. or its predecessor have declared common stock dividends payable
in cash in each year since incorporation in 1945. TXU Corp. paid quarterly
dividends of $0.60 a share in April 2002 and July 2002. 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.
CREDIT FACILITIES -- At June 30, 2002, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) available as
follows:
CREDIT FACILITIES AT
JUNE 30, 2002
----------------------------------
FACILITY
FACILITY EXPIRATION DATE BORROWERS LIMIT OUTSTANDING AVAILABLE
- -------- --------------- ----------------- --------- ----------- ---------
364-Day Revolving Credit Facility (a)... April 2003 US Holdings, TXU
Energy, Oncor $ 1,000 $ -- $
Revolving Credit Facility B(b).......... February 2005 TXU Corp., US
Holdings 1,400 --
Three-Year Revolving Credit Facility (c) May 2005 TXU Corp. 500 150
--------- -----------
Total (d)........................... 2,900 150 $ 1,087
Credit Facility......................... August 2002 TXU Corp. 365 365 --
Revolving Credit Facility -
Tranche A (e).......................... November 2006 TXU Europe 1,226 999 227
Senior Facility......................... October 2004 TXU Australia 883 821 62
Commercial Paper Facility............... N/A TXU Australia 123 123 --
Working Capital Facilities ............. N/A TXU Australia 56 -- 56
(a) As of June 30, 2002, letters of credit outstanding under this agreement
totaled $57 million, which reduced the available capacity by that amount.
(b) In February 2002, TXU Gas was removed as a borrower under this facility.
Short-term liquidity needs of TXU Gas are expected to be funded through
advances from affiliates. TXU Corp. was removed as a borrower under this
facility effective July 31, 2002. As of June 30, 2002, letters of credit
outstanding under this agreement totaled $482 million, which reduced the
available capacity by that amount.
(c) The $150 million of borrowings outstanding at June 30, 2002 was repaid
on July 29, 2002.
(d) Supports commercial paper borrowings. Available balance is net of
commercial paper borrowing of $1.124 billion and outstanding letters of
credit.
(e) As of June 30, 2002, the outstanding borrowings under the Revolving Credit
Facility and the associated interest rates were as follows: (euro)574
million ($569 million) at 4.12% per annum, 700 million Norwegian kroner
(NOK) ($93 million) at 7.86% per annum, and (pound)220 million ($337
million) at 4.73% per annum, all classified as long-term debt.
In July 2002, US Holdings entered into a $400 million credit facility that
terminates no later than November 30, 2002.
In May 2002, TXU Corp. entered into a $500 million three-year revolving
credit facility with a group of banks that terminates May 1, 2005. This facility
will be used for working capital and general corporate purposes.
In April 2002, US Holdings, TXU Energy and Oncor entered into a joint $1.0
billion 364-day credit facility with a group of banks that terminates April 22,
2003. This facility will be used for working capital and general corporate
purposes. Up to $1.0 billion of letters of credit may be issued under the
facility. This facility
36
and the $500 million three-year revolving credit facility described above
replaced the TXU Corp. and US Holdings $1.4 billion 364-day revolving credit
facility that expired in April 2002.
During the second quarter of 2002, each of TXU Energy and Oncor began
selling commercial paper to fund its short-term liquidity requirements. The new
commercial paper programs allow TXU Energy and Oncor to sell up to $2.4 billion
and $1.0 billion of commercial paper, respectively, limited to an aggregate of
$2.4 billion. The new credit facilities discussed above (the $500 million
three-year revolving credit facility and the $1.0 billion 364-day revolving
credit facility) and the existing $1.4 billion credit facility that expires in
2005 (Revolving Credit Facility B above) provide back-up for outstanding
commercial paper under the TXU Energy and Oncor programs. TXU Energy and Oncor
do not expect to sell commercial paper that, in the aggregate, is in excess of
aggregate available capacity under the back-up credit facilities. TXU Corp. has
discontinued its commercial paper program.
TXU Europe has a Euro term loan facility with a commercial bank available
only to fund its investment in the Atro Oyj Nordic joint venture. At June 30,
2002, there was (euro)50 million ($50 million) outstanding under this facility
at an annual interest rate based on Euribor of 4.4%.
During the remainder of 2002, TXU Corp. and its subsidiaries will have
financing needs to fund ongoing working capital requirements and maturities of
long-term debt and to refinance borrowings in connection with the financial
restructuring of US Holdings in 2001. TXU Corp. and its subsidiaries have funded
or intend to fund these financing needs through the issuance of long-term debt
or other securities. Other sources of funding include proceeds from asset sales,
issuance of commercial paper, bank borrowings, and loans from other
subsidiaries. If these options become unavailable for any reason, TXU Corp. and
its subsidiaries could borrow under their credit facilities.
TXU Corp. and its subsidiaries also from time to time may utilize its
short-term facilities to temporarily fund maturities and early redemptions of
long-term debt and other securities, as well as short-term requirements. If TXU
Corp. and its subsidiaries were unable to access the capital markets to refund
these short-term borrowings, additional liquidity sources would be necessary.
FINANCIAL COVENANTS -- The terms of certain financing arrangements of TXU
Corp. and its consolidated subsidiaries contain financial covenants that require
maintenance of specified fixed charge coverage ratios, shareholders' equity to
total capitalization ratios and leverage ratios and/or contain minimum net worth
covenants. TXU Corp. and its subsidiaries have credit rating covenants in
certain other financing arrangements and commercial agreements that would affect
liquidity in the event of a downgrade to below investment grade status. As of
June 30, 2002, TXU Corp. and its subsidiaries were in compliance with all such
applicable covenants.
37
In July 2002, Moody's announced that it had placed the credit ratings of
TXU Europe's debt, currently Baa1, under review for downgrade. Because TXU
Europe's rating has been placed on credit watch, the terms of certain lease
agreements of power stations required TXU Europe to obtain a letter of credit
for (pound)50 million ($77 million) or equivalent collateral to provide
additional security. This security is in addition to the (pound)100 million
($153 million) letter of credit already in place. TXU Europe would be required
to provide up to an additional (pound)50 million ($76 million) in letters of
credit or other collateral in the event of further notifications from the rating
agencies of downgrade or review for downgrade below ratings of Baa2 (Moody's) or
BBB (S&P). TXU Corp. anticipates that it will provide additional equity capital
to TXU Europe later in the year to support the restructuring of long-term power
purchase contracts.
Other agreements of TXU Corp. and its subsidiaries, including certain bank
facilities, contain terms pursuant to which the interest rates charged under the
agreements may be adjusted depending on the credit ratings of TXU Corp. or its
subsidiaries.
TXU Corp.'s goal is to continue to maintain credit ratings necessary to
allow TXU Corp. or its subsidiaries to access the commercial paper market. If
TXU Corp. and certain subsidiaries were to experience a substantial downgrade of
their respective credit ratings, which they do not anticipate, access to the
commercial paper markets could no longer be possible, resulting in the need to
borrow under committed bank lines or seek other liquidity sources.
LEASES -- In February 2002, TXU Corp. sold its interest in its headquarters
building in Dallas, Texas for $145 million. Simultaneously with the sale of the
property, TXU Corp. entered into a twenty-year lease obligation for the
property. At the end of the initial twenty-year term of the lease, TXU Corp. has
the right, but not the obligation, to renew the lease for three ten-year renewal
terms under which rents will be paid based on then-existing market conditions.
The sale was treated as a financing.
SALE OF RECEIVABLES -- TXU Corp., through its subsidiaries, has certain
facilities to provide financing through customer accounts receivable. All of the
facilities continually sell customer accounts receivable or undivided interests
therein to financial institutions on an ongoing basis to replace those accounts
receivable that have been collected.
Certain subsidiaries of TXU Corp. sell customer accounts receivable to a
wholly-owned bankruptcy remote subsidiary of TXU Corp. (TXU Receivables Company)
which sells undivided interests in accounts receivable it purchases to financial
institutions. As of January 1, 2002, the facility includes TXU Energy Retail
Company LP, TXU SESCO Energy Services Company, Oncor and TXU Gas as qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of June 30,
2002, TXU Corp. and its subsidiaries had sold $1.248 billion face amount of
receivables to TXU Receivables Company under the program in exchange for cash of
$600 million and $636 million in subordinated notes, with $12 million of losses
on sales for the six months ended June 30, 2002 principally representing the
interest on the underlying financing. These losses approximated 4% of the cash
proceeds from the receivables sales on an annualized basis. If the program
terminates, cash flows to TXU Corp. and its subsidiaries would temporarily stop
until the undivided interests of the financial institutions were repurchased.
The level of cash flows would normalize in approximately 16 to 31 days. TXU
Business Services, a subsidiary of TXU Corp., services the purchased receivables
and is paid a market based servicing fee by TXU Receivables Company. The
subordinated notes receivable from TXU Receivables Company represent TXU Corp.'s
and its subsidiaries' retained interests in the transferred receivables and are
recorded at book value, net of allowances for bad debts, which approximates fair
value due to the short-term nature of the subordinated notes, and are included
in accounts receivable in the consolidated balance sheet.
TXU Europe has facilities with a commercial bank whereby certain
subsidiaries of TXU Europe may sell an undivided interest in up to (pound)300
million ($460 million) of electricity and gas receivables and borrow up to an
aggregate of (pound)175 million ($268 million), collateralized by future
receivables, through a short-term note issue agreement. The program has an
overall limit of (pound)300 million ($460 million). As of June 30, 2002, TXU
Europe had sold (pound)205 million ($314 million) face amount of receivables
under the program. In addition, TXU Europe had borrowed (pound)95 million ($146
million), collateralized by future receivables of that amount, which is
reflected as notes payable on the balance sheet. For the six months ended June
30, 2002, debt securitization discounts, which are reflected in interest
expense, were (pound)5 million ($7 million) and interest on the short-term loans
was (pound)1 million ($2 million). The short-term loans bear interest at an
annual rate based on commercial paper rates plus a margin, which was 4.35% at
June 30, 2002.
REGULATORY ASSET SECURITIZATION -- The regulatory settlement plan approved
by the Commission provides Oncor with a financing order authorizing it to issue
securitization bonds in the aggregate amount of $1.3 billion to monetize and
recover generation-related regulatory assets. The settlement plan provides that
there will be an
38
initial issuance of securitization bonds in the amount of up to $500 million
followed by a second issuance for the remainder after 2003.
CAPITALIZATION -- External funds of a permanent or long-term nature are
obtained through the issuance of common stock, preference and preferred stock,
trust securities and long-term debt by TXU Corp. and its subsidiaries. The
capitalization ratios of TXU Corp. at June 30, 2002 consisted of 7.1%
equity-linked debt securities, 54.1% other long-term debt, 2.7% preferred
securities of subsidiary trusts, 2.0% preference and preferred stock, and 34.1%
common stock equity.
REGISTERED FINANCING ARRANGEMENTS -- TXU Corp., US Holdings, TXU Gas and
other subsidiaries of TXU Corp. may issue and sell additional debt and equity
securities which are currently registered with the SEC for offering pursuant to
Rule 415 under the Securities Act of 1933. The possible future issuance and
sale: (i) by TXU Corp. of up to an aggregate of $516 million of common stock,
preference stock, equity linked debt securities, debt securities and/or
preferred securities of subsidiary trusts; (ii) by US Holdings of up to $25
million of Cumulative Preferred Stock and up to an aggregate of $924 million of
additional Cumulative Preferred Stock, First Mortgage Bonds, debt securities
and/or preferred securities of subsidiary trusts and (iii) by TXU Gas of up to
an aggregate of $400 million of debt securities and/or preferred securities of
subsidiary trusts are currently registered.
See Notes 3, 4 and 5 to Financial Statements for further details concerning
financing arrangements, capitalization and trust securities.
CONTINGENCIES
See Note 7 to Financial Statements for discussion of contingencies.
All exposures related to Enron, other than as discussed in Legal
Proceedings in Note 7 to Financial Statements, have been provided for. As
disclosed in TXU Corp.'s 2001 Form 10-K, a charge of $22 million (after-tax) was
recorded in 2001 for exposures at TXU Europe. In the US, TXU Corp.'s significant
activities with Enron were associated with energy trading contracts. These
positions were marked to market and resulted in a net liability to Enron of $107
million at December 31, 2001. The net liability at June 30, 2002 was $120
million. All contracts in existence at the date of the Enron bankruptcy have
been terminated and are no longer marked to market and have been reclassified to
other current liabilities.
39
REGULATION AND RATES
US -- On December 31, 2001, US Holdings filed a settlement plan with the
Commission, which was approved by the Commission on June 20, 2002. On August 5,
2002, the Commission issued a financing order, pursuant to the settlement plan,
authorizing the issuance of securitization bonds. The Commission's approval of
the settlement plan is subject to appeal. TXU Corp. is unable to predict when
any appeal process related to the Commission's approval of the settlement plan
would be concluded or its outcome. If the Commission's approval is upheld, the
settlement plan resolves all major pending issues related to US Holdings'
transition to competition and will supersede certain ongoing proceedings that
are related to the 1999 Restructuring Legislation. The settlement plan does not
remove regulatory oversight of Oncor's business nor does it eliminate TXU
Energy's price-to-beat rates and related possible fuel adjustments. TXU Corp.
recorded the effects of the settlement plan at December 31, 2001, which
consisted primarily of adjustments to carrying values of assets and liabilities
as of that date affected by the settlement. The projected effects on 2002 and
beyond include the effects of settling prior fuel costs, limiting the retail
clawback and eliminating the wholesale clawback (discussed in previous
disclosures). For additional discussion of the settlement plan and related
items, see Note 4 to Financial Statements in TXU Corp.'s 2001 Form 10-K.
In April 2002, TXU Energy filed a request with the Commission to increase
the fuel factor component of its price-to-beat rates. The request, if approved,
would increase price-to-beat rates for residential and small commercial
customers by approximately 5%. Under Commission rules, affiliated REPs of
utilities are allowed to petition the Commission for an increase in the fuel
factor component of its price-to-beat rates if the average price of natural gas
futures increases more than 4% from the level used to set the previous
price-to-beat fuel factor rate. On May 29, 2002, an administrative law judge
issued a proposal for decision for consideration by the Commission. TXU Energy
is unable to predict the outcome of this proceeding.
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During the first six months of 2002,
rate cases supporting $56 million in annualized revenue increases have been
filed in 147 cities. Settlements or tentative agreements have been reached with
74 of these cities for annual increases aggregating $9 million. Rate cases have
been withdrawn from 23 cities, and 50 cities have declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the Railroad Commission of Texas (RRC),
which represents $25 million of annualized revenue increases. In addition, TXU
Gas has filed gas cost reconciliations, covering the period between November
1997 and June 2001, seeking to recover $29 million of under-recovered gas costs.
A settlement has been reached and approved by the RRC with respect to $19
million of this amount, while $10 million in under-recovered gas costs remains
pending.
INTERNATIONAL -- Although the energy markets in the UK and Australia are
now generally open to competition, there are certain price restrictions on rates
that can be charged and other price restrictions for electricity supply
businesses. In the UK, the electricity and gas markets are now fully open to
competition. Restrictions that affected TXU Europe's electricity supply business
were removed in April 2002. TXU Europe's natural gas supply business is not
subject to price regulation.
In Victoria and New South Wales Australia, all electricity customers have
had the option to choose their retailer since January 13, 2002, and the gas
retail customers in Victoria will have the same option effective October 1,
2002. The Australian government regulates retail prices and has approved a price
increase for TXU Australia's electricity retail customers for 2002. TXU
Australia is currently under discussion with the government for price increases
for TXU Australia's electricity and gas retail customers for 2003.
TXU Australia's electricity distribution tariffs are effective from January
1, 2001 until at least December 31, 2005, and TXU Australia's gas distribution
tariffs are effective until December 31, 2002. The Essential Services Commission
(formerly the Office of the Regulator General) issued a draft price
determination for the five-year period from 2003 to 2007 on July 4, 2002.
According to the draft determination, TXU Australia's gas distribution tariffs
for the same period are to be reduced slightly, after allowing for Consumer
Price Index increases. The final determination is scheduled to be issued on
October 2, 2002.
40
SUMMARY -- 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 financial position, results of
operations or cash flows.
CHANGES IN ACCOUNTING STANDARDS
See Note 2 to Financial Statements for discussion of changes in accounting
standards.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by 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
such statements its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s 2001 Form 10-K, as well as general industry trends;
implementation of the Texas electricity deregulation legislation and other
legislation; power costs and availability; changes in business strategy,
development plans or vendor relationships; availability of qualified personnel;
changes in, or the failure or inability to comply with, governmental
regulations, including, without limitation, environmental regulations; changes
in tax laws; implementation of new accounting standards; commercial paper market
and capital market conditions; and access to adequate transmission facilities to
meet changing demands; among others, that could cause the actual results of TXU
Corp. to differ materially from those projected in such forward-looking
statements.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information set forth in Item 7A. Quantitative and Qualitative Disclosures About
Market Risk included in TXU Corp.'s 2001 Form 10-K and is therefore not
presented herein.
41
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 29, 2001, various subsidiaries of Enron Corporation (Enron)
went into Administration (bankruptcy) in the UK. Prior to Enron's going into
Administration, TXU Europe Energy Trading (TXUEET) had certain energy purchase
and sales contracts with Enron, which had been entered into in the ordinary
course of business. The terms of these contracts provided that they terminated
automatically upon a party going into Administration. Also, on November 29, 2001
just prior to Enron going into Administration, TXUEET received a notice from
Enron purporting to terminate these contracts for cause. TXUEET and the
Administrator have had discussions regarding potential claims relating to
contract termination; in February 2002 TXUEET applied to the High Court in
London for permission to seek a judicial determination regarding contract
termination and, in March 2002, Enron filed an action in the High Court relating
to interpretation of certain other contractual provisions. For the more
expeditious and economic resolution of the issue of the contract termination,
TXUEET and Enron agreed in May 2002 to Enron initiating proceedings in the High
Court to enable the parties to seek a judicial determination regarding contract
termination, which action would supersede the previous actions. In June 2002,
Enron initiated such action and asked for a declaration that Enron is entitled
to payment of the net present value of the contracts or alternatively the market
value of the contracts, both for undetermined amounts, or alternatively, relief
from forfeiture of the contracts, for an undetermined amount, or in the further
alternative, restitution or relief from forfeiture of (pound)55 million ($84
million) previously paid by Enron to TXUEET for value under the contracts. While
the outcome of this matter cannot be predicted, TXUEET believes, consistent with
the advice of external legal advisors in the UK, that the attempted termination
of the contracts by Enron was without substance. Accordingly, TXUEET believes
any related claims by Enron are without merit and intends to vigorously defend
this suit.
42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TXU Corp. held its Annual Meeting of Shareholders on May 10, 2002. The
following items were presented to shareholders with the following results:
Votes
Votes Withheld or
For Against Abstentions
----------- ----------- -----------
Election of Directors:
Derek C. Bonham......................... 230,350,142 3,391,305 None
J.S. Farrington......................... 231,216,220 2,525,227 None
William M. Griffin...................... 229,591,338 4,150,109 None
Kerney Laday............................ 230,512,179 3,229,268 None
Jack E. Little.......................... 229,847,250 3,894,197 None
Margaret N. Maxey....................... 230,908,079 2,833,368 None
Erle Nye................................ 231,032,280 2,709,167 None
J.E. Oesterreicher...................... 229,854,627 3,886,820 None
Charles R. Perry........................ 229,685,083 4,056,364 None
Herbert H. Richardson................... 231,096,724 2,644,723 None
Approval of Amendment to
Restated Articles of Incorporation
for Authority for a Stock Split............ 231,122,433 1,031,553 1,587,461
Reapproval of the Long-Term
Incentive Compensation Plan,
as Amended................................. 218,076,764 12,285,927 3,378,756
Selection of Deloitte & Touche LLP
as Independent Auditors.................... 224,601,652 7,496,910 1,642,885
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
4(a) Indenture (For Unsecured Debt Securities Series M), dated as of
June 1, 2002, between TXU Corp. and The Bank of New York.
4(b) Officers' Certificate, dated June 5, 2002, establishing the
terms of the Series M Senior Notes.
4(c) Purchase Contract Agreement, dated as of June 1, 2002, between
TXU Corp. and The Bank of New York, as Purchase Contract Agent
and Trustee with respect to TXU Corp.'s issuance of
equity-linked securities.
4(d) Pledge Agreement, dated as of June 1, 2002, among TXU Corp.,
JPMorgan Chase Bank, as Collateral Agent, Custodial Agent and
Securities Intermediary and The Bank of New York as Purchase
Contract Agent with respect to equity-linked securities.
10(a) $400,000,000 Credit Agreement, dated as of July 15, 2002, among
TXU US Holdings Company, JPMorgan Chase Bank, as Administrative
Agent, and J.P. Morgan Securities, Inc.
10(b) $1,400,000,000 Five-Year Third Amended and Restated Competitive
Advance and Revolving Facility Agreement, dated as of July 31,
2002, among TXU US Holdings Company, JPMorgan Chase Bank, as
Administrative Agent and Competitive Advance Facility Agent,
J.P. Morgan Securities, Inc., Bank of America, N.A. and
Citibank, N.A.
43
15 Letter from Independent Accountants as to Unaudited Interim
Financial Information.
99.1 Condensed Statements of Consolidated Income - Twelve Months
Ended June 30, 2002.
99.2 Chief Executive Officer Certification.
99.3 Chief Financial Officer Certification.
(b) Reports on Form 8-K filed since March 31, 2002:
Date of Report Item Reported
-------------- -------------
July 15, 2002 Item 5. Other Events and
Regulation FD Disclosure.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ Biggs C. Porter
----------------------------------
Biggs C. Porter
Controller and Principal
Accounting Officer
Date: August 14, 2002
45