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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 1-11668
TXU US Holdings Company
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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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 12, 2002: 52,817,862 shares, without par
value.
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TABLE OF CONTENTS
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Page
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Part I. Financial Information
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income-
Three and Six Months Ended June 30, 2002 and 2001.................... 1
Condensed Statements of Consolidated Cash Flows - Six Months Ended
June 30, 2002 and 2001............................................ 2
Condensed Consolidated Balance Sheets - June 30, 2002 and December
31, 2001.......................................................... 3
Notes to Financial Statements........................................ 4
Independent Accountants' Report...................................... 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 30
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................... 31
Signature......................................................................... 32
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU US HOLDINGS COMPANY 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
Operating revenues ...................................................... $3,643 $3,057 $7,223 $7,177
------ ------ ------ ------
Operating expenses
Energy purchased for resale, fuel consumed and delivery costs ........ 2,310 1,842 4,556 4,930
Operation and maintenance ............................................ 566 453 1,089 846
Depreciation and amortization ........................................ 170 158 348 316
Goodwill amortization ................................................ -- 5 -- 8
Taxes other than income .............................................. 146 153 300 304
------ ------ ------ ------
Total operating expenses .......................................... 3,192 2,611 6,293 6,404
------ ------ ------ ------
Operating income ........................................................ 451 446 930 773
Other income ............................................................ 14 1 16 5
Other deductions ........................................................ 4 6 8 11
Interest income ......................................................... -- 10 1 21
Interest expense and other charges
Interest ............................................................. 106 113 213 230
Distributions on TXU US Holdings Company obligated, mandatorily
redeemable, preferred securities of subsidiary trusts holding
solely junior subordinated debentures of TXU US Holdings Company .. -- 17 -- 34
Allowance for borrowed funds used during construction and
capitalized interest .............................................. (3) (6) (6) (11)
------ ------ ------ ------
Total interest expense and other charges ......................... 103 124 207 253
------ ------ ------ ------
Income before income taxes .............................................. 358 327 732 535
Income tax expense ...................................................... 114 106 235 166
------ ------ ------ ------
Net income .............................................................. 244 221 497 369
Preferred stock dividends ............................................... 3 3 5 5
------ ------ ------ ------
Net income available for common stock ................................... $ 241 $ 218 $ 492 $ 364
====== ====== ====== ======
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................................................................. $244 $221 $ 497 $369
---- ---- ----- ----
Other comprehensive income (loss)
Net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001 (net of
tax of $ -).................................................... -- -- -- (1)
Net change in fair value of derivatives net of tax benefit of
$38, $64, and $ -.............................................. (70) -- (118) (1)
Amounts realized in earnings during the period net of tax
expense of $ - and $2.......................................... 1 -- 4 --
---- ---- ----- ----
Total.......................................................... (69) -- (114) (2)
---- ---- ----- ----
Comprehensive income....................................................... $175 $221 $ 383 $367
==== ==== ===== ====
See Notes to Financial Statements.
1
TXU US HOLDINGS COMPANY 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 ..................................................................... $ 497 $ 369
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization ............................................... 404 379
Deferred income taxes and investment tax credits-- net ...................... 25 8
Gains from sales of assets .................................................. (12) --
Net effect of unrealized mark-to-market valuation losses/(gains) ............ 12 (102)
Other ....................................................................... 39 27
Changes in operating assets and liabilities .................................... (514) (98)
------- -----
Cash provided by operating activities ................................. 451 583
------- -----
Cash flows-- financing activities
Issuance of long-term debt ..................................................... 1,261 121
Retirements/repurchases of securities:
Long-term debt .............................................................. (1,402) (153)
Common stock ................................................................ -- (420)
Dividends paid to parent ....................................................... (427) --
Change in notes payable-- affiliates ........................................... (686) 344
Capital contribution from parent ............................................... -- 75
Change in commercial paper ..................................................... 938 --
Preferred stock dividends paid ................................................. (5) (5)
Debt premium, discount, financing and reacquisition expenses ................... (24) (10)
------- -----
Cash used in financing activities ..................................... (345) (48)
------- -----
Cash flows-- investing activities
Capital expenditures ........................................................... (415) (506)
Acquisition of a business ...................................................... (36) --
Proceeds from sales of assets .................................................. 443 --
Nuclear fuel ................................................................... (50) (11)
Other .......................................................................... (66) (31)
------- -----
Cash used in investing activities ..................................... (124) (548)
------- -----
Net change in cash and cash equivalents ........................................... (18) (13)
Cash and cash equivalents-- beginning balance ..................................... 55 41
------- -----
Cash and cash equivalents-- ending balance ........................................ $ 37 $ 28
======= =====
See Notes to Financial Statements.
2
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 37 $ 55
Accounts receivable ................................... 1,746 940
Inventories -- at average cost ........................ 323 297
Prepayments ........................................... 117 48
Commodity contract assets ............................. 757 848
Other current assets .................................. 63 107
------- -------
Total current assets ......................... 3,043 2,295
------- -------
Investments ................................................. 717 721
Property, plant and equipment -- net ........................ 16,210 16,156
Goodwill .................................................... 558 558
Regulatory assets -- net .................................... 1,658 1,607
Commodity contract assets ................................... 386 389
Cash flow hedges and other derivative assets ................ 20 31
Deferred debits and other assets ............................ 107 81
------- -------
Total assets ................................. $22,699 $21,838
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Affiliates ...................................... $ 888 $ 1,300
Commercial paper ................................ 938 --
Long-term debt due currently .......................... 726 374
Accounts payable:
Affiliates ...................................... 51 64
Trade ........................................... 1,087 669
Commodity contract liabilities ........................ 560 630
Taxes accrued ......................................... 390 309
Interest accrued ...................................... 79 77
Other current liabilities ............................. 419 328
------- -------
Total current liabilities .................... 5,138 3,751
------- -------
Accumulated deferred income taxes ........................... 3,247 3,331
Investment tax credits ...................................... 461 476
Commodity contract liabilities .............................. 186 236
Cash flow hedges and other derivative liabilities ........... 158 2
Other deferred credits and noncurrent liabilities ........... 994 738
Long-term debt, less amounts due currently .................. 5,329 5,819
Preferred stock subject to mandatory redemption ............. 21 21
Contingencies (Note 6)
Shareholders' equity (Note 4) ............................... 7,165 7,464
------- -------
Total liabilities and shareholders' equity ... $22,699 $21,838
======= =======
See Notes to Financial Statements.
3
TXU US HOLDINGS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
As of January 1, 2002, TXU US Holdings Company (US Holdings, formerly TXU
Electric Company) is a holding company for TXU Energy Company LLC (TXU Energy)
and Oncor Electric Delivery Company (Oncor). US Holdings is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. Through December 31, 2001, US
Holdings was directly engaged in the generation, purchase, transmission,
distribution and sale of electric energy in the north-central, eastern and
western parts of Texas.
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, 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, 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 Company (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.
Business Acquisitions - 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.
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.
4
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- In accordance with accounting principles generally
accepted in the United States of America (US GAAP), the business restructuring
transactions discussed above have been accounted for as a change in reporting
entity. As such, the consolidated financial statements of US Holdings give
retroactive effect to those transactions, which have been accounted for in a
manner similar to that in a pooling of interest. The retroactive restatement
resulting from the change in reporting entity decreased net income of US
Holdings by $19 million for the six months ended June 30, 2001.
In connection with the restructuring of certain of TXU Corp.'s businesses
effective January 1, 2002, the wholesale trading and risk management and the
unregulated commercial and industrial retail gas businesses of TXU Gas were
acquired by TXU Energy. Included in the balance sheet of TXU Gas at December 31,
2001 was $773 million of goodwill, net of amortization, arising from TXU Corp.'s
1997 acquisition of ENSERCH Corporation. As a result of TXU Energy's acquisition
of the businesses, which were originally part of ENSERCH Corporation, and the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", $468 million of goodwill, net of $56
million of accumulated amortization, has been allocated to these businesses and
reflected in the June 30, 2002 balance sheet of US Holdings. US Holdings has two
reportable operating segments: North America Energy and North America Electric
Delivery (See Note 7).
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 from
these quarterly financial statements 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 are stated in millions of US dollars unless otherwise indicated.
Income Taxes -- US Holdings is included in the consolidated federal income
tax return of TXU Corp. and subsidiary companies. US Holdings uses the separate
return method to compute its income tax provision. Because of the alternative
minimum tax (AMT), differences may arise between the consolidated federal income
tax liability and the aggregated separate tax liability of the group members. In
instances where this occurs, the difference is allocated, pro-rata, to those
companies that generated AMT on a separate company basis.
Changes in Accounting Standards -- SFAS No. 142 became effective for US
Holdings 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 US Holdings' existing goodwill ($15 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. US Holdings has
completed the transitional impairment test, the results of which indicated no
impairment of goodwill.
5
The table below reflects what reported net income 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
Reported net income ................................ $244 $221 $497 $369
Add back: goodwill amortization .................... -- 5 -- 8
---- ---- ---- ----
Adjusted net income ................................ 244 226 497 377
Preferred stock dividends .......................... 3 3 5 5
---- ---- ---- ----
Adjusted net income available for common stock ..... $241 $223 $492 $372
==== ==== ==== ====
Exclusive of goodwill amortization expense for the years ended December 31,
2001, 2000 and 1999, net income would have been $722 million, $792 million and
$739 million, respectively.
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for US Holdings 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. US
Holdings 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 US Holdings 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 US Holdings 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 US Holdings 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 US Holdings 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. US Holdings 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 requires reclassification of
prior periods. US Holdings has not yet determined the amount of the
reclassifications; however, implementation of the new rules is expected to
result in a significant reduction in US Holdings' operating revenues and energy
purchased for resale. The required reclassifications will have no impact on US
Holdings' previously reported gross margin, net income or cash provided by
operating activities.
6
For accounting standards not yet adopted or implemented, US Holdings is
evaluating the potential impact on its financial position and results of
operations.
3. FINANCING ARRANGEMENTS
Credit Facilities -- At June 30, 2002, US Holdings 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 --
------ ----
Total(c) ............................. $2,400 $-- $737
(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.
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) Supports commercial paper borrowings. Available balance is net of
commercial paper borrowings of $1.124 billion and outstanding letters of
credit.
In July 2002, US Holdings entered into a $400 million credit facility that
terminates no later than November 30, 2002.
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 a $500 million three-year revolving credit
facility entered into by TXU Corp. 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 facility discussed above (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.
Long-Term Debt -- 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 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.
7
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.
TXU Mining redeemed $70 million of its 6.875% senior notes due 2005 and $53
million of its 7.0% senior notes due 2003.
As of June 30, 2002, the secured long-term debt of US Holdings consisted of
$3.3 billion of first mortgage bonds and senior secured notes that are secured
by a lien on substantially all of its tangible electric transmission and
distribution property. US Holdings' long-term debt obligations are not
guaranteed or secured by affiliates.
The terms of certain financing arrangements of Oncor 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, US Holdings was 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 subsidiaries contain provisions which 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.
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, subsidiaries of US Holdings had sold $1.189 billion face amount of
receivables to TXU Receivables Company under the program in exchange for cash of
$571 million and $607 million in subordinated notes, with $11 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 US Holdings 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 US Holdings' 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.
8
4. SHAREHOLDERS' EQUITY
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Shareholders' equity:
Preferred stock - not subject to mandatory redemption... $ 115 $ 115
------ ------
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: June 30, 2002 -- 52,817,862
and December 31, 2001 -- 51,122,600 .............. 2,248 2,248
Retained earnings....................................... 4,901 5,086
Accumulated other comprehensive income (loss)........... (99) 15
------ ------
Total common stock equity......................... 7,050 7,349
------ ------
Total shareholders' equity........................ $7,165 $7,464
====== ======
US Holdings issued 1,695,262 shares of its common stock to TXU Corp. and
affiliates on January 1, 2002 in connection with the transfer of businesses
described in Note 1.
5. 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. US Holdings 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. US Holdings
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 US Holdings' 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.
9
6. CONTINGENCIES
Power Purchase Contracts -- US Holdings has 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:
Capacity Payments
-----------------
July 1 through December 31, 2002 ....... $241
2003.................................... 269
2004.................................... 170
2005.................................... 152
2006.................................... 123
Thereafter.............................. 28
----
Total capacity payments ....... $983
====
Commitments under coal contracts at June 30, 2002 were not materially
different than those set forth in Note 14 to Financial Statements in US
Holdings' 2001 Form 10-K.
Legal Proceedings -- In September 1999, Quinque Operating Company (Quinque)
filed suit in the State District Court of Stevens County, Kansas against over
200 gas pipeline companies, including TXU Gas (named in the litigation as
ENSERCH Corporation). The suit was removed to federal court; however, a motion
to remand the case back to Kansas State District Court was granted in January
2001, and the case is now pending in Stevens County, Kansas. The plaintiffs
amended their petition to join TXU Fuel, a subsidiary of TXU Energy, as a
defendant in this litigation. Quinque has dismissed its claims and a new lead
plaintiff has filed an amended petition in which the plaintiffs seek to
represent a class consisting of all similarly situated gas producers, overriding
royalty owners, working interest owners and state taxing authorities either from
whom defendants had purchased natural gas or who received economic benefit from
the sale of such gas since January 1, 1974. No class has been certified. The
petition alleges that the defendants have mismeasured both the volume and heat
content of natural gas delivered into their pipelines resulting in underpayments
to plaintiffs. No amount of damages has been specified in the petition. While
TXU Energy and TXU Fuel are unable to estimate any possible loss or predict the
outcome of this case, TXU Energy and TXU Fuel believe these claims are without
merit and intend to vigorously defend this suit.
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.
General -- US Holdings and its subsidiaries are involved in various other
legal and administrative proceedings, the ultimate resolution of which, in the
opinion of US Holdings, is not expected to have a material effect upon their
financial position, results of operations or cash flows.
10
7. SEGMENT INFORMATION
Through December 31, 2001, US Holdings had no separate reportable operating
segments. As a result of TXU Corp.'s reorganization as of January 1, 2002 (see
Note 1), US Holdings realigned its operations into two reportable segments:
North America Energy and North America Electric Delivery. Prior period amounts
have been restated to conform to the new segments.
North America Energy (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; and
North America Energy Delivery (Electric Delivery) - operations involving
the transmission and distribution of electricity in Texas.
The prior year financial information for the Energy segment and the
Electric 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 Energy segment's revenues and cost of energy for the three and
six months ended June 30, 2001. The Energy segment's gross margin is not
affected by the inclusion of these electricity delivery fees.
11
Three Months Ended Six Months Ended
June 30, June 30
------------------ ----------------
2002 2001* 2002 2001*
------ ------ ------ ------
Operating revenues -
Energy ............................. $3,540 $2,967 $7,042 $7,084
Electric Delivery .................. 103 90 181 93
------ ------ ------ ------
Consolidated .................... $3,643 $3,057 $7,223 $7,177
====== ====== ====== ======
Affiliated revenues -
Energy ............................. $ 3 $ 1 $ 4 $ 1
Electric Delivery .................. 397 439 813 912
Eliminations ....................... (400) (440) (817) (913)
------ ------ ------ ------
Consolidated .................... $ -- $ -- $ -- $ --
====== ====== ====== ======
Net income
Energy ............................. $ 179 $ 181 $ 361 $ 305
Electric Delivery .................. 65 40 136 64
------ ------ ------ ------
Consolidated .................... $ 244 $ 221 $ 497 $ 369
====== ====== ====== ======
- ----------
*The Energy and Electric Delivery segments were created as a result of the
deregulation of the electric utility industry in Texas, which became
effective January 1, 2002. The 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. The Electric Delivery
segment includes the electric T&D business of US Holdings and TXU SESCO
Company.
Prior period data is included above for the purpose of providing historical
financial information about the Energy and Electric segments after giving
effect to the US Holdings restructuring transactions and allocations
described above and in Note 1. Had the Energy and Electric 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 Energy and Electric Delivery
segments' operations and financial positions could differ materially from
the historical information presented.
8. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Operating revenues
Regulated ................................. $ 100 $1,945 $ 177 $3,784
Unregulated ............................... 3,543 1,112 7,046 3,393
------ ------ ------ ------
Total operating revenues ............... 3,643 3,057 7,223 7,177
------ ------ ------ ------
Operating expenses
Energy purchased for resale - regulated ... -- 277 -- 561
Energy purchased for resale - unregulated.. 1,923 1,044 3,911 3,280
Fuel consumed - regulated ................. -- 521 -- 1,089
Fuel consumed - unregulated ............... 387 -- 645 --
Operation and maintenance - regulated ..... 189 387 367 729
Operation and maintenance - unregulated ... 377 66 722 117
Depreciation and amortization ............. 170 163 348 324
Taxes other than income ................... 146 153 300 304
------ ------ ------ ------
Total operating expenses ............... 3,192 2,611 6,293 6,404
------ ------ ------ ------
Operating income ............................. $ 451 $ 446 $ 930 $ 773
====== ====== ====== ======
12
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..... $12 $-- $12 $ 1
Other............................................... 2 1 4 4
--- --- --- ---
Total other income............................... $14 $ 1 $16 $ 5
=== === === ===
Other deductions
Equity in losses of unconsolidated entities......... $-- $ 1 $-- $ 1
Other............................................... 4 5 8 10
--- --- --- ---
Total other deductions........................... $ 4 $ 6 $ 8 $11
=== === === ===
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $2.1 billion and regulatory liabilities of $411 million
at June 30, 2002, and regulatory assets of $2.1 billion and regulatory
liabilities of $461 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 5 for further
discussion of the settlement plan.) The remaining regulatory assets have a
weighted average remaining recovery period of 24 to 43 years.
Accounts receivable -- At June 30, 2002 and December 31, 2001, accounts
receivable are stated net of uncollectible accounts of $98 million and $28
million, respectively. Accounts receivable included $838 million and $223
million unbilled revenues at June 30, 2002 and December 31, 2001, respectively.
13
Inventories by major category--
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Materials and supplies.................................................... $194 $186
Fuel stock................................................................ 63 62
Gas stored underground.................................................... 66 49
---- ----
Total inventories...................................................... $323 $297
==== ====
Property, plant and equipment--
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
In service:
Production ............................................................ $16,541 $16,627
Transmission .......................................................... 1,982 1,979
Distribution .......................................................... 6,217 6,110
General ............................................................... 817 672
------- -------
Total .............................................................. 25,557 25,388
Less accumulated depreciation ............................................ 9,205 9,074
------- -------
Net of accumulated depreciation ....................................... 16,352 16,314
Construction work in progress ............................................ 508 510
Nuclear fuel (net of accumulated amortization: 2002- $819; 2001 - $787) .. 164 146
Held for future use ...................................................... 22 22
Reserve for regulatory disallowances ..................................... (836) (836)
------- -------
Net property, plant and equipment ..................................... $16,210 $16,156
======= =======
Goodwill -- At June 30, 2002 and December 31, 2001, goodwill is stated net
of accumulated amortization of $67 million.
Derivatives and Hedges -- During the first six months of 2002, existing
accounting hedges of anticipated sales from baseload generation in TXU Energy
became less effective due to changes in Electric Reliability Council of Texas
(ERCOT) market rules and conditions. US Holdings experienced net hedge
ineffectiveness of $25 million and $33 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 risk remained
highly effective during the period.
As of June 30, 2002, it is expected that $15 million of after-tax net gains
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 gain 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.
14
INDEPENDENT ACCOUNTANTS' REPORT
TXU US Holdings Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU US
Holdings Company (US Holdings) 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 US
Holdings' management. The condensed consolidated financial statements give
retroactive effect to the acquisition of affiliated businesses which have been
accounted for as a combination of entities under common control as described in
the Notes to Financial Statements.
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 US
Holdings 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, after giving retroactive effect to the combination discussed
in the first paragraph.
As discussed in Note 2 to the Notes to Financial Statements, US Holdings 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
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
TXU US Holdings Company (US Holdings, formerly TXU Electric Company) is a
holding company for TXU Energy Company LLC (TXU Energy) and Oncor Electric
Delivery Company (Oncor). US Holdings is a wholly-owned subsidiary of TXU Corp.,
a Texas corporation. Through December 31, 2001, US Holdings was directly engaged
in the generation, purchase, transmission, distribution and sale of electric
energy in the north-central, eastern and western parts of Texas. Effective
January 1, 2002, as a result of legislation passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation), US Holdings transferred to Oncor its
transmission and distribution (T&D) business and to TXU Energy its generation
assets and retail customers. In addition, as of January 1, 2002, TXU Energy
acquired the following businesses from within the TXU Corp. system: the retail
electric provider (REP) of TXU SESCO Company; the wholesale trading business and
risk management operations and the unregulated commercial and industrial retail
gas business of TXU Gas Company (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. Also, the T&D
business of TXU SESCO Company was transferred to Oncor. The historical financial
statements for 2001 have been restated to reflect these acquisitions of entities
under common control and management.
As of January 1, 2002 US Holdings is an energy services company and engages
in electricity generation, wholesale energy trading and risk management, retail
energy sales, energy delivery and other energy-related services in North
America.
The prior period segment information reflects best efforts to allocate both
revenues and expenses of US Holdings between the North America Energy (Energy)
and North America Energy Delivery (Electric Delivery) segments. Therefore,
comparisons remain difficult due to the fact the prior period for the Energy
segment reflects certain operations that were regulated versus the unregulated
operations of today.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
US Holdings' operating revenues increased $586 million, or 19%, to $3.6
billion in 2002. Revenue growth in the Energy segment of $575 million was driven
by higher wholesale trading volumes in the deregulated Electric Reliability
Council of Texas (ERCOT) power market. Revenues in the Electric Delivery segment
declined $29 million.
Gross margin (operating revenue less energy purchased for resale, fuel
consumed and delivery costs) increased $118 million, or 10%, to $1.3 billion.
Higher margins in the Energy segment reflected improved results in the wholesale
business. 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.
Operation and maintenance expense increased $113 million, or 25%, to $566
million in 2002. The increase was driven by the 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 $8 million in 2002.
Other operating expenses (depreciation and other amortization, goodwill
amortization and taxes other than income) were $316 million in 2002 and 2001.
Increased depreciation and amortization expense of $12 million primarily due to
expansion of facilities and investments in computer systems was offset by
decreased taxes other
16
than income of $7 million and a $5 million impact from the discontinuance of
goodwill amortization pursuant to Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets".
Operating income increased $5 million, or 1%, to $451 million in 2002,
reflecting higher gross margin partially offset by higher operation and
maintenance expense.
Other income increased $13 million to $14 million in 2002. The increase was
due primarily to the amortization of the deferred gain on the sale of the
Handley and Mountain Creek generating plants, which is being amortized in the
summer months over a five year period.
Interest income declined by $10 million, or 100%, in 2002, due largely to
lower interest rates and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation.
Interest expense and other charges decreased $21 million, or 17%, to $103
million in 2002, reflecting lower interest rates.
Net income available for common stock rose $23 million, or 11%, to $241
million. The increase in net income primarily reflected a $25 million increase
in the Electric Delivery segment as discussed below under Segments. Net pension
and postretirement benefit costs reduced net income by $10 million in 2002 and
$5 million in 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
US Holdings' operating revenues increased $46 million, or 1%, to $7.2
billion in 2002. A decline in revenues of $39 million in the Energy segment and
$11 million in the Electric Delivery segment was more than offset by a lower
intercompany elimination between the Energy and Electric Delivery segments in
2002. Electric Delivery segment revenues in 2002 reflected delivery fees with
new REP's and lower affiliated delivery fees with the Energy segment due to the
effects of competition in the Texas electricity market.
Gross margin increased $420 million, or 19%, to $2.7 billion in 2002. The
gross margin increase was driven by the Energy segment's improved results in
wholesale operations and the retail electric business. 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.
Operation and maintenance expense increased $243 million, or 29%, to $1.1
billion in 2002. The increase was driven by the 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.
Other operating expenses increased $20 million, or 3%, to $648 million in
2002 reflecting higher depreciation and amortization expense in the Energy and
Electric Delivery segments due to expansion of office facilities, investments
in computer systems and property, plant and equipment additions.
Operating income increased $157 million, or 20%, to $930 million in 2002,
reflecting higher gross margin partially offset by higher operation and
maintenance expense and higher depreciation and amortization expense.
Other income increased $11 million to $16 million in 2002. The increase was
due primarily to the amortization of the deferred gain on the sale of two
generating plants.
Interest income declined by $20 million, or 95%, in 2002, due largely to
lower interest rates and the recovery of under-collected fuel revenue on which
interest income had been accrued under regulation.
Interest expense and other charges decreased $46 million, or 18%, to $207
million in 2002, reflecting lower interest rates.
17
Net income available for common stock increased $128 million, or 35%, to
$492 million in 2002. Net income growth reflected increases in the Energy and
Electric Delivery segments of $56 million and $72 million, respectively. These
performances are discussed below under Segments. Net pension and postretirement
benefit costs reduced net income by $20 million in 2002 and $11 million in 2001.
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 decrease, excluding
"other activity" as described below, of $12 million represents the net
unfavorable effect of mark-to-market accounting on earnings for the six months
ended June 30, 2002 ($134 million net favorable effect for the three months
ended June 30, 2002).
Balance of net commodity contract assets/(liabilities) at December 31, 2001 .. $ 371
Settlements of positions included in the opening balance (1) ................. (127)
Unrealized mark-to-market valuations of positions held at period-end (2) ..... 115
Other activity (3)............................................................ 38
-----
Balance of net commodity contract assets/(liabilities) at June 30, 2002 ...... $ 397
=====
(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) Represents net option premiums paid/(received) in the current period, a
commodity contract transferred from TXU Gas and reclassifications of
commodity contract assets and liabilities. 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.
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 4-5 years 5 years Total
- ---------------------- ------------- ----------- ----------- ----------- -----
Prices actively quoted..... $ 4 $ -- $-- $-- $ 4
Prices provided by other
external sources........ 202 122 28 8 360
Prices based on models..... 3 16 9 5 33
---- ---- --- --- ----
Total...................... $209 $138 $37 $13 $397
==== ==== === === ====
Percentage of total ....... 53% 35% 9% 3% 100%
As the above table indicates, approximately 88% 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 when there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available through 2004. 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. 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
18
forward and option components. In many instances, these contracts can be broken
down into their component parts and modeled by US Holdings as simple forwards
and options based on prices actively quoted. As the modeled value 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 Public Utility Commission of Texas
(Commission) and the Securities and Exchange Commission (SEC) regarding "wash
trades" in electric and gas trading markets in the United States. 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.
19
SEGMENTS
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 ................. 58 63 125 130
------ ------ ------ ------
Income before income taxes ......................... 260 268 528 442
Income tax expense ................................. 81 87 167 137
------ ------ ------ ------
Net income ......................................... $ 179 $ 181 $ 361 $ 305
====== ====== ====== ======
- ----------
*The Energy segment was created as a result of the deregulation of the
electric utility industry in Texas, which became effective January 1, 2002.
The 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
combined financial information about the Energy segment after giving effect
to the US Holdings restructuring transactions and allocations described in
the Notes to Financial Statements. Had the 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 Energy segment's operations and financial position could
differ materially from the historical information presented.
20
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 (billion cubic
feet - 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
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001* 2002 2001*
------ ------ ------ ------
Operating revenues (millions 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 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
21
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 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 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 $179 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 due largely 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 Electric 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 31.2% in 2002 from 32.5% in 2001, due primarily
to lower state income taxes.
The 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.
22
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 18%, to $361 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) related to the development of retail sales operations and expansion of
trading and risk management activities and increased bad debt expense ($96
million), all due largely 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 Electric 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 31.6% in 2002 compared to 31.0% in 2001.
23
Electric Delivery
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001* 2002 2001*
---- ----- ---- ------
Operating revenues ..................... $500 $529 $994 $1,005
---- ---- ---- ------
Operating expenses
Operation and maintenance ........... 189 217 367 402
Depreciation and amortization ....... 67 58 131 118
Taxes other than income ............. 92 125 187 249
---- ---- ---- ------
Total operating expenses ......... 348 400 685 769
---- ---- ---- ------
Operating income ....................... 152 129 309 236
Other income ........................... 1 1 2 3
Other deductions ....................... 1 1 3 3
Interest income ........................ 11 -- 23 --
Interest expense and other charges ..... 65 70 127 143
---- ---- ---- ------
Income before income taxes ............. 98 59 204 93
Income tax expense ..................... 33 19 68 29
---- ---- ---- ------
Net income ............................. $ 65 $ 40 $136 $ 64
==== ==== ==== ======
- ----------
*The Electric Delivery segment was created as a result of the deregulation
of the electric utility industry in Texas, which became effective January
1, 2002. The Electric Delivery segment includes the electric T&D business
of US Holdings and TXU SESCO Company.
Prior period data is included above for the purpose of providing historical
combined financial information about the Electric Delivery segment after
giving effect to the US Holdings restructuring transactions described in
the Notes to Financial Statements. Had the Electric 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 Electric Delivery segment's operations
and financial position could differ materially from the historical
information presented.
Segment Highlights
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2001* 2002 2001*
------- ------- ------- -------
Millions of Dollars
Electric energy delivered (GWh)...................... 26,232 24,876 49,818 48,517
======= ======= ======= =======
Electric points of delivery (end of period and in
thousands) .......................................... 2,887 2,830
Operating revenues (millions of dollars):
Energy............................................ $ 397 $ 439 $ 813 $ 912
Non-affiliated.................................... 103 90 181 93
------- ------- ------- -------
Total electric energy delivery................. $ 500 $ 529 $ 994 $ 1,005
======= ======= ======= =======
- ----------
*See footnote above.
24
The prior year financial information for the Electric 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.
The Electric Delivery segment's operating revenues decreased by $29
million, or 5%, to $500 million in the second quarter of 2002 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 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.
The Electric Delivery segment does not buy or sell electricity; its
revenues consist primarily of T&D fees. There is, therefore, no gross margin for
this segment.
Net income for the segment increased $25 million, or 62%, to $65 million
for the second quarter of 2002. The improvement was driven by the effect of
state gross receipts taxes that are reflected in the Energy segment effective
2002, interest income on regulatory-related assets charged by the Electric
Delivery segment to the Energy segment effective 2002 and reduced interest
expense due to lower rates and lower average debt balances. The effective tax
rate increased from 32.2% in 2001 to 33.7% in 2002 due primarily to prior period
adjustments, partially offset by the amortization of excess deferred taxes.
Operating revenues for the Electric Delivery segment decreased $11 million,
or 1%, to $994 million for the first six months of 2002. 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 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.
Net income increased by $72 million, or 112%, to $136 million for the first
six months of 2002. The improvement was driven by the effect of state gross
receipts taxes that are reflected in the Energy segment effective 2002, interest
income on regulatory-related assets charged by the Electric Delivery segment to
the Energy segment effective 2002 and reduced interest expense due to lower
rates and average debt balances. The effective tax rate increased from 31.2% in
2001 to 33.3% in 2002 due primarily to prior period adjustments, partially
offset by the amortization of excess deferred taxes.
COMPREHENSIVE INCOME
US Holdings has historically used, and will continue to use, derivatives
that are highly effective in offsetting future cash flow volatility in interest
rates and energy commodity prices. The fair value of derivatives that are
effective as cash flow hedges are recorded as derivative assets or liabilities
with an offset in other comprehensive income.
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 accounting hedges will be recorded in the statement of income as
the related transactions are actually settled.
25
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 US Holdings' 2001 10-K. No significant changes or events that
might affect the financial condition of US Holdings 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 declined $132 million, or 23%, to $451 million. The decrease
reflected higher accounts receivable in 2002. Unbilled accounts receivable in
the 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. The effect of the
higher accounts receivable was partially offset by higher cash income (net
income adjusted for noncash expense and income items).
Cash flows used in financing activities for 2002 were $345 million.
Retirements and repurchases of debt securities totaled $1.4 billion, and
issuances of debt securities totaled $1.3 billion during the first six months of
2002. Cash dividends paid to TXU Corp. were $427 million. Net repayment of
borrowings from TXU Corp. totaled $686 million. Issuances of commercial paper
totaled $938 million.
Cash flows used in investing activities for 2002 totaled $124 million
compared to $548 million used for investing activities in 2001. Proceeds from
the sale of the Handley and Mountain Creek generating plants in the Dallas-Ft.
Worth area were $443 million. Acquisitions in 2002 included $36 million for a
cogeneration and wholesale energy production business in New Jersey. Fuel
reloading at one of the nuclear generating units totalled $50 million in
expenditures in 2002.
Issuances and Retirements -- During the six months ended June 30, 2002, US
Holdings issued, redeemed, reacquired or made scheduled principal payments on
long-term debt as follows:
Issuances Retirements
--------- -----------
Oncor
First mortgage bonds.............. $ -- $ 297
Medium term notes................. -- 55
Senior secured notes.............. 1,200 --
TXU Energy
Floating rate debentures.......... -- 865
Pollution control revenue bonds .. 61 61
Other long-term debt.............. -- 124
------ ------
$1,261 $1,402
====== ======
Long-Term Debt - 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 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
26
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.
TXU Mining redeemed $70 million of its 6.875% senior notes due 2005 and $53
million of its 7.0% senior notes due 2003.
As of June 30, 2002, the secured long-term debt of Oncor consisted of
$3.3 billion of first mortgage bonds and senior secured notes that are secured
by a lien on substantially all of its tangible electric transmission and
distribution property. US Holdings' long-term debt obligations are not
guaranteed or secured by affiliates.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of subsidiaries contain provisions which 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.
Credit Facilities -- At June 30, 2002, US Holdings 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 --
------- ---
Total (c).......................... $ 2,400 $-- $737
(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.
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) Supports commercial paper borrowings. Available balance is net of
commercial paper borrowings of $1.124 billion and outstanding letters of
credit.
In July 2002, US Holdings entered into a $400 million credit facility that
terminates no later than November 30, 2002.
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 a $500 million three-year revolving credit
facility entered into by TXU Corp. 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 facility discussed above (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.
27
During 2002, US Holdings 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. US Holdings 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, US Holdings and its
subsidiaries could borrow under their credit facilities.
US Holdings and its subsidiaries also from time to time may utilize these
short-term facilities to temporarily fund maturities and early redemptions of
long-term debt and other securities, as well as short-term requirements. If US
Holdings 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 US
Holdings 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,
US Holdings was in compliance with all such applicable covenants.
US Holdings' goal is to continue to maintain credit ratings necessary to
allow US Holdings or its subsidiaries to access the commercial paper market. If
US Holdings 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.
In addition to the one described above, various agreements of US Holdings
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 US Holdings or its subsidiaries.
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, subsidiaries of US Holdings had sold $1.189 billion face amount of
receivables to TXU Receivables Company under the program in exchange for cash of
$571 million and $607 million in subordinated notes, with $11 million of losses
28
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 US Holdings 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 US Holdings' 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.
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 initial issuance of securitization bonds in the amount of up to
$500 million followed by a second issuance for the remainder after 2003.
Capitalization - The capitalization ratios of US Holdings at June 30, 2002
consisted of approximately 42% long-term debt, less amounts due currently, 1%
preferred stock and 57% common stock equity, compared to December 31, 2001
capitalization ratios of approximately 44% long-term debt, 1% preferred stock
and 55% common stock equity.
Registered Financing Arrangements - US Holdings 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 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 are currently registered.
COMMITMENTS AND CONTINGENCIES
See Note 6 to Financial Statements for a discussion of contingencies.
All of US Holdings' exposures related to Enron have been provided for. US
Holdings' 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
classified to other current liabilities.
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. US Holdings 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. US Holdings
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 US Holdings' 2001 Form 10-K.
29
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.
Although US Holdings 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 US Holdings contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although US Holdings 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 US Holdings' 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 US
Holdings 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 US Holdings 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 US
Holdings 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 DISCLOSURE 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 US Holdings' 2001 Form 10-K and is therefore not
presented herein.
30
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
10(a) $400,000,000 Credit Agreement, dated as of July 15, 2002, among
TXU US Holdings Company, JP Morgan Chase Bank, as Administrative
Agent, and J.P. Morgan Securities, Inc., previously filed as
Exhibit 10(a) with File No. 1-12833 Form 10-Q for the quarter
ended June 30, 2002.
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, JP Morgan Chase Bank, as
Administrative Agent and Competitive Advance Facility Agent, J.P.
Morgan Securities, Inc., Bank of America, N.A. and Citibank,
N.A., previously filed as Exhibit 10(b) with File No. 1-12833
Form 10-Q for the quarter ended June 30, 2002.
15 Letter from independent accountants as to unaudited interim
financial information.
99(a) Condensed Statements of Consolidated Income - Twelve Months
Ended June 30, 2002.
99(b) Chief Executive Officer Certification.
99(c) Chief Financial Officer Certification.
- ----------
(b) Reports on Form 8-K filed since March 31, 2002:
Date of Report Item Reported
-------------- -------------
April 17, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
April 17, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
May 20, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
May 29, 2002 Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits.
31
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 US HOLDINGS COMPANY
By /s/ Biggs C. Porter
--------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: August 14, 2002
32