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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission File Number 1-12833
TXU Corp.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2669310
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ----
Common Stock outstanding at May 4, 2004: 323,846,653 shares, without par value.
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TABLE OF CONTENTS
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PAGE
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GLOSSARY........................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 2004 and 2003....................................... 1
Condensed Statements of Consolidated Comprehensive Income -
Three Months Ended March 31, 2004 and 2003...................................... 2
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 2004 and 2003....................................... 3
Condensed Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003............................................. 4
Notes to Financial Statements.................................................... 5
Independent Accountants' Report.................................................... 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 58
Item 4. Controls and Procedures ....................................................... 60
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 60
Item 2. Changes in Securities and Use of Proceeds........................................ 61
Item 6. Exhibits and Reports on Form 8-K ................................................ 61
SIGNATURE.......................................................................................... 64
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Corp. are made available to the public,
free of charge, on the TXU Corp. website at http://www.txucorp.com, shortly
after they have been filed with the Securities and Exchange Commission. TXU
Corp. will provide copies of current reports not posted on the website upon
request.
i
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation................. Legislation that restructured the electric utility industry
in Texas to provide for competition
2003 Form 10-K................................. TXU Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2003
Bcf............................................ billion cubic feet
Commission..................................... Public Utility Commission of Texas
EITF........................................... Emerging Issues Task Force
EITF 98-10 .................................... EITF Issue No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities"
EITF 02-3 ..................................... EITF Issue No. 02-3, "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities"
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of various electricity systems within Texas
ERISA.......................................... Employee Retirement Income Security Act
FASB........................................... Financial Accounting Standards Board, the designated
organization in the private sector for establishing
standards for financial accounting and reporting
FERC........................................... Federal Energy Regulatory Commission
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities -
An Interpretation of ARB No. 51"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
GWh............................................ Gigawatt-hours
historical service territory................... US Holdings' historical service territory, largely in north
Texas, at the time of entering competition on January 1, 2002
IRS............................................ Internal Revenue Service
Moody's........................................ Moody's Investors Services, Inc.
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
Oncor.......................................... refers to Oncor Electric Delivery Company, a subsidiary of
US Holdings, or Oncor and its consolidated bankruptcy remote
financing subsidiary, Oncor Electric Delivery Transition
Bond Company LLC, depending on context
ii
Pinnacle....................................... Pinnacle One Partners, L.P., the holding company for the
telecommunications business and formerly a joint venture
price-to-beat rate............................. residential and small business customer electricity rates
established by the Commission in the restructuring of the
Texas market that are required to be charged in a REP's
historical service territories until January 1, 2005 or when
40% of the electricity consumed by such customer classes is
supplied by competing REPs, adjusted periodically for
changes in fuel costs, and required to be available to those
customers until January 1, 2007
REP............................................ retail electric provider
RRC............................................ Railroad Commission of Texas
S&P............................................ Standard & Poor's, a division of the McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 133....................................... SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
SFAS 143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS 150....................................... SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity"
SG&A........................................... selling, general and administrative
TXU Australia.................................. refers to TXU Australia Group Pty Ltd, a subsidiary of TXU
Corp., and/or its consolidated subsidiaries, depending on
context
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Communications............................. TXU Communications Ventures Company, a subsidiary of Pinnacle
TXU Corp. ..................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
TXU Energy..................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
TXU Europe..................................... TXU Europe Limited, a former subsidiary of TXU Corp.
TXU Gas........................................ TXU Gas Company, a subsidiary of TXU Corp.
TXU Mining..................................... TXU Mining Company LP, a subsidiary of TXU Energy
iii
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of TXU
Energy
UK............................................. United Kingdom
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iv
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2004 2003
-------- ------
(millions of dollars,
except per share
amounts)
Operating revenues............................................................ $2,992 $2,760
Costs and expenses:
Cost of energy sold and delivery fees...................................... 1,412 1,365
Operating costs........................................................... 417 414
Depreciation and amortization.............................................. 235 223
Selling, general and administrative expenses............................... 282 246
Franchise and revenue-based taxes.......................................... 108 111
Other income............................................................... (9) (13)
Other deductions........................................................... 19 17
Interest income............................................................ (5) (10)
Interest expense and related charges....................................... 237 247
----- -----
Total costs and expenses............................................... 2,696 2,600
----- -----
Income from continuing operations before income taxes and cumulative effect
of changes in accounting principles....................................... 296 160
Income tax expense............................................................ 95 45
----- -----
Income from continuing operations before cumulative effect
of changes in accounting principles........................................ 201 115
Loss from discontinued operations, net of tax benefit (Note 3)................ (19) (12)
Cumulative effect of changes in accounting principles, net of tax benefit (Note 2) -- (58)
----- -----
Net income ................................................................... $ 182 $ 45
Preference stock dividends ................................................... 5 5
----- -----
Net income available to common shareholders................................... $ 177 $ 40
Average shares of common stock outstanding (millions):
Basic...................................................................... 323 321
Diluted.................................................................... 380 378
Per share of common stock:
Basic earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles....................................... $ 0.62 $0.36
Preference stock dividends............................................... (0.01) (0.02)
Loss from discontinued operations, net of tax benefit.................... (0.06) (0.04)
Cumulative effect of changes in accounting principles, net of tax benefit -- (0.17)
Net income available to common shareholders.............................. 0.55 0.13
Diluted earnings:
Income from continuing operations before cumulative effect of
changes in accounting principles....................................... $ 0.57 $0.34
Preference stock dividends............................................... (0.01) (0.02)
Loss from discontinued operations, net of tax benefit................... (0.06) (0.03)
Cumulative effect of changes in accounting principles, net of tax benefit -- (0.15)
Net income available to common shareholders.............................. 0.50 0.14
Dividends declared........................................................ 0.125 0.125
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------
2004 2003
------ ------
(millions of dollars)
Components related to continuing operations:
Income from continuing operations before cumulative
effect of changes in accounting principles................................ $ 201 $ 115
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustment .................................. 7 55
Minimum pension liability adjustments (net of tax expense of $1 and
benefit of $3)........................................................... 1 (6)
Cash flow hedges:
Net change in fair value of derivatives (net of tax benefit of
$41 and $56)........................................................ (81) (108)
Amounts realized in earnings during the period (net of tax expense of
$10 and $42)........................................................ 20 81
------ -----
Total............................................................. (53) 22
------ -----
Comprehensive income from continuing operations............................... 148 137
Comprehensive loss from discontinued operations, net of tax benefit........... (19) (12)
Cumulative effect of changes in accounting principles, net of tax benefit..... -- (58)
------ -----
Comprehensive income.......................................................... $ 129 $ 67
====== =====
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
2004 2003
------ -------
(millions of
dollars)
Cash flows - operating activities:
Income from continuing operations before cumulative effect of
changes in accounting principles.............................................. $ 201 $ 115
Adjustments to reconcile income from continuing operations before cumulative
effect of changes in accounting principles to cash provided by operating
activities:
Depreciation and amortization ............................................... 254 246
Deferred income taxes and investment tax credits - net ...................... 76 --
Net gain from sale of assets................................................ -- (6)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 3 21
Net equity loss from unconsolidated affiliates and joint ventures............ -- 15
Adjustments related to gas cost recovery..................................... 8 (39)
Reduction in regulatory liability............................................ -- (42)
Changes in operating assets and liabilities..................................... (74) 617
----- ------
Cash provided by operating activities.................................... 468 927
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 759 1,317
Common stock................................................................. 8 4
Retirements/repurchases of securities:
Long-term debt............................................................... (1,429) (565)
Preferred securities of subsidiary, subject to mandatory redemption.......... -- (4)
Change in notes payable:
Commercial paper............................................................. (30) 5
Banks........................................................................ 116 (1,286)
Cash dividends paid:
Common stock................................................................. (40) (40)
Preference stock............................................................. (5) (5)
Redemption deposit applied to debt retirements.................................. -- 138
Debt premium, discount, financing and reacquisition expenses.................... (24) (47)
----- ------
Cash used in financing activities........................................ (645) (483)
Cash flows - investing activities:
Capital expenditures............................................................ (189) (228)
Proceeds from sale of assets.................................................... 1 13
Nuclear fuel.................................................................... (47) --
Other........................................................................... 12 25
----- ------
Cash used in investing activities........................................ (223) (190)
----- ------
Effect of exchange rates on cash and cash equivalents............................. 3 2
Cash contributions to discontinued operations..................................... (37) (4)
----- ------
Net change in cash and cash equivalents........................................... (434) 252
Cash and cash equivalents - beginning balance..................................... 875 1,574
----- ------
Cash and cash equivalents - ending balance........................................ $ 441 $1,826
===== ======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
--------- ------------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents....................................................... $ 441 $ 875
Restricted cash................................................................. 9 12
Accounts receivable -- trade.................................................... 1,338 1,369
Inventories..................................................................... 530 599
Commodity contract assets....................................................... 1,057 959
Assets of telecommunications holding company.................................... -- 110
Other current assets............................................................ 341 333
-------- --------
Total current assets..................................................... 3,716 4,257
Investments:
Restricted cash................................................................. 580 582
Other investments............................................................... 736 705
Property, plant and equipment -- net.............................................. 20,900 20,920
Goodwill.......................................................................... 1,835 1,829
Regulatory assets -- net.......................................................... 1,823 1,837
Commodity contract assets......................................................... 413 362
Cash flow hedges and other derivative assets...................................... 75 123
Other noncurrent assets........................................................... 380 411
Assets held for sale.............................................................. 600 660
-------- --------
Total assets............................................................. $ 31,058 $ 31,686
======== ========
LIABILITIES, PREFERRED SECURITIES OF SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable:
Commercial paper............................................................. $ 7 $ 39
Banks........................................................................ 175 58
Long-term debt due currently.................................................... 451 677
Accounts payable -- trade....................................................... 1,101 1,042
Commodity contract liabilities.................................................. 997 913
Liabilities of telecommunications holding company............................... -- 603
Other current liabilities....................................................... 1,232 1,339
-------- --------
Total current liabilities................................................ 3,963 4,671
Accumulated deferred income taxes................................................. 3,916 3,939
Investment tax credits............................................................ 426 430
Commodity contract liabilities.................................................... 359 318
Cash flow hedges and other derivative liabilities................................. 343 267
Long-term debt held by subsidiary trusts.......................................... 546 546
All other long-term debt, less amounts due currently.............................. 12,368 12,324
Other noncurrent liabilities and deferred credits................................. 2,295 2,370
Liabilities held for sale......................................................... 92 143
-------- --------
Total liabilities........................................................ 24,308 25,008
Preferred securities of subsidiaries (Note 6)..................................... 761 759
Contingencies (Note 8)
Shareholders' equity (Note 7):
Preferred stock - not subject to mandatory redemption........................... 300 300
Common stock without par value: Authorized shares: 1,000,000,000
Outstanding shares: 324,001,906 and 323,883,092.............................. 34 48
Additional paid-in capital................................................... 8,097 8,097
Retained deficit............................................................. (2,361) (2,498)
Accumulated other comprehensive loss......................................... (81) (28)
-------- --------
Total common stock equity................................................... 5,689 5,619
-------- --------
Total shareholders' equity................................................ 5,989 5,919
-------- --------
Total liabilities, preferred securities of subsidiaries and
shareholders' equity................................................... $ 31,058 $ 31,686
======== ========
See Notes to Financial Statements.
4
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business - TXU Corp. engages in power production
(electricity generation), retail and wholesale sales of electricity and natural
gas, and the transmission and distribution of electricity and natural gas. In
the competitive energy operations, TXU Corp. engages in hedging and risk
management activities. TXU Corp. is a holding company that conducts its US
operations through US Holdings and TXU Gas. US Holdings is also a holding
company that conducts its principal operations through TXU Energy and Oncor. TXU
Corp.'s principal international operations are conducted through TXU Australia.
Strategic Initiatives - As previously reported, on February 23, 2004, C.
John Wilder was named president and chief executive of TXU Corp. Mr. Wilder was
formerly executive vice president and chief financial officer of Entergy
Corporation. Mr. Wilder has been reviewing the operations of TXU Corp. and has
formulated certain strategic initiatives and continues to develop others.
Areas to be reviewed include:
o Performance in competitive markets, including profitability in new
markets
o Cost structure, including organizational alignments and headcount
o Management of natural gas price risk and cost effectiveness of the
generation fleet
o Non-core business activities
On April 26, 2004, TXU Corp. announced the following series of
transactions, as well as various performance improvement initiatives as follows:
o TXU Australia will be sold to Singapore Power Ltd. for $3.7 billion,
including $1.7 billion of assumed debt and $2.0 billion in cash. The
transaction must be cleared by the Australian Competition and Consumer
Commission and is expected to close in the third quarter of 2004.
o TXU Corp. also agreed to sell the assets of TXU Fuel Company, the gas
transportation subsidiary of TXU Energy, to Energy Transfer Partners,
L.P. for $500 million in cash. As part of the transaction, TXU Energy
will have an eight-year transportation agreement with the new owner to
transport gas to TXU Energy's generation plants. The transaction is
expected to close on June 1, 2004, subject to review under the
Hart-Scott-Rodino Act.
o TXU Corp. also announced its intent to sell TXU Gas. It is expected
that any transaction would be closed by the end of 2004, and the sales
price is expected to approximate book value.
o The anticipated net proceeds from these sales transactions allow for
the repurchase of preferred membership interests (as described
immediately below).
o On April 26, 2004, TXU Corp. repurchased all $750 million outstanding
principal amount of TXU Energy's Exchangeable Preferred Membership
Interests at a price of $1.8 billion funded initially by borrowings
under available credit facilities. The transaction will result in
savings of $68 million in annual cash distributions and the elimination
of 57.1 million diluted common shares. The transaction will also result
in a reduction in additional paid-in capital of approximately $815
million. This amount represents the excess of the $1.8 billion
repurchase amount over the carrying amount of the security, net of
approximately $380 million in deferred income tax benefits arising from
the transaction. The carrying amount of the security is the $750
million principal amount less a $102 million remaining unamortized
discount. The $815 million charge to paid-in capital will reduce net
income available to common shareholders, in the same manner as
TXU Corp.'s existing preference share dividends.
5
o TXU Corp. anticipates performance improvements as a result of various
strategic initiatives, including reduced administrative support costs,
increased base load (nuclear and coal-fired) generation plant output
and improved operating results in markets outside the historical
service territory. In the first quarter of 2004, TXU Corp. recorded a
$17 million ($11 million after-tax) charge, reported in other
deductions, consisting of $16 million for accrued severance benefits
and $1 million in asset writedowns related to these initiatives.
The review of TXU Corp.'s operations and formulation of strategic
initiatives is ongoing. The phases of the plan expected to result in unusual
charges are anticipated to be largely completed within one year. Upon completion
of each phase of the plan, TXU Corp. expects to fully describe the actions
intended to improve the financial performance of its operations.
TXU Corp. expects to report TXU Australia and TXU Gas as discontinued
operations beginning in the second quarter.
Facility Closings -- On March 29, 2004, TXU Energy announced it will
permanently retire eight gas-fired operating units due to electric industry
market conditions in Texas. TXU Energy will also temporarily close four other
gas-fired units and place them under evaluation for retirement. The 12 units
represent a total of 1,471 MW, or more than 13 percent, of TXU Energy's
gas-fired generation capacity in Texas. A majority of the 12 units were
designated as "peaking units" and operated only during the summer for many years
and have operated only sparingly during the last two years. Most of the units
were built in the 1950s. TXU Energy also determined that it will close its
Winfield North Monticello lignite mine in Texas later this year as it is no
longer economical to operate. The mine closure will result in the need to
purchase coal to fuel the adjacent generation facility. A total charge of $8
million ($5 million after-tax) was recorded in the first quarter for production
employee severance costs and impairments related to the various facility
closures.
Discontinued Businesses - In April 2004, TXU Corp. sold its
telecommunications business for $527 million. The business was formerly a joint
venture and has been consolidated since March 1, 2003.
In December 2003, TXU Energy finalized a formal plan to sell its strategic
retail services business, which is engaged principally in providing energy
management services.
In January 2004, TXU Corp. sold its small natural gas distribution
business in Mexico for $11 million.
The condensed consolidated financial statements for all periods presented
reflect the reclassification of the results of these businesses (for the periods
they were consolidated) as discontinued operations.
See Note 3 for more detailed information about discontinued operations.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Corp. have been prepared in accordance with US GAAP and on the same basis
as the audited financial statements included in its 2003 Form 10-K, except for
the changes in estimates of depreciable lives of assets discussed below. In the
opinion of management, all other adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of operations and
financial position have been included therein. All intercompany items and
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in annual consolidated financial
statements prepared in accordance with US GAAP have been omitted pursuant to the
rules and regulations of the SEC. Because the condensed consolidated interim
financial statements do not include all of the information and footnotes
required by US GAAP, they should be read in conjunction with the audited
financial statements and related notes included in the 2003 Form 10-K. The
results of operations for an interim period may not give a true indication of
results for a full year.
All dollar amounts in the financial statements and tables in the notes,
except per share amounts, are stated in millions of US dollars unless otherwise
indicated.
Depreciation of Energy Production Facilities -- Effective January 1, 2004,
the estimates of the depreciable lives of lignite-fired generation facilities
6
were extended an average of nine years to better reflect the useful lives of the
assets, and depreciation rates for the Comanche Peak nuclear generating plant
were decreased as a result of an increase in the estimated lives of boiler and
turbine generator components of the plant by an average of five years. The net
impact of these changes was a reduction in depreciation expense of $12 million
($8 million after-tax or $0.02 per diluted share) in the three months ended
March 31, 2004.
Effective April 1, 2003, the estimates of the depreciable lives of the
Comanche Peak nuclear generating plant and several gas generation plants were
extended to better reflect the useful lives of the assets. At the same time,
depreciation rates were increased on lignite and gas generation facilities to
reflect additional investments in equipment. The net impact of these changes was
an additional reduction in depreciation expense of $12 million ($8 million
after-tax or $0.02 per diluted share) in the three months ended March 31, 2004.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first quarter of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. FASB Staff Position 106-1,
issued in January 2004, allowed for, but did not require, deferral of the
accounting for the effects of the Medicare Act. TXU Corp. elected not to defer
accounting for the federal subsidy under the Medicare Act and recognized a $1.9
million net reduction in postretirement benefit expense in the 2003 financial
statements. For the three months ended March 31, 2004, the effect of adoption of
the Medicare Act was a reduction of approximately $7 million in TXU Corp.'s
postretirement benefit costs.
Earnings Per Share -- Basic earnings per share available to common
shareholders are based on the weighted average number of common shares
outstanding during the quarter. Diluted earnings per share include the effect of
all potential issuances of common shares under certain securities and employee
incentive arrangements. For the three months ended March 31, 2004 and 2003, the
$750 million of 9% Exchangeable Preferred Membership Interests in TXU Energy
were dilutive, and the related effects were included in the calculation of
diluted earnings per share. Assuming these securities were converted to TXU
Corp. common stock at the beginning of the periods at the exercise price of
$13.1242 per share, 57.1 million more shares would have been issued and net
income would have increased by $13 million for each of the three months ended
March 31, 2004 and 2003, representing the after-tax distributions on the
preferred membership interests and amortization of the related discount.
Additional dilution of earnings per share would result from approximately
7.0 million shares and 18.0 million shares of common stock issuable in
connection with equity-linked debt securities issued in 2002 and 2001,
respectively, if the average of the closing price per share of TXU Corp. common
stock on each of the twenty consecutive trading days ending on the third day
immediately preceding the end of a reporting period was above the strike price
of $62.91 and $55.68 per share for the respective issuances. For the three
months ended March 31, 2004 and 2003, these securities had no effect on the
calculation of earnings per share as the market price of TXU Corp. common stock
was below these strike prices.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for 2003 of changes in
accounting principles effective January 1, 2003:
Charge from rescission of EITF 98-10, net of tax effect of $34 million..... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million.......... 5
----
Total net charge...................................................... $(58)
====
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10,
which required mark-to-market accounting for all trading activities. Pursuant to
this rescission, only financial instruments that are derivatives under SFAS 133
are subject to mark-to-market accounting. Financial instruments that may not be
derivatives under SFAS 133, but were marked-to-market under EITF 98-10, consist
primarily of gas transportation and storage agreements, power tolling, full
requirements and capacity contracts. This new accounting rule was effective for
7
new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For TXU Corp., such liabilities primarily relate
to nuclear generation plant decommissioning, land reclamation related to lignite
mining and removal of lignite plant ash treatment facilities. The liability is
recorded at its net present value with a corresponding increase in the carrying
value of the related long-lived asset. The liability is accreted each period,
representing the time value of money, and the capitalized cost is depreciated
over the remaining useful life of the related asset.
As the new accounting rule required retrospective application to the
inception of the liability, the effects of the adoption reflect the accretion
and depreciation from the liability inception date through December 31, 2002.
Further, the effects of adoption take into consideration liabilities of $215
million (previously reflected in accumulated depreciation) TXU Corp. had
previously recorded as depreciation expense and $26 million (reflected in other
noncurrent liabilities) of unrealized net gains associated with the
decommissioning trusts.
The following table summarizes the impact as of January 1, 2003 of
adopting SFAS 143:
Increase in property, plant and equipment - net................ $488
Increase in other noncurrent liabilities and deferred credits.. (528)
Increase in accumulated deferred income taxes.................. (3)
Increase in regulatory assets - net............................ 48
----
Cumulative effect of change in accounting principles........... $ 5
====
The asset retirement liability at March 31, 2004 was $605 million,
comprised of a $599 million liability as of December 31, 2003, $10 million of
accretion during the three months ended March 31, 2004, reduced by $4 million in
reclamation payments.
With respect to nuclear decommissioning costs, for TXU Corp. the adoption
of SFAS 143 results in timing differences in the recognition of asset retirement
costs that are being recovered through the regulatory process.
3. DISCONTINUED OPERATIONS
The following summarizes the historical consolidated financial information
of the various businesses reported as discontinued operations for the three
months ended March 31:
Strategic
Retail
Telecom Mexico Services Europe Total
------- ------ --------- ------ -----
2004
Operating revenues...................... $ 45 $ 4 $ 5 $ -- $ 54
Operating costs and expenses............ 38 4 5 -- 47
Other deductions (income) -- net........ 16 -- (1) -- 15
Interest income......................... (1) -- -- -- (1)
Interest expense and related charges.... 13 -- -- -- 13
------- ------ ------- ------- -------
Income (loss) before income taxes....... (21) -- 1 -- (20)
Income tax benefit ..................... (5) (1) 1 -- (5)
Charge related to exit (after-tax)...... -- 2 2 -- 4
------- ------ ------- ------- -------
Loss from discontinued operations.... $ (16) $ (1) $ (2) $ -- $ (19)
======= ======= ======= ======= =======
8
Strategic
Retail
Telecom Mexico Services Europe Total
------- ------ --------- ------ -----
2003
Operating revenues...................... $ 16 $ 23 $ 15 $ -- $ 54
Operating costs and expenses............ 22 24 14 -- 60
Other deductions (income) -- net........ -- (1) -- -- (1)
Interest income......................... (1) -- -- -- (1)
Interest expense and related charges.... 6 -- -- -- 6
------- ------ -------- ------- -------
Income (Loss) before income taxes....... (11) -- 1 -- (10)
Income tax benefit...................... (1) -- -- -- (1)
Charge related to exit (after-tax)...... -- -- -- 3 3
------- ------ -------- ------- -------
Income (loss) from discontinued
operations........................... $ (10) $ -- $ 1 $ (3) $ (12)
======= ====== ======== ======= =======
The strategic retail services operations were previously reported in the
Energy segment. The telecommunications and Mexico operations were previously
reported in corporate and other activity. The Europe operations were
previously reported in the former International segment.
TXU Europe -- In 2002, TXU Corp. wrote off its investment in TXU Europe,
without recording a tax benefit. On its federal income tax return for calendar
year 2002, TXU Corp. claimed a deduction related to the worthlessness of TXU
Corp.'s investment in TXU Europe. While TXU Corp. believes that its tax
reporting of the write-off was proper, there is a risk that the IRS could
challenge TXU Corp.'s position regarding this deduction. The issue is currently
under examination by the IRS, and TXU Corp. is uncertain whether the IRS will
challenge it's position. If TXU Corp.'s position is sustained, it would
recognize the $983 million tax benefit in income with a corresponding increase
in shareholders' equity.
A portion of the 2002 worthlessness deduction related to TXU Corp.'s
investment in TXU Europe will reverse due to the forgiveness of TXU Europe's
debt, which is expected to occur upon final resolution of the UK administration
process. Reported earnings will not be affected by this reversal as a deferred
tax liability was previously recorded; however, an estimated $200 million in
taxes is expected to be paid in 2005 as a result of the debt forgiveness. The
timing of the tax payment assumes the UK administration proceedings are resolved
in 2004.
Telecommunications -- In April 2004, TXU Corp. sold its telecommunications
business (TXU Communications) for $524 million in cash and $3 million of assumed
debt. In March 2004, TXU Corp. redeemed the remaining outstanding $560 million
senior notes of the Pinnacle telecommunications holding company. For balance
sheet presentation purposes, the Pinnacle trust established to fund interest
payments on the senior notes has been netted with the TXU Corp. debt that
comprises the trust's assets. The remaining assets and liabilities of Pinnacle
are not material and have been classified in other current assets and
liabilities. The business was formerly a joint venture and has been consolidated
since March 1, 2003.
Strategic Retail Services -- In December 2003, TXU Energy finalized a
formal plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. TXU Energy is in the
process of negotiating sales of these operations to various parties.
Mexico -- In January 2004, TXU Corp. completed the sale of its
majority-owned gas distribution operations in Mexico for $11 million in notes
receivable and recorded an after-tax loss of $2 million.
Balance sheet - The following details the assets and liabilities held for
sale as of March 31, 2004:
March 31, 2004
----------------------------------
Strategic
Retail
Telecom Services Total
------- -------- -----
Current assets.............................................. $ 22 $ 3 $ 25
Investments................................................. 37 6 43
Goodwill.................................................... 299 -- 299
Property, plant and equipment............................... 228 3 231
Other noncurrent assets..................................... 2 -- 2
------- ------ --------
Assets held for sale.................................... $ 588 $ 12 $ 600
======= ====== ========
Current liabilities......................................... $ 26 $ -- $ 26
Accumulated deferred income taxes........................... 18 -- 18
Noncurrent liabilities...................................... 48 -- 48
------- ------ --------
Liabilities held for sale................................... $ 92 $ -- $ 92
======= ====== ========
9
4. FINANCING ARRANGEMENTS
Short-term Borrowings -- At March 31, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $175 million at a
weighted average interest rate of 2.67% and commercial paper of $7 million (in
Australia). At December 31, 2003, TXU Corp. had outstanding short-term
borrowings consisting of bank borrowings of $58 million and commercial paper of
$39 million (all in Australia).
Credit Facilities -- At March 31, 2004, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) as follows:
At March 31, 2004
-----------------------------------------------
Expiration Authorized Facility Letters of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- --------------------------- -------------- ------------ -------- ---------- ---------- ------------
Five-Year Revolving Credit
Facility February 2005 US Holdings $ 1,400 $ -- $ -- $1,400
TXU Energy,
Revolving Credit Facility February 2005 Oncor 450 -- 75 375
Three-Year Revolving Credit
Facility May 2005 US Holdings 400 -- 100 300
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 462 -- 38
------- ------ ------ ------
Total US $ 2,750 $ 462 $ 175 $2,113
======= ====== ====== ======
Three-Year Senior Facility February 2007 TXU Australia $ 415 $ - $ 415 $ -
Five-Year Senior Facility February 2009 TXU Australia 415 - 335 80
Working Capital Facility February 2005 TXU Australia 57 - - 57
Standby Facility (a) December 2004 TXU Australia 7 - - -
------- ------ ------ ------
Total Australia $ 894 $ - $ 750 $ 137
======= ====== ====== ======
(a) Commercial paper borrowings totaling $7 million at March 31, 2004 were
supported by the Standby Facility.
In February 2004, TXU Australia entered into a $415 million Senior
Facility maturing in February 2007 and a $415 million Senior Facility maturing
in February 2009. Proceeds from borrowings under these new facilities were used
to repay borrowings under the previous Senior Facility ($899 million facility
limit at December 31, 2003).
TXU Corp.'s $500 million 5-year revolving credit facility is with LOC 2003
Trust, a special purpose, wholly-owned subsidiary of TXU Corp. (LOC Trust). LOC
Trust, in turn, has a $500 million 5-year secured credit facility with a group
of lenders. TXU Corp. capitalized LOC Trust with approximately $525 million of
cash, which the lenders have invested in permitted investments as directed by
LOC Trust. This investment in LOC Trust is reflected on TXU Corp.'s balance
sheet as restricted cash (see Note 11). LOC Trust's assets, including the
investments, constitute collateral for the benefit of the lenders to secure
issuances of letters of credit or loans, and are owned by LOC Trust. LOC Trust
is included in the consolidated financial statements of TXU Corp. solely to
comply with US GAAP.
The US Holdings, TXU Energy and Oncor facilities provide back-up for any
future issuance of commercial paper by TXU Energy or Oncor. At March 31, 2004,
there was no such outstanding commercial paper.
On April 26, 2004, three new additional credit facilities (364-day credit
facilities expiring in April 2005) were established in connection with the
strategic initiatives announced by TXU Corp. (See Note 1). Borrowings under
these new facilities ($1.7 billion) and an additional $200 million in borrowings
by US Holdings under its existing five-year facility were used by TXU Corp. to
provide bridge financing for the repurchase of TXU Energy's 9% exchangeable
preferred membership interests. Borrowings under the new credit facilities will
be repaid with proceeds from the sales transactions described in Note 1. If the
sales transactions do not close as anticipated, these borrowings will need to be
refinanced. Amounts borrowed and repaid under the facility may not be
re-borrowed. The terms of these new additional credit facilities are as follows:
10
At April 30, 2004
------------------------------------------------
Expiration Authorized Facility Letters of Cash
Facility Date Borrowers Limit Credit Borrowings Availability
- ------------------------ ----------- ----------- -------- ---------- ---------- -------------
364-day Credit Facility April 2005 TXU Corp. $ 700 $ -- $ 700 $ --
364-day Credit Facility April 2005 TXU Energy 1,000 -- 785 215
364-day Credit Facility April 2005 TXU Gas 300 -- 185 115
------- ------ ------ ------
Total $ 2,000 $ -- $1,670 $ 330
======= ====== ====== ======
In April 2004, the $175 million in borrowings under the Revolving Credit
Facility and the Three Year Revolving Credit Facility were repaid with proceeds
from TXU Corp.'s sale of its telecommunications business.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of March 31, 2004, the maximum
amount of undivided interests that could be sold by TXU Receivables Company was
$600 million.
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests. The balance of the subordinated notes
payable was $505 million at March 31, 2004.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities, as
well as a servicing fee paid by TXU Receivables Company to TXU Business Services
Company, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $3 million for the three-month periods ending March 31, 2004 and
2003 and approximated 2.1% and 3.6% for the first quarter of 2004 and 2003,
respectively, of the average funding under the program on an annualized basis;
these fees represent the net incremental costs of the program to the originators
and are reported in SG&A expenses. The servicing fee, which totaled
approximately $2 million for the first quarters of 2004 and 2003, compensates
TXU Business Services Company for its services as collection agent, including
maintaining the detailed accounts receivable collection records.
The March 31, 2004 balance sheet reflects $1.1 billion face amount of
trade accounts receivable of TXU Energy, TXU Gas and Oncor, reduced by $600
million of undivided interests sold by TXU Receivables Company. Funding under
the program was unchanged for the three months ended March 31, 2004. Funding
under the program for the three months ended March 31, 2003 decreased $119
million. Funding increases or decreases under the program are reflected as
operating cash flow activity in the statement of cash flows. The carrying amount
of the retained interests in the accounts receivable approximated fair value due
to the short-term nature of the collection period.
11
Activities of TXU Receivables Company for the three months ended March 31,
2004 and 2003 were as follows:
Three Months Ended March 31,
----------------------------
2004 2003
-------- -------
(millions of dollars)
Cash collections on accounts receivable...................................... $ 2,199 $2,038
Face amount of new receivables purchased..................................... (2,193) (1,803)
Discount from face amount of purchased receivables........................... 5 5
Program fees paid............................................................ (3) (3)
Servicing fees paid.......................................................... (2) (2)
Increase (decrease) in subordinated notes payable............................ (6) (116)
------- ------
TXU Corp.'s operating cash flows (provided) used under the program...... $ - $ 119
======= ======
Upon termination of the program, cash flows to TXU Corp. would be delayed
as collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) all of the originators cease to maintain their required fixed charge
coverage ratio and debt to capital (leverage) ratio;
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or
deemed uncollectible), the dilution ratio (reductions for discounts,
disputes and other allowances) or the days collection outstanding
ratio exceed stated thresholds and the financial institutions do not
waive such event of termination. The thresholds apply to the entire
portfolio of sold receivables, not separately to the receivables of
each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within TXU Energy and ERCOT for clearing customers' switching and
billing data. The billing delays have been largely resolved. Strengthened credit
and collection policies and practices have brought the ratios into consistent
compliance with the program requirement.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
12
Long-Term Debt -- At March 31, 2004 and December 31, 2003, the long-term
debt of TXU Corp. and its consolidated subsidiaries consisted of the following:
March 31, December 31,
2004 2003
---- ----
TXU Energy
----------
Pollution Control Revenue Bonds:
Brazos River Authority:
3.000% Fixed Series 1994A due May 1, 2029, remarketing date May 1, 2005(a)....... $ 39 $ 39
5.400% Fixed Series 1994B due May 1, 2029, remarketing date May 1, 2006(a)....... 39 39
5.400% Fixed Series 1995A due April 1, 2030, remarketing date May 1, 2006(a)..... 50 50
5.050% Fixed Series 1995B due June 1, 2030, remarketing date June 19, 2006(a).... 118 118
7.700% Fixed Series 1999A due April 1, 2033...................................... 111 111
6.750% Fixed Series 1999B due September 1, 2034, remarketing date April 1,
2013(a)........................................................................ 16 16
7.700% Fixed Series 1999C due March 1, 2032...................................... 50 50
4.950% Fixed Series 2001A due October 1, 2030, remarketing date April 1, 2004(a). 121 121
4.750% Fixed Series 2001B due May 1, 2029, remarketing date November 1, 2006(a).. 19 19
5.750% Fixed Series 2001C due May 1, 2036, remarketing date November 1, 2011(a).. 274 274
1.100% Floating Series 2001D due May 1, 2033..................................... 271 271
1.110% Floating Taxable Series 2001I due December 1, 2036(b)..................... 63 63
1.120% Floating Series 2002A due May 1, 2037(b).................................. 61 61
6.750% Fixed Series 2003A due April 1, 2038, remarketing date April 1, 2013(a)... 44 44
6.300% Fixed Series 2003B due July 1, 2032....................................... 39 39
6.750% Fixed Series 2003C due October 1, 2038.................................... 72 72
5.400% Fixed Series 2003D due October 1, 2029, remarketing date October 1,
2014(a)........................................................................ 31 31
Sabine River Authority of Texas:
6.450% Fixed Series 2000A due June 1, 2021....................................... 51 51
5.500% Fixed Series 2001A due May 1, 2022, remarketing date November 1, 2011(a).. 91 91
5.750% Fixed Series 2001B due May 1, 2030, remarketing date November 1, 2011(a).. 107 107
5.800% Fixed Series 2003A due July 1, 2022....................................... 12 12
6.150% Fixed Series 2003B due August 1, 2022..................................... 45 45
Trinity River Authority of Texas:
6.250% Fixed Series 2000A due May 1, 2028........................................ 14 14
5.000% Fixed Series 2001A due May 1, 2027, remarketing date November 1, 2006(a).. 37 37
Other:
6.875% Fixed Senior Notes - TXU Mining due August 1, 2005........................ 30 30
6.125% Fixed Senior Notes due March 15, 2008..................................... 250 250
7.000% Fixed Senior Notes due March 15, 2013(c).................................. 1,000 1,000
Capital lease obligations........................................................ 12 13
Other............................................................................ 2 8
Fair value adjustments related to interest rate swaps............................ 22 11
Unamortized discount............................................................. -- (2)
------- ------
Total TXU Energy ............................................................ 3,091 3,085
Oncor
- -----
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. 100 100
6.250% Fixed First Mortgage Bonds due October 1, 2004............................ 121 121
6.750% Fixed First Mortgage Bonds due July 1, 2005............................... 92 92
7.625% Fixed First Mortgage Bonds due July 1, 2025............................... 215 215
7.375% Fixed First Mortgage Bonds due October 1, 2025............................ 178 178
6.375% Fixed Senior Secured Notes due May 1, 2012................................ 700 700
7.000% Fixed Senior Secured Notes due May 1, 2032................................ 500 500
6.375% Fixed Senior Secured Notes due January 15, 2015........................... 500 500
7.250% Fixed Senior Secured Notes due January 15, 2033........................... 350 350
5.000% Fixed Debentures due September 1, 2007.................................... 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized discount............................................................. (26) (30)
Oncor Electric Delivery Transition Bond Company LLC (h)
- -------------------------------------------------------
2.260% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2007.............................................................. 95 103
4.030% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2010.............................................................. 122 122
4.950% Fixed Series 2003 Bonds due in bi-annual installments through
February 15, 2013.............................................................. 130 130
5.420% Fixed Series 2003 Bonds due in bi-annual installments through
August 15, 2015................................................................ 145 145
------- -------
Total Oncor................................................................... 4,222 4,226
13
March 31, December 31,
2004 2003
---- ----
US Holdings
- -----------
7.170% Fixed Senior Debentures due August 1, 2007................................ 10 10
9.580% Fixed Notes due in bi-annual installments through December 4, 2019........ 70 70
8.254% Fixed Notes due in quarterly installments through December 31, 2021....... 66 67
1.910% Floating Rate Junior Subordinated Debentures, Series D due January 30,
2037(d)........................................................................ 1 1
8.175% Fixed Junior Subordinated Debentures, Series E due January 30, 2037....... 8 8
------- -------
Total US Holdings ........................................................... 155 156
TXU Gas
- -------
6.375% Fixed Notes due February 1, 2004.......................................... -- 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008, remarketing date
July 1, 2005 (a)............................................................... 125 125
Unamortized valuation adjustment................................................. 1 1
------- -------
Total TXU Gas ............................................................... 276 426
TXU Australia
- -------------
5.940% Floating Notes due September 21, 2007(e).................................. 169 206
5.940% Floating Notes due September 21, 2007..................................... 38 --
6.400% Floating Note, Tranche A Facility due February 26, 2009(e)................ 93 --
6.400% Floating Note, Tranche A Facility due February 26, 2009................... 1 --
6.280% Floating Note, Tranche A Facility due February 26, 2009(e)................ 75 --
6.340% Floating Note, Tranche A Facility due February 26, 2009(e)................ 113 --
6.340% Floating Note, Tranche A Facility due February 26, 2009................... 15 --
6.250% Floating Note, Tranche A Facility due February 26, 2009(e)................ 38 --
6.350% Floating Note, Tranche B Facility due February 26, 2007(e)................ 311 --
6.210% Floating Note, Tranche B Facility due February 26, 2007(e)................ 80 --
6.210% Floating Note, Tranche B Facility due February 26, 2007................... 21 --
6.350% Floating Note, Tranche B Facility due February 26, 2007................... 2 --
6.395% Floating Note, Tranche A Facility due October 26, 2004.................... -- 75
6.318% Floating Note, Tranche A Facility due October 26, 2004.................... -- 93
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 150
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 37
6.395% Floating Note, Tranche B Facility due October 26, 2004.................... -- 187
6.600% Floating Note, Tranche C Facility due October 26, 2004.................... -- 150
7.000% Fixed Medium Term Notes due September 22, 2005............................ 151 150
6.090% Fixed Senior Notes due December 1, 2006(g) (e)............................ 250 250
6.340% Fixed Senior Notes due December 1, 2016(g)................................ 100 100
7.290% Fixed Senior Notes due December 1, 2013(g)................................ 57 57
7.280% Fixed Senior Notes due December 1, 2013(g) (e)............................ 243 243
Fair value adjustments related to interest rate swaps............................ 22 17
------- -------
Total TXU Australia.......................................................... 1,779 1,715
TXU Corp.
- --------
6.375% Fixed Senior Notes Series B due October 1, 2004........................... 175 175
6.375% Fixed Senior Notes Series C due January 1, 2008........................... 200 200
4.050% Fixed Senior Notes Series E due August 16, 2004........................... 2 2
6.375% Fixed Senior Notes Series J due June 15, 2006(c).......................... 800 800
4.750% Fixed Senior Notes Series K due November 16, 2006 remarketing date
August 16, 2004(f)............................................................. 500 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(f)............................................................. 500 500
5.800% Fixed Senior Notes Series M due May 16, 2008 remarketing date
February 16, 2006(f)........................................................... 440 440
6.000% Fixed Pinnacle Overfund Trust Debt due bi-annually through August 15, 2004 -- 91
8.820% Building Financing due bi-annually through February 11, 2022.............. 125 130
2.620% Floating Convertible Senior Notes due July 15, 2033(d).................... 525 525
Fair value adjustments related to interest rate swaps............................ 31 32
Unamortized discount............................................................. (2) (2)
------- -------
Total TXU Corp.............................................................. 3,296 3,393
------- -------
Total TXU Corp. consolidated........................................................ 12,819 13,001
Less amount due currently........................................................... 451 677
------- -------
Total long-term debt................................................................ $12,368 $12,324
======= =======
- ---------------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the bonds.
(b) Interest rates in effect at March 31, 2004. These series are in a
flexible or weekly rate mode and are classified as long-term as they are
supported by long-term irrevocable letters of credit. Series in the
flexible mode will be remarketed for periods of less than 270 days.
(c) Interest rates swapped to floating on $100 million principal amount.
(d) Interest rates in effect at March 31, 2004.
(e) Interest rates fixed by swaps.
(f) Equity-linked.
(g) US Dollar denominated debt. Interest rates swapped to floating through a
cross-currency fair value hedge in Australia.
(h) These bonds are nonrecourse to Oncor.
14
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds (aggregate principal amount of $121 million) were purchased upon
mandatory tender.
Long-term borrowings under TXU Australia's credit facilities expiring in
2005 were repaid by long-term borrowings under its new credit facilities
expiring in 2007 and 2009, as discussed above. Other reductions of debt
represent repayments at maturity.
Fair Value Hedges -- In March 2004, fixed-to-variable interest rate swaps
related to $400 million of debt were settled for a gain of $18 million ($12
million in cash received as of March 31, 2004). The gain will be amortized to
offset interest expense over the remaining life of the debt. Also in March 2004,
TXU Corp. entered into interest rate swap transactions through 2006, which are
being accounted for as fair value hedges, to effectively convert $400 million of
its fixed rate notes to floating interest rates.
Transactions in April 2004 included settlement of fixed-to-variable
interest rate swaps related to $100 million of debt for a gain of $3.5 million,
which will be amortized over the remaining life of the debt, and the effective
conversion of $2.1 billion of fixed rate debt to variable rates through swaps
expiring through 2013.
5. LONG-TERM DEBT HELD BY SUBSIDIARY TRUSTS
Statutory business trusts have been established as wholly-owned financing
subsidiaries of TXU Corp. and TXU Gas. The assets of the trusts consist solely
of Junior Subordinated Debentures issued by TXU Corp. or TXU Gas, and the trusts
have issued preferred interests, as presented below:
Trust Assets (Long-Term Debt
Trust Preferred Interests of TXU Corp. or TXU Gas)
----------------------------- -----------------------------
March 31, December 31, March 31, December 31,
2004 2003 2004 2003
---------- ------------ ---------- ------------
TXU Corp.
- ---------
Capital I Trust
(9.2 million units of 7.25% Series due
2029).............................. $ 223 $ 223 $ 237 $ 237
Capital II Trust
(6.0 million units of 8.70% Series due
2034).............................. 145 145 154 154
------- ------ -------- -------
Total............................... 368 368 391 391
TXU Gas
- -------
Capital I Trust
(150 thousand units of Floating Rate
Series due 2028)................... 147 147 155 155
------- ------ -------- -------
Total................................ $ 515 $ 515 $ 546 $ 546
======= ====== ======== =======
TXU Corp. and TXU Gas, as the parent companies, own the subsidiary trusts'
common interests, which are reported in investments in the balance sheet, and
each has effectively issued a full and unconditional guarantee of its trusts'
preferred interests.
As a result of the adoption of FIN 46 in the fourth quarter of 2003, the
subsidiary trusts have been deconsolidated. TXU Corp.'s balance sheet reflects
the $546 million of long-term debt held by the trust and an investment in the
trust of $31 million, instead of the former presentation of $515 million of
preferred interests of subsidiaries.
On April 24, 2004, TXU Corp. redeemed all of the 7 1/4% Junior
Subordinated Debentures, Series A, at an amount equal to 100% of the outstanding
principal amount plus accrued and unpaid interest, for a total of $238 million.
With the proceeds, the TXU Corp. Capital I Trust redeemed all of the outstanding
7 1/4% Cumulative Trust Preferred Capital Securities due 2029 at an amount equal
to $25 per trust security plus accumulated and unpaid distributions, for a total
of $231 million.
15
6. PREFERRED SECURITIES OF SUBSIDIARIES
Preferred securities of consolidated subsidiaries consist of the
following:
March 31, December 31,
2004 2003
--------- -----------
Exchangeable preferred membership interests of TXU Energy,
net of $102 and $104 unamortized discount.............. $ 648 $ 646
Preferred stock of TXU Gas............................... 75 75
Preferred stock of US Holdings........................... 38 38
------ ------
Total.................................................... $ 761 $ 759
====== ======
Exchangeable Preferred Membership Interests of TXU Energy -- In July 2003,
TXU Energy exercised its right to exchange its $750 million 9% Exchangeable
Subordinated Notes issued in November 2002 and due November 2012 for
exchangeable preferred membership interests with identical economic and other
terms. The preferred membership interests bear distributions at the annual rate
of 9% and permit the deferral of such distributions. The preferred membership
interests may be exchanged at the option of the holders, subject to certain
restrictions, at any time for up to approximately 57 million shares of TXU Corp.
common stock at an exchange price of $13.1242 per share. The number of shares of
TXU Corp. common stock that may be issuable upon the exercise of the exchange
right is determined by dividing the aggregate liquidation value of preferred
membership interests to be exchanged by the exchange price. The exchange price
and the number of shares to be issued are subject to anti-dilution adjustments.
At issuance of the notes that were exchanged for the preferred membership
interests, TXU Corp. recognized a discount on the securities of $111 million,
with a corresponding credit to additional paid-in capital, which represented the
excess of the market value of TXU Corp. common stock on the transaction date
over the exchange price applied to the number of issuable shares. This discount
is being amortized to interest expense and related charges over the term of the
securities. As a result, the effective distribution rate on the preferred
membership interests is 11.5%. These preferred membership interests are
considered not to be mandatorily redeemable under SFAS 150 because of the
exchangeability provision. On April 26, 2004, TXU Corp. repurchased these
securities as discussed in Note 1.
Preferred Stock of TXU Gas -- At March 31, 2004, TXU Gas had 75,000 shares
of Adjustable Rate Series F Preferred Stock outstanding (2,000,000 total shares
authorized) which is entitled upon liquidation to the stated value of $1,000 per
share. The preferred stock series is the underlying preferred stock for
depositary shares that were issued to the public. Each depositary share of $25
per share, represents one-fortieth of a share of underlying preferred stock. The
dividend rate is determined quarterly, in advance, based on US Treasury rates
and was 4.50% at March 31, 2004. The preferred stock is not mandatorily
redeemable.
Preferred Stock of US Holdings -- At March 31, 2004, US Holdings had
379,000 shares of cumulative, preferred stock without par value outstanding with
dividend rates ranging from $4.00 to $5.08 per share. The preferred stock can be
redeemed at prices ranging from $101.70 per share to $112.00 per share. The
preferred stock is not mandatorily redeemable.
7. SHAREHOLDERS' EQUITY
The Board of Directors of TXU Corp., at its February 2004 meeting,
declared a quarterly dividend of $0.125 a share, payable April 1, 2004, to
shareholders of record on March 5, 2004. Future dividends may vary depending
upon TXU Corp.'s profit levels, operating cash flows and capital requirements as
well as financial and other business conditions existing at the time.
Certain debt instruments, preference, preferred and other securities of
TXU Corp. and its subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At March 31, 2004, TXU Corp. was in compliance with
these provisions. An Oncor mortgage restricts the payment of dividends to the
amount of Oncor's retained earnings.
16
8. CONTINGENCIES
Request from CFTC - In October 2003, TXU Corp. received an informal
request for information from the US Commodity Futures Trading Commission (CFTC)
seeking voluntary production of information concerning disclosure of price and
volume information furnished by TXU Portfolio Management Company LP, a
subsidiary of TXU Energy, to energy industry publications. The request seeks
information for the period from January 1, 1999 to October 2003. TXU Corp. has
cooperated with the CFTC, and is in the process of completing its response to
such information request. TXU Corp. believes that TXU Portfolio Management
Company LP has not engaged in any reporting of price or volume information that
would in any way justify any action by the CFTC.
In a similar, but unrelated matter, on April 13, 2004, the CFTC issued a
subpoena requiring TXU Corp. to produce information about storage of natural
gas, including TXU Corp.'s weekly and monthly storage report submissions to the
Energy Information Administration. This request seeks information for the period
of October 31, 2003 through January 2, 2004. TXU Corp. intends to cooperate with
the CFTC, and believes that TXU Gas and TXU Fuel have not engaged in any
activity that would justify action by the CFTC.
Guarantees -- TXU Corp. has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
Project development guarantees -- In 1990, US Holdings repurchased an
electric co-op's minority ownership interest in the Comanche Peak nuclear
generation plant and assumed the co-op's indebtedness to the US government for
the facilities. US Holdings is making principal and interest payments to the
co-op in an amount sufficient for the co-op to make payments on its
indebtedness. US Holdings guaranteed the co-op's payments, and in the event that
the co-op fails to make its payments on the indebtedness, the US government
would assume the co-op's rights under the agreement, and such payments would
then be owed directly by US Holdings. At March 31, 2004, the balance of the
indebtedness was $136 million with maturities of principal and interest
extending to December 2021. The indebtedness is secured by a lien on the
purchased facilities.
Residual value guarantees in operating leases -- TXU Corp. is the lessee
under various operating leases, entered into prior to January 1, 2003 that
obligate it to guarantee the residual values of the leased facilities. At March
31, 2004, the aggregate maximum amount of residual values guaranteed was
approximately $277 million with an estimated residual recovery of approximately
$165 million. The average life of the lease portfolio is approximately nine
years.
Shared saving guarantees -- As part of the operations of the strategic
retail services business, which TXU Energy intends to sell (see Note 3), TXU
Energy has guaranteed that certain customers will realize specified annual
savings resulting from energy management services it has provided. In aggregate,
the average annual savings have exceeded the annual savings guaranteed. The
maximum potential annual payout is approximately $8 million and the maximum
total potential payout is approximately $56 million. No guarantees were issued
during the three months ended March 31, 2004 that required recording a
liability. The fair value of guarantees recorded as of March 31, 2004 was $1.8
million with a maximum potential payout of $42 million. The average remaining
life of the portfolio is approximately nine years. These guarantees will be
transferred or eliminated as part of expected transactions for the sale of the
strategic retail services business.
Letters of credit -- TXU Energy has entered into various agreements that
require letters of credit for financial assurance purposes. Approximately $403
million of letters of credit were outstanding at March 31, 2004 to support
existing floating rate pollution control revenue bond debt of approximately $395
million. The letters of credit are available to fund the payment of such debt
obligations. These letters of credit have expiration dates through 2008.
US Holdings has outstanding letters of credit in the amount of $12 million
for miscellaneous credit support requirements. Although the average life of the
letters of credit is for approximately one year, the obligation to provide
guarantees is ongoing.
17
TXU Energy has outstanding letters of credit in the amount of $33 million
to support hedging and risk management margin requirements in the normal course
of business. As of March 31, 2004, approximately 82% of the obligations
supported by these letters of credit mature within one year, and substantially
all of the remainder mature in the next six years.
TXU Gas has an outstanding letter of credit in the amount of $14 million
issued in connection with its state-wide rate case. The letter of credit has an
expiration date of December 31, 2004.
TXU Corp. has an outstanding letter of credit in the amount of $10 million
as support for a subordinated loan to the SEA Gas joint venture pipeline
project in Australia. The obligation expires on January 31, 2005.
TXU Australia has outstanding letters of credit in the amount of
approximately $108 million, of which $92 million is to allow for participation
in the electricity and gas spot markets, $14 million is to provide credit
support for the shipping of gas and $2 million is for miscellaneous credit
support requirements. Although the average life of these guarantees is for
approximately one year, the obligation to provide guarantees is ongoing based
on TXU Australia's continued participation in the electricity and gas spot
markets and its ability to ship gas on the SEA Gas pipeline.
Surety bonds -- TXU Corp. has outstanding surety bonds of approximately
$53 million to support performance under various subsidiary contracts and legal
obligations in the normal course of business. The term of the surety bond
obligations is approximately one year.
Other -- 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, $12 million at March 31, 2004,
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 5.50% 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. 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 its contract rights
and obligations in connection with $8 million remaining principal amount of
bonds at March 31, 2004, issued for similar purposes, which had previously been
guaranteed by US Holdings. US Holdings is, however, contingently liable in the
event of default by the municipality.
In 1992, a discontinued engineering and construction business of TXU Gas
completed construction of a plant, the performance of which is warranted by TXU
Gas through 2008. The maximum contingent liability under the guarantee is
approximately $106 million. No claims have been asserted under the guarantee and
none are anticipated.
Income Tax Contingencies -- On its US federal income tax return for
calendar year 2002, TXU Corp. claimed a deduction related to the worthlessness
of TXU Corp.'s investment in TXU Europe, the tax benefit of which is estimated
to be $983 million (assuming the deduction is sustained on audit). While TXU
Corp. believes that its tax reporting for the TXU Europe write-off was proper,
there is a risk that the IRS could challenge TXU Corp.'s position regarding this
deduction. Accordingly, TXU Corp. has not recognized in book income any tax
benefit for the TXU Europe deduction. In the first quarter of 2003, TXU Corp.
received a cash refund of $527 million related to the deduction, which may be
repaid in the future, with interest, should TXU Corp. not prevail in its
position. This issue is currently under examination by the IRS. (Also see Note
3.)
Legal Proceedings -- On October 9, 2003, a lawsuit was filed in the
Supreme Court of the State of New York, County of New York, against TXU Corp.,
by purported beneficial owners of approximately 42% of certain TXU Corp.
equity-linked securities issued in October 2001. The common stock purchase
contracts that are a part of these securities require the holders to purchase
TXU Corp. common stock on specified dates in 2004 and 2005 at prices that are
above the current market price of TXU Corp. common stock. The plaintiffs seek a
declaratory judgment that (a) a termination event has occurred under the common
stock purchase contract as a result of the administration of TXU Europe and,
therefore, that plaintiffs are not required to purchase TXU Corp. common stock
pursuant to the contracts and (b) an event of default has occurred under the
indenture for the senior notes that constitute a part of these equity linked
18
securities. Plaintiffs also seek an injunction requiring TXU Corp. to give
notice that a termination event under the common stock purchase contract has
occurred. TXU Corp. disputes plaintiffs' allegations and believes that
plaintiffs' interpretation of the common stock purchase contract and indenture
is inconsistent with the clear language of these agreements and is contrary to
applicable law. On March 15, 2004, the court granted TXU Corp.'s Motion to
Dismiss and entered a judgment dismissing the litigation. The plaintiffs
appealed the dismissal of the lawsuit. On May 7, 2004, TXU Corp. announced it
had reached an agreement with the plaintiffs, under which TXU Corp. repurchased
the $423 million principal amount of the securities for approximately $404
million, that will result in the dismissal of this lawsuit.
On July 7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in
the United States District Court for the Southern District of Texas, Corpus
Christi Division, against TXU Energy and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. An amended complaint was filed in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers have filed motions for leave to intervene in the action alleging
claims substantially identical to TCE's. In addition, approximately 25 purported
former customers of TCE have filed a motion to intervene in the action alleging
claims substantially identical to TCE's, both on their own behalf and on behalf
of a putative class of all former customers of TCE. A hearing on these motions
is scheduled for May 20, 2004. TXU Corp. believes that it has not committed any
violation of the antitrust laws and the Commission's investigation of the market
conditions in late February 2003 has not resulted in any findings adverse to TXU
Energy. Accordingly, TXU Corp. believes that TCE's and the interveners' claims
against TXU Energy and its subsidiary companies are without merit and TXU Energy
and its subsidiaries intend to vigorously defend the lawsuit. TXU Corp. is
unable to estimate any possible loss or predict the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., TXU Energy and TXU
Portfolio Management. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. TXU Corp. believes the plaintiff's claims are without merit.
The plaintiff was terminated as the result of a reduction in force, not as a
reaction to any concerns the plaintiff had expressed, and plaintiff was not in a
position with TXU Portfolio Management such that he had knowledge or information
that would qualify the plaintiff to evaluate TXU Corp.'s financial statements or
assess the adequacy of TXU Corp.'s financial disclosures. Thus, TXU Corp. does
not believe that there is any merit to the plaintiff's claims under
Sarbanes-Oxley. Accordingly, TXU Corp., TXU Energy and TXU Portfolio Management
intend to vigorously defend the litigation. While TXU Corp., TXU Energy and TXU
Portfolio Management dispute the plaintiff's claims, TXU Corp. is unable to
predict the outcome of this litigation or the possible loss in the event of an
adverse judgment.
In November 2002 and February and March 2003, three lawsuits were filed in
the United States District Court for the Northern District of Texas asserting
claims under the Employee Retirement Income Security Act (ERISA) on behalf of a
putative class of participants in and beneficiaries of various employee benefit
plans of TXU Corp. These ERISA lawsuits have been consolidated, and a
consolidated complaint was filed in February 2004 against TXU Corp., the
directors of TXU Corp., Erle Nye, Peter B. Tinkham, Kirk R. Oliver, Biggs C.
Porter, Diane J. Kubin, Barbara B. Curry and Richard Wistrand. On February 10,
2004, the plaintiffs filed its motion for and memorandum in support of class
certification. Discovery is ongoing. The plaintiffs seek to represent a class of
participants in such employee benefit plans during the period between April 26,
2001 and July 11, 2002. While TXU Corp. believes the claims are without merit
and intends to vigorously defend the lawsuit, it is unable to estimate any
possible loss or predict the outcome of this consolidated action.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This case was transferred to the Beaumont
Division of the Eastern District of Texas and subsequently transferred on March
24, 2004 to the Northern District of Texas, Dallas Division. This action is
brought by an individual, alleged to be a retail consumer of electricity, on
behalf of herself and as a proposed representative of a putative class of retail
purchasers of electricity that are similarly situated. On September 15, 2003,
defendants filed a motion to dismiss the lawsuit which is pending before the
court. TXU Corp. believes that the plaintiff lacks standing to assert any
19
antitrust claims against TXU Corp. or TXU Portfolio Management, and that
defendants have not violated antitrust laws or other laws as claimed by the
plaintiff. Therefore, TXU Corp. believes that plaintiff's claims are without
merit and plans to vigorously defend the lawsuit. TXU Corp. is unable to
estimate any possible loss or predict the outcome of this action.
On October 23, 2002, a derivative lawsuit was filed by a purported
shareholder on behalf of TXU Corp. in the 116th Judicial District Court of
Dallas County, Texas, against TXU Corp., Erle Nye, Michael J. McNally, David W.
Biegler, J.S. Farrington, William M. Griffin, Kerney Laday, Jack E. Little,
Margaret N. Maxey, J.E. Oesterreicher, Charles R. Perry and Herbert H.
Richardson. The plaintiff alleges breach of fiduciary duty, abuse of control,
mismanagement, waste of corporate assets, and breach of the duties of loyalty
and good faith. The named individual defendants are current or former officers
and/or directors of TXU Corp. No amount of damages has been specified.
Furthermore, plaintiffs in such suit have failed to make a demand upon the
directors as is required by law, and this case is currently stayed. Therefore,
TXU Corp. is unable to estimate any possible loss or predict the outcome of this
action.
In October, November and December 2002 and January 2003, a number of
lawsuits were filed in, removed to or transferred to the United States District
Court for the Northern District of Texas against TXU Corp., and certain of its
officers. These lawsuits have all been consolidated and lead plaintiffs have
been appointed by the Court. On July 21, 2003, the lead plaintiffs filed an
amended consolidated complaint naming Erle Nye, Michael J. McNally, V.J. Horgan
and Brian N. Dickie and directors Derek C. Bonham, J.S. Farrington, William M.
Griffin, Kerney Laday, Jack E. Little, Margaret N. Maxey, J.E. Oesterreicher,
Herbert H. Richardson and Charles R. Perry, as defendants. The plaintiffs seek
to represent classes of certain purchasers of TXU Corp. common stock and
equity-linked debt securities during a proposed class period from April 26, 2001
to October 11, 2002. No class or classes have been certified. The complaint
alleges violations of the provisions of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, and Sections 11 and 12 of the Securities Act of 1933, as amended
(Securities Act), relating to alleged materially false and misleading
statements, including statements in prospectuses related to the offering by TXU
Corp. of its equity-linked debt securities and common stock in May and June
2002. On September 24, 2003, TXU Corp. and its officer and director defendants
filed a motion to dismiss to plaintiffs' Amended Complaint. The plaintiffs have
filed their response to the motion and the defendants have filed their reply
brief, however, the court has not yet ruled on the motion to dismiss. The named
individual defendants are current or former officers and/or directors of TXU
Corp. While TXU Corp. believes the claims are without merit and intends to
vigorously defend this lawsuit, it is unable to estimate any possible loss or
predict the outcome of this action.
Other Contingencies -- In October 2003, the former directors and officers
of TXU Europe Limited and subsidiaries that are now in administration
(collectively TXU Europe), who include current and former officers of TXU Corp.
and subsidiary companies, received notices from certain creditors and the
administrators of TXU Europe of various claims or potential claims relating to
losses incurred by creditors, including claims for alleged omissions from a
securities offering document and alleged breaches by directors of their English
law duties as directors of these companies in failing to minimize the potential
losses to the creditors of TXU Europe. Under the terms of the indemnification
agreements and bylaw and charter provisions that provide for indemnification of
corporate officers and directors, TXU Corp. or one of its subsidiaries will be
obligated to indemnify these persons from these and similar claims, unless it is
determined that the corporate officer's acts were committed in bad faith, were
the result of active and deliberate dishonesty or that the corporate officer
personally gained a financial profit to which he was not legally entitled.
Similar claims have been asserted directly against TXU Corp., as well. TXU Corp.
believes that these claims are without merit and intends to vigorously defend
any such claims if they are ultimately asserted.
General -- In addition to the above, TXU Corp. and its US and Australian
subsidiaries are involved in various other legal and administrative proceedings
in the normal course of business the ultimate resolution of which, in the
opinion of each, should not have a material effect upon their financial
position, results of operations or cash flows.
20
9. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Net pension and other postretirement benefit costs recognized during the
three months ended March 31, 2004 and 2003 are comprised of the following:
Three Months Ended
March 31,
------------------
2004 2003
------ -------
Components of Net Pension Costs:
Service cost........................................................................ $ 14 $ 13
Interest cost....................................................................... 35 33
Expected return on assets........................................................... (37) (37)
Amortization of unrecognized prior service cost..................................... 1 1
Amortization of net loss............................................................ 5 1
----- -----
Net periodic pension cost......................................................... $ 18 $ 11
===== =====
Components of Net Periodic Postretirement Benefit Costs:
Service cost........................................................................ $ 4 $ 5
Interest cost....................................................................... 15 17
Expected return on assets........................................................... (4) (4)
Amortization of unrecognized net transition asset................................... 1 1
Amortization of unrecognized prior service cost..................................... (1) --
Amortization of net loss............................................................ 7 8
----- -----
Net postretirement benefit cost................................................... $ 22 $ 27
===== =====
At March 31, 2004, TXU Corp. estimates that its total contributions to the
pension plans and other postretirement benefit plans for the remainder of 2004
will not be materially different than previously disclosed in the 2003 Form
10-K.
10. SEGMENT INFORMATION
TXU Corp.'s operations are aligned into three reportable segments: Energy,
Energy Delivery and Australia. The segments are managed separately because they
are either strategic business units that offer different products or services or
are geographically differentiated.
Energy - consists of operations of TXU Energy, which are principally in
the competitive Texas market, involving power production (electricity
generation), retail and wholesale energy sales and portfolio management, which
includes hedging and risk management activities.
Energy Delivery - consists of operations of Oncor and TXU Gas, which are
largely regulated, involving the transmission and distribution of electricity
and the purchase, transportation, distribution and sale of natural gas in Texas.
Australia - consists of operations, principally in Victoria and South
Australia, involving the generation of electricity, wholesale sales of energy,
retail energy sales and services in largely competitive markets, portfolio
management and gas storage, as well as regulated electricity and gas
distribution.
Corporate and Other - Remaining non-segment operations consisting
primarily of general corporate expenses, equity earnings or losses of
unconsolidated affiliates and interest on debt at the TXU Corp. level.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Corp. evaluates performance
based on income from continuing operations before extraordinary items and
cumulative effect of changes in accounting principles. TXU Corp. accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
Certain of the business segments provide services or sell products to one
or more of the other segments. Such sales are made at prices comparable with
those received from nonaffiliated customers for similar products or services. No
customer provided more than 10% of consolidated revenues.
21
Three Months Ended
March 31,
-------------------
2004 2003
------ ------
Operating revenues:
Energy............................................................ $ 1,964 $1,791
Energy Delivery................................................... 1,030 1,127
Australia......................................................... 355 225
Corporate and other .............................................. 6 3
Eliminations...................................................... (363) (386)
------- -------
Consolidated................................................... $ 2,992 $2,760
======= ======
Regulated revenues included in operating revenues:
Energy ........................................................... $ -- $ --
Energy Delivery................................................... 1,030 1,127
Australia......................................................... 29 20
Corporate and other............................................... -- --
Eliminations...................................................... -- --
------- ------
Consolidated................................................... $ 1,059 $1,147
======= ======
Affiliated revenues included in operating revenues:
Energy ........................................................... $ 7 $ 6
Energy Delivery................................................... 352 380
Corporate and other............................................... 4 --
Eliminations...................................................... (363) (386)
------- -------
Consolidated................................................... $ -- $ --
======= ======
Income from continuing operations before cumulative effect
of changes in accounting principles:
Energy ........................................................... $ 117 $ 34
Energy Delivery................................................... 104 110
Australia ........................................................ 32 27
Corporate and other............................................... (52) (56)
------- ------
Consolidated................................................... $ 201 $ 115
======= ======
11. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended
March 31,
-------------------
2004 2003
------ ------
Operating revenues:
Regulated...................................................................... $1,059 $1,147
Unregulated.................................................................... 2,296 1,999
Intercompany sales eliminations - regulated.................................... (352) (380)
Intercompany sales eliminations - unregulated ................................. (11) (6)
----- ------
Total operating revenues.................................................. 2,992 2,760
----- ------
Costs and operating expenses:
Cost of energy sold and delivery fees - regulated.............................. 334 436
Cost of energy sold and delivery fees - unregulated*........................... 1,078 929
Operating costs - regulated.................................................... 217 211
Operating costs - unregulated.................................................. 200 203
Depreciation and amortization - regulated...................................... 123 100
Depreciation and amortization - unregulated.................................... 112 123
Selling, general and administrative expenses - regulated....................... 71 39
Selling, general and administrative expenses - unregulated..................... 211 207
Franchise and revenue-based taxes - regulated.................................. 81 74
Franchise and revenue-based taxes - unregulated................................ 27 37
Other income................................................................... (9) (13)
Other deductions............................................................... 19 17
Interest income................................................................ (5) (10)
Interest expense and related charges........................................... 237 247
----- ------
Total costs and expenses.................................................. 2,696 2,600
----- ------
Income from continuing operations before income taxes and
cumulative effect of changes in accounting principles.......................... $ 296 $ 160
===== ======
-----------
*Includes cost of fuel consumed of $249 million and $425 million for
the three months ended March 31, 2004 and 2003, respectively. The
balance in each period represents energy purchased for resale and
delivery fees.
22
The operations of the Energy segment are included above as unregulated, as
the Texas market is open to competition. However, retail pricing to residential
customers in its historical service territory continues to be subject to
transitional regulatory provisions.
Other Income and Deductions --
Three Months
Ended March 31,
------------------
2004 2003
------ ------
Other income:
Net gain on sale of businesses and other properties...................... $ 1 $ 6
Unrealized foreign exchange gain on Australian dollar
denominated note receivable........................................... 1 5
Equity portion of allowance for funds used during construction........... 1 1
Equity in income of unconsolidated entities.............................. 1 --
Other.................................................................... 5 1
------ -----
Total other income.................................................. $ 9 $ 13
====== =====
Other deductions:
Equity in losses of unconsolidated entities.............................. $ -- $ 16
Employee severance and asset writedowns related to performance
improvement plan...................................................... 17 --
Expenses related to impaired construction projects....................... 2 1
------ -----
Total other deductions.............................................. $ 19 $ 17
====== =====
Interest Expense and Related Charges --
Three Months
Ended March 31,
-------------------
2004 2003
------- ------
Interest (a)..................................................................... $ 202 $ 226
Distributions on preferred membership interests of TXU Energy (a)................ 17 --
Interest on long-term debt held by subsidiary trust.............................. 9 10
Preferred stock dividends of subsidiaries........................................ 1 3
Amortization of debt discounts, premiums and issuance cost....................... 11 11
Allowance for borrowed funds used during construction
and capitalized interest...................................................... (3) (3)
------ ------
Total interest expense and related charges................................. $ 237 $ 247
====== ======
(a)Interest amount in 2003 includes $17 million related to the exchangeable
subordinated notes that were exchanged for preferred membership interests
in July 2003.
Regulatory Assets and Liabilities --
March 31, December 31,
2004 2003
-------- --------
Regulatory Assets
Generation-related regulatory assets recoverable by securitization bonds.... $1,644 $1,654
Securities reacquisition costs.............................................. 123 121
Recoverable deferred income taxes -- net.................................... 98 96
Other regulatory assets..................................................... 207 207
------ ------
Total regulatory assets................................................. 2,072 2,078
Regulatory Liabilities
Asset retirement obligations - removal cost................................. 131 129
Investment tax credit and protected excess deferred taxes.................. 87 89
Other ...................................................................... 31 23
------ ------
Total regulatory liabilities............................................ 249 241
------ ------
Net regulatory assets................................................. $1,823 $1,837
====== ======
Included in net regulatory assets are assets of $169 million and $172
million at March 31, 2004 and December 31, 2003, respectively, that are earning
a return. The regulatory assets, other than those subject to securitization,
have a remaining recovery period of 15 to 47 years.
23
Included in other regulatory assets as of March 31, 2004 was $29 million
related to nuclear decommissioning liabilities.
Restricted Cash -- At March 31, 2004, TXU Corp. had a $525 million
investment in LOC Trust, accounted for as restricted cash, representing
collateral to support a new $500 million credit facility (see Note 4). The
remaining restricted cash reported in investments on the balance sheet as of
March 31, 2004 included $45 million held as collateral for letters of credit
issued and $10 million principally related to payment of fees associated with
the securitization bonds. At March 31, 2004, the Oncor Electric Delivery
Transition Bond Company LLC had $9 million of restricted cash, representing
collections from customers that secure its securitization bonds and may be used
only to service its debt and pay its expenses.
Accounts Receivable -- At March 31, 2004 and December 31, 2003, accounts
receivable of $1.3 billion and $1.4 billion are stated net of allowance for
uncollectible accounts of $54 million and $60 million, respectively. During the
three months ended March 31, 2004, bad debt expense was $29 million, account
write-offs were $42 million and other activity increased the allowance for
uncollectible accounts by $8 million. During the three months ended March 31,
2003, bad debt expense was $15 million, account write-offs were $11 million and
other activity decreased the allowance for uncollectible accounts by $6 million.
Allowances related to receivables sold are reported in other current liabilities
and totaled $34 million and $42 million at March 31, 2004 and December 31, 2003,
respectively.
Accounts receivable included $566 million and $625 million of unbilled
revenues at March 31, 2004 and December 31, 2003, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of March 31, 2004 As of December 31, 2003
---------------------------- ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Intangible assets subject to amortization
included in property, plant and
equipment:
Capitalized software...................... $ 655 $ 345 $ 310 $ 634 $ 315 $ 319
Land easements............................ 195 75 120 192 74 118
Mineral rights and other.................. 31 22 9 31 22 9
----- ----- ----- ----- ----- -----
Total................................... $ 881 $ 442 $ 439 $ 857 $ 411 $ 446
===== ===== ===== ===== ===== =====
Aggregate TXU Corp. amortization expense for intangible assets for the
three months ended March 31, 2004 and 2003 was $31 million and $23 million,
respectively. At March 31, 2004, the weighted average useful lives of
capitalized software, land easements and mineral rights and other were 6 years,
68 years and 40 years, respectively.
Detail of the carrying amount of goodwill at March 31, 2004 and December
31, 2003, follows:
Energy
Energy Delivery Australia Total
------ -------- --------- -----
Balance at December 31, 2003................. $ 533 $ 331 $ 965 $1,829
Foreign currency translation effects .. -- -- 6 6
------- ------ ----- ------
Balance at March 31, 2004.................... $ 533 $ 331 $ 971 $1,835
======= ====== ===== ======
Commodity Contracts -- At March 31, 2004 and December 31, 2003, current
and noncurrent commodity contract assets, arising largely from mark-to-market
accounting, totaled $1.5 billion and $1.3 billion, respectively, and are stated
net of applicable credit (collection) and performance reserves totaling $19
million and $18 million, respectively. Performance reserves are provided for
direct, incremental costs to settle the contracts. Current and non-current
commodity contract liabilities totaled $1.4 billion and $1.2 billion at March
31, 2004 and December 31, 2003, respectively.
24
Inventories by Major Category --
March 31, December 31,
2004 2003
-------- -----------
Materials and supplies......................................................... $ 269 $ 269
Fuel stock..................................................................... 113 108
Gas stored underground......................................................... 148 222
------ ------
Total inventories.......................................................... $ 530 $ 599
====== ======
Property, Plant and Equipment -- As of March 31, 2004 and December 31,
2003, property, plant and equipment of $20.9 billion is stated net of
accumulated depreciation and amortization of $11.0 billion and $10.9 billion,
respectively.
As of March 31, 2004, substantially all of Oncor's electric utility
property, plant and equipment (with a net book value of $6.4 billion) was
pledged as collateral for Oncor's first mortgage bonds and senior secured notes.
Derivatives and Hedges -- TXU Corp. experienced net hedge ineffectiveness
of $11 million, reported as a loss in revenues, for the three months ended March
31, 2004. For the three months ended March 31, 2003, no hedge ineffectiveness
was reported in revenues. The loss relates primarily to hedges of anticipated
power sales.
The net effect of unrealized mark-to-market ineffectiveness accounting,
which includes the above amounts as well as the effect of reversing unrealized
gains and losses recorded in previous periods to offset realized gains and
losses in the current period, totaled $14 million in net losses for the three
months ended March 31, 2004 and $6 million in net gains for the three months
ended March 31, 2003.
As of March 31, 2004, it is expected that $83 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. Of this amount, $58 million relates to
commodities hedges and $25 million relates to financing-related hedges. This
amount represents the projected value of the hedges over the next twelve months
relative to what would be recorded if the hedge transactions had not been
entered into. The amount expected to be reclassified is not a forecasted loss
incremental to normal operations, but rather it demonstrates the extent to which
volatility in earnings and cash flows (which would otherwise exist) is mitigated
through the use of cash flow hedges.
Supplemental Cash Flow Information --
The consolidation of Pinnacle in 2003 was a noncash activity.
See Note 2 for the effects of adopting SFAS 143, which were noncash in
nature.
25
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries (TXU Corp.) as of March 31, 2004, and the related
condensed statements of consolidated income, comprehensive income and cash flows
for the three-month periods ended March 31, 2004 and 2003. These financial
statements are the responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as of December 31, 2003, 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 (which includes explanatory
paragraphs related to the adoption of Statement of Financial Accounting
Standards No. 142 and the rescission of Emerging Issues Task Force Issue No.
98-10) dated March 11, 2004 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2003,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 7, 2004
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU Corp. engages in power production (electricity generation), retail and
wholesale sales of electricity and natural gas, and the transmission and
distribution of electricity and natural gas. In the competitive energy
operations, TXU Corp. engages in hedging and risk management activities. TXU
Corp. is a holding company that conducts its US operations through US Holdings
and TXU Gas. US Holdings is also a holding company that conducts its principal
operations through TXU Energy and Oncor. TXU Corp.'s principal international
operations are conducted through TXU Australia.
TXU Corp. has three reportable segments: Energy, Energy Delivery and
Australia. (See Note 10 to Financial Statements for further information
concerning reportable business segments.)
TXU Corp. is considering various alternatives in evaluating the results of
operations of TXU Energy, and accordingly expects to disaggregate the business
into two or more business segments effective with reporting for the second
quarter of 2004.
Changes in Business
- -------------------
Strategic Initiatives - As previously reported, on February 23, 2004, C.
John Wilder was named president and chief executive of TXU Corp. Mr. Wilder was
formerly executive vice president and chief financial officer of Entergy
Corporation. Mr. Wilder has been reviewing the operations of TXU Corp. and has
formulated certain strategic initiatives and continues to develop others.
Areas to be reviewed include:
o Performance in competitive markets, including profitability in new
markets
o Cost structure, including organizational alignments and headcount
o Management of natural gas price risk and cost effectiveness of the
generation fleet
o Non-core business activities
On April 26, 2004, TXU Corp. announced the following series of
transactions, as well as various performance improvement initiatives as follows:
o TXU Australia will be sold to Singapore Power Ltd. for $3.7 billion,
including $1.7 billion of assumed debt and $2.0 billion in cash. The
pre-tax gain related to the sale is expected to be approximately $375
million. The transaction must be cleared by the Australian Competition
and Consumer Commission and is expected to close in the third quarter
of 2004.
o TXU Corp. also agreed to sell the assets of TXU Fuel Company, the gas
transportation subsidiary of TXU Energy, to Energy Transfer Partners,
L.P. for $500 million in cash. As part of the transaction, TXU Energy
will have an eight-year transportation agreement with the new owner to
transport gas to TXU Energy's generation plants. The transaction is
expected to close on June 1, 2004, subject to review under the
Hart-Scott-Rodino Act. The pre-tax gain related to the sale is expected
to be approximately $390 million, which will be recognized over eight
years.
o TXU Corp. also announced its intent to sell TXU Gas. It is expected
that any transaction would be closed by the end of 2004, and the sales
price is expected to approximate book value. Pre-tax cash proceeds from
the transaction are expected to approximate $1.4 billion.
o The anticipated after-tax net proceeds from these sales transactions of
approximately $3.4 billion allow for the repurchase of preferred
membership interests (as described immediately below) and the intended
reduction in debt of approximately $1.5 billion.
o On April 26, 2004, TXU Corp. repurchased all $750 million outstanding
principal amount of TXU Energy's Exchangeable Preferred Membership
Interests at a price of $1.8 billion funded initially by borrowings
under available credit facilities. The transaction will result in
27
savings of $68 million in annual cash distributions and the elimination
of 57.1 million diluted common shares. The transaction will also result
in a reduction in additional paid-in capital of approximately $815
million. This amount represents the excess of the $1.8 billion
repurchase amount over the carrying amount of the security, net of
approximately $380 million in deferred income tax benefits arising
from the transaction. The carrying amount of the security is the
$750 million principal amount less a $102 million remaining unamortized
discount. The $815 million charge to paid-in capital will reduce net
income available to common shareholders, in the same manner as
TXU Corp.'s existing preference share dividends.
o TXU Corp. anticipates performance improvements as a result of various
strategic initiatives, including reduced administrative support costs,
increased base load (nuclear and coal-fired) generation plant output
and improved operating results in markets outside the historical
service territory. Management preliminarily estimates the
implementation of these strategic initiatives will result in unusual
charges of approximately $370 million ($241 million after-tax) in 2004,
including approximately $100 million related to employee severance
costs and $270 million of asset impairments and write-offs.
These unusual charge amounts, which are expected to principally impact
the Energy segment, are subject to change and other charges may be
identified in the future. In the first quarter of 2004, TXU Corp.
recorded a $17 million ($11 million after-tax) charge, reported in
other deductions, consisting of $16 million for accrued severance
benefits and $1 million in asset writedowns related to these
initiatives.
The review of TXU Corp.'s operations and formulation of strategic
initiatives is ongoing. The phases of the plan expected to result in the unusual
charges discussed above are anticipated to be largely completed within one year.
Upon completion of each phase of the plan, TXU Corp. expects to fully describe
the actions intended to improve the financial performance of its operations. In
addition to the strategic initiatives described above and in "Facility Closings"
below, other new strategic initiatives are expected to be undertaken, which
could materially affect TXU Corp.'s financial results.
TXU Corp. expects to report TXU Australia and TXU Gas as discontinued
operations beginning in the second quarter.
Facility Closings -- On March 29, 2004, TXU Energy announced it will
permanently retire eight gas-fired operating units due to electric industry
market conditions in Texas. TXU Energy will also temporarily close four other
gas-fired units and place them under evaluation for retirement. The 12 units
represent a total of 1,471 MW, or more than 13 percent, of TXU Energy's
gas-fired generation capacity in Texas. A majority of the 12 units were
designated as "peaking units" and operated only during the summer for many years
and have operated only sparingly during the last two years. Most of the units
were built in the 1950s. TXU Energy also determined that it will close its
Winfield North Monticello lignite mine in Texas later this year as it is no
longer economical to operate. The mine closure will result in the need to
purchase coal to fuel the adjacent generation facility. A total charge of $8
million ($5 million after-tax) was recorded in the first quarter for production
employee severance costs and impairments related to the various facility
closures.
Discontinued Businesses - In April 2004, TXU Corp. sold its
telecommunications business for $527 million. The business was formerly a joint
venture and has been consolidated since March 1, 2003.
In December 2003, TXU Energy finalized a formal plan to sell its strategic
retail services business, which is engaged principally in providing energy
management services.
In January 2004, TXU Corp. sold its small natural gas distribution
business in Mexico for $11 million.
The condensed consolidated financial statements for all periods presented
reflect the reclassification of the results of these businesses (for the periods
they were consolidated) as discontinued operations.
See Note 3 for more detailed information about discontinued operations.
Issuance of Securitization Bonds -- Upon issuance of the remaining $790
million in securitization bonds, expected in the second quarter, under a
financing order issued by the Commission, TXU Corp. expects to record an
estimated extraordinary gain of approximately $10 million after-tax. The gain
would arise because of an increase in the carrying value of the regulatory asset
subject to securitization due to the effect of higher interest rates on amounts
to be recovered from REPs through delivery fee surcharges.
28
Exchange Rates
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars, unless they were determined using exchange
rates on the date of a specific event:
Balance Sheet Income Statement
At March 31, At December 31, (average for three months
2004 2003 ended March 31,)
------------- ---------------- --------------------------
2004 2003
---------- --------
Australian dollars (A$) .......... $0.7537 $0.7495 $0.7622 $0.5928
RESULTS OF OPERATIONS
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein, except per share
amounts, are stated in millions of US dollars unless otherwise indicated.
The results of operations and the related management's discussion of those
results for all periods presented reflect the discontinuance of certain
operations of TXU Corp. (see Note 3 to Financial Statements regarding
discontinued operations).
TXU Corp. Consolidated
- ----------------------
Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
Reference is made to the consolidated income statements presented in the
financial statements and the comparisons of results by business segment
following the discussion of consolidated results immediately below. The business
segment comparisons provide additional detail and quantification of items
affecting financial results.
TXU Corp.'s operating revenues increased $232 million, or 8%, to $3.0
billion in 2004. Operating revenues rose $173 million, or 10%, to $2.0 billion
in the Energy segment reflecting higher retail and wholesale pricing, partially
offset by the effect of a mix shift to lower-price wholesale sales. Operating
revenues in the Australia segment increased $130 million, or 58%, to $355
million driven by the translation effect of the stronger Australian dollar ($80
million), higher wholesale electricity and gas prices and volumes and higher
results from hedging and risk management activities. Operating revenues in the
Energy Delivery segment declined by $97 million, or 9%, to $1.0 billion driven
by lower gas sales volumes and prices, primarily reflecting colder weather in
the 2003 quarter. Consolidated revenue growth also reflected a $26 million
reduction in the intercompany sales elimination, primarily reflecting lower
sales by Oncor to TXU Energy as sales to nonaffiliated REPs increased.
Net results from hedging and risk management activities, which are
reported in revenues and include both realized and unrealized gains and losses,
declined $68 million to a net gain of $33 million in 2004. Changes in these
results reflect market price movements on commodity positions held to hedge
gross margin; the comparison to 2003 also reflects a decline of $18 million due
to a favorable settlement with a counterparty in 2003. Results from these
activities include net unrealized losses arising from mark-to-market accounting
of $3 million in 2004 and $21 million in 2003.
29
Gross Margin
Three Months Ended March 31,
---------------------------------------------
% of % of
2004 Revenue 2003 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 2,992 100% $ 2,760 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,412 47% 1,365 50%
Operating costs................................... 417 14% 414 15%
Depreciation and amortization related to operating
assets........................................ 207 7% 204 7%
------- ----- ------- -------
Gross margin........................................... $ 956 32% $ 777 28%
======= ===== ======= =======
Gross margin is considered a key operating metric as it measures the
effect of changes in sales volumes and pricing versus the variable and fixed
costs of energy sold, whether generated or purchased, as well as the costs to
deliver energy.
The depreciation and amortization expense included in gross margin
excludes $28 million and $19 million of such expense for the three months ended
March 31, 2004 and 2003, respectively, related to assets that are not directly
used in the generation and delivery of energy.
Gross margin increased $179 million, or 23%, to $956 million in 2004. The
Energy segment's gross margin increased $162 million, or 56%, to $452 million
reflecting higher sales prices, which were partially offset by the effect of
lower results from hedging and risk management activities, and more effective
management of gas-fired generation versus purchased power supply sourcing as
well as increased base load (nuclear and coal-fired) production, partially
offset by the effect of a mix shift from higher-margin retail sales to wholesale
sales and higher delivery fees. Lower depreciation and amortization and
operating costs also contributed to the Energy segment's gross margin
improvement. An increase in the Australia segment's margin of $33 million, or
36%, to $125 million reflected the stronger Australian dollar, the effect of
higher wholesale electricity and gas sales and higher hedging and risk
management results. The Energy Delivery segment's gross margin decreased $16
million, or 4%, to $386 million reflecting lower gas sales volumes and prices.
Depreciation and amortization (including amounts shown in the gross margin
table above) increased $12 million, or 5%, to $235 million in 2004, reflecting
investments in delivery facilities to support growth and normal replacements of
equipment and the start of amortization of regulatory assets associated with
securitization bonds issued in August 2003. These effects were partially offset
by a $24 million impact of lower depreciation related to TXU Energy's generation
fleet due primarily to extensions of estimated depreciable lives to better
reflect useful lives. (See Note 1 to Financial Statements.)
SG&A expense increased $36 million, or 15%, to $282 million in 2004. The
Australia segment's SG&A expense increased $17 million reflecting the impact of
foreign currency rates and higher employee staffing and marketing expenses to
support retail competition activities in newly competitive markets. The Energy
segment's SG&A expense increased $2 million due to a $14 million increase in bad
debt expense, partially offset by lower staffing and related administrative
expenses. The remaining increase reflects $14 million in compensation expense
under Mr. Wilder's employment agreement.
Other deductions increased $2 million to $19 million in 2004. The 2004
amount includes $17 million in charges for employee severance and asset
writedowns associated with the performance improvement initiatives discussed
above. Because of the scope and magnitude of the significant strategic
initiatives underway and contemplated, as described above under "Changes in
Business," TXU Energy expects to record significant unusual charges in 2004,
including asset writedowns and employee severance costs. These charges will be
classified as other deductions. The charges described immediately above
represent the effects of an initial phase of those initiatives. The 2003 period
includes $16 million of equity losses of Pinnacle prior to its consolidation in
March 2003.
Interest expense and related charges decreased $10 million, or 4%, to $237
million in 2004, reflecting a $13 million decrease due to lower average
borrowings, partially offset by a $3 million increase due to higher average
interest rates resulting in part from the replacement of short-term borrowings
with higher rate long-term debt.
30
The effective income tax rate on income from continuing operations before
cumulative effect of changes in accounting principles was 32.1% in 2004 and
28.1% in 2003. The increase reflected the effect of comparable tax benefit
amounts of depletion allowances and amortization of investment tax credits on a
higher income base in 2004. Also contibuting to the effective rate increase was
the effect of non-deductible executive compensation expense in 2004, which was
partially offset by the effect of a non-taxable Medicare subsidy in 2004 ($7
million for the quarter).
Income from continuing operations before cumulative effect of changes in
accounting principles increased $86 million to $201 million in 2004. This
performance reflected an increase of $83 million in the Energy segment, driven
by higher gross margin. Results in the Energy segment reflected $17 million ($11
million after-tax) in charges related to the performance improvement plan,
reported in other deductions as discussed above. Earnings in the Australia
segment rose $5 million, or 19%, to $32 million driven by the translation
benefit of a stronger Australian dollar ($7 million). Earnings in the Energy
Delivery segment decreased $6 million, or 5%, to $104 million due principally to
the effects of weather-related lower sales volumes in the gas business.
Corporate and other expenses declined $4 million, primarily reflecting the
absence of $16 million in equity losses from Pinnacle, partially offset by the
$14 million (pre and after-tax) charge related to Mr. Wilder's employment
agreement reported in SG&A expenses as discussed above. Net pension and
postretirement benefit costs reduced income from continuing operations by
$21 million in 2004 and 2003.
Loss from discontinued operations was $19 million in 2004 and $12 million
in 2003, primarily reflecting the results of the telecommunications business.
(See Note 3 to Financial Statements.)
A cumulative effect of changes in accounting principles, representing an
after-tax charge of $58 million in 2003, reflects the impact on commodity
contract mark-to-market accounting from rescission of EITF 98-10 and the
recording of asset retirement obligations under SFAS 143. (See Note 2 to
Financial Statements.)
Diluted earnings per share from continuing operations before cumulative
effect of changes in accounting principles and the effect of preference stock
dividends increased $0.23 to $0.57 per share in 2004, reflecting the improvement
in operating results as average common shares outstanding remained flat compared
to 2003. A total of 57.1 million dilutive shares relate to the $750 million
exchangeable preferred membership interests originally issued as subordinated
notes in November 2002. For the diluted earnings per share calculation, $13
million in after-tax distributions and discount amortization related to these
securities is added back to net income.
Commodity Contracts and Mark-to-Market Activities
- -------------------------------------------------
The table below summarizes the changes in commodity contract assets and
liabilities for the three months ended March 31, 2004. The net change in these
assets and liabilities, excluding "other activity" as described below,
represents the net effect of recording unrealized gains/(losses) under
mark-to-market accounting for positions in the commodity contract portfolio.
These positions consist largely of economic hedge transactions, with speculative
trading representing a small fraction of the activity.
Three Months
Ended
March 31, 2004
-----------------
Balance of net commodity contract assets at beginning of period............... $ 90
Settlements of positions included in the opening balance (1).................. (19)
Unrealized mark-to-market valuations of positions held at end of period....... 31
Other activity (2)............................................................ 12
-----
Balance of net commodity contract assets at end of period..................... $ 114
=====
--------------------------
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the period.
(2) Includes initial values of positions involving the receipt or payment
of cash or other consideration, such as option premiums and the
amortization of such values. These activities have no effect on
unrealized mark-to-market valuations.
31
In addition to the net effect of recording unrealized mark-to-market gains
and losses that are reflected in changes in commodity contract assets and
liabilities, similar effects arise in the recording of unrealized
ineffectiveness mark-to-market gains and losses associated with
commodity-related cash flow hedges that are reflected in changes in cash flow
hedges and other derivative assets and liabilities. The total net effect of
recording unrealized gains and losses under mark-to-market accounting is
summarized as follows:
Three Months
Ended March 31,
--------------------
2004 2003
------- ------
Unrealized gains/(losses) related to commodity contract portfolio................ $ 12 $ (27)
Ineffectiveness gains/(losses) related to cash flow hedges....................... (15) 6
------- ------
Total unrealized gains/(losses).................................................. $ (3) $ (21)
======= =======
These amounts are included in the "hedging and risk management activities"
component of revenues as presented in the TXU Energy and TXU Australia segment
data.
Maturity Table -- Of the net commodity contract asset balance above at
March 31, 2004, the amount representing unrealized mark-to-market net gains that
have been recognized in current and prior years' earnings is $154 million. The
offsetting net liability of $40 million included in the March 31, 2004 balance
sheet is comprised principally of amounts representing current and prior years'
net receipts of cash or other consideration, including option premiums,
associated with contract positions, net of any amortization. The following table
presents the unrealized mark-to-market balance at March 31, 2004, scheduled by
contractual settlement dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at March 31, 2004
----------------------------------------------------------------------------
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........... $ 72 $ - $ - $ - $ 72
Prices provided by other
external sources............. 6 39 2 (2) 45
Prices based on models........... 12 - 1 24 37
---- ---- --- ---- -----
Total............................ $ 90 $ 39 $ 3 $ 22 $ 154
==== ==== === ==== =====
Percentage of total fair value... 59% 25% 2% 14% 100%
As the above table indicates, approximately 84% of the unrealized
mark-to-market valuations at March 31, 2004 mature within three years. This is
reflective of the terms of the positions and the methodologies employed in
valuing positions for periods where there is less market liquidity and
visibility. The "prices actively quoted" category reflects only exchange traded
contracts with active quotes available in the US. The "prices provided by other
external sources" category represents forward commodity positions at locations
for which over-the-counter broker quotes are available. Over-the-counter quotes
for power and natural gas generally extend through 2005 and 2010, respectively,
in the US. The "prices based on models" category contains the value of all
non-exchange traded options, valued using industry accepted option pricing
models. In addition, this category contains other contractual arrangements which
may have both forward and option components. In many instances, these contracts
can be broken down into their component parts and modeled 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.
32
Energy
- ------
Financial Results
- -----------------
Three Months Ended March 31,
----------------------------
2004 2003 (a)
----------- -----------
Operating revenues............................................................... $1,964 $ 1,791
Costs and expenses:
Cost of energy sold and delivery fees....................................... 1,261 1,217
Operating costs............................................................. 168 182
Depreciation and amortization............................................... 98 113
Selling, general and administrative expenses................................ 144 142
Franchise and revenue-based taxes........................................... 26 28
Other income ............................................................... (1) (8)
Other deductions............................................................ 20 2
Interest income............................................................. (2) (2)
Interest expense and related charges ....................................... 79 77
------ -------
Total costs and expenses................................................ 1,793 1,751
------ -------
Income from continuing operations before income taxes and cumulative effect of
changes in accounting principles............................................... 171 40
Income tax expense............................................................... 54 6
------ -------
Income from continuing operations before cumulative effect of changes in
accounting principles.......................................................... $ 117 $ 34
====== =======
- -----------------
The segment includes the electricity generation, wholesale and retail energy
sales, and hedging and risk management operations of TXU Energy, operating
principally in the competitive Texas market.
(a) Prior year amounts have been restated to reflect the strategic retail
services business as discontinued operations (see Note 3 to Financial
Statements).
33
Energy
- ------
Operating Data
- --------------
Three Months Ended March 31,
----------------------------
2004 2003
-------- --------
Operating statistics - volumes:
Retail electricity (GWh):
Historical service territory (a):
Residential................................................................. 7,119 8,171
Small business (b).......................................................... 2,533 3,243
------- -------
Total historical service territory........................................ 9,652 11,414
Other territories (a):
Residential................................................................. 518 362
Small business (b).......................................................... 61 71
------- -------
Total other territories................................................... 579 433
Large business.............................................................. 6,709 7,551
------- -------
Total retail electricity.................................................. 16,940 19,398
Wholesale electricity (GWh).................................................... 12,936 7,451
------- -------
Total retail and wholesale electricity.................................... 29,876 26,849
======= =======
Production and purchased power (GWh):
Nuclear (base load)......................................................... 4,854 4,740
Lignite/coal (base load).................................................... 10,203 8,687
Gas/oil..................................................................... 910 3,662
Purchased power............................................................. 14,346 10,515
------- -------
Total energy supply....................................................... 30,313 27,604
Less line loss and other.................................................... 437 755
------- -------
Net energy supply......................................................... 29,876 26,849
======= =======
Base load capacity factors (%):
Nuclear..................................................................... 97.0 95.4
Lignite/coal................................................................ 83.8 73.2
Customer counts:
Retail electricity customers (end of period & in thousands - based on number of
meters):
Historical service territory (a):
Residential............................................................... 2,054 2,184
Small business (b)........................................................ 316 324
------- -------
Total historical service territory..................................... 2,370 2,508
Other territories (a):
Residential............................................................... 163 112
Small business (b)........................................................ 5 5
------- -------
Total other territories................................................ 168 117
Large business................................................................. 78 76
------- -------
Total retail electricity customers........................................ 2,616 2,701
======= =======
- --------------
(a) Breakout of historical service and other territory data are best estimates.
(b) Customers with demand of less than 1 MW annually.
34
Three Months Ended March 31,
----------------------------
2004 2003
--------- ---------
Operating revenues (millions of dollars):
Retail electricity revenues:
Historical service territory (a):
Residential................................................................. $ 650 $ 653
Small business (b).......................................................... 256 294
------- -------
Total historical service territory........................................ 906 947
Other territories (a):
Residential................................................................. 43 31
Small business (b).......................................................... 6 6
------- -------
Total other territories................................................... 49 37
Large business and other customers.......................................... 453 448
------- -------
Total retail electricity revenues.............................................. 1,408 1,432
Wholesale electricity revenues................................................. 475 237
Hedging and risk management activities......................................... (12) 81
Other revenues................................................................. 93 41
------- -------
Total operating revenues.................................................. $ 1,964 $ 1,791
======= =======
Weather (average for service territory)(c)
Percent of normal:
Heating degree days....................................................... 88.6% 106.6%
(a) Breakouts of historical service and other territory data are best
estimates.
(b) Customers with demand of less than 1 MW annually.
(c) Weather data is obtained from Meteorlogix, an independent company that
collects weather data from reporting stations of the National Oceanic and
Atmospheric Administration (a federal agency under the US Department of
Commerce).
35
Three Months Ended March 31,
----------------------------
2004 2003
-------- --------
Fuel and Purchased Power Costs ($/MWh)
Nuclear generation....................................................... $ 4.41 $ 4.32
Lignite/coal generation.................................................. $ 13.28 $ 13.05
Gas/Oil generation and purchased power................................... $ 43.99 $ 48.17
Average Total Electricity Supply....................................... $ 27.32 $ 29.59
Average Retail Volume (KWh)/Customer
(calculated using average no. of customers for period)
Residential.............................................................. 3,452 3,692
Small business........................................................... 8,084 10,000
Large business and other customers....................................... 91,240 98,126
Average Retail Revenues ($/MWh))
Residential.............................................................. $ 90.70 $ 80.14
Small business........................................................... $100.83 $ 90.43
Large business and other customers....................................... $ 67.53 $ 59.38
Average Delivery Fees Charge ($/MWh).......................................... $ 22.34 $ 19.77
Average Contribution Margin (a) ($/MWh)
Residential.............................................................. $ 41.04 $ 30.78
Small business........................................................... $ 51.17 $ 41.07
Large business and other customers....................................... $ 17.87 $ 10.02
Estimated Share of ERCOT Retail Markets
Residential (b).......................................................... 46% 48%
Small business (b)....................................................... 32% 34%
Large business and other customers (c)................................... 41% 38%
Hedging and Risk Management Activities
Net unrealized mark to market gains/(losses)............................. $ (18) $ (17)
Realized gains (losses).................................................. 6 98
----- ------
Total.................................................................. $ (12) $ 81
===== ======
(a) Operating revenues less cost of energy sold and delivery fees.
(b) Estimated market share is based on the number of customers that have choice.
(c) Estimated market share is based on the annualized consumption for this
overall market.
Energy
- ------
Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
Operating revenues increased $173 million, or 10%, to $2.0 billion in
2004. Total retail and wholesale electricity revenues rose $214 million, or 13%,
to $1.9 billion. This growth reflected higher retail and wholesale pricing,
partially offset by the effects of a mix shift to lower-price wholesale sales
and warmer winter weather. Total volumes increased 11%, but the effect of higher
wholesale volumes was largely offset by a decline in higher-price retail
volumes. Retail electricity revenues decreased $24 million, or 2%, to $1.4
billion reflecting a $181 million decline attributable to a 13% drop in sales
volumes, driven by the effect of competitive activity, largely offset by a $157
million increase due to higher pricing . Higher pricing reflected increased
price-to-beat rates, due to approved fuel factor increases, and higher contract
36
pricing in the competitive large business market, both resulting from higher
natural gas prices. Retail electricity customer counts at March 31, 2004
declined 3% from March 31, 2003 but have increased 1% from December 31, 2003.
Wholesale electricity revenues grew $238 million, or 100% to $475 million
reflecting a $174 million increase attributable to a 74% rise in sales volumes
and a $64 million increase due to the effect of increased natural gas prices on
wholesale prices. Higher wholesale electricity sales volumes reflected the
establishment of the new northeast zone in ERCOT. Because TXU Energy has a
generation plant in the new zone, wholesale sales have increased. Wholesale
power purchases also increased as a result of the establishment of the new zone.
The increase in wholesale sales volumes also reflected a partial shift in the
customer base from retail to wholesale services, particularly in the business
market.
Net results from hedging and risk management activities, which are
reported in revenues and include both realized and unrealized gains and losses,
declined $93 million from a net gain of $81 million in 2003 to a net loss of $12
million in 2004. Changes in these results reflect market price movements on
commodity positions held to hedge gross margin; the comparison to 2003 also
reflects a decline of $18 million due to a favorable settlement with a
counterparty in 2003. Because the hedging activities are intended to mitigate
the risk of commodity price movements on revenues and cost of energy sold, the
changes in such results should not be viewed in isolation, but rather taken
together with the effects of pricing and cost changes on gross margin. Results
from these activities include net unrealized losses arising from mark-to-market
accounting of $18 million in 2004 and $17 million in 2003. The majority of TXU
Energy's natural gas physical sales and purchases are in the wholesale markets
and essentially represent hedging activities. These activities are accounted for
on a net basis with the exception of retail sales to business customers, which
effective October 1, 2003 are reported gross in accordance with new accounting
rules and totaled $46 million in revenues for the first quarter of 2004. The
increase in other revenues of $52 million to $93 million in 2004 was primarily
driven by this change.
Gross Margin
Three Months Ended
March 31,
------------------------------------------------
% of % of
2004 Revenue 2003 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 1,964 100% $ 1,791 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,261 64% 1,217 68%
Operating costs................................... 168 9% 182 10%
Depreciation and amortization related to operating
assets........................................ 83 4% 102 6%
------- ----- ------- ------
Gross margin........................................... $ 452 23% $ 290 16%
======= ===== ======= ======
The depreciation and amortization expense reported in the gross margin
amounts above excludes $15 million and $11 million of such expense for the three
months ended March 31, 2004 and 2003, respectively, related to assets that are
not directly used in the generation of electricity.
Gross margin increased $162 million, or 56%, to $452 million in 2004
reflecting higher sales prices, which were partially offset by the effect of
lower results from hedging and risk management activities, and more effective
management of gas-fired generation versus purchased power supply sourcing as
well as increased base load (nuclear and coal-fired) production, partially
offset by the effect of a mix shift from higher-margin retail sales to wholesale
sales and higher delivery fees. Lower depreciation and amortization and
operating costs also contributed to the gross margin improvement.
Operating costs decreased $14 million, or 8%, to $168 million in 2004. The
decline reflected the timing of repair and maintenance activities. Depreciation
and amortization related to generation assets decreased $19 million, or 19%, to
$83 million, due primarily to extensions of estimated average depreciable lives
of nuclear and lignite generation facilities' assets to better reflect their
useful lives. (See Note 1 to Financial Statements).
SG&A expenses increased $2 million, or 1%, to $144 million in 2004 largely
due to a $14 million increase in bad debt expense, partially offset by lower
staffing and related administrative expenses. The increase in bad debt expense
reflects $8 million in higher provisions in 2004 due to higher charge-offs
and a $6 million credit in 2003 related to a favorable settlement with a
counterparty.
37
Other deductions increased $18 million to $20 million in 2004. The 2004
amount includes $17 million ($11 million after-tax) in charges for employee
severance and asset writedowns associated with the performance improvement
initiatives.
The effective income tax rate increased to 31.6% in 2004 from 15.0% in
2003. The increase was driven by the effects of comparable (to 2003) tax benefit
amounts of depletion allowances and amortization of investment tax credits on a
higher income base in 2004.
Income from continuing operations before cumulative effect of changes in
accounting principles increased $83 million to $117 million in 2004, reflecting
the higher gross margin partially offset by higher other deductions expense. Net
pension and postretirement benefit costs reduced net income by $10 million in
2004 and by $9 million in 2003.
Energy Delivery
- ----------------
Financial Results
- ------------------
Three Months Ended March 31,
----------------------------
2004 2003
------- --------
Operating revenues............................................................. $1,030 $ 1,127
Costs and expenses:
Cost of gas sold........................................................... 326 430
Operating costs............................................................ 216 211
Depreciation and amortization.............................................. 106 87
Selling, general and administrative expenses............................... 83 84
Franchise and revenue-based taxes ......................................... 81 74
Other income .............................................................. (4) (2)
Interest income ........................................................... (12) (16)
Interest expense and related charges ...................................... 80 92
------ -------
Total costs and expenses............................................... 876 960
------ -------
Income before income taxes..................................................... 154 167
Income tax expense............................................................. 50 57
------ -------
Net income..................................................................... $ 104 $ 110
====== =======
- ---------------
Includes the electricity transmission and distribution business of Oncor and
the natural gas pipeline and distribution business of TXU Gas, both of which
are subject to regulation by Texas authorities.
38
Energy Delivery
- ---------------
Operating Data
- --------------
Three Months Ended March 31,
----------------------------
2004 2003
------ ------
Operating statistics - volumes:
Electric energy delivered (GWh)................................................. 23,631 23,908
Retail gas distribution (Bcf):
Residential................................................................ 38 45
Business and other......................................................... 22 26
------ -------
Total..................................................................... 60 71
====== =======
Pipeline transportation (Bcf)................................................... 87 86
====== =======
Reliability statistics:
System Average Interruption Duration Index (SAIDI) (non-storm)(a)............... 86.28 86.90
System Average Interruption Frequency Index (SAIFI) (non-storm)(a).............. 1.26 1.32
Customer Average Interruption Duration Index (CAIDI) (non-storm)(a)............. 68.46 65.66
Retail gas distribution customers and electricity points of delivery (end of
period and in thousands):
Retail gas distribution customers.......................................... 1,489 1,475
Electricity distribution points of delivery (based on number of meters)(b) 2,942 2,914
Operating revenues (millions of dollars):
Electricity transmission and distribution:
Affiliated (TXU Energy).................................................... $ 349 $ 377
Non-affiliated............................................................. 174 129
------ -------
Total .................................................................... 523 506
Retail gas distribution:
Residential................................................................ 312 401
Business and other......................................................... 159 193
------ -------
Total .................................................................... 471 594
Pipeline transportation......................................................... 16 16
Other revenues, net of eliminations............................................. 20 11
------ -------
Total retail gas distribution and pipeline transportation................. 507 621
------ -------
Total operating revenues........................................................ $1,030 $ 1,127
====== =======
Weather (average for service territory)(c)
Percent of normal:
Heating degree days....................................................... 88.6% 106.6%
- --------------------------
(a) SAIDI is the number of minutes the average customer is out of electric
service in a year. SAIFI is the number of times a year that the average
customer experiences an interruption to electric service; and CAIDI is the
duration of the average interruption to electric service.
(b) Includes lighting sites, primarily guard lights, for which TXU Energy is the
REP but are not included in TXU Energy's customer count. Such sites totaled
99,591 and 104,851 at March 31, 2004 and 2003, respectively.
(c) Weather data is obtained from Meteorlogix, an independent company that
collects weather data from reporting stations of the National Oceanic and
Atmospheric Administration (a federal agency under the US Department of
Commerce).
39
Energy Delivery
- ----------------
Subsequent Event-- On April 26, 2004, TXU Corp. announced its intent to
sell TXU Gas by the end of 2004. TXU Gas will be reported as a discontinued
operation effective with second quarter results.
Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
Operating revenues decreased $97 million, or 9%, to $1.0 billion in 2004.
Gas delivery revenues decreased $114 million, or 18%, to $507 million reflecting
$81 million from a 15% decline in distribution sales volumes due to warmer
winter weather and $44 million due to a 13% decrease in the average cost of gas,
partially offset by $8 million from the sale of pipeline inventory and $2
million from increased revenue in the utility asset management services
business. Electricity delivery revenues increased $17 million, or 3%, to $523
million. Higher tariffs provided $29 million of this increase, reflecting
delivery fee surcharges associated with the issuance of securitization bonds in
August 2003 ($14 million), transmission rate increases approved in 2003 ($9
million) and an increase in distribution tariffs to recover higher transmission
costs ($6 million). Revenue growth also included $5 million in increased
disconnect/reconnect fees, reflecting disconnections initiated by REPs on
uncollected accounts and increased consumer switching due to competitive
activity. A 1% decline in electricity volumes delivered in 2004 resulted in a
$17 million decrease in revenue, reflecting lower consumption by residential
end-users due to weather, usage efficiencies and other factors.
Gross Margin
Three Months Ended March 31,
---------------------------------------------
% of % of
2004 Revenue 2003 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 1,030 100% $ 1,127 100%
Costs and expenses:
Cost of gas sold.................................. 326 32% 430 38%
Operating costs................................... 216 21% 211 19%
Depreciation and amortization related to delivery assets 102 10% 84 7%
------- ----- ------- ------
Gross margin........................................... $ 386 37% $ 402 36%
======= ===== ======= ======
The depreciation and amortization expense included in gross margin
excludes $4 million and $3 million of such expense for the year ended March 31,
2004 and 2003, respectively, related to assets that are not directly used in the
delivery of energy.
Gross margin decreased $16 million, or 4%, to $386 million in 2004. The
gross margin decline reflects the effect of lower gas delivery volumes and
prices, partially offset by a $3 million gain on sale of pipeline inventory and
a timing difference on the recovery of industrial gas costs in the first quarter
of 2003 of $3 million. Gross margin in the electricity delivery business was
about even as the increase in revenues was largely offset by an increase in
depreciation and amortization driven by increased amortization of regulatory
assets. The effect on revenues of the delivery fee surcharges associated with
the issuance of securitization bonds is offset by the related amortization
expense. The increase in operating costs of $5 million, or 2%, to $216 million
reflects a $2 million increase in electricity measurement services, a $2 million
increase on greater activity in the utility asset management services business
and a $1 million increase in gas main maintenance costs.
The effective income tax rate decreased to 32.5% in 2004 from 34.1% in
2003. The decrease primarily reflected the effect on postretirement benefit
expense of a non-taxable Medicare subsidy in 2004 ($4 million for the
quarter).
Net income decreased $6 million, or 5%, to $104 million in 2004,
reflecting lower results of $11 million in the gas delivery business, partially
offset by improved results of $5 million in the electricity delivery business.
The performance in the gas delivery business reflected the lower gross margin.
The increase in the electricity delivery business reflected lower interest
expense due to lower average interest rates. Net pension and postretirement
benefit costs reduced net income by $7 million in 2004 and $8 million in 2003.
40
Australia
- ---------
Financial Results
- ------------------
Three Months Ended March 31,
----------------------------
2004 2003
------ ------
Operating revenues............................................................ $ 355 $ 225
Costs and expenses:
Cost of energy sold and delivery fees.................................... 175 95
Operating costs.......................................................... 33 21
Depreciation and amortization............................................ 25 19
Selling, general and administrative expenses............................. 35 18
Other income ............................................................ (1) --
Other deductions......................................................... -- 1
Interest income ......................................................... (1) (1)
Interest expense and related charges .................................... 44 34
------ -------
Total costs and expenses............................................. 310 187
------ -------
Income before income taxes ................................................... 45 38
Income tax expense (benefit).................................................. 13 11
------ -------
Net income.................................................................... $ 32 $ 27
====== =======
41
Australia
- ---------
Operating Data
- --------------
Three Months Ended March 31,
------------------------------
2004 2003
------ ------
Operating statistics- volumes:
Retail electricity sales (GWh)................................................ 2,143 1,868
Delivered electricity (GWh)................................................... 659 597
Retail gas sales (Bcf)........................................................ 12 11
Retail gas distribution (Bcf)................................................. 7 6
Wholesale electricity sales (GWh).............................................. 854 414
Retail customers and points of delivery (end of period and in thousands):
Electricity customers.......................................................... 599 559
Gas customers.................................................................. 473 463
------- -------
Total.................................................................. 1,072 1,022
======= =======
Electricity points of delivery................................................. 562 552
Gas distribution points of delivery............................................ 484 469
------- -------
Total.................................................................. 1,046 1,021
======= =======
Operating revenues (millions of dollars):
Retail electricity sales:
Residential............................................................... $ 104 $ 90
Business and other........................................................ 70 45
------- -------
Total.................................................................. 174 135
Electricity delivery........................................................... 20 12
Retail gas sales:
Residential............................................................... 28 15
Business and other........................................................ 28 27
------- -------
Total................................................................. 56 42
Retail gas distribution........................................................ 7 6
Wholesale electricity revenues................................................. 47 10
Wholesale gas revenues......................................................... 6 --
Hedging and risk management activities and other revenues...................... 45 20
------- -------
Total operating revenues.................................................. $ 355 $ 225
======= =======
- ----------------------
Certain reclassifications have been made to prior periods to conform to current
period presentation.
Subsequent Event -- On April 26, 2004, TXU Corp. announced that TXU
Australia will be sold to Singapore Power for $3.7 billion, including $1.7
billion of assumed debt and $2.0 billion in cash. The pre-tax gain related to
the sale is expected to be approximately $375 million. The transaction must be
cleared by the Australian governmental and regulatory authorities and is
expected to close in the third quarter of 2004. TXU Australia will be reported
as a discontinued operation effective with second quarter results.
Australia
- ---------
Three Months Ended March 31, 2004 compared to Three Months Ended March 31, 2003
- -------------------------------------------------------------------------------
The Australia segment's operating revenues increased $130 million, or 58%,
to $355 million in 2004. Of this increase, $80 million represented the effect of
changes in the foreign currency translation rates, a result of the stronger
Australian dollar. The balance of the growth was driven by an increase in
wholesale electricity revenues of $27 million, or 165% and higher hedging and
risk management activities and other revenues of $20 million (all on a constant
exchange rate basis). Wholesale electricity revenues increased due to higher
volumes generated and sold into the wholesale markets and higher wholesale
market prices. Improved hedging and risk management results also reflected the
effects of higher wholesale prices and increased price volatility. Improvements
in wholesale markets reflected increased weather-related demand and the impact
of a fire in an unaffiliated gas processing plant during the quarter, which
resulted in reduced availability of gas to other generating plants in South
Australia. As a result, TXU Australia increased its generation of electricity
into the pool and also sold additional gas supplies through its newly completed
Sea Gas joint venture pipeline.
42
Retail electricity revenues on a constant exchange rate basis were
relatively flat even though total retail sales volumes rose 15%, primarily a
result of lower average prices. Nonresidential sales volumes rose 26%, but the
average price on new contracts was lower than in 2003, reflecting competitive
prices offered in new markets to these customers. Residential sales volumes were
up slightly, mainly as a result of new customers, but lower revenues reflected
the impact of a 4% regulated rate reduction to residential customers in the
state of Victoria effective April 2003.
Retail gas revenue growth on a constant exchange rate basis primarily
reflected an increase in residential customer revenues ($6 million) partially
offset by lower revenues from nonresidential customers ($5 million). Business
and other gas revenues decreased primarily as a result of lower average
competitive prices offered to these customers in new markets, which more than
offset the effect of higher sales volumes.
Gross Margin
Three Months Ended March 31
-------------------------------------------------
% of % of
2004 Revenue 2003 Revenue
---- ------- ---- --------
Operating revenues..................................... $ 355 100% $ 225 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 175 49% 95 42%
Operating costs................................... 33 10% 21 9%
Depreciation and amortization (related to operating
assets)....................................... 22 6% 17 8%
------- ----- ------- ------
Gross margin........................................... $ 125 35% $ 92 41%
======= ===== ======= ======
The depreciation and amortization expense included in gross margin
excludes $3 million and $2 million of such expense for 2004 and 2003,
respectively, which is not directly related to generation and delivery property,
plant and equipment.
Australia's gross margin improved $33 million, or 36%, to $125 million in
2004. On a local currency basis, gross margin increased 4%, primarily driven by
higher wholesale electricity and gas sales volumes and higher hedging and risk
management results. On a local currency basis, operating costs were up 19%,
primarily for increased delivery asset maintenance costs. Depreciation and
amortization related to operating assets increased 2% on a local currency basis,
reflecting expenditures for electricity delivery and production assets to
support growth. Mark-to-market accounting for commodity contracts increased
revenues and gross margin by $15 million in 2004, and decreased results in 2003
by $4 million (as compared to accounting on a settlement basis).
Australia's net income rose $5 million, or 19%, to $32 million in 2004.
This increase reflected a $7 million favorable effect of the stronger Australian
dollar. On a local currency basis, Australia's net income decreased almost 7%, a
result of a 38% increase in SG&A costs. The increase in SG&A expenses reflected
higher employee benefits and staffing and marketing expenses to support retail
competition activities in newly competitive markets. The number of employees as
of March 31, 2004 was up 41% from the year ago period. Net pension and
postretirement benefit costs reduced net income by less than $1 million in 2004
and in 2003. On a local currency basis, interest expense and other related
charges were basically unchanged as the favorable impact of reduced debt levels
in 2004 were offset by the write-off of previously deferred refinancing costs.
43
COMPREHENSIVE INCOME - Continuing Operations
Cash flow hedge activity reported in other comprehensive income from
continuing operations included:
Three Months Ended March 31,
----------------------------
2004 2003
------ ------
Cash flow hedge activity (net of tax):
Net change in fair value of hedges - gains/(losses):
Commodities................................................................. $ (63) $ (79)
Financing - interest rate and currency swaps................................ (18) (29)
------- --------
(81) (108)
Losses realized in earnings (net of tax):
Commodities................................................................. 1 48
Financing - interest rate and currency swaps................................ 19 33
------- -------
20 81
Net income (loss) effect of cash flow hedges reported in other
comprehensive income........................................................ $ (61) $ (27)
======== ========
Other comprehensive income also included adjustments related to foreign
currency translation of $7 million and $55 million in gains for the three months
ended March 31, 2004 and 2003, respectively. These adjustments reflected the
movement in exchange rates between the US dollar and the Australian dollar and
have no tax effects.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows - Cash flows provided by operating activities for the three
months ended March 31, 2004 were $468 million compared to $927 million for the
three months ended March 31, 2003. The principal driver of the $459 million
decrease in 2004 was a $616 million tax refund in 2003, primarily related to tax
benefits associated with the write-off of the investment in Europe, partially
offset by improved working capital (accounts receivable, accounts payable and
inventory) of $79 million and improved earnings.
Cash flows used in financing activities were $645 million in 2004 compared
to $483 million in 2003. Net cash used in issuances and repayments of borrowings
totaled $608 million in 2004 compared to $438 million in 2003. Common stock
dividends paid totaled $40 million in both 2004 and 2003.
Cash flows used in investing activities totaled $223 million and $190
million during 2004 and 2003, respectively. Capital expenditures, including
nuclear fuel, were $236 million in 2004 and $228 million in 2003. Capital
expenditures are expected to total $1.1 billion in 2004. Cash flows provided by
investing activities in 2004 consisted primarily of $12 million from the
settlement of fair value hedges (see Note 4 to Financial Statements). Cash flows
provided by investing activities in 2003 included $38 million largely related to
the sale of retail gas activities outside of Texas and the sale of property,
plant and equipment.
Depreciation and amortization expense reported in the statement of cash
flows exceeds the amount reported in the statement of income by $19 million for
2004. This difference represents amortization of nuclear fuel, which is reported
as cost of energy sold in the statement of income consistent with industry
practice, and amortization of certain regulatory assets, which is reported as
operating costs in the statement of income.
44
Financing Activities
- --------------------
Long-Term Debt Activity -- During the three months ended March 31, 2004,
TXU Corp. and its subsidiaries issued, redeemed, reacquired or made scheduled
principal payments on long-term debt as follows:
Issuances Retirements
--------- -----------
TXU Corp.:
Long-term debt ................................................... $ -- $ 5
Oncor:
Transition bonds.................................................. -- 8
TXU Gas:
Senior notes...................................................... -- 150
US Holdings:
Long-term debt.................................................... -- 1
Pinnacle telecommunications holding company:
Senior Notes...................................................... -- 560
TXU Australia:
Long-term debt.................................................... 759 705
------ ------
Total............................................ $ 759 $1,429
====== ======
See Notes 4, 5, 6 and 7 to Financial Statements for further detail of debt
issuance and retirements, financing arrangements, debt held by unconsolidated
subsidiary trusts and capitalization.
Debt and Capital Management -- Principally as a result of anticipated cash
proceeds from the sales of businesses and assets discussed above under "Changes
in Business," TXU Corp. intends to increase value and reduce risk through a
comprehensive liability management initiative. Under this iniative, TXU Corp.
expects, over time, to repurchase and issue debt, preferred and equity
securities, as demonstrated by the repurcahse of the TXU Energy Exchangeable
Preferred Membership Interests. During April and May 2004, TXU Corp. also
repurchased approximately $90 million of its debt and equity securities in
open market purchases.
Additionally, on May 7, 2004, TXU Corp. announced that it had
reached an agreement that will result in the dismissal of a lawsuit brought
against TXU Corp. by the owners of approximately 42% of certain TXU Corp.
equity-linked debt securities issued in October 2001. Under the terms of the
agreement, TXU Corp. will repurchase all of the approximately 8.5 million units
of the securities (approximately $423 million principal amount) held by the
plaintiffs for an aggregate price of $47.75 per unit for a total cash repurchase
price of approximately $404 million. The repurchase of the securities will
result in a charge to earnings of up to $16 million and a credit (increase) to
additional paid-in capital of up to $57 million. Both amounts are before
consideration of any income tax effects, which are under review by management.
All of the above repurchases were funded through cash on hand and bank
borrowings.
Fair Value Hedges -- In March 2004, fixed-to-variable interest rate swaps
related to $400 million of debt were settled for a gain of $18 million ($12
million in cash received as of March 31, 2004). The gain will be amortized to
offset interest expense over the remaining life of the debt. Also in March 2004,
TXU Corp. entered into interest rate swap transactions through 2006, which are
being accounted for as fair value hedges, to effectively convert $400 million of
its fixed rate notes to floating interest rates.
Transactions in April 2004 included settlement of fixed-to-variable
interest rate swaps related to $100 million of debt for a gain of $3.5 million,
which will be amortized over the remaining life of the debt, and the effective
conversion of $2.1 billion of fixed rate debt to variable rates through swaps
expiring through 2013.
Equity --TXU Corp. or its predecessor has declared common stock dividends
payable in cash in each year since incorporation in 1945. The Board of Directors
of TXU Corp., at its February 2004 meeting, declared a quarterly dividend of
$0.125 a share, payable April 1, 2004, to shareholders of record on March 5,
2004. TXU Corp. paid quarterly dividends of $0.125 a share throughout 2003.
Future dividends may vary and are subject to consideration of TXU Corp.'s
operating cash flow levels and capital requirements as well as financial and
other business conditions existing at the time.
The mortgage of Oncor restricts its payment of dividends to the amount of
its retained earnings. Certain other debt instruments and preferred securities
of TXU Corp. and its subsidiaries contain provisions that restrict payment of
dividends during any interest or distribution payment deferral period or while
any payment default exists. At March 31, 2004, there were no restrictions on the
payment of dividends under these provisions.
Capitalization -- The capitalization ratios of TXU Corp. at March 31,
2004, consisted of 2.8% long-term debt held by subsidiary trusts, 7.3%
equity-linked debt securities, 55.6% other long-term debt, less amounts due
currently, 3.3% exchangeable preferred membership interests, 1.5% preference
stock, 0.6% preferred stock of subsidiaries and 28.9% common stock equity. Total
debt to capitalization, including short-term debt, was 66% and 67% at March 31,
2004 and December 31, 2003, respectively.
45
Short-term Borrowings -- At March 31, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $175 million at a
weighted average interest rate of 2.67% and commercial paper of $7 million (in
Australia). At December 31, 2003, TXU Corp. had outstanding short-term
borrowings consisting of bank borrowings of $58 million and commercial paper of
$39 million (all in Australia). See Note 4 to Financial Statements for
borrowings under arrangements entered into in April 2004.
Credit Facilities -- At March 31, 2004, TXU Corp. had US credit facilities
totaling $2.8 billion and expiring in 2005 and 2008, of which $2.1 billion was
unused, and Australian facilities totaling $895 million of which $137 million
was unused. These credit facilities support issuances of letters of credit and
are available for borrowings. See Note 4 to Financial Statements for details of
the arrangements.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions. All new trade receivables under the program generated by
the originators are continuously purchased by TXU Receivables Company with the
proceeds from collections of receivables previously purchased. Funding under the
program at March 31, 2004 and December 31, 2003 totaled $600 million, which is
the maximum amount available. See Note 4 to Financial Statements for a more
complete description of the program including the financial impact on earnings
and cash flows for the periods presented and the contingencies that could result
in termination of the program.
Registered Financing Arrangements -- TXU Corp., US Holdings, TXU Gas and
other subsidiaries of TXU Corp. may issue and sell additional debt and equity
securities as needed, including: (i) issuances 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, debt securities and/or preferred
securities of subsidiary trusts and (ii) issuances by TXU Gas of up to an
aggregate of $400 million of debt securities and/or preferred securities of
subsidiary trusts, all of which are currently registered with the SEC for
offering pursuant to Rule 415 under the Securities Act. In May 2004, TXU Corp.
filed a new shelf registration for over $2.0 billion of debt and/or equity
securities.
Cash and Cash Equivalents -- Cash on hand totaled $441 million and $875
million at March 31, 2004 and December 31, 2003, respectively. The decline
reflects repayments of borrowings.
Restricted Cash -- Restricted cash at March 31, 2004 and December 31, 2003
includes $525 million related to a $500 million credit facility established in
2003. The remaining restricted cash reported in investments on the balance sheet
as of March 31, 2004 included $45 million held as collateral for letters of
credit issued and $10 million principally related to payment of fees associated
with the securitization bonds. At March 31, 2004, the Oncor Electric Delivery
Transition Bond Company LLC had $9 million of restricted cash, representing
collections from customers that secure its securitization bonds and may be used
only to service its debt and pay its expenses.
Credit Ratings of TXU Corp. and its US and Australian Subsidiaries -- The
current credit ratings for TXU Corp. and certain of its US and Australian
subsidiaries are presented below:
TXU Corp. US Holdings Oncor TXU Energy TXU Gas TXU Australia
------------ ----------- --------- ----------- --------- -------------
(Senior (Senior (Secured) (Senior (Senior (Senior
Unsecured) Unsecured) Unsecured) Unsecured) Unsecured)
S&P....... BBB- BBB- BBB BBB BBB BBB
Moody's... Ba1 Baa3 Baa1 Baa2 Baa3 Baa2
Fitch..... BBB- BBB- BBB+ BBB BBB- BBB-
Moody's and Fitch currently maintain a stable outlook for TXU Corp., US
Holdings, TXU Energy and Oncor and an evolving outlook for TXU Gas. S&P
currently maintains a negative outlook for TXU Corp., US Holdings, TXU Energy
and Oncor and a developing outlook for TXU Gas. Since the announcement of the
sale of TXU Australia (see Note 1 to Financial Statements) Fitch maintains a
positive outlook on TXU Australia, Moody's maintains credit watch for upgrade
and S&P maintains a negative outlook.
46
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency, and is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating Provisions and Cross Default Provisions
- -- The terms of certain financing arrangements of TXU Corp. and its subsidiaries
contain financial covenants that require maintenance of specified fixed charge
coverage ratios, shareholders' equity to total capitalization ratios and
leverage ratios and/or contain minimum net worth covenants. TXU Energy's
exchangeable preferred membership interests also limit its incurrence of
additional indebtedness unless a leverage ratio and interest coverage test are
met on a pro forma basis. See Note 1 to Financial Statements for discussion of
subsequent events. As of March 31, 2004, TXU Corp. and its subsidiaries were in
compliance with all such applicable covenants.
Certain financing and other arrangements of TXU Corp. and its subsidiaries
contain provisions that are specifically affected by changes in credit ratings
and also include cross default provisions. The material credit rating and cross
default provisions are described below.
Other agreements of TXU Corp., including some of the credit facilities
discussed above, contain terms pursuant to which the interest rates charged
under the agreements may be adjusted depending on the credit ratings of TXU
Corp. or its subsidiaries.
Credit Rating Covenants
-----------------------
TXU Energy has provided a guarantee of the obligations under TXU Corp.'s
lease (approximately $125 million at March 31, 2004) for its headquarters
building. In the event of a downgrade of TXU Energy's credit rating to below
investment grade, a letter of credit would need to be provided within 30 days of
any such ratings decline.
TXU Energy has entered into certain commodity contracts and lease
arrangements that in some instances give the other party the right, but not the
obligation, to request TXU Energy to post collateral in the event that its
credit rating falls below investment grade.
Based on its current commodity contract positions, if TXU Energy were
downgraded below investment grade by any specified rating agency, counterparties
would have the option to request TXU Energy to post additional collateral of
approximately $174 million.
In addition, TXU Energy has a number of other contractual arrangements
where the counterparties would have the right to request TXU Energy post
collateral. The amount TXU Energy would post under these transactions depends in
part on the value of the contracts at that time and TXU Energy's rating by each
of the three rating agencies. As of March 31, 2004, based on current contract
values, the maximum TXU Energy would post for these transactions is $253
million. Of this amount, $233 million relates to one specific counterparty that
requires all three rating agencies to downgrade TXU Energy to below investment
grade.
TXU Energy is also the obligor on leases aggregating $160 million. Under
the terms of those leases, if TXU Energy's credit rating were downgraded to
below investment grade by any specified rating agency, TXU Energy could be
required to sell the assets, assign the leases to a new obligor that is
investment grade, post a letter of credit or defease the leases.
ERCOT also has rules in place to assure adequate credit worthiness for
parties that schedule power on the ERCOT System. Under those rules, if TXU
Energy's credit rating were downgraded to below investment grade by any
specified rating agency, TXU Energy could be required to post collateral of
approximately $16 million.
47
In the event that TXU Australia's credit rating was downgraded to below
investment grade, there are cross currency swaps and interest rate swaps in
effect with banks who have the right to terminate the swaps. These contracts are
currently out of the money by $12 million on a net basis.
TXU Australia has several contracts that may require additional guarantees
or cash collateral totaling approximately $66 million if its credit rating was
downgraded to below investment grade, or if there was a material adverse change
in its financial condition.
Cross Default Provisions
------------------------
Certain financing arrangements of TXU Corp. contain provisions that would
result in an event of default if there were a failure under other financing
arrangements to meet payment terms or to observe other covenants that would
result in an acceleration of payments due. Such provisions are referred to as
"cross default" provisions.
A default by US Holdings or any subsidiary thereof on financing
arrangements of $50 million or more would result in a cross default under the
$1.4 billion US Holdings five-year revolving credit facility, the $400 million
US Holdings credit facility and $30 million of TXU Mining senior notes (which
have a $1 million cross default threshold).
A default by TXU Energy or Oncor or any subsidiary thereof in respect of
indebtedness in a principal amount in excess of $50 million would result in a
cross default for such party under the TXU Energy/Oncor $450 million revolving
credit facility. Under this credit facility, a default by TXU Energy or any
subsidiary thereof would cause the maturity of outstanding balances under such
facility to be accelerated as to TXU Energy, but not as to Oncor. Also, under
this credit facility, a default by Oncor or any subsidiary thereof would cause
the maturity of outstanding balances under such facility to be accelerated as to
Oncor, but not as to TXU Energy.
A default by TXU Corp. on indebtedness of $50 million or more would result
in a cross default under its $500 million five-year revolving credit facility.
A default by TXU Energy or its subsidiaries on indebtedness of $50 million
or more would result in a cross default under its new $1 billion 364-day credit
facility.
A default by TXU Gas or its subsidiaries on indebtedness of $50 million or
more would result in a cross default under its new $300 million 364-day credit
facility.
A default or similar event under the terms of the TXU Energy exchangeable
preferred membership interests that results in the acceleration (or other
mandatory repayment prior to the mandatory redemption date) of such security or
the failure to pay such security at the mandatory redemption date would result
in a default under TXU Energy's $1.25 billion senior unsecured notes. See
subsequent event discussion in Note 1 to Financial Statements.
TXU Energy has entered into certain mining and equipment leasing
arrangements aggregating $113 million that would terminate upon the default of
any other obligations of TXU Energy owed to the lessor. In the event of a
default by TXU Mining, a subsidiary of TXU Energy, on indebtedness in excess of
$1 million, a cross default would result under the $31 million TXU Mining
leveraged lease and the lease could terminate.
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services each have a cross
default threshold of $50,000. If either an originator, TXU Business Services or
TXU Receivables Company defaults on indebtedness of the applicable threshold,
the facility could terminate.
TXU Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if TXU Energy were to
default under an obligation in respect of borrowings in excess of thresholds
stated in the contracts, which thresholds vary.
48
Defaults by TXU Australia or its subsidiaries on financing arrangements
and interest rate, currency and commodity derivatives would result in
cross-defaults under other financing arrangements (including senior bank
facilities and senior debt) and interest rate, currency and commodity
derivatives of TXU Australia and its subsidiaries. The cross-default provisions
in these instruments vary in terms of which entities can cause cross-defaults
and the thresholds at which defaults would result in cross-defaults. Defaults by
TXU Australia or its subsidiaries would not result in cross-defaults under
material financing arrangements of TXU Corp. and its other subsidiaries and
defaults by TXU Corp. or its other subsidiaries would not result in
cross-defaults under material financing arrangements of TXU Australia and its
subsidiaries.
TXU Corp. and its subsidiaries have other arrangements, including leases
with cross default provisions, the triggering of which would not result in a
significant effect on liquidity.
Long-term Contractual Obligations and Commitments -- There have been no
significant changes in contractual cash obligations of TXU Corp., since December
31, 2003 as disclosed in the 2003 Form 10-K.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables and in Note 4 to Financial
Statements.
TXU Corp. has equity ownership interests in entities that are not
consolidated. These include operating businesses such as the Australia SEA Gas
pipeline joint venture as well as financing trusts not consolidated under FIN
46. See Notes 5 and 10 of Notes to Financial Statements in the 2003 Form 10-K
for disclosures related to these interests. There are no material contingencies
related to these interests.
COMMITMENTS AND CONTINGENCIES
Guarantees -- See Note 8 to Financial Statements for details of
contingencies, including guarantees.
REGULATION AND RATES
Price-to-Beat Rates - Under the 1999 Restructuring Legislation, TXU Energy
is required to continue to charge a "price-to-beat" rate established by the
Commission to residential customers in the historical service territory. TXU
Energy must continue to make price-to-beat rates available to small business
customers, however, it may offer rates other than price-to-beat, since it met
the requirements of the 40% threshold target calculation in December 2003. The
price-to-beat rate can be adjusted upward or downward twice a year, subject to
approval by the Commission, for changes in the market price of natural gas. TXU
Energy filed a request with the Commission on March 25, 2004 to change the
company's price-to-beat electricity prices for North Texas customers. The filing
reflects the significant increase in the market price of natural gas since last
summer. TXU Energy projects that the proposed increase will be approved by the
Commission and implemented in the second quarter of 2004. This adjustment would
raise an average monthly residential electric bill of a customer using 1,000
kilowatt hours by 3.4 percent or $3.39 per month. The average price of natural
gas futures increased 7.9 percent between July 23, 2003 and March 25, 2004.
Transmission Rates --On March 3, 2004, Oncor filed an annual request for
interim update of its wholesale transmission rate. Oncor requested a total
annualized revenue increase of $14 million. Approximately $8.5 million of this
increase would be recovered from wholesale customers, with the remaining $5.5
million to be recovered from REPs through the retail transmission cost recovery
factor (TCRF) of Oncor's distribution rate. Oncor's new wholesale transmission
rate was approved by the Commission and became effective on April 15, 2004.
In March 2004, the Commission approved an estimated annualized increase of
$9 million in the TCRF component of Oncor's distribution rates charged to REPs.
The effect of Oncor's wholesale transmission rate increase described in the
preceding paragraph will be included in Oncor's September 2004 TCRF update. With
respect to the impact on TXU Corp.'s consolidated results, the higher TCRF
results in reduced margin on TXU Energy's sales to those retail customers with
pricing that does not provide for recovery of higher delivery fees, principally
price-to-beat customers.
49
Gas Distribution Rates -- In May 2003, TXU Gas filed, for the first time,
a system-wide rate case for the distribution and pipeline operations. The case
was filed in all 437 incorporated cities served by the distribution operations,
and at the RRC for the pipeline business and for unincorporated areas served by
the distribution operations. The TXU Gas filing requested an annual revenue
increase of $69.5 million or 7.24%. All 437 cities took action on the case
within their statutory time frame, and TXU Gas has appealed these actions to the
RRC. Twelve parties have intervened in the case.
On April 23, 2004, the staff hearings examiners assigned to TXU Gas'
pending rate proceeding at the RRC issued a preliminary recommendation known as
a Proposal For Decision ("PFD"), which was revised on April 30, 2004. The staff
hearings examiners' PFD recommends a total annual decrease in rates of
approximately $53 million. TXU Gas believes that the evidence presented in the
proceeding supports its request. In addition, TXU Gas believes that the staff
hearings examiners' PFD does not follow applicable law or precedent in many
important respects. TXU Gas will file written exceptions to this PFD and present
oral arguments to the Commissioners of the RRC in an open meeting prior to the
issuance of an order in the proceeding by the RRC.
Australia -- The Essential Services Commission has determined the
distribution tariffs for electricity until December 31, 2005, and for gas until
December 31, 2007. According to the determination, the gas distribution tariffs
were increased by 2.2% for 2003. Each subsequent year, the gas distribution
tariffs are to increase by 0.8% plus Consumer Price Index (CPI) increase. The
electricity distribution tariffs are to increase by the CPI, less 1% each year.
In Victoria and New South Wales, the residential electricity markets have
both become competitive since January 2002, and the residential gas markets have
become competitive in New South Wales from January 2002 and in Victoria from
October 2002. The residential and small business energy prices for certain
classes of customers are still regulated and determined by the government bodies
of the respective States of Victoria and New South Wales.
In South Australia, the residential energy market has been competitive
since January 2003, although prices offered to certain classes of residential
and small business customers by incumbent retailers are still regulated and
determined by the South Australian government. TXU Australia entered into this
market in March 2003. The residential and small business gas market is scheduled
to be opened to competition in July 2004.
Summary -- Although TXU Corp. cannot predict future regulatory or
legislative actions or any changes in economic and securities market conditions,
no changes are expected in trends or commitments, other than those discussed in
this report, which might significantly alter its basic financial position,
results of operations or cash flows.
CHANGES IN ACCOUNTING STANDARDS
See Note 1 to Financial Statements for discussion of changes in
accounting standards.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed in
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on TXU Corp.'s operations,
financial results and financial condition, and could cause TXU Corp.'s actual
results or outcomes to differ materially from any projected outcome contained in
any forward-looking statement in this report, include:
The implementation of performance improvement initiatives identified by
Mr. Wilder may not produce the desired results and may result in disruptions
arising from employee displacements and the rapid pace of changes to
organizational structure and operating practices and processes. Additionally,
the bridge financing necessary to support the repurchase of the TXU Energy
Preferred Membership Interests may need to be replaced with long-term financing
if the sales of TXU Australia and TXU Fuel Company are not consummated.
50
ERCOT is the independent system operator that is responsible for
maintaining reliable operation of the bulk electric power supply system in the
ERCOT region. Its responsibilities include the clearing and settlement of
electricity volumes and related ancillary services among the various
participants in the deregulated Texas market. Because of new processes and
systems associated with the opening of the market to competition, which continue
to be improved, there have been delays in finalizing these settlements. As a
result, TXU Corp. is subject to settlement adjustments from ERCOT related to
prior periods, which may result in charges or credits impacting future reported
results of operations.
TXU Corp.'s businesses operate in changing market environments influenced
by various legislative and regulatory initiatives regarding deregulation,
regulation or restructuring of the energy industry, including deregulation of
the production and sale of electricity. TXU Corp. will need to adapt to these
changes and may face increasing competitive pressure.
TXU Corp.'s US businesses are subject to changes in laws (including the
Texas Public Utility Regulatory Act, as amended, the Texas Gas Utility
Regulatory Act, as amended, the Federal Power Act, as amended, the Atomic Energy
Act, as amended, the Public Utility Regulatory Policies Act of 1978, as amended,
the Natural Gas Act, as amended, the Natural Gas Policy Act, as amended, and the
Public Utility Holding Company Act of 1935, as amended) and changing
governmental policy and regulatory actions (including those of the Commission,
the RRC, the FERC and the NRC) with respect to matters including, but not
limited to, operation of nuclear power facilities, construction and operation of
other power generation facilities, construction and operation of transmission
facilities, acquisition, disposal, depreciation, and amortization of regulated
assets and facilities, recovery of purchased gas costs, decommissioning costs,
and return on invested capital for TXU Corp.'s regulated businesses, and present
or prospective wholesale and retail competition.
TXU Corp. believes that the electricity market in ERCOT is workably
competitive. TXU Corp. is the largest owner of generation and has the largest
retail position in ERCOT, and, along with other market participants, is subject
to oversight by the Commission. In that connection, TXU Corp. and other market
participants may be subject to various competition-related rules and
regulations, including but not limited to possible price-mitigation rules, as
well as rules related to market behavior.
TXU Australia is currently subject to multiple federal and state
regulators and regulations in the distribution and retail sectors that impose
limitations on the energy retail prices it can charge and returns on its
distribution assets, impose substantial costs on its business and seek to
promote competition in its markets. In addition, federal competition regulations
and Victorian state restrictions of cross-ownership of power generation, energy
distribution and energy retail operations could impede acquisitions by TXU
Australia and other business strategies.
Existing laws and regulations governing the market structure in Texas and
Australia could be reconsidered, revised or reinterpreted, or new laws or
regulations could be adopted.
TXU Corp. is not guaranteed any rate of return on its capital investments
in unregulated businesses. TXU Corp. markets and trades power, including power
from its own production facilities, as part of its wholesale energy sales
business and portfolio management operation. TXU Corp.'s results of operations
are likely to depend, in large part, upon prevailing retail rates, which are
set, in part, by regulatory authorities, and market prices for electricity, gas
and coal in its regional market and other competitive markets. Market prices may
fluctuate substantially over relatively short periods of time. Demand for
electricity can fluctuate dramatically, creating periods of substantial under-
or over-supply. During periods of over-supply, prices might be depressed. Also,
at times there may be political pressure, or pressure from regulatory
authorities with jurisdiction over wholesale and retail energy commodity and
transportation rates, to impose price limitations, bidding rules and other
mechanisms to address volatility and other issues in these markets.
TXU Corp.'s US regulated businesses are subject to cost-of-service
regulation and annual earnings oversight. This regulatory treatment does not
provide any assurance as to achievement of earnings levels. Oncor's rates are
51
regulated by the Commission based on an analysis of Oncor's costs, as reviewed
and approved in a regulatory proceeding. While rate regulation is premised on
the full recovery of prudently incurred costs and a reasonable rate of return on
invested capital, there can be no assurance that the Commission will judge all
of TXU Corp.'s costs to have been prudently incurred or that the regulatory
process in which rates are determined will always result in rates that will
produce full recovery of TXU Corp.'s costs and the return on invested capital
allowed by the Commission.
Some of the fuel for TXU Corp.'s power production facilities is purchased
under short-term contracts or on the spot market. Prices of fuel, including
natural gas, may also be volatile, and the price TXU Corp. can obtain for power
sales may not change at the same rate as changes in fuel costs. In addition, TXU
Corp. markets and trades natural gas and other energy related commodities, and
volatility in these markets may affect TXU Corp.'s costs incurred in meeting its
obligations.
If TXU Australia is unable to secure long-term supply arrangements for all
of its gas supply needs in Australia on commercially acceptable terms or if its
suppliers fail to perform under those agreements, it may be required to purchase
gas on the wholesale spot market at potentially higher prices. In addition, if
TXU Australia's gas needs are less than TXU Australia's gas take-or-pay
commitments and if TXU Australia is unable to make up this shortfall in future
contract years, TXU Australia may incur losses as a result of its gas
take-or-pay arrangements.
Volatility in market prices for fuel and electricity may result from:
o severe or unexpected weather conditions,
o seasonality,
o changes in electricity usage,
o illiquidity in the wholesale power or other markets,
o transmission or transportation constraints, inoperability or
inefficiencies,
o availability of competitively priced alternative energy sources,
o changes in supply and demand for energy commodities,
o changes in power production capacity,
o outages at TXU Corp.'s power production facilities or those of its
competitors,
o changes in production and storage levels of natural gas, lignite, coal
and crude oil and refined products,
o natural disasters, wars, sabotage, terrorist acts, embargoes and other
catastrophic events, and
o federal, state, local and foreign energy, environmental and other
regulation and legislation.
All but one of TXU Energy's facilities for power production in the US are
located in the ERCOT region, a market with limited interconnections to other
markets. Electricity prices in the ERCOT region are correlated to gas prices
because gas-fired plant is the marginal cost unit during the majority of the
year in the ERCOT region. Accordingly, the contribution to earnings and the
value of TXU Energy's base load power production is dependent in significant
part upon the price of gas. TXU Energy cannot fully hedge the risk associated
with dependency on gas because of the expected useful life of TXU Energy's power
production assets and the size of its position relative to market liquidity.
To manage its near-term financial exposure related to commodity price
fluctuations, TXU Corp. routinely enters into contracts to hedge portions of its
purchase and sale commitments, weather positions, fuel requirements and
inventories of natural gas, lignite, coal, crude oil and refined products, and
other commodities, within established risk management guidelines. As part of
this strategy, TXU Corp. routinely utilizes fixed-price forward physical
purchase and sales contracts, futures, financial swaps and option contracts
traded in the over-the-counter markets or on exchanges. However, TXU Corp. can
normally cover only a small portion of the exposure of its assets and positions
to market price volatility, and the coverage will vary over time. To the extent
TXU Corp. has unhedged positions, fluctuating commodity prices can materially
impact TXU Corp. results of operations and financial position, either favorably
or unfavorably.
Although TXU Corp. devotes a considerable amount of management time and
effort to the establishment of risk management procedures as well as the ongoing
review of the implementation of these procedures, the procedures it has in place
may not always be followed or may not always function as planned and cannot
eliminate all the risks associated with these activities.
52
TXU Corp. or one of its subsidiaries has guaranteed or indemnified the
performance of a portion of the obligations of certain subsidiaries, including
those involved in hedging and risk management activities. TXU Corp. or its
subsidiary, as the case may be, might not be able to satisfy all of these
guarantees and indemnification obligations if they were to come due at the same
time.
TXU Corp.'s hedging and risk management activities are exposed to the risk
that counterparties that owe TXU Corp. money, energy or other commodities as a
result of market transactions will not perform their obligations. The likelihood
that certain counterparties may fail to perform their obligations has increased
due to financial difficulties, brought on by various factors including improper
or illegal accounting and business practices, affecting some participants in the
industry. Some of these financial difficulties have been so severe that certain
industry participants have filed for bankruptcy protection or are facing the
possibility of doing so. Should the counterparties to these arrangements fail to
perform, TXU Corp. might be forced to acquire alternative hedging arrangements
or honor the underlying commitment at then-current market prices. In such event,
TXU Corp. might incur losses in addition to amounts, if any, already paid to the
counterparties. ERCOT market participants are also exposed to risks that another
ERCOT market participant may default in its obligations to pay ERCOT for power
taken in the ancillary services market, in which case such costs, to the extent
not offset by posted security and other protections available to ERCOT, may be
allocated to various non-defaulting ERCOT market participants.
The current credit ratings for TXU Corp.'s and its subsidiaries' long-term
debt are investment grade, except for Moody's credit rating for long-term debt
of TXU Corp. (the holding company), which is one notch below investment grade. A
rating reflects only the view of a rating agency, and it is not a recommendation
to buy, sell or hold securities. Any rating can be revised upward or downward at
any time by a rating agency if such rating agency decides that circumstances
warrant such a change. If S&P, Moody's or Fitch were to downgrade TXU Corp.'s
and/or its subsidiaries' long-term ratings, particularly below investment grade,
borrowing costs would increase and the potential pool of investors and funding
sources would likely decrease. If the downgrade were below investment grade,
liquidity demands would be triggered by the terms of a number of commodity
contracts, leases and other agreements.
Most of TXU Corp.'s large customers, suppliers and counterparties require
sufficient creditworthiness in order to enter into transactions. If TXU Corp.'s
subsidiaries' ratings were to decline to below investment grade, costs to
operate the power and gas businesses would increase because counterparties may
require the posting of collateral in the form of cash-related instruments, or
counterparties may decline to do business with TXU Corp.'s subsidiaries.
In addition, as discussed in the 2003 Form 10-K and elsewhere in this
report, the terms of certain financing and other arrangements contain provisions
that are specifically affected by changes in credit ratings and could require
the posting of collateral, the repayment of indebtedness or the payment of other
amounts.
The operation of power production and energy transportation facilities
involves many risks, including start up risks, breakdown or failure of
facilities, lack of sufficient capital to maintain the facilities, the
dependence on a specific fuel source or the impact of unusual or adverse weather
conditions or other natural events, as well as the risk of performance below
expected levels of output or efficiency, the occurrence of any of which could
result in lost revenues and/or increased expenses. A significant portion of TXU
Corp.'s facilities was constructed many years ago. In particular, older
generating equipment, even if maintained in accordance with good engineering
practices, may require significant capital expenditures to keep it operating at
peak efficiency. The risk of increased maintenance and capital expenditures
arises from (a) increased starting and stopping of generation equipment due to
the volatility of the competitive market, (b) any unexpected failure to produce
power, including failure caused by breakdown or forced outage, and (c) repairing
damage to facilities due to storms, natural disasters, wars, terrorist acts and
other catastrophic events. Further, TXU Corp.'s ability to successfully and
timely complete capital improvements to existing facilities or other capital
projects is contingent upon many variables and subject to substantial risks.
Should any such efforts be unsuccessful, TXU Corp. could be subject to
additional costs and/or the write-off of its investment in the project or
improvement.
53
Insurance, warranties or performance guarantees may not cover all or any
of the lost revenues or increased expenses, including the cost of replacement
power. Likewise, TXU Corp.'s ability to obtain insurance, and the cost of and
coverage provided by such insurance, could be affected by events outside its
control.
The ownership and operation of nuclear facilities, including TXU Corp.'s
ownership and operation of the Comanche Peak generation plant, involve certain
risks. These risks include: mechanical or structural problems; inadequacy or
lapses in maintenance protocols; the impairment of reactor operation and safety
systems due to human error; the costs of storage, handling and disposal of
nuclear materials; limitations on the amounts and types of insurance coverage
commercially available; and uncertainties with respect to the technological and
financial aspects of decommissioning nuclear facilities at the end of their
useful lives. The following are among the more significant of these risks:
o Operational Risk - Operations at any nuclear power production plant
could degrade to the point where the plant would have to be shut down.
If this were to happen, the process of identifying and correcting the
causes of the operational downgrade to return the plant to operation
could require significant time and expense, resulting in both lost
revenue and increased fuel and purchased power expense to meet supply
commitments. Rather than incurring substantial costs to restart the
plant, the plant may be shut down. Furthermore, a shut-down or failure
at any other nuclear plant could cause regulators to require a
shut-down or reduced availability at Comanche Peak.
o Regulatory Risk - The NRC may modify, suspend or revoke licenses and
impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under it or the terms of the licenses of nuclear
facilities. Unless extended, the NRC operating licenses for Comanche
Peak Unit 1 and Unit 2 will expire in 2030 and 2033, respectively.
Changes in regulations by the NRC could require a substantial increase
in capital expenditures or result in increased operating or
decommissioning costs.
o Nuclear Accident Risk - Although the safety record of Comanche Peak and
other nuclear reactors generally has been very good, accidents and
other unforeseen problems have occurred both in the US and elsewhere.
The consequences of an accident can be severe and include loss of life
and property damage. Any resulting liability from a nuclear accident
could exceed TXU Corp.'s resources, including insurance coverage.
TXU Corp. is subject to extensive environmental regulation by governmental
authorities. In operating its facilities, TXU Corp. is required to comply with
numerous environmental laws and regulations, and to obtain numerous governmental
permits. TXU Corp. may incur significant additional costs to comply with these
requirements. If TXU Corp. fails to comply with these requirements, it could be
subject to civil or criminal liability and fines. Existing environmental
regulations could be revised or reinterpreted, new laws and regulations could be
adopted or become applicable to TXU Corp. or its facilities, and future changes
in environmental laws and regulations could occur, including potential
regulatory and enforcement developments related to air emissions.
TXU Corp. may not be able to obtain or maintain all required environmental
regulatory approvals. If there is a delay in obtaining any required
environmental regulatory approvals or if TXU Corp. fails to obtain, maintain or
comply with any such approval, the operation of its facilities could be stopped
or become subject to additional costs. Further, at some of TXU Corp.'s older
facilities, including base load lignite and coal plants, it may be uneconomical
for TXU Corp. to install the necessary equipment, which may cause TXU Corp. to
shut down those facilities.
In addition, TXU Corp. may be responsible for any on-site liabilities
associated with the environmental condition of facilities that it has acquired
or developed, regardless of when the liabilities arose and whether they are
known or unknown. In connection with certain acquisitions and sales of assets,
TXU Corp. may obtain, or be required to provide, indemnification against certain
environmental liabilities. Another party could fail to meet its indemnification
obligations to TXU Corp.
54
TXU Corp. is obligated to offer the price-to-beat rate to requesting
residential and small business customers in the historical service territory of
its incumbent utility through January 1, 2007. TXU Corp. is not permitted to
offer electricity to the residential customers in the historical service
territory at a price other than the price-to-beat rate until January 1, 2005,
unless before that date the Commission determines that 40% or more of the amount
of electric power consumed by residential customers in that area is committed to
be served by REPs other than TXU Corp. Because TXU Corp. will not have the same
level of residential customer price flexibility as competitors in the historical
service territory, TXU Corp. could lose a significant number of these customers
to other providers. In addition, at times, during this period, if the market
price of power is lower than TXU Corp.'s cost to produce power, TXU Corp. would
have a limited ability to mitigate the loss of margin caused by its loss of
customers by selling power from its power production facilities.
The initial price-to-beat rates for the affiliated REPs, including TXU
Corp.'s, were established by the Commission on December 7, 2001. Pursuant to
Commission regulations, the initial price-to-beat rate for each affiliated REP
was 6% less than the average rates in effect for its incumbent utility on
January 1, 1999, adjusted to take into account a new fuel factor as of December
31, 2001.
Other REPs are allowed to offer electricity to TXU Corp.'s residential
customers at any price. The margin or "headroom" available in the price-to-beat
rate for any REP equals the difference between the price-to-beat rate and the
sum of delivery charges and the price that REP pays for power. Headroom may be a
positive or a negative number. The higher the amount of positive headroom for
competitive REPs in a given market, the more incentive those REPs would have to
compete in providing retail electric services in that market, which may result
in TXU Corp. losing customers to competitive REPs.
The results of TXU Corp.'s retail electric operations in the historical
service territory is largely dependent upon the amount of headroom available to
TXU Corp. and the competitive REPs in TXU Corp.'s price-to-beat rate. Since
headroom is dependent, in part, on power production and purchase costs, TXU
Corp. does not know nor can it estimate the amount of headroom that it or other
REPs will have in TXU Corp.'s price-to-beat rate or in the price-to-beat rate
for the affiliated REP in each of the other Texas retail electric markets.
There is no assurance that future adjustments to TXU Corp.'s price-to-beat
rate will be adequate to cover future increases in its costs of electricity to
serve its price-to-beat rate customers or that TXU Corp.'s price-to-beat rate
will not result in negative headroom in the future.
In most retail electric markets outside the historical service territory,
TXU Corp.'s principal competitor may be the retail affiliate of the local
incumbent utility company. The incumbent retail affiliates have the advantage of
long-standing relationships with their customers. In addition to competition
from the incumbent utilities and their affiliates, TXU Corp. may face
competition from a number of other energy service providers, or other energy
industry participants, who may develop businesses that will compete with TXU
Corp. and nationally branded providers of consumer products and services. Some
of these competitors or potential competitors may be larger and better
capitalized than TXU Corp. If there is inadequate margin in these retail
electric markets, it may not be profitable for TXU Corp. to enter these markets.
A number of energy utilities in states other than Victoria and South
Australia continue to be owned by state governments. The privatization of any of
these utilities could result in new, more commercially-focused competitors in
TXU Australia's markets, some of which may have larger capital bases and other
competitive advantages compared to TXU Australia. In addition, as the regulatory
developments in TXU Australia's markets continue to unfold, energy companies and
other utilities that have not previously been competitors may enter TXU
Australia's markets. The Australian energy industry has also been recently
experiencing a degree of consolidation activity. If this consolidation activity
continues, it may result in a smaller number of stronger competitors in the
markets in which TXU Australia operates.
TXU Corp. depends on transmission and distribution facilities owned and
operated by other utilities, as well as its own such facilities, to deliver the
electricity it produces and sells to consumers, as well as to other REPs. If
transmission capacity is inadequate, TXU Corp.'s ability to sell and deliver
electricity may be hindered, it may have to forgo sales or it may have to buy
more expensive wholesale electricity that is available in the
capacity-constrained area. In particular, during some periods transmission
55
access is constrained to some areas of the Dallas-Fort Worth metroplex. TXU
Corp. expects to have a significant number of customers inside these constrained
areas. The cost to provide service to these customers may exceed the cost to
provide service to other customers, resulting in lower headroom. In addition,
any infrastructure failure that interrupts or impairs delivery of electricity to
TXU Corp.'s customers could negatively impact the satisfaction of its customers
with its service.
TXU Corp. offers its customers a bundle of services that include, at a
minimum, the electric commodity itself plus transmission, distribution and
related services. The prices TXU Corp. charges for this bundle of services or
for the various components of the bundle, either of which may be fixed by
contract with the customer for a period of time, could differ from TXU Corp.'s
underlying cost to obtain the commodities or services.
The information systems and processes necessary to support risk
management, sales, customer service and energy procurement and supply in
competitive retail markets in Texas and elsewhere are new, complex and
extensive. TXU Corp. is refining these systems and processes, and they may prove
more expensive to refine than planned and may not work as planned.
Research and development activities are ongoing to improve existing and
alternative technologies to produce electricity, including gas turbines, fuel
cells, microturbines and photovoltaic (solar) cells. It is possible that
advances in these or other alternative technologies will reduce the costs of
electricity production from these technologies to a level that will enable these
technologies to compete effectively with electricity production from traditional
power plants like TXU Corp.'s. While demand for electric energy services is
generally increasing throughout the US, the rate of construction and development
of new, more efficient power production facilities may exceed increases in
demand in some regional electric markets. The commencement of commercial
operation of new facilities in the regional markets where TXU Corp. has
facilities will likely increase the competitiveness of the wholesale power
market in those regions. In addition, the market value of TXU Corp.'s power
production and/or energy transportation facilities may be significantly reduced.
Also, electricity demand could be reduced by increased conservation efforts and
advances in technology, which could likewise significantly reduce the value of
TXU Corp.'s facilities. Changes in technology could also alter the channels
through which retail electric customers buy electricity.
TXU Corp. is a holding company and conducts its operations primarily
through wholly-owned subsidiaries. Substantially all of TXU Corp.'s consolidated
assets are held by these subsidiaries. Accordingly, TXU Corp.'s cash flows and
ability to meet its obligations and to pay dividends are largely dependent upon
the earnings of its subsidiaries and the distribution or other payment of such
earnings to TXU Corp. in the form of distributions, loans or advances, and
repayment of loans or advances from TXU Corp. The subsidiaries are separate and
distinct legal entities and have no obligation to provide TXU Corp. with funds
for its payment obligations, whether by dividends, distributions, loans or
otherwise.
Because TXU Corp. is a holding company, its obligations to its creditors
are structurally subordinated to all existing and future liabilities and
existing and future preferred stock of its subsidiaries. Therefore, TXU Corp.'s
rights and the rights of its creditors to participate in the assets of any
subsidiary in the event that such a subsidiary is liquidated or reorganized are
subject to the prior claims of such subsidiary's creditors and holders of its
preferred stock. To the extent that TXU Corp. may be a creditor with recognized
claims against any such subsidiary, its claims would still be subject to the
prior claims of such subsidiary's creditors to the extent that they are secured
or senior to those held by TXU Corp.
The inability to raise capital on favorable terms, particularly during
times of uncertainty in the financial markets, could impact TXU Corp.'s ability
to sustain and grow its businesses, which are capital intensive, and would
increase its capital costs. TXU Corp. relies on access to financial markets as a
significant source of liquidity for capital requirements not satisfied by cash
on hand or operating cash flows. TXU Corp.'s access to the financial markets
could be adversely impacted by various factors, such as:
o changes in credit markets that reduce available credit or the ability
to renew existing liquidity facilities on acceptable terms;
o inability to access commercial paper markets;
o a deterioration of TXU Corp.'s credit or a reduction in TXU Corp.'s
credit ratings or the credit ratings of its subsidiaries;
56
o extreme volatility in TXU Corp.'s markets that increases margin or
credit requirements;
o a material breakdown in TXU Corp.'s risk management procedures;
o prolonged delays in billing and payment resulting from delays in
switching customers from one REP to another; and
o the occurrence of material adverse changes in TXU Corp.'s businesses
that restrict TXU Corp.'s ability to access its liquidity facilities.
A lack of necessary capital and cash reserves could adversely impact the
evaluation of TXU Corp.'s credit worthiness by counterparties and rating
agencies. Further, concerns on the part of counterparties regarding TXU Corp.'s
liquidity and credit could limit its portfolio management activities.
As a result of the energy crisis in California during 2001, the recent
volatility of natural gas prices in North America, the bankruptcy filing by
Enron Corporation, accounting irregularities of public companies, and
investigations by governmental authorities into energy trading activities,
companies in the regulated and non-regulated utility businesses have been under
a generally increased amount of public and regulatory scrutiny. Accounting
irregularities at certain companies in the industry have caused regulators and
legislators to review current accounting practices and financial disclosures.
The capital markets and ratings agencies also have increased their level of
scrutiny. Additionally, allegations against various energy trading companies of
"round trip" or "wash" transactions, which involve the simultaneous buying and
selling of the same amount of power at the same price and delivery location and
provide no true economic benefit, power market manipulation and inaccurate power
and commodity price reporting have had a negative effect on the industry. TXU
Corp. believes that it is complying with all applicable laws, but it is
difficult or impossible to predict or control what effect these events may have
on TXU Corp.'s financial condition or access to the capital markets.
Additionally, it is unclear what laws and regulations may develop, and TXU Corp.
cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies, the energy
industry or its operations specifically.
TXU Corp. is subject to costs and other effects of legal and
administrative proceedings, settlements, investigations and claims. Since
October 2002, a number of lawsuits have been filed in federal and state courts
in Texas against TXU Corp. and various of its officers, directors and
underwriters. In addition, TXU Corp.'s decision to exit all of its operations in
Europe, as well as the administration proceeding, have resulted in notices of
various claims or potential claims and might result in lawsuits by the creditors
of or others associated with TXU Europe. Such current and potential legal
proceedings could result in payments of judgment or settlement amounts.
The market price of TXU Corp.'s common stock has been volatile in the
past, and a variety of factors could cause the price to fluctuate in the future.
In addition to the matters discussed above and in TXU Corp.'s other filings
under the Securities Exchange Act of 1934, as amended, the following could
impact the market price for TXU Corp.'s common stock:
o developments related to TXU Corp.'s businesses;
o fluctuations in TXU Corp.'s results of operations;
o the level of dividends;
o TXU Corp.'s debt to equity ratios and other leverage ratios;
o effect of significant events relating to the energy sector in general;
o sales of TXU Corp. securities into the marketplace;
o general conditions in the industry and the energy markets in which
TXU Corp. is a participant;
o the worldwide economy;
o an outbreak of war or hostilities;
o a shortfall in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections; and
o actions by credit rating agencies.
57
Fluctuations in the market price of TXU Corp.'s common stock may be
unrelated to TXU Corp.'s performance. General market declines or market
volatility could adversely affect the price of TXU Corp.'s common stock and the
current market price may not be indicative of future market prices.
The issues and associated risks and uncertainties described above are not
the only ones TXU Corp. may face. Additional issues may arise or become material
as the energy industry evolves.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. and its subsidiaries
(collectively, TXU Corp.) contain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. Although TXU
Corp. believes that in making any such statement its expectations are based on
reasonable assumptions, any such statement involves uncertainties and is
qualified in its entirety by reference to the risks discussed above under "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" and factors contained in the
Forward-Looking Statements section of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations in TXU Corp.'s 2003
Form 10-K, that could cause the actual results of TXU Corp. to differ materially
from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is
made, and TXU Corp. undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which it is made
or to reflect the occurrence of unanticipated events. New factors emerge from
time to time, and it is not possible for TXU Corp. to predict all of them; nor
can TXU Corp. assess the impact of each such factor or the extent to which any
factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed below, 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 the 2003 Form 10-K and
is therefore not presented herein.
COMMODITY PRICE RISK
As discussed in the 2003 Form 10-K, TXU Corp. engaged a consulting firm to
review its portfolio management activities. The review, which commenced in late
March 2004, focuses on governance and risk policies, the control environment and
management processes. The project is nearing completion and recommendations for
improvement in operational efficiency, effectiveness and operational control are
being evaluated by TXU Corp. management.
VaR for Energy Contracts Subject to Mark-to-Market Accounting -- This
measurement estimates the potential loss in value, due to changes in market
conditions, of all energy-related contracts subject to mark-to-market
accounting, based on a specific confidence level and an assumed holding period.
Assumptions in determining this VaR include using a 95% confidence level and a
five-day holding period. A probabilistic simulation methodology is used to
calculate VaR, and is considered by management to be the most effective way to
estimate changes in a portfolio's value based on assumed market conditions for
liquid markets. TXU Australia uses a variance-covariance methodology in deriving
its VaR calculation, due to the differences in its market as compared to that of
TXU Energy.
March 31, December 31,
2004 2003
---------- ------------
Period-end MtM VaR:
-------------------
TXU Energy............................................................. $ 29 $ 15
TXU Australia ......................................................... $ 11 $ 12
Average Month-end MtM VaR:
--------------------------
TXU Energy............................................................. $ 21 $ 25
TXU Australia ......................................................... $ 11 $ 16
58
Portfolio VaR -- Represents the estimated potential loss in value, due to
changes in market conditions, of the entire energy portfolio, including owned
generation assets, estimates of retail sales load and all contractual positions
(the portfolio assets). The Portfolio VaR calculations for TXU Energy and
Australia represent a ten year and five year view, respectively, of owned assets
based on the nature of their particular markets. If the life of an asset extends
beyond the ten or five year duration period, the VaR calculation does not
measure the associated risk inherent in the asset over its full life. The
Portfolio VaR for TXU Australia does not include the gas commodity portfolio due
to a relatively illiquid gas market which does not lend itself to reliable
statistical measure. Assumptions in determining the total Portfolio VaR include
using a 95% confidence level and a five-day holding period and includes both
mark-to-market and accrual positions.
March 31 December 31,
2004 2003
---------- ------------
Period-end Portfolio VaR:
-------------------------
TXU Energy.......................................................... $ 177 $ 199
TXU Australia ...................................................... $ 19 $ 23
Average Month-end Portfolio VaR:
--------------------------------
TXU Energy.......................................................... $ 189 $ 181
TXU Australia....................................................... $ 25 $ 22
Other Risk Measures -- The metrics appearing below provide information
regarding the effect of changes in energy market conditions on earnings and cash
flow of TXU Energy. Similar metrics for TXU Australia are not available.
Earnings at Risk (EaR) -- EaR measures the estimated potential loss of
expected pretax earnings for the year presented due to changes in market
conditions. EaR metrics include the owned generation assets, estimates of retail
load and all contractual positions except for accrual positions expected to be
settled beyond the fiscal year. Assumptions include using a 95% confidence level
over a five-day holding period under normal market conditions.
Cash Flow at Risk (CFaR) -- CFaR measures the estimated potential loss of
expected cash flow over the next six months, due to changes in market
conditions. CFaR metrics include all owned generation assets, estimates of
retail load and all contractual positions that impact cash flow during the next
six months. Assumptions include using a 99% confidence level over a six-month
holding period under normal market conditions.
March 31, December 31,
2004 2003
---------- ------------
EaR .............................................................. $ 31 $ 15
CFaR ............................................................. $ 83 $ 67
INTEREST RATE RISK
See Note 4 to Financial Statements for a discussion of the issuance and
retirement of interest rate swaps since December 31, 2003.
CREDIT RISK
Concentration of Credit Risk -- The exposure to credit risk from large
business customers and hedging counterparties, excluding credit collateral, as
of March 31, 2004, is $1.2 billion net of standardized master netting contracts
and agreements that provide the right of offset of positive and negative credit
exposures with individual customers and counterparties. When considering
collateral currently held by TXU Corp. (cash, letters of credit and other
security interests), the net credit exposure is $925 million. Of this amount,
59
approximately 83% of the associated exposure is with investment grade customers
and counterparties, as determined using publicly available information including
major rating agencies' published ratings and TXU Corp.'s internal credit
evaluation process. Those customers and counterparties without an S&P rating of
at least BBB- or similar rating from another major rating agency are rated using
internal credit methodologies and credit scoring models to estimate an S&P
equivalent rating. TXU Corp. routinely monitors and manages its credit exposure
to these customers and counterparties on this basis.
The following table presents the distribution of credit exposure as of
March 31, 2004, for trade accounts receivable from large business customers,
commodity contract assets and other derivative assets that arise primarily from
hedging activities, by investment grade and noninvestment grade, credit quality
and maturity.
Exposure by Maturity
Exposure ----------------------------------------
before Greater
Credit Credit 2 years or Between than 5
Collateral Collateral Net Exposure less 2-5 years years Total
---------- ---------- ------------ ---- --------- ----- -----
Investment grade $ 893 $ 123 $ 770 $ 605 $ 103 $ 62 $ 770
Noninvestment grade 259 104 155 139 11 5 155
------- ------ ----- ----- ---- ----- -----
Totals $ 1,152 $ 227 $ 925 $ 744 $114 $ 67 $ 925
======= ====== ===== ===== ==== ===== =====
Investment grade 78% 54% 83%
Noninvestment grade 22% 46% 17%
TXU Corp. had no exposure to any one customer or counterparty greater than
10% of the net exposure of $925 million at March 31, 2004. Additionally,
approximately 80% of the credit exposure, net of collateral held, has a maturity
date of two years or less. TXU Corp. does not anticipate any material adverse
effect on its financial position or results of operations as a result of
non-performance by any customer or counterparty.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Corp.'s management, including the principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect as of the end of
the current period included in this quarterly report. Based on the evaluation
performed, TXU Corp.'s management, including the principal executive officer and
principal financial officer, concluded that the disclosure controls and
procedures were effective. During the most recent fiscal quarter covered by this
quarterly report, there has been no change in TXU Corp.'s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, TXU Corp.'s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings -- On October 9, 2003, a lawsuit was filed in the
Supreme Court of the State of New York, County of New York, against TXU Corp.,
by purported beneficial owners of approximately 42% of certain TXU Corp.
equity-linked securities issued in October 2001. The common stock purchase
contracts that are a part of these securities require the holders to purchase
TXU Corp. common stock on specified dates in 2004 and 2005 at prices that are
above the current market price of TXU Corp. common stock. The plaintiffs seek a
declaratory judgment that (a) a termination event has occurred under the common
stock purchase contract as a result of the administration of TXU Europe and,
therefore, that plaintiffs are not required to purchase TXU Corp. common stock
pursuant to the contracts and (b) an event of default has occurred under the
indenture for the senior notes that constitute a part of these equity linked
securities. Plaintiffs also seek an injunction requiring TXU Corp. to give
notice that a termination event under the common stock purchase contract has
occurred. TXU Corp. disputes plaintiffs' allegations and believes that
plaintiffs' interpretation of the common stock purchase contract and indenture
60
is inconsistent with the clear language of these agreements and is contrary to
applicable law. On March 15, 2004, the court granted TXU Corp.'s Motion to
Dismiss and entered a judgment dismissing the litigation. The plaintiffs
appealed the dismissal of the lawsuit. On May 7, 2004, TXU Corp. announced it
had reached an agreement with the plaintiffs, under which TXU Corp. repurchased
the $423 million principal amount of the securities for approximately $404
million, that will result in the dismissal of this lawsuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF COMMON STOCK
Total Number of Average Price Paid
Period Shares Purchased per Share
January 2004.......................................................... -- --
February 2004 ........................................................ -- --
March 2004 (a)........................................................ 500,000 $ 28.68
-------
Total................................................................. 500,000 $ 28.68
=======
- -------------------
(a) Shares repurchased in the open market for the benefit of Mr. Wilder.
TXU Corp. does not have an ongoing plan for share repurchases, although it
may repurchase shares from time to time in order to meet obligations under
various compensation and other agreements.
On April 24, 2004, TXU Corp. redeemed all of the 7 1/4% Junior
Subordinated Debentures, Series A, at an amount equal to 100% of the outstanding
principal amount plus accrued and unpaid interest, for a total of $238 million.
With the proceeds, the TXU Corp. Capital I Trust redeemed all of the outstanding
7 1/4% Cumulative Trust Preferred Capital Securities due 2029 at an amount equal
to $25 per trust security plus accumulated and unpaid distributions, for a total
of $231 million.
Additionally on May 7, 2004, TXU Corp. announced that it had reached an
agreement that will result in the dismissal of a lawsuit brought against
TXU Corp. by the owners of approximately 42% of certain TXU Corp. equity-linked
debt securities issued in October 2001. Under the terms of the agreement,
TXU Corp. will repurchase all of the approximately 8.5 million units of the
securities (approximately $423 million stated amount), held by plaintiffs for
an aggregate price of $47.75 per unit for a total cash repurchase price of
approximately $404 million.
During April and May 2004, TXU Corp. also repurchased approximately $90
million of its debt and equity securities in open market purchases.
All of the above repurchases were funded through cash on hand and bank
borrowings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed or furnished as part of Part II are:
Previously Filed*
--------------------
With File As
Exhibits Number Exhibit
-------- ------ -------
(3) Articles of Incorporation and By laws
3(ii) 333-115159 4 (b) -- Restated Bylaws of TXU Corp., as amended.
Form S-3
(filed May 4, 2004)
(10) Material Contracts.
Management Contracts.
10(a) 1-12833 10 (j) -- Employment Agreement, dated February 23, 2004, between
Form 10-K (2003) TXU Corp. and C. John Wilder.
(filed March 15,
2004)
61
Previously Filed*
--------------------
With File As
Exhibits Number Exhibit
-------- ------ -------
Credit Agreements.
10(b) 1-12833 10 (hh) -- Amendment and Restatement Deed - Deed of Common Terms
Form 10-K (2003) dated February 26, 2004, between TXU Australia Holdings
(filed March 15, Pty Ltd, the Partnership, the Obligors, the Senior
2004) Creditors, the Continuing Financiers, the Retiring
Financiers, the Continuing Hedge Counterparties, the New
Financiers, the Junior Creditors, TXU Corp, the
General Partners, the Limited Partners, the Retiring
Trustee, the New Trustee, the Retiring Syndicated Facilities
Agent, the New Syndicated Facilities Agent (each as defined
in that deed); Deed of Common Terms (Refinancing) and
Deed of Common Terms(IPO), both attached thereto.
10(c) 1-12833 10 (ii) -- Loan Note Subscription Agreement dated February 26,
Form 10-K (2003) 2004, between TXU Australia Holdings Pty Ltd, each of
(filed March 15, the Financiers listed in the Details to that agreement
2004) and Australia and New Zealand Banking Group Limited as
Facility Agent.
10(d) 1-12833 10 (jj) -- Loan Note Deed Poll dated February 26, 2004, between TXU
Form 10-K (2003) Australia Holdings Pty Ltd, each person who from time to
(filed March 15, time is a Financier and the Facility Agent.
2004)
10(e) 1-12833 10 (kk) -- Working Capital Facilities Agreement dated February 26,
Form 10-K (2003) 2004, between TXU Australia Holdings Pty Ltd, Australia
(filed March 15, and New Zealand Banking Group Limited and Commonwealth
2004) Bank of Australia.
(15) Letter re: Unaudited Interim Financial Information.
15 -- Letter from independent accountants as to unaudited
interim financial information.
(31) Rule 13a - 14(a)/15d - 14(a) Certifications.
31(a) -- Certification of C. John Wilder, principal executive
officer of TXU Corp., pursuant to Rule 13a - 14(a)/15d -
14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) -- Certification of H. Dan Farell, principal financial
officer of TXU Corp., pursuant to Rule 13a - 14(a)/15d -
14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
(32) Section 1350 Certifications.
32(a) -- Certification of C. John Wilder, principal executive
officer of TXU Corp., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
62
Previously Filed*
--------------------
With File As
Exhibits Number Exhibit
-------- ------ -------
32(b) -- Certification of H. Dan Farell, principal financial
officer of TXU Corp., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99) Additional Exhibits.
99 -- Condensed Statements of Consolidated Income - Twelve
Months Ended March 31, 2004.
- ------------------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K furnished or filed since December 31, 2003:
Date of Report Item Reported
-------------- -------------
January 16, 2004 Item 5. Other Events and Regulation FD Disclosure
February 12, 2004 Item 12. Results of Operations and Financial Condition
February 23, 2004 Item 5. Other Events and Regulation FD Disclosure
February 25, 2004 Item 5. Other Events and Regulation FD Disclosure
March 1, 2004 Item 9. Regulation FD Disclosure
March 17, 2004 Item 5. Other Events and Regulation FD Disclosure
March 30, 2004 Item 5. Other Events and Regulation FD Disclosure
April 26, 2004 Item 5. Other Events and Regulation FD Disclosure
Item 12. Results of Operations and Financial Condition
May 6, 2004 Item 12. Results of Operations and Financial Condition
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ David H. Anderson
----------------------------------
David H. Anderson
Vice President and Controller
Date: May 7, 2004
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