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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 JUNE 30, 2004
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
---------------------
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 August 4, 2004: 296,809,603 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 and Six Months Ended June 30, 2004 and 2003................................ 1
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2004 and 2003............................... 2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2004 and 2003.......................................... 3
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003.............................................. 4
Notes to Financial Statements.................................................... 5
Report of Independent Registered Public Accounting Firm.......................... 30
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 68
Item 4. Controls and Procedures.......................................................... 70
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 70
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. 71
Item 4. Submission of Matters to a Vote of Security Holders.............................. 72
Item 6. Exhibits and Reports on Form 8-K ................................................ 72
SIGNATURE.......................................................................................... 75
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 retail 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"
Electric Delivery.............................. refers to TXU Electric Delivery Company (formerly Oncor
Electric Delivery Company), a subsidiary of US Holdings, or
Electric Delivery and its consolidated bankruptcy remote
financing subsidiary, TXU Electric Delivery Transition Bond
Company LLC (formerly Oncor Electric Delivery Transition
Bond Company LLC), depending on context
Energy......................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
ERCOT.......................................... Electric Reliability Council of Texas, the Independent
System Operator and the regional reliability
coordinator of various electricity systems within Texas
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 retail competition on January
1, 2002
IRS............................................ Internal Revenue Service
ii
Moody's........................................ Moody's Investors Services, Inc.
MW............................................. megawatts
NRC............................................ United States Nuclear Regulatory Commission
Pinnacle....................................... Pinnacle One Partners, L.P., formerly 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, formerly 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, formerly a subsidiary
of Pinnacle
TXU Corp....................................... refers to TXU Corp., a holding company, 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 Energy
iii
TXU Portfolio Management....................... TXU Portfolio Management Company LP, a subsidiary of 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 Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars, except per share
amounts)
Operating revenues................................................. $2,296 $2,149 $4,421 $4,064
Costs and expenses:
Cost of energy sold and delivery fees........................... 1,013 936 1,920 1,777
Operating costs................................................. 379 336 719 688
Depreciation and amortization................................... 178 167 369 352
Selling, general and administrative expenses.................... 295 207 511 407
Franchise and revenue-based taxes............................... 86 92 171 188
Other income.................................................... (16) (18) (25) (27)
Other deductions................................................ 438 5 457 23
Interest income................................................. (2) (7) (6) (16)
Interest expense and related charges............................ 174 201 358 403
------ ------ ------ ------
Total costs and expenses.................................... 2,545 1,919 4,474 3,795
------ ------ ------ ------
Income (loss) from continuing operations before income taxes,
extraordinary gain and cumulative effect of changes in
accounting principles............................................ (249) 230 (53) 269
Income tax expense (benefit)....................................... (157) 70 (94) 75
------ ------ ------ ------
Income (loss) from continuing operations before extraordinary gain
and cumulative effect of changes in accounting principles........ (92) 160 41 194
Income (loss) from discontinued operations, net of tax benefit
(Note 3).......................................................... 330 (49) 380 20
Extraordinary gain, net of tax (Note 4)............................ 16 -- 16 --
Cumulative effect of changes in accounting principles, net of tax
benefit (Note 2)................................................. -- -- -- (58)
------ ------ ------ ------
Net income ........................................................ $ 254 $ 111 $ 437 $ 156
Exchangeable preferred membership interest buyback premium (Note 1) 849 -- 849 --
Preference stock dividends ........................................ 5 6 11 11
------ ------ ------ ------
Net income (loss) available to common shareholders................. $ (600) $ 105 $ (423) $ 145
Average shares of common stock outstanding (millions):
Basic........................................................... 320 321 322 321
Diluted......................................................... 320 378 322 378
Per share of common stock:
Basic earnings:
Income (loss) from continuing operations before extraordinary
gain and cumulative effect of changes in
accounting principles....................................... $ (0.29) $ 0.50 $ 0.13 $0.60
Income (loss) from discontinued operations, net of tax effect. 1.03 (0.15) 1.18 0.06
Extraordinary gain, net of tax................................ 0.05 -- 0.05 --
Cumulative effect of changes in accounting principles......... -- -- -- (0.18)
Exchangeable preferred membership interest buyback premium.... (2.65) -- (2.64) --
Preference stock dividends.................................... (0.01) (0.02) (0.04) (0.03)
Net income (loss) available to common shareholders............ (1.87) 0.33 (1.32) 0.45
Diluted earnings:
Income (loss) from continuing operations before extraordinary
gain and cumulative effect of changes in accounting principles $ (0.29) $ 0.45 $ 0.13 $0.58
Income (loss) from discontinued operations, net of tax effect. 1.03 (0.13) 1.18 0.05
Extraordinary gain, net of tax................................ 0.05 -- 0.05 --
Cumulative effect of changes in accounting principles, net of
tax benefit........................................................ -- -- -- (0.15)
Exchangeable preferred membership interest buyback premium.... (2.65) -- (2.64) --
Preference stock dividends.................................... (0.01) (0.01) (0.04) (0.03)
Net income (loss) available to common shareholders............ (1.87) 0.31 (1.32) 0.45
Dividends declared............................................. 0.125 0.125 0.250 0.250
See Notes to Financial Statements.
1
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
(millions of dollars)
Components related to continuing operations:
Income (loss) from continuing operations before
extraordinary gain and cumulative effect of
changes in accounting principles................................ $(92) $ 160 $ 41 $ 194
Other comprehensive income (loss), net of tax effects:
Cash flow hedges:
Net change in fair value of derivatives (net of tax
benefit of $2, $23, $36 and $71)............................ (1) (43) (63) (132)
Amounts realized in earnings during the period
(net of tax (expense) benefit of $2, $(25), $(3) and $59).. (4) 46 8 109
---- ----- ----- -----
Total.................................................... (5) 3 (55) (23)
---- ----- ----- -----
Comprehensive income (loss) related to continuing
operations...................................................... (97) 163 (14) 171
Components related to discontinued operations:
Income (loss) from discontinued operations, net of tax.......... 330 (49) 380 20
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustment ........................ (111) 106 (104) 161
Minimum pension liability adjustments (net of tax
(expense) benefit of $(3) and $--, $(3) and $3).............. 5 -- 6 (6)
Cash flow hedges:
Net change in fair value of derivatives (net
of tax (expense) benefit of $(7), $14, $--
and $22)................................................... 17 (33) (2) (52)
Amounts realized in earnings during the period
(net of tax (expense) benefit of $9, $(11), $6 and
$(19))..................................................... (21) 26 (13) 44
---- ----- ----- -----
Total.................................................... (110) 99 (113) 147
---- ----- ----- -----
Comprehensive income (loss) related to discontinued
operations...................................................... 220 (50) 267 167
Extraordinary gain, net of tax....................................... 16 -- 16 --
Cumulative effect of changes in accounting principles, net of tax
benefit............................................................ -- -- -- (58)
---- ----- ----- -----
Comprehensive income................................................. $139 $ 213 $ 269 $ 280
---- ----- ----- -----
See Notes to Financial Statements.
2
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------
2004 2003
------ ------
(millions of dollars)
Cash flows - operating activities:
Income from continuing operations before extraordinary gain and cumulative
effect of changes in accounting principles.................................... $ 41 $ 194
Adjustments to reconcile income from continuing operations before
extraordinary gain and cumulative effect of changes in accounting
principles to cash provided by operating activities:
Depreciation and amortization ............................................... 400 389
Deferred income taxes and investment tax credits - net ...................... (143) 55
Loss on early extinguishment of debt......................................... 49 --
Asset writedown charges...................................................... 189 --
Net (gain) loss from sale of assets......................................... 15 (21)
Net effect of unrealized mark-to-market valuations of commodity contracts.... 31 (47)
Net equity (income) loss from unconsolidated affiliates and joint ventures... (1) 17
Reduction in regulatory liability............................................ (1) (78)
Changes in operating assets and liabilities..................................... (93) 729
---- ------
Cash provided by operating activities.................................... 487 1,238
Cash flows - financing activities:
Issuances of securities:
Long-term debt............................................................... 790 1,293
Common stock................................................................. 18 8
Retirements/repurchases of securities:
Long-term debt held by subsidiary trusts..................................... (237) --
Equity-linked debt securities................................................ (427) --
Other long-term debt......................................................... (1,069) (664)
Exchangeable preferred membership interests.................................. (750) --
Preferred securities of subsidiary, subject to mandatory redemption.......... -- (4)
Common stock................................................................. (978) --
Change in notes payable:
Banks........................................................................ 2,675 (2,303)
Cash dividends paid:
Common stock................................................................. (80) (80)
Preference stock............................................................. (11) (11)
Premium paid for redemption of exchangeable preferred membership interests...... (1,093) --
Redemption deposit applied to debt retirements.................................. -- 210
Debt premium, discount, financing and other reacquisition expenses.............. 3 (52)
------ ------
Cash used in financing activities........................................ (1,159) (1,603)
Cash flows - investing activities:
Capital expenditures............................................................ (355) (358)
Disposition of businesses....................................................... 991 15
Acquisition of telecommunications partner's interest............................ -- (150)
Nuclear fuel.................................................................... (47) (35)
Other........................................................................... 19 5
----- -----
Cash provided by (used in) investing activities.......................... 608 (523)
----- -----
Cash contributions from (to) discontinued operations............................. (74) 65
----- -----
Net change in cash and cash equivalents........................................... (138) (823)
Cash and cash equivalents - beginning balance..................................... 829 1,514
----- ------
Cash and cash equivalents - ending balance........................................ $ 691 $ 691
===== ======
See Notes to Financial Statements.
3
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
----------- -------------
ASSETS (millions of dollars)
Current assets:
Cash and cash equivalents..................................................... $ 691 $ 829
Restricted cash............................................................... 23 12
Accounts receivable-- trade................................................... 1,232 1,108
Inventories................................................................... 343 419
Commodity contract assets..................................................... 596 548
Assets of telecommunications holding company.................................. -- 110
Other current assets.......................................................... 466 298
------- -------
Total current assets................................................... 3,351 3,324
Investments:
Restricted cash............................................................... 584 582
Other investments............................................................. 630 632
Property, plant and equipment-- net............................................. 16,589 16,803
Goodwill........................................................................ 542 558
Regulatory assets-- net........................................................ 1,907 1,872
Commodity contract assets....................................................... 142 109
Cash flow hedge and other derivative assets..................................... 34 88
Other noncurrent assets......................................................... 244 218
Assets held for sale............................................................ 6,079 7,111
------- -------
Total assets........................................................... $30,102 $31,297
LIABILITIES, PREFERRED SECURITIES OF SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable-- banks......................................................... $ 2,675 $ --
Long-term debt due currently.................................................. 534 678
Accounts payable-- trade...................................................... 1,051 784
Commodity contract liabilities................................................ 550 502
Liabilities of telecommunications holding company............................. -- 603
Other current liabilities..................................................... 1,482 1,191
------- -------
Total current liabilities.............................................. 6,292 3,758
Accumulated deferred income taxes............................................... 2,407 3,620
Investment tax credits.......................................................... 417 430
Commodity contract liabilities.................................................. 101 47
Cash flow hedge and other derivative liabilities................................ 349 240
Long-term debt held by subsidiary trusts........................................ 309 546
All other long-term debt, less amounts due currently............................ 10,463 10,608
Other noncurrent liabilities and deferred credits............................... 2,675 2,403
Liabilities held for sale....................................................... 2,620 2,967
------- -------
Total liabilities...................................................... 25,633 24,619
Preferred securities of subsidiaries (Note 6)................................... 113 759
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: 297,100,503 and 323,883,092............................ 60 48
Additional paid-in capital................................................. 6,343 8,097
Retained deficit........................................................... (2,151) (2,498)
Accumulated other comprehensive loss....................................... (196) (28)
------- -------
Total common stock equity................................................. 4,056 5,619
------- -------
Total shareholders' equity.............................................. 4,356 5,919
------- -------
Total liabilities, preferred securities of subsidiaries and
shareholders' equity................................................. $30,102 $31,297
======= =======
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. is a holding company that conducts its
operations through US Holdings and TXU Gas. The TXU Gas business is held for
sale. US Holdings is also a holding company that conducts its operations through
Energy and Electric Delivery. Energy engages in power production (electricity
generation), retail and wholesale sales of electricity and natural gas, and
commodity hedging and risk management activities. Electric Delivery engages in
regulated electricity transmission and distribution operations.
Strategic Initiatives and Other Actions - 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 being reviewed include:
o Performance in competitive markets, including profitability in new
markets;
o Cost structure, including organizational alignments and headcount;
o Management of natural gas price risk and cost effectiveness of the
generation fleet; and
o Non-core business activities.
As discussed immediately below, the effects of the implementation of the
strategic initiatives as well as other actions taken to date have resulted in
total charges of $428 million ($285 million after-tax) in the second quarter of
2004 and $445 million ($296 million after-tax) year-to-date, reported in other
deductions, related to asset writedowns, employee severance, debt extinguishment
losses and litigation. In addition, TXU Corp. has incurred consulting and
professional fees related to the strategic initiatives totaling $23 million ($15
million after-tax) in the second quarter of 2004, reported largely in SG&A
expenses, and nonrecurring contractual executive compensation expense of $38
million in the second quarter and $52 million year-to-date (both without tax
benefit), also reported in SG&A expenses. Finally, a $75 million income tax
credit was recorded to recognize a portion of the tax benefit arising from the
TXU Europe write-off.
Charges recorded in the three-month and six-month periods ended June 30,
2004 and 2003 reported in other deductions are detailed in Note 11.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, TXU Corp. entered into a services agreement with a
subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini), a
new company initially providing business process support services to TXU Corp.,
but immediately implementing a plan to offer similar services to other utility
companies. Under the ten-year agreement, over 2,500 employees transferred from
subsidiaries of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base
support services performed by Capgemini for a fixed fee include information
technology, customer call center, billing, human resources, supply chain and
certain accounting activities.
TXU Corp. received, a 2.9% limited partnership interest in Capgemini in
exchange for the asset license described below. TXU Corp. has the right to sell
all its interest in the partnership to Cap Gemini America Inc. for $200 million,
plus TXU Corp.'s share of Capgemini's undistributed earnings, upon expiration of
the agreement, or earlier upon the occurrence of certain unexpected events. Cap
Gemini North America Inc. has the right to purchase TXU Corp.'s 2.9% limited
partnership interest in Capgemini under the same terms and conditions. The
partnership interest has been recorded at an initial value of $2.9 million.
5
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use TXU Corp.'s information
technology assets, consisting primarily of capitalized software. A portion of
the software was in development and had not yet been placed in service by TXU
Corp. As a result of outsourcing its information technology activities, TXU
Corp. no longer intends to develop the majority of these projects and from
TXU's perspective the software is abandoned. The agreements with Capgemini do
not require that any software in development be completed and placed in service.
Consequently, the previously capitalized balance for these software projects was
written off in the second quarter of 2004, resulting in a charge of $110 million
($72 million after-tax), reported in other deductions. The ten-year term of the
asset license agreement establishes the useful life of the remaining assets,
totaling $255 million, and depreciation and amortization for the assets were
revised accordingly as of the contribution date.
Subject to certain terms and conditions, Cap Gemini North American, Inc.
and its parent Cap Gemini S.A., have guaranteed the performance and payment
obligations of Capgemini under the service agreements, as well as the payment of
$200 million in connection with TXU Corp.'s right to sell its partnership
interest to Cap Gemini North America, Inc. upon expiration of the arrangement.
Also as part of the agreements, TXU Corp. agreed to indemnify Capgemini
for severance costs incurred by Capgemini for former TXU Corp. employees
terminated within 18 months of their transfer to Capgemini. Accordingly, TXU
Corp. recorded a $40 million ($26 million after-tax) charge for severance
expense in the second quarter of 2004, which represents a reasonable estimate of
the indemnity and is reported in other deductions. In addition, TXU Corp.
committed to pay up to $25 million for costs associated with transitioning the
outsourced activities to Capgemini. The transition costs are expected to be
recorded by TXU Corp. during the remainder of 2004.
The transfer of employees to Capgemini triggered a curtailment with
respect to TXU Corp.'s pension and other post-employment benefit plans. In the
second quarter of 2004, TXU Corp. recorded a net pre-tax curtailment charge of
$3 million, reported in other deductions, related to these plans.
On July 1, 2004, TXU Corp. loaned Capgemini $25 million for working
capital purposes pursuant to a promissory note that bears interest at a
market-based annual rate of 4% and matures on July 1, 2019.
Sale of TXU Australia
---------------------
On July 30, 2004, TXU Corp. completed the sale of TXU Australia to
Singapore Power Ltd. for $3.6 billion, including $1.7 billion of assumed debt
and $1.9 billion in cash. The intent to sell the business had been previously
disclosed. The pre-tax gain related to the sale is approximately $375 million.
The transaction was cleared by the Australian Competition and Consumer
Commission on July 20, 2004. The results of TXU Australia are reported as
discontinued operations as discussed in Note 3.
Sale of TXU Fuel Company
------------------------
On June 2, 2004, TXU Corp. completed the sale of the assets of TXU Fuel
Company, the gas transportation subsidiary of Energy, to Energy Transfer
Partners, L.P. for $500 million in cash. The intent to sell the business had
been previously disclosed. The assets of TXU Fuel Company consisted of
approximately 1,900 miles of intrastate pipeline and a total system capacity of
1.3 Bcf/day. As part of the transaction, Energy entered into a market-price
based transportation agreement with the new owner to transport gas to Energy's
generation plants. Because of the continuing involvement in the business through
the transportation agreement, the pre-tax gain related to the sale of $377
million will be recognized over the eight-year life of the transportation
agreement and the business has not been accounted for as a discontinued
operation. The pre-tax gain is net of $16 million of Energy goodwill allocated
to TXU Fuel Company.
Sale of TXU Gas
---------------
On June 17, 2004, TXU Corp. announced that TXU Gas signed a definitive
agreement with Atmos Energy Corporation (Atmos) pursuant to which Atmos will
acquire the operations of TXU Gas for $1.925 billion in cash. The intent to sell
the business had been previously disclosed. The transaction is expected to close
by the end of the year, subject to the satisfaction of customary closing
conditions and Atmos obtaining limited state regulatory approvals. The results
of TXU Gas are reported as discontinued operations as discussed in Note 3.
6
Recognition of Income Tax Benefits
----------------------------------
On its US federal income tax return for calendar year 2002, TXU Corp.
claimed an ordinary loss 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). Due to a number of
uncertainties regarding the proper tax treatment of the worthlessness loss, no
portion of the tax benefit related to TXU Corp.'s 2002 write-off of its
investment in TXU Europe was recognized in income in prior periods. As discussed
immediately below, $711 million of the tax benefit was recognized in the second
quarter of 2004.
In June 2004, the IRS issued a preliminary notice of proposed adjustment
proposing to disallow the 2002 worthlessness deduction and treat the
worthlessness as a capital loss (deductible only against capital gains).
Accordingly, in the second quarter of 2004, TXU Corp. recorded a tax benefit in
income of $711 million related to the utilization of a portion of the TXU Europe
worthlessness deduction. The tax benefit recognized reflects utilization of the
capital loss deduction against capital gains reported for 2002 and the 1999-2001
carryback periods and the capital gains on the 2004 sales of the TXU Australia,
TXU Fuel Company and telecommunications businesses. The benefit recognized also
included $213 million for certain items related to TXU Europe expected to be
sustained as ordinary deductions as a result of the preliminary notice.
Benefits arising from the resolution of uncertainty regarding utilization
of deductions in the year of the TXU Europe write-off or in a prior year are
reported in discontinued operations. Benefits arising from resolution of
uncertainty regarding utilization of deductions in subsequent years are
classified in the same manner as the source of the income resulting in the
recognition of the benefits. Accordingly, of the total $711 million benefit, $75
million was reported in continuing operations as this amount relates to the
capital gain arising from the sale of TXU Fuel Company, the historical
operations of which have been classified as continuing operations. Additional
tax benefits may be recognized in future periods to the extent capital gains are
realized.
See Note 8 for discussion of income tax contingencies related to TXU
Europe and other matters.
Generation Facility Closures and Inventory Write-Down
-----------------------------------------------------
In March 2004, Energy announced the planned permanent retirement,
completed in the second quarter of 2004, of eight gas-fired operating units due
to electric industry market conditions in Texas. Energy also temporarily closed
four other gas-fired units and placed them under evaluation for retirement. The
12 units represent a total of 1,471 MW, or more than 13%, of Energy's gas-fired
generation capacity in Texas. A majority of the 12 units were designated as
"peaking units" and operated only during the summer for many years and have
operated only sparingly during the last two years. Most of the units were built
in the 1950's. Energy also determined that it 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 of 2004, reported in other
deductions, for production employee severance costs ($7 million) and impairments
related to the various facility closures ($1 million).
As part of Energy's review of its generation asset portfolio, during the
second quarter of 2004, Energy completed a review of its spare parts and
equipment inventory to determine the appropriate level of such inventory. The
review included nuclear, coal and gas-fired generation-related facilities. As a
result of this review, Energy recorded a charge of $79 million ($51 million
after-tax), reported in other deductions, to reflect excess inventory on hand
and to write down carrying values to scrap values.
Impairment of New Jersey Generation Facility
--------------------------------------------
In the second quarter of 2004, Energy initiated a plan to sell the
Pedricktown, New Jersey 122 MW power production facility and exit the related
power supply and gas transportation agreements. Accordingly, Energy recorded an
impairment charge of $26 million ($17 million after-tax) to write down the
facility to estimated fair market value. The results of the business are
reported in discontinued operations as discussed in Note 3.
7
Organizational Realignment and Headcount Reductions
---------------------------------------------------
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, TXU Corp. recorded severance charges
totaling $53 million ($34 million after-tax), reported in other deductions.
Debt and Capital Management Program
-----------------------------------
In April 2004, TXU Corp. repurchased Energy's exchangeable preferred
membership interests with a liquidation amount of $750 million for $1.85 billion
(including transaction costs). The excess of the purchase price over the
carrying value of the securities, net of $384 million in income tax benefits
recorded as a deferred tax asset, was recorded as a charge to additional paid-in
capital in the amount of $849 million. The carrying value of the securities was
$617 million, which is the liquidation amount of $750 million net of $102
million in unamortized discount and $31 million in unamortized debt issuance
costs, both recorded at the time of issuance of the securities in November 2002.
The charge to additional paid-in capital is accounted for in a manner similar to
TXU Corp.'s preference share dividends, resulting in a reduction in net income
available to common shareholders.
In the second quarter of 2004, TXU Corp. repurchased $427 million carrying
amount of equity-linked debt securities for $404 million. The repurchase was in
connection with a settlement of related litigation and resulted in total charges
of $34 million ($28 million after-tax), reported in other deductions,
essentially representing the premium for the debt component of the securities
and an additional repurchase premium. The repurchase also resulted in a credit
to additional paid-in capital of $57 million, which represented the holder's
out-of-the-money fair market value of the related equity purchase contracts. An
additional credit to additional paid-in capital of $18 million was recorded to
reverse the remaining liability for future contract adjustment payments to
holders of the securities. At the time of issuance of the securities, TXU Corp.
had recorded a liability for the present value of the contract adjustment
payments with an offsetting reduction to common stock equity.
On June 30, 2004, TXU Corp. repurchased 20 million shares of its
outstanding common stock through an accelerated share repurchase agreement at an
initial price of $39.86 per share. The 20 million shares repurchased under the
program are subject to a future contingent purchase price adjustment based on
the volume-weighted average price during the actual repurchase period by the
broker-dealer that executed the repurchase transaction.
Also in the second quarter of 2004, TXU Corp. repurchased at par $231
million principal amount of 7.25% notes held by subsidiary trusts and $118
million principal amount of 6.375% senior notes for $125 million. These
transactions resulted in losses on retirement of debt totaling $15 million ($10
million after-tax), reported in other deductions.
TXU Corp. also repurchased approximately $179 million of its equity
securities in open market purchases during the second quarter of 2004 and $193
million year-to-date. Shares purchased on the open market totaled 4.9 million in
the second quarter of 2004 and 5.4 million year-to-date.
See Notes 4, 5, and 6 for further detail of debt issuances and
retirements, financing arrangements and debt held by unconsolidated subsidiary
trusts.
Litigation Accrual
------------------
During the second quarter of 2004, management assessed the progress and
status of matters in litigation as described in Note 8 and recorded an accrual
of $100 million ($65 million after-tax), reported in other deductions, for the
expected resolution of certain cases.
8
Discontinued Businesses - Note 3 presents detailed information regarding
the discontinued TXU Australia, TXU Gas and New Jersey generation operations, as
well as previously disclosed discontinued businesses. 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.
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 and the
presentation of certain components as discontinued. In the opinion of
management, all other adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. All intercompany items and transactions
have been eliminated in consolidation. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with US GAAP have been omitted pursuant to the rules and
regulations of the SEC. Because the condensed consolidated interim financial
statements do not include all of the information and footnotes required by US
GAAP, they should be read in conjunction with the audited financial statements
and related notes included in the 2003 Form 10-K. The results of operations for
an interim period may not give a true indication of results for a full year.
Certain reclassifications have been made to conform prior period data to
the current period presentation. All dollar amounts in the financial statements
and tables in the notes, except per share amounts, are stated in millions of
dollars unless otherwise indicated.
Depreciation of Energy Production Facilities -- Effective January 1, 2004,
the estimates of the depreciable lives of lignite-fired generation facilities
were extended an average of nine years to better reflect the useful lives of the
assets, and depreciation rates for the Comanche Peak nuclear generating plant
were decreased as a result of an increase in the estimated lives of boiler and
turbine generator components of the plant by an average of five years. The net
impact of these changes was a reduction in depreciation expense of $12 million
and $22 million ($8 million and $14 million after-tax) in the three and six
months, respectively, ended June 30, 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) in the six months ended June 30, 2004.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first six months of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. TXU Corp. is accounting for the
effects of the Medicare Act in accordance with FASB Staff Position 106-2,
For the three and six months ended June 30, 2004, the effect of adoption of the
Medicare Act was a reduction of approximately $7 million and $14 million,
respectively, in TXU Corp.'s postretirement benefit costs.
Extraordinary gain -- An extraordinary gain of $16 million (net of tax of
$9 million) in 2004 represents an increase in the carrying value of Electric
Delivery's regulatory asset subject to securitization. The second and final
tranche of the securitization bonds was issued in June 2004. The increase in the
related regulatory asset is due to the effect of higher interest rates on the
bonds and therefore increased amounts to be recovered from REPs through delivery
fee surcharges to service the bonds.
9
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. The exchangeable preferred membership interests in
Energy were anti-dilutive for the period they were outstanding in 2004, prior to
TXU Corp.'s repurchase of these securities. However, the premium paid to buy
back these securities reduced basic and diluted earnings per share available for
common stock by $2.64 and $2.65 for the three and six months ended June 30,
2004, respectively. 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 million more shares for each of the three and six months ended June
30, 2003, respectively, would have been issued and net income would have
increased by $13 million and $26 million, respectively, representing the
after-tax distributions on the exchangeable preferred membership interests and
amortization of the related discount.
Additional dilutive shares would result from approximately 7 million
shares and 10 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 equal to or above the threshold appreciation
price of $62.91 and $55.68 per share for the respective issuances. For the three
and six months ended June 30, 2004 and 2003, the market price of TXU Corp.
common stock was below these prices.
Shares issuable under the $525 million convertible senior notes are not
reflected in dilutive shares because TXU Corp. intends to settle any conversion
in cash.
2. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The following summarizes the effect on results for 2003, reported in the
first quarter, of changes in accounting principles effective January 1, 2003:
Charge from rescission of EITF 98-10, net of tax effect of $34
million.......................................................... $(63)
Credit from adoption of SFAS 143, net of tax effect of $3 million.. 5
----
Total net charge.............................................. $(58)
On October 25, 2002, the EITF, through EITF 02-3, rescinded EITF 98-10,
which required mark-to-market accounting for all trading activities. Pursuant to
this rescission, only financial instruments that are derivatives under SFAS 133
are subject to mark-to-market accounting. Financial instruments that may not be
derivatives under SFAS 133, but were marked-to-market under EITF 98-10, consist
primarily of gas transportation and storage agreements, power tolling, full
requirements and capacity contracts. This new accounting rule was effective for
new contracts entered into after October 25, 2002. Non-derivative contracts
entered into prior to October 26, 2002, continued to be accounted for at fair
value through December 31, 2002; however, effective January 1, 2003, such
contracts were required to be accounted for on a settlement basis. Accordingly,
a charge of $97 million ($63 million after-tax) was reported as a cumulative
effect of a change in accounting principles in the first quarter of 2003. Of the
total, $75 million reduced net commodity contract assets and liabilities and $22
million reduced inventory that had previously been marked-to-market as a trading
position. The cumulative effect adjustment represents the net gains previously
recognized for these contracts under mark-to-market accounting.
SFAS 143 became effective on January 1, 2003. SFAS 143 requires entities
to record the fair value of a legal liability for an asset retirement obligation
in the period of its inception. For 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.
10
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 June 30, 2004 was $607 million,
comprised of a $599 million liability as of December 31, 2003, $20 million of
accretion during the six months ended June 30, 2004, reduced by $12 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:
Three Months Ended June 30, 2004
-----------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Total
------- --------- -------- ---- ------- -----
Operating revenues............................... $ 216 $ 333 $ 4 $ 8 $ 8 $ 569
Operating costs and expenses..................... 286 294 5 9 11 605
Other deductions (income)-- net.................. 85 5 10 -- -- 100
Interest income.................................. -- (1) -- -- (4) (5)
Interest expense and related charges............. 8 38 -- -- 5 51
----- ----- ----- ----- ----- -----
Operating income (loss) before income taxes...... (163) (3) (11) (1) (4) (182)
Income tax expense (benefit) .................... (40) (2) (3) -- (4) (49)
----- ----- ----- ----- ----- -----
Operating income (loss) (123) (1) (8) (1) -- (133)
Charges related to exit (after-tax).............. (35) (117) (1) (17) (3) (173)
Recognition of tax benefits...................... -- -- -- -- -- 636
----- ----- ----- ----- ----- -----
Income (loss) from discontinued operations.... $(158) $(118) $ (9) $ (18) $ (3) $ 330
===== ===== ===== ===== ===== =====
Six Months Ended June 30, 2004
----------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Total
------- --------- --------- --------- ------- ------ ------
Operating revenues........................ $ 724 $ 689 $ 10 $ 19 $ 54 $ 4 $1,500
Operating costs and expenses.............. 726 561 12 22 49 4 1,374
Other deductions (income)-- net........... 88 4 10 -- 16 -- 118
Interest income........................... -- (2) -- -- (5) -- (7)
Interest expense and related charges...... 15 84 -- -- 19 -- 118
----- ----- ----- ----- ----- ----- -----
Operating income (loss) before income
taxes.................................. (105) 42 (12) (3) (25) -- (103)
Income tax expense (benefit) ............. (20) 11 (5) (1) (8) (1) (24)
----- ----- ----- ----- ----- ----- -----
Operating income (loss) (85) 31 (7) (2) (17) 1 (79)
Charges related to exit (after-tax)....... (35) (117) (4) (17) (2) (2) (177)
Recognition of tax benefits............... -- -- -- -- -- -- 636
----- ----- ----- ----- ----- ----- -----
Income (loss) from discontinued
operations........................... $(120) $ (86) $ (11) $ (19) $ (19) $ (1) $ 380
===== ===== ===== ===== ===== ===== =====
11
Three Months Ended June 30, 2003
-------------------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Europe Total
------- --------- --------- -------- ------- ------ ------ -----
Operating revenues.............. $ 198 $ 274 $ 28 $ 5 $ 52 $ 26 $ -- $ 583
Operating costs and expenses.... 208 203 26 7 48 27 -- 519
Other deductions (income)-- net. -- (6) -- -- -- (1) -- (7)
Interest income................. -- (2) -- -- (2) -- -- (4)
Interest expense and related
charges...................... 11 37 -- -- 20 -- -- 68
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................. (21) 42 2 (2) (14) -- -- 7
Income tax expense (benefit) ... (8) 11 1 (1) (6) -- -- (3)
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (13) 31 1 (1) (8) -- -- 10
Charge related to exit
(after-tax).................. -- -- -- -- (58) -- (1) (59)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
discontinued operations.... $ (13) $ 31 $ 1 $ (1) $ (66) $ -- $ (1) $ (49)
===== ===== ===== ===== ===== ===== ===== =====
Six Months Ended June 30, 2003
------------------------------------------------------------------------------
Strategic
TXU Retail Pedrick-
TXU Gas Australia Services town Telecom Mexico Europe Total
------- --------- --------- -------- ------- ------ ------ -----
Operating revenues.............. $ 820 $ 499 $ 43 $ 8 $ 68 $ 50 $ -- $1,488
Operating costs and expenses.... 743 355 41 11 69 52 -- 1,271
Other deductions (income)-- net. (2) (10) -- -- 1 (1) -- (12)
Interest income................. (1) (3) -- -- (3) -- -- (7)
Interest expense and related
charges...................... 21 71 -- -- 26 -- -- 118
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before
income taxes................. 59 86 2 (3) (25) (1) -- 118
Income tax expense (benefit) ... 20 24 1 (1) (8) -- -- 36
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) 39 62 1 (2) (17) (1) -- 82
Charge related to exit
(after-tax).................. -- -- -- -- (60) -- (2) (62)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
discontinued operations.... $ 39 $ 62 $ 1 $ (2) $ (77) $ (1) (2) $ 20
===== ===== ===== ===== ===== ===== ==== =====
The TXU Gas business was previously reported in the Energy Delivery (now
Electric Delivery) segment. The TXU Australia business was previously reported
in its own segment. The Pedricktown business and the strategic retail services
operations were previously reported in the Energy segment. The
telecommunications and Mexico operations were previously reported in corporate
and other activities.
Recognition of Tax Benefits - As discussed in Note 1, in connection with
an IRS preliminary notice of proposed adjustment, in the second quarter of 2004,
TXU Corp. recognized income tax benefits arising from the utilization of the
previously unrecognized TXU Europe 2002 worthlessness deduction. The $636
million of tax benefits recognized in discontinued operations relate primarily
to capital gains generated in prior years as well as the capital gains arising
from the sales of TXU Communications and TXU Australia, which can be offset by
the TXU Europe deduction.
TXU Gas - In the second quarter of 2004, TXU Corp. finalized a formal plan
to sell the business and in June 2004 announced that TXU Gas had signed a
definitive agreement to sell the operations for $1.925 billion in cash.
Results of TXU Gas for the second quarter of 2004 reflect an after-tax
charge of $99 million to reserve for disallowed regulatory and other assets
pursuant to a May 2004 regulatory ruling in connection with the previously
disclosed system-wide distribution rate case. TXU Gas has filed a motion for
rehearing with the regulatory authority.
In June 2004, the IRS Appeals Office rejected TXU Gas' appeal of proposed
adjustments to 1993 income tax returns of ENSERCH Corporation, the acquired
predecessor of TXU Gas. Additional reserves deemed required by TXU Gas for this
matter totaled $47 million, and in accordance with acquisition accounting rules,
$17 million was recorded as an expense in the second quarter of 2004 (as a tax
provision) and $30 million was recorded as additional goodwill.
12
In consideration of the additional goodwill amount recorded and the
current best estimate of the net proceeds from the expected sale of the business
and the expected carrying value of the assets to be sold under the definitive
sales agreement, a goodwill impairment charge of $35 million (pre and after-tax)
was recorded in the second quarter of 2004.
TXU Australia - In the second quarter of 2004, TXU Corp. finalized a
formal plan to sell the business and on July 30, 2004 the business was sold for
$1.9 billion in cash and $1.7 billion of assumed debt. The pre-tax gain on the
sale is approximately $375 million.
Results of TXU Australia for the second quarter of 2004 include an income
tax charge of $117 million to establish a deferred tax liability for the excess
of the carrying value over the tax basis of the investment in the business, in
accordance with accounting rules, as a result of the decision to sell the
business.
Pedricktown - In the second quarter of 2004, Energy initiated a plan to
sell the Pedricktown, New Jersey 122 MW power production facility and exit the
related power supply and gas transportation agreements. Accordingly, results for
the second quarter of 2004 include a $17 million after-tax charge to write down
the facility to estimated fair market value.
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. The business
was formerly a joint venture and has been consolidated since March 1, 2003.
Strategic Retail Services -- In December 2003, Energy finalized a formal
plan to sell its strategic retail services business, which is engaged
principally in providing energy management services. Energy expects to
substantially complete the sales of these operations to various parties by
year-end 2004. Results in 2004 reflect a $9 million (6 million after-tax)
charge recorded in the second quarter to settle a contract dispute.
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 June 30, 2004:
June 30, 2004
---------------------------------------------------------
Strategic
Retail
Gas Australia Services Pedricktown Total
------- --------- ---------- ----------- ------
Current assets........................... $ 164 $ 350 $ 3 $ 2 $ 519
Investments.............................. -- 82 2 -- 84
Goodwill................................. 300 890 -- -- 1,190
Property, plant and equipment............ 1,624 2,211 1 15 3,851
Other noncurrent assets.................. -- 435 -- -- 435
------ ------- ------ ------ -------
Assets held for sale................ $2,088 $ 3,968 $ 6 $ 17 $ 6,079
====== ======= ====== ====== =======
Current liabilities...................... $ 105 $ 245 $ -- $ 4 $ 354
Accumulated deferred income taxes........ -- 162 -- -- 162
Long-term debt, less amounts due currently -- 1,642 -- -- 1,642
Noncurrent liabilities................... 113 345 -- 4 462
------ ------- ------ ------ -------
Liabilities held for sale........... $ 218 $ 2,394 $ -- $ 8 $ 2,620
====== ======= ====== ====== =======
4. FINANCING ARRANGEMENTS
Short-term Borrowings-- At June 30, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $2.7 billion at a
weighted average interest rate of 2.70%. At December 31, 2003, TXU Corp. had no
outstanding short-term borrowings.
13
Credit Facilities-- At June 30, 2004, TXU Corp. and its subsidiaries had
credit facilities (some of which provide for long-term borrowings) as follows:
- ----------------------------------- ------------ ---------------- ----------------------------------------------
At June 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 Energy 1,000 -- 1,000 --
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
364-day Credit Facility April 2005 TXU Gas 300 -- 300 --
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Energy, Electric
364-day Credit Facility June 2005 Delivery 600 -- -- 600
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Three-Year Revolving Credit Energy, Electric
Facility June 2007 Delivery 1,400 -- 675 725
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit
Facility August 2008 TXU Corp. 500 465 -- 35
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Five-Year Revolving Credit Energy,Electric
Facility June 2009 Delivery 500 -- -- 500
------- ------ ------ ------
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
Total $5,000 $ 465 $2,675 $1,860
====== ====== ====== ======
- ----------------------------------- ------------ ---------------- --------- ---------- ------------ ------------
In June 2004, US Holdings, Energy and Electric Delivery replaced $2.25
billion of credit facilities scheduled to mature in 2005 with $2.5 billion of
credit facilities maturing in June 2005, 2007 and 2009. These new facilities are
used for working capital and general corporate purposes and provide back-up for
any future issuances of commercial paper by Energy or Electric Delivery. At June
30, 2004, there was no such commercial paper outstanding.
In April 2004, three credit facilities totaling $2.0 billion (364-day
credit facilities expiring in April 2005) were established to provide bridge
financing for the repurchase of Energy's exchangeable preferred membership
interests. At June 30, 2004, these three credit facilities were fully drawn. In
July 2004, these facilities were repaid with the proceeds from Energy's issuance
of $800 million floating rate senior notes and part of the proceeds from the TXU
Australia sale and subsequently terminated.
TXU Corp.'s $500 million five-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 five-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.
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 June 30, 2004, $543 million
of undivided interests had been sold by TXU Receivables Company of the maximum
amount of $600 million. Effective June 30, 2004, the program was extended
through June 28, 2005. As part of the extension, the maximum amount available
under the program was increased to $700 million in recognition of seasonal power
sales. It is expected that a similar downward seasonal adjustment will be made
in the fall. Additionally, the extension allows for increased availability of
funding through a credit ratings-based reduction of customer deposits previously
used to reduce the amount of undivided interests that could be sold. Undivided
interests will now be reduced by 100% of the customer deposits for a Baa3/BBB-
rating; 50% for a Baa2/BBB rating; and zero % for a Baa1/BBB+ and above rating
(based on each originator's credit rating).
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
14
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 $433 million at June 30, 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, a direct subsidiary of TXU Corp. The program fees (losses on sale),
which consist primarily of interest costs on the underlying financing, were
approximately $6 million and $7 million for the six-month periods ending June
30, 2004 and 2003 and approximated 2.1% and 3.6% for the first six months of
2004 and 2003, respectively, of the average funding under the program on an
annualized basis; these fees represent the net incremental costs of the program
to the originators and are reported in SG&A expenses. The servicing fee, which
totaled approximately $3 million and $4 million for the first six months of 2004
and 2003, respectively, compensates TXU Business Services for its services as
collection agent, including maintaining the detailed accounts receivable
collection records.
The June 30, 2004 balance sheet reflects $976 million face amount of trade
accounts receivable of Energy, Electric Delivery and TXU Gas, reduced by $543
million of undivided interests sold by TXU Receivables Company. Funding under
the program decreased $57 million for the six months ended June 30, 2004.
Funding under the program for the six months ended June 30, 2003 increased $69
million. Funding increases or decreases under the program are reflected as
operating cash flow activity in the statement of cash flows. The carrying amount
of the retained interests in the accounts receivable approximated fair value due
to the short-term nature of the collection period.
Activities of TXU Receivables Company for the six months ended June 30,
2004 and 2003 were as follows:
Six Months
Ended June 30,
--------------------
2004 2003
------ ------
Cash collections on accounts receivable............................................ $ 4,200 $ 4,142
Face amount of new receivables purchased........................................... (4,065) (3,802)
Discount from face amount of purchased receivables................................. 9 11
Program fees paid.................................................................. (6) (7)
Servicing fees paid................................................................ (3) (4)
Increase (decrease) in subordinated notes payable.................................. (78) (409)
------- -------
TXU Corp.'s operating cash flows (provided) used under the program................. $ 57 $ (69)
======= =======
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.
15
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within Energy and ERCOT for clearing customers' switching and billing
data. Strengthened credit and collection policies and practices have brought the
ratios into consistent compliance with the program requirement.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure, by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
Long-Term Debt -- At June 30, 2004 and December 31, 2003, the long-term
debt of TXU Corp. and its consolidated subsidiaries consisted of the following:
June 30, December 31,
2004 2003
--------- ------------
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
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
1.140% Floating Series 2001D due May 1, 2033.................................. 271 271
1.380% Floating Taxable Series 2001I due December 1, 2036(b).................. 63 63
1.100% 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% TXU Mining Fixed Senior Notes due August 1, 2005.......................... 30 30
6.125% Fixed Senior Notes due March 15, 2008(c).................................. 250 250
7.000% Fixed Senior Notes due March 15, 2013(c).................................. 1,000 1,000
Capital lease obligations........................................................ 12 13
Other............................................................................ 2 8
Fair value adjustments related to interest rate swaps............................ (4) 11
Unamortized discount............................................................. -- (2)
------ ------
Total Energy ................................................................ 2,944 3,085
Electric Delivery
- -----------------
8.250% Fixed First Mortgage Bonds due April 1, 2004.............................. -- 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(c)............................. 700 700
16
June 30, December 31,
2004 2003
--------- ------------
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(c)................................. 200 200
7.000% Fixed Debentures due September 1, 2022.................................... 800 800
Unamortized discount............................................................. (26) (30)
TXU Electric Delivery Transition Bond Company LLC(e)
- ---------------------------------------------------
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
3.520% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2009.............................................................. 279 --
4.810% Fixed Series 2004 Bonds due in bi-annual installments through
November 15, 2012.............................................................. 221 --
5.290% Fixed Series 2004 Bonds due in bi-annual installments through
May 15, 2016................................................................. 290 --
------ ------
Total TXU Electric Delivery Transition Bond Company LLC....................... 1,282 500
------ ------
Total Electric Delivery....................................................... 4,912 4,226
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
1.979% 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
------ ------
Total TXU Gas ............................................................... 275 426
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(c)........................ 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).......................... 683 800
4.750% Fixed Senior Notes Series K due November 16, 2006 remarketing date
August 16, 2004(f)............................................................... 288 500
5.450% Fixed Senior Notes Series L due November 16, 2007 remarketing date
August 16, 2005(f)............................................................... 288 500
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
2.640% Floating Convertible Senior Notes due July 15, 2033(d).................... 525 525
Fair value adjustments related to interest rate swaps............................ (13) 32
Unamortized discount............................................................. (2) (2)
------- -------
Total TXU Corp.............................................................. 2,711 3,393
Total TXU Corp. consolidated........................................................ 10,997 11,286
Less amount due currently........................................................... 534 678
------- -------
Total long-term debt................................................................ $10,463 $10,608
======= =======
(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 June 30, 2004. These series are in a flexible
or weekly rate mode and are classified as long-term as they are supported
by long-term irrevocable letters of credit. Series in the flexible mode
will be remarketed for periods of less than 270 days.
(c) Interest rates swapped to floating on an aggregate $2.5 billion principal
amount.
(d) Interest rates in effect at June 30, 2004.
(e) These bonds are nonrecourse to Electric Delivery.
(f) Equity-linked.
In July 2004, Energy issued $800 million of floating rate senior notes in
a private placement offering. The net proceeds of $798 million were used to
repay, in part, borrowings outstanding under its fully drawn $1.0 billion 364
day credit facility. The Notes will bear interest at an annual rate equal to
3-month LIBOR, reset quarterly, plus 0.78% and will mature on January 17, 2006.
17
In July 2004, Energy announced its intent to redeem at par value $101
million of Brazos River Authority Pollution Control Revenue Bonds by September
2004, before their scheduled maturity pursuant to terms in the bond documents
that provide for redemption at par upon the occurrence of certain events.
In June 2004, Electric Delivery's wholly-owned, special purpose
bankruptcy-remote subsidiary, TXU Electric Delivery Transition Bond Company LLC,
issued $790 million aggregate principal amount of transition (securitization)
bonds in accordance with a settlement agreement with the Commission and a
financing order related to the transition to competition. The bonds were issued
in three classes that require bi-annual interest and principal installment
payments beginning in November 2004 through specified dates in 2009 through
2016. The transition bonds bear interest at fixed annual rates ranging from
3.52% to 5.29%. Electric Delivery used the proceeds to retire, subsequent to
June 30, 2004, two series of mortgage bonds with an aggregate principal amount
of $393 million due in 2025 and repurchase shares of common stock from its
parent for $375 million. As a result of the retirement of these two series of
mortgage bonds, Electric Delivery will be able to release the liens on its
outstanding senior secured notes, making them rank equally with Electric
Delivery's other senior unsecured debt. No decision has been made as to the
timing of such release.
In May 2004, TXU Corp. repurchased approximately 8.5 million units of
equity-linked debt securities with a carrying value of $427 million for a cash
repurchase price of $404 million. The repurchase of the securities resulted in a
pre-tax charge to earnings of $34 million and a credit (increase) to additional
paid-in capital of $75 million. See Note 1 for additional discussion.
In April 2004, the Brazos River Authority Series 2001A pollution control
revenue bonds with an aggregate principal amount of $121 million were purchased
upon mandatory tender. Energy intends to remarket these bonds at a later date.
Other retirements of long-term debt in 2004 totaling $388 million
represent payments at scheduled maturity dates.
Fair Value Hedges -- In April 2004, fixed-to-variable interest rate swaps
related to $100 million of debt were settled for a gain of $3.5 million, which
will be amortized to offset interest expense over the remaining life of the
debt. Also in April 2004, $2.1 billion of fixed rate debt was effectively
converted to variable rates through interest rate swap transactions, accounted
for as fair value hedges, expiring through 2013.
In March 2004, fixed-to-variable interest rate swaps related to $400
million of debt were settled for a gain of $18 million, which will be amortized
to offset interest expense over the remaining life of the debt. Also in March
2004, $400 million of fixed rate notes were effectively converted to variable
rates through interest rate swap transactions, accounted for as fair value
hedges, expiring through 2006.
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)
---------------------------- -----------------------------
June 30, December 31, June 30, December 31,
2004 2003 2004 2003
-------- ------------ -------- -------------
TXU Corp.
- ---------
Capital I Trust
(9.2 million units of 7.25% Series
due 2029).......................... $ -- $ 223 $ -- $ 237
Capital II Trust
(6.0 million units of 8.70% Series
due 2034)........................... 145 145 154 154
------ ----- ------- --------
Total............................... 145 368 154 391
TXU Gas
- -------
Capital I Trust
(150 thousand units of Floating Rate
Series due 2028)................... 147 147 155 155
------- ------ ------- -------
Total............................... $ 292 $ 515 $ 309 $ 546
======= ====== ======= =======
18
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.
The subsidiary trusts have been deconsolidated since the adoption of FIN
46 in the fourth quarter of 2003. TXU Corp.'s balance sheet at December 31, 2003
reflected 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.
In April 2004, TXU Corp. redeemed all of the 7.25% 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. The TXU
Corp. Capital I Trust used the proceeds to redeem all of the outstanding 7.25%
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.
Under the current definitive sales agreement, TXU Gas would be required to
provide for the satisfaction of its junior subordinated debentures and the
related trust securities prior to closing the sale of TXU Gas' operations.
6. PREFERRED SECURITIES OF SUBSIDIARIES
Preferred securities of consolidated subsidiaries consist of the
following:
June 30, December 31,
2004 2003
Exchangeable preferred membership interests of Energy,
net of $104 unamortized discount....................... $ -- $ 646
Preferred stock of TXU Gas............................... 75 75
Preferred stock of US Holdings........................... 38 38
------ ------
Total.................................................... $ 113 $ 759
====== ======
Exchangeable Preferred Membership Interests of Energy -- In
April 2004, TXU Corp. repurchased these securities as discussed in Note 1.
Preferred Stock of TXU Gas -- At June 30, 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 4.5% at June 30, 2004. The preferred stock is not mandatorily
redeemable. Under the current definitive sales agreement, TXU Gas would be
required to redeem the preferred stock upon closing the sale of TXU Gas'
operations.
Preferred Stock of US Holdings -- At June 30, 2004, US Holdings had
379,231 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 May 2004 meeting, declared a
quarterly dividend of $0.125 a share, payable July 1, 2004, to shareholders of
record on June 4, 2004. 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.
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 June 30, 2004, TXU Corp. and its subsidiaries
were in compliance with these provisions. An Electric Delivery mortgage
restricts the payment of dividends to the amount of Electric Delivery's retained
earnings.
19
The following table presents the changes during the six months ended June
30, 2004 to common stock equity:
Accumulated
Other Total
Additional Comprehen- Common
Common Paid-in Retained sive Stock
Stock Capital Deficit Gain (Loss) Equity
------- ---------- --------- -------------- -------
Balance at December 31, 2003..... $ 48 $8,097 $(2,498) $ (28) $5,619
Common stock repurchases..... -- (978) -- -- (978)
Common stock issuances....... 12 -- -- -- 12
Exchangeable preferred
member-ship interests buyback -- (849) -- -- (849)
Equity -linked securities
repurchased................ -- 75 -- -- 75
Cash flow hedges............. -- -- -- (70) (70)
Foreign currency translation. -- -- -- (104) (104)
Dividends.................... -- -- (90) -- (90)
Net income................... -- -- 437 -- 437
Other........................ -- (2) -- 6 4
------ ------ ------- ------ -------
Balance at June 30, 2004......... $ 60 $6,343 $(2,151) $ (196) $4,056
====== ====== ======= ====== =======
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, a subsidiary of
Energy, to energy industry publications. The request sought information for the
period from January 1, 1999 to October 2003. TXU Corp. cooperated with the CFTC,
and complied with its request for such information. On May 12, 2004, TXU Corp.
received notice from the CFTC that the CFTC had closed its investigation of TXU
Corp. and its subsidiaries related to disclosure of price and volume
information.
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 weekly and monthly storage reports to the Energy Information
Administration submitted by TXU Fuel Company and TXU Gas. This request seeks
information for the period of October 31, 2003 through January 2, 2004. TXU
Corp. has cooperated with the CFTC by producing the requested information and
believes that TXU Gas and TXU Fuel Company have not engaged in any activity that
would justify action against them by the CFTC.
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 June 30, 2004, the balance of the
indebtedness was $135 million with maturities of principal and interest
extending to December 2021. The indebtedness is secured by a lien on the
purchased facilities.
20
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 June
30, 2004, the aggregate maximum amount of residual values guaranteed was
approximately $265 million with an estimated residual recovery of approximately
$160 million. The average life of the lease portfolio is approximately seven
years.
Shared saving guarantees -- As part of the operations of the strategic
retail services business, which Energy intends to sell (see Note 3), Energy has
guaranteed that certain customers will realize specified annual savings
resulting from energy management services it has provided. In aggregate, the
average annual savings have exceeded the annual savings guaranteed. The maximum
potential annual payout is approximately $6 million and the maximum total
potential payout is approximately $49 million. No guarantees were issued during
the six months ended June 30, 2004 that required recording a liability. The fair
value of guarantees recorded as of June 30, 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 -- 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 June 30, 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.
Energy has outstanding letters of credit in the amount of $50 million to
support hedging and risk management margin requirements in the normal course of
business. As of June 30, 2004, approximately 77% of the obligations supported
by these letters of credit mature within one year, and substantially all of the
remainder mature in the next six years.
Surety bonds -- TXU Corp. has outstanding surety bonds of approximately
$30 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 June 30, 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 June 30, 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. TXU Corp. retains this contingent liability under the
terms of the definitive agreement to sell TXU Gas.
Income Tax Contingencies -- TXU Corp. and its subsidiaries are currently
under audit by the IRS with respect to tax returns for various tax periods
21
subsequent to 1992 and prior to 2003, and are subject to audit by other taxing
authorities and by the IRS for subsequent tax periods. The amount and timing of
any tax assessments resulting from these audits are uncertain, and could have a
material effect on the company's liquidity and results of operations. Certain
material audit matters as to which management believes there is a reasonable
possibility of a future tax assessment are discussed below.
TXU Europe -- On its US federal income tax return for calendar year 2002,
TXU Corp. claimed an ordinary loss 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). Due to a number of
uncertainties regarding the proper tax treatment of the worthlessness loss, no
portion of the tax benefit related to TXU Corp.'s 2002 write-off of its
investment in TXU Europe was recognized in income in prior periods. As discussed
in Note 1, $711 million of the tax benefit was recognized in the second quarter
of 2004.
In June 2004, the IRS issued a preliminary notice of proposed adjustment
proposing to disallow the 2002 worthlessness deduction and treat the
worthlessness as a capital loss (deductible only against capital gains).
Although the preliminary notice does not address the issue, the implication of
the notice is that the worthlessness deduction claimed in 2002 would not be
available to offset related cancellation-of-debt income of $3.2 billion expected
to be realized when the UK administration proceedings related to TXU Europe are
concluded and the debt is extinguished. If the IRS position as set forth in the
preliminary notice is sustained, TXU Corp. could potentially be required to
recognize an income tax charge for amounts related to the cancellation of
indebtedness income. The amount of such charge, if any, is uncertain, and TXU
Corp. believes the IRS' position (that TXU Corp. must recognize a capital loss
for the worthlessness of the debt component of the investment but recognize
ordinary income for the cancellation of the debt) is without merit. The
preliminary notice is not binding on the IRS; therefore, it is uncertain what
positions the IRS might ultimately assert or what, if any, tax liability might
result.
The tax benefit realized by TXU Corp. during the second quarter of 2004
was based on the capital loss and ordinary deductions allowed by the IRS in
accordance with the preliminary notice, adjusted to exclude the effects of
elements of the preliminary notice that TXU Corp. believes are without merit and
unlikely to be sustained as discussed above. Based on the assumptions used to
calculate the tax benefit, TXU Corp. would be required to repay $492 million in
tax refunds previously received (including interest through June 30, 2004). No
material earnings charge is expected with respect to any such repayment. TXU
Corp. is unable to predict the timing of any such repayment.
TXU Corp. believes that its original tax reporting of the worthlessness of
its investment in TXU Europe as an ordinary deduction was proper and intends to
protest the IRS's proposed adjustments. If TXU Corp.'s position is sustained, it
would recognize in income the remaining $272 million benefit of the deduction.
TXU Gas -- In April 2003, the IRS proposed to TXU Gas certain adjustments
to the US federal income tax returns of ENSERCH Corporation (the acquired
predecessor of TXU Gas) for the 1993 calendar year. TXU Gas appealed the
proposed adjustments to the IRS Appeals Office and in June 2004, the IRS Appeals
Office rejected the substance of TXU Gas' appeal of the IRS proposed
adjustments, refused to consider a settlement of the disputed issues, and
indicated that the IRS will issue a statutory notice of deficiency for the tax,
penalty, and interest due. If the matter is resolved against TXU Gas, TXU Gas
would be assessed a deficiency of $65 million (including penalty and interest
through June 30, 2004). In addition, TXU Gas would have tax liabilities of $40
million (plus any interest and penalty assessed) related to subsequent years,
for which audits have not yet been completed.
Based on the unsuccessful settlement negotiations, additional tax reserves
of $47 million were recorded during the current period to account for the excess
of the tax, penalty, and interest asserted by the IRS over the amount of tax
reserves previously recorded. The portion of the additional tax reserve related
to the pre-acquisition tax, penalty, and interest ($30 million) has been charged
to goodwill, and the remaining portion related to interest for periods after
August 5, 1997 ($17 million) has been charged to income. TXU Gas has the right
to appeal the IRS's proposed adjustments through a court proceeding, and its
currently evaluating its legal options. The results of TXU Gas are presented as
discontinued operations as discussed in Note 3. Management believes that
reserves recorded related to these matters are adequate. Under the definitive
sales agreement, the buyer of the TXU Gas operations will not assume
liabilities, among others, related to ENSERCH tax returns contested by the IRS.
22
Legal Proceedings -- During the second quarter of 2004, management
assessed the progress and status of matters in litigation and recorded an
accrual of $100 million ($65 million after-tax), reported in other deductions,
for the expected resolution of certain of the cases described immediately below.
On July 7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in
the United States District Court for the Southern District of Texas, Corpus
Christi Division, against Energy and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. An amended complaint was filed in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers filed motions for leave to intervene in the action alleging claims
substantially identical to TCE's. In addition, approximately 25 purported former
customers of TCE 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 was
conducted May 20, 2004 during which the Court stated that it intended to enter
an order dismissing the antitrust claims and an order was entered on June 24,
2004. TCE has indicated that it intends to appeal the dismissal, however, Energy
believes the dismissal of the antitrust claims was proper and that it has not
committed any violation of the antitrust laws. Further, the Commission's
investigation of the market conditions in late February 2003 has not resulted in
any findings adverse to TXU Corp. Accordingly, TXU Corp. believes that TCE's and
the interveners' claims against Energy and its subsidiary companies are without
merit and Energy and its subsidiaries intend to vigorously defend the lawsuit on
appeal. TXU Corp. is, however, unable to estimate any possible loss or predict
the outcome of this action.
On April 28, 2003, a lawsuit was filed by a former employee of TXU
Portfolio Management in the United States District Court for the Northern
District of Texas, Dallas Division, against TXU Corp., Energy and TXU Portfolio
Management. The Court has set this case for trial on April 4, 2005 and discovery
in the case is proceeding. Plaintiff asserts claims under Section 806 of
Sarbanes-Oxley arising from plaintiff's employment termination and claims for
breach of contract relating to payment of certain bonuses. Plaintiff seeks back
pay, payment of bonuses and alternatively, reinstatement or future compensation,
including bonuses. 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., Energy and TXU Portfolio Management
intend to vigorously defend the litigation. TXU Corp., Energy and TXU Portfolio
Management dispute the plaintiff's claims.
On March 10, 2003, a lawsuit was filed by Kimberly P. Killebrew in the
United States District Court for the Eastern District of Texas, Lufkin Division,
against TXU Corp. and TXU Portfolio Management, asserting generally that
defendants engaged in manipulation of the wholesale electric market, in
violation of antitrust and other laws. This case was transferred to the Beaumont
Division of the Eastern District of Texas and on March 24, 2004 subsequently
transferred to the Northern District of Texas, Dallas Division. This action is
brought by an individual, alleged to be a retail consumer of electricity, on
behalf of herself and as a proposed representative of a putative class of retail
purchasers of electricity that are similarly situated. Defendants have filed a
motion to dismiss the lawsuit which is pending before the court however as a
result of the dismissal of the antitrust claims in the litigation described
above brought by TCE, the parties have agreed to stay this litigation until the
appeal in the TCE case has been decided. TXU Corp. believes that the plaintiff
lacks standing to assert any antitrust claims against TXU Corp. or TXU Portfolio
Management, and that defendants have not violated antitrust laws or other laws
as claimed by plaintiff. Therefore, TXU Corp. believes that plaintiff's claims
are without merit and plans to vigorously defend the lawsuit. TXU Corp. is,
however, unable to estimate any possible loss or predict the outcome of this
action.
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
23
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 their motion for and memorandum in support of class
certification. Class certification discovery is ongoing and TXU Corp. and the
individual defendants will oppose class certification. The plaintiffs seek to
represent a class of participants in such employee benefit plans during the
period between April 26, 2001 and October 11, 2002. TXU Corp. believes the
claims are without merit and intends to vigorously defend the lawsuit.
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.
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 named individual
defendants are current or former officers and/or directors of TXU Corp. 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 the 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. TXU Corp.
believes the claims are without merit and intends to vigorously defend this
lawsuit.
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 directors or corporate officer's acts were committed in bad
faith, were the result of active and deliberate dishonesty or that the
individual 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. TXU Corp. is, however,
unable to estimate any possible loss or predict the outcome of this action.
General -- In addition to the above, TXU Corp. and its 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.
24
9. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Net pension and other postretirement benefit costs recognized during the
three and six months ended June 30, 2004 and 2003 are comprised of the
following:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Components of Net Pension Costs:
Service cost....................................................... $ 13 $ 14 $ 25 $25
Interest cost...................................................... 34 37 64 69
Expected return on assets.......................................... (36) (41) (66) (77)
Amortization of unrecognized prior service cost.................... 1 1 2 3
Amortization of net loss........................................... 4 1 8 2
Curtailment loss................................................... 4 -- 4 --
---- ---- ---- ---
Net periodic pension cost........................................ $ 20 $ 12 $ 37 $22
==== ==== ==== ===
Components of Net Periodic Postretirement Benefit Costs:
Service cost....................................................... $ 4 $ 4 $ 8 $ 9
Interest cost...................................................... 15 15 30 32
Expected return on assets.......................................... (4) (3) (9) (7)
Amortization of unrecognized net transition asset.................. -- 1 1 2
Amortization of unrecognized prior service cost.................... -- -- (1) --
Amortization of net loss........................................... 7 7 14 15
Curtailment gain................................................... (1) -- (1) --
---- ---- ---- ---
Net postretirement benefit cost.................................. $ 21 $ 24 $ 42 $51
==== ==== ==== ===
The Capgemini outsourcing transaction (see Note 1) caused a curtailment of
the retirement and postretirement benefit plans as of June 30, 2004, which
combined with a change in discount rate and other assumptions, is expected to
result in an annualized reduction in pension and other postretirement costs of
approximately $36 million.
At June 30, 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 two reportable segments: Energy
and Electric Delivery. The segments are managed separately because they are
strategic business units that offer different products or services. TXU
Australia was previously reported as a separate segment.
Energy - consists of the operations, 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.
Electric Delivery - consists of the operations that are regulated and
involve the transmission and distribution of electricity in Texas.
Corporate and Other - Remaining non-segment operations consisting
primarily of discontinued operations, 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.
25
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
Operating revenues:
Energy............................................................ $2,115 $2,016 $4,072 $3,806
Electric Delivery................................................. 518 486 1,041 992
Corporate and other .............................................. 11 3 17 6
Eliminations...................................................... (348) (356) (709) (740)
------ ------ ------ ------
Consolidated................................................... $2,296 $2,149 $4,421 $4,064
Regulated revenues included in operating revenues:
Energy ........................................................... $ -- $ -- $ -- $ --
Electric Delivery................................................. 518 486 1,041 992
Corporate and other............................................... -- -- -- --
Eliminations...................................................... (335) (349) (685) (726)
------ ------ ------ ------
Consolidated................................................... $ 183 $ 137 $ 356 $ 266
Affiliated revenues included in operating revenues:
Energy ........................................................... $ 7 $ 7 $ 14 $ 14
Electric Delivery................................................. 335 349 685 726
Corporate and other............................................... 6 -- 10 --
Eliminations...................................................... (348) (356) (709) (740)
------ ------ ------ ------
Consolidated................................................... $ -- $ -- $ -- $ --
====== ====== ====== ======
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles:
Energy ........................................................... $ (19) $ 154 $ 99 $ 190
Electric Delivery................................................. 47 52 113 113
Corporate and other............................................... (120) (46) (171) (109)
------ ------ ------ ------
Consolidated................................................... $ (92) $ 160 $ 41 $ 194
====== ====== ====== ======
11. SUPPLEMENTARY FINANCIAL INFORMATION
Regulated Versus Unregulated Operations --
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Operating revenues:
Regulated.................................................. $ 518 $ 486 $1,041 $ 992
Unregulated................................................ 2,126 2,019 4,089 3,812
Intercompany sales eliminations - regulated................ (335) (349) (685) (726)
Intercompany sales eliminations - unregulated ............. (13) (7) (24) (14)
------ ------ ------ ------
Total operating revenues............................. 2,296 2,149 4,421 4,064
Costs and operating expenses:
Cost of energy sold and delivery fees - regulated.......... -- 3 -- 8
Cost of energy sold and delivery fees - unregulated*....... 1,013 933 1,920 1,769
Operating costs - regulated................................ 180 173 356 345
Operating costs - unregulated.............................. 199 163 363 343
Depreciation and amortization - regulated.................. 83 70 170 137
Depreciation and amortization - unregulated................ 95 97 199 215
Selling, general and administrative expenses - regulated... 43 36 79 42
Selling, general and administrative expenses - unregulated. 252 171 432 365
Franchise and revenue-based taxes - regulated.............. 58 60 117 120
Franchise and revenue-based taxes - unregulated............ 28 32 54 68
Other income............................................... (16) (18) (25) (27)
Other deductions........................................... 438 5 457 23
Interest income............................................ (2) (7) (6) (16)
Interest expense and related charges....................... 174 201 358 403
------ ------ ------ ------
Total costs and expenses............................. 2,545 1,919 4,474 3,795
------ ------ ------ ------
Income (loss) from continuing operations before income
taxes and cumulative effect of changes in accounting
principles................................................. $ (249) $ 230 $ (53) $ 269
====== ===== ===== =====
- ---------
* Includes cost of fuel consumed of $242 million and $423 million for
the three months ended June 30, 2004 and 2003, respectively, and $462
million and $837 million for the six months ended June 30, 2004 and
2003, respectively. The balance in each period represents energy
purchased for resale and delivery fees.
26
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 Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
Other income:
Net gain on sale of businesses and other properties...... $ 16 $ 15 $ 17 $ 21
Equity portion of allowance for funds used during
construction........................................... -- 1 1 2
Other.................................................... -- 2 7 4
----- ----- ----- -----
Total other income..................................... $ 16 $ 18 $ 25 $ 27
Other deductions:
Software write-off....................................... $ 110 $ -- $ 110 $ --
Litigation charge........................................ 100 -- 100 --
Employee severance charges............................... 92 -- 107 --
Spare parts inventory writedown.......................... 79 -- 79 --
Debt extinguishment losses............................... 43 -- 43 --
Equity in debt extinguishment losses of financing trusts. 6 -- 6 --
Equity in losses of telecommunications joint venture..... -- -- -- 17
Transaction-related fees................................. 2 4
Expenses related to impaired construction projects....... 2 1 4 2
Write-off of frequency licenses.......................... -- 3 -- 3
Other.................................................... 4 1 4 1
----- ----- ----- -----
Total other deductions................................. $ 438 $ 5 $ 457 $ 23
===== ===== ===== =====
Interest Expense and Related Charges --
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
Interest (a)...................................................... $ 159 $ 187 $ 313 $ 372
Distributions on exchangeable preferred membership interests of 5 -- 22 --
Energy (a)........................................................
Interest on long-term debt held by subsidiary trust............... 4 8 13 15
Preferred stock dividends of subsidiaries......................... 1 2 1 5
Amortization of debt discounts, premiums and issuance cost........ 7 7 14 17
Allowance for borrowed funds used during construction and (2) (3) (5) (6)
----- ------ =----- ------
capitalized interest..............................................
Total interest expense and related charges.................. $ 174 $ 201 $ 358 $ 403
===== ====== ====== ======
(a)Interest amounts for the three and six months ended June 30, 2003, include
$17 million and $34 million, respectively, related to the exchangeable
subordinated notes that were exchanged for exchangeable preferred
membership interests in July 2003. Distributions on preferred membership
interests in the 2004 periods include amounts through April 2004, when
these securities were purchased by TXU Corp.
Regulatory Assets and Liabilities --
June 30, December 31,
2004 2003
-------- ------------
Regulatory Assets:
Generation-related regulatory assets recoverable by securitization bonds.... $1,669 $1,654
Securities reacquisition costs.............................................. 122 121
Recoverable deferred income taxes-- net..................................... 99 96
Other regulatory assets..................................................... 107 95
------ ------
Total regulatory assets................................................. 1,997 1,966
Regulatory Liabilities:
Investment tax credits and protected excess deferred taxes................. 84 88
Over collection of transition bond (securitization) revenues ............... 6 6
------ ------
Total regulatory liabilities............................................ 90 94
------ ------
Net regulatory assets................................................ $1,907 $1,872
====== ======
27
Included in net regulatory assets are assets of $121 million at June 30,
2004 and December 31, 2003, that are earning a return. The regulatory assets,
other than those subject to securitization, have a remaining recovery period of
15 to 47 years.
Included in other regulatory assets as of June 30, 2004 was $37 million
related to nuclear decommissioning liabilities.
Restricted Cash -- At June 30, 2004, TXU Corp. had a $525 million
investment in LOC Trust, accounted for as restricted cash, representing
collateral to support a $500 million credit facility (see Note 4). The remaining
restricted cash reported in investments on the balance sheet as of June 30, 2004
included $45 million held as collateral for letters of credit issued and $14
million principally related to payment of fees associated with the
securitization bonds. At June 30, 2004, the TXU Electric Delivery Transition
Bond Company LLC had $23 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 June 30, 2004 and December 31, 2003, accounts
receivable of $1.2 billion and $1.1 billion are stated net of allowance for
uncollectible accounts of $47 million and $56 million, respectively. During the
six months ended June 30, 2004, bad debt expense was $47 million, account
write-offs were $68 million and other activity increased the allowance for
uncollectible accounts by $12 million. During the six months ended June 30,
2003, bad debt expense was $37 million, account write-offs were $36 million and
other activity decreased the allowance for uncollectible accounts by $4 million.
Allowances related to receivables sold are reported in other current liabilities
and totaled $32 million and $42 million at June 30, 2004 and December 31, 2003,
respectively.
Accounts receivable included $443 million and $438 million of unbilled
revenues at June 30, 2004 and December 31, 2003, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of June 30, 2004 As of December 31, 2003
----------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
--------- ------------ --- --------- ------------- ---
Intangible assets subject to amortization
included in property, plant and equipment:
Capitalized software placed in service.... $ 535 $ 285 $ 250 $ 512 $ 248 $ 264
Land easements............................ 170 59 111 176 66 110
Other..................................... 31 22 9 31 21 10
----- ----- ----- ----- ----- -----
Total................................... $ 736 $ 366 $ 370 $ 719 $ 335 $ 384
===== ===== ===== ===== ===== =====
Aggregate TXU Corp. amortization expense for intangible assets for the six
months ended June 30, 2004 and 2003 was $38 million and $36 million,
respectively. At June 30, 2004, the weighted average useful lives of capitalized
software, land easements and other were 6 years, 68 years and 40 years,
respectively.
During the second quarter of 2004, TXU Corp. wrote-off certain software
projects, resulting in a charge of $110 million ($72 million after-tax). See
Note 1 for further discussion.
Goodwill of $542 million reported in the consolidated balance sheet as of
June 30, 2004, relates to Energy ($517 million) and Electric Delivery ($25
million). Assets held for sale reported in the consolidated balance sheet
include goodwill of $890 million related to TXU Australia and $300 million
related to TXU Gas. Goodwill was reduced by $16 million in the second quarter of
2004, reflecting an allocation of goodwill to the disposed TXU Fuel Company
business.
Commodity Contracts -- At June 30, 2004 and December 31, 2003, current and
noncurrent commodity contract assets, arising largely from mark-to-market
accounting, totaled $738 million and $657 million, 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 $651 million and $549 million at June 30,
2004 and December 31, 2003, respectively.
28
Inventories by Major Category --
June 30, December 31,
2004 2003
-------- -------------
Materials and supplies................. $ 162 $ 258
Fuel stock............................. 84 78
Gas stored underground................. 97 83
------ ------
Total inventories................. $ 343 $ 419
As described in Note 1, Energy recorded a charge of $79 million ($51
million after-tax) to write down spare parts and equipment inventory.
Property, Plant and Equipment -- As of June 30, 2004 and December 31,
2003, property, plant and equipment of $16.6 billion and $16.8 billion,
respectively, is stated net of accumulated depreciation and amortization of
$10.9 billion and $11.0 billion, respectively.
As of June 30, 2004, substantially all of Electric Delivery's electric
utility property, plant and equipment (with a net book value of $6.4 billion)
was pledged as collateral for Electric Delivery's first mortgage bonds and
senior secured notes.
Derivatives and Hedges -- TXU Corp. experienced net hedge ineffectiveness
of $5 million and $16 million, reported as a loss in revenues, for the three and
six months ended June 30, 2004, respectively. For the three and six months ended
June 30, 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
(versus settlement accounting), which includes the above amounts as well as the
effect of reversing unrealized gains and losses recorded in previous periods to
offset realized gains and losses in the current period, totaled $2 million and
$16 million, respectively, in net losses for the three and six months ended June
30, 2004 and $9 and $15 million in net gains for the three and six months ended
June 30, 2003.
As of June 30, 2004, it is expected that $82 million of after-tax net
losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. Of this amount, $59 million relates to
commodities hedges and $23 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.
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries (TXU Corp.) as of June 30, 2004, and the related
condensed statements of consolidated income and of comprehensive income for the
three-month and six-month periods ended June 30, 2004 and 2003, and the
condensed statements of consolidated cash flows for the six-month periods ended
June 30, 2004 and 2003. These interim financial statements are the
responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
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 an
explanatory paragraph related to the rescission of Emerging Issues Task Force
Issue No. 98-10) dated March 11, 2004 we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 5, 2004
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS BUSINESS
TXU Corp. is a holding company that conducts its operations through US
Holdings and TXU Gas. The TXU Gas business is held for sale. US Holdings is also
a holding company that conducts its operations through Energy and Electric
Delivery. Energy engages in power production (electricity generation), retail
and wholesale sales of electricity and natural gas, and commodity hedging and
risk management activities. Electric Delivery engages in regulated electricity
transmission and distribution operations.
TXU Corp. has two reportable segments: Energy and Electric Delivery. (See
Note 10 to Financial Statements for further information concerning reportable
business segments.)
Changes in Business
- -------------------
Strategic Initiatives and Other Actions - 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 being reviewed include:
o Performance in competitive markets, including profitability in new
markets;
o Cost structure, including organizational alignments and headcount;
o Management of natural gas price risk and cost effectiveness of the
generation fleet; and
o Non-core business activities.
TXU Corp. anticipates performance improvements as a result of various
strategic initiatives, including lower administrative support costs, more
efficient and cost-effective utilization of generation-related assets and
increased return on investments. As discussed immediately below, the effects of
the implementation of the strategic initiatives as well as other actions taken
to date have resulted in total charges of $428 million ($285 million after-tax)
in the second quarter of 2004 and $445 million ($296 million after-tax)
year-to-date, reported largely in other deductions, related to asset writedowns,
employee severance, debt extinguishment losses and litigation. In addition, TXU
Corp. has incurred consulting and professional fees related to the strategic
initiatives totaling $23 million ($15 million after-tax) in the second quarter
of 2004, reported in SG&A expenses, and nonrecurring contractual executive
compensation expense of $38 million in the second quarter and $52 million
year-to-date (both without tax benefit), also reported in SG&A expense. Finally,
a $75 million income tax credit was recorded to recognize a portion of the tax
benefit arising from the TXU Europe write-off.
Charges recorded in the three-month and six-month periods ended June 30,
2004 and 2003 reported in other deductions are detailed in Note 11 to Financial
Statements.
The review of TXU Corp.'s operations and formulation of strategic
initiatives is ongoing, and additional charges are expected. The phases of the
plan resulting in the charges to date are anticipated to be largely completed
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. Certain of the strategic initiatives described below, could
result in additional material charges that TXU Corp. is currently unable to
predict. In addition, other new strategic initiatives are likely to be under
taken that could also materially affect TXU Corp.'s financial results.
Capgemini Energy Agreement
--------------------------
On May 17, 2004, TXU Corp. entered into a services agreement with a
subsidiary of Cap Gemini North America Inc., Capgemini Energy LP (Capgemini), a
new company initially providing business process support services to TXU Corp.,
but immediately implementing a plan to offer similar services to other utility
companies. Under the ten-year agreement, over 2,500 employees transferred from
subsidiaries of TXU Corp. to Capgemini effective July 1, 2004. Outsourced base
support services performed by Capgemini for a fixed fee include information
technology, customer call center, billing, human resources, supply chain and
certain accounting activities. TXU Corp. expects that the Capgemini arrangement
will result in lower costs and improved service levels.
31
TXU Corp. received a 2.9% limited partnership interest in Capgemini in
exchange for the asset license described below. TXU Corp. has the right to sell
all its interest in the partnership to Cap Gemini America Inc. for $200 million,
plus TXU Corp.'s share of Capgemini's undistributed earnings, upon expiration of
the agreement, or earlier upon the occurrence of certain unexpected events. Cap
Gemini North America Inc. has the right to purchase TXU Corp.'s 2.9% limited
partnership interest in Capgemini under the same terms and conditions. The
partnership interest has been recorded at an initial value of $2.9 million.
Also as part of the agreements, TXU Corp. agreed to indemnify Capgemini
for severance costs incurred by Capgemini for former TXU Corp. employees
terminated within 18 months of their transfer to Capgemini. Accordingly, TXU
Corp. recorded a $40 million ($26 million after-tax) charge for severance
expense in the second quarter of 2004, which represents a reasonable estimate of
the indemnity and is reported in other deductions. In addition, TXU Corp.
committed to pay up to $25 million for costs associated with transitioning the
outsourced activities to Capgemini. The transition costs are expected to be
recorded by TXU Corp. during the remainder of 2004.
As part of the agreements, TXU Corp. provided Capgemini a royalty-free
right, under an asset license arrangement, to use TXU Corp.'s information
technology assets, consisting primarily of capitalized software. A portion of
the software was in development and had not yet been placed in service by TXU
Corp. As a result of outsourcing its information technology activities, TXU
Corp. no longer intends to develop the majority of these projects and from
TXU's perspective the software is abandoned. The agreements with Capgemini do
not require that any software in development be completed and placed in service.
Consequently, the previously capitalized balance for these software projects was
written off in the second quarter of 2004, resulting in a charge of $110 million
($72 million after-tax), reported in other deductions. The ten-year term of the
asset license agreement establishes the useful life of the remaining assets,
totaling $255 million, and depreciation and amortization for the assets were
revised accordingly as of the contribution date.
Subject to certain terms and conditions, Cap Gemini North America, Inc.
and its parent Cap Gemini S.A., have guaranteed the performance and payment
obligations of Capgemini under the service agreements, as well as the payment of
$200 million in connection with TXU Corp.'s right to sell its partnership
interest to Cap Gemini North America, Inc. upon expiration of the arrangement.
The transfer of employees to Capgemini triggered a curtailment with
respect to TXU Corp.'s pension and other post-employment benefit plans. In the
second quarter of 2004, TXU Corp. recorded a net pre-tax curtailment charge of
$3 million, reported in other deductions, related to these plans. The
curtailment required a remeasurement of liabilities under the plans as of the
employee transfer date. The estimated effect of the employee transfers, combined
with changes in the discount rate and other assumptions, is a reduction in
pension and other postretirement expenses of approximately $36 million on an
annualized basis effective July 1, 2004.
On July 1, 2004, TXU Corp. loaned Capgemini $25 million for working
capital purposes pursuant to a promissory note that bears interest at a
market-based annual rate of 4% and matures on July 1, 2019.
Sale of TXU Australia
---------------------
On July 30, 2004, TXU Corp. completed the sale of TXU Australia to
Singapore Power Ltd. for $3.6 billion, including $1.7 billion of assumed debt
and $1.9 billion in cash. The cash proceeds were used to repay short-term
borrowings. The intent to sell the business had been previously disclosed. The
pre-tax gain related to the sale is approximately $375 million. The transaction
was cleared by the Australian Competition and Consumer Commission on July 20,
2004. The results of TXU Australia are reported as discontinued operations as
discussed in Note 3.
32
Sale of TXU Fuel Company
------------------------
On June 2, 2004, TXU Corp. completed the sale of the assets of TXU Fuel
Company, the gas transportation subsidiary of Energy, to Energy Transfer
Partners, L.P. for $500 million in cash. The cash proceeds were used to repay
short-term borrowings. The intent to sell the business had been previously
disclosed. The assets of TXU Fuel Company consisted of approximately 1,900 miles
of intrastate pipeline and a total system capacity of 1.3 Bcf/day. As part of
the transaction, Energy entered into a market-price based transportation
agreement with the new owner to transport gas to Energy's generation plants.
Because of the continuing involvement in the business through the transportation
agreement, the pre-tax gain related to the sale of $377 million will be
recognized over the eight-year life of the transportation agreement, and the
business has not been accounted for as a discontinued operation. The pre-tax
gain is net of $16 million of Energy goodwill allocated to TXU Fuel Company.
Sale of TXU Gas
---------------
On June 17, 2004, TXU Corp. announced that TXU Gas signed a definitive
agreement with Atmos Energy Corporation (Atmos) pursuant to which Atmos will
acquire the operations of TXU Gas for $1.925 billion in cash. The intent to sell
the business had been previously disclosed. The transaction is expected to close
by the end of the year, subject to the satisfaction of customary closing
conditions and Atmos obtaining limited state regulatory approvals. TXU Gas
expects to use a portion of the proceeds to redeem all of its outstanding
preferred stock and to redeem or defease all of its outstanding debt securities,
the combined total of which was $505 million at June 30, 2004. The results of
TXU Gas are reported as discontinued operations as discussed in Note 3.
Recognition of Income Tax Benefits
-----------------------------------
On its US federal income tax return for calendar year 2002, TXU Corp.
claimed an ordinary loss 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). Due to a number of
uncertainties regarding the proper tax treatment of the worthlessness loss, no
portion of the tax benefit related to TXU Corp.'s 2002 write-off of its
investment in TXU Europe was recognized in income in prior periods. As discussed
immediately below, $711 million of the tax benefit was recognized in the second
quarter of 2004.
In June 2004, the IRS issued a preliminary notice of proposed adjustment
proposing to disallow the 2002 worthlessness deduction and treat the
worthlessness as a capital loss (deductible only against capital gains).
Accordingly, in the second quarter of 2004, TXU Corp. recorded a tax benefit in
income of $711 million related to the utilization of a portion of the TXU Europe
worthlessness deduction. The tax benefit recognized reflects utilization of the
capital loss deduction against capital gains reported for 2002 and the 1999-2001
carryback periods and the capital gains on the 2004 sales of the TXU Australia,
TXU Fuel Company and telecommunications businesses. The benefit recognized also
included $213 million for certain items related to TXU Europe expected to be
sustained as ordinary deductions as a result of the preliminary notice.
Benefits arising from the resolution of uncertainty regarding utilization
of deductions in the year of the TXU Europe write-off or in a prior year are
reported in discontinued operations. Benefits arising from resolution of
uncertainty regarding utilization of deductions in subsequent years are
classified in the same manner as the source of the income resulting in the
recognition of the benefits. Accordingly, of the total $711 million benefit, $75
million was reported in continuing operations as this amount relates to the
capital gain arising from the sale of TXU Fuel Company, the historical
operations of which have been classified as continuing operations. Additional
tax benefits may be recognized in future periods to the extent capital gains are
realized.
See Note 8 to Financial Statements for discussion of income tax
contingencies related to TXU Europe and other matters.
Generation Facility Closures and Inventory Write-Down
-----------------------------------------------------
In March 2004, Energy announced the planned permanent retirement,
completed in the second quarter of 2004, of eight gas-fired operating units due
to electric industry market conditions in Texas. Energy 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%, of Energy's
33
gas-fired generation capacity in Texas. A majority of the 12 units were
designated as "peaking units" and operated only during the summer for many years
and have operated only sparingly during the last two years. Most of the units
were built in the 1950's. Energy also determined that it 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 of 2004, reported in other
deductions, for production employee severance costs ($7 million) and impairments
related to the various facility closures ($1 million). Should final decisions be
reached, additional charges of approximately $68 million ($44 million after-tax)
would be incurred during the remainder of 2004 associated with future
generation-related facility closures.
As part of Energy's review of its generation asset portfolio, during the
second quarter of 2004, Energy completed a review of its spare parts and
equipment inventory to determine the appropriate level of such inventory. The
review included nuclear, coal and gas-fired generation-related facilities. As a
result of this review, Energy recorded a charge of $79 million ($51 million
after-tax), reported in other deductions, to reflect excess inventory on hand
and to write down carrying values to scrap values.
Impairment of New Jersey Generation Facility
--------------------------------------------
In the second quarter of 2004, management initiated a plan to sell the
Pedricktown, New Jersey 122 MW power production facility and exit the related
power supply and gas transportation agreements. Accordingly, TXU Corp. recorded
an impairment charge of $26 million ($17 million after-tax) to write the
facility down to estimated fair market value. The results of the business are
reported in discontinued operations, as discussed in Note 3.
Organizational Realignment and Headcount Reductions
----------------------------------------------------
TXU Corp. intends to realign its operations along three core business
segments consisting of:
o Electric Delivery - the regulated electric delivery business;
o Power - the electric power production business; and
o Energy - the retail energy business.
Processes are currently being developed to report operating results of the
Power and Energy business segments, taking into consideration the effects of the
expected formation of the energy marketing and trading joint venture. (Operating
results of the Electric Delivery segment and the current combined Energy segment
are provided in this report.) Results are expected to be reported under the new
segment alignment no later than the first quarter of 2005.
During the second quarter of 2004, management completed a comprehensive
organizational review, including an analysis of staffing requirements. As a
result, TXU Corp. completed a self-nomination severance program and finalized a
plan for additional headcount reductions under an involuntary severance program.
Accordingly, in the second quarter of 2004, TXU Corp. recorded severance charges
totaling $53 million ($34 million after-tax), reported in other deductions.
Investment in New Trading Entity
--------------------------------
Energy and Credit Suisse First Boston (USA), Inc. have entered into a
memorandum of understanding to establish a 50/50 investment in an entity that
would become the exclusive energy marketing and trading vehicle for both parties
in North America. The new entity will market and trade power, natural gas and
other energy-related commodities in North America. The new entity is expected to
begin operations in late 2004.
Strategic Review of Nuclear Assets
----------------------------------
TXU Corp. announced its intent to undertake a strategic review of its
nuclear assets, comprised of two electricity generating units at Comanche Peak,
each with a capacity of 1,150 MW. The objectives of this strategic review are to
evaluate potential means to reduce the cost risk of outages of these low
marginal cost facilities and improve the long-term availability and certainty of
electricity supply for Energy's customers.
34
Debt and Capital Management Program
-----------------------------------
With the cash proceeds from the sales of businesses and assets discussed
above and cash provided by operating activities, TXU Corp. has increased value
and reduced risks through an ongoing comprehensive liability management
initiative. Under this initiative, TXU Corp. expects to repurchase over $4
billion of debt and equity securities in 2004, and an additional $800 million to
$900 million of debt and equity securities in 2005.
In April 2004, TXU Corp. repurchased Energy's exchangeable preferred
membership interests with a liquidation amount of $750 million for $1.85 billion
(including transaction costs). The excess of the purchase price over the
carrying value of the securities, net of $384 million in income tax benefits
recorded as a deferred tax asset, was recorded as a charge to additional paid-in
capital in the amount of $849 million. The carrying value of the securities was
$617 million, which is the liquidation amount of $750 million net of $102
million in unamortized discount and $31 million in unamortized debt issuance
costs, both recorded at the time of issuance of the securities in November 2002.
The charge to additional paid-in capital is accounted for in a manner similar to
TXU Corp.'s preference share dividends, resulting in a reduction in net income
available to common shareholders.
In the second quarter of 2004, TXU Corp. repurchased $427 million carrying
amount of equity-linked debt securities for $404 million. The repurchase was in
connection with a settlement of related litigation and resulted in total charges
of $34 million ($28 million after-tax), reported in other deductions,
essentially representing the premium for the debt component of the securities
and an additional repurchase premium. The repurchase also resulted in a credit
to additional paid-in capital of $57 million, which represented the holder's
out-of-the-money fair market value of the related equity purchase contracts. An
additional credit to additional paid-in capital of $18 million was recorded to
reverse the remaining liability for future contract adjustment payments to
holders of the securities. At the time of issuance of the securities, TXU Corp.
had recorded a liability for the present value of the contract adjustment
payments with an offsetting reduction to common stock equity.
On June 30, 2004, TXU Corp. repurchased 20 million shares of its
outstanding common stock through an accelerated share repurchase agreement at an
initial price of $39.86 per share. The 20 million shares repurchased under the
program are subject to a future contingent purchase price adjustment based on
the volume-weighted average price during the actual repurchase period by the
broker-dealer that executed the repurchase transaction. These share repurchases
could offset the effect of shares potentially issuable under equity-linked debt
securities at a later date.
Also in the second quarter of 2004, TXU Corp. repurchased at par $237
million principal amount of 7.25% notes held by subsidiary trusts and $118
million principal amount of 6.375% senior notes for $125 million. These
transactions resulted in losses on retirement of debt totaling $15 million ($10
million after-tax), reported in other deductions.
TXU Corp. also repurchased approximately $179 million of its equity
securities in open market purchases during the second quarter of 2004 and $193
million year-to-date. Shares purchased on the open market totaled 4.9 million in
the second quarter of 2004 and 5.4 million year-to-date.
See Notes 4, 5, and 6 to Financial Statements for further detail of debt
issuances and retirements, financing arrangements, debt held by unconsolidated
subsidiary trusts and capitalization.
Litigation Accrual
------------------
During the second quarter of 2004, management assessed the progress and
status of matters in litigation as described in Note 8 to Financial Statements
and recorded an accrual of $100 million ($65 million after-tax), reported in
other deductions, for the expected resolution of certain cases.
35
Consolidation of Real Estate
----------------------------
Currently, TXU Corp. owns or leases more than 1.7 million square feet in
various management and support office locations, far more than its anticipated
needs, which are approximately 20% of that total. TXU Corp. is exploring
alternatives to reduce current office space and consolidate into a location that
will enable better employee communication and collaboration and cost
effectiveness. Implementation of these initiatives is expected to result in
charges in the second half of 2004, but the amounts are not yet estimable.
Capital Allocation Strategy
---------------------------
TXU Corp. intends to utilize cash provided by operating activities in
accordance with the following priorities:
o First, investments to preserve and enhance the quality of customer
service and production and delivery reliability;
o Second, reinvestments in its businesses, applying stringent
expectations for cash payback timelines and minimum return on
investment; and
o Third, to reduce debt and other liabilities, with the objective of
strengthening the balance sheet and increasing financial flexibility.
Upon reaching an appropriate level of balance sheet strength and financial
flexibility, management expects to recommend that the Board of Directors
reevaluate the current common stock dividend policy. At that time, management
expects it would recommend targeting annual common stock dividends equal to a
payout of 100% of the earnings of Electric Delivery. Of TXU Corp.'s free cash
flow (cash provided by operating activities less capital expenditures),
management would expect to return approximately 80% to shareholders in the form
of distributions or repurchases and retain approximately 20% for long-term
growth initiatives. Assuming the execution of the business initiatives and
transactions described above, and depending on market trends in commodity
prices, management expects that the capital allocation program will enable
management to recommend an increase of the TXU Corp. common stock dividend in
2006. In addition to management's recommendation, the Board of Directors may
consider other relevant factors in determining if and when to make a change in
dividend policy.
Initiatives to Improve System Reliability and Performance
---------------------------------------------------------
TXU Corp. is undertaking a number of initiatives to improve customer
service, electric delivery and production reliability, and operational
performance. These initiatives include:
o Investment for vegetation management across the electricity
distribution network, estimated at $45 million over the next three
years, an increase of 70% over the last three years;
o Investment in key electricity transmission projects to further
improve reliability and reduce congestion, estimated on average to be
$80 million annually over the next three years, a 35% increase over
the 2003 investment level;
o Investment of an additional $275 million over the next three years to
improve reliability of coal and nuclear production assets, a 45%
increase in annual spending over the 2003 investment level; and
o Replacement of four steam generators in one of the two units of the
Comanche Peak nuclear plant in order to maintain the operating
efficiency of the unit. Estimated capital requirements for this
project are $175 million to $225 million, to be spent largely over
the next three years.
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.
36
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 June 30, 2004 compared to Three Months Ended June 30, 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 $147 million, or 7%, to $2.3
billion in 2004. Operating revenues rose $99 million, or 5%, to $2.1 billion in
the Energy segment driven by higher wholesale volumes and pricing. Retail
electricity revenues declined as the effect of lower volumes due to competitive
activity and milder weather was only partially offset by higher pricing.
Operating revenues in the Electric Delivery segment rose $32 million, or 7%, to
$518 million driven by higher transmission and distribution fees (tariffs).
Consolidated revenue growth also reflected an $8 million reduction in the
intercompany sales elimination, primarily reflecting lower sales by Electric
Delivery to Energy as sales to nonaffiliated REPs increased.
Gross Margin
Three Months Ended June 30,
--------------------------------------------
% of % of
2004 Revenue 2003 Revenue
------- ------- -------- -------
Operating revenues..................................... $ 2,296 100% $ 2,149 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,013 44% 936 44%
Operating costs................................... 379 17% 336 15%
Depreciation and amortization related to operating
assets........................................ 167 7% 151 7%
------- --- ------- ---
Gross margin........................................... $ 737 32% $ 726 34%
======= === ======= ===
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.
Gross margin increased $11 million, or 2%, to $737 million in 2004, driven
by Electric Delivery segment's higher operating revenues. The Electric Delivery
segment's gross margin increased $10 million, or 4%, to $255 million reflecting
higher tariffs, partially offset by higher operating costs. The Energy segment's
gross margin was flat as higher sales pricing, which was partially offset by
lower results from hedging and risk management activities, and more effective
management of gas-fired generation versus purchased power supply sourcing
approximated the unfavorable effects of a volume mix shift from higher-margin
retail sales to wholesale sales, higher delivery fees, increased operating
expenses and milder weather.
Operating costs increased $43 million, or 13%, to $379 million in 2004
reflecting $23 million in incremental costs primarily associated with Energy's
planned outage for refueling at the nuclear generation facility. Increases in
various other cost categories were individually not significant.
Depreciation and amortization included in gross margin, which relates to
assets directly used in the generation and delivery of power, rose $16 million,
or 11%, to $167 million in 2004. This increase reflected regulatory asset
amortization in 2004 of $14 million associated with Electric Delivery
securitization bonds issued in August 2003, normal additions and replacements of
equipment and increased coal mining-related activities, partially offset by a
$12 million impact of lower depreciation related to Energy's generation fleet,
due primarily to extensions of estimated depreciable lives to better reflect
useful lives. (See Note 1 to Financial Statements.)
37
Depreciation and amortization not included in gross margin totaled $11
million and $16 million for the three months ended June 30, 2004 and 2003,
respectively. This decline reflected a decrease in software amortization due to
extending the useful lives of assets licensed to Capgemini in connection with
the outsourcing transaction.
SG&A expense increased $88 million, or 43%, to $295 million in 2004. The
increase reflected $38 million in compensation earned by Mr. Wilder under his
employment agreement and approximately $17 million in higher deferred incentive
compensation expense, both due to the increase in the price of TXU Corp. common
stock, $20 million related to consulting and professional fees in conjunction
with the formulation and execution of strategic initiatives and $11 million in
staffing and other costs to improve customer call center service levels.
Other deductions increased $433 million to $438 million in 2004. The 2004
amount reflects the initiatives discussed above under "Strategic Initiatives and
Other Actions," and includes $189 million in asset writedowns, $100 million in
accruals for the anticipated resolution of outstanding litigation, $92 million
in charges for employee severance and $49 million in losses on retirement of
debt, primarily related to the equity-linked securities.
Interest expense and related charges decreased $27 million, or 13%, to
$174 million in 2004, reflecting a $44 million decrease due to lower average
interest rates, partially offset by a $16 million increase due to higher average
borrowings.
The effective income tax rate on results from continuing operations before
extraordinary items was 63.1% on a loss in 2004 and 30.4% on income in 2003. The
increase was driven by several factors, including the $75 million tax benefit
arising from the utilization of the TXU Europe capital loss carryforward against
the gain from the sale of TXU Fuel Company and the ongoing benefits of lignite
depletion and investment tax credit amortization, partially offset by the
non-deductibility of certain executive compensation and the limited
deductibility of expenses recorded in connection with the repurchase of
equity-linked securities.
Results from continuing operations before extraordinary gain decreased
$252 million to a $92 million loss in 2004 (an after-tax measure). This
performance reflected a decrease of $173 million in the Energy segment driven by
$187 million of asset write-downs ($122 million after-tax) and $70 million of
severance costs ($48 million after-tax) reported in other deductions as
discussed above. Earnings in the Electric Delivery segment decreased $5 million,
or 10%, to $47 million due to $19 million of primarily severance-related other
deductions ($13 million after-tax) and higher SG&A expenses, partially offset by
higher gross margin. Corporate and other expenses increased $74 million,
primarily reflecting the following:
o litigation accrual of $65 million after-tax
o debt retirement expenses of $39 million after-tax
o non-recurring executive compensation expenses of $38 million pre and
after-tax
o consulting fees of $12 million after-tax
o higher deferred incentive compensation expense of $5 million
after-tax due to a higher TXU Corp. stock price
partially offset by:
o recognition of a $75 million tax benefit related to the TXU Fuel
Company capital gain
o interest income of $8 million after-tax on Energy's exchangeable
preferred membership interests acquired by TXU Corp.
Net pension and postretirement benefit costs reduced results from
continuing operations by $19 million in 2004 and $18 million in 2003.
Results from discontinued operations totaled income of $330 million in
2004 and a loss of $49 million in 2003. Losses of the discontinued TXU Gas
business totaled $158 million in 2004 and $13 million in 2003. TXU Gas' results
in 2004 include after-tax charges of $151 million related to regulatory
disallowances arising from the system-wide distribution rate case, goodwill
impairment and increased income tax reserves. Results of the discontinued TXU
38
Australia business totaled a loss of $118 million in 2004 and income of $31
million in 2003. TXU Australia's results in 2004 include a deferred tax charge
of $117 million related to the sale of the business. Discontinued operations
results in 2004 also included a deferred tax credit of $636 million to recognize
a portion of the deferred tax asset arising from the 2002 write-off of the
investment in TXU Europe. Finally, discontinued operations results in 2004
include a $17 million after-tax impairment charge arising from a June 2004
decision to sell the Pedricktown, New Jersey generation facility and discontinue
related operations, and a $6 million after-tax charge to settle a contract
dispute related to the strategic retail services business. Additional discussion
of the above items and a detailed analysis of discontinued operations results
are presented in Note 3 to Financial Statements.
An extraordinary gain of $16 million (net of tax of $9 million) in 2004
represents an increase in the carrying value of Electric Delivery's regulatory
asset subject to securitization. The second and final tranche of the
securitization bonds was issued in June 2004. The increase in the related
regulatory asset is due to the effect of higher interest rates on the bonds and
therefore increased amounts to be recovered from REPs through delivery fee
surcharges to service the bonds.
Results per share of common stock were a net loss of $1.87 (basic and
diluted) in 2004 compared to net income of $0.31 (diluted) in 2003. Results in
2004 were unfavorably impacted by a $2.65 per share effect from TXU Corp.'s
repurchase of Energy's exchangeable preferred membership interests in April
2004. The amounts paid in excess of the carrying value of the instruments, net
of an associated income tax benefit, totaled $849 million. This premium was
charged to additional paid-in capital and treated in a manner similar to
preference share dividends in computing earnings per share.
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
TXU Corp.'s operating revenues increased $357 million, or 9%, to $4.4
billion in 2004. Operating revenues rose $266 million, or 7%, to $4.1 billion in
the Energy segment reflecting higher wholesale volumes and pricing. Retail
electricity revenues declined as the effect of lower volumes due to competitive
activity and milder weather was only partially offset by higher pricing.
Operating revenues in the Electric Delivery segment increased by $49 million, or
5%, to $1.0 billion driven by higher transmission and distribution fees
(tariffs). Consolidated revenue growth also reflected a $31 million reduction in
the intercompany sales elimination, primarily reflecting lower sales by Electric
Delivery to Energy as sales to nonaffiliated REPs increased.
Gross Margin
Six Months Ended June 30,
---------------------------------------------
% of % of
2004 Revenue 2003 Revenue
------- ------- -------- -------
Operating revenues..................................... $ 4,421 100% $ 4,064 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,920 43% 1,777 44%
Operating costs................................... 719 16% 688 17%
Depreciation and amortization related to operating
assets........................................ 333 8% 319 8%
------- --- ------- ---
Gross margin........................................... $ 1,449 33% $ 1,280 31%
======= === ======= ===
Gross margin increased $169 million, or 13%, to $1.4 billion in 2004. The
Energy segment's gross margin increased $160 million, or 21%, to $939 million
reflecting the favorable effects of higher sales pricing, which was partially
offset by the effect of lower results from hedging and risk management
activities, more effective management of gas-fired generation versus purchased
power supply sourcing, as well as increased coal-fired production, partially
offset by the unfavorable effect of a volume mix shift from higher-margin retail
sales to wholesale sales. The Electric Delivery segment's gross margin increased
$7 million, or 1%, to $518 million reflecting higher operating revenue.
Operating costs increased $31 million, or 5%, to $719 million in 2004,
driven by $22 million in incremental costs primarily associated with a planned
outage for refueling at the nuclear generation facility.
Depreciation and amortization included in gross margin, which relates to
assets directly used in the generation and delivery of power, rose $14 million,
or 4%, to $333 million in 2004. This increase reflected regulatory asset
39
amortization in 2004 of $28 million associated with Electric Delivery
securitization bonds issued in August 2003, normal additions and replacements of
equipment and the effect of higher asset retirement obligations due to new
mining activity. These increases were partially offset by a $34 million impact
of lower depreciation related to Energy's generation fleet, due primarily to
extensions of estimated depreciable lives to better reflect useful lives. (See
Note 1 to Financial Statements.)
Depreciation and amortization not included in gross margin totaled $36
million and $33 million for the six months ended June 30, 2004 and 2003,
respectively. Capitalized software amortization represents a significant
component of these amounts.
SG&A expense increased $104 million, or 26%, to $511 million in 2004. The
increase reflected $38 million in compensation earned by Mr. Wilder under his
employment agreement and approximately $30 million in higher deferred incentive
compensation expense, both due to the increase in the price of TXU Corp. common
stock, $20 million related to consulting and professional fees in conjunction
with the formulation and execution of strategic initiatives, $14 million in
compensation expense in the first quarter of 2004 under Mr. Wilder's employment
agreement, $11 million in bad debt expense and $11 million in staffing and other
costs to improve customer call center service levels.
Other deductions increased $434 million to $457 million in 2004. The 2004
amount reflects the initiatives discussed above under "Strategic Initiatives and
Other Actions" and includes $189 million in asset writedowns, $100 million in
accruals for the anticipated resolution of outstanding litigation, $108 million
in charges for employee severance and $49 million in losses on retirement of
debt, primarily related to the equity-linked securities. The 2003 period
includes $16 million of equity losses of Pinnacle prior to its consolidation in
March 2003.
Interest expense and related charges decreased $45 million, or 11%, to
$358 million in 2004, primarily reflecting a $40 million decrease due to lower
average interest rate and a $4 million decrease due to lower average borrowings.
The effective income tax rate on results from continuing operations before
extraordinary items was 177.4% on a loss in 2004 and 27.9% on income in 2003.
The increase was driven by several factors, including the $75 million tax
benefit arising from the utilization of the TXU Europe capital loss carryforward
against the gain from the sale of TXU Fuel Company and the ongoing benefits of
lignite depletion and investment tax credit amortization, partially offset by
the non-deductibility of certain executive compensation and the limited
deductibility of expenses recorded in connection with the repurchase of
equity-linked securities.
Income from continuing operations before extraordinary gain and cumulative
effect of changes in accounting principles decreased $153 million to $41 million
in 2004 (an after-tax measure). This performance reflected a decrease of $91
million in the Energy segment. Results in the Energy segment reflected $187
million of asset write-offs ($122 million after-tax) and $86 million of
severance costs ($59 million after-tax) reported in other deductions as
discussed above and higher SG&A expenses, partially offset by higher gross
margin. Earnings in the Electric Delivery segment remained flat, as $19 million
of primarily severance-related other deductions ($13 million after-tax) and
higher SG&A expenses were offset by lower interest expense and higher gross
margin. Corporate and other expenses increased $62 million, primarily
reflecting:
o litigation accrual of $65 million after-tax
o non-recurring executive compensation expenses of $52 million pre and
after-tax
o debt retirement expenses of $39 million after-tax
o consulting fees of $12 million after-tax
partially offset by:
o recognition of a $75 million tax benefit related to the TXU Fuel
Company capital gain
o the effect of $11 million after-tax in equity losses in 2003 related
to the telecommunications business, then a joint venture
40
o lower net external and affiliate interest expense (net of interest
income) of $11 million after-tax due to financing-related activity.
o interest income of $8 million after-tax on Energy's exchangeable
preferred membership interests acquired by TXU Corp.
Net pension and postretirement benefit costs reduced income from
continuing operations by $41 million in 2004 and $39 million in 2003.
Income from discontinued operations totaled $380 million in 2004 and $20
million in 2003. Results of the discontinued TXU Gas business totaled a loss of
$120 million in 2004 and income of $39 million in 2003. TXU Gas' results in 2004
include after-tax charges of $151 million related to regulatory disallowances
arising from the system-wide distribution rate case, goodwill impairment and
increased income tax reserves. Results of the discontinued TXU Australia
business totaled a loss of $86 million in 2004 and income of $62 million in
2003. TXU Australia's results in 2004 include a deferred tax charge of $117
million related to the sale of the business. Discontinued operations results in
2004 also included a deferred tax credit of $636 million to recognize a portion
of the deferred tax asset arising from the 2002 write-off of the investment in
TXU Europe. Finally, discontinued operations results in 2004 include a $17
million after-tax impairment charge arising from a June 2004 decision to sell
the Pedricktown, New Jersey generation facility and discontinue related
operations, and a $6 million after-tax charge to settle a contract dispute
related to the strategic retail services business. Additional discussion of the
above items and a detailed analysis of discontinued operations results are
presented in Note 3 to Financial Statements.
An extraordinary gain of $16 million (net of tax of $9 million) in 2004
represents an increase in the carrying value of Electric Delivery's regulatory
asset subject to securitization. The second and final tranche of the
securitization bonds was issued in June 2004. The increase in the related
regulatory asset is due to the effect of higher interest rates on the bonds and
therefore increased amounts to be recovered from REPs through delivery fee
surcharges to service the bonds.
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.)
Results per share of common stock were a net loss of $1.32 (basic and
diluted) in 2004 compared to net income of $0.45 (diluted) in 2003. Results in
2004 were unfavorably impacted by a $2.64 per share effect from TXU Corp.'s
repurchase of Energy's exchangeable preferred membership interests in April
2004. The amounts paid in excess of the carrying value of the instruments, net
of an associated income tax benefit, totaled $849 million. This premium was
charged to additional paid-in capital and treated in a manner similar to
preference share dividends in computing earnings per share.
Commodity Contracts and Mark-to-Market Activities
- -------------------------------------------------
The table below summarizes the changes in commodity contract assets and
liabilities for the six months ended June 30, 2004 (excluding the discontinued
TXU Australia business). 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, versus
settlement 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.
41
Six Months
Ended
---------------
June 30, 2004
---------------
Balance of net commodity contract assets at beginning of period............... $ 108
Settlements of positions included in the opening balance (1).................. (39)
Unrealized mark-to-market valuations of positions held at end of period (2)... 25
Other activity (3)............................................................ (7)
-----
Balance of net commodity contract assets at end of period..................... $ 87
=====
__________________________
(1) Represents unrealized mark-to-market valuations of these positions
recognized in earnings as of the beginning of the period.
(2) There were no significant changes in fair value attributable to
changes in valuation techniques.
(3) 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.
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, which are reflected in changes in cash flow
hedge and other derivative assets and liabilities. The total net effect of
recording unrealized gains and losses under mark-to-market accounting, versus
settlement accounting, is summarized as follows:
Six Months
Ended June 30,
-------------------
2004 2003
------ ------
Unrealized gains/(losses) related to commodity contract portfolio................ $ (14) $ 33
Ineffectiveness gains/(losses) related to cash flow hedges....................... (17) 14
------ ------
Total unrealized gains/(losses).................................................. $ (31) $ 47
====== ======
These amounts are included in the "hedging and risk management activities"
component of revenues.
Maturity Table -- Of the net commodity contract asset balance above at
June 30, 2004, the amount representing unrealized mark-to-market net gains that
have been recognized in current and prior years' earnings is $107 million. The
offsetting net liability of $20 million included in the June 30, 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 June 30, 2004, scheduled by
contractual settlement dates of the underlying positions.
Maturity dates of unrealized net mark-to-market balances at June 30, 2004
--------------------------------------------------------------------------
Maturity Maturity in
less 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........... $ 90 $ - $ - $ - $ 90
Prices provided by other
external sources............. (36) 44 - (2) 6
Prices based on models........... 11 - - - 11
---- ---- --- ---- -----
Total............................ $ 65 $ 44 $ - $ (2) $ 107
==== ==== === ==== =====
Percentage of total fair value... 61% 41% -% (2)% 100%
As the above table indicates, essentially all of the unrealized
mark-to-market valuations at June 30, 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. 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. 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.
42
Energy
- -------
Financial Results
- -----------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2004 2003(a) 2004 2003(a)
------ -------- ----- --------
Operating revenues.......................................... $ 2,115 $ 2,016 $ 4,072 $ 3,806
Costs and expenses:
Cost of energy sold and delivery fees.................. 1,348 1,282 2,603 2,498
Operating costs........................................ 200 162 366 341
Depreciation and amortization.......................... 88 94 185 206
Selling, general and administrative expenses........... 163 149 307 292
Franchise and revenue-based taxes ..................... 27 28 53 55
Other income .......................................... (12) (16) (13) (24)
Other deductions....................................... 261 2 281 5
Interest income........................................ (7) (1) (8) (3)
Interest expense and related charges................... 93 87 172 163
------- ------- ------- -------
Total costs and expenses........................... 2,161 1,787 3,946 3,533
------- ------- ------- -------
Income (loss) from continuing operations before income taxes
and cumulative effect of changes in accounting principles... (46) 229 126 273
Income tax expense (benefit)................................ (27) 75 27 83
------- ------- ------- -------
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles.................. $ (19) $ 154 $ 99 $ 190
======= ======= ======= =======
- -----------------
The segment includes the electricity generation, wholesale and retail
energy sales, and hedging and risk management operations of Energy,
operating principally in the competitive Texas market.
(a)Prior year amounts reflect the reclassification of the strategic retail
services business and the Pedricktown, New Jersey generation operations as
discontinued operations (see Note 3 to Financial Statements).
43
Energy
- ------
Operating Data
- --------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
----- ----- ----- ------
Operating statistics - volumes:
Retail electricity (GWh):
Historical service territory (a):
Residential.............................................. 7,367 8,080 14,486 16,250
Small business (b)....................................... 2,542 3,321 5,075 6,565
------- ------- ------- -------
Total historical service territory..................... 9,909 11,401 19,561 22,815
Other territories (a):
Residential.............................................. 731 437 1,249 799
Small business (b)....................................... 89 77 150 148
------- ------- ------- -------
Total other territories................................ 820 514 1,399 947
Large business and other customers....................... 6,771 7,889 13,480 15,440
------- ------- ------- -------
Total retail electricity............................... 17,500 19,804 34,440 39,202
Wholesale electricity (GWh)................................. 12,171 8,337 24,724 15,743
------- ------- ------- -------
Total retail and wholesale electricity................. 29,671 28,141 59,164 54,945
======= ======= ======= =======
Production and purchased power (GWh):
Nuclear (base load)...................................... 3,992 4,413 8,845 9,153
Lignite/coal (base load)................................. 10,223 10,144 20,426 18,831
Gas/oil.................................................. 1,401 4,160 2,311 7,822
Purchased power.......................................... 15,237 11,367 29,469 21,863
------- ------- ------- -------
Total energy supply.................................... 30,853 30,084 61,051 57,669
Less line loss and other................................. 1,182 1,943 1,887 2,724
------- ------- ------- -------
Net energy supply...................................... 29,671 28,141 59,164 54,945
======= ======= ======= =======
Base load capacity factors (%):
Nuclear ................................................. 79.5 88.1 88.3 91.7
Lignite/coal ............................................ 83.9 83.0 83.8 78.1
Customer counts:
Retail electricity customers (end of period and in
thousands - based on number of meters):
Historical service territory (a):
Residential.............................................. 2,037 2,139
Small business (b)....................................... 318 324
------ ------
Total historical service territory..................... 2,355 2,463
Other territories (a)
Residential.............................................. 183 109
Small business (b)....................................... 6 4
----- -----
Total other territories................................ 189 113
Large business and other customers....................... 77 73
------ ------
Total retail electricity customers..................... 2,621 2,649
====== ======
(a) Historical service and other territory data for 2003 are best estimates.
(b) Customers with demand of less than 1 MW annually.
44
Energy
- ------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------ -------
Operating revenues (millions of dollars):
Retail electricity revenues:
Historical service territory (a):
Residential.............................................. $ 750 $ 768 $ 1,400 $ 1,421
Small business (b)....................................... 258 339 514 633
------- ------- ------- -------
Total historical service territory..................... 1,008 1,107 1,914 2,054
Other territories (a):
Residential.............................................. 72 40 115 71
Small business (b)....................................... 8 5 14 11
------- ------- ------ -------
Total other territories................................ 80 45 129 82
Large business and other customers....................... 455 488 908 936
------- ------- ------ -------
Total retail electricity revenues........................... 1,543 1,640 2,951 3,072
Wholesale electricity revenues.............................. 476 279 942 515
Hedging and risk management activities...................... 11 52 3 135
Other revenues.............................................. 85 45 176 84
------- ------- ------- -------
Total operating revenues............................... $ 2,115 $ 2,016 $ 4,072 $ 3,806
======= ======= ======= =======
Weather (average for service territory)(c)
Percent of normal:
Cooling degree days.................................... 102.7 107.1 105.2 104.7
Heating degree days.................................... 82.0 53.0 87.6 102.3
(a)Historical service and other territory data for 2003 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).
45
Energy
- ------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2004 2003 2004 2003
----- ------ ------ ------
Fuel and Purchased Power Costs ($/MWh)
Nuclear generation....................................... $ 4.25 $ 4.35 $ 4.34 $ 4.33
Lignite/coal generation.................................. $ 12.35 $12.84 $12.81 $12.94
Gas/oil generation and purchased power................... $ 47.17 $48.68 $45.60 $48.41
Average total electricity supply....................... $ 30.08 $30.09 $28.66 $29.83
Average Retail Volume (KWh)/Customer
(calculated using average no. of customers for period)
Residential.............................................. 3,649 3,748 7,108 7,456
Small business........................................... 8,161 10,342 16,222 20,272
Large business and other customers....................... 87,380 106,038 184,108 204,454
Average Revenues ($/MWh)
Residential.............................................. $101.53 $94.77 $96.27 $87.45
Small business........................................... $101.28 $101.37 $101.06 $95.97
Large business and other customers....................... $ 67.14 $61.84 $67.33 $60.64
Average Delivery Fees ($/MWh) $ 20.86 $17.90 $21.59 $18.83
Estimated Share of ERCOT Retail Markets
Historical service territory (a):
Residential (b).......................................... 85% 91%
Small business (b)....................................... 79% 85%
Total ERCOT
Residential (b).......................................... 45% 47%
Small business (b)....................................... 32% 34%
Large business and other customers (c)................... 35% 39%
Hedging and Risk Management Activities
Net unrealized mark-to-market gains/(losses)............. $ (13) $ 64 $ (31) $ 47
Realized gains/(losses).................................. 24 (12) 34 88
----- ----- ----- -----
Total.................................................. $ 11 $ 52 $ 3 $ 135
===== ===== ===== =====
(a) Historical service and other territory data for 2003 are best estimates.
(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.
46
Energy
- -------
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
Operating revenues increased $99 million, or 5%, to $2.1 billion in 2004.
Retail electricity revenues decreased $97 million, or 6%, to $1.5 billion
reflecting a $191 million decline attributable to a 12% drop in sales volumes,
driven by the effect of competitive activity and, to a lesser extent, milder
weather, partially offset by a $94 million increase due to higher pricing.
Higher pricing reflected increased price-to-beat rates, due to approved fuel
factor increases, and higher contract pricing in the competitive large business
market, both resulting from higher natural gas prices. Retail electricity
customer counts at June 30, 2004 declined 1% from June 30, 2003 but have
increased 1% from December 31, 2003. Wholesale electricity revenues grew $197
million, or 71%, to $476 million reflecting a $128 million increase attributable
to a 46% rise in sales volumes and a $69 million increase due to the effect of
increased natural gas prices on wholesale prices. Higher wholesale electricity
volumes reflected the establishment of the new northeast zone in ERCOT. Because
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 $41 million from a net gain of $52 million in 2003 to a net gain of $11
million in 2004. Changes in these results reflect market price movements on
commodity positions held to hedge gross margin. 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 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 $13 million in 2004 and net unrealized
gains of $64 million in 2003 The majority of 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 $42 million
in revenues for the second quarter of 2004. The increase in other revenues of
$40 million to $85 million was primarily driven by this change.
Gross Margin
Three Months Ended
June 30,
-------------------------------------------------
% of % of
2004 Revenue 2003 Revenue
------ --------- ------ ---------
Operating revenues..................................... $ 2,115 100% $ 2,016 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 1,348 64% 1,282 64%
Operating costs................................... 200 9% 162 8%
Depreciation and amortization related to
generation assets................................ 82 4% 86 4%
------- --- ------- ---
Gross margin........................................... $ 485 23% $ 486 24%
======= === ======= ===
Gross margin decreased $1 million to $485 million in 2004. The favorable
effect of higher sales pricing, which was partially offset by lower results from
hedging and risk management activities, and more effective management of
gas-fired generation versus purchased power supply sourcing approximated the
unfavorable effects of a volume mix shift from higher margin retail sales to
wholesale sales, higher delivery fees, increased operating costs and milder
weather. Cost of energy sold in 2004 was unfavorably impacted by an estimated
$40 million effect of the planned nuclear facility outage (due to higher cost of
replacement power), compared to a similar estimated $25 million in 2003 due to
an unplanned outage caused by a transmission grid disturbance.
Operating costs increased $38 million, or 23%, to $200 million in 2004.
The increase reflected $23 million in incremental testing, inspection and
component repair costs associated with the planned outage for refueling at the
nuclear facility, as well as increases in various cost categories that were
individually immaterial. Depreciation and amortization related to generation
assets decreased $4 million, or 5%, to $82 million, reflecting a decrease of $12
million due to extensions of estimated average depreciable lives of nuclear and
lignite generation facilities' assets to better reflect their useful lives,
partially offset by the effect of higher asset retirement obligations due to new
mining activity. (See Note 1 to Financial Statements).
47
Depreciation and amortization not included in gross margin totaled $6
million and $8 million for the three months ended June 30, 2004 and 2003,
respectively. This decline reflects the transfer of information technology
assets, principally capitalized software, to an affiliate in connection with the
Capgemini transaction.
SG&A expenses increased $14 million, or 9%, to $163 million in 2004
reflecting increases of $11 million in increased staffing and other costs to
improve customer call center service levels and $10 million in deferred
incentive compensation expense due to the increase in the price of TXU Corp.
stock, partially offset by the benefits of various cost reduction initiatives of
$5 million and lower bad debt expense of $2 million.
Other income decreased by $4 million to $12 million in 2004. Other income
in both 2004 and 2003 reflected $12 million of amortization of a gain on the
sale of two generation plants in 2002. Other income in 2003 also included a $3
million net gain on the sale of certain retail gas operations.
Other deductions increased by $259 million to $261 million in 2004. Other
deductions in 2004 consist largely of $109 million in software writedowns, $79
million in spare parts inventory writedowns and $71 million for employee
severance. These charges are discussed above under "Strategic Initiatives and
Other Actions."
Interest income increased by $6 million to $7 million in 2004 primarily
due to higher average advances to affiliates.
Interest expense and related charges increased by $6 million, or 7%, to
$93 million in 2004. The increase reflects $18 million due to higher average
debt levels partially offset by $9 million due to lower average interest rates
and $3 million in interest reimbursed to Electric Delivery in 2003 related to
the excess mitigation credit that ceased at the end of 2003.
The effective income tax rate was 58.7% on a loss in 2004 and 32.8% on
income in 2003. The effective rate increase was driven by the effects of
ongoing tax benefits of depletion allowances and amortization of investment
tax credits.
Results from continuing operations before cumulative effect of changes in
accounting principles decreased $173 million to a loss of $19 million in 2004,
reflecting the increase in other deductions and SG&A expenses. Net pension and
postretirement benefit costs reduced results from continuing operations by $9
million in both 2004 and 2003.
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
- --------------------------------------------------------------------------
Operating revenues increased $266 million, or 7%, to $4.1 billion in 2004.
Retail electricity revenues decreased $121 million, or 4%, to $3.0 billion
reflecting a $373 million decline attributable to a 12% drop in sales volumes,
driven by the effect of competitive activity and, to a lesser extent, milder
weather, partially offset by a $252 million increase due to higher pricing.
Higher pricing reflected increased price-to-beat rates, due to approved fuel
factor increases, and higher contract pricing in the competitive large business
market, both resulting from higher natural gas prices. Retail electricity
customer counts at June 30, 2004 declined 1% from June 30, 2003 but have
increased 1% from December 31, 2003. Wholesale electricity revenues grew $427
million, or 83%, to $942 million reflecting a $294 million increase attributable
to a 57% rise in sales volumes and a $133 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 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 $132 million from a net gain of $135 million in 2003 to a net gain of
$3 million in 2004. Changes in these results reflect market price movements on
commodity positions held to hedge gross margin. The comparison to 2003 also
48
reflects the effect of favorable gas price movements in 2003 in the wholesale
gas operations (approximately $40 million) and 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 $31 million in 2004 and net
unrealized gains of $47 million in 2003. The majority of 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 $88 million in revenues for the first six months of 2004. The increase
in other revenues of $92 million to $176 million in 2004 was primarily driven by
this change.
Gross Margin
Six Months Ended
June 30,
-----------------------------------------------
% of % of
2004 Revenue 2003 Revenue
------ --------- ------ ---------
Operating revenues..................................... $ 4,072 100% $ 3,806 100%
Costs and expenses:
Cost of energy sold and delivery fees............. 2,603 64% 2,498 66%
Operating costs................................... 366 9% 341 9%
Depreciation and amortization related to
generation assets.............................. 164 4% 188 5%
------- --- ------- =--
Gross margin........................................... $ 939 23% $ 779 20%
======= === ======= ===
Gross margin increased $160 million, or 21%, to $939 million in 2004. The
favorable effect of higher sales pricing, which was partially offset by lower
results from hedging and risk management activities, more effective management
of gas-fired generation versus purchased power supply sourcing, as well as
increased base load coal-fired production, were partially offset by the
unfavorable effects of a volume mix shift from higher-margin retail sales to
wholesale sales, higher delivery fees, increased operating costs and milder
weather. Cost of energy sold in 2004 was unfavorably impacted by an estimated
$40 million effect of the planned nuclear facility outage (due to higher cost of
replacement power), compared to a similar estimated $30 million effect in 2003
due to an unplanned outage caused by a transmission grid disturbance and an
unplanned outage to repair a pump motor.
Operating costs increased $25 million, or 7%, to $366 million in 2004. The
increase reflected $29 million in incremental testing, inspection and component
repair costs associated with the planned outage for refueling at the nuclear
facility, partially offset by the timing of other repair and maintenance
expenses. Depreciation and amortization related to generation assets decreased
$24 million, or 13%, to $164 million, reflecting a decrease of $34 million due
to extensions of estimated average depreciable lives of nuclear and lignite
generation facilities' assets to better reflect their useful lives, partially
offset by the effect of higher asset retirement obligations due to new mining
activity. (See Note 1 to Financial Statements).
Depreciation and amortization not included in gross margin totaled $21
million and $18 million for the six months ended June 30, 2004 and 2003,
respectively. The increase reflects the acceleration of the amortization of
certain software to reflect a shorter useful life, partially offset by the
effect of the transfer of information technology assets, principally capitalized
software, to an affiliate in connection with the Capgemini transaction.
SG&A expenses increased $15 million, or 5%, to $307 million in 2004
reflecting increases of $11 million in bad debt expense, $10 million in higher
staffing and other costs to improve customer call center service levels and $8
million in higher deferred incentive compensation expense due to the increase in
the price of TXU Corp. stock, partially offset by the benefits of various cost
reduction initiatives of $12 million.
Other income decreased by $11 million to $13 million in 2004. Other income
in both 2004 and 2003 reflected $12 million of amortization of a gain on the
sale of two generation plants in 2002. Other income in 2003 also included a $9
million net gain on the sale of certain retail gas operations.
49
Other deductions increased $276 million to $281 million in 2004. Other
deductions in 2004 consist largely of $109 million for software writedowns, $86
million for employee severance and $79 million in spare parts inventory
writedowns. These charges are discussed above under "Strategic Initiatives and
Other Actions."
Interest income increased by $5 million to $8 million in 2004 primarily
due to higher average advances to affiliates.
Interest expense and related charges increased by $9 million, or 6%, to
$172 million in 2004. The increase reflects $8 million due to higher average
debt levels and $6 million due to higher average interest rates partially
offset by $5 million in interest reimbursed to Electric Delivery in 2003 related
to the excess mitigation credit that ceased at the end of 2003.
The effective income tax rate decreased to 21.4% in 2004 from 30.4% in
2003 driven by the effects of ongoing tax benefits of depletion allowances and
amortization of investment tax credits on a lower income base in 2004.
Income from continuing operations before cumulative effect of changes in
accounting principles decreased $91 million to $99 million in 2004, reflecting
the increase in other deductions and SG&A expenses, partially offset by the
higher gross margin. Net pension and postretirement benefit costs reduced income
from continuing operations by $19 million in 2004 and $18 million in 2003.
Electric Delivery
- -----------------
Financial Results
- -----------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Operating revenues.......................................... $ 518 $ 486 $ 1,041 $ 992
Costs and expenses:
Operating costs........................................ 180 176 356 350
Depreciation and amortization.......................... 83 69 170 137
Selling, general and administrative expenses........... 53 47 102 97
Franchise and revenue-based taxes ..................... 59 61 117 120
Other income .......................................... (2) (2) (4) (4)
Other deductions ...................................... 19 -- 19 --
Interest income........................................ (14) (14) (25) (30)
Interest expense and related charges................... 71 74 141 155
------- ------- -------- -------
Total costs and expenses........................... 449 411 876 825
------- ------- -------- -------
Income before income taxes.................................. 69 75 165 167
Income tax expense.......................................... 22 23 52 54
------- ------- -------- -------
Income before extraordinary gain............................ $ 47 $ 52 $ 113 $ 113
======= ======= ======== =======
- -----------------------
This segment consists of the electricity transmission and distribution business,
which is subject to regulation by Texas authorities.
50
Electric Delivery
- -----------------
Operating Data
- --------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
Operating statistics - volumes:
Electric energy delivered (GWh).............................................. 24,900 24,378 48,531 48,286
Reliability statistics:
System Average Interruption Duration Index (SAIDI) (non-storm)(a)............ 81.58 75.47
System Average Interruption Frequency Index (SAIFI)(non-storm)(a)............ 1.16 1.24
Customer Average Interruption Duration Index (CAIDI)(non-storm)(a)........... 70.35 60.96
Electricity points of delivery (end of period and in thousands):
Electricity distribution points of delivery (based on number of meters)(b)... 2,954 2,909
Operating revenues (millions of dollars):
Electricity transmission and distribution:
Affiliated (Energy)..................................................... $ 332 $ 349 $ 681 $ 726
Non-affiliated.......................................................... 186 137 360 266
------- ------- ------- -------
Total operating revenues.............................................. $ 518 $ 486 $ 1,041 $ 992
======= ======= ======= =======
- ------------------
(a) SAIDI is the average number of total electric service outage minutes per
customer in the past year. SAIFI is the average number of electric service
interruptions per customer in the past year. CAIDI is the average number of
electric service outage minutes per interruption in the past year.
(b) Includes lighting sites, principally guard lights, for which Energy is the
REP but are not included in Energy's customer count. Such sites totaled
98,292 and 103,554 at June 30, 2004 and 2003, respectively.
51
Electric Delivery
- -----------------
Change in Business -- On June 17, 2004, TXU Corp. announced the sale of
TXU Gas, which is expected to close by the end of 2004. TXU Gas is reported as
a discontinued operation, and therefore is no longer included in the Electric
Delivery (formerly Energy Delivery) segment. Prior period financial information
has been reclassified to reflect the discontinued business.
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
Operating revenues increased $32 million, or 7%, to $518 million in 2004.
Higher tariffs provided $26 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 late 2003 and 2004 ($7
million) and an increase in distribution tariffs to recover higher transmission
costs ($5 million). A 2% increase in electricity volumes delivered in 2004
resulted in a $3 million increase in revenue, reflecting customer growth of
1.5%. Delivery fee surcharges associated with the second issuance of
securitization bonds in June 2004 were billed to customers starting on July 1,
2004. The estimated impact of these additional surcharges for the remainder of
2004 is an increase to revenues of $44 million with an offsetting increase to
amortization expense for the same amount.
Gross Margin
Three Months Ended June 30,
---------------------------------------------
% of % of
2004 Revenue 2003 Revenue
------ --------- ------ -------
Operating revenues..................................... $ 518 100% $ 486 100%
Costs and expenses:
Operating costs................................... 180 35% 176 36%
Depreciation and amortization..................... 83 16% 66 14%
------- --- ------- ---
Gross margin........................................... $ 255 49% $ 244 50%
======= === ======= ===
Gross margin increased $11 million, or 4%, to $255 million in 2004, driven
by higher operating revenues. The increase in operating costs of $4 million, or
2%, to $180 million, reflects a $2 million increase in third-party transmission
costs and a $2 million increase in metering-related costs due to increased
disconnect/reconnect activities. Depreciation and amortization included in gross
margin reflects depreciation of assets directly used in the delivery of
electricity and amortization of regulatory assets. The increase in depreciation
and amortization of $17 million, or 26%, to $83 million reflected $14 million in
higher amortization of regulatory assets associated with the issuance of
securitization bonds (offsetting the same amount of revenue increase) and $3
million in higher depreciation due to normal additions and replacements of
equipment.
An unusual level of storm activity in the second quarter of 2004 resulted
in approximately $25 million in damage repairs, which have been recorded as a
regulatory asset.
Depreciation and amortization not included in gross margin totaled $3
million for the three months ended June 30, 2003, compared to essentially zero
in the 2004 period. This decline reflects a transfer of information technology
assets, principally capitalized software, to a subsidiary of TXU Corp. in
connection with the Capgemini outsourcing transaction (see Note 1 to Financial
Statements).
SG&A expenses increased $6 million, or 13%, to $53 million in 2004, driven
by a $3 million increase in deferred incentive compensation expense due
primarily to a higher TXU Corp. common stock price. The balance of the increase
was due to individually immaterial increases in various expense categories.
Other deductions of $19 million in 2004 consist principally of
severance-related charges in connection with the Capgemini outsourcing
transaction and other cost reduction initiatives discussed above under
"Strategic Initiatives and Other Actions".
52
Interest expense and related charges decreased $3 million, or 4%, to $71
million in 2004. The decrease reflected a $5 million impact of lower average
interest rates and $3 million in interest paid to REPs in 2003 related to the
excess mitigation credit that ceased at the end of 2003, partially offset by a
$5 million impact of higher average borrowings.
The effective income tax rate increased to 31.9% in 2004 from 30.7% in
2003. The increase primarily reflected the effect of higher state income taxes
and interim period estimation differences, partially offset by the effect of a
non-taxable Medicare subsidy in 2004 related to postretirement benefit expense.
Income before extraordinary gain decreased $5 million, or 10%, to $47
million in 2004, primarily reflecting the other deductions and higher SG&A
expenses, partially offset by higher gross margin. Net pension and
postretirement benefit costs reduced income before extraordinary gain by $4
million in both 2004 and 2003.
Electric Delivery
- -----------------
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
Operating revenues increased $49 million, or 5%, to $1.0 billion in 2004.
Higher tariffs provided a $54 million increase, reflecting delivery fee
surcharges associated with the issuance of securitization bonds in August 2003
($28 million), transmission rate increases approved in late 2003 and 2004 ($16
million) and an increase in distribution tariffs to recover higher transmission
costs ($11 million). Delivery fee surcharges associated with the second issuance
of securitization bonds in June 2004 were billed to customers starting on July
1, 2004. The estimated impact of these additional surcharges for the remainder
of 2004 is an increase to revenues of $44 million with an offsetting increase to
amortization expense for the same amount. Revenue growth also included $6
million in increased disconnect/reconnect fees, reflecting disconnections
initiated by REPs on uncollected accounts and increased consumer switching due
to competitive activity. Revenue growth was partially offset by an estimated $11
million effect of lower residential consumption because of milder weather, usage
efficiencies and other factors.
Gross Margin
Six Months Ended June 30,
---------------------------------------------
% of % of
2004 Revenue 2003 Revenue
---- ------- ---- -------
Operating revenues..................................... $ 1,041 100% $ 992 100%
Costs and expenses:
Operating costs................................... 356 34% 350 35%
Depreciation and amortization..................... 167 16% 131 13%
------- --- ------- ---
Gross margin........................................... $ 518 50% $ 511 52%
======= === ======= ===
Gross margin increased $7 million, or 1%, to $518 million in 2004, driven
by higher operating revenue. The increase in operating costs of $6 million, or
2%, to $356 million, reflects a $4 million increase in metering-related costs
associated with the increased disconnect/reconnect activity and a $3 million
increase in third-party transmission costs. Depreciation and amortization
included in gross margin reflects depreciation of assets directly used in the
delivery of electricity and amortization of regulatory assets. The increase in
depreciation and amortization of $36 million, or 28%, to $167 million reflected
$28 million in higher amortization of regulatory assets associated with the
issuance of securitization bonds (offsetting the same amount of revenue
increase) and $8 million in higher depreciation due to normal additions and
replacements of equipment.
Depreciation and amortization not included in gross margin totaled $3
million and $6 million for the six months ended June 30, 2004 and 2003,
respectively. This decline reflects a transfer of information technology assets,
principally capitalized software, to an affiliate in connection with the
Capgemini outsourcing transaction (see Note 1 to Financial Statements).
53
SG&A expenses increased $5 million, or 5%, to $102 million in 2004, driven
by a $4 million increase in deferred incentive compensation expense due
primarily to a higher TXU Corp. common stock price.
Other deductions of $19 million in 2004 consist principally of
severance-related charges in connection with the Capgemini outsourcing
transaction and other cost reduction initiatives discussed above under
"Strategic Initiatives and Other Matters."
Interest income declined $5 million to $25 million in 2004 driven by a
decrease in interest income from Energy related to the excess mitigation credit
that ceased at the end of 2003.
Interest expense and related charges decreased $14 million, or 9%, to $141
million in 2004. The decrease reflected an $11 million impact of lower average
interest rates and $5 million in interest paid to REPs in 2003 related to the
excess mitigation credit that ceased at the end of 2003, partially offset by a
$2 million impact of higher average borrowings.
The effective income tax rate decreased to 31.5% in 2004 from 32.3% in
2003. The decrease primarily reflected the effect of a non-taxable Medicare
subsidy in 2004 ($2.2 million for the six months ended June 30, 2004) related to
postretirement benefit expense.
Income before extraordinary gain was $113 million in both 2004 and 2003,
primarily reflecting the other deductions and higher SG&A expenses, offset by
lower interest expense and higher gross margin. Net pension and postretirement
benefit costs reduced income before extraordinary gain by $8 million in 2004 and
$9 million in 2003.
COMPREHENSIVE INCOME - Continuing Operations
Cash flow hedge activity reported in other comprehensive income from
continuing operations included:
Six Months Ended June 30,
-------------------------
2004 2003
---- ------
Cash flow hedge activity (net of tax):
Net change in fair value of hedges - gains/(losses):
Commodities................................................................. $ (75) $ (98)
Financing - interest rate and currency swaps................................ 12 (34)
------- -------
(63) (132)
Losses realized in earnings (net of tax):
Commodities................................................................. 12 69
Financing - interest rate and currency swaps................................ (4) 40
------- -------
8 109
Effect of cash flow hedges reported in comprehensive results related
to continuing operations...................................................... $ (55) $ (23)
======= =======
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows - Cash flows provided by operating activities in 2004 were $487
million compared to $1.2 billion in 2003. The principal driver of the $751
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 and a $168 million decrease in working capital (accounts receivable,
accounts payable and inventory) changes reflecting the improvements in 2003 due
to higher collections following billing delays experienced during the transition
to competition.
Cash flows used in financing activities were $1.2 billion in 2004 compared
to $1.6 billion in 2003. Net cash provided by issuances and repayments of
borrowings totaled $1.8 billion in 2004 compared to $1.5 billion used in 2003.
Net cash used in repurchase of common stock totaled $960 million in 2004
compared to cash provided of $8 million in 2003. The exchangeable preferred
membership interests were repurchased in 2004 for $1.8 billion. Common stock
dividends of $80 million were paid in both 2004 and 2003.
54
Cash flows provided by investing activities totaled $608 million in 2004
compared to $523 million used during 2003. Capital expenditures, including
nuclear fuel, were $402 million in 2004 and $393 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 $495 million from the sale
of the telecommunications business and $496 million from the sale of TXU Fuel
Company (see Note 3 to Financial Statements). Cash flows provided by investing
activities in 2003 included $15 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 $31 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.
Income tax -- TXU Corp. does not expect to incur federal income tax
payments in 2004. An estimiated $200 million in taxes is expected to be
paid in March 2005 largely as a result of cancelation-of-
debt income arising from the anticipated conclusion of the UK administration
proceedings related to TXU Europe in the fourth quarter of 2004. (Also see
Note 8 to Financial Statements.) Reported earnings will not be affected by tax
paid related to this matter as a deferred tax liability was previously recorded.
If the proceedings are concluded earlier or later, the related tax payment
could be accelerated or deferred.
Financing Activities
- --------------------
Long-Term Debt Activity -- During the six months ended June 30, 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
Senior Notes..................................... -- 118
Equity-linked securities......................... -- 427
Energy:
Pollution control revenue bonds.................. -- 121
Other ........................................... -- 6
Electric Delivery:
Transition bonds................................. 790 8
First mortgage bonds............................. -- 100
TXU Gas:
Senior notes..................................... -- 150
US Holdings:
Long-term debt................................... -- 1
Pinnacle telecommunications holding company:
Senior Notes..................................... -- 560
------ ------
Total............................................ $ 790 $1,496
------ -------
See Notes 4, 5, and 6 to Financial Statements for further detail of debt
issuance and retirements, financing arrangements, fair value hedges and debt
held by unconsolidated subsidiary trusts.
As disclosed in the 2003 Form 10-K, in August 2004, in accordance with the
terms of the underlying agreements, TXU Corp. expects to remarket, and reset the
interest rate on, the Series K equity-linked senior notes due 2006, the
remaining outstanding stated amount of which is $288 million. The reset interest
rate will be equal to the sum of the yield on the benchmark treasury
(CUSIP 912828BP4180, November 15, 2006 maturity) plus 180 basis points (1.8%).
In the remarketing, TXU Corp. may submit an order to purchase a substantial
portion of the Series K senior notes to be remarketed, although TXU Corp.
makes no commitment to do so.
55
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 May 2004 meeting, declared a quarterly dividend of $0.125 a
share, payable July 1, 2004, to shareholders of record on June 4, 2004. TXU
Corp. paid quarterly dividends of $0.125 a share throughout 2003 and the first
quarter of 2004. 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 Electric Delivery 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 June 30, 2004, there
were no restrictions on the payment of dividends under these provisions.
See Note 7 for an analysis of changes in common stock equity.
Capitalization -- The capitalization ratios of TXU Corp. at June 30, 2004,
consisted of 2.0% long-term debt held by subsidiary trusts, 6.7% equity-linked
debt securities, 62.0% other long-term debt, less amounts due currently, 2.0%
preference stock, 0.7% preferred stock of subsidiaries and 26.6% common stock
equity. Total debt to capitalization, including short-term debt, was 71.7% and
62.0% at June 30, 2004 and December 31, 2003, respectively.
Short-term Borrowings -- At June 30, 2004, TXU Corp. had outstanding
short-term borrowings consisting of bank borrowings of $2.7 billion at a
weighted average interest rate of 2.70%. At December 31, 2003, TXU Corp. had no
short-term borrowings outstanding.
Credit Facilities -- At June 30, 2004, TXU Corp. had three fully drawn
credit facilities expiring in April 2005 totaling $2 billion that provided
bridge financing for the repurchase of TXU Energy's Exchangeable Preferred
Membership Interests. These facilities were repaid in July with the proceeds
from Energy's issuance of $800 million floating rate senior notes and part of
the proceeds from the TXU Australia sale and subsequently terminated. In
addition, TXU Corp. had other credit facilities totaling $3 billion of which
$1.9 billion was unused at June 30, 2004. These credit facilities are used for
working capital and general corporate purposes and support issuances of letters
of credit. 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 June 30, 2004 and December 31, 2003 totaled $543 million and $600
million, respectively. 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. and its subsidiaries may
issue and sell additional debt and equity securities as needed, including: (i)
issuances by TXU Corp. of up to approximately $2.0 billion of equity securities,
equity-linked securities, debt securities and/or preferred securities of
subsidiary trusts and (ii) 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, all of which are currently registered with the SEC for
offering pursuant to Rule 415 under the Securities Act.
Cash and Cash Equivalents -- Cash on hand totaled $691 million and $875
million at June 30, 2004 and December 31, 2003, respectively. The decline
primarily reflects repayments of borrowings.
56
Restricted Cash -- At June 30, 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 to
Financial Statements). The remaining restricted cash reported in investments on
the balance sheet as of June 30, 2004 included $45 million held as collateral
for letters of credit issued and $14 million principally related to payment of
fees associated with the securitization bonds. At June 30, 2004, the TXU
Electric Delivery Transition Bond Company LLC had $23 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 Subsidiaries -- The current credit
ratings for TXU Corp. and certain of its subsidiaries are presented below:
TXU Corp. US Holdings Electric Delivery Energy TXU Gas
---------- ----------- ---------------- --------- -----------
(Senior (Senior (Senior (Senior
Unsecured) Unsecured) (Secured) Unsecured) Unsecured)
S&P............... BBB- BBB- BBB BBB BBB
Moody's........... Ba1 Baa3 Baa1 Baa2 Baa3
Fitch............. BBB- BBB- BBB+ BBB BBB-
Moody's and Fitch currently maintain a stable outlook for TXU Corp., US
Holdings, Energy and Electric Delivery and a developing outlook for TXU Gas. S&P
currently maintains a negative outlook for TXU Corp., US Holdings, Energy and
Electric Delivery and a developing outlook for TXU Gas.
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. As of June 30, 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
------------------------
Energy has provided a guarantee of the obligations under TXU Corp.'s lease
(approximately $125 million at June 30, 2004) for its headquarters building. In
the event of a downgrade of Energy's credit rating to below investment grade, a
letter of credit would need to be provided within 30 days of any such rating
decline.
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 Energy to post collateral in the event that its credit rating falls
below investment grade.
Based on its current commodity contract positions, if Energy were
downgraded below investment grade by any specified rating agency, counterparties
would have the option to request Energy to post additional collateral of
approximately $162 million.
57
In addition, Energy has a number of other contractual arrangements under
which the counterparties would have the right to request Energy to post
collateral. The amount Energy would post under these transactions depends in
part on the value of the contracts at that time and Energy's rating by each of
the three rating agencies. As of June 30, 2004, based on current contract
values, the maximum Energy would post for these transactions is $230 million. Of
this amount, $209 million relates to one specific counterparty that would
require Energy to post collateral if all three rating agencies downgraded Energy
to below investment grade.
Energy is also the obligor on leases aggregating $158 million. Under the
terms of those leases, if Energy's credit rating were downgraded to below
investment grade by any specified rating agency, 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 creditworthiness for
parties that schedule power on the ERCOT System. Under those rules, if Energy's
credit rating were downgraded to below investment grade by any specified rating
agency, Energy could be required to post collateral of approximately $45
million.
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 Energy or Electric Delivery 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 $2.5 billion joint credit
facilities expiring in June 2005, 2007 and 2009. Under these credit facilities,
a default by Energy or any subsidiary thereof would cause the maturity of
outstanding balances under such facility to be accelerated as to Energy but not
as to Electric Delivery. Also, under this credit facility, a default by Electric
Delivery or any subsidiary thereof would cause the maturity of outstanding
balances under such facility to be accelerated as to Electric Delivery but not
as to Energy.
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
$30 million of TXU Mining (a subsidiary of Energy) senior notes, which have a $1
million cross default threshold.
A default by TXU Corp. on indebtedness with a principal amount in excess
of $50 million would result in a cross default under its $500 million five-year
revolving credit facility expiring August 2008.
A default by TXU Gas or any of its material subsidiaries on indebtedness
of $25 million or more would result in a cross default under TXU Gas' senior
notes.
Energy has entered into certain mining and equipment leasing arrangements
aggregating $109 million that would terminate upon the default of any other
obligations of Energy owed to the lessor. In the event of a default by TXU
Mining on indebtedness in excess of $1 million, a cross default would result
under the $30 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.
Energy enters into energy-related contracts, the master forms of which
contain provisions whereby an event of default would occur if Energy were to
default under an obligation in respect of borrowings in excess of thresholds,
which vary, stated in the contracts.
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.
58
Long-term Contractual Obligations and Commitments -- The table below
reflects updates of amounts presented in TXU Corp.'s 2003 Form 10-K to reflect
the obligation under the business services outsourcing agreement with Capgemini,
the sale of TXU Australia and TXU Gas resulting in changes in purchase
obligations, and the repayment of debt and other instruments as discussed in
Note 1 to Financial Statements.
Contractual Cash Obligations
- ----------------------------- -----------------------------------------
One to Three to More
Less Than Three Five Than Five
One Year Years Years Years
--------- ------ -------- ---------
Long-term debt - principal and interest........ $1,527 $2,966 $2,064 $14,574
Operating leases and capital lease obligations. 89 175 170 510
Purchase obligations........................... 1,389 1,616 571 505
Business services outsourcing obligations...... 342 513 513 1,282
There have been no other 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, INCLUDING VARIABLE INTEREST ENTITIES
TXU Corp.'s accounts receivable securitization program is discussed in
Note 4 to Financial Statements.
TXU Corp. has ownership interests in unconsolidated (under FIN 46)
financing trusts as discussed in Note 5 to Financial Statements.
Also see Note 1 to Financial Statements for discussion of TXU Corp.'s
business process outsourcing arrangement with Capgemini, an unconsolidated
(under FIN 46) entity in which an ownership interest is held. Also see related
contractual cash obligations immediately above.
COMMITMENTS AND CONTINGENCIES
See Note 8 to Financial Statements for details of contingencies, including
guarantees.
REGULATION AND RATES
Price-to-Beat Rates - Under the 1999 Restructuring Legislation, Energy is
required to continue to charge a "price-to-beat" rate established by the
Commission to residential customers in the historical service territory. 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.
In March 2004, Energy filed a request with the Commission to increase the
fuel factor component of its price-to-beat rates. This request was approved May
13, 2004. In accordance with the Commission's order, the new rate became
effective on May 20, 2004. This adjustment raised the average monthly
residential electric bill of a customer using 1,000 kilowatt hours by 3.4% or
$3.39 per month.
In June 2004, Energy filed its second request for this year with the
Commission to increase the fuel factor component of its price-to-beat rates.
This request was approved July 28, 2004. The filing reflects an increase of
12.7% in the market price of natural gas since the March 2004 filing. This
adjustment raised the average monthly residential electric bill of a customer
using 1,000 kilowatt hours by 5.7% or $5.87 per month.
Transmission Rates --On March 3, 2004, Electric Delivery filed an annual
request for interim update of its wholesale transmission rate. Electric Delivery
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 Electric Delivery's retail delivery rate.
Electric Delivery's new wholesale transmission rate was approved by the
Commission and became effective on April 15, 2004.
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In March 2004, the Commission approved an estimated annualized increase of
$9 million in the TCRF component of Electric Delivery's distribution rates
charged to REPs. The effect of Electric Delivery's wholesale transmission rate
increase described in the preceding paragraph will be included in Electric
Delivery's September 2004 TCRF update. On July 26, 2004, Electric Delivery filed
a second request with the Commission to increase the TCRF component of its
retail delivery rates charged to REPs. The request, as proposed, will increase
annual revenues by an estimated $29.5 million. Electric Delivery anticipates
that this proposed increase will be implemented September 1, 2004. With respect
to the impact on TXU Corp.'s consolidated results, the higher TCRF results in
reduced margin on Energy's sales to those retail customers with pricing that
does not provide for recovery of higher delivery fees, principally price-to-beat
customers.
Other Commission Matters -- On May 27, 2004, the Commission opened an
investigation to gather information regarding Electric Delivery's and its
affiliates' compliance with the Commission's affiliate code of conduct rules.
Energy's conversations with the Commission indicate that this investigation was
prompted in large part by the utility's change in its legal corporate name from
Oncor Electric Delivery Company back to TXU Electric Delivery Company. Those
discussions indicate a reasonable expectation that the Commission will focus its
investigation on Energy's implementation of a disclaimer rule that requires
Energy to place a disclaimer in certain advertisements and on business cards to
explain the distinction between Energy and Electric Delivery.
Electric Delivery filed formal notice of its name change at the Commission
on June 1, 2004, by filing for approval re-issued tariffs that display the new
company name but are in all other respects identical to the pre-existing
tariffs. The Commission's Policy Development Division has issued an order
indicating that the re-issued tariff is to be administratively approved in
August. Two groups of competitive retailers appealed that order to the
Commission and in early August the Commissioners declined to consider the
appeal.
The city of Denison, acting in its role as a regulatory authority,
initiated an inquiry on August 2, 2004 to determine if the rates of Electric
Delivery, which have been established by the Commission, are just and
reasonable. Certain other cities within the historical service territory are
considering similar requests. Electric Delivery expects to file information
responsive to the inquiry by the end of 2004, with city actions, if any, to take
place in 2005. It is too early to determine whether these inquiries will have
any material effect on Electric Delivery's rates. Electric Delivery has the
right to appeal any city action to the Commission.
Energy, along with several ERCOT wholesale market participants, has filed
an appeal at the Court of Appeals for the Third District of Texas (Austin)
contesting certain aspects of a recently adopted Commission rule regarding
enforcement standards applicable to the wholesale power market. Energy believes
that certain portions of the rule as adopted are unconstitutionally vague and
other portions may exact an unconstitutional taking of private property without
just compensation. There is no statutory deadline by which the court must act on
the appeal.
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 appealed these actions to the
RRC. Twelve parties intervened in the case.
On May 25, 2004, the RRC issued a final order in TXU Gas' system-wide rate
case granting an $11.7 million or 1.22% increase in TXU Gas' rates.
Additionally, as a result of the RRC order, TXU Gas recorded an after-tax charge
of approximately $99 million ($153 million pre-tax) in the second quarter 2004
to reserve for certain regulatory disallowances contained within the
Commission's Order. The disallowances consisted of the following costs:
o Regulatory assets relating to the costs of employee severance
programs occurring in 1997 and again in 1999 in the approximate
amount of $20 million;
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o Regulatory asset relating to costs incurred for identifying the
locations of polyethylene pipe ("Poly Pipe") in the approximate
amount of $26 million;
o Gas utility plant investment associated with the replacement of
Poly Pipe in the approximate amount of $50 million;
o Gains on sales of land and cushion gas in the combined approximate
amount of $3 million.
TXU Gas believes that the final order does not follow applicable law or
precedent in many important respects and has filed a motion for rehearing
requesting the RRC to reconsider and reverse significant errors identified by
TXU Gas. As discussed in Note 1 to Financial Statements, the TXU Gas business is
held for sale.
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
management 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.
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 businesses are subject to changes in laws (including the Texas
Public 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, the Clean Air 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, the EPA 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,
decommissioning costs, and return on invested capital for TXU Corp.'s regulated
businesses, and present or prospective wholesale and retail competition.
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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.
Existing laws and regulations governing the market structure in Texas
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 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. Electric Delivery's rates are
regulated by the Commission based on an analysis of Electric Delivery'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 Electric Delivery'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 Electric Delivery'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. purchases and sells natural gas and other energy related commodities, and
volatility in these markets may affect TXU Corp.'s costs incurred in meeting its
obligations.
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 Corp.'s facilities for power production 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
Corp.'s base load power production is dependent in significant part upon the
price of gas. TXU Corp. cannot fully hedge the risk associated with dependency
on gas because of the expected useful life of TXU Corp's power production assets
and the size of its position relative to market liquidity.
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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.'s 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. As a result of these
and other factors, TXU Corp. cannot predict with precision the impact that risk
management decisions may have on its business, results of operations or
financial position.
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 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.
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In addition, as discussed in TXU Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2003, the terms of certain of TXU Corp. Company's
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.
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
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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.
TXU Corp. is obligated to offer the price-to-beat rate to requesting
residential and small business customers in its historical service territory
within Texas 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 PUCT 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.
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.
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
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more expensive wholesale electricity that is available in the
capacity-constrained area. In particular, during some periods transmission
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 fall below 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. Delays in the
perfection of these systems and processes and any related increase in costs
could have a material adverse impact on TXU Corp.'s business and results of
operations.
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. Consequently, where TXU Corp. has
facilities, the market value of TXU Corp.'s power production and/or energy
transportation facilities could 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. Subject to restrictions contained in TXU
Corp.'s other financing arrangements, TXU Corp.'s subsidiaries may incur
additional indebtedness and other liabilities.
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;
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o a deterioration of TXU Corp.'s credit or a reduction in TXU Corp.'s
credit ratings or the credit ratings of its subsidiaries;
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, and would likely increase its capital costs. 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. Any such new accounting standards could
negatively impact reported financial results.
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.
67
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 presented 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. The risk information presented excludes TXU
Australia, which was sold on July 30, 2004.
COMMODITY PRICE RISK
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.
June 30, December 31,
2004 2003
-------- ------------
Period-end MtM VaR......................... $ 16 $ 15
Average Month-end MtM VaR:................. $ 22 $ 25
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 represent a ten year view
of owned assets based on the nature of their particular markets. If the life of
an asset extends beyond the ten year duration period, the VaR calculation does
not measure the associated risk inherent in the asset over its full life.
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.
68
June 30, December 31,
2004 2003
--------- ------------
Period-end Portfolio VaR................. $ 211 $ 199
Average Month-end Portfolio VaR.......... $ 190 $ 181
Other Risk Measures -- The metrics appearing below provide information
regarding the effect of changes in energy market conditions on earnings and cash
flow.
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.
June 30, December 31,
2004 2003
--------- ------------
EaR ...................................... $ 15 $ 15
CFaR ..................................... $ 92 $ 67
INTEREST RATE RISK
See Note 4 to Financial Statements for a discussion of the issuance and
retirement of debt and interest rate swaps since December 31, 2003.
CREDIT RISK
Concentration of Credit Risk -- As of June30, 2004, the exposure to credit
risk from large business customers and hedging counterparties, excluding credit
collateral, is $987 million, 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 $863 million. Of this amount,
approximately 76% of the 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.
69
The following table presents the distribution of credit exposure as of
June 30, 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 $ 689 $ 37 $ 652 $ 555 $ 54 $ 43 $ 652
Noninvestment grade 298 87 211 179 18 14 211
------- ------ ----- ----- ---- ----- -----
Totals $ 987 $ 124 $ 863 $ 734 $ 72 $ 57 $ 863
======= ====== ===== ===== ==== ===== =====
Investment grade 70% 30% 76%
Noninvestment grade 30% 70% 24%
TXU Corp. has exposure in the amount of $87 million to one customer or
counterparty that is 10% of the net exposure of $863 million at June 30, 2004.
TXU Corp. holds a guaranty from this counterparty's investment grade parent.
Additionally, approximately 85% 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. This evaluation took into
consideration the strategic initiatives described in Note 1 to Financial
Statements. 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 sought
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 sought an injunction requiring TXU Corp. to give
notice that a termination event under the common stock purchase contract had
occurred. TXU Corp. disputed plaintiffs' allegations and believed 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.
70
On July 7, 2003, a lawsuit was filed by Texas Commercial Energy (TCE) in
the United States District Court for the Southern District of Texas, Corpus
Christi Division, against Energy and certain of its subsidiaries, as well as
various other wholesale market participants doing business in ERCOT, claiming
generally that defendants engaged in market manipulation, in violation of
antitrust and other laws, primarily during the period of extreme weather
conditions in late February 2003. An amended complaint was filed in February
2004 that joined additional, unaffiliated defendants. Three retail electric
providers filed motions for leave to intervene in the action alleging claims
substantially identical to TCE's. In addition, approximately 25 purported former
customers of TCE 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 was
conducted May 20, 2004 during which the Court stated that it intended to enter
an order dismissing the antitrust claims and an order was entered on June 24,
2004. TCE has indicated that it intends to appeal the dismissal, however, Energy
believes the dismissal of the antitrust claims was proper and that it has not
committed any violation of the antitrust laws. Further, the Commission's
investigation of the market conditions in late February 2003 has not resulted in
any findings adverse to TXU Corp. Accordingly, TXU Corp. believes that TCE's and
the interveners' claims against Energy and its subsidiary companies are without
merit and Energy and its subsidiaries intend to vigorously defend the lawsuit on
appeal. TXU Corp. is, however, unable to estimate any possible loss or predict
the outcome of this action.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Shares/Units Average Price Paid
Period Purchased(e) per Share/Unit
April 1, 2004-- April 30, 2004 (a)................................ 860,500(Shares) $ 34.64
3,411,700 (Shares) $ 36.33
May 1, 2004 -- May 31, 2004....................................... 8,466,715 (Units)(b) $ 47.75
June 1, 2004 -- June 30, 2004..................................... 20,647,300 (Shares)(c) $ 39.48
24,919,500(Shares)(d) $ 38.88
Total............................................................. 8,466,715 (Units) $ 47.75
- -----------------------
(a) In addition, TXU Corp. repurchased 136,271 shares of its common stock
at an average price of $28.88 under its deferred compensation plans and
1,153 shares at an average price of $34.14 under its long-term
incentive compensation plan.
(b) Represents equity-linked securities repurchased by TXU Corp. in
connection with the settlement of a lawsuit brought against TXU Corp.
by the owners of approximately 42% of certain TXU Corp. equity-linked
securities issued in October 2001.
(c) 20 million of these shares were repurchased by TXU Corp. through an
accelerated share acquisition plan. Under the terms of the plan, TXU
Corp. repurchased the shares from Merrill Lynch at an initial price of
$39.86. Merrill Lynch is in the process of repurchasing an equal amount
of shares in the open market, which will likely continue through the
end of August. TXU Corp. may receive, or be required to pay, a price
adjustment based upon the actual cost of the shares once the
repurchases by Merrill Lynch are completed. As of August 4, 2004,
approximately 12.6 shares had been repurchased by Merrill Lynch
pursuant to the plan.
(d) Excluding the 20 million shares related to the accelerated share
acquisition plan described in footnote (c) above, all of these shares
were repurchased in open-market transactions.
(e) All of the above repurchases were funded through cash on hand and bank
borrowings.
Other than the accelerated share acquisition plan discussed in footnote (c)
above, TXU Corp. does not currently have an ongoing plan for share repurchases.
71
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TXU Corp. held its Annual Meeting of Shareholders on May 21, 2004. The
following items were presented to shareholders with the following results:
Votes Votes Withheld or
For Against Abstentions
-------------- ------------------ ------------
Election of Directors
Derek C. Bonham 271,239,852 11,502,185 None
E. Gail de Planque 271,379,009 11,363,028 None
William M. Griffin 268,621,536 14,120,501 None
Kerney Laday 261,880,884 20,861,153 None
Jack E. Little 270,425,285 12,316,752 None
Erle Nye 270,399,527 12,342,510 None
J. E. Oesterreicher 270,298,262 12,443,775 None
Michael W. Ranger 274,218,342 8,523,695 None
Herbert H. Richardson 272,493,839 10,248,198 None
C. John Wilder 273,028,052 9,713,985 None
Selection of Deloitte & Touche LLP as 274,453,627 5,900,512 2,387,898
Independent Auditors
Shareholder Proposal Related to Officers Sales 30,640,497 205,651,758 4,952,593
of Restricted Stock
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
- -------- --------- -------
(10) Material Contracts.
Credit Agreements.
10(a) -- $700,000,000 Credit Agreement dated as of April 26,
2004, among TXU Corp., the Lenders listed in Schedule
2.01 thereto, and Credit Suisse First Boston as
Administrative Agent.
10(b) -- $1,000,000,000 Credit Agreement dated as of April 26,
2004, among TXU Energy Company LLC, the Lenders listed
in Schedule 2.01 thereto, and Credit Suisse First Boston
as Administrative Agent.
10(c) -- $300,000,000 Credit Agreement dated as of April 26,
2004, among TXU Gas Company, the Lenders listed in
Schedule 2.01 thereto, and Credit Suisse First Boston as
Administrative Agent.
72
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
- -------- --------- -------
10(d) 1-2833 10(a) -- $2,500,000,000 Revolving Credit Agreement dated as of
Form 8-K June 24, 2004, among TXU Energy Company LLC and TXU
(filed July 1, 2004) Electric Delivery Company, the Lenders listed in
Schedule 2.01 thereto,
JPMorgan Chase Bank as
Administrative Agent and
the other parties named
therein.
Purchase and Sale Agreements.
10(e) -- Purchase Agreement dated April 23, 2004, by and among
each of the entities listed in Schedule A to the
agreement and TXU Corp. (related to the purchase of TXU
Energy Company LLC Class B Preferred Member Interests).
10(f) -- Purchase Agreement dated April 26, 2004, by and among
each of the entities listed in Schedule A to the
agreement and TXU Corp. (related to the purchase of TXU
Energy Company LLC Class B Preferred Member Interests).
10(g) -- Purchase Agreement dated as of May 7, 2004 by and among
each of the entities listed in Schedule to the agreement
and TXU Corp. (related to the repurchase of certain TXU
Corp. Corporate Units and settlement of certain related
litigation).
10(h) -- Purchase Agreement dated as of June 29, 2004 between TXU
Corp. and Merrill Lynch International (related to the
repurchase of 20 million shares of TXU Corp. common
stock).
10(i) -- Share Sale Agreement dated April 23, 2004, by and among
TXU Corp. SP Energy Pty. Ltd. And Singapore Power
Limited.
10(j) -- Purchase and Sale Agreement between TXU Fuel Company and Energy
Transfer Partners, L.P. dated April 25, 2004.
10(k) -- Agreement and Plan of Merger by and between TXU Gas
Company and LSG Acquisition Corporation dated June 17,
2004.
Joint Venture Agreements.
10(l) -- Master Framework Agreement dated May 17, 2004 by and
between Oncor Electric Delivery Company (now TXU
Electric Delivery Company) and CapGemini Energy LP.
(Confidential treatment has been requested for portions
of this exhibit.)
10(m) -- Master Framework Agreement dated May 17, 2004 by and
between TXU Energy Company LLC and CapGemini Energy LP.
(Confidential treatment has been requested for portions
of this exhibit.)
(15) Letter re: Unaudited Interim Financial Information.
15 -- Letter from independent accountants as to unaudited
interim financial information.
73
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
- -------- --------- -------
(31) Rule 13a - 14(a)/15d - 14(a) Certifications.
31(a) -- Certification of C. John Wilder, President and Chief
Executive 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 Kirk R. Oliver, Chief 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, President and Chief
Executive of TXU Corp., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) -- Certification of Kirk R. Oliver, Chief 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 June 30, 2004.
- ---------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K furnished or filed since March 31, 2004:
Date of Report Item Reported
-------------- -------------
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
May 14, 2004 Item 5. Other Events and Regulation FD Disclosure
May 24, 2004 Item 5. Other Events and Regulation FD Disclosure
Item 9. Regulation FD Disclosure
May 27, 2004 Item 5. Other Events and Regulation FD Disclosure
June 7, 2004 Item 5. Other Events and Regulation FD Disclosure
June 16, 2004 Item 5. Other Events and Regulation FD Disclosure
June 18, 2004 Item 5. Other Events and Regulation FD Disclosure
July 1, 2004 Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
July 7, 2004 Item 5. Other Events and Regulation FD Disclosure
July 29, 2004 Item 12. Results of Operations and Financial Condition
August 5, 2004 Item 5. Other Events and Regulation FD Disclosure
74
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/ Scott Longhurst
-------------------------------
Scott Longhurst
Senior Vice President and
Group Controller
Date: August 6, 2004
75