<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Texas Utilities Company d/b/a TXU Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
[TXU LOGO]
- --------------------------------------------------------------------------------
Texas Utilities Company
(Doing Business as TXU Corp.)
Notice of Annual Meeting
of Shareholders,
Proxy Statement and
Financial Information
Annual Meeting of Shareholders:
Friday, May 12, 2000, at 9:30 a.m.
Eugene McDermott Concert Hall
Morton H. Meyerson Symphony Center
2301 Flora Street
Dallas, Texas 75201
Whether or not you will be able to attend the annual meeting, please sign and
return the proxy promptly so that you may be represented at the meeting.
<PAGE>
TEXAS UTILITIES COMPANY
1601 Bryan Street
Dallas, Texas 75201-3411
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------
March 30, 2000
To the Shareholders of
Texas Utilities Company:
The annual meeting of shareholders of Texas Utilities Company will be held
in the Eugene McDermott Concert Hall of the Morton H. Meyerson Symphony Center,
2301 Flora Street, Dallas, Texas on Friday, May 12, 2000 at 9:30 a.m. for the
following purposes:
1. To elect a Board of Directors for the ensuing year;
2. To approve an amendment to the Restated Articles of Incorporation that
would change the name of the Company to TXU Corp.;
3. To reapprove the Annual Incentive Plan, as required by the Internal
Revenue Code; and
4. To approve the selection of auditors for the year 2000.
The Board of Directors has fixed the close of business on March 13, 2000 as
the time as of which shareholders entitled to notice of, and to vote at, the
meeting and any adjournments shall be determined.
Whether or not you will be able to attend the meeting, PLEASE SIGN AND
RETURN THE ACCOMPANYING PROXY PROMPTLY. No postage need be affixed to the reply
envelope which is enclosed herewith for your convenience if it is mailed in the
United States.
Peter B. Tinkham
Secretary
<PAGE>
TEXAS UTILITIES COMPANY
1601 Bryan Street
Dallas, Texas 75201-3411
--------------------
PROXY STATEMENT
--------------------
March 30, 2000
A proxy in the accompanying form is solicited by the Board of Directors of
TEXAS UTILITIES COMPANY for use at the annual meeting of shareholders to be
held in the Eugene McDermott Concert Hall of the Morton H. Meyerson Symphony
Center, 2301 Flora Street, Dallas, Texas on Friday, May 12, 2000 at 9:30 a.m.
and any adjournments thereof for the purposes set forth in the accompanying
notice.
The close of business on March 13, 2000 has been fixed as the time as of
which shareholders entitled to notice of, and to vote with respect to, this
meeting shall be determined. At such date there were outstanding and entitled
to vote 263,926,119 shares of common stock. Except as indicated below, each
share is entitled to one vote on all matters submitted to shareholders.
Any shareholder may exercise the right of cumulative voting in the election
of directors provided the shareholder gives written notice of such intention
to the Secretary of the Company on or before the date preceding the election.
When exercising this right the shareholder is entitled to one vote for each
share held multiplied by the number of directors to be elected and may cast
all such votes for a single nominee or spread such votes among the nominees in
any manner desired.
This Notice, Proxy Statement and form of proxy are being mailed or given to
shareholders on or about March 30, 2000. Since the Summary Annual Report for
1999 contains abbreviated financial information, the audited consolidated
financial statements and certain other financial information of the Company
are included in Appendix A to this Proxy Statement.
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mails, proxies may be solicited by directors, officers and regular
employees of the Company in person or by telephone. The Company has hired D.
F. King & Co. to assist in the solicitation of proxies at an estimated cost of
$8,000 plus disbursements. Shareholders may assist the Company in avoiding
expenses in this connection by returning their proxies promptly.
Any proxy delivered pursuant to this solicitation is revocable at the
option of the person executing the same at any time prior to the exercise
thereof. The shares represented by any proxy duly given as a result of this
request will be voted in the discretion of the persons named in the proxy
unless the shareholder specifies a choice by means of the ballot space on the
proxy, in which case the shares will be voted accordingly.
The Company has adopted a confidential voting policy. Accordingly,
tabulation of proxies and votes cast at the meeting will be conducted by an
independent agent and the votes of individual shareholders will be kept
private and not disclosed to the Company, except in limited circumstances.
1
<PAGE>
The presence in person or by proxy of the holders of a majority of the
shares of the common stock entitled to vote shall constitute a quorum entitled
to transact business at the meeting. Directors are elected by plurality vote
of the votes cast at the meeting; abstentions and non-votes, as described
below, will have no effect. The reapproval of the Annual Incentive Plan and
the approval of the selection of auditors require the affirmative vote of a
majority of the shares represented at the meeting. The approval of the
amendment to the Restated Articles of Incorporation will require the
affirmative vote, in person or by proxy, of the holders of at least two-thirds
of the outstanding shares. In all three of these matters, abstentions and non-
votes, i.e. shares held by brokers and other nominees or fiduciaries that are
present at the meeting but not voted on such matter, will be treated as
negative votes.
2001 ANNUAL MEETING SHAREHOLDERS' PROPOSALS
All proposals from shareholders to be considered at the next annual meeting
scheduled for May 18, 2001 must be received by the Secretary of the Company,
Energy Plaza, 1601 Bryan Street, Dallas, Texas 75201-3411, not later than the
close of business on November 30, 2000.
In addition, the rules of the Securities and Exchange Commission allow the
Company to use discretionary voting authority to vote on any matter coming
before the 2001 annual meeting of shareholders that is not included in the
proxy statement for that meeting if the Company does not have notice of the
matter by February 13, 2001.
ELECTION OF DIRECTORS
It is the intent of the Board of Directors that the persons named in the
proxy will vote your shares in favor of the nominees for directors listed
hereafter, unless authority is withheld. All of the nominees are current
members of the Board of Directors and have been nominated by the Nominating
Committee. The persons named in the proxy may cumulate the votes represented
thereby and in case any such nominee shall become unavailable, which the Board
of Directors has no reason to anticipate, may vote for a substitute.
The names of the nominees for the office of director for the ensuing year
and information about them, as furnished by the nominees themselves, are set
forth below:
<TABLE>
<CAPTION>
Served as
Name Age director since Business experience during past five years
---- --- -------------- ------------------------------------------
<S> <C> <C> <C>
Derek C. Bonham
(3)(4)(6).......... 56 1998 Chairman of Imperial Tobacco Group PLC since
October 1996; Chairman of The Energy Group PLC
(February 1997 - July 1998); prior thereto
Deputy Chairman and Chief Executive of Hanson
PLC (November 1993 - February 1997); prior
thereto Chief Executive of Hanson PLC (April
1992 - November 1993). A Director of TXU Europe
Limited, Cadbury Schweppes PLC, Fieldens PLC,
Glaxo Wellcome PLC, and Imperial Tobacco Group
PLC.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Served as
Name Age director since Business experience during past five years
---- --- -------------- ------------------------------------------
<S> <C> <C> <C>
J.S. Farrington
(2)(5)............. 65 1983 Retired Chairman of the Board and Chief
Executive of the Company; Consultant to the
Company since May 1998; prior thereto Chairman
Emeritus of the Company (May 1997 - May 1998);
prior thereto Chairman of the Board of the
Company (May 1995- May 1997); prior thereto
Chairman of the Board and Chief Executive of the
Company (February 1987- May 1995); prior thereto
President of the Company (May 1983 - February
1987).
William M. Griffin
(1)(3)(4)(6)(7)... 73 1966 Principal, Griffin, Swanson & Co., Inc.
(investments). Executive Vice President (until
August 1985) and Chairman of the Finance
Committees (until March 1986) of The Hartford
Fire Insurance Company and Subsidiaries. A
Director of The Hartford Fire Insurance Company
(until March 1991) and Shawmut National
Corporation (until April 1992).
Kerney Laday
(3)(4)(6)(7)...... 58 1993 President, The Laday Company (management
consulting and business development) since July
1995; prior thereto Vice President, field
operations, Southern Region, U.S. Customer
Operations, Xerox Corporation (January 1991 -
June 1995); prior thereto Vice President and
region general manager, Xerox (1986 - 1991).
Margaret N. Maxey
(1)(2)(3)(4)(6).... 73 1984 Director, Clint W. Murchison, Sr. Chair of Free
Enterprise and Professor, Biomedical Engineering
Program, College of Engineering, The University
of Texas at Austin since 1982; prior thereto
Assistant Director, Energy Research Institute,
Columbia, South Carolina (1980 - 1982).
James A. Middleton
(1)(3)(4)(5)(6)(7).. 64 1989 Chairman of the Board, Crown Energy Company
(asphalt marketing and tar sands processing)
since January 1996; prior thereto Executive Vice
President (October 1987 - December 1994) and
Senior Vice President (June 1981 - October 1987)
of Atlantic Richfield Company. President, ARCO
Oil and Gas Company (January 1985 - October
1990). A Director of Crown Energy Company.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Served as
Name Age director since Business experience during past five years
---- --- -------------- ------------------------------------------
<S> <C> <C> <C>
Erle Nye
(2)(5)(7).......... 62 1987 Chairman of the Board and Chief Executive of the
Company since May 1997; prior thereto President
and Chief Executive of the Company (May 1995 -
May 1997); prior thereto President of the
Company (February 1987 - May 1995); Chairman of
the Board and Chief Executive, and a Director,
of TXU Electric Company and TXU Gas Company; a
Director of TXU Europe Limited.
J. E. Oesterreicher
(1)(3)(4)(6)...... 58 1996 Chairman of the Board of J C Penney Company,
Inc. (retailer) since January 1997 and Chief
Executive Officer since January 1995; Vice
Chairman of the Board from 1995 to 1997;
President, J C Penney Stores and Catalog from
1992 to 1995. A Director of J C Penney Company,
Inc. and Brinker International, Inc.
Charles R. Perry
(1)(2)(3)(4)(5)(6).. 70 1985 Oil and gas interests, private investments.
Chairman of the Board of Perry Management, Inc.,
Avion Flight Centre, Inc. and Perry Gas
Companies, Inc.
Herbert H.
Richardson
(1)(3)(4)(5)(6).... 69 1992 Associate Vice Chancellor for Engineering and
Director, Texas Transportation Institute, The
Texas A&M University System; Associate Dean of
Engineering, Regents Professor and Distinguished
Professor of Engineering, Texas A&M University;
Chancellor, The Texas A&M University System
(1991 - 1993) and Deputy Chancellor for
Engineering, The Texas A&M University System
(1986 - 1991).
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Executive Committee.
(3) Member of Finance Committee.
(4) Member of Nominating Committee.
(5) Member of Nuclear Committee.
(6) Member of Organization and Compensation Committee.
(7) Member of Business Development Committee.
4
<PAGE>
During 1999 the Board of Directors held four meetings. The standing
committees of the Board of Directors and the membership of each committee are
shown on the preceding pages. During 1999 each of the Directors attended more
than 96% of the aggregate of the Board of Directors meetings and the meetings
of the Committees on which they serve.
The Audit Committee nominates to the Board, for approval by the
shareholders at each annual meeting, a firm of independent auditors to audit
the books of account and records of the Company and to perform such other
duties as this Committee may prescribe or approve, receives the reports and
comments from such independent auditors, reviews the adequacy of internal
controls, reviews the accounting principles employed in financial reporting
and takes any action with respect thereto as it may deem appropriate, reports
to the Board of Directors upon its findings and recommendations and performs
such other duties as may be assigned to it from time to time by the Board; the
Audit Committee held two meetings during 1999. The Executive Committee
exercises the authority of the Board in the intervals between meetings of the
Board; the Executive Committee did not meet during 1999. The Finance Committee
reviews and recommends to the Board, for its consideration, major financial
undertakings and policies and performs such other duties as may be assigned to
it from time to time by the Board; the Finance Committee held three meetings
during 1999. The Nominating Committee selects and recommends to the Board, for
its consideration, persons as nominees for election as directors of the
Company and performs such other duties as may be assigned to it from time to
time by the Board; the Nominating Committee held one meeting in 1999.
Shareholders may recommend nominees for directors to the Nominating Committee
by writing to the Secretary of the Company, 1601 Bryan Street, Dallas, Texas
75201-3411. The Nuclear Committee reviews, generally oversees, and makes
reports and recommendations to the Board in connection with the operation of
the Company's nuclear generating units; the Nuclear Committee held eight
meetings during 1999. The Organization and Compensation Committee reviews and
establishes the duties, titles and remuneration of officers of the Company;
the Organization and Compensation Committee held two meetings in 1999. The
Business Development Committee reviews and recommends to the Board, for its
consideration, new business opportunities, proposed acquisitions and other
transactions and performs such other duties as may be assigned to it from time
to time by the Board; the Business Development Committee held six meetings
during 1999.
Except as described herein, directors were compensated in 1999 by a
retainer at the annual rate of $30,000 plus $1,500 for each Board meeting
attended and $1,000 for each Committee meeting attended. Members of the
Nuclear Committee and the Business Development Committee received annual
retainers of $8,000 and $3,000, respectively, for their services on those
Committees. Directors who are officers, or former officers, of the Company do
not receive any fees for service as a director. All directors are reimbursed
for reasonable expenses incurred in connection with their services as
directors. Directors who receive a retainer for their service as a director
may elect to defer, in increments of 25%, all or a portion of their annual
Board retainer pursuant to the Deferred Compensation Plan for Outside
Directors (Directors' Plan). Amounts deferred are matched by the Company.
Under the Directors' Plan, a trustee purchases Company common stock with an
amount of cash equal to each participant's deferred retainer and matching
amount, and accounts are established for each participant containing
performance units equal to such number of common shares. Directors' Plan
investments, including reinvested dividends, are restricted to Company common
stock. On the expiration of the applicable maturity period (not fewer than
three nor more than ten years, as selected by the participant) or upon death
or disability while serving as a director, the value of the participant's
accounts is paid in cash based on the then current value of the performance
units.
5
<PAGE>
In lieu of the retainer paid to other non-officer directors as described
above, Mr. Bonham received annual compensation from the Company in the amount
of (Pounds)100,000 (approximately $161,530 based on 1999 year-end foreign
exchange rates), under the terms of an agreement which also provides for
administrative support, transportation expenses and health insurance. This
agreement may be terminated at any time by either party upon three-months'
notice.
In addition to the retainers and fees described above, Mr. Laday provides
consulting services to the Company under an agreement which provides for a
monthly retainer of $12,000 as well as reimbursement of certain travel
expenses. The initial term of the agreement is for twelve months commencing
June 1, 1999. The agreement may be extended by the mutual consent of the
parties and may be terminated at any time by either party upon 60-days written
notice. Mr. Laday was paid $96,000 during 1999 under this agreement.
Mr. Farrington entered into a management transition agreement with the
Company pursuant to which he retired as an active employee of the Company in
May 1998. In accordance with the terms of the agreement, Mr. Farrington
provides consulting services to the Company at an annual fee of $200,000. The
term of this agreement expires on May 31, 2000.
BENEFICIAL OWNERSHIP OF COMMON STOCK OF THE COMPANY
Each nominee for director and certain executive officers reported
beneficial ownership of common stock of the Company, as of March 16, 2000, as
follows:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------
Beneficially Deferred
Name Owned Plans (1) Total
---- ------------ --------- -------
<S> <C> <C> <C>
Derek C. Bonham............................... 3,000 N/A 3,000
J. S. Farrington.............................. 22,398 29,017 51,415
William M. Griffin............................ 70,000(2) 4,743 74,743
Kerney Laday.................................. 2,100 4,743 6,843
Margaret N. Maxey............................. 5,313 8,050 13,363
James A. Middleton............................ 3,000 8,050 11,050
Erle Nye...................................... 127,727 73,869 201,596
J. E. Oesterreicher........................... 2,600 4,937 7,537
Charles R. Perry.............................. 4,200(3) 4,743 8,943
Herbert H. Richardson......................... 2,000 3,849 5,849
David W. Biegler.............................. 163,963(4) 18,886 182,849
H. Jarrell Gibbs.............................. 36,194 30,893 67,087
Michael J. McNally............................ 52,809 23,431 76,240
Brian N. Dickie............................... 10,592 6,967 17,559
All Directors and Executive Officers as a
group (14 persons)........................... 505,896 222,178 728,074
</TABLE>
- --------
(1) Share units held in deferred compensation accounts under the Deferred and
Incentive Compensation Plan or the Directors' Plan. Although these plans
allow such units to be paid only in the form of cash, investments in such
units create essentially the same investment stake in the performance of
the Company's common stock as do investments in actual shares of common
stock. Since he does not receive a retainer, Mr. Bonham is not eligible to
participate in the Directors' Plan.
6
<PAGE>
(2) Shares reported include 10,000 shares owned by spouse as her separate
property in which Mr. Griffin disclaims any beneficial ownership.
(3) Shares reported include 200 shares owned by spouse as her separate
property in which Mr. Perry disclaims any beneficial ownership.
(4) Shares reported include 129,778 shares subject to stock options
exercisable within sixty days of the record date.
Except as noted, the named individuals have voting and investment power for
the shares of common stock reported as Beneficially Owned. Ownership of such
common stock by each individual director and executive officer and for all
directors and executive officers as a group constituted less than 1% of the
Company's outstanding shares.
The Company has no knowledge of any person who beneficially owned more than
5% of the common stock of the Company as of December 31, 1999. Mellon Bank, N.A.
(Mellon), held as of such date, in its capacity as Trustee of the Employees'
Thrift Plan of the Texas Utilities Company System (Thrift Plan), a total of
12,428,714 shares of the Company's common stock, or 4.5% of the outstanding
common shares, of which 7,523,836 shares, or 2.7% of the outstanding shares,
have been allocated to Thrift Plan participants' accounts. Thrift Plan
participants are entitled to direct Mellon as to how to vote shares allocated to
their accounts, and Mellon disclaims beneficial ownership of such allocated
shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Act of 1934 requires the Company's
directors and executive officers to file with the Securities and Exchange
Commission reports of ownership and changes in the ownership with respect to
the equity securities of the Company. All required forms relating to changes
in beneficial ownership were timely filed except that, as the result of an
inadvertent oversight, a report disclosing an open market purchase by Kerney
Laday of 1,000 shares of the Company's common stock which was due in September
1999 was not filed until November 1999.
7
<PAGE>
EXECUTIVE COMPENSATION
The Company and its subsidiaries have paid or awarded compensation during
the last three calendar years to the following executive officers for services
in all capacities:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation (2)
----------------------- -----------------------------
Awards Payouts
--------------------- -------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Awards Options/ Payouts sation
Principal Position Year ($) ($) (1) ($) ($) SARs (#) ($) ($) (3)
------------------ ---- ------- ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Erle Nye, ............. 1999 908,333 475,000 -- 688,750 -- 61,016 184,892
Chairman of the Board 1998 818,750 350,000 -- 541,250 -- 19,674 156,906
and Chief Executive of 1997 760,417 325,000 -- 499,375 -- 23,928 143,963
the Company
David W. Biegler,...... 1999 641,667 164,000 -- 310,250 -- 0 81,509
President and Chief 1998 617,500 102,500 -- 244,250 -- 0 174,208
Operating Officer of 1997 245,833 0 -- 0 -- 0 0
the Company
H. Jarrell Gibbs,...... 1999 511,667 156,000 278,001(4) 273,000 -- 24,969 94,140
Vice Chairman of the 1998 443,750 97,500 187,007 210,000 -- 7,390 77,213
Board of the Company 1997 354,583 103,000 -- 185,125 -- 8,432 66,226
Michael J. McNally,.... 1999 395,000 145,000 -- 239,500 -- 0 134,852
Executive Vice 1998 335,000 102,000 -- 183,000 -- 0 123,936
President and Chief 1997 279,167 105,000 -- 172,500 -- 0 103,630
Financial Officer
of the Company
Brian N. Dickie, (5)... 1999 531,250 0 526,551(4) 168,750 -- 0 500,648
Executive Vice 1998 0 0 -- 0 -- 0 0
President of the 1997 0 0 -- 0 -- 0 0
Company
</TABLE>
- ----------------
(1) Amounts reported as Bonus in the Summary Compensation Table are
attributable to the named officer's participation in the Annual Incentive
Plan (AIP). Elected corporate officers of the Company and its
participating subsidiaries with a title of Vice President or above are
eligible to participate in the AIP. Under the terms of the AIP, target
incentive awards ranging from 40% to 75% of base salary, and a maximum
award of 100% of base salary, are established. The percentage of the
target or the maximum actually awarded, if any, is dependent upon the
attainment of per share net income goals established in advance by the
Organization and Compensation Committee (Committee) as well as the
Committee's evaluation of the participant's and the Company's performance.
One-half of each award is paid in cash and is reflected as Bonus in the
Summary Compensation Table. Payment of the remainder of the award is
deferred under the Deferred and Incentive Compensation Plan (DICP)
discussed hereinafter in footnote (2).
(2) Amounts reported as Long-Term Compensation in the Summary Compensation
Table are attributable to the named officer's participation in the DICP.
Elected corporate officers of the Company and its participating
subsidiaries with the title of Vice President or above are eligible to
participate in the DICP. Participants in the DICP may defer a percentage
of their base salary not to exceed a maximum percentage determined by the
Committee for each Plan year and in any event not to exceed 15% of the
participant's base salary. Salary deferred under the DICP is included in
amounts reported as Salary in the Summary Compensation Table. The Company
makes a matching award (Matching Award) equal to 150% of the participant's
deferred salary. In addition, one-half of any AIP award (Incentive Award)
is deferred and invested under the DICP.
8
<PAGE>
The Matching Awards and Incentive Awards are subject to forfeiture under
certain circumstances. Under the DICP, a trustee purchases Company common
stock with an amount of cash equal to each participant's deferred salary,
Matching Award and Incentive Award, and accounts are established for each
participant containing performance units (Units) equal to such number of
common shares. DICP investments, including reinvested dividends, are
restricted to Company common stock. On the expiration of the applicable
maturity period (three years for the Incentive Awards and five years for
deferred salary and Matching Awards), the values of the participants'
accounts are paid in cash based upon the then current value of the Units;
provided, however, that in no event will a participant's account be deemed
to have a cash value which is less than the sum of such participant's
deferred salary together with 6% per annum interest compounded annually.
The maturity period is waived if the participant dies or becomes totally
and permanently disabled and may be extended under certain circumstances.
Incentive Awards and Matching Awards that have been made under the DICP are
included under Restricted Stock Awards in the Summary Compensation Table
for each of the last three years. As a result of these awards,
undistributed Incentive Awards and Matching Awards made under the Plan in
prior years, and dividends reinvested thereon, the number and market value
of such Units at December 31, 1999 (each of which is equal to one share of
common stock) held in the DICP accounts for Messrs. Nye, Biegler, Gibbs,
McNally and Dickie were 55,941 ($1,989,402), 13,782 ($490,122), 22,058
($784,438), 17,621 ($626,647),and 4,109 ($146,126), respectively.
The Long-Term Incentive Compensation Plan (LTICP) is a comprehensive,
stock-based incentive compensation plan providing for discretionary grants
of common stock-based awards, including restricted stock. Outstanding
awards to named executive officers vest over a three year period and they
may earn from 0% to 200% of the number of shares awarded based on the
Company's total return to shareholders over this three year period compared
to the total return provided by the companies comprising the Standard &
Poor's Electric Utility Index. Dividends are paid and reinvested on stock
awards at the same rate as dividends on the Company's common stock. As a
result of restricted stock awards under the LTICP, and reinvested
dividends, the number of shares of restricted stock and the value of such
shares at December 31, 1999 held for Messrs. Nye, Biegler, Gibbs, McNally
and Dickie were 90,227 ($3,208,698), 17,875 ($635,680), 24,530 ($872,348),
37,908 ($1,348,103), and 10,294 ($366,080), respectively.
As noted, salary deferred under the DICP is included in amounts reported as
Salary in the Summary Compensation Table. Amounts shown in the table below
represent the number of shares purchased under the DICP with these deferred
salaries for 1999 and the number of shares awarded under the LTICP:
Long-Term Incentive Plans -- Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Deferred and Incentive
Compensation Plan Long-Term Incentive Compensation Plan
------------------------ ----------------------------------------------------
Number Performance Number of Performance
of Shares, or Other Shares, or Other
Units or Period Until Units or Period Until Estimated Future Payouts
Other Maturation or Other Maturation ----------------------------
Name Rights (#) Payout Rights (#) or Payout Minimum (#) Maximum (#)
---- ---------- ------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Erle Nye................ 3,417 5 Years 40,000 3 Years 0 80,000
David W. Biegler........ 2,337 5 Years 10,000 3 Years 0 20,000
H. Jarrell Gibbs........ 1,870 5 Years 13,000 3 Years 0 26,000
Michael J. McNally...... 1,510 5 Years 13,000 3 Years 0 26,000
Brian N. Dickie......... 2,697 5 Years 10,000 3 Years 0 20,000
</TABLE>
The amounts reported under LTIP Payouts in the Summary Compensation Table
represent payouts maturing during such years of earnings on deferred salary
under the DICP in prior years.
9
<PAGE>
(3) Amounts reported as All Other Compensation in the Summary Compensation
Table are attributable to the named officer's participation in certain
plans and as otherwise described hereinafter in this footnote.
Under the Employees' Thrift Plan of the Texas Utilities Company System
(Thrift Plan) all employees of the Company or any of its participating
subsidiaries may invest up to 16% of their regular salary or wages in common
stock of the Company, or in a variety of selected mutual funds. Under the
Thrift Plan, the Company matches a portion of an employee's contributions in
an amount equal to 40%, 50% or 60% (depending on the employee's length of
service) of the first 6% of such employee's contributions. All matching
amounts are invested in common stock of the Company. The amounts reported
under All Other Compensation in the Summary Compensation Table include these
matching amounts which, for Messrs. Nye, Biegler, Gibbs, McNally and Dickie
were $5,760, $5,760, $4,800, $3,840, and $3,412, respectively, during 1999.
The Company has a Salary Deferral Program (Program) under which each
employee of the Company and its participating subsidiaries whose annual
salary is equal to or greater than an amount established under the Program
($97,910 for the Program Year beginning April 1, 1999) may elect to defer a
percentage of annual base salary, or any bonus or other special cash
compensation for a period of seven years, for a period ending with the
retirement of such employee, or for a combination thereof. Effective with
the Program Year beginning April 1, 1998, such deferrals may be up to a
maximum of 50% of the employee's annual salary and/or 100% of the employee's
bonus or other special cash compensation. The Company makes a matching
award, subject to forfeiture under certain circumstances, equal to 100% of
up to the first 8% of salary deferred under the Program. Prior to April 1,
1998, deferrals under the Program were limited to up to 10% of the
employee's salary and the Company made a matching award equal to 100% of the
employee's salary deferral. Salary and bonuses deferred under the Program
are included in amounts reported under Salary and Bonus, respectively, in
the Summary Compensation Table. Deferrals made after April 1, 1998, are
credited with earnings or losses based on the performance of investment
alternatives selected by each participant. Deferrals made prior to April 1,
1998, are, at the end of the applicable maturity period, credited with the
greater of the actual earnings of the Program assets, or the average yield
during the applicable maturity period of U.S. Treasury Notes having a
maturity of ten years. At the end of the applicable maturity period, the
trustee for the Program distributes the deferrals and the applicable
earnings in cash. The distribution is in a lump sum if the applicable
maturity period is seven years. If the retirement option is elected, the
distribution is made in twenty annual installments. Individuals who were
participating in the Program on March 31, 1998, were given a one time
opportunity to elect (1) to continue to have the provisions of the Program
relating to permitted deferrals, matching awards, investments and
calculation of earnings in effect prior to April 1, 1998, apply to their
future Program participation; or (2) to have the Program provisions relating
to investments and calculation of earnings apply to their entire Program
account, including deferrals and matching contributions which had been made
prior to April 1, 1998. The Company is financing the retirement portion of
the Program through the purchase of corporate-owned life insurance on the
lives of the participants. The proceeds from such insurance are expected to
allow the Company to fully recover the cost of the retirement option. During
1999, matching awards, which are included under All Other Compensation in
the Summary Compensation Table, were made for Messrs. Nye, Biegler, Gibbs,
McNally and Dickie in the amounts of $72,667, $51,333, $40,933, $31,600, and
$-0-, respectively.
10
<PAGE>
Under the Company's Split-Dollar Life Insurance Program (Insurance Program),
split-dollar life insurance policies are purchased for elected corporate
officers of the Company and its participating subsidiaries with a title of
Vice President or above, with a death benefit equal to four times their annual
Insurance Program compensation. New participants vest in the policies issued
under the Insurance Program over a six year period. The Company pays the
premiums for these policies and has received a collateral assignment of the
policies equal in value to the sum of all of its insurance premium payments.
Although the Insurance Program is terminable at any time, it is designed so
that if it is continued, the Company will fully recover all of the insurance
premium payments it has made either upon the death of the participant or, if
the assumptions made as to policy yield are realized, upon the later of
fifteen years of participation or the participant's attainment of age sixty-
five. During 1999, the economic benefit derived by Messrs. Nye, Biegler,
Gibbs, McNally and Dickie from the term insurance coverage provided and the
interest foregone on the remainder of the insurance premiums paid by the
Company amounted to $106,465, $24,416, $48,407, $11,999 and $4,580,
respectively.
An amount of $87,413 is included in the All Other Compensation column of
the Summary Compensation Table for Mr. McNally for 1999 representing
additional compensation that the Company agreed to pay Mr. McNally incident
to his employment with the Company in lieu of payments he would have
received from a prior employer.
An amount of $492,656 is included in the All Other Compensation column of
the Summary Compensation Table for Mr. Dickie for 1999 representing a
special one-time bonus paid to Mr. Dickie under the terms of his employment
agreement with the Company.
(4) The amount reported for Mr. Gibbs as Other Annual Compensation consists of
certain benefits provided by the Company under its standard expatriate
policy in connection with an extended assignment in the United Kingdom
during 1999. The amount includes approximately $128,000 for housing during
the assignment, United Kingdom income taxes paid on Mr. Gibbs' behalf and
certain other benefits.
The amount included in the Other Annual Compensation column for Mr. Dickie
for 1999 represents relocation expenses paid by the Company under its
standard employee relocation policy in connection with Mr. Dickie's
employment with the Company.
(5) The Company entered into an employment agreement with Mr. Dickie effective
April 12, 1999, which provides for a minimum annual base salary of
$750,000 through May 31, 2002, and a minimum annual incentive bonus equal
to one-half of Mr. Dickie's then current annual base salary and minimum
annual restricted stock awards of 10,000 shares under the Company's LTICP
for each of 1999, 2000 and 2001. Under the terms of the agreement, Mr.
Dickie is also entitled to certain retirement compensation, as well as
severance benefits in the event of a termination of Mr. Dickie's
employment without cause, including a payment equal to annual base salary
and target bonus; a payment for otherwise forfeited incentive
compensation; and health care benefits. The agreement also provides for
compensation and benefits under certain circumstances, following a change-
in-control of the Company, including a payment equal to three times annual
base salary and target bonus; a payment in lieu of foregone and forfeited
incentive compensation; health care benefits; and a tax gross-up payment
to offset any excise tax which may result from such change-in-control
payments.
11
<PAGE>
As a part of the acquisition of ENSERCH (predecessor by name change to TXU
Gas Company), options to purchase the common stock of ENSERCH which had been
granted to various employees of ENSERCH were converted into options to acquire
common shares of the Company. The table below shows, for each of the named
officers, the information specified with respect to exercised, exercisable and
unexercisable options under all existing stock option plans, converted into
shares of the Company's common stock into which such options became
exercisable at the time of the ENSERCH acquisition.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number Of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Shares December 31, 1999 December 31, 1999
Acquired on Value (#) ($)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Erle Nye................ 0 0 0 0 0 0
David W. Biegler........ 0 0 129,778 0 1,463,332 0
H. Jarrell Gibbs........ 0 0 0 0 0 0
Michael J. McNally...... 0 0 0 0 0 0
Brian N. Dickie......... 0 0 0 0 0 0
</TABLE>
The Company and its subsidiaries maintain retirement plans (TU Retirement
Plan) which are qualified under applicable provisions of the Internal Revenue
Code of 1986, as amended (Code). Annual retirement benefits under the
traditional defined benefit formula of the TU Retirement Plan, which applied
to each of the named officers, are computed as follows: for each year of
accredited service up to a total of 40 years, 1.3% of the first $7,800, plus
1.5% of the excess over $7,800, of the participant's average annual earnings
during his or her three years of highest earnings. Amounts reported under
Salary for the named officers in the Summary Compensation Table approximate
earnings as defined by the TU Retirement Plan without regard to any
limitations imposed by the Code. Benefits paid under the TU Retirement Plan
are not subject to any reduction for Social Security payments but are limited
by provisions of the Code. As of February 29, 2000, years of accredited
service under the TU Retirement Plan for Messrs. Nye, Biegler, Gibbs, McNally
and Dickie were 37, 2, 37, 3, and -0-, respectively.
TEXAS UTILITIES PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
----------------------------------------------------------------
Remuneration 20 25 30 35 40
- ------------ -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 14,688 $ 18,360 $ 22,032 $ 25,704 $ 29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
1,800,000 539,688 674,610 809,532 944,454 1,079,376
2,000,000 599,688 749,610 899,532 1,049,454 1,199,376
</TABLE>
12
<PAGE>
Before the ENSERCH acquisition, Mr. Biegler earned retirement benefits
under the Retirement and Death Benefit Program of 1969 of ENSERCH Corporation
and Participating Subsidiary Companies (ENSERCH Retirement Plan) which was
merged into, and became a part of, the TU Retirement Plan effective December
31, 1997. In connection with this plan merger, the TU Retirement Plan was
amended to provide that the retirement benefit of employees who were employed
by ENSERCH Corporation or one of its subsidiaries participating in the ENSERCH
Retirement Plan on August 5, 1997, and as of the last full pay period of 1997,
will equal the sum of (1) their accrued benefit under the ENSERCH Retirement
Plan through the last pay period of 1997 and (2) their accrued benefit under
the TU Retirement Plan beginning with the first pay period of 1998; provided
that the aggregate retirement benefit earned under the traditional defined
benefit plan formula of the plans can be no less than the retirement benefit
which would have been earned had all service under the traditional defined
benefit formula been under the ENSERCH Retirement Plan. Mr. Biegler, whose
employment with the Company began August 5, 1997, is treated in a similar
manner. Amounts reported for Mr. Biegler under Salary and Bonus in the Summary
Compensation Table approximate earnings as defined by the ENSERCH Retirement
Plan without regard to any limitations imposed by the Code. Benefits paid
under the ENSERCH Retirement Plan are not subject to any reduction for Social
Security payments but are limited by provisions of the Code. As of February
29, 2000, Mr. Biegler had 29 years of accredited service under the ENSERCH
Retirement Plan and 2 years of accredited service under the TU Retirement
Plan.
ENSERCH PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------------------------
Remuneration 20 25 30 35 40 45
- ------------ -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 12,541 $ 15,676 $ 18,812 $ 21,947 $ 23,197 $ 24,447
100,000 30,041 37,551 45,062 52,572 55,072 57,572
200,000 65,041 81,301 97,562 113,822 118,822 123,822
400,000 135,041 168,801 202,562 236,322 246,322 256,322
800,000 275,041 343,801 412,562 481,322 501,322 521,322
1,000,000 345,041 431,301 517,562 603,822 628,822 653,822
1,400,000 485,041 606,301 727,562 848,822 883,822 918,822
1,800,000 625,041 781,301 937,562 1,093,822 1,138,822 1,183,822
2,000,000 695,041 868,801 1,042,562 1,216,322 1,266,322 1,316,322
</TABLE>
The Company's supplemental retirement plans (Supplemental Plan) provide for
the payment of retirement benefits which would otherwise be limited by the
Code or the definition of earnings in the TU Retirement Plan or the ENSERCH
Retirement Plan, as applicable. Under the Supplemental Plan, retirement
benefits are calculated in accordance with the same formula used under the
applicable qualified plan, except that, with respect to calculating the
portion of the Supplemental Plan benefit attributable to service under the TU
Retirement Plan, earnings also include AIP awards (50% of the AIP award is
reported under Bonus for the named officers in the Summary Compensation
Table). The tables set forth above illustrate the total annual benefit payable
at retirement under the TU Retirement Plan and the ENSERCH Retirement Plan,
respectively, inclusive of benefits payable under the Supplemental Plan, prior
to any reduction for a contingent beneficiary option which may be selected by
participants.
13
<PAGE>
The following information contained under the headings Organization and
Compensation Committee Report on Executive Compensation and Performance Graph
is not to be deemed to be (i) incorporated by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934 (Securities
Acts) or (ii) "soliciting material" or "filed" with the Securities and
Exchange Commission within the meaning of Item 402(a)(9) of SEC Regulation S-K
of the Securities Acts.
ORGANIZATION AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors
(Committee) is responsible for reviewing and establishing the compensation of
the executive officers of the Company. The Committee consists of all of the
nonemployee directors of the Company and is chaired by James A. Middleton. The
Committee has directed the preparation of this report and has approved its
contents and submission to the shareholders.
As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation
plans should align executive compensation with returns to shareholders with
due consideration accorded to balancing both long-term and short-term
objectives. The overall compensation program should provide for an appropriate
and competitive balance between base salaries and performance-based annual and
long-term incentives. The Committee has determined that, as a matter of policy
to be implemented over time, the base salaries of the officers will be
established at the median, or 50th percentile, of the top ten electric
utilities in the United States and that opportunities for total direct
compensation (defined as the sum of base salaries, annual incentives and long-
term incentives) to reach the 75th percentile, or above, of such utilities
will be provided through performance-based compensation plans. Such
compensation principles and practices have allowed, and should continue to
allow, the Company to attract, retain and motivate its key executives.
In furtherance of these policies, a nationally recognized compensation
consultant has been retained since 1994 to assist the Committee in its
periodic reviews of compensation and benefits provided to officers. The
consultant's evaluations include comparisons to the largest utilities as well
as to general industry with respect both to the level and composition of
officers' compensation. The consultant's recommendations including the Annual
Incentive Plan, the Long-Term Incentive Compensation Plan and certain benefit
changes have generally been implemented. The Annual Incentive Plan, which was
first approved by the shareholders in 1995 and is being resubmitted this year,
is generally referred to as the AIP and is described in this report, in
footnote 1 on page 8 of this proxy statement, and on pages 18 and 19 of this
proxy statement. The Long-Term Incentive Compensation Plan, referred to as the
Long-Term Plan or LTICP, was approved by the shareholders in 1997 and is
described in this report as well as in footnote 2 on pages 8 and 9 of this
proxy statement.
The compensation of the officers of the Company consists principally of
base salaries, the opportunity to participate in the Deferred and Incentive
Compensation Plan (referred to as the DICP and described in footnote 2 on
pages 8 and 9 of this proxy statement), the opportunity to earn an incentive
award under the AIP and, in certain instances, awards of performance-based
restricted shares under the Long-Term Plan. The value of future payments under
the DICP, as well as the value of the deferred portion of any award under the
AIP and the value of any awards of performance-based restricted shares under
the Long-Term Plan, is directly related to the future performance of the
Company's common stock. It is anticipated that performance-based incentive
awards under the AIP and the Long-Term Plan, will, in future years, continue
to constitute a substantial percentage of the officers' total compensation.
14
<PAGE>
Certain of the Company's business units have developed separate annual and
long-term incentive compensation plans. Those plans focus on the results
achieved by those individual business units and the compensation opportunities
provided by those plans are considered to be competitive in the markets in
which those units compete. Generally, officers may not participate in both the
traditional incentive compensation plans as discussed herein and the business
unit plans. None of the named officers participate in the individual business
unit plans.
The AIP is administered by the Committee and provides an objective
framework within which annual Company and individual performance can be
evaluated by the Committee. Depending on the results of such performance
evaluations, and the attainment of the per share net income goals established
in advance, the Committee may provide annual incentive compensation awards to
eligible officers. The evaluation of each individual participant's performance
is based upon the attainment of individual and business unit objectives. The
Company's performance is evaluated, compared to the ten largest electric
utilities and/or the electric utility industry, based upon its total return to
shareholders and return on invested capital, as well as other measures
relating to competitiveness, service quality and employee safety. The
combination of individual and Company performance results, together with the
Committee's evaluation of the competitive level of compensation which is
appropriate for such results, determines the amount, if any, actually awarded.
As required by Section 162(m) of the Internal Revenue Code relating to the
deductibility of compensation, the AIP is being submitted for reapproval by
the shareholders. Detailed information concerning the proposal to reapprove
the AIP is contained on pages 18 and 19 of this proxy statement. It is
important to note that the principal terms of the plan will remain unchanged.
The reapproval is being requested simply to comply with the Internal Revenue
Code. The Committee believes that the AIP is an important and appropriate
component of officers' compensation and recommends that the shareholders vote
in favor of reapproval.
The Long-Term Plan, which is also administered by the Committee, is a
comprehensive stock-based incentive compensation plan under which all awards
are made in, or based on the value of, the Company's common stock. The Long-
Term Plan provides that, in the discretion of the Committee, awards may be in
the form of stock options, stock appreciation rights, performance and/or
restricted stock or stock units or in any other stock-based form. The purpose
of the Long-Term Plan is to provide performance-related incentives linked to
long-term performance goals. Such performance goals may be based on individual
performance and/or may include criteria such as absolute or relative levels of
total shareholder return, revenues, sales, net income or net worth of the
Company, any of its subsidiaries, business units or other areas, all as the
Committee may determine. Awards under the Long-Term Plan are expected to
constitute the principal long-term component of officers' compensation.
In establishing levels of executive compensation at its May 1999 meeting,
the Committee reviewed various performance and compensation data, including
the performance measures under the AIP and the report of its compensation
consultant. Information was also gathered from industry sources and other
published and private materials which provided a basis for comparing the
largest electric and gas utilities and other survey groups representing a
large variety of business organizations. Included in the data considered were
the comparative returns provided by the largest electric and gas utilities as
represented by the returns of the Standard & Poor's Electric Utility Index
which are reflected in the graph on page 17. Compensation amounts were
established by the Committee based upon its consideration of the above
comparative data and its subjective evaluation of Company and individual
performance at levels consistent with the Committee's policy relating to total
direct compensation.
At its meeting in May 1999, the Committee provided awards of performance-
based restricted stock under the Long-Term Plan to certain officers, including
the Chief Executive. The future value of those awards will be determined by
the Company's total return to shareholders over a three year period compared
to the total return for that period of the companies comprising the Standard &
Poor's Electric
15
<PAGE>
Utility Index. Depending upon the Company's relative return for such period,
the officers may earn from 0% to 200% of the original award and their
compensation is, thereby, directly related to shareholder value. Awards
granted in May 1999 contemplate that 200% of the original award will be
provided if the Company's total return is in the 81st percentile or above of
the returns of the companies comprising the Standard & Poor's Electric Utility
Index and that such percentage of the original award will be reduced as the
Company's return compared to the Index declines so that 0% of the original
award will be provided if the Company's return is in the 40th percentile or
below of returns provided by the companies comprising the Index. These awards,
and any awards that may be made in the future, are based upon the Committee's
evaluation of the appropriate level of long-term compensation consistent with
its policy relating to total direct compensation.
In May 1999 the Committee increased Mr. Nye's base salary as Chief
Executive to an annual rate of $950,000 representing a $100,000 or 11.8%
increase over the amount established for Mr. Nye in May of 1998. Based upon
the Committee's evaluation of individual and Company performance, as called
for by the AIP, the Committee also provided Mr. Nye with an AIP award of
$950,000 compared to the prior year's award of $700,000. The Committee also
awarded 40,000 shares of performance-based restricted stock to Mr. Nye. Under
the terms of the award, Mr. Nye can earn from 0% to 200% of the award
depending on the Company's total return to shareholders over a three-year
period (April 1, 1999 through March 31, 2002) compared to the total return
provided by the companies comprising the Standard & Poor's Electric Utility
Index. This level of compensation was established based upon the Committee's
subjective evaluation of the information described in this report.
In discharging its responsibilities with respect to establishing executive
compensation, the Committee normally considers such matters at its May meeting
held in conjunction with the Annual Meeting of Shareholders. Although Company
management may be present during Committee discussions of officers'
compensation, Committee decisions with respect to the compensation of the
Chairman of the Board and Chief Executive and the President are reached in
private session without the presence of any member of Company management.
As noted, Section 162(m) of the Code limits the deductibility of
compensation which a publicly traded corporation provides to its most highly
compensated officers. As a general policy, the Company does not intend to
provide compensation which is not deductible for federal income tax purposes.
Awards under the AIP in 1996 and subsequent years have been fully deductible
and, assuming shareholder reapproval of the plan, are expected to continue to
be deductible. Awards under the Long-Term Plan are expected to be fully
deductible, and the DICP and the Salary Deferral Program have been amended to
require the deferral of distributions of amounts earned in 1995 and subsequent
years until the time when such amounts would be deductible. Awards provided
under the AIP in 1995 and distributions under the DICP and the Salary Deferral
Program which were earned in plan years prior to 1995, may not be fully
deductible but such amounts are not expected to be material.
Shareholder comments to the Committee are welcomed and should be addressed
to the Secretary of the Company at the Company's offices.
Organization and Compensation Committee
<TABLE>
<S> <C>
James A. Middleton, Chair Margaret N. Maxey
Derek C. Bonham J. E. Oesterreicher
William M. Griffin Charles R. Perry
Kerney Laday Herbert H. Richardson
</TABLE>
16
<PAGE>
PERFORMANCE GRAPH
The following graph compares the performance of the Company's common stock
to the S&P 500 Index and S&P Electric Utility Index for the last five years.
The graph assumes the investment of $100 at December 31, 1994 and that all
dividends were reinvested. The amount of the investment at the end of each
year is shown in the graph and in the table which follows.
Cumulative Total Returns
for the Five Years Ended 12/31/99
[PERFORMANCE GRAPH]
----------------------------------
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Texas Utilities................................. 100 139 145 156 185 150
- --------------------------------------------------------------------------------
S&P 500 Index................................... 100 138 169 226 290 351
- --------------------------------------------------------------------------------
S&P Electric Utility Index...................... 100 131 131 165 190 154
</TABLE>
- -------------------------------------------------------------------------------
17
<PAGE>
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION TO CHANGE
THE COMPANY'S NAME
The Board of Directors has unanimously approved, subject to shareholder
approval, an amendment to the Restated Articles of Incorporation that would
change the name of the Company to TXU Corp. Accordingly, the following
resolution will be submitted for consideration at the meeting:
RESOLVED that Article I of the Restated Articles of Incorporation of
the Company be, and hereby is, amended to read as follows:
"The name of the corporation is TXU Corp."
The Company adopted a corporate identity program in May 1999 that brings
together many divisions and subsidiaries, both domestic and international,
under one name. The proposed amendment is the final step in implementing this
identity program. With the expansion of its business and scope in recent
years, the Company is no longer a traditional utility company with its
business focused entirely in Texas. It is now a multinational, integrated
energy company with a well-diversified portfolio of complimentary, closely
related businesses. The proposed name reflects both the Company's history and
its new position and strategy. "TXU Corp." also allows the parent company to
build on the existing investor recognition of the long standing stock symbol,
transfer its strong identity and equity to its affiliates, and move beyond a
single state while preserving its Texas heritage.
Shareholders will not be required to exchange their stock certificates or
take any other similar action as a result of the Company's name change. All
currently outstanding stock certificates will remain valid and fully
negotiable as originally issued.
The Board of Directors Recommends a Vote FOR the Approval of this
Amendment.
REAPPROVAL OF ANNUAL INCENTIVE PLAN
As indicated in the Organization and Compensation Committee Report on
Executive Compensation, the Company believes in a compensation philosophy
based on pay for performance. Consistent with this philosophy, in 1995, the
Board of Directors recommended, and the shareholders approved, an Annual
Incentive Plan (AIP), the purpose of which is to provide performance-based
annual incentive compensation opportunities to officers who contribute
significantly to the growth and success of the Company. Regulations
promulgated under Section 162(m) of the Internal Revenue Code provide that, in
order for the Company to continue to fully deduct for federal income tax
purposes compensation paid under the AIP to its five most highly compensated
officers, the Company must seek reapproval of the AIP every five years. The
shareholders are not being asked to approve any amendments to the AIP; rather,
the reapproval is being sought in order to comply with this regulatory
requirement. The Board believes that the AIP is an effective tool in
maintaining an appropriate and competitive compensation program, and that
reapproval of the material AIP terms as set forth below in order to permit the
continued federal income tax deduction of compensation provided under the AIP
is advisable.
The individuals eligible to participate in the AIP are the elected
corporate officers of the Company and its participating subsidiaries with a
title of Vice President or above (currently 47 persons), including those
persons named in the Summary Compensation Table. The Plan is administered by
the Organization and Compensation Committee of the Board of Directors
(Committee), which is responsible for the establishment of levels of executive
compensation and which consists entirely of non-employee directors of the
Company.
18
<PAGE>
Under the terms of the AIP, per share net income targets are established by
the Committee at the beginning of each calendar year. If those net income
targets are achieved, incentive awards ranging from 40% to 75% of base pay,
with a maximum of 100% of base pay, are authorized under the plan. The amounts
actually awarded, if any, are dependent upon the attainment of the net income
targets as well as the Committee's evaluation of the participants' and the
Company's performance. Since the Committee retains the discretion to establish
those net income targets, Section 162(m) requires that the shareholders
consider reapproval of the AIP every five years in order to permit the Company
to continue to deduct awards provided under the plan.
The evaluation of each individual participant's performance is based upon
individual and business unit objectives. The Company's performance is
evaluated compared to the ten largest electric utility companies and/or the
electric utility industry. Specific Company performance measures to be
considered by the Committee in its evaluation currently include total return
to shareholders and return on invested capital, as well as other measures
relating to competitiveness, service quality and employee safety. Based upon
the Committee's evaluation of individual and Company performance, grades,
which generally correlate to exceeding, meeting or failing to meet
expectations, are assigned by the Committee. The combination of such
individual and Company grades, together with the Committee's evaluation of the
competitive level of total direct compensation which is appropriate for such
grades, determines the amount actually awarded. This evaluation process is
used by the Committee to establish the actual awards which, depending upon the
achievement of per share net income targets, may be equal to or less than the
maximum or target award levels.
One-half of any amount awarded is paid in cash. The remaining one-half of
any amount awarded is deferred under the Deferred and Incentive Compensation
Plan (DICP) and distributed to the participant at the end of the third year
following the date of the deferred award in accordance with the terms of the
DICP.
Assuming that shareholder reapproval is obtained, the Company expects that
awards under the AIP will continue to be fully deductible for federal income
tax purposes. In order to comply with the requirements of Section 162(m) of
the Code, $1,000,000 has been established as the maximum amount which may be
awarded under the AIP in any year to any participant. Because elements of the
awards under the AIP are within the discretion of the Committee and depend
upon the individual and Company performance, payments that will be received by
participants in the future are not presently determinable.
The Board may amend, suspend or terminate the AIP at any time; however, any
amendment which changes the material terms of the performance goals or
increases the maximum amount payable under the Plan will be subject to the
shareholder approval requirements of Section 162(m) of the Code in order for
the Company to continue to be able to fully deduct awards under the Plan for
federal income tax purposes.
The Board of Directors Recommends a Vote FOR Reapproval of the Annual
Incentive Plan.
19
<PAGE>
SELECTION OF AUDITORS
The Audit Committee has nominated to the Board of Directors for its
consideration the firm of Deloitte & Touche LLP to act as independent auditors
for the Company for the year 2000 and, subject to the approval of shareholders
at the annual meeting, the Board has selected that firm to audit the books of
account and records of the Company and to make a report thereon to the
shareholders. The persons named in the proxy will, unless otherwise instructed
thereon, vote your shares in favor of the following resolution which will be
submitted for consideration:
RESOLVED that the selection of the firm of Deloitte & Touche LLP,
independent auditors, to audit the books of account and records of the
Company for the year 2000, to make a report thereon, and to perform
other services, be, and it hereby is, approved.
The firm of Deloitte & Touche LLP, independent auditors, has been the
outside auditors for the Company since its organization in 1996 and for TXU
Energy Industries Company (formerly Texas Utilities Company) since its
organization in 1945, including the last fiscal year. Representatives of
Deloitte & Touche LLP are expected to be present at the annual meeting and
will have the opportunity to make a statement, if they desire to do so, and to
respond to appropriate questions.
In August 1999, based upon the recommendation of its Audit Committee, the
Board of Directors of TXU Europe Limited appointed Deloitte & Touche LLP as
the principal accountants for TXU Europe Limited and its subsidiaries for
1999. TXU Europe Limited chose not to continue the engagement of
PricewaterhouseCoopers, its former principal accountants. The decision by TXU
Europe Limited to change principal accountants was made in order to align the
principal accountants of TXU Europe Limited with those of the Company.
No report of PricewaterhouseCoopers on TXU Europe Limited's financial
statements contained any adverse opinion or disclaimer of opinion, nor was any
report qualified in any manner. There were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. In addition,
there were no "reportable events" as that term is defined in the SEC rules.
The Board of Directors Recommends a Vote FOR the Approval of Auditors.
OTHER BUSINESS
Other than as stated herein, the Board of Directors does not intend to
bring any business before the meeting and it has not been informed of any
matters that may be presented to the meeting by others. However, if any other
matters properly come before the meeting, it is the intent of the Board of
Directors that the persons named in the proxy will vote pursuant to the proxy
in accordance with their judgment in such matters.
Dated: March 30, 2000
Whether or not you will be able to attend the meeting, please sign and return
the accompanying proxy promptly.
20
<PAGE>
APPENDIX A
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
FINANCIAL INFORMATION
DECEMBER 31, 1999
<PAGE>
INDEX TO FINANCIAL INFORMATION
December 31, 1999
Selected Financial Data - Consolidated Financial and Operating A-2
Statistics..........................................................
Management's Discussion and Analysis of Financial Condition and A-4
Results of Operations...............................................
Statement of Responsibility.......................................... A-25
Independent Auditors' Reports........................................ A-26
Financial Statements:
Statements of Consolidated Income.................................... A-28
Statements of Consolidated Comprehensive Income...................... A-29
Statements of Consolidated Cash Flows................................ A-30
Consolidated Balance Sheets.......................................... A-31
Statements of Consolidated Common Stock Equity....................... A-33
Notes to Financial Statements........................................ A-34
A-1
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Millions of US Dollars, except ratios)
Total assets -- end of year..................................... $40,741 $39,507 $24,864 $21,376 $21,536
- ------------------------------------------------------------------------------------------------------------------
Property, plant & equipment -- gross -- end of year............. $33,890 $31,946 $26,578 $24,931 $24,912
Accumulated depreciation and amortization -- end of year..... 9,414 8,243 7,171 6,497 5,858
Reserve for regulatory disallowances -- end of year.......... 836 836 836 836 1,308
Construction expenditures..................................... 1,632 1,168 583 433 430
- ------------------------------------------------------------------------------------------------------------------
Capitalization -- end of year
Long-term debt, less amounts due currently..................... $16,325 $15,134 $ 8,759 $ 8,668 $ 9,175
Mandatorily redeemable, preferred securities of subsidiary
trusts, each holding solely junior subordinated debentures
of the obligated company (trust securities):
TXU Corp. obligated........................................ 368 223 -- -- --
Subsidiary obligated....................................... 971 969 875 381 381
Preferred stock of subsidiaries:
Not subject to mandatory redemption......................... 190 190 304 465 490
Subject to mandatory redemption............................. 21 21 21 238 263
Common stock equity............................................ 8,334 8,246 6,843 6,033 5,732
------- ------- ------- ------- -------
Total...................................................... $26,209 $24,783 $16,802 $15,785 $16,041
======= ======= ======= ======= =======
Capitalization ratios -- end of year (a)
Long-term debt, less amounts due currently..................... 62.3% 61.1% 52.1% 54.9% 57.2%
Trust securities............................................... 5.1 4.8 5.2 2.4 2.4
Preferred stock of subsidiaries................................ .8 .8 2.0 4.5 4.7
Common stock equity............................................ 31.8 33.3 40.7 38.2 35.7
------- ------- ------- ------- -------
Total...................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
Embedded interest cost on long-term debt -- end of year......... 7.0% 7.7% 7.9% 8.1% 8.4%
Embedded distribution cost on trust securities -- end of year... 7.1% 8.0% 8.3% 8.7% 8.6%
Embedded dividend cost on preferred stock of subsidiaries --
end of year (b).............................................. 8.4% 9.4% 9.2% 7.5% 7.4%
- ------------------------------------------------------------------------------------------------------------------
Net income (loss)............................................... $ 985 $ 740 $ 660 $ 754 $ (139)
Dividends declared on common stock.............................. $ 647 $ 597 $ 496 $ 456 $ 635
- ------------------------------------------------------------------------------------------------------------------
Common stock data
Shares outstanding -- average (millions)....................... 279 265 231 225 226
Shares outstanding -- end of year (millions)................... 276 282 245 225 226
Basic earnings (loss) per share................................ $ 3.53 $ 2.79 $ 2.86 $ 3.35 $ (0.61)
Diluted earnings (loss) per share.............................. $ 3.53 $ 2.79 $ 2.85 $ 3.35 $ (0.61)
Dividends declared per share................................... $ 2.325 $ 2.225 $ 2.125 $ 2.025 $ 2.81
Book value per share -- end of year............................ $ 30.15 $ 29.21 $ 27.90 $ 26.86 $ 25.38
Return on average common stock equity.......................... 11.9% 9.8% 10.3% 12.8% (2.3)%
Ratio of earnings to fixed charges.............................. 1.87 1.84 2.14 2.18 0.72
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Including the effect of restricted cash pledged against future lease
obligations that is included in other investments (See Note 16 to Financial
Statements), the capitalization ratios at December 31, 1999 consisted of
60.5% long-term debt, 5.4% trust securities, .8% preferred stock and 33.3%
common stock equity.
(b) Includes the unamortized balance of the loss on reacquired preferred stock
and associated amortization. The embedded dividend cost excluding the
effects of the loss on reacquired preferred stock is 6.2% for 1999, 5.9%
for 1998, 6.6% for 1997, 6.8% for 1996, and 6.9% for 1995.
Certain financial statistics were affected by the February 1999 acquisition of
Westar/Kinetik Energy, the May 1998 acquisition of The Energy Group PLC (TEG),
the November 1997 acquisition of TXU Communications Company, the August 1997
acquisition of TXU Gas Company and the December 1995 acquisition of Eastern
Energy Limited; and for the year 1995, were affected by recording of the
impairment of certain assets. Average shares outstanding (millions) assuming
dilution for 1998 and 1997 were 266 and 232, respectively. There were no
additional diluted shares for any of the other periods presented.
Certain previously reported financial statistics have been reclassified to
conform to current classifications.
A-2
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED OPERATING STATISTICS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
SALES VOLUMES
Electric (gigawatt hours-GWh)
<S> <C> <C> <C> <C> <C>
Residential...................................... 54,881 47,593 36,377 35,855 31,284
Commercial and industrial........................ 84,234 79,786 61,337 59,863 55,239
Other............................................ 3,366 4,261 4,499 4,626 3,580
-------- -------- -------- -------- -------
Total electric........................... 142,481 131,640 102,213 100,344 90,103
======== ======== ======== ======== =======
Gas (billion cubic feet - Bcf)
Residential...................................... 136 98 33 -- --
Commercial and industrial........................ 158 104 24 -- --
Pipeline transportation (Bcf)......................... 551 599 255 -- --
Gas liquids (million barrels)......................... 6 6 3 -- --
US energy marketing
Gas (Bcf)........................................ 1,102 1,115 292 -- --
Electric (GWh)................................... 6,544 16,268 -- -- --
Europe wholesale energy sales
Gas (Bcf)........................................ 447 148 -- -- --
Electric (GWh)................................... 78,950 51,060 -- -- --
OPERATING REVENUES (millions)
Electric
Residential...................................... $ 3,938 $ 3,239 $ 2,248 $ 2,252 $ 1,920
Commercial and industrial........................ 3,802 3,543 2,357 2,370 2,110
Other electric utilities......................... 105 121 139 146 118
US fuel (including over/under-recovered)......... 1,688 1,788 1,696 1,671 1,418
Transmission service............................. 148 126 114 -- --
Other............................................ 729 465 108 112 73
-------- -------- -------- -------- -------
Subtotal..................................... 10,410 9,282 6,662 6,551 5,639
Earnings in excess of earnings cap............... (92) -- -- -- --
-------- -------- -------- -------- -------
Total electric............................... 10,318 9,282 6,662 6,551 5,639
-------- -------- -------- -------- -------
Gas
Residential...................................... 833 572 206 -- --
Commercial and industrial........................ 563 370 124 -- --
-------- -------- -------- -------- -------
Subtotal..................................... 1,396 942 330 -- --
Agency and management fees....................... (67) -- -- -- --
-------- -------- -------- -------- -------
Net gas...................................... 1,329 942 330 -- --
-------- -------- -------- -------- -------
Pipeline transportation............................... 116 121 57 -- --
Gas liquids........................................... 86 64 36 -- --
US energy marketing................................... 2,983 3,199 859 -- --
Europe wholesale energy sales......................... 2,168 1,199 -- -- --
Other revenues, net of intercompany eliminations (a).. 118 (71) 2 -- --
-------- -------- -------- -------- -------
Total operating revenues....................... $ 17,118 $ 14,736 $ 7,946 $ 6,551 $ 5,639
======== ======== ======== ======== =======
CUSTOMERS (end of year -- in thousands)
Electric.............................................. 6,054 6,255 2,972 2,913 2,852
Gas................................................... 2,622 2,156 1,355 -- --
Telephone access lines................................ 113 105 97 -- --
</TABLE>
- ---------------------------------
Certain previously reported operating statistics have been reclassified to
conform to current classifications. The operating statistics include the
operations of Westar/Kinetik Energy, TXU Europe, TXU Gas Company and Eastern
Energy from their respective dates of acquisition, February 1999, May 1998,
August 1997 and December 1995.
(a) Includes TXU Communications operations.
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS, MERGERS AND ACQUISITIONS
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
TXU Corp.'s principal subsidiaries, with their current and former names where
applicable, are as follows:
<TABLE>
<CAPTION>
Current Name Former Name
- ------------ -----------
<S> <C>
TXU Electric Company Texas Utilities Electric Company
TXU Gas Company ENSERCH Corporation
TXU Lone Star Pipeline, a division of Lone Star Pipeline Company, a
division of TXU Gas Company ENSERCH Corporation
TXU Gas Distribution, a division of Lone Star Gas Company, a division
of TXU Gas Company ENSERCH Corporation
TXU Processing Company Enserch Processing, Inc
TXU Energy Trading Company Enserch Energy Services, Inc.
TXU International Holdings Limited TU International Holdings Limited
TXU Europe Limited TXU Eastern Holdings Limited
TXU Europe Group plc Eastern Group plc
TXU Europe Energy Trading Limited Eastern Power Energy Trading
Limited
Eastern Electricity plc No change
TXU Europe Power Limited Eastern Generation Limited
Eastern Natural Gas Limited No change
TXU Australia Holdings (Partnership)
Limited Partnership No change
TXU Australia Pty. Ltd. Texas Utilities Australia Pty. Ltd.
Eastern Energy Limited No change
Kinetik Energy Pty. Ltd. No change
Westar Pty. Ltd. No change
TXU Energy Industries Company Texas Energy Industries, Inc.
TXU SESCO Company Southwestern Electric Service Company
TXU Fuel Company Texas Utilities Fuel Company
TXU Mining Company Texas Utilities Mining Company
TXU Communications Company Lufkin-Conroe Communications Co.
TXU Energy Services Company Texas Utilities Integrated Solutions,
Inc.
TXU Business Services Company Texas Utilities Services Inc.
</TABLE>
A-4
<PAGE>
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses.
Certain comparisons in this report have been affected by TXU Corp.'s or its
subsidiaries acquisitions of Westar and Kinetik Energy in Australia (as
described below) in February 1999, The Energy Group PLC (TEG), the former
holding company of TXU Europe Group in May 1998, TXU Communications Company (TXU
Communications) in November 1997 and TXU Gas in August 1997. (See Note 15 to
Financial Statements for information concerning reportable segments.)
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia. The excess of the purchase consideration plus acquisition costs
over the net fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of A$751 million ($475
million), which is being amortized over 40 years.
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
<TABLE>
<CAPTION>
Income Statement
Balance Sheet (average for periods)
(at December 31,) ended December 31,)
---------------- ---------------------------
1999 1998 1999 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
UK pounds sterling ((Pounds)) $1.6165 $1.6554 $1.6214 $1.6616 --
Australian dollars (A$) $0.6507 $0.6123 $0.6432 $0.6313 $0.7443
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW
1999 versus 1998
Earnings for 1999 reflect continued strong results from US Electric
operations and a significant improvement from US Gas operations in spite of very
mild winter weather. Results for 1999 reflect a full year of operations of TXU
Europe and operations of Westar/Kinetik Energy from its February 1999
acquisition date, while the 1998 results included operations of TXU Europe from
its May 1998 acquisition date. Results for 1999 also benefited from the sale of
TXU Corp.'s 20% ownership interest in the partnerships that operate PrimeCo
Personal Communications LP (PrimeCo). Contributions from Australian operations
were lower in 1999 primarily due to very mild winter weather. The results of US
Energy Marketing operations were less than 1998 primarily due to lower gas
margins and in part to expenditures necessary to prepare for the opening of the
Texas electricity market to competition in 2002. See Notes 3 and 13 to
Financial Statements for a discussion of the 1999 Texas electric industry
restructuring legislation (1999 Restructuring Legislation). Year-to-year
comparisons of earnings per share were affected by the issuance in 1998 of 37.3
million shares of common stock for the acquisition of TEG and the repurchase of
6.1 million and .6 million of TXU Corp. common shares in 1999 and 1998,
respectively.
Net income for 1999 was $985 million ($3.53 per share) compared with $740
million ($2.79 per share) for 1998, a 33% improvement. Results for 1999 include
a $222 million pre-tax ($145 million after tax) non-recurring gain from the sale
of the 20% interest in PrimeCo, which is recorded in other income, a $52 million
pre-tax ($31 million after tax) fuel reconciliation settlement, and non-
recurring charges totaling $17 million after-tax in Australia primarily for
integration and acquisition-related costs. Results for 1998 included a non-
recurring gain from TXU Europe's renegotiation of a long-term gas contract and
non-recurring costs
A-5
<PAGE>
associated with the acquisition of TEG, which offset to add $7 million to 1998
net income. Excluding these non-recurring items, 1999 net income was $888
million ($3.19 per share) compared with $733 million ($2.76 per share) for 1998.
From January 1, 1998 through June 30, 1999, earnings in excess of the
earnings cap were recorded as additional depreciation of nuclear production
assets. Effective July 1, 1999, following the 1999 Restructuring Legislation,
earnings in excess of the earnings cap were recorded as a reduction of revenues,
with a corresponding regulatory liability recorded. Mitigation as a result of
the earnings cap reduced net income by $90 million in 1999 and $143 million in
1998.
Additionally from January 1, 1998 through June 30, 1999, depreciation expense
was reclassified from transmission and distribution (T&D) to nuclear production
assets. Effective July 1, 1999, following the 1999 Restructuring Legislation,
T&D depreciation expense was no longer transferred to nuclear production assets;
instead an amount equivalent to T&D depreciation was recorded as a regulatory
asset, with an offsetting amount recorded as a regulatory liability. The
regulatory asset will be amortized as it is recovered through the Distribution
portion of the business, while the regulatory liabilities will be applied
against stranded generation assets. (See Note 13 to Financial Statements.)
Additional nuclear mitigation in 1999 was $336 million, including $144 million
to reduce earnings to the earnings cap, $95 million of depreciation expense
reclassified from T&D to nuclear production assets and an amount equivalent to
$97 million of T&D depreciation expense recorded as a regulatory asset. Since
January 1998, regular nuclear depreciation and additional nuclear mitigation
total approximately $1.3 billion.
In June 1999, TXU Electric reached an agreement with all intervening parties
to refund $52 million to consumers as part of a fuel reconciliation proceeding
with the Public Utility Commission of Texas (PUC). The refund, which was
recorded as a reduction of revenues, was approximately 1% of the $5.04 billion
spent by TXU Electric during the period from July 1, 1995 through June 30, 1998
for fuel to generate electricity and appeared as a one-time credit on customer
bills during the September 1999 billing cycle.
Excluding the $92 million reduction of revenues in 1999 as a result of
earnings in excess of the earnings cap and the $52 million fuel reconciliation
disallowance, operating revenues for 1999 were 17% higher than 1998. The
increase was primarily due to the inclusion of TXU Europe for a full period in
1999 and Westar/Kinetik Energy since acquisition in February 1999.
Total operating expenses for 1999 were 18% higher than 1998. Substantially
all of the increase was due to the inclusion of TXU Europe for a full period in
1999 and Westar/Kinetik Energy since acquisition, partially offset by less
mitigation depreciation recorded by TXU Electric in 1999 versus 1998.
Total interest expense and other charges were 13% higher in 1999 than in
1998. The increase was principally due to debt incurred and assumed in
connection with the acquisitions of the European operations and Westar/Kinetik
Energy, partially offset by the favorable impact of capital restructuring and
debt reduction programs.
The overall effective income tax rate for 1999 was 31% versus 41% for 1998.
The year 1999 benefited from the discontinuation of amortization of prior-period
flow-through amounts and other tax-related regulatory assets and liabilities of
TXU Electric as a result of the 1999 Restructuring Legislation, foreign tax
credits and other tax benefits associated with non-US operations, and the
reversal of a deferred tax asset valuation allowance as a result of a 1999
change in Internal Revenue Service (IRS) regulations. Partially offsetting
these favorable items was greater non-deductible goodwill amortization in 1999
as a result of acquisitions.
A-6
<PAGE>
1998 versus 1997
Net income of $740 million ($2.79 per share) for 1998 increased approximately
12% from 1997 net income of $660 million ($2.86 per share), reflecting strong US
Electric sales growth, the effect of extremely hot summer weather in 1998 on US
Electric sales and capital cost reductions in US Electric operations. The
results also reflect the addition of TXU Europe, with especially strong fourth
quarter results, significant improvement in US Energy Marketing operations and
strong results from Australian operations. Partially offsetting was the impact
of the rate reduction settlement at TXU Electric that became effective January
1, 1998, and increased nuclear depreciation expense that reduced 1998 income by
$143 million. Results from US Gas operations were unfavorably impacted by mild
winter weather in both the first and fourth quarters of 1998.
Results for 1998 included a non-recurring gain from TXU Europe's
renegotiation of a long-term gas contract and non-recurring costs associated
with the acquisition of TEG, which offset to add $7 million to net income.
Results for 1997 included an $81 million Fuel Disallowance (including interest)
and a $10 million charge related to the sale of sulfur dioxide allowances, which
together reduced net income by $55 million. Excluding these non-recurring
items, 1998 net income was $733 million ($2.76 per share) compared with $715
million ($3.10 per share) for 1997.
Operating revenues increased 86% to $14.7 billion for 1998 compared with $7.9
billion in 1997. The increase in operating revenues was due primarily to the
inclusion of TXU Europe's revenues for the period following the acquisition, TXU
Gas revenues for the entire period and increased revenues from US Electric
operations.
Energy purchased for resale and fuel consumed in 1998 was more than double
1997 primarily due to the inclusion of TXU Europe for the period following
acquisition, the inclusion of TXU Gas for the entire year of 1998 as compared to
the period following acquisition in 1997, and an increase in energy sales and
gas usage for US Electric operations principally due to the hotter-than-normal
summer weather in 1998.
Total operating expenses, excluding energy purchased for resale and fuel
consumed, increased 58% for 1998 compared with 1997, with 55% of the increase
attributable to the inclusion of TXU Europe and 13% of the increase attributable
to TXU Gas since the merger. Most of the remaining increase was due to
increased depreciation expense as a result of the TXU Electric earnings cap.
Total interest expense and other charges, totaled approximately $1.4 billion
in 1998 versus $852 million in 1997. The year-to-year comparison was affected
by the debt incurred or assumed in connection with the 1998 acquisition of TEG
and the 1997 acquisition of TXU Gas, partially offset by favorable impacts of
capital restructuring and debt reduction programs.
The increase in the overall effective income tax rate from 1997 to 1998 was
due primarily to the effects of TXU Europe since acquisition along with the
impact of TXU Electric's amortization of prior-period flow-through amounts
related to additional depreciation on nuclear production assets in connection
with the rate reduction agreement. (See Note 13 to Financial Statements).
A-7
<PAGE>
SEGMENTS
Revenues and net income by operating segment are shown below.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- -----------------
Net Net Net
Income Income Income
Revenues (Loss) Revenues (Loss) Revenues (Loss)
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Millions)
US Electric.......... $ 6,263 $773 $ 6,541 $ 788 $6,176 $748
US Gas............... 877 3 864 (32) 428 (2)
US Energy Marketing.. 2,983 (25) 3,199 6 859 (12)
Europe............... 6,090 280 3,601 140 -- --
Australia............ 682 6 439 31 489 17
Other/Eliminations... 223 (52) 92 (193) (6) (91)
------- ---- ------- ----- ------ ----
Consolidated...... $17,118 $985 $14,736 $ 740 $7,946 $660
======= ==== ======= ===== ====== ====
</TABLE>
US Electric
- -----------
Segment Highlights
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
Revenues (millions):
<S> <C> <C> <C>
Base rate............................................ $ 4,447 $ 4,557 $ 4,314
Transmission service................................. 148 126 114
Fuel................................................. 1,740 1,788 1,776
Fuel disallowance/sale of sulfur dioxide allowances.. (52) -- (79)
Earnings in excess of earnings cap................... (92) -- --
Other................................................ 72 70 51
-------- -------- -------
Total operating revenues........................ $ 6,263 $ 6,541 $ 6,176
======== ======== =======
Electric energy sales (gigawatt-hours)....................... 100,548 103,142 97,023
Degree days (% of normal):
Cooling................................................ 114% 130% 94%
Heating................................................ 70% 89% 106%
Impact of earnings cap (millions):
Reduction of revenues.................................. $ 92 $ -- $ --
Additional nuclear depreciation........................ 52 170 --
Tax benefits........................................... (54) (27) --
-------- -------- -------
Net earnings reduction.......................... $ 90 $ 143 $ --
======== ======== =======
Operation and maintenance expenses (millions)................ $ 1,384 $ 1,335 $ 1,277
</TABLE>
1999 versus 1998
Net income for the US Electric segment of $773 million for 1999 was 1.9%
lower than 1998. Comparisons of net income were impacted by both a fuel
reconciliation settlement that reduced 1999 net income by $31 million and a rate
settlement agreement that became effective in January 1998 and was modified by
the 1999 Restructuring Legislation, which reduced customer rates and introduced
an earnings cap. The net effect of TXU Electric's earnings cap reduced net
income by $90 million in 1999 and $143 million in 1998. Since January 1998,
regular nuclear depreciation and additional nuclear mitigation total
approximately $1.3 billion.
A-8
<PAGE>
Excluding the reduction of revenues as a result of the earnings cap and the
fuel reconciliation disallowance, operating revenues for 1999 were 2.1% lower
than 1998. Revenues in 1999 were $160 million less than 1998 due to the impact
of the exceptionally hot summer weather in 1998. An additional reduction in
rates effective January 1, 1999 due to the 1998 rate settlement agreement was
somewhat offset by continued strong core retail sales and revenue growth.
Electric energy sales volumes for 1999 were 2.5% lower than 1998. Fuel revenues
for 1999 were slightly lower than in 1998, primarily as a result of lower energy
sales.
Operation and maintenance expenses for 1999 were 4% higher than 1998 largely
as a result of increased PUC third party transmission tariffs. Depreciation and
amortization expense was $109 million lower in 1999 versus 1998 primarily due to
less mitigation depreciation recorded in 1999. Mitigation depreciation recorded
in 1999 was $52 million versus $170 million in 1998.
The net decrease of $62 million in interest expense and other charges for
1999 compared to 1998 was primarily due to the reacquisition of long-term debt
and remarketing of certain debt to lower interest rates.
The effective income tax rate was lower in 1999 compared to 1998 due
primarily to the discontinuation of amortization of prior-period flow-through
amounts and other tax-related regulatory assets and liabilities resulting from
the impact of the 1999 Restructuring Legislation.
1998 versus 1997
Net income of $788 million for 1998 increased approximately 5% from 1997.
Results for 1997 were reduced by an $81 million fuel disallowance (including
interest) and a $10 million charge related to the sale of sulfur dioxide
allowances, which reduced net income by $55 million. Excluding the effect of
these items, 1998 net income decreased slightly from 1997. Results for 1998
were impacted by the rate reduction settlement approved by the PUC in April 1998
that became effective January 1, 1998, and increased nuclear depreciation net of
associated income taxes that reduced 1998 income by $143 million. These effects
were partially offset by continued strong sales growth and the effect of
exceptionally hot summer weather in 1998.
Operating revenues increased approximately 6% for 1998 as compared to 1997
primarily due to an increase in base rate electricity revenues due to the
exceptionally high summer temperatures and customer growth, partially offset by
the effect of the rate reduction settlement on base rate revenues. Electric
energy sales in gigawatt-hours (GWh) were approximately 6% higher in 1998 than
in 1997. Fuel revenue, excluding the fuel disallowance in 1997, increased
slightly in 1998 primarily due to increases in fuel costs driven by increased
energy sales.
Energy purchased for resale and fuel consumed increased approximately 2%
primarily due to increased energy sales, with increased gas usage partially
offset by decreased gas prices in 1998. Total operating expenses, excluding
energy purchased for resale and fuel consumed, increased 11% for 1998 compared
to 1997 largely as a result of higher marketing incentives, increased provision
for uncollectible accounts and increased reactive maintenance expenses,
partially offset by decreased employee-related costs. TXU Electric's rate
reduction settlement resulted in additional nuclear depreciation of $353 million
in 1998; $183 million was the result of the transfer of T&D depreciation, and
$170 million was the result of TXU Electric's earnings in excess of the earnings
cap. Taxes other than income increased in 1998 primarily due to higher state
and local gross receipt taxes.
Interest expense and other charges decreased 10% in 1998 compared with 1997.
Capital restructuring and debt reduction programs favorably affected the year-
to-year comparison. Distributions on trust securities and preferred stock
dividends decreased from 1997, reflecting 1998 reacquisitions.
A-9
<PAGE>
The effective income tax rate for 1998 was higher than in 1997 due to the
impact of amortization of prior-period flow-through amounts, which increased due
to the accelerated depreciation on nuclear production assets in conjunction with
the rate reduction agreement.
US Gas
- --------
Segment Highlights
1999 1998 1997*
------- ------- -------
Gas distribution:
Sales volumes (billion cubic feet -Bcf).. 117 130 57
Margin (millions)........................ $ 301 $ 291 $ 117
Pipeline transportation:
Transportation volumes (Bcf)............. 551 599 255
Revenues (millions)...................... $ 116 $ 121 $ 58
Gas liquids:
Sales volumes (million barrels)......... 6 6 3
Average prices ($ per barrel)............ 14.32 10.69 14.53
Plant revenues (millions)................ $ 86 $ 64 $ 36
Heating degree days (% of normal).............. 70% 89% 119%
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
1999 versus 1998
The US Gas segment had net income of $3 million for 1999 compared with a net
loss of $32 million for 1998. Strong cost controls and improved margins
contributed to the results for 1999, as did after-tax gains totaling $8 million
from the sale of assets and a reversal of a deferred tax asset valuation
allowance as a result of a 1999 change in Internal Revenue Service regulations.
Operating revenues for 1999 increased by $13 million over 1998 primarily due
to higher gas processing revenues due to a 34% improvement in natural gas
liquids prices, partially offset by lower distribution and pipeline revenues
resulting from the very mild winter weather. Gas purchased for resale
declined by $18 million in 1999 because of lower demand. Higher gas processing
fees in 1999, primarily caused by higher natural gas liquids prices, were more
than offset by cost reductions in other operation and maintenance expenses.
Depreciation and other amortization expenses increased by $7 million primarily
due to increased distribution system depreciation. Taxes other than income
decreased by $7 million from 1998 to 1999 due to lower gas receipts taxes in
1999.
1998 versus 1997
The 1998 results for the US Gas segment represent a full year of operations,
while the 1997 period is from date of acquisition of TXU Gas (August 5, 1997) to
December 31, 1997. The segment had a net loss of $32 million for 1998 versus a
net loss of $2 million for the 1997 period.
Operating revenues were $864 million for 1998 compared with $428 million for
the 1997 period. Energy purchased for resale was $375 million in 1998 and $213
million in 1997, while other operating expenses totaled $454 million in 1998
versus $178 million for 1997. The segment had other income of $4 million,
interest expense of $78 million and an income tax benefit of $6 million for
1998. In the 1997 period, the segment had other income of $2 million, interest
expense of $35 million and income tax expense of $5 million.
A-10
<PAGE>
Results for 1998 were impacted by mild winter weather, while heating degree
days were above normal for the 1997 period. Results for 1998 included goodwill
amortization of $21 million versus $8 million in the 1997 period.
US Energy Marketing
- --------------------
Segment Highlights
1999 1998 1997*
----- ------ -----
Trading volumes:
Gas (billion cubic feet).. 1,102 1,115 292
Electric (gigawatt-hours).. 6,544 16,268 --
*For the period from acquisition of TXU Gas (August 5, 1997) to December 31,
1997.
1999 versus 1998
Results for 1999 for the US Energy Marketing Segment were down significantly
due to lower-than-expected gas margins, planned costs to develop infrastructure
capabilities and unusually high natural gas prices which affected the results
from retail marketing originations. The segment had a net loss of $25 million
for 1999 compared with net income of $6 million for 1998. Operating revenues
decreased by 7% from $3,199 million in 1998 to $2,983 million in 1999 primarily
due to management's decision to decrease electricity trading. Gross margin
decreased from $46 million in 1998 to $9 million in 1999. Other operating
expenses increased by 40% from $35 million in 1998 to $49 million in 1999 due in
part to costs related to developing middle and back office infrastructure
capabilities to prepare for the opening of the Texas electricity market to
competition in 2002. Results for 1999 included other income of $4 million
related to a pre-tax gain from the sale of commercial customer accounts.
1998 versus 1997
The 1998 results for the segment represent a full year of operations, while
the 1997 period is from the date of acquisition of TXU Gas (August 5, 1997) to
December 31, 1997. The segment contributed net income of $6 million in 1998 but
had a net loss of $12 million in the 1997 period.
Operating revenues were $3,199 million for 1998 versus $859 million for the
1997 period. Sales margin was $46 million in 1998 compared with a margin loss of
$1 million in the 1997 period. Other operating expenses totaled $35 million in
1998 compared with $16 million in the 1997 period.
The 1998 results reflect an increase in segment activity and margins, partly
due to the beginning of electricity trading in 1998, while the lower results in
the 1997 period were primarily the result of trading losses, inadequate system
infrastructure and costs associated with systems that were implemented at the
end of 1997.
A-11
<PAGE>
Europe
- ------
Segment Highlights
<TABLE>
<CAPTION>
1999 1998*
-------- --------
Sales volumes:
<S> <C> <C>
Electric (gigawatt-hours - GWh).......................... 36,424 23,285
Gas (billion cubic feet- Bcf)............................ 126 72
Units distributed (GWh).................................. 33,120 19,249
Wholesale energy sales:
Electricity generated and sold to the Pool (GWh) 78,950 51,060
Gas (Bcf) 447 148
1999 1998*
--------------- ---------------
Revenues (millions): (Pounds) $ (Pounds) $
Electric................................................... 1,869 3,033 1,196 1,985
Gas........................................................ 348 565 157 260
Distribution............................................... 405 657 238 395
Wholesale energy sales..................................... 1,336 2,168 721 1,199
Intra-segment eliminations and other....................... (205) (333) (147) (238)
------ ------ ------ ------
Total........................................... 3,753 6,090 2,165 3,601
====== ====== ====== ======
By segment (millions):
Energy retail.............................................. 1,548 2,512 1,036 1,723
Energy management and generation........................... 1,759 2,854 845 1,405
Networks................................................... 428 695 253 421
Other...................................................... 18 29 31 52
------ ------ ------ ------
Total............................................ 3,753 6,090 2,165 3,601
====== ====== ====== ======
</TABLE>
* For the period from acquisition (May 19, 1998) to December 31, 1998.
1999 versus 1998
The 1999 results for the Europe segment represent a full year of operations,
while the 1998 period is from date of acquisition (May 19, 1998) to December 31,
1998. The 1998 period also includes the 22% equity in the net income of TEG for
the period March to May 19, 1998. The Europe segment contributed net income for
1999 of $280 million compared with $140 million in the 1998 period.
The Europe segment added (Pounds)3.8 billion ($6.1 billion) to 1999 operating
revenues versus (Pounds)2.2 billion ($3.6 million) in the 1998 period. Revenues
from energy retail operations for 1999 were (Pounds)1.5 billion ($2.5 billion)
compared with (Pounds)1.0 billion ($1.7 billion) in 1998. Volumes in the gas
residential market increased in 1999 as a result of the market being fully
opened to competition. Electricity volumes have decreased due to the loss of
industrial and commercial customers in the October 1999 contract round; however,
prices have improved. Revenues from the energy management and generation
operations for 1999 were (Pounds)1.8 billion ($2.9 billion) versus (Pounds)845
million ($1.4 billion) in the 1998 period. Increased operating volumes in the
gas portfolio have increased revenues, partially offset by lower revenues in the
electricity portfolio due to lower time-weighted Pool purchase prices (weighted
for time of day sales) and reduced volumes. Revenues from the networks business
for 1999 were (Pounds)428 million ($695 million) compared with (Pounds)253
million ($421 million) in the 1998 period. GWh's distributed increased by
approximately 3% year on year, and regulated prices increased approximately 1%
from April 1999. Other revenues were (Pounds)18 million ($29 million) in 1999,
which were primarily related to the metering business. In the 1998 period,
other revenues were (Pounds)31 million ($52 million) and included metering
revenues, revenues from the telecommunications business sold in December 1998
and revenues from the modular building business sold in February 1999.
A-12
<PAGE>
Energy purchased for resale and fuel consumed for 1999 was (Pounds)2.2
billion ($3.6 billion) compared with (Pounds)1.3 billion ($2.2 billion) in the
1998 period. Operation and maintenance expenses for the full year of 1999 were
(Pounds)706 million ($1.1 billion) versus (Pounds)379 million ($628 million) in
the 1998 period. Depreciation and amortization, including goodwill
amortization, totaled (Pounds)260 million ($421 million) in 1999 compared with
(Pounds)144 million ($240 million) in 1998.
Interest expense for 1999 was (Pounds)347 million ($563 million) compared
with (Pounds)269 million ($447 million) in the 1998 period from the date of
acquisition. The segment had interest income of (Pounds)63 million ($102
million) in 1999 versus (Pounds)64 million ($106 million) in the 1998 period.
The effective tax rate for the Europe segment was 35% in 1999 versus 46% in
the 1998 period. The rate in 1999 benefited from foreign tax credits, while the
1998 period benefited from a 1% reduction in the UK statutory tax rate and
included income that was taxed at rates less than the statutory rate. Non-
deductible expenses related to capital leases and goodwill amortization also
affected both periods.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory clearance has
been submitted to the Office of Gas and Electricity Markets (OFGEM). The joint
venture will begin operations once these clearances are obtained, which may be
as early as April 2000. By the time the joint venture starts operations, it is
expected that the combined workforce will have been reduced by approximately
400. It is anticipated that the workforce currently engaged by Eastern Energy
and London Electricity plc, will be further reduced by at least a similar number
during the joint venture's first 18 months of operations. Primarily as a result
of the creation of this joint venture, TXU Europe is expected to record a
restructuring charge of approximately $50 million in 2000. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
In June 1999, TXU Europe Group announced details of a program to restructure
the energy retailing business in order to be more cost effective in the
competitive energy markets. This program resulted in the closure of two
principal offices with the loss of 300 permanent and 200 temporary positions.
TXU Europe Group also is seeking new ways to access the energy markets and to
form more partnerships with the objective of reducing costs, improving access to
customers and capitalizing on emerging new markets like the Internet.
A-13
<PAGE>
Australia
- ---------
Segment Highlights
1999* 1998 1997
----- ----- -----
Sales volumes:
Electric (Gigawatt-hours) 5,509 5,213 5,190
Gas (Billion cubic feet) 51 -- --
Degree days:
Cooling................... 239 236 292
Heating................... 1,199 1,387 1,360
1999* 1998 1997
------------ ------------ -----------
A$ $ A$ $ A$ $
Revenues (millions):
Electric................... 567 $365 571 361 577 430
Gas........................ 200 130 -- -- -- --
Other...................... 291 187 125 78 80 59
----- ---- ----- ----- ----- ----
Total............. 1,058 682 696 439 657 489
===== ==== ===== ===== ===== ====
*Includes results of Westar/Kinetik Energy from date of acquisition of
February 24, 1999.
1999 versus 1998
TXU Australia had net income of $6 million for 1999 compared with $31 million
for 1998. Results for 1999 were affected by very mild winter weather and non-
recurring charges totaling $17 million after-tax primarily for integration and
acquisition-related costs. Net income for 1999 includes the results of
Westar/Kinetik Energy from date of acquisition on February 24, 1999.
Operating revenues rose from A$696 million ($439 million) in 1998 to A$1,058
million ($682 million) in 1999, an increase of 52%. The increase is primarily
due to revenues from the Westar/Kinetik Energy gas distribution and retailing
businesses since acquisition, higher construction revenues and increased
external electricity network charges.
Energy purchased for resale increased from A$265 million ($167 million) in
1998 to A$415 million ($268 million) in 1999. The A$150 million ($101 million)
increase includes A$110 million ($71 million) of gas purchase and distribution
costs associated with Westar/Kinetik Energy, with the remainder of the increase
due to higher purchased electricity and distribution costs as a result of a 6%
increase in energy sold and higher electricity pool prices. Operation and
maintenance expenses increased from A$193 million ($121 million) in 1998 to
A$335 million ($216 million) in 1999 due to costs associated with the
Westar/Kinetik Energy gas business and increased expenditures related to the
construction businesses. Depreciation and amortization, including goodwill
amortization, increased from A$68 million ($43 million) to A$119 million ($77
million) in 1999 primarily due to the Westar/Kinetik Energy acquisition.
Interest expense and other charges increased from A$94 million ($59 million)
in 1998 to A$203 million ($131 million) in 1999 due to an increase in
outstanding debt resulting from the acquisition of Westar/Kinetik Energy and the
initial payment under the agreement with AES Ecogen.
The effective income tax rate for the Australia segment was impacted by non-
deductible goodwill amortization and other foreign permanent differences. The
statutory tax rate in Australia will decrease from 36% to 30% between 2000 and
2001. Accordingly, TXU Australia adjusted its deferred taxes to the 30% rate
and credited deferred tax expense for $3 million in 1999.
TXU Australia sold its construction and engineering business, Enetech, in
January 2000.
A-14
<PAGE>
1998 versus 1997
Operating revenues were A$657 million ($489 million) in 1997 and A$696
million ($439 million) in 1998. Revenues denominated in Australian dollars
increased by 6% from 1997 to 1998 due to higher construction revenues,
reflecting the full year impact of the acquisition of Streamline, a former
maintenance division of Melbourne Water. The impact on TXU Corp. revenues was a
decrease of 10% as a result of the decline in the average exchange rate from
1997 to 1998. While electricity energy sales rose marginally in 1998,
electricity sales revenues decreased slightly, principally due to lower prices,
as further classes of electricity customers were free to choose their electric
supplier. Customers with loads in excess of 160 MWh/year but less than 750 MWh
per year were able to choose their electricity supplier effective July 1, 1998.
As of December 31, 1998, TXU Australia estimated that it had lost approximately
500 GWhs as a result of customers within its franchised area electing to choose
another energy retailer to supply their energy needs. This loss was net of
gains made during the same period by TXU Australia in acquiring customers from
other retailers in Victoria and New South Wales.
Energy purchased for resale decreased 10% from A$294 million ($219 million)
in 1997 to A$265 million ($167 million) in 1998 largely due to the phasing out
of the franchise fee charged by the Victorian Government in respect of the
customer base allocated to TXU Australia during the privatization of the
electricity industry. Operation and maintenance expense increased from A$154
million ($112 million) in 1997 to A$193 million ($121 million) in 1998 primarily
due to costs associated with increased construction activity for third parties.
The reduction in interest expense from A$97 million ($73 million) in 1997 to
A$94 million ($59 million) in 1998 was attributable to both a reduction in debt
and lower interest rates.
The effective income tax rate decreased from 54% in 1997 to 45% in 1998 due
to a reduction in non-deductible franchise fee payments.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows -- Cash flows provided by operating activities before changes in
operating assets and liabilities for 1999 were $2.6 billion compared with $2.3
billion and $1.6 billion for 1998 and 1997, respectively. Changes in operating
assets and liabilities used cash of $379 million and $338 million in 1999 and
1998, respectively, but provided $15 million in 1997. The increase in each year
is primarily due to the inclusion of TXU Europe results since acquisition in
1998 and for a full year in 1999.
Cash flows used for investing activities for the year ended December 31, 1999
totaled $3.1 billion, including $1.0 billion for the acquisition of
Westar/Kinetik Energy, compared with $4.3 billion, including $2.5 billion used
for the acquisition of TEG, for 1998 and $708 million for 1997. Construction
expenditures were $1.6 billion for 1999, compared with $1.2 billion and $583
million for 1998 and 1997, respectively, primarily resulting from the inclusion
of TXU Europe since acquisition in 1998 and for a full year in 1999.
In 1998, TXU Corp. acquired TEG for $7.4 billion, including $1.4 billion
assigned to common stock issued. In 1997, TXU Corp. acquired TXU Gas for $579
million and TXU Communications for $319 million, primarily through the issuance
of common stock.
A-15
<PAGE>
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. Any gain on the sale
of these plants will be recorded as a regulatory liability and applied against
TXU Electric's generation assets that may become stranded costs under provisions
of the 1999 Restructuring Legislation. TXU Electric anticipates completion of
the plant sales by the end of 2000. In March 2000, TXU Gas announced that it had
entered into a contract for the sale of substantially all of the assets of TXU
Processing for approximately $105 million.
In 1999, TXU Europe contributed approximately (Pounds)190 million ($308
million) for an 81% ownership interest in the joint venture company with
Pohjolan Voima Oy (PVO), Finland's second largest electricity generator, and
approximately (Pounds)40 million ($65 million) for an approximately 40% stake in
Savon Voima Oy (SVO), Finland's seventh largest electricity distributor.
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million. Proceeds from the sale were
received in January 2000.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. The offer is subject to a number of conditions, including, among
others, authorization by the CNMV, or Spanish Securities Exchange, approval by
European Union competition authorities and TXU Europe acquiring sufficient
shares such that it would hold at least 51% of Hidrocantabrico after the
transaction is completed. The transaction is expected to close in the second
quarter of 2000.
TXU Europe's offer of 21.25 euros per share values the equity of
Hidrocantabrico at 2.4 billion euros ($2.3 billion). If the offer becomes
unconditional, TXU Europe intends to finance the acquisition through bank
borrowings and the issuance of preferred securities to its parent company, TXU
International Holdings. TXU International Holdings intends to fund the purchase
of the TXU Europe preferred securities through bank borrowings guaranteed by TXU
Corp.
On March 13, 2000, TXU Corp. announced that it had entered into an agreement
to acquire Fort Bend Communication Companies, Inc. (FBCC) based in Katy, Texas,
near Houston, in a transaction that values the stock of FBCC at approximately
$167 million. FBCC common and preferred stock will be exchanged for
approximately $90 million of TXU Corp. common stock and approximately $77
million in cash, subject to certain adjustments. The transaction is expected to
close in the second quarter of 2000.
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
Future Capital Requirements --TXU Corp.'s maintenance capital construction
expenditures are estimated at $1.1 billion for 2000. Approximately 65% is
planned for US Electric and Gas operations, 23% for operations in the UK and
continental Europe, and 12% for operations in Australia, telecommunications and
other activities. Additional expenditures may be made for development
activities.
TXU Corp. will pursue potential investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and will dispose of nonstrategic assets to allow redeployment of
resources into faster growing opportunities in an effort to enhance the long-
term return to its shareholders.
A-16
<PAGE>
During 1999, TXU Corp.'s Board of Directors increased the common stock
repurchase limit to $1.6 billion, of which $478 million had been used as of
December 31, 1999 to purchase and retire a total of 11,953,751 shares of TXU
Corp.'s issued and outstanding common stock during the four years then ended. On
March 7, 2000, TXU Corp. repurchased approximately 12.4 million shares of its
common stock for approximately $408 million. The cost of the repurchased
shares, to the extent it exceeded the estimated amount received upon their
original issuance, has been charged to retained earnings.
TXU Europe Group received government consent to build a 215 MW combined heat
and power plant for which there is a commitment of (Pounds)117 million ($189
million), most of which falls due in 2001. In addition, estimated capital
expenditures on environmental control facilities are (Pounds)43 million ($70
million) in 2000, (Pounds)50 million ($81 million) in 2001, (Pounds)40 million
($65 million) in 2002, and (Pounds)35 million ($57 million) in 2003.
External funds of a permanent or long-term nature are obtained through the
issuance of common and preferred stock, TXU Corp. or subsidiary obligated,
mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of TXU Corp. or related subsidiary (trust
securities) and long-term debt by TXU Corp. The capitalization ratios of TXU
Corp. at December 31, 1999, consisted of approximately 62% long-term debt
(including equity-linked securities), 5% trust securities, 1% preferred stock
and 32% common stock equity. Restricted cash of $1.2 billion included in other
investments collateralizes certain TXU Europe capital lease obligations.
Offsetting the cash pledge against lease obligations, the capitalization ratios
consisted of 61% long-term debt, 5% trust securities, 1% preferred stock and 33%
common stock equity.
Issuances and Retirements -- During the year ended December 31, 1999, TXU
Corp. issued, redeemed, reacquired or made scheduled principal payments on
acquisition facilities, other long-term debt, preferred stock and trust
securities for cash, as follows:
Issuances Retirements
--------- -----------
TXU Electric:
Brazos River Authority Pollution Control Bonds $ 177 $ 177
First Mortgage Bonds -- 551
Other -- 3
TXU Europe:
Senior Notes 1,500 --
Term Facility 1,225 --
Acquisition Facilities -- 1,225
Revolving Credit Facility (Tranche B) 921 514
Other 306 749
TXU Australia Holdings:
Acquisition Facilities 926 --
Other 93 --
TXU Corp.:
TXU Capital II Trust Securities 150 --
Senior Notes 925 --
All Other Subsidiaries 3 240
------ ------
Total $6,226 $3,459
====== ======
In March 2000, TXU Europe issued $150 million of 9.75% Trust Originated
Preferred Securities.
See Notes to Financial Statements for further details concerning short-term
financing, long-term debt, trust securities and preferred stock of subsidiaries.
Early redemptions of preferred stock and long-term debt may occur from time to
time in amounts presently undetermined.
A-17
<PAGE>
Financing Arrangements -- TXU Corp., TXU Electric, TXU Gas and other
subsidiaries of TXU Corp. may issue additional debt and equity securities as
needed, including the possible future sale: (i) by TXU Electric of up to $499
million principal amount of debt securities and up to $25 million of Cumulative
Preferred Stock, and (ii) by TXU Gas of up to $600 million aggregate principal
amount of debt securities and/or preferred securities of subsidiary trusts, all
of which are currently registered with the Securities and Exchange Commission
(SEC) for offering pursuant to Rule 415 under the Securities Act of 1933. In
addition, TXU Corp. may issue up to $340 million of debt securities and up to an
aggregate of $360 million of (i) debt securities, (ii) shares of its preference
stock, or (iii) preferred securities of subsidiary trusts.
At December 31, 1999, TXU Corp., TXU Electric and TXU Gas Company had joint
US dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
1999, TXU Corp. had no borrowings outstanding under these facilities. The US
Credit Agreements were amended and restated in February 2000 and have two
facilities. Facility A provides for short-term borrowings aggregating up to $1.4
billion outstanding at any one time at variable interest rates and terminates
February 23, 2001, but may be extended by up to one year. Facility B provides
for short-term borrowings aggregating up to $1.4 billion outstanding at any one
time at variable interest rates and terminates February 25, 2005. Facility B
also provides for the issuance of up to $300 million of letters of credit. TXU
Electric's and TXU Gas' borrowings under both facilities are limited to
aggregate amounts outstanding at any one time of $1.25 billion and $650 million,
respectively.
TXU Europe and a finance subsidiary have a joint sterling-denominated line of
credit (Sterling Credit Agreement) that provides for borrowings of up to
(Pounds)1.275 billion ($2.1 billion) and has two facilities which will terminate
on March 2, 2003. As of December 31, 1999, the amended Sterling Credit
Agreement had (Pounds)750 million ($1.2 billion) of borrowings outstanding under
the term facility at an interest rate of 6.55%, and approximately (Pounds)237
million ($384 million) of non-UK borrowings outstanding under Tranche B at a
weighted average interest rate of 5.61%.
Eastern Electricity has a separate revolving credit facility of up to
(Pounds)250 million ($404 million), terminating March 2, 2003, which provides
for short-term borrowings to be used for Eastern Electricity's general corporate
purposes. No borrowings were outstanding at December 31, 1999 under this
facility.
On December 15, 1999, TXU Europe commenced a 2.0 billion euro Euro Medium
Term Note (EMTN) Program. Under the EMTN Program, TXU Europe may from time to
time issue notes on a continuing basis to one or more dealers in a principal
outstanding amount not exceeding 2.0 billion euros. As of December 31, 1999, no
notes had been issued under this program. However, in March 2000, (Pounds)225
million ($364 million) of 7.25% Sterling Eurobonds due March 8, 2030, were
issued. On the same day, an interest rate swap was entered into that converts
the interest on the new Sterling Eurobond to a variable rate based on LIBOR for
the first five years. The effective interest rate after the swap was 5.862%.
TXU Electric has facilities with financial institutions whereby it is
entitled to sell and such financial institutions may purchase, on an ongoing
basis, undivided interests in customer accounts receivable representing up
to an aggregate of $500 million. TXU Gas has a similar facility for $100
million. TXU Europe has facilities with a third party whereby Eastern
Electricity may sell up to (Pounds)300 million ($486 million) of its electricity
receivables and a finance subsidiary may borrow up to an aggregate of
(Pounds)275 million ($445 million), collateralized by future receivables, with
an overall program limit of (Pounds)550 million ($891 million). Additional
receivables are continually sold to replace those collected. At December 31,
1999, accounts receivable of TXU Electric were reduced by $500 million, TXU Gas'
were reduced by $100 million and Eastern Electricity's were reduced by
(Pounds)224 million ($362 million) to reflect the sales of receivables under
their programs and (Pounds)177 million ($286 million) of short-term loans were
outstanding collateralized by future receivables.
A-18
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
TXU Corp. and its subsidiaries enter into derivative instruments for non-
trading purposes in order to manage market risks related to changes in interest
rates, foreign currency exchange rates and commodity prices. TXU Corp. also
enters into derivative instruments and other contractual commitments for trading
purposes through its subsidiaries TXU Energy Trading, TXU Europe and TXU
Australia. See Note 11 to Financial Statements for further discussion of TXU
Corp's risk management activities.
INTEREST RATE RISK -- The table below provides information concerning TXU
Corp.'s financial instruments as of December 31, 1999 that are sensitive to
changes in interest rates, which include debt obligations, interest rate swaps
and trust securities. TXU Corp. has entered into interest rate swaps under
which it has agreed to exchange the difference between fixed-rate and variable-
rate interest amounts calculated with reference to specified notional principal
amounts at dates that generally coincide with interest payments. For trust
securities, the table presents cash flows based on December 31, 1999 book values
and the related weighted average rates by expected redemption date. Weighted
average variable rates are based on rates in effect at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------------
(Millions, except percents) 1999 1998
There- 1999 Fair 1998 Fair
2000 2001 2002 2003 2004 after Total Value Total Value
------ ------ ----- ------ ------ ------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
(including
current maturities)
Fixed Rate.............. $1,261 $ 533 $ 852 $ 915 $1,496 $6,679 $11,736 $10,734 $11,318 $11,912
Average interest 6.78% 7.43% 7.09% 6.64% 7.33% 7.08% 7.06% -- 7.29% --
rate...............
Variable Rate.......... -- $1,378 $ 572 $1,598 -- $ 846 $ 4,394 $ 4,394 $ 3,503 $ 3,503
Average interest -- 6.50% 6.38% 6.34% -- 5.43% 6.22% -- 5.86% --
rate...............
Trust Securities*
Fixed rate.............. -- -- -- -- -- $1,095 $ 1,095 $ 977 $ 950 $ 987
Average interest rate -- -- -- -- -- 8.03% 8.03% -- 7.93% --
Variable rate.......... -- -- -- -- -- $ 244 $ 244 $ 235 $ 243 $ 249
Average interest rate -- -- -- -- -- 7.26% 7.26% -- 6.41% --
Interest Rate Swaps
(notional amounts)
Variable to Fixed....... $1,574 $ 738 $ 449 $ 250 -- $1,242 $ 4,253 $ 25 $ 2,274 $ (132)
Average to pay rate. 5.96% 6.72% 7.27% 6.81% -- 6.23% 6.36% -- 6.67% --
Average receive rate 6.13% 5.50% 5.18% 7.26% -- 5.33% 5.75% -- 5.49% --
Fixed to variable....... $ 425 -- $ 350 -- -- $1,500 $ 2,275 $ (94) $ 515 $ 46
Average pay rate..... 6.24% -- 6.73% -- -- 6.77% 6.67% -- 5.39% --
Average receive rate. 5.11% -- 6.15% -- -- 6.65% 6.29% -- 7.37% --
</TABLE>
*TXU Corp. or subsidiary obligated mandatorily redeemable, preferred securities
of subsidiary trusts each holding solely junior subordinated debentures of TXU
Corp. or related subsidiary.
A-19
<PAGE>
FOREIGN CURRENCY RISK -- TXU Corp. has exposure to foreign currency risks,
primarily with the pound sterling and the Australian dollar. TXU Europe and TXU
Australia have accessed the US capital markets and issued dollar denominated
obligations. TXU Corp. and its subsidiaries enter into currency swaps, options
and forwards, where appropriate, to manage foreign currency exposure. The
following table summarizes notional amounts at the contract exchange rates,
weighted-average contractual exchange rates and estimated fair value by contract
maturity for open contracts at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------
(Millions, except exchange rates) 1999 1998
There- Fair Fair
2000 2001 2002 2003 2004 after Total Value Value
----- ----- ----- ----- ----- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
British pound sterling $ 135 $ 135 $ 483 $ 114 $ 114 $2,569 $3,550 $(37) $(57)
Average exchange rate $1.63 $1.63 $1.62 $1.63 $1.63 $ 1.72 $ 1.69 -- --
Australian dollar -- -- -- -- -- $ 350 $ 350 $ 30 $ 53
Average exchange rate -- -- -- -- -- $ 0.72 $ 0.72 -- --
</TABLE>
ENERGY PRICE RISK-- Non-trading Activities -- In the UK and Australia,
electricity prices are established through power pools which are controlled
through an agreement with the licensed generators and suppliers in the case of
the UK, or by a statutory, independent corporation in the case of Australia. In
both cases, substantially all power generated must be sold into and purchased
from wholesale electricity trading pools. In order to manage the exposure to
fluctuations in electricity pool prices, both TXU Europe and TXU Australia enter
into both short- and long-term derivative instruments whereby the pool price is
fixed for an agreed-upon quantity and duration by reference to an agreed-upon
strike price. In the US, as a result of continued regulation, TXU Electric and
TXU Gas have minimal exposure to energy price risk, therefore, their use of
derivative instruments is limited.
UK --The hypothetical loss in fair value of TXU Europe Group's contracts for
differences, electricity forward agreements and other contracts in existence at
December 31, 1999 and 1998 entered into for non-trading purposes arising from a
10% adverse movement in future electricity prices is estimated at (Pounds)21
million ($34 million) and (Pounds)81 million ($134 million), respectively. This
loss is calculated by modeling the contracts against an internal forecast of
Pool prices using discounted cash flow techniques. The decrease in the
hypothetical market movement results from decreases in energy purchase
commitments during 1999.
Australia -- The hypothetical loss in fair value of TXU Australia's contracts
for differences, electricity forward agreements and other contracts in existence
at December 31, 1999 entered into for non-trading purposes arising from a 10%
adverse movement in future electricity prices is estimated at A$12 million ($8
million). This loss is calculated by modeling the contracts against an internal
forecast of Pool prices using discounted cash flow techniques.
ENERGY PRICE RISK -- Trading Activities -- TXU Corp. has further positioned
itself to provide comprehensive energy products and services to a diversified
client base in the US, Europe and Australia. In the US, TXU Energy Trading
continues to engage in risk management activities, including the purchase and
sale of physical commodities and entering into futures contracts, other forward
commitments, swap agreements, exchange traded options, over-the-counter options
which are net settled or physically settled, exchange-of-futures-for physical
transactions, energy exchange transactions, storage activities, and other
contractual arrangements.
In 1999, TXU Europe and TXU Australia began offering price risk management
services to customers through a variety of financial and other instruments
including contracts for differences (swaps), virtual power stations, written
options and forward contracts.
A-20
<PAGE>
The trading subsidiaries all manage the market risk on a portfolio basis
within limitations imposed by their respective Boards of Directors and in
accordance with TXU Corp.'s overall risk management policies. Market risks are
monitored daily, utilizing appropriate mark-to-market methodologies, which value
the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions. Each entity uses various techniques and
methodologies that simulate forward price curves in their respective markets to
estimate the size and probability of changes in market value resulting from
price movements. These techniques include, but are not limited to, sensitivity
analyses. The use of these methodologies requires a number of key assumptions
including the selection of confidence levels, the holding period of the
positions, and the depth and applicability to future periods of historical price
information.
The portfolio subjects the entities to a number of risks and costs associated
with the future contractual commitments, including price risk, credit risk
associated with counter parties, product location (basis) differentials, market
liquidity. Each entity continuously monitors the valuation of identified risks
and adjusts the portfolio valuation based on present market conditions.
Reserves are established in recognition that certain risks exist until delivery
of energy has occurred, counterparties have fulfilled their financial
commitments and related financial instruments mature or are closed out. Price
and credit risk are further managed within the established trading policies and
limits established for each trading entity which are evaluated on a daily basis.
US -- TXU Energy Trading uses market-implied volatilities to determine its
exposure to market risk. Market risk is estimated as the potential loss in fair
value resulting from at least a 15% change in market factors, which may differ
from actual results. Using a two standard deviation change, the most adverse
change in fair value at December 31, 1999 and 1998, as a result of this
analysis, was a reduction of $2.3 million and $2.1 million, respectively.
UK -- The hypothetical loss in fair value of TXU Europe Group's contracts
for differences and other energy purchase contracts in existence at December 31,
1999 entered into for trading purposes arising from a 10% adverse movement in
future electricity prices is estimated at (Pounds)4 million ($6 million).
Australia -- The hypothetical loss in fair value of TXU Australia's trading
contracts and other energy purchase contracts in existence at December 31, 1999
entered into for trading purposes arising from a 10% adverse movement in future
electricity prices is estimated at A$31 million ($20 million).
Regulation and Rates
US -- Electric Industry Restructuring -- Project teams have been established
to prepare TXU Electric for a competitive environment. These teams are
comprised of resources from all facets of TXU Corp.'s business and formulate
short- and long-term strategy to address the implementation of the 1999
Restructuring Legislation. TXU Corp. continues to analyze the long-range
implications of the 1999 Restructuring Legislation on their respective
financial positions, results of operations and cash flows.
TXU Gas Distribution employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting to
about $7.5 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 1999. Rate cases supporting an additional $8.3 million in
annualized revenue increases were pending in a number of cities as of December
31, 1999. The $8.3 million of annualized revenue increases includes $6.3
million for the general rate increase filed for in August 1999 by TXU Gas
Distribution in the cities of Dallas, University Park, Highland Park and
Cockrell Hill, Texas. On February 23, 2000, the City of Dallas denied the rate
increase. Similar action is expected in the other cities. TXU Gas Distribution
intends to appeal this action to the RRC, which has the power to review and
overturn the denial, and seek in excess of $9 million in rate relief. TXU Gas
is unable to predict the outcome of the appeal.
A-21
<PAGE>
In October 1999, TXU Lone Star Pipeline filed with the RRC a Statement of
Intent to change the city gate rate for gas transported for subsequent
distribution to residential and commercial customers. The filing requests a
general increase in annual revenues of approximately $20 million. Action on
this request is anticipated in the second quarter of 2000. TXU Lone Star
Pipeline is unable to predict the outcome of this case.
TXU Electric and certain other regulated subsidiaries of TXU Corp. have
several rate requests or refunds pending or on appeal, see Note 13 to Financial
Statements.
Europe -- The regulation of distribution and supply charges is currently
subject to review by OFGEM. Since the implementation of the initial price
controls in 1990, there have been two reviews of the supply price control.
These reviews have resulted in reduced distribution and supply prices, but
because related costs have also been reduced, the effect on TXU Europe has not
been material. In December 1999, OFGEM issued a final report, proposing a range
of substantial net revenue reductions for the distribution businesses of all
regional electricity companies in the UK. The final proposals for Eastern
Electricity incorporated an initial reduction in allowed revenues for regulated
units of 28% beginning April 1, 2000 with further annual reductions of 3% for
the next four years, adjusted for inflation. TXU Europe Limited and TXU Europe
Group estimate that the effect on distribution revenues will be a reduction of
about (Pounds)73 million ($118 million) in the year ending December 31, 2000
and of about (Pounds)100 million ($162 million) in the year ending December
31, 2001. The net impact on TXU Europe is less than these reductions, as a
portion of the reduction is a pass through of costs to the energy retail
business.
In November 1999, OFGEM issued a final report on price adjustments for the
electricity supply businesses. The final report was accepted by TXU Europe
Group in December 1999 and the supply price adjustments become effective April
1, 2000. The directly controlled tariffs will be reduced by an average of 7.1%
from April 1, 2000 as required by the new controls. TXU Europe estimates that
the effect on electricity supply revenues will be a reduction in annual revenues
of approximately (Pounds)15 million ($24 million).
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply published new proposals for generation
licenses in order to promote fair competition in the generation and trading of
electricity. The proposals seek to ensure that generators with positions of
significant market power who are able to exert an upward influence on prices in
the Pool ensure that their prices closely reflect their costs and that they do
not take unfair advantage of any imperfections in the operation of the Pool. The
Director General has proposed that these restrictions should cease one year
after the introduction of the New Electricity Trading Arrangements. TXU Europe
Limited has played an active part in these discussions and accepted the Director
General's proposals on February 7, 2000. However, five generators rejected
the proposals and the matter has been referred to the UK Competition Commission.
TXU Europe Limited does not anticipate that these new proposals will have a
material adverse effect on its revenues.
Australia -- TXU Australia is subject to regulation by the Office of the
Regulator General (ORG). The distribution tariffs applying to Eastern Energy
are effective until December 31, 2000. The ORG plans to issue by September 2000
a determination of the maximum prices for use of the electrical network for the
period from December 31, 2000 to at least December 31, 2005. TXU Australia is
not able to predict the outcome of this review or the impact on its financial
position or results of operations. There is a risk that the ORG could determine
pricing arrangements significantly below current levels.
Maximum retail prices for remaining franchise electricity customers, those
with usage below 160 MWh/year, are fixed by the Tariff Order until December 31,
2000. Retail prices for non-franchise customers are subject to competitive
forces and are not regulated. All electricity retail prices are scheduled to be
deregulated beginning January 1, 2001. TXU Australia is analyzing how the long-
range implications of the unregulated market will affect its financial position,
results of operations and cash flows, and is developing a strategy to address
these issues.
A-22
<PAGE>
The distribution tariffs applying to Westar are effective until December 31,
2002, at which time a price review process will occur prior to new tariffs being
approved by the ORG for the next five-year period. After the next period,
prices will be set for periods nominated by Westar and approved by ORG. TXU
Australia is not able to predict the outcome of this review or the impact on its
financial position or results of operations.
Gas retail customers with loads above 460,000 Mcf/year are currently subject
to competition. All remaining customers will be able to choose their own gas
retailer by September 1, 2001. While the market is expected to be competitive,
TXU Australia does not expect the same intensity of competition in the early
stages of competition as has been experienced in electricity in Victoria. The
most profitable segment of the retail gas market in Victoria is the class of
customers with load below 4,600 Mcf/year, which will become contestable in
September 2001. As with competition in the electric industry, TXU Australia's
expectation is that the competition, and therefore the downward pressure on
margins, will be less intense for these smaller customers.
Although TXU Corp. cannot predict future regulatory or legislative actions
or any changes in economic and securities market conditions, no changes are
expected in trends or commitments, other than those discussed in this report,
which might significantly alter its basic financial position, results of
operations or cash flows. (See Note 14 to the Financial Statements.)
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" , as extended, is effective for
TXU Corp. beginning January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires the recognition of derivatives as either assets or liabilities in the
statement of financial position and the measurement of those instruments at fair
value. TXU Corp. is currently evaluating the impact the adoption of this
standard will have on its financial position and results of operations.
EUROPEAN MONETARY UNION (EMU)
Most of TXU Europe Group's income and expenditures are denominated in pounds
sterling or in the currencies of other countries which either are not eligible
or have not joined the first stage of the EMU. TXU Europe Limited therefore
does not expect the new currency of countries which participate in the EMU to
have a material impact on those operations for so long as the UK continues to
remain outside the EMU. TXU Europe has prepared its accounting systems to be
able to deal with the receipt of payments in euro's.
Year 2000 Issues
Beginning in 1996, a thorough and detailed program was undertaken throughout
the TXU Corp. System to address Year 2000 (Y2K) issues. TXU Australia initiated
a Y2K program in 1997. The focus was on information technology (IT) mainframe-
based application systems, IT related hardware, operating systems and desk top
software, and embedded systems such as process controls for energy production
and delivery and business-unit-owned applications. Applications and equipment
in each of these categories were inventoried and categorized based on
criticality to TXU Corp.'s business operations. Assessments of potential
impact due to Y2K issues were completed in 1999. Remediation and testing work
in each of these areas was completed by December 31, 1999. A further upgrade to
the Eastern Electricity billing system was performed on January 20, 2000 to
ensure that all mainframe billing systems would function correctly on February
29, 2000.
During the year 2000 rollover, the US, TXU Europe and TXU Australia customers
experienced no service interruptions due to computer hardware, software and
imbedded chips. A few minor problems occurred with internal systems, but these
were considered to be no more than normal system issues.
A-23
<PAGE>
The total costs incurred to date associated with TXU Corp.'s Y2K efforts were
approximately $59 million. These costs reflect new, incremental costs and the
reallocation of resources in pre-existing maintenance budgets. These costs were
expensed as incurred and a total of approximately $5 million is expected to be
spent during the year 2000. There can be no assurance that these estimates will
not change as a result of the discovery of unexpected additional remediation
work.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. and its subsidiaries
(TXU Corp.) contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Although TXU Corp. believes
that in making any such statement its expectations are based on reasonable
assumptions, any such statement involves uncertainties and is qualified in its
entirety by reference to the following important factors, among others, that
could cause the actual results of TXU Corp. to differ materially from those
projected in such forward-looking statements: (i) prevailing governmental
policies and regulatory actions, including those of the Federal Energy
Regulatory Commission (FERC), the PUC, the Railroad Commission of Texas (RRC),
the Nuclear Regulatory Commission (NRC), the Office of the Regulator General of
Victoria, Australia, and the Office of Electricity Regulatory covering England,
Wales and Scotland (OFFER) in the UK with respect to allowed rates of return,
industry and rate structure, purchased power and investment recovery, operations
of nuclear generating facilities, acquisitions and disposal of assets and
facilities, operation and construction of plant facilities, decommissioning
costs, present or prospective wholesale and retail competition, changes in tax
laws and policies and changes in and compliance with environmental and safety
laws and policies, (ii) weather conditions and other natural phenomena, (iii)
unanticipated population growth or decline, and changes in market demand and
demographic patterns, (iv) competition for retail and wholesale customers, (v)
pricing and transportation of crude oil, natural gas and other commodities, (vi)
unanticipated changes in interest rates, rates of inflation or foreign exchange
rates, (vii) unanticipated changes in operating expenses and capital
expenditures, (viii) capital market conditions, (ix) competition for new energy
development opportunities, (x) legal and administrative proceedings and
settlements, (xi) inability of the various counterparties to meet their
obligations with respect to TXU Corp.'s financial instruments, (xii) changes in
technology used and services offered by TXU Corp., and (xiii) significant
changes in TXU Corp.'s relationship with its employees and the potential adverse
effects if labor disputes or grievances were to occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Corp. undertakes no obligation to update any forward-
looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time and it is not possible for TXU Corp. to
predict all of such factors, nor can it assess the impact of each such factor or
the extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement.
A-24
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of Texas Utilities Company (doing business as TXU Corp.) is
responsible for the preparation, integrity and objectivity of the consolidated
financial statements of TXU Corp. and its subsidiaries and other information
included in this report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. As
appropriate, the statements include amounts based on informed estimates and
judgments of management.
The management of TXU Corp. has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance with
management's authorization and financial records are reliable for preparing
consolidated financial statements. Management believes that the system of
control provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period. Key elements in this system include the
effective communication of established written policies and procedures,
selection and training of qualified personnel and organizational arrangements
that provide an appropriate division of responsibility. This system of control
is augmented by an ongoing internal audit program designed to evaluate its
adequacy and effectiveness. Management considers the recommendations of the
internal auditors and independent auditors concerning TXU Corp.'s system of
internal control and takes appropriate actions which are cost-effective in the
circumstances. Management believes that, as of December 31, 1999, TXU Corp.'s
system of internal control was adequate to accomplish the objectives discussed
herein.
The Board of Directors of TXU Corp. addresses its oversight responsibility
for the consolidated financial statements through its Audit Committee, which is
composed of directors who are not employees of TXU Corp. The Audit Committee
meets regularly with TXU Corp.'s management, internal auditors and independent
auditors to review matters relating to financial reporting, auditing and
internal control. To ensure auditor independence, both the internal auditors
and independent auditors have full and free access to the Audit Committee.
The independent auditing firm of Deloitte & Touche LLP is engaged to audit,
in accordance with generally accepted auditing standards, the consolidated
financial statements of TXU Corp. and its subsidiaries and to issue their report
thereon.
/s/ ERLE NYE /s/ D. W. BIEGLER
- ---------------------------------- ---------------------------------
Erle Nye, Chairman of the Board D. W. Biegler, President and
and Chief Executive Chief Operating Officer
/s/ BRIAN N. DICKIE /s/ PHILIP G. TURBERVILLE
- ---------------------------------- ---------------------------------
Brian N. Dickie, Philip G. Turberville,
Emerging Businesses Europe Chief Executive
Group President
/s/ MICHAEL J. McNALLY /s/ JERRY W. PINKERTON
- ---------------------------------- ---------------------------------
Michael J. McNally, Executive Vice Jerry W. Pinkerton, Controller and
President and Chief Financial Principal Accounting Officer
A-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Texas Utilities Company:
We have audited the accompanying consolidated balance sheets of Texas Utilities
Company (doing business as TXU Corp.) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, cash flows and common stock equity for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of TXU Europe Limited, formerly known as TXU
Eastern Holdings Limited (a consolidated subsidiary) for the year ended December
31, 1998, which statements reflect total assets constituting 36% of consolidated
total assets and total revenues constituting 24% of consolidated total revenues
for that year. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for TXU Europe Limited, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of TXU Corp. and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 16, 2000
A-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of TXU Europe Limited (formerly known
as TXU Eastern Holdings Limited) and Subsidiaries:
In our opinion, the consolidated balance sheet and the related statements of
consolidated income, of comprehensive income, of common stock equity and of cash
flows present fairly, in all material respects, the financial position of TXU
Europe Limited (formerly known as TXU Eastern Holdings Limited) and Subsidiaries
at December 31, 1998, and the results of their operations and their cash flows
for the period from formation (February 5, 1998) to December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards in the United Kingdom which do not differ
significantly with those in the United States and which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
London, England
March 3, 1999
A-27
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars, Except per Share Amounts
<S> <C> <C> <C>
OPERATING REVENUES............................................. $17,118 $14,736 $7,946
------- ------- ------
OPERATING EXPENSES
Energy purchased for resale and fuel consumed............. 9,257 7,914 3,276
Operation and maintenance................................. 3,354 2,570 1,539
Depreciation and other amortization....................... 1,080 1,025 645
Goodwill amortization..................................... 191 122 21
Taxes other than income................................... 642 642 559
------- ------- ------
Total operating expenses............................ 14,524 12,273 6,040
------- ------- ------
OPERATING INCOME............................................... 2,594 2,463 1,906
OTHER INCOME (DEDUCTIONS) -- NET............................... 262 45 (49)
------- ------- ------
INCOME BEFORE INTEREST, OTHER CHARGES
AND INCOME TAXES.......................................... 2,856 2,508 1,857
------- ------- ------
INTEREST INCOME................................................ 134 139 32
INTEREST EXPENSE AND OTHER CHARGES
Interest.................................................. 1,456 1,300 763
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely
junior subordinated debentures of the obligated company:
TXU obligated....................................... 18 -- --
Subsidiary obligated................................ 78 74 70
Preferred stock dividends of subsidiaries................. 14 16 28
Allowance for borrowed funds used during construction
and capitalized interest............................. (10) (9) (9)
------- ------- ------
Total interest expense and other charges............ 1,556 1,381 852
------- ------- ------
INCOME BEFORE INCOME TAXES..................................... 1,434 1,266 1,037
INCOME TAX EXPENSE............................................. 449 526 377
------- ------- ------
NET INCOME..................................................... $ 985 $ 740 $ 660
======= ======= ======
Average shares of common stock outstanding (millions).......... 279 265 231
Per share of common stock:
Basic earnings............................................ $3.53 $2.79 $2.86
Diluted earnings.......................................... $3.53 $2.79 $2.85
Dividends declared........................................ $2.325 $2.225 $2.125
</TABLE>
See Notes to Financial Statements.
A-28
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
<S> <C> <C> <C>
NET INCOME..................................................... $ 985 $ 740 $ 660
----- ----- -----
OTHER COMPREHENSIVE INCOME (LOSS) --
Net change during period, net of tax effects:
Foreign currency translation adjustments.................. (46) (67) (99)
Unrealized holding gains (losses) on investments.......... 34 (13) --
Minimum pension liability adjustments..................... 2 (6) --
----- ----- -----
Total............................................. (10) (86) (99)
----- ----- -----
COMPREHENSIVE INCOME........................................... $ 975 $ 654 $ 561
===== ===== =====
</TABLE>
See Notes to Financial Statements.
A-29
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
<S> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
Net income................................................................... $ 985 $ 740 $ 660
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel).......... 1,448 1,340 839
Deferred income taxes -- net............................................ 293 288 168
Investment tax credits -- net........................................... (23) (23) (23)
Gains from the sale of assets........................................... (251) (21) --
Reduction of revenues for earnings in excess of earnings cap............ 92 -- --
Other................................................................... 11 19 (5)
Changes in operating assets and liabilities:
Accounts receivable................................................ 423 (167) (442)
Inventories........................................................ 45 (29) (14)
Accounts payable................................................... (336) 317 334
Interest and taxes accrued......................................... (58) (24) 40
Other working capital.............................................. 189 (268) 90
Over/(under) - recovered fuel revenue -- net of deferred taxes..... (59) 26 (21)
Energy marketing risk management assets and liabilities............ (211) (4) (13)
Other -- net....................................................... (372) (189) 41
------- ------- -------
Cash provided by operating activities.......................... 2,176 2,005 1,654
------- ------- -------
CASH FLOWS -- FINANCING ACTIVITIES
Issuances of securities:
Acquisition and interim facilities...................................... 926 3,429 --
Other long-term debt.................................................... 5,150 2,310 823
Mandatorily redeemable, preferred securities of subsidiary trusts, each
holding solely junior subordinated debentures of the obligated company:
TXU obligated.................................................. 150 230 --
Subsidiary obligated........................................... -- 150 493
Common stock............................................................ 1 8 --
Retirements/repurchase of securities:
Acquisition and interim facilities..................................... (1,225) (2,183) --
Other long-term debt/obligations....................................... (2,234) (1,504) (1,573)
Preferred stock of subsidiaries........................................ -- (114) (553)
Subsidiary obligated, mandatorily redeemable, preferred securities of
subsidiary trusts, each holding solely junior subordinated debentures
of the obligated subsidiary....................................... -- (47) --
Common stock........................................................... (251) (25) (149)
Change in notes payable:
Commercial paper....................................................... (1,100) 1,311 1,102
Banks.................................................................. 99 242 (543)
Common stock dividends paid.................................................. (639) (573) (479)
Debt premium, discount, financing and reacquisition expenses................. (95) (215) (41)
------- ------- -------
Cash provided by (used in) financing activities................. 782 3,019 (920)
------- ------- -------
CASH FLOWS -- INVESTING ACTIVITIES
Acquisition of businesses (net of cash acquired of $20 in 1999, $3,265 in
1998 and $26 in 1997)...................................................... (1,013) (2,534) 5
Construction expenditures................................................... (1,632) (1,168) (583)
Nuclear fuel................................................................ (54) (51) (74)
Other....................................................................... (441) (587) (56)
------- ------- -------
Cash used in investing activities.............................. (3,140) (4,340) (708)
------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............................. (54) 68 2
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... (236) 752 28
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE.................................... 796 44 16
------- ------- -------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE....................................... $ 560 $ 796 $ 44
======= ======= =======
</TABLE>
See Notes to Financial Statements.
A-30
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Millions of Dollars
PROPERTY, PLANT AND EQUIPMENT
United States (US):...............................................................
Electric...................................................................... $23,599 $23,131
Gas distribution and pipeline................................................. 1,378 1,212
Other......................................................................... 1,004 844
------- -------
Total.................................................................. 25,981 25,187
Less accumulated depreciation................................................. 8,159 7,426
------- -------
Net of accumulated depreciation....................................... 17,822 17,761
Construction work in progress................................................. 314 346
Nuclear fuel (net of accumulated amortization: 1999 -- $635; 1998 -- $549)... 171 201
Held for future use........................................................... 24 24
Reserve for regulatory disallowances.......................................... (836) (836)
------- -------
Net US property, plant and equipment................................... 17,495 17,496
Europe -- Electric and other (net of accumulated depreciation: 1999 -- $424; 1998
-- $147).......................................................................... 4,394 4,428
Australia -- Electric and gas distribution (net of accumulated depreciation: 1999
-- $196; 1998 -- $121)............................................................ 1,751 943
------- -------
Net property, plant and equipment...................................... 23,640 22,867
------- -------
INVESTMENTS
Goodwill (net of accumulated amortization: 1999 -- $345; 1998 -- $154)............ 7,516 6,830
Other investments................................................................. 2,876 2,482
------- -------
Total investments...................................................... 10,392 9,312
------- -------
CURRENT ASSETS
Cash and cash equivalents........................................................ 560 796
Accounts receivable (net of allowance for uncollectible accounts: 1999 -- $50;
1998 -- $50).................................................................... 1,492 1,887
Inventories -- at average cost:
Materials and supplies...................................................... 261 267
Fuel stock.................................................................. 230 276
Gas stored underground...................................................... 131 133
Energy marketing risk management assets........................................... 619 825
Deferred income taxes............................................................. 2 88
Other current assets.............................................................. 605 308
------- -------
Total current assets.................................................. 3,900 4,580
------- -------
OTHER ASSETS
Regulatory assets................................................................ 1,750 1,817
Long-term prepayments............................................................ 577 527
Deferred debits.................................................................. 482 404
------- -------
Total other assets.................................................... 2,809 2,748
------- -------
Total......................................................... $40,741 $39,507
======= =======
</TABLE>
See Notes to Financial Statements.
A-31
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
Millions of Dollars
<S> <C> <C>
CAPITALIZATION
Common stock without par value................................................... $ 6,795 $ 6,940
Retained earnings................................................................ 1,691 1,448
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments.................................... (169) (123)
Unrealized holding gains (losses) on investments............................ 21 (13)
Minimum pension liability adjustments....................................... (4) (6)
------- -------
Total common stock equity........................................... 8,334 8,246
Preferred stock of subsidiaries:
Not subject to mandatory redemption.......................................... 190 190
Subject to mandatory redemption.............................................. 21 21
Mandatorily redeemable, preferred securities of subsidiary trusts, each holding
solely junior subordinated debentures of the obligated company:
TXU obligated........................................................ 368 223
Subsidiary obligated................................................. 971 969
Long-term debt, less amounts due currently...................................... 16,325 15,134
------- -------
Total capitalization................................................ 26,209 24,783
------- -------
CURRENT LIABILITIES
Notes payable:
Commercial paper............................................................. 1,903 2,055
Banks........................................................................ 1,385 896
Long-term debt due currently.................................................... 1,288 1,071
Accounts payable................................................................ 1,442 1,747
Energy marketing risk management liabilities.................................... 525 838
Dividends declared.............................................................. 172 164
Taxes accrued................................................................... 474 490
Interest accrued................................................................ 310 310
Other current liabilities....................................................... 898 698
------- -------
Total current liabilities.......................................... 8,397 8,269
------- -------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes............................................... 3,938 3,718
Investment tax credits.......................................................... 524 547
Other deferred credits and noncurrent liabilities............................... 1,673 2,190
------- -------
Total deferred credits and other noncurrent liabilities............ 6,135 6,455
------- -------
COMMITMENTS AND CONTINGENCIES (Note 14)
------- -------
Total......................................................... $40,741 $39,507
======= =======
</TABLE>
See Notes to Financial Statements.
A-32
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Millions of Dollars
<S> <C> <C> <C>
COMMON STOCK without par value-- authorized shares --
1,000,000,000
Balance at beginning of year........................... $6,940 $5,587 $4,787
Issued for acquisitions:
The Energy Group PLC (37,316,884 shares)........ -- 1,449 --
TXU Gas Company (15,861,272 shares)............. -- -- 565
TXU Communications Company (8,727,730 shares)... -- -- 317
Direct Stock Purchase and Dividend Reinvestment
Plan (198,184 shares)............................. -- 8 --
Issued for Conversion of Convertible Debentures
(77,963 shares)................................... -- 3 --
Issued for Long-Term Incentive Compensation Plan
(1999 -- 208,200 shares; 1998 -- 68,000 shares;
and 1997 -- 61,000 shares)...................... 6 4 3
Common stock repurchased and retired (1999 --
6,134,500 shares; 1998-- 565,771 shares; and
1997 -- 4,015,000 shares)....................... (152) (14) (91)
Treasury Stock -- Long-Term Incentive Plan Trusts... (4) (26) --
Equity-linked securities............................ -- (76) --
Special allocation to Thrift Plan by trustee........ 8 8 8
Other............................................... (3) (3) (2)
------ ------ ------
Balance at end of year ( 1999 -- 276,406,519 shares;
1998 -- 282,332,819 shares; and 1997 --
245,237,559 shares)............................... 6,795 6,940 5,587
------ ------ ------
RETAINED EARNINGS
Balance at beginning of year............................ 1,448 1,312 1,203
Net income......................................... 985 740 660
Dividends declared on common stock................. (647) (597) (496)
Common stock repurchased and retired............... (99) (11) (59)
LESOP dividend deduction tax benefit and other..... 4 4 4
------ ------ ------
Balance at end of year................................. 1,691 1,448 1,312
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year............................ (142) (56) 43
Change during the year.............................. (10) (86) (99)
------ ------ ------
Balance at end of year.................................. (152) (142) (56)
------ ------ ------
COMMON STOCK EQUITY......................................... $8,334 $8,246 $6,843
====== ====== ======
</TABLE>
See Notes to Financial Statements.
A-33
<PAGE>
TEXAS UTILITIES COMPANY (doing business as TXU CORP.) AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, MERGERS, ACQUISITIONS AND DISPOSITIONS
In May 1999, Texas Utilities Company (TXU Corp.) adopted TXU Corp. as its
assumed name and began conducting business as TXU Corp. During 1999, several of
TXU Corp.'s subsidiaries changed their corporate names in connection with the
new TXU Corp. corporate identity program. TXU Corp., a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through TXU Electric Company (TXU Electric), TXU Gas Company (TXU Gas), and TXU
Energy Industries Company (TEI). TXU Corp.'s principal international operations
are conducted through TXU International Holdings Limited (TXU International
Holdings), which in turn indirectly owns TXU Europe Limited, (TXU Europe), and
TXU Australia Holdings (Partnership) Limited Partnership (TXU Australia). TXU
Europe's operations in the United Kingdom (UK) and other parts of Europe are
conducted through subsidiaries of TXU Europe Group plc, (TXU Europe Group). TXU
Australia's principal operating subsidiaries include Eastern Energy Limited
(Eastern Energy) and the gas operations of Westar Pty. Ltd. (Westar) and Kinetik
Energy Limited (Kinetik Energy). Additional information concerning subsidiaries
and divisions follows. TXU Corp. and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations, power
development and other businesses.
In May 1998, TXU Corp. acquired The Energy Group PLC (TEG), the former
holding company of TXU Europe Group for $7.4 billion. TXU Corp. recorded its
approximate 22% equity interest in the net income of TEG for the period from
March 1998 to May 19, 1998 and has accounted for TEG and TXU Europe Group as
consolidated subsidiaries since May 19, 1998. The excess of the purchase
consideration plus acquisition costs over the net fair value of tangible and
identifiable intangible assets acquired and liabilities assumed, reflecting
final purchases adjustments, resulted in goodwill of (Pounds)3.6 billion ($5.8
billion), which is being amortized over 40 years. The process of determining the
fair value of assets acquired, liabilities assumed and contingencies existing at
the acquisition date was completed in 1999 and resulted in an increase in
goodwill of approximately (Pounds)263 million ($425 million) over the
preliminary allocation, primarily due to refinement of estimates.
In February 1999, TXU Australia acquired from the Government of Victoria,
Australia, the gas retail business of Kinetik Energy and the gas distribution
operations of Westar (together, Westar/Kinetik Energy). The purchase price of
A$1.6 billion ($1.0 billion) was financed principally through bank borrowings by
TXU Australia. The excess of the purchase consideration plus acquisition costs
over the net fair value of the tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of A$751 million ($475
million), which is being amortized over 40 years.
Since the acquisition of Westar/Kinetik Energy was treated for accounting
purposes as a purchase business combination, no financial or other information
is presented for periods prior to the date of acquisition. Consolidated pro
forma income and earnings per share for the years ended December 31, 1999 and
1998, assuming the acquisition of Westar/Kinetik Energy had occurred at the
beginning of the periods, would not have differed significantly from reported
results.
Unaudited pro forma consolidated results assuming that the acquisition of TEG
in 1998 and ENSERCH Corporation (now TXU Gas) and Lufkin-Conroe Communications
(now TXU Communications) in 1997 had occurred at the beginning of each period
presented are as follows. Expenses of the acquisitions, the 22% equity in
earnings of TEG and a one-time windfall tax imposed on TEG have been eliminated.
On a pro forma basis for 1998 and 1997, respectively, revenues were $17.3
billion and $14.8 billion, net income was $849 million and $842
A-34
<PAGE>
million, basic earnings per share of common stock were $3.01 and $2.95 and
diluted earnings per share were $3.01 and $2.94.
In November 1999, TXU Europe formed a joint venture with certain shareholders
of Pohjolan Voima Oy (PVO), Finland's second largest electricity generator. As
part of the transaction, TXU Europe contributed approximately (Pounds)190
million ($308 million) for an 81% ownership interest in the joint venture
company TXU Nordic Energy. The joint venture is entitled to the output from
approximately 584 megawatts (MW) of PVO's thermal generating capacity. In
addition, TXU Europe made an approximate 40% investment in Savon Voima Oy
(SVO), a regional electricity distributor in central Finland for approximately
(Pounds)40 million ($65 million).
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. These plants have an
aggregate generating capacity of 3,116 MW, or approximately 15% of TXU
Electric's generating capacity. Any gain on the sale of the plants will be
recorded as a regulatory liability and applied against TXU Electric's generation
assets that may become stranded costs under provisions of the electric utility
restructuring legislation passed by the 1999 Texas Legislature (1999
Restructuring Legislation). (See Note 3). TXU Electric plans to sell the
plants, together with all associated assets, including land, lakes, water
rights, air permits, emission allowances and fuel transportation contracts. TXU
Electric anticipates entering into a tolling agreement with the new owners to
receive the capacity and energy from these plants for a portion of the peak load
season of 2001 and purchasing any remaining requirements on the open market.
TXU Electric anticipates completion of the plant sales by the end of 2000.
On December 14, 1999, TXU Europe Group and EDF London Investments plc, a
subsidiary of Electricite de France, entered into an arrangement for the
creation of an equally held joint venture company. Employees of the joint
venturers' subsidiaries, Eastern Electricity and London Electricity plc, will be
employed by the new joint venture company in the management, operation and
maintenance of those subsidiaries' respective electricity distribution networks.
The physical assets, as well as all operating licenses, will continue to be
owned by Eastern Electricity and London Electricity plc, respectively. An
application was made to the European Commission's Merger Task Force for
competition law clearance, and on February 8, 2000, the European Commission
announced that it had cleared plans for the creation of the joint venture for
competition law purposes. A separate application for regulatory clearance has
been submitted to the Office of Gas and Electricity Markets (OFGEM). The joint
venture will begin operations once these clearances are obtained, which may be
as early as April 2000. By the time the joint venture starts operations, it is
expected that the combined workforce will have been reduced by approximately
400. It is anticipated that the workforce currently engaged by Eastern Energy
and London Electricity plc, will be further reduced by at least a similar number
during the joint venture's first 18 months of operations. By streamlining
operations and reducing costs, the joint venture is expected to help offset the
price reductions mandated by the recent distribution price review by OFGEM.
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million, which resulted in a $222
million pre-tax gain ($145 million after-tax) and is recorded in other income.
Proceeds from the sale were received in January 2000 and have been reflected in
the December 31, 1999 balance sheet in Other Current Assets.
A-35
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of TXU Corp. and its majority owned subsidiaries, including its business trusts.
All intercompany items and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates are accounted for by the equity method.
Certain previously reported amounts have been reclassified to conform to current
classifications. All dollar amounts in the financial statements and notes to
financial statements, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
Use of Estimates -- The preparation of TXU Corp.'s financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense during the periods.
In the event estimates and/or assumptions prove to be different from actual
amounts, adjustments are made in subsequent periods to reflect more current
information. No material adjustments, other than those disclosed elsewhere
herein, were made to previous estimates during the current year.
System of Accounts -- The accounting records of TXU Electric are maintained
in accordance with the Federal Energy Regulatory Commission's (FERC) Uniform
System of Accounts as adopted by the Public Utility Commission of Texas (PUC).
TXU Gas Distribution Company (TXU Gas Distribution) and TXU Lone Star Pipeline
Company (TXU Lone Star Pipeline), divisions of TXU Gas, are subject to the
accounting requirements prescribed by the National Association of Regulatory
Utility Commissioners (NARUC). TXU Europe Group separately prepares regulatory
accounts under accounting requirements specified by the Office of Gas and
Electricity Markets.
Regulatory Assets and Liabilities --The financial statements of TXU Electric
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effect of Certain Types of Regulation." As a result of the
1999 Restructuring Legislation, the electricity generation portion of TXU
Electric's business no longer meets the criteria to apply SFAS No. 71. (See
Notes 3 and 13).
Property, Plant and Equipment -- US electric and gas utility plant is stated
at original cost less certain regulatory disallowances. The cost of property
additions to US electric (transmission, distribution and generation prior to
July 1, 1999) and gas utility plant includes labor and materials, applicable
overhead and payroll-related costs and an allowance for funds used during
construction (AFUDC). Other property, including non-US property, is stated at
cost.
Interest Capitalized and Allowance For Funds Used During Construction --
AFUDC is a cost accounting procedure whereby amounts based upon interest charges
on borrowed funds and a return on equity capital used to finance construction
are added to US utility plant.
Prior to July 1, 1999, TXU Electric capitalized AFUDC for all of its
expenditures for ongoing construction work in progress and nuclear fuel in
process not otherwise allowed in rate base by regulatory authorities. Because
of the 1999 Restructuring Legislation effective July 1, 1999, TXU Electric began
recording AFUDC only on T&D construction work in progress, and interest during
construction of generation assets has been capitalized as appropriate. For
1999, 1998 and 1997, TXU Electric used AFUDC rates of 9.0%, 8.0% and 7.9%,
respectively.
A-36
<PAGE>
Depreciation of Property, Plant and Equipment -- Depreciation of TXU Corp.'s
property, plant and equipment is generally based upon an amortization of the
original cost of depreciable properties on a straight-line basis over the
estimated service lives of the properties. Depreciation also includes an amount
for decommissioning costs for TXU Electric's nuclear powered electric generating
station (Comanche Peak), which is being accrued over the lives of the units.
Consolidated depreciation as a percent of average depreciable property for TXU
Corp. approximated 3.6% for 1999, 3.0% for 1998 and 2.6% for 1997. The fair
value of the acquired UK power stations under capital lease is amortized to
expense ratably over the remaining estimated economic lives of the power
stations, which extend to 2018. The successful efforts method is used to
account for UK natural gas fields. Depletion is charged on a unit-of-production
basis.
Goodwill -- Goodwill represents the excess of the purchase price paid over
the estimated fair value of the assets acquired and liabilities assumed for each
company acquired and is being amortized over 40 years.
Valuation of long-lived assets -- TXU Corp. evaluates the carrying value of
goodwill and long-lived assets to be held and used when events and circumstances
warrant such a review. The carrying value of goodwill and long-lived asset is
considered impaired when the projected undiscounted cash flows are less than the
carrying value. In that event, a loss will be recognized based on the amount by
which the carrying value exceeds the fair market value. Fair market value is
determined primarily by available market valuations or, if applicable,
discounted cash flows.
Amortization of Nuclear Fuel and Refueling Outage Costs -- The amortization
of nuclear fuel in the reactors (net of regulatory disallowances) is calculated
on the units-of-production method and is included in nuclear fuel expense. TXU
Electric accrues a provision for costs anticipated to be incurred during the
next scheduled refueling outage for Comanche Peak as permitted by the PUC of
Texas.
Foreign Currency Translation -- The assets and liabilities of non-US
operations denominated in local currencies are translated at rates in effect at
year end. Revenues and expenses are translated at average rates for the
applicable periods. Generally, local currencies are considered to be the
functional currency, and adjustments resulting from such translation are
included in other comprehensive income, a separate component of common stock
equity.
Marketable Securities -- TXU Corp and subsidiaries classify all of their
marketable securities as available for sale. Available for sale securities are
carried at fair value with the unrealized gains and losses reported as a
component of accumulated other comprehensive income or loss in common stock
equity. Declines in fair value that are other than temporary are reflected in
income.
Derivative Instruments -- TXU Corp. and its subsidiaries participation in
derivative transactions, except for energy marketing activities, have been
designated primarily for hedging purposes and instruments are not held or issued
for trading purposes. Amounts paid or received under interest rate swap
agreements are accrued as interest rates change and are recognized over the life
of the agreements as adjustments to interest expense. The impact of changes in
the market value of the derivative instruments, or other contractual agreements
in connection with the wholesale purchases of electric energy by TXU Europe
Group and TXU Australia, which serve as hedges, are deferred until the related
transaction is completed.
Energy Marketing Activities --TXU Corp., through its energy marketing
subsidiaries, TXU Energy Trading Company, TXU Europe Energy Trading Limited and
TXU Australia, enters into a variety of transactions, involving physical
commodity and derivative instruments. TXU Corp. uses the mark-to-market method
of accounting for trading activities. (See Note 11.)
A-37
<PAGE>
Revenues -- Electric and gas sales revenues are recognized when services are
provided to customers on the basis of periodic cycle meter readings and include
an estimated accrual for the value of electricity and gas provided from the
meter reading date to the end of the period. US electric and gas revenues
include billings under approved rates and adjustments under various mechanisms
to recover or refund the cost of fuel and purchased power costs that are above
or below the level included in base rates. (See Note 13 for a discussion of
Regulations and Rates.)
Income Taxes --TXU Corp. and its US subsidiaries file a consolidated
federal income tax return, and federal income taxes are allocated to
subsidiaries based upon their respective taxable income or loss. Investment tax
credits are amortized to income over the estimated service lives of the
properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities. Certain provisions of
SFAS No. 109 provide that regulated enterprises are permitted to recognize such
adjustments as regulatory tax assets or tax liabilities if it is probable that
such amounts will be recovered from, or returned to, customers in future rates.
Income Taxes on Undistributed Earnings of non-US Subsidiaries -- TXU Corp.
intends to reinvest the earnings of its non-US subsidiaries into those
businesses. Accordingly, no provision has been made for taxes which would be
payable if such earnings were to be repatriated.
Earnings Per Share -- Basic earnings per share applicable to common stock are
based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share include the effect of potential common shares
resulting from the assumed exercise of all outstanding stock options, settlement
of forward stock purchase agreements and conversion of the convertible
subordinated debentures of TXU Gas for the period outstanding (converted in
1998). For the years ended December 31, 1999, 1998 and 1997; 193,194; 677,269
and 999,492 shares, respectively, were added to the average shares outstanding.
For the years ended December 31, 1998 and 1997, $.9 million and $1.5 million
respectively, of after-tax interest expense was added to earnings applicable to
common stock for the purpose of calculating diluted earnings per share.
Consolidated Cash Flows -- For purposes of reporting cash and cash
equivalents, temporary cash investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents.
Changes in Accounting Standards -- SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as extended, is effective for TXU Corp.
beginning January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires the
recognition of derivatives as either assets or liabilities in the statement of
financial position and the measurement of those instruments at fair value. TXU
Corp. is currently evaluating the impact the adoption of this standard will have
on its financial position and results of operations.
A-38
<PAGE>
3. ACCOUNTING IMPACT OF THE RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY IN
TEXAS
Electric Industry Restructuring -- The 1999 Restructuring Legislation, among
other matters, continues the stipulation in Docket 18490 that earnings in excess
of the earnings cap be used as mitigation to the cost of nuclear production
assets (see Note 13); authorizes competition in the retail and generation
markets for electricity beginning January 1, 2002; provides for the recovery of
generation-related and purchased power related stranded costs and generation-
related regulatory assets; requires reductions in nitrogen oxide and sulfur
dioxide emissions; requires a rate freeze for all retail customers until January
1, 2002 and certain rate reductions for residential and small commercial
customers for up to five years thereafter; and sets certain limits on capacity
owned and controlled by power generation companies. Certain provisions of the
1999 Restructuring Legislation may be subject to different interpretation. By
September 1, 2000, each electric utility must separate from its regulated
activities its customer energy services business activities that are otherwise
already widely available in the competitive market. By January 1, 2002, each
electric utility must separate ("unbundle") its business into the following
units: a power generation company, a retail electric provider and a T&D company
or separate T&D companies. A power generation company generates electricity
that is intended to be sold at wholesale. In general, a power generation
company may not own a T&D facility and may not have a certificated service area.
A retail electric provider sells electric energy to retail customers and may not
own or operate generation assets. A T&D company may only own or operate
facilities to transmit or distribute electricity.
Accounting Impact of the Restructuring -- Regulatory Assets and Liabilities -
---------------------------------
- - The financial statements of TXU Electric reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with SFAS No. 71. As
a result of the 1999 Restructuring Legislation, the electricity generation
portion of TXU Electric's business no longer meets the criteria to apply
regulatory accounting principles. Accordingly, application of SFAS No. 71 to
the generation portion of TXU Electric's business was discontinued as of June
30, 1999. TXU Electric's T&D operations continue to meet the criteria for
recognition of regulatory assets and liabilities. The 1999 Restructuring
Legislation provides for the recovery of net generation-related regulatory
assets existing at December 31, 1998. Such generation-related regulatory assets
will be amortized as recovered through the Distribution portion of the
business. In addition, fuel costs will be fully recoverable, subject to
regulatory review, during the transition period that extends to January 1, 2002.
As a result, management believes the economic benefit of all net regulatory
assets related to the generation business will be recovered.
Generation Production Assets -- TXU Electric anticipates that a portion of
-----------------------------
the cost of its generation production assets and power purchase contracts may be
identified as stranded costs under the legislation and become subject to a
future quantification of the economic value of such assets in 2004. The 1999
Restructuring Legislation provides that 100% of such stranded costs will be
recovered from customers. TXU Electric has performed an impairment analysis of
generation assets under the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires a company to forecast future net cash flows from operating
the asset, on an undiscounted basis excluding carrying costs, and to compare the
sum of those cash flows with the net carrying value of the asset. Under this
test, if the undiscounted net cash flows exceed the net carrying value, no
impairment exists for accounting purposes. TXU Electric has forecasted the net
cash flows of its generating assets and determined that the undiscounted net
cash flows exceed the net carrying value of those plants. Accordingly, for
accounting purposes, there is no impairment. Generation-related plant assets at
December 31, 1999 were approximately $9.7 billion, net of accumulated
depreciation.
Investment Tax Credits -- TXU Electric has unamortized deferred investment
----------------------
tax credits (ITCs) of approximately $426 million applicable to its generation
business. The unamortized ITCs are temporary differences under generally
accepted accounting principles for which a deferred income tax asset has been
recorded. Under regulatory accounting, a regulatory liability also has been
recorded. It is uncertain under applicable regulations whether, and to what
extent, the customers will ultimately benefit from the unamortized ITCs and/or
the related regulatory liability. Upon final determination by the PUC, TXU
Electric expects that the amount of unamortized
A-39
<PAGE>
ITCs not applicable to customers will be amortized over the remaining life of
the generation plants. Also, upon final determination by the PUC, TXU Electric
expects that the regulatory liability related to the ITCs that is not applicable
to customers will be written off as an extraordinary credit to income.
4. SHORT-TERM FINANCING
At December 31, 1999, TXU Corp. had outstanding short-term borrowings
consisting of commercial paper of $1,903 million and bank borrowings of $1,385
million. During the years 1999 and 1998, TXU Corp.'s average amounts outstanding
for short-term borrowings, including amounts classified as long-term, were
$3,732 million and $3,131 million, respectively. Weighted average interest rates
on short-term borrowings were 6.04% and 6.46% at December 31, 1999 and 1998,
respectively.
At December 31, 1999, TXU Corp., TXU Electric and TXU Gas Company have joint
US dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
1999, TXU Corp. had no borrowings outstanding under these facilities. The US
Credit Agreements were amended in February 2000 and have two facilities.
Facility A provides for short-term borrowings aggregating up to $1.4 billion
outstanding at any one time at variable interest rates and terminates February
23, 2001, but may be extended by up to one year. Facility B provides for short-
term borrowings aggregating up to $1.4 billion outstanding at any one time at
variable interest rates and terminates February 25, 2005. Facility B also
provides for the issuance of up to $300 million of letters of credit. TXU
Electric's and TXU Gas' borrowings under both facilities are limited to an
aggregate amount outstanding at any one time of $1.25 billion and $650 million,
respectively.
An Eastern Electricity Revolving Credit Facility provides for short-term
borrowings for general corporate purposes of up to (Pounds)250 million ($404
million) outstanding at any one time and terminates March 2, 2003. No
borrowings were outstanding at December 31, 1999 under this facility.
TXU Australia bank borrowings at December 31, 1999 included a A$413 million
($269 million) Subordinated Acquisition Facility and a A$275 million ($179
million) Tranche A of the Senior Acquisition Facility related to the funding of
the acquisition of Westar/Kinetik Energy. The interest rates on these borrowings
at December 31, 1999 were 7.035% and 6.075%, respectively (See Note 5.)
Certain non-US subsidiaries had revolving credit agreements (denominated in
both foreign currencies and US dollars) aggregating approximately $106 million,
of which $83 million was outstanding at December 31, 1998. During 1999, all of
the facilities were repaid and terminated.
TXU Europe has a facility with a third party whereby it may borrow up to
(Pounds)275 million ($445 million), collateralized by future receivables of
Eastern Electricity, through a short-term note issue arrangement. At December
31, 1999, borrowings of (Pounds)177 million ($286 million) were outstanding
under this facility. These borrowings bear interest at an annual rate on
commercial paper rates plus 0.225%, which was 5.63% at December 31, 1999. The
program has an overall limit of (Pounds)550 million ($891 million), including a
(Pounds)300 million ($486 million) sale of receivables program (see Note 16).
At December 31, 1999, TXU Europe and TXU Finance (No. 2) Limited had a joint
sterling-denominated line of credit under a credit facilities agreement
(Sterling Credit Agreement). The Sterling Credit Agreement, as amended March
1999, includes a (Pounds)200 million ($323 million) revolving credit facility
(Tranche A) with a 364-day maturity. At December 31, 1999, there were no
borrowings outstanding under this facility. (See Note 5 for discussion of long-
term facilities.)
A-40
<PAGE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
First mortgage bonds, fixed rate (6.25% to 10.44% due 2001 to 2025)............. $ 2,254 $ 2,276
Pollution control series:
Brazos River Authority:
Fixed rate (3.7% to 7.875% due 2021 to 2033)............................. 863 902
Taxable series (6.090% due 2023) (a)..................................... 89 116
Variable rate (3.54% to 5.85% due 2022 to 2034) (b) (c).................. 466 400
Sabine River Authority of Texas:
Fixed rate (5.55% to 8.25% due 2020 to 2022)............................. 199 199
Variable rate (4.5% to 5.25% due 2022 to 2030) (c)....................... 182 182
Trinity River Authority of Texas:
Flexible rate (5.28% to 5.55% due 2022 to 2032) (c)...................... 51 51
Secured medium-term notes, fixed rate (6.41% to 9.7%, due 2001 to 2003).......... 159 315
Debt assumed for purchase of utility plant (d)................................... 148 151
TXU Electric Floating Rate Debentures due 2000 (5.474%).......................... -- 350
TXU Electric 7.17% Senior Debentures due 2007.................................... 300 300
TXU Europe:
Bonds (7.25% to 10.8% due 2004 to 2029)...................................... 2,058 1,935
Senior notes (6.15% to 6.75% due 2002 to 2009) (e)........................... 1,488 --
Rent factoring agreement (weighted average rate of 7.35%, due 1999 to 2001).. 307 708
Capital leases (See Note 14)................................................. 946 855
Other long-term debt......................................................... 611 679
Senior notes:
TXU Corp. (6.2% to 7.105% due through 2008).................................. 1,425 625
Various subsidiaries (6.25% to 22.755% due 2003 to 2016)..................... 1,062 1,279
TXU Gas Company Remarketed Reset Notes due 2008 (f).............................. 125 125
TXU Corp. Equity-linked securities (6.37% to 6.50% due 2003 and 2004) (i)........ 700 700
TXU Corp. 5.94% mandatory putable/remarketable securities (h).................... 375 375
Credit facilities:
TXU Australia (5.523% due 2001 and 6.275% due 2002)......................... 944 417
TXU Europe sterling credit facility (g)..................................... 1,596 1,324
TXU Corp.................................................................... -- 816
Other....................................................................... -- 82
Unamortized premium and discount and fair value adjustments...................... (23) (28)
------- -------
Total long-term debt, less amounts due currently.................... $16,325 $15,134
======= =======
</TABLE>
- ----------------------------------------------
(a) Interest rates in effect at December 31, 1999 are presented. Taxable
pollution control series are in a flexible rate mode. Series 1991D bonds due
2021 are secured by an irrevocable letter of credit with maturities in
excess of one year. Series 1993 bonds due 2023 will be remarketed for
periods of less than 270 days and are secured by an irrevocable letter of
credit with maturities in excess of one year.
(b) Interest rates in effect at December 31, 1999 are presented. These series
are in a flexible mode with varying interest rates and, while in such mode,
will be remarketed for periods of less than 270 days and are secured by an
irrevocable letter of credit with maturities in excess of one year.
(c) Interest rates in effect at December 31, 1999 are presented. These series
are in a daily or multiannual mode with varying interest rates and are
supported by either municipal bond insurance policies and standby bond
purchase agreements or are secured by irrevocable letters of credit with
maturities in excess of one year.
(d) In 1990, TXU Electric purchased the ownership interest in Comanche Peak of
Tex-La Electric Cooperative of Texas, Inc. (Tex-La) and assumed debt of Tex-
La payable over approximately 32 years. The assumption is secured by a
mortgage on the acquired interest.
(e) TXU Europe has interest rate swaps in effect with an aggregate notional
amount of $1.5 billion that convert the fixed rate Senior Notes to a
floating rate based on LIBOR, which is 6.82% at December 31, 1999. These
swaps mature on the dates of the underlying notes.
(f) In July 1998, the interest rate was reset to a fixed rate of 6.56% payable
until July 1, 2005.
(g) Represents a Sterling Credit Agreement, which consists of a term loan of
$1.2 billion with an interest rate of 6.554% and four Tranche B Revolvers in
the total amount of $384 million with interest rates ranging from 4.041% to
7.134% at December 31, 1999. Interest rate swaps in place at December 31,
1999 convert a portion of the borrowings under the Sterling Credit Agreement
to fixed rates, with notional amounts of (Pounds)400 million ($647 million)
maturing 2001 at an average rate of 6.71% and (Pounds)400 million ($647
million) maturing in 2008 at an average rate of 6.45%.
(h) The notes are mandatorily putable to a dealer for remarketing on October 15,
2001. TXU Corp. will be required to repurchase the notes in the event they
are not remarketed.
(i) Equity-linked securities consist of senior notes initially sold with
purchase contracts under which the holder will purchase from TXU Corp. on
settlement dates in 2001 and 2002, a number of its shares of common stock
equal to a specified rate (based on a formula using the market price of TXU
Corp.'s common stock). TXU Corp. has 50 million authorized shares of serial
preference stock having a par value of $25 per share, none of which has been
issued.
A-41
<PAGE>
TXU Electric's first mortgage bonds are secured by a mortgage and deed of
trust with a major financial institution. Electric plant of TXU Electric is
generally subject to the lien of its mortgage. Certain variable rate debt of
TXU Electric requires periodic remarketing. Because TXU Electric intends to
remarket these obligations, and has the ability to refinance if necessary, they
have been classified as long-term debt.
TXU Corp. has an interest rate swap on $125 million of its Floating Rate
Senior Notes maturing in 2000 that converts the interest rate to a fixed rate of
4.55%.
Europe -- The Sterling Credit Agreement, as amended in March 1999, provides
------
for borrowings of up to (Pounds)1.275 billion ($2.1 billion) in various
currencies with interest rates based on the prevailing rates in effect in the
countries in which the borrowings originate. The Sterling Credit Agreement has
two facilities: a (Pounds)750 million ($1.2 billion) term facility which will
terminate March 2, 2003 and a (Pounds)525 million ($849 million) revolving
credit facility which has a (Pounds)200 ($323 million) million 364-day tranche
(Tranche A - see Note 4) and a (Pounds)325 million ($525 million) tranche
(Tranche B) which terminates March 2, 2003. At December 31, 1999, the Sterling
Credit Agreement had (Pounds)750 million ($1.2 billion) of borrowings
outstanding under the term facility at an interest rate of 6.55% and (Pounds)237
million ($384 million) of borrowings in various currencies outstanding under
Tranche B at a weighted average interest rate of 5.61%.
TXU Europe Limited has various other interest rate swaps in addition to those
described in notes (e) and (g) in the table above on subsidiary borrowings and a
portfolio hedge with notional amounts aggregating (Pounds)408 million ($660
million) to swap floating rate interest to fixed rates. These swaps mature in
2000 through 2008 and have a weighted average fixed rate of 6.47%.
On December 15, 1999, TXU Europe commenced a 2.0 billion euros Euro Medium
Term Note Program. Under the Euro Medium Term Note Program, TXU Europe may from
time to time issue notes on a continuing basis to one or more dealers in a
principal outstanding amount not exceeding 2.0 billion euros. As of December
31, 1999, no notes have been issued under this program.
In May 1999, a subsidiary of TXU Europe issued $1.5 billion of Senior Notes.
Shortly thereafter, TXU Europe entered into various interest rate and currency
swaps that in effect changed the interest rate on the borrowings from fixed to
variable based on LIBOR and fixed the principal amount to be repaid in sterling.
On October 14, 1999, TXU Europe entered into additional swaps that in effect
changed the interest rate on the borrowings to a fixed rate payable in sterling.
In December 1999, the Senior Notes were exchanged in a transaction registered
with the US Securities and Exchange Commission for similar Senior Notes that
could be traded publicly in US markets.
Australia -- At December 31, 1999, TXU Australia had a A$1.1 billion ($716
---------
million) Senior Acquisition Facility with a group of banking institutions, and
TXU Australia and Eastern Energy had a A$413 million ($269 million)
Subordinated Acquisition Facility with a banking institution to fund the
acquisition of Westar/Kinetik Energy. The Senior Acquisition Facility is
composed of a A$275 million ($179 million) short-term facility (Tranche A- see
Note 4); a A$220 million ($143 million) revolving cash advance facility (Tranche
B); and a A$605 million ($394 million) term facility (Tranche C). In February
2000, Tranche A was extended to December 29, 2000 and the expiration of Tranche
B and Tranche C were extended to February 24, 2002. The Subordinated Acquisition
Facility expires June 30, 2000 (see Note 4). As of December 31, 1999, there was
A$1.5 billion ($984 million) outstanding under these facilities.
At December 31, 1999, TXU Australia had interest rate swaps denominated in
Australian dollars with an aggregate notional amount of A$2.3 billion ($1.5
billion) to swap floating rate interest to fixed rates at a weighted average
fixed rate of 6.34%. In addition, TXU Australia had interest rate swaps
denominated in US dollars with notional amounts of $250 million maturing in 2006
and $100 million maturing in 2016 to swap fixed rate interest to floating rates
(6.55% at December 31, 1999).
A-42
<PAGE>
Sinking fund and maturity requirements for the years 2000 through 2004 under
long-term debt instruments in effect at December 31, 1999, were as follows:
Year
----
2000...................................... $1,288
2001...................................... 2,558
2002...................................... 1,427
2003...................................... 2,513
2004...................................... 1,496
6. TXU CORP. OR SUBSIDIARY OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS, EACH HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF TXU CORP. OR RELATED SUBSIDIARY (TRUST SECURITIES)
Statutory business trusts have been established as wholly-owned financing
subsidiaries (Trusts) of TXU Corp., TXU Electric and TXU Gas (parent companies)
for the purposes, in each case, of issuing trust securities and holding Junior
Subordinated Debentures issued by the Trust's parent company (Debentures). TXU
Corp. Capital I and II and TXU Electric Capital I and III Trust Securities have
a liquidation preference of $25 per unit, and TXU Electric Capital IV and V and
TXU Gas Capital I Trust Securities have a liquidation preference of $1,000 per
unit. The only assets of each Trust are Debentures of its parent company having
a principal amount set forth under "Trust Assets" in the table below. The
interest on Trust assets matches the distributions on the Trust Securities.
Each Trust will use interest payments received on the Debentures it holds to
make cash distributions on the Trust Securities it has issued.
The Trust Securities are subject to mandatory redemption upon payment of the
Debentures at maturity or upon redemption. The Debentures are subject to
redemption, in whole or in part at the option of the parent company, at 100% of
their principal amount plus accrued interest, after an initial period during
which they may not be redeemed and at any time upon the occurrence of certain
events. The carrying value of the Trust Securities is increased periodically to
equal the redemption amounts at the mandatory redemption dates with a
corresponding increase in Trust Securities distributions.
A-43
<PAGE>
The statutory business trust subsidiaries of TXU Corp., TXU Electric and TXU
Gas had Trust Securities outstanding, as follows:
<TABLE>
<CAPTION>
Trust Securities Trust Assets Maturity
--------------------------------------------- --------------------- --------
Units (000's) Amount Amount
---------------------- --------------------- ---------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Corp.
- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TXU Corp. Capital I
(7.25% Series).......... 9,200 9,200 -- $ 223 $ 223 $ -- $ 237 $ 237 $ -- 2029
TXU Corp. Capital II
(8.7% Series)........... 6,000 -- -- 145 -- -- 155 -- -- 2034
------ ------ ------ ------ ------ ----- ------ ------ -----
Total TXU Corp...... 15,200 9,200 -- 368 223 -- 392 237 --
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Electric
- -------------
TXU Electric Capital I
(8.25% Series).......... 5,871 5,871 5,871 141 141 141 155 155 155 2030
TXU Electric Capital II
(9.00% Series).......... -- -- 1,991 -- -- 47 -- -- 52 --
TXU Electric Capital III
(8.00% Series).......... 8,000 8,000 8,000 194 194 194 206 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Securities)(a)........... 100 100 100 97 96 98 103 103 103 2037
TXU Electric Capital V
(8.175% Series).......... 400 400 400 392 392 395 412 412 412 2037
------ ------ ------ ------ ------ ----- ------ ------ -----
Total TXU Electric.. 14,371 14,371 16,362 824 823 875 876 876 928
------ ------ ------ ------ ------ ----- ------ ------ -----
TXU Gas
- -------
TXU Gas Capital I
(Floating Rate Trust
Securities)(b)............. 150 150 -- 147 146 -- 155 155 -- 2028
------ ------ ------ ------ ------ ----- ------ ------ -----
Total................ 29,721 23,721 16,362 $1,339 $1,192 $ 875 $1,423 $1,268 $ 928
====== ====== ====== ====== ====== ===== ====== ====== =====
</TABLE>
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring 2002, effectively fixes the rate on the TXU Electric
Capital IV securities at 7.183%.
(b) Interest rate swaps effectively fix the rate on $100 million of the TXU Gas
Floating Rate Trust Securities at 6.629% and at 6.444% on the remaining $50
million of the Trust Securities to July 1, 2003.
Each parent company owns the trust securities issued by its subsidiary trust
and has effectively issued a full and unconditional guarantee of such trust's
securities.
A-44
<PAGE>
7. PREFERRED STOCK OF SUBSIDIARIES OF TXU CORP.
<TABLE>
<CAPTION>
Shares Outstanding Amount Redemption Price Per Share
Dividend Rate December 31, December 31, December 31, 1999
- ------------- ------------------- ------------------ ---------------------------
1999 1998 1999 1998
------- ------- ------ ------
Thousands of Shares
Not Subject to Mandatory Redemption:
- ------------------------------------
TXU Electric (cumulative, without par value, entitled upon liquidation to $100 a share: authorized 17,000,000 shares)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.00 to $5.08 series............... 379 379 $ 38 $ 38 $101.79 to $112.00
7.98 series....................... 261 261 26 26 (b)
7.50 series (a)................... 308 308 30 30 (b)
7.22 series (a)................... 221 221 21 21 (b)
----- ----- ----- -----
Total....................... 1,169 1,169 115 115
----- ----- ----- -----
TXU Gas (entitled upon liquidation to stated value per share; authorized 2,000,000 shares)
- ------------------------------------------------------------------------------------------
Adjustable Rate Preferred Stock:....
Series F (c)...................... 75 75 75 75 1,000.00
----- ----- ----- -----
Total........................ 1,244 1,244 $ 190 $ 190
===== ===== ===== =====
TXU Electric -- Subject to Mandatory Redemption (d)
- ---------------------------------------------------
$6.98 series........................ 107 107 $ 11 $ 11 (b)
6.375 series...................... 100 100 10 10 (b)
----- ----- ----- -----
Total........................ 207 207 $ 21 $ 21
===== ===== ===== =====
</TABLE>
- ------------------------------------
(a) The preferred stock series is the underlying preferred stock for depositary
shares that were issued to the public. Each depositary share represents one
quarter of a share of underlying preferred stock.
(b) Preferred stock series is not redeemable at December 31, 1999.
(c) Stated value $1,000 per share. The preferred stock series is the underlying
preferred stock for depositary shares that were issued to the public. Each
depositary share represents one-fortieth of a share for ($25 per share).
Dividend rates are determined quarterly, in advance, based on certain US
Treasury rates. At December 31, 1999, the Series F bears a dividend rate of
5.42%.
(d) TXU Electric is required to redeem at a price of $100 per share plus
accumulated dividends a specified minimum number of shares annually or semi-
annually on the initial/next dates shown below. These redeemable shares may
be called, purchased or otherwise acquired. Certain issues may not be
redeemed at the option of TXU Electric prior to 2003. TXU Electric may
annually call for redemption, at its option, an aggregate of up to twice the
number of shares shown below for each series at a price of $100 per share
plus accumulated dividends.
Minimum Redeemable Initial/Next Date of
Series Shares Mandatory Redemption
------- ----------------- --------------------
$ 6.98 50,000 annually July 1, 2003
6.375 50,000 annually October 1, 2003
The carrying value of preferred stock subject to mandatory redemption is
being increased periodically to equal the redemption amounts at the mandatory
redemption dates with a corresponding increase in preferred stock dividends.
A-45
<PAGE>
8. COMMON STOCK EQUITY
TXU Corp. has a Direct Stock Purchase and Dividend Reinvestment Plan (DRIP),
an Employee's Thrift Plan of the Texas Utilities Company System (Thrift Plan)
and an Employee Stock Purchase and Savings Plan of ENSERCH (EN$AVE). During the
last three years, most of the requirements under the DRIP, Thrift Plan and
EN$AVE plans have been met through open market purchases of TXU Corp.'s common
stock. In 1998, approximately $8 million in common stock of TXU Corp. was
issued to the plans. No amounts of common stock were issued to the plans in
1999.
At December 31, 1999, the Thrift Plan had an obligation of $249 million
outstanding in the form of a note, which TXU Corp. purchased from the original
third-party lender and recorded as a reduction to common equity. At December 31,
1999, the Thrift Plan trustee held 4,902,009 shares of common stock (LESOP
Shares) of TXU Corp. under the leveraged employee stock ownership provision of
the Thrift Plan. LESOP Shares are held by the trustee until allocated to Thrift
Plan participants when required to meet TXU Corp.'s obligations under terms of
the Thrift Plan. The Thrift Plan uses dividends on the LESOP Shares held and
contributions from TXU Corp., if required, to repay interest and principal on
the note. Common stock equity increases at such time as LESOP Shares are
allocated to participants' accounts although shares of common stock outstanding
include unallocated LESOP Shares held by the trustee. Allocations to
participants' accounts in each of the years 1999, 1998, and 1997 increased
common stock equity by $8 million each year.
The Long-Term Incentive Compensation Plan is a comprehensive, stock-based
incentive compensation plan, providing for discretionary awards (Awards) of
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units,
bonus stock and other stock-based awards. The maximum number of shares of
common stock for which Awards may be granted under the plan is 2,500,000.
During 1999, 1998 and 1997, the Board of Directors authorized the award of
208,200, 68,000 and 61,000 shares, respectively, of restricted common stock,
which were issued subject to performance and vesting requirements over a three-
to five-year period.
TXU Europe offers a Long-Term Incentive Plan, a Sharesave and a Loyalty Award
Plan to eligible UK-based employees. TXU Corp. applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its employee
share plans. Compensation costs recorded for these plans was $15 million, $3
million and $344 thousand in 1999, 1998 and 1997, respectively. Had
compensation costs been determined based on SFAS 123, there would have been no
significant difference in the compensation expense recognized.
Effective with the Merger of TXU Gas with TXU Corp., outstanding options for
TXU Gas common stock were exchanged for options for 532,913 shares of TXU
Corp.'s common stock exercisable at prices ranging from $7.03 to $37.71 per
share, and TXU Gas was precluded from awarding further options. The estimated
fair value of these options of $3.2 million was accounted for as a part of the
cost of the acquisition. At December 31, 1999, 218,046 of these options
remained outstanding and exercisable.
At December 31, 1999, 31,331,993 shares of the authorized but unissued common
stock of TXU Corp. were reserved for issuance and sale pursuant to the above
plans, for equity-linked securities and for other purposes.
During 1999, TXU Corp.'s Board of Directors increased the common stock
repurchase limit to $1.6 billion, of which $478 million had been used as of
December 31, 1999 to purchase and retire a total of 11,953,751 shares of TXU
Corp.'s issued and outstanding common stock during the four years then ended.
The cost of the repurchased shares, to the extent it exceeded the estimated
amount received upon their original issuance, has been charged to retained
earnings.
A-46
<PAGE>
At December 31, 1999, TXU Corp. had two equity purchase agreements with
separate financial institutions to purchase up to $200 million each of TXU
Corp.'s common stock. The timing and amount of these purchases are made at the
direction of management. The repurchase price is the weighted average price per
share the financial institutions paid plus commissions and interest. The
agreements expire in November and December 2000.
TXU Corp. has 50 million authorized shares of serial preference stock having
a par value of $25 per share, none of which has been issued.
Shareholders Rights Plan -- On February 19, 1999, the Board of Directors
adopted a shareholder rights plan pursuant to which shareholders were granted
rights to purchase one one-hundreth of a share of Series A Preference Stock
(Rights) for each share of TXU Corp.'s common stock held.
In the event that any person acquires more than 15% of TXU Corp.'s
outstanding common stock, the Right becomes exercisable, entitling each holder
(other than the acquiring person or group) to purchase that number of shares of
securities or other property of TXU Corp. having a market value equal to two
times the exercise price of the Right. If TXU Corp. were acquired in a merger
or other business combination, each Right would entitle its holder to purchase a
number of the acquiring company's common shares having a market value of two
times the exercise price of the Right. In either case, TXU Corp.'s Board of
Directors may choose to redeem the Rights before they become exercisable. TXU
Corp.'s Board declared a dividend of one Right for each outstanding share of
Common Stock. Rights were distributed to shareholders of record on March 1,
1999.
9. INCOME TAXES
The components of TXU Corp.'s provisions for income taxes are as follows:
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Current:
US Federal...................................... $ 110 $ 174 $ 182
State........................................... 17 29 40
Non-US.......................................... 19 72 --
----- ----- -----
Total......................................... 146 275 222
----- ----- -----
Deferred:
US Federal...................................... 170 208 175
State........................................... 18 1 (17)
Non-US.......................................... 138 65 20
----- ----- -----
Total......................................... 326 274 178
----- ----- -----
Investment tax credits............................ (23) (23) (23)
----- ----- -----
Total......................................... $ 449 $ 526 $ 377
===== ===== =====
A-47
<PAGE>
Reconciliation of income taxes computed at the federal statutory rate to
provision for income taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Income before income taxes:
Domestic.................................................. $1,016 $ 951 $1,002
Non-US.................................................... 418 315 35
------ ------ ------
Total............................................... 1,434 1,266 1,037
Preferred stock dividends of subsidiaries................. 14 16 28
------ ------ ------
Income before preferred stock dividends of subsidiaries... $1,448 $1,282 $1,065
====== ====== ======
Income taxes at the US federal statutory rate of 35%............ $ 507 $ 449 $ 373
Depletion allowance....................................... (25) (24) (22)
Amortization of investment tax credits.................... (23) (23) (23)
Amortization of tax rate difference....................... (7) (5) (7)
Allowance for funds used during construction.............. (2) (2) (2)
Amortization of prior flow-through amounts................ 2 66 37
State income taxes, net of federal tax benefit............ 22 19 15
Amortization of goodwill.................................. 55 43 7
Foreign tax credit........................................ (31) -- --
Foreign tax rate differences.............................. (21) (10) --
Valuation allowance reversal.............................. (10) -- --
Other..................................................... (18) 13 (1)
------ ------ ------
Provision for income taxes...................................... $ 449 $ 526 $ 377
====== ====== ======
Effective tax rate (on income before preferred stock dividends
of subsidiaries)........................................... 31% 41% 35%
</TABLE>
TXU Corp. had net tax benefits from LESOP dividend deductions of $4.1
million, $3.7 million and $3.9 million in 1999, 1998 and 1997, respectively,
which were credited directly to retained earnings.
A-48
<PAGE>
The components of TXU Corp.'s deferred tax assets and deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Total Current Noncurrent Total Current Noncurrent
------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Deferred Tax Assets
Unbilled revenues......................... $ 31 $ 31 $ -- $ 30 $ 30 $ --
Over/(under)-recovered fuel revenue....... (14) (14) -- 18 18 --
Unamortized investment tax credits........ 280 -- 280 293 -- 293
Impairment of assets...................... 76 -- 76 76 -- 76
Regulatory disallowance................... 120 -- 120 152 -- 152
Alternative minimum tax................... 639 -- 639 594 -- 594
Tax rate differences...................... 72 -- 72 62 -- 62
Employee benefits......................... 212 17 195 158 4 154
Net operating loss carryforwards.......... 109 14 95 147 -- 147
Mitigation and redirected depreciation.... 66 -- 66 -- -- --
Foreign tax loss carryforwards............ 119 -- 119 83 -- 83
Deferred benefits of state income taxes... 194 5 189 184 11 173
Leased assets............................. 506 -- 506 584 -- 584
Valuation allowance....................... (262) -- (262) (238) -- (238)
Other..................................... 300 15 285 338 25 313
Deferred state income taxes............... 68 2 66 61 5 56
------ ---- ------ ------ ---- ------
Total............................... 2,516 70 2,446 2,542 93 2,449
------ ---- ------ ------ ---- ------
Deferred Tax Liabilities
Depreciation differences and capitalized
construction costs.................... 4,943 -- 4,943 4,818 -- 4,818
Redemption of long-term debt.............. 136 -- 136 134 -- 134
Sale of partnership....................... 92 92 -- -- -- --
Recoverable redirected depreciation....... 51 -- 51 -- -- --
Deferred charges for state income taxes... 26 -- 26 22 -- 22
Unbilled income........................... 27 27 -- 17 17 --
Leased assets............................. 488 -- 488 553 -- 553
Other..................................... 375 9 366 301 -- 301
Deferred state income taxes............... 374 -- 374 339 -- 339
------ ---- ------ ------ ---- ------
Total............................... 6,512 128 6,384 6,184 17 6,167
------ ---- ------ ------ ---- ------
Net Deferred Tax Liability (Asset)........ $3,996 $ 58 $3,938 $3,642 $(76) $ 3,718
====== ==== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Net Net Net Net Net Net
Current Current Noncurrent Current Current Noncurrent
Asset Liability Liability Asset Liability Liability
------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Summary of Deferred Income Taxes
US Federal.................... $ -- $ 42 $ 2,889 $83 $ -- $ 2,876
State......................... 2 -- 309 5 -- 283
United Kingdom................ -- -- 660 -- -- 531
Australia..................... -- 11 80 -- 12 28
Mexico........................ -- 7 -- -- -- --
------- ------- ------- ------- --------- -------
Total.................... $ 2 $ 60 $ 3,938 $88 $ 12 $ 3,718
======= ======= ======= ======= ========= =======
</TABLE>
A-49
<PAGE>
At December 31, 1999, TXU Corp. had $639 million of alternative minimum tax
credit carryforwards available to offset future tax payments. At December 31,
1999, TXU Gas had pre-merger net operating loss (NOL) carryforwards of $319
million that begin to expire in 2003. The NOL's can be used to offset future
taxable income. Due to a 1999 change in Internal Revenue Service (IRS)
regulations, TXU Gas fully expects to utilize all such NOL's prior to their
expiration date. Accordingly, a $10 million deferred tax asset valuation
allowance recorded in 1998 was reversed in 1999. TXU Gas utilized $101 million
of NOL's in 1999. At December 31, 1999, TXU Australia had $342 million and TXU
Europe Group had $51 million of tax loss carryforwards that can be used to
offset future taxable income in their respective jurisdictions. Such tax loss
carryforwards do not have expiration dates. TXU Europe Group has recorded a
valuation allowance of $262 million against the deferred tax assets related to
leased assets.
The IRS is currently auditing the consolidated Federal Income Tax returns
of TXU Corp. for the years 1994 through 1996. In management's opinion, an
adequate provision has been made for any future taxes that may be owed as a
result of this audit.
Separately, the TXU Gas consolidated income tax returns have been audited
and settled with the IRS through 1992. The IRS is currently auditing the years
1993 through 1997 and as yet, no notice of proposed adjustments has been issued.
TXU Gas has reached a tentative agreement with the IRS for the 1993 tax year,
which if approved, is not expected to have a material impact on TXU Corp.'s
financial position or results of operations. To the extent that adjustments to
income tax accounts for periods prior to the Merger are required as a result of
an IRS audit, the adjustment will be added to or deducted from goodwill.
10. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Most US employees are covered by various defined benefit pension plans
which provide benefits based on years of service and average earnings. In
addition, most US employees are eligible for voluntary participation in either
the Employees' Thrift Plan of the Texas Utilities Company System (Thrift Plan)
or the ENSERCH Corporation Employee Stock Purchase and Savings Plan (EN$AVE).
The plans are participant-directed defined contribution combination employee
stock ownership and profit sharing plans under Section 401(k) and 401(m) of the
Internal Revenue Code and are subject to the provisions of the Employee
Retirement Income Security Act of 1974. Under each of the plans, a participant
may invest, through pre-tax salary deferrals or after-tax payroll deductions, a
specified amount ranging from 1% to 16% of regular salary or wages. Employer
matching contributions as a percentage of participant contributions, up to 6% of
base pay, are at a rate of 40%, 50% or 60% depending on length of service.
Contributions to the Thrift Plan and EN$AVE aggregated $15 million for each of
the years ending December 31, 1999, 1998 and 1997.
During 1999, certain US employees were offered and accepted early
retirement and settlement options resulting in curtailment losses and settlement
gains. As a portion of these costs are recoverable, an offsetting regulatory
asset was recorded. Effects of the early retirement options applicable to
regulated business were recorded as regulatory assets.
TXU Europe Group participates in several defined benefit pension plans in
the UK which cover the majority of its employees. The benefits under these plans
are primarily based on years of credited service and final average compensation
levels as defined under the respective plan provisions. In the UK, the majority
of TXU Europe Group employees are members of the Electricity Supply Pension
Scheme (ESPS) which provides pensions of a defined benefit nature for employees
throughout the electricity supply industry. The ESPS operates on the basis that
there is no cross-subsidy between employers, and the financing of TXU Europe's
pension liabilities is, therefore, independent of the experience of other
participating employers. The assets of the ESPS are held in a separate trustee-
administered fund and consist principally of UK and European equities, UK
property holdings and cash. The pension cost relating to the TXU Europe Group
portion of the ESPS is assessed in accordance with the advice
A-50
<PAGE>
of independent qualified actuaries using the projected unit method. The benefits
under these plans are primarily based on years of service and compensation
levels as defined under the respective plan provisions.
TXU Australia sponsors a defined contribution pension plan covering
employees hired after March 31, 1995. Employees may elect to contribute at 0%,
3% or 6% of their salary. TXU Australia's contributions were determined at a
rate of 10% of employees' salaries. TXU Australia sponsors two defined benefit
pension plans covering employees hired prior to March 31, 1995. The plan
benefits are based on the participants' contributions, number of years of
service and final average salaries. Employees may elect to contribute at rates
from 0% to 7.5% of their salaries. TXU Australia's contributions range from 0%
to 9.5% of participants' salaries depending upon the funding ratio of the plan
as calculated in accordance with the plan's contribution rules.
A-51
<PAGE>
The projected benefit obligations and fair value of plan assets for the
pension plans with projected benefit obligations in excess of plan assets were
$31 million and $7 million, respectively, as of December 31, 1999 and $744
million and $718 million, respectively, as of December 31, 1998.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Weighted-average assumptions:
Discount rate.......................................................... 8.25% 7.00% 7.25%
Expected return on plan assets......................................... 9.00% 9.00% 9.00%
Rate of compensation increase.......................................... 4.30% 4.30% 4.30%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Components of Net Pension Costs:
Service cost........................................................... $ 70 $ 53 $ 37
Interest cost.......................................................... 203 163 94
Expected return on assets.............................................. (252) (205) (107)
Amortization of unrecognized net transition asset...................... (1) (1) (1)
Amortization of unrecognized prior service cost........................ 4 4 4
Amortization of net gain............................................... -- (5) (5)
Recognized settlement gains............................................ (41) -- (30)
Recognized termination benefits loss................................... 60 -- 34
----- ----- -----
Net periodic pension cost.......................................... $ 43 $ 9 $ 26
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Change in Pension Obligation:
<S> <C> <C>
Pension obligation at beginning of year................................ $ 3,331 $1,576
Service cost....................................................... 70 53
Interest cost...................................................... 203 163
Participant contributions.......................................... 18 10
Plan amendments.................................................... 31 12
Net transfer of obligations to other plans......................... (5) --
Actuarial (gain)/loss.............................................. (334) 193
Acquisitions....................................................... 22 1,429
Benefits paid...................................................... (176) (133)
Curtailments....................................................... 10 --
Settlements........................................................ (164) --
Special termination benefits....................................... 77 --
Currency exchange rate changes..................................... (33) 25
Other.............................................................. -- 3
------- -------
Pension obligation at end of year...................................... $ 3,050 $ 3,331
======= =======
Change in Plan Assets:
Fair value of assets at beginning of year.............................. $ 3,782 $ 1,794
Actual return on assets............................................ 349 188
Acquisitions....................................................... 25 1,832
Employer contributions............................................. 54 57
Participant contributions.......................................... 18 10
Net transfer of assets to other plans.............................. (5) --
Benefits paid...................................................... (175) (133)
Settlements........................................................ (159) --
Currency exchange rate changes..................................... (37) 34
------- -------
Fair value of assets at end of year.................................... $ 3,852 $ 3,782
======= =======
Funded Status:
Pension obligation..................................................... $(3,050) $(3,331)
Fair value of assets................................................... 3,852 3,782
Unrecognized net transition asset...................................... (3) (4)
Unrecognized prior service cost........................................ 56 42
Unrecognized net gain.................................................. (593) (199)
------- -------
(Accrued)/prepaid pension cost......................................... $ 262 $ 290
======= =======
Amounts Recognized in the Statement of Financial Position Consist of:
Prepaid pension cost................................................... $ 413 $ 433
Accrued benefit liability.............................................. (157) (151)
Intangible asset....................................................... 1 2
Accumulated other comprehensive income................................. 3 6
Accumulated deferred income taxes...................................... 2 --
------- -------
Net amount recognized............................................... $ 262 $ 290
======= =======
</TABLE>
A-52
<PAGE>
In addition to the retirement plans, the US subsidiaries offer certain health
care and life insurance benefits to substantially all of their employees and
their eligible dependents at retirement. Benefits received vary in level
depending on years of service and retirement dates.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
Weighted-average assumptions:
<S> <C> <C> <C>
Discount rate............................................. 8.25% 7.00% 7.25%
Expected return on plan assets............................ 8.49% 8.13% 7.50%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Components of Net Periodic Postretirement Benefit Costs:
Service cost.............................................. $ 24 $ 19 $ 12
Interest cost............................................. 47 42 43
Expected return on assets................................. (12) (10) (8)
Amortization of unrecognized net transition obligation.... 10 16 17
Amortization of unrecognized prior service cost........... 2 2 --
Amortization of net loss.................................. 5 2 2
Recognized curtailment loss............................... 24 -- 10
----- ----- -----
Net postretirement benefit cost...................... $ 100 $ 71 $ 76
===== ===== =====
Change in Postretirement Benefit Obligation:
Benefit obligation at beginning of year................... $ 702 $ 591
Service cost.......................................... 24 19
Interest cost......................................... 47 42
Participant contributions............................. 4 6
Actuarial (gain)/loss................................. (132) 83
Benefits paid......................................... (44) (39)
Curtailments.......................................... 19 --
----- -----
Benefit obligation at end of year......................... $ 620 $ 702
===== =====
Change in Plan Assets:
Fair value of assets at beginning of year................. $ 145 $ 112
Actual return on assets............................... 19 18
Employer contributions................................ 42 42
Participant contributions............................. 3 3
Benefits paid......................................... (32) (30)
----- -----
Fair value of assets at end of year....................... $ 177 $ 145
===== =====
Funded Status:
Benefit obligation........................................ $(620) $(702)
Fair value of assets...................................... 177 145
Unrecognized transition obligation........................ 130 146
Unrecognized prior service cost........................... 16 17
Unrecognized net (gain)/loss.............................. (4) 139
----- -----
Accrued postretirement benefit cost....................... $(301) $(255)
===== =====
</TABLE>
A-53
<PAGE>
The expected increase in costs of future benefits covered by the
postretirement benefit plans is projected using a health care cost trend
rate of 5% in 2000 and thereafter. A one percentage point increase in the
assumed health care cost trend rate in each future year would increase the
accumulated postretirement benefit obligation at December 31, 1999 by
approximately $64 million and other postretirement benefits cost for 1999 by
approximately $9.6 million.
11. DERIVATIVE INSTRUMENTS
TXU Corp. and its subsidiaries enter into derivative instruments,
including options, swaps, futures, forwards and other contractual commitments
for both non-trading and trading purposes. TXU Corp. and its domestic and
international subsidiaries enter into derivative instruments for non-trading
purposes in order to manage market risks related to changes in interest rates,
foreign currency exchange rates and commodity prices. Gains and losses on non-
trading derivative instruments effective as hedges are deferred and recorded as
a component of the underlying transaction when settled. TXU Corp. also enters
into derivative instruments and other contractual commitments for trading
purposes through its subsidiaries TXU Energy Trading, TXU Europe Energy Trading
and TXU Australia. Contracts entered into for trading purposes are recorded on a
mark-to-market basis with gains and losses recognized in earnings in the period
in which such valuation changes occur.
Non-Trading
Interest Rate Risk Management -- TXU Corp. and its subsidiaries enter into
interest rate swaps to manage exposures to the market risk inherent in fixed
rate debt securities and the cash flow risk inherent in variable rate
securities. The terms of each swap and the underlying hedged security are in
Notes 5 and 6.
Foreign Currency Risk Management -- TXU Corp. has exposure to foreign
currency risks, primarily with the pound sterling and the Australian dollar. TXU
Europe and TXU Australia have accessed the US capital markets and issued dollar
denominated obligations. TXU Corp. and its subsidiaries enter into currency
swaps, options and forwards, where appropriate, to manage foreign currency
exposures.
TXU Europe has entered into swaps in respect to the principal and semi-
annual interest payments on $500 million of bonds to swap from dollars to pounds
sterling. For the principal payments, TXU Europe entered into a forward foreign
currency contract to acquire $200 million and $300 million in October 2017 and
October 2027, respectively, for approximately (Pounds)218 million ($352
million). A foreign currency gain of (Pounds)92 million ($148 million) was
deferred at December 31, 1999. For interest payments on the $200 million 7.425%
notes due 2017 and the $300 million 7.55% notes due 2027, the contract sets the
exchange rate between pounds sterling and dollars at $1.605 and $1.6245,
respectively.
TXU Europe has entered into currency swaps that fix the $1.5 billion
principal amount and interest payments of the Senior Notes to be repaid in
pounds sterling at a weighted-average exchange rate between pounds sterling and
US dollars at $1.629.
TXU Australia maintains cross currency swaps for its US dollar denominated
debt. These swaps mature in December 2006 and December 2016 for $250 million
and $100 million, respectively. The maturity of these swaps coincides with the
maturity of the US dollar denominated debt.
Energy Price Risk Management -- In the UK and Australia, electricity prices
are established through power pools which are controlled through an agreement
with the licensed generators and suppliers in the case of the UK, or by a
statutory, independent corporation in the case of Australia. In both cases,
substantially all power must be sold into and purchased from the pools. In
order to manage the exposure to fluctuations in electricity pool prices, TXU
Europe and TXU Australia enter into both short- and long-term derivative
instruments whereby the pool price is fixed for an agreed-upon quantity and
duration by reference to an agreed-upon strike price. In the US, as a result
A-54
<PAGE>
of continued regulation, TXU Electric and TXU Gas have minimal exposure to
energy price risk, therefore, their use of derivative instruments is limited.
At December 31, 1999, TXU Europe had non-trading derivative contracts
(including "virtual power station" agreements) outstanding covering 142 terawatt
hours (TWh), expiring from 2000 to 2010. Net gains (losses) are deferred under
these contracts until settled. TXU Europe's "virtual power station" agreements
with third parties, provide for a variety of payments based on a notional plant
capacity, fuel consumption and operating expenses in exchange for the receipt of
cash payments based on future pool prices and a notional output.
TXU Australia has entered into wholesale market contracts to cover most of
its forecasted load through the end of 2000. At December 31, 1999, these
contracts cover a notional volume of approximately 4.3 million MWh for the
period from January 2000 through 2001. Short-term contracts outstanding at
December 31, 1999 covered approximately 4.1 million MWh. Net losses deferred
under these contracts at December 31, 1999 were A$57 million ($37 million).
Trading
TXU Corp. has continued to position itself to provide comprehensive energy
products and services to a diversified client base in the US, Europe and
Australia. In the US, TXU Energy Trading continues to engage in price and basis
risk management activities, involving the purchase and sale of physical
commodities, and enters into futures contracts, forward commitments, swap
agreements with net settlement, exchange traded options, over-the-counter
options which are net settled or physically settled, exchange-of-futures-for
physical transactions, energy exchange transactions, storage activities, and
other contractual arrangements. In 1999, TXU Europe and TXU Australia began
offering price risk management services to customers through a variety of
financial and other instruments including contracts for differences (swaps),
virtual power stations, written options and forward contracts. These
transactions are primarily conducted with retail end-users, established energy
companies and major financial institutions.
The trading subsidiaries all manage the market risk on a portfolio basis
within limitations imposed by their respective Boards of Directors and in
accordance with TXU Corp.'s overall risk management policies. Market risks are
monitored daily, utilizing appropriate mark-to-market methodologies, which value
the portfolio of contracts and the hypothetical effect on this value from
changes in market conditions. Each entity uses various techniques and
methodologies that simulate forward price curves in their respective markets to
estimate the size and probability of changes in market value resulting from
price movements. These techniques include, but are not limited to, sensitivity
analyses. The use of these methodologies requires a number of key assumptions
including the selection of confidence levels, the holding period of the
positions, and the depth and applicability to future periods of historical price
information.
The portfolio subjects the entities to a number of risks and costs associated
with the future contractual commitments, including price risk, credit risk
associated with counter parties, product location (basis) differentials, market
liquidity. Each entity continuously monitors the valuation of identified risks
and adjusts the portfolio valuation based on present market conditions.
Reserves are established in recognition that certain risks exist until delivery
of energy has occurred, counterparties have fulfilled their financial
commitments and related financial instruments mature or are closed out. Price
and credit risk are further managed through the established trading policies and
limits for each trading entity which are evaluated on a daily basis.
US -- The exposure of fixed price natural gas and electric power purchase and
sale commitments, and derivative financial instruments, including options,
swaps, futures and other contractual commitments, is based on a methodology that
uses a five-day holding period and a 95% confidence level. The notional amounts
and terms of the portfolio as of December 31, 1999 included financial
instruments that provide for fixed price receipts of 2,406 trillion British
thermal units equivalent (Tbtue) and fixed price payments of 2,836 Tbtue, with a
maximum term of
A-55
<PAGE>
seven years. Additionally, sales and purchases commitments totaling 1,129 Tbtue,
with terms extending up to nine years, are included in the portfolio as of
December 31, 1999.
Europe -- At December 31, 1999, the outstanding notional quantity of
commodity instruments under contracts held for trading purposes was 118 TWh of
electricity for periods to 2015. In the gas retail business, TXU Europe is
subject to fluctuations in the gas spot market as it sells gas, primarily at
fixed prices, and manages the demand through a portfolio of gas purchase
contracts. This risk is also managed through the use of derivative instruments
including swaps and futures. There were no swaps or futures outstanding at
December 31, 1999. At December 31, 1999, TXU Europe had instruments outstanding
covering approximately 134 Bcf, expiring in 2003.
Australia -- At December 31, 1999, the outstanding notional quantity of
commodity instruments under contracts held for trading purposes was 209 GWh of
electricity for periods to 2002.
The fair value of open positions expiring within one year is included within
Risk Management Assets and Liabilities on the balance sheet, and the long-term
portion is included within Other Assets and Liabilities. Gross revenue and
expenses from physically settled transactions are included within Operating
Revenues and Operating Expenses, respectively. Financially settled
transactions along with unrealized gains and losses from changes in the fair
value of the open positions are included within Operating Revenues on a net
basis.
The following table displays the mark-to-market values of the energy trading
risk management assets and liabilities:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------ -------------------------------
Assets Liabities Net Assets Liabilities Net
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Fair Value:
Current........................ $628 $525 $103 $832 $838 $ (6)
Noncurrent..................... 151 12 139 128 93 35
---- ---- ---- ---- ---- ---
Total.................... $779 $537 242 $960 $931 29
==== ==== ==== ====
Less reserves.................. 9 7
---- ---
Net of reserves.......... $233 $ 22
==== ===
Average Value For Year:
Total.......................... $648 $510 $138 $656 $617 $ 39
==== ==== ==== ====
Less reserves.................. 9 7
---- ---
Net of reserves.......... $129 $ 32
==== ===
</TABLE>
TXU Corp. recorded net trading gains of $9 million, $38 million, and $2
million at TXU Energy Trading, TXU Europe and TXU Australia, respectively, in
1999. In 1998, TXU Energy Trading recorded a net trading gain of $46 million,
while TXU Europe and TXU Australia had no trading activity.
Credit Risk -- Credit risk relates to the risk of loss that TXU Corp. would
incur as a result of nonperformance by counterparties. TXU Corp. maintains
credit policies with regard to its counterparties that management believes
significantly minimize overall credit risk. TXU Corp. generally does not
obtain collateral to support the agreements but establishes credit limits and
monitors the financial viability of counterparties. In the event a
counterparty's credit rating declines, TXU Corp. may apply certain remedies, if
considered necessary. TXU Corp. believes the risk of nonperformance by
counterparties is minimal.
A-56
<PAGE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of TXU Corp.'s
significant financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
On balance sheet assets (liabilities):
Long-term debt (including current maturities)*........................ $(16,641) $(15,638) $(15,332) $(15,926)
TXU Corp. or subsidiary obligated, mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely junior
subordinated debentures of TXU Corp. or related subsidiary....... (1,339) (1,212) (1,192) (1,236)
Preferred stock of subsidiary subject to mandatory redemption......... (21) (21) (21) (21)
LESOP note receivable................................................. 249 265 250 302
Off balance sheet assets (liabilities):
Financial guarantees.................................................. -- (623) -- (432)
Interest rate swaps................................................... -- (69) -- (86)
Currency swaps and forwards........................................... -- (7) -- (4)
Gas swaps............................................................. -- -- -- (3)
Contracts for differences, electricity forward agreements
and other energy contracts........................................ -- 139 -- 101
</TABLE>
*Excludes capital leases.
The fair values of long-term debt and preferred stock subject to mandatory
redemption are estimated at the lesser of either the call price or the market
value as determined by quoted market prices, where available, or, where not
available, at the present value of future cash flows discounted at rates
consistent with comparable maturities with similar credit risk. The fair value
of trust securities is based on quoted market prices. The carrying amounts for
financial assets classified as current assets and the carrying amounts for
financial liabilities classified as current liabilities approximate fair value
due to the short maturity of such instruments.
Other investments, primarily include deposits in an external trust fund for
nuclear decommissioning of Comanche Peak, which is carried at market value, and
restricted cash held as collateral for certain leases, for which the carrying
value approximates the fair value due to the short maturity of these
instruments. The trust fund is invested primarily in fixed income debt and
equity securities, which are considered as available-for-sale. Any unrealized
gains or losses are treated as regulatory assets or regulatory liabilities,
respectively.
Common stock -- net has been reduced by the note receivable from the
trustee of the leveraged employee stock ownership provision of the Thrift Plan.
The fair value of such note is estimated at the lesser of TXU Corp.'s call price
or the present value of future cash flows discounted at rates consistent with
comparable maturities adjusted for credit risk.
A-57
<PAGE>
The fair value of the financial guarantees are based on the present value
of the instruments' approximate cash flows discounted at the year-end risk free
rate for issues of comparable maturities adjusted for credit risk. Fair values
for off-balance sheet instruments (interest rate and currency swaps) are based
either on quotes or the cost to terminate the agreements. The fair values of
contracts for differences, electricity forward agreements and other energy
contracts are based upon a discounted cash flow analysis using estimates of
energy forward prices. The fair values of other financial instruments for which
carrying amounts and fair values have not been presented are not materially
different than their related carrying amounts.
13. REGULATION AND RATES
US -- Docket 9300 -- The PUC's final order (Order) in connection with TXU
Electric's January 1990 rate increase request (Docket 9300) was ultimately
reviewed by the Supreme Court of Texas. As a result, an aggregate of $909
million of disallowances with respect to TXU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to TXU Corp.'s earnings, has been remanded to the District Court
with instructions that it be remanded to the PUC for reconsideration on the
basis of a prudent investment standard. On remand, the PUC also was required to
reevaluate the appropriate level of TXU Electric's construction work in progress
included in the rate base in light of its financial condition at the time of the
initial hearing. In connection with the settlement of Docket 18490, proceedings
in the remand of Docket 9300 have been stayed. TXU Electric cannot predict the
outcome of the reconsideration of the Order on remand by the PUC.
Docket 18490 -- The PUC approved the non-unanimous stipulation filed on
December 17, 1997 by TXU Electric, together with the General Counsel of the PUC,
the Office of Public Utility Counsel (OPC) and various other parties interested
in TXU Electric's rates and services. The stipulation, modified to incorporate
changes made by the PUC, resulted in base rate credits beginning January 1,
1998, of 4% for residential customers, 2% for general service secondary
customers and 1% for all other retail customers, and additional base rate
credits for residential customers of 1.4% beginning January 1, 1999. Certain
parties that did not sign the stipulation have appealed the PUC's approval by
filing suit in state district court. TXU Electric cannot predict the outcome of
these appeals.
In accordance with the stipulation, from January 1, 1998 through June 30,
1999, earnings in excess of the earnings cap were recorded as additional
depreciation of nuclear production assets, and a reclassification of
depreciation expense was made from T&D to nuclear production assets. As
discussed in Note 3, application of regulatory accounting principles to the
generation portion of TXU Electric's business was discontinued as of June 30,
1999. Effective July 1, 1999, earnings in excess of the earnings cap imposed by
the 1999 Restructuring Legislation were recorded as a reduction of revenues,
with a corresponding regulatory liability recorded. Upon final PUC
determination, the regulatory liability associated with earnings in excess of
the earnings cap will be applied against TXU Electric's stranded generation
assets as determined under the 1999 Restructuring Legislation's market valuation
criteria or refunded to customers.
Additionally, effective July 1, 1999, TXU Electric ceased the
reclassification of T&D depreciation expense to nuclear production assets.
Instead, an amount equal to T&D depreciation expense for the period was recorded
as a regulatory asset, which will be amortized as it is recovered through the
Distribution portion of the business. An equivalent amount was recorded as a
regulatory liability which will be applied against TXU Electric's stranded
generation assets as determined under the 1999 Restructuring Legislation's
market valuation criteria or refunded to customers.
For 1999, TXU Electric recorded $52 million as additional depreciation of
nuclear production assets and $92 million as a reduction of revenues as a result
of earnings in excess of the earnings cap, compared with $170 million of
additional depreciation of nuclear production assets for the same period in
1998. In addition, depreciation expense of $95 million for the first six months
of 1999 was reclassified from T&D to nuclear production assets and a regulatory
asset of $97 million equivalent to T&D depreciation expense was recorded for the
last half of 1999 according to the accounting treatment discussed above. Also,
$50 million of Transmission redirected depreciation
A-58
<PAGE>
has been reclassified as a regulatory asset to conform with the 1999
Restructuring Legislation. In 1998, depreciation expense of $183 million was
reclassified from T&D to nuclear production assets. Including deferred income
tax effects, mitigation reduced net income by $90 million in 1999 and $143
million in 1998.
Separation Costs -- On or before April 1, 2000, each electric utility must
file with the PUC a separation of its costs into competitive and regulated
components, proposed tariffs for its proposed T&D utility, and an initial
estimate of its generation-related stranded costs.
UK -- The prices that the energy retail business can charge in the ex-
franchise market are subject to a price control formula that sets a maximum
price. On October 8, 1999, OFGEM issued proposed price adjustments for the
electricity supply businesses. The final report of OFGEM was issued at the end
of November 1999, and accepted by TXU Europe Group in December 1999. The supply
price adjustments become effective April 1, 2000. TXU Europe Group's directly
controlled tariffs will be reduced by an average of 7.1% from April 1, 2000 as
required by the new controls, giving rise to an estimated reduction in annual
revenues of approximately (Pounds)15 million ($24 million).
In December 1999, following extensive consultation with the industry, the
Director General of Electricity Supply published new proposals for generation
licenses in order to promote fair competition in the generation and trading of
electricity. The proposals seek to ensure that generators with positions of
significant market power who are able to exert an upward influence on prices in
the pool should ensure that their prices closely reflect their costs and that
they do not take unfair advantage of any imperfections in the operation of the
Pool. The Director General has proposed that these restrictions should cease
one year after the introduction of the New Electricity Trading Arrangement
(NETA). TXU Europe has played an active part in these discussions and accepted
the proposals on February 7, 2000. However, five generators rejected the
proposals and the matter has been referred to the UK competition commission.
TXU Europe does not anticipate that these proposals will have a material adverse
effect on revenues. The implementation of NETA, scheduled for introduction on
October 1, 2000, is also likely to lead to a number of modifications to
generation distribution, and retail electricity licenses.
The rate charged by the networks business in the UK are regulated by a
distribution price control formula. This formula is subject to periodic review
and adjustments. Based on the current distribution price control formula,
future increases in profit by the networks operations will depend upon unit
growth and productivity improvements. In his draft proposals for the
distribution price control review which were released in August 1999, adjusted
in October 1999 and published in final form on December 2, 1999, the regulator
proposed a substantial decrease in distribution prices charged by the networks
business in its service territory. The final proposals for Eastern Electricity
incorporated an initial reduction in allowed revenues for regulated units of 28%
from April 1, 2000 with further annual reductions of 3% per year for the next
four years, adjusted for inflation. The allowed revenues will be calculated
from a formula to be provided by OFGEM in the near future. However, TXU Europe
estimates that the effect on revenues will be a reduction of about (Pounds)73
million ($118 million) for the year ending December 31, 2000 and about
(Pounds)100 million ($162 million) for the year ended December 31, 2001.
A-59
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
Clean Air Act -- The Federal Clean Air Act, as amended (Clean Air Act)
includes provisions which, among other things, place limits on the sulfur
dioxide emissions produced by generating units. TXU Electric's capital
requirements have not been significantly affected by the requirements of the
Clean Air Act.
Purchased Power Contracts --TXU Electric and SESCO have entered into
purchased power contracts to purchase power from utilities and non-
utilities through the year 2005. These contracts provide for capacity payments
subject to performance standards and energy payments based on the actual power
taken under contract. Capacity payments under these contracts for the years
ended December 31, 1999, 1998 and 1997 were $235 million, $247 million and $240
million, respectively.
Assuming operating standards are achieved, future capacity payments under
US Electric segment agreements are estimated as follows:
Year
----
2000.............................................. $210
2001.............................................. 210
2002.............................................. 131
2003.............................................. 77
2004.............................................. 38
Thereafter........................................ 29
----
Total capacity payments........................ $695
====
TXU Europe Energy Trading has various contracts for which capacity payments
are required. Under the terms of these contracts, TXU Europe Energy Trading
will pay annual capacity fees of $348 million for 2000, $371 million for 2001,
$376 million for 2002, $402 million for 2003, $402 million for 2004 and $2.4
billion thereafter. In addition, TXU Europe Group will provide a (Pounds)200
million ($324 million) guarantee (declining over time) representing
approximately one year's capacity payment, with the counterparty providing a
(Pounds)20 million ($32 million) guarantee.
Coal Contracts -- In November 1998, TXU Europe Limited agreed to two coal
purchase agreements with a supplier, supplementing the 12 million tons TXU
Europe Limited had previously contracted to take from said supplier between 1998
and 2001. The first agreement is for 25 million tons in total between 1998 and
2003. The second agreement is for 21 million tons in total between 2003 and
2009. Total committed purchases under these contracts were approximately
(Pounds)1.3 billion ($2.1 billion) at December 31, 1999.
US Gas Purchase Contracts -- TXU Fuel Company and TXU Gas Distribution buy
gas under long-term and short-term intrastate contracts in order to assure
reliable supply to their customers. Many of these contracts require minimum
purchases ("take-or-pay") of gas. TXU Gas Distribution has made accruals for
payments that may be required for settlement of gas-purchase contract claims
asserted or that are probable of assertion. TXU Gas Distribution continually
evaluates its position relative to asserted and unasserted claims, above-market
prices or future commitments. Based on estimated gas demand, which assumes
normal weather conditions, requisite gas purchases of TXU Fuel, TXU Gas
Distribution and TXU Europe Group are expected to substantially satisfy their
purchase obligations for the year 2000 and thereafter.
Europe Gas Take-or-Pay Contracts -- TXU Europe is party to various types of
contracts for the purchase of gas. Almost all include "take-or-pay" obligations
under which the buyer agrees to pay for a minimum quantity of gas in a year. In
order to help meet the expected needs of its wholesale and retail customers, TXU
Europe Limited has entered into a range of gas purchase contracts. At December
31, 1999 the commitments under long-term gas purchase contracts amounted to an
estimated (Pounds)1.1 billion ($1.8 billion) covering periods up to 15 years
forward. Management does not consider it likely, on the basis of TXU Europe's
current expectations of demand from its customers that any material payments
will become due for gas not taken.
A-60
<PAGE>
Leases -- Subsidiaries have entered into operating leases covering various
facilities and properties including generating plants, combustion turbines,
transportation, mining equipment, data processing equipment and office space.
Certain of these leases contain renewal and purchase options and residual value
guarantee. Lease costs charged to operating expense for the years ended
December 31, 1999, 1998 and 1997 were $212 million, $243 million, $157 million,
respectively.
At December 31, 1999, future minimum lease payments under capital leases,
together with the present value of such minimum lease payments, and future
minimum lease commitments under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1999, were
as follows:
Capital Operating
Year Leases Leases
- ---- ------- ---------
2000............................................ $ 89 $ 117
2001............................................ 753 124
2002............................................ 36 112
2003............................................ 34 95
2004............................................ 32 89
Thereafter...................................... 322 472
------ ------
Total future minimum lease payments........ 1,266 $1,009
======
Less amounts representing interest.............. 231
------
Present value of future minimum lease payments.. 1,035
Less current portion............................ 89
------
Long-term capital lease obligation.............. $ 946
======
Substantially all of the capital lease obligations relate to coal-fired
power stations. Additional payments of approximately (Pounds)6 per megawatt hour
(indexed from 1996 prices) linked to output levels from the stations are payable
for the first seven years of their operations by Eastern Electricity (operations
commenced in 1996). In accounting for the acquisition of TEG, a liability for
the estimated probable additional payments linked to output levels for coal-
fired generating stations was established. At December 31, 1999 and 1998, the
balance of the liability of (Pounds)291 million ($471 million) and (Pounds)412
million ($682 million), respectively, is included with capital lease
obligations.
Financial Guarantees --TXU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric
energy and has agreed, in effect, to guarantee the principal, $24 million at
December 31, 1999, and interest on bonds issued to finance the reservoirs from
which the water is supplied. The bonds mature at various dates through 2011 and
have interest rates ranging from 5-1/2% to 7%. TXU Electric is required to make
periodic payments equal to such principal and interest, including amounts
assumed by a third party and reimbursed to TXU Electric, of $4 million
annually for the years 2000 through 2003, and $7 million for 2004. Annual
payments made by TXU Electric, net of amounts assumed by a third party under
such contracts, for 1999, 1998 and 1997 were $4 million each year. In addition,
TXU Electric is obligated to pay certain variable costs of operating and
maintaining the reservoirs. TXU Electric has assigned to a municipality all
contract rights and obligations of TXU Electric in connection with $53
million remaining principal amount of bonds at December 31, 1999, issued for
similar purposes which had previously been guaranteed by TXU Electric. TXU
Electric is, however, contingently liable in the unlikely event of default
by the municipality.
TXU Europe has guaranteed up to (Pounds)68 million ($110 million) at
December 31, 1999 of certain liabilities that may be incurred and payable by the
purchasers of its US and Australian coal business and US energy marketing
operations sold in 1998 (Peabody Sale) with respect to the Peabody Holding
Company Retirement Plan for Salaried Employees, the Powder River Coal Company
Retirement Plan and the Peabody Coal UMWA Retirement Plan, subject to certain
specified conditions.
A-61
<PAGE>
Nuclear Insurance -- With regard to liability coverage, the Price-Anderson
Act (Act) provides financial protection for the public in the event of a
significant nuclear power plant incident. The Act sets the statutory limit of
public liability for a single nuclear incident currently at $9.5 billion and
requires nuclear power plant operators to provide financial protection for this
amount. As required, TXU Electric provides this financial protection for a
nuclear incident at Comanche Peak resulting in public bodily injury and
property damage through a combination of private insurance and industry-wide
retrospective payment plans. As the first layer of financial protection, TXU
Electric has purchased $200 million of liability insurance from American Nuclear
Insurers (ANI), which provides such insurance on behalf of a major stock
insurance company pool, Nuclear Energy Liability Insurance Association. The
second layer of financial protection is provided under an industry-wide
retrospective payment program called Secondary Financial Protection (SFP).
Under the SFP, each operating licensed reactor in the US is subject to an
assessment of up to $88 million, subject to increases for inflation every five
years, in the event of a nuclear incident at any nuclear plant in the US.
Assessments are limited to $10 million per operating licensed reactor per year
per incident. All assessments under the SFP are subject to a 3% insurance
premium tax which is not included in the amounts above.
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.1 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and
stable condition, to decontaminate it pursuant to a plan submitted to and
approved by the NRC before the proceeds can be used for plant repair or
restoration or to provide for premature decommissioning. TXU Electric maintains
nuclear decontamination and property damage insurance for Comanche Peak in the
amount of $4.0 billion, above which TXU Electric is self-insured. The
primary layer of coverage of $500 million is provided by Nuclear Electric
Insurance Limited (NEIL), a nuclear electric utility industry mutual insurance
company. The remaining coverage includes premature decommissioning coverage
and is provided by ANI in the amount of $500 million and additional insurance
from NEIL in the amount of $3.0 billion. TXU Electric is subject to a
maximum annual assessment from NEIL of $13.5 million in the event NEIL's losses
under this type of insurance for major incidents at nuclear plants participating
in these programs exceed the mutual's accumulated funds and reinsurance.
TXU Electric maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than twelve weeks
as a result of covered direct physical damage. The coverage provides for weekly
payments of $3.5 million for the first fifty-two weeks and $2.8 million for the
next 110 weeks for each outage, respectively, after the initial twelve
week-period. The total maximum coverage is $490 million per unit. The coverage
amounts applicable to each unit will be reduced to 80% if both units are out of
service at the same time as a result of the same accident. Under this coverage,
TXU Electric is subject to a maximum annual assessment of $4 million per year.
Nuclear Decommissioning and Disposal of Spent Fuel -- TXU Electric has
established a reserve, charged to depreciation expense and included in
accumulated depreciation, for the decommissioning of Comanche Peak, whereby
decommissioning costs are being recovered from customers over the life of the
plant and deposited in external trust funds (included in other investments). At
December 31, 1999, such reserve totaled $167 million, which includes an
accrual of $18 million for the year ended December 31, 1999. As of December
31, 1999, the market value of deposits in the external trust for
decommissioning of Comanche Peak was $244 million, including unrealized gains
of $78 million. Any difference between the market value of the external
trust fund and the decommissioning reserve, that represents unrealized
gains or losses of the trust fund, is treated as a regulatory asset or a
regulatory liability. Realized earnings on funds deposited in the external
trust are recognized in the reserve. Based on a site-specific study
completed during 1997 using the prompt dismantlement method and 1997
dollars, decommissioning costs for Comanche Peak Unit 1 and for Unit 2 and
common facilities were estimated to be $271 million and $404 million,
respectively.
A-62
<PAGE>
Decommissioning activities are projected to begin in 2030 for Comanche Peak
Unit 1 and 2033 for Unit 2 and common facilities. TXU Electric is
recovering decommissioning costs based upon a 1992 site-specific study through
rates placed in effect under its January 1993 rate increase request. Actual
decommissioning costs are expected to differ from estimates due to changes in
the assumed dates of decommissioning activities, regulatory requirements,
technology and costs of labor, materials and equipment. In addition, the
marketable fixed income debt and equity securities in which assets of the
external trust are invested are subject to interest rate and equity price
sensitivity.
TXU Electric has a contract with the United States Department of Energy (DOE)
for the future disposal of spent nuclear fuel. The DOE has not begun
acceptance of spent nuclear fuel. TXU Electric's onsite spent nuclear fuel
storage capability is sufficient to accommodate the operation of Comanche Peak
through the year 2017, while fully maintaining the capability to off-load the
core of one of the nuclear-fueled generating units. Additional approval from
the NRC will be required to utilize this full storage capability. TXU Electric
is currently pursuing options for utilizing a larger portion of the full storage
capability, subject to approval by the NRC. TXU Electric is unable to predict
what impact, if any, the DOE delay will have on TXU Electric's future
operations. The disposal fee is at a cost to TXU Electric of one mill per
kilowatt-hour of Comanche Peak net generation and is included in nuclear fuel
expense.
UK -- In February 1997, the official government representative of pensioners
in the UK, the Pensions Ombudsman, made a final determination against the
National Grid and its group trustees with respect to complaints by two
pensioners in National Grid's section of the Electricity Supply Pension Scheme
relating to the use of the pension fund surplus resulting from the March 31,
1992 actuarial valuation of the National Grid section to meet certain costs
arising from the payment of pensions on early retirement upon reorganization or
downsizing. These determinations were set aside by the High Court on June 10,
1997, and the arrangements made by National Grid and its group trustees in
dealing with the surplus were confirmed. The two pensioners appealed this
decision, and judgment has now been received. The judgment endorsed the
Pensions Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. National Grid has made an appeal to the
House of Lords, although the case is not likely to be heard until the fourth
quarter of 2000. If a similar complaint were to be made against TXU Europe
Group in relation to its use of actuarial surplus in its section of the
Electricity Supply Pension Scheme, it would vigorously defend the action,
ultimately through the courts. However, if a determination were finally to be
made against it and upheld in the courts, TXU Europe Group could have a
potential liability to repay to its section of the Electricity Supply Pension
Scheme an amount estimated by TXU Europe Group to be up to (Pounds)45 million
($73 million), exclusive of any future applicable interest charges.
A-63
<PAGE>
On January 25, 1999, the Hindustan Development Corporation issued proceedings
in the Arbitral Tribunal in Delhi, India against TEG claiming damages of $413
million for breach of contract following the termination of a Joint Development
Agreement dated March 20, 1997 relating to the construction, development and
operation of a lignite based thermal power plant at Barsingsar, Rajasthan. TXU
Europe Limited is vigorously defending this claim.
In November 1998, five complaints were filed in the High Court of Justice in
London, Queens Bench Division, Commercial Court, against subsidiaries of TXU
Europe Group by five of their former sales agencies. The agencies claim a total
(Pounds)104 million ($168 million) arising from the summary termination for the
claimed fundamental breach of their respective contracts in April 1998. The
five agencies are claiming damages for failure to give reasonable notice and for
compensation under the UK Commercial Agents Regulations 1994. These actions are
all being defended strenuously, and counterclaims have been filed. TXU Europe
Group cannot predict the outcome of these claims and counterclaims.
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the United
States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc., TXU Corp., David W. Biegler,
Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The Gracy
Fund sought to represent a class of certain purchasers of the common stock of
ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, TXU Gas,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and B.
K. Irani and sought to represent a certain class of purchasers of common stock
of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order consolidating the Gracy Fund and the Thorne
suits (Consolidated Action). In January 1999, the Gracy Fund et al. filed an
amended class action complaint in the Consolidated Action against EEX, TXU Gas,
David W. Biegler, Gary J. Junco, Thomas Hamilton, J. Philip McCormick, Fredrick
S. Addy and B. K. Irani. TXU Corp. and Erle Nye were omitted as defendants
pursuant to a tolling agreement. The individual named defendants are current or
former officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions of
the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. No amount of
damages has been specified in the Consolidated Action. Defendants filed a joint
motion to dismiss in March 1999, and discovery has been stayed pending a ruling
on the motion to dismiss. TXU Gas is continuing to evaluate these claims and is
unable at this time to predict the outcome of this proceeding, but intends to
vigorously defend this suit.
General -- In addition to the above, TXU Corp. and other subsidiaries are
involved in various other legal and administrative proceedings which, in the
opinion of each, should not have a material effect upon their financial
position, results of operations or cash flows.
A-64
<PAGE>
15. SEGMENT INFORMATION
TXU Corp.'s five reportable operating segments are strategic business units
that offer different products and services or are geographically integrated.
They are managed separately because each business requires different marketing
strategies or is in a different geographic area.
(1) US Electric - operations involving the generation, purchase,
transmission, distribution and sale of electric energy primarily in the north
central, eastern and western portions of Texas;
(2) US Gas - operations involving the gathering, processing, transmission
and distribution of natural gas and selling of natural gas liquids in Texas;
(3) US Energy Marketing - operations involving purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US and parts of Canada;
(4) Europe - operations involving the generation, purchase, distribution,
marketing and sale of electricity and the purchase and sale of natural gas
primarily in the UK, with additional energy interests throughout the rest of
Europe;
(5) Australia - operations involving the purchase, distribution, trading
and retailing of electricity and natural gas primarily in the State of Victoria,
Australia; and
Other - non-segment operations consisting of telecommunications, retail
energy services, international gas operations, power development and other
energy development activities.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. TXU Corp. evaluates
performance based on net income or loss. TXU Corp. accounts for intersegment
sales and transfers as if the sales or transfers were to third parties, that is,
at current market prices.
A-65
<PAGE>
<TABLE>
<CAPTION>
US
US US Energy All
Electric Gas Marketing Europe Australia Other Eliminations Consolidated
---------- -------- --------- --------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trade Revenues -
1999.......... $ 6,263 $ 838 $2,981 $ 6,090 $ 682 $ 264 $ -- $17,118
1998.......... 6,541 822 3,198 3,601 439 135 -- 14,736
1997.......... 6,176 409 859 -- 489 13 -- 7,946
Affiliated Revenues -
1999.......... -- 39 2 -- -- 338 (379) --
1998.......... -- 42 1 -- -- 337 (380) --
1997.......... -- 19 -- -- -- -- (19) --
Depreciation and
Amortization (Including
Goodwill Amortization) -
1999.......... 650 82 2 421 77 39 -- 1,271
1998.......... 759 75 1 240 43 29 -- 1,147
1997.......... 580 29 1 -- 48 8 -- 666
Equity in Earnings
(Losses) of
Unconsolidated
Subsidiaries -
1999.......... -- (1) -- -- -- (14) -- (15)
1998.......... -- -- -- 4 -- (23) -- (19)
1997.......... -- -- -- -- -- (27) -- (27)
Interest Income -
1999.......... 3 1 1 102 -- 90 (63) 134
1998.......... 3 1 -- 106 -- 114 (85) 139
1997.......... 6 -- -- -- -- 47 (21) 32
Interest Expense and Other
Charges -
1999.......... 518 79 3 563 131 325 (63) 1,556
1998.......... 580 78 2 447 59 300 (85) 1,381
1997.......... 648 35 2 -- 73 115 (21) 852
Income Tax Expense
(Benefit) -
1999.......... 358 (3) (13) 153 (22) (24) -- 449
1998.......... 486 (6) 3 119 25 (101) -- 526
1997.......... 408 5 (6) -- 20 (50) -- 377
Net Income (Loss) -
1999.......... 773 3 (25) 280 6 (52) -- 985
1998.......... 788 (32) 6 140 31 (193) -- 740
1997.......... 748 (2) (12) -- 17 (91) -- 660
Investment in Equity
Investees -
1999.......... -- 1 -- -- -- 16 -- 17
1998.......... -- 4 -- -- -- 161 -- 165
1997.......... -- 6 -- -- -- 145 -- 151
Total Assets -
1999.......... 18,854 2,778 922 14,266 2,999 14,340 (13,418) 40,741
1998.......... 19,028 2,776 1,362 14,332 1,432 13,479 (12,902) 39,507
1997.......... 19,544 2,533 577 -- 1,436 9,242 (8,468) 24,864
Construction Expenditures -
1999.......... 562 153 1 624 171 121 -- 1,632
1998.......... 501 185 2 341 63 76 -- 1,168
1997.......... 450 56 1 -- 49 27 -- 583
</TABLE>
A-66
<PAGE>
16. SUPPLEMENTARY FINANCIAL INFORMATION
Sale of Receivables -- TXU Electric has facilities with financial
institutions whereby it is entitled to sell and such financial institutions may
purchase, on an ongoing basis, undivided interests in customer accounts
receivable representing up to an aggregate of $500 million. TXU Gas has a
similar facility for $100 million. TXU Europe has facilities with a third party
whereby Eastern Electricity may sell up to (Pounds)300 million ($486 million) of
its electricity receivables. Additional receivables are continually sold to
replace those collected. At December 31, 1999 and 1998, accounts receivable of
TXU Electric was reduced by $500 million and $450 million, respectively, and
accounts receivable of TXU Gas were reduced by $100 million to reflect the sales
of such receivables to financial institutions under such agreements. At
December 31, 1999, accounts receivable of Eastern Electricity were reduced by
(Pounds)224 million ($362 million) to reflect the sales of receivables under
this program.
Regulatory Assets and Liabilities --
December 31,
--------------
1999 1998
------ ------
Regulatory Assets
Securities reacquisition costs......................... $ 433 $ 434
Recoverable redirected depreciation.................... 146 --
Rate case costs........................................ 55 54
Litigation and settlement costs........................ 73 73
Voluntary retirement/severance program................ 122 105
Recoverable deferred income taxes -- net............... 1,562 1,624
Other regulatory assets................................ 114 101
------ ------
Total regulatory assets............................ 2,505 2,391
------ ------
Regulatory Liabilities
Liability to be applied to stranded generation assets.. 189 --
ITC and protected excess deferred taxes................ 392 420
Other regulatory liabilities........................... 101 81
Reserve for regulatory disallowances................... 73 73
------ ------
Total regulatory liabilities....................... 755 574
------ ------
Net regulatory assets.............................. $1,750 $1,817
====== ======
Restricted Cash -- At December 31, 1999, $660 million of the deposits
classified with investments has been used to cash-collateralize existing
future obligations of TXU Europe Group to certain banks in respect of the
funding of the leases of three power stations, and $511 million is matched to
lease obligations arising from a leasing arrangement on two other power
stations.
A-67
<PAGE>
Supplemental cash flow information:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
CASH PAYMENTS
Interest (net of amounts capitalized)..................... $1,478 $ 1,206 $ 700
Income taxes.............................................. 165 357 175
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Westar/Kinetik Energy (1999), TEG (1998),
TXU Gas and TXU Communications (1997):
Fair value of assets acquired....................... $ 681 $10,414 $ 2,033
Goodwill............................................ 475 5,412 1,005
Common stock issued, net of capitalized expenses.... -- (1,449) (892)
Loan notes payable.................................. (5) (141) --
Liabilities assumed................................. (118) (8,437) (2,125)
------ ------- -------
Cash used....................................... 1,033 5,799 21
Cash acquired....................................... (20) (3,265) (26)
------ ------- -------
Net cash used (provided)........................ $1,013 $ 2,534 $ (5)
====== ======= =======
</TABLE>
In December 1999, TXU Corp. sold its 20% ownership interest in the
partnerships that operate PrimeCo for $357 million and recognized a pre-tax gain
of $222 million, net of estimated selling costs of $7 million. Since the cash
proceeds from the sale were not received until January 2000, this non-cash
transaction has not been reflected within the 1999 Statements of Consolidated
Cash Flows.
Quarterly Information (unaudited) -- In the opinion of TXU Corp., the
information below includes all adjustments (constituting only normal recurring
accruals) necessary for a fair statement of such amounts. Quarterly results are
not necessarily indicative of expectations for a full year's operations because
of seasonal and other factors, including rate changes, variations in maintenance
and other operating expense patterns, and the charges for regulatory
disallowances. Certain quarterly information has been reclassified to conform to
the current year presentation.
<TABLE>
<CAPTION>
Basic
Earnings
Consolidated Per Share of
Operating Revenues Operating Income Net Income Common Stock*
-------------------- ---------------- ------------------ ------------------
Quarter Ended 1999 1998 1999 1998 1999 1998 1999 1998
- ------------- ------- ------- ------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31.................... $ 4,468 $ 2,500 $ 613 $ 426 $ 182 $ 127 $0.65 $0.52
June 30..................... 3,729 3,236 521 474 99 83 0.35 0.33
September 30................ 4,435 4,380 885 783 361 293 1.31 1.04
December 31................. 4,486 4,620 575 780 343 (1) 237 1.24 0.89
------- ------- ------ -------- -------- -------
$17,118 $14,736 $2,594 $2,463 $ 985 $ 740
======= ======= ====== ======== ======== =======
</TABLE>
- -----------------------------------------
* The sum of the quarters may not equal annual earnings per share due to
rounding. Diluted earnings per share for the quarter ended March 31, 1998
was $0.51. All other quarters were not different from basic earnings per
share.
(1) Includes a $222 million pre-tax ($145 million after-tax) gain from the sale
of the 20% interest in PrimeCo.
A-68
<PAGE>
17. SUBSEQUENT EVENTS (Unaudited)
In October 1999, TXU Electric filed a petition with the PUC for a financing
order (Docket No. 21527) to securitize $1.65 billion of its generation-related
regulatory assets and other qualified costs in accordance with the 1999
Restructuring Legislation. TXU Electric would issue transition bonds
securitizing a component of future revenues. The proceeds received by TXU
Electric are to be used solely for the purposes of retiring utility debt and
equity. On March 1, 2000, the PUC rejected TXU Electric's request for
securitization of the $1.65 billion and authorized securitization of only $357
million. TXU Electric believes this ruling is inconsistent with the 1999
Restructuring Legislation and announced that it will pursue an appeal to the
Travis County, Texas District Court following the receipt of a final order
evidencing such ruling from the PUC. TXU Electric expects that any difference
between the $1.65 billion and the amount finally authorized will continue to be
deferred until securitization of generation-related assets is addressed in 2002.
TXU Electric is unable to predict the outcome of these proceedings.
On December 15, 1999, TXU Europe commenced a 2.0 billion euro Euro Medium
Term Note (EMTN) Program. Under the EMTN Program, TXU Europe may from time to
time issue notes on a continuing basis to one or more dealers in a principal
outstanding amount not exceeding 2.0 billion euros. As of December 31, 1999, no
notes had been issued under this program. However, in March 2000, (Pounds)225
million ($364 million) of 7.25% Sterling Eurobonds due March 8, 2030, were
issued. On the same day, an interest rate swap was entered into that converts
the interest on the new Sterling Eurobond to a variable rate based on LIBOR for
the first five years. The effective interest rate after the swap was 5.862%.
Also in March 2000, TXU Europe issued $150 million of 9.75% Trust Originated
Preferred Securities.
From January 1, 2000 thru March 7, 2000, TXU Corp. repurchased
approximately 12.4 million shares of its common stock for approximately $408
million.
On March 13, 2000, TXU Europe (Espana) S.L., a subsidiary of TXU Europe,
announced its intention to make a cash offer to acquire all of the shares of
Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico) that TXU Europe does not
currently own. Hidrocantabrico is a vertically integrated Spanish energy
company. The offer is subject to a number of conditions, including, among
others, authorization by the CNMV, or Spanish Securities Exchange, approval by
European Union competition authorities and TXU Europe acquiring sufficient
shares such that it would hold at least 51% of Hidrocantabrico after the
transaction is completed. The transaction is expected to close in the second
quarter of 2000.
TXU Europe's offer of 21.25 euros per share values the equity of
Hidrocantabrico at 2.4 billion euros ($2.3 billion). If the offer becomes
unconditional, TXU Europe intends to finance the acquisition through bank
borrowings and the issuance of preferred securities to its parent company, TXU
International Holdings. TXU International Holdings intends to fund the purchase
of the TXU Europe preferred securities through bank borrowings guaranteed by TXU
Corp.
On March 13, 2000, TXU Corp. announced that it had entered into an
agreement to acquire Fort Bend Communication Companies, Inc. (FBCC) based in
Katy, Texas, near Houston, in a transaction that values the stock of FBCC at
approximately $167 million. FBCC common and preferred stock will be exchanged
for approximately $90 million of TXU Corp. common stock and approximately $77
million in cash, subject to certain adjustments. The transaction is expected to
close in the second quarter of 2000.
Following the closing of the FBCC transaction, TXU Corp. expects to
facilitate the growth of its communications operations by contributing the
assets of TXU Communications Company and FBCC into a joint venture. This
transaction, if consummated, would enable TXU Corp. to retire debt and
repurchase common stock in an aggregate amount of up to $1 billion.
A-69
<PAGE>
Printed on recycled paper.
<PAGE>
- --------------------------------------------------------------------------------
Texas Utilities Company
Doing Business as TXU Corp. [LOGO OF TXU]
P
R Energy Plaza
O 1601 Bryan Street
X Dallas, TX 75201-3411
Y
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Erle Nye and J.S. Farrington, and each
of them, Proxies with power to appoint a substitute, and hereby authorizes them
to represent and to vote all shares of common stock of Texas Utilities Company
held of record by the undersigned on March 13, 2000 at the annual meeting of
shareholders of the Company to be held in the Eugene McDermott Concert Hall of
the Morton H. Meyerson Symphony Center, 2301 Flora Street, Dallas, Texas, on
Friday, May 12, 2000, and at any adjournments thereof, and to vote, as directed
on the reverse side of this card, on all specified matters coming before said
meeting, and in their discretion, upon such other matters not specified as may
come before said meeting.
(Continued, and to be signed and dated, on reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
- --------------------------------------------------------------------------------
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted FOR items 1,2,3 and 4.
Please mark
your votes as X
indicated in
this example
Directors recommend a vote FOR all Nominees and FOR Items 2,3, and 4.
- --------------------------------------------------------------------------------
1. Election of Directors: FOR WITHHELD
Nominees:
Derek C. Bonham James A. Middleton
J.S. Farrington Erle Nye
William M. Griffin J.E. Oesterreicher
Kerney Laday Charles R. Perry
Margaret N. Maxey Herbert H. Richardson
For, except vote withheld from the following nominee(s):
- ---------------------------------------------------------------
2. Approval of an amendment to the Restated Articles of Incorporation to change
the name of the Company to TXU Corp.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. Reapproval of the Annual Incentive Plan, as required by the Internal Revenue
Code.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. Approval of Auditors - Deloitte & Touche LLP
FOR AGAINST ABSTAIN
[_] [_] [_]
- --------------------------------------------------------------------------------
___
|
|
NOTE: Please sign names exactly as printed hereon. Joint owners should each
sign. In signing as attorney, administrator, executor, guardian, officer,
partner or trustee, please give full title as such. Receipt is acknowledged of
the Summary Annual Report of the Company for 1999 and the Notice of Annual
Meeting of Shareholders, Proxy Statement and Financial Information.
Signature(s) Date
--------------------------------------- --------------------
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
