<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-12833
TXU CORP.
A Texas Corporation I.R.S. Employer Identification
No. 75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK OUTSTANDING AT AUGUST 8, 2000: 264,075,123 shares, without par
value.
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<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income -
Three and Six Months Ended June 30, 2000 and 1999.................................. 3
Condensed Statements of Consolidated Comprehensive Income -
Three and Six Months Ended June 30, 2000 and 1999.................................. 4
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2000 and 1999............................................ 5
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999................................................ 6
Notes to Financial Statements...................................................... 8
Independent Accountants' Report.................................................... 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................... 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................... 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................. 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 30
SIGNATURE............................................................................................ 31
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
OPERATING REVENUES .................................................. $ 4,592 $ 3,729 $ 9,368 $ 8,197
------- ------- ------- -------
OPERATING EXPENSES
Energy purchased for resale and fuel consumed .................. 2,902 1,989 5,798 4,668
Operation and maintenance ...................................... 658 706 1,443 1,433
Depreciation and other amortization ............................ 257 306 521 551
Goodwill amortization .......................................... 48 49 97 94
Taxes other than income ........................................ 159 158 319 317
------- ------- ------- -------
Total operating expenses ................................. 4,024 3,208 8,178 7,063
------- ------- ------- -------
OPERATING INCOME .................................................... 568 521 1,190 1,134
OTHER INCOME (DEDUCTIONS)-- NET ..................................... 121 (22) 133 (28)
------- ------- ------- -------
INCOME BEFORE INTEREST, OTHER
CHARGES AND INCOME TAXES ....................................... 689 499 1,323 1,106
------- ------- ------- -------
INTEREST INCOME ..................................................... 31 30 67 62
INTEREST EXPENSE AND OTHER CHARGES
Interest ....................................................... 368 361 728 714
Distributions on mandatorily redeemable, preferred
securities of subsidiary trusts, each holding solely junior
subordinated debentures of the obligated company:
TXU Corp. obligated .................................. 8 3 15 8
Subsidiary obligated ................................. 19 20 39 39
Preferred stock dividends of subsidiaries ...................... 3 3 7 7
Distributions on preferred securities of subsidiary perpetual
trust of TXU Europe ...................................... 4 - 5 -
Allowance for borrowed funds used during
construction and capitalized interest .................... (3) (3) (5) (6)
------- ------- ------- -------
Total interest expense and other charges ................. 399 384 789 762
------- ------- ------- -------
INCOME BEFORE INCOME TAXES .......................................... 321 145 601 406
INCOME TAX EXPENSE .................................................. 94 46 181 125
------- ------- ------- -------
NET INCOME .......................................................... $ 227 $ 99 $ 420 $ 281
======= ======= ======= =======
Average shares of common stock outstanding (millions) ............... 263 280 268 281
Per share of common stock:
Basic earnings ................................................. $ 0.87 $ 0.35 $ 1.57 $ 1.00
Diluted earnings ............................................... $ 0.87 $ 0.35 $ 1.57 $ 1.00
Dividends declared ............................................. $ 0.60 $ 0.575 $ 1.20 $ 1.15
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
NET INCOME........................................... $ 227 $ 99 $ 420 $ 281
----- ----- ----- -----
OTHER COMPREHENSIVE INCOME (LOSS) --
Net change during period, net of tax effects:
Foreign currency translation adjustments......... (162) (32) (240) (117)
Unrealized holding gains on investments.......... 11 3 61 3
Minimum pension liability adjustments............ -- -- -- 1
----- ----- ----- -----
Total...................................... (151) (29) (179) (113)
----- ----- ----- -----
COMPREHENSIVE INCOME................................. $ 76 $ 70 $ 241 $ 168
===== ===== ===== =====
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
TXU CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
MILLIONS OF DOLLARS
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income..................................................................... $ 420 $ 281
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization ............................................... 697 741
Deferred income taxes and investment tax credits - net ...................... (35) 115
Gains from the sale of assets................................................ (119) 1
Reduction of revenues for earnings in excess of earnings cap................. 100 --
Other........................................................................ (35) (2)
Changes in operating assets and liabilities:
Accounts receivable...................................................... (303) 743
Inventories.............................................................. 24 35
Accounts payable......................................................... 394 (534)
Interest and taxes accrued............................................... (17) (120)
Other working capital ................................................... (164) 180
Over/(under)-recovered fuel revenue - net of deferred taxes.............. (81) (38)
Energy marketing risk management assets and liabilities.................. 3 (207)
Other - net.............................................................. (90) (35)
------- -------
Cash provided by operating activities.............................. 794 1,160
------- -------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Acquisition and interim facilities........................................... -- 926
Other long-term debt......................................................... 761 4,158
Preferred securities of subsidiary perpetual trust of TXU Europe............. 150 --
Preference stock............................................................. 300 --
Common stock................................................................. 1 --
Retirements/repurchases of securities:
Acquisition and interim facilities........................................... -- (1,225)
Other long-term debt/obligations............................................. (1,433) (954)
Common stock................................................................. (414) (64)
Change in notes payable:
Commercial paper............................................................. 528 (1,094)
Banks........................................................................ 338 (400)
Common stock dividends paid.................................................... (321) (316)
Debt premium, discount, financing and reacquisition expenses................... (20) (55)
------- -------
Cash provided by (used in) financing activities.................... (110) 976
------- -------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures...................................................... (615) (717)
Acquisitions of businesses .................................................... (339) (1,013)
Proceeds from sale of assets................................................... 627 5
Nuclear fuel .................................................................. (38) (45)
Other.......................................................................... (211) (151)
------- -------
Cash used in investing activities.................................. (576) (1,921)
------- -------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS............................ (39) (63)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......................................... 69 152
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE.................................... 560 796
------- -------
CASH AND CASH EQUIVALENTS - ENDING BALANCE....................................... $ 629 $ 948
======= =======
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- -----------
MILLIONS OF DOLLARS
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
United States (US):
Electric................................................................... $23,790 $23,599
Gas distribution and pipeline.............................................. 1,436 1,378
Other...................................................................... 1,002 1,004
---------- ----------
Total............................................................... 26,228 25,981
Less accumulated depreciation.............................................. 8,494 8,159
---------- ----------
Net of accumulated depreciation..................................... 17,734 17,822
Construction work in progress.............................................. 429 314
Nuclear fuel (net of accumulated amortization: 2000--$679; 1999--$635).... 165 171
Held for future use........................................................ 22 24
Reserve for regulatory disallowances....................................... (836) (836)
---------- ----------
Net US property, plant and equipment................................ 17,514 17,495
Europe - Electric and other (net of accumulated depreciation: 2000--$516;
1999--$424).................................................................... 4,120 4,394
Australia - Electric and gas distribution (net of accumulated depreciation:
2000--$210; 1999--$196)........................................................ 1,730 1,751
---------- ----------
Net property, plant and equipment................................... 23,364 23,640
---------- ----------
INVESTMENTS
Goodwill (net of accumulated amortization: 2000--$420; 1999--$345).............. 7,255 7,519
Other investments............................................................... 3,054 2,876
---------- ----------
Total investments................................................... 10,309 10,395
---------- ----------
CURRENT ASSETS
Cash and cash equivalents...................................................... 629 560
Accounts receivable (net of allowance for uncollectible accounts:
2000--$34; 1999--$50).......................................................... 1,757 1,492
Inventories - at average cost:
Materials and supplies...................................................... 240 261
Fuel stock.................................................................. 211 230
Gas stored underground...................................................... 141 131
Energy marketing risk management assets......................................... 1,175 619
Other current assets............................................................ 403 607
---------- ----------
Total current assets............................................... 4,556 3,900
---------- ----------
OTHER ASSETS
Regulatory assets.............................................................. 1,807 1,784
Long-term prepayments.......................................................... 631 577
Energy marketing risk management assets........................................ 271 151
Other deferred debits.......................................................... 525 292
----------- -----------
Total other assets................................................. 3,234 2,804
----------- -----------
Total.................................................... $41,463 $40,739
=========== ===========
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
TXU CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
MILLIONS OF DOLLARS
<S> <C> <C>
CAPITALIZATION
Common stock without par value:
Authorized shares: 1,000,000,000
Outstanding shares: 2000--264,078,369 and 1999--276,406,519....... $ 6,483 $ 6,795
Retained earnings........................................................ 1,696 1,691
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments........................... (409) (169)
Unrealized holding gains on investments............................ 82 21
Minimum pension liability adjustments.............................. (4) (4)
--------- ---------
Total common stock equity.................................. 7,848 8,334
Preference stock......................................................... 300 --
Preferred stock of subsidiaries:
Not subject to mandatory redemption................................ 190 190
Subject to mandatory redemption.................................... 21 21
Preferred securities of subsidiary perpetual trust of TXU Europe......... 150 --
Mandatorily redeemable, preferred securities of subsidiary trusts, each
holding solely junior subordinated debentures of the obligated company:
TXU Corp. obligated........................................ 368 368
Subsidiary obligated....................................... 976 971
Long-term debt, less amounts due currently............................... 15,880 16,325
--------- ---------
Total capitalization....................................... 25,733 26,209
--------- ---------
CURRENT LIABILITIES
Note payable:
Commercial paper................................................... 2,415 1,903
Banks.............................................................. 1,637 1,385
Long-term debt due currently............................................. 826 1,288
Accounts payable......................................................... 1,808 1,442
Energy marketing risk management liabilities............................. 1,076 525
Dividends declared....................................................... 162 172
Taxes accrued............................................................ 484 474
Interest accrued......................................................... 262 310
Other current liabilities................................................ 773 898
--------- ---------
Total current liabilities................................. 9,443 8,397
--------- ---------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes........................................ 3,965 3,936
Investment tax credits................................................... 513 524
Energy marketing risk management liabilities............................. 151 12
Other deferred credits and noncurrent liabilities........................ 1,658 1,661
--------- ---------
Total deferred credits and other noncurrent liabilities.... 6,287 6,133
--------- ---------
CONTINGENCIES (Note 6)
--------- ---------
Total ............................................... $41,463 $40,739
========= =========
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
TXU CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS, ACQUISITIONS AND DISPOSITIONS
In May 2000, Texas Utilities Company changed its corporate name to TXU
Corp. 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 primarily
through TXU Europe Group plc (TXU Europe Group) and its subsidiaries. TXU
Australia's principal operating subsidiaries include TXU Electricity Limited,
formerly known as Eastern Energy Limited (TXU Australia Electricity), and the
gas operations of TXU Networks (Gas) Pty. Ltd., formerly known as Westar Pty.
Ltd. (TXU Australia Gas Networks), and TXU Pty. Ltd., formerly known as
Kinetik Energy Limited (TXU Australia Gas Retail).
Through its subsidiaries, TXU Corp. engages in the generation, purchase,
transmission, distribution and sale of electricity; the purchase,
transmission, distribution and sale of natural gas; energy services; and
telecommunications and other businesses.
In February 1999, TXU Australia acquired from the Government of
Victoria, Australia, the gas retail business of Kinetik Energy Limited and the
gas distribution operations of Westar Pty. Ltd. (together, TXU Australia Gas).
Since the acquisition of TXU Australia Gas was a purchase business combination
for accounting purposes, 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 six-month period ended June 30, 1999, assuming the
acquisition of TXU Australia Gas had occurred at the beginning of that period,
would not have differed significantly from reported results.
In December 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 for the management,
operation and maintenance of their subsidiaries' respective electricity
distribution networks. In March 2000, final approval was received from the
Office of Gas and Electricity Markets covering England, Scotland and Wales
(OFGEM). The new joint venture has been named "24seven" and began operations
in April 2000. 24seven serves over five million electricity customers in
London and the eastern counties of England. Employees of the joint venturers'
subsidiaries, Eastern Electricity plc (Eastern Electricity) and London
Electricity plc, have been transferred to 24seven. The physical distribution
system assets, as well as all operating licenses, continue to be owned by
Eastern Electricity and London Electricity plc, respectively.
In March 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 did not
then own. Later in March 2000, after a competing bid had been subsequently
issued, TXU Europe announced that it would not pursue its offer. In a series
of private transactions since that date, TXU Europe acquired additional shares
in Hidrocantabrico and directly or indirectly holds approximately 19.2% of the
outstanding shares. TXU Europe has a preemptive option to acquire an
additional 4.9% of the stock in Hidrocantabrico currently held by Electrabel
SA, an electricity company in Belgium, if Electrabel were to sell its interest
to another company. TXU Europe also has a conditional put option whereby it
may be required to purchase the full 10.0% interest in Hidrocantabrico held by
Electrabel if Electrabel is required to dispose of its holdings by European
Union or Spanish Competition Authorities. The conditions of this put option
include a reasonable notice period before execution.
8
<PAGE>
On August 3, 2000, the Spanish Stock Market Commission (CNMV) announced
it was opening an investigation as to whether TXU Europe and Electrabel acted
in concert over share purchases in order to avoid making a formal takeover
bid. If the two utilities are found to be in violation of Spanish securities
law, they could face a substantial fine and other restrictions. The
investigation is expected to last several months. TXU Europe is unable to
determine what impact there may be, if any, as a result of the investigation.
In the meantime, TXU Europe has not received any formal notification of
whether the two companies' political rights (including voting rights) in
Hidrocantabrico have been suspended. TXU Europe does not believe there has
been any violation of Spanish securities laws and is fully cooperating with
the investigation. TXU Europe has also indicated that it would support a full
offer for Hidrocantabrico by a third party that has the support of
Hidrocantabrico's Board of Directors.
On May 11, 2000, TXU Corp. acquired all of the outstanding common and
preferred stock of Fort Bend Communication Companies, Inc. (FBCC) for
approximately $161 million in cash plus liabilities assumed. TXU Corp. expects
to facilitate the growth of its communications operations by contributing
substantially all of the assets of TXU Communications Company and FBCC into a
joint venture, which would obtain external financing. This transaction would
enable TXU Corp. to reduce short-term indebtedness by about $.9 billion.
On May 4, 2000, TXU Australia was awarded a long-term lease by the
government of South Australia to operate a 1,280-megawatt natural gas powered
generating station. Funding for the $177 million project was provided from
internal sources and bank borrowings.
In June 2000, TXU Europe entered into an agreement to sell its 21.9%
interest in Severomoravska energetika, a.s. (SME), the largest Czech
electricity distribution and supply company. The sale is expected to be
completed in the third quarter of 2000.
On July 13, 2000, TXU Europe agreed to purchase 51% of Stadtwerke Kiel
AG, a German municipal utility, for approximately L143 million ($215 million).
The state parliament of Kiel unanimously approved the sale. The city
government of Kiel, the state capital, will retain the other 49% of the
utility, which has approximately 250,000 gas and electricity customers, 175
megawatts of power generation and 2.7 billion cubic feet of gas storage
capacity. Final approval is needed from the European Union regulators before
the acquisition can close. Such approval may take several months.
On August 3, 2000, TXU Europe also announced its unconditional purchase
of United Utilities' retail energy supply business, Norweb Energi (Norweb),
for L310 million ($465 million). Financing was provided through existing bank
lines. TXU Europe's existing supply business, Eastern Energy, has 2.7 million
electricity and 0.7 million gas customers. Combined with Norweb's 1.8 million
electricity and 0.4 million gas customers, the acquisition will create the
UK's second largest energy retailer, with 5.6 million accounts. The
transaction also includes the assumption of Norweb's power purchase
agreements, which will be integrated into TXU Europe's energy portfolio. On
August 9, 2000, the Office of Gas and Electricity Markets issued a
consultation paper on the regulatory issues involved in the acquisition. As
the transaction is unconditional, TXU Europe has assumed the risk of, and
responsibility for, obtaining all necessary regulatory approvals.
Also on August 3, 2000, TXU Europe announced it had contracted its
customer services operation to Vertex, United Utilities' customer services
business. Customer services include the call centers, billing, credit
management and debt collection. Eastern Energy's 1,250 customer services staff
will transfer to Vertex on September 1, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The condensed consolidated financial statements
of TXU Corp. and its subsidiaries have been prepared on the same basis as
those in its 1999 Form 10-K and, in the opinion of management, all adjustments
(constituting only normal recurring accruals) necessary for a fair
presentation of the results of operations and financial position have been
included therein. Certain information and footnote disclosures normally
included in annual consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain previously reported amounts have been
9
<PAGE>
reclassified to conform to current classifications. All dollar amounts in the
financial statements and tables in the notes, except per share amounts, are
stated in millions of US dollars unless otherwise indicated.
EARNINGS PER SHARE -- Basic earnings per share applicable to common
stock are based on the weighted average number of common shares outstanding
during the period reported. Diluted earnings per share include the effect of
potential common shares resulting from the assumed exercise of all outstanding
stock options and settlement of forward stock purchase agreements. The
following table details the number of shares of common stock added to the
average shares outstanding for the purpose of calculating diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares of common stock
(in thousands)................ 426 94 594 96
</TABLE>
3. SHORT-TERM FINANCING
In April 2000, the holders of $340 million of TXU Electric's Floating
Rate Debentures due April 24, 2000 agreed to extend the maturity date of those
debentures to December 1, 2000. In connection with the extension, the
quarterly interest rate formula, based on LIBOR plus a margin, was changed.
The interest rate through July 23, 2000 was 6.68%, and was then reset at 7.11%.
SHORT-TERM FACILITIES -- In June 2000, TXU Europe Group renegotiated the
terms and amounts it could borrow under a short-term facility. The amended
facility, which now expires in December 2000, allows for aggregate borrowings
of euro 506 million ($482 million) which can be borrowed by TXU Europe (euro
200 million) and TXU Europe Group (euro 306 million) at variable interest
rates based on LIBOR plus a margin. The amount outstanding at June 30, 2000
was euro 506 million ($482 million) at an annual interest rate of 4.80%.
TXU Europe and TXU Finance (No.2) Limited (TXU Finance), 90% owned by
TXU Europe, have a joint sterling-denominated line of credit with a group of
banking institutions under a credit facility agreement (Sterling Credit
Agreement). In March 2000, TXU Europe's Tranche A 364-day revolving credit
facility under the Sterling Credit Agreement expired. In May 2000, TXU Europe
entered into a six-month L200 million revolving credit facility with a
commercial bank expiring in October 2000 to serve as a replacement for the
former Tranche A facility. Interest is based on LIBOR plus a margin. As of
June 30, 2000 (pounds) 87 million ($132 million) was outstanding at an annual
interest rate of 4.76%.
In March 2000, TXU Australia established a A$750 million combined
short-term/medium-term note program. Short-term notes issued under this
program replaced commercial paper previously issued by TXU Australia
Electricity. The short-term borrowings under the program are restricted to the
amount available under qualifying support facilities of A$485 million plus any
undrawn amounts under the bank facility, which varies from time to time. At
June 30, 2000, the outstanding commercial paper balance was approximately
A$335 million ($202 million) at an annual interest rate of 6.34%. At June 30,
2000, the amount restricted under this program was A$485 ($292 million).
ACCOUNTS RECEIVABLE -- Eastern Electricity, a subsidiary of TXU Europe,
continually sells additional receivables under its receivable financing
program to replace those collected. At June 30, 2000, accounts receivable of
Eastern Electricity of (pounds) 219 million ($333 million) had been sold under
the program. A further (pounds) 81 million ($123 million) of future
receivables collateralize short-term loans. These borrowings bear interest at
an annual rate based on commercial paper rates plus 0.225%, which was 6.12%
at June 30, 2000. TXU Electric and TXU Gas also have facilities which provide
financing through sales of receivables, the amounts and terms of which have
not changed from December 31, 1999.
10
<PAGE>
4. CAPITALIZATION
COMMON STOCK -- During the six months ended June 30, 2000, TXU Corp.
repurchased approximately 12.7 million shares of its common stock for $414
million. The cost of the repurchased shares, to the extent it exceeded the
amount received upon issuance, has been charged to retained earnings.
Additional purchases may occur from time to time.
PREFERENCE STOCK -- On June 15, 2000, TXU Corp. issued 3,000 shares of
Series B preference stock for $300 million. The preference stock has a
dividend rate of 7.24% until June 15, 2005. The dividend rate for subsequent
periods will be determined according to periodic auctions. The Series B
preference stock has a liquidation preference of $100,000 per share. TXU Corp.
may not redeem the shares before June 15, 2005. The proceeds were used to
repay short-term debt, including commercial paper, and for general corporate
purposes. TXU Corp. is authorized to issue up to 50 million shares of
preference stock in one or more series.
PREFERRED SECURITIES OF SUBSIDIARY PERPETUAL TRUST OF TXU EUROPE -- In
March 2000, TXU Europe Capital I, a statutory business trust, established as a
financing subsidiary for TXU Europe, issued to investors $150 million of
9 3/4% Trust Originated Preferred Securities (Preferred Securities), in
6,000,000 units. The proceeds from this issuance were invested in Preferred
Partnership Securities issued by TXU Europe Funding I, L.P., a limited
partnership of which TXU Europe is the general partner. The Preferred
Securities have a liquidation preference of $25 per unit. The only assets of
the trust are the Preferred Partnership Securities. The Trust has a perpetual
existence, subject to certain termination events as provided in its Amended
and Restated Trust Agreement. The Preferred Securities are subject to
mandatory redemption upon payment of the Preferred Partnership Securities
which may be redeemed at the option of TXU Europe, in whole, or in part, at
any time on or after March 2, 2005. The trust uses distributions it receives
on the Preferred Partnership Securities to make cash distributions on the
Preferred Securities. TXU Europe has issued certain limited guarantees of the
Preferred Securities, the Preferred Partnership Securities and the junior
subordinated debentures held by TXU Europe Funding I, L.P.
11
<PAGE>
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) -- At June
30, 2000 and December 31, 1999, the statutory business trust subsidiaries had
Trust Securities outstanding, as follows:
<TABLE>
<CAPTION>
TRUST SECURITIES TRUST ASSETS MATURITY
------------------------------------------------------- ------------------------ ---------
UNITS (000'S) AMOUNT AMOUNT
-------------------------- -------------------------- ------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
TXU CORP.
---------
TXU Capital I
(7.25% Series)...... 9,200 9,200 $ 223 $ 223 $ 237 $ 237 2029
TXU Capital II
(8.7% Series)....... 6,000 6,000 145 145 155 155 2034
--------- --------- ------- ------- ------- -------
Total TXU Corp.......... 15,200 15,200 368 368 392 392
--------- --------- ------- ------- ------- -------
TXU ELECTRIC
------------
TXU Electric Capital I
(8.25% Series)...... 5,871 5,871 141 141 155 155 2030
TXU Electric Capital III
(8.00% Series)...... 8,000 8,000 194 194 206 206 2035
TXU Electric Capital IV
(Floating Rate Trust
Securities)(a)...... 100 100 98 97 103 103 2037
TXU Electric Capital V
(8.175% Trust
Securities)......... 400 400 396 392 412 412 2037
--------- --------- ------- ------- ------- -------
Total TXU Electric.. 14,371 14,371 829 824 876 876
--------- --------- ------- ------- ------- -------
TXU GAS
-------
TXU Gas Capital I
(Floating Rate Trust
Securities)(b)...... 150 150 147 147 155 155 2028
--------- --------- ------- ------- ------- -------
Total............... 29,721 29,721 $ 1,344 $ 1,339 $ 1,423 $ 1,423
========= ========= ======= ======= ======= =======
</TABLE>
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring 2002, effectively fixes the rate at 7.183%.
(b) Floating rate is determined quarterly based on LIBOR. Related interest rate
swaps, expiring 2003, effectively fix the rates at 6.629% on $100 million
and at 6.444% on $50 million.
Each parent company owns the common trust securities issued by its
subsidiary trust and has effectively issued a full and unconditional guarantee
of such trust's securities.
12
<PAGE>
LONG-TERM DEBT -- EUROPE -- As of June 30, 2000, the amended Sterling
Credit Agreement provides for borrowings of up to L1.075 billion and has two
facilities: a L750 million term facility and a L325 million revolving credit
facility (Tranche B), both of which expire on March 2, 2003. The Sterling
Credit Agreement allows for borrowings in various currencies with interest
rates based on the prevailing rates in effect in the countries in which the
borrowings originate. As of June 30, 2000, L750 million ($1.1 billion) of
borrowings were outstanding under the term facility at an interest rate of
6.89% per annum. The outstanding Tranche B borrowing and interest rate in
effect at June 30, 2000 consisted of L56 million ($85 million) of Norwegian
kroner at 7.21% per annum.
TXU Europe has a euro 2.0 billion Euro Medium Term Note (EMTN) Program.
Under the EMTN Program, TXU Europe may from time to time issue notes to one or
more dealers in an aggregate principal amount outstanding of up to 2.0 billion
euros. As of June 30, 2000, L225 million ($342 million) of 7.25% Sterling
Eurobonds due March 8, 2030, were outstanding. An interest rate swap is in
place that converts the interest on the Sterling Eurobonds to a variable rate
based on LIBOR for the first five years and at a rate based on EURIBOR for the
remainder of the term. The effective interest rate at June 30, 2000 after the
swap was 6.37%.
AUSTRALIA -- In February 2000, TXU Australia restructured its senior debt.
The terms of all senior bank debt previously borrowed by TXU Australia and TXU
Australia Electricity were renegotiated and maturity dates extended, so that all
senior bank debt, aggregating approximately A$2.0 billion ($1.2 billion), now
ranks equally as senior debt of TXU Australia. As part of the restructuring,
maturity dates were extended from June 30, 2000 to December 29, 2000 for a A$200
million syndicated loan facility, and to June 29, 2001 for a A$413 million
subordinated acquisition facility. Also, a new A$120 million facility maturing
December 29, 2000 was added.
5. REGULATION AND RATES
US -- DOCKET NO. 21527 -- In October 1999, TXU Electric filed a petition
with the Public Utility Commission of Texas (PUC) for a financing order (Docket
No. 21527) to permit the issuance by a special purpose entity of $1.65 billion
of transition bonds secured by payments designed to enable TXU Electric to
recover its generation-related regulatory assets and other qualified costs in
accordance with the 1999 Restructuring Legislation. The proceeds received by TXU
Electric are to be used solely for the purposes of retiring TXU Electric debt
and equity. On May 1, 2000, the PUC signed a final order rejecting TXU
Electric's request for the $1.65 billion and authorized only $363 million. TXU
Electric believes this final order is inconsistent with the 1999 Restructuring
Legislation and filed an appeal on May 2, 2000 with the Travis County, Texas,
District Court. TXU Electric expects that any difference between the $1.65
billion and the amount finally authorized will continue to be deferred until
recovery of generation-related assets is again addressed by the PUC, most likely
in 2001. TXU Electric is unable to predict the outcome of these proceedings.
The constitutionality of the securitization provisions of the 1999
Restructuring Legislation under the Texas constitution has been challenged in
connection with a securitization request made by Central Power and Light
Company. On July 21, 2000, the Travis County, Texas District Court issued its
judgment denying this appeal and finding that the securitization provisions
are constitutional. Notice of appeal of this judgement to the Texas Supreme
Court has been filed. TXU Electric is unable to predict the outcome of such
proceedings.
DOCKET NO. 21950 -- In January 2000, TXU Electric filed with the PUC its
business separation plan as required by the 1999 Restructuring Legislation. The
plan describes how TXU Electric proposes to separate, by September 1, 2000, the
provision of competitive energy services from its regulated business activities,
and how it proposes to unbundle its business by January 1, 2002 in accordance
with the 1999 Restructuring Legislation. Only the transmission and distribution
(T&D) functions will continue to be regulated. An independent organization
certified by the PUC will oversee transmission system planning and reliability
in the State of Texas. Beginning January 1, 2002, retail electric customers in
Texas will be able to select their electricity providers. The portion of this
plan that describes how TXU Electric proposes to separate the provision of
competitive
13
<PAGE>
energy services from its regulated business activities has been severed by
the PUC from Docket No. 21950 and assigned Docket No. 21987. On April 3,
2000, TXU Electric and certain other parties to Docket No. 21987 filed with
the PUC a nonunanimous stipulation concerning matters at issue in that
proceeding. In June 2000, the PUC issued an order in Docket No. 21987
approving this stipulation and the TXU Electric plan, as modified by this
stipulation. The remainder of Docket No. 21950 has been merged with Docket
No. 22350 described below.
DOCKET NO. 22350 -- As required by the 1999 Restructuring Legislation, in
March 2000, TXU Electric filed its transition to competition plan with the PUC.
This plan lays the foundation for retail competition to begin in the Texas
electricity market. Under the plan as filed, the generation business unit and
the retail business unit of TXU Electric will become unregulated entities and
will be allowed to compete for customers. The T&D business units of TXU Electric
will be separated into regulated entities and will together represent the
regulated part of the business. The filing also includes proposed T&D delivery
rates to be charged to retail electric providers. In addition to the actual T&D
charges for delivering electricity, these rates include nuclear decommissioning
fund charges, system benefit fund charges and stranded cost recovery charges.
TXU Electric's stranded costs are estimated to be approximately $3.7 billion
including the regulatory assets that were part of the Docket No. 21527
proceedings and amounts related to the remand of Docket No. 9300, addressed
below. TXU Electric will be filing an updated stranded cost estimate on or
before August 28, 2000 to reflect various PUC decisions made since Docket No.
22350 was filed. This estimate is subject to a future "true-up" in 2004. TXU
Electric is unable to predict the outcome of these proceedings.
DOCKET NO. 9300/DOCKET NO. 22652 -- The PUC's final order (Order) in
connection with TXU Electric's January 1990 rate increase request (Docket No.
9300) was ultimately reviewed by the Texas Supreme Court. 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 Electric's earnings, was 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 rate base in light of its financial
condition at the time of the initial hearing. In connection with the settlement
of Docket No. 18490, proceedings in the remand of Docket No. 9300 had been
stayed through December 31, 1999. In April 2000, TXU Electric requested that the
District Court enter an order remanding Docket No. 9300 to the PUC. On June 9,
2000, the District Court's order of remand was filed with the PUC, and the PUC
has assigned the remand proceeding Docket No. 22652. TXU Electric cannot predict
the outcome of the reconsideration of the Order on remand by the PUC.
DOCKET NO. 22880 -- On August 4, 2000, TXU Electric filed with the PUC a
request to surcharge the cumulative undercollection of fuel cost revenues that
existed as of June 30, 2000, together with interest through November 2000, in
the amount of $167 million, and to increase its current fuel factors by 27.6%.
TXU Electric proposes that the surcharge be collected over a six-month period,
beginning in November 2000. TXU Electric proposes to increase its current fuel
factors, solely to reflect the projected increase in the commodity cost of
natural gas for the period July 1, 2000 through June 30, 2001, on an interim
basis effective September 4, 2000. TXU Electric cannot predict the outcome of
this proceedings.
GAS -- TXU Gas employs a continuing program of rate review for all classes
of customers in its regulatory jurisdictions. Rate relief amounting to about $1
million in annualized revenue increases, exclusive of changes in gas costs, has
been granted in 2000 in addition to about $7.5 million granted in 1999. Rate
cases supporting $9 million in annualized revenue increases were pending in 39
cities as of June 30, 2000. Additionally, an appeal to the Railroad Commission
of Texas (RRC) of actions taken by three cities in the Dallas Distribution
System seeks to recover $9 million in annualized revenue deficiencies. A
decision on this matter is expected in the fourth quarter of 2000. Additional
rate cases have been filed subsequent to June 30, 2000 seeking to recover $8
million in revenue deficiences.
14
<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 requested a
general increase in annual revenues of approximately $20 million. In June 2000,
the RRC issued a final ruling on TXU Lone Star Pipeline's requested gate rate
increase. The final ruling denied the increase and results in a $1.5 million
reduction in the city gate rate, but granted certain changes to its tariff
structure between demand and commodity rates which should stabilize its
revenues. On July 12, 2000, TXU Lone Star Pipeline filed with the RRC a motion
for rehearing concerning its final ruling. TXU Lone Star Pipeline is unable to
predict the outcome of the motion for rehearing.
6. CONTINGENCIES
LEGAL PROCEEDINGS -- In February 1997, the official government
representative of pensioners in the UK, the Pensions Ombudsman, made a final
determination against the National Grid Company plc (National Grid) and its
group trustees with respect to complaints by two pensioners in National
Grid's section of the Electricity Supply Pension Scheme (ESPS). The
determination related 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 to the Court of Appeal and judgment was 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 first quarter of 2001. 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 ESPS, it would vigorously defend the action, ultimately
through the courts. However, if a determination were finally to be made
against it and upheld by the courts, TXU Europe Group could have a potential
liability to repay to its section of the ESPS an amount estimated by TXU
Europe Group to be up to (pounds) 45 million ($68 million), exclusive of any
applicable interest charges.
In January 1999, the Hindustan Development Corporation issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group plc (TEG), now known as Energy Holdings (No. 3) Limited,
claiming damages of (pounds) 255 million ($387 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 is
vigorously defending this claim and cannot predict the outcome of these
proceedings. Arbitration has been completed and the decision of the
arbitrators is expected in September 2000.
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 claimed a final total of (pounds) 133 million ($202 million) arising
from the summary termination for the claimed fundamental breach of their
respective contracts in April 1998. The five agencies claimed damages for
failure to give reasonable notice and for compensation under the UK
Commercial Agents Regulations 1994. The complaints were settled in June 2000,
following a mediation ordered by the High Court, for approximately (pounds) 6
million ($9 million). There was no impact on the income statement, as TXU
Europe Group had previously made provisions for such estimated expenses.
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
(EEX), 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.
15
<PAGE>
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.
The parties to the Consolidated Action entered into an agreement that TXU Gas
expects to form the basis of the settlement of this litigation, subject to
the completion of confirmatory discovery by the plaintiffs and approval of
the Court. The terms of this agreement required TXU Gas to pay $5 million
into escrow.
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, $25 million at
June 30, 2000, 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 has assigned to a
municipality all contract rights and obligations of TXU Electric in connection
with $53 million principal amount of bonds remaining at June 30, 2000, 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 $110 million at June 30, 2000 of certain
liabilities that may be incurred and payable by the purchasers of its former US
and Australian coal business and US Energy marketing operations sold in 1998
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.
GENERAL -- In addition to the above, TXU Corp. and its subsidiaries are
involved in various other legal and administrative proceedings which, in the
opinion of management, should not have a material effect upon TXU Corp.'s
financial position, results of operations or cash flows.
7. SEGMENT INFORMATION
TXU Corp. has five reportable operating segments. In 2000, TXU Corp.
renamed its US Energy Marketing Segment to US Energy and included its retail
energy services and related businesses in that segment.
(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 purchase, transmission and
distribution of natural gas in Texas;
(3) US ENERGY - 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, retail energy services and related
businesses;
(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; and
(5) AUSTRALIA - operations involving the generation, purchase,
distribution, trading and retailing of electricity, the retailing of natural gas
and the storage of natural gas primarily in the States of South Australia and
Victoria.
16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Trade Revenues -
US Electric...................... $1,698 $1,519 $3,061 $2,815
US Gas........................... 148 144 472 436
US Energy........................ 1,215 556 2,254 1,366
Europe........................... 1,259 1,307 3,108 3,223
Australia........................ 209 164 357 284
All Other........................ 63 39 116 73
------ ------ ------ ------
Consolidated............. $4,592 $3,729 $9,368 $8,197
====== ====== ====== ======
Affiliated Revenues -
US Gas........................... $ 9 $ 8 $ 17 $ 15
US Energy........................ (2) -- (3) --
All Other........................ 99 82 181 163
Eliminations..................... (106) (90) (195) (178)
------ ------ ------ ------
Consolidated........... $ -- $ -- $ -- $ --
====== ====== ====== ======
Net Income (Loss) -
US Electric...................... $ 186 $ 161 $ 331 $ 264
US Gas........................... 13 (25) 43 (7)
US Energy........................ (3) (12) (11) (24)
Europe........................... 49 29 116 140
Australia........................ 26 (10) 37 (5)
All Other........................ (44) (44) (96) (87)
------ ------ ------ ------
Consolidated............. $ 227 $ 99 $ 420 $ 281
====== ====== ====== ======
</TABLE>
8. RESTRUCTURING CHARGES
During the six months ended June 30, 2000, TXU Europe recorded
restructuring charges and other costs of approximately $87 million pre-tax ($64
million after-tax). Of this amount, $77 million pre-tax ($54 million after-tax)
of restructuring costs have been charged to operation and maintenance expense.
Approximately $10 million of costs incurred in connection with the offer for
Hidrocantabrico have been included in Other Income (Deductions)-Net.
The restructuring costs consisted of asset writedowns and other exit and
redundancy costs (severance benefits paid to staff under voluntary retirement
programs and related pension benefits) primarily as a result of the creation of
the 24seven joint venture and for certain other staff reorganizations. As of
June 30, 2000, TXU Europe had recognized pre-tax redundancy costs of
approximately $35 million related to voluntary termination benefits for 442
employees that have accepted the voluntary benefits. In addition, other pre-tax
restructuring charges consisting of $25 million of asset writedowns and $17
million of other exit costs, have been recorded. As of June 30, 2000, $15
million of the redundancy costs and $13 million of other exit costs charged
during the six months then ended have been paid. Further restructuring charges
are expected to be incurred through the end of 2000.
17
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
TXU Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Corp. and subsidiaries as of June 30, 2000, and the related condensed statements
of consolidated income and of comprehensive income for the three-month and
six-month periods ended June 30, 2000 and 1999, and the condensed statements of
consolidated cash flows for the six-month periods ended June 30, 2000 and 1999.
These financial statements are the responsibility of TXU Corp.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Corp. as of December 31, 1999, and the related statements of consolidated
income, comprehensive income, cash flows and common stock equity for the year
then ended (not presented herein); and in our report, dated February 16, 2000,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 7, 2000
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
<TABLE>
<CAPTION>
INCOME STATEMENT
(AVERAGE RATES)
BALANCE SHEET -----------------------------------------
----------------------- THREE MONTHS SIX MONTHS
JUNE 30, DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
-------- ------------ ------------------- -----------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
UK pounds sterling (pounds) $1.5183 $1.6165 $1.5333 $1.6070 $1.5698 $1.6203
Australian dollars (A$) $0.6019 $0.6507 $0.5895 $0.6531 $0.6106 $0.6398
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000
Net income for the second quarter of 2000 was $227 million ($.87 per
share) compared with $99 million ($.35 per share) for the second quarter of
1999, a 129% increase. Results for the 2000 quarter benefited from a $53 million
pre-tax ($34 million after-tax) gain from the sale of substantially all of the
assets of the natural gas processing business and a $44 million pre-tax ($31
million after-tax) gain from the sale of TXU Europe's metering business.
Partially offsetting were after-tax costs of $15 million, mostly restructuring
charges associated with the implementation of the joint venture to operate TXU
Europe's UK electric distribution network with that of London Electricity plc
and other corporate reorganizations, as well as costs associated with the
acquisition bid for Hidroelectrica del Cantabrico, S.A. (Hidrocantabrico).
Earnings for the 1999 second quarter included a $52 million pre-tax ($31 million
after-tax) charge for a fuel reconciliation settlement and other charges
totaling $17 million after-tax in Australia primarily for integration and
acquisition-related costs. Excluding these items, earnings per share for the
current second quarter were $.67 versus $.52 per share in the prior second
quarter, a 29% increase.
Most of the improvement came from increased contributions from TXU
Australia and the US Energy segment. The US Gas segment continued to show
improvement, primarily the result of revenue enhancement and cost reduction
programs.
Mitigation as a result of the earnings cap reduced net income by $65
million in the 2000 second quarter and $33 million in the 1999 second quarter.
Since January 1998, regular nuclear depreciation and additional nuclear
mitigation total approximately $1.6 billion. Excluding a $100 million reduction
in revenues as a result of the earnings cap and the $52 million fuel
reconciliation settlement, operating revenues for the second quarter of 2000
were 24% higher than the second quarter of 1999, primarily due to higher
revenues from the US Energy and US Electric segments. Energy purchased for
resale and fuel consumed for the second quarter of 2000 were 46% greater than
the prior-year second quarter due to higher prices in the US Energy and US
Electric segments. Total operating expenses, excluding energy purchased for
resale and fuel consumed, were $97 million (8%) lower in the second quarter of
2000 than the same period of 1999, which included mitigation depreciation of $61
million.
Differences in effective tax rates are primarily attributable to benefits
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, partially offset by the effect of
non-deductible goodwill amortization.
19
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000
Net income for the six months ended June 30, 2000 was $420 million ($1.57
per share) compared with $281 million ($1.00 per share) for the prior six-month
period, an increase of 49%. Results for the 2000 period include the gains from
the sale of assets discussed above offset by after-tax restructuring costs and
bid-related costs at TXU Europe of $64 million. Results for the six months ended
June 30, 1999 included the fuel reconciliation settlement and the other costs at
TXU Australia discussed above. Excluding these items, net income for the six
months ended June 30, 2000 was $419 million ($1.57 per share) compared with $329
million ($1.17 per share), an increase of 27%.
Net income for the six months ended June 30, 2000 reflects continued
strong results from the US Electric segment, improved results from TXU Australia
and a significant improvement in US Gas operations in spite of very mild winter
weather. Mitigation as a result of the earnings cap reduced net income by $65
million in the 2000 period and $37 million in the 1999 period.
Excluding the reduction in revenues as a result of the earnings cap and
the fuel reconciliation settlement, operating revenues for the 2000 six-month
period were 15% higher than the prior six-month period of 1999, primarily due to
higher revenues from the US Energy and US Electric segments.
Excluding the TXU Europe restructuring costs discussed above, operation
and maintenance expenses for the 2000 period were 7% less than the prior-year
period. Depreciation and amortization was $30 million lower in the current
period compared with the prior-year period, which included mitigation
depreciation of $61 million.
Differences in effective tax rates are primarily attributable to benefits
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, partially offset by the effect of
non-deductible goodwill amortization.
20
<PAGE>
SEGMENTS
Revenues and net income by operating segment are shown in Note 7 to
Financial Statements.
US ELECTRIC
SEGMENT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (millions):
Base rate................................. $ 1,162 $ 1,100 $ 2,113 $ 2,013
Transmission service...................... 41 34 84 68
Fuel...................................... 577 423 931 756
Fuel reconciliation settlement............ -- (52) -- (52)
Earnings in excess of earnings cap........ (100) -- (100) --
Other..................................... 18 14 33 30
------- ------- ------- -------
Total operating revenues.......... $ 1,698 $ 1,519 $ 3,061 $ 2,815
======= ====== ======= =======
Electric energy sales (gigawatt-hours-- GWh).. 25,507 25,026 48,050 46,632
Degree days (% of normal):
Cooling................................... 115% 112% 121% 110%
Heating................................... 79% 53% 64% 73%
</TABLE>
Comparisons of net income for both periods were impacted by a fuel
reconciliation settlement that reduced 1999 net income by $31 million and a rate
settlement agreement that became effective in 1998 and was modified by the 1999
Restructuring Legislation, which reduced customer rates and introduced an
earnings cap.
Net income of $186 million for the three months ended June 30, 2000 was
16% higher than the same period of 1999. The improvement reflects higher
revenues resulting primarily from customer growth and a 14% reduction in
interest expense due to reacquisition of long-term debt and remarketing of
certain debt to lower interest rates. For the six months ended June 30, 2000,
net income increased 25% from the same period of 1999. The current six-month
period reflects continued strong retail revenue growth and interest cost
reductions, partially offset by the effects of milder winter weather on
revenues.
From January 1, 1998 through June 30, 1999, earnings in excess of TXU
Electric's 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. 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 liability will be applied against
stranded generation assets.
In October 1999, TXU Electric announced plans to sell six of its eighteen
natural gas-fired electricity generating plants in Texas. Due to recent action
by the Texas Natural Resource Conservation Commission, which would require
emission reductions for TXU Electric power plants, TXU Electric has extended the
bid process to allow prospective buyers time to evaluate this action. TXU
Electric anticipates completion of the plant sales in 2001.
21
<PAGE>
US GAS
------
SEGMENT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gas distribution:
Sales volumes (billion cubic feet-- Bcf)....... 19 17 68 69
Margin (millions).............................. $ 57 $ 56 $179 $169
Pipeline transportation:
Transportation volumes (Bcf)................... 133 131 274 271
Revenues (millions)............................ $ 24 $ 24 $ 59 $ 62
Heating degree days (% of normal).................... 79% 53% 64% 73%
</TABLE>
For the three months ended June 30, 2000, the US Gas segment had net
income of $13 million compared with a net loss of $25 million for the three
months ended June 30, 1999. Improved results for the 2000 period were due to a
gain of $53 million ($34 million after-tax) from the sale of substantially all
of the natural gas processing assets and cost reductions in gas distribution
operations.
For the six months ended June 30, 2000, the US Gas segment had net
income of $43 million compared with a loss of $7 million for the six months
ended June 30, 1999. Results for the 2000 six-month period reflect the
previously discussed gain on sale of gas processing assets, improved margins,
and cost reductions for gas distribution operations and higher gas processing
margins.
US ENERGY
---------
SEGMENT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading and marketing volumes:
Gas (Bcf)..................................... 306 241 626 592
Electric (GWh) ............................... 6,836 773 10,540 1,830
</TABLE>
The US Energy segment includes TXU Corp.'s US energy trading, retail
energy services, development activities and related businesses.
The US Energy segment had a net loss of $3 million for the three months
ended June 30, 2000 compared with a net loss of $12 million for the three
months ended June 30, 1999. Results for the 2000 period include income from
the sale of a development project and improved energy trading margins, which
more than offset higher operation and maintenance expenses. The increase in
operation and maintenance expenses reflects costs to develop infrastructure
capabilities to prepare for the opening of the Texas electricity market to
competition in 2002 and severance and other costs in connection with the
relocation of energy trading operations to Dallas.
The segment had a net loss of $11 million for the six months ended June
30, 2000 compared with a net loss of $24 million for the six-months ended June
30, 1999. Results for the 2000 six-month period improved for the same reasons
mentioned above for the second quarter.
22
<PAGE>
EUROPE
------
SEGMENT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales volumes:
Electric (GWh).......................... 6,001 8,892 14,164 19,335
Gas (Bcf)............................... 21 23 59 70
Units distributed (GWh)................. 7,621 7,974 16,825 17,206
Wholesale energy sales:
Electricity (GWh).................. 33,263 17,694 57,698 41,759
Gas (Bcf).......................... 242 96 428 209
Revenues (millions):
Electric................................ $ 501 $ 675 $ 1,171 $ 1,597
Gas..................................... 93 109 277 305
Distribution............................ 114 156 303 345
Wholesale energy sales.................. 564 443 1,408 1,150
Intra-segment eliminations and other.... (13) (76) (51) (174)
------- ------- ------- -------
Total ....................... $ 1,259 $ 1,307 $ 3,108 $ 3,223
======= ======= ======= =======
</TABLE>
Net income for the three months ended June 30, 2000 was $49 million
compared with $29 million for the same period in 1999. Results for the 2000
second quarter were impacted by after-tax costs of $15 million, primarily
restructuring charges associated with the implementation of the joint venture
to operate TXU Europe's UK electric distribution network with that of London
Electricity plc and other corporate reorganizations, as well as costs
associated with the offer for Hidrocantabrico. This was offset by an after-tax
gain of $31 million from the sale of the metering business. Excluding these
items, net income for the second quarter of 2000 was $33 million.
Net income for the six months ended June 30, 2000 was $116 million
compared with $140 million for the same period in 1999. Results for the 2000
period included after-tax restructuring and other costs of $64 million and the
gain from the sale of the metering business. Excluding these items, net income
for the year-to-date 2000 period was $149 million.
23
<PAGE>
AUSTRALIA
---------
SEGMENT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2000 1999 2000 1999*
---- ---- ---- -----
<S> <C> <C> <C> <C>
Sales volumes:
Electric (Gwh)................ 1,440 1,362 2,783 2,660
Gas (Bcf)..................... 17 16 31 19
Degree days:
Cooling....................... 11 4 215 160
Heating....................... 431 429 499 494
Revenues (millions):
Electric...................... $ 91 $ 82 $ 179 $ 169
Gas........................... 53 39 86 47
Other......................... 65 43 92 68
------ ------ ------ ------
Total................ $ 209 $ 164 $ 357 $ 284
====== ====== ====== ======
</TABLE>
*Includes results of TXU Australia Gas from date of acquisition of February
24, 1999.
Net income for the quarter ended June 30, 2000 was $26 million compared
with a net loss of $10 million for the same period in 1999, which included
integration and acquisition-related costs totaling $17 million after-tax. The
second quarter 2000 reflects income related to trading activities which
commenced in late 1999.
Net income for the six months ended June 30, 2000 was $37 million versus
a net loss of $5 million for the 1999 period. Year-to-date net income for the
current year includes the results of TXU Australia Gas operations for the full
six months, while the same period last year included their results from date
of acquisition. Net income for the current six-month period was favorably
impacted by trading activities and an after-tax gain of $6 million from the
sale of Enetech, the former construction and engineering business of TXU
Australia. The 1999 year-to-date period included the charges for integration
and acquisition-related costs.
COMPREHENSIVE INCOME
The losses from currency translation adjustments for all periods
principally reflect the substantial movement in exchange rates between the US
dollar and the UK pound sterling and the Australian dollar. The net unrealized
holding gains on investments are primarily related to market changes on
investments held by TXU Europe and TXU Communications Company.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s 1999 Form 10-K. Results for the three-month and
six-month periods presented herein are not necessarily indicative of
expectations for a full year's operations because of seasonal and other
factors, including variations in maintenance and other operating expense
patterns. No significant changes or events that might affect the financial
condition of TXU Corp. have occurred subsequent to year-end other than as
disclosed in other reports of TXU Corp. or included herein.
24
<PAGE>
CASH FLOWS -- Cash flows provided by operating activities before changes
in operating assets and liabilities for the six months ended June 30, 2000
were $1,028 million compared with $1,136 million for the comparable period in
1999. Changes in operating assets and liabilities for the six months ended
June 30, 2000 used $234 million compared with $24 million provided in the same
period of 1999. The 1999 period included $413 million from the sale of
(pounds) 255 million of accounts receivable by TXU Europe.
Cash flows used in investing activities for the six months ended June
30, 2000 and 1999 were $576 million and $1.9 billion, respectively. The 2000
period benefited from the receipt of net proceeds from the sale of assets
totaling $627 million, including $350 million from the December, 1999 PrimeCo
partnership sale and $105 million from the TXU Processing asset sale. Cash of
$339 million was used in the first half of 2000 for acquisitions versus $1.0
billion used in the 1999 period for the TXU Australia Gas acquisition.
Construction expenditures were $615 million for the current six-month period
compared with $717 million for the comparable period in 1999.
In March 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 did not
then own. Later in March 2000, TXU Europe announced that it would not pursue
its offer after a competing bid was made. In a series of private transactions
since that date, TXU Europe acquired additional shares in Hidrocantabrico and
directly or indirectly holds approximately 19.2% of the outstanding shares.
TXU Europe has a preemptive option to acquire an additional 4.9% of the stock
in Hidrocantabrico currently held by Electrabel SA, an electricity company in
Belgium, if Electrabel were to sell its interest to another company. TXU
Europe also has a conditional put option whereby it may be required to
purchase the full 10.0% interest in Hidrocantabrico held by Electrabel if
Electrabel is required to dispose of its holdings by European Union or Spanish
Competition Authorities. The conditions of this put option include a
reasonable notice period before execution.
On August 3, 2000, the Spanish Stock Market Commission (CNMV) announced
it was opening an investigation as to whether TXU Europe and Electrabel acted
in concert over share purchases in order to avoid making a formal takeover
bid. If the two utilities are found to be in violation of Spanish securities
law, they could face a substantial fine and other restrictions. The
investigation is expected to last several months. TXU Europe is unable to
determine what impact there may be, if any, as a result of the investigation.
In the meantime, TXU Europe has not received any formal notification of
whether the two companies' political rights (including voting rights) in
Hidrocantabrico have been suspended. TXU Europe does not believe there has
been any violation of Spanish securities laws and is fully cooperating with
the investigation. TXU Europe has also indicated that it would support a full
offer for Hidrocantabrico by a third party that has the support of
Hidrocantabrico's Board of Directors.
On May 11, 2000, TXU Corp. acquired all of the outstanding common and
preferred stock of Fort Bend Communication Companies, Inc. (FBCC) for
approximately $161 million in cash plus liabilities assumed. TXU Corp. expects
to facilitate the growth of its communications operations by contributing
substantially all of the assets of TXU Communications Company and FBCC into a
joint venture, which would obtain external financing. This transaction would
enable TXU Corp. to reduce short-term indebtedness by about $.9 billion.
On May 4, 2000, TXU Australia was awarded a long-term lease by the
government of South Australia to operate a 1,280-megawatt natural gas powered
generating station. Funding for the $177 million project was provided from
internal sources and bank borrowings.
On July 13, 2000, TXU Europe agreed to purchase 51% of Stadtwerke Kiel
AG, a German municipal utility, for approximately (pounds) 143 million ($215
million). The state parliament of Kiel unanimously approved the sale. The
city government of Kiel, the state capital, will retain the other 49% of the
utility, which has approximately 250,000 gas and electricity customers, 175
megawatts of power generation and 2.7 billion cubic feet of gas storage
capacity. Final approval is needed from the European Union regulators before
the acquisition can close. Such approval may take several months.
25
<PAGE>
On August 3, 2000, TXU Europe also announced its unconditional purchase
of United Utilities' retail energy supply business, Norweb Energi (Norweb),
for L310 million ($465 million). Financing was provided through existing bank
lines. TXU Europe's existing supply business, Eastern Energy, has 2.7 million
electricity and 0.7 million gas customers. Combined with Norweb's 1.8 million
electricity and 0.4 million gas customers, the acquisition will create the
UK's second largest energy retailer with 5.6 million accounts. The
transaction also includes the assumption of Norweb's power purchase
agreements, which will be integrated into TXU Europe's energy portfolio. On
August 9, 2000, the Office of Gas and Electricity Markets issued a
consultation paper on the regulatory issues involved in the acquisition. As
the transaction is unconditional, TXU Europe has assumed the risk of, and
responsibility for, obtaining all necessary regulatory approvals.
Also on August 3, 2000, TXU Europe announced it had contracted its
customer services operation to Vertex, United Utilities' customer services
business. Customer services include the call centers, billing, credit
management and debt collection. Eastern Energy's 1,250 customer services staff
will transfer to Vertex on September 1, 2000.
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.
Since January 1, 2000, TXU Corp. has repurchased approximately 12.7
million shares of its common stock for $414 million. The cost of the
repurchased shares, to the extent it exceeded the amount received upon
issuance, has been charged to retained earnings. Additional repurchases may
occur from time to time.
External funds of a permanent or long-term nature are obtained through
the issuance of common stock, preferred stock, trust securities and long-term
debt by TXU Corp. and subsidiaries. The capitalization ratios of TXU Corp. at
June 30, 2000 consisted of approximately 62% long-term debt, 6% preferred
securities of subsidiary trusts, 2% preference and preferred stock and 30%
common stock equity. Restricted cash of $1.1 billion pledged against TXU
Europe lease obligations is included in other investments. Applying the cash
pledged against related lease obligations, the capitalization ratios consisted
of 60% long term debt, 6% preferred securities of subsidiary trusts, 2%
preference and preferred stock and 32% common stock equity.
ISSUANCES AND RETIREMENTS -- During the six months ended June 30, 2000,
TXU Corp. issued, redeemed, reacquired or made scheduled principal payments on
preference stock, acquisition facilities, other long-term debt and trust
securities, as follows:
<TABLE>
<CAPTION>
Issuances Retirements
--------- -----------
<S> <C> <C>
TXU Corp:
Preference Stock.................................... $ 300 $ --
Senior Notes........................................ -- 125
TXU Electric:
First Mortgage Bonds................................ -- 85
Other............................................... 14 25
TXU Europe:
Euro Medium Term Notes.............................. 355 --
Preferred Securities of Subsidiary Perpetual Trust.. 150 --
Revolving Credit Facility (Tranche B)............... 322 610
Other............................................... 67 331
All Other Subsidiaries.................................... 3 257
------ ------
Total............................................... $1,211 $1,433
====== ======
</TABLE>
At June 30, 2000, TXU Corp., TXU Electric and TXU Gas had no borrowings
outstanding under the US Credit Agreements described in Note 4 of TXU Corp.'s
1999 Form 10-K. Letters of credit drawn under the agreement were $182 million
as of June 30, 2000. The US Credit Agreements primarily support commercial
26
<PAGE>
paper borrowings. At June 30, 2000, outstanding commercial paper borrowings
supported by both facilities totaled $2.2 billion.
No other substantive changes to financing arrangements have occurred
subsequent to December 31, 1999 except as described in Note 3 to Financial
Statements. See Notes 3 and 4 to Financial Statements for further details
concerning short-term financing and capitalization. Early redemptions of
preferred stock and long-term debt may occur from time to time in amounts
presently undetermined.
REGULATION AND RATES
UK -- NEW ELECTRICITY TRADING ARRANGEMENTS (NETA) -- The implementation
of NETA is now scheduled for November 21, 2000. The arrangements provide those
wishing to buy and sell electricity the freedom to enter into directly
negotiated contracts instead of having to trade through a central electric
pool. It is expected that under the new arrangements bulk electricity will be
traded on one or more exchanges and through a variety of bilateral and
multilateral contracts and that market participants will include not only
generators and suppliers but also traders with physical positions, i.e. energy
wholesalers.
AUSTRALIA -- TXU Australia Group is subject to regulation by the Office
of the Regulator General (ORG). The ORG has the power to issue licenses for
the supply, distribution and sale of electricity within Victoria and regulates
tariffs for the use of the distribution system. The Australian Competition and
Consumer Commission is responsible for regulating transmission system tariffs.
The electricity distribution tariffs applying to TXU Australia Electricity are
effective until December 31, 2000.
Following a detailed submission from TXU Australia in December 1999 and
an Issues Paper released in February 2000, on May 31, 2000, the ORG published
its draft decision in the 2001 Electricity Distribution Price Review. The
draft decision proposes a reduction of 19% in TXU Australia Electricity's
average distribution charges, resulting from the combined effect of a
reduction in the cost of capital, the allocation of certain costs from the
distribution business to the retail business and the pass-through of
efficiency improvements made in the first regulatory period. This represents
an average annual revenue reduction of A$53 million ($32 million) per year
over the next five years. A final decision is due to be published by the ORG
in September 2000.
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.
The gas distribution tariffs applying to TXU Australia Gas 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 not less than a five-year period.
After the next period, prices will be set for periods nominated by TXU
Australia Gas and approved by the ORG. TXU Australia is not able to predict
the outcome of this review or the impact on its financial position or results
of operations.
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
the 1999 Form 10-K and this Form 10-Q, which might significantly alter its
financial position, results of operations or cash flows. See Note 5 to
Financial Statements.
27
<PAGE>
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as extended and amended,
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.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Corp. contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Corp. believes that in making
such statement its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Corp.'s 1999 Form 10-K, as well as general industry trends;
implementation of the Texas electricity deregulation legislation; power costs
and availability; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; and access to
adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of TXU Corp. to differ materially from those
projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Corp. undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for TXU
Corp. to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from
the information set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in TXU Corp.'s 1999 Form 10-K and is therefore not
presented herein. Since December 31, 1999 there has been basically no change
in the foreign currency contracts as disclosed in the 1999 Form 10-K; however,
the estimated fair value of such contracts has improved $102 million to a
favorable $65 million, principally from the decline in the exchange rate for
UK pound sterling into US dollars.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, the Hindustan Development Corporation issued
arbitration proceedings in the Arbitral Tribunal in Delhi, India against The
Energy Group plc (TEG), now known as Energy Holdings (No. 3) Limited,
claiming damages of (pounds) 255 million ($387 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 is vigorously
defending this claim and cannot predict the outcome of these proceedings.
Arbitration has been completed and the decision of the arbitrators is
expected in September 2000.
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 claimed a final total of (pounds) 133 million ($202 million) arising
from the summary termination for the claimed fundamental breach of their
respective contracts in April 1998. The five agencies claimed damages for
failure to give reasonable notice and for compensation under the UK
Commercial Agents Regulations 1994. The complaints were settled in June 2000,
following a mediation ordered by the High Court, for approximately (pounds) 6
million ($9 million). There was no impact on the income statement, as TXU
Europe Group had previously made provisions for such estimated expenses.
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
(EEX), 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. The parties to the Consolidated Action entered
into an agreement that TXU Gas expects to form the basis of the settlement of
this litigation, subject to the completion of confirmatory discovery by the
plaintiffs and approval of the Court. The terms of this agreement required TXU
Gas to pay $5 million into escrow.
29
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TXU Corp. held its Annual Meeting of Shareholders on May 12, 2000. The
following items were presented to the shareholders with the following results:
<TABLE>
<CAPTION>
Votes
Withheld or
Election of Directors Votes for Against Abstentions
------------------------------------ ----------- ------------ -----------
<S> <C> <C> <C>
Derek C. Bonham 229,093,745 2,252,126 None
J. S. Farrington 229,073,653 2,272,218 None
William M. Griffin 228,808,316 2,537,555 None
Kerney Laday 229,141,628 2,204,243 None
Margaret N. Maxey 228,770,183 2,575,688 None
James A. Middleton 229,195,735 2,150,136 None
Erle Nye 229,090,531 2,255,340 None
J. E. Oesterreicher 229,100,151 2,245,720 None
Charles R. Perry 228,918,349 2,427,522 None
Herbert H. Richardson 228,998,682 2,347,189 None
Selection of Deloitte & Touche LLP 229,563,902 663,715 1,118,254
As Independent Accountants
Corporate Name Change 228,891,926 1,197,152 1,256,793
Reapproval of Annual Incentive Plan 221,924,480 7,310,809 2,110,582
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
3(b) Statement of Resolution Establishing Flexible Money Market Cumulative
Preference Stock Series B of TXU Corp.
15 Letter from independent accountants as to unaudited interim financial
information
27 Financial Data Schedules
99 Condensed Statements of Consolidated Income -- Twelve Months Ended
June 30, 2000 and 1999.
(b) Reports on Form 8-K filed since March 31, 2000:
Date of Report Item Reported
-------------- -------------
May 16, 2000 Item 5. Other Events
Item 7. Financial Statements and Exhibits
August 1, 2000 Item 5. Other Events
30
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU CORP.
By /s/ Jerry W. Pinkerton
-------------------------------
Jerry W. Pinkerton
Controller and Principal
Accounting Officer
Date: August 10, 2000
31
