<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 SEPTEMBER 30, 2000
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11668
TXU ELECTRIC COMPANY
A Texas Corporation I.R.S. Employer Identification
No. 75-1837355
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 NOVEMBER 10, 2000: 79,749,600 shares, without
par value.
================================================================================
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Statements of Consolidated Income -
Three and Nine Months Ended September 30, 2000 and 1999........... 3
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2000 and 1999..................... 4
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999.......................... 5
Notes to Financial Statements..................................... 7
Independent Accountants' Report................................... 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............. 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 15
SIGNATURES..................................................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
OPERATING REVENUES................................. $2,444 $2,059 $5,479 $4,847
-------- -------- ------- -------
OPERATING EXPENSES
Energy purchased for resale and fuel consumed. 1,071 709 2,189 1,635
Operation and maintenance..................... 383 313 1,021 929
Depreciation and amortization................. 153 138 456 492
Income taxes.................................. 194 225 346 334
Taxes other than income....................... 134 131 398 391
-------- -------- ------- -------
Total operating expenses................ 1,935 1,516 4,410 3,781
-------- -------- ------- -------
OPERATING INCOME................................... 509 543 1,069 1,066
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction 3 5 6 7
Other income (deductions)-- net............... (4) (3) (12) (13)
Income tax benefit (expense).................. 1 -- -- 10
-------- -------- ------- -------
Total other income (deductions)......... -- 2 (6) 4
-------- -------- ------- -------
INCOME BEFORE INTEREST AND
OTHER CHARGES................................. 509 545 1,063 1,070
-------- -------- ------- -------
INTEREST INCOME.................................... 1 -- 2 2
INTEREST EXPENSE AND OTHER CHARGES
Interest...................................... 100 95 289 325
Distributions on TXU Electric Company obligated,
mandatorily redeemable, preferred securities
of subsidiary trusts holding solely junior
subordinated debentures of TXU Electric Company 17 17 51 51
Allowance for borrowed funds used during construction
and capitalized interest................ (2) (1) (6) (6)
-------- -------- ------- -------
Total interest expense and other charges 115 111 334 370
-------- -------- ------- -------
NET INCOME ........................................ 395 434 731 702
PREFERRED STOCK DIVIDENDS.......................... 2 2 7 7
-------- -------- ------- -------
NET INCOME AVAILABLE FOR COMMON STOCK.............. $ 393 $ 432 $ 724 $ 695
======== ======== ======= =======
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---- ----
MILLIONS OF DOLLARS
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
Net income..................................................................... $ 731 $ 702
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization............................................. 597 600
Deferred income taxes and investment tax credits-- net ................... (102) 53
Allowance for equity funds used during construction....................... (6) (7)
Reduction in revenues for earnings in excess of earnings cap.............. 247 59
Changes in operating assets and liabilities:
Accounts receivable................................................ (300) (95)
Inventories........................................................ 5 8
Accounts payable:
Affiliates.................................................... 97 15
Other......................................................... 80 (5)
Interest and taxes accrued......................................... 283 135
Other working capital ............................................. 19 44
Over/(under)-recovered fuel revenue-- net of deferred taxes........ (326) (71)
Other-- net........................................................ (20) 7
--------- ---------
Cash provided by operating activities........................ 1,305 1,445
--------- ---------
CASH FLOWS -- FINANCING ACTIVITIES
Issuances of long-term debt.................................................... 65 127
Retirements/repurchases of securities:
Long-term debt............................................................. (161) (557)
Common stock............................................................... (588) (445)
Change in notes payable-- affiliates........................................... (78) (21)
Preferred stock dividends paid................................................. (7) (8)
Debt premium, discount, financing and reacquisition expenses................... (5) (26)
--------- ---------
Cash used in financing activities.............................. (774) (930)
--------- ---------
CASH FLOWS -- INVESTING ACTIVITIES
Construction expenditures....................................................... (458) (401)
Nuclear fuel ................................................................... (47) (55)
Other investments............................................................... (15) (17)
--------- ---------
Cash used in investing activities.............................. (520) (473)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................................ 11 42
CASH AND CASH EQUIVALENTS-- BEGINNING BALANCE....................................... 4 5
--------- ---------
CASH AND CASH EQUIVALENTS-- ENDING BALANCE.......................................... $ 15 $ 47
========= =========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- -----------
MILLIONS OF DOLLARS
<S> <C> <C>
ELECTRIC PLANT
In service:
Production................................................................ $15,569 $15,533
Transmission.............................................................. 1,697 1,681
Distribution ............................................................. 5,616 5,390
General................................................................... 505 498
---------- -----------
Total................................................................ 23,387 23,102
Less accumulated depreciation............................................ 7,827 7,409
---------- -----------
Electric plant in service, less accumulated depreciation............ 15,560 15,693
Construction work in progress.................................................. 324 191
Nuclear fuel (net of accumulated amortization: 2000-- $700; 1999-- $635)..... 155 171
Held for future use............................................................ 22 24
---------- -----------
Electric plant, less accumulated depreciation and amortization...... 16,061 16,079
Reserve for regulatory disallowances .......................................... (836) (836)
---------- -----------
Net electric plant.................................................. 15,225 15,243
---------- -----------
INVESTMENTS......................................................................... 643 612
---------- -----------
CURRENT ASSETS
Cash and cash equivalents...................................................... 15 4
Accounts receivable (net of allowance for uncollectible accounts: 2000-- $7; 1999-- $4) 462 162
Inventories - at average cost:
Materials and supplies.................................................... 158 158
Fuel stock................................................................ 79 84
Deferred income taxes.......................................................... -- 21
Prepayments and other current assets........................................... 58 38
---------- -----------
Total current assets................................................ 772 467
---------- -----------
OTHER ASSETS
Regulatory assets.............................................................. 1,392 1,680
Under-recovered fuel revenue................................................... 541 39
Deferred debits................................................................ 86 67
---------- -----------
Total other assets.................................................... 2,019 1,786
---------- -----------
Total...................................................... $18,659 $18,108
========== ===========
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
MILLIONS OF DOLLARS
<S> <C> <C>
CAPITALIZATION
Common stock without par value:
Authorized shares: 180,000,000
Outstanding shares: 2000-- 86,916,300 and 1999-- 103,874,700 ....... $ 2,636 $ 3,145
Stock of parent held for long-term incentive plan trust .................. -- (10)
Retained earnings......................................................... 4,182 3,536
----------- --------
Total common stock equity..................................... 6,818 6,671
Preferred stock:
Not subject to mandatory redemption................................. 115 115
Subject to mandatory redemption..................................... 21 21
TXU Electric Company obligated, mandatorily redeemable, preferred securities of subsidiary
trusts holding solely junior subordinated debentures of TXU Electric Company 829 824
Long-term debt, less amounts due currently............................... 4,508 4,684
----------- --------
Total capitalization.......................................... 12,291 12,315
----------- --------
CURRENT LIABILITIES
Notes payable - affiliates............................................... 243 321
Long-term debt due currently............................................. 593 509
Accounts payable:
Affiliates........................................................ 213 116
Other............................................................. 199 119
Customers' deposits...................................................... 78 79
Taxes accrued............................................................ 426 139
Interest accrued......................................................... 109 113
Deferred income taxes.................................................... 170 --
Other current liabilities................................................ 165 130
----------- --------
Total current liabilities................................... 2,196 1,526
----------- --------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes....................................... 3,264 3,340
Investment tax credits.................................................. 498 515
Other deferred credits and noncurrent liabilities....................... 410 412
----------- --------
Total deferred credits and other noncurrent liabilities..... 4,172 4,267
----------- --------
CONTINGENCIES (Note 5)
----------- --------
Total.................................................. $18,659 $18,108
=========== ========
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
TXU ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Electric Company (TXU Electric) is an electric utility engaged in
the generation, purchase, transmission, distribution and sale of electric
energy solely within the State of Texas. TXU Electric is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a holding company
that 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 primarily
in the United States (US), Europe and Australia. As an integrated electric
utility, TXU Electric currently has only one reportable segment.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The condensed consolidated financial
statements of TXU Electric 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
reclassified to conform to current classifications. All dollar amounts in the
financial statements and tables in the notes are stated in millions of
dollars unless otherwise indicated.
CHANGES IN ACCOUNTING STANDARDS -- Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as extended by SFAS No. 137 (June 1999) and amended by SFAS No.
138 (June 2000), is effective for TXU Electric beginning January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments 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.
The process relating to implementation of SFAS No. 133 has been ongoing
since July 1999. To date, all derivatives within TXU Electric have been
identified pursuant to SFAS No. 133 requirements. TXU Electric is in the
process of designating, documenting and assessing hedging relationships, the
majority of which are expected to result in cash-flow hedges, which will
require TXU Electric to record the derivative assets or liabilities at fair
value on its statement of financial position with an offset in Other
Comprehensive Income to the extent the hedge is effective. Hedge
ineffectiveness will be recorded in earnings.
TXU Electric continues to evaluate the impact of SFAS No. 133 as well as
the ongoing implementation issues currently being addressed by the
Derivatives Implementation Group. As a result, the direct financial impact of
the application of hedge accounting and the transition adjustment on TXU
Electric's financial position and results of operations has yet to be
determined.
There were no items impacting comprehensive income for the periods
reported; therefore, comprehensive income is the same as net income.
3. CAPITALIZATION
COMMON STOCK -- During the nine months ended September 30, 2000, TXU
Electric purchased and retired 17 million shares of its issued and
outstanding common stock from TXU Corp. at a cost of $588 million. In
November 2000, TXU Electric purchased and retired 7.2 million shares of its
issued and outstanding common stock from TXU Corp. at a cost of $215 million.
The cost of the repurchased shares, to the extent it exceeded the amount
received upon issuance, has been charged to retained earnings.
7
<PAGE>
TXU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS, HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TXU
ELECTRIC (TRUST SECURITIES) -- The statutory business trust subsidiaries had
Trust Securities and Trust Assets outstanding as follows:
<TABLE>
<CAPTION>
TRUST SECURITIES TRUST ASSETS MATURITY
--------------------------------------------------------- ---------------------------- --------
UNITS (000'S) AMOUNT AMOUNT
--------------------------- ---------------------------- ----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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..... 14,371 14,371 $ 829 $ 824 $ 876 $ 876
------- ------ ----- ----- ----- -----
</TABLE>
(a) Floating rate is determined quarterly based on LIBOR. A related interest
rate swap, expiring in May 2002, effectively fixes the rate at 7.183%.
TXU Electric owns the common securities issued by its subsidiary trusts
and has effectively issued a full and unconditional guarantee of each such
trust's securities.
LONG-TERM DEBT -- Certain variable rate debt of TXU Electric requires
periodic remarketing. Because TXU Electric intends to remarket these
obligations, and has the ability to refinance if necessary, they have been
classified as long-term debt. TXU Electric's first mortgage bonds are secured
by a mortgage and deed of trust with a major financial institution. Electric
plant of TXU Electric is generally subject to the lien of its mortgage.
4. REGULATION AND RATES
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 legislation passed in 1999 to
restructure the electric utility industry in Texas (1999 Restructuring
Legislation). The proceeds received by TXU Electric are to be used solely for
the purpose of retiring utility 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 filed an appeal on May 2, 2000
with the Travis County, Texas District Court.
On September 7, 2000, the Travis County, Texas District Court issued a
final judgment reversing that part of the PUC's financing order that utilized
regulated asset life (up to 40 years) for purposes of present-valuing the
benefits of securitization. Instead, the District Court ruled that a
present-value period based upon stranded cost and regulatory asset recovery
periods authorized under the 1999 Restructuring Legislation should have been
used by the PUC. The District Court also ruled that the PUC statements in its
financing order concerning the future impact of securitization of loss on
reacquired debt were only an advisory opinion. The judgment affirmed other
aspects of the PUC's financing order and ordered the case remanded to the PUC
for further proceedings consistent with the judgment. TXU Electric and
various other parties have appealed this judgement directly to the Texas
Supreme 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.
8
<PAGE>
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. In July 2000, the Travis County, Texas District Court issued its
judgment denying this appeal and finding that the securitization provisions
are constitutional. This judgment has been appealed directly to the Texas
Supreme Court. 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 described how TXU Electric proposed 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 proposed to separate the provision of competitive energy services
from its regulated business activities has been severed by the PUC from
Docket No. 21950 and assigned Docket No. 21987. In April 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. In that March 2000 filing, TXU Electric's
stranded costs were 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 filed an updated stranded cost estimate on August 28, 2000 to
reflect various PUC decisions made since Docket No. 22350 was filed. In the
August 28, 2000 filing, TXU Electric's stranded costs were estimated to be
$2.8 billion. Subsequent to the August 2000 filing, the PUC has required TXU
Electric to revise the stranded cost estimate to remove amounts related to
regulatory assets, certain environmental expenditures, and the remand of
Docket No. 9300, which resulted in a revised stranded cost estimate of $14
million. TXU Electric has appealed certain of the PUC's decisions related to
this matter to the Travis County, Texas District Court. Various parties to
Docket No. 22350 have presented stranded cost estimates ranging from negative
$1.5 billion to negative $3.5 billion along with recommendations that these
amounts be returned to customers beginning in 2002. The estimate established
in Docket No. 22350 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.
Pursuant to an order entered on August 31, 2000, this docket will be held in
abeyance until March 20, 2001. TXU Electric cannot predict the outcome of the
reconsideration of the Order on remand by the PUC.
9
<PAGE>
DOCKET NO. 22344 -- In a generic issues docket held in August 2000, the
PUC issued orders that impacted TXU Electric's recovery of restructuring
expenses and certain other regulatory assets. Accordingly, in September 2000,
such unrecovered regulatory assets totaling $50 million were written off.
This reduced earnings in excess of the earnings cap by an equal amount. As a
result, there was no impact to net income.
DOCKET NO. 22880 -- On August 4, 2000, TXU Electric filed a request
with the PUC to surcharge the cumulative under-collection 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%. On August 31, 2000, the Administrative Law Judge
entered an Interim Order, implementing an agreement of the parties, providing
for an interim increase in fuel factors of 13.8%, effective September 6,
2000, and a surcharge of TXU Electric's cumulative under-recovery of fuel
cost revenues that existed as of July 31, 2000, together with the interest
through November 2000, in the amount of $315 million to be collected over the
fourteen-month period beginning November 2000. On October 13, 2000, TXU
Electric filed a Supplemental Application with the PUC requesting its initial
27.6% fuel factor increase instead of the interim increase.
DOCKET NO. 23153 -- On October 13, 2000, TXU Electric filed with the
PUC a request for a surcharge to recover a $230 million under-collection of
fuel cost revenues for the months of August and September, 2000. The proposed
surcharge would be collected from January 2001 through December 2001. TXU
Electric cannot predict the outcome of this proceeding.
5. CONTINGENCIES
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, $23
million at September 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
outstanding at September 30, 2000, that had been issued for similar purposes
and previously guaranteed by TXU Electric. TXU Electric is, however,
contingently liable in the unlikely event of default by the municipality.
GENERAL -- TXU Electric is involved in various legal and administrative
proceedings, the ultimate resolution of which, in the opinion of management,
should not have a material effect upon its financial position, results of
operations or cash flows.
10
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
TXU Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Electric Company and subsidiaries (TXU Electric) as of September 30, 2000,
and the related condensed statements of consolidated income for the
three-month and nine-month periods ended September 30, 2000 and 1999 and of
consolidated cash flows for the nine-month periods ended September 30, 2000
and 1999. These financial statements are the responsibility of TXU Electric'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 Electric 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
November 10, 2000
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
TXU Electric has announced plans to sell six of its eighteen natural
gas-fired electricity generating plants in Texas. Due to action by the Texas
Natural Resource Conservation Commission, which would require emission
reductions for TXU Electric's 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.
RESULTS OF OPERATIONS
SIGNIFICANT HIGHLIGHTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues (millions):
Base rate................. $1,542 $1,456 $3,622 $3,437
Transmission service...... 42 34 126 102
Fuel...................... 990 610 1,928 1,319
Fuel reconciliation settlement -- -- -- (52)
Earnings in excess of earnings cap (147) (59) (247) (59)
Other..................... 17 18 50 100
------ ------ ------ ------
Total operating $2,444 $2,059 $5,479 $4,847
====== ====== ====== ======
revenues
Electric energy sales (gigawatt-hours) 33,138 31,021 80,698 77,160
Degree days (% of normal):
Cooling................... 119% 115% 118% 113%
Heating................... -- -- 66% 73%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net income of $395 million for the three months ended September 30,
2000 was 9% lower than the same period of 1999. Comparisons of net income
were impacted by 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. From January 1, 1998 through
June 30, 1999, earnings in excess of the earnings cap were recorded as
additional depreciation of nuclear production assets. Effective July 1, 1999,
following the 1999 Restructuring Legislation, earnings in excess of the
earnings cap were recorded as a reduction of revenues, with a corresponding
regulatory liability recorded. Mitigation as a result of the earnings cap
reduced net income by $95 million in the third quarter of 2000 and $32
million in the third quarter of 1999.
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.
Since January 1998, regular nuclear depreciation and additional nuclear
mitigation total approximately $1.9 billion.
In a generic issues docket held in August 2000, the PUC issued orders
that impacted TXU Electric's recovery of restructuring expenses and certain
other regulatory assets. Accordingly, in September 2000, such unrecovered
regulatory assets totaling $50 million were written off. This reduced
earnings in excess of the earnings cap by an equal amount. As a result, there
was no impact to net income.
12
<PAGE>
Excluding the decrease in revenues as a result of the earnings cap,
operating revenues for the third quarter of 2000 were up 22% from the third
quarter of 1999 primarily due to an increase in fuel revenues as a result of
higher gas prices, a 7% increase in sales volumes resulting from a 2.5%
growth in customers and a positive impact from weather on the service area.
Energy purchased for resale and fuel consumed in the current quarter
increased $362 million (51%) from the third quarter of last year primarily
due to both higher fuel gas prices and growth in electric energy sales.
Operation and maintenance expenses for the current third quarter were
22% higher than in the 1999 third quarter, primarily due to a write-off of
certain regulatory assets and increased PUC third-party transmission tariffs.
The 4% increase in interest expense and other charges in the third
quarter of 2000 compared with the prior-year third quarter was primarily due
to increased interest rates on floating-rate debt instruments.
The effective income tax rate for the 2000 three-month period was 33%
versus 34% for the prior-year period. Both periods benefited from the
discontinuation of amortization of prior period flow-through amounts and
other tax-related regulatory assets and liabilities resulting from the impact
of the 1999 Restructuring Legislation.
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net income for the nine months ended September 30, 2000 of $731 million
increased 4% from the same period of 1999, which included a $31 million fuel
reconciliation settlement. Mitigation as a result of the earnings cap reduced
net income by $161 million in the 2000 period and $69 million in the 1999
period.
Excluding the reduction in revenues as a result of the earnings cap and
fuel reconciliation settlement, operating revenues for year-to-date 2000 were
up 15% from the corresponding 1999 period, reflecting a 46% increase in fuel
revenues and a 5% increase in sales volumes as a result of continued customer
and usage growth and warmer than normal weather.
Energy purchased for resale and fuel consumed in the first nine months
of 2000 increased $554 million (34%) from the first nine months of 1999
primarily due to both higher fuel gas prices and growth in electric energy
sales.
Operation and maintenance expenses for the current nine-month period
were 10% higher than the same period in 1999 primarily due to a write-off of
certain regulatory assets and increased PUC third-party transmission tariffs.
Depreciation and amortization expense was $36 million lower in the current
period compared with the prior-year period, which included mitigation
depreciation of $52 million.
Interest expense and other charges of $334 million for the nine-month
period of 2000 was 10% lower than in the same period of 1999 due to the
reacquisition of long-term debt and remarketing of certain debt to lower
interest rates.
The effective income tax rate for the 2000 nine-month period and for
the prior-year period was 32%. Both periods benefited from the
discontinuation of amortization of prior period flow-through amounts and
other tax-related regulatory assets and liabilities resulting from the impact
of the 1999 Restructuring Legislation.
13
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities before changes in operating
assets and liabilities for the nine months ended September 30, 2000 were $1.5
billion compared with $1.4 billion for the same period in 1999. Changes in
operating assets and liabilities in the first nine months of 2000 used $162
million of cash versus $38 million of cash provided in the prior-year period.
For the 2000 period, this is primarily due to an increase in under-recovered
fuel revenue of $501 million. A surcharge has been approved by the PUC for
recovery of $315 million of under-collections through July 2000 to be
collected over a fourteen-month period beginning November 2000. A second
surcharge totaling $230 million for August and September under-collections is
pending approval from the PUC. See Note 4 to Financial Statements.
Cash flows used in financing activities were $774 million in the first
nine months of 2000 compared with $930 million for the first nine months of
1999. Financing activities in the first nine months of 2000 included a $174
million net reduction in debt and notes payable and the repurchase of $588
million of common stock from TXU Corp.
Cash flows used in investing activities for the first nine months of
2000 totaled $520 million versus $473 million for the same period last year.
Construction expenditures were $458 million and $401 million for the nine
months of 2000 and 1999, respectively.
No other substantive changes to financing arrangements have occurred
subsequent to December 31, 1999. Early redemptions of preferred stock,
long-term debt and trust securities may occur from time to time.
REGULATION AND RATES
Although TXU Electric 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 4 to
Financial Statements.
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as extended by SFAS No.
137 (June 1999) and amended by SFAS No. 138 (June 2000), is effective for TXU
Electric beginning January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments 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.
The process relating to implementation of SFAS No. 133 has been ongoing
since July 1999. To date, all derivatives within TXU Electric have been
identified pursuant to SFAS No. 133 requirements. TXU Electric is in the
process of designating, documenting and assessing hedging relationships, the
majority of which are expected to result in cash-flow hedges, which will
require TXU Electric to record the derivative assets or liabilities at fair
value on its statement of financial position with an offset in Other
Comprehensive Income to the extent the hedge is effective. Hedge
ineffectiveness will be recorded in earnings.
TXU Electric continues to evaluate the impact of SFAS No. 133 as well as
the ongoing implementation issues currently being addressed by the
Derivatives Implementation Group. As a result, the direct financial impact of
the application of hedge accounting and the transition adjustment on TXU
Electric's financial position and results of operations has yet to be
determined.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Electric contain
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Although TXU Electric believes
that in making any such statement its expectations are based on reasonable
assumptions, any such statement involves uncertainties and is qualified in
its entirety by reference to 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 Electric's 1999 Form
10-K, as well as general industry trends; implementation of the 1999
Restructuring 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 Electric 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 Electric 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
Electric 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 Electric's 1999 Form 10-K and
is therefore not presented herein.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 Letter from independent accountants as to unaudited interim
financial information
27 Financial Data Schedule
99 Condensed Statements of Consolidated Income-- Twelve Months Ended
September 30, 2000 and 1999.
(b) Reports on Form 8-K filed since June 30, 2000:
Date of Report Item Reported
-------------- -------------
September 7, 2000 Item 5. Other Events
15
<PAGE>
SIGNATURES
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 ELECTRIC COMPANY
By /s/ Jerry W. Pinkerton
--------------------------------
Jerry W. Pinkerton
Vice President,
Principal Accounting Officer
By /s/ Gaylene M. McMahon
--------------------------------
Gaylene M. McMahon
Controller
Date: November 10, 2000
16
