TXU 2002 Annual Report - Financial Report

In April 2002, TXU Energy acquired a cogeneration and wholesale energy production business in New Jersey for $36 million in cash. The acquisition included a 122 megawatt (MW) combined-cycle power production facility and various contracts, including electric supply and gas transportation agreements.

In May 2000, TXU Corp. acquired a telecommunications company, Fort Bend Communication Company, for $161 million and TXU Australia acquired certain assets and liabilities of Optima Energy Pty Ltd for $177 million.

Dispositions TXU Corp. intends to sell its 60% interest in a gas distribution business in Mexico and recorded a charge of $15 million after-tax in the third quarter of 2002 to write down its investment in the business. The charge was reported as discontinued operations. (See Note 3.)

In May 2000, TXU Gas sold substantially all of the assets of its natural gas processing subsidiary for $105 million, resulting in a pre-tax gain of $53 million ($34 million after-tax), reported in other income in the statement of income.

Generation Plant Acquisition and Disposition In May 2002, TXU Energy acquired a 260 MW combined-cycle power generation facility in northwest Texas through a settlement agreement which dismissed a lawsuit previously filed related to the plant, and included a nominal cash payment. TXU Energy previously purchased all of the electrical output of this plant under a long-term contract.

In April 2002, TXU Energy completed the sale of its Handley and Mountain Creek generating plants in the Dallas-Fort Worth area with total plant capacity of 2,334 MW for $443 million in cash. Concurrent with the sale, TXU Energy entered into a tolling agreement to purchase power during the summer months through 2006. The terms of the tolling agreement include above-market pricing, representing a fair value liability of $190 million. A pre-tax gain on the sale of $146 million, net of the effects of the tolling agreement, was deferred and is being recognized in other income during summer months over the five-year term of the tolling agreement. Both the value of the tolling agreement and the deferred gain are reported in other liabilities in the balance sheet.

Joint Venture In August 2000, TXU Corp. formed a joint venture with third-party investors and contributed the stock of its telecommunications subsidiaries, including Fort Bend Communication Company, to Pinnacle One Partners, L.P. (Pinnacle or the joint venture) for a 50% voting interest and a distribution of approximately $600 million in cash. The third-party investors contributed $150 million for the remaining 50% voting interest. No gain or loss was recorded on the formation of the joint venture. TXU Corp.’s investment in the joint venture is accounted for using the equity method. (See Notes 5 and 16.)

2. Significant Accounting Policies

Basis of Presentation The consolidated financial statements of TXU Corp. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the US and, except for the discontinuance of TXU Europe operations and the reclassifications made in accordance with the Emerging Issues Task Force (EITF) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” and the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” discussed below, on the same basis as the audited financial statements included in its 2001 Form 10-K. Investments in businesses over which TXU Corp. does not maintain effective control, such as the Pinnacle joint venture, are generally accounted for under the equity method, and the assets and liabilities of such investees are, therefore, not reflected in the consolidated financial statements. The only significant unconsolidated entities are the Pinnacle joint venture and the company established to purchase accounts receivable from subsidiaries of TXU Corp. (See Notes 6 and 16.) In the opinion of management, all other adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. All intercompany items and transactions have been eliminated in consolidation. 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.