TXU 2002 Annual Report - Financial Report

Net income decreased $4 million, or 17%, to $19 million in 2001. On a local currency basis, net income increased 3% reflecting the revenue growth and lower interest rates, partially offset by a $16 million gain on the sale of an engineering and construction business in 2000.

Comprehensive Income – Continuing Operations

Foreign currency translation adjustments for 2002, 2001 and 2000, a gain of $76 million and losses of $61 million and $98 million, respectively, primarily reflected the movement in exchange rates between the US dollar and the Australian dollar. These adjustments have no tax effects.

Minimum pension liability adjustments for 2002, 2001 and 2000 are losses of $128 million ($83 million after-tax) and $9 million ($6 million after-tax) and a gain of $1 million, respectively. The minimum pension liability represents the difference between the excess of the accumulated benefit obligation over the plans’ assets and the liability reflected in the balance sheet. Further, based on the current assumptions and available information, funding requirements in 2003 related to the pension plans are expected to increase by $7 million and pension expense is expected to increase approximately $40 million over the 2002 amounts. The recording of the liability did not affect TXU Corp.’s financial covenants in any of its credit agreements.

TXU Corp. adopted SFAS No. 133 effective January 1, 2001, and recorded a $37 million ($25 million after-tax) charge to other comprehensive income to reflect the fair value of derivatives effective as cash flow hedges at transition. TXU Corp. has historically used, and will continue to use, derivative financial instruments that are highly effective in offsetting future cash flow volatility in interest rates, energy commodity prices, and currency exchange rates. The amounts included in other comprehensive income are expected to be used in the future to offset the impact of rate or price changes on related payments. Amounts in other comprehensive income include (i) the value of the cash flow hedges, based on current market conditions, and (ii) the value of dedesignated and terminated cash flow hedges at the time of such dedesignation, less amortization, providing the transaction that was hedged is still probable. The effects of the hedge will be recorded in the statement of income as the hedged transactions are actually settled.

During 2002 and 2001, changes in the fair value of derivatives effective as cash flow hedges reflected losses of $348 million ($229 million after-tax) and $113 million ($79 million after-tax), respectively. Losses in 2002 were due to decreases of $256 million ($169 million after-tax) in the fair value of interest rate hedges because of lower interest rates, and decreases of $92 million ($60 million after-tax) in the fair value of commodity hedges. Losses in 2001 were related to decreases in the fair value of hedges of indebtedness in Australia.

During 2002 and 2001, other comprehensive income hedge losses recognized in income were $119 million ($81 million after-tax) and $87 million ($62 million after-tax), respectively, primarily related to interest rate hedges.

See also Note 14 to Financial Statements.

Financial Condition

Liquidity and Capital Resources

Cash Flows Cash flows provided by operating activities for the year ended December 31, 2002, were $1.3 billion compared to $1.9 billion and $908 million for the years ended December 31, 2001 and 2000, respectively. The decrease in cash flows provided by operating activities in 2002 of $535 million, or 29%, reflected a number of factors. The principal driver of the decline was lower cash earnings (net income adjusted for the significant noncash items identified in the statement of cash flows) and the effect of a return in 2001 of $227 million in margin deposits related to portfolio management activities (in exchange for letters of credit). The net working capital (accounts receivable, accounts payable and inventories) increase of approximately $396 million in 2002 was comparable to 2001. However, this performance reflected higher unbilled accounts receivable of approximately $200 million related to the opening of the Texas market to competition, which reflects the effects of a new ERCOT protocol that allows five days to clear meter-read data through ERCOT, as well as other changes in billing processes. The higher accounts receivable was largely offset by increased accounts payable, reflecting more purchases of power (as opposed to power generated by TXU Energy) and timing of payments.