TXU 2002 Annual Report - Financial Report

Under Texas law, TXU Corp. may only declare dividends out of surplus, which is statutorily defined as total shareholders’ equity less the book value of common stock (stated capital). The write-off of TXU Corp.’s investment in TXU Europe resulted in negative surplus. Texas law permits, subject to the receipt of shareholder approval, the reclassification of stated capital into surplus. TXU Corp. received such shareholder approval of this reclassification in a special meeting of shareholders held February 14, 2003. Accordingly, approximately $8.0 billion will be reclassified from stated capital to additional paid in capital, resulting in an increase of surplus in the same amount.

The mortgage of Oncor restricts its payment of dividends to the amount of its retained earnings. Certain other debt instruments and preferred securities of TXU Corp.’s subsidiaries contain provisions that restrict payment of dividends during any interest or distribution payment deferral period or while any payment default exists. At December 31, 2002, there were no restrictions on the payment of dividends under these provisions.

Other Capital Transactions Since August 2001, TXU Corp.’s requirements under its Direct Stock Purchase and Dividend Reinvestment Plan and Thrift Plan have been met through additional issuances by TXU Corp. of common stock. Issuances under these plans totaled 1,069,264 and 260,243 shares in 2002 and 2001, respectively.

Capitalization TXU Corp. capitalization consists of common, preference and preferred stock, long-term debt securities, including equity-linked and exchangeable debt, and preferred securities of subsidiary trusts, each holding solely junior subordinated debentures of TXU Corp. or its subsidiaries. The capitalization ratios of TXU Corp. at December 31, 2002, consisted of 8.2% equity-linked debt securities, 4.3% exchangeable subordinated notes, 54.4% other long-term debt, less amounts due currently, 2.9% trust securities, 1.2% preferred stock of subsidiaries, 1.7% preference stock and 27.3% common stock equity. Not reflected in these ratios is restricted cash of $210 million included in other investments that is held in trust for the defeasance of long-term debt.

Equity-Linked Debt Securities In 2002 and 2001, TXU Corp. issued equity-linked securities with aggregate stated amounts of $440 million and $1.0 billion, respectively. Equity-linked debt securities are units that consist of (i) TXU Corp. senior notes and (ii) a stock purchase contract that requires the holder to purchase TXU Corp. common stock in the future. The number of shares issuable upon settlement of stock purchase contracts is based on the market price, which is determined as the average of the closing price of TXU Corp. common stock on each of the twenty consecutive trading days ending on the third trading day immediately preceding the settlement date. The calculation of shares issuable is subject to a minimum price or “reference price” (typically this is the price of the common stock at the time of the initial issuance of the equity-linked debt securities) and a maximum price or “threshold appreciation price” (this represents a premium over the reference price that is negotiated in connection with the pricing of the offering). The reference price and the threshold appreciation price for each series of TXU Corp.’s equity-linked debt securities are based on market conditions at the time the securities were issued.

To the extent the market price of TXU Corp. common stock is below the reference price on the applicable settlement date, holders of equity-linked debt securities would be required to purchase TXU Corp. common stock at a price higher than the market price at that time. The market price of TXU Corp.’s common stock is currently below the reference price for both currently outstanding series of TXU Corp.’s equity-linked debt securities. TXU Corp.’s liquidity and stock price affect the market price of the equity-linked debt securities (as well as the market price of other securities issued by TXU Corp. and its subsidiaries), but do not have any effect on the provisions of the equity-linked debt securities other than the impact on the settlement rate, as discussed above.

Under the terms of the purchase contracts, TXU Corp. expects to issue between 24,953,600 and 30,514,000 shares of its common stock upon settlement. A total of 30,514,000 shares have been reserved for issuance.