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Exchangeable Subordinated Debt In November 2002, TXU Energy issued $750 million of exchangeable subordinated notes in a private placement. The notes will mature in November 2012, bear interest at the annual rate of 9% and permit the deferral of interest payments. TXU Corp. has granted the holders the right to exchange the notes for TXU Corp. common stock. The notes currently may be exchanged, subject to certain restrictions, at any time for up to approximately 57 million shares of TXU Corp. common stock at an exercise price of $13.1242 per share. The number of shares of TXU Corp. common stock that may be issuable upon the exercise of the exchange right is determined by dividing the principal amount of notes to be exchanged by the exercise price. The exercise price and the number of shares to be issued are subject to anti-dilution adjustments. The proceeds from the issuance of the notes were used for the repayment of two standby credit facilities that expired in November 2002. TXU Corp. recognized a discount on the notes of $111 million, which represented the excess of the market value of TXU Corp. common stock on the transaction date over the exercise price applied to the number of issuable shares. This discount is being amortized to interest expense over the term of the debt. As a result, the effective interest rate on the notes is 11.5%. At the time of any exchange of the notes for common stock, the unamortized discount will be proportionately written off as a charge to earnings. (See discussion in Note 7 to Financial Statements under “Exchangeable Subordinated Notes.”)
The exchangeable notes are subordinated in bankruptcy to all other TXU Energy obligations. TXU Energy has the right until May 2003 to require the holders of the notes to exchange their interest in the notes for a preferred equity interest in TXU Energy with economic and other terms substantially identical to the notes. The original purchasers of the notes have the right to nominate one member to the board of directors of TXU Corp., and such member has been appointed to fill a vacancy. This right exists so long as the original purchasers hold at least 30% of their original investment in the form of common stock and/or notes, but no later than November 2012 or, if later, the date no notes remain outstanding. The holders of the notes are restricted from actions that would increase their control of TXU Corp. Registered Financing Arrangements TXU Corp., US Holdings, TXU Gas and other subsidiaries of TXU Corp. may issue and sell additional debt and equity securities as needed, including: (i) issuances by US Holdings of up to $25 million of Cumulative Preferred Stock and up to an aggregate of $924 million of additional Cumulative Preferred Stock, debt securities and/or preferred securities of subsidiary trusts and (ii) issuances by TXU Gas of up to an aggregate of $400 million of debt securities and/or preferred securities of subsidiary trusts, all of which are currently registered with the Securities and Exchange Commission (SEC) for offering pursuant to Rule 415 under the Securities Act of 1933. Long-Term Debt During the year ended December 31, 2002, TXU Corp. and its subsidiaries issued, redeemed, reacquired or made scheduled principal payments on long-term debt as follows:
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