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Management's Discussion and Analysis of Financial Condition and Results of Operations BusinessUse of the term “TXU Corp.,” unless otherwise noted or indicated by the context, refers to TXU Corp., a holding company, and its consolidated subsidiaries. TXU Corp. is an energy company that engages in power production (electricity generation), wholesale energy sales, retail energy sales and related services, portfolio management, including risk management and certain trading activities, energy delivery and, through a joint venture, telecommunications services. The consolidated financial statements and related discussion of results of operations of TXU Corp. have been restated to reflect the operations of TXU Europe Limited (TXU Europe) as discontinued operations (see Note 3 to Financial Statements for information about discontinued operations). Concurrent with TXU Corp.’s reorganization as of January 1, 2002, TXU Corp. realigned its operations into three reportable segments: North America Energy, North America Energy Delivery and International Energy. With the exiting of the Europe operations, the International Energy segment has been renamed and consists solely of operations in Australia. (See Note 17 to Financial Statements for further information concerning reportable business segments.) The following exchange rates have been used to convert foreign currency denominated amounts into United States (US) dollars, unless they were determined using exchange rates on the date of a specific event:
Critical Accounting Policies All dollar amounts in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the tables therein, except per share amounts, are stated in millions of US dollars unless otherwise indicated. TXU Corp.’s significant accounting policies are detailed in Note 2 to Financial Statements. TXU Corp. follows accounting principles generally accepted in the United States of America. In applying these accounting policies in the preparation of TXU Corp.’s consolidated financial statements, management is required to make estimates and assumptions about future events that affect the reporting and disclosure of assets and liabilities at the balance sheet dates and revenue and expense during the periods covered. The following is a summary of certain critical accounting policies of TXU Corp. that are impacted by judgments and uncertainties and for which different amounts might be reported under a different set of conditions or using different assumptions. Financial Instruments and Mark-to-Market Accounting TXU Corp. enters into financial instruments, including options, swaps, futures, forwards and other contractual commitments primarily to manage market risks related to changes in commodity prices, including costs of fuel for generation of power, as well as changes in interest rates and foreign currency exchange rates. These financial instruments are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” and, prior to October 26, 2002, Emerging Issues Task Force (EITF) Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” The majority of financial instruments entered into by TXU Corp. are derivatives as defined in SFAS No. 133. SFAS No. 133 requires the recognition of derivatives in the balance sheet, the measurement of those instruments at fair value and the recognition in earnings of changes in the fair value of derivatives. This recognition is referred to as “mark-to-market” accounting. SFAS No. 133 provides exceptions to this accounting if (a) the derivative is deemed to represent a transaction in the normal course of purchasing from a supplier and selling to a customer, or (b) the derivative is deemed to be a cash flow or fair value hedge. In accounting for cash flow hedges, derivative assets and liabilities are recorded on the balance sheet at fair value with an offset in other comprehensive income. Any hedge ineffectiveness is recorded in earnings. Amounts are reclassified from other comprehensive income to earnings as the underlying transactions occur and realized gains and losses are recognized in earnings. | |||||||||||||||||||||||||||||||||||||
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