TXU 2002 Annual Report - Financial Report

Additionally, as a result of the impairments of long-lived assets and goodwill recorded by the telecommunications joint venture (see discussion below under “Impairment of Long-Lived Assets” and “Goodwill and Intangible Assets”), TXU Corp. evaluated its potential obligations related to the partnership arrangement. TXU Corp. determined that it was probable, in light of the decline in value of the business, that an economic loss had occurred, and accordingly recorded a charge of $150 million (without tax benefit) in 2002, reported in other deductions in the statement of income.

Impairment of Long-Lived Assets TXU Corp. evaluates long-lived assets for impairment whenever indications of impairment exist, in accordance with the requirement of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” One of those indications is a current expectation that “more likely than not” a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The determination of the existence of this and other indications of impairment involves judgments that are subjective in nature and in some cases requires the use of estimates in forecasting future results and cash flows related to an asset or group of assets. Further, the unique nature of TXU Corp.’s property, plant and equipment, which includes a fleet of generation assets using different fuels and individual plants that have varying utilization rates, requires the use of significant judgments in determining the existence of impairment indications and grouping assets for impairment testing.

In 2002, TXU Corp. recorded an impairment charge of $237 million ($154 million after-tax) for the writedown of two generation plant construction projects as a result of current wholesale electricity market conditions and reduced planned developmental capital spending. Fair value was determined based on current appraisals of property and equipment. The charge is reported in other deductions in the statement of income. As the writedown is based on current estimates, the remaining carrying value of the projects of $113 million is subject to further adjustment should estimates of recoverable value change.

Additionally, in 2002 TXU Corp.’s telecommunication joint venture recognized writedowns related to long-lived assets, of which TXU Corp. recognized its share, $28 million ($18 million after-tax). The writedowns reflected estimated net realizable values of assets in the competitive local exchange carrier and fiber-optic transport operations held for sale. The charge is reported in other deductions in the statement of income. See discussion below under “Investments in Unconsolidated Entities.”

Goodwill and Intangible Assets TXU Corp. evaluates goodwill for impairment at least annually in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” TXU Corp. has performed impairment tests for reporting units reflected in results from continuing operations, and no goodwill impairment charges were recorded. In 2002, TXU Corp.’s telecommunications joint venture recorded a goodwill impairment charge, of which TXU Corp. recognized its share, $9 million ($6 million after-tax). The charge is reported in other deductions in the statement of income. See discussion below under “Investments in Unconsolidated Entities.”

TXU Corp. primarily uses discounted cash flow analyses to test for goodwill impairment. Such analyses require a significant number of estimates and assumptions regarding future earnings, working capital requirements, capital expenditures, discount rate, terminal year growth factor and other modeling factors.

Depreciation The depreciable lives of power generation plants are based on management’s estimates/determinations of the plants’ economically useful lives. To the extent that the actual lives differ from these estimates there would be an impact on the amount of depreciation charged to the financial statements.

Regulatory Assets and Liabilities The financial statements of TXU Corp.’s regulated businesses, primarily its US electricity T&D (Oncor) and its US gas distribution operations (TXU Gas), reflect regulatory assets and liabilities under cost-based rate regulation in accordance with SFAS No. 71, “Accounting for the Effect of Certain Types of Regulation.” As a result of the 1999 Restructuring Legislation (see Note 15 to Financial Statements for further description), the US electricity generation portion of TXU Corp.’s business no longer meets the criteria to apply regulatory accounting principles. Accordingly, application of SFAS No. 71 to the generation portion of TXU Corp.’s business was discontinued as of June 30, 1999. Oncor’s operations continue to meet the criteria for recognition of regulatory assets and liabilities. The assumptions and judgments used by regulatory authorities continue to have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates. (See discussion in Note 18 to Financial Statements under “Regulatory Assets and Liabilities.”)