Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
-OR-
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3183
TXU Gas Company
A Texas Corporation I.R.S. Employer Identification
No. 75-0399066
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Common Stock outstanding at August 9, 2002: 451,000 shares, par value $0.01 per
share.
================================================================================
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income--
Three and Six Months Ended June 30, 2002 and 2001 ................ 1
Condensed Statements of Consolidated Comprehensive Income--
Three and Six Months Ended June 30, 2002 and 2001 ................ 2
Condensed Statements of Consolidated Cash Flows--
Six Months Ended June 30, 2002 and 2001 .......................... 3
Condensed Consolidated Balance Sheets--
June 30, 2002 and December 31, 2001 .............................. 4
Notes to Financial Statements .................................... 5
Independent Accountants' Report .................................. 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 17
SIGNATURE ................................................................. 18
(i)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
2002 2001 2002 2001
------- ------- ------- ------
Millions of Dollars
Operating revenues .............................................. $ 160 $ 171 $ 504 $ 855
------- ------- ------- -------
Operating expenses
Gas purchased for resale ..................................... 74 91 255 586
Operation and maintenance .................................... 71 65 133 132
Depreciation and other amortization .......................... 17 16 32 31
Goodwill amortization ........................................ -- 1 -- 4
Taxes other than income ...................................... 24 39 43 61
------- ------- ------- -------
Total operating expenses ................................... 186 212 463 814
------- ------- ------- -------
Operating income (loss) ......................................... (26) (41) 41 41
Other income .................................................... 6 5 8 7
Other deductions ................................................ -- 1 4 2
Interest income ................................................. -- 1 -- 1
Interest expense and other charges .............................. 16 17 34 32
------- ------- ------- -------
Income (loss) from continuing operations before income taxes .... (36) (53) 11 15
Income tax expense (benefit) .................................... (13) (18) 3 7
------- ------- ------- -------
Income (loss) from continuing operations ........................ (23) (35) 8 8
Income from discontinued operations, net of tax ................. -- 1 -- 3
------- ------- ------- -------
Net income (loss) ............................................... (23) (34) 8 11
Preferred stock dividends ....................................... 1 1 2 2
------- ------- ------- -------
Net income (loss) applicable to common stock .................... $ (24) $ (35) $ 6 $ 9
======= ======= ======= =======
See Notes to Financial Statements.
1
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
2002 2001 2002 2001
------- -------- -------- ------
Millions of Dollars
Income (loss) from continuing operations ......................... $ (23) $ (35) $ 8 $ 8
-------- ------- ------- -------
Other comprehensive income (loss) from continuing operations
Net change during period, net of tax effect
Cash flow hedges:
Cumulative transition adjustment as of January 1, 2001
(net of tax expense of $1) .............................. -- -- -- 2
Net change in fair value of derivatives
(net of tax benefit of $- and $1) ....................... (1) -- -- (3)
-------- ------- ------- -------
Total ................................................. (1) -- -- (1)
-------- ------- ------- -------
Comprehensive income (loss) from continuing operations ........... (24) (35) 8 7
-------- ------- ------- -------
Income from discontinued operations, net of tax .................. -- 1 -- 3
------- ------- ------- -------
Comprehensive income (loss) ...................................... $ (24) $ (34) $ 8 $ 10
======= ======= ======= =======
See Notes to Financial Statements.
2
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------------
2002 2001
-------- ------
Millions of Dollars
Cash flows - operating activities
Income from continuing operations ....................................... $ 8 $ 8
Adjustments to reconcile income from continuing operations
to cash provided by operating activities:
Depreciation and amortization .................................... 37 39
Deferred income taxes - net ...................................... -- 7
Gain from sale of assets ......................................... -- (4)
Other ............................................................ (2) 1
Changes in operating assets and liabilities ............................. 115 13
------ ------
Cash provided by operating activities ............................... 158 64
------ ------
Cash flows - financing activities
Net change in advances to parent and affiliates ......................... (106) 17
Cash dividends paid ..................................................... (2) (2)
------ ------
Cash provided by (used in) financing activities ............... (108) 15
------ ------
Cash flows - investing activities
Capital expenditures .................................................... (46) (86)
Proceeds from sale of assets ............................................ -- 5
Other investments ....................................................... (1) 5
------- ------
Cash used in investing activities ............................. (47) (76)
------ ------
Cash used in discontinued operations ........................................ (2) (8)
------ ------
Net change in cash and cash equivalents ..................................... 1 (5)
Cash and cash equivalents - beginning balance ............................... 3 6
------ ------
Cash and cash equivalents - ending balance .................................. $ 4 $ 1
====== ======
See Notes to Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 4 $ 3
Accounts receivable:
Parent and affiliates .......................................... 5 --
Trade .......................................................... 44 131
Inventories-at average cost ....................................... 106 116
Other current assets .............................................. 40 85
-------- -------
Total current assets ......................................... 199 335
Assets-discontinued operations (Note 3) .............................. -- 2,314
Investments-other .................................................... 35 35
Property, plant and equipment-net .................................... 1,497 1,485
Goodwill ............................................................. 305 305
Regulatory assets - net .............................................. 71 67
Deferred debits and other assets ..................................... 11 17
-------- -------
Total assets ................................................. $ 2,118 $ 4,558
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from parent .............................................. $ 138 $ 244
Long-term debt due currently ...................................... 325 200
Accounts payable:
Parent and affiliates .......................................... -- 10
Trade .......................................................... 51 75
Taxes accrued ..................................................... 12 21
Other current liabilities ......................................... 97 81
-------- -------
Total current liabilities .................................... 623 631
Liabilities-discontinued operations (Note 3) ......................... -- 1,753
Accumulated deferred income taxes and investment tax credits ......... 184 191
Cash flow hedges and other derivatives liabilities ................... 6 6
Other deferred credits and noncurrent liabilities .................... 226 216
Long-term debt, less amounts due currently ........................... 427 554
TXU Gas Company obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated debentures of TXU Gas Company ........................ 147 147
Contingencies (Note 7)
Shareholders' equity (Note 5) ........................................ 505 1,060
-------- -------
Total liabilities and shareholders' equity ................... $ 2,118 $ 4,558
======== =======
See Notes to Financial Statements.
4
TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Gas Company (TXU Gas), a Texas corporation, is an integrated company
engaged in the purchase, transmission, distribution and sale of natural gas in
the north-central, eastern and western parts of Texas, and asset management
services operations. TXU Gas conducts business through two divisions, TXU Gas
Distribution and TXU Lone Star Pipeline. Until January 1, 2002, TXU Gas was also
engaged in wholesale trading of natural gas and electricity throughout the
United States (US) and parts of Canada and retail sales of natural gas to large
commercial and industrial customers (see discussion below). TXU Gas is a
wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global
energy services company that engages in electricity generation, wholesale energy
trading and risk management, retail energy sales, energy delivery, other
energy-related services and, through a joint venture, telecommunications
services.
Business Restructuring - Legislation was passed during the 1999 session of
the Texas Legislature that restructured the electric utility industry in Texas
(1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of
its businesses effective January 1, 2002, whereby TXU Energy Company, LLC (TXU
Energy), an indirect subsidiary of TXU Corp., acquired the wholesale trading and
risk management operations and the unregulated commercial and industrial retail
natural gas business of TXU Gas, among other operations of TXU Corp.
The operations of TXU Gas acquired by TXU Energy have been accounted for as
discontinued operations, and prior year results have been restated herein to
reflect the results of those businesses on a discontinued basis (see Note 3). A
substantial majority of the remaining business is regulated.
The balance sheet of TXU Gas at December 31, 2001 included $773 million of
goodwill, net of amortization, arising from TXU Corp.'s 1997 acquisition of
ENSERCH Corporation (renamed TXU Gas Company). The wholesale trading and risk
management operations and the unregulated commercial and industrial retail gas
business were originally part of ENSERCH Corporation. In connection with the
restructuring and transfer of these two businesses to TXU Energy, $468 million
of that goodwill has been allocated to these discontinued businesses and
reflected in the June 30, 2002 balance sheet of TXU Energy. The remaining amount
of goodwill ($305 million) associated with the ENSERCH acquisition has been
allocated to the continuing gas distribution and pipeline business of TXU Gas.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements of
TXU Gas and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP) and,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142 "Goodwill and Other Intangible Assets" discussed below, on the same
basis as the audited financial statements included in its Annual Report on Form
10-K for 2001 (2001 Form 10-K). In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations and financial position have been included therein.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with US GAAP have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations for an interim period may not give a true
indication of results for a full year. Certain previously reported amounts have
been reclassified to conform to current classifications. All dollar amounts in
the financial statements and tables in the notes to the financial statements are
stated in millions of US dollars unless otherwise indicated.
5
Changes in Accounting Standards -- SFAS No. 142 became effective for TXU
Gas on January 1, 2002. SFAS No. 142 requires, among other things, the
allocation of goodwill to reporting units based upon the current fair value of
the reporting units and the discontinuance of goodwill amortization. The
amortization of TXU Gas' existing goodwill ($9 million annually from continuing
operations) ceased effective January 1, 2002.
In addition, SFAS No. 142 required completion of a transitional goodwill
impairment test within six months from the date of adoption. It establishes a
new method of testing goodwill for impairment on an annual basis, or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. TXU Gas has completed
the transitional impairment test, the results of which indicated no impairment
of goodwill.
The table below reflects what reported income from continuing operations,
income from discontinued operations and net income would have been in the 2001
periods, exclusive of goodwill amortization expense recognized in that period
compared to the 2002 periods.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Reported income (loss) from continuing operations ............ $(23) $(35) $ 8 $ 8
Add back: goodwill amortization ............................. -- 1 -- 4
---- ---- ---- ----
Adjusted income (loss) from continuing operations ............ $(23) $(34) $ 8 $ 12
==== ==== ==== ====
Reported income from discontinued operations, net of tax ..... $ -- $ 1 $ -- $ 3
Add back: goodwill amortization ............................ -- 4 -- 7
---- ---- ---- ----
Adjusted income from discontinued operations, net of tax ..... $ -- $ 5 $ -- $ 10
==== ==== ==== ====
Reported net income (loss) .................................. $(23) $(34) $ 8 $ 11
Add back: goodwill amortization ............................ -- 5 -- 11
---- ---- ---- ----
Adjusted net income (loss) ................................... $(23) $(29) $ 8 $ 22
==== ==== ==== ====
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Gas on January 1, 2003. SFAS No. 143 requires the recognition
of a fair value liability for any retirement obligation associated with
long-lived assets. SFAS 143 also requires additional disclosures.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Gas on January 1, 2002. SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by
sale, and resolves significant implementation issues related to SFAS No. 121.
The adoption of SFAS No. 144 by TXU Gas has not materially affected its
financial position or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", was issued in April 2002 and
will be effective for TXU Gas on January 1, 2003. One of the provisions of this
statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", whereby any gain or loss on the early extinguishment of
debt that was classified as an extraordinary item in prior periods in accordance
with SFAS No. 4 shall be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions".
6
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and will be effective for TXU Gas on
January 1, 2003. SFAS No. 146 requires that a liability for costs associated
with an exit or disposal activity be recognized only when the liability is
incurred and measured initially at fair value.
For accounting standards not yet adopted or fully implemented, TXU Gas is
evaluating the potential impact on its financial position and results of
operations.
Income Taxes--TXU Gas is included in the consolidated federal income tax
return of TXU Corp. and subsidiary companies. TXU Gas uses the separate return
method to compute its income tax provision. Because of the alternative minimum
tax (AMT), differences may arise between the consolidated federal income tax
liability and the aggregated separate tax liability of the group members. In
instances where this occurs, the difference is allocated, pro-rata, to those
companies that generated AMT on a separate company basis.
3. DISCONTINUED OPERATIONS
As a result of the deregulation of the electricity markets in Texas,
effective January 1, 2002, TXU Corp. realigned the operations of its US
subsidiaries, including those of TXU Gas. As a part of that realignment,
ownership of the wholesale trading and risk management and unregulated
commercial and industrial retail gas supply businesses was transferred to TXU
Energy.
Accordingly, these businesses, which comprised the former energy trading
segment of TXU Gas, have been reflected as discontinued operations in the
statements of consolidated income and cash flows of TXU Gas and the related
consolidated financial statements for prior periods have been restated. The
results of operations of these discontinued businesses were as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2001
------------ ----------
Revenues .......................................... $ 1,083 $ 3,353
Operating income .................................. $ 6 $ 13
Income after-tax from discontinued operations ..... $ 1 $ 3
Cash provided by operating activities ............. $ 257
Cash used by financing activities ................. (235)
Cash used by investing activities ................. (28)
-------
Cash used in discontinued operations .......... $ (6)
=======
In addition, for the six months ended June 30, 2001, an additional $2
million was used in previously discontinued engineering and construction
operations.
7
The assets and liabilities of the discontinued businesses segregated in the
TXU Gas balance sheet as of December 31, 2001 herein consisted of the following:
December 31,
2001
------------
Current assets
Accounts receivable ...................................... $ 542
Accounts receivable from affiliated companies ............ 14
Commodity contract assets ................................ 743
Other .................................................... 58
Long-term assets
Goodwill (net of accumulated amortization of $56) ........ 468
Commodity contract assets ................................ 366
Other .................................................... 123
-------
Total assets .......................................... 2,314
-------
Current liabilities
Accounts payable ......................................... (426)
Accounts payable to affiliated companies ................ (41)
Commodity contract liabilities ........................... (602)
Other current liabilities ................................ (30)
Non-current liabilities
Commodity contract liabilities ........................... (229)
Advances from TXU Corp. .................................. (387)
Other .................................................... (38)
-------
Total liabilities ..................................... (1,753)
-------
Net investment ............................................. $ 561
=======
Certain reclassifications to balances related to the discontinued
businesses, primarily related to the allocation of goodwill (Note 1), have been
incorporated. See discussion in Note 3 of TXU Gas' 2001 Form 10-K.
In June 2002, the Emerging Issues Task Force (EITF) reached a consensus on
certain aspects of Issue 02-3, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities", regarding the presentation of trading
activities in the statement of income. The new rules require all trading
contracts, whether or not physically settled, to be recorded net upon
settlement, rather than gross as a sale and cost of sale. The former energy
trading segment of TXU Gas has historically recorded financial contracts net,
but has recorded those contracts that provide for physical delivery gross upon
settlement. TXU Gas' continuing operations are not expected to be impacted by
this change. The change will be effective with third quarter 2002 reporting and
requires reclassification of prior periods, which will impact the discontinued
operations revenue disclosure above. The amount of the reclassifications has not
yet been determined. However, implementation of the new rules is expected to
result in a significant reduction in operating revenues of the former energy
trading segment of TXU Gas. The required reclassifications will have no impact
on the former energy trading segment's previously reported operating income,
income after tax, or cash provided by operating activities.
4. CAPITALIZATION
TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of TXU Gas (Trust
Securities) -- At June 30, 2002, a consolidated statutory business trust, TXU
Gas Capital I, had $147 million of floating rate mandatorily redeemable
preferred securities outstanding. Distributions on these Trust Securities are
payable quarterly based on an annual floating rate determined quarterly with
reference to a three-month LIBOR rate plus a margin. The only assets held by the
trust are $155 million principal amount of Floating Rate Junior Subordinated
Debentures Series A (Series A Debentures) of TXU Gas. The interest on the Series
A Debentures matches the distributions on the Trust Securities. The Series A
Debentures will mature on July 1, 2028. TXU Gas has the right to redeem the
Series A Debentures and cause the redemption of the Trust Securities in whole or
in part on or after July 1, 2003. TXU Gas owns the common securities issued by
its subsidiary trust and has effectively issued a full and unconditional
guarantee of the trust's securities. At June 30, 2002, TXU Gas had two interest
rate swap agreements with respect to floating rate Trust Securities of TXU
8
Gas Capital I, with notional principal amounts of $100 million and $50 million,
that effectively fixed the rate at 6.629% and 6.444%, respectively, per annum to
July 1, 2003.
5. SHAREHOLDERS' EQUITY
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Preferred stock $ 75 $ 75
-------- -------
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000, Outstanding shares - 451,000 ....... -- --
Paid in capital ........................................................ 462 1,025
Deficit ................................................................ (27) (35)
Accumulated other comprehensive loss ................................... (5) (5)
-------- -------
Total common stock equity ........................................... 430 985
-------- -------
Total shareholders' equity ........................................ $ 505 $ 1,060
======== =======
TXU Energy acquired certain operations (Note 3) in a non-cash transaction.
Accordingly, $561 million was charged to paid-in capital to reflect this
distribution of the net assets at net book value at January 1, 2002.
6. REGULATION AND RATES
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. On March 1, 2002, TXU Gas
Distribution, a division of TXU Gas, filed rate cases with respect to 111 north
Texas cities, including the city of Dallas, supporting $53 million in annualized
revenue increases. The Dallas Distribution System gas rate case, representing 4
cities, was settled for an annual increase of $6.8 million. In the North Texas
Metroplex gas rate case, settlement terms were accepted by 33 cities for an
annual increase of $760,000, and another city has tentatively accepted the
settlement. The case was withdrawn from 23 Fort Worth area cities because the
settlement would have resulted in essentially no increase in rates. 50 cities
declined the settlement offer and passed ordinances denying the filed rate case.
On July 15, 2002, TXU Gas Distribution filed an appeal of these cities' actions
with the Railroad Commission of Texas (RRC) for $24.5 million (GUD 9313). In the
Northwest Region gas rate case filed on March 21, 2002, a tentative settlement
has been reached for an annual increase of $1.2 million. Weather normalization
adjustment clauses, which allow rates to be adjusted to reflect warmer- or
cooler-than-normal weather during the winter months, have been approved by 419
cities served by TXU Gas Distribution. TXU Gas Distribution has filed
applications to terminate these adjustments in the cities associated with the
2002 rate cases.
On July 16, 2001, TXU Gas Distribution filed a 36 month gas cost prudence
review (GUD 9233) covering the period of November 1, 1997 through October 30,
2000 with the RRC. This filing was amended on March 15, 2002. TXU Gas believes
it has under-recovered its gas costs by $10.5 million during this period, which
amount is carried as a regulatory asset. The Administrative Law Judge (AJL) has
ruled that the issue of the underrecovery should not be considered as part of
this proceeding. The intervening parties have recommended a disallowance of $4.2
million relating to a prior contract settlement. TXU Gas Distribution has
appealed the AJL's ruling and is filing rebuttal testimony relating to the
intervening parties' recommendation. The outcome of these issues cannot be
determined at this time.
On August 31, 2001, TXU Gas Distribution filed a city gate rate cost
reconciliation (GUD 9246) covering the period of July 1, 2000 to June 30, 2001
with the RRC. This filing was amended on February 14, 2002. TXU Gas
under-recovered its gas costs by $18.6 million during the covered period. This
amount has been recovered through a surcharge under a settlement approved by the
RRC, which reserves prudence issues and rate case expenses for GUD 9233.
9
7. CONTINGENCIES
In July 1999, the City of Gatesville, Texas filed suit in the State
District Court of Coryell County, Texas, 52nd Judicial District. The suit has
been amended to assert claims against TXU Gas and TXU Corp. The Plaintiff seeks
to represent a class of plaintiffs consisting of more than 300 Texas cities,
towns and other municipalities to which TXU Gas Distribution had paid municipal
franchise fees since January 1, 1987. Discovery in this case is being conducted,
and a decision on class certification has not yet been made. The Plaintiff
alleges that TXU Gas Distribution failed to properly pay franchise fees by
omitting miscellaneous revenues from the franchise fee payment base used for
determining the municipal franchise fees owed to the Plaintiff. No amount of
damages has been specified in the suit. While TXU Gas is unable to estimate any
possible loss or predict the outcome of this case, TXU Gas Distribution believes
the Plaintiff's claims are without merit and intends to vigorously defend this
suit.
In September 1999, Quinque Operating Company (Quinque) filed suit in the
State District Court of Stevens County, Kansas against over 200 gas pipeline
companies, including TXU Gas (named in the litigation as ENSERCH Corporation).
The suit was removed to federal court; however, a motion to remand the case back
to Kansas State District Court was granted in January 2001, and the case is now
pending in Stevens County, Kansas. The plaintiffs amended their petition to join
TXU Fuel Company (TXU Fuel), a subsidiary of TXU Energy, as a defendant in this
litigation. Quinque has dismissed its claims and a new lead plaintiff has filed
an amended petition in which the plaintiffs seek to represent a class consisting
of all similarly situated gas producers, overriding royalty owners, working
interest owners and state taxing authorities either from whom defendants had
purchased natural gas or who received economic benefit from the sale of such gas
since January 1, 1974. No class has been certified. The petition alleges that
the defendants have mismeasured both the volume and heat content of natural gas
delivered into their pipelines resulting in underpayments to plaintiffs. No
amount of damages has been specified in the petition with respect to TXU Gas or
TXU Fuel. While TXU Gas and TXU Fuel are unable to estimate any possible loss or
predict the outcome of this case, TXU Gas and TXU Fuel believe these claims are
without merit and intend to vigorously defend this suit.
General -- In addition to the above, TXU Gas and its subsidiaries are
involved in various other legal and administrative proceedings the ultimate
resolution of which, in the opinion of management, are not expected to have a
material effect on their financial position, results of operations or cash
flows.
10
8. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions--
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Other income
Gain on sale of properties ......... $ 1 $ 3 $ 1 $ 4
Other (consists of several
immaterial items)................. 5 2 7 3
---- ---- ---- ----
Total other income ............. $ 6 $ 5 $ 8 $ 7
==== ==== ==== ====
Other deductions
Loss on sale of properties ......... $ -- $ -- $ -- $ 1
Other (consists of several
immaterial items)................. -- 1 4 1
---- ---- ---- ----
Total other deductions ......... $ -- $ 1 $ 4 $ 2
==== ==== ==== ====
Accounts receivable -- At June 30, 2002 and December 31, 2001, accounts
receivable are stated net of uncollectible accounts of $4 million and $5
million, respectively. Accounts receivable included $14 million and $39 million
of unbilled revenues at June 30, 2002 and December 31, 2001, respectively.
Regulatory Assets and Liabilities -- Included in regulatory assets - net
are regulatory assets of $84 million and regulatory liabilities of $13 million
at June 30, 2002, and regulatory assets of $80 million and regulatory
liabilities of $13 million at December 31, 2001. No regulatory assets were
earning a return. The regulatory assets have a weighted average remaining
recovery period of approximately 15 years.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer
accounts receivable to a wholly-owned bankruptcy remote subsidiary of TXU Corp.
(TXU Receivables Company) which sells undivided interests in accounts receivable
it purchases to financial institutions. As of January 1, 2002, the facility
includes TXU Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor
Electric Delivery Company and TXU Gas as qualified originators of accounts
receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. As of June 30, 2002, TXU Gas had sold
$59 million face amount of receivables to TXU Receivables Company under the
program in exchange for cash of $29 million and $29 million in subordinated
notes, with $1 million of losses on sales for the six months ended June 30, 2002
principally representing the interest on the underlying financing. These losses
approximated 4% of the cash proceeds from the receivables sales on an annualized
basis. If the program terminates, cash flows to TXU Gas would temporarily stop
until the undivided interests of the financial institutions were repurchased.
The level of cash flows would normalize in approximately 16 to 31 days. TXU
Business Services, an affiliate of TXU Gas, services the purchased receivables
and is paid a market based servicing fee by TXU Receivables Company. The
subordinated notes receivable from TXU Receivables Company represent TXU Gas'
retained interests in the transferred receivables and are recorded at book
value, net of allowances for bad debts, which approximates fair value due to the
short-term nature of the subordinated notes, and are included in accounts
receivable in the consolidated balance sheet.
11
Inventories by major category--
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Materials and supplies ............................ $ 7 $ 6
Gas stored underground ............................ 99 110
------- -------
Total inventories ............................ $ 106 $ 116
======= =======
Property, plant and equipment--
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Gas distribution and pipeline ..................... $ 1,734 $ 1,678
Other ............................................. 27 26
------- -------
Total ..................................... 1,761 1,704
Less accumulated depreciation ..................... 298 265
------- -------
Net of accumulated depreciation ........... 1,463 1,439
Construction work in progress ..................... 34 46
------- -------
Net property, plant and equipment ......... $ 1,497 $ 1,485
======= =======
Goodwill -- At June 30, 2002 and December 31, 2001, goodwill is stated net
of accumulated amortization of $37 million.
Derivative Instruments and Hedging Activities - The terms of TXU Gas'
derivatives that have been designated as accounting hedges match the terms of
the underlying hedged items. As a result, TXU Gas experienced no hedge
ineffectiveness during the period.
As of June 30, 2002, it is expected that $3 million of after-tax net losses
accumulated in other comprehensive income will be reclassified into earnings
during the next twelve months. This amount represents the projected value of the
hedges over the next twelve months relative to what would be recorded if the
hedge transactions had not been established. The amount expected to be
reclassified is not a forecasted loss incremental to normal operations, but
rather it demonstrates the extent to which the volatility in earnings (which
would otherwise exist) is mitigated through the use of cash flow hedges.
12
INDEPENDENT ACCOUNTANTS' REPORT
TXU Gas Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Gas Company and subsidiaries (TXU Gas) as of June 30, 2002, and the related
condensed statements of consolidated income and of comprehensive income for the
three-month and six-month periods ended June 30, 2002 and 2001 and the condensed
statements of consolidated cash flows for the six month period ended June 30,
2002 and 2001. These financial statements are the responsibility of TXU Gas'
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Gas as of December 31, 2001, and the related statements of consolidated
operations, comprehensive income, cash flows and shareholders' equity for the
year then ended (not presented herein); and in our report dated January 31,
2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2001, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
As discussed in Note 2 to the Notes to the Financial Statements, TXU Gas changed
its method of accounting for goodwill amortization in 2002 in connection with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
DELOITTE & TOUCHE LLP
Dallas, Texas
August 13, 2002
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As a result of the business restructuring effective January 1, 2002, the
wholesale trading and risk management operations and the unregulated commercial
and industrial retail gas business of TXU Gas were transferred to an affiliate
company, TXU Energy. The operations of the transferred business have been
reflected as discontinued operations in the statements of consolidated income
and cash flows, and the related consolidated financial statements for prior
periods have been restated accordingly. TXU Gas' continuing natural gas
pipeline, gas distribution and asset management services operations are managed
as one integrated business; accordingly, there are no separate reportable
segments.
Although the price of natural gas has varied significantly since the first
quarter of 2001, the city gate rate for the cost of gas TXU Gas ultimately
delivers to residential and commercial customers is established by the Railroad
Commission of Texas and generally provides for full recovery of the actual cost
of gas delivered.
Three Months Ended June 30, 2002 Compared to 2001
Operating revenues for TXU Gas decreased by $11 million, or 6%, to $160
million in 2002. The decrease reflects the reduced cost of gas sold, partly
offset by an increase in gas sales volumes of 11% due to cooler spring weather.
Gross margin (operating revenues less gas purchased for resale) increased
by $6 million, or 8%, to $86 million in 2002. The increase was driven by higher
distribution sales volumes.
Operation and maintenance expense increased by $6 million, or 9%, to $71
million in 2002. The increase primarily reflects increased insurance, pension,
and compensation costs. Total net pension and post-retirement benefit costs
increased $2 million in 2002.
Other operating expenses (depreciation and other amortization, goodwill
amortization, and taxes other than income) decreased $15 million, or 27%, to $41
million in 2002. The decrease was driven by lower gross receipts taxes on lower
revenues on which these taxes are based. Amortization of goodwill ceased in the
current year pursuant to the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," offset by additional
depreciation associated with distribution and pipeline property additions.
Loss from continuing operations decreased by $12 million, or 34%, to $23
million in 2002, as a result of increased gross margin offset by decreased
operating expenses. Net pension and postretirement benefit costs reduced net
income by $3 million in 2002 and $1 million in 2001. The effective tax rate
benefit was 36.1% in 2002 and 34.0% in 2001, with the difference due to the
cessation of nondeductible goodwill amortization.
Six Months Ended June 30, 2002 Compared to 2001
Operating revenues for TXU Gas decreased by $351 million, or 41%, to $504
million in 2002. The decrease reflects the reduced cost of gas and lower
distribution sales volumes, generally driven by milder winter weather and
reduced heating demand relative to 2001. Gas sales volumes declined 7%.
Gross margin decreased by $20 million, or 7%, to $249 million in 2002. The
decrease was driven by the effect of lower sales volumes and prices.
14
Operation and maintenance expense increased by $1 million, or 1%, to $133
million in 2002. The increase reflects higher insurance, pension, and
compensation costs, offset by reduced bad debt expense associated with lower
revenues. Total net pension and post-retirement benefit costs increased $2
million in 2002.
Other operating expenses decreased $21 million, or 22%, to $75 million in
2002. The decrease reflects lower gross receipts taxes on lower revenues on
which these taxes are based, and the cessation of goodwill amortization pursuant
to the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
Income from continuing operations is unchanged at $8 million in 2002, as a
result of decreased gross margin offset by decreased operating expenses. Net
pension and post-retirement benefit costs reduced net income by $5 million in
2002 and $3 million in 2001. The effective tax rate was 27.3% in 2002 and 46.7%
in 2001, with the difference due to the cessation of nondeductible goodwill
amortization.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended June 30,
2002 was $158 million compared with $64 million for the same period last year.
The increase of $94 million reflected a $52 million favorable movement in
inventories due to buildup of inventory in 2001 on colder temperatures and high
demand. In addition, accounts receivable were higher last year reflecting higher
gas costs and slower collections.
Cash of $108 million was used by financing activities in 2002 compared with
$15 million provided in 2001. A total of $106 million of advances from TXU Corp.
were repaid in 2002 compared to $17 million advanced from TXU Corp. in 2001,
primarily the result of increased available cash provided by operations and
decreased investing activity.
Cash of $47 million was used in investing activities in 2002 compared with
$76 million used in the prior year period. Capital expenditures in 2002
decreased from 2001 levels, which were impacted by higher than normal spending
for system reliability improvements.
US Credit Agreements described in Note 4 of TXU Gas' Annual Report on 2001
Form 10-K were amended in February 2002 to remove TXU Gas as a borrower. TXU Gas
will meet its short-term liquidity needs through advances from TXU Corp.
Financing Arrangements - TXU Gas may issue and sell additional debt and
equity securities which are currently registered with the Securities and
Exchange Commission for issuance pursuant to Rule 415 under the Securities Act
of 1933. This includes the possible future issuance and sale of up to an
aggregate of $400 million of debt securities and/or preferred securities of
subsidiary trusts.
REGULATION AND RATES
Although TXU Gas cannot predict future regulatory or legislative actions or
any changes in economic and securities market conditions, no changes are
expected in trends or commitments other than those discussed in the TXU Gas 2001
Form 10-K and this Form 10-Q, which might significantly alter TXU Gas' financial
position, results of operations or cash flows. See Note 6 to Financial
Statements.
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards -- See Note 2 to Financial Statements for a
discussion of changes in accounting standards.
15
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Gas contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although TXU Gas believes that in making any such statement
its expectations are based on reasonable assumptions, any such statement
involves uncertainties and is qualified in its entirety by reference to factors
contained in the Forward-Looking Statements section of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
TXU Gas 2001 Form 10-K, as well as general industry trends; natural gas costs
and availability; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; implementation of
new accounting standards; and access to adequate transmission facilities to meet
changing demand, among others, that could cause the actual results of TXU Gas
and/or its subsidiaries to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Gas undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for TXU Gas
to predict all of such factors, nor can it assess the impact of each such factor
or the extent to which any factor, or combination of factors, may cause results
to differ materially from those contained in any forward-looking statement.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different from the
information set forth in Item 7A. Quantitative and Qualitative Disclosures about
Market Risk included in TXU Gas' 2001 Form 10-K and is, therefore, not presented
herein.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 Letter from independent accountants as to unaudited interim
financial information
99(a) Condensed Statements of Consolidated Income - Twelve Months
Ended June 30, 2002
99(b) Chairman of the Board and Chief Executive Certification
99(c) Principal Financial Officer Certification
(b) Reports on Form 8-K filed since March 31, 2002:
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TXU GAS COMPANY
By /s/ Biggs C. Porter
-----------------------------------
Biggs C. Porter
Vice President,
Principal Accounting Officer
Date: August 14, 2002
18