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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 MARCH 31, 2003
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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
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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
-- --
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
-- --
Common Stock outstanding at May 12, 2003: 451,000 shares, par value $0.01 per
share.
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income--
Three Months Ended March 31, 2003 and 2002......................................... 1
Condensed Statements of Consolidated Cash Flows --
Three Months Ended March 31, 2003 and 2002......................................... 2
Condensed Consolidated Balance Sheets --
March 31, 2003 and December 31, 2002............................................... 3
Notes to Financial Statements...................................................... 4
Independent Accountants' Report.................................................... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 18
Item 4. Controls and Procedures............................................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 19
Item 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURE......................................................................................... 20
CERTIFICATIONS.................................................................................... 21
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Gas Company are made available to the
public, free of charge, on the TXU Corp. website at http://www.txucorp.com,
shortly after they have been filed with the Securities and Exchange Commission.
TXU Gas Company will provide copies of current reports not posted on the website
upon request.
i
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
---- -----
(millions of dollars)
Operating revenues.............................................. $ 621 $ 344
------- --------
Operating expenses:
Gas purchased for resale................................... 430 180
Operation and maintenance.................................. 66 61
Depreciation and amortization.............................. 18 15
Taxes other than income.................................... 22 19
------- --------
Total operating expenses................................... 536 275
------- --------
Operating income................................................ 85 69
Other income.................................................... 1 --
Other deductions................................................ -- 4
Interest income................................................. 1 --
Interest expense and other charges.............................. 11 18
------- --------
Income before income taxes...................................... 76 47
Income tax expense.............................................. 26 16
------- --------
Net income...................................................... 50 31
Preferred stock dividends....................................... 1 1
------- --------
Net income applicable to common stock........................... $ 49 $ 30
======= ========
CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME
(Unaudited)
Net income...................................................... $ 50 $ 31
Other comprehensive income:
Cash flow hedge activity, net of tax effect:
Net change in fair value of derivatives.................. -- 1
Amounts realized in earnings............................. 1 --
------- --------
Total................................................. 1 1
------- --------
Comprehensive income............................................ $ 51 $ 32
======= ========
See Notes to Financial Statements.
1
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
------ -----
(millions of dollars)
Cash flows - operating activities:
Net income....................................................... $ 50 $ 31
Adjustments to reconcile income from continuing operations
to cash provided by operating activities:
Depreciation and amortization................................. 20 19
Deferred income taxes - net................................... -- 4
Equity in earnings of affiliates and joint ventures........... (1) --
Over (under)-recovered gas costs.............................. (39) 40
Changes in operating assets and liabilities...................... 51 77
------ -------
Cash provided by operating activities of continuing operations 81 171
------ -------
Cash flows -- financing activities:
Retirements of long-term debt.................................... (125) --
Change in advances from affiliates............................... 72 (143)
Cash dividends paid.............................................. (1) (1)
Redemption deposits applied to debt retirements and other........ (1) --
------ -------
Cash used in financing activities of continuing operations. (55) (144)
------ --------
Cash flows -- investing activities:
Capital expenditures............................................. (24) (25)
Other............................................................ 2 --
------ -------
Cash used in investing activities of continuing operations. (22) (25)
------ --------
Cash provided by continuing operations............................. 4 2
------ -------
Cash used in discontinued operations -
Engineering and construction businesses sold..................... -- (2)
------ --------
Cash used in discontinued operations....................... -- (2)
------ --------
Net change in cash and cash equivalents............................ 4 --
Cash and cash equivalents-- beginning balance...................... 4 3
------ -------
Cash and cash equivalents-- ending balance......................... $ 8 $ 3
====== =======
See Notes to Financial Statements.
2
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
------------ --------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 8 $ 4
Accounts receivable........................................................... 126 118
Inventories................................................................... 80 125
Other current assets.......................................................... 34 28
------ -------
Total current assets...................................................... 248 275
Investments:
Restricted cash............................................................... 10 8
Other investments............................................................. 31 29
Property, plant and equipment - net............................................. 1,522 1,520
Goodwill........................................................................ 305 305
Regulatory assets............................................................... 183 142
Other noncurrent assets......................................................... 14 10
------- -------
Total assets............................................................ $ 2,313 $ 2,289
====== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates...................................................... $ 182 $ 110
Long-term debt due currently.................................................. 150 125
Accounts payable.............................................................. 139 125
Other current liabilities..................................................... 92 87
------ -------
Total current liabilities................................................. 563 447
Accumulated deferred income taxes and investment tax credits.................... 197 193
Other noncurrent liabilities and deferred credits............................... 252 248
Long-term debt, less amounts due currently...................................... 276 426
Mandatorily redeemable, preferred securities of subsidiary trust
holding solely junior subordinated debentures of TXU Gas Company.............. 147 147
Contingencies (Note 5)
Shareholder's equity (Note 4)................................................... 878 828
------ -------
Total liabilities and shareholder's equity................................ $ 2,313 $ 2,289
====== =======
See Notes to Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- TXU Gas Company (TXU Gas), a Texas
corporation, is a largely regulated business engaged in the purchase,
transmission, distribution and sale of natural gas in the north-central, eastern
and western parts of Texas, and also provides energy asset management services.
TXU Gas is a wholly-owned subsidiary of TXU Corp.
Divisions and subsidiaries of TXU Gas include TXU Gas Distribution
Division, a retail gas distribution business serving over 1.4 million
residential, commercial and industrial customers through over 26,000 miles of
distribution mains, TXU Lone Star Pipeline Division, which operates
approximately 6,800 miles of transmission and gathering pipeline in Texas, and
Oncor Utility Solutions (North America) Company and Oncor Utility Solutions
(Texas) Company, both wholly-owned subsidiaries of TXU Gas, which offer utility
asset management services to cooperatives and municipally-owned and
investor-owned utilities in North America.
TXU Gas' natural gas pipeline, gas distribution and asset management
services operations are managed as one integrated business; accordingly, there
are no separate reportable business segments.
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 on the same basis as the audited financial statements included in its
Annual Report on Form 10-K for the year ended December 31, 2002 (2002 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. All intercompany
items and transactions have been eliminated in consolidation. 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
(SEC). Because the consolidated interim financial statements do not include all
of the information and footnotes required by US GAAP, they should be read in
conjunction with the audited financial statements and related notes included in
the 2002 Form 10-K. The results of operations for an interim period may not give
a true indication of results for a full year. All dollar amounts in the
financial statements and tables in the notes are stated in millions of US
dollars unless otherwise indicated. Certain previously reported amounts have
been reclassified to conform to current classifications.
Changes in Accounting Standards - Statement of Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement Obligations", became effective
on January 1, 2003. SFAS No. 143 requires entities to record the fair value of
a legal liability for an asset retirement obligation in the period of its
inception. The adoption of SFAS No. 143 did not impact TXU Gas' results of
operations for the three months ended March 31, 2003.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," became effective
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." The
adoption of SFAS No. 145 did not result in a reclassification of TXU Gas'
results of operations for the three months ended March 31, 2002.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," became effective 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. The
adoption of SFAS No. 146 did not materially impact TXU Gas' results of
operations for the three months ended March 31, 2003.
4
Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34," requires recording
the fair value of guarantees upon issuance or modification after December 31,
2002. The implementation also requires expanded disclosures of guarantees (see
Note 5 under Guarantees). The adoption of FIN No. 45 did not materially impact
TXU Gas' results of operations for the three months ended March 31, 2003.
FIN No. 46, "Consolidation of Variable Interest Entities," was issued
in January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for existing variable interest entities in the
quarter ending September 30, 2003 and immediately for any new variable interest
entities.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," was issued in April 2003 and becomes effective on June 30,
2003. SFAS No. 149 clarifies the definition of a derivative and the treatment in
the statement of cash flows when a derivative contains a financing component.
For standards not yet adopted or implemented, TXU Gas is evaluating the
potential impact on its financial position and results of operations.
2. FINANCING ARRANGEMENTS
At March 31, 2003 and December 31, 2002, advances from TXU Corp.
totaled $182 million and $110 million, respectively, and the weighted average
interest rates on these short-term borrowings were 2.70% and 2.63%,
respectively. TXU Gas expects to meet its short-term liquidity needs through
advances from TXU Corp. and affiliates.
Long-term Debt -- Long-term debt of TXU Gas consisted of the following:
March 31, December 31,
2003 2002
-------- ------------
6.250% Fixed Notes due January 1, 2003 (a) ...................................... $ -- $ 125
6.375% Fixed Notes due February 1, 2004.......................................... 150 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008 (b)...................... 125 125
Unamortized premium and discount................................................. 1 1
----- -----
Total........................................................................ 426 551
----- -----
Less amounts due currently....................................................... 150 125(a)
----- -----
Total long-term debt............................................................. $ 276 $ 426
===== =====
(a) On January 1, 2003, TXU Gas redeemed, at par value, $125 million principal
amount 6.25% Notes, which matured on that date. TXU Gas used cash advances
from TXU Corp. and cash on hand to fund the redemption of these notes.
(b) A fixed rate of 6.564% is payable until the reset date of January 1, 2005.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary, which sells undivided interests in accounts receivable it purchases
to financial institutions. As of March 31, 2003, TXU Energy Company LLC (TXU
Energy) (through certain subsidiaries), Oncor Electric Delivery Company (Oncor)
and TXU Gas are 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 March 31, 2003, TXU Gas had sold $170 million face amount of receivables
to TXU Receivables Company under the program in exchange for cash of $42 million
and $128 million in subordinated notes, with $0.3 million of losses on sales for
the three months ended March 31, 2003 that principally represent the interest
costs on the underlying financing. These losses approximated 6% of the cash
proceeds from the sale of undivided interests in accounts receivable on an
annualized basis. Funding under the program decreased from 32% of receivables
sold at December 31, 2002 to 25% of receivables sold at March 31, 2003 primarily
due to reserve requirements which apply factors from the prior 12-month period
in determining the current period reserve. This period reflects billing and
collection delays previously experienced as a result of new systems and
processes in TXU Energy and the Electric Reliability Council of Texas (ERCOT)
for clearing customers' switching and billing data upon the transition to
competition.
5
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services Company, a subsidiary of TXU
Corp., 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 balance sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was amended to allow receivables that are 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
Contingencies Related to Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) the credit rating for the long-term senior debt securities
of all originators and the parent guarantor, if any,
declines below BBB- by Standard & Poor's (S&P) or Baa3 by
Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the
sold receivables, the default ratio (delinquent for 91
days or deemed uncollectible), the dilution ratio
(reductions for discounts, disputes and other allowances)
or the days collection outstanding ratio exceed stated
thresholds and the financial institutions do not waive
such event of termination.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first quarter of 2003, but waivers were granted. These ratios were
affected by issues related to the transition to deregulation. Certain billing
and collection delays arose due to implementation of new systems and processes
within TXU Energy and ERCOT for clearing customer switching and billing data.
The billing delays have been resolved but, while improving, the lagging
collection issues continue to impact the ratios. The implementation of new
provider of last resort (POLR) rules by the Public Utility Commission of Texas
(Commission) and strengthened credit and collection policies and practices are
expected to bring the ratios in consistent compliance with the program.
Under the receivable sales program, all originators are required to
maintain a "BBB-" (S&P) and a "Baa3" (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators and the parent guarantor, if
any, are downgraded so that there are no eligible originators, the facility
would terminate.
Cross Default Provisions -- Certain financing arrangements of TXU Gas
contain provisions that would result in an event of default if there were a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions.
6
A default by TXU Gas or any of its material subsidiaries on
indebtedness of $25 million or more would result in a cross-default under the
TXU Gas senior notes due 2004 and 2005 ($300 million) and two interest rate swap
agreements entered into in connection with TXU Gas' floating rate mandatorily
redeemable preferred securities (see Note 3). In the event of default on the
swap agreements, a cash settlement of $3 million (as of March 31, 2003) for the
out-of-the money position would be required.
The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross default threshold of $50,000. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.
3. TXU GAS OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
TXU GAS (TRUST SECURITIES)
At March 31, 2003 and December 31, 2002, TXU Gas Capital I, a
consolidated statutory business trust, 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 March 31, 2003, TXU Gas
had two interest rate swap agreements with respect to floating rate trust
securities of TXU Gas Capital I, with notional principal amounts of $100 million
and $50 million, respectively, that effectively fixed the rate at 6.629% and
6.444%, respectively, per annum to July 1, 2003.
4. SHAREHOLDER'S EQUITY
March 31, December 31,
2003 2002
---------- ----------
Preferred stock.................................................... $ 75 $ 75
-------- -------
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000, Outstanding shares - 451,000... -- --
Paid in capital.................................................... 820 820
Retained earnings (deficit)........................................ 2 (47)
Accumulated other comprehensive loss............................... (19) (20)
-------- -------
Total common stock equity....................................... 803 753
-------- -------
Total shareholder's equity.................................... $ 878 $ 828
======== =======
5. CONTINGENCIES
Guarantees -- In 1992, a discontinued engineering and construction
business of TXU Gas completed construction of a plant, the performance of which
is warranted by TXU Gas for a period ending no later than 2008. The maximum
contingent liability under the guarantee is $92 million. No claims have been
asserted under the guarantee and none are anticipated.
Income Tax Contingencies -- In April 2003, the Internal Revenue Service
proposed to TXU Gas certain adjustments to the United States federal income tax
reported by the predecessor company, ENSERCH Corporation, for the 1993 calendar
year. The adjustments proposed would result in taxes payable for that year of
$22 million excluding interest, but including penalties of $9 million. TXU Gas
intends to protest the proposed audit adjustments. The potential earnings impact
to TXU Gas would consist of the penalty and interest costs ultimately payable
should TXU Gas not prevail in its position. The Internal Revenue Service has
indicated that it intends to examine tax returns for the years 1994 through
1997.
7
Legal Proceedings -- 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. 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. On April 10, 2003, the District Court entered an
order denying the plaintiffs' motion seeking certification of a class. No amount
of damages has been specified in the petition with respect to TXU Gas or TXU
Fuel, and neither TXU Gas nor TXU Fuel have purchased natural gas from the named
plaintiffs in the litigation. 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 each, are not expected to have a material
effect on their financial position, results of operations or cash flows.
6. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Deductions --
Three Months
Ended March 31,
------------------------
2003 2002
------ -----
Other income:
Other.................................................... $ 1 $ --
====== =======
Other deductions:
Charges related to a sold business....................... $ -- $ 3
Equity losses of unconsolidated subsidiaries............. -- 1
------ -------
Total other deductions.................................. $ -- $ 4
====== =======
Interest Expense and Related Charges --
Three Months
Ended March 31,
2003 2002
--------- -------
Interest .................................................. $ 8 $ 16
Distributions on TXU Gas obligated, mandatorily
redeemable, preferred securities of subsidiary trust
holding solely junior subordinated debentures of TXU Gas.. 3 3
Amortization of debt issuance expense and premiums......... -- (1)
------ -------
Total interest expense and other charges ............ $ 11 $ 18
====== =======
8
Accounts Receivable -- At March 31, 2003 and December 31, 2002,
accounts receivable are stated net of allowance for uncollectible accounts of $7
million and $3 million, respectively.
Accounts receivable included $24 million and $27 million of unbilled
revenues at March 31, 2003 and December 31, 2002, respectively.
Intangible Assets -- SFAS No. 142, "Goodwill and Other Intangible
Assets," became effective for TXU Gas on January 1, 2002. SFAS No. 142 requires
the discontinuance of goodwill amortization and additional disclosures regarding
intangible assets (other than goodwill) that are amortized or not amortized:
As of March 31, 2003 As of December 31, 2002
------------------------------------ ----------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ ---- -------- ------------- ---
Amortized intangible assets
Capitalized software.............. $ 29 $ 12 $ 17 $ 29 $ 11 $ 18
Land easements.................... 16 8 8 15 8 7
----- ----- ----- ----- ----- -----
Total....................... $ 45 $ 20 $ 25 $ 44 $ 19 $ 25
===== ===== ===== ===== ===== =====
Amortized intangible asset balances are classified as property, plant
and equipment in the balance sheet. TXU Gas has no intangible assets
(other than goodwill) that are not amortized.
Aggregate amortization expense for intangible assets was $1 million for
the three months ended March 31, 2003 and 2002.
Inventories by major category--
March 31, December 31,
2003 2002
-------- ---------
Materials and supplies, at cost............................. $ 8 $ 7
Gas stored underground, primarily at weighted average cost.. 72 118
------- -------
Total inventories........................................ $ 80 $ 125
======= =======
Property, Plant and Equipment-- At March 31, 2003 and December 31,
2002, property, plant and equipment was stated net of accumulated depreciation
and amortization of $350 million and $333 million, respectively.
Regulatory Assets --
March 31, December 31,
2003 2002
-------- -------
Under-collected gas costs.......................... $ 88 $ 49
Distribution safety compliance costs............... 42 43
Rate case costs.................................... 9 12
Other regulatory assets............................ 44 38
------- -------
Regulatory assets............................... $ 183 $ 142
======= =======
Included above are assets of $62 million at March 31, 2003 and $57
million at December 31, 2002 that were not earning a return. The regulatory
assets have an average remaining recovery period of approximately 15 years.
Derivatives and Hedges - The terms of TXU Gas' interest rate swap
agreements that have been designated as cash flow hedges match the terms of the
underlying hedged indebtedness. As a result, TXU Gas experienced no hedge
ineffectiveness during the three months ended March 31, 2003 or 2002.
9
As of March 31, 2003, it is expected that $2 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.
Affiliate Transactions -- The following represent significant affiliate
transactions of TXU Gas:
o Average daily short-term advances from affiliates during the first
three months of 2003 and 2002 were $168 million and $147 million,
respectively, and interest expense incurred on the advances was $1
million. The average interest rate for the three months ended
March 31, 2003 and 2002 was 2.60% and 3.11%, respectively.
o TXU Business Services Company, a subsidiary of TXU Corp., charges
TXU Gas for certain financial, accounting, information technology,
environmental, procurement and personnel services and other
administrative services at cost. For the three months ended March
31, 2003 and 2002, these costs totaled $9 million and $12 million,
respectively, and are reported in operation and maintenance
expenses.
o Oncor and TXU Energy, indirect subsidiaries of TXU Corp., charge
TXU Gas for customer and administrative services. For the three
months ended March 31, 2003 and 2002 these charges totaled $15
million and $14 million, respectively, and are reported in
operation and maintenance expenses.
o TXU Gas had revenues of $3 million from the sale and
transportation of gas to other TXU Corp. subsidiaries for the
three months ended March 31, 2003 and 2002.
10
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 March 31, 2003, and the related
condensed statements of consolidated income, comprehensive income, and cash
flows for the three-month periods ended March 31, 2003 and 2002. 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, 2002, and the related statements of consolidated income,
comprehensive income, cash flows and shareholder's equity for the year then
ended (not presented herein); and in our report (which includes an explanatory
paragraph related to the adoption of Statement of Financial Accounting Standards
No. 142) dated February 14, 2003, 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, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 15, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.
Divisions and subsidiaries of TXU Gas include TXU Gas Distribution
Division, a retail gas distribution business serving over 1.4 million
residential, commercial and industrial customers through over 26,000 miles of
distribution mains, TXU Lone Star Pipeline Division, which operates
approximately 6,800 miles of transmission and gathering pipeline in Texas, and
Oncor Utility Solutions (North America) Company and Oncor Utility Solutions
(Texas) Company, both wholly-owned subsidiaries of TXU Gas, which offers utility
asset management services to cooperatives and municipally-owned and
investor-owned utilities in North America.
TXU Gas' natural gas pipeline, gas distribution and asset management
services operations are managed as one integrated business; accordingly, there
are no separate reportable segments.
RESULTS OF OPERATIONS
Results of operations of TXU Gas are subject to seasonal variation,
reflecting higher gas usage in the first and fourth quarters due to colder
weather. These variations generally result in higher net income and cash flow
from operations during these periods.
Dollar amounts in the following tables are stated in millions of US
dollars unless otherwise stated.
Highlights
Three Months Ended March 31,
----------------------------
2003 2002
-------- -------
Operating statistics
Gas distribution sales volumes (billion cubic feet -- Bcf):
Residential............................................... 45 41
Commercial................................................ 24 22
Industrial and electric generation........................ 2 3
-------- --------
Total gas distribution................................. 71 66
======== ========
Pipeline transportation volumes (Bcf)......................... 86 102
======== ========
Operating revenues (million of dollars)
Gas distribution:
Residential............................................... $ 401 $ 223
Commercial................................................ 183 98
Industrial and electric generation........................ 10 8
-------- --------
Total gas distribution................................. 594 329
Pipeline transportation....................................... 16 12
Other revenues, net of intercompany eliminations.............. 11 3
-------- --------
Total operating revenues............................... $ 621 $ 344
======== ========
Heating degree days (% of normal)................................ 107% 101%
12
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
- -------------------------------------------------------------------------------
TXU Gas' operating revenues increased by $277 million, or 81%, to $621
million in 2003. The growth reflected $249 million from the effects of higher
gas costs passed on to customers and $8 million from increased volumes,
generally driven by colder winter weather and increased heating demand relative
to 2002, and an estimated $5 million from higher base distribution rates. The
balance of the revenue growth reflected recurring changes in estimates for
unbilled revenues and gas costs. The average cost of gas rose 98% while sales
volumes increased 8%.
Gross margin (operating revenues less gas purchased for resale)
increased by $27 million, or 16%, to $191 million in 2003. The increase
reflected the higher volumes and increased base distribution rates.
Operation and maintenance expense increased $5 million, or 8%, to $66
million in 2003. The increase primarily reflects increased bad debt expense
associated with higher revenues.
Depreciation and amortization expense increased $3 million, or 20%, to
$18 million in 2003. The increase reflects amortization of a regulatory asset
related to distribution safety compliance costs and higher depreciation of
distribution system assets arising from normal growth.
Taxes other than income increased $3 million, or 16%, to $22 million in
2003. The increase was driven by higher gross receipts taxes, reflecting higher
revenues in the prior periods on which these taxes are based. Due to the lag in
timing between revenues and the corresponding gross receipts tax expense, TXU
Gas is expected to report even greater increases in taxes other than income in
future periods.
There were no other deductions in 2003 compared with $4 million in
2002. Other deductions in 2002 primarily reflected charges related to a business
sold several years ago.
Interest expense and other charges decreased $7 million, or 39%, to $11
million in 2003. The decrease reflects a $4 million decrease due to lower debt
levels, and a $3 million decrease due to lower interest rates, primarily due to
a higher proportion of lower interest rate advances from TXU Corp. and
affiliates.
The effective income tax rate is essentially unchanged at 34.2% in 2003
versus 34.0% in 2002, with no significant offsetting items.
Net income increased by $19 million, or 61%, to $50 million in 2003,
driven by the increase in gross margin. Net pension and postretirement benefit
costs reduced net income by $3 million in 2003 and $2 million in 2002.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended March
31, 2003 was $81 million compared with $171 million for the same period last
year. The decrease in cash flows provided by operating activities of $90 million
reflected lower cash earnings (net income adjusted for the significant noncash
items identified in the statement of cash flows) of $64 million, reflecting
under-recovery of gas costs in 2003 versus over-recovery in 2002, and
unfavorable working capital (accounts receivable, inventory and accounts
payable) changes of $40 million. Future cash flows will reflect the remaining
recovery of gas costs through billings to customers. The net unfavorable working
capital change is primarily due to increased accounts receivable balances
related to higher revenue.
Cash used in financing activities was $55 million in 2003 compared with
$144 million in 2002. A total of $72 million was advanced from TXU Corp. in 2003
compared to $143 million repaid to TXU Corp. in 2002. Retirements of long-term
debt of $125 million in 2003 were funded by the funds advanced and cash on hand
(see Note 2 to Financial Statements for more debt retirement details).
13
Financing Arrangements
TXU Gas expects to meet its short-term liquidity needs through advances
from TXU Corp. or affiliated companies. TXU Gas had short-term advances from TXU
Corp. or affiliates of $182 million and $110 million as of March 31, 2003 and
December 31, 2002, respectively.
Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary, which sells undivided interests in accounts receivable it purchases
to financial institutions. As of March 31, 2003, the facility includes TXU
Energy Company LLC (TXU Energy) (through certain subsidiaries), Oncor Electric
Delivery Company (Oncor) 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 March 31, 2003, TXU Gas had sold
$170 million face amount of receivables to TXU Receivables Company under the
program in exchange for cash of $42 million and $128 million in subordinated
notes, with $0.3 million of losses on sales for the three months ended March 31,
2003 that principally represent the interest costs on the underlying financing.
These losses approximated 6% of the cash proceeds from the sale of undivided
interests in accounts receivable on an annualized basis. Funding under the
program decreased from 32% of receivables sold at December 31, 2002 to 25% of
receivables sold at March 31, 2003 primarily due to reserve requirements which
apply factors from the prior 12-month period in determining the current period
reserve. This period reflects billing and collection delays previously
experienced as a result of new systems and processes in TXU Energy and the
Electric Reliability Council of Texas (ERCOT) for clearing customers' switching
and billing data upon the transition to competition.
Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services Company, a subsidiary of TXU
Corp., 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 Corp.'s subsidiaries' 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 balance
sheet.
In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was amended to allow receivables that are 31-90 days
past due into the program. TXU Corp. intends to extend the program upon
expiration in July 2003.
Contingencies Related to Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:
1) the credit rating for the long-term senior debt securities of all
originators and the parent guarantor, if any, declines below BBB- by
S&P or Baa3 by Moody's; or
2) the delinquency ratio (delinquent for 31 days) for the sold
receivables, the default ratio (delinquent for 91 days or deemed
uncollectible), the dilution ratio (reductions for discounts, disputes
and other allowances) or the days collection outstanding ratio exceed
stated thresholds and the financial institutions do not waive such
event of termination.
14
The delinquency and dilution ratios exceeded the relevant thresholds at
various times during the first quarter of 2003, but waivers were granted. These
ratios were affected by issues related to the transition to deregulation.
Certain billing and collection delays arose due to implementation of new systems
and processes within TXU Energy and ERCOT for clearing customer switching and
billing data. The billing delays have been resolved but, while improving, the
lagging collection issues continue to impact the ratios. The implementation of
new provider of last resort (POLR) rules by the Public Utility Commission of
Texas (Commission) and strengthened credit and collection policies and practices
are expected to bring the ratios in consistent compliance with the program.
Registered Financing Arrangements -- TXU Gas may issue and sell
additional debt and equity securities as needed, including issuances 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 for offering pursuant to Rule 415 under the Securities Act
of 1933.
Credit Ratings of TXU Corp. and TXU Gas
The current credit ratings for TXU Corp. and TXU Gas are presented
below:
TXU Corp. TXU Gas
---------- -----------
(Senior (Senior
Unsecured) Unsecured)
Standard & Poor's...... BBB- BBB
Moody's................ Ba1 Baa3
Fitch ................. BBB- BBB-
Moody's currently maintains a negative outlook for TXU Corp. and TXU
Gas. Fitch currently maintains a stable outlook for both entities. Standard &
Poor's (S&P) currently maintains a negative outlook for both entities.
These ratings are investment grade except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.
A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.
Financial Covenants, Credit Rating and Cross Default Provisions --
Certain of TXU Gas' financing arrangements contain provisions that are
specifically affected by changes in credit ratings and also include
cross-default provisions. The material provisions are described below.
Credit Rating Provisions --Under the accounts receivable program, all
originators are required to maintain a `BBB-' (S&P) and a `Baa3' (Moody's)
rating (or supply a parent guarantee with a similar rating). A downgrade below
the required ratings for an originator would prevent that originator from
selling its accounts receivable under the program. If all originators and the
parent guarantor, if any, are downgraded so that there are no eligible
originators, the facility would terminate.
Cross Default Provisions -- Certain financing arrangements of TXU Gas
contain provisions that would result in an event of default if there were a
failure under other financing arrangements to meet payment terms or to observe
other covenants that would result in an acceleration of payments due. Such
provisions are referred to as "cross default" provisions.
The accounts receivable program described above contains a cross
default provision with a threshold of $50 million applicable to each of the
originators under the program. TXU Receivables Company and TXU Business Services
Company each have a cross default threshold of $50,000. If either an originator,
TXU Business Services Company or TXU Receivables Company defaults on
indebtedness of the applicable threshold, the facility could terminate.
15
A default by TXU Gas or any of its material subsidiaries on
indebtedness of $25 million or more would result in a cross-default under the
TXU Gas senior notes due 2004 and 2005 ($300 million) and two interest rate swap
agreements entered into in connection with TXU Gas' floating rate mandatorily
redeemable preferred securities (see Note 3 to Financial Statements). In the
event of default on the swap agreements, a cash settlement of $3 million (as of
March 31, 2003) for the out-of-the money position would be required.
COMMITMENTS AND CONTINGENCIES
See Note 5 to Financial Statements for discussion of contingencies.
There were no material changes in cash commitments from those discussed in TXU
Gas' 2002 Form 10-K.
REGULATION AND RATES
The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the Railroad
Commission of Texas (RRC) and provides for full recovery of the actual cost of
gas delivered, including out-of-period costs such as gas purchase contract
settlement costs. The distribution service rates TXU Gas Distribution charges
its residential and commercial customers are generally established by the
municipal governments of the cities and towns served, with the RRC having
appellate, or in some instances, primary jurisdiction.
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual favorable impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million.
In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending.
On August 30, 2002, TXU Gas filed the city gate gas cost reconciliation
for the twelve-month period ended June 30, 2002 with the RRC. During this
period, TXU Gas over-recovered its gas cost by $24 million, which is being
refunded from October 2002 through June 2003. The refund has no material impact
on the net income of TXU Gas.
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
2002 Form 10-K and this Form 10-Q, which might significantly alter TXU Gas'
financial position, results of operations or cash flows.
CHANGES IN ACCOUNTING STANDARDS
See Note 1 to Financial Statements for a discussion of changes in
accounting standards.
16
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.
Some important factors, in addition to others specifically addressed in
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on TXU Gas' operations, financial
results and financial condition, and could cause TXU Gas' actual results or
outcomes to differ materially from any projected outcomes contained in any
forward-looking statements in this report, include:
TXU Gas' businesses operate in changing market environments influenced
by various legislative and regulatory initiatives. TXU Gas will need to adapt to
these changes.
TXU Gas is subject to changes in laws or regulations, changing
governmental policies and regulatory actions, including those of the Railroad
Commission of Texas, with respect to matters including, but not limited to,
operation and construction of pipeline transmission facilities, acquisition,
disposal, depreciation and amortization of regulated assets and facilities,
recovery of purchased gas costs, and return on invested capital.
TXU Gas is subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and health and safety. There are capital,
operating and other costs associated with compliance with these environmental
statutes, rules and regulations, and those costs could increase in the future.
TXU Gas' businesses are subject to cost-of-service regulation. This
regulatory treatment does not provide any assurance as to achievement of
earnings levels.
TXU Gas relies on advances from affiliates as a significant source of
liquidity for capital requirements not satisfied by operating cash flows and
access to financial markets to a lesser extent. The inability to raise capital
on favorable terms, particularly during times of uncertainty in the financial
markets, could impact TXU Gas' ability to sustain and grow its businesses, which
are capital intensive, and would likely increase its capital costs. Further,
concerns on the part of counterparties regarding TXU Gas' liquidity and credit
could limit its ability to enter into larger and longer-dated transactions.
TXU Gas uses derivative financial instruments, such as interest rate
swaps, and may use other instruments, such as options, futures and forwards, to
manage risks. TXU Gas could recognize financial losses as a result of volatility
in the market values of these contracts, or if a counterparty fails to perform.
TXU Gas' inability or failure to effectively hedge its assets or positions
against changes in commodity prices, interest rates, counterparty credit risk or
other risk measures could result in greater volatility of and/or declines in
future financial results.
The operation of gas transportation facilities involves many risks,
including breakdown or failure of equipment, pipelines, lack of sufficient
capital to maintain the facilities, or the impact of unusual or adverse weather
conditions or other natural events, as well as the risk of performance below
expected levels of output or efficiency. This could result in lost revenues
and/or increased expenses. Insurance, warranties or performance guarantees may
not cover any or all of the lost revenues or increased expenses. In addition to
these risks, breakdown or failure of a TXU Gas operating facility may prevent
the facility from performing under applicable sales agreements which, in certain
situations, could result in termination of those agreements or incurring a
liability for liquidated damages.
Natural disasters, war, terrorist acts and other catastrophic events
may impact TXU Gas' operations in unpredictable ways, including disruption of
natural gas supply and delivery activities, declines in customer demand and
instability in the financial markets.
17
TXU Gas' ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables and subject to substantial risks. Should any such efforts be
unsuccessful, TXU Gas could be subject to additional costs and/or the write off
of its investment in the project or improvement.
TXU Gas is subject to costs and other effects of legal and
administrative proceedings, settlements, investigations and claims.
TXU Gas is subject to the effects of new, or changes in, income tax
rates or policies and increases in taxes related to property, plant and
equipment and gross receipts and other taxes. Further, TXU Gas is subject to
audit and reversal of its tax positions by the Internal Revenue Service and
state taxing authorities.
TXU Gas' ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.
TXU Gas is subject to employee workforce factors, including loss or
retirement of key executives and availability of qualified personnel.
The issues and associated risks and uncertainties described above are
not the only ones TXU Gas may face. Additional issues may arise or become
material as the energy industry evolves. The risks and uncertainties associated
with these additional issues could impair TXU Gas' businesses in the future.
Reference is made to the discussion under Liquidity and Capital Resources.
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 the risks discussed above under RISK FACTORS THAT MAY EFFECT FUTURE RESULTS
and factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Gas' 2002 Form 10-K, that could cause the actual results of
TXU Gas 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 the
actual results of TXU Gas to differ materially from those projected in any
forward-looking statement.
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' 2002 Form 10-K and is, therefore, not
presented herein.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Gas' management, including the principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this quarterly report. Based on the evaluation performed, TXU
Gas' management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective. There were no significant changes in TXU Gas' internal controls or in
other factors that could significantly affect internal controls subsequent to
their evaluation.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal Proceedings -- 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. 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. On April 10, 2003, the District Court entered an
order denying the plaintiffs' motion seeking certification of a class. No amount
of damages has been specified in the petition with respect to TXU Gas or TXU
Fuel, and neither TXU Gas nor TXU Fuel have purchased natural gas from the named
plaintiffs in the litigation. 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.
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
March 31, 2003
99(b) Section 906 Certification of Chief Executive Officer
99(c) Section 906 Certification of Principal Financial Officer
(b) Reports on Form 8-K filed since December 31, 2002:
April 30, 2003 Item 5.Other Events and Regulation FD Disclosure
Item 7.Exhibits
May 1, 2003 Item 7.Exhibits
(Form 8-K/A)
19
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
May 15, 2003
20
TXU GAS COMPANY
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU Gas Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of TXU Gas Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Erle Nye
--------------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
21
TXU GAS COMPANY
Certificate Pursuant to Section 302
of Sarbanes - Oxley Act of 2002
CERTIFICATION OF PFO
I, Scott Longhurst, Principal Financial Officer of TXU Gas Company, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of TXU Gas Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Scott Longhurst
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Signature: Scott Longhurst
Title: Principal Financial Officer
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