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UNITED STATES 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 MARCH 31, 2004
--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
(Exact Name of Registrant as Specified in its Charter)
Texas 75-0399066
(State of Incorporation) (I.R.S. Employer Identification No.)
1601 Bryan Street, Dallas TX, 75201-3411 (214) 812-4600
(Address of Principal Executive Offices) (Registrant's Telephone Number)
(Zip Code)
---------------------
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 check mark 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 10, 2004: 449,631 shares, par value $0.01 per
share.
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TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
----
Glossary.......................................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Consolidated Income and Comprehensive Income--
Three Months Ended March 31, 2004 and 2003......................................... 1
Condensed Statements of Consolidated Cash Flows --
Three Months Ended March 31, 2004 and 2003......................................... 2
Condensed Consolidated Balance Sheets --
March 31, 2004 and December 31, 2003............................................... 3
Notes to Condensed 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 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURE ....................................................................................... 20
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
GLOSSARY
When the following terms and abbreviations appear in the text of this report,
they have the meanings indicated below.
1999 Restructuring Legislation................. Legislation that restructured the electric utility industry
in Texas to provide for competition
2003 Form 10-K................................. TXU Gas' Annual Report on Form 10-K for the year ended
December 31, 2003
Bcf............................................ billion cubic feet
Commission..................................... Public Utility Commission of Texas
ERCOT.......................................... Electric Reliability Council
of Texas, the Independent
System Operator and the
regional reliability
coordinator of the various
electricity systems within
Texas
FASB........................................... Financial Accounting
Standards Board, the
designated organization in
the private sector for
establishing standards for
financial accounting and
reporting
FIN............................................ Financial Accounting Standards Board Interpretation
FIN 46......................................... FIN No. 46, "Consolidation of Variable Interest Entities"
FIN 46R........................................ FIN No. 46 (Revised 2003), "Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51"
Fitch.......................................... Fitch Ratings, Ltd.
IRS............................................ Internal Revenue Service
Moody's........................................ Moody's Investors Services, Inc.
Oncor.......................................... refers to Oncor Electric Delivery Company, a subsidiary of
US Holdings, or Oncor and its consolidated bankruptcy remote
financing subsidiary, TXU Electric Delivery Transition Bond
Company LLC (formerly Oncor Electric Delivery Transition
Bond Company LLC), depending on context
RRC............................................ Railroad Commission of Texas
S&P............................................ Standard & Poor's, a division of The McGraw Hill Companies
Sarbanes-Oxley................................. Sarbanes - Oxley Act of 2002
SEC............................................ United States Securities and Exchange Commission
SFAS........................................... Statement of Financial Accounting Standards issued by the
FASB
SFAS 140....................................... SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125"
TXU Business Services.......................... TXU Business Services Company, a subsidiary of TXU Corp.
TXU Corp....................................... refers to TXU Corp., a holding company, and/or its
consolidated subsidiaries, depending on context
ii
TXU Energy..................................... refers to TXU Energy Company LLC, a subsidiary of US
Holdings, and/or its consolidated subsidiaries, depending on
context
TXU Gas........................................ refers to TXU Gas Company, a subsidiary of TXU Corp., and
/or its subsidiaries, depending on context
US............................................. United States of America
US GAAP........................................ accounting principles generally accepted in the US
US Holdings.................................... TXU US Holdings Company, a subsidiary of TXU Corp.
iii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
---------
2004 2003
---- ----
(millions of dollars)
Operating revenues.............................................. $ 508 $ 621
------- -------
Operating expenses:
Gas purchased for resale................................... 326 430
Operation and maintenance.................................. 69 66
Depreciation and amortization.............................. 19 18
Taxes other than income.................................... 31 22
------- -------
Total operating expenses................................ 445 536
Operating income................................................ 63 85
Other income.................................................... 2 1
Interest income................................................. - 1
Interest expense and related charges............................ 8 11
------- -------
Income before income taxes...................................... 57 76
Income tax expense.............................................. 19 26
------- -------
Net income...................................................... 38 50
Preferred stock dividends....................................... 1 1
------- -------
Net income applicable to common stock........................... $ 37 $ 49
======= =======
CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME
(Unaudited)
Net income...................................................... $ 38 $ 50
Other comprehensive income:
Cash flow hedge activity, net of tax effect:
Net change in fair value of derivatives................. - -
Amounts realized in earnings............................ - 1
------- -------
Total ............................................... - 1
------- -------
Comprehensive income............................................ $ 38 $ 51
======= =======
See Notes to Condensed Financial Statements.
1
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------
2004 2003
------ -----
(millions of dollars)
Cash flows - operating activities:
Net income....................................................... $ 38 $ 50
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization................................. 21 20
Deferred income taxes - net................................... 3 -
Equity in earnings of affiliates and joint ventures........... - (1)
Adjustments related to gas cost recovery...................... 8 (39)
Changes in operating assets and liabilities...................... 23 51
------ ------
Cash provided by operating activities...................... 93 81
Cash flows -- financing activities:
Retirements of long-term debt.................................... (150) (125)
Change in advances from affiliates............................... 77 72
Cash dividends paid.............................................. (1) (1)
Debt premium, discount, financing and reacquisition expenses..... - (1)
------ ------
Cash used in financing activities.......................... (74) (55)
Cash flows -- investing activities:
Capital expenditures............................................. (21) (24)
Other............................................................ 2 2
------ ------
Cash used in investing activities.......................... (19) (22)
------- ------
Net change in cash and cash equivalents............................ -- 4
Cash and cash equivalents-- beginning balance...................... 5 4
------ ------
Cash and cash equivalents-- ending balance......................... $ 5 $ 8
====== ======
See Notes to Condensed Financial Statements.
2
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
(millions of dollars)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 5 $ 5
Accounts receivable............................................................ 8 101
Inventories.................................................................... 112 144
Other current assets........................................................... 49 27
------- ---------
Total current assets....................................................... 174 277
Investments:
Restricted cash.............................................................. 10 10
Other investments............................................................ 33 35
Property, plant and equipment - net............................................... 1,690 1,685
Goodwill.......................................................................... 305 305
Other noncurrent assets........................................................... 14 16
------- ---------
Total assets............................................................. $ 2,226 $ 2,328
======= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Advances from affiliates....................................................... $ 231 $ 154
Long-term debt due currently................................................... - 150
Accounts payable............................................................... 72 148
Other current liabilities...................................................... 90 88
------- ---------
Total current liabilities.................................................. 393 540
Accumulated deferred income taxes and investment tax credits...................... 221 217
Long-term debt held by subsidiary trust........................................... 155 155
All other long-term debt, less amounts due currently.............................. 276 276
Regulatory liabilities............................................................ 40 35
Other noncurrent liabilities and deferred credits................................. 225 226
------- ---------
Total liabilities.......................................................... 1,310 1,449
Contingencies (Note 5)
Shareholder's equity :
Preferred stock - not subject to mandatory redemption ................... 75 75
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000, Outstanding shares - 449,631.......... - -
Additional paid in capital............................................... 815 815
Retained earnings (deficit).............................................. 30 (7)
Accumulated other comprehensive loss..................................... (4) (4)
------- -------
Total common stock equity.............................................. 841 804
------- -------
Total shareholder's equity........................................... 916 879
------- -------
Total liabilities and shareholder's equity......................... $ 2,226 $ 2,328
======= =========
See Notes to Condensed Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Description of Business -- 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 utility asset management services. TXU Gas is a wholly-owned
subsidiary of TXU Corp.
TXU Gas serves more than 1.4 million retail gas customers and owns and
operates gas distribution mains, gas transportation and gathering pipelines and
underground storage reservoirs. TXU Gas also provides transportation services to
gas distribution companies, electricity generation plants, end-use industrial
customers and through-system shippers. Oncor Utility Solutions 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 business segments.
TXU Corp.'s Strategic Initiatives - On April 26, 2004, TXU Corp. announced
a series of proposed transactions, including the intent to sell TXU Gas. It is
expected that any transaction would be closed by the end of 2004, and the sales
price is expected to approximate book value.
Basis of Presentation -- The condensed consolidated financial statements
of TXU Gas have been prepared in accordance with US GAAP and on the same basis
as the audited financial statements included in its 2003 Form 10-K. In the
opinion of management, all other 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 SEC. Because the condensed 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 2003 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 dollars unless otherwise indicated.
Changes in Accounting Standards -- FIN 46R was issued in December 2003 and
replaced FIN 46, which was issued in January 2003. FIN 46R expands and clarifies
the guidance originally contained in FIN 46, regarding consolidation of variable
interest entities. FIN 46R did not impact results of operations or financial
position for the first quarter of 2004.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was enacted in December 2003. FASB Staff Position 106-1,
issued in January 2004, allowed for, but did not require, deferral of the
accounting for the effects of the Medicare Act. TXU Corp. elected not to defer
accounting for the federal subsidy under the Medicare Act and recognized a $1.9
million net reduction in postretirement benefit expense in the 2003 financial
statements. For the three months ended March 31, 2004, the effect of adoption of
the Medicare Act was a reduction of approximately $1 million in TXU Gas'
allocated postretirement benefit costs.
4
2. FINANCING ARRANGEMENTS
Short-term Borrowings -- At March 31, 2004, TXU Gas had outstanding
short-term borrowings consisting of advances from affiliates of $231 million at
a weighted average interest rate of 2.86%. At December 31, 2003, TXU Gas had
outstanding short-term advances from affiliates of $154 million at a weighted
average interest rate of 2.85%.
Credit Facilities -- On April 26, 2004, a new $300 million, 364-day credit
facility was established for TXU Gas. Borrowings of $185 million under this new
facility were used to repay advances from affiliates. Amounts borrowed and
repaid under the facility may not be re-borrowed.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions (the funding entities). As of March 31, 2004, the maximum
amount of undivided interests that could be sold by TXU Receivables Company was
$600 million.
All new trade receivables under the program generated by the originators
are continuously purchased by TXU Receivables Company with the proceeds from
collections of receivables previously purchased. Changes in the amount of
funding under the program, through changes in the amount of undivided interests
sold by TXU Receivables Company, are generally due to seasonal variations in the
level of accounts receivable and changes in collection trends. TXU Receivables
Company has issued subordinated notes payable to the originators for the
difference between the face amount of the uncollected accounts receivable
purchased, less a discount, and cash paid to the originators that was funded by
the sale of the undivided interests.
The discount from face amount on the purchase of receivables principally
funds program fees paid by TXU Receivables Company to the funding entities, as
well as a servicing fee paid by TXU Receivables Company to TXU Business
Services. The program fees (losses on sale), which consist primarily of interest
costs on the underlying financing, were less than $1 million for the three-month
periods ending March 31, 2004 and 2003 and approximated 2.1% and 3.6% for the
first quarter of 2004 and 2003, respectively, of the average funding under the
program on an annualized basis; these fees represent the net incremental costs
of the program to TXU Gas and are reported in operation and maintenance
expenses. The servicing fee, which totaled approximately $1 million for the
first quarters of 2004 and 2003, compensates TXU Business Services Company for
its services as collection agent, including maintaining the detailed accounts
receivable collection records.
The March 31, 2004 balance sheet reflects $189 million face amount of
trade accounts receivable reduced by $103 million of undivided interests sold by
TXU Receivables Company. Funding under the program increased $50 million for the
three months ended March 31, 2004, primarily due to the effect of seasonal
fluctuations. Funding under the program for the three months ended March 31,
2003 increased $26 million. Funding increases or decreases under the program are
reflected as operating cash flow activity in the statement of cash flows. The
carrying amount of the retained interests in the accounts receivable
approximated fair value due to the short-term nature of the collection period.
5
Activities of TXU Receivables Company related to TXU Gas for the three
months ended March 31, 2004 and 2003 were as follows:
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
(millions of dollars)
Cash collections on accounts receivable...................................... $ 516 $ 422
Face amount of new receivables purchased..................................... (607) (525)
Discount from face amount of purchased receivables........................... 1 1
Program fees paid............................................................ - -
Servicing fees paid.......................................................... (1) (1)
Increase in subordinated notes payable....................................... 41 77
------- ------
TXU Gas' operating cash flows provided under the program................ $ (50) $ (26)
======= ======
Upon termination of the program, cash flows to TXU Gas would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests sold instead of purchasing new receivables.
The level of cash flows would normalize in approximately 16 to 31 days.
Contingencies Related to Sale of 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 funding entities 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) all of the originators cease to maintain their required fixed
charge coverage ratio and debt to capital
(leverage) ratio;
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 funding entities do not
waive such event of termination. The thresholds apply to the
entire portfolio of sold receivables, not separately to the
receivables of each originator.
The delinquency and dilution ratios exceeded the relevant thresholds
during the first four months of 2003, but waivers were granted. These ratios
were affected by issues related to the transition to competition. Certain
billing and collection delays arose due to implementation of new systems and
processes within TXU Energy and ERCOT for clearing customers' switching and
billing data. The billing delays have been largely resolved. Strengthened credit
and collection policies and practices have brought the ratios into consistent
compliance with the program requirement.
Under terms of the receivables sale program, all the originators are
required to maintain specified fixed charge coverage and leverage ratios (or
supply a parent guarantor that meets the ratio requirements). The failure by an
originator or its parent guarantor, if any, to maintain the specified financial
ratios would prevent that originator from selling its accounts receivable under
the program. If all the originators and the parent guarantor, if any, fail to
maintain the specified financial ratios so that there are no eligible
originators, the facility would terminate.
6
Long-Term Debt -- At March 31, 2004 and December 31, 2003, the long-term
debt of TXU Gas and its consolidated subsidiaries consisted of the following:
March 31, December 31,
2004 2003
---- ----
6.375% Fixed Notes due February 1, 2004.......................................... $ -- $ 150
7.125% Fixed Notes due June 15, 2005............................................. 150 150
6.564% Fixed Remarketed Reset Notes due January 1, 2008, remarketing
date July 1, 2005 (a).......................................................... 125 125
Unamortized valuation adjustment................................................. 1 1
------- -------
Total TXU Gas ............................................................... 276 426
Less amount due currently........................................................... - 150
------- -------
Total long-term debt................................................................ $ 276 $ 276
======= =======
- ---------
(a) These series are in the multiannual mode and are subject to mandatory
tender prior to maturity on the mandatory remarketing date. On such date,
the interest rate and interest rate period will be reset for the notes.
3. LONG-TERM DEBT HELD BY SUBSIDIARY TRUST
At March 31, 2004 and December 31, 2003, a statutory business trust
established as a wholly-owned financing subsidiary of TXU Gas, had 150 units
($147 million) of floating rate mandatorily redeemable preferred securities
outstanding. Distributions on these preferred 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 issued by TXU Gas. The interest on the debentures matches the distributions on
the preferred trust securities. The debentures will mature on July 1, 2028. TXU
Gas has the right to redeem the debentures and cause the redemption of the
preferred securities in whole or in part. TXU Gas owns the common securities
issued by its subsidiary trust and has effectively issued a full and
unconditional guarantee of the trust's preferred securities.
As a result of the adoption of FIN 46 in the fourth quarter of 2003, the
subsidiary trust has been deconsolidated. As a result, TXU Gas' balance sheet
reflects the $155 million of long-term debt held by the trust and an investment
in the trust of $8 million, instead of the former presentation of $147 million
of preferred interests of subsidiaries.
4. PREFERRED STOCK
At March 31, 2004, TXU Gas had 75,000 shares of Adjustable Rate Series F
Preferred Stock outstanding (2,000,000 total shares authorized) which is
entitled upon liquidation to the stated value of $1,000 per share. The preferred
stock series is the underlying preferred stock for depositary shares that were
issued to the public. Each depositary share of $25 per share, represents
one-fortieth of a share of underlying preferred stock. The dividend rate is
determined quarterly, in advance, based on US Treasury rates and was 4.50% at
March 31, 2004. The preferred stock is not mandatorily redeemable.
At February 23, 2004, the Board of Directors declared a dividend of $11.25
per share on the outstanding Adjustable Rate Cumulative Preferred Stock, Series
F payable on May 1, 2004 to shareholders of record at the close of business on
April 16, 2004.
5. CONTINGENCIES
On April 13, 2004, the US Commodity Futures Trading Commission (CFTC)
issued a subpoena requiring TXU Corp. to produce information about storage of
natural gas, including TXU Corp.'s weekly and monthly storage report submissions
to the Energy Information Administration. This request seeks information for the
period of October 31, 2003 through January 2, 2004. TXU Corp. intends to
cooperate with the CFTC, and believes that TXU Gas and TXU Fuel have not engaged
in any activity that would justify action by the CFTC.
7
Guarantees -- TXU Gas has entered into contracts that contain guarantees
to outside parties that could require performance or payment under certain
conditions. These guarantees have been grouped based on similar characteristics
and are described in detail below.
TXU Gas has an outstanding letter of credit in the amount of $14 million
issued in connection with its state-wide rate case. The letter of credit has an
expiration date of December 31, 2004.
Other - 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 through 2008. The maximum contingent liability under the guarantee is
approximately $106 million. No claims have been asserted under the guarantee and
none are anticipated.
Income Tax Contingencies -- In April 2003, the IRS proposed to
TXU Gas certain adjustments to the US federal income tax returns of ENSERCH
Corporation (the acquired predecessor of TXU Gas) for the 1993 calendar year.
TXU Gas has protested the IRS proposed adjustments to its 1993 tax return with
the Appeals Office of the IRS. Although TXU Gas is vigorously contesting the IRS
proposed adjustments, it is possible that the matter will be resolved against
TXU Gas during 2004. Based on the current status of negotiations, if the matter
is resolved against TXU Gas, TXU Gas would be assessed a deficiency of $65
million (including penalty and interest through March 31, 2004). In addition,
TXU Gas would suffer net increases in taxes payable in future years of $56
million (including interest through March 31, 2004).
Any tax, penalty, and interest accruing for periods prior to August 5,
1997 (the date on which ENSERCH Corporation was acquired by TXU Corp.) would be
charged first to tax reserves acquired as part of the ENSERCH acquisition and
then to goodwill. Interest for periods after August 5, 1997 would be charged to
income from continuing operations.
General -- In addition to the above, TXU Gas and its subsidiaries are
involved in various other legal and administrative proceedings in the normal
course of business the ultimate resolution of which, in the opinion of each,
should not have a material effect upon their financial position, results of
operations or cash flows.
6. SUPPLEMENTARY FINANCIAL INFORMATION
Other Income and Other Deductions -- Other income and other deductions
consist of several individually immaterial items.
Interest Expense and Related Charges --
Three Months
Ended March 31,
---------------
2004 2003
---- ----
Interest (a).......................................... $ 7 $ 10
Interest-affiliated debt.............................. 1 1
------ -------
Total interest expense and related charges ..... $ 8 $ 11
====== =======
(a) Includes interest on long-term debt held by subsidiary trust.
Retirement Plan And Other Postretirement Benefits - TXU Gas is a
participating employer in the TXU Retirement Plan, a defined benefit pension
plan sponsored by TXU Corp. TXU Gas also participates with TXU Corp. and other
affiliated subsidiaries of TXU Corp. to offer health care and life insurance
benefits to eligible employees and their eligible dependents upon the retirement
of such employees. The allocated net periodic pension cost and net periodic
postretirement benefits cost other than pensions applicable to TXU Gas were $5
million for each of the three months ended March 31, 2004 and 2003,
respectively.
8
At March 31, 2004, TXU Gas estimates that its total contributions to the
pension plan and other postretirement benefit plans for the remainder of 2004
will not be materially different than previously disclosed in the 2003 Form
10-K.
Regulatory Assets (Liabilities) --
March 31, December 31,
2004 2003
-------- ------------
Asset retirement obligations - removal cost............... $ (131) $ (129)
Under(over)-collected gas costs........................... (10) (2)
Distribution safety compliance costs...................... 40 41
Rate case costs........................................... 23 17
Other regulatory assets................................... 38 38
------- -------
Regulatory liabilities............................... $ (40) $ (35)
======== ========
Included above are assets of $48 million and $51 million at March 31, 2004
and December 31, 2003, respectively, that are earning a return. The regulatory
assets have an average remaining recovery period of approximately 15 years.
Regulatory liabilities related to asset removal costs were previously
classified as a component of accumulated depreciation.
Accounts Receivable -- At March 31, 2004 and December 31, 2003, accounts
receivable are stated net of allowance for uncollectible accounts of $4 million
and $3 million, respectively. During the three months ended March 31, 2004, bad
debt expense was $2 million and account write-offs were $1 million. During the
three months ended March 31, 2003, bad debt expense was $3 million and other
activity was $1 million. Allowances related to receivables sold are reported in
other current liabilities and totaled $2 million at March 31, 2004 and December
31, 2003.
Accounts receivable included $17 million and $27 million of unbilled
revenues at March 31, 2004 and December 31, 2003, respectively.
Intangible Assets -- Intangible assets other than goodwill are comprised
of the following:
As of March 31, 2004 As of December 31, 2003
------------------------------------ ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Amortized intangible assets
Capitalized software.............. $ 32 $ 17 $ 15 $ 32 $ 15 $ 17
Land easements.................... 16 8 8 16 9 7
----- ----- ----- ----- ----- -----
Total....................... $ 48 $ 25 $ 23 $ 48 $ 24 $ 24
===== ===== ===== ===== ===== =====
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, 2004 and 2003.
9
Inventories by Major Category--
March 31, December 31,
2004 2003
---------- ------------
Materials and supplies, at cost................................ $ 6 $ 5
Gas stored underground, primarily at weighted average cost..... 106 139
------- -------
Total inventories......................................... $ 112 $ 144
======= =======
Property, Plant and Equipment-- At March 31, 2004 and December 31, 2003,
property, plant and equipment was stated net of accumulated depreciation and
amortization of $291 million and $275 million, respectively.
Derivatives and Hedges - TXU Gas had interest rate swaps related to the
preferred securities of the subsidiary financing trust that expired on July 1,
2003. The terms of these interest rate swap agreements, which had been
designated as cash flow hedges, matched the terms of the underlying hedged
indebtedness. As a result, TXU Gas experienced no hedge ineffectiveness. TXU Gas
has no other cash flow hedges at this time.
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 2004 and 2003 were $175 million and $168 million,
respectively, and interest expense incurred on the advances was
approximately $1 million during the first three months of 2004 and
2003. The average interest rate for the three months ended March 31,
2004 and 2003 was 2.86% and 2.60%, respectively.
o TXU Energy charges TXU Gas for customer and administrative services at
cost. For the three months ended March 31, 2004 and 2003, these costs
totaled $7 million. These charges are reported in operation and
maintenance expenses.
o Oncor charges TXU Gas for customer and administrative services at cost.
For the three months ended March 31, 2004 and 2003, these costs totaled
$5 million and $8 million, respectively. These charges are reported in
operation and maintenance expenses.
o Included in reported revenues were $3 million from the sale and
transportation of gas to other TXU Corp. subsidiaries for the three
months ended March 31, 2004 and 2003.
o TXU Business Services 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, 2004 and 2003, these costs totaled $9
million. These costs are largely reported in operation and maintenance
expense.
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, 2004, and the related
condensed statements of consolidated income, comprehensive income, and cash
flows for the three-month periods ended March 31, 2004 and 2003. 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, 2003, 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 dated March 11, 2004, 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, 2003, 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 14, 2004
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
TXU Gas, a Texas corporation, is a largely regulated business engaged
primarily in the purchase, transmission, distribution and sale of natural gas in
the north-central, eastern and western parts of Texas. TXU Gas is a wholly-owned
subsidiary of TXU Corp.
TXU Gas serves more than 1.4 million retail gas customers and owns and
operates gas distribution mains, gas transportation and gathering pipelines and
underground storage reservoirs. TXU Gas also provides transportation services to
gas distribution companies, electricity generation plants, end-use industrial
customers and through-system shippers. Through Oncor Utility Solutions, TXU Gas
also offers utility asset management services to cooperatives and
municipally-owned and investor-owned utilities in North America.
TXU Corp.'s Strategic Initiatives - On April 26, 2004, TXU Corp. announced
a series of proposed transactions, including the intent to sell TXU Gas. It is
expected that any transaction would be closed by the end of 2004, and the sales
price is expected to approximate book value.
RESULTS OF OPERATIONS
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein are stated in
millions of US dollars unless otherwise indicated.
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.
Operating Data
Three Months Ended March 31,
----------------------------
2004 2003
-------- -------
Operating statistics - volumes:
Retail gas distribution (Bcf):
Residential............................................... 38 45
Business and other........................................ 22 26
-------- --------
Total gas distribution................................. 60 71
======== ========
Pipeline transportation (Bcf)................................. 87 86
======== ========
Retail gas distribution customers (in thousands)................. 1,489 1,475
Operating revenues (millions of dollars):
Retail gas distribution:
Residential............................................... $ 312 $ 401
Business and other (a).................................... 159 193
-------- --------
Total gas distribution (a)............................. 471 594
Pipeline transportation (a)................................... 16 16
Other revenues, net of eliminations (a)....................... 21 11
-------- --------
Total operating revenues............................... $ 508 $ 621
======== ========
Weather (average for service territory) (b) Percent of normal:
Heating degree days....................................... 88.6% 106.6%
- --------------------------
(a) Prior periods reclassified to conform to current year presentation.
(b) Weather data is obtained from Meteorlogix, an independent company that
collects weather data from reporting stations of the National Oceanic and
Atmospheric Administration (a federal agency under the US Department of
Commerce).
12
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
TXU Gas' operating revenues decreased $113 million, or 18%, to $508
million reflecting $81 million as a result of a 15% decline in distribution
sales volumes due to warmer winter weather and $44 million due to a 13% decrease
in the average cost of gas. These decreases were partially offset by $8 million
from the sale of pipeline inventory and $2 million from increased revenue in the
utility asset management services business.
Gross margin (operating revenue less gas purchased for resale) decreased
$9 million, or 5%, to $182 million in 2004. The decrease reflected the effect of
the lower distribution sales volumes and gas prices ($19 million), offset by a
$3 million net gain from the sale of pipeline inventory, a timing difference on
the recovery of industrial customer gas costs in the first quarter of 2003 of $3
million and the increased revenues from the utility asset management services
business of $2 million.
Gross margin is considered a key operating metric as it generally measures
the contribution of distribution service rates to recover the operating and
other costs of the business.
Operation and maintenance expense increased $3 million, or 5%, to $69
million in 2004. The increase reflects $2 million related to increased activity
in the utility asset management services business and a $1 million increase in
overall maintenance expenses, primarily for gas mains.
Taxes other than income increased $9 million, or 41%, to $31 million in
2004. The increase was primarily driven by higher gross receipts taxes,
reflecting higher prior period revenues on which these taxes are based.
Interest expense and related charges decreased $3 million, or 27%, to $8
million in 2004. The decrease reflects $2 million in lower average debt levels,
and a $1 million decrease due to lower average interest rates, primarily due to
a higher proportion of lower interest rate advances from affiliates.
The effective income tax rate was 33.3% in 2004 and 34.2% in 2003. There
were no significant unusual items impacting the effective rates.
Net income decreased $12 million, or 24%, to $38 million in 2004, driven
by the decline in gross margin and higher gross receipts taxes incurred in 2004.
Net pension and postretirement benefit costs reduced net income by $3 million in
2004 and 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows -- Cash provided by operating activities for the three months
ended March 31, 2004 was $93 million compared with $81 million for the same
period last year. The increase in cash flows provided by operating activities of
$12 million was driven by higher cash earnings (net income adjusted for the
significant noncash items identified in the statement of cash flows) of $40
million, and a $7 million increase in working capital (accounts receivable,
accounts payable and inventory), partially offset by a decrease of $35 million,
reflecting timing of tax payments and rate case costs recorded as regulatory
assets.
Cash used in financing activities was $74 million in 2004 compared with
$55 million in 2003. Retirements of long-term debt were $150 million in 2004
compared to $125 million in 2003, reflecting payment of scheduled debt
maturities. A total of $77 million was advanced from TXU Corp. in 2004 compared
to $72 million advanced from TXU Corp. in 2003.
13
Financing Activities
See Notes 2, 3, and 4 to Financial Statements for further detail of
expected financing arrangements, debt issuance and retirements, debt held by
unconsolidated subsidiary trusts and preferred stock.
Capitalization -- Total capitalization at March 31, 2004 of $1.3 billion
consisted of approximately 20.5% long-term debt less amount due currently, 11.5%
long term debt held by subsidiary trust, 5.6% preferred stock, and 62.4% common
stock equity.
Short-term Borrowings -- At March 31, 2004, TXU Gas had outstanding
short-term borrowings consisting of advances from affiliates of $231 million at
a weighted average interest rate of 2.86%. At December 31, 2003, TXU Gas had
outstanding short-term advances from affiliates of $154 million at a weighted
average interest rate of 2.85%.
Credit Facilities -- On April 26, 2004, a new $300 million, 364-day credit
facility was established for TXU Gas. Borrowings of $185 million under this new
facility were used to repay advances from affiliates. Amounts borrowed and
repaid under the facility may not be re-borrowed.
Sale of Receivables -- TXU Corp. has established an accounts receivable
securitization program. The activity under this program is accounted for as a
sale of accounts receivable in accordance with SFAS 140. Under the program, US
subsidiaries of TXU Corp. (originators) sell trade accounts receivable to TXU
Receivables Company, a consolidated wholly-owned bankruptcy remote direct
subsidiary of TXU Corp., which sells undivided interests in the purchased
accounts receivable for cash to special purpose entities established by
financial institutions. All new trade receivables under the program generated by
the originators are continuously purchased by TXU Receivables Company with the
proceeds from collections of receivables previously purchased. Funding to TXU
Gas under the program at March 31, 2004 and December 31, 2003 totaled $103
million and $53 million, respectively. The increase of $52 million primarily
reflects seasonality. See Note 2 to Financial Statements for a more complete
description of the program including the financial impact on earnings and cash
flows for the periods presented and the contingencies that could result in
termination of the program.
Registered Financing Arrangements -- TXU Gas has the ability to 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.
Credit Ratings of TXU Corp. and TXU Gas
Credit Ratings-- The current credit ratings for TXU Corp. and TXU Gas are
presented below:
TXU Corp. TXU Gas
--------- -------
(Senior (Senior
Unsecured) Unsecured)
S&P.......................... BBB- BBB
Moody's...................... Ba1 Baa3
Fitch........................ BBB- BBB-
Moody's and Fitch currently maintain a stable outlook for TXU Corp. and an
evolving outlook for TXU Gas. S&P currently maintains a negative outlook for TXU
Corp. and a developing outlook for TXU Gas.
These ratings are investment grade, except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one rating level below investment grade.
A rating reflects only the view of a rating agency, and 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.
14
Cross Default Provisions -- Certain of TXU Gas' financing arrangements
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 material
provisions are described below.
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 TXU Gas' senior
notes.
A default by TXU Gas or its subsidiaries on indebtedness of $50 million or
more would result in a cross default under its new $300 million 364-day credit
facility.
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 each have a cross
default threshold of $50,000. If either an originator, TXU Business Services or
TXU Receivables Company defaults on indebtedness of the applicable threshold,
the facility could terminate.
Long-term Contractual Obligations and Commitments -- There have been no
significant changes in contractual cash obligations of TXU Gas, since December
31, 2003 as disclosed in the 2003 Form 10-K.
OFF BALANCE SHEET ARRANGEMENTS
See discussion above under Sale of Receivables and in Note 2 to Financial
Statements.
COMMITMENTS AND CONTINGENCIES
See Note 5 to Financial Statements for details of contingencies, including
guarantees.
REGULATION AND RATES
Gas Distribution Rates -- In May 2003, TXU Gas filed, for the first time,
a system-wide rate case for the distribution and pipeline operations. The case
was filed in all 437 incorporated cities served by the distribution operations,
and at the RRC for the pipeline business and for unincorporated areas served by
the distribution operations. The TXU Gas filing requested an annual revenue
increase of $69.5 million or 7.24%. All 437 cities took action on the case
within their statutory time frame, and TXU Gas has appealed these actions to the
RRC. Twelve parties have intervened in the case.
On April 23, 2004, the staff hearings examiners assigned to TXU Gas'
pending rate proceeding at the RRC issued a preliminary recommendation known as
a Proposal For Decision ("PFD"), which was revised on April 30, 2004. The staff
hearings examiners' PFD recommends a total annual decrease in rates of
approximately $53 million. TXU Gas believes that the evidence presented in the
proceeding supports its request. In addition, TXU Gas believes that the staff
hearings examiners' PFD does not follow applicable law or precedent in many
important respects. TXU Gas will file written exceptions to this PFD and present
oral arguments to the Commissioners of the RRC in an open meeting prior to the
issuance of an order in the proceeding by the RRC.
In July and August 2001, TXU Gas filed two cases with the RRC, 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 partial 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 remained pending. On
April 23, 2004, the RRC Commissioners approved a settlement that resolved all of
the pending issues with no material impact on TXU Gas' earnings.
15
In August 2003, TXU Gas filed the city gate gas cost reconciliation for
the twelve-month period ended June 30, 2003 with the RRC and the incorporated
cities served by TXU Gas. TXU Gas reconciled $797 million of gas costs.
Including interest and prior period adjustments, TXU Gas under-recovered $6
million of gas costs which is being recovered via a surcharge over nine months
starting October 2003.
Summary -- 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
this report, which might significantly alter its basic 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.
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 Corp.'s actual results or
outcomes to differ materially from any projected outcome contained in any
forward-looking statement in this report, include:
TXU Gas is subject to changes in laws (including the Texas Gas Utility
Regulatory Act, as amended, the Natural Gas Act, as amended, the Natural Gas
Policy Act, as amended) and changing governmental policy and regulatory actions,
including those of the RRC, 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' businesses operate in changing market environments influenced by
various legislative and regulatory initiatives. TXU Gas will need to adapt to
these changes.
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 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 relies on advances from affiliates and access to financial markets
to a lesser extent as a significant source of liquidity for capital requirements
not satisfied by operating cash flows. 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.
16
TXU Gas has used and may use 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 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 throughput 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 where force majeure is not applicable, could possibly 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.
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 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' ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.
As a result of the energy crisis in California during 2001, the recent
volatility of natural gas prices in North America, the bankruptcy filing by
Enron Corporation, accounting irregularities of public companies, and
investigations by governmental authorities into energy trading activities,
companies in the regulated and non-regulated utility businesses have been under
a generally increased amount of public and regulatory scrutiny. Accounting
irregularities at certain companies in the industry have caused regulators and
legislators to review current accounting practices and financial disclosures.
The capital markets and ratings agencies also have increased their level of
scrutiny. Additionally, allegations against various energy trading companies of
"round trip" or "wash" transactions, which involve the simultaneous buying and
selling of the same amount of power at the same price and delivery location and
provide no true economic benefit, power market manipulation and inaccurate power
and commodity price reporting have had a negative effect on the industry. TXU
Gas believes that it is complying with all applicable laws, but it is difficult
or impossible to predict or control what effect these events may have on TXU
Gas' financial condition or access to the capital markets. Additionally, it is
unclear what laws and regulations may develop, and TXU Gas cannot predict the
ultimate impact of any future changes in accounting regulations or practices in
general with respect to public companies, the energy industry or its operations
specifically.
TXU Corp. is not obligated to provide any loans, further equity
contributions or other funding to TXU Gas or any of its subsidiaries. TXU Gas
must compete with all of TXU Corp.'s other subsidiaries for capital and other
resources. As a member of the TXU corporate group, TXU Gas operates within
policies, including dividend policies, established by TXU Corp. that impact the
liquidity of TXU Gas.
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.
17
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Gas and its subsidiaries
(collectively, 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 AFFECT 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' 2003 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 it is
made, and TXU Gas undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which it 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 them; nor can
TXU Gas 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as discussed below, 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 the 2003 Form 10-K and
is therefore not presented herein.
INTEREST RATE RISK
See Note 2 to Financial Statements for a table showing the outstanding
long-term debt of TXU Gas as of March 31, 2004 and December 31, 2003.
CREDIT RISK
Credit risk relates to the risk of loss associated with non-performance by
non-affiliated counterparties. TXU Gas' gross exposure to credit risk, net of
receivable sales as of March 31, 2004 was $8 million, after reserves of $4
million, primarily representing trade accounts receivable associated with the
sale of natural gas to residential and business customers. TXU Gas had one
customer with a balance of $1 million that represented greater than 10% of TXU
Gas' trade accounts receivable at March 31, 2004. This customer is a Texas state
agency. The risk of material loss from non-performance of this customer is
unlikely based upon historical experience. Reserves for uncollectible accounts
receivable are established for the potential loss from non-payment by these
customers based on historical experience and market or operational conditions.
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 as of the end of
the current period included in 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. During the most recent fiscal quarter covered by this
quarterly report, there has been no change in TXU Gas' internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, TXU Gas' internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits provided as part of Part II are:
Previously Filed*
-----------------
With File As
Exhibits Number Exhibit
-------- ------ -------
15 -- Letter from independent accountants as to unaudited interim
financial information.
(31) Rule 13a - 14(a)/15d - 14(a) Certifications.
31(a) -- Certification of C. John Wilder, principal executive officer
of TXU Gas Company, pursuant to Rule 13a - 14(a)/15d - 14(a)
of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) -- Certification of Scott Longhurst, principal financial
officer of TXU Gas Company, pursuant to Rule 13a - 14(a)/15d
- 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32) Section 1350 Certifications.
32(a) -- Certification of C. John Wilder, principal executive officer
of TXU Gas Company, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32(b) -- Certification of Scott Longhurst, principal financial
officer of TXU Gas Company, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99) Additional Exhibits.
99 -- Condensed Statements of Consolidated Income - Twelve Months
Ended March 31, 2004
- ----------------------------
* Incorporated herein by reference.
(b) Reports on Form 8-K furnished or filed since December 31, 2003:
Date of Report Item Reported
-------------- -------------
April 26, 2004 Item. 5 Other Events and Regulation FD Disclosure
April 27, 2004 Item. 5 Other Events and Regulation FD Disclosure
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/ David H. Anderson
----------------------------
David H. Anderson
Vice President & Principal
Accounting Officer
May 14, 2004
20