-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MTtZw0dFezQu425aHhyQLn+4s86XUe6+eND/ClcO4dpyKMwCwVf/sofpa/JkAg10 LA4TZNhQMw5Es+L05Fbf9Q== 0000930661-02-002959.txt : 20020814 0000930661-02-002959.hdr.sgml : 20020814 20020814160346 ACCESSION NUMBER: 0000930661-02-002959 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TXU GAS CO CENTRAL INDEX KEY: 0000033015 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 750399066 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03183 FILM NUMBER: 02736514 BUSINESS ADDRESS: STREET 1: ENERGY PLAZA STREET 2: 1601 BRYAN STREET CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148125210 MAIL ADDRESS: STREET 1: 1601 BRYAN STREET STREET 2: SUITE 36056 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: LONE STAR GAS CO DATE OF NAME CHANGE: 19751015 FORMER COMPANY: FORMER CONFORMED NAME: ENSERCH CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 -OR- ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3183 TXU Gas Company A Texas Corporation I.R.S. Employer Identification No. 75-0399066 ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411 (214) 812-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Common Stock outstanding at August 9, 2002: 451,000 shares, par value $0.01 per share. ================================================================================ TABLE OF CONTENTS - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Statements of Consolidated Income-- Three and Six Months Ended June 30, 2002 and 2001 ................ 1 Condensed Statements of Consolidated Comprehensive Income-- Three and Six Months Ended June 30, 2002 and 2001 ................ 2 Condensed Statements of Consolidated Cash Flows-- Six Months Ended June 30, 2002 and 2001 .......................... 3 Condensed Consolidated Balance Sheets-- June 30, 2002 and December 31, 2001 .............................. 4 Notes to Financial Statements .................................... 5 Independent Accountants' Report .................................. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ............................ 17 SIGNATURE ................................................................. 18 (i) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TXU GAS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ------------------- 2002 2001 2002 2001 ------- ------- ------- ------ Millions of Dollars Operating revenues .............................................. $ 160 $ 171 $ 504 $ 855 ------- ------- ------- ------- Operating expenses Gas purchased for resale ..................................... 74 91 255 586 Operation and maintenance .................................... 71 65 133 132 Depreciation and other amortization .......................... 17 16 32 31 Goodwill amortization ........................................ -- 1 -- 4 Taxes other than income ...................................... 24 39 43 61 ------- ------- ------- ------- Total operating expenses ................................... 186 212 463 814 ------- ------- ------- ------- Operating income (loss) ......................................... (26) (41) 41 41 Other income .................................................... 6 5 8 7 Other deductions ................................................ -- 1 4 2 Interest income ................................................. -- 1 -- 1 Interest expense and other charges .............................. 16 17 34 32 ------- ------- ------- ------- Income (loss) from continuing operations before income taxes .... (36) (53) 11 15 Income tax expense (benefit) .................................... (13) (18) 3 7 ------- ------- ------- ------- Income (loss) from continuing operations ........................ (23) (35) 8 8 Income from discontinued operations, net of tax ................. -- 1 -- 3 ------- ------- ------- ------- Net income (loss) ............................................... (23) (34) 8 11 Preferred stock dividends ....................................... 1 1 2 2 ------- ------- ------- ------- Net income (loss) applicable to common stock .................... $ (24) $ (35) $ 6 $ 9 ======= ======= ======= =======
See Notes to Financial Statements. 1 TXU GAS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- --------------------- 2002 2001 2002 2001 ------- -------- -------- ------ Millions of Dollars Income (loss) from continuing operations ......................... $ (23) $ (35) $ 8 $ 8 -------- ------- ------- ------- Other comprehensive income (loss) from continuing operations Net change during period, net of tax effect Cash flow hedges: Cumulative transition adjustment as of January 1, 2001 (net of tax expense of $1) .............................. -- -- -- 2 Net change in fair value of derivatives (net of tax benefit of $- and $1) ....................... (1) -- -- (3) -------- ------- ------- ------- Total ................................................. (1) -- -- (1) -------- ------- ------- ------- Comprehensive income (loss) from continuing operations ........... (24) (35) 8 7 -------- ------- ------- ------- Income from discontinued operations, net of tax .................. -- 1 -- 3 ------- ------- ------- ------- Comprehensive income (loss) ...................................... $ (24) $ (34) $ 8 $ 10 ======= ======= ======= =======
See Notes to Financial Statements. 2 TXU GAS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited)
Six Months Ended June 30, ----------------------- 2002 2001 -------- ------ Millions of Dollars Cash flows - operating activities Income from continuing operations ....................................... $ 8 $ 8 Adjustments to reconcile income from continuing operations to cash provided by operating activities: Depreciation and amortization .................................... 37 39 Deferred income taxes - net ...................................... -- 7 Gain from sale of assets ......................................... -- (4) Other ............................................................ (2) 1 Changes in operating assets and liabilities ............................. 115 13 ------ ------ Cash provided by operating activities ............................... 158 64 ------ ------ Cash flows - financing activities Net change in advances to parent and affiliates ......................... (106) 17 Cash dividends paid ..................................................... (2) (2) ------ ------ Cash provided by (used in) financing activities ............... (108) 15 ------ ------ Cash flows - investing activities Capital expenditures .................................................... (46) (86) Proceeds from sale of assets ............................................ -- 5 Other investments ....................................................... (1) 5 ------- ------ Cash used in investing activities ............................. (47) (76) ------ ------ Cash used in discontinued operations ........................................ (2) (8) ------ ------ Net change in cash and cash equivalents ..................................... 1 (5) Cash and cash equivalents - beginning balance ............................... 3 6 ------ ------ Cash and cash equivalents - ending balance .................................. $ 4 $ 1 ====== ======
See Notes to Financial Statements. 3 TXU GAS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, (Unaudited) 2001 ----------- ------------ Millions of Dollars ASSETS Current assets: Cash and cash equivalents ......................................... $ 4 $ 3 Accounts receivable: Parent and affiliates .......................................... 5 -- Trade .......................................................... 44 131 Inventories-at average cost ....................................... 106 116 Other current assets .............................................. 40 85 -------- ------- Total current assets ......................................... 199 335 Assets-discontinued operations (Note 3) .............................. -- 2,314 Investments-other .................................................... 35 35 Property, plant and equipment-net .................................... 1,497 1,485 Goodwill ............................................................. 305 305 Regulatory assets - net .............................................. 71 67 Deferred debits and other assets ..................................... 11 17 -------- ------- Total assets ................................................. $ 2,118 $ 4,558 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Advances from parent .............................................. $ 138 $ 244 Long-term debt due currently ...................................... 325 200 Accounts payable: Parent and affiliates .......................................... -- 10 Trade .......................................................... 51 75 Taxes accrued ..................................................... 12 21 Other current liabilities ......................................... 97 81 -------- ------- Total current liabilities .................................... 623 631 Liabilities-discontinued operations (Note 3) ......................... -- 1,753 Accumulated deferred income taxes and investment tax credits ......... 184 191 Cash flow hedges and other derivatives liabilities ................... 6 6 Other deferred credits and noncurrent liabilities .................... 226 216 Long-term debt, less amounts due currently ........................... 427 554 TXU Gas Company obligated, mandatorily redeemable, preferred securities of subsidiary trust holding solely junior subordinated debentures of TXU Gas Company ........................ 147 147 Contingencies (Note 7) Shareholders' equity (Note 5) ........................................ 505 1,060 -------- ------- Total liabilities and shareholders' equity ................... $ 2,118 $ 4,558 ======== =======
See Notes to Financial Statements. 4 TXU GAS COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. BUSINESS TXU Gas Company (TXU Gas), a Texas corporation, is an integrated company engaged in the purchase, transmission, distribution and sale of natural gas in the north-central, eastern and western parts of Texas, and asset management services operations. TXU Gas conducts business through two divisions, TXU Gas Distribution and TXU Lone Star Pipeline. Until January 1, 2002, TXU Gas was also engaged in wholesale trading of natural gas and electricity throughout the United States (US) and parts of Canada and retail sales of natural gas to large commercial and industrial customers (see discussion below). TXU Gas is a wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global energy services company that engages in electricity generation, wholesale energy trading and risk management, retail energy sales, energy delivery, other energy-related services and, through a joint venture, telecommunications services. Business Restructuring - Legislation was passed during the 1999 session of the Texas Legislature that restructured the electric utility industry in Texas (1999 Restructuring Legislation). As a result, TXU Corp. restructured certain of its businesses effective January 1, 2002, whereby TXU Energy Company, LLC (TXU Energy), an indirect subsidiary of TXU Corp., acquired the wholesale trading and risk management operations and the unregulated commercial and industrial retail natural gas business of TXU Gas, among other operations of TXU Corp. The operations of TXU Gas acquired by TXU Energy have been accounted for as discontinued operations, and prior year results have been restated herein to reflect the results of those businesses on a discontinued basis (see Note 3). A substantial majority of the remaining business is regulated. The balance sheet of TXU Gas at December 31, 2001 included $773 million of goodwill, net of amortization, arising from TXU Corp.'s 1997 acquisition of ENSERCH Corporation (renamed TXU Gas Company). The wholesale trading and risk management operations and the unregulated commercial and industrial retail gas business were originally part of ENSERCH Corporation. In connection with the restructuring and transfer of these two businesses to TXU Energy, $468 million of that goodwill has been allocated to these discontinued businesses and reflected in the June 30, 2002 balance sheet of TXU Energy. The remaining amount of goodwill ($305 million) associated with the ENSERCH acquisition has been allocated to the continuing gas distribution and pipeline business of TXU Gas. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation -- The condensed consolidated financial statements of TXU Gas and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and, except for the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" discussed below, on the same basis as the audited financial statements included in its Annual Report on Form 10-K for 2001 (2001 Form 10-K). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with US GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for an interim period may not give a true indication of results for a full year. Certain previously reported amounts have been reclassified to conform to current classifications. All dollar amounts in the financial statements and tables in the notes to the financial statements are stated in millions of US dollars unless otherwise indicated. 5 Changes in Accounting Standards -- SFAS No. 142 became effective for TXU Gas on January 1, 2002. SFAS No. 142 requires, among other things, the allocation of goodwill to reporting units based upon the current fair value of the reporting units and the discontinuance of goodwill amortization. The amortization of TXU Gas' existing goodwill ($9 million annually from continuing operations) ceased effective January 1, 2002. In addition, SFAS No. 142 required completion of a transitional goodwill impairment test within six months from the date of adoption. It establishes a new method of testing goodwill for impairment on an annual basis, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. TXU Gas has completed the transitional impairment test, the results of which indicated no impairment of goodwill. The table below reflects what reported income from continuing operations, income from discontinued operations and net income would have been in the 2001 periods, exclusive of goodwill amortization expense recognized in that period compared to the 2002 periods.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Reported income (loss) from continuing operations ............ $(23) $(35) $ 8 $ 8 Add back: goodwill amortization ............................. -- 1 -- 4 ---- ---- ---- ---- Adjusted income (loss) from continuing operations ............ $(23) $(34) $ 8 $ 12 ==== ==== ==== ==== Reported income from discontinued operations, net of tax ..... $ -- $ 1 $ -- $ 3 Add back: goodwill amortization ............................ -- 4 -- 7 ---- ---- ---- ---- Adjusted income from discontinued operations, net of tax ..... $ -- $ 5 $ -- $ 10 ==== ==== ==== ==== Reported net income (loss) .................................. $(23) $(34) $ 8 $ 11 Add back: goodwill amortization ............................ -- 5 -- 11 ---- ---- ---- ---- Adjusted net income (loss) ................................... $(23) $(29) $ 8 $ 22 ==== ==== ==== ====
SFAS No. 143, "Accounting for Asset Retirement Obligations", will be effective for TXU Gas on January 1, 2003. SFAS No. 143 requires the recognition of a fair value liability for any retirement obligation associated with long-lived assets. SFAS 143 also requires additional disclosures. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", became effective for TXU Gas on January 1, 2002. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", for long-lived assets to be disposed of by sale, and resolves significant implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 by TXU Gas has not materially affected its financial position or results of operations. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued in April 2002 and will be effective for TXU Gas on January 1, 2003. One of the provisions of this statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4 shall be reclassified if it does not meet the criteria of an extraordinary item as defined by Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". 6 SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", was issued in June 2002 and will be effective for TXU Gas on January 1, 2003. SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized only when the liability is incurred and measured initially at fair value. For accounting standards not yet adopted or fully implemented, TXU Gas is evaluating the potential impact on its financial position and results of operations. Income Taxes--TXU Gas is included in the consolidated federal income tax return of TXU Corp. and subsidiary companies. TXU Gas uses the separate return method to compute its income tax provision. Because of the alternative minimum tax (AMT), differences may arise between the consolidated federal income tax liability and the aggregated separate tax liability of the group members. In instances where this occurs, the difference is allocated, pro-rata, to those companies that generated AMT on a separate company basis. 3. DISCONTINUED OPERATIONS As a result of the deregulation of the electricity markets in Texas, effective January 1, 2002, TXU Corp. realigned the operations of its US subsidiaries, including those of TXU Gas. As a part of that realignment, ownership of the wholesale trading and risk management and unregulated commercial and industrial retail gas supply businesses was transferred to TXU Energy. Accordingly, these businesses, which comprised the former energy trading segment of TXU Gas, have been reflected as discontinued operations in the statements of consolidated income and cash flows of TXU Gas and the related consolidated financial statements for prior periods have been restated. The results of operations of these discontinued businesses were as follows: Three Months Six Months Ended Ended June 30, June 30, 2001 2001 ------------ ---------- Revenues .......................................... $ 1,083 $ 3,353 Operating income .................................. $ 6 $ 13 Income after-tax from discontinued operations ..... $ 1 $ 3 Cash provided by operating activities ............. $ 257 Cash used by financing activities ................. (235) Cash used by investing activities ................. (28) ------- Cash used in discontinued operations .......... $ (6) ======= In addition, for the six months ended June 30, 2001, an additional $2 million was used in previously discontinued engineering and construction operations. 7 The assets and liabilities of the discontinued businesses segregated in the TXU Gas balance sheet as of December 31, 2001 herein consisted of the following: December 31, 2001 ------------ Current assets Accounts receivable ...................................... $ 542 Accounts receivable from affiliated companies ............ 14 Commodity contract assets ................................ 743 Other .................................................... 58 Long-term assets Goodwill (net of accumulated amortization of $56) ........ 468 Commodity contract assets ................................ 366 Other .................................................... 123 ------- Total assets .......................................... 2,314 ------- Current liabilities Accounts payable ......................................... (426) Accounts payable to affiliated companies ................ (41) Commodity contract liabilities ........................... (602) Other current liabilities ................................ (30) Non-current liabilities Commodity contract liabilities ........................... (229) Advances from TXU Corp. .................................. (387) Other .................................................... (38) ------- Total liabilities ..................................... (1,753) ------- Net investment ............................................. $ 561 ======= Certain reclassifications to balances related to the discontinued businesses, primarily related to the allocation of goodwill (Note 1), have been incorporated. See discussion in Note 3 of TXU Gas' 2001 Form 10-K. In June 2002, the Emerging Issues Task Force (EITF) reached a consensus on certain aspects of Issue 02-3, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities", regarding the presentation of trading activities in the statement of income. The new rules require all trading contracts, whether or not physically settled, to be recorded net upon settlement, rather than gross as a sale and cost of sale. The former energy trading segment of TXU Gas has historically recorded financial contracts net, but has recorded those contracts that provide for physical delivery gross upon settlement. TXU Gas' continuing operations are not expected to be impacted by this change. The change will be effective with third quarter 2002 reporting and requires reclassification of prior periods, which will impact the discontinued operations revenue disclosure above. The amount of the reclassifications has not yet been determined. However, implementation of the new rules is expected to result in a significant reduction in operating revenues of the former energy trading segment of TXU Gas. The required reclassifications will have no impact on the former energy trading segment's previously reported operating income, income after tax, or cash provided by operating activities. 4. CAPITALIZATION TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of TXU Gas (Trust Securities) -- At June 30, 2002, a consolidated statutory business trust, TXU Gas Capital I, had $147 million of floating rate mandatorily redeemable preferred securities outstanding. Distributions on these Trust Securities are payable quarterly based on an annual floating rate determined quarterly with reference to a three-month LIBOR rate plus a margin. The only assets held by the trust are $155 million principal amount of Floating Rate Junior Subordinated Debentures Series A (Series A Debentures) of TXU Gas. The interest on the Series A Debentures matches the distributions on the Trust Securities. The Series A Debentures will mature on July 1, 2028. TXU Gas has the right to redeem the Series A Debentures and cause the redemption of the Trust Securities in whole or in part on or after July 1, 2003. TXU Gas owns the common securities issued by its subsidiary trust and has effectively issued a full and unconditional guarantee of the trust's securities. At June 30, 2002, TXU Gas had two interest rate swap agreements with respect to floating rate Trust Securities of TXU 8 Gas Capital I, with notional principal amounts of $100 million and $50 million, that effectively fixed the rate at 6.629% and 6.444%, respectively, per annum to July 1, 2003. 5. SHAREHOLDERS' EQUITY
June 30, 2002 December 31, (Unaudited) 2001 ----------- ------------ Preferred stock $ 75 $ 75 -------- ------- Common stock (par value - $.01 per share): Authorized shares - 100,000,000, Outstanding shares - 451,000 ....... -- -- Paid in capital ........................................................ 462 1,025 Deficit ................................................................ (27) (35) Accumulated other comprehensive loss ................................... (5) (5) -------- ------- Total common stock equity ........................................... 430 985 -------- ------- Total shareholders' equity ........................................ $ 505 $ 1,060 ======== =======
TXU Energy acquired certain operations (Note 3) in a non-cash transaction. Accordingly, $561 million was charged to paid-in capital to reflect this distribution of the net assets at net book value at January 1, 2002. 6. REGULATION AND RATES TXU Gas employs a continuing program of rate review for all classes of customers in its regulatory jurisdictions. On March 1, 2002, TXU Gas Distribution, a division of TXU Gas, filed rate cases with respect to 111 north Texas cities, including the city of Dallas, supporting $53 million in annualized revenue increases. The Dallas Distribution System gas rate case, representing 4 cities, was settled for an annual increase of $6.8 million. In the North Texas Metroplex gas rate case, settlement terms were accepted by 33 cities for an annual increase of $760,000, and another city has tentatively accepted the settlement. The case was withdrawn from 23 Fort Worth area cities because the settlement would have resulted in essentially no increase in rates. 50 cities declined the settlement offer and passed ordinances denying the filed rate case. On July 15, 2002, TXU Gas Distribution filed an appeal of these cities' actions with the Railroad Commission of Texas (RRC) for $24.5 million (GUD 9313). In the Northwest Region gas rate case filed on March 21, 2002, a tentative settlement has been reached for an annual increase of $1.2 million. Weather normalization adjustment clauses, which allow rates to be adjusted to reflect warmer- or cooler-than-normal weather during the winter months, have been approved by 419 cities served by TXU Gas Distribution. TXU Gas Distribution has filed applications to terminate these adjustments in the cities associated with the 2002 rate cases. On July 16, 2001, TXU Gas Distribution filed a 36 month gas cost prudence review (GUD 9233) covering the period of November 1, 1997 through October 30, 2000 with the RRC. This filing was amended on March 15, 2002. TXU Gas believes it has under-recovered its gas costs by $10.5 million during this period, which amount is carried as a regulatory asset. The Administrative Law Judge (AJL) has ruled that the issue of the underrecovery should not be considered as part of this proceeding. The intervening parties have recommended a disallowance of $4.2 million relating to a prior contract settlement. TXU Gas Distribution has appealed the AJL's ruling and is filing rebuttal testimony relating to the intervening parties' recommendation. The outcome of these issues cannot be determined at this time. On August 31, 2001, TXU Gas Distribution filed a city gate rate cost reconciliation (GUD 9246) covering the period of July 1, 2000 to June 30, 2001 with the RRC. This filing was amended on February 14, 2002. TXU Gas under-recovered its gas costs by $18.6 million during the covered period. This amount has been recovered through a surcharge under a settlement approved by the RRC, which reserves prudence issues and rate case expenses for GUD 9233. 9 7. CONTINGENCIES In July 1999, the City of Gatesville, Texas filed suit in the State District Court of Coryell County, Texas, 52nd Judicial District. The suit has been amended to assert claims against TXU Gas and TXU Corp. The Plaintiff seeks to represent a class of plaintiffs consisting of more than 300 Texas cities, towns and other municipalities to which TXU Gas Distribution had paid municipal franchise fees since January 1, 1987. Discovery in this case is being conducted, and a decision on class certification has not yet been made. The Plaintiff alleges that TXU Gas Distribution failed to properly pay franchise fees by omitting miscellaneous revenues from the franchise fee payment base used for determining the municipal franchise fees owed to the Plaintiff. No amount of damages has been specified in the suit. While TXU Gas is unable to estimate any possible loss or predict the outcome of this case, TXU Gas Distribution believes the Plaintiff's claims are without merit and intends to vigorously defend this suit. In September 1999, Quinque Operating Company (Quinque) filed suit in the State District Court of Stevens County, Kansas against over 200 gas pipeline companies, including TXU Gas (named in the litigation as ENSERCH Corporation). The suit was removed to federal court; however, a motion to remand the case back to Kansas State District Court was granted in January 2001, and the case is now pending in Stevens County, Kansas. The plaintiffs amended their petition to join TXU Fuel Company (TXU Fuel), a subsidiary of TXU Energy, as a defendant in this litigation. Quinque has dismissed its claims and a new lead plaintiff has filed an amended petition in which the plaintiffs seek to represent a class consisting of all similarly situated gas producers, overriding royalty owners, working interest owners and state taxing authorities either from whom defendants had purchased natural gas or who received economic benefit from the sale of such gas since January 1, 1974. No class has been certified. The petition alleges that the defendants have mismeasured both the volume and heat content of natural gas delivered into their pipelines resulting in underpayments to plaintiffs. No amount of damages has been specified in the petition with respect to TXU Gas or TXU Fuel. While TXU Gas and TXU Fuel are unable to estimate any possible loss or predict the outcome of this case, TXU Gas and TXU Fuel believe these claims are without merit and intend to vigorously defend this suit. General -- In addition to the above, TXU Gas and its subsidiaries are involved in various other legal and administrative proceedings the ultimate resolution of which, in the opinion of management, are not expected to have a material effect on their financial position, results of operations or cash flows. 10 8. SUPPLEMENTARY FINANCIAL INFORMATION Other Income and Deductions-- Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Other income Gain on sale of properties ......... $ 1 $ 3 $ 1 $ 4 Other (consists of several immaterial items)................. 5 2 7 3 ---- ---- ---- ---- Total other income ............. $ 6 $ 5 $ 8 $ 7 ==== ==== ==== ==== Other deductions Loss on sale of properties ......... $ -- $ -- $ -- $ 1 Other (consists of several immaterial items)................. -- 1 4 1 ---- ---- ---- ---- Total other deductions ......... $ -- $ 1 $ 4 $ 2 ==== ==== ==== ==== Accounts receivable -- At June 30, 2002 and December 31, 2001, accounts receivable are stated net of uncollectible accounts of $4 million and $5 million, respectively. Accounts receivable included $14 million and $39 million of unbilled revenues at June 30, 2002 and December 31, 2001, respectively. Regulatory Assets and Liabilities -- Included in regulatory assets - net are regulatory assets of $84 million and regulatory liabilities of $13 million at June 30, 2002, and regulatory assets of $80 million and regulatory liabilities of $13 million at December 31, 2001. No regulatory assets were earning a return. The regulatory assets have a weighted average remaining recovery period of approximately 15 years. Sale of Receivables -- Certain subsidiaries of TXU Corp. sell customer accounts receivable to a wholly-owned bankruptcy remote subsidiary of TXU Corp. (TXU Receivables Company) which sells undivided interests in accounts receivable it purchases to financial institutions. As of January 1, 2002, the facility includes TXU Energy Retail Company LP, TXU SESCO Energy Services Company, Oncor Electric Delivery Company and TXU Gas as qualified originators of accounts receivable under the program. TXU Receivables Company may sell up to an aggregate of $600 million in undivided interests in the receivables purchased from the originators under the program. As of June 30, 2002, TXU Gas had sold $59 million face amount of receivables to TXU Receivables Company under the program in exchange for cash of $29 million and $29 million in subordinated notes, with $1 million of losses on sales for the six months ended June 30, 2002 principally representing the interest on the underlying financing. These losses approximated 4% of the cash proceeds from the receivables sales on an annualized basis. If the program terminates, cash flows to TXU Gas would temporarily stop until the undivided interests of the financial institutions were repurchased. The level of cash flows would normalize in approximately 16 to 31 days. TXU Business Services, an affiliate of TXU Gas, services the purchased receivables and is paid a market based servicing fee by TXU Receivables Company. The subordinated notes receivable from TXU Receivables Company represent TXU Gas' retained interests in the transferred receivables and are recorded at book value, net of allowances for bad debts, which approximates fair value due to the short-term nature of the subordinated notes, and are included in accounts receivable in the consolidated balance sheet. 11 Inventories by major category-- June 30, 2002 December 31, (Unaudited) 2001 ----------- ------------ Materials and supplies ............................ $ 7 $ 6 Gas stored underground ............................ 99 110 ------- ------- Total inventories ............................ $ 106 $ 116 ======= ======= Property, plant and equipment-- June 30, 2002 December 31, (Unaudited) 2001 ----------- ------------ Gas distribution and pipeline ..................... $ 1,734 $ 1,678 Other ............................................. 27 26 ------- ------- Total ..................................... 1,761 1,704 Less accumulated depreciation ..................... 298 265 ------- ------- Net of accumulated depreciation ........... 1,463 1,439 Construction work in progress ..................... 34 46 ------- ------- Net property, plant and equipment ......... $ 1,497 $ 1,485 ======= ======= Goodwill -- At June 30, 2002 and December 31, 2001, goodwill is stated net of accumulated amortization of $37 million. Derivative Instruments and Hedging Activities - The terms of TXU Gas' derivatives that have been designated as accounting hedges match the terms of the underlying hedged items. As a result, TXU Gas experienced no hedge ineffectiveness during the period. As of June 30, 2002, it is expected that $3 million of after-tax net losses accumulated in other comprehensive income will be reclassified into earnings during the next twelve months. This amount represents the projected value of the hedges over the next twelve months relative to what would be recorded if the hedge transactions had not been established. The amount expected to be reclassified is not a forecasted loss incremental to normal operations, but rather it demonstrates the extent to which the volatility in earnings (which would otherwise exist) is mitigated through the use of cash flow hedges. 12 INDEPENDENT ACCOUNTANTS' REPORT TXU Gas Company: We have reviewed the accompanying condensed consolidated balance sheet of TXU Gas Company and subsidiaries (TXU Gas) as of June 30, 2002, and the related condensed statements of consolidated income and of comprehensive income for the three-month and six-month periods ended June 30, 2002 and 2001 and the condensed statements of consolidated cash flows for the six month period ended June 30, 2002 and 2001. These financial statements are the responsibility of TXU Gas' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of TXU Gas as of December 31, 2001, and the related statements of consolidated operations, comprehensive income, cash flows and shareholders' equity for the year then ended (not presented herein); and in our report dated January 31, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As discussed in Note 2 to the Notes to the Financial Statements, TXU Gas changed its method of accounting for goodwill amortization in 2002 in connection with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." DELOITTE & TOUCHE LLP Dallas, Texas August 13, 2002 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS As a result of the business restructuring effective January 1, 2002, the wholesale trading and risk management operations and the unregulated commercial and industrial retail gas business of TXU Gas were transferred to an affiliate company, TXU Energy. The operations of the transferred business have been reflected as discontinued operations in the statements of consolidated income and cash flows, and the related consolidated financial statements for prior periods have been restated accordingly. TXU Gas' continuing natural gas pipeline, gas distribution and asset management services operations are managed as one integrated business; accordingly, there are no separate reportable segments. Although the price of natural gas has varied significantly since the first quarter of 2001, the city gate rate for the cost of gas TXU Gas ultimately delivers to residential and commercial customers is established by the Railroad Commission of Texas and generally provides for full recovery of the actual cost of gas delivered. Three Months Ended June 30, 2002 Compared to 2001 Operating revenues for TXU Gas decreased by $11 million, or 6%, to $160 million in 2002. The decrease reflects the reduced cost of gas sold, partly offset by an increase in gas sales volumes of 11% due to cooler spring weather. Gross margin (operating revenues less gas purchased for resale) increased by $6 million, or 8%, to $86 million in 2002. The increase was driven by higher distribution sales volumes. Operation and maintenance expense increased by $6 million, or 9%, to $71 million in 2002. The increase primarily reflects increased insurance, pension, and compensation costs. Total net pension and post-retirement benefit costs increased $2 million in 2002. Other operating expenses (depreciation and other amortization, goodwill amortization, and taxes other than income) decreased $15 million, or 27%, to $41 million in 2002. The decrease was driven by lower gross receipts taxes on lower revenues on which these taxes are based. Amortization of goodwill ceased in the current year pursuant to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," offset by additional depreciation associated with distribution and pipeline property additions. Loss from continuing operations decreased by $12 million, or 34%, to $23 million in 2002, as a result of increased gross margin offset by decreased operating expenses. Net pension and postretirement benefit costs reduced net income by $3 million in 2002 and $1 million in 2001. The effective tax rate benefit was 36.1% in 2002 and 34.0% in 2001, with the difference due to the cessation of nondeductible goodwill amortization. Six Months Ended June 30, 2002 Compared to 2001 Operating revenues for TXU Gas decreased by $351 million, or 41%, to $504 million in 2002. The decrease reflects the reduced cost of gas and lower distribution sales volumes, generally driven by milder winter weather and reduced heating demand relative to 2001. Gas sales volumes declined 7%. Gross margin decreased by $20 million, or 7%, to $249 million in 2002. The decrease was driven by the effect of lower sales volumes and prices. 14 Operation and maintenance expense increased by $1 million, or 1%, to $133 million in 2002. The increase reflects higher insurance, pension, and compensation costs, offset by reduced bad debt expense associated with lower revenues. Total net pension and post-retirement benefit costs increased $2 million in 2002. Other operating expenses decreased $21 million, or 22%, to $75 million in 2002. The decrease reflects lower gross receipts taxes on lower revenues on which these taxes are based, and the cessation of goodwill amortization pursuant to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Income from continuing operations is unchanged at $8 million in 2002, as a result of decreased gross margin offset by decreased operating expenses. Net pension and post-retirement benefit costs reduced net income by $5 million in 2002 and $3 million in 2001. The effective tax rate was 27.3% in 2002 and 46.7% in 2001, with the difference due to the cessation of nondeductible goodwill amortization. FINANCIAL CONDITION Liquidity and Capital Resources Cash provided by operating activities for the six months ended June 30, 2002 was $158 million compared with $64 million for the same period last year. The increase of $94 million reflected a $52 million favorable movement in inventories due to buildup of inventory in 2001 on colder temperatures and high demand. In addition, accounts receivable were higher last year reflecting higher gas costs and slower collections. Cash of $108 million was used by financing activities in 2002 compared with $15 million provided in 2001. A total of $106 million of advances from TXU Corp. were repaid in 2002 compared to $17 million advanced from TXU Corp. in 2001, primarily the result of increased available cash provided by operations and decreased investing activity. Cash of $47 million was used in investing activities in 2002 compared with $76 million used in the prior year period. Capital expenditures in 2002 decreased from 2001 levels, which were impacted by higher than normal spending for system reliability improvements. US Credit Agreements described in Note 4 of TXU Gas' Annual Report on 2001 Form 10-K were amended in February 2002 to remove TXU Gas as a borrower. TXU Gas will meet its short-term liquidity needs through advances from TXU Corp. Financing Arrangements - TXU Gas may issue and sell additional debt and equity securities which are currently registered with the Securities and Exchange Commission for issuance pursuant to Rule 415 under the Securities Act of 1933. This includes the possible future issuance and sale of up to an aggregate of $400 million of debt securities and/or preferred securities of subsidiary trusts. REGULATION AND RATES Although TXU Gas cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions, no changes are expected in trends or commitments other than those discussed in the TXU Gas 2001 Form 10-K and this Form 10-Q, which might significantly alter TXU Gas' financial position, results of operations or cash flows. See Note 6 to Financial Statements. CHANGES IN ACCOUNTING STANDARDS Changes in Accounting Standards -- See Note 2 to Financial Statements for a discussion of changes in accounting standards. 15 FORWARD-LOOKING STATEMENTS This report and other presentations made by TXU Gas contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although TXU Gas believes that in making any such statement its expectations are based on reasonable assumptions, any such statement involves uncertainties and is qualified in its entirety by reference to factors contained in the Forward-Looking Statements section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the TXU Gas 2001 Form 10-K, as well as general industry trends; natural gas costs and availability; changes in business strategy, development plans or vendor relationships; availability of qualified personnel; changes in, or the failure or inability to comply with, governmental regulations, including, without limitation, environmental regulations; changes in tax laws; implementation of new accounting standards; and access to adequate transmission facilities to meet changing demand, among others, that could cause the actual results of TXU Gas and/or its subsidiaries to differ materially from those projected in such forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and TXU Gas undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for TXU Gas to predict all of such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required hereunder is not significantly different from the information set forth in Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in TXU Gas' 2001 Form 10-K and is, therefore, not presented herein. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed as a part of Part II are: 15 Letter from independent accountants as to unaudited interim financial information 99(a) Condensed Statements of Consolidated Income - Twelve Months Ended June 30, 2002 99(b) Chairman of the Board and Chief Executive Certification 99(c) Principal Financial Officer Certification (b) Reports on Form 8-K filed since March 31, 2002: None 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TXU GAS COMPANY By /s/ Biggs C. Porter ----------------------------------- Biggs C. Porter Vice President, Principal Accounting Officer Date: August 14, 2002 18 EX-15 3 dex15.txt LETTER FROM INDEPENDENT ACCOUNTANTS EXHIBIT 15 TXU Gas Company: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited condensed consolidated interim financial information of TXU Gas Company and subsidiaries (TXU Gas) for the three and six month periods ended June 30, 2002 and 2001, as indicated in our report dated August 13, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in TXU Gas' Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, is incorporated by reference in Registration Statements No. 333-85769, 333-85769-01, 333-85769-02 and 333-85769-03 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Dallas, Texas August 13, 2002 EX-99.A 4 dex99a.txt CONDENSED STATEMENTS OF CONSOLIDATED INCOME EXHIBIT 99(a) TXU GAS COMPANY AND SUBSIDIARIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (Unaudited) Twelve Months Ended June 30, 2002 ------------------- Millions of Dollars Operating revenues ......................................... $ 878 ----- Operating expenses Gas purchased for resale ............................... 433 Operation and maintenance .............................. 261 Depreciation and other amortization .................... 66 Goodwill amortization .................................. 5 Taxes other than income ................................ 77 ----- Total operating expenses ........................... 842 ----- Operating income ........................................... 36 Other income ............................................... 32 Other deductions ........................................... 5 Interest income ............................................ 5 Interest expense and other charges ......................... 65 ----- Income from continuing operations before income taxes ...... 3 Income tax expense ......................................... 2 ----- Income from continuing operations .......................... 1 Income from discontinued operations, net of tax ............ 25 ----- Net income ................................................. 26 Preferred stock dividends .................................. 4 ----- Net income applicable to common stock ...................... $ 22 ===== EX-99.B 5 dex99b.txt CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 99(b) TXU GAS COMPANY Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 The undersigned, Earl Nye, Chairman of the Board and Chief Executive of TXU Gas Company (the "Company"), DOES HEREBY CERTIFY that: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 14th day of August, 2002. /s/ Erle Nye -------------------------------- Name: Erle Nye Title: Chairman of the Board and Chief Executive EX-99.C 6 dex99c.txt CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 99(c) TXU GAS COMPANY Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 The undersigned, Scott Longhurst, Principal Financial Officer of TXU Gas Company (the "Company"), DOES HEREBY CERTIFY that: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. IN WITNESS WHEREOF, the undersigned has caused this instrument to be executed this 14th day of August, 2002. /s/ Scott Longhurst ----------------------------------- Name: Scott Longhurst Title: Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----