- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 2000
-- 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 NOVEMBER 10, 2000: 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 Operations --
Three and Nine Months Ended September 30, 2000 and 1999.................. 3
Condensed Statements of Consolidated Cash Flows --
Nine Months Ended September 30, 2000 and 1999............................ 4
Condensed Consolidated Balance Sheets --
September 30, 2000 and December 31, 1999................................. 5
Notes to Financial Statements............................................ 7
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......... 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 16
SIGNATURES .................................................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
MILLIONS OF DOLLARS
OPERATING REVENUES........................................ $ 1,622 $ 952 $ 4,310 $ 2,738
OPERATING EXPENSES
Energy purchased for resale........................... 1,534 856 3,921 2,368
Operation and maintenance............................. 81 92 263 276
Depreciation and other amortization................... 15 17 47 49
Goodwill amortization................................. 5 5 16 16
Taxes other than income............................... 14 13 49 49
--------- --------- --------- ---------
Total operating expenses........................... 1,649 983 4,296 2,758
--------- --------- --------- ---------
OPERATING INCOME (LOSS)................................... (27) (31) 14 (20)
OTHER INCOME (DEDUCTIONS) NET............................. 1 10 53 9
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INTEREST, OTHER
CHARGES AND INCOME TAXES.............................. (26) (21) 67 (11)
INTEREST INCOME........................................... 4 -- 4 1
INTEREST EXPENSE AND OTHER
CHARGES............................................... (21) (19) (58) (57)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAXES................................................. (43) (40) 13 (67)
INCOME TAX EXPENSE (BENEFIT).............................. (14) (14) 9 (20)
--------- --------- --------- ---------
NET INCOME (LOSS)......................................... (29) (26) 4 (47)
PREFERRED STOCK DIVIDENDS................................. 1 1 3 3
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK.......................................... $ (30) $ (27) $ 1 $ (50)
========= ========= ========= =========
See Notes to Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
MILLIONS OF DOLLARS
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss)................................................................ $ 4 $ (47)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization................................................ 67 67
Deferred income taxes - net.................................................. 29 2
Gain from the sale of assets................................................. (53) (10)
Changes in operating assets and liabilities:
Accounts receivable..................................................... (437) 128
Inventories............................................................. (12) (7)
Accounts payable:
Parent and affiliates............................................... (10) 7
Other............................................................... 424 (66)
Interest and taxes accrued.............................................. (57) (11)
Other working capital................................................... (132) 26
Energy marketing risk management assets and liabilities - net........... (25) (93)
Other - net ............................................................ (7) (16)
--------- ---------
Cash used in operating activities................................... (209) (20)
--------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Issuance of common stock......................................................... -- 250
Retirement of long-term debt..................................................... -- (150)
Change in notes payable:
Banks........................................................................ -- (2)
Parent....................................................................... 203 1
Cash dividends paid.............................................................. (3) (2)
--------- ---------
Cash provided by financing activities............................... 200 97
--------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures........................................................ (123) (113)
Proceeds from sale of assets..................................................... 110 41
Other investments................................................................ (5) (3)
--------- ---------
Cash used in investing activities................................... (18) (75)
--------- ---------
CASH PROVIDED BY DISCONTINUED OPERATIONS .............................................. 29 6
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................................................ 2 8
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE.......................................... 6 --
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING BALANCE............................................. $ 8 $ 8
========= =========
See Notes to Financial Statements.
4
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- -----------
MILLIONS OF DOLLARS
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline................................................ $ 1,479 $ 1,378
Other ....................................................................... 27 68
----------- -----------
Total.................................................................. 1,506 1,446
Less accumulated depreciation................................................ 190 142
----------- -----------
Net of accumulated depreciation........................................ 1,316 1,304
Construction work in progress................................................ 65 47
----------- -----------
Net property, plant and equipment...................................... 1,381 1,351
----------- -----------
INVESTMENTS...................................................................... 41 38
----------- -----------
GOODWILL (net of accumulated amortization: 2000 - $66; 1999 - $50)............... 793 809
----------- -----------
CURRENT ASSETS
Cash and cash equivalents.................................................... 8 6
Accounts receivable (net of allowance for uncollectible accounts:
2000 - $14; 1999 - $8).................................................... 785 391
Energy marketing risk management assets...................................... 1,035 581
Inventories - at average cost:
Materials and supplies.................................................... 9 12
Gas stored underground.................................................... 104 93
Deferred income taxes........................................................ 28 29
Other current assets......................................................... 149 16
----------- -----------
Total current assets................................................... 2,118 1,128
----------- -----------
OTHER ASSETS
Energy marketing risk management assets...................................... 126 27
Regulatory assets............................................................ 48 45
Deferred income taxes........................................................ -- 19
Deferred debits.............................................................. 8 16
----------- -----------
Total other assets..................................................... 182 107
----------- -----------
Total.................................................................. $ 4,515 $ 3,433
=========== ===========
See Notes to Financial Statements.
5
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
--------- ---------
MILLIONS OF DOLLARS
CAPITALIZATION
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000
Outstanding shares - 451,000.................................................... $ -- $ --
Paid in capital.................................................................... 1,013 1,016
Deficit .......................................................................... (47) (51)
--------- ---------
Total common stock equity.................................................... 966 965
Preferred stock.................................................................... 75 75
TXU Gas Company obligated, mandatorily redeemable, preferred securities of
subsidiary trust holding solely junior subordinated debentures of TXU Gas
Company......................................................................... 147 147
Advances from parent............................................................... 602 385
Long-term debt, less amounts due currently......................................... 551 551
--------- ---------
Total capitalization......................................................... 2,341 2,123
--------- ---------
CURRENT LIABILITIES
Notes payable - banks.............................................................. 1 1
Accounts payable:
Parent and affiliates........................................................... 26 36
Other .......................................................................... 704 280
Energy marketing risk management liabilities....................................... 951 525
Interest and taxes accrued......................................................... 26 86
Other current liabilities.......................................................... 74 80
--------- ---------
Total current liabilities.................................................... 1,782 1,008
--------- ---------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes and investment tax credits....................... 19 13
Pensions and other postretirement benefits......................................... 147 153
Energy marketing risk management liabilities....................................... 114 12
Other deferred credits and noncurrent liabilities.................................. 112 124
--------- ---------
Total deferred credits and other noncurrent liabilities...................... 392 302
--------- ---------
CONTINGENCIES (Note 5)
Total........................................................................ $ 4,515 $ 3,433
========= =========
See Notes to Financial Statements.
6
TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Gas Company (TXU Gas) is an integrated natural gas company
engaged in the purchase, transmission, distribution and sale of natural gas
and energy marketing. TXU Gas is a wholly-owned subsidiary of TXU Corp., a
Texas corporation. TXU Corp. is engaged in the generation, purchase,
transmission, distribution and sale of electricity; the purchase,
transmission, distribution and sale of natural gas; energy services; and
telecommunications and other businesses primarily in the United States (US),
Europe and Australia.
TXU Gas has sold certain assets that no longer align with its
long-term strategy. In May 2000, TXU Gas sold substantially all of the assets
of its natural gas processing subsidiary, TXU Processing Company, for $105
million resulting in a pre-tax gain of $53 million ($34 million after-tax).
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The condensed consolidated financial
statements of TXU Gas and its subsidiaries have been prepared on the same
basis as those in its 1999 Form 10-K and, in the opinion of management, all
adjustments (constituting only 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 accounting principles generally accepted in the United States of America
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain previously reported amounts have been
reclassified to conform to current classifications. All dollar amounts in the
condensed consolidated financial statements and tables in the notes are
stated in millions of dollars unless otherwise indicated.
There were no items impacting comprehensive income for the
periods reported; therefore, comprehensive income is the same as net income.
CHANGES IN ACCOUNTING STANDARDS - Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as extended by SFAS No. 137 (June 1999) and amended
by SFAS No. 138 (June 2000), is effective for TXU Gas beginning January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires the
recognition of derivatives as either assets or liabilities in the statement
of financial position and the measurement of those instruments at fair value.
The process relating to implementation of SFAS No. 133 has been
ongoing since July 1999. To date, all derivatives within TXU Gas have been
identified pursuant to SFAS No. 133 requirements. TXU Gas is in the process
of designating, documenting and assessing hedging relationships, the majority
of which are expected to result in cash-flow hedges, which will require TXU
Gas to record derivative assets or liabilities at fair value on its statement
of financial position with an offset in Other Comprehensive Income to the
extent the hedge is effective. Hedge ineffectiveness will be recorded in
earnings. TXU Gas accounts for its trading activities on a mark-to-market
basis, which, for the most part, will not be affected by the implementation
of SFAS No. 133.
TXU Gas continues to evaluate the impact of SFAS No. 133, as well
as the ongoing implementation issues currently being addressed by the
Derivatives Implementation Group. As a result, the direct financial impact of
the application of hedge accounting and the transition adjustment on TXU Gas'
financial position and results of operations has yet to be determined.
7
3. CAPITALIZATION
TXU GAS OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TXU GAS
(TRUST SECURITIES) - At September 30, 2000, a statutory business trust, TXU
Gas Capital I, had $147 million of floating rate Trust Securities
outstanding. Distributions on these Trust Securities are payable quarterly at
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 September 30, 2000, TXU Gas had two
interest rate swap agreements with respect to floating rate Trust Securities
of TXU Gas Capital I, with notional principal amounts of $100 million and $50
million, respectively, that effectively fixed the rate at 6.629% and 6.444%,
respectively, per annum to July 1, 2003.
LONG-TERM DEBT - On October 17, 2000, TXU Gas issued $200 million
aggregate principal amount of Putable Asset Term Securities due October 15,
2012. The securities have a fixed rate of 7-5/8% from the date of issuance
through October 14, 2002. TXU Gas also assigned to a third party the right to
call the securities. On October 15, 2002, the securities will be either
mandatorily tendered to and purchased by the callholder or mandatorily
redeemed by TXU Gas. If the callholder chooses to purchase the securities,
TXU Gas may elect to have the securities remarketed for a floating rate
period of up to one year, in which case the callholder must purchase the
securities at the end of the floating rate period. If the callholder
exercises its right to call the securities on October 15, 2002, or at the end
of the floating rate period if applicable, the securities will be remarketed
at a fixed rate for a ten year period. If the callholder does not purchase
the securities on October 15, 2002, TXU Gas will be required to redeem all of
the securities for 100% of the aggregate principal amount outstanding plus
accrued interest, if any. Proceeds from the debt issuance and the assignment
of the call option were used for general corporate purposes, including among
other things the repayment of advances from TXU Corp.
4. REGULATION AND RATES
TXU Gas employs a continuing program of rate review for all
classes of customers in its regulatory jurisdictions. Rate relief amounting
to about $3.5 million in annualized revenue increases, exclusive of changes
in gas costs, has been granted in 2000 in addition to about $7.5 million
granted in 1999. Rate cases supporting $15.4 million in annualized revenue
increases were pending in 52 cities as of September 30, 2000. Additionally,
an appeal to the Railroad Commission of Texas (RRC) of actions taken by three
cities in the Dallas Distribution System seeks to recover $8 million in
annualized revenue deficiencies. A proposal for decision in this matter would
grant $5.1 million of this request. A final decision on this matter is
expected in the fourth quarter of 2000.
In October 1999, TXU Lone Star Pipeline filed with the RRC a
Statement of Intent to change the city gate rate for gas transported for
subsequent distribution to residential and commercial customers. The filing
requested a general increase in annual revenues of approximately $20 million.
In June 2000, the RRC issued a final ruling on TXU Lone Star Pipeline's
requested gate rate increase that denied the increase and resulted in a $1.5
million reduction in the city gate rate, but granted certain changes to its
tariff structure between demand and commodity rates which should stabilize
its revenues. TXU Lone Star Pipeline and the intervenors in the proceeding
filed with the RRC motions for rehearing concerning the final ruling. All
motions for rehearing have been denied, and no appeals will be filed seeking
further review of the RRC final ruling.
8
5. CONTINGENCIES
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in
the United States District Court for the Northern District of Texas against
EEX Corporation (EEX), formerly Enserch Exploration, Inc., TXU Corp., David
W. Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip
McCormick. The Gracy Fund sought to represent a class of certain purchasers
of the common stock of ENSERCH Corporation (now TXU Gas) and EEX based upon
claims of various violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit
in the United States District Court for the Southern District of Texas
against EEX, TXU Gas, DeGolyer & MacNaughton, David W. Biegler, Gary J.
Junco, Fredrick S. Addy and B. K. Irani and sought to represent a certain
class of purchasers of common stock of EEX. In December 1998, the United
States District Court for the Northern District of Texas issued an Order
consolidating the Gracy Fund and the Thorne suits (Consolidated Action). In
January 1999, the Gracy Fund ET AL. filed an amended class action complaint
in the Consolidated Action against EEX, TXU Gas, David W. Biegler, Gary J.
Junco, Thomas Hamilton, J. Philip McCormick, Fredrick S. Addy and B. K.
Irani. TXU Corp. and Erle Nye were omitted as defendants pursuant to a
tolling agreement. The individual named defendants are current or former
officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions
of the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. The parties
to the Consolidated Action entered into an agreement that TXU Gas expects to
form the basis of the settlement of this litigation, subject to the
completion of confirmatory discovery by the plaintiffs and approval of the
Court. The terms of this agreement required TXU Gas to pay $5 million into
escrow.
In July 1999, the City of Gatesville, Texas filed suit in the
State District Court of Coryell County, Texas, 52nd Judicial District,
against TXU Gas Distribution, TXU Gas and other TXU companies, and sought to
represent a class of plaintiffs consisting of approximately 490 Texas cities,
towns and other municipalities to whom TXU Gas Distribution had paid
municipal franchise fees over a period of twenty-five years. The complaint
alleges that TXU Gas Distribution concealed information from the cities
regarding its revenue data, gross receipts and related charges and fees that
were subject to, but not used as a basis for determining, municipal franchise
fees owed to the plaintiffs. No amount of damages has been specified in the
complaint. While TXU Gas is unable to estimate any possible loss or predict
the outcome of this case, TXU Gas Distribution believes the 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
companies, including TXU Gas and TXU Energy Trading Company, a wholly-owned
subsidiary (TXU Energy Trading). Quinque and the other named plaintiffs
sought to represent a class of plaintiffs consisting of all similarly
situated gas producers, overriding royalty owners, working interest owners
and state taxing authorities either from whom defendants had purchased
natural gas or who received economic benefit from the sale of such gas since
January 1, 1974. The complaint 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 complaint. While TXU Gas and TXU Energy Trading are
unable to estimate any possible loss or predict the outcome of this case, TXU
Gas and TXU Energy Trading believe these claims are without merit and intend
to vigorously defend this suit.
FINANCIAL GUARANTEES - TXU Gas and/or its subsidiaries are the
guarantor on various commitments and obligations of others in an aggregate
amount of $9 million at September 30, 2000. TXU Gas is exposed to loss in the
event of nonperformance by other parties. However, TXU Gas does not
anticipate nonperformance by the counterparties.
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, should not have a
material effect upon its financial position, results of operations or cash
flows.
9
6. SEGMENT INFORMATION
TXU Gas has two reportable operating segments:
(1) GAS PIPELINE AND DISTRIBUTION - operations involving the
purchase, transmission, distribution and sale of natural gas in Texas; and
(2) ENERGY MARKETING - operations involving the purchasing and
selling of natural gas and electricity and providing risk management services
for the energy industry throughout the US and parts of Canada.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2000 1999 2000 1999
------- -------- ------- -------
TRADE REVENUES --
Gas Pipeline and Distribution............... $ 148 $ 146 $ 629 $ 584
Energy Marketing............................ 1,474 804 3,681 2,149
Other....................................... -- 2 -- 5
------- -------- ------- -------
Consolidated........................... $ 1,622 $ 952 $ 4,310 $ 2,738
======= ========= ======== ========
AFFILIATED REVENUES --
Gas Pipeline and Distribution............... $ 1 $ 7 $ 9 $ 17
Energy Marketing............................ 2 (1) -- --
Eliminations................................ (3) (6) (9) (17)
------- -------- ------- -------
Consolidated........................... $ -- $ -- $ -- $ --
======= ========= ======== ========
NET INCOME (LOSS) --
Gas Pipeline and Distribution............... $ (1) $ (12) $ 56 $ (3)
Energy Marketing............................ (19) (14) (31) (30)
Other....................................... (9) -- (21) (14)
------- -------- ------- -------
Consolidated........................... $ (29) $ (26) $ 4 $ (47)
======= ======== ======= =======
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 September 30, 2000, and the
related condensed statements of consolidated operations for the three-month
and nine-month periods ended September 30, 2000 and 1999, and the condensed
statements of consolidated cash flows for the nine-month periods ended
September 30, 2000 and 1999. 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, 1999, and the related statements of consolidated
operations, comprehensive loss, cash flows and common stock equity for the
year then ended (not presented herein); and in our report dated February 16,
2000, 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, 1999, 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
November 10, 2000
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
TXU Gas Company (TXU Gas) has sold certain assets that no longer
align with its long-term strategy. In May 2000, TXU Gas sold substantially
all of the assets of its natural gas processing subsidiary, TXU Processing
Company, for $105 million resulting in a pre-tax gain of $53 million ($34
million after-tax).
Although the price of natural gas has increased significantly in
2000, the city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the
Railroad Commission of Texas and provides for full recovery of the actual
cost of gas delivered.
RESULTS OF OPERATIONS
OVERVIEW
THREE MONTHS ENDED SEPTEMBER 30, 2000
For the three months ended September 30, 2000, TXU Gas had a net
loss of $29 million compared with a net loss of $26 million for the three
months ended September 30, 1999. Results for the third quarter of 2000
reflect improved gas distribution and pipeline results partially offset by
less favorable energy marketing results. Third quarter 1999 results included
a $3 million contribution to earnings from the gas processing business sold
in May 2000 and an after-tax gain of $6 million from the sale of assets.
Operating revenues for the third quarter of 2000 increased by
$670 million and energy purchased for resale increased by $678 million from
the 1999 period primarily as a result of trading activities in the Energy
Marketing segment. Trading revenues and energy purchased for resale reflect
somewhat higher volumes, but the increases were primarily the result of a
significant increase in the price of natural gas over the prior-year period.
Higher operation and maintenance expenses in the Energy Marketing segment
were more than offset by cost reductions for gas distribution and pipeline
operations and the elimination of gas processing expenses. Gains of $10
million from the sale of assets were included in other income in the 1999
period. The effective income tax rate for both periods was affected by
non-deductible amortization of goodwill.
NINE MONTHS ENDED SEPTEMBER 30, 2000
For the nine months ended September 30, 2000, TXU Gas had net
income of $4 million compared to a net loss of $47 million for the nine
months ended September 30, 1999. The better results for the first nine months
of 2000 were attributable to significantly improved gas distribution results
and the $34 million after-tax gain related to the sale of substantially all
of the gas processing assets.
Operating revenues for the first nine months of 2000 increased by
$1.6 billion and energy purchased for resale increased by $1.6 billion from
the 1999 period primarily as a result of trading activities in the Energy
Marketing segment. Trading revenues and energy purchased for resale increased
for the same reasons mentioned above for the three-month period. Higher
operation and maintenance expenses in the Energy Marketing segment were more
than offset by cost reductions for gas distribution operations and reduced
gas processing expenses as a result of the sale. Other income for the 2000
period included a pre-tax gain of $53 million from the sale of the gas
processing assets, while other income for the 1999 period included a pre-tax
gain of $10 million from the sale of other assets. The effective income tax
rate for both periods was affected by non-deductible amortization of goodwill.
12
SEGMENTS
Revenues and net income by operating segment are shown in Note 6
to the Financial Statements.
GAS PIPELINE AND DISTRIBUTION
SEGMENT HIGHLIGHTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
Gas distribution:
Sales volumes (billion cubic feet - Bcf).................. 14 13 82 82
Margin (millions)......................................... $ 66 $ 49 $ 245 $ 218
Pipeline transportation:
Transportation volumes (Bcf).............................. 168 155 442 426
Revenues (millions)....................................... $ 28 $ 24 $ 87 $ 86
Heating degree days (% of normal)............................... -- -- 66% 73%
For the three months ended September 30, 2000, the Gas Pipeline
and Distribution segment had a net loss of $1 million compared with a net
loss of $12 million for the three months ended September 30, 1999. Results
for the 2000 period reflected improved gas distribution and pipeline margins
combined with operating cost reductions.
For the nine months ended September 30, 2000, the segment had net
income of $56 million compared with a net loss of $3 million for the
comparable 1999 nine-month period. Results for the 2000 nine-month period
reflect improved margin and cost reductions in gas distribution operations
and the gain on sale of gas processing assets.
ENERGY MARKETING
SEGMENT HIGHLIGHTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
Trading and marketing volumes:
Gas (Bcf)................................................ 327 213 953 805
Electric (gigawatt-hours-GWh)............................ 4,358 3,522 14,898 5,352
The Energy Marketing segment had a net loss of $19 million for
the three months ended September 30, 2000 compared with a net loss of $14
million for the three months ended September 30, 1999. Results were
negatively impacted by an $8 million increase in operation and maintenance
expenses which more than offset a $3 million improvement in margin. The
increase in operation and maintenance expenses reflects costs to prepare the
trading and portfolio management operation for the opening of the Texas
electricity market to competition in 2002.
For the nine months ended September 30, 2000, the segment had a
net loss of $31 million compared with a net loss of $30 million for the nine
months ended September 30, 1999. A $27 million increase in margin was for the
most part offset by higher operation and maintenance expenses. The increase
in operation and maintenance expenses reflects costs associated with the
relocation of energy trading operations to Dallas, as well as the trading and
portfolio management development costs discussed above.
13
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities before changes in
operating assets and liabilities for the nine months ended September 30, 2000
were $47 million compared with $12 million for the same period last year.
Changes in operating assets and liabilities required $256 million for the
nine months of 2000 compared with $32 million for the same period in 1999.
The current year amount reflects the impact of higher fuel costs in accounts
receivable and $110 million of deposits required on over-the-counter and
exchange trading margin accounts.
Cash flows of $200 million were provided by financing activities
in the first nine months of 2000 compared with cash flows provided by
financing activities of $97 million for the first nine months of 1999.
Advances from TXU Corp. totaled $203 million during the first nine months of
2000.
Cash flows used by investing activities for the nine months ended
September 30, 2000 were $18 million compared with cash flows used by
investing activities of $75 million for the nine months ended September 30,
1999. The sale of substantially all of TXU Gas' natural gas processing assets
along with the sale of other assets provided $110 million in the first nine
months of 2000. Construction expenditures were $123 million and $113 million
for the first nine months of 2000 and 1999, respectively.
Cash flows provided by discontinued operations were $29 million
in the first nine months of 2000 compared with $6 million during the first
nine months of 1999. Cash flows for the current nine-month period reflect the
collection of a $42 million outstanding receivable following favorable
settlement of related litigation.
On October 17, 2000, TXU Gas issued $200 million aggregate
principal amount of Putable Asset Term Securities due October 15, 2012. The
securities have a fixed rate of 7-5/8% from the date of issuance through
October 14, 2002. TXU Gas also assigned to a third party the right to call
the securities. On October 15, 2002, the securities will be either
mandatorily tendered to and purchased by the callholder or mandatorily
redeemed by TXU Gas. If the callholder chooses to purchase the securities,
TXU Gas may elect to have the securities remarketed for a floating rate
period of up to one year, in which case the callholder must purchase the
securities at the end of the floating rate period. If the callholder
exercises its right to call the securities on October 15, 2002, or at the end
of the floating rate period if applicable, the securities will be remarketed
at a fixed rate for a ten year period. If the callholder does not purchase
the securities on October 15, 2002, TXU Gas will be required to redeem all of
the securities for 100% of the aggregate principal amount outstanding plus
accrued interest, if any. Proceeds from the debt issuance and the assignment
of the call option were used for general corporate purposes, including among
other things the repayment of advances from TXU Corp.
No other substantive changes to financing arrangements have
occurred subsequent to December 31, 1999. Early redemptions of preferred
stock, long-term debt and trust securities may occur from time to time in
amounts presently undetermined.
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 1999 Form 10-K and this Form 10-Q, which might significantly alter its
financial position, results of operations or cash flows. See Note 4 to
Financial Statements.
14
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as extended
by SFAS No. 137 (June 1999) and amended by SFAS No. 138 (June 2000), is
effective for TXU Gas beginning January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires the recognition of derivatives as either assets or
liabilities in the statement of financial position and the measurement of
those instruments at fair value.
The process relating to implementation of SFAS No. 133 has been
ongoing since July 1999. To date, all derivatives within TXU Gas have been
identified pursuant to SFAS No. 133 requirements. TXU Gas is in the process
of designating, documenting and assessing hedging relationships, the majority
of which are expected to result in cash-flow hedges, which will require TXU
Gas to record derivative assets or liabilities at fair value on its statement
of financial position with an offset in Other Comprehensive Income to the
extent the hedge is effective. Hedge ineffectiveness will be recorded in
earnings. TXU Gas accounts for its trading activities on a mark-to-market
basis, which, for the most part, will not be affected by the implementation
of SFAS No. 133.
TXU Gas continues to evaluate the impact of SFAS No. 133, as well
as the ongoing implementation issues currently being addressed by the
Derivatives Implementation Group. As a result, the direct financial impact of
the application of hedge accounting and the transition adjustment on TXU Gas'
financial position and results of operations has yet to be determined.
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 TXU Gas' 1999 Form 10-K, as
well as general industry trends; power 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; and access to adequate transmission
facilities to meet changing demand, among others, that could cause the actual
results of TXU Gas to differ materially from those projected in such
forward-looking statements.
Any forward-looking statement speaks only as of the date on which
such statement is made, and TXU Gas undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for TXU
Gas to predict all of such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any
forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder is not significantly different
from the information set forth in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included in TXU Gas' 1999 Form 10-K and is,
therefore, not presented herein.
15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
4 Officer's Certificate dated as of October 17, 2000, establishing the
terms of the Putable Asset Term Securities.
15 Letter from independent accountants as to unaudited interim financial
information
27 Financial Data Schedules
99 Condensed Statements of Consolidated Operations - Twelve Months Ended
September 30, 2000 and 1999
(b) Reports on Form 8-K filed since June 30, 2000:
None
16
SIGNATURES
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/ Jerry W. Pinkerton
-------------------------------------
Jerry W. Pinkerton
Vice President,
Principal Accounting Officer
By /s/ Gaylene M. McMahon
-------------------------------------
Gaylene M. McMahon
Controller
Date: November 10, 2000
17