================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
- 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 May 10, 2001: 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 and Comprehensive Income --
Three Months Ended March 31, 2001 and 2000................................ 3
Condensed Statements of Consolidated Cash Flows --
Three Months Ended March 31, 2001 and 2000................................ 4
Condensed Consolidated Balance Sheets --
March 31, 2001 and December 31, 2000...................................... 5
Notes to Financial Statements............................................. 6
Independent Accountants' Report........................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 15
Part II. Other Information
Item 1. Legal Proceedings..................................................... 16
Item 6. Exhibits and Reports on Form 8-K...................................... 16
SIGNATURE.......................................................................... 17
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2001 2000
------ ------
Millions of Dollars
Operating revenues................................... $2,951 $1,350
------ ------
Operating expenses
Energy purchased for resale......................... 2,730 1,157
Operation and maintenance........................... 88 94
Depreciation and other amortization................. 15 16
Goodwill amortization............................... 6 6
Taxes other than income............................. 23 15
------ ------
Total operating expenses........................... 2,862 1,288
------ ------
Operating income..................................... 89 62
Other income (deductions) net........................ 1 --
------ ------
Income before interest, other
charges and income taxes............................ 90 62
Interest income...................................... 4 --
Interest expense and other charges................... (23) (18)
------ ------
Income before income taxes........................... 71 44
Income tax expense................................... 26 18
------ ------
Net income........................................... 45 26
Preferred stock dividends............................ 1 1
------ ------
Net income applicable to common stock................ $ 44 $ 25
====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2001 2000
------ ------
Millions of Dollars
Net income........................................... $ 45 $ 26
Other comprehensive income (loss) -
net change during period, net of tax effects:
Cash flow hedges:
Cumulative transition adjustment as of
January 1, 2001................................... 2 --
Net change in fair value of derivatives............ (3) --
------ ------
Total............................................. (1) --
------ ------
Comprehensive income................................. $ 44 $ 26
====== ======
See Notes to Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------
2001 2000
------ ------
Millions of Dollars
Cash flows - operating activities
Net income........................................................................ $ 45 $ 26
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization................................................... 24 23
Deferred income taxes - net..................................................... 7 3
Changes in operating assets and liabilities..................................... 301 24
------ ------
Cash provided by operating activities....................................... 377 76
------ ------
Cash flows - financing activities
Change in notes payable:
Banks........................................................................... (1) --
Parent.......................................................................... (325) (49)
Cash dividends paid............................................................... (1) (1)
------ ------
Cash used in financing activities........................................... (327) (50)
------ ------
Cash flows - investing activities
Capital expenditures.............................................................. (51) (23)
Other investments................................................................. (1) (2)
------ ------
Cash used in investing activities........................................... (52) (25)
------ ------
Cash provided by (used in) discontinued operations.................................. -- (1)
------ ------
Net change in cash and cash equivalents............................................. (2) --
Cash and cash equivalents - beginning balance....................................... 23 6
------ ------
Cash and cash equivalents - ending balance.......................................... $ 21 $ 6
====== ======
See Notes to Financial Statements.
4
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 21 $ 23
Accounts receivable................................................................... 947 1,164
Inventories at average cost.......................................................... 60 85
Margin deposits....................................................................... -- 231
Merchant energy trading assets........................................................ 621 1,412
Deferred income taxes................................................................. 23 29
Other current assets.................................................................. 70 96
----------- ------------
Total current assets............................................................... 1,742 3,040
Investments............................................................................ 40 43
Property, plant and equipment - net.................................................... 1,453 1,417
Goodwill............................................................................... 782 788
Regulatory assets...................................................................... 69 69
Merchant energy trading assets......................................................... 420 287
Deferred debits and other assets....................................................... 8 14
----------- ------------
Total assets....................................................................... $ 4,514 $ 5,658
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable banks.................................................................. $ -- $ 1
Accounts payable:
Parent and affiliates................................................................ 30 18
Trade................................................................................ 776 1,018
Merchant energy trading liabilities................................................... 636 1,396
Other current liabilities............................................................. 143 97
----------- ------------
Total current liabilities.......................................................... 1,585 2,530
Accumulated deferred income taxes and investment tax credits........................... 103 103
Merchant energy trading liabilities.................................................... 367 276
Other deferred credits and noncurrent liabilities...................................... 240 246
Advances from parent................................................................... 250 575
Long-term debt, less amounts due currently............................................. 756 757
TXU Gas Company obligated, mandatorily redeemable, preferred securities of subsidiary
trust holding solely junior subordinated debentures of TXU Gas Company................ 147 147
Contingencies (Note 5).................................................................
Shareholders' equity:
Preferred stock....................................................................... 75 75
----------- ------------
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000, Outstanding shares - 451,000........................ -- --
Paid in capital....................................................................... 1,012 1,013
Deficit............................................................................... (20) (64)
Accumulated other comprehensive loss.................................................. (1) --
----------- ------------
Total common stock equity............................................................. 991 949
----------- ------------
Total shareholders' equity........................................................... 1,066 1,024
----------- ------------
Total liabilities and shareholders' equity......................................... $ 4,514 $ 5,658
=========== ============
See Notes to Financial Statements.
5
TXU GAS COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
TXU Gas Company (TXU Gas) 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 merchant energy trading of natural gas and
electricity throughout the United States (US) and parts of Canada. TXU Gas is a
wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a
holding company that engages in the generation, purchase, transmission,
distribution and sale of electricity; the purchase, transmission, distribution
and sale of natural gas; and merchant energy trading, energy services,
telecommunications and other businesses in the US, Europe and Australia.
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 the new accounting standard discussed below, prepared
on the same basis as the audited financial statements included in its 2000 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 the 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 are stated in millions of US
dollars unless otherwise indicated.
Changes in Accounting Standards -- On January 1, 2001, TXU Gas adopted
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). All derivatives within TXU
Gas have been accounted for pursuant to SFAS No. 133 requirements. TXU Gas
enters into derivative transactions within its merchant energy trading
activities, which are accounted for on the mark-to-market accounting method.
These derivatives have been entered into with the objective of generating
profits on, or from exposure to, shifts or changes in market prices. TXU Gas
enters into derivative transactions to hedge market risks related to changes in
interest rates. TXU Gas has designated, documented and assessed those derivative
hedging relationships, which are cash-flow hedges that require TXU Gas to record
the derivative assets or liabilities at their fair value on its balance sheet
with an offset in other comprehensive income for the effective portion.
Ineffectiveness is recorded in earnings.
Interest Rate Risk Management -- TXU Gas enters into derivatives to manage
exposures to cash flow risk inherent in variable rate securities. TXU Gas uses
derivatives to convert a portion of its variable-rate debt to fixed rates. The
resulting cost of funds is lower than it would have been had fixed-rate
borrowings been issued directly. These derivatives are designated as cash-flow
hedges.
Energy Price Risk Management -- As a result of regulation, TXU Gas has
minimal exposure to energy price risk; therefore, its use of derivative
instruments is limited. TXU Gas' operations expose it to market risk related to
gas commodities. TXU Gas uses a combination of physical and financial contracts
including short- and long-term sale agreements and other contracts in managing
these risks.
6
TXU Gas formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as hedges to specific assets and liabilities on
the balance sheet or to specific firm commitments or forecasted transactions.
Amounts are removed from other comprehensive income as the underlying
transactions occur.
In accordance with the transition provisions of SFAS No. 133, TXU Gas
recorded, as of January 1, 2001, $2.4 million of derivatives as assets with a
cumulative effect of $1.6 million after-tax as an increase to other
comprehensive income to recognize the fair value of all derivatives effective as
cash-flow hedging instruments.
The terms of TXU Gas' derivatives match the terms of the underlying hedged
item. As a result, TXU Gas experienced no hedge ineffectiveness during the
period.
As of March 31, 2001, $.3 million of net losses included within the net
gains/losses on derivative instruments accumulated in other comprehensive income
are expected to be reported in earnings during the next twelve months.
Ongoing implementation issues being addressed by the Derivatives
Implementation Group (DIG) may affect the application of SFAS No. 133. In its
normal course of business, TXU Gas enters into commodity contracts that include
options to buy or sell certain volumes of the underlying commodity. TXU Gas uses
these contracts to provide some of their commodity requirements. TXU Gas
evaluated these contracts and determined that they qualified for the normal
purchases and sales exception provided by SFAS No. 133. In October 2000, the DIG
reached a tentative conclusion that option contracts do not qualify for such
exception. In April 2001, the Financial Accounting Standards Board approved this
tentative conclusion, and these contracts will be required to be accounted for
as derivatives commencing July 1, 2001. TXU Gas is evaluating the impact of this
decision.
There are a number of issues pending before the DIG that may have an impact
on the application of SFAS No. 133. TXU Gas is unable to predict the ultimate
outcome of these issues.
The effect on net income for the three months ended March 31, 2001 from
implementing SFAS No. 133 has not been significant. The majority of derivative
contracts are merchant energy trading derivatives and already were being marked-
to-market. The remaining derivatives identified are designated as, and are
effective as, cash flow hedges, with changes in the fair value of derivatives
reflected in other comprehensive income.
SFAS No. 140 -- Securitization Standard -- SFAS No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities",
is effective for TXU Gas for transfers on or after April 1, 2001. SFAS No. 140
replaces SFAS No. 125. SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires disclosures, but carries over most of SFAS No. 125's provisions without
reconsideration. TXU Gas does not expect SFAS No. 140 to have a material impact
on the sale of receivables program.
3. CAPITALIZATION
TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of TXU Gas (Trust
Securities) -- At March 31, 2001, 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 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, TXU Gas Capital I, and has
effectively issued a full and unconditional guarantee of the trust's securities.
At March 31, 2001, TXU Gas had two interest rate swap agreements with respect to
floating rate Trust Securities of TXU Gas Capital
7
I, with notional principal amounts of $100 million and $50 million,
respectively, that effectively fixed the rate at 6.629% and 6.444%,
respectively, per annum to July 1, 2003.
4. 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 $19.8
million in annualized revenue increases, exclusive of changes in gas costs, was
granted in 2000. During 2001, rate cases supporting $15.0 million in annualized
revenue increases have been filed in 178 cities.
5. CONTINGENCIES
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 which TXU Gas Distribution had paid municipal franchise fees
over a period of twenty-five years. This case is in the early stages of
discovery, and a decision on class certification has not yet been made. 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 (named in the litigation as ENSERCH) and TXU Energy Trading
Company, a wholly-owned subsidiary (TXU Energy Trading). The suit was removed to
federal court, however, a motion to remand the case back to Kansas State
District Court was granted on January 16, 2001, and the case is now pending in
Stevens County, Kansas. TXU Energy Trading has been dismissed from the suit.
Quinque and the other named plaintiffs seek 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. No class has been certified. 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 is unable
to estimate any possible loss or predict the outcome of this case, TXU Gas
believes these claims are without merit and intends 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, should not have a material
effect upon its financial position, results of operations or cash flows.
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) Merchant Energy Trading -- operations involving the purchase and sale
of natural gas and electricity and the provision of risk management services for
the energy industry throughout the US and parts of Canada; and
Other -- non-segment operations.
8
TXU Gas evaluates performance based on net income or loss. TXU Gas accounts
for intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
Three Months Ended
March 31,
------------------------
2001 2000
------ ------
Millions of Dollars
Operating revenues --
Gas pipeline and distribution............. $ 683 $ 327
Merchant energy trading................... 2,268 1,023
------ ------
Consolidated............................ $2,951 $1,350
====== ======
Affiliated revenues --
Gas pipeline and distribution............. $ 1 $ 5
Merchant energy trading................... 1 (1)
Eliminations.............................. (2) (4)
------ ------
Consolidated............................ $ -- $ --
====== ======
Net income (loss) --
Gas pipeline and distribution............. $ 44 $ 38
Merchant energy trading................... 5 (5)
Other..................................... (4) (7)
------ ------
Consolidated............................ $ 45 $ 26
====== ======
9
7. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts receivable -- At March 31, 2001 and December 31, 2000, accounts
receivable are stated net of uncollectible accounts of $19 million and $17
million, respectively.
Inventories by major category --
March 31,
2001 December 31,
(Unaudited) 2000
---------- ------------
Materials and supplies.......................... $ 5 $ 5
Gas stored underground.......................... 55 80
---------- ------------
Total inventories............................ $ 60 $ 85
========== ============
Property, plant and equipment --
March 31,
2001 December 31,
(Unaudited) 2000
---------- ------------
Gas distribution and pipeline................... $ 1,539 $ 1,510
Other........................................... 35 25
---------- ------------
Total.................................... 1,574 1,535
Less accumulated depreciation................... 220 205
---------- ------------
Net of accumulated depreciation.......... 1,354 1,330
Construction work in progress................... 99 87
---------- ------------
Net property, plant and equipment........ $ 1,453 $ 1,417
========== ============
Goodwill -- At March 31, 2001 and December 31, 2000, goodwill is stated net
of accumulated amortization of $78 million and $72 million, respectively.
Credit Risk -- Credit risk relates to the risk of loss that TXU Gas would
incur as a result of nonperformance by counterparties. TXU Gas maintains credit
policies with regard to its counterparties that management believes
significantly minimize overall credit risk. These policies include an evaluation
of potential counterparties' financial condition (including credit rating),
guarantees and collateral requirements and the use of standardized agreements
that allow for the netting of positive and negative exposures associated with a
single counterparty.
California -- The State of California continues to work through its
transition to deregulation in an environment of insufficient energy supply
compounded by volatile natural gas prices. This situation has financially
distressed California utilities. TXU Gas has essentially no exposure to the
California Independent System Operator or the regulated utilities. However, due
to the uncertainties surrounding the California power situation, management
cannot predict the effects that the California situation on merchant energy
trading counterparties, legislation and the capital markets.
10
Concentration of Credit Risk -- During the three months ended March 31,
2001, TXU Gas' merchant energy trading activity grew substantially. Systems and
procedures have been implemented to continually monitor the counterparty risk
exposure throughout its trading region. Price and credit risk are evaluated
daily within the established trading policies and limits established.
TXU Gas' gross exposure to credit risk (before any netting agreements or
reserves) as of March 31, 2001 was $2,007 million.
Concentrations of credit risk have the potential to affect TXU Gas' overall
exposure to credit risk, either positively or negatively, in that the customer
base and counterparties may be similarly affected by changes in economic,
regulatory, industry, weather or other conditions.
One customer's exposure to TXU Gas represented 5% of the gross fair value
of TXU Gas' accounts receivable, merchant energy trading assets and derivative
assets at March 31, 2001. TXU Gas' counterparties are primarily major energy
companies and financial institutions that are considered to be of investment
grade, determined using publicly available information including a Standard &
Poor's rating of at least BBB-. The risk of loss to TXU Gas arising from non-
performance by these counterparties is considered unlikely.
Based on TXU Gas' policies, its exposures and its credit and other
reserves, TXU Gas does not anticipate a materially adverse effect on its
financial position or results of operations as a result of nonperformance by a
counterparty.
Sale of Receivables - TXU Gas continually sells customer accounts
receivable to a wholly-owned bankruptcy-remote subsidiary, which sells undivided
interests in these accounts receivable to financial institutions. At March 31,
2001, $100 million of accounts receivable had been sold.
11
INDEPENDENT ACCOUNTANTS' REPORT
TXU Gas Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Gas Company and subsidiaries (TXU Gas) as of March 31, 2001, and the related
condensed statements of consolidated income, comprehensive income and cash flows
for the three-month periods ended March 31, 2001 and 2000. 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, 2000, and the related statements of consolidated
operations, comprehensive loss, cash flows and shareholders' equity for the year
then ended (not presented herein); and in our report dated February 1, 2001, 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, 2000, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 11, 2001
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Although the price of natural gas has increased significantly since the
first quarter of 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 March 31, 2001
- ---------------------------------
For the three months ended March 31, 2001, TXU Gas Company (TXU Gas) had
net income of $45 million compared with net income of $26 million for the three
months ended March 31, 2000. The 73% increase in net income was primarily due to
improved trading margins in the Merchant Energy Trading segment, as well as the
rate relief granted and increased gas volumes transported and distributed in the
Gas Pipeline and Distribution segment due to colder weather.
Operating revenues for the first quarter of 2001 increased by $1,601
million over the same period of 2000 due to an increase of $1,245 million in
Merchant Energy Trading segment revenues and an increase of $356 million in Gas
Pipeline and Distribution segment revenues. Energy purchased for resale
increased by $1,223 million for the 2001 period for the Merchant Energy Trading
segment and by $347 million for the Gas Pipeline and Distribution segment.
Margin for the first three months of 2001 was $28 million higher than the prior-
year period reflecting, an improvement of $24 million for the Merchant Energy
Trading segment and $5 million for the Gas Pipeline and Distribution segment. A
decrease of $6 million in operation and maintenance expense from the 2000 to the
2001 period was primarily due to the gas processing costs in the first quarter
of 2000 exceeding increased gas distribution and trading operation costs in the
2001 quarter. Taxes other than income increased by $8 million in the 2001
quarter over the 2000 quarter due to increased state and local gross receipts
taxes.
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
March 31,
------------------
2001 2000
----- -----
Gas distribution:
Sales volumes (billion cubic feet - Bcf)......... 74 49
Margin (millions)................................ $ 152 $ 122
Pipeline transportation:
Transportation volumes (Bcf)..................... 158 141
Revenues (millions).............................. $ 38 $ 35
Heating degree days (% of normal).................. 109% 63%
13
For the three months ended March 31, 2001, the Gas Pipeline and
Distribution segment had net income of $44 million compared with net income of
$38 million for the three months ended March 31, 2000. The 16% increase in net
income was primarily due to the rate relief granted for gas distribution
operations and increased gas volumes transported and distributed due to the
colder weather experienced in the 2001 period. Gas distribution margins improved
by $30 million in the first quarter of 2001 over the 2000 period primarily due
to rate relief granted and increased volumes distributed. Gas pipeline margins
improved by $6 million from the 2000 to the 2001 period due to increased volumes
transported, and combined with the increased gas distribution margins, more than
offset the margin provided in the prior period from the gas processing
operations sold in May 2000. Operation and maintenance expense decreased by $11
million for the first quarter of 2001 compared to the first quarter of 2000. Gas
processing costs in the 2000 quarter were greater than increased gas
distribution expenses in the 2001 quarter. Taxes other than income increased by
$6 million for the 2001 period over the 2000 period primarily due to an increase
in state and local gross receipts taxes.
Merchant Energy Trading
- -----------------------
Segment Highlights
Three Months Ended
March 31,
------------------
2001 2000
------ ------
Trading and marketing volumes:
Gas (Bcf)......................................... 272 320
Electric (gigawatt-hours-GWh)..................... 5,359 3,704
The Merchant Energy Trading segment had net income of $5 million for the
three months ended March 31, 2001 compared with a net loss of $5 million for the
three months ended March 31, 2000. Improved margin for the segment more than
offset increased operation and maintenance expense and higher interest costs for
the 2001 period compared to the 2000 period. Trading margin for the segment
increased by $19 million, and retail energy services margin increased by $5
million for the first quarter of 2001 over the 2000 period. Operation and
maintenance expense increased by $6 million from the 2000 period to the 2001
period primarily due to the costs to support the growth in the trading
operation. Interest expense was $6 million higher in the first quarter of 2001
compared to the 2000 period due to costs to fund expanded infrastructure and
trading operations.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flows provided by operating activities before changes in operating
assets and liabilities for the three months ended March 31, 2001 were $76
million compared with $52 million for the same period last year. Changes in
operating assets and liabilities provided $301 million for the first three
months of 2001 compared to $24 million for the first three months of 2000. TXU
Energy Trading Company changed its practice to primarily provide letters of
credit rather than cash for its margin requirements. Such change yielded a
return in the first quarter of 2001 of $270 million of cash for previously
posted over-the-counter margin requirements.
Cash flows of $327 million were used in financing activities in the first
three months of 2001 compared with cash flows used of $50 million for the first
three months of 2000. A total of $325 million in advances from TXU Corp. was
repaid in the first quarter of 2001.
Cash flows used in investing activities required $52 million in the first
quarter of 2001 compared with cash flows used in investing activities of $25
million in the first quarter of 2000. Capital expenditures were $51 million and
$23 million for the first three months of 2001 and 2000, respectively.
CREDIT RISK
- -----------
See Note 7 to Financial Statements for information on credit risk.
14
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 2000 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.
CHANGES IN ACCOUNTING STANDARDS
Changes in Accounting Standards -- See Note 2 to Financial Statements for
discussion of changes in accounting standards.
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' 2000 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' 2000 Form 10-K and is, therefore, not presented
herein.
15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 (named in the litigation as ENSERCH) and TXU Energy Trading
Company, a wholly-owned subsidiary (TXU Energy Trading). The suit was removed to
federal court, however, a motion to remand the case back to Kansas State
District Court was granted on January 16, 2001, and the case is now pending in
Stevens County, Kansas. TXU Energy Trading has been dismissed from the suit.
Quinque and the other named plaintiffs seek 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. No class has been certified. 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 is unable
to estimate any possible loss or predict the outcome of this case, TXU Gas
believes these claims are without merit and intends to vigorously defend this
suit.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 Letter from independent accountants as to unaudited interim financial
information
99 Condensed Statements of Consolidated Income - Twelve Months Ended
March 31, 2001 and 2000
(b) Reports on Form 8-K filed since December 31, 2000:
None
16
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: May 11, 2001
17