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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
-- OR--
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-3183
TXU Gas Company
A Texas Corporation I.R.S. Employer Identification
No. 75-0399066
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common Stock outstanding at May 9, 2002: 451,000 shares, par value $0.01 per
share.
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TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Statements of Consolidated Income--
Three Months Ended March 31, 2002 and 2001 ....................... 1
Condensed Statements of Consolidated Comprehensive Income--
Three Months Ended March 31, 2002 and 2001 ....................... 2
Condensed Statements of Consolidated Cash Flows--
Three Months Ended March 31, 2002 and 2001 ....................... 3
Condensed Consolidated Balance Sheets--
March 31, 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
March 31,
-----------------------
2002 2001
------- -------
Millions of Dollars
Operating revenues ............................................................. $ 344 $ 684
------- -------
Operating expenses
Gas purchased for resale .................................................... 181 495
Operation and maintenance ................................................... 62 67
Depreciation and other amortization ......................................... 15 15
Goodwill amortization ....................................................... -- 3
Taxes other than income ..................................................... 19 22
------- -------
Total operating expenses .................................................. 277 602
------- -------
Operating income ............................................................... 67 82
Other income (deductions) - net ................................................ (2) 1
------- -------
Income from continuing operations before interest, other
charges and income taxes .................................................... 65 83
Interest income ................................................................ -- 3
Interest expense and other charges ............................................. 18 18
------- -------
Income from continuing operations before income taxes .......................... 47 68
Income tax expense ............................................................. 16 25
------- -------
Income from continuing operations .............................................. 31 43
Income from discontinued operations, net of tax ................................ -- 2
------- -------
Net income ..................................................................... 31 45
Preferred stock dividends ...................................................... 1 1
------- -------
Net income applicable to common stock .......................................... $ 30 $ 44
======= =======
1
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
------- -------
Millions of Dollars
Income from continuing operations .............................................. $ 31 $ 43
------- -------
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 ................... -- 2
Net change in fair value of derivatives .................................. 1 (3)
------- -------
Total .................................................................. 1 (1)
------- -------
Comprehensive income (loss) from continuing operations ......................... 32 42
------- -------
Income from discontinued operations, net of tax ................................ -- 2
------- -------
Comprehensive Income ........................................................... $ 32 $ 44
======= =======
See Notes to Financial Statements.
2
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
------ ------
Millions of Dollars
Cash flows - operating activities
Income from continuing operations .......................................... $ 31 $ 43
Adjustments to reconcile income from continuing operations
to cash provided by operating activities:
Depreciation and amortization ....................................... 19 20
Deferred income taxes - net ......................................... 4 2
Changes in operating assets and liabilities ......................... 117 66
------ ------
Cash provided by operating activities ............................ 171 131
------ ------
Cash flows - financing activities
Parent-advances ............................................................ (143) (90)
Cash dividends paid ........................................................ (1) (1)
------ ------
Cash used in financing activities ................................ (144) (91)
------ ------
Cash flows - investing activities
Capital expenditures ....................................................... (25) (37)
Other investments .......................................................... -- (1)
------ ------
Cash used in investing activities ................................ (25) (38)
------ ------
Cash used in discontinued operations ........................................... (2) (2)
------ ------
Net change in cash and cash equivalents ........................................ -- --
Cash and cash equivalents - beginning balance .................................. 3 6
------ ------
Cash and cash equivalents - ending balance ..................................... $ 3 $ 6
====== ======
See Notes to Financial Statements.
3
TXU GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
Millions of Dollars
ASSETS
Current assets:
Cash and cash equivalents .......................................................... $ 3 $ 3
Accounts receivable ................................................................ 77 127
Inventories-at average cost ........................................................ 83 116
Other current assets ............................................................... 58 85
-------- -------
Total current assets .......................................................... 221 331
Assets-discontinued operations (Note 3) ............................................... -- 2,314
Investments-other ..................................................................... 35 39
Property, plant and equipment-net ..................................................... 1,494 1,485
Goodwill .............................................................................. 305 305
Regulatory assets ..................................................................... 80 79
Deferred debits and other assets ...................................................... 15 17
-------- -------
Total assets .................................................................. $ 2,150 $ 4,570
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Advances from parent. .............................................................. $ 101 $ 244
Long-term debt due currently ....................................................... 325 200
Accounts payable:
Parent and affiliates ........................................................... 3 10
Trade ........................................................................... 79 75
Taxes accrued ...................................................................... 18 21
Other current liabilities .......................................................... 82 81
-------- -------
Total current liabilities ..................................................... 608 631
Liabilities-discontinued operations (Note 3) .......................................... -- 1,753
Accumulated deferred income taxes and investment tax credits .......................... 194 191
Derivative liabilities ................................................................ 5 6
Other deferred credits and noncurrent liabilities ..................................... 238 228
Long-term debt, less amounts due currently ............................................ 428 554
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) ......................................................... 530 1,060
-------- -------
Total liabilities and shareholders' equity .................................... $ 2,150 $ 4,570
======== =======
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 energy trading of natural gas and electricity
throughout the United States (US) and parts of Canada and retail sales of
natural gas to large commercial/industrial customers. 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, retail energy marketing, 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 restructures 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 energy
trading business and the unregulated commercial/industrial retail natural gas
operations of TXU Gas, among other operations of TXU Corp.
The former energy trading business and unregulated
commercial/industrial retail gas 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).
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 energy trading business and
the unregulated commercial/industrial retail gas operations 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 March 31, 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 allocation of goodwill mentioned above and 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 US 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, "Goodwill and Other
Intangible Assets", became effective for TXU Gas beginning 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 (approximately $9 million annually) ceased effective January 1, 2002.
In addition, SFAS No. 142 requires TXU Gas to complete 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. Any goodwill
impairment loss during the transition period will be recognized as the
cumulative effect of a change in accounting principle. Subsequent impairments,
if any, will be recorded in operations. As part of its effort to implement SFAS
142, TXU Gas is in the process of completing the transitional impairment test.
Based on the information gathered to date, TXU Gas does not anticipate an
impairment of its goodwill.
The table below reflects what reported income from continuing
operations, income from discontinued operations, and net income would have been
in the 2001 period exclusive of amortization expense recognized in that period
related to goodwill, compared to the 2002 period.
Three Months Ended
March 31,
(Unaudited)
-------------------
2002 2001
---- ----
Millions of Dollars
Reported income from continuing operations ..................................... $ 31 $ 43
Add back: goodwill amortization ................................................ - 3
---- ----
Adjusted income from continuing operations ..................................... $ 31 $ 46
==== ====
Reported income from discontinued operations, net of tax ....................... $ -- $ 2
Add back: goodwill amortization ................................................ -- 3
---- ----
Adjusted income from discontinued operations, net of tax ....................... $ -- $ 5
==== ====
Reported net income ............................................................ $ 31 $ 45
Add back: goodwill amortization ................................................ -- 6
---- ----
Adjusted net income ............................................................ $ 31 $ 51
==== ====
6
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. The offset to any liability recorded is added to the
previously recorded asset, and the additional amount is depreciated over the
same period as the long-lived asset for which the retirement obligation is
established. 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 is applicable to fiscal years beginning after May 15, 2002. One
of the provisions of this technical 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, which does not meet the
criteria of an extraordinary item as defined by APB Opinion 30, shall be
reclassified.
For accounting standards not yet adopted or fully implemented, TXU Gas
is evaluating the potential impact on its financial position and results of
operations.
7
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 energy trading and unregulated commercial/industrial
retail gas supply businesses was transferred to TXU Energy.
Accordingly, these operations, which comprised the 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 the discontinued energy trading segment were as
follows:
Three Months
Ended
March 31,
2001
(Unaudited)
-----------
Revenues .......................................... $ 2,270
Operating income .................................. $ 7
Income after-tax from discontinued operations ..... $ 2
Cash provided by operating activities ............. $ 248
Cash used by financing activities ................. (236)
Cash used by investing activities ................. (14)
-------
Cash used in discontinued operations ......... $ (2)
=======
The assets and liabilities of the discontinued energy trading segment
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
Energy trading assets ................................. 743
Other ................................................. 58
Long-term assets
Goodwill (net of accumulated amortization of $56) ..... 468
Energy trading assets ................................. 366
Other ................................................. 123
-------
Total Assets ..................................... 2,314
-------
Current liabilities
Accounts payable ...................................... (426)
Accounts payable to affiliated companies ............. (41)
Energy trading liabilities ............................ (602)
Other current liabilities ............................. (30)
Non-current liabilities
Energy trading liabilities ............................ (229)
Advances from TXU Corp. ............................... (387)
Other ................................................. (38)
-------
Total Liabilities ................................ (1,753)
-------
Net investment ........................................... $ 561
=======
8
Certain reclassifications to balances related to the discontinued
energy trading segment, primarily the allocation of goodwill (Note 1), have been
incorporated. See discussion in Note 3 of TXU Gas' Form 2001 10-K.
4. CAPITALIZATION
TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of TXU Gas (Trust
Securities) -- At March 31, 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 March 31, 2002, 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, that
effectively fixed the rate at 6.629% and 6.444%, respectively, per annum to July
1, 2003.
5. SHAREHOLDERS' EQUITY
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
Millions of Dollars
Preferred stock ...................................................... $ 75 $ 75
-------- -------
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000, Outstanding shares - 451,000 ..... -- --
Paid in capital ...................................................... 463 1,025
Deficit .............................................................. (4) (35)
Accumulated other comprehensive income ............................... (4) (5)
-------- -------
Total common stock equity ......................................... 455 985
-------- -------
Total shareholders' equity ...................................... $ 530 $ 1,060
======== =======
The former energy trading and unregulated commercial/industrial retail
gas operations have been transferred to TXU Energy (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. On March 21, 2002, TXU Gas Distribution filed a rate case in
36 cities in its Northwest Region seeking $2.5 million in annualized revenue
increases. 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, but cannot
predict the outcome of these proceedings.
TXU Gas Distribution has filed a 36 month gas cost prudence review
covering the period of November 1, 1997 through October 30, 2000 with the
Railroad Commission of Texas (RRC). This filing, made on July 16, 2001, was
assigned GUD 9233. 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 an asset.
9
TXU Gas Distribution has filed a city gate rate cost reconciliation
covering the period of July 1, 2000 to June 30, 2001 with the RRC. This filing,
made on August 31, 2001, was assigned GUD 9246. 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
tentative settlement, which reserves prudence issues for GUD 9233. The
settlement proposes to accept the filing as amended.
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
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, should not have a material
effect on their financial position, results of operations or cash flows.
10
8. SUPPLEMENTARY FINANCIAL INFORMATION
Accounts receivable -- At March 31, 2002 and December 31, 2001,
accounts receivable are stated net of uncollectible accounts of $3 million and
$5 million, respectively.
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 March 31, 2002, subsidiaries of
TXU Gas had sold $110 million face amount of receivables to TXU Receivables
Company under the program in exchange for cash of $56 million and $54 million in
subordinated notes, with $0.5 million representing cost of the program during
the three months ended March 31, 2002. Annualized cost of the program
approximated 3.7% of the cash proceeds from the receivables sales. The
subordinated notes receivable from TXU Receivables Company are included in
accounts receivable in the consolidated balance sheet.
Inventories by major category--
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
Materials and supplies ......................................................... $ 7 $ 6
Gas stored underground ......................................................... 76 110
------- -------
Total inventories ......................................................... $ 83 $ 116
======= =======
Property, plant and equipment--
March 31,
2002 December 31,
(Unaudited) 2001
----------- ------------
Gas distribution and pipeline .................................................. $ 1,703 $ 1,678
Other .......................................................................... 27 26
------- -------
Total .................................................................. 1,730 1,704
Less accumulated depreciation .................................................. 281 265
------- -------
Net of accumulated depreciation ........................................ 1,449 1,439
Construction work in progress .................................................. 45 46
------- -------
Net property, plant and equipment ...................................... $ 1,494 $ 1,485
======= =======
11
Goodwill -- At March 31, 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 March 31, 2002, it is expected that $2.5 million of after-tax net
losses now included in the net gains/losses from derivative instruments that are
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 March 31, 2002, and the related
condensed statements of consolidated income, comprehensive income, and cash
flows for the three-month periods ended March 31, 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
May 9, 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 energy trading business and the unregulated commercial/industrial retail gas
operations 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 March 31, 2002 Compared to 2001
- --------------------------------------------------
Operating revenues for TXU Gas decreased by $340 million, or 50%, to
$344 million in 2002. The decrease reflects the reduced cost of gas and the
reduced volume of gas sold, generally driven by milder winter weather and
reduced heating demand relative to 2001, which also impacts transport revenues.
Gas sales volumes declined 11%.
Gross margin (operating revenues less gas purchased for resale)
decreased by $26 million, or 14%, to $163 million in 2002. The decrease was
driven by reduced revenue related to taxes billed to customers (such taxes
payable are reported in operating expenses) and the effect of reduced sales
volumes, partially offset by rate increases.
Operation and maintenance expense decreased by $5 million, or 7%, to
$62 million in 2002. The decrease primarily reflects reduced bad debt expense
associated with lower revenues.
Other operating expenses decreased $6 million, or 15%, to $34 million
in 2002. The decrease reflects the cessation of goodwill amortization pursuant
to the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (see Note 2) and lower revenue related
to taxes on lower revenues.
Income from continuing operations decreased by $12 million, or 28%, to
$31 million in 2002, driven by the decrease in gross margin that was only
partially offset by the decrease in operating expenses. Interest income
decreased $3 million to zero in 2002, as interest income related to a portion of
under-recovered gas costs has been waived as part of a tentative settlement (see
Note 6). The effective tax rate was 34.0% in 2002 and 36.8% in 2001, with the
difference due to the cessation of nondeductible goodwill amortization.
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FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by operating activities for 2002 was $171 million
compared with $131 million for the same period last year. This change was caused
primarily by the effects of milder winter weather and lower natural gas costs on
working capital relative to 2001.
Cash of $144 million was used by financing activities in 2002 compared
with $91 million in 2001. A total of $143 million of advances from TXU Corp.
were repaid in 2002 compared to $90 million in 2001, primarily the result of
increased available cash provided by operations and decreased investing
activity.
Cash of $25 million was used in investing activities in 2002 compared
with $38 million used in the prior year period. Current year capital
expenditures decreased due to system reliability improvements in 2001.
US Credit Agreements described in Note 4 of TXU Gas' Annual Report on
Form 10-K for 2001 were amended in February 2002 to remove TXU Gas as a
borrower. In May 2002, TXU Corp. entered into a 3-year $500 million credit
facility that supports TXU Corp.'s commercial paper program. 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 as needed, including the possible future issuance and sale of
up to an aggregate of $400 million of debt securities and/or preferred
securities of subsidiary trusts, which are currently registered with the
Securities and Exchange Commission for issuance pursuant to Rule 415 under the
Securities Act of 1933.
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 discussion of changes in accounting standards.
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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; 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.
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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 Condensed Statements of Consolidated Income - Twelve Months Ended
March 31, 2002
(b) Reports on Form 8-K filed since December 31, 2001:
None
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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 14, 2002
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