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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------------------
TXU Gas Company
(formerly known as ENSERCH Corporation)
A Texas Corporation I.R.S. Employer Identificiation
Commission File Number 1-3183 No. 750399066
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
-------------------------
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock outstanding at August 11, 1999: 451,000 shares, par value $0.01
per share.
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<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Part I. Financial Information Page
----
Item 1. Financial Statements
TXU Gas Company and Subsidiaries
Condensed Statements of Consolidated Income -
Three, Six and Twelve Months Ended June 30, 1999 and 1998... 3
Condensed Statements of Consolidated Comprehensive Income -
Three, Six and Twelve Months Ended June 30, 1999 and 1998... 4
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1999 and 1998..................... 5
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998......................... 6
Notes to Condensed Consolidated Financial Statements........ 8
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.. 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................ 19
Signature.................................................................. 20
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Twelve Months Ended June 30,
----------------------------
1998
------------ -------------
Predecessor
------------
Period From Period From
Three Months Ended Six Months Ended Acquisition July 1, 1997
June 30, June 30, Date to Through
------------------ ---------------- June 30, Acquisition
1999 1998 1999 1998 1999 1998 Date
---- ---- ---- ---- ---- ----------- -----------
Millions of Dollars
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . . . . . . . $ 690 $ 873 $1,786 $1,893 $3,931 $3,170 $ 136
------ ------ ------ ------ ------ ------ -------
OPERATING EXPENSES
Gas and electricity purchased for resale. . . . . . 588 767 1,512 1,611 3,404 2,673 86
Operation and maintenance . . . . . . . . . . . . . 91 85 184 171 359 313 29
Depreciation and other amortization . . . . . . . . 17 15 32 29 59 50 5
Goodwill amortization . . . . . . . . . . . . . . . 5 5 11 10 21 18 -
Taxes other than income . . . . . . . . . . . . . . 19 16 36 39 64 63 4
------ ------ ------ ------ ------ ------ -------
Total operating expenses. . . . . . . . . . . . 720 888 1,775 1,860 3,907 3,117 124
------ ------ ------ ------ ------ ------ -------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . (30) (15) 11 33 24 53 12
OTHER INCOME (DEDUCTIONS) - NET . . . . . . . . . . . - 1 (1) 1 3 2 (18)
------ ------ ------ ------ ------ ------ -------
INCOME (LOSS) BEFORE INTEREST AND
INCOME TAXES . . . . . . . . . . . . . . . . . . (30) (14) 10 34 27 55 (6)
INTEREST INCOME . . . . . . . . . . . . . . . . . . . 1 - 1 - 1 - -
INTEREST AND OTHER CHARGES. . . . . . . . . . . . . . (18) (18) (38) (37) (77) (69) (6)
------ ------ ------ ------ ------ ------ ------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . (47) (32) (27) (3) (49) (14) (12)
INCOME TAX EXPENSE (BENEFIT). . . . . . . . . . . . . (14) (10) (6) 2 (11) - -
------ ------ ------ ------ ------ ------ ------
LOSS FROM CONTINUING OPERATIONS . . . . . . . . . . . (33) (22) (21) (5) (38) (14) (12)
INCOME FROM DISCONTINUED OPERATIONS . . . . . . . . . - - - - - - 3
------ ------ ------ ------ ------- ------ ------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . (33) (22) (21) (5) (38) (14) (9)
PREFERRED STOCK DIVIDENDS . . . . . . . . . . . . . . 1 1 2 2 4 7 1
------ ------ ------ ------ ------ ------ ------
NET LOSS AVAILABLE FOR COMMON STOCK . . . . . . . . . $ (34) $ (23) $ (23) $ (7) $ (42) $ (21) $ (10)
====== ====== ====== ====== ====== ====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Twelve Months Ended June 30,
----------------------------
1998
----------------------------
Predecessor
-----------
Period From Period From
Three Months Ended Six Months Ended Acquisition July 1, 1997
June 30, June 30, Date to Through
----------------- ------------------- June 30, Acquisition
1999 1998 1999 1998 1999 1998 Date
---- ---- ---- ---- ---- ---- ----
Millions of Dollars
<S> <C> <C> <C> <C> <C> <C> <C>
NET LOSS . . . . . . . . . . . . . . . . . . . . . $ (33) $ (22) $ (21) $ (5) $ (38) $ (14) $ (9)
------ ------ ----- ---- ----- ----- -----
OTHER COMPREHENSIVE INCOME (LOSS) -
Net change during period:
Foreign currency translation adjustments . . . . - - - - - - 1
Minimum pension liability adjustments. . . . . . - - - - (1) - -
------ ------ ----- ---- ----- ----- -----
Total . . . . . . . . . . . . . . . . . . . - - - - (1) - 1
------ ------ ----- ---- ----- ----- -----
COMPREHENSIVE LOSS . . . . . . . . . . . . . . . . $ (33) $ (22) $ (21) $ (5) $ (39) $ (14) $ (8)
====== ====== ===== ==== ===== ===== =====
</FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------
1999 1998
---- ----
Millions of Dollars
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21) $ (5)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 41
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 32
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293 240
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 10
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) 5
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (249) (163)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (35)
Other working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (24)
Energy marketing risk management assets and liabilities - net. . . . . . . . . . . . . (69) (25)
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (13)
------ -----
Cash (used in) provided by operating activities. . . . . . . . . . . . . . . . . . . (5) 63
------ -----
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 250
Common stock - parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 -
Retirements of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (91)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (100)
Change in notes payable:
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (4)
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (177) (51)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (3)
Debt financing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1)
------ -----
Cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . 75 -
------ -----
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71) (64)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4)
------ -----
Cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . (71) (68)
------ -----
CASH PROVIDED BY DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 7 1
------ -----
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (4)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE . . . . . . . . . . . . . . . . . . . . . . . - 12
------ ------
CASH AND CASH EQUIVALENTS - ENDING BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 8
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1999 December 31,
(Unaudited) 1998
---------- ------------
Millions of Dollars
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,284 $1,212
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 92
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,377 1,304
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 80
------ ------
Net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 1,265 1,224
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 71
------ ------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . 1,333 1,295
------ ------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 44
------ ------
GOODWILL (net of accumulated amortization: 1999 - $40; 1998 - $29). . . . . . . . . . . . . 818 829
------ ------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 -
Accounts receivable (net of allowance for uncollectible accounts:
1999 - $4; 1998 - $3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 553
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . . . . . . 844 832
Inventories - at average cost:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 103
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 43
------ ------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,559
------ ------
OTHER ASSETS
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . . . . . . 145 128
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 48
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 51
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10
------ ------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 237
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,698 $3,964
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
June 30,
1999 December 31,
(Unaudited) 1998
---------- ------------
Millions of Dollars
<S> <C> <C>
CAPITALIZATION
Common stock (par value - $.01 per share):
Authorized shares - 100,000,000
Outstanding shares: 1999 - 451,000 and 1998 - 201,000. . . . . . . . . . . . . . . . . $ - $ -
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,024 775
Retained deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (33)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1)
------ ------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969 741
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 75
TXU Gas Company obligated, mandatorily redeemable, preferred securities of
subsidiary trust holding solely junior subordinated debentures of
TXU Gas Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 146
Advances from parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 420
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . . . . . . 551 551
------ ------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,984 1,933
------ ------
CURRENT LIABILITIES
Notes payable - banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3
Long-term debt due currently. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 151
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 27
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 483
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . . . 772 838
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 40
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 91
------ ------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 1,633
------ ------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes and unamortized investment tax credits. . . . . . . . . 13 13
Pensions and other postretirement benefits. . . . . . . . . . . . . . . . . . . . . . . . 149 149
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . . . 119 93
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . . . . . . 133 143
------ ------
Total deferred credits and other noncurrent liabilities. . . . . . . . . . . . . . . 414 398
------ ------
COMMITMENTS AND CONTINGENCIES (Note 7)
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,698 $3,964
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
7
<PAGE>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND MERGERS
In May 1999, Texas Utilities Company, the parent of ENSERCH Corporation
(ENSERCH), adopted TXU Corp as its assumed name and began doing business as
TXU Corp (TXU). On June 14, 1999, ENSERCH's name was changed to TXU Gas
Company (TXU Gas), and the names of several of its subsidiaries were also
changed. TXU Gas is an integrated energy company focused on natural gas.
Substantially all of its business operations consist of the gathering,
processing, transmission and distribution of natural gas and the marketing of
natural gas and electricity.
TXU accounted for its acquisition of TXU Gas on August 5, 1997 as a
purchase business combination, and purchase accounting adjustments, including
goodwill, have been pushed down and are reflected in the financial statements
of TXU Gas and its subsidiaries for the period subsequent to August 5, 1997.
The financial statements of TXU Gas for the periods ended before August 5,
1997 were prepared using TXU Gas' historical basis of accounting and are
designated as "Predecessor". The comparability of the operating results for
the Predecessor and the periods encompassing push down accounting are affected
by the purchase accounting adjustments, including the amortization of goodwill
over a period of forty years.
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 the 1998 Annual Report on Form 10-K (1998 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 generally accepted accounting principles have been
omitted pursuant to 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, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
3. LINES OF CREDIT
At June 30, 1999, TXU, TXU Electric Company, (formerly Texas Utilities
Electric Company), a wholly-owned subsidiary of TXU (TXU Electric), and TXU
Gas had $2.5 billion of joint US dollar-denominated lines of credit under
revolving credit facility agreements (US Credit Agreements) with a group of
banking institutions. The US Credit Agreements have two facilities. Facility
A provides for short-term borrowings aggregating up to $1.1 billion
outstanding at any one time at variable interest rates and terminates February
25, 2000. Of this amount, $800 million can be used for working capital and
other general corporate purposes. Facility B provides for borrowings
aggregating up to $1.4 billion outstanding at any one time at variable
interest rates and terminates March 2, 2003. Borrowings under this facility
can be used for working capital and other general corporate purposes. The
combined borrowings of TXU, TXU Electric and TXU Gas under both facilities,
excluding amounts restricted to finance the acquisition of a non-US subsidiary
by TXU, are limited to an aggregate of $2.2 billion outstanding at any one
time. TXU Gas' borrowings under both facilities is limited to an aggregate
of $650 million outstanding at any one time. The facilities primarily support
8
<PAGE>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
commercial paper borrowings by TXU. At June 30, 1999, TXU Gas had no
borrowings outstanding under these lines.
4. CAPITALIZATION
TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of TXU Gas
(Trust Securities)-- At June 30, 1999, a statutory business trust, TXU Gas
Capital I (formerly ENSERCH Capital I), established as a financing subsidiary
of TXU Gas for the purpose of issuing trust securities and holding Junior
Subordinated Debentures of TXU Gas, had $150 million of floating rate trust
securities outstanding which have a liquidation preference of $1,000 per
security. 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, and 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.
Common Stock -- In February 1999, TXU purchased 250,000 shares of common
stock from TXU Gas for $250 million, and TXU Gas used the proceeds to repay
intercompany advances from TXU.
5. DERIVATIVE INSTRUMENTS
TXU Gas enters into derivative instruments to manage market risks related
to changes in interest rates and commodity prices. TXU Gas' participation in
derivative transactions, except for the energy marketing activities of TXU
Energy Trading Company (formerly Enserch Energy Services, Inc. or EES), have
been designated for hedging purposes and are not held or issued for trading
purposes.
Interest Rate Risk Management -- At June 30, 1999, TXU Gas had various
interest rate swaps in effect, the terms and notional amounts of which had not
changed from December 31, 1998.
6. REGULATION AND RATES
Gas Utilities Docket No. 8935 -- Lone Star Gas Company, doing business as
TXU Lone Star Gas, a division of TXU Gas, filed an application with the
Railroad Commission of Texas on February 25, 1999, to modify the gas cost
adjustment provision of the city gate rate tariff approved in November 1997.
The modification will allow for a more accurate recovery of the gas cost
approved for recovery from TXU Lone Star Gas residential and commercial
customers. Currently, cycle billing causes TXU Lone Star Gas to over- or
under-recover the allowed gas costs. A hearing is scheduled for late August
1999. TXU Lone Star Gas is unable to predict the outcome of these
proceedings.
Other -- TXU Lone Star Gas has an on-going program to identify distribution
systems in which its current rates are producing inadequate returns on its
investment and to seek rate relief from the municipalities served by those
deficient systems. TXU Lone Star Gas filed and completed fifteen such rate
cases since July 1998. Approved revenue increases totaled $5.6 million on an
annual basis. TXU Lone Star Gas currently has
9
<PAGE>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
rate cases pending in three distribution systems in which it is seeking
rate increases totaling $8.8 million on an annual basis. TXU Lone Star Gas
is unable to predict the outcome of the pending rate cases.
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings -- On October 30, 1995, a lawsuit was filed in the
Supreme Court of Western Australia by Woodside Petroleum Ltd. and its joint
venture partners against TXU Gas, a former subsidiary and others. Plaintiffs
seek damages of approximately $18 million from TXU Gas based on an indemnity
arrangement and approximately $208 million from the other defendants for
alleged breaches of contract and breaches of a trade practice act, all in
connection with the construction of an offshore gas and condensate drilling
production platform. TXU Gas has agreed to indemnify the current owner
of the former subsidiary pursuant to the provisions in the prior sales
agreement. Following a preliminary hearing, the Court, on December 4, 1997,
delivered an opinion in favor of TXU Gas, the former subsidiary and the other
defendants finding that the defendants are other assureds under certain
insurance policies owned by the plaintiffs and that the plaintiffs and their
insurers are precluded from bringing a subrogated claim against the
defendants. On April 29, 1998, the court entered a final judgment. The
plaintiff's lawsuit was dismissed as well as the counterclaims of the
defendants. The plaintiffs served their notice of appeal on May 19, 1998.
The appeal was heard by the Full Court of the Supreme Court of Western
Australia beginning February 1, 1999. In March 1999, the Full Court of the
Supreme Court entered a judgment dismissing the plaintiffs' appeal. The final
order has now been submitted to the court.
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, formerly Enserch Exploration, Inc. (EEX), TXU, 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 and Exchange Act
of 1934 (Exchange Act). 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 & Naughton, 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 in Cause No.
3-98-CV-1808-G consolidating the Gracy Fund and the Thorne suits (the
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 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 of 1933 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.
No amount of damages has been specified in the Consolidated Action.
Defendants filed a joint motion to dismiss in March 1999, and discovery has
been stayed pending a ruling on the motion to dismiss. TXU Gas is continuing
to evaluate these claims and is unable at this time to predict the outcome of
this proceeding, but intends to vigorously defend this suit.
General -- TXU Gas is involved in various legal and administrative
proceedings and has other contingencies, which, in the opinion of management,
should not have a material effect upon TXU Gas' financial position, results of
operations or cash flows.
10
<PAGE>
<TABLE>
<CAPTION>
TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION
Twelve Months Ended June 30,
----------------------------
1998
------------------------
Predecessor
-----------
Period From Period From
Three Months Ended Six Months Ended Acquisition July 1, 1997
June 30, June 30, Date to Through
----------------- ---------------- June 30, Acquisition
1999 1998 1999 1998 1999 1998 Date
---- ---- ---- ---- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trade Revenues -
US Gas Pipeline and Distribution. . $145 $157 $ 438 $ 492 $ 775 $ 909 $ 58
US Energy Marketing . . . . . . . . 542 715 1,342 1,399 3,141 2,258 63
Other . . . . . . . . . . . . . . . 3 1 6 2 15 3 15
---- ---- ------ ------ ------ ------ ----
Consolidated. . . . . . . . . $690 $873 $1,786 $1,893 $3,931 $3,170 $136
==== ==== ====== ====== ====== ====== ====
Affiliated Revenues -
US Gas Pipeline and Distribution. . $ 5 $ 7 $ 10 $ 14 $ 21 $ 24 $ 2
US Energy Marketing . . . . . . . . - - - - 1 - -
Other . . . . . . . . . . . . . . . 1 - 1 - - 1 -
Eliminations. . . . . . . . . . . . (6) (7) (11) (14) (22) (25) (2)
---- ---- ------ ------ ------ ------ ----
Consolidated. . . . . . . . . $ - $ - $ - $ - $ - $ - $ -
==== ==== ====== ====== ====== ====== ====
Net Income (Loss) -
US Gas Pipeline and Distribution. . $(17) $(18) $ 9 $ 7 $ (8) $ 15 $ 4
US Energy Marketing . . . . . . . . (8) - (15) (1) (8) (13) (4)
Other . . . . . . . . . . . . . . . (8) (4) (15) (11) (22) (16) (12)
Discontinued Operations . . . . . . - - - - - - 3
---- ---- ------ ------ ------ ------ ----
Consolidated. . . . . . . . . $(33) $(22) $ (21) $ (5) $ (38) $ (14) $ (9)
==== ==== ====== ====== ====== ====== ====
</TABLE>
11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
TXU Gas Company:
We have reviewed the accompanying condensed consolidated balance sheet of TXU
Gas Company (formerly ENSERCH Corporation) and subsidiaries (TXU Gas) as of
June 30, 1999, and the related condensed statements of consolidated income and
of comprehensive income for the three-month and six-month periods ended June
30, 1999 and 1998, the twelve-month period ended June 30, 1999, and the period
from the acquisition date (August 5, 1997) through June 30, 1998, and the
condensed statements of consolidated cash flows for the six-month periods
ended June 30, 1999 and 1998, and for the Predecessor Company operations, the
condensed statements of consolidated income and of comprehensive income for
the period from July 1, 1997 through the acquisition date. 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 review
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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of TXU Gas as of December 31, 1998,
and the related statements of consolidated income, comprehensive income, cash
flows and common stock equity for the year then ended (not presented herein);
and in our report dated March 5, 1999, 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, 1998, 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
August 12, 1999
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NAME CHANGE
In May 1999, Texas Utilities Company, the parent of ENSERCH
Corporation (ENSERCH), adopted TXU Corp as its assumed name and began doing
business as TXU Corp (TXU). On June 14, 1999, ENSERCH's name was changed to
TXU Gas Company (TXU Gas), and the names of several of its subsidiaries were
also changed.
MERGER WITH TXU AND DISPOSITION
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions involving the former Texas Utilities Company, which became Texas
Energy Industries, Inc. and is now known as TXU Energy Industries Company, and
TXU Gas were completed. All of the common stock of TXU Gas was converted into
common stock of a new holding company named Texas Utilities Company, now doing
business as TXU Corp, and TXU Gas became a wholly-owned subsidiary of TXU.
Immediately prior to TXU Gas' merger with TXU, Enserch Exploration, Inc. (EEX)
and Lone Star Energy Plant Operations, Inc. (LSEPO), former subsidiaries of
TXU Gas, were merged to form a new company (New EEX), and TXU Gas distributed
to its common shareholders its ownership interest in these businesses.
TXU accounted for its acquisition of TXU Gas as a purchase business
combination, and purchase accounting adjustments, including goodwill, have
been pushed down and are reflected in the financial statements of TXU Gas and
its subsidiaries for the period subsequent to August 5, 1997. The financial
statements of TXU Gas for the periods ended before August 5, 1997 were
prepared using TXU Gas' historical basis of accounting and are designated as
"Predecessor". The comparability of the operating results for the Predecessor
and the periods encompassing push down accounting are affected by the purchase
accounting adjustments, including the amortization of goodwill over a period
of forty years.
For purposes of the discussion of operating results provided herein, the
financial information of the Predecessor for the 1997 periods prior to the
Merger Date has been combined with the post-merger financial information. The
continuing business operations of TXU Gas were not significantly changed as a
result of the merger. Post-merger and pre-merger operating results, except as
noted, are comparable.
RESULTS OF OPERATIONS
For the three- and six-month periods ended June 30, 1999, TXU Gas had
losses from continuing operations of $33 million and $21 million,
respectively, compared with losses of $22 million and $5 million,
respectively, for the same periods of 1998. Results for the 1999 periods were
impacted by mild winter weather and lower margins on energy marketing
activities.
For the twelve-month periods of 1999 and 1998, TXU Gas had losses from
continuing operations of $38 million and $26 million, respectively. Results
for the 1998 twelve-month period were impacted by pretax merger-related
expenses of $19 million included in other income (deductions)-net.
Consolidated revenues for the three and six months ended June 30, 1999
decreased 21%, and 6%, respectively, compared with the same periods for 1998.
The lower revenues were primarily due to decreased natural gas sales resulting
from the impact of milder winter weather and reduced energy marketing
activities. Gas distribution sales volumes decreased from 19 Bcf for the
three months ended June 30, 1998 to 17 Bcf for the three months ended June 30,
1999. For the six months ended June 30, 1998 and 1999, gas distribution
volumes were 79 Bcf and 69 Bcf, respectively. Gas and electricity purchased
for resale for the three- and six-month periods ended June 30, 1999 decreased
23% and 6%, respectively, over the 1998 periods also due to lower demand as a
result of milder winter and spring weather.
13
<PAGE>
For the twelve-month period ended June 30, 1999, consolidated revenues
increased 19% over the same period in 1998. The higher revenues were
primarily due to increased energy marketing activities, particularly electric
trading during the hotter-than-normal summer of 1998. Gas and electricity
purchased for resale for the twelve months ended June 30, 1999 increased 23%
over the 1998 period, also due to the significant increase in energy marketing
activities.
The US Gas Pipeline and Distribution segment had a loss of $17 million
for the second quarter of 1999 versus a loss of $18 million in the 1998 second
quarter. For the six months ended June 30, 1999 and 1998, the segment
recorded net income of $9 million and $7 million, respectively. Operating
revenues for the three- and six-month periods in 1999 were $14 million and $58
million lower than the same periods in 1998, as much milder heating weather
drove down both demand and prices. Despite this, net results were improved
over the same periods in 1998, primarily due to higher margins resulting from
the lower cost of gas sold to customers and to lower gross receipts taxes,
partially offset by increased operation and maintenance expenses.
For the quarter ended June 30, 1999, the US Energy Marketing segment had
a net loss of $8 million compared with approximately breakeven results in the
second quarter of 1998. While settled volumes for the six months ended June
30, 1999 were up approximately 20% compared with the same period in 1998, net
results were down $14 million compared with the prior year, primarily due to
increased market competition and the continued maturation of the wholesale gas
industry that has reduced trading margins, the mild winter weather in the
first quarter of 1999 and higher operating expenses due to increased
infrastructure costs as a result of business growth.
The Company's effective income tax rate in all periods since acquisition
differs from the statutory rate primarily due to amortization of goodwill,
which is not deductible for tax purposes.
FINANCIAL CONDITION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Gas' 1998 Annual Report on Form 10-K (1998 Form 10-K).
Results for the three- and six-month periods presented herein are not
necessarily indicative of expectations for a full year's operations because of
seasonal and other factors, including variations in maintenance and other
operating expense patterns. No significant changes or events which might
affect the financial condition of TXU Gas have occurred subsequent to year-end
other than as disclosed in other reports of TXU Gas or included herein.
Cash flows provided by operating activities before changes in
operating assets and liabilities for the six months ended June 30, 1999 were
$35 million compared with $68 million in the same period of 1998. Changes in
operating assets and liabilities for the six months ended June 30, 1999 and
1998 used cash of $40 million and $5 million, respectively. Discontinued
operations provided cash of $7 million in the six months of 1999 compared with
$1 million in the 1998 period.
Cash flows used in investing activities for the six-month period ended
June 30, 1999 were $71 million versus $68 million in the comparable period of
1998. Capital expenditures for the 1999 six months were $7 million higher
than the comparable period of 1998.
The capitalization ratios of TXU Gas as of June 30, 1999 consisted of
approximately 40% long-term debt (including advances from parent), 4%
preferred stock, 7% trust securities and 49% common stock equity.
14
<PAGE>
In February 1999, TXU purchased 250,000 shares of common stock from TXU
Gas for $250 million, and TXU Gas used the proceeds to repay intercompany
advances from TXU.
At June 30, 1999, TXU, TXU Electric Company (formerly Texas Utilities
Electric Company), a wholly-owned subsidiary of TXU (TXU Electric), and TXU
Gas had $2.5 billion of joint US dollar-denominated lines of credit under
revolving credit facility agreements (US Credit Agreements) with a group of
banking institutions. The US Credit Agreements have two facilities. Facility
A provides for short-term borrowings aggregating up to $1.1 billion
outstanding at any one time at variable interest rates and terminates February
25, 2000. Of this amount, $800 million can be used for working capital and
other general corporate purposes. Facility B provides for borrowings
aggregating up to $1.4 billion outstanding at any one time at variable
interest rates and terminates March 2, 2003. Borrowings under this facility
can be used for working capital and other general corporate purposes. The
combined borrowings of TXU, TXU Electric and TXU Gas under both facilities,
excluding amounts restricted to finance the acquisition of a non-US subsidiary
by TXU, are limited to an aggregate of $2.2 billion outstanding at any one
time. TXU Gas' borrowings under both facilities is limited to an aggregate
of $650 million outstanding at any one time. The facilities primarily
support commercial paper borrowings by TXU. At June 30, 1999, TXU Gas had no
borrowings outstanding under these lines.
TXU Gas may issue additional debt and equity securities as needed,
including the possible future sale of up to $100 million aggregate principal
amount of securities currently registered with the Securities and Exchange
Commission for offering pursuant to Rule 415 under the Securities Act of
1933.
Risk Management -- No material substantive changes in the exposure to or
management of interest rate risk have occurred subsequent to December 31,
1998.
Regulation and Rates
- --------------------
TXU Gas has several rate requests pending or on appeal. (See Note 6 to
Condensed Consolidated Financial Statements for a discussion of these items).
CHANGE IN ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", will be effective for TXU Gas beginning January 1, 2001. This
standard requires that all derivative financial instruments be recognized as
either assets or liabilities on the balance sheet at their fair values and
that accounting for the changes in their fair values be recorded in earnings
or common stock equity as part of comprehensive income depending upon the
intended use of the derivatives and their resulting designations. Many
existing contracts relating to gas purchases and sales may be classified as
derivatives under the definition of derivatives in the new standard. The new
standard will supersede or amend existing standards that deal with hedge
accounting and derivatives. TXU Gas has not yet determined the effect
adopting this standard will have on its financial statements.
YEAR 2000 ISSUES
Overview
- --------
Year 2000 (Y2K) issues of TXU Gas are being addressed with those of its
parent company, TXU. The following disclosure regarding Y2K issues of TXU's
US businesses is excerpted from TXU's Form 10-Q for the period ended June 30,
1999.
15
<PAGE>
Many existing computer programs use only the last two digits to identify
a year in the date field. Thus, they would not recognize a year that begins
with 20 instead of 19. If not corrected, many computer applications could
fail or produce erroneous data on or about the year 2000.
TXU began its US efforts to address Y2K issues in 1996 by focusing on
information technology mainframe-based application systems (IT Corporate
Applications). In early 1997, an infrastructure project to address TXU's
information technology (IT) related hardware, operating systems and desktop
software was begun (IT Infrastructure). In late 1997, a project was begun to
address Y2K issues throughout TXU related to embedded systems, such as process
controls for energy production and delivery, and business-unit-owned
applications (Non-IT Equipment and Applications).
Applications and equipment in each of these three major initiatives have
been inventoried and categorized based on their criticality to TXU's business
operations. Assessments of the potential impact due to Y2K issues are
essentially complete. This process includes the solicitation of vendor
feedback, comparing information with other energy companies, and in many cases
internal verification by testing. The remediation and testing work on IT
Corporate Applications currently stands at approximately 95% complete. The IT
Infrastructure project is currently 90% complete. Remediation work on
embedded systems is currently at 94% complete.
Readiness
- ---------
TXU reported its readiness to North American Electric Reliability Council
(NERC) and the Nuclear Regulatory Commission (NRC) on June 30, 1999. In the
NERC report, all mission critical work was confirmed as complete with three
exceptions: Tradinghouse Unit 2; a 900 megahertz radio system and Comanche
Peak Unit 1. Work on Tradinghouse Unit 2 has been completed as indicated in a
follow-up report to NERC on July 20, 1999.
The IT Corporate Applications remediation and testing activities are
approximately 95% complete. Certification for the Y2K compliance on all
mission critical business applications was completed as scheduled.
Certification of remaining applications is scheduled for the third quarter of
1999.
The IT Infrastructure project involves assessing the compliance of
standard computer hardware, network systems including gateways, hubs and
routers, telecommunications equipment, operating systems and IT standard
software products. Equipment is being individually tested using software
products and applicable test procedures. Network system tests have been
performed. Ninety percent of the IT Infrastructure is Y2K ready. All mission
critical equipment is ready with one exception, TXU's 900 megahertz radio
system which is being upgraded and is scheduled to be completed in September
1999. Mainframe computers and support equipment within the data center have
received all necessary upgrades. Other remediation schedules on non-critical
equipment were adjusted during the first quarter to improve the cost
effectiveness of the work. Non-critical equipment in remote sites will be
remediated throughout the third quarter.
Non-IT Equipment and Applications involve the hardware and software
products that reside in individual business units. These items include the
embedded systems that are used in the production, energy delivery, and other
processes of TXU. Overall this project is at 94% completion, with Comanche
Peak Unit 1 as the one mission critical item remaining, which TXU plans to
complete in November during its fall refueling outage. TXU has implemented a
specific Y2K program at Comanche Peak. Inventories were completed in mid-1998
and detailed assessments were made in December 1998. Comanche Peak generating
station Unit 2 is Y2K ready. A plant training simulator is also being
upgraded with a scheduled completion date in October 1999.
16
<PAGE>
TXU is analyzing the potential impact of Y2K compliance efforts of third
parties. Over 2,000 suppliers and service providers have been contacted to
determine the status of their Y2K efforts. Ninety-nine percent of the top 500
key suppliers have responded. Fifty-six of the key suppliers have been audited
with positive results. The more significant interdependencies relate to
telecommunications and gas suppliers. On site audits of a limited number of
these significant third parties have been performed and readiness verified.
Additional reviews will be conducted throughout the third quarter.
Costs
- -----
The costs associated with TXU's Y2K efforts for its US energy businesses
are currently estimated to be approximately $40 million. These costs reflect
new, incremental costs and the reallocation of resources in pre-existing
maintenance budgets. New costs added to the estimate during the second
quarter include the cost to upgrade the 900 megahertz radio system, the cost
of a third party assessment of the Y2K program, additional cost associated
with the remediation of business personal computers (PC's), and additional
projected cost in the event that further effort is required during the year
2000. The costs related to the three major initiatives are estimated to be as
follows: IT Corporate Applications - $15 million; IT Infrastructure - $10
million; and Non-IT Equipment and Applications - $15 million. These costs are
being expensed as incurred over the period 1996 to 2000; and a total of
approximately $30 million has been expended through June 30, 1999. There can
be no assurance that these estimated costs will not change as TXU's Y2K
program continues.
Strategic initiatives were begun in two areas prior to beginning work on
the Y2K issue, and the costs for these initiatives are not included in the
estimate above. The energy management system for TXU's transmission grid is
being replaced. TXU's principal financial and accounting system has been
replaced. Each of these projects will eliminate potential Y2K deficiencies;
however, that was not a significant consideration at the time replacement
decisions were made.
Risk Issues
- -----------
With respect to internal risks, TXU's current assessment of the most
reasonably likely worst case scenario is that impacts on either service or
financial performance will not be materially adverse. TXU believes, based on
the results of testing that has already occurred on a large portion of its
production equipment with embedded systems, that if any disruption to service
occurs, it will be isolated and of short-term duration. TXU continues to
collaborate with other major energy suppliers through the joint Electric Power
Research Institute's embedded systems project.
NERC is continuing to evaluate the status of the electric infrastructure
throughout North America. TXU is a participant in this process. The third
NERC status report, issued on April 30, 1999, indicated that the transition
through critical Y2K dates was expected to have minimal impact on electrical
systems in North America. With continued work and coordinated contingency
planning, operating risks can be effectively mitigated. Results from TXU's
testing program compare favorably with the results on which the NERC
conclusions have been based. NERC will perform scenario analyses of potential
risks to the electric infrastructure during the third quarter. Joint industry
testing between the electric industry and the telecommunications industry was
performed during the quarter with positive results.
As TXU's Y2K program proceeds, TXU will continue to assess its internal
and external risks, not all of which are within its control; and it will
continue to consider the most reasonably likely worst case scenario. There
can be no assurance that all material Y2K risks within TXU's control will have
been adequately identified and corrected before the end of 1999. In addition,
TXU can make no assurances regarding the Y2K readiness of systems and parties
outside its control or the effect on TXU if those parties are not Y2K
compliant.
17
<PAGE>
Contingency Plans
- -----------------
TXU has in place detailed emergency response and disaster recovery plans
designed to ensure high reliability of service to customers. These plans are
utilized routinely for abnormal service conditions. These plans have been
reviewed to identify required actions specific to the Y2K issue. Y2K
contingency plans were developed and filed with the Public Utility Commission
of Texas (PUC) on June 30, 1999. These Y2K contingency plans address both
TXU's activities and actions necessary to mitigate the impact of third party
disruptions. These contingency plans have been coordinated with those of the
Electric Reliability Council of Texas (ERCOT) and NERC. TXU will continue to
refine and test these plans throughout the remainder of 1999.
FORWARD-LOOKING STATEMENTS
This report and other presentations made by TXU Gas and its subsidiaries
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' 1998 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 statement.
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 for TXU Gas is not significantly
different from the information set forth in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk included in the 1998 Form 10-K and
is, therefore, not presented herein.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of Part II are:
3(a) - Articles of Amendment, effective June 14, 1999, to the
Articles of Incorporation of ENSERCH Corporation.
3(b) - Bylaws of TXU Gas, as restated August 1, 1999.
15 - Letter of Deloitte & Touche LLP as to unaudited interim
financial information.
27 - Financial Data Schedule
(b) Reports on Form 8-K filed since March 31, 1999:
None
19
<PAGE>
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 thereunto duly authorized.
TXU Gas Company
(Formerly ENSERCH Corporation)
By /s/ Jerry W. Pinkerton
-----------------------------
Jerry W. Pinkerton
Vice President and Controller,
Principal Accounting Officer
Date: August 13, 1999
20
Exhibit 3 (a)
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
ENSERCH CORPORATION
Pursuant to the provisions of Articles 4.04 and 10.03 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its amended and restated articles of incorporation to be
effective as set forth herein.
ARTICLE ONE
The name of the corporation is ENSERCH Corporation.
ARTICLE TWO
The following amendment to the amended and restated articles of incorporation
was adopted by the sole shareholder of the corporation on May 14, 1999. The
amended and restated articles of incorporation are amended to change the name
of the corporation.
The amendment alters or changes Article One of the amended and restated
articles of incorporation and the full text of each provision of Article One
is amended to read as follows:
"ARTICLE ONE
The name of the Corporation is TXU Gas Company."
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was 201,000; and the number entitled to vote thereon was 201,000.
ARTICLE FOUR
The holder of all of the shares outstanding and entitled to vote on said
amendment has signed a consent in writing pursuant to Article 9.10 adopting
said amendment and any written notice required by Article 9.10 has been given.
ARTICLE FIVE
<PAGE>
This amendment does not necessitate an exchange, reclassification or
cancellation of issued shares.
ARTICLE SIX
This amendment does not effect a change in stated capital.
ARTICLE SEVEN
The name of the registered agent as PRESENTLY shown in the records of the
Texas Secretary of State is Texas Utilities Services Inc. (Office of the
Corporate Secretary). The name of the NEW registered agent is TXU Business
Services Company (Office of the Corporate Secretary). The address of the
registered office will remain the same. This change of registered agent was
authorized by the Board of Directors of the Corporation.
ARTICLE EIGHT
This amendment shall be effective as of June 14, 1999.
ENSERCH CORPORATION
By:
John F. Stephens, Jr.
Assistant Secretary
Exhibit 3 (b)
RESTATED BYLAWS
OF
TXU GAS COMPANY
SECTION 1. PLACE OF MEETINGS OF SHAREHOLDERS. All meetings of
the shareholders shall be held at the principal office of the Corporation in
Dallas, Texas, or at such other place within or without the State of Texas as
may be stated in the call and notice.
SECTION 2. ANNUAL MEETING OF SHAREHOLDERS. The annual meeting
of the shareholders for the election of Directors and the transaction of such
other business as may properly come before such meeting shall be held at such
time as determined by the Board of Directors and as stated in the notice of
meeting. In the event that such annual meeting is not held, a subsequent
meeting may be held in place thereof and any business transacted or elections
held at such meeting shall be as valid as if transacted or held at the annual
meeting. Any such subsequent meeting shall be called in the same manner as
provided for special meetings of shareholders.
SECTION 3. SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings
of the shareholders may be called by the Chairman of the Board, the President,
the Board of Directors or the holders of not less than one-tenth of all the
outstanding shares entitled to vote at such meetings.
SECTION 4. NOTICE OF MEETINGS OF SHAREHOLDERS. Written notice
of all meetings of shareholders, stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered to the shareholders of record
entitled to vote at such meetings not less than ten (10) nor more than sixty
(60) days before the meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail addressed to the
shareholder at his address as it appears on the stock transfer books of the
Corporation, with postage thereon prepaid. A waiver of notice in writing
signed by the person or persons entitled to such notice, whether before or
after the meeting, shall be equivalent to the giving of such notice.
SECTION 5. QUORUM AT MEETINGS OF SHAREHOLDERS. The holders of a
majority of the shares entitled to vote, present in person or by proxy, shall
constitute a quorum at any meeting of shareholders, but less than a quorum
shall have power to adjourn any meeting from time to time. Except as
otherwise provided by statute or by the Articles of Incorporation of the
Corporation, when a quorum is present at any meeting a majority of the shares
having voting power present in person or represented by proxy shall decide any
question brought before such meeting. At any meeting of shareholders each
shareholder entitled to vote shall be entitled to one vote for each share of
stock held by him, and may vote and otherwise act in person or by proxy.
<PAGE>
SECTION 6. FORM OF CERTIFICATES OF STOCK AND TRANSFER OF
SHARES. Certificates of stock of the Corporation shall be in such form as the
Board of Directors may from time to time determine. The stock of the
Corporation shall be transferable only on the books of the Corporation by the
holders in person or by attorney on surrender of the certificates therefor
properly endorsed. The Board of Directors may appoint one or more transfer
agents and one or more registrars of the stock. The Corporation shall be
entitled to treat the holder of record of any shares of the Corporation as the
owner thereof for all purposes, and shall not be bound to recognize any
equitable or other claim to, or interest in, such shares or any rights
deriving from such shares, on the part of any other person, unless and until
such other person becomes the holder of record of such shares, whether or not
the Corporation shall have either actual or constructive notice of the
interest of such other person.
SECTION 7. SIGNING OF CERTIFICATES OF STOCK. Certificates of
stock of the Corporation shall be signed by the Chairman of the Board, the
President or a Vice President and either the Secretary or an Assistant
Secretary, and shall be sealed with the seal of the Corporation or a facsimile
thereof.
SECTION 8. NUMBER, ELECTION AND TENURE OF DIRECTORS. The
affairs of the Corporation shall be managed by a Board of Directors. The
number of Directors of the Corporation shall initially be established by the
Articles of Incorporation and shall thereafter be established from time to
time by resolution of the Board of Directors, and shall consist of at least
one (1) or more members, who shall be chosen at the annual meeting of
shareholders, or at any meeting of shareholders held in place thereof, and
shall serve until their successors are elected unless removed as herein
provided for.
Vacancies in the Board of Directors, including vacancies arising from an
increase in the number of Directors, shall be filled by a majority of the
Directors then in the office and such new Directors shall serve until the next
annual meeting of shareholders. Any or all of the Directors may at any time
be removed, whether cause be assigned for such removal or not, by the vote of
the holders of a majority in aggregate number of the shares of stock of the
Corporation then entitled to vote at an election of Directors.
SECTION 9. MEETINGS OF DIRECTORS. Meetings of the Board of
Directors shall be held at the time and place fixed by resolution of the Board
of Directors or upon the call of the Chairman of the Board or the President.
The Secretary or officer performing his duties shall give at least twenty-four
hours' notice of all meetings of Directors by mail, telegram, facsimile or
hand delivery to the last known address of each Director, provided that a
meeting may be held without notice immediately after the annual meeting of
shareholders, and notice need not be given of regular meetings held at such
time as may be fixed by a resolution of the Board. Meetings of the Directors
may be held at any time without notice if all Directors are present or if
those not present waive notice either before or after the meeting. At any
2
<PAGE>
meeting of Directors a majority of the total number of Directors shall
constitute a quorum, but less than a quorum shall have power to adjourn the
meeting from time to time.
SECTION 10. COMMITTEES. The Board of Directors may designate from
among its members one (1) or more committees, each of which shall be comprised
of one (1) or more of its members, and may designate one (1) or more of its
members as alternate members of any committee, who may, subject to any
limitations imposed by the Board of Directors, replace absent or disqualified
members at any meeting of that committee. Any such committee, to the extent
provided in the resolution establishing such committee, shall have and may
exercise all the authority of the Board of Directors, subject to statutory
limitations.
SECTION 11. OFFICERS. The Board of Directors, after the annual
meeting of shareholders each year, may elect one of their number Chairman of
the Board, shall elect one of their number President, may elect one or more
Vice Presidents, shall elect a Secretary and may elect a Treasurer, and may
elect one or more Assistant Secretaries and Assistant Treasurers and such
other officers as they may from time to time deem proper. The same person may
be elected to and hold more than one office. The Chairman of the Board shall
be the chief executive officer of the Corporation. He shall preside at all
meetings of shareholders and of the Board of Directors. In the absence of a
President, the Chairman of the Board shall also be considered to be the
President of the Corporation and shall perform the duties and exercise the
powers of the President. In the absence of the Chairman of the Board, the
President shall preside at all meetings of the Board of Directors and the
shareholders and shall perform the duties and exercise the powers of the
Chairman of the Board. The Vice Presidents, in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence
or disability of a Chairman of the Board and President, perform the duties and
exercise the powers of the President. The Secretary shall attend all meetings
of the Board of Directors and of the shareholders and record votes and minutes
of proceedings in a book to be kept for that purpose. He shall give, or cause
to be given, notice of all meetings of shareholders and special meetings of
the Board of Directors. The Treasurer shall have custody of corporate funds
and securities, shall keep full and accurate account of receipts and
disbursements of the Corporation, and shall deposit all moneys and other
valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation pursuant to instructions from the
Board of Directors, and shall render to the Chairman of the Board and
Directors, at the regular meetings of the Board or whenever they may require
it, an account of all his transactions as Treasurer and of the financial
condition of the Corporation. In the absence of the Secretary or Treasurer,
the Assistant Secretaries or Assistant Treasurers may perform their duties or
exercise their powers, respectively, or such other duties as may be conferred
on them by the Board of Directors or other officers.
The term of office of all officers shall be one year, or until their
respective successors are chosen and qualified, but any officer may be removed
from office for or without cause at any time by the Board of Directors.
Whenever any vacancy shall occur in any office by death, resignation, increase
in the number of offices of the Corporation, or otherwise, the same shall be
3
<PAGE>
filled by the Board of Directors, and the officer so elected shall hold office
until his successor is chosen and qualified. Notwithstanding the foregoing
paragraph, the officers of the Corporation shall have such other powers and
duties as usually pertain to their offices, respectively, as well as such
other powers and duties as may from time to time be conferred by the Board of
Directors.
SECTION 12. TRANSACTIONS WITH THE CORPORATION. A Director of the
Corporation shall not be disqualified by his office from dealing or
contracting with this Corporation, either as a vendor, purchaser or otherwise,
nor shall any transaction or contract of the Corporation be void or voidable
by reason of the fact that any Director or any firm of which any Director is a
member, or any corporation of which any Director is a shareholder or Director,
is in any way interested in such transaction or contract, provided that such
transaction or contract is or shall be authorized, ratified or approved either
(1) by vote of the majority of a quorum of the Board of Directors, without
counting in such majority or quorum any Director so interested; or (2) by a
vote of the shareholders or by a consent signed by such holders; nor shall any
Director be liable to account to the Corporation for any profits realized by
him from or through any transaction or contract of this Corporation
authorized, ratified or approved, as aforesaid, by reason of the fact that he
or any firm of which he is a member or any corporation of which he is a
shareholder or Director was interested in such transaction or contract.
Nothing herein contained shall create any liability in the events above
described or prevent the authorization, ratification or approval of such
contracts in any other manner provided by law.
SECTION 13. INSURANCE, INDEMNIFICATION AND OTHER ARRANGEMENTS.
Without further specific approval of the shareholders of the Corporation, the
Corporation shall indemnify and may purchase, enter into, maintain or provide
insurance or other arrangements for the benefit of any person who is or was a
Director, officer, employee or agent of the Corporation or is or was serving
another entity at the request of the Corporation as a Director, officer,
employee, agent or otherwise, to the fullest extent permitted by the laws of
the State of Texas, including without limitation Art. 2.02-1 of the Texas
Business Corporation Act or any successor provision, against any liability
asserted against or incurred by any such person in any such capacity or
arising out of such person's service in such capacity whether or not the
Corporation would otherwise have the power to indemnify against any such
liability under the Texas Business Corporation Act. If the laws of the State
of Texas are amended to authorize the purchase, entering into, maintaining or
providing of insurance, indemnification or other arrangements in the nature of
those permitted hereby to a greater extent than presently permitted, then the
Corporation shall have the power and authority to purchase, enter into,
maintain and provide any additional insurance, indemnification or other
arrangement in such regard as shall be permitted from time to time by the laws
of the State of Texas without further approval of the shareholders of the
Corporation. No repeal or modification of such laws or this Section shall
adversely affect any such insurance, arrangement or right to indemnification
existing at the time of such repeal or modification.
SECTION 14. AMENDMENT OF BYLAWS. These bylaws may be amended by the
Board of Directors or the shareholders.
4
<PAGE>
SECTION 15. ACTION BY CONSENT. Any action required to be taken at a
meeting of the Directors or the shareholders may be taken without a meeting if
a consent in writing shall be signed by the persons legally required and
entitled to vote on such action.
August 1, 1999.
EXHIBIT 15
TXU Gas Company:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
condensed consolidated financial information of TXU Gas Company (formerly
ENSERCH Corporation) and subsidiaries (TXU Gas) for the periods ended
June 30, 1999 and 1998, as indicated in our report dated August 12, 1999;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in TXU Gas'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, is
incorporated by reference in Registration Statements No. 333-43811 and
333-43811-01 on Post Effective Amendment No. 1 to Form S-3 of TXU Gas.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that
Act.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 12, 1999
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