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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
--OR--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Exact Name of Registrant as Specified in
its Charter; State of Incorporation;
Commission Address of Principal Executive Offices; I.R.S. Employer
File Number and Telephone Number Identification No.
- ----------- ----------------------------------------- -----------------
1-3183 TXU Gas Company 75-0399066
A Texas Corporation
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------ ------------------------
Depositary shares, Series F, each representing New York Stock Exchange
1/40 share of the Adjustable Rate Cumulative
Preferred Stock, Series F,liquidation preference
$1,000 per share
Securities registered pursuant to Section 12(g) of the Act: None
----------------------------------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act).
Yes [ ] No [X]
Aggregate market value of TXU Gas Company Common Stock held by non-affiliates:
None
Common Stock outstanding at March 24, 2003: 451,000 shares, par value $0.01
per share.
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DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
----
PART I
Items 1. and 2. BUSINESS AND PROPERTIES
BUSINESS AND PROPERTIES............................................................... 1
COMPETITIVE STRATEGY.................................................................. 1
DESCRIPTION OF OPERATIONS............................................................. 2
ENVIRONMENTAL MATTERS................................................................. 5
Item 3. LEGAL PROCEEDINGS..................................................................... 5
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 6
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................... 7
Item 6. SELECTED FINANCIAL DATA............................................................... 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................... 7
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK..................................................................... 7
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 7
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 7
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................ 8
Item 11. EXECUTIVE COMPENSATION................................................................ 10
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 21
PART IV
Item 14. CONTROLS AND PROCEDURES............................................................... 22
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.............................................................................. 22
APPENDIX A - Financial Information
APPENDIX B - TXU Gas Company Exhibits for 2002 Form 10-K
Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Gas Company are made available to the
public, free of charge, on the TXU Corp. website at http://www.txucorp.com,
shortly after they have been filed with the Securities and Exchange Commission.
TXU Gas Company will provide copies of current reports not posted on the website
upon request.
i
PART I
Items 1. & 2. BUSINESS AND PROPERTIES
BUSINESS AND PROPERTIES
-----------------------
TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.
Prior to the restructuring of TXU Corp. and its United States (US)
subsidiaries in connection with the opening of the Texas electricity market to
competition, effective January 1, 2002, TXU Gas was also engaged in certain risk
management and energy trading activities and the retail sale of natural gas to
large commercial and industrial customers in various competitive markets in the
US. As a part of that restructuring, TXU Gas transferred those operations to TXU
Energy Company LLC (TXU Energy), a wholly-owned indirect subsidiary of TXU Corp.
Accordingly, the transferred operations have been reflected as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.
Business of TXU Gas
At December 31, 2002, TXU Gas had 1,400 full-time employees. TXU Gas
and its subsidiaries possess all necessary franchises, licenses and certificates
to enable them to conduct their respective businesses.
TXU Gas conducts its operations through the following divisions and
subsidiaries:
o TXU Gas Distribution
o TXU Lone Star Pipeline
o Oncor Utility Solutions
Operating Segments
With the transfers of businesses to TXU Energy on January 1, 2002, TXU
Gas is an integrated business with no separate reportable segments.
COMPETITIVE STRATEGY
--------------------
As legislative, regulatory, economic and technological changes occur,
the energy and utility industries are faced with increasing pressure to become
more competitive while adhering to regulatory requirements. A number of
variables, including price, reliability of service, the cost of energy
alternatives, new technologies and governmental regulations, affect the level of
competition.
TXU Gas aggressively manages its operating costs and capital
expenditures through streamlined business processes and is developing and
implementing strategies to improve return on assets and to maximize value
through new marketing programs.
1
DESCRIPTION OF OPERATIONS
------------------------
GENERAL
TXU Gas Distribution -- TXU Gas Distribution, a division of TXU Gas,
provides service through over 26,000 miles of distribution mains. Through these
facilities, it purchases, distributes and sells natural gas to over 1.4 million
residential, commercial and industrial customers in approximately 550 cities and
towns, including the 11-county Dallas-Fort Worth Metroplex. TXU Gas Distribution
also transports natural gas to end users within its distribution system as
market opportunities allow. The distribution service rates that TXU Gas
Distribution charges its residential and commercial customers are generally
established by the municipal governments of the cities and towns served, with
the Railroad Commission of Texas (RRC) having appellate, or in some instances,
primary jurisdiction. The majority of TXU Gas Distribution's residential and
commercial gas customers use natural gas for heating, and their needs are
directly affected by the mildness or severity of the heating season. Weather
adjustments, which allow rates to be adjusted to reflect warmer or colder than
normal weather during the winter months, currently exist in 311 cities served by
TXU Gas Distribution. TXU Gas Distribution has replaced weather normalization
clauses with a new rate design that provides a similar level of revenue
stabilization in 124 cities.
Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.2
billion cubic feet (Bcf). Daily purchases on the spot market raise this
availability level to meet additional peak-day needs.
TXU Gas Distribution's peak-day demand in 2002 was on March 2, when
sales to its customers reached approximately 2.1 Bcf. During 2002 the average
daily demand of TXU Gas Distribution's residential and commercial customers was
0.4 Bcf.
Estimates of natural gas supplies and reserves are not necessarily
indicative of TXU Gas Distribution's ability to meet current or anticipated
market demands or immediate delivery requirements because of factors such as the
physical limitations of gathering, storage and transmission systems, the
duration and severity of cold weather, the availability of gas reserves from its
suppliers, the ability to purchase additional supplies on a short-term basis and
actions by federal and state regulatory authorities.
Certain service contracts include the right to curtail gas deliveries
up to 100% according to a priority plan. Curtailment rights provide TXU Gas
Distribution flexibility to meet the human-needs requirements of its customers
on a firm basis. Priority allocations imposed by federal and state regulatory
agencies, as well as other factors beyond the control of TXU Gas Distribution,
may affect its ability to meet the demands of its customers.
Gas Supply -- TXU Gas Distribution's natural gas supply consists of
contracts for the purchase of specific reserves, contracts not related to
specific reserves or fields, and natural gas in storage. The total planned
annual natural gas supply as of January 1, 2003 is 148 Bcf, which is
approximately seven percent less than TXU Gas Distribution's actual supply
during 2002. TXU Gas Distribution has approximately 18 Bcf committed under
contracts with specific reserves, 31 Bcf in working gas in storage and 50 Bcf
committed under gas supply contracts not related to specific reserves or fields.
In 2002, TXU Gas Distribution's natural gas requirements were purchased from
approximately 93 independent producers, marketers and pipeline companies.
TXU Gas Distribution manages its storage working gas inventory and
storage deliverability along with other purchased gas to meet its peak-day
requirements. TXU Gas Distribution utilizes the services of five natural gas
storage fields owned by TXU Lone Star Pipeline, all of which are located in
Texas. These fields have an optimal working gas capacity of more than 39 Bcf and
a storage withdrawal deliverability of up to 1.2 Bcf per day. A sixth natural
gas storage field currently is being depleted for possible retirement.
TXU Gas Distribution buys natural gas under long-term and short-term
intrastate contracts, many of which require minimum purchases of gas. The
estimated natural gas demand, which assumes normal weather conditions,
significantly exceeds the minimum purchase obligations of these contracts for
the year 2003 and thereafter.
2
The TXU Gas Distribution supply program is designed to contract for new
supplies of natural gas and to recontract targeted expiring sources. In addition
to being heavily concentrated in the established natural gas-producing areas of
central, northern and eastern Texas, TXU Lone Star Pipeline's intrastate
pipeline system also extends into or near the major producing areas of the Texas
Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins
located in Texas are estimated to contain a substantial portion of the nation's
remaining onshore natural gas reserves. TXU Lone Star Pipeline's pipeline system
provides access to all of these basins. TXU Lone Star Pipeline is well situated
to receive large volumes into its system at the major hubs, such as Katy and
Waha, as well as from storage facilities where TXU Gas Distribution maintains
high delivery capabilities.
TXU Lone Star Pipeline -- TXU Lone Star Pipeline, a division of TXU
Gas, owns and operates interconnected natural gas transmission lines, five
underground storage reservoirs, 20 compressor stations and related properties,
all within Texas. TXU Lone Star Pipeline also owns a sixth underground storage
reservoir that is currently being depleted for possible retirement. With a
system consisting of approximately 6,800 miles of transmission and gathering
pipelines in Texas, TXU Lone Star Pipeline is one of the largest pipelines in
the US. Through these facilities, it transports natural gas to distribution
systems of TXU Gas Distribution and other distribution companies, electric
generation plants, end use industrial customers and through-system shippers.
Rates for the services provided by TXU Lone Star Pipeline are subject to review
by the RRC.
Oncor Utility Solutions -- Oncor Utility Solutions (North America)
Company and Oncor Utility Solutions (Texas) Company (collectively, "Utility
Solutions"), both wholly-owned subsidiaries of TXU Gas, were launched in late
2001 to provide unregulated utility asset management services for cooperatives
and municipally-owned and investor-owned utilities throughout North America.
Electric, gas, water and wastewater utilities may choose from Utility Solutions'
menu of services ranging from a complete turnkey solution to selected services
such as work management, resource management, strategic planning, design,
maintenance and construction. Utility Solutions leverages TXU Corp.'s existing
economies of scale, asset management processes, technologies and personnel to
deliver cost savings and reliability improvements to client network systems.
Facilities -- The gas transmission and distribution lines of TXU Gas
Distribution and TXU Lone Star Pipeline have been constructed over lands of
others pursuant to easements or along public highways, streets and rights-of-way
as permitted by law.
COMPETITION
Customer sensitivity to energy prices and the availability of
competitively priced natural gas in the unregulated markets continue to cause
competition in the electric generation and industrial user markets. Natural gas
faces varying degrees of competition from electricity, coal, natural gas
liquids, oil and other refined products throughout TXU Gas Distribution's
service territory. Pipeline systems of other companies, both intrastate and
interstate, extend into or through the areas in which TXU Gas Distribution's
markets are located, creating competition from other sellers of natural gas. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.
TXU Lone Star Pipeline is the sole transporter of natural gas to TXU
Gas Distribution's distribution systems. TXU Lone Star Pipeline competes with
other pipelines in Texas to transport natural gas to new and existing industrial
and power generation facilities as well as off-system markets. These businesses
are highly competitive.
Open Access - Transmission -- TXU Lone Star Pipeline has been an open
access transporter under Section 311 of the Natural Gas Policy Act of 1978
(NGPA) on its intrastate transmission facilities since July 1988. Such
transportation is performed pursuant to Section 311(a)(2) of the NGPA and is
subject to an exemption from the jurisdiction of the FERC under the Natural Gas
Act, pursuant to Section 601 of the NGPA.
3
Customers -- There are no individually significant customers upon which
TXU Gas' business or results of operations are highly dependent.
REGULATION AND RATES
Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of natural gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial customers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.
The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the RRC and
provides for full recovery of the actual cost of gas delivered, including
out-of-period costs such as gas purchase contract settlement costs. The
distribution service rates TXU Gas Distribution charges its residential and
commercial customers are generally established by the municipal governments of
the cities and towns served, with the RRC having appellate, or in some
instances, primary jurisdiction.
TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual favorable impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million.
In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending.
On August 30, 2002, TXU Gas filed the city gate gas cost reconciliation
for the twelve-month period ended June 30, 2002 with the RRC. During this
period, TXU Gas over-recovered its gas cost by $24 million, which is being
refunded from October 2002 through June 2003. The refund has no material impact
on the net income of TXU Gas.
TXU Gas Distribution sells to industrial customers under standard rate
schedules that permit automatic adjustment on a monthly basis for the full
amount of increases or decreases in the cost of natural gas. Transportation
services to industrial and electricity generation customers are provided under
both standard tariffs and competitively negotiated contracts.
4
ENVIRONMENTAL MATTERS
---------------------
TXU Gas is subject to various federal, state and local regulations
dealing with air and water quality and related environmental matters.
Air - Under the Texas Clean Air Act, the Texas Commission on
Environmental Quality (TCEQ) has jurisdiction over the permissible level of air
contaminant emissions from, and permitting requirements for, gas delivery
facilities located within the State of Texas. In addition, the new source
performance standards of the Environmental Protection Agency (EPA) promulgated
under the Federal Clean Air Act, as amended (Clean Air Act), which have also
been adopted by the TCEQ, are also applicable. TXU Gas' facilities operate in
compliance with applicable regulations, permits and emission standards
promulgated pursuant to these acts.
In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities apply for permits. TXU Gas anticipates that the
permits can be obtained for its "grandfathered" facilities without significant
effects on the costs for operating these facilities.
Water - The TCEQ, the EPA and the RRC have jurisdiction over water
discharges (including storm water) from TXU Gas' facilities. TXU Gas' facilities
are presently in compliance with applicable state and federal requirements
relating to discharge of pollutants into the water. TXU Gas holds all required
waste water permits from the TCEQ and the RRC for facilities in operation and
has applied for or obtained necessary permits for facilities under construction.
TXU Gas believes it can satisfy the requirements necessary to obtain any
required permits or renewals. Recent changes to federal rules pertaining to
spill prevention, control and countermeasure plans for oil-filled electrical
equipment and bulk storage facilities for oil will require updating of certain
plans and facilities. TXU Gas is unable to predict at this time the impact of
these changes.
Other - Treatment, storage and disposal of solid and hazardous waste
are regulated at the state level under the Texas Solid Waste Disposal Act (Texas
Act) and at the federal level under the Resource Conservation and Recovery Act
of 1976, as amended, (RCRA) and the Toxic Substances Control Act (TSCA). The EPA
has issued regulations under the RCRA and TSCA, and the TCEQ and the RRC have
issued regulations under the Texas Act applicable to TXU Gas' facilities. TXU
Gas has obtained or applied for such permits as are required by such
regulations.
Item 3. LEGAL PROCEEDINGS
In September 1999, Quinque Operating Company (Quinque) filed suit in
the State District Court of Stevens County, Kansas against over 200 gas pipeline
companies, including TXU Gas (named in the litigation as ENSERCH Corporation).
The suit was removed to federal court; however, a motion to remand the case back
to Kansas State District Court was granted in January 2001, and the case is now
pending in Stevens County, Kansas. The plaintiffs amended their petition to join
TXU Fuel Company (TXU Fuel), a subsidiary of TXU Energy, as a defendant in this
litigation. Quinque has dismissed its claims and a new lead plaintiff has filed
an amended petition in which the plaintiffs seek to represent a class consisting
of all similarly situated gas producers, overriding royalty owners, working
interest owners and state taxing authorities either from whom defendants had
purchased natural gas or who received economic benefit from the sale of such gas
since January 1, 1974. No class has been certified. The petition alleges that
the defendants have mismeasured both the volume and heat content of natural gas
delivered into their pipelines resulting in underpayments to plaintiffs. No
amount of damages has been specified in the petition with respect to TXU Gas or
TXU Fuel. While TXU Gas and TXU Fuel are unable to estimate any possible loss or
predict the outcome of this case, TXU Gas and TXU Fuel believe these claims are
without merit and intend to vigorously defend this suit.
On November 21, 2000, the City of Denton, Texas and other Texas cities
filed suit in the 134th Judicial District Court of Dallas County, Texas against
TXU Gas, TXU US Holdings Company (US Holdings) and TXU Corp. The petition
alleges claims for breach of contract and other claims related to the
defendants' alleged exclusion of certain revenues from the cities' franchise fee
base. All of the plaintiff cities have now executed a settlement agreement to
settle this suit, and, on March 11, 2003, the district court entered a final
5
order dismissing this lawsuit. Such resolution will not have a material effect
on TXU Gas' financial position, results of operations or cash flows.
General -- In addition to the above, TXU Gas and its subsidiaries are
involved in various other legal and administrative proceedings the ultimate
resolution of which, in the opinion of management, are not expected to have a
material effect on their financial position, results of operations or cash
flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable. All of TXU Gas' common stock is owned by TXU Corp.
Item 6. SELECTED FINANCIAL DATA
The information required hereunder for TXU Gas is set forth under
Selected Financial Data included in Appendix A to this report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for TXU Gas is set forth under
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Appendix A to this report.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TXU Gas is set forth under
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Appendix A to this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for TXU Gas is set forth under
Statement of Responsibility, Independent Auditors' Report, Statements
of Consolidated Income, Statements of Consolidated Comprehensive
Income, Statements of Consolidated Cash Flows, Consolidated Balance
Sheets, Statements of Consolidated Shareholder's Equity and Notes to
Financial Statements included in Appendix A of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Identification of Directors, business experience and other
directorships:
Other Positions and Date First Elected as
Offices Presently Held Director Present Principal Occupation or
With TXU Gas (Current Term Employment and Principal
(Current Term Expires Expires Business (Preceding Five Years),
Name of Director Age In May 2003) in May 2003) Other Directorships
------------------------------------------------------ ----------------------- ---------------------------------------
T. L. Baker 57 Vice Chairman January 1, 2002 Executive Vice President of TXU
Corp. and Vice Chairman of Oncor
and TXU Gas; prior thereto,
President of Oncor and TXU Gas;
prior thereto, President of TXU
Electric Company; prior thereto,
President of Electric Service
Division of TXU Electric
Company, TXU Gas Distribution
Division of TXU Gas (TXU Gas
Distribution) and TXU SESCO;
other directorship: Oncor.
Michael J. 48 None February 16, 1996 Executive Vice President of TXU
McNally Corp.; prior thereto, Executive
Vice President and Chief
Financial Officer of TXU Corp.
and Executive Vice President of
US Holdings; other
directorships: Oncor, TXU
Energy, US Holdings and TXU
Europe Limited.
Erle Nye 65 Chairman of the September 17, 1982 Chairman of the Board and Chief
Board and Chief Executive of TXU Corp., Oncor,
Executive TXU Energy, TXU Gas and US
Holdings; other directorships:
TXU Corp., Oncor, TXU Energy, US
Holdings and TXU Europe Limited.
Eric H. Peterson 42 None November 1, 2002 Executive Vice President and
General Counsel of TXU Corp.;
prior thereto, Senior Vice
President and General Counsel of
DTE Energy; prior thereto,
Partner in the law firm of
Worsham, Forsythe & Wooldridge;
other directorships: Oncor, TXU
Energy and US Holdings.
R. A. Wooldridge 65 None August 5, 1997 Partner in the law firm of Hunton
& Williams; other
directorships: Oncor, TXU
Energy, US Holdings and TXU
Europe Limited.
Directors of TXU Gas receive no compensation in their capacity as Directors.
8
Identification of Executive Officers and business experience:
Positions and Offices Date First Elected to
Presently Held Present Offices
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age in May 2003) in May 2003) (Preceding Five Years)
- -------------------- -------- ----------------------- ----------------------- --------------------------------------
Erle Nye 65 Chairman of the Board January 1, 1998 Chairman of the Board and Chief
and Chief Executive Executive of TXU Corp., Oncor,
TXU Energy, TXU Gas and US
Holdings.
T. L. Baker 57 Vice Chairman November 4, 2002 Executive Vice President of TXU
Corp. and Vice Chairman of
Oncor and TXU Gas; prior
thereto, President of Oncor and
TXU Gas; prior thereto,
President of TXU Electric
Company; prior thereto,
President of Electric Service
Division of TXU Electric
Company, TXU Gas Distribution
and TXU SESCO.
Michael T. McCall 45 President March 26, 2003 President of TXU Gas; prior
thereto, Vice President of TXU
Business Services; prior
thereto; Director, Public
Policy, Texas Utilities
Services.
Scott R. Longhurst 35 Senior Vice President August 1, 2002 Senior Vice President of Oncor
and TXU Gas; prior thereto,
Vice President - Corporate
Financial Planning of TXU
Business Services Company;
prior thereto, Vice President
of Finance of TXU Europe
Limited; prior thereto, Chief
Financial Officer of Shell Oil
Products Joint Venture Saudi
Arabia.
There is no family relationship between any of the above-named Directors and
Executive Officers.
9
Item 11. EXECUTIVE COMPENSATION
TXU Gas (the Company) and its affiliates have paid or awarded compensation
during the last three calendar years to the executive officers named in the
Summary Compensation Table for services in all capacities. Amounts reported in
the Table as Bonus and LTIP Payouts for any calendar year reflect the
performance of the individual and TXU Corp. in prior periods. Accordingly,
amounts reported as Bonus in 2002 reflect performance in 2001 and amounts
reported as LTIP Payouts in 2002 reflect performance for the three years ended
in March 2002. Information relating to compensation provided in 2003 based on
performance in 2002 is contained in the footnotes to the Table and in the
Organization and Compensation Committee Report which follows the footnotes.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------ --------------------------------------
Awards Payouts
------------------------ ------------
Other Restricted Securities All Other
Annual Stock Underlying LTIP Compen-
Name and Salary Bonus Compen-sation Awards Options/ Payouts sation
Principal Position Year ($) ($) (5) ($) (6) ($) (7) SARs (#) ($) (8) ($) (9)
- -------------------------- ------ ---------- ---------- ------------ ----------- ----------- ------------ -----------
Erle Nye, (1) (10) .... 2002 1,037,500 1,950,000 --- 236,250 --- 4,286,400 299,985
Chairman of the Board 2001 964,583 475,000 --- 694,375 --- 519,747 222,658
and Chief Executive of 2000 950,000 380,000 --- 593,750 --- 399,793 218,101
the Company
T. L. Baker (2) (10)... 2002 495,000 500,000 --- 112,500 --- 1,109,770 119,960
Vice Chairman of the 2001 449,167 125,000 --- 230,750 --- 111,800 89,374
Company 2000 399,167 125,000 --- 219,500 --- 93,968 84,152
H. Dan Farell (3) (10) 2002 323,333 180,000 73,125 --- 349,638 64,258
President of the 2001 304,583 80,500 --- 151,375 --- 61,290 47,455
Company 2000 279,583 70,000 (44,181) 135,250 --- 4,901 45,160
Scott R. Longhurst (4) 2002 185,194 128,290 170,875 --- --- --- 1,845
(10) 2001 155,916 42,225 --- --- --- --- ---
Senior Vice President 2000 87,669 --- --- --- --- --- ---
of the Company
- ---------------
(1) Compensation amounts represent compensation paid by TXU Corp.
(2) Mr. Baker was elected Vice Chairman of TXU Gas effective November 4,
2002. Compensation amounts represent compensation paid by Oncor.
(3) Mr. Farell was elected President, TXU Gas effective November 4,
2002. Compensation amounts represent compensation paid by Oncor.
(4) Mr. Longhurst was appointed and subsequently elected Senior Vice
President, TXU Gas effective August 1, 2002. Compensation amounts
represent compensation paid by TXU Europe and, beginning November 1,
2002, TXU Business Services.
(5) Amounts reported as Bonus in the Summary Compensation Table are
attributable principally to the named executive officers'
participation in the TXU Annual Incentive Plan (AIP). Amounts reported
for 2002 resulted from performance in 2001; no AIP awards for 2002
performance were provided in 2003 to any officers. Under the current
terms of the AIP, target incentive awards ranging from 20% to 75% of
base salary, and a maximum award of 100% of base salary, are
established. The percentage of the target or maximum actually awarded,
if any, is dependent upon the attainment of performance measurement
criteria established in advance by TXU Corp.'s Organization and
Compensation Committee (Committee), as well as the Committee's
evaluation of the participant's and TXU Corp.'s performance. Amounts
reported for Mr. Nye as Bonus also include amounts provided in his
employment contract as discussed in footnote (10) and an additional
bonus of $750,000 awarded in February 2002 in recognition of his
contributions to TXU Corp.'s performance in 2001.
10
(6) The amount reported for Mr. Longhurst as Other Annual Compensation
consists of certain benefits provided by the Company under the
standard expatriate policy in connection with his extended assignment
in the United States. The amount reported represents housing,
relocation expenses, taxes associated with such benefits paid on Mr.
Longhurst's behalf, and certain other benefits.
(7) Amounts reported as Restricted Stock Awards in the Summary
Compensation Table are attributable to the named officer's
participation in the Deferred and Incentive Compensation Plan (DICP).
Participants in the DICP may defer a percentage of their base salary
not to exceed a maximum percentage determined by the Committee for
each plan year and in any event not to exceed 15% of the participant's
base salary. Salary deferred under the DICP is included in amounts
reported as Salary in the Summary Compensation Table. TXU Corp. makes
a matching award (Matching Award) equal to 150% of the participant's
deferred salary. Prior to 2002, one-half of any AIP award (Incentive
Award) was deferred and invested under the DICP. Matching Awards are
subject to forfeiture under certain circumstances. Under the DICP, a
trustee purchases TXU Corp. common stock with an amount of cash equal
to each participant's deferred salary and Matching Award, and accounts
are established for each participant containing performance units
(Units) equal to such number of common shares. DICP investments,
including reinvested dividends, are restricted to TXU Corp. common
stock, and the value of each unit credited to participants' accounts
equals the value of a share of TXU Corp. common stock and is at risk
based on the performance of the stock. On the expiration of the five
year maturity period, the value of the participant's maturing accounts
are paid in cash based upon the then current value of the Units;
provided, however, that in no event will a participant's account be
deemed to have a cash value which is less than the sum of such
participant's deferral together with 6% per annum interest compounded
annually. Participants may elect to defer amounts that would otherwise
mature under the DICP, under and subject to the provisions of the
Salary Deferral Program (SDP) as discussed in footnote (9). The
maturity period is waived if the participant dies or becomes totally
and permanently disabled and may be extended under certain
circumstances.
Matching Awards that have been made under the DICP are included under
Restricted Stock Awards in the Summary Compensation Table. As a result
of these awards, undistributed Matching Awards and Incentive Awards
made in prior years under DICP provisions that are no longer effective
and dividends reinvested thereon, the number and market value at
December 31, 2002 of such Units (each of which is equal to one share of
common stock) held in the DICP accounts for Messrs. Nye, Baker and
Farell were 61,832 ($1,155,022), 19,607 ($366,259) and 12,886
($240,710), respectively.
(8) Amounts reported as LTIP Payouts in the Summary Compensation Table are
attributable to the vesting and distribution of performance-based
restricted stock awards under the Long-Term Incentive Compensation Plan
(LTICP) and the distribution during the year of earnings on salaries
previously deferred under the DICP.
The LTICP is a comprehensive, stock-based incentive compensation plan
providing for common stock-based awards, including performance-based
restricted stock. Outstanding awards, as of December 31, 2002, of
performance-based restricted stock to the named executive officers may
vest at the end of a three-year performance period and provide for an
ultimate distribution of from 0% to 200% of the number of the shares
initially awarded, based on TXU Corp.'s total return to shareholders
over such three-year period compared to the total returns provided by
the companies comprising the Standard & Poor's Electric Utilities
Index. Dividends on restricted shares are reinvested in TXU Corp.
common stock and are paid in cash upon release of the restricted
shares. Under the terms of the LTICP, the maximum amount of any award
that may be paid in any one year to any of the named executive officers
is the fair market value of 100,000 shares of TXU Corp.'s common stock
determined as of the first day of such calendar year. The portion of
any award that, based on such limitation, cannot be fully paid in any
year is deferred until a subsequent year when it can be paid. For 2002,
based on TXU Corp. achieving the 5th highest total return to
shareholders of the returns provided by the companies comprising the
Standard & Poor's Electric Utilities Index over the three-year period
ending March 31, 2002, Messrs. Nye, Baker and Farell each received 200%
of the restricted shares awarded in May of 1999, which stock was valued
at $4,286,400, $1,071,600 and $321,480, respectively.
11
Amounts reported also include earnings distributed during the year on
salaries previously deferred under the DICP for Messrs. Baker and
Farell of $38,170 and $28,158, respectively.
As a result of restricted stock awards under the LTICP, and reinvested
dividends thereon, the number of shares of restricted stock and the
market value of such shares at December 31, 2002 held for Messrs. Nye,
Baker, Farell and Longhurst were 376,431 ($7,031,731), 68,207
($1,274,107), 21,582 ($403,152) and 8,637 ($161,339), respectively.
As noted, salaries deferred under the DICP are included in amounts
reported as Salary in the Summary Compensation Table. Amounts shown in
the table below represent the number of shares purchased under the DICP
with those deferred salaries for 2002 and the number of shares awarded
under the LTICP.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Deferred and Incentive
Compensation Plan (DICP) Long-Term Incentive Compensation Plan (LTICP)
--------------------------- --------------------------------------------------------------
Number of Performance Performance
Shares, Or Other Number of or Other
Units or Period Until Shares, Units Period Until Estimated Future Payouts
Other Maturation or Other Maturation or -------------------------
Name Rights (#) Or Payout Rights (#) Payout Minimum (#) Maximum (#)
- -------------------- ----------- -------------- -------------- ---------------- -----------------------------
Erle Nye.......... 2,877 5 Years 150,000 3 Years 0 300,000
T. L. Baker....... 1,370 5 Years 40,000 3 Years 0 80,000
H. Dan Farell..... 891 5 Years 8,000 3 Years 0 16,000
Scott R. Longhurst 0 5 Years 5,000 3 Years 0 10,000
(9) Amounts reported as All Other Compensation in the Summary Compensation
Table are attributable to the named executive officer's participation
in certain plans and as otherwise described in this footnote.
Under the TXU Thrift Plan (Thrift Plan) all eligible employees of TXU
Corp. and any of its participating subsidiaries may invest a portion of
their regular salary or wages in common stock of TXU Corp., or in a
variety of selected mutual funds. Under the Thrift Plan, TXU Corp.
matches a portion of an employee's contributions. Currently, TXU
Corp.'s matching contribution is 75% of the first 6% of the employee's
contribution for employees covered under the traditional defined
benefit component of the TXU Retirement Plan, and 100% of the first 6%
of the employee's contribution for employees covered under the cash
balance component of the TXU Retirement Plan. All matching
contributions are invested in common stock of TXU Corp. The amounts
reported under All Other Compensation in the Summary Compensation Table
include these matching amounts which, for Messrs. Nye, Baker, Farell
and Longhurst were $12,000, $9,000, $9,000 and $1,845, respectively,
during 2002.
Under the Salary Deferral Program (SDP) each employee of TXU Corp. and
its participating subsidiaries whose annual salary is equal to or
greater than an amount established under the SDP ($106,030 for the
program year beginning January 1, 2002) may elect to defer up to 50% of
annual base salary, and/or up to 100% of any bonus or incentive award
and certain maturing DICP awards, for a period of seven years, for a
period ending with the retirement of such employee, or for a
combination thereof. TXU Corp. makes a matching award, subject to
forfeiture under certain circumstances, equal to 100% of up to the
first 8% of salary deferred under the SDP; provided that employees who
first become eligible to participate in the SDP on or after January 1,
2002, who are also eligible, or become eligible, to participate in the
DICP, are not eligible to receive any SDP matching award. Salaries and
bonuses deferred under the SDP are included in amounts reported under
Salary and Bonus, respectively, in the Summary Compensation Table.
12
Deferrals are credited with earnings or losses based on the performance
of investment alternatives under the SDP selected by each participant.
At the end of the applicable maturity period, the trustee for the SDP
distributes the deferrals and the applicable earnings in cash as a lump
sum or in annual installments. TXU Corp. is financing the retirement
option portion of the SDP through the purchase of corporate-owned life
insurance on the lives of participants. The proceeds from such
insurance are expected to allow TXU Corp. to fully recover the cost of
the retirement option. During 2002, matching awards, which are included
under All Other Compensation in the Summary Compensation Table, were
made for Messrs. Nye, Baker and Farell in the amounts of $103,000,
$49,200 and $32,233, respectively.
Under the TXU Split-Dollar Life Insurance Program (Insurance Program)
split-dollar life insurance policies are purchased for eligible
corporate officers of TXU Corp. and its participating subsidiaries. The
death benefit of the participants' insurance policies are equal to two,
three or four times their annual Insurance Program compensation
depending on their category. Individuals who first became eligible to
participate in the Insurance Program after October 15, 1996, vest in
the policies issued under the Insurance Program over a six year period.
TXU Corp. pays the premiums for the policies and has received a
collateral assignment of the policies equal in value to the sum of all
of its insurance premium payments. Although the Insurance Program is
terminable at any time, it is designed so that if it is continued, TXU
Corp. will fully recover all of the insurance premium payments it has
made either upon the death of the participant or, if the assumptions
made as to policy yield are realized, upon the later of 15 years of
participation or the participant's attainment of age 65. During 2002,
the economic benefit derived by Messrs. Nye, Baker and Farell from the
term insurance coverage provided and the interest foregone on the
remainder of the insurance premiums paid by the Company amounted to
$184,985, $61,760 and $23,025, respectively.
(10) TXU Corp. has entered into employment agreements with Messrs. Nye,
Baker, and Longhurst as hereinafter described in this footnote.
Effective June 1, 2002, TXU Corp. entered into a new employment
agreement with Mr. Nye, which supersedes his previous employment
agreement. The new agreement provides for an initial term expiring May
31, 2005, and a secondary term expiring May 31, 2007. During the
initial term, Mr. Nye will continue to serve as TXU Corp.'s Chairman of
the Board and Chief Executive until such time as his successor is
elected at which time Mr. Nye may continue as TXU Corp.'s Chairman of
the Board and/or in such other executive position as he and TXU Corp.
may mutually agree upon. During the secondary term, Mr. Nye will
continue as an employee of TXU Corp. or, with TXU Corp.'s approval, he
may retire and serve TXU Corp. in a consulting capacity through the
expiration of the secondary term. Mr. Nye will, during the initial
term, be entitled to a minimum annual base salary of $1,050,000,
eligibility for an annual bonus under the terms of the AIP, and minimum
annual restricted stock awards of 40,000 shares under the LTICP. The
agreement also provides for a special one-time bonus of $1,000,000 in
consideration for his entering into the new agreement. Such bonus is
payable in equal annual installments over a five year period. During
the secondary term, Mr. Nye will be entitled to an annual base salary
equal to 75% of his base salary prior to expiration of the initial term
and eligibility for a prorated bonus under the terms of the AIP for the
2005 AIP plan year. The agreement also provides Mr. Nye with certain
benefits following his retirement, including administrative support,
annual medical examinations and financial planning services. The
agreement also reconfirms TXU Corp.'s prior agreement to fund the
retirement benefit to which Mr. Nye will be entitled under TXU Corp.'s
supplemental retirement plan. Additionally, the agreement entitles Mr.
Nye to certain severance benefits in the event he dies, becomes
disabled, is terminated without cause or resigns or retires with TXU
Corp.'s approval during the term of the agreement, including the base
salary and annual incentive awards he would have received; continued
payment of the remaining special bonus annual installment payments; a
payment in lieu of foregone and forfeited incentive compensation; and
health care benefits. The agreement also provides for compensation and
benefits under certain circumstances following a change-in-control of
TXU Corp. during the initial term, including a payment equal to the
greater of three times his annualized base salary and target bonus or
the total base salary and bonus he would have received for the
remainder of the term of the agreement; any unpaid portion of the
special bonus; a payment in lieu of foregone and forfeited incentive
compensation; health care benefits; and a tax gross-up payment to
offset any excise tax which may result from such change-in-control
payments.
13
TXU Corp. entered into an employment agreement with Mr. Baker effective
July 1, 2000. The agreement, as amended, provides for the continued
service by Mr. Baker through June 30, 2004 (Term). Under the terms of
the agreement, Mr. Baker will, during the Term, be entitled to a
minimum annual base salary of $420,000, eligibility for an annual bonus
under the terms of the AIP, and minimum restricted stock awards of
12,000 shares under the LTICP. The agreement entitles Mr. Baker to
certain severance benefits in the event he is terminated without cause
during the Term, including a payment equal to the greater of his
annualized base salary and target bonus, or the total amount of base
salary and target bonuses he would have received for the remainder of
the Term; a payment in lieu of foregone and forfeited incentive
compensation; and health care benefits. The agreement also provides for
compensation and benefits under certain circumstances following a
change-in-control of TXU Corp. during the Term, including a payment
equal to three times his annualized base salary and target bonus; a
payment in lieu of foregone and forfeited incentive compensation;
health care benefits and a tax gross-up payment to offset any excise
tax which may result from such change-in-control payments.
The Company entered into an employment agreement with Mr. Longhurst
effective November 1, 2002. The agreement provides for the continued
service by Mr. Longhurst through July 31, 2005 (Term). Under the terms
of the agreement, Mr. Longhurst will, during the Term, be entitled to
an initial annual base salary of $205,000, eligibility for an annual
bonus under the terms of the AIP, a retention bonus payment equal to
$20,000 if Mr. Longhurst continues his employment through the end of
the Term, and eligibility for consideration for awards under the LTICP.
The agreement also provides for certain benefits associated with Mr.
Longhurst's transition from international assignment status to his
employment status with the Company, including housing, relocation and
transportation assistance, immigration assistance and tax preparation
assistance. The agreement entitles Mr. Longhurst to certain severance
benefits in the event he is terminated without cause during the Term,
including a payment equal to the base salary and target bonuses he
would have received for the remainder of the Term; the retention bonus
payment; a payment in lieu of certain international assignment
transition benefits provided for in the agreement; and relocation to
the U.K. for Mr. Longhurst and his family.
TXU Corp. and its participating subsidiaries maintain retirement plans
(Retirement Plan), which are qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (Code). The Retirement Plan contains
both a traditional defined benefit component and a cash balance component.
Annual retirement benefits under the traditional defined benefit component,
which applied during 2002 to each of the named officers other than Mr. Nye and
Mr. Longhurst, are computed as follows: for each year of accredited service up
to a total of 40 years, 1.3% of the first $7,800, plus 1.5% of the excess over
$7,800, of the participant's average annual earnings during his or her three
years of highest earnings. The Retirement Plan also contains a cash balance
component, which covers all employees who first become eligible to participate
in the Retirement Plan on or after January 1, 2002, and employees previously
covered under the traditional defined benefit component who, during a one-time
election period in 2001 (and for certain employees covered by collective
bargaining agreements, during other specifically negotiated election periods)
elected to convert the actuarial equivalent of their accrued traditional defined
benefit to the cash balance plan component. Mr. Nye elected to convert to the
cash balance plan during the 2001 election period. Under the cash balance
component, hypothetical accounts are established for participants and credited
with monthly contribution credits equal to a percentage of the participant's
compensation (3.5%, 4.5%, 5.5% or 6.5% depending on the participant's combined
age and years of accredited service) and interest credits based on the average
yield of the 30-year Treasury bond for the 12 months ending November 30 of the
prior year. Amounts reported under Salary for the named executive officers in
the Summary Compensation Table approximate earnings as defined under the
traditional defined benefit component of the Retirement Plan without regard to
any limitations imposed by the Code. Benefits paid under the traditional defined
benefit component of the Retirement Plan are not subject to any reduction for
Social Security payments but are limited by provisions of the Code. Based on
benefits accrued under the cash balance component of the Retirement Plan as of
December 31, 2002, the estimated annual benefit payable to Mr. Nye under such
component at normal retirement age is $1,138,269. Mr. Longhurst was covered by
the Electricity Supply Pension Scheme, in which TXU Europe participates, through
October 31, 2002. As of December 31, 2002, years of accredited service under the
Retirement Plan for Messrs. Nye, Baker, Farell and Longhurst were 40, 32, 28 and
0, respectively.
14
TXU PENSION PLAN TABLE
Years of Service
------------------------------------------------------------------------------------------
Remuneration 20 25 30 35 40
------------------ -------------- ---------------- ------------------ ----------------- -----------------
$ 50,000 $ 14,688 $ 18,360 $ 22,032 $ 25,704 $ 29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
1,800,000 539,688 674,610 809,532 944,454 1,079,376
2,000,000 599,688 749,610 899,532 1,049,454 1,199,376
TXU Corp.'s supplemental retirement plan (Supplemental Plan) provides
for the payment of retirement benefits, which would otherwise be limited by the
Code or the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the Supplemental Plan,
retirement benefits are calculated in accordance with the same formula used
under the qualified plan, except that, with respect to calculating the portion
of the Supplemental Plan benefit attributable to service under the defined
benefit component of the Retirement Plan, earnings also include AIP awards (for
2002, 100% of the AIP award, and for 2001 and 2000, 50% of the AIP awards, are
reported under Bonus for the named officers in the Summary Compensation Table).
The table set forth above illustrates the total annual benefit payable at
retirement under the Retirement Plan inclusive of benefits payable under the
Supplemental Plan, prior to any reduction for earlier-than-normal or a
contingent beneficiary option which may be selected by participants.
15
The following report and performance graph are presented herein for information
purposes only. This information is not required to be included herein and shall
not be deemed to form a part of this report to be "filed" with the Securities
and Exchange Commission. The report set forth hereinafter is the report of the
Organization and Compensation Committee of the Board of Directors of TXU Corp.
and is illustrative of the methodology utilized in establishing the compensation
of executive officers of TXU Gas. References in the report to the "Company" are
references to TXU Corp. and references to "this proxy statement" are references
to TXU Corp.'s proxy statement in connection with TXU Corp.'s 2003 annual
meeting of shareholders.
ORGANIZATION AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors
(Committee) is responsible for reviewing and establishing the compensation of
the executive officers of the Company. The Committee consists of directors of
the Company who are not employees or former employees of the Company and is
chaired by J. E. Oesterreicher. The Committee has directed the preparation of
this report and has approved its content and submission to the shareholders.
As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation plans
should align executive compensation with returns to shareholders with due
consideration accorded to balancing both long-term and short-term objectives.
The overall compensation program should provide for an appropriate and
competitive balance between base salaries and performance-based annual and
long-term incentives. The Committee has determined that, as a matter of policy
to be implemented over time, the base salaries of the officers will be
established around the median, or 50th percentile, of the base salaries provided
by comparable energy companies, or other relevant market, and that opportunities
for total direct compensation (defined as the sum of base salaries, annual
incentives and long-term incentives) to reach the 75th percentile, or above, of
such market or markets will be provided through annual and long-term
performance-based incentive compensation plans. Such compensation principles and
practices have allowed, and should continue to allow, the Company to attract,
retain and motivate its key executives.
In furtherance of these policies, nationally recognized compensation
consultants have been retained to assist the Committee in its periodic reviews
of compensation and benefits provided to officers. The consultants' evaluations
include comparisons to comparable utilities and energy companies as well as to
general industry with respect both to the level and composition of officers'
compensation.
The compensation of the officers of the Company consists principally of
base salaries, the opportunity to earn an incentive award under the Annual
Incentive Plan (AIP), awards of performance-based restricted shares under the
Long-Term Incentive Compensation Plan (Long-Term Plan) and the opportunity to
participate in the Deferred and Incentive Compensation Plan (DICP). Awards under
the AIP are directly related to annual performance as evaluated by the
Committee. The ultimate value of any awards of performance-based restricted
shares, if any, under the Long-Term Plan, as well as the value of future
payments under the DICP are directly related to the future performance of the
Company's common stock. It is anticipated that performance-based incentive
awards under the AIP and the Long-Term Plan, will, in future years, continue to
constitute a substantial percentage of the officers' total compensation.
The AIP, which was first approved by the shareholders in 1995 and
reapproved in 2000, is administered by the Committee and provides an objective
framework within which annual performance can be evaluated by the Committee.
Depending on the results of such performance evaluations, and the attainment of
the per share net income goals established in advance, the Committee may provide
annual incentive compensation awards to eligible officers. As amended in 2001
with respect to awards provided in 2002 and thereafter, the evaluation of each
individual participant's performance may be based upon the attainment of a
combination of corporate, group, business unit, function and/or individual
objectives. The Company's annual performance is evaluated based upon its total
return to shareholders, return on invested capital and earnings growth, as well
as other measures such as competitiveness, service quality and employee safety.
The combination of individual and Company results, together with the Committee's
evaluation of the competitive level of compensation which is appropriate for
such results, determines the amount, if any, actually awarded. Awards under the
AIP constitute the principal annual incentive component of officers'
compensation.
16
The Long-Term Plan, which was first approved by the shareholders in
1997 and reapproved as amended in 2002, is also administered by the Committee
and is a comprehensive stock-based incentive compensation plan under which all
awards are made in, or based on the value of, the Company's common stock. The
Long-Term Plan provides that, in the discretion of the Committee, awards may be
in the form of stock options, stock appreciation rights, performance and/or
restricted stock or stock units or in any other stock-based form. The purpose of
the Long-Term Plan is to provide performance-related incentives linked to
long-term performance goals. Such performance goals may be based on individual
performance and/or may include criteria such as absolute or relative levels of
total shareholder return, revenues, sales, net income or net worth of the
Company, any of its subsidiaries, business units or other areas, all as the
Committee may determine. Awards under the Long-Term Plan provided to the
officers of the Company have been almost exclusively in the form of
performance-based restricted stock as more fully described hereinafter. Awards
under the Long-Term Plan constitute the principal long-term component of
officers' compensation.
In establishing levels of executive compensation, the Committee has
reviewed various performance and compensation data, including the performance
measures under the AIP and the reports of its compensation consultant.
Information was also gathered from industry sources and other published and
private materials which provided a basis for comparing comparable electric and
gas utilities and other survey groups representing a large variety of business
organizations. Included in the data considered were the comparative returns
provided by the largest electric and gas utilities as represented by the returns
of the Standard & Poor's Electric Utilities Index which are reflected in the
graph on page 21. Compensation amounts were established by the Committee based
upon its consideration of the above comparative data and its subjective
evaluation of Company and individual performance at levels consistent with the
Committee's policy relating to total direct compensation.
Since its last report to shareholders which was published in the proxy
statement for 2002, the Committee has considered officers' compensation matters
at several meetings including those held in February and May of 2002 and in
February of 2003. The results of Committee actions taken in February and May of
2002 are included in the Summary Compensation Table on page 9 of this proxy
statement. Generally speaking, the actions taken at those meetings in 2002
reflected the Company's exemplary performance in 2001 (total return of 12.2%,
the 2nd highest of the 10 largest utilities in the United States) and for the
three years ended in March 2002 (total return of 57.9%, the 5th highest of the
28 companies comprising the Standard & Poor's Electric Utilities Index). Actions
taken at its meeting in February 2003 reflect the Company's recent business
reversals and include freezing executive officers' salaries and not providing
any AIP awards for 2002 performance. Moreover, it is anticipated that awards of
performance-based restricted stock under the Long-Term Plan which were provided
in May 2000 will be forfeited as a result of recent performance, and that awards
provided in 2001 and 2002 may also be completely or partially forfeited
depending on returns during the remainder of the relevant performance periods.
With respect to the base salaries of the officers, at its meeting in
February of 2002, the Committee authorized certain increases in salaries,
including the Chief Executive's. Those increases were intended to reflect
competitive market comparisons and to establish base salaries around the median
of such markets. Increases provided in February 2002 are reflected in the
Summary Compensation Table. As noted earlier, at its meeting in February 2003
the Committee decided not to increase the base pay of any of the executive
officers.
AIP awards provided by the Committee in February 2002 were based upon
the Company's strong performance in 2001 and are reflected in the Summary
Compensation Table. Based upon the Company's performance in 2002, including its
failure to achieve the earnings per share targets established in advance, the
Committee, at its meeting in February 2003, determined not to provide AIP awards
to any officers for 2002 performance. Discretionary cash bonuses were provided
to a limited number of officers in February 2003 as the result of superior
performance in certain business activities and other individual circumstances.
At its meetings in February 2002 and February 2003, the Committee
provided awards of performance-based restricted shares under the Long-Term Plan
to certain officers, including the Chief Executive. Information relating to
17
awards made to the named executive officers in 2002 is contained in the Table on
page 11 of this proxy statement. The ultimate value of all of the awards, if
any, will be determined by the Company's total return to shareholders over
selected performance periods compared to the total returns for those periods of
the companies comprising the Standard & Poor's Electric Utilities Index.
Depending upon the Company's relative total return for such periods, the
officers may earn from 0% to 200% of the original award, and their compensation
is, thereby, directly related to shareholder value. All of the awards
contemplate that 200% of the original award will be provided if the Company's
total return is in the 81st percentile or above of the returns of the companies
comprising the Standard & Poor's Electric Utilities Index and that such
percentage of the original award will be reduced as the Company's return
compared to the returns provided by the companies in the Index declines so that
0% of the original award will be provided if the Company's return is in the 40th
percentile or below of returns provided by the companies comprising the Index.
These awards, and any awards that may be made in the future, are based upon the
Committee's evaluation of the appropriate level of long-term compensation
consistent with its policy relating to total direct compensation.
Additionally, with respect to the Long-Term Plan, the Committee, at its
meeting in May 2002, considered the performance-based restricted stock awards
provided to certain officers in May 1999. Based upon its review and comparison
of the Company's total return to the returns provided by the companies
comprising the Standard & Poor's Electric Utilities Index, the Committee
determined that the Company's performance during the three-year performance
period ending in March 2002 permitted the payment of 200% of such 1999 awards.
As noted earlier, during the three-year performance period ending in March 2002,
the Company's total return of 57.9% was the 5th highest (85th percentile) of the
28 companies comprising the index at that time. Payments of these awards were
made in the form of the Company's stock and cash, and, for Messrs. Nye, Gibbs,
Dickie and McNally and Ms. Curry, the value of such cash and stock at the date
of distribution is included in the LTIP Payouts column of the Summary
Compensation Table on page 9 of this proxy statement.
With respect to the compensation of the Chief Executive, in February
2002 the Committee increased Mr. Nye's base salary as Chief Executive to an
annual rate of $1,050,000 representing a $75,000 or 7.6% increase over the
amount established for Mr. Nye in May of 2001. Based upon the Committee's
evaluation of individual and Company performance in 2001, including the
Company's total return of 12.2% which was the second highest of the 10 largest
utilities in the United States, the Committee provided Mr. Nye with an AIP award
of $1,000,000 and a special bonus award of $750,000 compared to the prior year's
AIP award of $950,000. The Committee also awarded 150,000 shares of
performance-based restricted stock to Mr. Nye. Under the terms of his award, Mr.
Nye can earn from 0% to 200% of the original award, depending on the Company's
total return to shareholders over a three-year period (April 1, 2002 through
March 31, 2005) compared to the total return provided by the companies
comprising the Standard & Poor's Electric Utilities Index. In addition, as
previously noted in this report and based upon the Company's total return of
57.9% for the three years ended in March of 2002, the Committee in May of 2002
approved the payment of 200% of the 1999 performance-based restricted stock
awards under the Long-Term Plan, which for Mr. Nye was 80,000 shares.
Actions taken by the Committee in 2003 with respect to the Chief
Executive's compensation reflect the Company's recent business reversals. In
February 2003, the Committee established Mr. Nye's base salary at an annual rate
of $1,050,000, which is the same rate as established in 2002. In recognition of
the Company's cost reduction efforts, Mr. Nye has voluntarily reduced his base
salary to a rate of $950,000 for one year. As noted earlier, the Committee did
not provide AIP awards to any executive officers, including Mr. Nye, in 2003
based on 2002 performance. Additionally, in 2003 the Committee provided awards
of performance-based restricted stock to Mr. Nye, the ultimate value of which
will be determined by the Company's performance over two-year and three-year
performance periods. Under the terms of his awards, Mr. Nye can earn from 0% to
200% of the original awards depending, with respect to 80,000 shares, on the
Company's total return to shareholders over a two-year period (April 1, 2003
through March 31, 2005) and, with respect to 80,000 shares, on the Company's
total return to shareholders over a three-year period (April 1, 2003 through
March 31, 2006) compared to the total returns provided for the respective
periods by the companies comprising the Standard & Poor's Electric Utilities
Index. The level of compensation established for the Chief Executive in 2002 and
in 2003 was based upon the Committee's subjective evaluation of the information
contained in this report consistent with the Committee's policy relating to
total compensation.
18
As previously reported, the Company has entered into employment
agreements, as approved by the Committee, with certain officers, including the
Chief Executive. Mr. Nye's prior employment agreement was superceded, effective
June 1, 2002, by a new agreement which was approved in May 2002. The terms of
employment agreements with the named executive officers are described in
Footnote 6 to the Summary Compensation Table on pages 12, 13 and 14 of this
proxy statement.
Certain of the Company's business units have developed separate annual
incentive compensation plans. Those plans focus on the results achieved by those
individual business units and the compensation opportunities provided by those
plans are considered to be competitive in the markets in which those units
compete. Generally, officers may not participate in both the traditional
incentive compensation plans as discussed herein and the business unit plans.
None of the named executive officers participate in the individual business unit
plans.
In discharging its responsibilities with respect to establishing
officers' compensation, the Committee normally considers such matters at its
February and May meetings. Although Company management may be present during
Committee discussions of officers' compensation, Committee decisions with
respect to the compensation of the Chief Executive are reached in private
session without the presence of any member of Company management.
Section 162(m) of the Code limits the deductibility of compensation
which a publicly traded corporation provides to its most highly compensated
officers. As a general policy, the Company does not intend to provide
compensation which is not deductible for federal income tax purposes. Awards
under the AIP and the Long-Term Plan are expected to be fully deductible. The
DICP and the Salary Deferral Program have been amended to require the deferral
of distributions of maturing amounts until the time when such amounts would be
deductible. A portion of the special bonus amounts provided to Mr. Nye in 2002
are not expected to be deductible but such amounts are not material.
Shareholder comments to the Committee are welcomed and should be
addressed to the Secretary of the Company at the Company's offices.
Organization and Compensation Committee
J. E. Oesterreicher, Chair Jack E. Little
Derek C. Bonham Margaret N. Maxey
William M. Griffin Charles R. Perry (retired February 2003)
Kerney Laday Herbert H. Richardson
19
PERFORMANCE GRAPH
The following graph compares the performance of TXU Corp.'s common
stock to the S&P 500 Index and S&P Electric Utilities Index for the last five
years. The graph assumes the investment of $100 at December 31, 1997 and that
all dividends were reinvested. The amount of the investment at the end of each
year is shown in the graph and in the table which follows.
Cumulative Total Returns
for the Five Years Ended 12/31/02
Line graph inserted here that shows Cumulative Total Returns in dollars
by years 1997-2002.
----------- ---------- ------------ ----------- ----------- ----------
1997 1998 1999 2000 2001 2002
- --------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
TXU Corp................................ 100 118 96 128 143 59
- --------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
S&P 500 Index........................... 100 129 156 141 125 97
- --------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
S&P Electric Utilities Index............ 100 115 93 143 131 112
- --------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Security ownership of certain beneficial owners at March 17, 2003:
Amount and Nature
Name and Address of Beneficial
Title of Class of Beneficial Owner Ownership Percent of Class
---------------------- ------------------------- ----------------------- -------------------
Common stock, TXU Corp. 451,000 shares 100.0%
$0.01 par value, Energy Plaza sole voting and
of TXU Gas 1601 Bryan Street investment power
Dallas, Texas 75201
Security ownership of management at March 17, 2003:
The following lists the common stock of TXU Corp. owned by the Directors
and Executive Officers of TXU Gas. The named individuals have sole voting and
investment power for the shares of common stock reported. Ownership of such
common stock by the Directors and Executive Officers, individually and as a
group, constituted less than 1% of the outstanding shares at March 17, 2003.
None of the named individuals own any of the preferred stock of TXU Gas or the
preferred securities of any subsidiaries of TXU Gas.
Number of Shares
---------------------------------------------------------------------------
Name Beneficially Owned Deferred Plan (1) Total
---- ------------------ ----------------- -----
T. L. Baker....................... 91,588 28,104 119,692
H. Dan Farell .................... 28,006 18,784 46,790
Scott R. Longhurst................ 8,896 0 8,896
Michael J. McNally................ 127,344 33,734 161,078
Erle Nye.......................... 420,366 87,792 508,158
Eric H. Peterson.................. 26,443 0 26,443
R. A. Wooldridge.................. 9,576 0 9,576
All Directors and Executive
Officers as a group (7)......... 712,219 168,414 880,633
- -----------------
(1) Share units held in deferred compensation accounts under the Deferred
and Incentive Compensation Plan. Although this plan allows such units to
be paid only in the form of cash, investments in such units create
essentially the same investment stake in the performance of TXU Corp.'s
common stock as do investments in actual shares of common stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert A. Wooldridge, a Director of TXU Gas, is a partner of Hunton &
Williams, which provides legal services to TXU Gas.
21
PART IV
Item 14. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of TXU Gas' management, including the principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this annual report. Based on the evaluation performed, TXU
Gas' management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective.
There have been no significant changes in TXU Gas' internal controls or
in other factors that could significantly affect these controls subsequent to
the evaluation referenced above.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
Financial Statements (included in Appendix A to this report):
Item Page
---- ----
Selected Financial Data................................................................... A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ A-3
Statement of Responsibility............................................................... A-16
Independent Auditors' Report.............................................................. A-17
Statements of Consolidated Income and Comprehensive Income for each of the
three years in the period ended December 31, 2002.................................... A-18
Statements of Consolidated Cash Flows for each of the three years in the period
ended December 31, 2002.............................................................. A-19
Consolidated Balance Sheets, December 31, 2002 and 2001................................... A-20
Statements of Consolidated Shareholder's Equity for each of the three years in the
period ended December 31, 2002....................................................... A-21
Notes to Financial Statements............................................................. A-22
The consolidated financial statement schedules are omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 2002, are as follows:
Date Item Reported
---- -------------
November 5, 2002 Item 2. Disposition of Assets
Item 7. Financial Statements and Exhibits
December 17, 2002 Item 5. Other Events and Regulation FD Disclosure
(c) Exhibits: Included in Appendix B to this report.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Gas Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TXU GAS COMPANY
Date: March 28, 2003 By: /s/ ERLE NYE
------------------------------------
(Erle Nye, Chairman of the Board and
Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TXU Gas
Company and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ ERLE NYE Principal Executive March 28, 2003
- ----------------------------------------------------------- Officer and Director
(Erle Nye, Chairman of the Board and Chief Executive)
/s/ SCOTT LONGHURST Principal Financial March 28,2003
.......----------------------------------------------------- Officer
(Scott Longhurst, Senior Vice President)
/s/ BIGGS C. PORTER Principal Accounting Officer March 28, 2003
- -----------------------------------------------------------
(Biggs C. Porter, Vice President)
/s/ T. L. BAKER Director March 28, 2003
- -----------------------------------------------------------
(T. L. Baker)
/s/ MICHAEL J. McNALLY Director March 28, 2003
- -----------------------------------------------------------
(Michael J. McNally)
/s/ ERIC H. PETERSON Director March 28, 2003
- ------------------------------------------------------------
(Eric H. Peterson)
/s/ ROBERT A. WOOLDRIDGE Director March 28, 2003
- -------------------------------------------------------------
(Robert A. Wooldridge)
23
TXU GAS COMPANY
CERTIFICATION OF CEO
I, Erle Nye, Chairman of the Board and Chief Executive of TXU Gas Company,
certify that:
1. I have reviewed this annual report on Form 10-K of TXU Gas Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Erle Nye
----------------------------------------------
Signature: Erle Nye
Title: Chairman of the Board and Chief Executive
24
TXU GAS COMPANY
CERTIFICATION OF PFO
I, Scott Longhurst, Principal Financial Officer of TXU Gas Company, certify
that:
1. I have reviewed this annual report on Form 10-K of TXU Gas Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Scott Longhurst
------------------------------
Signature: Scott Longhurst
Title: Principal Financial Officer
25
Appendix A
TXU GAS COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
December 31, 2002
Page
Selected Financial Data..................................................................... A-2
Management's Discussion and Analysis of Financial Condition and Results of Operations....... A-3
Statement of Responsibility................................................................. A-16
Independent Auditors' Report................................................................ A-17
Financial Statements:
Statements of Consolidated Income and Comprehensive Income............................. A-18
Statements of Consolidated Cash Flows.................................................. A-19
Consolidated Balance Sheets............................................................ A-20
Statements of Consolidated Shareholder's Equity........................................ A-21
Notes to Financial Statements.......................................................... A-22
A-1
TXU GAS COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
Year Ended
December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------- -----------
(millions of dollars, except volumes and ratios)
Total assets-- end of year......................... $2,289 $4,543 $5,658 $ 3,433 $3,957
====== ====== ====== ======= ======
Capitalization-- end of year
Long-term debt, less amounts due currently....... $ 426 $ 553 $ 757 $ 551 $ 551
TXU Gas Company obligated, mandatorily
redeemable, preferred securities of
subsidiary trust holding solely junior
subordinated debentures of TXU Gas
Company (trust securities)..................... 147 147 147 147 146
Preferred stock................................. 75 75 75 75 75
Common stock equity............................. 753 985 949 965 741
------ ------ ------ ------- ------
Total........................................ $1,401 $1,760 $1,928 $ 1,738 $1,513
====== ====== ====== ======= ======
Capitalization ratios-- end of year
Long-term debt.................................. 30.4% 31.4% 39.3% 31.7% 36.4%
Trust securities................................ 10.5 8.3 7.6 8.5 9.6
Preferred stock................................. 5.4 4.3 3.9 4.3 5.0
Common stock equity............................. 53.7 56.0 49.2 55.5 49.0
------ ------ ------ ------- ------
Total........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======= ======
Operating revenues of continuing operations
Gas distribution:
Residential................................... $ 563 $ 710 $ 616 $ 402 $ 437
Commercial.................................... 291 387 318 212 225
Industrial and electric generation............ 20 47 28 20 20
------ ------ ----- ------- ------
Total gas distribution....................... 874 1,144 962 634 682
Pipeline transportation......................... 59 48 57 57 58
Other revenues, net of intercompany
eliminations.................................. 48 37 88 177 115
------ ------ ----- ------- ------
Total operating revenues of continuing
operations................................. $ 981 $1,229 $1,107 $ 868 $ 855
====== ====== ====== ======= ======
Income (loss) from continuing operations.......... $ 11 $ 1 $ 66 $ 8 $ (29)
====== ===== ===== ======= ======
Ratio of income (loss)from continuing
operations to fixed charges..................... 1.26 1.12 2.43 1.08 0.52
Ratio of income (loss)from continuing
operations to combined fixed charges and
preferred dividends............................. 1.15 0.76 2.25 1.04 0.49
With the transfer of certain businesses to TXU Energy Company LLC on January 1,
2002 (see Note 1 to Financial Statements), the gas distribution, gas pipeline
and asset management services businesses constitute TXU Gas Company's continuing
operations.
Certain previously reported financial and operating statistics have
been reclassified to conform to current classifications.
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS AND DISPOSITIONS
TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.
Divisions and subsidiaries of TXU Gas include TXU Gas Distribution, a
retail gas distribution company serving over 1.4 million residential, commercial
and industrial customers through over 26,000 miles of distribution mains, TXU
Lone Star Pipeline, which operates approximately 6,800 miles of transmission and
gathering pipeline in Texas, and Oncor Utility Solutions which offers utility
asset management services to cooperatives and municipally-owned and
investor-owned utilities in North America.
Prior to the restructuring of TXU Corp. and its United States (US)
subsidiaries in connection with the opening of the Texas electricity market to
competition, effective January 1, 2002, TXU Gas was also engaged in certain risk
management and energy trading activities and the retail sale of natural gas to
large commercial and industrial customers in various competitive markets in the
US. As a part of that restructuring, TXU Gas transferred those operations to TXU
Energy Company LLC (TXU Energy), a wholly-owned indirect subsidiary of TXU Corp.
Accordingly, the transferred operations have been reflected as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.
In May 2000, TXU Gas sold substantially all of the assets of its
natural gas processing subsidiary for $105 million, resulting in a pre-tax gain
of $53 million ($34 million after-tax), which is reported in other income in the
statement of income.
CRITICAL ACCOUNTING POLICIES
All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein are stated in
millions of US dollars unless otherwise indicated.
TXU Gas' significant accounting policies are detailed in Note 2 to
Financial Statements. TXU Gas follows accounting principles generally accepted
in the United States of America. In applying these accounting policies in the
preparation of TXU Gas' consolidated financial statements, management is
required to make estimates and assumptions about future events that affect the
reporting and disclosure of assets and liabilities at the balance sheet dates
and revenue and expense during the periods covered. The following is a summary
of certain critical accounting policies of TXU Gas that are impacted by
judgments and uncertainties and for which different amounts might be reported
under a different set of conditions or using different assumptions.
Revenue recognition - TXU Gas records gas distribution revenues as
natural gas is provided to retail customers on the basis of periodic cycle meter
readings and includes an estimated accrual for the value of gas provided from
the meter reading date to the end of the period. Such accruals are based on
estimated daily consumption, which is derived using historical customer profiles
adjusted for weather and other measurable factors affecting consumption. Gas
pipeline transportation revenues are recognized as services are provided to
customers based on estimated volumes subsequently confirmed by meter readings.
Revenues include adjustments under regulatory mechanisms to recover or refund
the cost of natural gas purchased for distribution to retail customers that is
above or below the level included in billed distribution rates.
Regulatory assets and liabilities - The financial statements of TXU Gas
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effect of Certain Types of Regulation." The assumptions and
judgments used by regulatory authorities continue to have an impact on the
A-3
recovery of costs, the rate earned on invested capital and the timing and amount
of assets to be recovered by rates. (See Note 11 to Financial Statements.)
Depreciation of Property, Plant and Equipment - The depreciable lives
of pipeline and distribution systems are based on management's
estimates/determinations of the systems' economically useful lives as approved
by regulatory authorities. To the extent that the actual lives differ from these
estimates, there would be an impact on the amount of depreciation expense
recognized in the financial statements.
Goodwill and Intangible Assets -- TXU Gas evaluates goodwill for
impairment at least annually in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." TXU
Gas has performed impairment tests for reporting units reflected in results of
operations from continuing operations, and no goodwill impairment charges were
recorded.
TXU Gas primarily uses discounted cash flow analyses to test for
goodwill impairment. Such analyses require a significant number of estimates and
assumptions regarding future earnings, working capital requirements, capital
expenditures, discount rate, terminal year growth factor and other modeling
factors.
Defined Benefit Pension Plans and Other Postretirement Benefit Plans --
TXU Gas is a participating employer in the TXU Retirement Plan (Retirement
Plan), a defined benefit pension plan sponsored by TXU Corp. TXU Gas also
participates with TXU Corp. and certain other affiliated subsidiaries of TXU
Corp. to offer certain health care and life insurance benefits to eligible
employees and their eligible dependents upon the retirement of such employees
from TXU Corp. Reported costs of providing non-contributory defined pension
benefits and other postretirement benefits (see Note 9 to Financial Statements
for further discussion of those costs) are dependent upon numerous factors,
assumptions and estimates.
For example, these costs are impacted by actual employee demographics
(including age, compensation levels and employment periods), the level of
contributions made to the plan, and earnings on plan assets. The Retirement
Plan's assets are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may also impact current and future
pension costs. Fluctuations in actual equity market returns as well as changes
in general interest rates may result in increased or decreased pension costs in
future periods. Pension costs may also be significantly affected by changes in
key actuarial assumptions, including anticipated rates of return on plan assets
and the discount rates used in determining the projected benefit obligation and
pension costs.
In accordance with SFAS 87, "Employers' Acco