SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Texas Utilities Company
A Texas Corporation I.R.S. Employer Identification
Commission File Number 1-12833 No.75-2669310
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
Texas Utilities Electric Company
A Texas Corporation I.R.S. Employer Identificatio
Commission File Number 1-11668 No.75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes ____X___ No _______
Common Stock outstanding at August 13, 1998:
Texas Utilities Company: 281,331,548 shares, without par value.
Texas Utilities Electric Company: 133,381,800 shares, without par value.
This combined Form 10-Q is filed separately by Texas Utilities Company and
Texas Utilities Electric Company. Information contained herein relating to an
individual registrant is filed by that registrant on its own behalf except
that the information with respect to Texas Utilities Electric Company, other
than the condensed consolidated financial statements of Texas Utilities
Electric Company, is filed by each of Texas Utilities Company and Texas
Utilities Electric Company. Each registrant makes no representation as to
information filed by the other registrant.
TABLE OF CONTENTS
Part I. Financial information Page
Item 1. Financial Statements
Texas Utilities Company and Subsidiaries
Condensed Statements of Consolidated Income -
Three, Six and Twelve Months Ended June 30, 1998
and 1997 3
Condensed Statements of Consolidated Comprehensive Income -
Three, Six and Twelve Months Ended June 30, 1998 and
1997 4
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 6
Texas Utilities Electric Company and Subsidiaries
Condensed Statements of Consolidated Income -
Three, Six and Twelve Months Ended June 30, 1998 and
1997 8
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1998 and 1997 9
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 10
Notes to Condensed Consolidated Financial Statements 12
Independent Accountants' Reports 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 27
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 39
Part II.Other Information
Item 1. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42
Signatures 44
APPENDIX A - Financial Information of ENSERCH Corporation and Subsidiaries
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Thousands of Dollars
OPERATING REVENUES . . . . . . . . . . . . . . $3,236,444 $1,588,485 $5,735,942 $3,082,289 $10,600,160 $6,478,004
---------- ---------- ---------- ---------- ----------- ----------
OPERATING EXPENSES
Fuel and purchased power. . . . . . . . . . . 858,998 499,114 1,313,322 991,395 2,534,616 2,091,253
Gas purchased for resale. . . . . . . . . . . 874,451 1,717,754 2,780,513
Operation and maintenance . . . . . . . . . . 617,586 345,953 1,046,012 671,153 1,914,126 1,328,299
Depreciation and amortization . . . . . . . . 261,407 158,581 446,059 316,791 795,716 629,543
Taxes other than income . . . . . . . . . . . 149,936 124,908 313,131 261,214 610,590 534,168
---------- ---------- ---------- ---------- ----------- ----------
Total operating expenses. . . . . . . . . . 2,762,378 1,128,556 4,836,278 2,240,553 8,635,561 4,583,263
---------- ---------- ---------- ---------- ----------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . 474,066 459,929 899,664 841,736 1,964,599 1,894,741
OTHER INCOME (DEDUCTIONS) - NET. . . . . . . . 3,471 (7,813) 1,721 (9,869) (5,998) (10,225)
---------- ---------- ---------- ---------- ----------- ----------
INCOME BEFORE INTEREST, OTHER CHARGES
AND INCOME TAXES. . . . .. . . . . . . . . . 477,537 452,116 901,385 831,867 1,958,601 1,884,516
---------- ---------- ---------- ---------- ----------- ----------
INTEREST AND OTHER CHARGES
Interest. . . . . . . . . . . . . . . . . . . . 300,502 182,007 503,952 363,691 903,198 744,760
Allowance for borrowed funds used during
construction. . . . . .. . . . . . . . . . . . (2,302) (2,633) (4,824) (4,938) (8,776) (9,649)
Distributions on subsidiary obligated, mandatorily
redeemable, preferred securities of subsidiary trusts
holding solely debentures of subsidiary . . . 17,181 18,293 34,330 33,296 70,735 49,798
Preferred stock dividends of subsidiaries . . . 4,082 3,711 8,588 16,018 20,553 41,651
---------- ---------- ---------- ---------- ----------- ----------
Total interest and other charges. . . . . . . 319,463 201,378 542,046 408,067 985,710 826,560
---------- ---------- ---------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . 158,074 250,738 359,339 423,800 972,891 1,057,956
INCOME TAX EXPENSE . . . . . . . . . . . . . . . 75,051 89,992 149,687 148,255 378,330 357,837
---------- ---------- ---------- ---------- ----------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 83,023 $ 160,746 $ 209,652 $ 275,545 $ 594,561 $ 700,119
========== ========= ========= ========== =========== ==========
Average shares of common stock outstanding
(thousands) . . . . . . . . . . . . . . . . . . 250,994 224,616 248,117 224,609 242,712 224,606
Per share of common stock:
Basic earnings. . . . . . . . . . . . . . . . . $0.33 $0.72 $0.84 $1.23 $2.45 $3.12
Diluted earnings. . . . . . . . . . . . . . . . $0.33 $0.72 $0.84 $1.23 $2.44 $3.12
Dividends declared. . . . . . . . . . . . . . . $0.55 $0.525 $1.10 $1.05 $2.175 $2.075
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Thousands of Dollars
NET INCOME. . . . . . . . . . . . . . . . $83,023 $160,746 $209,652 $275,545 $594,561 $700,119
------- -------- -------- -------- -------- --------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment. (19,804) (27,810) 7,434 (35,223) (85,144) (28,975)
Income tax effect . . . . . . . . . . . (25,475) (28,313)
------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . (45,279) (27,810) (20,879) (35,223) (85,144) (28,975)
------- -------- -------- -------- -------- --------
COMPREHENSIVE INCOME . . . . . . . . . . $37,744 $132,936 $188,773 $240,322 $509,417 $671,144
======= ======== ======== ======== ======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------
1998 1997
---- ----
Thousands of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 209,652 $ 275,545
Adjustments to reconcile net income to cash provided by operating activities: --------- ---------
Depreciation and amortization (including amounts charged to fuel). . . . . . . . . 523,443 391,116
Deferred income taxes - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,909 76,176
Investment tax credits- net. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,728) (11,397)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,087) (660)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,201 (137,633)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,652 7,027
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137,740) 12,960
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . (37,272) 35,772
Other working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,419) 44,356
Over/(under)-recovered fuel revenue - net of deferred taxes . . . . . . . . . . (10,610) 6,467
Energy marketing risk management assets and liabilities . . . . . . . . . . . . (25,393)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,210 31,650
-------- --------
Cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 907,818 731,379
-------- --------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Acquisition and interim facilities. . . . . . . . . . . . . . . . . . . . . . . . 2,837,323
Other long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878,965 106,350
Subsidiary obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of subsidiary . . . . . . . . . . . . . . . . . . . 493,273
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572
Retirements/repurchases of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (672,725) (715,938)
Preferred stock of subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . (114,139) (543,148)
Subsidiary obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of subsidiary. . . . . . . . . . . . . . . . . . . . (47,374)
Change in notes payable:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,530,246 486,516
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,395 7,546
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (270,449) (235,833)
Debt premium, discount, financing and reacquisition expenses. . . . . . . . . . . . (170,396) (27,924)
--------- --------
Cash provided by (used in) financing activities. . . . . . . . . . . . . . . . 4,987,418 (429,158)
--------- --------
CASH FLOWS - INVESTING ACTIVITIES
Acquisition of The Energy Group (net of cash acquired of $3,262,050,000). . . . . . (2,168,119)
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (362,094) (226,902)
Nuclear fuel (excluding allowance for equity funds used during construction). . . . (15,404) (28,395)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,094) (39,968)
---------- --------
Cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . (2,609,711) (295,265)
---------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . . . . . . . . . . . . . . . . 85,942 530
---------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . 3,371,467 7,486
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . . . . . . . . 44,435 15,845
---------- ---------
CASH AND CASH EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . . . . . . . . $3,415,902 $ 23,331
========== =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Thousands of Dollars
PROPERTY, PLANT AND EQUIPMENT
United States (US):
Electric:
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,276,451 $16,294,778
Transmission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,688,062 1,675,681
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,930,815 4,809,846
Gas distribution and pipeline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,090,647 1,068,708
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,992 145,125
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545,063 528,374
----------- -----------
Total . . . . . . . . . 24,687,030 24,522,512
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,982,995 6,652,473
----------- -----------
Net of accumulated depreciation 17,704,035 17,870,039
Construction work in progress 408,989 307,978
Nuclear fuel (net of accumulated amortization: 1998 - $500,384,000;
1997 - $456,490,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,365 242,018
Held for future use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,087 24,087
Less reserve for regulatory disallowances. . . . . . . . . . . . . . . . . . . . . . . . . 836,005 836,005
----------- -----------
Net US property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,515,471 17,608,117
Non-US:
United Kingdom - Electric and Gas (net of accumulated depreciation of $21,540,000) . . . . 2,994,829
Australia - Electric (net of accumulated depreciation: 1998 - $75,975,000;
1997 - $63,189,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924,907 962,913
----------- -----------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,435,207 18,571,030
----------- -----------
INVESTMENTS
Goodwill (net of accumulated amortization: 1998 - $68,462,000; 1997 - $33,444,000) . . . . 7,420,667 1,423,420
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014,192 851,320
----------- -----------
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,434,859 2,274,740
----------- -----------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,415,902 44,435
Accounts receivable (net of allowance for uncollectible accounts:
1998 - $35,467,000; 1997 - $11,322,000). . . . . . . . . . . . . . . . . . . . . . . . 1,219,186 981,067
Inventories - at average cost:
Materials and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,928 209,825
Fuel stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,688 81,490
Gas stored underground. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,227 156,637
Special deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680,853 1,770
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . . . . . . . 493,247 365,650
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,680 59,809
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,328 76,307
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,154 17,858
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,885,193 1,994,848
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,895,949 1,876,228
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 832,350 157,283
----------- -----------
Total deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,728,299 2,033,511
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,483,558 $24,874,129
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
6
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Thousands of Dollars
CAPITALIZATION
Common stock without par value:
Authorized shares - 500,000,000
Outstanding shares - 1998 - 279,572,743 and 1997 - 245,237,559. . . . . . . . $6,921,918 $5,587,200
Common stock subscribed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,032
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,247,427 1,311,875
Accumulated other comprehensive income -
Cumulative currency translation adjustment . . . . . . . . . . . . . . . . (76,891) (56,013)
---------- ----------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . 8,150,486 6,843,062
Preferred stock of subsidiaries:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . 190,055 304,194
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . 20,607 20,600
Subsidiary obligated, mandatorily redeemable, preferred securities of subsidiary
trusts holding solely debentures of subsidiary 823,125 875,146
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . 14,925,009 8,759,379
---------- ----------
Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,109,282 16,802,381
---------- ----------
CURRENT LIABILITIES
Notes payable:
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,560,397 570,000
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341,161 44,442
Long-term debt due currently. . . . . . . . . . . . . . . . . . . . . . . . . . 663,665 772,071
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284,234 879,593
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . 471,754 357,044
Dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,201 139,994
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,930 91,440
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,633 182,532
Interest accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,934 193,125
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,444 7,919
Over-recovered fuel revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 11,987
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324,759 271,853
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 8,721,112 3,522,000
---------- ----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 3,567,912 2,989,254
Unamortized investment tax credits. . . . . . . . . . . . . . . . . . . . . . . 558,856 570,283
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . 2,526,396 990,211
---------- ----------
Total deferred credits and other noncurrent liabilities . . . . . . . . . . 6,653,164 4,549,748
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,483,558 $24,874,129
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
7
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------- ------------------ ------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Thousands of Dollars
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $1,665,700 $1,451,541 $2,997,616 $2,817,000 $6,316,033 $5,939,503
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power. . . . . . . . . . . . . . . . . 557,311 451,854 987,702 902,062 2,148,349 1,910,525
Operation and maintenance . . . . . . . . . . . . . . . . 334,148 310,397 616,160 603,887 1,238,657 1,186,442
Depreciation and amortization . . . . . . . . . . . . . . 183,702 143,139 327,639 285,745 614,171 568,850
Income taxes. . . . . . . . . . . . . . . . . . . . . . . 123,330 98,449 198,449 176,141 441,989 399,322
Taxes other than income . . . . . . . . . . . . . . . . . 123,258 117,831 253,177 247,427 513,056 506,105
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses. . . . . . . . . . . . . . . . 1,321,749 1,121,670 2,383,127 2,215,262 4,956,222 4,571,244
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 343,951 329,871 614,489 601,738 1,359,811 1,368,259
---------- ---------- ---------- ---------- ---------- ----------
OTHER INCOME
Allowance for equity funds used during
construction. . . . . . . . . . . . . . . . . . . 1,450 341 3,115 647 7,670 1,298
Other income (deductions) - net . . . . . . . . . . . . . (3,279) (638) 2,730 (275) 1,306 5,138
Income tax benefit (expense). . . . . . . . . . . . . . . 1,381 (1,354) (981) 14,158 (5,004) 12,252
---------- ---------- ---------- ---------- ---------- ----------
Total other income. . . . . . . . . . . . . . . . . . . (448) (1,651) 4,864 14,530 3,972 18,688
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND
OTHER CHARGES . . . . . . . . . . . . . . . . . . . . . 343,503 328,220 619,353 616,268 1,363,783 1,386,947
---------- ---------- ---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on mortgage bonds . . . . . . . . . . . . . . . 96,283 112,548 196,750 227,237 408,911 466,552
Interest on other long-term debt . . . . . . . . . . . . 13,078 3,569 21,935 7,143 36,916 16,945
Other interest . . . . . . . . . . . . . . . . . . . . . 13,885 13,281 28,668 27,262 67,150 54,988
Distributions on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric . . . . . . . 17,181 18,293 34,330 33,296 70,735 49,798
Allowance for borrowed funds used during
construction . . . . . . . . . . . . . . . . . . . . . (1,947) (2,458) (4,181) (4,668) (7,656) (9,375)
---------- ---------- ---------- ---------- ---------- ----------
Total interest and other charges. . . . . . . . . . . . 138,480 145,233 277,502 290,270 576,056 578,908
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 205,023 182,987 341,851 325,998 787,727 808,039
PREFERRED STOCK DIVIDENDS. . . . . . . . . . . . . . . . . 3,130 7,102 6,354 19,562 13,642 45,195
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME AVAILABLE FOR
COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . $ 201,893 $ 175,885 $ 335,497 $ 306,436 $ 774,085 $ 762,844
========= ========= ========= ========== ========= =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
8
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------
1998 1997
---- ----
Thousands of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,851 $ 325,998
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel) . . . . . . . . . . . . . . 398,571 356,763
Deferred income taxes - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,426 69,288
Investment tax credits - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,611) (10,611)
Allowance for equity funds used during construction . . . . . . . . . . . . . . . . . . . . . (3,115) (647)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,242 (122,082)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,136) 899
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,572 23,188
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,091 50,011
Other working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,561 52,620
Over/(under) - recovered fuel revenue - net of deferred taxes . . . . . . . . . . . . . . . (10,182) 6,467
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,206 42,261
--------- ---------
Cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . 896,476 794,155
--------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428,965 106,350
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts holding
solely debentures of TU Electric. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493,273
Retirements/repurchases of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (564,824) (367,750)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,139) (543,148)
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts holding
solely debentures of TU Electric. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,374)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (286,476)
Change in notes receivable/payable:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (253,151)
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,805) 306,607
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,515
Preferred stock dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,655) (28,724)
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,832)
Debt premium, discount, financing and reacquisition expenses. . . . . . . . . . . . . . . . . . (50,302) (23,247)
--------- ---------
Cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (621,610) (547,107)
--------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240,136) (200,155)
Allowance for equity funds used during construction (excluding amount for nuclear fuel) . . . . 2,277 391
Nuclear fuel (excluding allowance for equity funds used during construction). . . . . . . . . . (15,404) (28,395)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,924) (10,538)
--------- ---------
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (278,187) (238,697)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,321) 8,351
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . 11,829 13,005
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,508 $ 21,356
========= =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
9
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1998 December 31,
(Unaudited) 1997
---------- ------------
Thousands of Dollars
ELECTRIC PLANT
In service:
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,352,977 $15,369,306
Transmission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,681,645 1,669,259
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,864,158 4,745,270
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441,203 436,059
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,339,983 22,219,894
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,398,950 6,120,309
----------- -----------
Electric plant in service, less accumulated depreciation . . . . . . . . . . . . . 15,941,033 16,099,585
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,214 190,579
Nuclear fuel (net of accumulated amortization: 1998 - $500,384,000;
1997 - $456,490,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,366 242,017
Held for future use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,966 23,966
----------- -----------
Electric plant, less accumulated depreciation and amortization . . . . . . . . . . 16,425,579 16,556,147
Less reserve for regulatory disallowances . . . . . . . . . . . . . . . . . . . . . . . 836,005 836,005
----------- -----------
Net electric plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,589,574 15,720,142
----------- -----------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,661 534,487
----------- -----------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,508 11,829
Accounts receivable (net of allowance for uncollectible accounts: 1998 - $3,758,000;
1997 - $6,049,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,460 357,702
Inventories - at average cost:
Materials and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,683 181,157
Fuel stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,100 81,489
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,682 31,338
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,557 49,359
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,065 1,818
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723,055 714,692
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,826,089 1,796,516
Under-recovered fuel revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,336
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,817 67,596
----------- -----------
Total deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,887,242 1,864,112
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,770,532 $18,833,433
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
10
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
Thousands of Dollars
CAPITALIZATION
Common stock without par value:
Authorized shares - 180,000,000
Outstanding shares - 1998 - 133,381,800 and 1997 - 142,931,000. . . . . . . . . . . . . $4,029,759 $ 4,316,235
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,317,707 1,982,210
---------- -----------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,347,466 6,298,445
Preferred stock:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . . . . 115,055 129,194
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,607 20,600
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric . . . . . . . . . . . . . . . . . . . . . . . . 823,125 875,146
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . . . . . . 5,789,256 5,475,447
---------- -----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,095,509 12,798,832
---------- -----------
CURRENT LIABILITIES
Notes payable - affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,124 182,929
Long-term debt due currently. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,700 752,645
Accounts payable:
Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,333 289,075
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,673 152,367
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,267 2,567
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,166 74,256
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,249 167,009
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,389 140,538
Over-recovered fuel revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,987
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,612 134,369
---------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,427,513 1,907,742
---------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,303,643 3,216,951
Unamortized investment tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,132 556,743
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . . . . . . 397,735 353,165
---------- -----------
Total deferred credits and other noncurrent liabilities . . . . . . . . . . . . . . . 4,247,510 4,126,859
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,770,532 $18,833,433
=========== ===========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
11
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, MERGERS AND ACQUISITIONS
The Company
Texas Utilities Company (TUC, or the Company) is a holding company which
owns all of the outstanding common stock of Texas Energy Industries, Inc.
(TEI), ENSERCH Corporation (ENSERCH), TU United Kingdom Holdings, Inc. and TU
Finance (No. 2) Holdings, Inc. (together with TU United Kingdom Holdings,
Inc., TU Holdings). Through subsidiaries and divisions of TEI (parent of
Texas Utilities Electric Company [TU Electric], Texas Utilities Australia Pty.
Ltd. [TU Australia] and several other companies), ENSERCH and TU Holdings, the
Company engages in the generation, transmission and distribution of
electricity; the processing, transmission, distribution and marketing of
natural gas; and telecommunications, power development and other businesses
primarily in the United States (US), the United Kingdom (UK) and Australia.
The Company is currently determining its reportable segments under Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments
of an Enterprise and Related Information" which becomes effective for purposes
of reporting the full year 1998 results of operations.
In March 1998, the Company offered to acquire all of the outstanding
ordinary shares of The Energy Group PLC (TEG) through TU Acquisitions PLC (TU
Acquisitions) (an indirect subsidiary of the Company). TEG, which has been
re-registered as a private limited company incorporated in England and Wales,
owns and operates a diversified international energy business. Substantially
all of TEG's operations are conducted through its subsidiary, Eastern Group
plc (Eastern Group), one of the largest integrated electricity and gas groups
in the UK. At March 31, 1998, TU Acquisitions had acquired approximately 22%
of TEG's outstanding shares. The Company's offer for TEG was declared
unconditional on May 19, 1998. As of that date, TU Acquisitions had received
acceptances with respect to over 70% of TEG's outstanding shares. Therefore,
it was determined that, as of May 19, 1998 the Company had acquired TEG.
Accordingly, the Company recorded its approximate 22% equity interest in the
net income of TEG for the period March to May 19, 1998 and has accounted for
TEG as a subsidiary since May 19, 1998.
Prior to being acquired by the Company, TEG completed the sale of its US
and Australian coal business and US energy marketing operations (Peabody
Sale). The TEG businesses acquired by TUC, which exclude those representing
the Peabody Sale, are referred to as "TEG Businesses Acquired". The total
purchase consideration for the TEG Businesses Acquired is expected to be
approximately $7.4 billion including cash paid through June 30, 1998 of $5.4
billion, and non-cash consideration of $2.0 billion consisting of the value
assigned to the shares of TUC common stock issued or subscribed of $1.4
billion and $.6 billion to be paid to acquire the remaining shares of TEG. At
the date of the acquisition, TEG had assets of $8.7 billion, including cash of
$3.3 billion, and liabilities of $7.3 billion, including debt of $3.5
billion. As of June 30, 1998, TU Acquisitions had acquired over 96% of TEG's
outstanding shares and was in the process of acquiring the remaining
outstanding shares pursuant to the compulsory acquisition procedure under UK
law. As of June 30, 1998, the Company had issued 34,180,628 shares of TUC
common stock to those holders of TEG shares who elected to receive shares of
TUC common stock in exchange for their TEG shares. Additional shares of TUC
common stock have been and will be issued in connection with the acquisition
of the remaining outstanding TEG shares. The process of determining the fair
value of assets and liabilities of TEG has not been completed; however, the
excess of the purchase consideration plus acquisition costs over a preliminary
estimate of net fair value of tangible and identifiable intangible assets
acquired and liabilities assumed resulted in goodwill of $6 billion which is
being amortized over 40 years. This amount is subject to revision as
additional information about the fair value of TEG's assets acquired and
liabilities assumed becomes available.
12
On August 5, 1997, the merger transactions (Merger) between the former
Texas Utilities Company, now known as TEI, and ENSERCH were completed. On
November 21, 1997, the Company acquired Lufkin-Conroe Communications Co.
(LCC). The acquisitions of ENSERCH and LCC were each accounted for as a
purchase business combination. The assets and liabilities of each acquired
company at the respective acquisition dates were adjusted to their estimated
fair values. For each company acquired, the excess of the purchase price paid
over the estimated fair value of the net assets acquired and liabilities
assumed was recorded as goodwill and is being amortized over 40 years. The
process of determining the fair value of assets and liabilities of ENSERCH and
LCC as of their respective dates of acquisition is continuing, and the final
results await primarily the resolution of income tax and other contingencies
and finalization of certain preliminary estimates. The results of operations
of the acquired businesses are reflected in the consolidated financial
statements of the Company from their respective dates of acquisition.
On July 10, 1998, TU Australia allowed its offer to acquire Allgas Energy
Limited, a publicly held gas distribution company based in Queensland,
Australia, to expire. TU Australia, which had acquired 12.49 % of the
outstanding shares of Allgas, sold its investment to another bidder in late
July.
The Company continues to seek potential investment opportunities from
time to time when it concludes that such investments are consistent with its
business strategies and are likely to enhance the long-term return to its
shareholders. The timing, amount and funding of any new business investment
opportunities, other than those discussed above, are presently undetermined.
The following summary of unaudited pro forma consolidated results of the
Company's operations reflect the acquisitions of the TEG Businesses Acquired,
ENSERCH and LCC as though each had occurred at the beginning of the respective
periods presented. Amounts are in thousands of dollars, except per share.
Twelve Months
Six Months Ended Ended
----------------------------- -------------
June 30, 1998 June 30, 1997 June 30, 1998
Revenues $8,323,895 $7,000,168 $16,128,943
Operating income 1,337,010 1,334,428 2,837,268
Net income 379,351 387,601 832,332
Earnings per share
of common stock
Basic $1.34 $1.35 $2.94
Diluted $1.34 $1.35 $2.93
The above pro forma results are based on a preliminary estimate of the
fair value of assets acquired and liabilities assumed of the TEG Businesses
Acquired. These results are not necessarily indicative of what the actual
results would have been had the acquisitions occurred at the beginning of
these periods. Further, the pro forma results are not intended to be a
projection of future results of the combined companies. The $55.4 million
impact of TU Electric's fuel reconciliation disallowance and related items (as
previously discussed) and TEG's after-tax income of $17 million from a
non-recurring transaction in the first quarter of 1998 are reflected in these
pro forma results. A substantial portion of TEG's and the Eastern Group's
earnings occur during the first and fourth quarters of the year which include
the periods of peak electricity usage in the UK. ENSERCH's earnings occur
primarily in the first and fourth quarters. The second quarter is now
expected to be the Company's lowest period of earnings. For the twelve month
period ended June 30, 1998, excluding the impact of the TEG acquisition (loss
of $81.5
13
million) and including results of ENSERCH and LCC for the full period
(additional income of $8.5 million) TUC's consolidated net income would have
been $684.5 million or $2.78 per share of common stock as compared with $832.3
million or $2.94 per share for the same period on a pro forma basis including
TEG for the full twelve months.
2.SIGNIFICANT ACCOUNTING POLICIES
TUC and TU Electric
Basis of Presentation -- The condensed consolidated financial statements
of TUC and its subsidiaries (System Companies) and TU Electric have been
prepared on the same basis as those in the 1997 Annual Reports on Form 10-K of
TUC and TU Electric (1997 Form 10-K) and, in the opinion of TUC or TU
Electric, as the case may be, all adjustments (constituting only normal
recurring accruals) necessary to a fair presentation of the results of
operation and financial position have been included therein. Certain
information and footnote disclosures normally included in annual consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
Certain previously reported amounts have been reclassified to conform to
current classifications.
The preparation of financial statements requires estimates and
assumptions by management; actual results could differ from those estimates.
No material adjustments were made to previous estimates during the current
period.
Consolidation -- The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. For the period from
March 1998, when the Company acquired an approximate 22% ownership interest in
TEG, to May 19, 1998, the date the offer for TEG became unconditional, the
Company recorded its equity in the net income of TEG using the equity method
of accounting. Subsequent to May 19, 1998, the Company fully consolidated
TEG's results of operations. The Company's consolidated financial statements
for the period ended June 30, 1998 include TEG financial information for the
period ended May 31, 1998, the latest available information at the time the
Company's report was prepared.
Prior to August 5, 1997, the date of the Merger with ENSERCH, the Company
did not have any assets or operations. Pursuant to the Merger, the Company
became the parent of TEI and of ENSERCH. For financial reporting purposes,
the Company was treated as the successor to TEI. Unless otherwise specified,
all references to the Company for periods prior to August 5, 1997, are deemed
to be references to TEI since the merger of the Company and TEI was a
combination of entities under common control treated in a manner similar to
pooling of interests accounting. Since the acquisitions of the TEG Businesses
Acquired, ENSERCH and LCC were purchase business combinations, no financial or
other information for those companies is presented for periods prior to their
dates of acquisition. The consolidated financial statements of TU Electric
include all of its business trusts.
All significant intercompany items and transactions have been eliminated
in consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
Earnings Per Share -- Basic earnings per share applicable to common stock
is based on the weighted average number of common shares outstanding during
the period reported. Diluted earnings per share include the effect of
potential common shares that could be issued after the Merger date resulting
from the assumed conversion of the 6. 375% Convertible Subordinated Debentures
due 2002 (Convertible Debentures) of ENSERCH during the periods such
Convertible Debentures were outstanding and the exercise of all outstanding
stock options. The Convertible Debentures were redeemed for cash or converted
into common stock in late March 1998. For the six-and twelve-months periods
ended June 30, 1998, 2,372,457 and 1,616,560 shares, respectively, were added
to the average shares outstanding
14
and $898,330 and $2,444,295, respectively, of after-tax interest expense was
added to earnings applicable to common stock for the purpose of calculating
diluted earnings per share.
Energy Marketing Activities -- The Company, through its energy marketing
subsidiary, Enserch Energy Services, Inc. (EES), enters into a variety of
transactions in the US, including forward contracts involving physical
delivery of natural gas or electrical power commodities, as well as swaps,
futures, options and other derivative contractual arrangements. As part of
these business activities, EES offers price risk management services to the
energy sector. These transactions are primarily conducted with retail end
users, established energy companies and major financial institutions. EES
uses the mark-to-market method of valuing and accounting for these
activities. Under this method, the current market value of EES' energy
portfolio, net of future servicing costs, is reflected within the Company's
consolidated balance sheets, with resulting unrealized gains and losses, as
"Energy Marketing Risk Management Assets" or "Energy Marketing Risk Management
Liabilities". The actual timing of cash receipts and payments may, however,
vary as contracts may be settled at intervals other than their scheduled
maturities. (See Note 6).
3. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," became effective as of
the first quarter of 1998. This statement requires companies to report and
display comprehensive income and its components (revenues, expenses, gains and
losses). Comprehensive income includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive income consists of net income reported
in the statements of consolidated income and the change in the foreign
currency translation adjustment, net of tax, as included in common stock
equity. For TU Electric, comprehensive income is the same as net income
reported in the statements of consolidated income, since there were no other
items of comprehensive income for the periods presented.
4. LINES OF CREDIT
TUC and TU Electric
At June 30, 1998, TUC, TU Electric and ENSERCH had joint lines of credit
under revolving credit facility agreements (Credit Agreements) with a group of
banking institutions. The Credit Agreements have two facilities. Facility A
provides for short-term borrowings aggregating up to $3,600,000,000
outstanding at any one time at variable interest rates and terminates March 1,
1999. Under this facility, $2,800,000,000 is restricted to use in financing
the purchase of TEG shares and paying acquisition related expenses. The
remaining $800,000,000 can be used for working capital and other general
corporate purposes, including commercial paper backup. Facility B provides
for borrowings aggregating up to $1,400,000,000 outstanding at any one time at
variable interest rates and terminates March 2, 2003. Borrowings under this
facility can be used for working capital and other general corporate purposes,
including commercial paper backup. Excluding the $2,800,000,000 which is
restricted to use in financing the acquisition of TEG shares, the combined
borrowings of TUC, TU Electric and ENSERCH under both facilities are limited
to an aggregate of $2,200,000,000 outstanding at any one time. ENSERCH's
borrowings under both facilities are limited to an aggregate of $650,000,000
outstanding at any one time. TU Electric's borrowings under both facilities
are limited to an aggregate of $1,250,000,000 outstanding at any one time. At
June 30, 1998, commercial paper borrowings supported by both facilities
totaled $4,090,686,000 including $2,760,397,000 related to the acquisition of
TEG shares and $530,289,000 classified as long-term debt.
At June 30, 1998, TU Finance (No. 1) Limited (UK Finance 1), TU Finance
(No. 2) Limited (UK Finance 2), and TU Acquisitions had a sterling-denominated
joint line of credit with a group of banking institutions under a
15
credit facility agreement (Sterling Credit Agreement). The Sterling Credit
Agreement provides for borrowings of up to pounds3,625,000,000 and has three
facilities. The Acquisition Facility provides for borrowings aggregating
pounds1,775,000,000 outstanding at any one time and terminates March 2, 2003;
however, no new incremental draws can be made after January 2, 1999. The
Interim Facility provides for short-term borrowings aggregating
pounds1,150,000,000 at any one time and terminates January 2, 1999.
Borrowings under these two facilities provide financing to purchase TEG shares
and pay acquisition related expenses. The Revolving Credit Facility provides
for short-term borrowings aggregating pounds700,000,000 outstanding at any
one time and terminates March 2, 2003. Under this facility, up to
pounds450,000,000 can be used by UK Finance 1 and, subject to satisfaction of
certain conditions, TEG and its subsidiaries (excluding Eastern Electricity
plc) for general corporate purposes and for interest payments on the
facilities until six months after the date of acquisition of TEG. The
remaining pounds250,000,000 has been carved out for general corporate use by
Eastern Electricity plc. As of July 28, 1998, UK Finance 1 had entered into
various interest rate swaps as required by the Sterling Credit Agreements.
The Acquisition Facility requires half of the borrowings under these
facilities to be swapped from floating to fixed and have a maturity of at
least two years from July 28, 1998. The aggregate notional amount of the
interest rate swaps entered into is pounds800,000,000 with an average
maturity of six years and an average fixed rate of 7.83%. At June 30, 1998,
borrowings totaled pounds1,656,000,000 ($2,761,145,000) under the Acquisition
Facility and pounds75,000,000 ($125,077,000) under the Interim Facility.
In addition, certain non-US subsidiaries have revolving credit agreements
aggregating approximately $87,000,000, of which $77,000,000 was outstanding at
June 30, 1998. These revolving credit agreements expire at various dates
through 2000.
5. CAPITALIZATION
TUC
Common Stock -- During the six months ended June 30, 1998, common stock
equity increased by $1,327,000,000 resulting from the issuance of 34,180,628
shares in connection with the acquisition of TEG, by $4,130,000 due to an
allocation of TUC common stock held by the Trustee of the TUC Employees'
Thrift Plan to the accounts of participants, by $431,000 recorded for the
amortization of costs of Long-Term Incentive Plans, by $3,005,000 resulting
from the conversion of the portion of ENSERCH's Convertible Debentures which
were converted into 77,963 shares of TUC common stock and by $160,000 for
other direct purchases and exercise of stock options.
Preferred Stock -- In January 1998, ENSERCH redeemed $100,000,000 of
Series E adjustable rate preferred stock at par. At June 30, 1998, ENSERCH
had outstanding its Series F adjustable rate preferred stock, which had an
aggregate liquidation amount of $75,000,000.
Long-Term Debt -- In January 1998, TUC issued $200,000,000 aggregate
principal amount of 6.375% Series C Senior Notes due 2008. In addition,
ENSERCH issued $125,000,000 of 6.25% Series A Notes due 2003 and $125,000,000
of Remarketed Reset Notes due 2008. On July 1, 1998, the interest rate on the
Remarketed Reset Notes was reset to a fixed rate of 6.564% to July 1, 2005.
On March 27, 1998, ENSERCH redeemed the outstanding balance of its
Convertible Debentures. Holders of $3,005,000 principal amount of the
Convertible Debentures elected to convert such debentures into shares of TUC
common stock, and the remaining $87,745,000 principal amount was redeemed at
par for cash. On July 6, 1998, ENSERCH redeemed at par $100,000,000 principal
amount of its 8.875% Senior Notes due 2001.
16
At May 31, 1998, TEG and its subsidiaries had long-term debt outstanding
of pounds1,864,000,000, which was equivalent to $3,109,000,000 at June 30,
1998 exchange rates, and had maturities of $391,400,000 in 2000, $421,100,000
in 2001, $123,200,000 in 2002, $56,400,000 in 2003 and $2,116,900,000
thereafter.
Equity-Linked Securities -- On July 22 and August 6, 1998, the Company
issued a total of 14,000,000 equity-linked securities consisting of 12,700,000
units of income equity-linked securities with a stated amount per security of
$50; 1,300,000 units of growth equity-linked securities with a stated amount
per security of $50, and also issued $32,500,000 aggregate principal amount
of separately offered and separately traded 6.37% Series D Senior Notes due
August 16, 2003 (Series D Notes) and $32,500,000 aggregate principal amount of
separately offered and separately traded 6.50% Series E Senior Notes due
August 16, 2004 (Series E Notes).
Each income equity-linked security initially consists of a unit comprised
of a purchase contract (Purchase Contract) under which the holder will
purchase from the Company by not later than August 16, 2001 (first settlement
date) for $25 cash a number of shares of the Company's common stock equal to a
specified rate (based on a formula using the market price of the Company's
common stock) and will purchase from the Company by not later than August 16,
2002 (second settlement date) for $25 cash a number of shares of the Company's
common stock equal to a specified rate (based on a formula using the market
price of the Company's common stock); and a Series D Note having a principal
amount of $25 until the first settlement date, and a Series E Note having a
principal amount of $25 until the second settlement date. Initially,
$317,500,000 aggregate principal amount of Series D Notes and $317,500,000
aggregate principal amount of Series E Notes were issued and will be held as a
component of the equity-linked securities. The holder of an income
equity-linked security will receive from the Company quarterly payments, in
arrears, at 9.25% per annum of the stated amount of such security ($50) prior
to the first settlement date and 9.25% per annum of the remaining stated
amount ($25) from that date to the second settlement date, consisting of
contract adjustment payments of 2.815% per annum of the stated amount and
interest on the Series D Note and the Series E Note through the first
settlement date and 2.75% per annum of the remaining stated amount and
interest on the Series E Note thereafter.
Each growth equity-linked security initially consists of a unit comprised
of a Purchase Contract and beneficial ownership interest in a 1/40th undivided
interest in a 3-year Treasury security having a principal amount at maturity
equal to $1,000, until the first settlement date, and a 1/40th undivided
interest in a 4-year Treasury security having a principal amount at maturity
equal to $1,000, until the second settlement date. The holder of a growth
equity-linked security will receive from the Company, quarterly in arrears,
contract adjustment payments of 3.315% per annum of the stated amount of such
security ($50) to the first settlement date and 3.25% per annum of the
remaining stated amount ($25) from that date to the second settlement date.
Under the terms of the Purchase Contracts, the Company will issue between
7,115,267 and 8,395,802 shares of common stock by the first settlement date
and between 7,115,267 and 8,395,802 additional shares by the second settlement
date.
All of the proceeds from the sale of the growth equity-linked securities
were used to purchase the underlying Treasury securities to be transferred to
holders of the growth equity-linked securities pursuant to the terms thereof.
All of the proceeds from the sale of the Series D and Series E Notes that are
not components of income equity-linked securities and all of the proceeds from
the sale of the income equity-linked securities were paid to the Company. The
net proceeds to the Company of $679,000,000 (after deducting the underwriting
commissions) from the sale of the Series D and Series E Notes and the income
equity-linked securities, were used to repay short-term indebtedness incurred
in connection with the acquisition of TEG.
17
The Company recorded the present value of the contract adjustment payments,
totaling approximately $63 million, as a liability and a reduction of common
stock equity. The liability will be reduced as the contract adjustment
payments are made. The Company has the right to defer the contract adjustment
payments, but any such election will subject the Company to restrictions on
the payment of the dividends on and redemption of outstanding shares of its
common stock.
Subsidiary Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts Holding Solely Debentures of Subsidiary -- In July 1998, a
statutory business trust, ENSERCH Capital I, was established as a financing
subsidiary for ENSERCH for the purpose of issuing common and preferred trust
securities, with a liquidation preference of $1,000 per unit, and holding
Junior Subordinated Debentures issued by ENSERCH. ENSERCH Capital I issued
$150,000,000 of floating rate capital securities. Distributions on capital
securities are payable quarterly based on an annual floating rate determined
quarterly with reference to a three-month LIBOR plus a margin of 1.35%. The
debentures held by the trust are its only assets. The trust assets are
$154,600,000 principal amount of Floating Rate Junior Subordinated Debentures
Series A (Series A Debentures). ENSERCH Capital I will use interest payments
received on the Series A Debentures to make cash distributions on the capital
securities it has issued. The interest rate on the Series A Debentures will
be set quarterly, based on three-month LIBOR plus 1.35%. The initial rate for
the period from July 2, 1998 to September 30, 1998 is 7.06875%. The proceeds
were used by ENSERCH for general corporate purposes, including the acquisition
or redemption of outstanding securities of ENSERCH. The Series A debentures
will mature on July 1, 2028 and ENSERCH has the right to redeem the debentures
in whole or in part on or after July 1, 2003.
TU Electric
Common Stock -- During the six months ended June 30, 1998, TU Electric
purchased and retired a total of 9,549,200 shares of its issued and
outstanding common stock at a total cost of $286,476,000.
Preferred Stock -- During the six months ended June 30, 1998, TU
Electric redeemed 146,501 shares of its $8.20 Series preferred stock at a
total cost of $14,139,000. At June 30, 1998, TU Electric had 17,000,000
shares of preferred stock authorized by its Articles of Incorporation of which
1,169,062 shares were issued and outstanding.
18
TU Electric Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trusts Holding Solely Debentures of TU Electric -- At June 30,
1998 and December 31, 1997, the statutory business trust subsidiaries of TU
Electric had preferred trust securities outstanding, as follows:
Preferred Securities Trust Assets
--------------------------------------------------- -----------------------
Units Outstanding Amount Amount
--------------------------------------------------- -----------------------
June 30, December 31, June 30, December 31, June 30, December 31,
1998 1997 1998 1997 1998 1997
------------------------ ---------------------- ---------------------
Thousands of Dollars
TU Electric Capital I (8.25% Series) 5,871,044 5,871,044 $140,941 $140,851 $154,869 $154,869
TU Electric Capital II (9.00% Series) -- 1,991,253 -- 47,374 -- 51,419
TU Electric Capital III (8.00% Series) 8,000,000 8,000,000 193,596 193,510 206,186 206,186
TU Electric Capital IV (floating rate
Capital Securities)(a) 100,000 100,000 96,621 97,570 103,093 103,093
TU Electric Capital V (8.175% Capital
Securities) 400,000 400,000 391,967 395,841 412,372 412,372
---------- ---------- -------- -------- -------- --------
Total TU Electric 14,371,044 16,362,297 $823,125 $875,146 $876,520 $927,939
========== ========== ======== ======== ======== ========
<FN>
(a) Floating rate is determined quarterly based on LIBOR. A related
interest rate swap, expiring 2002, effectively fixes the rate at 7.183%.
</FN>
19
The sole trust assets of each trust are Junior Subordinated
Debentures of TU Electric having a principal amount set forth under "Trust
Assets" in the table above. Interest on each series of Junior Subordinated
Debentures is payable at a rate equal to that of the corresponding preferred
trust securities. The Junior Subordinated Debentures held by TU Electric
Capital I mature on September 30, 2030. The Junior Subordinated Debentures
held by TU Electric Capital III matures on December 31, 2035. The Junior
Subordinated Debentures held by each of TU Electric Capital IV and TU Electric
Capital V mature on January 30, 2037.
Long-Term Debt -- In April 1998, TU Electric issued $350,000,000
aggregate principal amount of Floating Rate Debentures due April 24, 2000.
Interest rates on the debentures will be set quarterly based on LIBOR for
three month deposits plus .27%. The interest rate for the period from April
24, 1998 to July 24,1998 was 5.9575%. The interest rate for the period from
July 24, 1998 to October 23, 1998 is 5.9575%. On May 1, 1998, the Brazos
River Authority (Brazos Authority) issued $78,965,000 aggregate principal
amount of 5.55% Pollution Control Revenue Refunding Bonds, Series 1998A, due
May 1, 2033. Proceeds were used to refund the 9.25% Brazos Authority Series
1988A Bonds and a portion of the Brazos Authority Taxable Series 1991D Bonds.
Pursuant to an Installment Payment and Bond Amortization Agreement with the
Brazos Authority, TU Electric is obligated to make payments of the principal
and interest on the bonds. Such payments on the new bonds are insured.
In June 1998, TU Electric exercised its option to convert the
$118,355,000 Brazos Authority Revenue Refunding Bonds Series 1995B and the
$118,355,000 Brazos Authority Revenue Refunding Bonds Series 1995C from a
daily mode to a multiannual mode. The Series 1995B Bonds bear interest from
June 18, 1998 to the mandatory tender date of June 18, 1999 at a rate of 4.15%
per annum. The Series 1995B Bonds will be remarketed prior to the mandatory
tender date. The interest rate on the Series 1995C Bonds will be 5.55% per
annum from June 18, 1998, to maturity at June 1, 2030. TU Electric's
obligations under these bonds are now unsecured.
On July 1, 1998, TU Electric retired $150,000,000 principal amount of
5.75% Series First Mortgage Bonds due on that date.
6. DERIVATIVE INSTRUMENTS
TUC and TU Electric
The Company enters into derivative instruments, including options, swaps,
futures and other contractual commitments to manage market risks related to
changes in interest rates, commodity price and foreign currency exposures.
The Company's participation in derivative transactions, except for the energy
marketing activities, has been designated for hedging purposes, and derivative
instruments are not held or issued for trading purposes.
Interest Rate Risk Management -- At June 30, 1998, TU Australia's
principal subsidiary, Eastern Energy Ltd (Eastern Energy), had interest rate
swaps outstanding with an aggregate notional amount of $1,387,000,000. These
swap agreements establish a mix of fixed and variable interest rates on the
outstanding debt and have remaining terms up to 19 years. TEG's principal
subsidiary, Eastern Electricity, had interest rate swaps outstanding with an
aggregate notional amount of $166,800,000 that swap fixed interest rates for
floating rates.
As of July 28, 1998, UK Finance 1 had entered into various interest rate
swaps as required by the Sterling Credit Agreement. The Sterling Credit
Agreement requires half of the borrowings under these facilities to be swapped
from floating to fixed and have a maturity of at least two years from July 28,
1998. The aggregate notional amount of the interest rate swaps entered into
is pounds800,000,000 with an average maturity of six years and an average
fixed rate of 7.83%
20
At June 30, 1998, TU Electric had an interest rate swap agreement with
respect to preferred securities of TU Electric Capital IV, with a notional
principal amount of $100,000,000 expiring 2002 that effectively fixed the rate
at 7.183% per annum.
Foreign Currency Risk Management -- In connection with its acquisition of
TEG, the Company purchased call options to fix the pound sterling to US dollar
exchange rate on pounds2.9 billion, which is equivalent to the portion of
the acquisition cost expected to be funded through US dollar borrowings.
Prior to June 30, 1998, all of such options either expired or were sold by the
Company. The net cost of such options, after accounting for premiums received
on resale and other adjustments, totaled approximately $39.7 million, which
cost has been reflected as an item of other income (deductions)- net in the
results of operation during 1998.
Contracts For Differences and Electricity Forward Agreements -- Almost
all electricity generated in England and Wales must be sold to the electricity
trading market in England and Wales (the Pool), and electricity distributors
must likewise generally buy electricity from the Pool for resale to their
customers. The Pool is operated under a Pooling and Settlement Agreement to
which all licensed generators and distributors of electricity in Great Britain
are party. The Eastern Group enters into derivative contracts to assist in
the management of its exposure to fluctuations in electricity pool prices.
The contracts bought and sold are contracts for differences (CfDs) and
electricity forward agreements (EFAs) which fix the price of electricity for
an agreed quantity and duration by reference to an agreed strike price. The
impact of changes in the market value of these contracts, which serve as
hedges, are deferred until the related transaction is completed.
EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than
being individually negotiated. Long-term CfDs are in place to hedge a portion
of electricity purchases up to 2009. Up until 1998, the costs of such CfDs
were passed through to customers as part of franchise tariffs. From 1998
forward, such CfDs represent an annual commitment of approximately five
terawatt hours (TWh), falling on a linear basis to two TWh by 2005 and finally
expiring in 2010. There are no similar long-term commitments under EFAs.
Electricity Price Risk Management -- Eastern Energy and the other
distribution companies in the state of Victoria, Australia purchase their
power from a competitive power pool operated by a statutory, independent
corporation. Eastern Energy purchases about 95% of its energy from this pool,
the cost of which is based on spot market prices. Eastern Energy and other
distribution companies were required to enter into wholesale market contracts
to cover a substantial majority of their forecasted franchise load through the
end of 2000. Eastern Energy also maintains a strategy of seeking hedging
contracts with individual generators to cover forecasted contestable loads.
These contracts fix the price of energy within a certain range for the purpose
of hedging or protecting against fluctuations in the spot market price.
During the second quarter of 1998, the average spot price for electric energy
from the Victorian pool approximated $16.04 per megawatt-hour (MWh) as
compared with the average fixed price of Eastern Energy's electric
energy under its contracts of approximately $28 per MWh. At June 30, 1998,
Eastern Energy's contracts related to its forecasted contestable and franchise
load cover a notional volume of approximately 11.9 million MWh's for the
period from July 1998 through 2001. Further hedge contracts may be required
in that period to service forecast sales. Under these contracts, payments are
made between Eastern Energy and the generators representing the difference
between the wholesale electricity market price and the contract price. The
net payable or receivable is recognized in earnings as adjustments to
purchased power expense in the period the related transactions are completed.
Energy Marketing Activities -- EES' energy portfolio is comprised of
forward commitments, futures, swaps, options and other derivative
instruments. The notional amounts and terms of the portfolio as of June 30,
21
1998 included financial instruments that provide for fixed price receipts of
2,265 trillion British thermal units equivalent (Tbtue) and fixed price
payments of 2,314 Tbtue, with a maximum term of seven years. Additionally,
sales and purchase commitments totaling 1,140 Tbtue, with terms extending up
to five years, are included in the portfolio as of June 30, 1998.
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments.
Accordingly, the notional amounts represented above do not necessarily measure
EES' exposure to market or credit risks. Additionally, the maximum term in
years are not indicative of likely future cash flows as these positions may be
offset in the markets at any time in response to EES' risk management needs.
7. REGULATION AND RATES
TUC And TU Electric
Docket 18490 - The Public Utility Commission of Texas (PUC) approved the
stipulation filed on December 17, 1997, by TU Electric, together with the PUC
General Counsel, the Office of Public Utility Counsel and various other
parties interested in TU Electric's rates and services. The stipulation,
modified to incorporate changes made by Commissioners, resulted in base rate
credits beginning January 1, 1998, of 4% for residential customers, 2% for
general service secondary customers and 1% for all other retail customers and
additional base rate credits for residential customers of 1.4% beginning
January 1, 1999. All other provisions of the stipulation were approved. They
(i) impose an 11.35% annual cap on TU Electric's rate of return on common
equity during 1998 and 1999, with any sums earned above an earnings cap being
applied as additional nuclear production depreciation, (ii) allow TU Electric
to record depreciation applicable to transmission and distribution assets in
1998 and 1999 as additional depreciation of nuclear production assets, (iii)
establish an updated cost of service study that includes interruptible
customers as customer classes, (iv) result in the permanent dismissal of
pending appeals of prior PUC orders, including Docket No. 11735, if all other
parties that have filed appeals of those dockets also dismiss their appeals,
(v) result in the stay of any proceedings in the remand of Docket No. 9300
prior to January 1, 2000, and, (vi) flow all gains from off-system sales of
electricity in excess of the amount included in base rates to customers
through the fuel factor. Modifications that were also approved by the PUC
include: (i) imputing $16 million of revenues from discounted rates in the
calculation of the return cap, (ii) limiting the recovery of interest on any
new debt issued prior to December 31, 1999 to the interest rate available to
TU Electric at its bond rating as of January 1, 1998 in the calculation of the
return cap, (iii) limiting the amount of annual capital additions to
production plant to 1.5% of TU Electric's net plant in service on December 31,
1996 in the calculation of the return cap, and (iv) permitting TU Electric, at
its discretion, to apply earnings as additional depreciation of nuclear
production assets, after the determinations have been made under the return
cap.
For the three months and six months ended June 30, 1998, TU Electric
recorded $39,232,000 as additional depreciation of nuclear production assets,
a pro rata portion of expected 1998 earnings in excess of the stipulated
return cap. In addition, for the six months there was $90,400,000 of
depreciation expense reclassified from transmission and distribution to
nuclear production assets. Including deferred income tax effects, the net
effect was a $33,268,000 reduction in net income for the three months and a
$37,138,000 reduction for the six months of 1998.
TUC
Lone Star Gas Rates -- In August 1996, the Railroad Commission of Texas
(RRC) ordered a general inquiry into the rates and services of Lone Star Gas,
most notably a review of historic gas cost and gas acquisition practices since
the last rate setting. The inquiry docket was separated into different
phases, all of which are now resolved. Two of the phases,
22
conversion to the National Association of
Regulatory Utility Commissioners account numbering system and unbundling, have
been dismissed by the RRC, and one other phase, rate case expense, has been
concluded. In the phase dealing with historic gas cost and gas acquisition
practices, the RRC issued a final order on June 2, 1998 approving a stipulated
settlement of the docket. Lone Star Gas agreed to credit residential and
commercial customers $18 million to be spread over the next two heating
seasons (November through March). The earnings of Lone Star Gas are not
affected by the settlement due to previously established reserves. Lone Star
Gas and the intervenors both agreed to withdraw their appeals of the city
gate rate case. The final order approving the stipulation found that all gas
costs flowed through Lone Star Gas' monthly gas cost adjustment clause prior
to October 31, 1997 were just, reasonable, and necessary.
8. COMMITMENTS AND CONTINGENCIES
TU Electric
Nuclear Decommissioning and Disposal of Spent Fuel -- TU Electric has
established a reserve, charged to depreciation expense and included in
accumulated depreciation, for the decommissioning of the Comanche Peak nuclear
generating station (Comanche Peak), whereby decommissioning costs are being
recovered from customers over the life of the plant and deposited in an
external trust fund (included in other investments). At June 30, 1998, such
reserve totaled $132,971,000 which includes accruals of $9,090,000 and
$18,179,000 for the six and twelve months ended June 30, 1998, respectively.
As of June 30, 1998, the market value of assets in the external trust fund for
the decommissioning of Comanche Peak was $185,643,000. Any difference between
the market value of the external trust fund and the decommissioning reserve
that represents unrealized gains or losses of the trust fund is treated as a
regulatory liability or a regulatory asset. Realized earnings on funds
deposited in the external trust are recognized in the reserve. Based on a
site-specific study completed during 1997 using the prompt dismantlement
method and 1997 dollars, decommissioning costs for Comanche Peak Unit 1 and
for Unit 2 and common facilities were estimated to be $271,000,000 and
$404,000,000, respectively. Decommissioning activities are projected to begin
in 2030 for Comanche Peak Unit 1 and in 2033 for Unit 2 and common
facilities. TU Electric is recovering decommissioning costs based upon a 1992
site-specific study through rates placed in effect under its January 1993 rate
increase request. Actual decommissioning costs are expected to differ from
estimates due to possible changes in the assumed dates of decommissioning
activities, regulatory requirements, technology and costs of labor, materials
and equipment. In addition, the marketable fixed income debt and equity
securities in which assets of the external trust are invested are subject to
interest rate and equity price sensitivity.
TUC and TU Electric
Financial Guarantees -- TU Electric has entered into contracts with
public agencies to purchase cooling water for use in the generation of
electric energy. In connection with certain contracts, TU Electric has
agreed, in effect, to guarantee the principal, $30,005,000 at June 30, 1998,
and interest on bonds issued to finance the reservoirs from which the water is
supplied. The bonds mature at various dates through 2011 and have interest
rates ranging from 5.5% to 7%. TU Electric is required to make periodic
payments equal to such principal and interest. Payments made by TU Electric
are net of amounts assumed by a third party under such contracts. In
addition, TU Electric is obligated to pay certain variable costs of operating
and maintaining the reservoirs. TU Electric has assigned to a municipality
all contract rights and obligations of TU Electric in connection with
$69,395,000 remaining principal amount of bonds at June 30, 1998 issued for
similar purposes, which had previously been guaranteed by TU Electric. TU
Electric is, however, contingently liable in the unlikely event of default by
the municipality. The Company and/or its subsidiaries are the guarantor on
various other commitments and obligations of others aggregating approximately
$33,300,000 at June 30, 1998.
TEG has guaranteed up to $110 million of certain liabilities which may
be incurred and payable by P&L Holdings and members of its controlled group
with respect to the Peabody Holding Company Retirement Plan for Salaried
Employees, the Powder River Coal Company Retirement Plan and the Peabody
Coal UMWA Retirement Plan, subject to certain specified conditions.
23
Lease Commitments -- As of June 30, 1998, TEG had various operating lease
commitments, mostly related to coal-fired power stations, as well as capital
leases. The combined future minimum rental commitments under these leases as
of June 30, 1998 are $115,500,000 in 1999, $87,000,000 in 2000, $89,000,000 in
2001, $84,000,000 in 2002 and $76,000,000 in 2003. Additional payments of
approximately $10 per megawatt hour (indexed) linked to output levels from
these stations are payable between the first five and seven years of their
operation by TEG.
Gas "Take or Pay" Contracts -- In order to help meet the expected needs
of its wholesale and retail customers, Eastern Electricity has entered into a
range of gas purchase contracts. Almost all include "take or pay"
obligations, under which the buyer agrees to pay for a minimum quantity of gas
in a year. As at June 30, 1998, the commitments under long-term gas purchase
contracts amounted to an estimated pounds2,800,000,000 ($4,700,000,000)
covering periods up to 2015.
General -- In addition to the above, and as described in Part II. Item 1.
Legal Proceedings, the Company and TU Electric are each involved in various
legal and administrative proceedings which, in the opinion of the management
of each, should not have a material effect upon its financial position,
results of operation or cash flows.
24
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Texas Utilities Company and subsidiaries (Company) as of June 30, 1998, and
the related condensed statements of consolidated income and of comprehensive
income for the three-month, six-month and twelve-month periods ended June 30,
1998 and 1997, and of consolidated cash flows for the six-month periods ended
June 30, 1998 and 1997. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of December 31,
1997, and the related consolidated statements of income, cash flows and common
stock equity for the year then ended (not presented herein); and in our report
dated February 24, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1997, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP Dallas, Texas
August 13, 1998
25
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Electric Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Texas Utilities Electric Company and subsidiaries (TU Electric) as of June 30,
1998, and the related condensed statements of consolidated income for the
three-month, six-month and twelve-month periods ended June 30, 1998 and 1997,
and of consolidated cash flows for the six-month periods ended June 30, 1998
and 1997. These financial statements are the responsibility of TU Electric's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of TU Electric as of December 31,
1997, and the related consolidated statements of income, retained earnings and
cash flows for the year then ended (not presented herein); and in our report
dated February 24, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1997, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP Dallas, Texas
August 13, 1998
26
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
TUC and TU Electric
This report and other presentations made by Texas Utilities Company (the
Company or TUC) and its direct and indirect subsidiaries (System Companies) or
Texas Utilities Electric Company and its subsidiaries (TU Electric) contain
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company and TU
Electric each believes that in making any such statement its expectations are
based on reasonable assumptions, any such statement involves uncertainties and
is qualified in its entirety by reference to factors contained in the
Forward-Looking Statements section of Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operation in TUC's and TU
Electric's Annual Reports on Form 10-K for the year 1997 (1997 Form 10-K),
among others, that could cause the actual results of the Company or TU
Electric to differ materially from those projected in such
forward─looking statement.
Any forward-looking statement speaks only as of the date on which
such statement is made, and neither the Company nor TU Electric undertakes any
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and
it is not possible for the Company or TU Electric to predict all of such
factors, nor can they assess the impact of each such factor or the extent to
which any factor, or combination of factors, may cause results to differ
materially from those contained in any forward-looking statement.
MERGERS AND ACQUISITIONS
TUC
Certain comparisons in this Form 10-Q have been affected by the May 1998
acquisition of The Energy Group PLC (TEG), the August 1997 acquisition of
ENSERCH Corporation (ENSERCH) and the November 1997 acquisition of
Lufkin-Conroe Communications Co. (LCC) by the Company and/or its subsidiaries.
The results of each acquired company are included only for the periods
subsequent to acquisition.
In March 1998, the Company offered to acquire all of the outstanding
shares of The Energy Group PLC (TEG) through TU Acquisitions PLC (TU
Acquisitions) (an indirect subsidiary of the Company). TEG, which has been
re-registered as a private limited company incorporated in England and
Wales, owns and operates a diversified international energy business.
Substantially all of TEG's operations are conducted through its subsidiary
Eastern Group plc (Eastern Group), one of the largest integrated electricity
and gas groups in the UK. At March 31, 1998, TU Acquisitions had acquired
approximately 22% of TEG's shares. The Company's offer for TEG was declared
unconditional on May 19, 1998. As of that date, TU Acquisitions had received
acceptances with respect to over 70% of TEG's issued share capital. Therefore,
it was determined that, as of May 19, 1998 the Company had acquired TEG.
Accordingly, the Company recorded its approximate 22% equity in the net income
of TEG for the period March to May 19, 1998 and has accounted for TEG as a
subsidiary since May 19, 1998.
Prior to being acquired by the Company, TEG completed the sale of its
United States (US) and Australian coal business and US energy marketing
operations (Peabody Sale). The businesses acquired by TUC, which exclude those
representing the Peabody Sale, are referred to as "TEG Businesses Acquired".
The total purchase consideration for the TEG Businesses Acquired is expected
to be approximately $7.4 billion including cash paid through June 30, 1998 of
$5.4 billion, and non-cash consideration of $2.0 billion consisting of the
value assigned to the TUC shares issued or subscribed of $1.4 billion and $.6
billion to be paid to acquire the remaining shares. At the date of the
acquisition, TEG had assets of $8.7 billion, including cash of $3.3 billion,
and liabilities of $7.3 billion, including debt of $3.5 billion. As of June
30, 1998, TU Acquisitions had acquired over 96% of the outstanding TEG shares
27
and was in the process of acquiring the remaining shares pursuant to the
compulsory acquisition procedure under UK law. As of June 30, 1998, the
Company had issued 34,180,628 shares of TUC common stock to those holders of
TEG shares who elected the share alternative offered. Additional shares have
been and will be issued in connection with the acquisition of the remaining
outstanding TEG shares. The process of determining the fair value of assets
and liabilities of TEG has not been completed; however, the excess of the
purchase consideration plus acquisition costs over a preliminary estimate of
net fair value of tangible and identifiable intangible assets acquired and
liabilities assumed resulted in goodwill of $6 billion which is being
amortized over 40 years. This amount is subject to revision as additional
information about the fair value of TEG's assets acquired and liabilities
assumed becomes available.
On August 5, 1997, the merger transactions (Merger) between the former
Texas Utilities Company, now known as TEI, and ENSERCH were completed. On
November 21, 1997, the Company acquired Lufkin-Conroe Communications Co.
(LCC). The acquisitions of ENSERCH and LCC were each accounted for as a
purchase business combination. The assets and liabilities of each acquired
company at the acquisition date were adjusted to their estimated fair values.
For each company acquired, the excess of the purchase price paid over the
estimated fair value of the net assets acquired and liabilities assumed was
recorded as goodwill and is being amortized over 40 years. The process of
determining the fair value of assets and liabilities of ENSERCH and LCC as of
their respective dates of acquisition is continuing, and the final results
await primarily the resolution of income tax and other contingencies and
finalization of certain preliminary estimates. The results of operations of
the acquired businesses are reflected in the consolidated financial statements
of the Company from their respective dates of acquisition.
For financial reporting purposes, the Company is being treated as the
successor to TEI. Unless otherwise specified, all references to the Company
which relate to a period prior to August 5, 1997, shall be deemed to be
references to TEI.
On July 10, 1998, TU Australia allowed its offer to acquire Allgas Energy
Limited, a publicly held gas distribution company based in Queensland,
Australia, to expire. TU Australia, which had acquired 12.49% of the
outstanding shares of Allgas sold its investment to another bidder in late
July.
The Company continues to seek potential investment opportunities from
time to time when it concludes that such investments are consistent with its
business strategies and are likely to enhance the long-term return to its
shareholders. The timing, amount and funding of any new business investment
opportunities, other than those discussed above, are presently undetermined.
FINANCIAL CONDITION
Liquidity and Capital Resources
TUC and TU Electric
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation in TUC's and TU Electric's 1997 Form 10-K. Results for the three-
and six-month periods presented herein are not necessarily indicative of
expectations for a full year's operations because of seasonal and other
factors, including variations in maintenance and other operating expense
patterns. No significant changes or events which might affect the financial
condition of the Company or TU Electric have occurred subsequent to year-end
other than as disclosed in other reports of TUC or TU Electric or included
herein.
28
External funds of a permanent or long-term nature are obtained through
the issuance of common stock, preferred stock, preferred securities and
long-term debt by the System Companies. The capitalization ratios of the
Company at June 30, 1998 consisted of approximately 61.9% long-term debt, 3.4%
preferred securities of trusts, 0.9% preferred stock and 33.8% common stock
equity. The capitalization ratios of TU Electric at June 30, 1998 consisted
of approximately 44.2% long-term debt, 6.3% preferred securities of trusts,
1.0% preferred stock and 48.5% common stock equity.
During the six months ended June 30, 1998, common stock equity increased
by $1.3 billion from the issuance of 34,180,628 shares as part of the
acquisition of TEG, by $4.1 million due to an allocation of TUC common stock
held by the Trustee of the TUC Employees' Thrift Plan to the accounts of
participants, by $.4 million recorded for the amortization of costs of
Long-Term Incentive Plans, by $3.0 million resulting from the conversion of
the portion of ENSERCH's Convertible Debentures which were converted into
77,963 shares of TUC common stock and by $.2 million for other direct
purchases and exercise of stock options. Additional shares will be issued in
connection with the acquisition of TEG shares; however, the exact number
cannot yet be determined.
In April 1998, TU Electric issued $350 million aggregate principal
amount of Floating Rate Debentures due April 24, 2000. Interest rates on the
debentures will be set quarterly based on LIBOR for three month deposits plus
.27%. The initial interest rate for the period from April 24, 1998 to July
24, 1998 was 5.9575%. The interest rate for the period from July 24, 1998 to
October 23, 1998 is 5.9575%. On May 1, 1998, the Brazos River Authority
(Brazos Authority) issued approximately $79 million aggregate principal amount
of 5.55% Pollution Control Revenue Refunding Bonds, Series 1998A, due May 1,
2033. Proceeds were used to refund the 9.25% Brazos Authority Series 1988A
Bonds and a portion of the Brazos Authority Taxable Series 1991D Bonds. TU
Electric is obligated to make payments of principal and interest on the
bonds. Such payments on the new bonds are insured.
In June 1998, TU Electric exercised its option to convert the $118.4
million Brazos Authority Revenue Refunding Bonds Series 1995B and the $118.4
million Brazos Authority Revenue Refunding Bonds Series 1995C from a daily
mode to a multiannual mode. The Series 1995B Bonds bear interest from June
18, 1998 to the mandatory tender date of June 18, 1999 at a rate of 4.15% per
annum. The Series 1995B Bonds will be remarketed prior to the mandatory
tender date. The interest rate on the Series 1995C Bonds will be 5.55% per
annum from June 18, 1998, to maturity at June 1, 2030. TU Electric's
obligations under these bonds are now unsecured.
In January 1998, TUC issued $200 million aggregate principal amount of
6.375% Series C Senior Notes due 2008. In addition, ENSERCH issued $125
million of 6.25% Series A Notes due 2003 and $125 million of Remarketed Reset
Notes due 2008. On July 1, 1998, the interest rate on the Remarketed Reset
Notes was reset to a fixed rate of 6.564% to July 1, 2005. Net proceeds
from these borrowings were used to refinance or redeem like amounts of
higher rate debt and preferred stock.
29
During the six month period ended June 30, 1998, the Company redeemed,
reacquired or made scheduled principal payments for cash totaling $834.2
million (including $626.3 million by TU Electric) on long-term debt, preferred
stock and preferred securities, as follows (in thousands of dollars):
TU Electric:
$8.20 Series Preferred stock $ 14,139
Capital II 9.00% Series Preferred Securities 47,374
Long-term Debt:
Brazos River Authority Pollution Control Bonds 78,965
Other 485,859
--------
Total TU Electric 626,337
ENSERCH:
Series E Preferred Stock 100,000
6.375% Convertible Debentures 90,750
All Other Subsidiaries:
Long-term debt 17,151
--------
Total TUC $834,238
========
On July 6, 1998, ENSERCH redeemed at par its $100 million principal
amount of 8.875% Senior Notes due 2001. On July 1, 1998, the $150 million
principal amount of TU Electric 5.75% Series first mortgage bonds was retired.
Equity-Linked Securities - On July 22 and August 6, 1998, the Company
issued a total of 14,000,000 equity-linked securities consisting of 12,700,000
units of income equity-linked securities with a stated amount per security of
$50; 1,300,000 units of growth equity-linked securities with a stated amount
per security of $50, and also issued $32.5 million aggregate principal amount
of separately offered and separately traded 6.37% Series D Senior Notes due
August 16, 2003 (Series D Notes) and $32.5 million aggregate principal amount
of separately offered and separately traded 6.50% Series E Senior Notes due
August 16, 2004 (Series E Notes).
Each income equity-linked security initially consists of a unit comprised
of a purchase contract (Purchase Contract) under which the holder will
purchase from the Company by not later than August 16, 2001 (first settlement
date) for $25 cash a number of shares of the Company's common stock equal to a
specified rate (based on a formula using the market price of the Company's
common stock) and will purchase from the Company by not later than August 16,
2002 (second settlement date) for $25 cash a number of shares of the Company's
common stock equal to a specified rate (based on a formula using the market
price of the Company's common stock); and a Series D Note having a principal
amount of $25 until the first settlement date, and a Series E Note having a
principal amount of $25 until the second settlement date. Initially, $317.5
million aggregate principal amount of Series D Notes and $317.5 million
aggregate principal amount of Series E Notes were issued and will be held as a
component of the equity-linked securities. The holder of an income
equity-linked security will receive from the Company quarterly payments, in
arrears, at 9.25% per annum of the stated amount of such security ($50) prior
to the first settlement date and 9.25% per annum of the remaining stated
amount ($25) from that date to the second settlement date, consisting of
contract adjustment payments of 2.815% per annum of the stated amount and
interest on the Series D Note and the Series E Note through the first
settlement date and 2.75% per annum of the remaining stated amount and
interest on the Series E Note thereafter.
Each growth equity-linked security initially consists of a unit comprised
of a Purchase Contract and beneficial ownership interest in a 1/40th undivided
interest in a 3-year Treasury security having a principal amount at maturity
equal to $1,000, until the first settlement date, and a 1/40th undivided
interest in a 4-year Treasury security having a principal amount at maturity
equal to $1,000, until the second settlement date. The holder of a growth
equity-linked security will receive from the Company, quarterly in arrears,
contract adjustment payments of 3.315% per annum of the stated amount of such
security ($50) to the first settlement date and 3.25% per annum of the
remaining stated amount ($25) from that date to the second settlement date.
30
Under the terms of the Purchase Contracts, the Company will issue between
7,115,267 and 8,395,802 shares of common stock by the first settlement date
and between 7,115,267 and 8,395,802 additional shares by the second settlement
date.
All of the proceeds from the sale of the growth equity-linked securities
were used to purchase the underlying Treasury securities to be transferred to
holders of the growth equity-linked securities pursuant to the terms thereof.
All of the proceeds from the sale of the Series D and Series E Notes that are
not components of income equity-linked securities and all of the proceeds from
the sale of the income equity-linked securities were paid to the Company. The
net proceeds to the Company of $679.0 million (after deducting the
underwriting commissions) from the sale of the Series D and Series E Notes and
the income equity-linked securities, were used to repay short-term
indebtedness incurred in connection with the acquisition of TEG.
The Company recorded the present value of the contract adjustment
payments, totaling approximately $63 million, as a liability and a reduction
of common stock equity. The liability will be reduced as the contract
adjustment payments are made. The Company has the right to defer the contract
adjustment payments, but any such election will subject the Company to
restrictions on the payment of the dividends on and redemption of outstanding
shares of its common stock.
In July 1998, a statutory business trust, ENSERCH Capital I issued $150
million of floating rate capital securities. Distributions on these capital
securities are payable quarterly based on an annual floating rate determined
quarterly with reference to a three-month LIBOR plus a margin of 1.35%. The
debentures held by the trust are its only assets. The trust assets are $154.6
million principal amount of Floating Rate Junior Subordinated Debentures
Series A (Series A Debentures). ENSERCH Capital I will use interest payments
received on the Series A Debentures to make cash distributions on the capital
securities it has issued. The interest rate on the Series A Debentures will
be set quarterly, based on three-month LIBOR plus 1.35%. The initial rate for
the period from July 2, 1998 to September 30, 1998 is 7.06875%. The proceeds
were used by ENSERCH for general corporate purposes, including the
acquisition or redemption of outstanding securities of ENSERCH. The Series
A debentures will mature on July 1, 2028 and ENSERCH has the right to redeem
the debentures in whole or in part on or after July 1, 2003.
At June 30, 1998, TUC, TU Electric and ENSERCH had joint lines of credit
under revolving credit facility agreements (Credit Agreements) with a group of
banking institutions. The Credit Agreements have two facilities. Facility A
provides for short-term borrowings aggregating up to $3.6 billion outstanding
at any one time at variable interest rates and terminates March 1, 1999.
Under this facility, $2.8 billion is restricted to use in financing the
purchase of TEG shares and paying acquisition related expenses. The remaining
$800 million can be used for working capital and other general corporate
purposes, including commercial paper backup. Facility B provides for
borrowings aggregating up to $1.4 billion outstanding at any one time at
variable interest rates and terminates March 2, 2003. Borrowings under this
facility can be used for working capital and other general corporate purposes,
including commercial paper backup. Excluding the $2.8 billion which is
restricted to use in financing the acquisition of TEG shares, the combined
borrowings of TUC, TU Electric and ENSERCH under both facilities are limited
to an aggregate of $2.2 billion outstanding at any one time. ENSERCH's
borrowings under both facilities are limited to an aggregate of $650 million
outstanding at any one time. TU Electric's borrowings under both facilities
are limited to an aggregate of $1.25 billion outstanding at any one time. At
June 30, 1998, commercial paper borrowings supported by both facilities
totaled $4.1 billion including $2.8 billion related to the acquisition of TEG
shares and $530 million classified as long-term debt.
At June 30, 1998, TU Finance (No. 1) Limited (TU Finance 1), TU Finance
(No. 2) Limited, and TU Acquisitions plc (TU Acquisitions) had a
sterling-denominated joint line of credit with a group of banking institutions
under a credit facility agreement (Sterling Credit Agreement). The Sterling
Credit Agreement provides for borrowings of up to pounds3.6 billion and has
three facilities. The Acquisition Facility provides for borrowings
31
aggregating pounds1.8 billion outstanding at any one time and terminates
March 2, 2003; however, no new incremental draws can be made after January 2,
1999. The Interim Facility provides for short-term borrowings aggregating
pounds1.2 billion at any one time and terminates January 2, 1999. Borrowings
under these facilities provide financing to purchase TEG shares and pay
acquisition related expenses. The Revolving Credit Facility provides for
short-term borrowings aggregating pounds700 million outstanding at any one
time and terminates March 2, 2003. Under this facility, up to
pounds450 million can be used by TU Finance 1 and, subject to satisfaction
of certain conditions, TEG and its subsidiaries (excluding Eastern Electricity
plc) for general corporate purposes and for interest payments on the
facilities until six months after the date of acquisition of TEG. The
remaining pounds250 million has been carved out for general corporate use by
Eastern Electricity plc. At June 30, 1998, borrowings totaled pounds1.7
billion ($2.8 billion) under the Acquisition Facility and pounds75 million
($125 million) under the Interim Facility.
In addition, certain non-US subsidiaries have revolving credit agreements
aggregating approximately $87 million, of which $77 million was outstanding
at June 30, 1998. These revolving credit agreements expire at various dates
through 2000.
The Company and TU Electric may issue additional debt and equity
securities as needed, including the possible future sale: (i) by TU Electric
of up to $498.9 million principal amount of debt securities, (ii) by TU
Electric of up to $25 million of its Cumulative Preferred Stock, and (iii) by
ENSERCH of up to $100 million aggregate principal amount of securities, all of
which are currently registered with the Securities and Exchange Commission
(SEC) for offering pursuant to Rule 415 under the Securities Act of 1933. TU
Company may offer, issue and sell, together or separately, up to $670 million
of (i) debt securities, (ii) shares of its common stock, (iii) contracts to
purchase shares of common stock and (iv) units pledged to secure the holder's
obligation to purchase common stock under stock purchase contracts.
Sales of Accounts Receivable -- TU Electric has facilities with financial
institutions whereby it is entitled to sell and such financial institutions
may purchase, on an ongoing basis, undivided interests in customer accounts
receivables representing up to an aggregate of $500,000,000. ENSERCH has a
facility for $100,000,000. Additional receivables are continually sold to
replace those collected. At June 30, 1998, accounts receivable of TU Electric
was reduced by $500,000,000 and at June 30, 1998, accounts receivable of
ENSERCH companies were reduced by $100,000,000, to reflect the sales of such
receivables to financial institutions under such agreements.
Risk Management -- The Company's and TU Electric's operations involve
managing market risks related to changes in interest rates and, for the
Company, foreign exchange and commodity price exposures. Derivative
instruments including swaps and forward contracts are used to reduce and
manage a portion of those risks. With the exception of the marketing
activities of an ENSERCH subsidiary, Enserch Energy Services, Inc. (EES), the
Company's and TU Electric's participations in derivative transactions are
designed for hedging purposes; and derivative instruments are not held or
issued for trading purposes. Credit risk relates to the risk of loss that the
Company and TU Electric would incur as a result of nonperformance by
counterparties to their respective derivative instruments. The Company and TU
Electric believe the risk of nonperformance by counterparties is minimal. For
other information regarding derivative instruments, see Note 6 to Condensed
Consolidated Financial Statements.
As part of its energy marketing business activities, EES enters into a
variety of transactions, including forward contracts involving physical
delivery of natural gas or electrical power commodities, as well as swaps,
futures, options and other derivative contractual arrangements. These
activities involve price commitments into the future and, therefore, give rise
to market risk. EES uses the mark-to-market method of valuing and
accounting for these activities. The notional amounts and terms of the
portfolio as of June 30, 1998 included financial instruments that provide for
fixed price receipts of 2,265 trillion British thermal units equivalent
(Tbtue) and fixed price payments of 2,314 Tbtue, with a maximum term of seven
years. Additionally, sales and purchase commitments totaling 1,140 Tbtue,
with terms extending up to five years, are included in the portfolio as of
June 30, 1998.
Eastern Group's electricity supply business generally involves entering
into fixed price contracts to supply electricity to customers. Eastern Group
obtains substantially all of the electricity to satisfy its obligations under
such contracts through purchases from the wholesales trading market for
electricity in England and Wales (the Pool). Within the Pool, the prices are
32
set, for each half hour period and are only fixed one day ahead. In order to
reduce their exposure to Pool prices, generators and distributors enter into
financial, hedging contracts with each other. These contracts are in the form
of Contracts for Differences (CfDs) and electricity forward agreements
(EFAs). CfDs and EFAs in effect fix the price which a distributor pays and a
generator receives for electricity and are therefore used to reduce the price
risk that would otherwise be associated with the sale and purchase of
electricity through the Pool. Differences between the actual prices set by
the Pool and the agreed prices give rise to different payments between the
parties to the particular CfD within the franchise market. EFAs are similar
in nature to CfDs, except they tend to last for shorter time periods and are
based on standard industry terms rather than being individually negotiated.
In a competitive supply market, Eastern Group is exposed to two principal
risks associated with such contracts: (i) purchasing price risk (Eastern
Group's cost of purchased electricity relative to the price Eastern Group
receives from the supply customer) and (ii) load shape risk (the risk
associated with a shift in the customer's usage pattern, including absolute
amounts demanded and timing of amounts demanded). Eastern Group seeks to
hedge purchasing price risk through CfDs and EFAs.
Eastern Group has long-term CfDs in place to hedge a proportion of
electricity purchases up to 2009. Up until 1998 the costs of such CfDs were
passed through to customers as part of franchise tariffs. From 1998 forward,
such CfDs represent an annual commitment of approximately five terawatt hours
(TWh), falling on a linear basis to two TWh by 2005 and finally expiring in
2010. There are no similar long-term commitments under EFAs. Load shape risk
is mitigated by paying detailed attention to forecasting demand.
Eastern Group's ability to manage its purchasing price risk depends, in
part, on the future availability of appropriately priced risk management
mechanisms such as CfDs and EFA's. No assurance can be given that an
adequate, transparent market for such products will continue to be available.
No assurance can be given that this risk will be effectively mitigated.
Regulation, Rates and Competition
TUC and TU Electric
Docket 18490 -- The Public Utility Commission of Texas (PUC) approved the
stipulation filed on December 17, 1997, by TU Electric, together with the PUC
General Counsel, the Office of Public Utility Counsel and various other
parties interested in TU Electric's rates and services. The stipulation,
modified to incorporate changes made by Commissioners, resulted in base rate
credits beginning January 1, 1998, of 4% for residential customers, 2% for
general service secondary customers and 1% for all other retail customers and
additional base rate credits for residential customers of 1.4% beginning
January 1, 1999. All other provisions of the stipulation were approved. They
(i) impose an 11.35% annual cap on TU Electric's rate of return on common
equity during 1998 and 1999, with any sums earned above an earnings cap being
applied as additional nuclear production depreciation, (ii) allow TU Electric
to record depreciation applicable to transmission and distribution assets in
1998 and 1999 as additional depreciation of nuclear production assets, (iii)
establish an updated cost of service study that includes interruptible
customers as customer classes, (iv) result in the permanent dismissal of
pending appeals of prior PUC orders, including Docket No. 11735, if all other
parties that have filed appeals of those dockets also dismiss their appeals,
(v) result in the stay of any proceedings in the remand of Docket No. 9300
prior to January 1, 2000, and, (vi) flow all gains from off-system sales of
electricity in excess of the amount included in base rates to customers
through the fuel factor. Modifications that were also approved by the PUC
include: (i) imputing $16 million of revenues from discounted rates in the
calculation of the return cap, (ii) limiting the recovery of interest on any
new debt issued prior to December 31, 1999 to the interest rate available to
TU Electric at its bond rating as of January 1, 1998 in the calculation of the
return cap, (iii) limiting the amount of annual capital additions to
production plant to 1.5% of TU Electric's net plant in service on December 31,
1996 in the calculation of the return cap, and (iv) permitting TU Electric, at
its discretion, to apply earnings as additional depreciation of nuclear
production assets, after the determinations have been made under the return
cap.
33
For the three months and six months ended June 30, 1998, TU Electric
recorded $39.2 million as additional depreciation of nuclear production
assets, a pro rata portion of expected 1998 earnings in excess of the
stipulated return cap. In addition, for the six months, there was $90.4
million of depreciation expense reclassified from transmission and
distribution to nuclear production assets. Including deferred income tax
effects, the net effect was a $33.3 million reduction in net income for the
three months and a $37.1 million reduction for the six months of 1998.
TUC
Lone Star Gas Rates -- In August 1996, the Railroad Commission of Texas
(RRC) ordered a general inquiry into the rates and services of Lone Star Gas,
most notably a review of historic gas cost and gas acquisition practices since
the last rate setting. The inquiry docket was separated into different
phases, all of which are now resolved. Two of the phases, conversion to the
National Association of Regulatory Utility Commissioners account numbering
system and unbundling, have been dismissed by the RRC, and one other phase,
rate case expense, has been concluded. In the phase dealing with historic
gas cost and gas acquisition practices, the RRC issued a final order on
June 2, 1998 approving a stipulated settlement of the docket. Lone Star
Gas agreed to credit residential and commerical customers $18 million to
be spread over the next two heating seasons (November through March).
The earnings of Lone Star Gas are not affected by the Settlement due to
previously established reserves. Lone Star Gas and the intervenors both
agreed to withdraw their appeals of the city gate rate case. The final
order approving the stipulation found that all gas costs flowed through
Lone Star Gas' monthly gas cost adjustment clause prior to October 31, 1997
were just, reasonable, and necessary.
Capital Expenditures
TUC and TU Electric
The re-evaluation of growth expectations, the effects of inflation,
additional regulatory requirements and the availability of fuel, labor,
materials and capital may result in changes to the estimated construction
costs and dates of completion in TUC's and TU Electric's construction
programs (see Item 2. Properties -- Capital Expenditures in the 1997 Form
10-K). Commitments in connection with the construction program are generally
revocable subject to reimbursement to manufacturers for expenditures incurred
or other cancellation penalties. (TEG's capital expenditures program
is being re-evaluated in light of the acquisition.)
RESULTS OF OPERATION
TU Electric
Net income for TU Electric for the three months and six months ended June
30, 1998 increased approximately 12% and 4.9% respectively, from the same
periods of 1997 while net income for the twelve month period decreased 2.5%
from the same period of 1997. Results for the 1998 twelve months were reduced
by the recognition in August 1997 of an $81.1 million fuel disallowance
(including interest) and a charge of $10.1 million from the sale of sulfur
dioxide allowances previously recognized. After revenue-related and income
taxes, these settlements reduced income by $55.4 million. Excluding these
items, net income for the twelve months ended June 30, 1998 was $35.1 million
(4.3%) above that for the comparable 1997 period. Results for the current
twelve-month period were also reduced by the recognition of the $80.0 million
rate settlement refund recorded in July 1997. In April 1998, the PUC,
approved a permanent rate settlement agreement which was effective as of
January 1, 1998, that will reduce TU Electric's revenues by an estimated $263
million over the next two years.
34
TU Electric's residential customers received a 4 percent reduction of
their base rate charges through 1998, with an additional 1.4 percent reduction
planned for 1999. General service secondary customers received a 2 percent
decrease, and all other retail customers received a 1 percent decrease. Under
the agreement, TU Electric's rate of return on common equity during 1998 and
1999 is limited to 11.35% annually and any sums above the cap must be applied
as additional nuclear production depreciation. The agreement also allows
transfer of depreciation from transmission and distribution assets to nuclear
production assets. There was $29.3 million after-tax reduction to net income
for the three, six and twelve months ended June 30, 1998 due to $39 million of
nuclear depreciation expense recorded as a result of expected 1998 earnings in
excess of the stipulated return cap. Total accelerated nuclear production
depreciation for the six months was approximately $130 million, including $91
million transferred from transmission and distribution depreciation and the
$39 million from the return cap.
For the three-, six- and twelve-month periods ended June 30, 1998, TU
Electric's operating revenues increased significantly from the comparable
period of 1997. The following table details the factors contributing to these
changes:
<captions>
Increase (Decrease)
---------------------------------------
Three Months Six Months Twelve Months
---------- ----------- -----------
Thousands of Dollars
Base rate revenue $114,099 $ 98,262 $179,179
Fuel revenue (including over/under
- recovered) 98,029 74,424 221,904
Fuel disallowance -- -- (68,556)
Transmission service revenue 3,277 4,523 61,834
Other revenue (1,246) 3,407 (17,831)
-------- -------- --------
Total $214,159 $180,616 $376,530
======== ======== ========
Percentage increase 14.8% 6.4% 6.3%
Excluding fuel disallowance -- -- 7.5%
The increases in energy sales and base rate revenues were primarily due
to exceptionally high temperatures during the second quarter of 1998 and to
growth, partially offset by the implementation in January 1998 of the rate
settlement agreement, and, as to the twelve month period, the $80 million rate
settlement refund recorded in July 1997.
Fuel revenues increased in the 1998 periods as compared to 1997 due to
higher energy sales and increased usage of fuel gas. The increase in
transmission revenues for the twelve month period reflects implementation of
the PUC's Open Access Transmission Rule effective January 1, 1997.
Fuel and purchased power expense for the three-,six-, and twelve month
periods ended June 30, 1998 increased 23%, 9%, and 12%, respectively, from the
comparable 1997 periods as a result of higher energy sales and increased usage
of fuel gas.
Operation and maintenance expenses increased 8%, 2% and 4% for the
three-, six-, and twelve month periods reflecting implementation of ERCOT
tariffs in January 1997 and differences in the timing of maintenance projects.
The effective income tax rate differs from the US statutory rate of 35%
due to the impact of amortization of prior period flow through amounts, the
impact of which increased in the 1998 periods due to the acceleration of
depreciation on nuclear production assets in conjunction with the rate
settlement.
Interest on mortgage bonds decreased from 1997 to 1998 for all periods
presented due to the retirement of mortgage bonds, while interest on other
long-term debt increased due to the issuance of unsecured debt. For the three
month period, other interest increased due primarily to higher levels of
borrowings in 1998. Other interest for the twelve-month period, ending June
30, 1997 included an interest payment related to a settlement with the
35
Internal Revenue Service (IRS), while the 1998 period includes the interest on
the fuel disallowance, as noted above. The increase in distributions on
preferred securities of trusts reflects a full year effect in the 1998
twelve-month period of the issuance of TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary trusts in January 1997,
partially offset by a redemption of TU Electric Capital II preferred trust
securities in January 1998.
Preferred stock dividends decreased from 1997 to 1998 for all periods
presented, reflecting redemption of a significant portion of the preferred
stock.
TUC
Earnings for the second quarter of 1998 were $83.0 million (33 cents per
share, basic and diluted) compared to $160.7 million (72 cents per share,
basic and diluted) for the second quarter of 1997. Earnings for the six
months ended June 30, 1998 were $210 million (84 cents per share, basic and
diluted) compared with $276 million ($1.23 per share, basic and diluted) for
1997. Earnings for the 1998 twelve-month period were $595 million ($2.45 per
share basic, $2.44 per share diluted) compared with $700 million ($3.12 per
share, basic and diluted) for the prior twelve-month period. Earnings per
share comparisons for all periods were affected by the issuance of additional
shares of common stock for the acquisitions of TEG, ENSERCH and LCC,
partially offset by the repurchases of common stock in the third and fourth
quarters of 1997.
For all periods presented, the factors affecting the results of TU
Electric, as discussed above, are also major factors affecting the results of
TUC. TEG (including certain one-time acquisition transaction related costs
which totaled $31.6 million after-tax), ENSERCH and LCC had the following
impact on the Company's net income:
Periods Ended June 30, 1998
------------------------------------------
Three Months Six Months Twelve Months
---------- --------- -----------
Thousands of Dollars
TEG $(74,148) $(81,465) $(81,465)
ENSERCH (23,328) (7,126) (21,368)
LCC 4,527 9,270 11,090
-------- -------- --------
Total $(92,949) $(79,321) $(91,743)
======== ======== ========
Earnings for the three-, six- and twelve- month periods were reduced by
transaction expenses related to the TEG acquisition that were expensed during
1998. In addition, earnings for the twelve months were affected by the
previously discussed TU Electric fuel reconciliation disallowance and related
items. Excluding these items, earnings per share for the three-, six- and
twelve-month periods of 1998 were $.39, $.97 and $2.81 per share,
respectively.
For the three-, six- and twelve-month periods ended June 30, 1998,
contributions to consolidated operating revenues were as follows (in millions
of dollars):
<captions>
Periods Ended June 30, 1998 Periods Ended June 30, 1997
---------------------------- -----------------------------
Three Six Twelve Three Six Twelve
Months Months Months Months Months Months
TU Electric $1,666 $2,998 $6,316 $1,451 $2,817 $5,940
TU Australia 112 221 464 127 247 496
TEG 546 546 546 -- -- --
ENSERCH 873 1,893 3,170 -- -- --
LCC and Other 39 78 104 10 18 42
------ ------ ------- ------ ------ ------
Consolidated $3,236 $5,736 $10,600 $1,588 $3,082 $6,478
====== ====== ======= ====== ====== ======
36
Other income (deductions) -- net for the six- and twelve-month periods
ended June 30, 1998, included income of $11 million representing TUC's equity
in earnings of TEG prior to acquisition on May 19, 1998. The twelve months
ended June 30, 1998 were also affected by losses from an interest in a
telecommunications partnership.
Year-to-year comparisons of interest expense and distributions on
preferred securities and preferred stock of subsidiaries have been affected by
the Company's capital restructuring and debt reduction programs, the debt and
preferred stock assumed in connection with the acquisitions of TEG, ENSERCH
and LCC and debt incurred to finance the TEG acquisition. Interest expense
for the twelve-month period of 1998 included a charge of $12 million related
to the fuel disallowance.
The effective income tax rate differs from the US statutory rate of 35%
due to the impact of amortization of prior period flow-through amounts, the
impact of which increased in the 1998 periods due to the acceleration of
depreciation on nuclear production assets in conjunction with the rate
settlement. Differences in the tax rates applicable to results of non-US
operations and the amortization of goodwill, which is not deductible for tax
purposes, also impact the effective tax rate.
On a pro forma basis, as if TEG, ENSERCH and LCC had been acquired at
July 1, 1997, consolidated revenues would have been $16.1 billion and
consolidated net income would have been $832.3 million for the twelve months
ended June 30, 1998. The $55.4 million impact of TU Electric's fuel
reconciliation disallowance and related items (as previously discussed) and
TEG's after-tax income of $17 million from a non-recurring transaction in the
first quarter of 1998 are reflected in these pro forma results. A substantial
portion of TEG's and the Eastern Group's earnings occur during the first and
fourth quarters of the year which include the periods of peak electricity
usage in the UK. ENSERCH's earnings occur primarily in the first and fourth
quarters. The second quarter is now expected to be the Company's lowest
period of earnings. For the twelve month period ended June 30, 1998,
excluding the impact of the TEG acquisition (loss of $81.5 million) and
including results of ENSERCH and LCC for the full period (additional income of
$8.5 million), TUC's consolidated net income would have been $684.5 million or
$2.78 per share of common stock as compared with $832.3 million or $2.94 per
share for the same period on a pro forma basis including TEG for the full
twelve months.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Company,
comprehensive income consists of net income reported in the statements of
consolidated income and the change in the foreign currency translation
adjustment, net of tax as included in common stock equity. For TU Electric,
comprehensive income is the same as net income reported in the statements of
consolidated income, since there were no other items of comprehensive income
for the periods presented. (See Condensed Statements of Consolidated
Comprehensive Income).
CHANGE IN ACCOUNTING STANDARDS
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998 for reporting full year results of
operations. This statement establishes standards for defining and reporting
business segments. TUC is currently determining its reportable segments. The
adoption of SFAS 131 will not affect consolidated financial position, results
of operations or cash flows.
37
YEAR 2000 ISSUES
US Companies
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or produce erroneous data by
or at the Year 2000. The Year 2000 issues affect virtually all companies and
organizations.
The Company began its Year 2000 initiative in 1996 by addressing
mainframe-based application systems. In early 1997, an infrastructure project
to address information technology (IT) related equipment and system software
was begun. In late 1997, a corporate-wide project to address Year 2000 issues
related to embedded systems such as process controls for energy production and
delivery and client-developed applications was begun. Most of the ENSERCH
mainframe applications, infrastructure, embedded systems and client-developed
applications that will not be migrated to existing or planned Company systems
have been incorporated into these projects. These projects extend beyond the
Company's organization in an effort to also work with key vendors, service
suppliers and others so that the Company can appropriately prepare for the
Year 2000.
The remediation and replacement work on the majority of IT application
systems and infrastructure are targeted to be completed by the end of 1998.
For the corporate-wide effort on embedded systems, a majority of the
assessment work has been completed, and a number of tests on operational
equipment have been performed. The testing of this equipment will continue
throughout 1998. Although much of the work on the corporate-wide Year 2000
project is expected to be completed by the end of 1998, the project will
extend into 1999.
Based on additional assessment work performed during the first half of
1998, cost estimates have been updated. The current estimate for the Year 2000
effort is $28 to $31 million including $10 to 12 million for IT Corporate
Applications, $3 to 4 million for IT Infrastructure and $15 million for
Corporate-wide Embedded Systems. These costs are being expensed as incurred
over the five-year period (1996-2000).
LCC continues to work on its Year 2000 project. The costs to either
modify or replace LCC application systems affected by Year 2000 issues are
estimated to be $1.5 million. Assessment work on LCC embedded systems was
completed in the second quarter of 1998. The cost of remediation work related
to those systems is $571,000.
Non-US Companies
Eastern Energy initiated a Year 2000 project in the third quarter of
1997. The estimated cost of that project including embedded systems is $2.1
million. The completion of the project is planned for January 1999.
The Eastern Group established a program of projects in August 1996 to
ensure that all systems within the Eastern Group are Year 2000 compliant.
Most of the projects are now in the correction and testing stages with many of
the older information technology systems having already been replaced by
systems which are Year 2000 compliant. As part of its compliance program, the
Eastern Group is cooperating with other utility companies, trade associations
and its suppliers and customers by sharing information and experience. The
Eastern Group is also an active member of the UK Year 2000 interest group,
which together with a wide range of other businesses, focuses on dealing with
the issue of Year 2000 compliance.
38
LEGAL PROCEEDINGS
On August 3, 1998, the Gracy Fund, L.P. filed suit in the United States
District Court for the Northern District of Texas against EEX Corporation,
formerly Enserch Exploration, Inc. (EEX), the Company, David W. Biegler, Gary
J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The plaintiff
seeks to represent a class comprised of all purchasers of the common stock of
ENSERCH or EEX between January 26, 1996 and August 4, 1997, including former
shareholders of ENSERCH who received shares of EEX and the Company pursuant to
the merger agreement between ENSERCH and the Company dated April 13, 1996, all
EEX shareholders solicited pursuant to a proxy statement/prospectus issued by
EEX dated October 2, 1996 and all ENSERCH shareholders solicited by a joint
proxy statement/prospectus issued by ENSERCH and the Company dated September
23, 1996. The individual defendants are current or former officers and/or
directors of the Company or EEX. The plaintiffs allege that the defendants
participated in a fraudulent scheme and course of business by disseminating
materially false and misleading statements regarding EEX's and ENSERCH's
business which caused the plaintiffs and other members of the class to
purchase EEX and ENSERCH stock at artificially inflated prices. In such
connection, the plaintiffs allege that the defendants violated various
provisions of the Securities Act of 1933 and the Securities Exchange Act of
1934 (Exchange Act). No amount of damages is specified. The Company is
evaluating these claims and is unable at this time to predict the outcome of
this proceeding, but it intends to vigorously defend this suit.
Also, on August 3, 1998, Stan C. Thorne filed suit in the United States
District Court for the Southern District of Texas against EEX, ENSERCH,
DeGolyer & MacNaughton (D&M), David W. Biegler, Gary J. Junco, Fredrick S.
Addy and B. K. Irani. The plaintiff seeks to represent a class comprised of
all purchasers of the common stock of EEX during the period of August 3, 1995
through August 5, 1997. The individual defendants are current or former
officers and/or directors of EEX and Mr. Biegler has been an officer and
director of ENSERCH. D&M served as independent petroleum consultants to EEX.
The plaintiff alleges that the defendants engaged in a course of conduct
designed to mislead the plaintiff and the investing public in order to
maintain the price of EEX common stock at artificially high levels through
false and misleading representations concerning the gas reserves of EEX in
violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
thereunder. The plaintiff also alleges that the defendants were
negligent in making such misrepresentations and that they constituted
common law fraud against the defendants. No amount of damages is specified in
this action. The Company is also evaluating these claims and is unable at
this time to predict the outcome of this proceeding, but it also intends to
vigorously defend this suit.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for TUC and TU Electric related to
Energy Marketing Activities and Foreign Currency Risk Management is set forth
in Note 6 to Condensed Consolidated Financial Statements of Item 1 Financial
Statements. All other information required hereunder for TUC and TU Electric
is not significantly different from the information set forth in Item 7A
Quantitative and Qualitative Disclosures About Market Risk included in the
1997 Form 10-K and is therefore not presented herein.
39
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
TUC
On August 3, 1998, the Gracy Fund, L.P. filed suit in the United States
District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc. (EEX), the Company,
David W. Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip
McCormick. The plaintiff seeks to represent a class comprised of all
purchasers of the common stock of ENSERCH or EEX between January 26, 1996 and
August 4, 1997, including former shareholders of ENSERCH who received shares
of EEX and the Company pursuant to the merger agreement between ENSERCH and
the Company dated April 13, 1996, all EEX shareholders solicited pursuant to a
proxy statement/prospectus issued by EEX dated October 2, 1996 and all ENSERCH
shareholders solicited by a joint proxy statement/prospectus issued by ENSERCH
and the Company dated September 23, 1996. The individual defendants are
current or former officers and/or directors of the Company or EEX. The
plaintiffs allege that the defendants participated in a fraudulent scheme and
course of business by disseminating materially false and misleading statements
regarding EEX's and ENSERCH's business which caused the plaintiffs and other
members of the class to purchase EEX and ENSERCH stock at artificially
inflated prices. In such connection, the plaintiffs allege that the
defendants violated various provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934 (Exchange Act). No amount of damages is
specified. The Company is evaluating these claims and is unable at this time
to predict the outcome of this proceeding, but it intends to vigorously defend
this suit.
Also, on August 3, 1998, Stan C. Thorne filed suit in the United States
District Court for the Southern District of Texas against EEX, ENSERCH,
DeGolyer & MacNaughton (D&M), David W. Biegler, Gary J. Junco, Fredrick S.
Addy and B. K. Irani. The plaintiff seeks to represent a class comprised of
all purchasers of the common stock of EEX during the period of August 3, 1995
through August 5, 1997. The individual defendants are current or former
officers and/or directors of EEX and Mr. Biegler has been an officer and
director of ENSERCH. D&M served as independent petroleum consultants to EEX.
The plaintiff alleges that the defendants engaged in a course of conduct
designed to mislead the plaintiff and the investing public in order to
maintain the price of EEX common stock at artificially high levels through
false and misleading representations concerning the gas reserves of EEX in
violation of Sections 10(b) and 20(a) of the Exchange Act
and Rule 10b-5 thereunder. The plaintiff also alleges that the defendants
were negligent in making such misrepresentations and that they constituted
common law fraud against the defendants. No amount of damages is specified in
this action. The Company is also evaluating these claims and is unable at
this time to predict the outcome of this proceeding, but it also intends to
vigorously defend this suit.
40
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TUC
Texas Utilities Company held its Annual Meeting of Shareholders on May 8,
1998. The following items were presented to the shareholders with the
following results:
<captions>
Votes
Withheld or
Election of Directors Votes for Against Abstentions
J. S. Farrington 204,725,846 1,318,479 None
Bayard H. Friedman 204,576,874 1,467,451 None
William M. Griffin 204,607,483 1,436,842 None
Kerney Laday 204,665,387 1,378,938 None
Margaret N. Maxey 204,570,365 1,473,960 None
James A. Middleton 204,780,285 1,264,040 None
Erle Nye 204,738,442 1,305,883 None
J. E. Oesterreicher 204,734,124 1,310,201 None
Charles R. Perry 204,619,779 1,424,546 None
Herbert H. Richardson 204,665,511 1,378,814 None
Selection of Deloitte & Touche
LLP as Independent Accountants 204,926,416 434,604 683,305
41
Item 5. OTHER INFORMATION
TUC
1999 Annual Meeting Shareholders' Proposals
Rule 14a-4(c) of the Securities and Exchange Commission's proxy rules
allows the Company to use discretionary voting authority to vote on a matter
coming before an annual meeting of shareholders which is not included in the
Company's proxy statement, if the Company does not have notice of the matter
at least 45 days before the date on which the Company first mailed its proxy
material for the prior year's annual meeting of shareholders. In addition,
discretionary voting authority may generally also be used if the Company
receives timely notice of such matter (as described in the preceding sentence)
and if, in the proxy statement, the Company describes the nature of such
matter and how the Company intends to exercise its discretion to vote on such
matter. Accordingly, for the 1999 Annual Meeting of Shareholders any such
notice must be received by the Secretary of the Company on or before February
2, 1999.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a shareholder must meet in order to have a
shareholder proposal included in the Company's proxy statement and form of
proxy. As described in the Company's proxy statement for its 1998 Annual
Meeting, specific proposals of common shareholders intended to be presented at
the 1999 Annual Meeting of Shareholders must be received by the Secretary of
the Company no later than November 19, 1998 in order to be eligible for
inclusion in the Company's proxy materials relating to that meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
TUC and TU Electric
(a) Exhibits filed as a part of Part II are:
15 -Letters from Deloitte & Touche LLP as to
unaudited interim financial information
15(a) Texas Utilities Company
15(b) Texas Utilities Electric Company
27 -Financial Data Schedules
27(a) Texas Utilities Company
27(b) Texas Utilities Electric Company
42
(b) Reports on Form 8-K filed since March 31, 1998:
Date of Report Item Reported
---------------- -------------
TUC
April 8, 1998 Item 5. Other Events
April 9, 1998 Item 7. Financial Statements and Exhibits
April 17, 1998 Item 5. Other Events
May 19, 1998 Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
Amendment No. 1
to May 19, 1998
8-K (filed June 25, Item 2. Acquisition or Disposition of Assets
1998) Item 7. Financial Statements and Exhibits
Amendment No. 2
to May 19, 1998
8-K (filed July 17, Item 2. Acquisition or Disposition of Assets
1998) Item 7. Financial Statements and Exhibits
August 6, 1998 Item 5. Other Events
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEXAS UTILITIES COMPANY
By /s/ J. W. Pinkerton
-------------------------
J. W. Pinkerton
Controller and Principal
Accounting Officer
Date: August 13, 1998
- ------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEXAS UTILITIES ELECTRIC COMPANY
By /s/ J. W. Pinkerton
------------------------------
J. W. Pinkerton
Controller and Principal
Accounting Officer
Date: August 13, 1998
Appendix A
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
INDEX TO FINANCIAL INFORMATION
June 30, 1998
Page
Condensed Statements of Consolidated Income -
Three, Six and Twelve Months Ended June 30, 1998 and 1997 A-2
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1998 and 1997 A-3
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 A-4
Notes to Condensed Consolidated Financial Statements A-6
Independent Accountants' Report A-10
Management's Discussion and Analysis of Financial Condition
and Results of Operation A-11
A-1
<captions>
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Predecessor
---------------------------
Twelve Months Ended June 30, 1998
Predecessor Predecessor ---------------------------------
----------- ----------- Period From
Three Months Ended Six Months Ended Period From July 1, 1997 Twelve
June 30 June 30 Acquisition Through Months Ended
--------------------- ----------------------- Date Thru Acquisition June 30,
1998 1997 1998 1997 June 30, 1998 Date 1997
---------- --------- ----------- ---------- ------------- ------------- ------------
Thousands of Dollars
OPERATING REVENUES . . . . . . . . . $873,441 $348,649 $1,893,251 $1,144,186 $3,170,257 $135,492 $2,045,451
-------- -------- ---------- ---------- ---------- -------- ----------
OPERATING EXPENSES
Gas purchased for resale. . . . . . 766,983 246,625 1,610,631 868,790 2,673,071 86,471 1,494,359
Operation and maintenance . . . . . 85,508 84,481 171,595 168,772 313,281 28,710 345,272
Depreciation and amortization . . . 19,504 14,429 38,632 28,900 68,352 4,793 56,073
Taxes other than income . . . . . . 16,465 19,364 39,177 42,646 62,513 3,712 73,110
-------- -------- ---------- ---------- ---------- -------- ----------
Total operating expenses. . . . . 888,460 364,899 1,860,035 1,109,108 3,117,217 123,686 1,968,814
-------- -------- ---------- ---------- ---------- -------- ----------
OPERATING INCOME (LOSS) . . . . . . (15,019) (16,250) 33,216 35,078 53,040 11,806 76,637
MERGER EXPENSES. . . . . . . . . . . (5,070) (5,825) (19,310) (12,615)
OTHER INCOME (DEDUCTIONS) - NET. . . 934 1,224 866 1,347 1,747 1,452 (320)
INTEREST CHARGES . . . . . . . . . . (18,287) (19,022) (37,038) (37,956) (68,793) (6,581) (77,715)
-------- -------- ---------- ---------- ---------- -------- ----------
LOSS BEFORE INCOME TAXES . . . . . . (32,372) (39,118) (2,956) (7,356) (14,006) (12,633) (14,013)
INCOME TAX EXPENSE (BENEFIT) . . . . (9,996) (17,542) 1,936 (4,356) 451 (256) (4,084)
-------- -------- ---------- ---------- ---------- -------- ----------
LOSS FROM CONTINUING
OPERATIONS. . . . . . . . . . . . . (22,376) (21,576) (4,892) (3,000) (14,457) (12,377) (9,929)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS . . . . . . . . . . . . (8,511) (228,012) 3,321 (223,021)
EXTRAORDINARY LOSS ON
EXTINGUISHMENT OF DEBT. . . . . . . (2,096)
-------- -------- ---------- ---------- ---------- -------- ----------
NET LOSS . . . . . . . . . . . . . . (22,376) (30,087) (4,892) (231,012) (14,457) (9,056) (235,046)
PREFERRED STOCK DIVIDENDS. . . . . . 952 2,893 2,234 5,755 6,911 970 11,518
-------- -------- ---------- ---------- ---------- -------- ----------
NET LOSS AVAILABLE FOR
COMMON STOCK . . . . . . . . . $(23,328) $(32,980) $ (7,126) $ (236,767) $ (21,368) $(10,026) $ (246,564)
======== ======== ========== ========== ========== ======== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
A-2
<captions>
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (Unaudited)
Predecessor
-----------
Six Months Ended June 30
-------------------------
1998 1997
---- ----
Thousands of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Loss from continuing operations . . . . . . . . . . . . . . . . . . $ (4,892) $ (3,000)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 38,672 31,916
Deferred income taxes . . . . 31,770 (7,595)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 240,005 166,235
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,568 19,826
Accounts payable
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . 5,108
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (162,763) (154,274)
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . (35,312) (15,440)
Other working capital . . . . . . . . . . . . . . . . . . . . . . (24,381) 1,491
Energy marketing risk management assets and liabilities . . . . . (25,393)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,609) 5,419
--------- ---------
Cash provided by operating activities . . . . . . . . . . . . . 65,773 44,578
--------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 100,000
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,762
Retirements of securities:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . (90,750) (100,784)
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . (100,000)
Change in notes payable:
Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . 65,500
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,094)
Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,524)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (3,455) (12,773)
Debt financing expenses . . . . . . . . . . . . . . . . . . . . . . (1,060)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
--------- ---------
Cash provided by financing activities . . . . . . . . . . . . . 117 55,698
--------- ---------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . (67,296) (50,625)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . (3,908) (26,870)
--------- ---------
Cash used in investing activities . . . . . . . . . . . . . . . (71,204) (77,495)
--------- ---------
CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS. . . . . . . . . 1,462 (30,867)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . (3,852) (8,086)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . 11,770 17,715
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . $ 7,918 $ 9,629
========= =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
A-3
<captions>
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
1998 December 31,
(Unaudited) 1997
---------- -----------
Thousands of Dollars
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,090,647 $1,068,708
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,002 46,400
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,146,649 1,115,108
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,139 24,669
---------- ----------
Net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,093,510 1,090,439
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,597 85,635
Held for future use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 121
---------- ----------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212,228 1,176,195
---------- ----------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,788 37,041
---------- ----------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,918 11,770
Accounts receivable (net of allowance for uncollectible accounts: 1998 - $6,402,000;
1997 - $3,902,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,263 524,908
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . . . . . . 493,247 365,650
Inventories - at average cost:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500 6,544
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,720 114,244
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,010 1,527
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,663 22,663
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,761 7,678
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959,082 1,054,984
---------- ----------
DEFERRED DEBITS
Goodwill (net of accumulated amortization: 1998 - $18,107,000; 1997 - $8,113,000) . . . . 781,407 791,401
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . . . . . . 70,980 41,522
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,298 52,336
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,362 72,631
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,247 14,038
---------- ----------
Total deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970,294 971,928
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,182,392 $3,240,148
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
A-4
<captions>
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
June 30,
1998 December 31,
(Unaudited) 1997
----------- -----------
Thousands of Dollars
CAPITALIZATION
Common Stock (par value - $.01 per share):
Authorized shares - 100,000,000
Outstanding shares - 201,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 2
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770,923 771,207
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,001) (9,565)
---------- ----------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754,924 761,644
Preferred stock not subject to mandatory redemption . . . . . . . . . . . . . . . . . . 75,000 175,000
Advances from parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242,913 293,843
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . . . . . 802,952 646,796
---------- ----------
Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,875,789 1,877,283
---------- ----------
CURRENT LIABILITIES
Notes payable - banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,973 6,067
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,034 4,926
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,240 491,645
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . . 471,754 357,044
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,222 19,010
Interest accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,123 20,264
Dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638 1,859
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,017 7,751
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,131 79,078
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,132 987,644
---------- ----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,088 10,498
Unamortized investment tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,334 3,364
Pensions and other postretirement benefits. . . . . . . . . . . . . . . . . . . . . . . 165,780 165,514
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . . 48,276 31,324
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . . . . . 165,993 164,521
---------- ----------
Total deferred credits and other noncurrent liabilities. . . . . . . . . . . . . . . 393,471 375,221
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,182,392 $3,240,148
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
A-5
ENSERCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.MERGERS AND DISPOSITIONS
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions between Texas Utilities Company (TUC) and ENSERCH Corporation
(ENSERCH or the Corporation) were completed. All of the common stock of
ENSERCH was converted into common stock of TUC, and ENSERCH became a
wholly-owned subsidiary of TUC. Immediately prior to ENSERCH's merger with
TUC, Enserch Exploration, Inc. (EEX) and Lone Star Energy Plant Operations,
Inc. (LSEPO), former subsidiaries of the Corporation, were merged to form a
new company (New EEX), and ENSERCH distributed to its common shareholders its
ownership interest in these businesses.
TUC accounted for its acquisition of ENSERCH as a purchase, and purchase
accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the
period subsequent to August 5, 1997. The financial statements of ENSERCH for
the periods ended before August 5, 1997 were prepared using ENSERCH's
historical basis of accounting and are designated as "Predecessor". The
comparability of the operating results for the Predecessor and the periods
encompassing push down accounting are affected by the purchase accounting
adjustments, including the amortization of goodwill over a period of forty
years.
The Predecessor financial statements have been restated to reflect EEX
and LSEPO as a discontinued operation. The historical financial statements of
ENSERCH reflect certain reclassifications made to conform to TUC's
presentation style. On December 31, 1997, ENSERCH sold, to another subsidiary
of TUC, at net book value, the group of companies which had constituted the
Corporation's power development and international gas distribution
operations. For financial reporting purposes, the sale was deemed to have
occurred on August 5, 1997. Accordingly, operating results for periods
following the Merger Date exclude those operations. Prior periods were not
restated to reflect the sale.
The fair value of the assets and liabilities of ENSERCH's rate-regulated
natural gas utility business (conducted through its Lone Star Gas Company and
Lone Star Pipeline Company divisions) is considered to be equivalent to the
historical basis of accounting and accordingly, no adjustment has been made to
the carrying value. The excess of the consideration paid by TUC over the
estimated fair value of the assets and liabilities of ENSERCH at the merger
date was approximately $800 million and is reflected as goodwill in the
ENSERCH balance sheet as of December 31, 1997. The process of determining the
fair value of assets and liabilities at the Merger Date is continuing, and the
final result awaits the resolution of income tax and other contingencies and
finalization of certain estimates.
A-6
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements
of ENSERCH and its subsidiaries have been prepared on the same basis as those
in the 1997 Annual Report on Form 10-K (1997 Form 10-K) and, in the opinion of
ENSERCH, all adjustments (constituting only normal recurring accruals)
necessary to a fair presentation of the results of operation and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to rules and regulations of the Securities and Exchange
Commission.
Certain previously reported amounts have been reclassified to
conform to current classifications.
Energy Marketing Activities -- The Corporation, through its energy
marketing subsidiary, Enserch Energy Services, Inc. (EES), enters into a
variety of transactions, including forward contracts involving physical
delivery of natural gas or electrical power commodities, as well as swaps,
futures, options and other derivative contractual arrangements. As part of
these business activities, EES offers price risk management services to the
energy sector. These transactions are primarily conducted with retail end
users, established energy companies and major financial institutions. EES
uses the mark-to-market method of valuing and accounting for these
activities. Under this method, the current market value of EES' energy
portfolio, net of future servicing costs is reflected within the Corporation's
consolidated balance sheets, with resulting unrealized gains and losses, as
"Energy Marketing Risk Management Assets" or "Energy Marketing Risk Management
Liabilities". The actual timing of cash receipts and payments may however
vary as contracts may be settled at intervals other than their scheduled
maturities. (See Note 6).
3.COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Corporation,
comprehensive income is the same as net income reported in the consolidated
statement of income. There are no other items of comprehensive income for the
periods presented.
4.LINES OF CREDIT
At June 30, 1998, TUC, Texas Utilities Electric Company (a subsidiary of
TUC) (TU Electric) and ENSERCH had joint lines of credit under revolving
credit facility agreements (Credit Agreements) with a group of banking
institutions. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $3,600,000,000 outstanding at any
one time at variable interest rates and terminates March 1, 1999. Facility B
provides for borrowings aggregating up to $1,400,000,000 outstanding at any
one time at variable interest rates and terminates March 2, 2003. Excluding
$2,800,000,000 which is restricted to TUC's use in financing the acquisition
of a foreign-based entity, the combined borrowings of TUC, TU Electric and
ENSERCH under both facilities are limited to an aggregate of $2,200,000,000
outstanding at any one time, which may be used for working capital and other
general corporate purposes, including commercial paper backup. ENSERCH's
borrowings under both facilities are limited to an aggregate of up to
A-7
$650,000,000 outstanding at any one time. At June 30, 1998, ENSERCH had
no borrowings outstanding under these facilities.
5.CAPITALIZATION
Long-Term Debt -- In January 1998, the Corporation issued $125,000,000 of
6.25% Series A Notes due January 1, 2003 (Series A Notes) and $125,000,000 of
Remarketed Reset Notes due January 1, 2008 (Reset Notes). Net proceeds from
these borrowings were used to refinance or redeem like amounts of higher rate
debt and preferred stock. On July 1, 1998, the interest rate on the Reset
Notes was reset to a fixed rate of 6.564% to July 1, 2005.
In March 1998, ENSERCH redeemed the outstanding balance of its 6.375%
Convertible Subordinated Debentures. Holders of $3,005,000 principal amount
of the debentures elected to convert such debentures into 77,963 shares of TUC
common stock, and the remaining $87,745,000 principal amount was redeemed at
par for cash.
On July 6, 1998, ENSERCH redeemed at par its $100,000,000 principal
amount 8.875% Senior Notes.
ENSERCH Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Debentures of ENSERCH -- In July 1998, a
statutory business trust, ENSERCH Capital I, was established as a financing
subsidiary of ENSERCH for the purpose of issuing common and preferred trust
securities, with a liquidation preference of $1,000 per unit, and holding
Junior Subordinated Debentures issued by ENSERCH. ENSERCH Capital I issued
$150,000,000 of floating rate capital securities. Distributions on these
capital securities are payable quarterly based on an annual floating rate
determined quarterly with reference to a three-month LIBOR plus a margin of
1.35%. The debentures held by the trust are its only assets. The trust
assets are $154,600,000 principal amount of Floating Rate Junior Subordinated
Debentures Series A (Series A Debentures). ENSERCH Capital I will use interest
payments received on the Series A Debentures to make cash distributions on the
capital securities it has issued. The interest rate on the Series A
Debentures will be set quarterly, based on three-month LIBOR plus 1.35%. The
initial rate for the period from July 2, 1998 to September 30, 1998 is
7.06875%. The proceeds were used by ENSERCH for general corporate purposes,
including the acquisition or redemption of outstanding securities of ENSERCH.
The Series A Debentures will mature on July 1, 2028 and ENSERCH has the right
to redeem the debentures in whole or in part on or after July 1, 2003.
Preferred Stock -- In January 1998, the Corporation redeemed all of the
outstanding shares of its Adjustable Rate Preferred Stock, Series E, at par
value of $1,000 per share, $100,000,000 principal amount, plus accrued and
unpaid dividends of $14.777 per share.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $100,000,000 aggregate principal
amount of securities currently registered with the SEC for offering pursuant
to Rule 415 under the Securities Act of 1933.
A-8
6.DERIVATIVE INSTRUMENTS
Energy Marketing Activities -- EES' energy portfolio is comprised of
forward commitments, futures, swaps, options and other derivative
instruments. The notional amounts and terms of the portfolio as of June 30,
1998 included financial instruments that provide for fixed price receipts of
2,265 trillion British thermal units equivalent (Tbtue) and fixed price
payments of 2,314 Tbtue, with a maximum term of seven years. Additionally,
sales and purchase commitments totaling 1,140 Tbtue, with terms extending up
to five years are included in the portfolio as of June 30, 1998.
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments.Accordingly,
the notional amounts represented above do not necessarily measure EES'
exposure to market or credit risks. Additionally, the maximum term in years
are not indicative of likely future cash flows as these positions may be
offset in the markets at any time in response to EES' risk management needs.
7.REGULATION AND RATES
Lone Star Gas Rates -- In August 1996, the Railroad Commission of Texas
(RRC) ordered a general inquiry into the rates and services of Lone Star Gas,
most notably a review of historic gas cost and gas acquisition practices since
the last rate setting. The inquiry docket was separated into different phases,
all of which are now resolved. Two of the phases, conversion to the National
Association of Regulatory Utility Commissioners account numbering system and
unbundling, have been dismissed by the RRC, and one other phase, rate case
expense, has been concluded. In the phase dealing with historic gas cost and
gas acquisition practices, the RRC issued a final order on June 2, 1998
approving a stipulated settlement of the docket. Lone Star Gas agreed to
credit residential and commercial customers $18 million to be spread over the
next two heating seasons (November through March). The earnings of Lone Star
Gas are not affected by the settlement due to previously established reserves.
Lone Star Gas and the intervenors both agreed to withdraw their appeals of
the city gate rate case. The final order approving the stipulation found that
all gas costs flowed through Lone Star Gas' monthly gas cost adjustment clause
prior to October 31, 1997 were just, reasonable, and necessary.
8.COMMITMENTS AND CONTINGENCIES
Guarantees -- The Corporation and/or its subsidiaries are the guarantor
on various commitments and obligations of others aggregating approximately
$33,300,000 at June 30, 1998. The Corporation is exposed to loss in the event
of nonperformance by other parties. However, the Corporation does not
anticipate nonperformance by the counterparties.
A-9
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiaries (the Corporation) as of June 30, 1998,
and the related condensed statements of consolidated income for the
three-month and six-month periods ended June 30, 1998 and the period from the
acquisition date (August 5, 1997) through June 30, 1998 (Successor Company
Operations), the condensed statements of consolidated income for the
three-month, six-month and twelve-month periods ended June 30, 1997 and the
period from July 1, 1997 through the acquisition date (Predecessor Company
Operations) and the consolidated cash flows for the six-month periods ended
June 30, 1998 and 1997. These financial statements are the responsibility of
the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Corporation as of December 31,
1997, and the related consolidated statements of income, cash flows and
common stock equity for the year then ended (not presented herein); and in our
report dated February 24, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1997, is fairly stated in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 13, 1998
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
FORWARD-LOOKING STATEMENTS
This report and other presentations made by ENSERCH Corporation (ENSERCH
or the Corporation) and its subsidiaries contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Although ENSERCH believes that in making any such statement its
expectations are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to the factors
contained in the Forward-looking Statements section of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation in
ENSERCH's 1997 Annual Report on Form 10-K for the year 1997 (1997 Form 10-K),
among others, that could cause the actual results of ENSERCH to differ
materially from those projected in such forward-looking statement.
Any forward-looking statement speaks only as of the date on which such
statement is made, and ENSERCH undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
ENSERCH to predict all of such factors, nor can it assess the impact of each
such factor or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
FINANCIAL CONDITION
Merger With TUC and Disposition
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions between Texas Utilities Company (TUC) and ENSERCH Corporation
(ENSERCH or the Corporation) were completed. All of the common stock of
ENSERCH was converted into common stock of TUC, and ENSERCH became a
wholly-owned subsidiary of TUC. Immediately prior to ENSERCH's merger with
TUC, Enserch Exploration, Inc. (EEX) and Lone Star Energy Plant Operations,
Inc. (LSEPO), former subsidiaries of the Corporation, were merged to form a
new company (New EEX), and ENSERCH distributed to its common shareholders its
ownership interest in these businesses.
TUC accounted for its acquisition of ENSERCH as a purchase, and purchase
accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the
period subsequent to August 5, 1997. The financial statements of ENSERCH for
the periods ended before August 5, 1997, were prepared using ENSERCH's
historical basis of accounting and are designated as "Predecessor". The
comparability of the operating results for the Predecessor and the periods
encompassing push down accounting are affected by the purchase accounting
adjustments including the amortization of goodwill over a period of forty
years.
The Predecessor financial statements have been restated to reflect EEX
and LSEPO as a discontinued operation. The historical financial statements of
ENSERCH reflect certain reclassifications made to conform to TUC's
presentation style. On December 31, 1997, ENSERCH sold, to another subsidiary
of TUC, at net book value, the group of companies which had constituted the
Corporation's power development and international gas distribution operations.
For financial reporting purposes, the sale was deemed to have occurred on
August 5, 1997. Accordingly, operating results for periods following the
Merger Date exclude those operations. Prior periods were not restated to
reflect the sale.
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Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation in ENSERCH's 1997 Form 10-K. Results for the three- and six-month
periods presented herein are not necessarily indicative of expectations for a
full year's operations because of seasonal and other factors, including
variations in maintenance and other operating expense patterns. No significant
changes or events which might affect the financial condition of the
Corporation have occurred subsequent to year-end other than as disclosed in
other reports of ENSERCH or included herein.
Continuing operations provided cash of $66 million for operating
activities in the first six months of 1998 compared with $45 million in the
same period of 1997. Discontinued operations provided cash of $1.5 million
in the 1998 six months and used cash of $31 million in the 1997 period.
Investing activities required $71 million in the first six months of 1998
versus $77 million in 1997. Capital spending in the first six months of 1998
was $17 million higher than the first six months of the prior year. Other
investing activities used cash of $3.9 million in 1998 and $27 million in
1997.
The capitalization ratios of the Corporation as of June 30, 1998
consisted of approximately 55.8% long-term debt (including amounts due
parent), 4.0% preferred stock and 40.2% common stock equity.
In January 1998, ENSERCH issued $125 million of 6.25% Series A Notes due
2003 and $125 million of Remarketed Reset Notes due 2008. Net proceeds from
these borrowings were used to refinance or redeem like amounts of higher rate
debt and preferred stock. On July 1, 1998, the interest rate on the Reset
Notes was reset to a fixed rate of 6.564% to July 1, 2005. In January,
the $100 million principal amount of Series E Adjustable Rate Preferred Stock
was redeemed at 100% of its liquidation price plus accrued and unpaid
dividends. In March 1998, the Corporation redeemed the outstanding balance of
its 6.375% Convertible Subordinated Debentures. Holders of the debentures
elected to convert $3.0 million principal amount of such debentures into
77,963 shares of TUC common stock, and the remaining $87.7 million principal
amount was redeemed at par for cash. On July 6, 1998, ENSERCH redeemed at par
its $100 million principal amount of 8.875% Senior Notes due 2001.
In July 1998, a statutory business trust, ENSERCH Capital I, was
established as a financing subsidiary of ENSERCH for the purpose of issuing
common and preferred trust securities with a liquidation preference of $1,000
per unit, and holding Junior Subordinated Debentures, issued by ENSERCH.
ENSERCH Capital I issued $150 million of floating rate capital securities.
Distributions on these capital securities are payable quarterly based on an
annual floating rate determined quarterly with reference to a three-month
LIBOR plus a margin of 1.35%. The debentures held by the trust are its only
assets. The trust assets are $154.6 million principal amount of Floating Rate
Junior Subordinated Debentures Series A (Series A Debentures). ENSERCH
Capital I will use interest payments received on the Series A Debentures to
make cash distributions on the capital securities it has issued. The interest
rate on the Series A Debentures will be set quarterly, based on three-month
LIBOR plus 1.35%. The initial rate for the period from July 2, 1998 to
September 30, 1998 is 7.06875%. The proceeds were used by ENSERCH for general
corporate purposes, including the acquisition or redemption of outstanding
securities of ENSERCH. The Series A Debentures will mature on July 1, 2028
and ENSERCH has the right to redeem the debentures in whole or in part on or
after July 1, 2003.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $100 million aggregate principal
amount of securities currently registered with the Securities and Exchange
Commission (SEC) for offering pursuant to Rule 415 under the Securities Act of
1933.
A-12
At June 30, 1998, TUC, Texas Utilities Electric Company, subsidiary of
TUC (TU Electric), and ENSERCH had joint lines of credit under revolving
credit facility agreements (Credit Agreements) with a group of banking
institutions. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $3.6 billion outstanding at any
one time at variable interest rates and terminates March 1, 1999. Facility B
provides for borrowings aggregating up to $1.4 billion outstanding at any one
time at variable interest rates and terminates March 2, 2003. Excluding $2.8
billion of Facility A which is restricted to use by TUC in financing the
acquisition of The Energy Group PLC, the combined borrowings of TUC, TU
Electric and ENSERCH under both facilities are limited to an aggregate of $2.2
billion outstanding at any one time which may used for working capital and
other general corporate purposes, including commercial paper backup.
ENSERCH's borrowings under both facilities are limited to an aggregate of up
to $650 million outstanding at any one time. At June 30, 1998, ENSERCH had no
borrowings outstanding under these facilities.
Regulation and Rates
Lone Star Gas Rates -- In August 1996, the Railroad Commission of Texas
(RRC) ordered a general inquiry into the rates and services of Lone Star Gas,
most notably a review of historic gas cost and gas acquisition practices since
the last rate setting. The inquiry docket was separated into different phases,
all of which are now resolved. Two of the phases, conversion to the National
Association of Regulatory Utility Commissioners account numbering system and
unbundling, have been dismissed by the RRC, and one other phase, rate case
expense, has been concluded. In the phase dealing with historic gas cost and
gas acquisition practices, the RRC issued a final order on June 2, 1998
approving a stipulated settlement of the docket. Lone Star Gas agreed to
credit residential and commercial customers $18 million to be spread over the
next two heating seasons (November through March). The earnings of Lone Star
Gas are not affected by the Settlement due to previously established reserves.
Lone Star Gas and the intervenors both agreed to withdraw their appeals of the
city gate rate case. The final order approving the stipulation found that all
gas costs flowed through Lone Star Gas' monthly gas cost adjustment clause
prior to October 31, 1997 were just, reasonable, and necessary.
RESULTS OF OPERATION
For the three-, six- and twelve-month periods ended June 30, 1998,
ENSERCH had losses from continuing operations of $22 million, $4.9 million and
$27 million, respectively compared with losses of $22 million, $3.0 million
and $9.9 million, respectively, for the Corporation and Predecessor, as
applicable, for the same period of 1997. The amortization of goodwill
arising from the acquisition by Texas Utilities was $5.0 million for the three
months, $10.0 million the first six months and $18.1 million for the twelve
months ended June 30, 1998. Income for the 1997 six and twelve month period
was reduced by an $8.6 million pretax, $5.6 million after-tax, provision for a
credit Lone Star Pipeline Company made voluntarily to its customers.
Consolidated revenues for the three, six and twelve months ended June 30,
1998 increased 151%, 65% and 62% compared with the same periods for 1997. The
higher revenues reflect a significant increase in energy marketing revenues in
the second quarter. Gas purchased for resale increased 211%, 85% and 85% in
the three-, six- and twelve-month 1998 periods, respectively, over the same
periods of 1997, reflecting the increase in energy marketing activity.
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Operating income for the twelve months ended June 30, 1998 was $64.8
million compared to $76.6 million for the 1997 period.
Consolidated operating income the for the six months was $33.2 million
in 1998 compared with $35.1 million in 1997. There was an operating loss from
natural gas gathering and processing operations of $1.9 million for the six
months of 1998 compared with operating income of $6.4 million for the same
period of 1997. Fluctuations in natural gas liquids (NGL) demand, price
volatility for NGL products and natural-gas feedstock costs are the major
factors that influence financial results in the NGL processing business. Lone
Star Pipeline operating income increased $4.0 million in the 1998 six month
period from the 1997 first six months, partially attributable to lower
operating and maintenance expenses. The results in 1997 were after a
voluntary refund of $8.6 million made to residential and commercial
customers. For the first six months, Lone Star Gas operating income decreased
$10.5 million in 1998 from 1997 primarily due to higher operating and
maintenance expenses. Energy marketing activities reported an improvement in
operating results of some $16.2 million compared with the 1997 first six
months, the result of improved gas margins. Power development and
international gas operations, transferred to another TUC affiliate effective
with the Merger, detracted $7.0 million from operating income in the first six
months of 1997. Results for the first six months of 1998 were reduced $10.0
million by the amortization of goodwill recorded in connection with the Merger
with TUC.
In the second quarter of 1998, the Corporation had an operating loss of
$15.0 million compared with a loss of $16.3 million in 1997. There was an
operating loss from natural gas gathering and processing operations of $.7
million for the second quarter of 1998 compared with operating income of $2.4
million for the same period of 1997. Lone Star Pipeline operating income
increased $.5 million in the 1998 second quarter from the 1997 second
quarter, which was partially attributable to lower operating and maintenance
expenses. For the second quarter, Lone Star Gas had an operating loss of
$12.2 million in 1998 compared with a loss of $9.2 million in 1997 primarily
due to higher operating and maintenance expenses. Energy marketing
activities reported an improvement in operating results of some $6.1 million
compared with the 1997 second quarter, the result of improved gas margins.
Amortization of goodwill reduced 1998 second quarter results by $5.0 million.
The loss from discontinued operations of $228.0 million for the six
months ended June 30, 1997, included the effect of a $236 million after-tax
write-down of the carrying value of EEX's oil and gas properties due to the US
cost center ceiling limitation at March 31, 1997, and a $9.7 million ($14.9
million pre-tax) provision for estimated costs and expenses to wind-up
engineering and construction operations.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Corporation,
comprehensive income is the same as net income reported in the statements of
consolidated income, since there are no other items of comprehensive income
for the periods presented.
CHANGES IN ACCOUNTING STANDARDS
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998. This statement establishes
standards for defining and reporting business segments. The Corporation is
currently determining its reportable segments. The adoption of SFAS 131 will
not affect the Corporation's consolidated financial position, results of
operations or cash flows.
A-14
YEAR 2000
Year 2000 issues of ENSERCH are being addressed with those of its parent
company, TUC. The following disclosure regarding Year 2000 issues of TUC's
US companies is included in TUC's Form 10-Q for June 30, 1998:
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or produce erroneous data by or at the Year
2000. The Year 2000 issues affect virtually all companies and organizations.
The Company began its Year 2000 initiative in 1996 by addressing
mainframe-based application systems. In early 1997, an infrastructure project
to address information technology (IT) related equipment and system software
was begun. In late 1997, a corporate-wide project to address Year 2000 issues
related to embedded systems such as process controls for energy production and
delivery and client-developed applications was begun. Most of the ENSERCH
mainframe applications, infrastructure, embedded systems and client-developed
applications that will not be migrated to existing or planned Company systems
have been incorporated into these projects. These projects extend beyond the
Company's organization in an effort to also work with key vendors, service
suppliers and others so that the Company can appropriately prepare for the
Year 2000.
The remediation and replacement work on the majority of IT application systems
and infrastructure are targeted to be completed by the end of 1998. For the
corporate-wide effort on embedded systems, a majority of the assessment work
has been completed and, a number of tests on operational equipment have been
performed. The testing of this equipment will continue throughout 1998.
Although much of the work on the corporate-wide Year 2000 project is expected
to be completed by the end of 1998, the project will extend into 1999.
Based on additional assessment work performed during the first half of 1998,
cost estimates have been updated. The current estimate for the Year 2000
effort is $28 to $31 million including $10 to 12 million for IT Corporate
Applications, $3 to 4 million for IT Infrastructure and $15 million for
Corporate-wide Embedded Systems. These costs are being expensed as incurred
over the five-year period (1996-2000).
LEGAL PROCEEDINGS
On August 3, 1998, Stan C. Thorne filed suit in the United States
District Court for the Southern District of Texas against EEX Corporation,
formerly Enserch Exploration, Inc. (EEX), ENSERCH,
DeGolyer & MacNaughton (D&M), David W. Biegler, Gary J. Junco, Fredrick S.
Addy and B. K. Irani. The plaintiff seeks to represent a class comprised of
all purchasers of the common stock of EEX during the period of August 3, 1995
through August 5, 1997. The individual defendants are current or former
officers and/or directors of EEX and Mr. Biegler has been an officer and
director of ENSERCH. D&M served as independent petroleum consultants to
EEX. The plaintiff alleges that the defendants engaged in a course of conduct
designed to mislead the plaintiff and the investing public in order to
maintain the price of EEX common stock at artificially high levels through
false and misleading representations concerning the gas reserves of EEX in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder. The plaintiff also alleges that the defendants
were negligent in making such misrepresentations and that they constituted
common law fraud against the defendants. No amount of damages is specified in
this action. The Company is also evaluating these claims and is unable at
this time to predict the outcome of this proceeding, but it also intends to
vigorously defend this suit.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Corporation is not
significantly different from the information set forth in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk included in the
1997 Form 10-K and is therefore not presented herein.
A-16