SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
-- 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 Identification
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 May 11, 1999:
Texas Utilities Company: 280,652,819 shares, without par value.
Texas Utilities Electric Company: 118,714,200 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 and Twelve Months Ended March 31, 1999 and 1998 . . . . 3
Condensed Statements of Consolidated Comprehensive Income -
Three and Twelve Months Ended March 31, 1999 and 1998 . . . . 4
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1999 and 1998. . . . . . . . . . 5
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998. . . . . . . . . . . . . 6
Texas Utilities Electric Company and Subsidiaries
Condensed Statements of Consolidated Income -
Three and Twelve Months Ended March 31, 1999 and 1998 . . . . 8
Condensed Statements of Consolidated Comprehensive Income -
Three and Twelve Months Ended March 31, 1999 and 1998 . . . . 8
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1999 and 1998. . . . . . . . . . 9
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998. . . . . . . . . . . . . 10
Notes to Condensed Consolidated Financial Statements . . . . . . . 12
Independent Accountants' Reports . . . . . . . . . . . . . . . . . 23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . 37
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 37
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Millions of Dollars
OPERATING REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $4,468 $2,500 $16,704 $8,952
OPERATING EXPENSES
Fuel and purchased power. . . . . . . . . . . . . . . . . . . . . . . 1,290 454 4,635 2,175
Gas and electricity purchased for resale. . . . . . . . . . . . . . . 1,388 844 4,659 1,907
Operation and maintenance . . . . . . . . . . . . . . . . . . . . . . 728 428 2,870 1,642
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 290 185 1,252 693
Taxes other than income . . . . . . . . . . . . . . . . . . . . . . . 159 163 638 585
------ ------ ------- ------
Total operating expenses. . . . . . . . . . . . . . . . . . . . . . 3,855 2,074 14,054 7,002
------ ------ ------- ------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 426 2,650 1,950
OTHER INCOME (DEDUCTIONS) - NET . . . . . . . . . . . . . . . . . . . . (6) (10) 49 (48)
------ ------ ------- ------
INCOME BEFORE INTEREST, OTHER CHARGES
AND INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 607 416 2,699 1,902
------ ------ ------- ------
INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 8 163 31
INTEREST EXPENSE AND OTHER CHARGES
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 204 1,449 785
Distributions on Company or subsidiary obligated, mandatorily
redeemable, preferred securities of Company or subsidiary trusts,
each holding solely junior subordinated debentures of the Company
or related subsidiary . . . . . . . . . . . . . . . . . . . . . . . 24 17 81 72
Preferred stock dividends of subsidiaries . . . . . . . . . . . . . . 4 5 15 20
Allowance for borrowed funds used during construction . . . . . . . . (3) (3) (9) (9)
------ ------ ------- ------
Total interest expense and other charges . . . . . . . . . . . . . 378 223 1,536 868
------ ------ ------- ------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . 261 201 1,326 1,065
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . 79 74 531 393
------ ------ ------- ------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182 $ 127 $ 795 $ 672
====== ====== ======= ======
Average shares of common stock outstanding (millions) . . . . . . . . . 282 245 274 236
Per share of common stock:
Basic earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.65 $0.52 $2.90 $2.85
Diluted earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . $0.65 $0.51 $2.90 $2.84
Dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . $0.575 $0.55 $2.25 $2.15
<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 Twelve Months Ended
March 31, March 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Millions of Dollars
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 182 $ 127 $ 795 $ 672
----- ----- ----- -----
OTHER COMPREHENSIVE INCOME (LOSS) - net change during period:
Foreign currency translation adjustments. . . . . . . . . . (90) 27 (156) (93)
Unrealized holding losses on investments. . . . . . . . . . - - (13) -
Minimum pension liability adjustments . . . . . . . . . . . 1 - (5) -
------ ----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . (89) 27 (174) (93)
----- ----- ----- -----
Deferred income tax effects . . . . . . . . . . . . . . . . 5 (3) (20) 26
----- ----- ----- -----
COMPREHENSIVE INCOME. . . . . . . . . . . . . . . . . . . . . $ 98 $ 151 $ 601 $ 605
===== ===== ===== =====
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Millions of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182 $ 127
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel) . . . . . . . . . . . . . . . . . . 339 224
Deferred income taxes - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 71
Investment tax credits - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (6)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 9
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 284
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 38
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (293) (203)
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (166) (29)
Other working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 (42)
Over/(under)-recovered fuel revenue - net of deferred taxes . . . . . . . . . . . . . . . . . . . . 40 26
Energy marketing risk management assets and liabilities . . . . . . . . . . . . . . . . . . . . . . (44) (19)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65) 7
------ ------
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 487
------ ------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities -
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,920 450
Retirements of securities:
Other long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,633) (93)
Preferred stock of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (114)
Company or subsidiary obligated, mandatorily redeemable, preferred securities of Company or
subsidiary trusts, each holding solely junior subordinated debentures of the Company or related
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (47)
Change in notes payable:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 1,430
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (251) (5)
Common stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (143) (136)
Debt premium, discount, financing and reacquisition expenses. . . . . . . . . . . . . . . . . . . . . (24) (75)
------ ------
Cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043 1,410
------ ------
CASH FLOWS - INVESTING ACTIVITIES
Acquisitions of businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,054) (1,640)
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (286) (153)
Nuclear fuel (excluding allowance for equity funds used during construction). . . . . . . . . . . . . . (19) (15)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (82) (88)
------ ------
Cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,441) (1,896)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . (6) 22
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) 23
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796 44
------ -------
CASH AND CASH EQUIVALENTS - ENDING BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750 $ 67
====== =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1999 December 31,
(Unaudited) 1998
---------- ------------
Millions of Dollars
PROPERTY, PLANT AND EQUIPMENT
United States (US):
Electric. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,196 $23,130
Gas distribution and pipeline . . . . . . . . . . . . . . . . . . . . . . . . 1,249 1,212
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 852 844
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,297 25,186
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . 7,575 7,426
------- -------
Net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . 17,722 17,760
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . 384 346
Nuclear fuel (net of accumulated amortization: 1999 - $572;
1998 - $549). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 202
Held for future use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 24
Less reserve for regulatory disallowances . . . . . . . . . . . . . . . . . . 836 836
------- -------
Net US property, plant and equipment. . . . . . . . . . . . . . . . . . . . 17,493 17,496
UK/Europe - Electric and other (net of accumulated depreciation: 1999 - $206;
1998 - $147) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,301 4,428
Australia - Electric and gas distribution (net of accumulated depreciation:
1999 - $137; 1998 - $121) . . . . . . . . . . . . . . . . . . . . . . . . . 1,516 943
------- -------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . 23,310 22,867
------- -------
INVESTMENTS
Goodwill (net of accumulated amortization: 1999 - $197; 1998 - $154). . . . . . 7,215 6,830
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,534 2,482
------- -------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,749 9,312
------- -------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 750 796
Accounts receivable (net of allowance for uncollectible accounts:
1999 - $37; 1998 - $50) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,762 1,887
Inventories - at average cost:
Materials and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . 261 267
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 276
Gas stored underground. . . . . . . . . . . . . . . . . . . . . . . . . . . 94 133
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . 569 832
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 88
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 308
------- -------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,083 4,587
------- -------
DEFERRED DEBITS
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . 1,761 1,805
Long-term prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514 527
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 416
------- -------
Total deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,755 2,748
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,897 $39,514
======= =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
6
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
March 31,
1999 December 31,
(Unaudited) 1998
---------- -----------
Millions of Dollars
CAPITALIZATION
Common stock without par value:
Authorized shares - 500,000,000
Outstanding shares -1999 and 1998 - 282,332,819. . . . . . . . . . . . . . . . . . . . . . . . $ 6,942 $ 6,940
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,469 1,448
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . (208) (123)
Unrealized holding losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (13)
Minimum pension liability adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (6)
------- -------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,185 8,246
Preferred stock of subsidiaries:
Not subject to mandatory redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 190
Subject to mandatory redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21
Company or subsidiary obligated, mandatorily redeemable, preferred securities of
Company or subsidiary trusts, each holding solely junior subordinated debentures of
the Company or related subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,193 1,193
Long-term debt, less amounts due currently . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,486 15,133
------- -------
Total capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,075 24,783
------- -------
CURRENT LIABILITIES
Notes payable:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,054 2,055
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618 896
Long-term debt due currently . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,072 1,071
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,447 1,747
Energy marketing risk management liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 532 838
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 164
Taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 490
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 310
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875 705
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400 8,276
------- -------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,739 3,718
Unamortized investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542 548
Other deferred credits and noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,141 2,189
------- -------
Total deferred credits and other noncurrent liabilities . . . . . . . . . . . . . . . . . . 6,422 6,455
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,897 $39,514
======= =======
<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 Twelve Months Ended
March 31, March 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Millions of Dollars
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,285 $1,332 $6,441 $6,102
------ ------ ------ ------
OPERATING EXPENSES
Fuel and purchased power . . . . . . . . . . . . . . . . . . . . . . . . . 413 430 2,085 2,043
Operation and maintenance. . . . . . . . . . . . . . . . . . . . . . . . . 315 282 1,313 1,215
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 147 144 752 573
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 75 460 417
Taxes other than income. . . . . . . . . . . . . . . . . . . . . . . . . . 132 130 535 508
------ ------ ------ ------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . 1,052 1,061 5,145 4,756
------ ------ ------ ------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 271 1,296 1,346
------ ------ ------ ------
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during construction. . . . . . . . . . . . 1 2 6 7
Other income (deductions) - net. . . . . . . . . . . . . . . . . . . . . . (4) 5 (22) -
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . 1 (2) 7 (8)
------ ------ ------ ------
Total other income (deductions). . . . . . . . . . . . . . . . . . . . (2) 5 (9) (1)
------ ------ ------ ------
INCOME BEFORE INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . . 231 276 1,287 1,345
------ ------ ------ ------
INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 4 4
INTEREST EXPENSE AND OTHER CHARGES
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 124 464 519
Distributions on TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding solely junior
subordinated debentures of TU Electric. . . . . . . . . . . . . . . . . . 17 17 69 72
Allowance for borrowed funds used during construction. . . . . . . . . . . (3) (2) (9) (8)
------ ------ ------ ------
Total interest expense and other charges . . . . . . . . . . . . . . . 126 139 524 583
------ ------ ------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 137 767 766
PREFERRED STOCK DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 12 18
------ ------ ------ ------
NET INCOME AVAILABLE FOR
COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103 $ 134 $ 755 $ 748
====== ====== ====== ======
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Millions of Dollars
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106 $ 137 $ 767 $ 766
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME (LOSS) - net change during
period in minimum pension liability adjustment. . . . . . . . . . . . . . . - - (1) -
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (1) -
------ ------ ------ ------
COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106 $ 137 $ 766 $ 766
====== ====== ====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
8
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Millions of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106 $ 137
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel). . . . . . . . . . . . . . . . . . . 186 181
Deferred income taxes - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 38
Investment tax credits - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (5)
Allowance for equity funds used during construction. . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 132
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (62)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (82) 10
Other working capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (10)
Over/(under) - recovered fuel revenue - net of deferred taxes. . . . . . . . . . . . . . . . . . . . 40 26
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 32
----- -----
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 479
----- -----
CASH FLOWS - FINANCING ACTIVITIES
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 -
Retirements/repurchases of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (209) (1)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (14)
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts holding
solely junior subordinated debentures of TU Electric. . . . . . . . . . . . . . . . . . . . . . . . . - (47)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) (143)
Change in notes payable - affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) (123)
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (4)
Debt premium, discount, financing and reacquisition expenses . . . . . . . . . . . . . . . . . . . . . . (10) (3)
----- -----
Cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (274) (335)
----- -----
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) (108)
Allowance for equity funds used during construction (excluding amount for nuclear fuel). . . . . . . . . - 1
Nuclear fuel (excluding allowance for equity funds used during construction) . . . . . . . . . . . . . . (19) (15)
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (19)
----- -----
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (161) (141)
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 3
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 12
----- -----
CASH AND CASH EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 15
===== =====
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
9
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1999 December
(Unaudited) 1998
----------- --------
Millions of Dollars
ELECTRIC PLANT
In service:
Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,475 $15,469
Transmission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,623 1,621
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,104 5,046
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,649 22,583
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . 6,911 6,789
------- -------
Electric plant in service, less accumulated depreciation. . . . . . . . . . 15,738 15,794
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . 265 226
Nuclear fuel (net of accumulated amortization: 1999 - $572;
1998 - $549) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 201
Held for future use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 24
------- --------
Electric plant, less accumulated depreciation and amortization . . . . . . 16,226 16,245
Less reserve for regulatory disallowances . . . . . . . . . . . . . . . . . . . 836 836
------- --------
Net electric plant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,390 15,409
------- -------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 588
------- -------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5
Accounts receivable (net of allowance for uncollectible accounts: 1999 - $3;
1998 - $7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 205
Inventories - at average cost:
Materials and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 181
Fuel stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 84
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 73
Prepayments and other current assets. . . . . . . . . . . . . . . . . . . . . . 54 36
------- -------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 584
------- -------
DEFERRED DEBITS
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,707 1,750
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 74
------- -------
Total deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,795 1,824
------- -------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,235 $18,405
======= =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
10
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
Millions of Dollars
CAPITALIZATION
Common stock without par value:
Authorized shares - 180,000,000
Outstanding shares - 1999 - 118,714,200 and 1998 - 123,660,700 . . . . . . . . . . . . . . $ 3,590 $ 3,738
Stock of parent held for long-term incentive plan trust. . . . . . . . . . . . . . . . . . . (11) (9)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,871 2,767
Accumulated other comprehensive income (loss) -
Minimum pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1)
------- -------
Total common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,449 6,495
Preferred stock:
Not subject to mandatory redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 115
Subject to mandatory redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 21
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely junior subordinated debentures of TU Electric . . . . . . . . . . . . . . . 823 823
Long-term debt, less amounts due currently . . . . . . . . . . . . . . . . . . . . . . . . . 5,117 5,208
------- -------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,525 12,662
------- -------
CURRENT LIABILITIES
Notes payable - affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 163
Long-term debt due currently . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528 533
Accounts payable:
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 115
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 157
Customers' deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 76
Taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 169
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 133
Over-recovered fuel revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 52
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 113
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484 1,511
------- -------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,304 3,307
Unamortized investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 536
Other deferred credits and noncurrent liabilities. . . . . . . . . . . . . . . . . . . . . . 392 389
------- -------
Total deferred credits and other noncurrent liabilities . . . . . . . . . . . . . . . . 4,226 4,232
------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
------- -------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,235 $18,405
======= =======
<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
TUC
Texas Utilities Company (TUC or the Company), a Texas corporation, is a
holding company whose principal United States (US) operations are conducted
through Texas Utilities Electric Company (TU Electric), ENSERCH Corporation
(ENSERCH), and Texas Energy Industries, Inc. (TEI). Its principal
international operations are conducted through TU International Holdings
Limited (TU International Holdings), which in turn owns TXU Eastern Holdings
Limited (TXU Eastern) and TU Australia Holdings L.P. (TU Australia Holdings).
TXU Eastern's operations in the United Kingdom (UK) and Europe are conducted
through subsidiaries of Eastern Group plc (Eastern Group), primarily Eastern
Electricity plc (Eastern Electricity). TU Australia Holdings' principal
operating subsidiaries include Eastern Energy Limited (Eastern Energy) and
the recently acquired gas operations in Australia which are described below.
Through its subsidiaries, the Company engages in the generation, purchase,
transmission, distribution and sale of electricity; the gathering, processing,
transmission and distribution of natural gas; energy marketing; and
telecommunications, retail energy services, international gas operations,
power development and other businesses primarily in the US, UK and Australia.
In March 1998, the Company made an offer for all the ordinary shares of
The Energy Group PLC (TEG), the former holding company of Eastern Group. The
Company's offer for TEG was declared unconditional on May 19, 1998, which was
determined to be the date the Company acquired TEG. The Company recorded its
approximate 22% equity interest in the net income of TEG for the period March
1998 to May 19, 1998 and has accounted for TEG and Eastern Group as
consolidated subsidiaries since May 19, 1998.
Immediately prior to being acquired by the Company, TEG completed the
sale of its US and Australian coal businesses 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". To date, the process of determining the fair value of assets
acquired and liabilities assumed 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 £3.3 billion
($5.3 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, liabilities assumed and contingencies existing at the
acquisition date becomes known. In particular, there is uncertainty over the
valuation of the electricity distribution system including metering assets
pending finalization of the current distribution price review and the
intention that the metering business market becomes competitive in 2000. In
addition, there is uncertainty over the outcome of certain proceedings
concerning the pension scheme. In April 1999, the gross adjusted
consideration for the Peabody Sale was determined to be $2.1 billion without
any adverse impact on results of operations, financial condition or cash flow.
12
The following summary of unaudited condensed consolidated pro forma
results of the Company's operations reflects the operations of the TEG
Businesses Acquired as though the acquisition had occurred at the beginning of
each period presented. Expenses of the acquisition incurred by the Company
and the 22% equity in earnings of TEG have been eliminated. Amounts are in
millions of dollars, except per share amounts.
Three Months Twelve Months
Ended Ended
March 31, 1998 March 31, 1999
----------------------- -----------------------
As Reported Pro forma As Reported Pro forma
----------- --------- ----------- ---------
Operating revenues . . . . . . . . . . $2,500 $4,314 $16,704 $17,407
Operating income . . . . . . . . . . . 426 695 2,650 2,708
Net income . . . . . . . . . . . . . . 127 229 795 802
Average shares outstanding (millions). 245 283 274 282
Earnings per share of common stock:
Basic. . . . . . . . . . . . . . . . . $0.52 $0.81 $2.90 $2.84
Diluted. . . . . . . . . . . . . . . . $0.51 $0.80 $2.90 $2.84
The above pro forma results are based on the most current estimate of the
fair value of assets acquired, liabilities assumed and contingencies existing
as of the acquisition date of the TEG Businesses Acquired. These results are
not necessarily indicative of what the actual results would have been for the
periods had the acquisition occurred at the beginning of these periods.
Further, the pro forma results are not intended to be a projection of the
future results of the combined companies.
On February 24, 1999, TU Australia Holdings acquired from the Government
of Victoria, Australia the gas retail business of Kinetik Energy, which has
approximately 400,000 gas customers, and the gas distribution operations of
Westar, which is of a similar size (Westar/Kinetik Energy). The purchase
price was $1.0 billion which has been principally financed through banks by TU
Australia Holdings. A portion of the financing was provided by a six-month
subordinated credit facility. To date, the process of determining the fair
value of assets acquired and liabilities assumed of Westar/Kinetik Energy 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 A$794 million ($499 million), which is being amortized over 40
years. This amount is subject to revision as additional information about the
fair value of Westar/Kinetik Energy's assets acquired, liabilities assumed and
contingencies existing at the acquisition date becomes known. Consolidated
pro forma income and earnings per share for the periods ended March 31, 1999
and 1998, assuming the acquisition of Westar/Kinetik Energy had occurred at
the beginning of the periods, would not have differed significantly from
reported results.
Since the acquisitions of TEG and Westar/Kinetik Energy were purchase
business combinations, no financial or other information for those companies
is presented for periods prior to their dates of acquisition.
Throughout this document, references to TEG shall mean the consolidated
UK entity acquired in May 1998, and references to Eastern Group or TXU
Eastern shall mean the Company's primary operations in the UK and other parts
of Europe. References to Eastern Energy or TU Australia Holdings shall mean
the Company's primary operations in Australia, including results for
Westar/Kinetik Energy from date of acquisition.
13
The following exchange rates have been used to convert foreign currency
denominated amounts into US dollars:
Income Statement
Balance Sheet (Average Rates)
----------------------- -----------------------------------------
Three Months Twelve Months
March 31, December 31, Ended March 31, Ended March 31,
--------- ------------ ------------------ --------------------
1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- -------
UK pounds sterling (pounds) $1.6110 $1.6554 $1.6337 -- $1.6537 --
Australian dollars (A$) $0.6293 $0.6123 $0.6178 $0.6738 $0.6210 $0.7204
2.SIGNIFICANT ACCOUNTING POLICIES
TUC and TU Electric
Basis of Presentation -- The condensed consolidated financial statements
of TUC and its subsidiaries and TU Electric and its subsidiaries have been
prepared on the same basis as those in their respective 1998 Annual Reports on
Form 10-K (1998 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 for a fair presentation of the results of operations and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain previously reported amounts have been reclassified to
conform to current classifications.
All dollar amounts in the condensed financial statements and notes to
condensed financial statements, except per share amounts, are stated in
millions of US dollars unless otherwise indicated.
Consolidation -- The consolidated financial statements include the
accounts of the Company and all of its majority-owned subsidiaries. The
consolidated financial statements of TU Electric include all of its business
trusts.
TUC
Earnings Per Share --Basic earnings per share applicable to common stock
are 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 resulting from the assumed conversion of the
convertible subordinated debentures of ENSERCH for the period prior to their
conversion in 1998 and the assumed exercise of all outstanding stock options.
14
The following table details the after-tax interest expense added to
earnings applicable to common stock and the number of shares added to average
shares outstanding for the purpose of calculating diluted earnings per share.
Three Months Twelve Months
Ended March 31, Ended March 31,
---------------- ---------------
1999 1998 1999 1998
----- ----- ---- -----
After-tax interest expense. . $ -- $0.9 $ -- $2.5
Shares of common stock
(in thousands). . . . . . 100 2,476 116 1,611
3. LINES OF CREDIT
TUC and TU Electric
At March 31, 1999, TUC, TU Electric and ENSERCH had $3.5 billion of joint
US dollar-denominated lines of credit under revolving credit facility
agreements (US Credit Agreements) with a group of banking institutions. The
US Credit Agreements have two facilities. Facility A provides for short-term
borrowings aggregating up to $2.1 billion outstanding at any one time at
variable interest rates and terminates February 25, 2000. Of this, $800
million can be used for working capital and other general corporate purposes.
Facility B provides for borrowings aggregating up to $1.4 billion
outstanding at any one time at variable interest rates and terminates March 2,
2003. Borrowings under this facility can be used for working capital and
other general corporate purposes. The combined borrowings of TUC, TU Electric
and ENSERCH under both facilities, excluding amounts restricted to finance the
acquisition of TEG, are limited to an aggregate of $2.2 billion outstanding at
any one time. TU Electric's and ENSERCH's borrowings under both facilities
are limited to an aggregate of $1.25 billion and $650 million outstanding at
any one time, respectively. The facilities primarily support commercial
paper borrowings. At March 31, 1999, outstanding commercial paper borrowings
supported by both facilities totaled $3.0 billion, including $992 million
classified as long-term debt.
TUC
A separate Eastern Electricity Revolving Credit Facility provides for
short term borrowings for general corporate purposes of up to pounds250
million outstanding at any one time and terminates March 2, 2003. No
borrowings were outstanding at March 31, 1999 under this facility.
In addition, certain non-US subsidiaries have revolving credit agreements
(denominated in both foreign currencies and US dollars) aggregating
approximately $106 million, of which $83 million was outstanding at March 31,
1999. These revolving credit agreements expire at various dates through
2001.
4. CAPITALIZATION
In April 1999, the Company repurchased approximately 1.7 million shares
of its outstanding common stock at a total cost of approximately $64 million.
15
TU Electric
Common Stock -- During the three months ended March 31, 1999, TU Electric
purchased and retired a total of 4.9 million shares of its common stock from
TUC at a cost of approximately $148 million.
TUC and TU Electric
Company or Subsidiary Obligated, Mandatorily Redeemable, Preferred
Securities of Company or Subsidiary Trusts, Each Holding Solely Junior
Subordinated Debentures of the Company or Related Subsidiary (Trust
Securities) -- At March 31, 1999 and December 31, 1998, the statutory business
trust subsidiaries had trust securities outstanding, as follows:
Trust Securities Trust Assets (a)
----------------------------------------------- ----------------------
Units(000's) Amount Amount
---------------------- ---------------------- ----------------------
March 31, December 31, March 31, December 31, March 31, December 31,
1999 1998 1999 1998 1999 1998 Maturity
--------- ------------ --------- ------------ --------- ------------ --------
TUC
TXU Capital I (7.25% Series) . . . . . . . . . 9,200 9,200 $ 223 $ 223 $ 237 $ 237 2029
------ ------ ------ ------ ------ ------
TU Electric
TU Electric Capital I (8.25% Series) . . . . . 5,871 5,871 141 141 155 155 2030
TU Electric Capital III (8.00% Series) . . . . 8,000 8,000 194 194 206 206 2035
TU Electric Capital IV (Floating Rate
Trust Securities)(b) . . . . . . . . . . 100 100 96 96 103 103 2037
TU Electric Capital V (8.175% Trust
Securities). . . . . . . . . . . . . . . 400 400 392 392 412 412 2037
------ ------ ------ ------ ------ ------
Total TU Electric. . . . . . . . . . . . 14,371 14,371 823 823 876 876
------ ------ ------ ------ ------ ------
ENSERCH
ENSERCH Capital I (Floating Rate Trust
Securities)(c) . . . . . . . . . . . . . 150 150 147 147 155 155 2028
------ ------ ------ ------ ------ ------
Total 23,721 23,721 $1,193 $1,193 $1,268 $1,268
====== ====== ====== ====== ====== ======
<FN>
(a) Interest rates on the trusts' sole assets, Junior Subordinated Debentures, correspond in
each case to the rate indicated for the corresponding series of Trust Securities.
(b) Floating rate is determined quarterly based on LIBOR. A related interest rate swap,
expiring 2002, effectively fixes the rate at 7.183%.
(c) Floating rate is determined quarterly based on LIBOR. Interest rate swaps effectively fix
the rates through July 1, 2003 at 6.629% on $100 million and at 6.444% on $50 million.
</FN>
Each parent company owns securities issued by its subsidiary trust
and has effectively issued a full and unconditional guarantee of such trust's
securities.
TU Electric
Long-Term Debt -- In March 1999, the Brazos River Authority issued
$111 million aggregate principal amount of Collateralized Pollution Control
Revenue Refunding Bonds, Series 1999A, due April 1, 2033 (1999A Bonds). The
1999A Bonds bear interest at a rate of 3.70% per annum until the mandatory
tender date of April 1, 2000. Upon mandatory tender, the 1999A Bonds will be
remarketed by a remarketing agent appointed by TU Electric. Proceeds were
used to refund the 8.25% Brazos River Authority Series 1989A Bonds and a
16
portion of the Brazos River Authority Taxable Series 1991D Bonds. TU Electric
is obligated to make payments of principal and interest on the 1999A Bonds.
This obligation is secured by TU Electric First Mortgage Bonds.
TUC
United Kingdom -- At March 31, 1999, TXU Eastern and TU Finance (No.
2) Limited, had a joint sterling-denominated line of credit with a group of
banking institutions under a credit facilities agreement (Sterling Credit
Agreement). The Sterling Credit Agreement, as amended in March 1999, provides
for borrowings of up to pounds1.275 billion and has two facilities: a
pounds750 million term facility which will terminate on March 2, 2003 and a
pounds525 million revolving credit facility which has a pounds200 million
364-day tranche (Tranche A) and a pounds325 million tranche which terminates
March 2, 2003 (Tranche B). TXU Eastern and TU Finance (No. 2) Limited
currently are the only permitted borrowers under the amended Sterling Credit
Agreement. As of March 31, 1999, pounds750 million ($1,208 million) of
borrowings were outstanding under the term facility, and approximately
pounds233 million ($375 million) were outstanding under Tranche B. In
addition, letters of credit totaling pounds37 million ($60 million) were
issued under Tranche A, and letters of credit totaling pounds85 million
($137 million) were issued under Tranche B. The amended Sterling Credit
Agreement is unsecured.
Australia -- At March 31, 1999, TU Australia Holdings had a A$1.1
billion Senior Acquisition Facility with a group of banking institutions and
TU Australia Holdings and Eastern Energy had a A$468 million Subordinated
Acquisition Facility with a banking institution to fund the acquisition of the
assets of Westar/Kinetik Energy. The Senior Acquisition Facility is composed
of: a A$275 million term facility due February 24, 2000 (Tranche A); a A$220
million revolving cash advance facility due February 24, 2002 (Tranche B); and
a A$605 million term facility due February 24, 2002 (Tranche C). The
Subordinated Acquisition Facility expires August 24, 1999. As of March 31,
1999, there was A$1.51 billion ($952 million) outstanding under these
facilities.
5. 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, foreign currency exchange rates and
commodity prices. The Company's participation in derivative transactions,
except for the energy marketing activities of Enserch Energy Services, Inc.
(EES), have been designated for hedging purposes and are not held or issued
for trading purposes.
Interest Rate Risk Management --At March 31, 1999, TUC, TU Electric
and ENSERCH had various interest rate swaps in effect, the terms and notional
amounts of which had not significantly changed from December 31, 1998.
At March 31, 1999, Eastern Energy and Westar/Kinetik Energy had
interest rate swaps and forward rate agreements outstanding, denominated in
Australian dollars and/or US dollars, with an aggregate notional amount of
$1,495 million. These agreements establish a mix of fixed and variable
interest rates on outstanding debt and have remaining terms up to 17 years.
At March 31, 1999, TXU Eastern had various interest rate swaps as
required by the Sterling Credit Agreement and to hedge certain of its
borrowings. The Sterling Credit Agreement required that one-half of the
borrowings under those facilities be swapped from a floating to a fixed
interest rate with a maturity of at least two years from
17
July 28, 1998. The aggregate notional amount of interest rate swaps entered
into is £848 million ($1,366 million) with an average maturity of six
years and an average fixed rate of 6.7%. Eastern Group had interest rate
swaps outstanding with an aggregate notional amount of $161 million that
convert fixed interest rates to floating rates expiring in 2004 and forward
rate agreements totaling $459 million for a maximum duration of one year to
swap floating rate deposits into fixed rates.
Foreign Currency Risk Management -- At March 31, 1999, TUC, Eastern
Group and Eastern Energy had various foreign currency swaps, options and
exchange contracts in effect, the terms and amounts of which had not
significantly changed from December 31, 1998.
Electricity Price Risk Management -- UK/Europe -- Long-term
contracts for differences (CfDs) are in place to hedge a portion of the
electricity to be purchased by Eastern Group through 2009. From 1998, such
CfDs represent an annual commitment of approximately five terawatt hours
(TWh), declining on a linear basis to approximately two TWh by 2005 and
finally expiring in 2010. The impact of changes in the market value of these
contracts, which serve as hedges, is deferred until the related transaction is
completed.
Australia -- At March 31, 1999, Eastern Energy's contracts related to
both its forecasted contestable and franchise load cover a notional volume of
approximately 7.2 TWh for the period from April 1999 through 2001. Further
hedge contracts may be required in that period to service forecasted sales.
US Energy Marketing Activities --EES' energy portfolio is comprised of
forward commitments, futures, swaps, options and other derivative instruments
related to natural gas and electricity marketing activities. The notional
amounts and terms of the portfolio as of March 31, 1999 included financial
instruments that provide for fixed price receipts of 2,693 trillion British
thermal units equivalent (TBtue) and fixed price payments of 2,844 TBtue, with
a maximum term of seven years. Additionally, sales and purchase commitments
totaling 1,208 TBtue, with terms extending up to nine years, are included in
the portfolio as of March 31, 1999.
6. REGULATION AND RATES
TUC And TU Electric
Docket 18490 -- The Public Utility Commission of Texas (PUC) approved
the non-unanimous 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 the PUC, 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. Certain parties that did not sign the stipulation have
appealed the PUC's approval by filing suit in state district court. The
Company cannot predict the outcome of these appeals.
In accordance with the provisions of the stipulation, for the three
months ended March 31, 1999 and 1998, TU Electric recorded $47 million and $45
million, respectively, of depreciation expense reclassified from transmission
and distribution to nuclear production assets. For the twelve months ended
March 31, 1999, TU Electric recorded an additional $355 million of
depreciation on its nuclear powered generating station, Comanche Peak,
representing $185 million of depreciation expense reclassified from
transmission and distribution and $170 million of additional depreciation
representing earnings in excess of the stipulated earnings cap. The earnings
18
cap calculation on TU Electric's rate of return under the stipulation was not
reached, therefore, no additional depreciation charges were made to nuclear
production assets during the three months ended March 31, 1999.
On March 31, 1999, TU Electric filed with the PUC its first report, as
required in Docket 18490, concerning the earnings cap calculation for 1998.
Interested parties are allowed to challenge the calculation and the
reasonableness of the underlying costs. The Company and TU Electric are
unable to predict whether any such challenge will be filed or the outcome
thereof.
Docket 20666 -- TU Electric filed a petition with the PUC in March 1999
to refund to customers approximately $115 million, including interest, in
over-collected fuel costs for the period June 1997 through February 1999. TU
Electric has requested that the refund be made with June 1999 billings. This
over-collection is primarily due to declining prices for the natural gas
component of TU Electric's fuel cost .
Flexible Rate Initiatives --TU Electric offers optional time-of-use rates
to residential, commercial and industrial customers, under rates approved by
the PUC in April 1999 in areas where the PUC retains sole regulatory
jurisdiction. These time-of-use rate options allow participating customers to
plan and manage their electrical energy usage to shift their loads from the TU
Electric on-peak periods to off-peak periods. Such activity reduces TU
Electric's requirements for capacity resources to meet the peak electrical
load of all of its customers. On January 15, 1999, TU Electric applied for
approval of these rates with municipal regulatory authorities in 173 cities.
As of April 22, 1999, 171 of the municipalities had approved these rates. TU
Electric estimates that any decrease in revenue resulting from the
implementation of these rates will be offset by the reductions in the peak
load and associated costs.
Open Access Transmission -- On April 13, 1999, modifications to the PUC
rules addressing open-access wholesale transmission service became effective.
The modified rules allow utilities to revise their transmission rates annually
to reflect rate base additions and updated billing units. In addition, the
rules now clarify the cost responsibility for entities connecting new
resources to the Electric Reliability Council of Texas (ERCOT) transmission
grid. These revisions to the rules were enacted primarily to enhance
wholesale competition and provide for the timely recovery by utilities of
their transmission investment. It is anticipated that the adoption of these
rules will have a minimal impact on open-access transmission rates.
TUC
Gas Utilities Docket No. 8935 --Lone Star Gas Company (Lone Star Gas), a
division of ENSERCH, filed an application with the Railroad Commission of
Texas on February 25, 1999, to modify the gas cost adjustment provision of the
city gate rate tariff approved in November 1997. The modification will allow
for a more accurate recovery of the gas cost approved for recovery from Lone
Star Gas residential and commercial customers. Currently, cycle billing
causes Lone Star Gas to over or under recover the allowed gas costs. A Final
Order is expected in August 1999. Lone Star Gas is unable to predict the
outcome of these proceedings.
Lone Star Gas has an on-going program to identify distribution systems in
which its current rates are producing inadequate returns on its investment and
to seek rate relief from the municipalities served by those deficient
systems. Lone Star Gas filed and completed twelve such rate cases since July
1998. Approved revenue increases totaled $5.5 million on an annual basis.
Lone Star Gas currently has rate cases pending in five distribution systems in
which it is seeking rate increases totaling $9.1 million on an annual basis.
Lone Star Gas is unable to predict the outcome of these rate cases.
19
7. COMMITMENTS AND CONTINGENCIES
TUC and TU Electric
Legal Proceedings -- In February 1997, the official government
representative of pensioners in the UK (Pensions Ombudsman) made final
determinations against The National Grid Company plc (National Grid) and its
group trustees with respect to complaints by two pensioners in National Grid's
section of the ESPS relating to the use of the pension fund surplus resulting
from the March 31, 1992 actuarial valuation of the National Grid section to
meet certain costs arising from the payment of pensions on early retirement
upon reorganization or downsizing. These determinations were set aside by
the High Court on June 10, 1997, and the arrangements made by National Grid
and its group trustees in dealing with the surplus were confirmed. The two
pensioners have now appealed against this decision, and judgment has now been
received although a final order is awaited. The appeal endorsed the Pension
Ombudsman's determination that the corporation was not entitled to
unilaterally deal with any surplus. If a similar action were to be made
against Eastern Group in relation to its use of actuarial surplus in its
section of the ESPS, it would vigorously defend the action, ultimately through
the courts. However, if a determination were finally to be made against it
and upheld in the courts, Eastern Group could have a potential liability to
repay to its section of the ESPS an amount estimated by the Company to be up
to $165 million (exclusive of any applicable interest charges).
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc. (EEX), the Company, David W.
Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick.
The Gracy Fund sought 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 Gracy Fund alleged 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 allegedly caused the plaintiffs and other members of
the class to purchase EEX and ENSERCH stock at artificially inflated prices.
In such connection, the plaintiffs alleged that the defendants violated
various provisions of the Securities Act of 1933 and the Securities and
Exchange Act of 1934 (Exchange Act).
Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, ENSERCH,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and
B. K. Irani. Thorne sought 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. Thorne alleged that the defendants engaged in a course of conduct
designed to mislead the plaintiff and 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.
Thorne also alleged that the defendants were negligent in making such
misrepresentations and that they constituted common law fraud against the
defendants.
In December 1998, the United States District Court for the Northern
District of Texas issued an Order in Cause No. 3-98-CV-1808-G consolidating
the Gracy Fund and the Thorne suits (the Consolidated Action). On January 22,
1999, the Gracy Fund, et al filed an amended class action complaint in the
Consolidated Action against EEX, ENSERCH, David W. Biegler, Gary J. Junco,
20
Thomas Hamilton, J. Philip McCormick, Fredrick S. Addy and B. K. Irani. The
Company and Erle Nye were omitted as defendants pursuant to a tolling
agreement. The individual named defendants in the amended complaint are
current or former officers and/or directors of EEX, and Mr. Biegler has been
an officer and director of ENSERCH. The amended complaint alleges violations
of provisions of the Securities Act of 1933 and the Exchange Act. The state
law claims alleged in the Thorne case have been omitted. The class period
was amended to include those persons acquiring stock of ENSERCH and/or EEX
between August 3, 1995 and August 5, 1997, inclusive. No amount of damages
has been specified in the Consolidated Action. Defendants filed a joint
motion to dismiss on March 8, 1999, and it is expected that under the Private
Securities Litigation Reform Act of 1995 the court will stay discovery pending
a ruling on the motion to dismiss. The Company is continuing to evaluate
these claims and is unable at this time to predict the outcome of this
proceeding, but it intends to vigorously defend this suit.
General -- The Company and TU Electric are each involved in various legal
and administrative proceedings and have other contingencies, which, in the
opinion of the management of each, should not have a material effect upon
their financial positions, results of operations or cash flows.
8. SEGMENT INFORMATION
The Company has five reportable operating segments:
(1) US Electric - operations engaged in the generation, purchase,
transmission, distribution and sale of electric energy primarily in the
north central, eastern and western portions of Texas (primarily TU Electric,
Southwestern Electric Service Company, Texas Utilities Fuel Company and Texas
Utilities Mining Company operations);
(2) US Gas - operations engaged in the gathering, processing,
transmission and distribution of natural gas and selling of natural gas
liquids primarily within Texas (primarily Lone Star Gas, Lone Star Pipeline
Company, a division of ENSERCH, and Enserch Processing, Inc.);
(3) US Energy Marketing - operations engaged in purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US (EES);
(4) UK/Europe - operations engaged in the generation, purchase,
distribution and sale of electricity; the purchase and sale of natural gas;
and energy portfolio management operations primarily in the UK, with
additional energy interests throughout the rest of Europe (primarily Eastern
Group); and
(5) Australia - operations engaged in the purchase, distribution and sale
of electricity and natural gas and the provision of other energy-related
services primarily in the State of Victoria, Australia (primarily Eastern
Energy and Westar/Kinetik Energy).
21
Reportable Segments:
Three Months Ended Twelve Months Ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------- ------
Trade Revenues -
US Electric . . . . . . . . . . . . . . . . . . . . . . . . $1,296 $1,344 $ 6,493 $ 6,145
US Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . 294 333 783 742
US Energy Marketing . . . . . . . . . . . . . . . . . . . . 800 684 3,314 1,543
UK/Europe . . . . . . . . . . . . . . . . . . . . . . . . . 1,916 - 5,517 -
Australia . . . . . . . . . . . . . . . . . . . . . . . . . 120 109 450 478
All Other . . . . . . . . . . . . . . . . . . . . . . . . . 42 30 147 44
------ ------ ------- -------
Consolidated. . . . . . . . . . . . . . . . . . . . . $4,468 $2,500 $16,704 $ 8,952
====== ====== ======= =======
Affiliated Revenues -
US Electric . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
US Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10 39 28
US Energy Marketing . . . . . . . . . . . . . . . . . . . . - - 1 1
UK/Europe . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Australia . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
All Other . . . . . . . . . . . . . . . . . . . . . . . . . 79 73 342 73
Eliminations. . . . . . . . . . . . . . . . . . . . . . . . (86) (83) (382) (102)
------ ------ ------- -------
Consolidated. . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
====== ====== ======= =======
Net Income (Loss) -
US Electric . . . . . . . . . . . . . . . . . . . . . . . . $ 103 $ 134 $ 757 $ 751
US Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 17 (32) 16
US Energy Marketing . . . . . . . . . . . . . . . . . . . . (7) (1) - (14)
UK/Europe . . . . . . . . . . . . . . . . . . . . . . . . . 111 8 242 8
Australia . . . . . . . . . . . . . . . . . . . . . . . . . 5 10 26 23
All Other . . . . . . . . . . . . . . . . . . . . . . . . . (48) (41) (198) (112)
------ ------ ------- -------
Consolidated. . . . . . . . . . . . . . . . . . . . . $ 182 $ 127 $ 795 $ 672
====== ====== ======= =======
22
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of
Texas Utilities Company and subsidiaries (Company) as of March 31, 1999, and
the related condensed statements of consolidated income and of comprehensive
income for the three-month and twelve-month periods ended March 31, 1999
and 1998, and of consolidated cash flows for the three-month periods ended
March 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management.
We were furnished with the report of other accountants on their review of the
interim financial information of TXU Eastern Holdings Limited (a consolidated
subsidiary), whose total assets constituted 35% of consolidated total assets
at March 31, 1999, and whose total revenues constituted 43%, and 33% of
consolidated total revenues for the three-month and twelve-month periods ended
March 31, 1999, respectively.
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 and the report of other accountants, 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,
1998, and the related statements of consolidated income, comprehensive income,
cash flows and common stock equity for the year then ended (not presented
herein); and in our report, based on our audit and the report of other
auditors, dated March 5, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1998, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 13, 1999
23
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 March
31, 1999, and the related condensed statements of consolidated income and of
comprehensive income for the three-month and twelve-month periods ended March
31, 1999 and 1998, and of consolidated cash flows for the three-month periods
ended March 31, 1999 and 1998. 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,
1998, and the related statements of consolidated income, comprehensive income,
cash flows and common stock equity for the year then ended (not presented
herein); and in our report dated March 5, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 13, 1999
24
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
TUC and TU Electric
This report and other presentations made by Texas Utilities Company and
its subsidiaries (the Company or TUC) 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 believe that in making any such
statement its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TUC's and TU Electric's Annual Reports on Form 10-K for the year
1998 (1998 Form 10-K), as well as, general industry trends; power costs and
availability; changes in business strategy, development plans or vendor
relationships; availability of qualified personnel; changes in, or the failure
or inability to comply with, governmental regulations, including, without
limitation, environmental regulations; changes in tax laws; and access to
adequate transmission facilities to meet changing demands, among others, that
could cause the actual results of the Company or TU Electric to differ
materially from those projected in such forward-looking statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and 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 report have been affected by the Company's
acquisitions (accounted for as purchase business combinations) of
Westar/Kinetik Energy in Australia (as described below) in February 1999, The
Energy Group PLC (TEG) in May 1998, Lufkin-Conroe Communications Co. (LCC) in
November 1997 and ENSERCH Corporation (ENSERCH) in August 1997. Results of
operations of these companies have been included only from their dates of
acquisition. The Company's principal international operations are conducted
through TU International Holdings Limited (TU International Holdings), which
in turn owns TXU Eastern Holdings Limited (TXU Eastern) and TU Australia
Holdings L.P. (TU Australia Holdings). TXU Eastern's operations in the
United Kingdom (UK) and Europe are conducted through subsidiaries of
Eastern Group plc (Eastern Group), primarily Eastern Electricity plc (Eastern
Electricity). TU Australia Holdings' principal operating subsidiaries include
Eastern Energy Limited (Eastern Energy) and the recently acquired gas
operations in Australia described below.
On February 24, 1999, TU Australia Holdings acquired from the Government
of Victoria, Australia the gas retail business of Kinetik Energy, which has
approximately 400,000 gas customers, and the gas distribution operations of
Westar, which is of a similar size (Westar/Kinetik Energy). The purchase
price was $1.0 billion which has been principally financed through banks by TU
Australia Holdings. A portion of the financing was provided by a six-month
subordinated credit facility. To date, the process of determining the fair
value of assets acquired and liabilities assumed of Westar/Kinetik Energy 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 A$794 million ($499 million), which is being amortized over 40
years. This amount is subject to revision as additional information about the
fair value of Westar/Kinetik Energy's assets acquired, liabilities assumed and
contingencies existing at the acquisition date becomes known. Consolidated
pro forma income and earnings per share for the periods ended March 31, 1999
and 1998, assuming the acquisition of Westar/Kinetik Energy had occurred at
the beginning of the periods, would not have differed significantly from
reported results.
25
The Company will pursue 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.
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
Operations in TUC's and TU Electric's 1998 Form 10-K. Results for the
three-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.
Cash flows provided from operating activities for the Company before
changes in operating assets and liabilities for the three months ended March
31, 1999 were $607 million compared with $425 million for the comparable
period in 1998 ($366 million versus $349 million for TU Electric). The
inclusion of the winter heating results for Eastern Group more than offset a
reduction in net income for TU Electric. Changes in operating assets and
liabilities for the Company for the three months ended March 31, 1999 used
$248 million, but provided $62 million in the comparable three-month period of
1998. The year-to-year comparison reflects working capital requirements for
the Eastern Group operations and higher requirements associated with interest.
Additionally, the first quarter last year included a federal income tax refund
with no like amount in the 1999 first quarter. Changes in operating assets
and liabilities for TU Electric provided $65 million for the first quarter
of 1999 compared with $130 million for the 1998 first quarter.
Cash flows used for investing activities for the three months ended March
31, 1999 were $1.4 billion compared with $1.9 billion for the same period of
1998 ($161 million versus $141 million for TU Electric). The February 1999
acquisition of Westar/Kinetik Energy in Australia used approximately $1.0
billion while the purchase of the initial 22% equity interest in TEG in the
first quarter of 1998 required $1.6 billion. Construction expenditures used
$286 million for the current three-month period compared with $153 million for
the comparable three-month period in 1998 ($135 million versus $108 million
for TU Electric), primarily resulting from the inclusion of expenditures for
Eastern Group.
External funds of a permanent or long-term nature are obtained through
the issuance of common stock, preferred stock, trust securities and long-term
debt by the Company and subsidiaries. The capitalization ratios of the
Company at March 31, 1999 consisted of approximately 63% long-term debt, 5%
Company or subsidiary obligated, mandatorily redeemable, preferred securities
of Company or subsidiary trusts, each holding solely junior subordinated
debentures of the Company or related subsidiary (trust securities), 1%
preferred stock and 31% common stock equity. Restricted cash of $1.2
billion pledged against Eastern Group lease obligations is included in other
investments. Applying the cash pledged against related lease obligations, the
capitalization ratios consisted of 61% long term debt, 5% trust securities, 1%
preferred stock and 33% common stock equity. The capitalization ratios of TU
Electric at March 31, 1999 consisted of approximately 41% long-term debt, 7%
trust securities, 1% preferred stock and 51% common stock equity.
26
During the three-month period ended March 31, 1999, the Company
(including TU Electric) issued, redeemed, reacquired or made scheduled
principal payments on long-term debt for cash, as follows (in millions of
dollars):
Issuances Retirements
--------- -----------
TU Electric:
Brazos River Authority Pollution Control Bonds $ 111 $ 111
First Mortgage Bonds -- 98
------ ------
Total TU Electric 111 209
------ ------
TXU Eastern:
Acquisition and Interim Facilities -- 1,225
Term Facility 1,225 --
Revolving Credit Facility (Tranche B) 380 --
Other 169 195
TU Australia Holdings:
Acquisition Facilities 926 --
Other 109 --
All Other Subsidiaries -- 4
------ ------
Total $2,920 $1,633
====== ======
See Note 4 to Condensed Consolidated Financial Statements for additional
information on new issuances of long term debt.
On May 13, 1999, a financing subsidiary of TXU Eastern issued $1.5
billion of senior notes in three series: $350 million of 6.15% senior notes
due 2002, $650 million of 6.45% senior notes due 2005 and $500 million of
6.75% senior notes due 2009. Net proceeds of approximately $1.49 billion are
to be used to reduce indebtedness incurred in connection with the acquisition
of TEG, to repay short-term debt and for general corporate purposes.
In addition, TXU Eastern entered into interest rate swaps with a group of
banks to convert the fixed interest rate on $1.5 billion notional amount of
the new senior notes to a LIBOR-based floating rate and entered into foreign
currency swaps to deliver US dollars for sterling to match amounts due at the
maturity and interest payment dates for the new senior notes.
At March 31, 1999, TUC, TU Electric and ENSERCH had $3.5 billion of joint
US dollar-denominated lines of credit under revolving credit facility
agreements (US Credit Agreements) with a group of banking institutions. The
US Credit Agreements have two facilities. Facility A provides for short-term
borrowings aggregating up to $2.1 billion outstanding at any one time at
variable interest rates and terminates February 25, 2000. Of this, $800
million can be used for working capital and other general corporate purposes.
Facility B provides for borrowings aggregating up to $1.4 billion
outstanding at any one time at variable interest rates and terminates March 2,
2003. Borrowings under this facility can be used for working capital and
other general corporate purposes. The combined borrowings of TUC, TU Electric
and ENSERCH under both facilities, excluding amounts restricted to finance the
acquisition of TEG, are limited to an aggregate of $2.2 billion outstanding at
any one time. TU Electric's and ENSERCH's borrowings under both facilities
are limited to an aggregate of $1.25 billion and $650 million outstanding at
any one time, respectively. The facilities primarily support commercial paper
borrowings.
At March 31, 1999, outstanding commercial paper borrowings supported by
both facilities totaled $3.0 billion, including $992 million classified as
long-term debt.
In addition, a separate Eastern Electricity Revolving Credit Facility
provides for short term borrowings for general corporate purposes of up to
£250 million ($403 million) outstanding at any one time and terminates
March 2, 2003. No borrowings were outstanding at March 31, 1999 under this
facility.
27
At March 31, 1999, TXU Eastern and TU Finance (No. 2) Limited, had a
joint sterling-denominated line of credit with a group of banking institutions
under a credit facilities agreement (Sterling Credit Agreement). The Sterling
Credit Agreement, as amended in March 1999, provides for borrowings of up to
pounds1.275 billion and has two facilities: a pounds750 million term
facility which will terminate on March 2, 2003 and a pounds525 million
revolving credit facility which has a pounds200 million 364-day tranche
(Tranche A) and a pounds325 million tranche which terminates March 2, 2003
(Tranche B). TXU Eastern and TU Finance (No. 2) Limited currently are the
only permitted borrowers under the amended Sterling Credit Agreement. As of
March 31, 1999, pounds750 million ($1,208 million) of borrowings were
outstanding under the term facility, and approximately pounds233 million
($375 million) were outstanding under Tranche B. In addition, letters of
credit totaling pounds37 million ($60 million) were issued under Tranche
A, and letters of credit totaling pounds85 million ($137 million) were
issued under Tranche B. The amended Sterling Credit Agreement is unsecured.
At March 31, 1999, TU Australia Holdings had a A$1.1 billion Senior
Acquisition Facility with a group of banking institutions and TU Australia
Holdings and Eastern Energy had a A$468 million Subordinated Acquisition
Facility with a banking institution to fund the acquisition of the assets of
Westar/Kinetik Energy. The Senior Acquisition Facility is composed of: a
A$275 million term facility due February 24, 2000 (Tranche A); a A$220 million
revolving cash advance facility due February 24, 2002 (Tranche B); and a A$605
million term facility due February 24, 2002 (Tranche C). The Subordinated
Acquisition Facility expires August 24, 1999. As of March 31, 1999, there was
A$1.51 billion ($953 million) outstanding under these facilities.
In addition, certain non-US subsidiaries have revolving credit agreements
(denominated in both foreign currencies and US dollars) aggregating
approximately $106 million, of which $83 million was outstanding at March 31,
1999. These revolving credit agreements expire at various dates through
2001.
During the three months ended March 31, 1999, TU Electric purchased and
retired a total of 4.9 million shares of its common stock from TUC at a cost
of approximately $148 million.
In April 1999, the Company repurchased approximately 1.7 million shares
of its outstanding common stock at a total cost of approximately $64 million.
The Company, TU Electric, ENSERCH and or other subsidiaries of the
Company may issue additional debt and equity securities as needed, including
the possible future sale: (i) by TU Electric of up to $499 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. In addition, the
Company may issue up to $170 million of debt securities and, together or
separately, up to $170 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 similarly registered with the SEC.
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, options and forward contracts are used to reduce
and manage a portion of those risks. With the exception of the energy
marketing activities of a subsidiary, Enserch Energy Services, Inc. (EES),
which uses the mark-to-market method of accounting, the Company's and TU
Electric's participations in derivative transactions are designated for
hedging purposes and are not held or issued for trading purposes.
No material substantive changes in the exposure to, or management of,
interest rate, foreign currency and electricity or gas price risk have
occurred subsequent to December 31, 1998 for the Company's US operations. For
information regarding certain changes in non-US derivative instruments, see
Note 5 to Condensed Consolidated Financial Statements.
28
EES' energy portfolio is comprised of forward commitments, futures,
swaps, options and other derivative instruments related to natural gas and
electricity marketing activities. The notional amounts and terms of the
portfolio as of March 31, 1999 included derivative financial instruments that
provide for fixed price receipts of 2,693 trillion British thermal units
equivalent (TBtue) and fixed price payments of 2,844 TBtue, with a maximum
term of seven years. Additionally, sales and purchase commitments totaling
1,208 TBtue, with terms extending up to nine years, are included in the
portfolio as of March 31, 1999.
Regulation, Rates and Competition
TUC and TU Electric
Under the current regulatory environment, certain US subsidiaries of the
Company are subject to the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation". This statement applies to utilities that have cost-based rates
established by a regulator and charged to and collected from customers. In
accordance with this statement, these companies may defer the recognition of
certain costs (regulatory assets) and certain obligations (regulatory
liabilities) that, as a result of the ratemaking process, have probable
corresponding increases or decreases in future revenues. Future significant
changes in regulation or competition could affect these companies' ability to
meet the criteria for continued application of SFAS 71 and may affect these
companies' ability to recover such regulatory assets from, or refund such
regulatory liabilities to, customers. These regulatory assets and liabilities
are being amortized over various periods (5 to 40 years). The amortization is
currently, or is expected to be, included in rates. In the event all or a
portion of these companies' operations fail to meet the criteria for
application of SFAS 71, these companies would be required to write-off all or
a portion of their regulatory assets and liabilities. Should significant
changes in regulation or competition occur, the affected subsidiaries would be
required to assess the recoverability of plant and regulatory assets.
While the Company and the US Electric segment companies anticipate
legislation being enacted during the 1999 session of the Texas legislature to
authorize retail competition, they cannot predict the ultimate outcome of the
ongoing efforts that are taking place to restructure the electric utility
industry or whether such outcome will have a material effect on their
financial position, results of operations or cash flows.
TU Electric and certain other regulated subsidiaries of the Company have
several rate requests or refunds pending or on appeal. (See Note 6 to
Condensed Consolidated Financial Statements for a discussion of the impact of
these various issues.) With regard to Eastern Group, the regulation of
distribution and supply charges is currently subject to review by the Office
of Electricity Regulation covering England, Wales and Scotland (OFFER), with
the outcome of the review scheduled to be completed by April 1, 2000. The
Company cannot predict the ultimate outcome of OFFER's review or whether
such outcome will have a material effect on its financial position, results of
operations or cash flows.
RESULTS OF OPERATIONS
TU Electric
Net income for TU Electric for the three months ended March 31, 1999 was
lower than the same period of 1998, but for the twelve-month period in 1999
was slightly higher compared to the same period in 1998. Mild winter
temperatures in the first quarter of 1999 and an additional decline in rates
effective January 1, 1999 due to the 1998 rate settlement agreement resulted
in lower quarterly revenues. In addition, there was an increase in operation
and maintenance (O&M) expenses for the first quarter of 1999, a portion of
which was due to the timing of scheduled maintenance. Results for the twelve
months ended March 31, 1999 reflect continued strong retail electric sales
growth, increased electric sales resulting from hotter-than-normal summer
weather and continued capital cost reductions.
29
The rate settlement agreement, which became effective in January 1998,
reduced customer rates, increased depreciation expense of nuclear production
assets as a result of earnings in excess of a stipulated earnings cap and
reclassified depreciation from transmission and distribution to nuclear
production assets in 1998. Increased nuclear depreciation had a minimal
effect on the first quarter results of this year and last year, but reduced
net income by $143 million in the 1999 twelve-month period compared with a $4
million reduction in the year-earlier period.
Results for the 1998 twelve months were affected by the recognition of an
$81 million fuel disallowance (including interest) and a $10 million charge
related to the sale of sulfur dioxide allowances, which reduced net income by
$55 million. Excluding these items, net income for the twelve months ended
March 31, 1998 was $821 million.
There was a decrease in energy sales and base rate revenues for the first
quarter of 1999 compared with the 1998 period, primarily due to milder winter
weather conditions. Electric energy sales in gigawatt hours for the three
months of 1999 were 2.5% lower than the same period of 1998. For the twelve
months ended March 31, 1999, energy sales and base rate revenues increased
from the comparable 1998 period, a result of strong sales growth and the
effect of hotter-than-normal weather in the summer of 1998. Electric energy
sales for the twelve-month period of 1999 were up 5% from the 1998
twelve-month period.
Fuel revenues decreased for the first quarter of 1999 compared with the
1998 period due to decreased energy sales. For the twelve-month period, fuel
revenues increased primarily due to higher volumes of energy sales offset by
lower gas prices.
Fuel and purchased power expenses for both the three-month and
twelve-month period ended March 31, 1999 reflect lower natural gas prices from
the comparable 1998 periods. The increase in fuel and purchased power for the
twelve-month period for 1999 reflects the increase in gas consumed and
purchased power to meet demand during the hotter-than-normal summer.
O&M expenses for the three- and twelve-month periods ending March 31, 1999
increased 12% and 8%, respectively, in comparison to the same periods for
1998. The increase for the three-month period is primarily due to the
timing of expenditures associated with routine maintenance
work at several generating plants. Reduced generation requirements resulting
from the mild winter weather allowed TU Electric to perform this
planned routine maintenance earlier than normal. Third-party
transmission expenses for the first quarter of 1999 were also higher than the
first quarter last year due to a favorable contract adjustment in the 1998
period. The increase in O&M expenses for the 1999 twelve-month period is
primarily a result of the hotter-than-normal summer of 1998.
Depreciation and amortization expense for the twelve months ended
March 31, 1999 was 31% higher than the same period in 1998. TU Electric's
rate settlement agreement resulted in an increase of $355 million in
depreciation on its Comanche Peak nuclear powered generating station for the
twelve-months ended March 31, 1999. Of the $355 million, $185 million is the
result of the transfer of transmission and distribution depreciation, and $170
million is the result of TU Electric's earnings in excess of its earnings cap.
The 1999 first quarter effective income tax rate for TU Electric was
lower than the same period for 1998 primarily due to a favorable adjustment to
prior years' tax accruals. The effective tax rate for the twelve months ended
March 31, 1999 was slightly higher than the 1998 period principally due to the
impact of amortization of prior period flow-through amounts resulting from the
acceleration of depreciation on nuclear production assets in conjunction with
the rate settlement, partially offset by the favorable adjustment to prior
year's tax accruals.
Net decreases in interest expense for the three- and twelve-months ended
March 31, 1999, compared to similar periods in 1998, are primarily due to the
reacquisition of long-term debt in 1998.
30
TUC
Earnings for the first quarter of 1999 were $182 million ($.65 per share,
basic and diluted) compared with $127 million ($.52 per share basic, $.51 per
share diluted) for the first quarter of 1998, or a 43% earnings improvement.
Earnings for the twelve months ended March 31, 1999 were $795 million ($2.90
per share, basic and diluted) compared with $672 million ($2.85 per share
basic, $2.84 per share diluted) for the prior twelve-month period, or an 18%
increase in earnings. For all periods presented, the factors affecting the
results of TU Electric, as discussed above, are also major factors affecting
the results of TUC. Operations of Eastern Group since the date of acquisition
of TEG (including certain one-time acquisition transaction-related costs which
totaled $31 million after-tax in the 1999 twelve-month period) also impacted
the Company's net income. Earnings per share comparisons for the quarter and
twelve months ended March 31, 1999 were affected by the issuance of additional
shares of common stock for the acquisition.
The 1999 first-quarter results reflect record operating revenues of $4.5
billion, a 79% increase over the same period in 1998. Substantially all of the
increase is due to the addition of the winter heating season results of
Eastern Group in the UK. Partially offsetting were lower results from the
Company's US Electric operations due to extremely mild winter temperatures in
Texas during the first quarter that reduced revenues. In addition, O&M
expenses for the US Electric segment were higher than the prior year primarily
due to the timing of scheduled maintenance activities.
The 1999 twelve-month period reflects record revenues of almost $17
billion, approximately 87% higher than the same period a year ago. Results
for the twelve months ended March 31, 1999 reflect continued strong US retail
electric sales growth, weather-driven US Electric sales experienced during the
hotter-than-normal summer of 1998 and continued capital reductions in US
Electric operations. The higher results also reflect the addition of the
Eastern Group, and significant improvement in the Company's US Energy
Marketing operations. These improvements were partially offset by TU
Electric's 1998 rate settlement that reduced revenues and increased
depreciation, and by mild winter weather in the fourth quarter of 1998 and the
first quarter of 1999.
Earnings for the twelve months ended March 31, 1999 include a
non-recurring gain from Eastern Group's renegotiation of a long-term gas
contract and non-recurring costs related to the acquisition of TEG, while
earnings for the prior twelve-month period ended March 31, 1998 were reduced
by the fuel disallowance (including interest) and the charge related to the
sale of sulfur dioxide allowances for TU Electric, as described above.
Excluding these non-recurring items, earnings for the twelve months ended
March 31, 1999 were $2.87 per share (basic and diluted) compared with $3.09
per share ($3.08 per share diluted) for the prior twelve-month period.
For a brief description of reportable business segments and certain
financial data by segment, see Note 8 to Condensed Consolidated Financial
Statements.
US Electric -- Net income for the US Electric segment for the first three
months of 1999 decreased 23% from the same period of 1998, reflecting a 4%
reduction in operating revenues as a result of mild winter weather conditions
and increased O&M expenses primarily due to the timing of planned routine
maintenance work.
US Gas -- Net income for the US Gas segment for the first quarter of 1999
was $18 million versus $17 million in the first quarter last year. A 12%
reduction in operating revenues, which reflects the mild winter weather in the
first quarter this year, was offset by lower gas purchase costs and lower
revenue-related taxes.
US Energy Marketing -- This segment had a net loss for the three months
ended March 31, 1999 of $7 million compared with a $1 million net loss in the
first quarter last year. Operating revenues for the 1999 first quarter were
up 17% from the year-earlier period; however, margins were down significantly
due to a market that was capped by mild winter weather. Operating expenses
for the first quarter this year were also higher than in the prior first
quarter due to increased infrastructure costs as a result of business growth.
31
UK/Europe -- The UK/Europe segment contributed $111 million of net income
to first quarter 1999 results versus $8 million equity in the net income of
TEG in the first quarter last year. Operating revenues for these operations
were $1.9 billion for the first quarter of 1999.
Australia -- Net income for the three months ended March 31, 1999 was $5
million compared with $10 million for the year-ago first quarter. Results for
this segment include Westar/Kinetik Energy from the date of acquisition of
February 24, 1999. A 10% improvement in operating revenues was more than
offset by higher operating expenses and increased interest costs, principally
related to the acquisition of Westar/Kinetik Energy. Reported results for
1999 were impacted by lower average foreign currency exchange rates compared
to the 1998 period.
Year-to-year comparisons of consolidated interest expense and
distributions on trust securities and preferred stock of subsidiaries have
been affected by the Company's capital restructuring and debt reduction
programs, and by the debt assumed and incurred in connection with the
acquisitions of TEG and Westar/Kinetik Energy.
The lower effective income tax rate for the first quarter of 1999
compared with the 1998 first quarter was primarily due to favorable
adjustments to prior years' tax accruals and the effects of Eastern Group
results in the 1999 period which are taxed at a lower rate than US
operations. The effective tax rate for the twelve months ended March 31, 1999
was higher than in the same period of 1998 due to the impact of amortization
of prior period flow-through amounts resulting from the acceleration of
depreciation on nuclear production assets in conjunction with the rate
settlement, partially offset by the favorable adjustments to prior year's tax
accruals and the effects of Eastern Group since acquisition.
CHANGE IN ACCOUNTING STANDARDS
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",
is effective for fiscal years beginning after June 15, 1999. Many existing
contracts relating to electric and gas purchases and sales may be classified
as derivatives under the definition of derivatives in the new standard. This
standard requires that all derivative financial instruments be recognized as
either assets or liabilities on the balance sheet at their fair values and
that accounting for the changes in their fair values be recorded in earnings
or common stock equity as part of comprehensive income depending upon the
intended use of the derivatives and their resulting designations. The new
standard will supersede or amend existing standards which deal with hedge
accounting and derivatives. The Company and TU Electric have not yet
determined the effect adopting this standard will have on their financial
statements.
YEAR 2000 ISSUES
TUC and TU Electric
Overview
Many existing computer programs use only the last two digits to identify
a year in the date field. Thus, they would not recognize a year that begins
with 20 instead of 19. If not corrected, many computer applications could
fail or produce erroneous data on or about the year 2000.
The Company began its US efforts to address Year 2000 (Y2K) issues in
1996 by focusing on information technology mainframe-based application systems
(IT Corporate Applications). In early 1997, an infrastructure project to
address the Company's information technology related hardware, operating
systems and desktop software was begun (IT Infrastructure). In late 1997, a
project was begun to address Y2K issues throughout the Company related to
embedded systems, such as process controls for energy production and delivery,
and business unit owned applications (Non-IT Equipment and Applications).
32
Applications and equipment in each of these three major initiatives have
been inventoried and categorized based on their criticality to the Company's
business operations. Assessments of the potential impact due to Y2K issues
are essentially complete. This process includes the solicitation of vendor
feedback, comparing information with other energy companies, and in many cases
internal verification by testing. The remediation and testing work on IT
Corporate Applications currently stands at approximately eighty percent
complete. The IT Infrastructure project is currently eighty-five percent
complete. Remediation work on embedded systems is scheduled to be completed
by September 1999. A number of tests on production equipment with embedded
systems have been performed. The Company will continue to test this equipment
throughout the first half of 1999.
Readiness
The IT Corporate Applications remediation and testing activities are
approximately eighty percent complete. Certification for the Y2K compliance on
mission critical core business applications was completed as scheduled by the
end of the first quarter, with certification of remaining applications
scheduled for the third quarter of 1999.
The IT Infrastructure project involves assessing the compliance of
standard computer hardware, network systems including gateways, hubs and
routers, telecommunications equipment, operating systems and IT standard
software products. Equipment is being individually tested using software
products and applicable test procedures. Network system tests have been
performed. Eighty-five percent of the IT Infrastructure is Y2K ready.
Mainframe computers and support equipment within the data center have
received all necessary upgrades. Other remediation schedules were adjusted
during the quarter to improve the cost effectiveness of the work. Remediation
of equipment within major work locations will be completed by May 31, 1999.
Non critical equipment in remote sites will be remediated throughout the
second and third quarters. Certain software vendors will not have Y2K ready
versions of their product available until the second quarter of 1999. These
software upgrades will be tested and implemented during the second quarter.
The Company's 900 megahertz radio system is being upgraded and is scheduled to
be completed in July 1999.
Non-IT Equipment and Applications involve the hardware and software
products that reside in individual business units. These items include the
embedded systems that are used in the production, energy delivery, and other
processes of the Company. Inventories have been conducted to identify these
embedded systems in individual business units. Assessments are substantially
complete. Forty of fifty-three fossil steam generating units are Y2K ready.
Validation testing is scheduled throughout the second quarter of 1999 on the
remaining thirteen fossil generating units. Some remediation needs have been
identified in various business units as a result of Y2K testing. In most
cases, these concern software upgrades that are necessary to ensure that
information produced by these systems can be efficiently used in the Company's
business processes. The upgrades are not required for equipment functionality.
These remediation activities are planned for completion by the end of the
second quarter of 1999.
The Company has implemented a specific Y2K program at its Comanche Peak
nuclear powered generating station. Inventories were completed by mid-1998 and
detailed assessments were made by December 1998. Remediation projects on
Units 2 and 1 are scheduled for completion by the end of May and September of
1999, respectively.
The Company is analyzing the potential impact of Y2K compliance efforts
of third parties. Over 2000 suppliers and service providers have been
contacted to determine the status of their Y2K efforts. Approximately
seventy percent of these vendors have responded. Their responses are being
prioritized, and the programs and status of the most significant among them
are being analyzed in detail. This initial analysis is complete. The more
significant interdependencies relate to telecommunications and gas suppliers.
On site audits of a number of significant third parties are being conducted
during the first half of 1999.
33
Costs
The costs associated with the Company's Y2K efforts for its US energy
businesses are currently estimated to be approximately $36 million. These
costs reflect new, incremental costs and the reallocation of resources in pre-
existing maintenance budgets. The costs related to the three major initiatives
are estimated to be as follows: IT Corporate Applications - $14 million; IT
Infrastructure - $7 million; and Non IT-Equipment and Applications - $15
million. These costs are being expensed as incurred over the period 1996 to
2000; and a total of approximately $17 million had been expended through
December 31, 1998 (latest available information). There can be no assurance
that these estimated costs will not change as the Company's Y2K program
continues.
Strategic initiatives were begun in two areas prior to beginning work on
the Y2K issue, and the costs for these initiatives are not included in the
estimate above. The energy management system for the Company's transmission
grid is being replaced. The Company's principal financial and accounting
system has been replaced. Each of these projects will eliminate potential Y2K
deficiencies; however, that was not a significant consideration at the time
replacement decisions were made.
LCC continues to work on its Y2K project. IT applications affected by
Y2K issues are being replaced by systems with dramatically increased
functionality. The cost of this effort is estimated to be $4 million, which
is being expended through 1999. As of December 31, 1998 (latest available
information), estimated costs expended were approximately $2.2 million.
Remediation of IT applications is scheduled to be completed in June 1999.
Testing is underway for both IT applications and embedded systems, with the
majority of these testing activities scheduled for completion in June 1999.
LCC filed a draft description of its Y2K Contingency Plan with the Public
Utilities Commission of Texas (PUC) on December 31, 1998. The plan is
scheduled to be completed by June 1999.
Risk Issues
With respect to internal risks, the Company's current assessment of the
most reasonably likely worst case scenario is that impacts on either service
or financial performance will not be materially adverse. The Company
believes, based on the results of testing that has already occurred on a large
portion of its production equipment with embedded systems, that if any
disruption to service occurs, it will be isolated and of short-term duration.
The Company continues to collaborate with other major energy suppliers through
the joint Electric Power Research Institute's embedded systems project.
The North American Electric Reliability Council (NERC) is continuing to
evaluate the status of the electric infrastructure throughout North America.
The Company is a participant in this process. The second NERC status report,
issued on January 11, 1999, indicates that the transition through critical Y2K
dates is expected to have minimal impact on electrical systems in North
America and that, with continued work and coordinated contingency planning,
operating risks can be effectively mitigated. Results from the Company's
testing program compare favorably with the results on which the NERC
conclusions have been based. NERC will perform scenario analyses of potential
risks to the electric infrastructure. Joint industry testing between the
electric industry and the telecommunications industry is also being planned.
Until this work is complete, the Company cannot assess a worst case scenario
relating to external interdependencies.
As the Company's Y2K program proceeds, the Company will continue to
assess its internal and external risks, not all of which are within its
control; and it will continue to consider the most reasonably likely worst
case scenario. There can be no assurance that all material Y2K risks within
the Company's control will have been adequately identified and corrected
before the end of 1999. In addition, the Company can make no assurances
regarding the Y2K readiness of systems and parties outside its control or the
effect on the Company if those parties are not Y2K compliant.
34
Contingency Plans
The Company has in place detailed emergency response and disaster
recovery plans designed to ensure high reliability of service to customers.
These plans are utilized routinely for abnormal service conditions. These
plans have been reviewed to identify required actions specific to the Y2K
issue. Draft contingency plans have been developed and were filed with the PUC
on December 31, 1998. These Y2K contingency plans address both Company
activities and actions necessary to mitigate the impact of third party
disruptions. These contingency plans have been coordinated with those of the
Electric Reliability Council of Texas (ERCOT) and NERC. Final contingency
plans are scheduled to be completed by June 1999.
International Operations - Y2K Programs
Australia
Overview
TU Australia Pty. Ltd., an interim holding company for the Company's
Australian operations (TU Australia) initiated a Y2K Program in the third
quarter of 1997 with the compilation of a Y2K inventory of supported IT
assets and systems. An IT Project Manager was appointed and a consultant
engaged to develop a Y2K remediation plan for items in the inventory
assessed as having Y2K risk. A consulting firm was engaged in early 1998
to provide a methodology for addressing the Y2K risks of all other assets
and systems. The consulting firm was subsequently retained to establish a
Y2K Program Office and complete a non-IT inventory. A Y2K structure was also
established in 1998 and a full time Program Director appointed to bring all
activities together into a single TU Australia Y2K Program. The
inventory contains over eight hundred different asset types divided
approximately equally between IT and non-IT items. The Program consists of
sixty-nine separate projects with individual project plans and project
managers.
Readiness
Fifty-one of the sixty-nine Y2K projects have been completed. Two projects
track the progress of Y2K preparedness associated with telecommunications and
electricity wholesale trading partners. The remaining projects are due for
completion by July 1999 and are associated with the implementation of new
applications for customer information and system control and data acquisition.
Costs
As a result of lower than anticipated requirements, the estimated costs
associated with the TU Australia Y2K Program were reduced to $2.3
million. Some additional costs included in capital budgets for new IT systems
are not reflected in these Y2K costs. Approximately 50% of the Y2K costs were
incurred during 1998 with the majority of the remaining costs to be incurred
in the first half of 1999. There can be no assurance that these estimates will
not change as a result of the discovery of unexpected additional remediation
work identified during Y2K testing.
Risk Issues
With respect to internal risks, TU Australia's current assessment
of the most reasonably likely worst case scenario is that impacts on either
service or financial performance will not be materially adverse. TU Australia
believes, based on the results of testing that has already occurred
on a large portion of operating equipment, that if any disruption to service
occurs, it will be isolated and of short-term duration.
35
Audits of the Y2K Program were conducted by PricewaterhouseCoopers in
1997 and 1998. The State Government Office of the Regulator General has
engaged an international consulting firm to externally audit the Y2K
preparations of all Victorian Electricity Supply Industry Companies in 1999.
Contingency Plans
Y2K contingency planning is being developed on three levels; asset level,
project level and program level. In addition, Y2K contingency planning
associated with assets that are assessed as having the capacity to interrupt
electricity supply will be developed jointly with the rest of the Victorian
Electricity Supply Industry. Y2K contingency plans at the asset level have
been completed and several project level plans have also been prepared. The
completion of the remainder of contingency plans represents the majority of
Y2K activities planned in 1999. Y2K contingency plans will be incorporated
into existing disaster plans and business continuity plans where appropriate.
UK/Europe
Overview
In the UK, the Eastern Group established a program of projects in August
1996 designed to ensure that all its systems are Y2K compliant. In testing
for conformity, Eastern Group uses the revised version of the British
Standards Institute's definition of Y2K conformity. Each project has six
phases: inventory, risk assessment, analysis, remediation, testing and
contingency planning.
Readiness
The inventory, risk assessment and analysis of the mainframe systems were
completed in June 1997. All COBOL code was fixed by November 1998. The
mainframe remediation work was completed in March 1999, and the testing work
is scheduled for completion by July 1999.
Inventories of all other IT systems and of embedded systems (controls,
monitoring, and protection systems, including electricity meters and customer
premises and systems used in Eastern Group's offices) were completed in
February 1998. Risk assessments were completed in August 1998. Many of the
older IT systems have already been replaced by systems which are Y2K
compliant. Remediation and testing of these systems is underway and is
scheduled for completion by August 1999. Since October 1996, requirements
have been included in the standard purchasing terms and conditions requiring
Y2K readiness for new systems. Acceptance tests for any significant new or
upgraded system include testing for Y2K readiness.
The IT infrastructure is currently based on a mixture of hardware and
operating systems connected by local and wide area networks. The system was
remediated in March 1999 and will be tested and verified compliant by the end
of May 1999. The infrastructure PABX systems were upgraded to be compliant in
February 1999.
Remediation products for three of the eight power station turbine control
systems were not available from all suppliers in time for the planned summer
shutdowns of 1998. Completion of this work has, therefore, been delayed until
August 1999. All the electricity distribution systems have been checked, and
testing was completed in February 1999.
Cost
The costs of addressing the Y2K issue are estimated to be approximately
$33 million. These costs include all Y2K related activities. They do not
include the cost of achieving Y2K compliance for new IT systems installed in
connection with the opening up of the domestic UK electricity retail market to
competition, new systems installed to meet other business needs, or the cost
of developing contingency plans for the energy management business.
36
Costs of addressing the Y2K issue are being expensed as incurred.
Amounts expended through December 31, 1998 (latest available information)
totaled $4.6 million. Cost expenditures for 1999 are estimated at $24.4
million and an additional $4 million for 2000.
Risk and Contingency Plans
With respect to internal risks, Eastern Group's current assessment of the
most reasonably likely worst case scenario is that impacts on either service
or financial performance will not be materially adverse. Eastern Group
believes, based on the results of testing that has already occurred on a large
portion of production equipment with embedded systems, that if any disruption
to service occurs, it will be isolated and of short-term duration.
All of Eastern Group's businesses, other than the energy management
business, have developed Y2K contingency plans. The energy management
business is in the process of developing its contingency plan. The Y2K
process includes a review of all the existing contingency plans and further
development of contingency arrangements to cover the Y2K failure scenarios.
The work is underway and due to be completed by June 1999, to be followed by
further review, testing and refinement and will result in revisions to the
existing contingency plans.
Eastern Group is working with its equipment and service suppliers to
ensure their products and services are Y2K compliant. Reviews were completed
by December 1998. Eastern Group believes that any failure of such suppliers
to be compliant is unlikely to have a material effect on Eastern Group or its
operations. Eastern Group's operations are heavily dependent upon the
reliability of the high voltage transmission system in England and Wales and
on the operations of the wholesale trading market for electricity in England
and Wales. The owners and operators of those systems have taken the position
that they anticipate no material disruptions of service.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The 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
1998 Form 10-K and is therefore not presented herein. Similar information for
recently acquired Westar/Kinetik Energy in Australia is not presently
available without undue cost and effort and is therefore not presented herein.
Item 5. OTHER INFORMATION
2000 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 in 2000 corresponding to 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 2000
Annual Meeting of Shareholders, any such notice must be received by the
Secretary of the Company on or before February 20, 2000.
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 1999 Annual
Meeting, specific proposals of common shareholders intended to be presented at
the 2000 Annual Meeting must be received by the Secretary of the Company no
later than December 6, 1999 in order to be eligible for inclusion in the
Company's proxy materials relating to that meeting.
37
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
TUC and TU Electric
- -------------------
(a) Exhibits filed as a part of Part II are:
4 Instruments defining the rights of security holders
4(a) - Fifty-ninth Supplemental Indenture dated as of March 1,
1999 to TU Electric's Mortgage and Deed of Trust dated as
of December 1, 1983.
10 Material contracts
10(a) - Facilities Agreement for pounds1,275,000, Credit Facilities,
dated March 24, 1999, among TXU Eastern Holdings Limited,
TU Finance (No. 2) Limited, TU Acquisitions Limited, Chase
Manhattan Bank plc, Lehman Brothers International (Europe),
Merrill Lynch Capital Corporation and the other banks named
therein.
10(b) - Restated Salary Deferral Program of the Texas Utilities
Company System, as amended effective April 1, 1998.
10(c) - Split Dollar Life Insurance Program of the Texas Utilities
Company System, restated as of August 1, 1987.
10(d) - Second Supplemental Retirement Plan for Employee's of the
Texas Utilities Company System, as amended and restated
August 11, 1998.
10(e) - Long Term Incentive Compensation Plan of the Texas
Utilties Company System, dated as of May 23, 1997.
10(f) - Employment Agreement between TUC and David W. Biegler.
10(g) - Description of Compensatory Arrangement with Michael J.
McNally.
10(h) - Description of Compensatory Arrangement with H. Jarrell
Gibbs.
15 Letters from independent accountants as to unaudited interim
financial information
15(a) Deloitte & Touche LLP - Texas Utilities Company
15(b) Deloitte & Touche LLP - Texas Utilities Electric Company
27 Financial Data Schedules
27(a) Texas Utilities Company
27(b) Texas Utilities Electric Company
38
(b) Reports on Form 8-K filed since December 31, 1998:
Date of Report Item Reported
---------------- --------------
TUC
---
January 19, 1999 Item 7. Financial Statements and Exhibits
February 26, 1999 Item 5. Other Events
TU Electric
-----------
March 17, 1999 Item 5. Other Events
39
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/ Jerry W. Pinkerton
-------------------------------
Jerry W. Pinkerton
Controller and Principal
Accounting Officer
Date: May 13, 1999
- -----------------------------------------------------------------------------
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/ Jerry W. Pinkerton
-----------------------------
Jerry W. Pinkerton
Controller and Principal
Accounting Officer
Date: May 13, 1999
40