1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
-- OR --
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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TEXAS UTILITIES COMPANY
A Texas Corporation I.R.S. Employer Identification
Commission File Number 1-3591 No. 75-0705930
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201
(214) 812-4600
TEXAS UTILITIES ELECTRIC COMPANY
A Texas Corporation I.R.S. Employer Identification
Commission File Number 0-11442 No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201
(214) 812-4600
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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 APRIL 30, 1997:
Texas Utilities Company: 224,602,557 shares, without par value.
Texas Utilities Electric Company: 156,800,000 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 ELECTRIC COMPANY AND TEXAS
UTILITIES COMPANY. NEITHER TEXAS UTILITIES ELECTRIC COMPANY NOR TEXAS
UTILITIES COMPANY MAKES ANY REPRESENTATIONS AS TO INFORMATION FILED BY THE
OTHER REGISTRANT.
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TABLE OF CONTENTS
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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, 1997 and 1996 . . . . . . . . . 3
Condensed Statements of Consolidated Cash Flows
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . 4
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . 5
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
Condensed Statements of Consolidated Income
Three and Twelve Months Ended March 31, 1997 and 1996 . . . . . . . . . 7
Condensed Statements of Consolidated Cash Flows
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . 8
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 11
INDEPENDENT ACCOUNTANTS' REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
3
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
THOUSANDS OF DOLLARS
OPERATING REVENUES ........................................ $ 1,493,804 $ 1,463,900 $ 6,580,831 $ 5,858,323
----------- ----------- ----------- -----------
OPERATING EXPENSES
Fuel and purchased power ................................ 492,281 481,831 2,146,758 1,732,230
Operation and maintenance ............................... 325,200 281,443 1,300,037 1,126,639
Depreciation and amortization ........................... 158,210 153,309 625,406 578,214
Taxes other than income ................................. 136,306 132,379 538,771 530,019
----------- ----------- ----------- -----------
Total operating expenses .............................. 1,111,997 1,048,962 4,610,972 3,967,102
----------- ----------- ----------- -----------
OPERATING INCOME .......................................... 381,807 414,938 1,969,859 1,891,221
OTHER INCOME AND (DEDUCTIONS) - NET ....................... (2,056) 3,590 (6,794) 23,491
----------- ----------- ----------- -----------
TOTAL INCOME .............................................. 379,751 418,528 1,963,065 1,914,712
----------- ----------- ----------- -----------
INTEREST AND OTHER CHARGES
Interest ................................................ 181,684 199,575 780,002 729,236
Allowance for borrowed funds used during construction ... (2,305) (3,956) (9,597) (14,114)
Impairment of assets .................................... -- -- -- 1,233,320
Distributions on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric ................ 15,003 8,249 39,755 10,050
Preferred stock dividends of subsidiary ................. 12,307 14,419 51,246 75,788
----------- ----------- ----------- -----------
Total interest and other charges ...................... 206,689 218,287 861,406 2,034,280
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ......................... 173,062 200,241 1,101,659 (119,568)
INCOME TAX EXPENSE (BENEFIT) .............................. 58,263 74,167 359,328 (31,586)
----------- ----------- ----------- -----------
CONSOLIDATED NET INCOME (LOSS) ............................ $ 114,799 $ 126,074 $ 742,33 $ (87,982)
=========== =========== =========== ===========
Average shares of common stock outstanding (thousands) .... 224,603 225,841 224,850 225,841
Earnings (loss) and dividends per share of common stock:
Earnings (loss) (on average shares outstanding) ......... $ 0.51 $ 0.56 $ 3.30 $ (0.39)
Dividends declared per share of common stock ............ $ 0.525 $ 0.50 $ 2.05 $ 2.54
See accompanying Notes to Condensed Consolidated Financial Statements.
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4
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
--------- ---------
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income .................................................... $ 114,799 $ 126,074
Adjustments to reconcile consolidated net income to cash provided by
operating activities:
Depreciation and amortization (including amounts charged to fuel) ........ 200,395 190,314
Deferred income taxes -- net ............................................. 26,552 60,304
Federal investment tax credits -- net .................................... (5,698) (5,761)
Allowance for equity funds used during construction ...................... (313) (546)
Changes in operating assets and liabilities:
Accounts receivable .................................................... 18,435 34,852
Inventories ............................................................ 8,335 24,453
Accounts payable ....................................................... (73,715) (34,500)
Interest and taxes accrued ............................................. (13,519) (27,123)
Other working capital .................................................. 13,325 (24,448)
Over/(under)-recovered fuel revenue -- net of deferred taxes ........... 12,846 (37,695)
Other -- net ........................................................... (24,620) 30,770
--------- ---------
Cash provided by operating activities ............................... 276,822 336,694
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds ..................................................... 106,350 133,010
TU Electric obligated, mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of TU Electric ............ 498,804 --
Retirements/repurchases of securities:
First mortgage bonds ..................................................... (117,165) (168,620)
Other long-term debt ..................................................... (27,427) (3,818)
Preferred stock of subsidiary ............................................ (434,589) --
Change in notes payable .................................................... 187,871 (20,061)
Common stock dividends paid ................................................ (117,917) (112,921)
Debt premium, discount, financing and reacquisition expenses ............... (11,049) (9,861)
--------- ---------
Cash provided by (used in) financing activities ..................... 84,878 (182,271)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures .................................................. (98,513) (94,804)
Allowance for equity funds used during construction (excluding amount
for nuclear fuel) .......................................................... 188 337
Change in construction receivables/payables -- net ......................... (601) --
Non-utility property -- net ................................................ (5,968) 1,599
Nuclear fuel (excluding allowance for equity funds used during construction) (2,922) (14,785)
Other investments .......................................................... (6,197) (58,872)
--------- ---------
Cash used in investing activities ................................... (114,013) (166,525)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES .............................................. -- 215
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................................... 247,687 (11,887)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE ................................ 15,845 24,853
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING BALANCE ................................... $ 263,532 $ 12,966
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
THOUSANDS OF DOLLARS
UTILITY PLANT
In service:
Production ........................................................ $ 16,278,107 $ 16,277,151
Transmission ...................................................... 1,617,746 1,607,925
Distribution ...................................................... 5,701,043 5,655,677
General ........................................................... 502,028 503,688
------------ ------------
Total .......................................................... 24,098,924 24,044,441
Less accumulated depreciation ..................................... 6,273,754 6,127,610
------------ ------------
Utility plant in service, less accumulated depreciation ........ 17,825,170 17,916,831
Construction work in progress ...................................... 254,268 240,612
Nuclear fuel (net of accumulated amortization: 1997 -- $391,514,000;
1996 -- $369,114,000) ............................................ 233,235 252,589
Held for future use ................................................ 24,483 24,483
------------ ------------
Utility plant, less accumulated depreciation and amortization ... 18,337,156 18,434,515
Less reserve for regulatory disallowances .................... 836,005 836,005
------------ ------------
Net utility plant ............................................... 17,501,151 17,598,510
------------ ------------
INVESTMENTS ........................................................... 1,165,740 1,158,223
------------ ------------
CURRENT ASSETS
Cash in banks ...................................................... 17,764 15,845
Temporary cash investments ......................................... 245,768 --
Special deposits ................................................... 1,780 805
Accounts receivable:
Customers ......................................................... 276,416 290,111
Other ............................................................. 31,584 44,032
Allowance for uncollectible accounts .............................. (5,173) (6,262)
Inventories -- at average cost:
Materials and supplies ............................................ 201,005 200,601
Fuel stock ........................................................ 112,889 121,699
Prepayments ........................................................ 75,296 56,324
Deferred income taxes .............................................. 42,671 40,021
Other current assets ............................................... 29,816 13,279
------------ ------------
Total current assets ........................................... 1,029,816 776,455
------------ ------------
DEFERRED DEBITS
Unamortized regulatory assets ...................................... 1,865,492 1,753,418
Other deferred debits .............................................. 101,899 89,101
------------ ------------
Total deferred debits .......................................... 1,967,391 1,842,519
------------ ------------
Total ...................................................... $ 21,664,098 $ 21,375,707
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- -----------
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value -- net:
Authorized shares -- 500,000,000
Outstanding shares -- 224,602,557 ............................... $ 4,789,092 $ 4,787,047
Retained earnings ................................................. 1,200,256 1,202,390
Cumulative currency translation adjustment ........................ 36,063 43,476
----------- -----------
Total common stock equity ................................... 6,025,411 6,032,913
Preferred stock of subsidiary:
Not subject to mandatory redemption ............................. 247,685 464,427
Subject to mandatory redemption ................................. 20,589 238,391
TU Electric obligated, mandatorily redeemable, preferred securities
of subsidiary trusts holding solely debentures of TU Electric ... 874,725 381,311
Long-term debt, less amounts due currently ........................ 8,632,924 8,668,111
----------- -----------
Total capitalization ........................................ 15,801,334 15,785,153
----------- -----------
CURRENT LIABILITIES
Notes payable:
Commercial paper ................................................ 414,000 253,151
Banks ........................................................... 96,165 69,788
Long-term debt due currently ...................................... 346,351 356,076
Accounts payable .................................................. 261,630 336,391
Dividends declared ................................................ 129,709 129,879
Customers' deposits ............................................... 82,046 80,390
Taxes accrued ..................................................... 166,343 143,424
Interest accrued .................................................. 120,237 156,758
Over-recovered fuel revenue ....................................... 62,747 42,984
Other current liabilities ......................................... 132,771 90,485
----------- -----------
Total current liabilities ................................... 1,811,999 1,659,326
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes ................................. 2,945,524 2,801,626
Unamortized federal investment tax credits ........................ 584,014 589,713
Other deferred credits and noncurrent liabilities ................. 521,227 539,889
----------- -----------
Total deferred credits and other noncurrent liabilities ..... 4,050,765 3,931,228
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total .................................................. $21,664,098 $21,375,707
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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7
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
THOUSANDS OF DOLLARS
OPERATING REVENUES ................................... $ 1,365,459 $ 1,348,330 $ 6,046,740 $ 5,675,020
----------- ----------- ----------- -----------
OPERATING EXPENSES
Fuel and purchased power ........................... 450,208 449,821 1,966,142 1,740,210
Operation and maintenance .......................... 293,490 250,392 1,155,008 1,044,516
Depreciation and amortization ...................... 142,606 139,064 565,445 552,118
Income taxes ....................................... 77,692 78,809 419,895 413,680
Taxes other than income ............................ 129,596 125,187 510,841 504,464
----------- ----------- ----------- -----------
Total operating expenses ....................... 1,093,592 1,043,273 4,617,331 4,254,988
----------- ----------- ----------- -----------
OPERATING INCOME ..................................... 271,867 305,057 1,429,409 1,420,032
----------- ----------- ----------- -----------
OTHER INCOME (LOSS)
Allowance for equity funds used during
construction ....................................... 306 540 1,316 7,256
Impairment of assets ............................... -- -- -- (486,350)
Other income and (deductions) -- net ............... 363 (228) 1,093 6,035
Income tax benefits ................................ 15,512 112 30,912 170,258
----------- ----------- ----------- -----------
Total other income (loss) ...................... 16,181 424 33,321 (302,801)
----------- ----------- ----------- -----------
TOTAL INCOME ......................................... 288,048 305,481 1,462,730 1,117,231
----------- ----------- ----------- -----------
INTEREST AND OTHER CHARGES
Interest on mortgage bonds ........................ 114,689 125,966 475,513 516,001
Interest on other long-term debt .................. 3,574 8,296 21,734 43,768
Other interest .................................... 13,981 14,140 82,301 57,860
Distributions on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary
trusts holding solely debentures of
TU Electric ..................................... 15,003 8,249 39,755 10,050
Allowance for borrowed funds used during
construction ...................................... (2,210) (3,955) (9,494) (14,106)
----------- ----------- ----------- -----------
Total interest and other charges ............... 145,037 152,696 609,809 613,573
----------- ----------- ----------- -----------
CONSOLIDATED NET INCOME .............................. 143,011 152,785 852,921 503,658
PREFERRED STOCK DIVIDENDS ............................ 12,460 14,419 51,399 75,788
----------- ----------- ----------- -----------
CONSOLIDATED NET INCOME AVAILABLE FOR
COMMON STOCK ...................................... $ 130,551 $ 138,366 $ 801,522 $ 427,870
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
--------- ---------
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income .................................................................. $ 143,011 $ 152,785
Adjustments to reconcile consolidated net income to cash provided by operating activities:
Depreciation and amortization (including amounts charged to fuel) ...................... 177,687 168,480
Deferred income taxes -- net ........................................................... 16,700 55,336
Federal investment tax credits -- net .................................................. (5,306) (5,367)
Allowance for equity funds used during construction .................................... (306) (540)
Changes in operating assets and liabilities:
Accounts receivable .................................................................. 21,338 40,812
Inventories .......................................................................... (747) 9,860
Accounts payable ..................................................................... (48,867) 16,414
Interest and taxes accrued ........................................................... 4,816 11,339
Other working capital ................................................................ 6,543 (36,496)
Over/(under) -- recovered fuel revenue -- net of deferred taxes ...................... 12,846 (37,695)
Other -- net ......................................................................... 5,940 7,842
--------- ---------
Cash provided by operating activities ............................................. 333,655 382,770
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds ................................................................... 106,350 133,010
TU Electric obligated, mandatorily redeemable, preferred securities
of subsidiary trusts holding solely debentures of TU Electric ....................... 498,804 --
Retirements of securities:
First mortgage bonds ................................................................... (117,150) (168,605)
Other long-term debt ................................................................... (297) (269)
Preferred stock ........................................................................ (39,986) --
Change in notes payable .................................................................. (253,151) (86,990)
Change in notes receivable ............................................................... (28,796) 563
Preferred stock dividends paid ........................................................... (12,430) (14,533)
Common stock dividends paid .............................................................. (136,416) (122,304)
Debt premium, discount, financing and reacquisition expenses ............................. (6,316) (8,355)
--------- ---------
Cash provided by (used in) financing activities ................................... 10,612 (267,483)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures ................................................................ (87,407) (83,019)
Allowance for equity funds used during construction (excluding amount for nuclear fuel) .. 181 331
Change in construction receivables/payables -- net ....................................... (601) --
Non-utility property -- net .............................................................. 159 --
Nuclear fuel (excluding allowance for equity funds used during construction) ............. (2,922) (14,785)
Other investments ........................................................................ (5,736) (30,206)
--------- ---------
Cash used in investing activities ................................................. (96,326) (127,679)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................... 247,941 (12,392)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE ............................................. 13,005 22,633
--------- ---------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE ................................................ $ 260,946 $ 10,241
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
THOUSANDS OF DOLLARS
ELECTRIC PLANT
In service:
Production ......................................................... $ 15,330,871 $ 15,330,974
Transmission ....................................................... 1,611,363 1,601,628
Distribution ....................................................... 4,494,430 4,442,547
General ............................................................ 432,114 432,178
------------ ------------
Total ........................................................... 21,868,778 21,807,327
Less accumulated depreciation ...................................... 5,722,602 5,594,363
------------ ------------
Electric plant in service, less accumulated depreciation ........ 16,146,176 16,212,964
Construction work in progress ....................................... 220,922 210,573
Nuclear fuel (net of accumulated amortization: 1997 -- $391,514,000;
1996 -- $369,114,000) ............................................. 233,235 252,589
Held for future use ................................................. 24,483 24,483
------------ ------------
Electric plant, less accumulated depreciation and amortization .. 16,624,816 16,700,609
Less reserve for regulatory disallowances ........................... 836,005 836,005
------------ ------------
Net electric plant .............................................. 15,788,811 15,864,604
------------ ------------
INVESTMENTS ............................................................ 513,781 508,437
------------ ------------
CURRENT ASSETS
Cash in banks ....................................................... 15,178 13,005
Temporary cash investments .......................................... 245,768 --
Special deposits .................................................... 552 552
Notes receivable -- affiliates ...................................... 64,311 35,515
Accounts receivable:
Customers .......................................................... 198,236 215,706
Other .............................................................. 18,049 23,282
Allowance for uncollectible accounts ............................... (3,944) (5,021)
Inventories -- at average cost:
Materials and supplies ............................................. 182,702 181,405
Fuel stock ......................................................... 76,569 77,119
Prepayments ......................................................... 51,390 31,758
Deferred income taxes ............................................... 53,844 50,882
Other current assets ................................................ 2,068 2,694
------------ ------------
Total current assets ............................................ 904,723 626,897
------------ ------------
DEFERRED DEBITS
Unamortized regulatory assets ....................................... 1,848,260 1,735,306
Other deferred debits ............................................... 69,638 59,695
------------ ------------
Total deferred debits ........................................... 1,917,898 1,795,001
------------ ------------
Total ....................................................... $ 19,125,213 $ 18,794,939
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
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10
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- -----------
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value:
Authorized shares -- 180,000,000
Outstanding shares -- 156,800,000 .................................................... $ 4,732,305 $ 4,732,305
Retained earnings ...................................................................... 1,367,737 1,373,602
----------- -----------
Total common stock equity ........................................................ 6,100,042 6,105,907
Preferred stock:
Not subject to mandatory redemption .................................................. 464,427 464,427
Subject to mandatory redemption ...................................................... 198,451 238,391
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric ............................................. 874,725 381,311
Long-term debt, less amounts due currently ............................................. 6,313,352 6,310,594
----------- -----------
Total capitalization ............................................................. 13,950,997 13,500,630
----------- -----------
CURRENT LIABILITIES
Notes payable -- commercial paper ...................................................... -- 253,151
Long-term debt due currently ........................................................... 327,439 338,213
Accounts payable:
Affiliates ........................................................................... 96,126 126,143
Other ................................................................................ 116,950 136,401
Dividends declared ..................................................................... 148,363 148,379
Customers' deposits .................................................................... 71,586 70,141
Taxes accrued .......................................................................... 174,264 132,514
Interest accrued ....................................................................... 96,013 132,947
Over-recovered fuel revenue ............................................................ 62,747 42,984
Other current liabilities .............................................................. 81,497 57,681
----------- -----------
Total current liabilities ........................................................ 1,174,985 1,438,554
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes ...................................................... 3,122,374 2,989,612
Unamortized federal investment tax credits ............................................. 572,660 577,965
Other deferred credits and noncurrent liabilities ...................................... 304,197 288,178
----------- -----------
Total deferred credits and other noncurrent liabilities .......................... 3,999,231 3,855,755
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total .......................................................................... $19,125,213 $18,794,939
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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11
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND TU ELECTRIC
Basis of Presentation -- The condensed consolidated financial statements of
Texas Utilities Company (Company) and its subsidiaries and Texas Utilities
Electric Company and its subsidiaries (TU Electric) have been prepared on the
same basis as those in the 1996 Annual Reports of the Company and TU Electric
on Form 10-K and, in the opinion of the Company or TU Electric, as the case may
be, all adjustments (constituting only normal recurring accruals) necessary to
a fair presentation of the results of operation and financial position have
been included therein. The statements are presented pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). 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 such rules and regulations.
These condensed consolidated financial statements, and notes thereto,
should be considered in conjunction with the consolidated financial statements,
and the notes thereto, of the Company and TU Electric included in the 1996
Annual Reports of the Company and TU Electric on Form 10-K, and the information
under Management's Discussion and Analysis of Financial Condition and Results
of Operation herein. The Company and TU Electric each believes that its
respective disclosures are adequate to make the information presented not
misleading. Certain previously reported amounts have been reclassified to
conform to current classifications.
Use of Estimates -- The preparation of the Company's and TU Electric's
condensed consolidated financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions about future events that affect the reporting and disclosure of
assets and liabilities at the balance sheet dates and the reported amounts of
revenue and expense during the periods covered by the consolidated financial
statements. In the event estimates and/or assumptions prove to be different
from actual amounts, adjustments are made in subsequent periods to reflect more
current information. No material adjustments were made to previous estimates
during the current period.
THE COMPANY
Consolidation -- The condensed consolidated financial statements include
the Company and all of its majority-owned subsidiaries:
TU Electric Texas Utilities Services Inc. (TU Services)
Texas Utilities Australia Pty. Ltd. (TU Australia) Texas Utilities Properties Inc. (TU Properties)
Southwestern Electric Service Company (SESCO) Texas Utilities Communications Inc. (TU Communications)
Texas Utilities Fuel Company (Fuel Company) Basic Resources Inc. (Basic)
Texas Utilities Mining Company (Mining Company) Chaco Energy Company (Chaco)
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
TU ELECTRIC
Consolidation -- The condensed consolidated financial statements of TU
Electric include its subsidiaries, all of which are business trusts. All
significant intercompany items and transactions have been eliminated in
consolidation.
Income Taxes -- Effective January 1, 1997, TU Electric's state franchise
tax status changed from taxes based on net taxable capital to taxes based on
net taxable earned surplus. Net taxable earned surplus is based on the federal
income tax return. TU Electric has determined that a portion of the taxes
calculated under the new tax status method is, in effect, a state income tax.
As a result, TU Electric recorded an accumulated deferred tax liability,
partially offset by a corresponding regulatory asset.
2. SHORT-TERM FINANCING
THE COMPANY AND TU ELECTRIC
At March 31, 1997, the Company and TU Electric had joint lines of credit
aggregating $1,250,000,000 under two credit facility agreements with a group of
commercial banks. Borrowings under these facilities were used for working
capital and other corporate
11
12
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
purposes, including commercial paper backup. The total of short-term
borrowings authorized by the Board of Directors of the Company at March 31,
1997, from banks or other lenders, was $2,150,000,000.
In April 1997, the Company, TU Electric and TUC Holding Company (TUC),
which will be the new holding company after completion of the proposed merger
with ENSERCH Corporation (ENSERCH), entered into new credit agreements (Credit
Agreements) with a group of commercial banks. The Credit Agreements replaced
the prior lines of credit with two facilities. Facility A provides for
short-term borrowings of up to $570,000,000 at variable interest rates and
terminates April 23, 1998. Facility B provides for short-term borrowings of up
to $1,330,000,000 at variable interest rates and terminates April 24, 2002.
Prior to the effective date of the Company's merger with ENSERCH, the Company's
borrowings under Facilities A and B are limited to an aggregate of
$1,500,000,000 outstanding at any one time. Upon completion of the Company's
merger with ENSERCH, ENSERCH will become a party to the Credit Agreements with
borrowings under both facilities limited to an aggregate of $650,000,000, and
TUC will replace the Company as a borrower. Borrowings under these facilities
will be used for working capital and other corporate purposes, including
commercial paper backup.
3. CAPITALIZATION
THE COMPANY
COMMON STOCK
The Company has purchased from a third party a note that was issued by the
Company's Employee Thrift Plan (Thrift Plan) to finance the purchase of shares
of common stock (LESOP Shares). The purchase of the note was recorded by the
Company as a reduction to common stock equity. LESOP Shares are outstanding
shares, but are held by the Thrift Plan trustee until allocated to accounts of
participants, at which time increases to common stock equity are recorded.
Allocations to participants' accounts during the three months ended March 31,
1997, increased common stock equity by $2,045,000.
PREFERRED STOCK
In March 1997, the Company completed its previously announced tender offer
for any and all shares of 20 series of TU Electric's preferred stock and
depositary shares. The Company funded the purchase of 3,985,652 shares of such
stock at a total purchase price of approximately $398,715,000 primarily through
the issuance of commercial paper.
TU ELECTRIC
PREFERRED STOCK
At March 31, 1997 and December 31, 1996, TU Electric had 17,000,000 shares
of preferred stock authorized by its articles of incorporation of which
6,701,879 and 7,101,879 shares were issued and outstanding, respectively.
During the three months ended March 31, 1997, TU Electric redeemed the
remaining 400,000 shares of its $9.64 Cumulative Preferred Stock.
TU Electric redeemed the remaining 440,127 shares of its Adjustable Rate
Cumulative Preferred Stock, Series B on April 21, 1997, and the remaining
247,862 shares of its $7.24, 200,000 shares of its $7.20 and 200,000 shares of
its $6.84 Cumulative Preferred Stocks on May 1, 1997.
TU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF TU ELECTRIC
Three statutory business trusts, TU Electric Capital I, TU Electric
Capital II and TU Electric Capital III (each a TU Electric Trust) were
established in 1995 as financing subsidiaries of TU Electric for the purposes,
in each case, of issuing common and preferred trust securities, with a
liquidation preference of $25 per unit, and holding Junior Subordinated
Debentures issued by TU Electric (Debentures). In January 1997, two additional
TU Electric Trusts, TU Electric Capital IV and TU Electric Capital V, were
established for the purposes, in each case, of issuing common and preferred
trust securities, with a liquidation preference of $1,000 per unit, and holding
Debentures. The Debentures held by each TU Electric Trust are its only assets.
Each TU Electric Trust will use interest payments received on the Debentures it
holds to make cash distributions on the trust securities it has issued.
At March 31, 1997 and December 31, 1996, preferred and common trust
securities of TU Electric Capital I, II, III, IV and V were outstanding as
follows:
UNITS OUTSTANDING AMOUNT
--------------------------------- ---------------------------------
COMPANY MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1997 DECEMBER 31, 1996
------- -------------- ----------------- -------------- -----------------
THOUSANDS OF DOLLARS
TU Electric Capital I (a) ...... 5,871,044 5,871,044 $ 140,716 $ 140,671
TU Electric Capital II (b) ..... 1,991,253 1,991,253 47,319 47,301
TU Electric Capital III (c) .... 8,000,000 8,000,000 193,382 193,339
TU Electric Capital IV (d) ..... 100,000 -- 97,547 --
TU Electric Capital V (e) ...... 400,000 -- 395,761 --
---------- ---------- ---------- ----------
Total ..................... 16,362,297 15,862,297 $ 874,725 $ 381,311
========== ========== ========== ==========
- ---------------
(a) Trust assets are $154,869,150 principal amount, Junior Subordinated
Debentures Series A, 8.25% due 9/30/30.
(b) Trust assets are $51,418,575 principal amount, Junior Subordinated
Debentures Series B, 9.00% due 9/30/30.
(c) Trust assets are $206,185,575 principal amount, Junior Subordinated
Debentures Series C, 8.00% due 12/31/95.
(d) Trust assets are $103,093,000 principal amount, Junior Subordinated
Debentures Series D, Floating Interest Rate due 1/30/37.
(e) Trust assets are $412,372,000 principal amount, Junior Subordinated
Debentures Series E, 8.175% due 1/30/37.
LONG-TERM DEBT
In February 1997, the Brazos River Authority issued $106,350,000 aggregate
principal amount of Pollution Control Revenue Refunding Bonds collateralized by
TU Electric's First Mortgage Bonds. Such bonds mature on February 1, 2032,
have variable
12
13
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
interest rates and are subject to mandatory tender and remarketing from time to
time. The remarketing of the bonds is supported by standby bond purchase
agreements. Scheduled payments of interest and of principal at maturity or on
mandatory redemption, upon the occurrence of certain events, are supported by
insurance policies. Interest rates on all the bonds are determined daily. For
the period ended March 31, 1997, such rates ranged from 3.90% to 4.25%.
During the three months ended March 31, 1997, TU Electric redeemed
$106,350,000 aggregate principal amount of Pollution Control Revenue Bonds,
with interest rates and maturities ranging from 5.41% to 7-7/8% and 2017 to
2021, respectively.
4. DERIVATIVE INSTRUMENTS
THE COMPANY AND TU ELECTRIC
The Company's and TU Electric's operations involve managing market risks
related to changes in interest rates and, for the Company, foreign exchange and
commodity price exposures. Derivative instruments including swaps and forward
contracts are used to reduce and manage a portion of those risks. The
Company's and TU Electric's participations in derivative transactions have been
designed for hedging purposes and are not held or issued for trading purposes.
INTEREST RATE RISK MANAGEMENT
At March 31, 1997, Eastern Energy Limited (Eastern Energy) had interest
rate swaps outstanding with respect to certain of its debt with an aggregate
notional amount of $905,550,000. These swap agreements establish a mix of
fixed and variable interest rates on the outstanding debt and have remaining
terms between 6 and 20 years.
In February 1997, TU Electric entered into an interest rate swap agreement
with respect to preferred securities of TU Electric Capital IV, with a notional
principal amount of $100,000,000 expiring 2002 and a fixed interest rate of
7.183% per annum.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company's foreign exchange exposures result from transactions
denominated in currencies other than the local currency of its foreign
subsidiary. At March 31, 1997, Eastern Energy had cross-currency swap
agreements outstanding with an aggregate notional amount of $339,630,000
expiring on various dates through 2016.
ELECTRICITY PRICE RISK MANAGEMENT
Eastern Energy and the other distribution companies in Victoria purchase
their power from a competitive power pool operated by a statutory, independent
corporation. Eastern Energy purchases about 95% of its energy from this pool,
the cost of which is based on spot market price. Eastern Energy has entered
into wholesale market contracts to cover a substantial majority of its
forecasted load through the end of 2000. These contracts fix the price of
energy within a certain range for the purpose of hedging or protecting against
fluctuations in the spot market price. Eastern Energy's contracts related to
its forecasted contestable and franchise load cover a notional volume of
approximately 18 million MWh's for 1997 through 2000. Under these contracts,
payments are made between Eastern Energy and the generators representing the
difference between the wholesale electricity market price and the contract
price. The net payable or receivable is recognized in earnings as adjustments
to purchased power expense in the period the related transactions are
completed.
CREDIT RISK
Credit risk relates to the risk of loss that the Company and TU Electric
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Company and TU Electric believe the risk of
nonperformance by counterparties is minimal.
5. REGULATION AND RATES
TU ELECTRIC
On March 26, 1997, TU Electric, joined by other parties, filed with the
Public Utility Commission of Texas (PUC) a stipulation, which, if accepted by
the PUC, would result in TU Electric making a one-time $80 million refund to
its customers in August 1997
13
14
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and TU Electric's rates remaining unchanged during the remainder of 1997. The
other parties joining TU Electric in this filing are the PUC General Counsel,
on behalf of the PUC Staff and the public interest, the Office of Public
Utility Counsel, the state agency charged with representing the interests of
residential and small commercial customers, and the Coalition of Cities served
by TU Electric. The PUC Staff, as part of its regular earnings monitoring
process, had advised the PUC that it believed TU Electric was earning in excess
of a reasonable rate of return and was engaged in discussions with TU Electric
concerning possible remedies. The parties had been discussing a longer-term
resolution, but determined that it would be best at that time to negotiate an
agreement that would resolve issues concerning only TU Electric's earnings
during 1997, so that they could continue their discussions of a broader and
longer-term resolution in light of any legislation from the Texas legislature,
which is currently in session. It is likely that a broader and longer-term
resolution, if mutually agreed to, would include a resolution of the appeals of
TU Electric's last two general rate cases, including the Texas Supreme Court's
reversal of a prior disallowance of the costs of the repurchase of the minority
interests in the Comanche Peak nuclear generating station (Comanche Peak). TU
Electric is unable to predict the outcome of the joint stipulation.
6. COMMITMENTS AND CONTINGENCIES
COOLING WATER CONTRACTS
TU ELECTRIC
TU Electric has entered into contracts with public agencies to purchase
cooling water for use in the generation of electric energy. In connection with
certain contracts, TU Electric has agreed, in effect, to guarantee the
principal, $32,365,000 at March 31, 1997, and interest on bonds issued to
finance the reservoirs from which the water is supplied. The bonds mature at
various dates through 2011 and have interest rates ranging from 5-1/2% to 7%.
TU Electric is required to make periodic payments equal to such principal and
interest, including amounts assumed by a third party and reimbursed to TU
Electric. In addition, TU Electric is obligated to pay certain variable costs
of operating and maintaining the reservoirs. TU Electric has assigned to a
municipality all contract rights and obligations of TU Electric in connection
with $74,780,000 remaining principal amount of bonds at March 31, 1997, issued
for similar purposes which had previously been guaranteed by TU Electric. TU
Electric is, however, contingently liable in the unlikely event of default by
the municipality.
NUCLEAR DECOMMISSIONING AND DISPOSAL OF SPENT FUEL
TU ELECTRIC
TU Electric has established a reserve, charged to depreciation expense and
included in accumulated depreciation, for the decommissioning of Comanche Peak,
whereby decommissioning costs are being recovered from customers over the life
of the plant and deposited in external trust funds (included in other
investments). At March 31, 1997, such reserve totaled $103,081,000 which
includes an accrual of $4,545,000 and $18,179,000 for the three and twelve
months ended March 31, 1997, respectively. As of March 31, 1997, the market
value of deposits in the external trust for decommissioning of Comanche Peak
was $123,015,000. Any difference between the market value of the external
trust fund and the decommissioning reserve that represents unrealized gains or
losses of the trust fund is treated as a regulatory liability or a regulatory
asset. Realized earnings on funds deposited in the external trust are
recognized in the reserve. Based on a site-specific study during 1992 using
the prompt dismantlement method and then-current dollars, decommissioning costs
for Comanche Peak Unit 1, and Unit 2 and common facilities were estimated to be
$255,000,000 and $344,000,000, respectively. Decommissioning activities are
projected to begin in 2030 and 2033 for Comanche Peak Unit 1, and Unit 2 and
common facilities, respectively. TU Electric is recovering such costs based
upon the 1992 study through rates placed in effect under its January 1993 rate
increase request. An updated site-specific study will be performed and
completed by the end of 1997. Actual decommissioning costs are expected to
differ from estimates due to changes in the assumed dates of decommissioning
activities, regulatory requirements, technology and costs of labor, materials
and equipment.
GENERAL
THE COMPANY AND TU ELECTRIC
In addition to the above, the Company and TU Electric are involved in
various legal and administrative proceedings which, in the opinion of the
management of each, should not have a material effect upon its financial
position, results of operation or cash flows.
14
15
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of Texas
Utilities Company and subsidiaries as of March 31, 1997, and the related
condensed statements of consolidated income for the three-month, and
twelve-month periods ended March 31, 1997 and 1996, and of consolidated cash
flows for the three-month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Texas Utilities Company and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, retained earnings and cash flows for the year then ended (not
presented herein); and in our report dated March 12, 1997, we expressed an
unqualified opinion on those consolidated financial statements, which opinion
included an explanatory paragraph concerning Texas Utilities Company and
subsidiaries' change during 1995 in accounting for the impairment of long-lived
assets and long-lived assets to be disposed of to conform with Statement of
Financial Accounting Standards No. 121. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1996, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
May 8, 1997
15
16
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, 1997,
and the related condensed statements of consolidated income for the three-month
and twelve-month periods ended March 31, 1997 and 1996, and of consolidated
cash flows for the three-month periods ended March 31, 1997 and 1996. 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 and subsidiaries as of
December 31, 1996, and the related consolidated statements of income, retained
earnings and cash flows for the year then ended (not presented herein); and in
our report dated March 12, 1997, we expressed an unqualified opinion on those
consolidated financial statements, which opinion included an explanatory
paragraph concerning TU Electric and subsidiaries' change during 1995 in
accounting for the impairment of long-lived assets and long-lived assets to be
disposed of to conform with Statement of Financial Accounting Standards No.
121. In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
May 8, 1997
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD--LOOKING STATEMENTS
This report and other presentations made by Texas Utilities Company
(Company) and its subsidiaries or Texas Utilities Electric Company and its
subsidiaries (TU Electric) contain forward--looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company and TU Electric each believes that in making any such
statement its expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety by reference
to the following important factors that could cause the actual results of the
Company or TU Electric to differ materially from those projected in such
forward--looking statement: (i) prevailing governmental policies and regulatory
actions, including those of the Federal Energy Regulatory Commission, the
Public Utility Commission of Texas (PUC), the Nuclear Regulatory Commission,
and, in the case of the Company, the Office of the Regulator General of
Victoria, Australia, with respect to allowed rates of return, industry and rate
structure, purchased power and investment recovery, operations of nuclear
generating facilities, acquisitions and disposal of assets and facilities,
operation and construction of plant facilities, decommissioning costs, present
or prospective wholesale and retail competition, changes in tax laws and
policies and changes in and compliance with environmental and safety laws and
policies, (ii) weather conditions and other natural phenomena, (iii)
unanticipated population growth or decline, and changes in market demand and
demographic pattern, (iv) competition for retail and wholesale customers, (v)
pricing and transportation of crude oil, natural gas and other commodities,
(vi) unanticipated changes in interest rates or in rates of inflation, (vii)
unanticipated changes in operating expenses and capital expenditures, (viii)
capital market conditions, (ix) competition for new energy development
opportunities, and (x) legal and administrative proceedings and settlements.
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.
GENERAL
Certain comparisons in this Quarterly Report on Form 10-Q have been
affected by the December 1995 acquisition of Eastern Energy Limited (Eastern
Energy) by Texas Utilities Australia Pty. Ltd. (TU Australia), a wholly-owned
subsidiary of the Company. The results of Eastern Energy are included only for
the periods subsequent to acquisition.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY AND TU ELECTRIC
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation in the Company and TU Electric Annual Reports on Form 10-K for the
year 1996 (1996 Form 10-K). Quarterly results 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 and its subsidiaries (System Companies)
have occurred subsequent to year-end other than as disclosed in the reports of
the Company and TU Electric included herein.
External funds of a permanent or long-term nature are obtained through the
issuance of common stock, preferred stock, preferred securities and long-term
debt by the System Companies. The capitalization ratios of the Company and its
subsidiaries at March 31, 1997 consisted of approximately 55% long-term debt,
5% preferred securities of trusts, 2% preferred stock and 38% common stock
equity. The capitalization ratios of TU Electric at March 31, 1997 consisted
of approximately 45% long-term debt, 6% TU Electric obligated, mandatorily
redeemable, preferred securities of trusts, 5% preferred stock and 44% common
stock equity.
In February 1997, the Brazos River Authority issued $106,350,000 aggregate
principal amount of Pollution Control Revenue Refunding Bonds collateralized by
TU Electric's First Mortgage Bonds. Such bonds mature on February 1, 2032,
have variable interest rates and are subject to mandatory tender and
remarketing from time to time. The remarketing of the bonds is supported by
standby bond purchase agreements. Scheduled payments of interest and of
principal at maturity or on mandatory redemption, upon the occurrence of
certain events, are supported by insurance policies. Interest rates on all the
bonds are determined daily. For the period ended March 31, 1997, such rates
ranged from 3.90% to 4.25%.
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
To date in 1997, the System Companies redeemed, reacquired or made
principal payments of $369,213,000 (including $365,648,000 for TU Electric) on
long-term debt and preferred stock.
In March 1997, the Company completed its previously announced tender offer
for any and all shares of 20 series of TU Electric's preferred stock and
depositary shares. The Company funded the purchase of 3,985,652 shares of such
stock at a total purchase price of approximately $398,715,000 primarily through
the issuance of commercial paper.
In April 1997, the Company, TU Electric and TUC Holding Company (TUC),
which will be the new holding company after completion of the proposed merger
with ENSERCH Corporation (ENSERCH), entered into new credit agreements (Credit
Agreements) with a group of commercial banks. The Credit Agreements replaced
the prior lines of credit with two facilities. Facility A provides for
short-term borrowings of up to $570,000,000 at variable interest rates and
terminates April 23, 1998. Facility B provides for short-term borrowings of up
to $1,330,000,000 at variable interest rates and terminates April 24, 2002.
Prior to the effective date of the Company's merger with ENSERCH, the Company's
borrowings under Facilities A and B are limited to an aggregate of
$1,500,000,000 outstanding at any one time. Upon completion of the Company's
merger with ENSERCH, ENSERCH will become a party to the Credit Agreements with
borrowings under both facilities limited to an aggregate of $650,000,000, and
TUC will replace the Company as a borrower. Borrowings under these facilities
will be used for working capital and other corporate purposes, including
commercial paper backup.
The System Companies expect to issue additional debt and equity securities
as needed, including (i) the possible future sale by TU Electric of up to
$350,000,000 principal amount of First Mortgage Bonds currently registered with
the Securities and Exchange Commission (SEC) for offering pursuant to Rule 415
under the Securities Act of 1933 and (ii) the possible future sale by TU
Electric of up to 250,000 shares of Cumulative Preferred Stock ($100
liquidation value) similarly registered. In addition, TU Electric has the
ability to issue from time to time up to $98,850,000 of First Mortgage Bonds
designated as Medium-Term Notes, Series D.
The Company's and TU Electric's operations involve managing market risks
related to changes in interest rates and, for the Company, foreign exchange and
commodity price exposures. Derivative instruments including swaps and forward
contracts are used to reduce and manage a portion of those risks. The
Company's and TU Electric's participations in derivative transactions have been
designed for hedging purposes and are not held or issued for trading purposes.
The Company's foreign exchange exposures result from transactions denominated
in currencies other than the local currency of its foreign subsidiary. As of
March 31, 1997, the aggregate notional amount of such exposure was
$339,630,000. The Company enters into currency swaps to reduce foreign
exchange exposure. As of March 31, 1997, net deferred gains and losses
associated with the currency swaps were not material. Credit risk relates to
the risk of loss that the Company and TU Electric would incur as a result of
nonperformance by counterparties to their respective derivative instruments.
The Company and TU Electric believe the risk of nonperformance by
counterparties is minimal. For other information regarding Derivative
Instruments, see Note 4 to Condensed Consolidated Financial Statements.
REGULATION, RATES AND COMPETITION
THE COMPANY AND TU ELECTRIC
Under the current regulatory environment, TU Electric and Southwestern
Electric Service Company (SESCO) are subject to the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). In the event the companies no longer meet the
criteria for application of SFAS 71 due to significant changes in regulation or
competition, the companies would discontinue the application of SFAS 71. If a
portion of either company's operations continues to meet the criteria for
application of SFAS 71, only that portion would be subject to SFAS 71 treatment.
Should significant changes in regulation or competition occur, TU Electric and
SESCO would be required to assess the recoverability of other assets, including
plant, and, if impaired, to write down the assets to reflect their fair market
value. Neither TU Electric nor SESCO can predict whether or to what extent
changes in the business environment may occur requiring the partial or complete
discontinuation of SFAS 71 application.
On March 26, 1997, TU Electric, joined by other parties, filed with the PUC
a stipulation, which, if accepted by the PUC, would result in TU Electric
making a one-time $80 million refund to its customers in August 1997 and TU
Electric's rates remaining unchanged during the remainder of 1997. The other
parties joining TU Electric in this filing are the PUC General Counsel, on
behalf of the PUC Staff and the public interest, the Office of Public Utility
Counsel, the state agency charged with representing the interests of
residential and small commercial customers, and the Coalition of Cities served
by TU Electric. The PUC Staff, as part of its regular earnings monitoring
process, had advised the PUC that it believed TU Electric was earning in excess
of a reasonable rate of return and was engaged in discussions with TU Electric
concerning possible remedies. The parties had been discussing a longer-term
resolution, but determined that it would be best at that time to negotiate an
agreement that would resolve issues concerning only TU Electric's earnings
during 1997, so that they could continue their discussions of a broader and
longer-term
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
resolution in light of any legislation from the Texas legislature, which is
currently in session. It is likely that a broader and longer-term resolution,
if mutually agreed to, would include a resolution of the appeals of TU
Electric's last two general rate cases, including the Texas Supreme Court's
reversal of a prior disallowance of the costs of the repurchase of the minority
interests in the Comanche Peak nuclear generating station. TU Electric
is unable to predict the outcome of the joint stipulation.
In order to remain competitive, the Company and TU Electric are
aggressively managing their operating costs and capital expenditures through
streamlined business processes and are developing and implementing strategies
to address an increasingly competitive environment. These strategies include
initiatives to improve their return on corporate assets and to maximize
shareholder value through new marketing programs, creative rate design, and new
business opportunities. Additional initiatives under consideration include the
potential disposition or alternative utilization of existing assets and the
restructuring of strategic business units.
While TU Electric and SESCO have experienced competitive pressures in the
wholesale market resulting in a small loss of load for TU Electric since the
beginning of 1993, wholesale sales represented a relatively low percentage of TU
Electric's consolidated operating revenues for the three-month and twelve- month
periods ended March 31, 1997. TU Electric and SESCO are unable to predict the
extent of future competitive developments in either the wholesale or retail
markets or what impact, if any, such developments may have on their operations.
BUSINESS MERGERS AND ACQUISITIONS
THE COMPANY
In April 1996, the Company announced that it had entered into a merger
agreement with ENSERCH. Under the terms of the agreement, Lone Star Gas
Company (Lone Star Gas) and Lone Star Pipeline Company (Lone Star Pipeline),
the local distribution and pipeline divisions of ENSERCH, and other businesses,
excluding Enserch Exploration Inc. (EEX), a subsidiary of ENSERCH, will be
acquired by a new holding company, which will be named Texas Utilities Company
and will own all of the common stock of ENSERCH and the Company. Shares of the
Company's common stock will be automatically converted into shares of the new
holding company common stock on a one-for-one basis in a tax-free transaction.
Lone Star Gas is one of the largest gas distribution companies in the United
States and the largest in Texas, serving over 1.3 million customers and
providing service through over 23,500 miles of distribution mains. Lone Star
Pipeline has one of the largest pipelines in the United States, consisting of
9,200 miles of gathering and transmission pipelines in Texas. Also included in
the acquisition are ENSERCH's subsidiaries engaged in natural gas processing,
natural gas marketing and independent power production. The new holding
company is expected to issue approximately $550 million of the new holding
company's common stock to ENSERCH shareholders, and approximately $1.15 billion
of ENSERCH's debt and preferred stock would remain outstanding after the
merger. The transaction is subject to certain conditions which include the
approval by the SEC and receipt by ENSERCH of a favorable tax ruling from the
Internal Revenue Service (IRS) to the effect that its distribution of EEX stock
is a tax-free transaction. An IRS ruling was issued to ENSERCH in February
1997. ENSERCH recently advised the Company that, inadvertently, certain facts
which ENSERCH does not believe are material, were incorrectly stated in its
ruling request; and ENSERCH also advised that it has received an opinion from
its outside counsel that it will still be able to rely on the ruling. While
ENSERCH and the Company do not believe the corrected facts would change the
IRS's ruling, the situation is being evaluated by the parties and further
communication with, and action by, the IRS may ensue. The transaction was
approved at special meetings of the shareholders of ENSERCH, EEX and the Company
held separately on November 15, 1996. The Texas Railroad Commission has been
notified of the proposed transaction and has indicated no objection to it. In
March 1997, the Antitrust Division of the U.S. Department of Justice notified
the SEC that it had closed its investigation of the proposed transaction and
indicated that no further action would be required. The acquisition of ENSERCH
will be accounted for as a purchase business combination.
CAPITAL EXPENDITURES
THE COMPANY AND TU ELECTRIC
The re-evaluation of growth expectations, the effects of inflation,
additional regulatory requirements and the availability of fuel, labor,
materials and capital may result in changes to the estimated construction costs
and dates of completion in the Company's and TU Electric's construction
programs (see Item 2. Properties -- Capital Expenditures in the 1996 Form 10-K).
Commitments in connection with the construction program are generally revocable
subject to reimbursement to manufacturers for expenditures incurred or other
cancellation penalties.
The Company and TU Electric each plans to seek new investment opportunities
from time to time when it concludes that such investments are consistent with
its business strategies and will likely enhance the long-term returns to
shareholders. Other than the ENSERCH acquisition discussed above, the timing
and amounts of any specific new business investment opportunities are presently
undetermined.
RESULTS OF OPERATION
THE COMPANY
For the three-month and twelve-month periods ended March 31, 1997, the
Company's consolidated net income, excluding the after-tax effect of the 1995
asset impairment representing approximately $802 million ($316 million for TU
Electric), decreased approximately 9%, and increased approximately 4% as
compared to the respective periods ended March 31, 1996. For the Company
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
and TU Electric, from which most of consolidated earnings is derived, the major
factor affecting earnings for the three- month period was milder weather
conditions as compared to the prior period. For the twelve-month period, the
major factors affecting consolidated earnings were increased customer growth
and warmer weather, partially offset by a full twelve-months of interest
expense related to the acquisition of Eastern Energy, as compared to the prior
period.
The Company's condensed statement of consolidated income for the twelve
months ended March 31, 1997, is affected by a full twelve month's results of
operation of Eastern Energy, which was acquired by TU Australia in December
1995. For the twelve months ended March 31, 1997, the Company's condensed
statement of consolidated income includes operating revenues of $489 million,
operating expenses of $395 million and interest expense of $86 million, which
represent TU Australia's results of operation.
TU ELECTRIC
For the three-month and twelve-month periods, operating revenues increased
approximately 1% and 7%, respectively. The following table details the factors
contributing to these changes:
INCREASE (DECREASE)
-----------------------------------------
THREE MONTHS ENDED TWELVE MONTHS ENDED
------------------ -------------------
FACTORS THOUSANDS OF DOLLARS
-------
Base rate revenue (including unbilled) . . . . . . . . . . . $ (7,322) $119,922
Fuel revenue and power cost recovery factor revenue . . . . . 1,829 220,742
Transmission service revenue . . . . . . . . . . . . . . . . 28,536 28,536
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . (5,914) 2,520
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,129 $371,720
========= ========
Total energy sales (including unbilled energy sales) did not change
significantly for the three-month period and increased 4% for the twelve-month
period. The decrease in base rate revenue for the three-month period is due
primarily to milder weather conditions. The increase in transmission service
revenue for the three-month period is due to the recognition of revenues from
implementing the PUC's Open Access Transmission Rule. Increased base rate
revenue for the twelve-month period was primarily the result of an increase in
customers and warmer weather conditions as compared to the prior period.
The increase in fuel revenue for the twelve-month period was primarily due
to increases in energy sales and increases in spot market gas prices.
Fuel and purchased power expense did not change significantly for the
three-month period and increased 13% for the twelve-month period. The increase
in the twelve-month period was primarily due to increased energy sales and
increased spot market gas prices primarily during the summer cooling months as
compared to the prior period.
Other income and (deductions) -- net decreased for the twelve-month period
due primarily to an increase in non-utility property expenses, offset in part,
by gains on the disposition of certain properties.
Income tax benefits related to other income (loss) increased for the
three-month period due to the initial effect of the implementation of a change
in TU Electric's state franchise tax status effective January 1, 1997. The
resulting increase in TU Electric's effective income tax rate increased the
value of its deferred tax assets.
Interest on mortgage bonds decreased as compared to the prior periods due
to reduced interest requirements resulting from TU Electric's refinancing
efforts. The decrease in interest on other long-term debt for the twelve-month
period was affected by the prepayment of TU Electric's promissory note to
Brazos Electric Power Cooperative in October 1995. Other interest decreased
for the three-month period due to a decrease in average short-term borrowings.
For the twelve-month period, other interest charges increased due to an
interest payment related to a settlement with the IRS, offset in part by
decreased interest on average short-term borrowings. Preferred securities of
trusts distributions resulted from the issuance, in December 1995 and January
1997, of TU Electric obligated, mandatorily redeemable, preferred securities of
trusts.
For the three-month and twelve-month periods, preferred stock dividends
decreased due primarily to the redemption of certain series of TU Electric's
preferred stock.
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PART II. OTHER INFORMATION
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
THE COMPANY AND TU ELECTRIC
(a) Exhibits filed as a part of Part II are:
15 - Letters from Deloitte & Touche LLP as to unaudited interim
financial information
15(a) Texas Utilities Company
15(b) Texas Utilities Electric Company
27 - Financial Data Schedules
27(a) Texas Utilities Company
27(b) Texas Utilities Electric Company
99(a) - Amended and Restated 364-day Competitive Advance and
Revolving Credit Facility Agreement, Facility A, dated as of
April 24, 1997, among TUC Holding Company, the Company, TU
Electric, ENSERCH Corporation, certain banks and The Chase
Manhattan Bank and Texas Commerce Bank National Association,
as Agents.
99(b) - Amended and Restated 5-year Competitive Advance and Revolving
Credit Facility Agreement, Facility B, dated as of April 24,
1997, among TUC Holding Company, the Company, TU Electric,
ENSERCH Corporation, certain banks and The Chase Manhattan
Bank and Texas Commerce Bank National Association, as Agents.
(b) Reports on Form 8-K filed since December 31, 1996 are as follows:
Date of Report Item Reported
-------------- -------------
TU ELECTRIC
-----------
March 31, 1997 Item 5. OTHER EVENTS
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEXAS UTILITIES COMPANY
By /s/ Marc D. Moseley
-------------------------------------
Marc D. Moseley
Acting Controller and
Principal Accounting Officer
Date: May 8, 1997
- --------------------------------------------------------------------------------
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/ Marc D. Moseley
-------------------------------------
Marc D. Moseley
Acting Controller and
Principal Accounting Officer
Date: May 8, 1997
22
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
15 - Letters from Deloitte & Touche LLP as to unaudited interim
financial information
15(a) Texas Utilities Company
15(b) Texas Utilities Electric Company
27 - Financial Data Schedules
27(a) Texas Utilities Company
27(b) Texas Utilities Electric Company
99(a) - Amended and Restated 364-day Competitive Advance and
Revolving Credit Facility Agreement, Facility A, dated as of
April 24, 1997, among TUC Holding Company, the Company, TU
Electric, ENSERCH Corporation, certain banks and The Chase
Manhattan Bank and Texas Commerce Bank National Association,
as Agents.
99(b) - Amended and Restated 5-year Competitive Advance and Revolving
Credit Facility Agreement, Facility B, dated as of April 24,
1997, among TUC Holding Company, the Company, TU Electric,
ENSERCH Corporation, certain banks and The Chase Manhattan
Bank and Texas Commerce Bank National Association, as Agents.