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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 SEPTEMBER 30, 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
(formerly TUC Holding Company)
A Texas Corporation I.R.S. Employer Indentification
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 0-11442 No. 75-1837355
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(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________
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COMMON STOCK OUTSTANDING AT OCTOBER 31, 1997:
Texas Utilities Company: 237,756,829 shares, without par value.
Texas Utilities Electric Company: 147,705,600 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, Nine and Twelve Months Ended September 30,
1997 and 1996..................................... 3
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1997 and 1996..... 4
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996.......... 5
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
Condensed Statements of Consolidated Income -
Three, Nine and Twelve Months Ended September 30,
1997 and 1996..................................... 7
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1997 and 1996..... 8
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996.......... 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... 11
INDEPENDENT ACCOUNTANTS' REPORTS....................... 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 28
Item 6. Exhibits and Reports on Form 8-K.................. 28
SIGNATURES............................................................ 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------- -------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
OPERATING REVENUES.............. $2,264,945 $1,930,097 $5,347,234 $5,085,310 $6,812,852 $6,350,066
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power....... 670,460 600,681 1,661,855 1,637,132 2,161,032 2,004,436
Gas purchased for resale....... 205,343 -- 205,343 -- 205,343 --
Operation and maintenance...... 390,820 301,304 1,061,973 900,438 1,417,815 1,200,352
Depreciation and amortization.. 172,865 155,664 489,656 463,417 646,744 609,299
Taxes other than income........ 140,413 128,838 401,627 390,728 545,743 531,105
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses...... 1,579,901 1,186,487 3,820,454 3,391,715 4,976,677 4,345,192
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME................ 685,044 743,610 1,526,780 1,693,595 1,836,175 2,004,874
OTHER INCOME AND (DEDUCTIONS) -
NET............................ (3,635) 5,570 (13,504) 4,778 (19,429) 15,078
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INCOME.................... 681,409 749,180 1,513,276 1,698,373 1,816,746 2,019,952
---------- ---------- ---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest...................... 201,089 193,178 564,780 610,002 752,671 789,815
Allowance for borrowed funds
used during construction..... ( 1,770) (2,716) (6,708) (9,253) (8,704) (10,171)
Distributions on TU Electric
obligated, mandatorily
redeemable, preferred securities
of subsidiary trusts holding
solely debentures
of TU Electric............... 18,127 8,250 51,423 24,749 59,675 26,550
Preferred stock dividends
of subsidiaries.............. 5,476 13,120 21,494 40,845 34,008 59,845
---------- ---------- ---------- ---------- ---------- ----------
Total interest and other
charges..................... 222,922 211,832 630,989 666,343 837,650 866,039
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES...... 458,487 537,348 882,287 1,032,030 979,096 1,153,913
INCOME TAX EXPENSE.............. 168,877 179,365 317,132 345,016 347,348 387,671
---------- ---------- ---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME......... $ 289,610 $ 357,983 $ 565,155 $ 687,014 $ 631,748 $ 766,242
========== ========== ========== ========== ========== ==========
Average shares of common stock
outstanding (thousands)......... 233,283 224,603 227,500 225,346 226,776 225,469
Earnings and dividends per share
of common stock:
Earnings (on average shares
outstanding)................... $ 1.24 $ 1.59 $ 2.48 $ 3.05 $ 2.79 $ 3.40
Dividends declared............. $ 0.525 $ 0.50 $ 1.575 $ 1.50 $ 2.10 $ 2.00
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
---- ----
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income........................................ $ 565,155 $ 687,014
Adjustments to reconcile
consolidated net income to cash
provided by operating activities:
Depreciation and amortization
(including amounts charged to fuel).......................... 620,415 580,107
Deferred income taxes -- net.................................. 81,642 155,807
Federal investment tax credits -- net......................... (17,095) (17,504)
Allowance for equity funds used
during construction.......................................... (3,818) (1,292)
Other......................................................... 80,061 --
Changes in operating assets and liabilities:
Accounts receivable.......................................... (291,519) (132,445)
Inventories.................................................. (4,724) 20,117
Accounts payable............................................. 122,105 71,741
Interest and taxes accrued................................... 21,723 53,419
Other working capital........................................ 82,943 (32,595)
Over/(under)-recovered fuel revenue -- net of deferred
taxes....................................................... (63,245) (41,077)
Other -- net................................................. 72,932 50,301
---------- ----------
Cash provided by operating activities...................... 1,266,575 1,393,593
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds.......................................... 198,640 244,225
Other long-term debt.......................................... 309,964 300,000
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely debentures of
TU Electric.................................................. 493,273 --
Retirements of securities:
First mortgage bonds.......................................... (634,467) (475,847)
Other long-term debt.......................................... (623,883) (318,942)
Preferred stock of subsidiaries............................... (553,093) (37,769)
Common stock.................................................. (97,333) (51,636)
Change in notes payable:
Commercial paper.............................................. 784,739 (60,045)
Banks......................................................... (269,789) (169,590)
Common stock dividends paid.................................... (356,591) (338,761)
Debt premium, discount, financing and reacquisition
expenses...................................................... (31,399) (41,044)
---------- ----------
Cash used in financing activities.......................... (779,939) (949,409)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures...................................... (376,914) (304,205)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel)...................................... 1,992 719
Change in construction receivables/payables -- net............. (672) 994
Non-utility property -- net.................................... (29,388) (6,431)
Nuclear fuel (excluding allowance for equity funds used during
construction)................................................. (39,637) (50,712)
Other investments.............................................. (17,774) (73,543)
---------- ----------
Cash used in investing activities.......................... (462,393) (433,178)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES................................. 1,761 (300)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS......................... 26,004 10,706
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE.................. 15,845 24,853
---------- ----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE.................... $ 41,849 $ 35,559
========== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
1997 December 31,
(Unaudited) 1996
----------- ------------
Thousands of Dollars
PROPERTY, PLANT AND EQUIPMENT
In service:
Electric........................................................................
Production.................................................................... $16,282,213 $16,277,151
Transmission.................................................................. 1,664,733 1,607,925
Distribution.................................................................. 5,790,720 5,655,677
General....................................................................... 504,966 503,688
----------- -----------
Total electric............................................................. 24,242,632 24,044,441
Gas............................................................................. 1,186,363 --
----------- -----------
Total property, plant and equipment in service................................ 25,428,995 24,044,441
Less accumalated depreciation................................................... 6,572,305 6,127,610
----------- -----------
Net property, plant and equipment in service.................................. 18,856,690 17,916,831
Construction work in progress.................................................... 243,998 240,612
Nuclear fuel (net of accumulated amortization: 1997 -- $439,133,000;
1996 -- $369,114,000).......................................................... 224,033 252,589
Held for future use.............................................................. 23,966 24,483
----------- -----------
Property, plant and equipment, less accumulated depreciation and amortization.. 19,348,687 18,434,515
Less reserve for regulatory disallowances........................................ 836,005 836,005
----------- -----------
Net property, plant and equipment............................................. 18,512,682 17,598,510
----------- -----------
INVESTMENTS
Goodwill (net of accumulated amortization)....................................... 1,281,077 526,410
Other investments................................................................ 814,546 631,813
----------- -----------
Total investments............................................................. 2,095,623 1,158,223
----------- -----------
CURRENT ASSETS
Cash and cash equivalents........................................................ 41,849 15,845
Special deposits................................................................. 2,441 805
Accounts receivable:
Customers....................................................................... 749,796 290,111
Other........................................................................... 62,159 44,032
Allowance for uncollectible accounts............................................ (11,604) (6,262)
Inventories -- at average cost:
Materials and supplies.......................................................... 208,819 200,601
Fuel stock...................................................................... 74,774 77,227
Gas stored underground.......................................................... 152,314 44,472
Prepayments...................................................................... 81,783 56,324
Deferred income taxes............................................................ 61,285 40,021
Other current assets............................................................. 78,462 13,279
----------- -----------
Total current assets.......................................................... 1,502,078 776,455
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets.................................................... 1,835,746 1,753,418
Under-recovered fuel revenue..................................................... 54,373 --
Other deferred debits............................................................ 169,576 89,101
----------- -----------
Total deferred debits......................................................... 2,059,695 1,842,519
----------- -----------
Total..................................................................... $24,170,078 $21,375,707
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value -- net:
Authorized shares -- 500,000,000
Outstanding shares: 1997 - 237,756,829; 1996 - 224,602,557.............................. $ 5,296,772 $ 4,787,047
Retained earnings......................................................................... 1,374,125 1,202,390
Cumulative currency translation adjustment................................................ (16,677) 43,476
----------- -----------
Total common stock equity............................................................. 6,654,220 6,032,913
Preferred stock of subsidiaries:
Not subject to mandatory redemption..................................................... 304,194 464,427
Subject to mandatory redemption......................................................... 20,596 238,391
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric................................................ 875,005 381,311
Long-term debt, less amounts due currently................................................ 9,094,826 8,668,111
----------- -----------
Total capitalization.................................................................. 16,948,841 15,785,153
----------- -----------
CURRENT LIABILITIES
Notes payable:
Commercial paper........................................................................ 694,697 253,151
Banks................................................................................... 43,067 69,788
Long-term debt due currently.............................................................. 348,544 356,076
Accounts payable.......................................................................... 642,516 336,391
Dividends declared........................................................................ 129,256 129,879
Customers' deposits....................................................................... 90,162 80,390
Taxes accrued............................................................................. 204,182 143,424
Interest accrued.......................................................................... 170,710 156,758
Over-recovered fuel revenue............................................................... -- 42,984
Other current liabilities................................................................. 320,741 90,485
----------- -----------
Total current liabilities............................................................. 2,643,875 1,659,326
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes......................................................... 2,983,588 2,801,626
Unamortized federal investment tax credits................................................ 576,113 589,713
Other deferred credits and noncurrent liabilities......................................... 1,017,661 539,889
----------- -----------
Total deferred credits and other noncurrent liabilities............................... 4,577,362 3,931,228
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total.............................................................................. $24,170,078 $21,375,707
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------- -------------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
OPERATING REVENUES.................................... $1,851,356 $1,787,412 $4,668,356 $4,694,520 $6,003,446 $5,918,587
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power............................. 637,943 553,077 1,540,005 1,510,370 1,995,390 1,881,821
Operation and maintenance............................ 289,096 263,929 892,983 793,286 1,211,608 1,073,520
Depreciation and amortization........................ 143,468 140,991 429,213 419,788 571,327 558,583
Income taxes......................................... 178,991 185,294 355,132 383,125 393,020 430,283
Taxes other than income.............................. 124,948 121,851 372,375 369,605 509,202 503,847
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses............................ 1,374,446 1,265,142 3,589,708 3,476,174 4,680,547 4,448,054
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME...................................... 476,910 522,270 1,078,648 1,218,346 1,322,899 1,470,533
---------- ---------- ---------- ---------- ---------- ----------
OTHER INCOME
Allowance for equity funds used during construction.. 3,153 373 3,800 1,272 4,077 7,988
Other income and (deductions) -- net................. (465) 6,272 (740) 1,362 (1,600) 1,732
Income tax benefit (expense)......................... (2,464) (2,236) 11,694 15,183 12,025 17,090
---------- ---------- ---------- ---------- ---------- ----------
Total other income................................. 224 4,409 14,754 17,817 14,502 26,810
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INCOME.......................................... 477,134 526,679 1,093,402 1,236,163 1,337,401 1,497,343
---------- ---------- ---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on mortgage bonds.......................... 108,654 122,285 335,891 369,762 452,921 495,671
Interest on other long-term debt.................... 6,071 6,205 13,214 22,858 16,811 32,627
Other interest...................................... 23,873 13,215 51,135 67,948 65,646 84,082
Distribution on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary
trusts holding solely debentures of TU Electric.... 18,127 8,250 51,423 24,749 59,675 26,550
Allowance for borrowed funds used during
construction....................................... (1,583) (2,714) (6,251) (9,246) (8,245) (10,161)
---------- ---------- ---------- ---------- ---------- ----------
Total interest and other charges.................. 155,142 147,241 445,412 476,071 586,808 628,769
---------- ---------- ---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME............................... 321,992 379,438 647,990 760,092 750,593 868,574
PREFERRED STOCK DIVIDENDS............................. 3,598 13,120 23,160 40,845 35,674 59,845
---------- ---------- ---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME AVAILABLE FOR
COMMON STOCK......................................... $ 318,394 $ 366,318 $ 624,830 $ 719,247 $ 714,919 $ 808,729
========== ========== ========== ========== ========== ==========
See Accompanying Notes to Condensed Consolidated Financial Statements.
7
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---- ----
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income........................................... $ 647,990 $ 760,092
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization (including amounts charged to fuel) 537,365 513,157
Deferred income taxes -- net..................................... 102,302 125,822
Federal investment tax credits -- net............................ (15,916) (16,323)
Allowance for equity funds used during construction.............. (3,800) (1,272)
Other............................................................ 80,061 --
Changes in operating assets and liabilities:
Accounts receivable............................................. (249,350) (107,196)
Inventories..................................................... 189 9,172
Accounts payable................................................ 77,639 55,465
Interest and taxes accrued...................................... 71,108 119,803
Other working capital........................................... 45,933 (35,257)
Over/(under)-recovered fuel revenue -- net of deferred taxes.... (63,282) (41,077)
Other -- net.................................................... 66,144 13,355
---------- -----------
Cash provided by operating activities......................... 1,296,383 1,395,741
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds............................................. 198,640 244,225
Other long-term debt............................................. 300,000 --
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely
debentures of TU Electric....................................... 493,273 --
Retirements of securities:
First mortgage bonds............................................. (634,440) (475,820)
Other long-term debt............................................. (910) (301,106)
Preferred stock.................................................. (553,093) (37,769)
Common stock..................................................... (136,416) --
Change in notes payable -- commercial paper....................... (253,151) (96,990)
Change in notes receivable -- affiliates.......................... (15,982) (36,622)
Preferred stock dividends paid.................................... (32,495) (41,659)
Common stock dividends paid....................................... (272,832) (244,608)
Debt premium, discount, financing and reacquisition expenses...... (25,742) (38,623)
---------- -----------
Cash used in financing activities............................. (933,148) (1,028,972)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures......................................... (310,298) (266,411)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel)......................................... 1,973 699
Change in construction receivables/payables -- net................ (672) (994)
Non-utility property -- net....................................... 1,012 --
Nuclear fuel (excluding allowance for equity funds used during
construction).................................................... (39,637) (50,712)
Other investments................................................. (12,238) (39,306)
---------- -----------
Cash used in investing activities............................. (359,860) (356,724)
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................ 3,375 10,045
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE..................... 13,005 22,633
---------- -----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE........................ $ 16,380 $ 32,678
========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
8
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
--------- ------------
THOUSANDS OF DOLLARS
ELECTRIC PLANT
In service:
Production............................................................ $15,337,913 $15,330,974
Transmission.......................................................... 1,658,309 1,601,628
Distribution.......................................................... 4,654,064 4,442,547
General............................................................... 434,360 432,178
----------- -----------
Total............................................................... 22,084,646 21,807,327
Less accumulated depreciation......................................... 5,985,207 5,594,363
----------- -----------
Net electric plant in service....................................... 16,099,439 16,212,964
Construction work in progress.......................................... 202,267 210,573
Nuclear fuel (net of accumulated amortization: 1997 -- $439,133,000;
1996 -- $369,114,000)................................................ 224,033 252,589
Held for future use.................................................... 23,966 24,483
----------- -----------
Electric plant, less accumulated depreciation and amortization...... 16,549,705 16,700,609
Less reserve for regulatory disallowances.............................. 836,005 836,005
----------- -----------
Net electric plant.................................................. 15,713,700 15,864,604
----------- -----------
INVESTMENTS............................................................. 528,233 508,437
----------- -----------
CURRENT ASSETS
Cash and cash equivalents.............................................. 16,380 13,005
Special deposits....................................................... 552 552
Notes receivable -- affiliates......................................... 51,497 35,515
Accounts receivable:
Customers............................................................. 474,120 215,706
Other................................................................. 16,132 23,282
Allowance for uncollectible accounts.................................. (6,935) (5,021)
Inventories -- at average cost:
Materials and supplies................................................ 183,561 181,405
Fuel stock............................................................ 74,774 77,119
Prepayments............................................................ 50,319 31,758
Deferred income taxes.................................................. 51,473 50,882
Other current assets................................................... 1,052 2,694
----------- -----------
Total current assets................................................ 912,925 626,897
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets.......................................... 1,818,595 1,735,306
Under-recovered fuel revenue........................................... 54,373 --
Other deferred debits.................................................. 99,423 59,695
----------- -----------
Total deferred debits............................................... 1,972,391 1,795,001
----------- -----------
Total............................................................. $19,127,249 $18,794,939
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
9
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
--------- ------------
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value:
Authorized shares -- 180,000,000
Outstanding shares: 1997 - 147,705,600; 1996 - 156,800,000............................... $ 4,459,473 $ 4,732,305
Retained earnings......................................................................... 1,862,016 1,373,602
----------- -----------
Total common stock equity............................................................... 6,321,489 6,105,907
Preferred stock:
Not subject to mandatory redemption...................................................... 129,194 464,427
Subject to mandatory redemption.......................................................... 20,596 238,391
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric................................................. 875,005 381,311
Long-term debt, less amounts due currently................................................ 6,191,555 6,310,594
----------- -----------
Total capitalization.................................................................... 13,537,839 13,500,630
----------- -----------
CURRENT LIABILITIES
Notes payable -- commercial paper......................................................... -- 253,151
Long-term debt due currently.............................................................. 327,491 338,213
Accounts payable:
Affiliates............................................................................... 306,751 126,143
Other.................................................................................... 169,176 136,401
Dividends declared........................................................................ 2,562 148,379
Customers' deposits....................................................................... 73,437 70,141
Taxes accrued............................................................................. 206,098 132,514
Interest accrued.......................................................................... 130,471 132,947
Over-recovered fuel revenue............................................................... -- 42,984
Other current liabilities................................................................. 117,236 57,681
----------- -----------
Total current liabilities............................................................... 1,333,222 1,438,554
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes......................................................... 3,238,302 2,989,612
Unamortized federal investment tax credits................................................ 562,049 577,965
Other deferred credits and noncurrent liabilities......................................... 455,837 288,178
----------- -----------
Total deferred credits and other noncurrent liabilities................................. 4,256,188 3,855,755
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total................................................................................ $19,127,249 $18,794,939
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
10
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS MERGERS AND ACQUISITIONS
TUC
- ---
On August 5, 1997, the merger transactions (Merger) provided for in a
previously announced agreement between Texas Utilities Company, now known as
Texas Energy Industries, Inc. (TEI) and ENSERCH Corporation (ENSERCH) were
completed. At the effective time of the Merger: (i) Texas Utilities Company
changed its name to TEI, (ii) TEI and ENSERCH merged with wholly-owned
subsidiaries of TUC Holding Company, which now owns all the common stock of TEI
and of ENSERCH, (iii) TUC Holding Company changed its name to Texas Utilities
Company (TUC), (iv) each share of TEI's common stock was automatically converted
into one share of common stock of TUC, and (v) each share of common stock of
ENSERCH was automatically converted into 0.225 share of common stock of TUC,
with cash issued in lieu of fractional shares. The share conversions were tax-
free transactions.
Businesses and subsidiaries acquired in the Merger were Lone Star Gas
Company (Lone Star Gas), 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 Company (Lone Star Pipeline), one of the largest pipelines in the
United States, consisting of 8,000 miles of gathering and transmission pipelines
in Texas; and subsidiaries engaged in natural gas processing, natural gas
marketing, independent power production and international gas distribution
systems development.
In the Merger, 15,861,272 shares of TUC common stock, valued at
approximately $565 million, were issued to former holders of ENSERCH common
stock. At the date of the Merger, ENSERCH had debt and preferred stock
outstanding of approximately $1.3 billion. (See Note 4.)
The acquisition of ENSERCH was accounted for as a purchase business
combination. The assets and liabilities of ENSERCH, at the Merger date, August
5, 1997, were adjusted to their estimated fair values, and the excess of the
purchase price paid by TUC over the estimated fair value of ENSERCH's net assets
acquired and liabilities assumed was recorded as goodwill on ENSERCH's balance
sheet and is being amortized over 40 years. The process of determining the fair
value of assets and liabilities at the Merger date is continuing, and the final
result awaits the resolution of income tax and other contingencies and
finalization of some preliminary estimates. ENSERCH's results of operation, as
of the date of the acquisition, are reflected in the consolidated financial
statements of TUC and its subsidiaries.
In August 1997, TUC announced that it had entered into a definitive
agreement to acquire Lufkin-Conroe Communications Co. (LCC). LCC is the parent
company of Lufkin-Conroe Telephone Exchange, Inc. (LCTX) and Lufkin-Conroe
Telecommunications Corporation (LCT) and its subsidiaries. LCTX is an
independent local exchange carrier which has provided telephone services for
almost 100 years, and as of September 1997, was the fourth largest telephone
company in Texas (28th largest in the United States). LCTX has sixteen exchanges
that serve approximately 100,000 access lines in the Alto, Conroe and Lufkin
areas of southeast Texas. It also provides access services to a number of
interexchange carriers, who provide long distance services. LCT and its
subsidiaries own fiber optic cable systems which they lease to interexchange
carriers, provide Internet access, radio communications tower rentals, cellular
mobile telephones and radio paging services and private branch exchange service
to local customers. LCT, through a subsidiary, also provides interexchange long
distance service, with a primary focus on business customers. TUC is expected to
issue approximately $320 million of TUC's common stock to LCC shareholders in a
stock for stock exchange, and TUC would assume approximately $8 million of LCC's
debt. The acquisition is subject to certain conditions which include the
approval of LCC shareholders. The acquisition of LCC will be accounted for as a
purchase business combination.
2. SIGNIFICANT ACCOUNTING POLICIES
TUC AND TU ELECTRIC
- -------------------
BASIS OF PRESENTATION -- The condensed consolidated financial statements of
TUC 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 on Form 10-K of TEI, formerly Texas Utilities Company, and
TU Electric and, in the opinion of TUC or
11
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 TEI and TU Electric included in the 1996 Annual
Reports on Form 10-K of TEI and TU Electric, and the information under
Management's Discussion and Analysis of Financial Condition and Results of
Operation herein. TUC 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 TUC'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 condensed 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.
TUC
- ---
CONSOLIDATION -- Prior to August 5, 1997, the date of the Merger, TUC did
not have any assets or operations. Pursuant to the Merger, TUC became the parent
of each of TEI and ENSERCH. For financial reporting purposes, TUC is being
treated as the successor to TEI. Unless otherwise specified, all references to
TUC, which relate to a period prior to August 5, 1997, shall be deemed to be
references to TEI. Since the acquisition of ENSERCH has been accounted for as a
purchase business combination, no financial and other information for ENSERCH is
presented for periods prior to the date of acquisition. The condensed
consolidated financial statements for the three-, nine- and twelve-months ended
September 30, 1997 and as of September 30, 1997, include TEI and all of its
majority-owned subsidiaries for all periods and ENSERCH and all of its majority-
owned subsidiaries only from August 5, 1997 and as of September 30, 1997. The
condensed consolidated financial statements for the three-, nine- and twelve-
months ended September 30, 1996 and as of September 30, 1996, include TEI and
all of its majority-owned subsidiaries for all periods and do not include
ENSERCH or any of its subsidiaries for any periods.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
CONSOLIDATED CASH FLOWS -- The supplemental schedule below details TUC's
noncash investing and financing activities:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
---- ----
THOUSANDS OF DOLLARS
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of ENSERCH:
Book value of net assets (liabilities) acquired.. $(228,076) $ --
Goodwill acquired................................ 806,056 --
Less: Stock issued............................... 577,992 --
--------- --------
Cash paid...................................... 12 --
Less: Cash acquired.............................. 12 --
--------- --------
Net cash....................................... $ -- $ --
========= ========
12
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ENERGY MARKETING ACTIVITIES -- Certain System Companies enter into a
variety of transactions and derivative financial instruments, including swaps,
options, futures and other contractual arrangements. These activities are
accounted for using the mark-to-market method, under which, changes in the
market value of outstanding financial instruments are recognized as gains or
losses in the period of change.
GOODWILL -- The difference of $1,140,701,000 between the amount at which
the investments in subsidiaries is carried by TUC and the underlying book equity
of such subsidiaries is included in goodwill.
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.
3. SHORT-TERM FINANCING
TUC AND TU ELECTRIC
- -------------------
At September 30, 1997, TUC, TU Electric and ENSERCH had joint lines of
credit under credit facility agreements (Credit Agreements) with a group of
commercial banks. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $570,000,000 outstanding at any one
time at variable interest rates and terminates April 23, 1998. Facility B
provides for short-term borrowings aggregating up to $1,330,000,000 outstanding
at any one time at variable interest rates and terminates April 24, 2002. The
combined borrowings of TUC, TU Electric and ENSERCH under both facilities are
limited to an aggregate of $1,900,000,000 outstanding at any one time. ENSERCH's
borrowings under both facilities are limited to an aggregate of up to
$650,000,000 outstanding at any one time. Borrowings under these facilities will
be used for working capital and other corporate purposes, including commercial
paper backup. The total of short-term borrowings authorized by the Board of
Directors of TUC at September 30, 1997, from banks or other lenders, was
$2,150,000,000.
Following the Merger, ENSERCH's commercial paper program and bank lines in
the form of a revolving credit agreement were discontinued. ENSERCH retired its
$204,500,000 commercial paper balance and its $260,400,000 long-term debt
balance outstanding under the credit agreement. TUC advances to ENSERCH
to fund these retirements and to provide for other cash needs totalled $512,
300,000 at September 30, 1997.
In addition, two ENSERCH subsidiaries have revolving credit agreements
aggregating $30,000,000, of which $25,000,000 was outstanding at September 30,
1997. These revolving credit agreements expire on March 31, 2000.
4. CAPITALIZATION
TUC
- ---
COMMON STOCK --During the nine months ended September 30, 1997, common
stock equity increased by $6,070,000 due to an allocation to the accounts of
participants in TUC's Employee Thrift Plan (Thrift Plan) of TUC common stock
held by the Thrift Plan Trustee.
In August 1997, TUC issued 15,861,272 shares of its authorized but unissued
common stock to former holders of ENSERCH common stock pursuant to provisions of
the Merger (see Note 1). In June and September 1997, TUC sold, for
approximately $1,926,000, 58,000 shares of its authorized but unissued common
stock under the Long-Term Incentive Compensation Plan of Texas Utilities Company
System.
13
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Merger, TUC agreed that options for shares of
ENSERCH'S common stock outstanding under ENSERCH'S stock option plans would
become exercisable for shares of TUC common stock after the Merger. On August 5,
1997, options for a total of 532,948 shares of TUC common stock with an
estimated value of $3,214,000 were outstanding.
During the nine months ended September 30, 1997, TUC purchased and retired
an aggregate of 2,765,000 shares of its issued and outstanding common stock for
$97,333,000.
PREFERRED STOCK -- At September 30, 1997, ENSERCH had issued and
outstanding two series of preferred stock having an aggregate liquidation
preference of $175,000,000.
LONG-TERM DEBT -- In October 1997, TUC issued $125,000,000 aggregate
principal amount of its 6.20% Series A Senior Notes due 2002, and $175,000,000
aggregate principal amount of its 6.375% Series B Senior Notes due 2004. Payment
of the principal of and interest on the Senior Notes, when due or at maturity,
is guaranteed by a financial guaranty insurance policy.
At September 30, 1997, ENSERCH had approximately $675,000,000 of long-term
debt outstanding.
TU ELECTRIC
- -----------
COMMON STOCK -- During the nine months ended September 30, 1997, TU
Electric purchased and retired a total of 9,094,400 shares of its issued and
outstanding common stock at a total cost of approximately $272,832,000.
PREFERRED STOCK -- At September 30, 1997 and December 31, 1996, TU Electric
had 17,000,000 shares of preferred stock authorized by its Articles of
Incorporation of which 1,523,062 and 7,101,879 shares were issued and
outstanding, respectively.
During the nine months ended September 30, 1997, TU Electric redeemed or
purchased 5,578,817 shares of its preferred stock (including 3,989,640 shares
purchased by TEI in March 1997 pursuant to a tender offer and subsequently sold
to TU Electric) with annual dividend rates ranging from 4.00% to 9.64% at a
total cost of approximately $553,093,000.
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 September 30, 1997 and December 31, 1996, preferred trust securities of
each TU Electric Trust were outstanding as follows:
PREFERRED SECURITIES OUTSTANDING AMOUNT
--------------------------------------- ---------------------------------------
COMPANY SEPTEMBER 30, 1997 DECEMBER 31, 1996 SEPTEMBER 30, 1997 DECEMBER 31, 1996
------- ------------------ ----------------- ------------------ -----------------
THOUSANDS OF DOLLARS
TU Electric Capital I (a)................. 5,871,044 5,871,044 $140,806 $140,671
TU Electric Capital II (b)................ 1,991,253 1,991,253 47,356 47,301
TU Electric Capital III (c)............... 8,000,000 8,000,000 193,467 193,339
TU Electric Capital IV (d)................ 100,000 -- 97,562 --
TU Electric Capital V (e)................. 400,000 -- 395,814 --
---------- ---------- -------- --------
Total................................ 16,362,297 15,862,297 $875,005 $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 12/31/35.
(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.
14
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT -- TU Electric issued the following long-term debt during
the nine months ended September 30, 1997:
PRINCIPAL CURRENT
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ --------------- ----------
Collateralized pollution control revenue bonds (a).............. $198,640,000 3.95% to 4.25% 2022-2032
Unsecured debentures............................................ 300,000,000 7.17% 2007
------------
Total...................................................... $498,640,000
============
________________
(a) All such bonds 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 the bonds are determined weekly and daily.
In October 1997, the Trinity River Authority of Texas (Trinity Authority)
issued $14,075,000 aggregate principal amount of Pollution Control Revenue Bonds
due October 1, 2032. The bonds have variable interest rates and are subject to
mandatory or optional tender and remarketing from time to time. Pursuant to an
Installment Payment and Bond Amortization Agreement with the Trinity Authority,
TU Electric is obligated to make payment of the purchase price of the bonds upon
mandatory or optional tender and of the principal of and interest on the bonds.
Such payments are supported by an irrevocable letter of credit. Draws under the
letter of credit are reimbursable by TU Electric. Interest rates on the bonds
are determined at varying intervals. At the time of issuance, the interest rate
was 5.60%.
During the nine months ended September 30, 1997, TU Electric redeemed,
reacquired or made principal payments on the following long-term debt:
PRINCIPAL CURRENT
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ --------------- ----------
First mortgage bonds............................................ $435,800,000 6-3/8% to 9.20% 1997-2022
Collateralized pollution control revenue bonds.................. 198,640,000 5.41% to 9-7/8% 2007-2021
Promissory note................................................. 910,000 8-1/4% 2022
------------
Total...................................................... $635,350,000
============
In October 1997, TU Electric reacquired, on the open market, $5,000,000 of
its 9-3/4% First Mortgage and Collateral Trust Bonds due May 1, 2021. In
November 1997, TU Electric redeemed $300,000,000 of its Floating Rate Series
First Mortgage and Collateral Trust Bonds due May 1, 1999.
5. DERIVATIVE INSTRUMENTS
TUC AND TU ELECTRIC
- -------------------
TUC's and TU Electric's operations involve managing market risks related to
changes in interest rates and, for TUC, foreign exchange and commodity price
exposures. Derivative instruments including swaps and forward contracts are
used to reduce and manage a portion of those risks. TUC's, with the exception
of the marketing activities of an ENSERCH subsidiary, Enserch Energy Services,
Inc. (EES), and TU Electric's participations in derivative transactions are
designed for hedging purposes; and derivative instruments are not held or issued
for trading purposes.
INTEREST RATE RISK MANAGEMENT -- At September 30, 1997, Eastern Energy
Limited (Eastern Energy), a wholly-owned indirect subsidiary of TUC, had
interest rate swaps outstanding with respect to certain of its debt with an
aggregate notional amount of $836,193,000. These swap agreements establish a mix
of fixed and variable interest rates on the outstanding debt and have remaining
terms between 5 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.
15
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN EXCHANGE RISK MANAGEMENT -- TUC's foreign exchange exposures result
from transactions denominated in currencies other than the local currency of its
foreign subsidiary. At September 30, 1997, Eastern Energy had cross-currency
swap agreements outstanding with an aggregate notional amount of $313,617,000
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 prices. 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.
NATURAL GAS MARKETING ACTIVITIES -- TUC, through EES, is a marketer of
natural gas and natural gas services. As part of these business activities, EES
enters into a variety of transactions, including forward contracts that
principally involve physical delivery of natural gas, and derivative financial
instruments, including swaps, options, futures and other contractual
arrangements. The derivative transactions are concentrated with established
energy companies and major financial institutions.
EES's marketing activities involve price commitments into the future and,
therefore, give rise to market risk, which represents the potential loss that
can be caused by a change in the market value of a particular commitment. Net
open portfolio positions often result from the origination of new transactions
or in response to changing market conditions.
EES enters into contracts to purchase and sell natural gas for physical
delivery in the future. At September 30, 1997, EES had net commitments to sell
approximately 41.0 billion cubic feet (Bcf) of natural gas through the year 2003
with offsetting net financial positions to purchase approximately 48.1 Bcf.
CREDIT RISK -- Credit risk relates to the risk of loss that TUC, TU
Electric and ENSERCH would incur as a result of nonperformance by counterparties
to their respective derivative instruments. TUC and TU Electric believe the risk
of nonperformance by counterparties is minimal.
6. REGULATION AND RATES
TU ELECTRIC
- -----------
In late 1996, as part of its regular earnings monitoring process, the
Public Utility Commission of Texas (PUC) staff, after reviewing the 1995
Electric Investor-Owned Utilities Earnings Report of TU Electric, advised the
PUC that it believed TU Electric was earning in excess of a reasonable rate of
return, and the PUC and TU Electric subsequently began discussions concerning
possible remedies. It was decided to limit negotiations to a resolution of
issues concerning TU Electric's earnings through 1997, and discussion of a long-
term resolution was deferred. In July 1997, the PUC issued its final written
order approving TU Electric's proposal to make a one-time $80 million refund to
its customers and to leave rates unchanged during the remainder of 1997. TU
Electric recorded the charge to revenues in July 1997 and included the refunds
in August 1997 billings. The proposal was the result of a joint stipulation in
which TU Electric was joined by 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. TU
Electric is continuing its negotiations with respect to a longer-term settlement
of the issues and, at this time, is unable to predict the outcome of any of
these negotiations.
16
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Also in July 1997, the PUC ruled on TU Electric's petition seeking final
reconciliation of all eligible fuel and purchased power expenses incurred during
the reconciliation period of July 1, 1992 through June 30, 1995 (approximately
$4.7 billion). In the ruling, the PUC disallowed approximately $80 million of
eligible fuel related costs (including interest) incurred during the
reconciliation period (Fuel Disallowance). The majority of the Fuel Disallowance
(approximately $67 million) is related to replacement fuel costs as a result of
the November 1993 collapse of the emissions chimney serving Unit 3 of the
Monticello lignite-fueled generating station. In addition, the PUC ruled that
approximately $10 million from the gain on sale of sulfur dioxide allowances
should be deferred and reconsidered at a future date. TU Electric received a
final written order from the PUC and recorded the charge to revenues in August
1997. TU Electric strongly disagrees with the Fuel Disallowance and continues to
vigorously defend its position. TU Electric has appealed the PUC's order to the
District Court of Travis County, Texas.
TU Electric, in July 1997, petitioned the PUC for and received interim
approval of a fuel refund to customers of approximately $67 million, including
interest, in over-collected fuel costs for the period October 1995 through May
1997 (Fuel Refund). Such over-collection was primarily due to TU Electric's
ability to use less expensive nuclear fuel and purchased power to offset a
higher-priced natural gas market during the period. Customer refunds were
included in August 1997 billings. A final order confirming the Fuel Refund was
entered by the PUC in October 1997.
TUC
- ---
In October 1996, Lone Star Pipeline (a division of ENSERCH), filed a
request with the Railroad Commission of Texas (RRC) to increase the rate it
charges Lone Star Gas (a division of ENSERCH), to store and transport gas
ultimately destined for residential and commercial customers in the 550 Texas
cities and towns served by Lone Star Gas. Lone Star Gas also requested that the
RRC separately set rates for costs to aggregate gas supply for these cities.
Rates currently in effect were set by the RRC in 1982. The purpose of the rate
request was to allow for the recovery of a substantial increase in the cost of
doing business since 1982 and to cover significant capital investments of
approximately $420 million made during the past 14 years to maintain and improve
the reliability and safety of the pipeline system and help reduce natural-gas
supply costs.
In May 1997, the RRC issued an order setting new rates for ENSERCH that
would have reduced the current margin by approximately 7 percent. The order
would allow 100 percent recovery of gas cost subject to a reconciliation
procedure after three years and would impose certain restrictions on the
recovery of gas purchased from affiliates. ENSERCH and other parties to the case
filed motions for rehearing of the order. In August 1997, the RRC issued an
order partially granting and partially denying the motions for rehearing. The
August order reduces the current margin an additional 3 percent beyond the May
20 order.
The August order was met with additional motions for rehearing which were
granted in part and denied in part. On September 30, 1997, the RRC issued a
second order on rehearing, which did not change the margin set in the prior
order. On November 4, 1997, the RRC acted on the motions for rehearing filed in
response to the September 30, 1997 order by denying the motions. Pursuant to
the tariffs approved by the RRC, the new rates will become effective on December
1, 1997, if no further changes to the order are made. ENSERCH has 30 days to
appeal the decision.
Prior to the ENSERCH filing of a request for a rate increase, the RRC
ordered a general inquiry into the rates and services of Lone Star Gas. The
scope of the inquiry has not been defined fully, but it will focus initially on
historical gas costs and unbundling issues. A hearing on the gas cost issues is
set to begin in August 1998. TUC management is unable to determine at this time
the ultimate outcome of this inquiry.
7. COMMITMENTS AND CONTINGENCIES
TU ELECTRIC
- -----------
COOLING WATER CONTRACTS -- TU Electric has entered into contracts with
public agencies to purchase cooling water for use in the generation of electric
energy. In connection with certain contracts, TU Electric has agreed, in
effect, to guarantee the principal, $30,475,000 at September 30, 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%
17
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 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 has
established a reserve, charged to depreciation expense and included in
accumulated depreciation, for the decommissioning of the Comanche Peak nuclear
generating station (Comanche Peak), whereby decommissioning costs are being
recovered from customers over the life of the plant and deposited in an external
trust fund (included in other investments). At September 30, 1997, such reserve
totaled $114,393,000 which includes an accrual of $13,634,000 and $18,179,000
for the nine and twelve months ended September 30, 1997, respectively. As of
September 30, 1997, the market value of assets in the external trust fund for
decommissioning of Comanche Peak was $151,131,000. 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.
TUC AND TU ELECTRIC
- -------------------
GENERAL
In addition to the above, TUC 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.
18
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of Texas
Utilities Company and subsidiaries (the Company) as of September 30, 1997, and
the related condensed statements of consolidated income for the three-month,
nine-month and twelve-month periods ended September 30, 1997 and 1996, and of
consolidated cash flows for the nine-month periods ended September 30, 1997 and
1996. These financial statements are the responsibility of TUC'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 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 Energy Industries, Inc.
(TEI), formerly Texas Utilities Company 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 TEI's change in
accounting for the impairment of long-lived assets and long-lived assets to be
disposed of. 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
Dallas, Texas
November 12, 1997
19
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 September 30,
1997, and the related condensed statements of consolidated income for the three-
month, nine-month and twelve-month periods ended September 30, 1997 and 1996,
and of consolidated cash flows for the nine-month periods ended September 30,
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 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,
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's change in accounting for the impairment of long-lived assets and
long-lived assets to be disposed of. 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
Dallas, Texas
November 12, 1997
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
TUC AND TU ELECTRIC
- -------------------
This report and other presentations made by Texas Utilities Company (TUC)
and its direct and indirect subsidiaries (System Companies) or Texas Utilities
Electric Company and its subsidiaries (TU Electric) contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Although TUC 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 TUC 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 Railroad Commission of Texas (RRC), the Nuclear
Regulatory Commission, and, in the case of TUC, 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 patterns, (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, rates of inflation or in foreign
exchange rates, (vii) unanticipated changes in operating expenses and capital
expenditures, (viii) capital market conditions, (ix) competition for new energy
development opportunities, (x) legal and administrative proceedings and
settlements, (xi) inability of the various counterparties to meet their
obligations with respect to TUC's and TU Electric's financial instruments, (xii)
changes in technology used and services offered by TUC and TU Electric, and
(xiii) significant changes in TUC's relationship with its employees and the
potential adverse effects if labor disputes or grievances were to occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and neither TUC 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 TUC 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.
BUSINESS MERGERS AND ACQUISITIONS
TUC
- ---
On August 5, 1997, the merger transactions (Merger) provided for in a
previously announced agreement between Texas Utilities Company, now known as
Texas Energy Industries, Inc. (TEI) and ENSERCH Corporation (ENSERCH) were
completed. At the effective time of the Merger: (i) Texas Utilities Company
changed its name to TEI, (ii) TEI and ENSERCH merged with wholly-owned
subsidiaries of TUC Holding Company, which now owns all the common stock of TEI
and of ENSERCH, (iii) TUC Holding Company changed its name to TUC, (iv) each
share of TEI's common stock was automatically converted into one share of common
stock of TUC, and (v) each share of common stock of ENSERCH was automatically
converted into 0.225 share of common stock of TUC, with cash issued in lieu of
fractional shares. The share conversions were tax-free transactions.
Businesses and subsidiaries acquired in the Merger were Lone Star Gas
Company (Lone Star Gas), 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 Company (Lone Star Pipeline), one of the largest pipelines in the
United States, consisting of 8,000 miles of gathering and transmission pipelines
in Texas; and subsidiaries engaged in natural gas processing, natural gas
marketing, independent power production and international gas distribution
systems development.
In the Merger, 15,861,272 shares of TUC common stock, valued at
approximately $565 million, were issued to former holders of ENSERCH common
stock. At the date of the Merger, ENSERCH had debt and preferred stock
outstanding of approximately $1.3 billion. (See Note 4 to Condensed Consolidated
Financial Statements.)
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The acquisition of ENSERCH was accounted for as a purchase business
combination. The assets and liabilities of ENSERCH, at the Merger date, August
5, 1997, were adjusted to their estimated fair values, and the excess of the
purchase price paid by TUC over the estimated fair value of ENSERCH's net assets
acquired and liabilities assumed was recorded as goodwill on ENSERCH's balance
sheet and is being amortized over 40 years. The process of determining the fair
value of assets and liabilities at the Merger date is continuing, and the final
result awaits the resolution of income tax and other contingencies and
finalization of some preliminary estimates. ENSERCH's results of operation, from
the date of the acquisition, are reflected in the consolidated financial
statements of TUC and its subsidiaries.
In August 1997, TUC announced that it had entered into a definitive
agreement to acquire Lufkin-Conroe Communications Co. (LCC). LCC is the parent
company of Lufkin-Conroe Telephone Exchange, Inc. (LCTX) and Lufkin-Conroe
Telecommunications Corporation (LCT) and its subsidiaries. LCTX is an
independent local exchange carrier which has provided telephone services for
almost 100 years, and as of September 1997, was the fourth largest telephone
company in Texas (28th largest in the United States). LCTX has sixteen exchanges
that serve approximately 100,000 access lines in the Alto, Conroe and Lufkin
areas of southeast Texas. It also provides access services to a number of
interexchange carriers, who provide long distance services. LCT and its
subsidiaries own fiber optic cable systems which they lease to interexchange
carriers, provide Internet access, radio communications tower rentals, cellular
mobile telephones and radio paging services and private branch exchange service
to local customers. LCT, through a subsidiary, also provides interexchange long
distance service, with a primary focus on business customers. TUC is expected to
issue approximately $320 million of TUC's common stock to LCC shareholders in a
stock for stock exchange, and TUC would assume approximately $8 million of LCC's
debt. The acquisition is subject to certain conditions which include the
approval of LCC shareholders. The acquisition of LCC will be accounted for as a
purchase business combination.
GENERAL
TUC
- ---
Prior to August 5, 1997, the date of the Merger, TUC did not have any
assets or operations. Pursuant to the Merger, TUC became the parent of each of
TEI and ENSERCH. For financial reporting purposes, TUC is being treated as the
successor to TEI. Unless otherwise specified, all references to TUC, which
relate to a period prior to August 5, 1997, shall be deemed to be references to
TEI. Since the acquisition of ENSERCH has been accounted for as a purchase
business combination, no financial and other information for ENSERCH is
presented for periods prior to the date of acquisition. The condensed
consolidated financial statements for the three-, nine- and twelve-months ended
September 30, 1997 and as of September 30, 1997, include TEI and all of its
majority-owned subsidiaries for all periods and ENSERCH and all of its majority-
owned subsidiaries only from August 5, 1997 and as of September 30, 1997. The
condensed consolidated financial statements for the three-, nine- and twelve-
months ended September 30, 1996 and as of September 30, 1996, include TEI and
all of its majority-owned subsidiaries for all periods and does not include
ENSERCH or any of its subsidiaries for any periods.
Certain TUC comparisons in this Quarterly Report on Form 10-Q have been
affected by the August 1997 acquisition of ENSERCH by TUC and the December 1995
acquisition of Eastern Energy Limited (Eastern Energy) by Texas Utilities
Australia Pty. Ltd. (TU Australia), a wholly-owned subsidiary of TEI. The
results of operation of ENSERCH and Eastern Energy are included only for the
periods subsequent to their respective dates of acquisition.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
TUC AND TU ELECTRIC
- -------------------
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation in TEI's and TU Electric's 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 System Companies have occurred subsequent to year-end other
than as disclosed in other reports of TUC, TEI, TU Electric and ENSERCH or
included herein.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 System Companies
at September 30, 1997 consisted of approximately 54% long-term debt, 5%
preferred securities of trusts, 2% preferred stock and 39% common stock equity.
The capitalization ratios of TU Electric at September 30, 1997 consisted of
approximately 46% long-term debt, 6% preferred securities of trusts, 1%
preferred stock and 47% common stock equity.
In October 1997, TUC issued $125,000,000 aggregate principal amount of its
6.20% Series A Senior Notes due 2002, and $175,000,000 aggregate principal
amount of its 6.375% Series B Senior Notes due 2004. Payment of the principal
of and interest on the Senior Notes, when due or at maturity, is guaranteed by a
financial guaranty insurance policy.
In October 1997, the Trinity River Authority of Texas issued $14,075,000
aggregate principal amount of Pollution Control Revenue Bonds due October 1,
2032 (Taxable Bonds). In July 1997, the Brazos River Authority, the Sabine River
Authority of Texas and the Trinity River Authority of Texas issued $92,290,000
aggregate principal amount of Pollution Control Revenue Refunding Bonds due July
1, 2022 collateralized by TU Electric's First Mortgage Bonds. In February 1997,
the Brazos River Authority issued $106,350,000 aggregate principal amount of
Pollution Control Revenue Refunding Bonds due February 1, 2032 collateralized by
TU Electric's First Mortgage Bonds. All such bonds have variable interest rates
and are subject to mandatory tender and/or remarketing from time to time. The
remarketing of the bonds is supported by standby bond purchase agreements, or in
the case of the Taxable Bonds, a direct-pay letter of credit. Scheduled payments
of interest and of principal at maturity or on mandatory redemption, upon the
occurrence of certain events with respect to such bonds are supported by
insurance policies or, in the case of the Taxable Bonds, a direct-pay letter of
credit. Interest rates on the bonds are determined daily, weekly and/or
multiannually or for variable rate periods . Currently, such rates range from
3.70% to 5.60%.
In August 1997, TU Electric issued $300,000,000 aggregate principal amount
of 7.17% Unsecured Debentures due 2007.
To date in 1997, the System Companies have redeemed, reacquired or made
principal payments of $2,339,407,000 (including $1,766,275,000 for TU Electric)
on long-term debt and preferred stock.
In March 1997, TEI completed its tender offer for any and all shares of 20
series of TU Electric's preferred stock, including preferred stock underlying
depositary shares. TEI funded the purchase of 3,989,640 shares of preferred
stock at a total cost of approximately $404,000,000 primarily through the
issuance of commercial paper. In May and June 1997, TEI sold such shares to TU
Electric for approximately $408,000,000. Upon purchase by TU Electric, the
shares were retired. TU Electric's purchase of the shares was funded with a
portion of proceeds from the sale of capital securities in January 1997.
At September 30, 1997, TUC, TU Electric and ENSERCH had joint lines of
credit under credit facility agreements (Credit Agreements) with a group of
commercial banks. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $570,000,000 outstanding at any one
time at variable interest rates and terminates April 23, 1998. Facility B
provides for short-term borrowings aggregating up to $1,330,000,000 outstanding
at any one time at variable interest rates and terminates April 24, 2002. The
combined borrowings of TUC, TU Electric and ENSERCH under both facilities are
limited to an aggregate of $1,900,000,000 outstanding at any one time. ENSERCH's
borrowings under both facilities are limited to an aggregate of up to
$650,000,000 outstanding at any one time. Borrowings under these facilities will
be used for working capital and other corporate purposes, including commercial
paper backup. The total of short-term borrowings authorized by the Board of
Directors of TUC at September 30, 1997, from banks or other lenders, was
$2,150,000,000.
Following the Merger, ENSERCH's commercial paper program and and bank lines
in the form of a revolving credit agreement were discontinued. ENSERCH retired
its $204,500,000 commercial paper balance and its $260,400,000 long-term debt
balance outstanding under the credit agreement. TUC advances to ENSERCH to fund
these retirements and to provide for other cash needs totalled $512,300,000 at
September 30, 1997.
In addition, two ENSERCH subsidiaries have revolving credit agreements
aggregating $30,000,000, of which $25,000,000 was outstanding at September 30,
1997. These revolving credit agreements expire on March 31, 2000.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The System Companies may issue additional debt and equity securities as
needed, including the possible future sale: (i) by TU Electric of up to
$148,850,000 principal amount of debt securities, (ii) by TU Electric of up to
250,000 shares of Cumulative Preferred Stock ($100 liquidation value), and (iii)
by ENSERCH of up to $225,000,000 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.
TUC's and TU Electric's operations involve managing market risks related to
changes in interest rates and, for TUC, foreign exchange and commodity price
exposures. Derivative instruments including swaps and forward contracts are used
to reduce and manage a portion of those risks. TUC's, with the exception of the
marketing activities of an ENSERCH subsidiary, Enserch Energy Services, Inc.
(EES), and TU Electric's participations in derivative transactions are designed
for hedging purposes; and derivative instruments are not held or issued for
trading purposes. TUC's foreign exchange exposures result from transactions
denominated in currencies other than the local currency of its foreign
subsidiary. As of September 30, 1997, the aggregate notional amount of such
exposure was $313,617,000. TUC enters into currency swaps to reduce foreign
exchange exposure. As of September 30, 1997, net deferred gains and losses
associated with the currency swaps were not material. As part of its natural gas
marketing activities, EES enters into forward contracts that principally involve
physical delivery of natural gas and derivative financial instruments, including
swaps, options, futures and other contractual arrangements to offset price risks
of gas supply. These activities involve price commitments into the future and,
therefore, give rise to market risk. EES applies mark-to-market accounting to
its business activities. At September 30, 1997, natural gas marketing operations
had net commitments to sell approximately 41.0 billion cubic feet (Bcf) of
natural gas through the year 2003 with offsetting net financial positions to
purchase approximately 48.1 Bcf. Credit risk relates to the risk of loss that
TUC, TU Electric and ENSERCH would incur as a result of nonperformance by
counterparties to their respective derivative instruments. TUC and TU Electric
believe the risk of nonperformance by counterparties is minimal. For other
information regarding derivative instruments, see Note 5 to Condensed
Consolidated Financial Statements.
REGULATION, RATES AND COMPETITION
TUC AND TU ELECTRIC
- -------------------
Under the current regulatory environment, certain System Companies 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 a company no longer meets the criteria for application of SFAS 71 due to
significant changes in regulation or competition, the affected company would
discontinue the application of SFAS 71. If a portion of the affected 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, the affected company would be required to
assess the recoverability of certain assets, including plant, and, if impaired,
to write down the assets to reflect their fair market value. The System
Companies cannot predict whether or to what extent changes may occur requiring
the partial or complete discontinuation of SFAS 71 application.
In order to remain competitive, TUC 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.
TU ELECTRIC
- -----------
In late 1996, as part of its regular earnings monitoring process, the
Public Utility Commission of Texas (PUC) staff, after reviewing the 1995
Electric Investor-Owned Utilities Earnings Report of TU Electric, advised the
PUC that it believed TU Electric was earning in excess of a reasonable rate of
return, and the PUC and TU Electric subsequently began discussions concerning
possible remedies. It was decided to limit negotiations to a resolution of
issues concerning TU Electric's earnings through 1997, and discussion of a long-
term resolution was deferred. In July 1997, the PUC issued its final written
order approving TU Electric's proposal to make a one-time $80 million refund to
its customers (Rate Settlement), and to leave rates unchanged during the
remainder of 1997. TU Electric recorded the charge to revenues in
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
July 1997 and included the refunds in August 1997 billings. The proposal was
the result of a joint stipulation in which TU Electric was joined by 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. TU Electric is continuing its negotiations with
respect to a longer-term settlement of the issues and, at this time, is unable
to predict the outcome of any of these negotiations.
Also in July 1997, the PUC ruled on TU Electric's petition seeking final
reconciliation of all eligible fuel and purchased power expenses incurred during
the reconciliation period of July 1, 1992 through June 30, 1995 (approximately
$80 billion). In the ruling, the PUC disallowed approximately $80 million of
eligible fuel related costs (including interest) incurred during the
reconciliation period (Fuel Disallowance). The majority of the Fuel Disallowance
(approximately $67 million) is related to replacement fuel costs as a result of
the November 1993 collapse of the emissions chimney serving Unit 3 of the
Monticello lignite-fueled generating station. In addition, the PUC ruled that
approximately $10 million from the gain on sale of sulfur dioxide allowances
should be deferred and reconsidered at a future date. TU Electric received a
final written order from the PUC and recorded the charge to revenues in August
1997. TU Electric strongly disagrees with the Fuel Disallowance and continues to
vigorously defend its position. TU Electric has appealed the PUC's order to the
District Court of Travis County, Texas.
TU Electric, in July 1997, petitioned the PUC for and received interim
approval of a fuel refund to customers of approximately $67 million, including
interest, in over-collected fuel costs for the period October 1995 through May
1997 (Fuel Refund). Such over-collection was primarily due to TU Electric's
ability to use less expensive nuclear fuel and purchased power to offset a
higher-priced natural gas market during the period. Customer refunds were
included in August 1997 billings. A final order confirming the Fuel Refund was
entered by the PUC in October 1997.
While TU Electric has experienced competitive pressures in the wholesale
market resulting in a small loss of load since the beginning of 1993, wholesale
sales represented a relatively low percentage of TU Electric's consolidated
operating revenues for the three-, nine- and twelve-month periods ended
September 30, 1997. TU Electric is 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 its operations.
TUC
- ---
In October 1996, Lone Star Pipeline (a division of ENSERCH), filed a
request with the RRC to increase the rate it charges Lone Star Gas (a division
of ENSERCH), to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star Gas.
Lone Star Gas also requested that the RRC separately set rates for costs to
aggregate gas supply for these cities. Rates currently in effect were set by the
RRC in 1982. The purpose of the rate request was to allow for the recovery of a
substantial increase in the cost of doing business since 1982 and to cover
significant capital investments of approximately $420 million made during the
past 14 years to maintain and improve the reliability and safety of the pipeline
system and help reduce natural-gas supply costs.
In May 1997, the RRC issued an order setting new rates for ENSERCH that
would have reduced the current margin by approximately 7 percent. The order
would allow 100 percent recovery of gas cost subject to a reconciliation
procedure after three years and would impose certain restrictions on the
recovery of gas purchased from affiliates. ENSERCH and other parties to the case
filed motions for rehearing of the order. In August 1997, the RRC issued an
order partially granting and partially denying the motions for rehearing. The
August order reduces the current margin an additional 3 percent beyond the May
20 order.
The August order was met with additional motions for rehearing which were
granted in part and denied in part. On September 30, 1997, the RRC issued a
second order on rehearing, which did not change the margin set in the prior
order. On November 4, 1997, the RRC acted on the motions for rehearing filed in
response to the September 30, 1997 order by denying the motions. Pursuant to
the tariffs approved by the RRC, the new rates will become effective on December
1, 1997, if no further changes to the order are made. ENSERCH has 30 days to
appeal the decision.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Prior to the ENSERCH filing of a request for a rate increase, the RRC
ordered a general inquiry into the rates and services of Lone Star Gas. The
scope of the inquiry has not been defined fully, but it will focus initially on
historical gas costs and unbundling issues. A hearing on the gas cost issues is
set to begin in August 1998. TUC Management is unable to determine at this time
the ultimate outcome of this inquiry.
CAPITAL EXPENDITURES
TUC AND TU ELECTRIC
- -------------------
The re-evaluation of growth expectations, the effects of inflation,
additional regulatory requirements and the availability of fuel, labor,
materials and capital may result in changes to the estimated construction costs
and dates of completion in TUC's and TU Electric's construction programs (see
Item 2. Properties -- Capital Expenditures in the 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.
TUC 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. The timing and amounts of any specific new business investment
opportunities are presently undetermined.
RESULTS OF OPERATION
TUC
- ---
For the three-, nine- and twelve-month periods ended September 30, 1997,
TUC's consolidated net income decreased approximately 19%, 18% and 18% as
compared to the respective periods ended September 30, 1996. For TUC and TU
Electric, from which most of TUC's consolidated earnings is derived, the major
factors affecting earnings for all current periods were more normal weather
conditions as compared to the respective prior periods, the Rate Settlement and
the Fuel Disallowance.
TUC's condensed statement of consolidated income for the three-, nine- and
twelve-month periods ended September 30, 1997, is affected by the results of
operation of ENSERCH which are included for the periods subsequent to August 5,
1997. For the twelve months ended September 30, 1997, TUC's condensed statement
of consolidated income includes operating revenues of $277 million, operating
expenses of $278 million (including income tax benefits) and interest expense
and preferred stock dividends of $15 million, which represent ENSERCH's results
of operation.
TUC's condensed statement of consolidated income for the twelve-month
period ended September 30, 1997, is also 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 September 30, 1997, TUC's condensed
statement of consolidated income includes operating revenues of $496 million,
operating expenses of $404 million (including income tax expense) and interest
expense of $79 million, which represent Eastern Energy's results of operation.
TU ELECTRIC
- -----------
For the three- and twelve-month periods, operating revenues increased
approximately 4% and 1%, respectively. Operating revenues decreased
approximately 1% for the nine-month period. The following table details the
factors contributing to these changes:
INCREASE (DECREASE)
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
------------------ ----------------- -------------------
FACTORS THOUSANDS OF DOLLARS
-------
Base rate revenue....................................... $ 34,758 $(48,885) $(27,724)
Fuel revenue and power cost recovery factor revenue..... 20,387 (30,503) 53,012
Transmission service revenue............................ 28,195 84,683 84,683
Other revenue........................................... (19,396) (31,459) (25,112)
-------- -------- --------
Total.............................................. $ 63,944 $(26,164) $ 84,859
======== ======== ========
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Total energy sales for the three-, nine-and twelve-month periods increased
by approximately 8%, 1% and 2%, respectively. Total energy sales for the three-
month period increased primarily as a result of warmer weather conditions as
compared to the prior period. Total energy sales did not change significantly
for the nine- and twelve-month periods. The increase in base rate revenue for
the three-month period is due primarily to warmer weather conditions partially
offset by the Rate Settlement. The decrease in base rate revenue for the nine-
and twelve-month periods was due primarily to the Rate Settlement and milder
weather, partially offset by customer growth. Increases in transmission service
revenue for the three-, nine- and twelve-month periods are due to the
recognition of revenues from implementing the PUC's Open Access Transmission
Rule effective January 1, 1997. Other revenues decreased for all periods due
primarily to the deferral in August 1997 of previous gains on the sale of sulfur
dioxide allowances and the classification of wheeling revenues as other revenues
in prior periods.
Fuel revenue for the three-month and twelve-month periods increased as a
result of increases in energy sales, partially offset by the Fuel Disallowance.
The decrease in fuel revenue for the nine-month period was primarily due to the
Fuel Disallowance.
Fuel and purchased power expense for the three-, nine- and twelve-month
periods increased 15%, 2% and 6%, respectively, primarily due to increased
energy sales as compared to the prior periods and increases in spot market gas
prices.
Operation and maintenance expenses increased for the three-, nine-, and
twelve-month periods due primarily to transmission tariffs implemented in
January 1997.
Other income and (deductions) -- net was affected for the three-, nine- and
twelve-month periods, as compared to prior periods, by a gain on disposition of
property in July 1996.
Income tax benefits related to other income decreased for the nine-month
and twelve-month periods primarily due to an IRS audit adjustment reflected in
the respective prior periods and was partially offset by the initial effect of
the implementation of a change in TU Electric's state franchise tax status
effective January 1, 1997 (see Note 2 to Condensed Consolidated Financial
Statements). The resulting increase in TU Electric's effective income tax rate
increased the value of its unamortized regulatory assets.
Interest on mortgage bonds decreased as compared to the prior periods due
to reduced interest requirements resulting from TU Electric's refinancing
efforts. Decreases in interest on other long-term debt for the three-, nine- and
twelve-month periods were affected by the prepayment in August and September
1996 of TU Electric's borrowings under a term credit agreement. Other interest
increased for the three-month period due primarily to interest related to the
PUC's disallowance of eligible fuel related costs in 1997. Other interest
decreased for the nine- and twelve-month periods due primarily to an interest
payment related to a settlement with the Internal Revenue Service in June 1996,
partially offset by interest related to the Fuel Disallowance. Increases in
distribution on preferred securities of trusts resulted from the issuance, in
December 1995 and January 1997, of TU Electric obligated, mandatorily
redeemable, preferred securities of trusts.
For the three-, nine- and twelve-month periods, preferred stock dividends
decreased due primarily to the redemption of significant portions of TU
Electric's preferred stock.
ACCOUNTING CHANGE
TUC
- ---
TUC intends to adopt Financial Accounting Standards Board Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information," in
its 1998 annual report when it is required. This statement establishes standards
for defining and reporting business segments. TUC is currently determining the
appropriate segments to be covered by this disclosure.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
TUC
- ---
As previously reported in the 1996 Annual Report on Form 10-K of TEI, in
October 1995, the Antitrust Division of the U.S. Department of Justice (DOJ)
submitted a civil investigative demand (CID) to TEI. The CID requested
documents and information relating to an investigation of whether alleged tying
arrangements or other actions that unreasonably deny or condition access to TU
Electric's transmission system by others had occurred in violation of certain
antitrust laws. In response, TEI submitted various documents and information to
the DOJ. By letter dated November 4, 1997, the DOJ has advised TEI that the CID
investigation has been closed and the documents will be returned.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
TUC AND TU ELECTRIC
- -------------------
(a) Exhibits filed as a part of Part II are:
2 - Agreement and Plan of Merger dated as of August 23, 1997 among
TUC, TUCOM Acquisition Co. and LCC. (Previously filed in file
number 333-37131 as Exhibit 2).
4(a) - Indenture (For Unsecured Debt Securities), dated as of August
1, 1997, between TU Electric and The Bank of New York, Trustee.
4(b) - Officer's Certificate, dated August 18, 1997, establishing
terms of TU Electric's 7.17% Debentures due August 1, 2007.
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
(b) Reports on Form 8-K filed since June 30, 1997:
Date of Report Item Reported
-------------- -------------
TUC
---
August 5, 1997 Item 5. Other Events
August 25, 1997 Item 5. Other Events
28
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
Controller and Principal
Accounting Officer
Date: November 12, 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 ELECTRIC COMPANY
By /s/ Marc D. Moseley
--------------------------------
Marc D. Moseley
Controller and Principal
Accounting Officer
Date: November 12, 1997
29
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
2 - Agreement and Plan of Merger dated as of August 23, 1997 among
TUC, TUCOM Acquisition Co. and LCC. (Previously filed in file
number 333-37131 as Exhibit 2).
4(a) - Indenture (For Unsecured Debt Securities), dated as of August 1,
1997, between TU Electric and The Bank of New York, Trustee.
4(b) - Officer's Certificate, dated August 18, 1997, establishing terms
of TU Electric's 7.17% Debentures due August 1, 2007.
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