<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1 TO FORM 8-K)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) -- MAY 19, 1998
TEXAS UTILITIES COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-12833 75-2669310
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
</TABLE>
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE -- (214) 812-4600
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS........................ 1
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
FINANCIAL INFORMATION OF THE ENERGY GROUP PLC:
Audited Financial Statements as of March 31, 1997 and
September 30, 1996 and for the six months ended March 31,
1997 and the three years in the period ended September 30,
1996.
Report of Independent Auditors.............................. F-1
Consolidated Profit and Loss Accounts....................... F-2
Consolidated Statement of Total Recognized Gains and
Losses...................................................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Cash Flow Statements........................... F-4
Changes in Invested Capital/Shareholders' Equity............ F-5
Notes to the Financial Statements........................... F-6
Unaudited Financial Statements as of September 30, 1997 and
for the six months ended September 30, 1997 and 1996.
Consolidated Profit and Loss Account........................ F-43
Consolidated Balance Sheet.................................. F-44
Consolidated Cash Flow Statement............................ F-45
Notes to Financial Statements............................... F-46
Unaudited Financial Results for the three months and nine
months ended December 31, 1997.............................. F-52
(B) PRO FORMA FINANCIAL INFORMATION
PRO FORMA FINANCIAL INFORMATION OF TEXAS UTILITIES
COMPANY..................................................... P-1
Unaudited Condensed Consolidated Pro Forma Balance Sheet as
of March 31, 1998........................................... P-2
Unaudited Condensed Consolidated Pro Forma Statement of
Income for the twelve Months Ended December 31, 1997........ P-3
Unaudited Condensed Consolidated Pro Forma Statement of
Income for the three Months Ended March 31, 1998............ P-4
Notes to Unaudited Condensed Consolidated Pro Forma
Financial Statements........................................ P-5
PRO FORMA FINANCIAL INFORMATION OF THE TEG BUSINESSES
ACQUIRED.................................................... P-8
Unaudited Condensed Consolidated Pro Forma Balance Sheet as
of September 30, 1997....................................... P-9
Unaudited Condensed Consolidated Pro Forma Statement of
Income for the Twelve Months Ended December 31, 1997........ P-10
Notes to Unaudited Condensed Consolidated Pro Form Financial
Statements.................................................. P-11
(C) EXHIBITS
23(a) Consent of Ernst & Young
</TABLE>
i
<PAGE> 3
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The offer (Offer) by TU Acquisitions PLC (TU Acquisitions), a wholly owned
indirect subsidiary of Texas Utilities Company (Texas Utilities), for all of the
ordinary shares, including ordinary shares evidenced by American Depositary
Receipts (ADRs), of The Energy Group PLC (TEG) was declared unconditional on May
19, 1998. As of June 22, 1998, TU Acquisitions owns, has rights over or has
received valid acceptances in respect of approximately 94.43% of TEG's issued
ordinary share capital. The Offer has been extended so that TU Acquisitions may
exercise its right under United Kingdom (UK) law to compulsorily acquire the
remaining share capital of TEG.
The consideration for the TEG shares will be either 840 pence in cash or
.355 shares of Texas Utilities common stock per TEG share, as elected by the
holders of the TEG shares and ADRs (or loan notes in the UK). TU Acquisitions
and Texas Utilities will use cash borrowed from a group of banks, arranged by
affiliates of The Chase Manhattan Bank, Lehman Brothers Inc., and Merrill Lynch
& Co., commercial paper issuances, shares of Texas Utilities common stock and
loan notes to pay for the shares and ADRs acquired by TU Acquisitions.
TEG, a public limited company incorporated in England and Wales, owns and
operates a diversified energy business. TEG's most significant operations are
conducted through its subsidiary Eastern Group plc (Eastern), one of the largest
integrated electricity and gas groups in the UK. The registered office of TEG is
located at 117 Piccadilly, London W1V 9FJ, and its telephone number is (44) 171
647 3200.
Texas Utilities intends to build on Eastern's position in the UK to exploit
the potential created by privatization and deregulation of global energy
markets.
TEG's major business operations are conducted through the following
companies:
- Eastern Electricity plc is the largest supplier and distributor of
electricity in England and Wales, with over three million customers and
an authorized area covering approximately 20,300 square kilometers in the
east of England and parts of north London;
- Eastern Generation Limited (Eastern Generation), the fourth largest
generator of electricity in Great Britain, currently owns, operates or
has an interest in eight power stations, representing approximately 9.4%
of the total registered generating capacity in the UK of 71,850 MW as of
March 31, 1997;
- Eastern Natural Gas Limited is one of the largest suppliers of natural
gas in the UK; and
- Eastern Power and Energy Trading Limited (Eastern Power and Energy
Trading) manages for Eastern the price and volume risks associated with
electricity generation and the supply of fuels required for electricity
generation, and with the wholesaling and retailing of electricity and
natural gas. These exposures are managed by trading its contract
portfolio and by bidding Eastern Generation's output into the electricity
trading market in England and Wales. Eastern Power and Energy Trading
also has small equity interests in three natural gas producing fields in
the North Sea.
Eastern also has interests in other parts of Europe, including Scandinavia,
the Czech Republic, Holland, Poland and Spain.
1
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
FINANCIAL INFORMATION OF THE ENERGY GROUP PLC
AUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND SEPTEMBER 30, 1996 AND FOR
THE SIX MONTHS ENDED MARCH 31, 1997 AND THE THREE YEARS IN THE PERIOD ENDED
SEPTEMBER 30, 1996
REPORT OF INDEPENDENT AUDITORS
To: The Board of Directors
The Energy Group PLC
We have audited the consolidated balance sheets of The Energy Group PLC as
at 31 March 1997 and 30 September 1996, and the related consolidated profit and
loss accounts and statements of total recognised gains and losses, cash flows
and changes in invested capital/shareholders' equity for the six months ended 31
March 1997 and each of the three years in the period ended 30 September 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to form an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis of our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Energy
Group PLC at 31 March 1997 and 30 September 1996, and the consolidated results
of its operations and its consolidated cash flows for the six months ended 31
March 1997 and each of the three years in the period ended 30 September 1996 in
conformity with accounting principles generally accepted in the United Kingdom
which differ in certain respects from those generally accepted in the United
States (see Note 30 of Notes to the Financial Statements).
/s/ ERNST & YOUNG
------------------------------------
ERNST & YOUNG
Chartered Accountants
London, England
12 June 1997, except for
Note 31 -- Subsequent Events,
as to which the date is
1 August 1997
F-1
<PAGE> 5
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------ ----------------
1994 1995 1996 1997
NOTE ------ ------ ------ ----------------
(L MILLION)
<S> <C> <C> <C> <C> <C>
Turnover 1,247 1,446 3,635 2,519
Add: Special discount -- -- 132 --
------ ------ ------ ----------------
Turnover before special discount 4 1,247 1,446 3,767 2,519
Costs and overheads less other income 5 (1,148) (1,311) (3,321) (2,222)
------ ------ ------ ----------------
Operating profit before National Grid Group
flotation 99 135 446 297
National Grid Group flotation dividends
receivable 7 -- -- 176 --
special discount 7 -- -- (132) --
------ ------ ------ ----------------
Operating profit 4 99 135 490 297
Profit on disposal of First Hydro 7 -- -- 25 --
Net interest 8 (14) (11) (43) (37)
------ ------ ------ ----------------
Profit on ordinary activities before taxation 85 124 472 260
Taxation 9 (17) (56) (115) (81)
------ ------ ------ ----------------
Profit for the period* 68 68 357 179
Dividend 11 -- -- -- (29)
------ ------ ------ ----------------
Profit retained for the period 68 68 357 150
====== ====== ====== ================
Earnings per share 10 13.1p 13.1p 68.5p 34.5p
====== ====== ====== ================
Adjusted earnings per share 10 13.1p 13.1p 60.8p 38.2p
====== ====== ====== ================
</TABLE>
The net interest expense and taxation in each of the three years in the period
ended 30 September 1996 shown above were affected significantly by the financing
and taxation arrangements of Hanson Group. The results of Eastern are included
from 1 October 1995.
* A summary of the adjustments to the profit for the period that would be
required if United States generally accepted accounting principles had been
applied instead of those generally accepted in the United Kingdom is set forth
in Note 30 of Notes to the Financial Statements.
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 30 SEPTEMBER ENDED 31 MARCH
------------------------ ----------------
1994 1995 1996 1997
------ ------ ------ ----------------
(L MILLIONS)
<S> <C> <C> <C> <C>
Profit for the period 68 68 357 179
Currency differences on foreign net investments (29) -- 20 (52)
------ ------ ------ ----------------
Total recognised gains relating to the period 39 68 377 127
====== ====== ====== ================
</TABLE>
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-2
<PAGE> 6
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
------------ --------
1996 1997
NOTE ------------ --------
(L MILLION)
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets 12 3,975 3,910
Investments 13 17 72
------------ --------
3,992 3,982
------------ --------
CURRENT ASSETS
Stocks 14 254 256
Amounts due from the Hanson Group 2 --
Debtors
amounts falling due after one year 15 536 561
amounts falling due within one year 15 763 798
Investments 16 8 10
Short-term deposits 17 -- 753
Cash 173 385
------------ --------
1,736 2,763
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 18 (1,041) (1,747)
------------ --------
NET CURRENT ASSETS 695 1,016
------------ --------
TOTAL ASSETS LESS CURRENT LIABILITIES 4,687 4,998
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 18 (945) (1,655)
PROVISIONS FOR LIABILITIES AND CHARGES 19 (1,557) (1,498)
------------ --------
2,185 1,845
============ ========
INVESTED CAPITAL/SHAREHOLDERS' EQUITY*
Called up share capital -- 52
Other reserves -- 639
Profit and loss account -- 1,154
Invested capital 2,185 --
------------ --------
2,185 1,845
============ ========
</TABLE>
* A summary of the adjustments to invested capital/shareholders' equity that
would be required if United States generally accepted accounting principles
had been applied instead of those generally accepted in the United Kingdom is
set forth in Note 30 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-3
<PAGE> 7
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 30 SEPTEMBER ENDED 31 MARCH
------------------------- --------------
1994 1995 1996 1997
NOTE ----- ----- ------- --------------
(L MILLION)
<S> <C> <C> <C> <C> <C>
Net cash inflow from operating activities 24 143 402 12 346
---- ---- ------ --------------
Returns on investments and servicing of
finance
Interest received -- -- -- 29
Interest paid (19) (11) (33) (83)
Dividends received from investments -- -- -- 1
National Grid Group flotation -- -- 44 --
---- ---- ------ --------------
(19) (11) 11 (53)
---- ---- ------ --------------
Taxation (5) (4) (128) (23)
---- ---- ------ --------------
Capital expenditure and financial investment
Purchase of tangible fixed assets (133) (140) (374) (133)
Purchase of investments -- -- -- (39)
Sale of tangible fixed assets 76 31 29 4
Sale of investments -- -- 235 12
---- ---- ------ --------------
(57) (109) (110) (156)
---- ---- ------ --------------
Acquisitions
Purchase of subsidiary undertakings 25 -- 36 (2,495) (20)
---- ---- ------ --------------
Cash flow before use of liquid resources and
financing 62 314 (2,710) 94
Management of liquid resources
Net cash placed on short-term deposit 26 -- -- -- (753)
Financing
Net new short-term borrowings 26 36 (20) 97 149
Debt due beyond a year:
New secured loan repayable within 5 years 26 -- -- -- 907
Repayments of amounts borrowed 26 (9) -- 31 (118)
Changes in invested capital from cash funding 26 (61) (57) 2,290 --
---- ---- ------ --------------
(34) (77) 2,418 938
---- ---- ------ --------------
Increase/(decrease) in cash in the period 28 237 (292) 279
==== ==== ====== ==============
</TABLE>
The returns on investments and servicing of finance, taxation and financing cash
flows shown above for the three years in the period ended 30 September 1996 were
affected significantly by the financing and taxation arrangements of the Hanson
Group. The cash flows of Eastern are included from 1 October 1995.
The significant differences between the cash flow statements presented above and
those required under United States generally accepted accounting principles are
described in Note 30 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements.
F-4
<PAGE> 8
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CHANGES IN INVESTED CAPITAL/SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 30 SEPTEMBER ENDED 31 MARCH
------------------------ --------------
1994 1995 1996 1997
---- ------- ------- --------------
(L MILLION)
<S> <C> <C> <C> <C>
Profit on ordinary activities after taxation 68 68 357 179
Dividend -- -- -- (29)
Currency differences on foreign net investments -- -- -- (52)
Other net recognised gains/(losses) relating to period (29) -- 20 --
Movements on demerger
-- additional net debt -- -- -- (391)
-- contribution towards dividend paid by Hanson in
January 1997 -- -- -- (32)
-- other net movements -- -- -- (15)
Increases/(decreases) in funding by Hanson
Cash (61) (57) 2,290 --
Non-Cash 95 2,493 (2,418) --
Dividend in specie of/Investment in National Grid
Group -- -- (393) --
Goodwill (set off)/write back -- (1,368) 221 --
---- ------- ------- --------------
Net increase in invested capital/shareholders' equity 73 1,136 77 (340)
Opening invested capital/shareholders' equity 899 972 2,108 2,185
---- ------- ------- --------------
Closing invested capital/shareholders' equity 972 2,108 2,185 1,845
==== ======= ======= ==============
</TABLE>
No goodwill arose on the acquisition of the Group's Interest in Teplarny Brno.
The cumulative amount of goodwill resulting from acquisitions prior to 31 March
1997, net of goodwill attributable to subsidiary undertakings or businesses
disposed of prior to 31 March 1997, amounted to L1,147 million derived by
calculating the amount of historical goodwill in the currency of acquisition at
period end rates of exchange. This has been set off against merger reserve and
the net amount reported as other reserves.
Included in the consolidated reserves as at 31 March 1997 was L1 million in
respect of associated undertakings, all of which arose in the period ended 31
March 1997.
There are no significant statutory or contractual restrictions on the
distribution of current profits of subsidiary or associated undertakings;
undistributed profits of prior years are, in the main, permanently employed in
the businesses of these companies. The undistributed profits of Group companies
overseas may be liable to overseas taxes and/or UK taxation (after allowing for
double taxation relief) if they were to be distributed as dividends.
F-5
<PAGE> 9
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY AND ITS CAPITALISATION
The Company was incorporated as a private limited company on 1 October 1996 as
The Energy Group Limited, with an authorised share capital of L50,000 divided
into 5,000,000 ordinary shares of 1p each, of which two ordinary shares were
issued to the subscribers fully paid. On 4 December 1996, 4,999,998 of the
authorised but unissued ordinary shares of 1p each were converted into 4,999,998
redeemable preference shares of 1p each (the "Preference Shares") and were
issued on that date at par. On 6 December 1996, the Company was re-registered as
a public limited company under the name The Energy Group PLC. The Preference
Shares were redeemed at par prior to the Demerger using funds contributed to the
Company by Hanson and such shares were re-converted into ordinary shares of 1p
each. On 22 January 1997, the Company's authorised share capital was increased
to L100,000,000 by the creation of 9,995,000,000 ordinary shares of 1p each.
Upon admission of the Company's ordinary shares to the Official List of the
London Stock Exchange becoming effective ("Admission"), every ten authorised and
issued ordinary shares of 1p each were consolidated into one ordinary share of
10p. 520,857,817 ordinary shares of 10p each were in issue following this
consolidation.
THE DEMERGER
At the date of the Demerger, Rollalong Limited ("Rollalong"), a wholly-owned
subsidiary of Hanson, pursuant to an agreement dated 27 January 1997 (the
"Demerger Agreement"), owned or had contracted to acquire, all of the
energy-related businesses of Hanson, as described below.
At various dates between 30 September 1996 and 27 January 1997, various of the
energy-related businesses of Hanson were reorganised under the ownership of
Rollalong. Peabody Holding Company, Inc. and its subsidiaries ("Peabody
Holding") were transferred to a subsidiary of Rollalong on 7 March 1997. On 24
February 1997, Hanson transferred to the Company the entire issued share capital
of Rollalong in consideration for which the Company issued ordinary shares,
credited as fully paid, to Hanson shareholders pro rata to their shareholdings
in Hanson, in satisfaction of a dividend in specie declared by Hanson. The
transactions provided for under the Demerger Agreement, including the agreement
for the transfer of Peabody Holding, are together referred to as the "Demerger
Transactions".
THE GROUP
Following completion of the Demerger Transactions, the Company became the
holding company for a group of companies and businesses (together, the "Group")
comprising:
<TABLE>
<S> <C>
Eastern Group plc and its subsidiaries ("Eastern")
Peabody Holding
Lee Ranch Coal Company ("Peabody")
Peabody Resources Limited (Australia) and its subsidiaries
Rollalong Limited, Consolidated Gold Fields Limited, Major
Insurance Company Limited and various other subsidiaries and ("Infrastructure companies")
Intermediate holding companies and non-trading companies
</TABLE>
The Group now includes Citizens Power LLC and its subsidiaries, which were
acquired on 19 May 1997.
F-6
<PAGE> 10
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
2. BASIS OF PREPARATION
The financial statements have been prepared to show the performance of the Group
for the three years and six months in the period ended 31 March 1997 as if it
had been in existence from 1 October 1993 as described below. Peabody and the
infrastructure companies were wholly-owned by Hanson throughout that period
until they became part of the Group upon completion of the respective Demerger
Transactions. Eastern was acquired by Hanson on 18 September 1995.
(i) The financial statements have been prepared using merger accounting
principles as if the companies and businesses comprising the Group had been
part of the Group for all periods presented, or, in the case of those
acquired or disposed of (other than pursuant to the Demerger Transactions)
during this period, from or up to the date control passed, as appropriate.
Some individual elements of the reorganisation under Rollalong and of the
Demerger Transactions were for cash consideration. Such individual elements
do not satisfy all of the conditions for merger accounting to be permitted
in accordance with UK Financial Reporting Standard 6 and Schedule 4A to the
Companies Act 1985 (the "Companies Act"), which would require such
transfers to be accounted for using acquisition accounting principles.
The Directors took account of the continuity of ownership under Hanson of
all of its energy-related businesses that formed the Group following
completion of the Demerger Transactions and considered that the Demerger
Transactions, taken as a whole, required the adoption of merger accounting
principles in order to show a true and fair view in accordance with section
226(5) of the Companies Act.
The adoption of acquisition accounting principles for some individual
elements of the reorganisation under Rollalong and of the Demerger
Transactions would have required: the restatement at fair value of certain
assets and liabilities transferred; the recognition of goodwill which, in
some cases, would not be representative of that arising had the transfers
been conducted at arm's length; and the inclusion of the results of certain
businesses only from the various arbitrary dates chosen for the transfers.
As a result of the foregoing, in the opinion of the Directors, financial
statements using different bases of accounting would not give a true and
fair view. No qualification has been given of the effects of this departure
because to do so would be misleading.
(ii) Although Eastern was acquired by Hanson on 18 September 1995, its results
and cash flows have been included in the financial statements based on an
effective acquisition date of 30 September 1995. The results and cash flows
for the period 19 to 30 September 1995 are not material.
(iii)Transactions and balances owing between companies and businesses forming
part of the Group have been eliminated.
(iv) Interest income and expense prior to the Demerger are based on amounts
recorded in the historical financial returns submitted to Hanson in respect
of the companies and businesses forming part of the Group. No adjustments
have been made to reflect the capital structure of the Group as it is
following the Demerger and, as such, the historical level of interest
income and expense may not be representative of such amounts following the
Demerger.
(v) Taxation charges and liabilities prior to the Demerger are based on amounts
recorded in the historical financial returns submitted to Hanson in respect
of the companies and businesses forming part of the Group, except that
adjustments have been made, where appropriate, to provide for deferred tax
liabilities consequent upon the Group being on a stand-alone basis
following the Demerger. Prior to the Demerger and in previous accounting
periods, there were various tax-sharing arrangements between Hanson, those
subsidiaries that form part of the Group and other Hanson subsidiaries.
These arrangements have had the effect that tax charges shown in the
financial statements may not be representative of tax charges that will be
incurred following the Demerger.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported. Actual results could
differ from estimates.
F-7
<PAGE> 11
The financial statements have been prepared in accordance with applicable UK
Accounting Standards. The principal accounting policies, which have been applied
consistently for all periods, are set out below.
Accounting convention
The financial statements have been prepared in accordance with the historical
cost convention.
Accounting for acquisitions
Other than in respect of the Demerger Transactions, the results of acquired
companies and businesses are dealt with in the financial statements from the
date of acquisition. On the acquisition of a company or business, fair values
reflecting conditions at the date of acquisition are attributed to the
identifiable tangible assets and liabilities acquired. Where the consideration
paid exceeds the fair value of the net tangible assets acquired, the difference
is treated as goodwill and is set off against reserves in the acquisition
period.
Associated undertakings
Investments which are not subsidiary undertakings and over which the Group
exercises significant influence (other than those which are unincorporated joint
ventures) have been accounted for as associated companies using the equity
method of accounting. Where the Group has an interest in an unincorporated joint
venture or a partnership, such interest has been accounted for as follows:
(i) where all of the ventures share in common the benefits and risks of the
entire venture, the Group's interest is accounted for using the equity
method of accounting.
(ii) where each venturer has its own separate interest in the benefits and
risks, the Group's interest is accounted for using proportional
consolidation on a line-by-line basis.
Turnover
Coal sales revenue is recognized at the time of shipment. Electricity and gas
sales include an estimated accrual for the value of electricity and gas consumed
by customers between the date of their last meter reading and the period end.
Turnover is stated exclusive of UK value added tax, but inclusive of related US
coal production duties and UK fossil fuel levy.
Tangible fixed assets
(a) Capitalisation
Tangible fixed assets are stated at cost or valuation less accumulated
depreciation.
Interest costs relating to the construction or development of production
facilities are capitalised during the pre-production period. Interest costs
incurred after production has commenced are expensed.
Costs incurred to increase the productive capacity of a coal mine or gas field
are capitalised. Costs incurred to maintain the productive capacity of a coal
mine or gas field are expensed.
(b) Depreciation and depletion
Buildings and improvements at coal mines are depreciated over the expected
productive life of the mine from the date that full production commences.
Depletion of coal and gas reserves is charged on a unit-of-production basis,
based on an assessment of available and proven reserves respectively.
Freehold land is not depreciated.
F-8
<PAGE> 12
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Depreciation of assets other than freehold land, coal and gas reserves and
buildings and improvements at coal mines is charged as follows:
<TABLE>
<S> <C>
Electricity generating station assets 30 years
Electricity distribution system assets 40 years at a rate of 3 per cent per annum for first
20 years and 2 per cent per annum for remaining 20
years
Freehold buildings up to 60 years
Leasehold buildings shorter of 60 years and remaining period of lease
Telecommunications network assets 10 to 40 years
Plant, equipment and motor vehicles 2 to 49 years
</TABLE>
(c) Assets held under leases
Assets held under finance leases are included within fixed assets at the
capitalized value of future minimum lease payments and are depreciated over the
shorter of their lease period and their useful life. The capital element of the
future payments is treated as a liability and the interest element is charged to
the profit and loss account so as to reflect a constant annual rate of interest
on the remaining balance of the outstanding obligation.
Rentals paid on operating leases are charged to the profit and loss account on a
straight line basis over the shorter of the lease period and the useful life of
the leased asset.
(d) Impairment
At each financial year end, an assessment is made of the recoverability of the
balance sheet carrying values of coal and gas assets. This assessment is made
individually at the lowest operational level at which income and cash flows are
monitored as a separate unit. A reduction in carrying value is triggered when
the current book value of such a unit of assets exceeds the undiscounted future
cash flows. Where shortfalls in cash flows compared with carrying values arise,
the assets are written down to fair value, determined usually by discounted
future cash flows generated from the assets.
(e) Reclamation, restoration and abandonment costs
Provision is made for surface reclamation and restoration costs in respect of
coal mines and for abandonment costs in respect of gas fields in accordance with
local conditions and requirements on the basis of costs estimated at the balance
sheet date. The costs are charged to accounting periods on a unit-of-production
basis for gas assets and over the life of the mine for coal.
(f) Environmental costs and obligations
Costs incurred in respect of environmental protection are capitalized if they
provide future economic benefits for the related production facility.
Liabilities for environmental clean-up costs are recognised when clean-ups are
probable and the associated costs can be estimated reasonably.
(g) Customers' contributions
Customer contributions to electricity distribution system assets are credited to
the profit and loss account over a 40-year period at a rate of 3 per cent per
annum for the first 20 years followed by 2 per cent per annum for the following
20 years. The unamortized amount of these contributions is deducted form
tangible fixed assets.
(h) Disposals of fixed assets
HM Government is entitled to a proportion of any gain realised by Eastern on
certain property disposals made up to 31 March 2000. A provision for drawback in
respect of such disposals is made to the extent that it is probable that a
liability would crystalize. Such a liability would crystalize when an actual or
deemed disposal occurs.
F-9
<PAGE> 13
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
3. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
Stocks
Stocks are stated at the lower of cost and net realisable value. Cost includes
labour, supplies, equipment and an appropriate proportion of operating and
overhead costs.
Investments
Fixed asset investments are stated at cost or Directors' valuation less
provisions for permanent diminutions in value. Current asset investments are
stated at the lower of cost and net realisable value. Investment income is
included in the financial statements of the period to which it relates.
Foreign currencies
Transactions in foreign currencies are recorded at the exchange rates ruling at
the date of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated at the rates of exchange ruling at the balance
sheet date. All differences on translation are taken to the profit and loss
account.
Average rates of exchange ruling during the period are used to translate the
profit and loss accounts of overseas subsidiary and associated undertakings. The
balance sheets of overseas subsidiary undertakings are translated at rates
ruling at the balance sheet date. Differences on translation arising from
changes in the sterling value of overseas net assets, together with the
differences between profit and loss accounts translated at average rates and at
balance sheet rates, are shown as a movement on reserves and in the statement of
recognized gains and losses. Other exchange rate differences are dealt with in
the profit and loss account for the period.
Deferred taxation
Deferred taxation is provided on the liability method in respect of timing
differences except where the liability or asset is not expected to crystallize
in the foreseeable future. No deferred tax asset is recognised corresponding to
liabilities provided for in respect of post-retirement healthcare benefits.
Provision is not made for additional taxation which might be payable if profits
retained by overseas companies were distributed as dividends.
Healthcare and other obligations to employees
The Group provides healthcare and other benefits, including workers'
compensation benefits, to certain qualifying employees and former employees of
the Peabody companies and their dependants under the provisions of various
benefit plans or as required by US state or federal law. These benefits are
accrued and charged to the profit and loss account over the expected service
lives of the employees with the exception of pneumoconiosis (black lung)
benefits in respect of employees ceasing employment prior to 1 July 1973, which
are accounted for as payments are made. Pneumoconiosis benefits in respect of
employees ceasing employment after 30 June 1973 are estimated actuarially; the
last actuarial review was performed as at 1 October 1996. Other workers'
compensation benefits are also assessed actuarially.
Pension costs
The Group operates retirement benefit schemes in the UK, the US and Australia,
in accordance with local regulations and custom. The assets of the schemes are
held in separate funds administered by trustees.
The costs of providing pensions are charged to the consolidated profit and loss
account over employees' service lives. The pension costs relating to those
schemes which provide defined benefits are assessed in accordance with the
advice of qualified actuaries.
F-10
<PAGE> 14
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
4. SEGMENTAL INFORMATION
By activity:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------------------------------------------------------------ ------------------------
1994 1995 1996 1997
------------------------ ------------------------ ------------------------ ------------------------
OPERATING OPERATING OPERATING OPERATING
TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS)
-------- ------------- -------- ------------- -------- ------------- -------- -------------
(L MILLION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coal 1,217 102 1,418 160 1,461 154 647 66
Power -- -- -- -- 2,178 83 1,801 129
Networks -- -- -- -- 482 211 274 122
Other 30 (3) 28 (25) 24 (2) 9 --
Intra-group trading -- -- -- -- (378) -- (212) --
-------- ------------- -------- ------------- -------- ------------- -------- -------------
1,247 99 1,446 135 3,767 446 2,519 317
Exceptional items -- -- -- -- (132) 44 -- (20)
-------- ------------- -------- ------------- -------- ------------- -------- -------------
1,247 99 1,446 135 3,635 490 2,519 297
======== ============= ======== ============= ======== ============= ======== =============
</TABLE>
Power turnover includes gas sales of L258 million in the year ended 30 September
1996 and L251 million in the six months ended 31 March 1997.
All intra-group trading represent charges, at market rates, for use of the
distribution system from the Networks business to the Power business.
By geographical location:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------------------------------------------------------------ ------------------------
1994 1995 1996 1997
------------------------ ------------------------ ------------------------ ------------------------
OPERATING OPERATING OPERATING OPERATING
TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS) TURNOVER PROFIT/(LOSS)
-------- ------------- -------- ------------- -------- ------------- -------- -------------
(L MILLION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United Kingdom 22 6 22 (31) 2,303 293 1,853 248
US 1,108 66 1,297 141 1,317 125 574 52
Australia 117 27 127 25 147 28 74 14
Other -- -- -- -- -- -- 18 3
-------- ------------- -------- ------------- -------- ------------- -------- -------------
1,247 99 1,446 135 3,767 446 2,519 317
Exceptional items -- -- -- -- (132) 44 -- (20)
-------- ------------- -------- ------------- -------- ------------- -------- -------------
1,247 99 1,446 135 3,635 490 2,519 297
======== ============= ======== ============= ======== ============= ======== =============
</TABLE>
The above analysis of turnover shows the geographical segments from which goods
and services are supplied.
Turnover by geographical destination:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
----------------------- ----------
1994 1995 1996 1997
----- ----- ----- ----------
(L MILLION)
<S> <C> <C> <C> <C>
United Kingdom 27 34 2,183 1,861
North and South America 1,053 1,197 1,218 542
Rest of Europe 35 57 62 42
Asia/Pacific 132 158 172 74
----- ----- ----- ----------
1,247 1,446 3,635 2,519
===== ===== ===== ==========
</TABLE>
F-11
<PAGE> 15
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
4. SEGMENTAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER AS OF 31 MARCH
--------------------------------------------------------- -----------------
1994 1995 1996 1997
----------------- ----------------- ----------------- -----------------
TOTAL CAPITAL TOTAL CAPITAL TOTAL CAPITAL TOTAL CAPITAL
ASSETS EMPLOYED ASSETS EMPLOYED ASSETS EMPLOYED ASSETS EMPLOYED
------ -------- ------ -------- ------ -------- ------ --------
(L MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
By activity:
Coal 2,933 1,277 3,004 1,399 3,102 1,440 2,975 1,370
Power -- -- 608 273 1,317 889 1,934 1,117
Networks -- -- 1,149 1,008 1,192 1,089 1,175 1,063
Other 86 (7) 69 (23) 30 (4) 105 8
----- -------- ----- -------- ----- -------- ----- --------
3,019 1,270 4,830 2,657 5,641 3,414 6,189 3,558
===== ======== ===== ======== ===== ======== ===== ========
By geographical location:
United Kingdom 44 7 1,780 1,283 2,520 1,981 3,121 2,166
US 2,685 1,048 2,723 1,154 2,727 1,226 2,706 1,148
Australia 290 215 327 220 394 207 269 226
Other -- -- -- -- -- -- 93 18
----- -------- ----- -------- ----- -------- ----- --------
3,019 1,270 4,830 2,657 5,641 3,414 6,189 3,558
===== ======== ===== ======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF 30 SEPTEMBER 31 MARCH
--------------------- --------
1994 1995 1996 1997
----- ----- ----- --------
(L MILLIONS)
<S> <C> <C> <C> <C>
Total assets are reconciled to the consolidated balance
sheet as follows:
Assets analysed by activity 3,019 4,830 5,641 6,189
Unallocated cash, investments and other assets -- 812 87 556
----- ----- ----- -----
Total assets 3,019 5,642 5,728 6,745
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF 30 SEPTEMBER 31 MARCH
---------------------- --------
1994 1995 1996 1997
----- ----- ------ --------
(L MILLIONS)
<S> <C> <C> <C> <C>
Capital employed is reconciled to invested
capital/shareholders' equity as follows:
Capital employed by activity 1,270 2,657 3,414 3,558
Current and deferred taxes (99) (303) (147) (285)
Dividend -- -- -- (29)
Borrowings less cash, investments and other unallocated
assets and liabilities (199) (246) (1,082) (1,399)
----- ----- ------ ------
Invested capital/shareholders' equity 972 2,108 2,185 1,845
===== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
------------------------------------------------------------------------------------
1994 1995 1996
-------------------------- -------------------------- --------------------------
DEPRECIATION DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND CAPITAL AND
EXPENDITURE DEPLETION EXPENDITURE DEPLETION EXPENDITURE DEPLETION
----------- ------------ ----------- ------------ ----------- ------------
(L MILLIONS)
By ac-
tivity:
<S> <C> <C> <C> <C> <C> <C>
Coal 133 113 140 119 98 121
Power -- -- -- -- 134 15
Networks -- -- -- -- 142 61
Other -- -- -- -- -- --
----------- ------------ ----------- ------------ ----------- ------------
133 113 140 119 374 197
=========== ============ =========== ============ =========== ============
<CAPTION>
SIX MONTHS ENDED
31 MARCH
--------------------------
1997
--------------------------
DEPRECIATION
CAPITAL AND
EXPENDITURE DEPLETION
----------- ------------
(L MILLIONS)
By ac-
tivity:
<S> <C> <C>
Coal 43 58
Power 26 11
Networks 71 31
Other 10 --
----------- ------------
150 100
=========== ============
</TABLE>
F-12
<PAGE> 16
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
5. COSTS AND OVERHEADS LESS OTHER INCOME
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
----------------------- ----------
1994 1995 1996 1997
----- ----- ----- ----------
(L MILLIONS)
<S> <C> <C> <C> <C>
Changes in stocks of finished goods and work in progress (6) (18) (19) (10)
Raw materials and consumables 194 232 1,983 1,334
Employment costs (Note 6) 304 321 411 220
Depreciation 60 58 128 64
Depletion 53 61 69 36
Restructuring and reorganisation -- 29 (29) 20
Other acquisition-related costs of Eastern -- -- 31 --
Production taxes 113 138 162 70
Other operating charges less other income 430 490 585 488
----- ----- ----- ----------
1,148 1,311 3,321 2,222
===== ===== ===== ==========
</TABLE>
Included above are costs and overheads for the six months ended 31 March 1997
within Teplarny Brno of L15 million.
The reorganisation expense of L20 million in the six months ended 31 March 1997
reflects full provision for the reopening of Eastern's voluntary severance
scheme in its Networks business.
The reorganisation provision created on the acquisition of Eastern in 1995 of
L29 million was no longer deemed necessary and was reversed in 1996. A deferred
tax asset of L11 million, recognised in 1995 to reflect the taxation relief in
respect of this provision, was also reversed in 1996.
Other operating charges less other income for the six months ended 31 March 1997
includes operating lease rentals payable of L138 million (years ended 30
September 1996 L77 million, 1995 L20 million, 1994 L20 million) primarily in
respect of plant and machinery.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------- ----------
1994 1995 1996 1997
------ ------ ------ ----------
(L MILLION)
<S> <C> <C> <C> <C>
Audit fees 0.4 0.4 0.8 0.6
Non-audit fees payable to Ernst & Young in the
United Kingdom -- -- 7.3 6.1
Non-audit fees payable to Ernst & Young outside the
United Kingdom and to other auditors -- -- -- 1.8
</TABLE>
F-13
<PAGE> 17
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
6. EMPLOYEES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------ ----------
1994 1995 1996 1997
------ ------ ------ ----------
(L MILLIONS)
<S> <C> <C> <C> <C>
(a) Employment costs
Wages and salaries 270 288 411 208
Employers' social security costs 20 20 28 14
Post-retirement benefits -- -- -- 17
Pension costs (Note 23) 14 13 17 10
------ ------ ------ ----------
304 321 456 249
Less: amounts capitalized -- -- (45) (29)
------ ------ ------ ----------
Charged to profit and loss account 304 321 411 220
====== ====== ====== ==========
</TABLE>
(b) Numbers employed
The average number of persons employed by the Group was:
<TABLE>
<CAPTION>
(NUMBER)
<S> <C> <C> <C> <C>
United Kingdom 193 201 6,195 6,770
US 7,442 7,336 6,824 6,549
Australia 1,054 1,069 1,098 1,120
Other -- -- -- 669
------ ------ ------ ------
8,689 8,606 14,117 15,108
====== ====== ====== ======
</TABLE>
The average number of persons employed by the Group by activity was:
<TABLE>
<S> <C> <C> <C> <C>
Coal 8,488 8,399 7,916 7,670
Power -- -- 1,630 2,906
Networks -- -- 4,370 4,256
Other 201 207 201 276
------ ------ ------ ------
8,689 8,606 14,117 15,108
====== ====== ====== ======
</TABLE>
7. EXCEPTIONAL ITEMS
During 1996, the Group received an interim dividend of L11 million and special
dividends (net of associated costs) totaling L165 million connected with the
flotation of The National Grid Group plc ("National Grid Group"). Amounts
credited to electricity customers in the form of a discount on electricity bills
connected with this flotation totalled L132 million.
The profit on disposal of First Hydro of L25 million in 1996 arose on the
disposal of the Group's interest in the pumped storage business of National Grid
Group.
F-14
<PAGE> 18
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
8. NET INTEREST
Prior to the Demerger, a significant proportion of the Group's cash and bank
balances and borrowing requirements were transferred to, or provided by, the
Hanson Group. No interest was received or paid on the amounts so transferred or
provided.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Interest expense
On loans wholly repayable within five years 7 5 68 42
On other loans 10 10 20 35
Interest capitalised -- -- (8) (5)
---------- ---------- ---------- ----------
17 15 80 72
Interest income (3) (4) (37) (35)
---------- ---------- ---------- ----------
Net interest expense 14 11 43 37
========== ========== ========== ==========
</TABLE>
Included in interest payable for the six months ended 31 March 1997 is L3
million relating to finance leases (year ended 30 September 1996: L7 million).
9. TAXATION CHARGE/(CREDIT)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
UNITED KINGDOM
Corporation tax at 33 per cent -- -- 3 68
Adjustment in respect of previous years -- -- (15) --
Advance corporation tax written off 1 -- -- --
Deferred taxation -- (11) 22 2
Tax credit on franked investment income -- -- 29 --
---------- ---------- ---------- ----------
1 (11) 39 70
OVERSEAS
Current taxation 21 25 19 7
Deferred taxation (5) 42 57 4
---------- ---------- ---------- ----------
Charge for the period 17 56 115 81
========== ========== ========== ==========
The taxation charge for the period has been
reduced by the following amounts arising
from group relief surrendered for nil
consideration by other Hanson Group
companies -- -- 30 26
========== ========== ========== ==========
</TABLE>
F-15
<PAGE> 19
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
9. TAXATION CHARGE/(CREDIT) (CONTINUED)
The tax charge for the six months ended 31 March 1997 is net of a credit of L1
million in respect of an exceptional item. If full provision had been made for
deferred tax for the period ended 31 March 1997, the tax charge would have
decreased by L71 million (year ended 30 September 1996 increased by L31 million,
1995 Lnil, 1994 reduced by L6 million) being L38 million in respect of capital
allowances in excess of depreciation and L33 million in respect of other timing
differences. As a result of the stand-alone basis of providing for deferred tax,
the charge for deferred tax shown above was increased by L57 million for the
year ended 30 September 1996 (1995 L42 million, 1994 reduced by L5 million).
As a result of the surrender of group relief for nil consideration, together
with the taxation effects of the National Grid Group flotation, the tax charge
shown for the three years ended 30 September 1996 is not representative of the
charge that may arise following the Demerger Transactions.
A reconciliation of the tax charge at the UK statutory rate of corporation tax
to the actual tax charge is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Profit before taxation 85 124 472 260
========== ========== ========== ==========
National UK corporation tax at 33 per cent 28 41 156 86
Permanent differences (4) (20) (4) 16
Timing differences (4) 3 (31) --
Free group relief -- -- (30) (26)
Effect of overseas tax rates (3) 32 39 4
Adjustments in respect of prior years -- -- (15) --
Other -- -- -- 1
---------- ---------- ---------- ----------
Actual tax charge 17 56 115 81
========== ========== ========== ==========
</TABLE>
10. EARNINGS PER SHARE
Earnings per share are based on the profit for each period and on 521 million
ordinary shares for each of the three years in the period ended 30 September
1996, being the number of ordinary shares in the Company which were issued in
respect of the Demerger.
Earnings per share for the six months ended 31 March 1997 are based on 519
million ordinary shares. This excludes the 2 million shares held as at 31 March
1997 by The Energy Group Employee Benefit Trust which has waived its right to
dividends on the shares it holds.
Adjusted earnings per share are based on the same number of shares and the
profit for the relevant period after excluding the items relating to the
National Grid Group flotation, the profit on disposal of First Hydro, the
exceptional restructuring and reorganisation and the related taxation as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Profit for the period as reported 68 68 357 179
Adjusted for
National Grid Group flotation -- -- (44) --
Profit on disposal of First Hydro -- -- (25) --
Exceptional restructuring and
reorganisation cost -- -- -- 20
Related taxation -- -- 29 (1)
---------- ---------- ---------- ----------
Profit as adjusted 68 68 317 198
========== ========== ========== ==========
</TABLE>
F-16
<PAGE> 20
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
11. DIVIDEND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
31 MARCH
PENCE PER 1997 IN
SHARE L MILLION
--------- ----------
<S> <C> <C>
Dividend paid to ordinary shareholders on 4 July 1997 5.5p 29
</TABLE>
Prior to the Demerger, the businesses comprising The Energy Group PLC were owned
by Hanson and appropriations of cash and other assets have been treated as
diminutions in net assets.
12. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
PLANT,
COAL EQUIPMENT
LAND AND AND GAS DISTRIBUTION GENERATING AND MOTOR
BUILDINGS ASSETS SYSTEM STATIONS VEHICLES TOTAL
--------- ------- ------------ ---------- --------- -----
(L MILLION)
<S> <C> <C> <C> <C> <C> <C>
COST
As at 1 October 1993 -- 2,298 -- -- 832 3,130
Exchange adjustments -- (99) -- -- (26) (125)
Additions -- 55 -- -- 77 132
Disposals -- (101) -- -- (52) (153)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1994 -- 2,153 -- -- 831 2,984
Exchange adjustments -- (5) -- -- -- (5)
Additions -- 36 -- -- 104 140
Acquisitions 78 228 904 261 118 1,589
Disposals and other -- (30) -- -- (72) (102)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1995 78 2,382 904 261 981 4,606
Exchange adjustments -- 35 -- -- 18 53
Additions 14 55 83 93 129 374
Disposals (17) (6) -- -- (32) (55)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1996 75 2,466 987 354 1,096 4,978
Exchange adjustments -- (116) -- -- (45) (161)
Additions 14 21 48 13 54 150
Acquisitions -- -- -- 36 7 43
Disposals and other -- (75) (3) (1) (44) (123)
-------- ------- ------------ ---------- --------- -----
As at 31 March 1997 89 2,296 1,032 402 1,068 4,887
======== ======= ============ ========== ========= =====
</TABLE>
F-17
<PAGE> 21
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
12. TANGIBLE FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
PLANT,
COAL EQUIPMENT
LAND AND AND GAS DISTRIBUTION GENERATING AND MOTOR
BUILDINGS ASSETS SYSTEM STATIONS VEHICLES TOTAL
--------- ------- ------------ ---------- --------- -----
(L MILLION)
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED DEPRECIATION AND DEPLETION
As at 1 October 1993 -- 289 -- -- 505 794
Exchange adjustments -- (14) -- -- (18) (32)
Charge for the year -- 53 -- -- 60 113
Disposals -- (34) -- -- (47) (81)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1994 -- 294 -- -- 500 794
Exchange adjustments -- (2) -- -- -- (2)
Charge for the period -- 61 -- -- 58 119
Disposals -- (23) -- -- (56) (79)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1995 -- 330 -- -- 502 832
Exchange adjustments -- 6 -- -- 10 16
Charge for the year 2 69 39 7 80 197
Disposals -- (16) -- -- (26) (42)
-------- ------- ------------ ---------- --------- -----
As at 30 September 1996 2 389 39 7 566 1,003
Exchange adjustments -- (19) -- -- (26) (45)
Charge for the period 1 36 20 -- 43 100
Disposals and other -- (20) -- (1) (60) (81)
-------- ------- ------------ ---------- --------- -----
As at 31 March 1997 3 386 59 6 523 977
======== ======= ============ ========== ========= =====
NET BOOK VALUE
As at 1 October 1993 -- 2,009 -- -- 327 2,336
======== ======= ============ ========== ========= =====
As at 30 September 1994 -- 1,859 -- -- 331 2,190
======== ======= ============ ========== ========= =====
As at 30 September 1995 78 2,052 904 261 479 3,774
======== ======= ============ ========== ========= =====
As at 30 September 1996 73 2,077 948 347 530 3,975
======== ======= ============ ========== ========= =====
As at 31 March 1997 86 1,910 973 396 545 3,910
======== ======= ============ ========== ========= =====
</TABLE>
The net book value of land and buildings at 31 March 1997 comprises freeholds of
L85 million (30 September 1996 L72 million), long leaseholds of L1 million (30
September 1996 L1 million) and short leaseholds of Lnil (30 September 1996
Lnil).
Coal and gas assets at 31 March 1997 include natural gas assets with a cost of
L40 million (30 September 1996 L35 million), accumulated depletion of L8 million
(30 September 1996 L2 million) and net book value of L32 million (30 September
1996 L33 million).
Capitalised interest at 31 March 1997 included within fixed assets amounts to
L13 million (30 September 1996 L8 million).
The cost of distribution system fixed assets at 31 March 1997 is shown net of
customer contributions of L359 million (30 September 1996 L343 million). The net
book value of customer contributions at 31 March 1997 was L267 million (30
September 1996 L256 million).
Other movements consist mainly of the change in treatment of Black Beauty Coal
Company which is described in Note 13.
Assets in the course of construction at 31 March 1997 amounted to L298 million
(30 September 1996 L310 million).
F-18
<PAGE> 22
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
12. TANGIBLE FIXED ASSETS (CONTINUED)
Generating stations include assets held under finance leases as follows:
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLIONS)
<S> <C> <C>
Cost 128 128
Accumulated depreciation (12) (14)
------------ --------
Net book value 116 114
============ ========
</TABLE>
13. FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
UNLISTED INVESTMENTS
--------------------------------------------------------
LOANS TO ASSOCIATED INVESTMENT IN
ASSOCIATES UNDERTAKING OTHER OWN SHARES TOTAL
---------- ----------- ----- ------------- -----
(L MILLION)
<S> <C> <C> <C> <C> <C>
As at 1 October 1993 -- 5 -- -- 5
Share of retained profit -- 1 -- -- 1
--------- ----------- ----- ------------- -----
As at 30 September 1994 -- 6 -- -- 6
Acquisitions 16 -- 15 -- 31
--------- ----------- ----- ------------- -----
As at 30 September 1995 16 6 15 -- 37
Disposals (16) (1) (3) -- (20)
--------- ----------- ----- ------------- -----
As at 30 September 1996 -- 5 12 -- 17
Adjustment -- 25 -- -- 25
Acquisitions -- -- 2 -- 2
Additions -- -- 28 11 39
Share of retained profit -- 1 -- -- 1
Disposals -- -- (12) -- (12)
--------- ----------- ----- ------------- -----
As at 31 March 1997 -- 31 30 11 72
========= =========== ===== ============= =====
</TABLE>
The investment in own shares represents The Energy Group Employee Benefit
Trust's investment in the company's shares.
The Energy Group Employee Benefit Trust has been established to acquire ordinary
shares in the company, by subscription or purchase, with funds provided by the
company to satisfy rights to shares arising on the exercise of share options and
on the vesting of performance-related share awards. At 31 March 1997 the trust
had acquired 2,250,000 ordinary shares at a cost of L10.7 million, financed by
interest-free loans from the company, which at the balance sheet date totalled
L15 million. Since 31 March 1997 the trust has acquired a further 1,850,891
ordinary shares at a cost of L9.3 million and a further interest-free loan of L5
million has been made to the trust. The trust has waived its right to dividends
on the ordinary shares held by it.
The principal associated undertaking at 31 March 1997 was:
<TABLE>
<CAPTION>
FINANCIAL SHARE CAPITAL PRE-TAX %
COUNTRY YEAR END AND RESERVES PROFIT OWNED
------- ----------- ------------- ------- -----
<S> <C> <C> <C> <C> <C>
Black Beauty Coal Company USA 31 December L74m L6m 33
</TABLE>
F-19
<PAGE> 23
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
13. FIXED ASSET INVESTMENTS (CONTINUED)
Following a detailed consideration of the nature of the joint venture agreement
governing Black Beauty Coal Company ("BBCC"), the Group's interest in that
operation is now accounted for on an equity accounting basis, rather than the
proportional consolidation basis which had historically been applied. This
change in treatment better reflects the nature of the Group's interest in the
operation, its revenues and its assets. A summary of the effect of this change
in accounting treatment on the Group balance sheet is shown below:
<TABLE>
<CAPTION>
GROUP'S SHARE OF
BBCC'S BALANCE SHEET
------------------------
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Tangible fixed assets 41 44
Working capital 37 43
Net debt (53) (62)
------------ --------
Group's share of net assets 25 25
============ ========
</TABLE>
Each of the individual items in the summarised BBCC balance sheet at 30
September 1996 was included within the Group balance sheet as at 30 September
1996 under proportional consolidation. During the six month period ended 31
March 1997 adjustments have been made to remove these items due to the change in
treatment. The above BBCC balance sheet analysis as at 31 March 1997 is purely
for information purposes as it is only the Group's share of the net assets of
BBCC which is included within the consolidated balance sheet under "Fixed Asset
Investments -- Associated Undertakings." The balance at the start of the period
is shown as an adjustment in the above table of fixed asset investments.
14. STOCKS
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Raw materials and consumables 152 118
Work in progress 52 66
Finished stock and items for resale 50 72
------------ --------
254 256
============ ========
</TABLE>
15. DEBTORS
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Amounts falling due after more than one year
Trade debtors -- 6
Advance corporation tax recoverable 84 91
Royalties receivable and other debtors 182 232
Operating lease prepayments 270 232
------------ --------
536 561
============ ========
Amounts falling due within one year
Trade debtors 502 647
Other debtors and prepayments 261 151
------------ --------
763 798
============ ========
</TABLE>
F-20
<PAGE> 24
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
16. CURRENT ASSET INVESTMENTS
At 31 March 1997 and at 30 September 1996 all current asset investments were in
unlisted entities.
17. SHORT-TERM DEPOSITS
At 31 March 1997, L408 million of the short-term deposits has been used to
cash-collateralise existing future obligations to certain banks in respect of
the funding of the operating leases of power stations leased from National
Power.
18. CREDITORS
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Amounts falling due within one year
Bank overdrafts 119 61
Short-term loans 14 732
Commercial paper 144 --
Finance leases 10 6
Trade creditors 313 376
Corporation tax 39 105
Other taxation and social security 61 20
Other creditors 49 148
Accruals and deferred income 292 270
Dividend -- 29
------------ --------
1,041 1,747
============ ========
</TABLE>
Weighted average interest rates at 31 March 1997 on bank overdrafts were 12.8
per cent, and on short-term loans and commercial paper, 6.5 per cent.
Weighted average interest rates at 30 September 1996 on bank overdrafts were 7.4
per cent, short-term loans, 7.5 per cent and commercial paper 7.1 per cent.
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Amounts falling due after more than one year
Loans not wholly repayable within 5 years
$300 million 5% subordinated income note 2006 192 170
L350 million 8.375% bonds 2004 347 348
L200 million 8.5% bonds 2025 197 197
------------ --------
736 715
Other loans repayable within 5 years 56 791
Net obligations under finance leases 153 149
------------ --------
945 1,655
============ ========
</TABLE>
L100 million of the L350 million 8.375 per cent bonds has been converted into
floating rate debt by way of interest rate swaps expiring in 2004. At 31 March
1997, the weighted average interest rate payable was 7.4 per cent (30 September
1996 5.7 per cent). Amounts shown above for bonds are net of unamortised issue
costs.
F-21
<PAGE> 25
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
18. CREDITORS (CONTINUED)
Long-term debt and finance leases are repayable as follows:
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
1998 29 --
1999 32 227
2000 43 243
2001 28 261
2002 26 149
thereafter 787 775
------------ --------
945 1,655
============ ========
</TABLE>
Long-term debt and finance leases are denominated in the following currencies:
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Sterling 689 1,473
US dollars 248 174
Australian dollars 8 8
------------ --------
945 1,655
============ ========
</TABLE>
The Group is exposed to loss in the event of non-performance by banks under
currency swap and interest rate protection agreements described above. The
extent of this exposure varies with the prevailing interest and currency rates
and was not material throughout the period. No single bank was party as at 31
March 1997 to more than L235 million nominal value of such agreements. The Group
does not anticipate non-performance by any of its counterparties.
Obligations of commercial banks under standby letters of credit totalled L135
million as at 31 March 1997.
F-22
<PAGE> 26
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
19. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
HEALTH CARE RECLAMATION
AND AND
OBLIGATIONS TO ENVIRONMENTAL DEFERRED
EMPLOYEES OBLIGATIONS TAXATION OTHER TOTAL
-------------- ------------- -------- ----- -----
(L MILLION)
<S> <C> <C> <C> <C> <C>
As at 1 October 1993 966 378 101 68 1,513
Exchange adjustments (49) (20) (5) (2) (76)
Utilised in year (84) (38) (4) (8) (134)
Provided/(released) in year 84 (8) (5) 2 73
Acquisitions -- (3) -- (1) (4)
-------------- ------------- -------- ----- -----
As at 30 September 1994 917 309 87 59 1,372
Exchange adjustments (3) (1) (2) -- (6)
Utilised in year (68) (43) -- (29) (140)
Provided/(released) in year 65 23 42 36 166
Acquisitions 8 17 86 258 369
-------------- ------------- -------- ----- -----
As at 30 September 1995 919 305 213 324 1,761
Exchange adjustments 12 4 1 -- 17
Utilised in year (80) (43) 7 (62) (178)
Provided/(released) in year 48 19 57 (4) 120
Acquisition adjustment (Note 16) -- -- (86) (77) (163)
-------------- ------------- -------- ----- -----
As at 30 September 1996 899 285 192 181 1,557
Exchange adjustments (43) (14) (9) (1) (67)
Utilised in period (34) (13) (7) (15) (69)
Provided in period 26 22 4 25 77
-------------- ------------- -------- ----- -----
As at 31 March 1997 848 280 180 190 1,498
============== ============= ======== ===== =====
</TABLE>
Deferred tax provided as at 30 September 1996 included L142 million in respect
of liabilities recognised by the Group, consequent upon being on a stand-alone
basis following the Demerger. The provided and unprovided liabilities to
deferred taxation were as follows:
<TABLE>
<CAPTION>
AMOUNTS PROVIDED AMOUNTS UNPROVIDED
----------------------- -----------------------
AS AT AS AT AS AT AS AT
30 SEPTEMBER 31 MARCH 30 SEPTEMBER 31 MARCH
------------ -------- ------------ --------
1996 1997 1996 1997
------------ -------- ------------ --------
(L MILLION)
<S> <C> <C> <C> <C>
Excess of capital allowances 100 87 803 753
Post-retirement healthcare benefits -- -- (226) (215)
Other timing differences 92 93 (200) (220)
------------ -------- ------------ --------
192 180 377 318
============ ======== ============ ========
</TABLE>
F-23
<PAGE> 27
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
20. ACQUISITIONS
During the six months ended 31 March 1997 the Group acquired 52.8 per cent. of
the issued share capital of Teplarny Brno a.s., a heating and generation company
based in the Czech Republic. For the period since acquisition, turnover of L18
million and operating profit of L3 million in respect of this acquisition are
included within the consolidated profit and loss account. The total purchase
consideration for the acquisition of this 52.8 per cent. interest was L21
million. Its operating assets and liabilities were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED 31 MARCH 1997
---------------------------------------
BOOK VALUE ADJUSTMENTS FAIR VALUE
---------- ----------- ----------
(L MILLION)
<S> <C> <C> <C>
Tangible fixed assets 33 10 43
Fixed asset investments 2 -- 2
Working capital (4) (2) (6)
Cash 1 -- 1
---------- ----------- ----------
32 8 40
========== =========== ==========
Cash consideration 21
Minority interest 19
----------
40
==========
The net cash flow for the acquisition was:
Cash consideration 21
Cash acquired (1)
----------
Net cash paid 20
==========
</TABLE>
Fair value adjustments were made to the book value of the assets and liabilities
of the above acquisition to bring them into alignment with the Group's
accounting policies and to adjust where applicable the carrying values of
certain assets and liabilities.
The above figures reflect a preliminary allocation of the purchase consideration
to the net assets and liabilities of the acquisition made in the period. The
preliminary allocation will be reviewed based on additional information up to 31
March 1998. The Directors do not believe that any net adjustments resulting from
such a review would have a material adverse effect on the Group.
For the year prior to acquisition, Teplarny Brno reported profit after tax of L4
million.
There were no significant acquisitions in the year ended 30 September 1994 and
the year ended 30 September 1996.
Eastern was acquired by Hanson on 18 September 1995. As explained above, Eastern
has been included in the balance sheet of the Group as at 30 September 1995 and
in its results from 1 October 1995. The Caballo and Rawhide mines were acquired
by Peabody on 1 November 1994.
F-24
<PAGE> 28
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
20. ACQUISITIONS (CONTINUED)
The operating assets and liabilities of Eastern and the Caballo and Rawhide
mines together with the fair value adjustments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
----------------------------------------------------------------------------------------
1995 1996
------------------------------------------------------------- ------------------------
CABALLO
EASTERN AND RAWHIDE
BOOK MINES TOTAL TOTAL TOTAL TOTAL TOTAL
VALUE BOOK VALUE BOOK VALUE ADJUSTMENTS FAIR VALUE ADJUSTMENTS FAIR VALUE
------- ----------- ---------- ----------- ---------- ----------- ----------
(L MILLION)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed assets 1,106 124 1,230 359 1,589 -- 1,589
Stock 12 10 22 -- 22 -- 22
Debtors 379 2 381 (13) 368 13 381
Cash 264 -- 264 -- 264 -- 264
Unlisted investments 284 -- 284 295 579 44 623
Creditors (392) (10) (402) (17) (419) 17 (402)
Loans and finance leases (688) -- (688) -- (688) -- (688)
Provisions for liabilities
and charges (129) (11) (140) (220) (360) 147 (213)
------- ----------- ---------- ----------- ---------- ----------- ----------
836 115 951 404 1,355 221 1,576
======= =========== ========== =========== ========== =========== ==========
Consideration (Eastern L2,496 million; Caballo and Rawhide L227 million) 2,723 2,723
Goodwill (Eastern) (1,368) (1,147)
---------- ----------
1,355 1,576
========== ==========
</TABLE>
The following fair value adjustments relating to Eastern and the Caballo and
Rawhide mines were made to the book values of the assets and liabilities
acquired:
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
-----------------------------------------------
1995 1996
----------------------------- ---------------
CABALLO
AND RAWHIDE
EASTERN MINES TOTAL EASTERN TOTAL
------- ----------- ----- ------- -----
(L MILLION)
<S> <C> <C> <C> <C> <C>
Tangible fixed assets 242 117 359 -- 359
Unlisted investments 295 -- 295 44 339
Debtors (13) -- (13) 13 --
Liabilities in respect of purchase contracts (129) -- (129) 61 (68)
Creditors (17) -- (17) 17 --
Deferred tax (86) -- (86) 86 --
Other liabilities -- (5) (5) -- (5)
------- ----------- ----- ------- -----
292 112 404 221 625
======= =========== ===== ======= =====
</TABLE>
Goodwill arising at the time of acquisition of Eastern of L1,368 million was
reduced in 1996 by L221 million, principally as a result of the release of
provisions no longer considered necessary.
F-25
<PAGE> 29
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
20. ACQUISITIONS (CONTINUED)
All of the above acquisitions have been accounted for using the acquisition
method of accounting. Had the acquisitions been made at the beginning of the
years in which they were actually made and at the beginning of the respective
previous years, the unaudited pro forma results of operations of the Group would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED 30 SEPTEMBER
------------------------
1994 1995
------ ------
(L MILLION)
<S> <C> <C>
Turnover 3,109 3,640
Profit for the year 210 132
Earnings per share 40.3p 25.3p
</TABLE>
The acquisition of Teplarny Brno would not have had a material impact on the
Group's results prior to acquisition.
21. CONTINGENT LIABILITIES
Certain properties in the US in which the Group has or has had an interest are
subject to actual or potential environmental claims. The Directors have made a
L42 million provision, included in provisions for reclamation and environmental
obligations (Note 19), in relation to these claims, but significant uncertainty
exists as to whether these claims will be pursued against the Group in all cases
and, where they are pursued, the amount of the eventual costs and liabilities.
In the event that future costs and liabilities are in excess of amounts accrued,
the Directors do not anticipate that they will have a material adverse effect on
the consolidated results of operations, financial portion or liquidity of the
Group.
In February 1997 final determinations were made against The National Grid
Company plc ("National Grid") and its group trustees by the Pensions Ombudsman
on complaints by two pensioners in National Grid's section of the Electricity
Supply Pension Scheme ("ESPS") relating to the use of the surplus arising under
the actuarial valuation of the National Grid section as at 31 March 1992 to meet
certain additional costs arising from the payment of pensions on early
retirement pursuant to reorganisation or redundancy and certain additional
contributions. These determinations were set aside by the High Court on 10 June
1997 and the arrangements made by National Grid and its trustees in dealing with
its section's surplus were confirmed. The two pensioners have now appealed
against this decision. If a similar complaint were to be made against Eastern in
relation to its use of actuarial surplus in its section of the ESPS, it would
resist it, ultimately through the courts. However, if a determination were
finally to be made against it and upheld by the courts, Eastern could have a
potential liability to repay to its section of the ESPS an amount estimated by
the Directors to be up to L75 million (exclusive of any applicable interest
charges).
The Group is subject to business risks which are actively managed against
exposures.
22. FINANCIAL COMMITMENTS
(a) Capital commitments of the Group were as follows:
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
1996 1997
------------ --------
(L MILLIONS)
<S> <C> <C>
Contracted but not provided for 83 146
============ ========
</TABLE>
(b) Gas take or pay contracts
There are various types of contracts for the purchase of gas. Almost all include
"take or pay" obligations under which the buyer agrees to pay for a minimum
quantity of gas in a year. In order to help meet the expected needs of its
wholesale and retail customers. Eastern has entered into a range of gas purchase
contracts. As at 31 March 1997 the commitments under long-term gas purchase
contracts amounted to an estimated L2.2 billion (30 September 1996 L2.3 billion)
covering periods up to 18 years forward. The Directors do not consider it
likely, on the basis of the Group's current expectations of demand from its
customers as compared with its take or pay obligations under such purchase
contracts, that any material payments will become due from the Group for gas not
taken.
F-26
<PAGE> 30
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
22. FINANCIAL COMMITMENTS (CONTINUED)
(c) The future minimum rental commitments at 31 March 1997, under finance leases
and non-cancellable operating leases, together with the present value of minimum
lease payments under finance leases were as follows:
<TABLE>
<CAPTION>
OPERATING FINANCE
YEAR ENDING 31 MARCH LEASES LEASES
-------------------- --------- -------
(L MILLION)
<S> <C> <C>
1998 22 16
1999 66 19
2000 62 20
2001 38 18
2002 36 17
thereafter 120 121
--------- -------
Total minimum lease payments 344 211
=========
Less amount representing interest (56)
-------
Present value of minimum lease payments 155
=======
</TABLE>
The majority of the operating lease commitments relate to coal-fired power
stations. Additional payments of approximately L6 per megawatt hour (indexed)
linked to output levels from these stations are payable for between the first
five and seven years of their operation by the Group.
(d) The annual commitments under non-cancellable operating leases at 30
September 1996 and 31 March 1997 were:
<TABLE>
<CAPTION>
30 SEPTEMBER 1996 31 MARCH 1997
------------------ ------------------
LAND AND LAND AND
BUILDINGS OTHER BUILDINGS OTHER
--------- ----- --------- -----
(L MILLION)
<S> <C> <C> <C> <C>
Leases expiring
Within one year -- -- -- --
Within two to five years -- 9 2 5
After five years 2 29 1 14
--------- ----- --------- -----
2 38 3 19
========= ===== ========= =====
</TABLE>
23. PENSION AND POST-RETIREMENT HEALTHCARE
PENSIONS
The Group participates in several defined benefit pension plans in the UK, the
US and Australia which cover the majority of employees. The benefits for these
plans are based primarily on years of credited service and final average
pensionable pay as defined under the respective plan provisions.
The total cost of all pensions of the Group in the years ended 30 September
1994, 1995 and 1996 and the six months ended 31 March 1997, was L14 million, L13
million, L17 million and L10 million, respectively. The amount for 1996 includes
L4 million relating to UK employees and L10 million in respect of additional
one-off cash retirement costs for US employees.
In the US, Peabody sponsors four main defined benefit pension plans. With the
exception of one plan, assets are set aside in separate trustee-administered
funds. Each of these plans is assessed annually by independent qualified
actuaries using the projected unit method, the latest valuations being as at 30
September 1996. In addition, Peabody participates in two multi-employer plans.
In these plans, the assets contributed by the participating employers are
aggregated and the contributions payable are determined by independent qualified
actuaries in accordance with industry-wide agreements. Peabody also has a number
of defined contribution plans. Costs relating to the multi-employer and the
defined contribution plans are recognised as incurred.
F-27
<PAGE> 31
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
23. PENSION AND POST-RETIREMENT HEALTHCARE (CONTINUED)
In the UK, the majority of Eastern employees are members of the ESPS which
provides pensions of a defined benefit nature for employees throughout the
Electricity Supply industry. The ESPS operates on the basis that there is no
cross-subsidy between employers and the financing of Eastern's pension
liabilities is therefore independent of the experience of other participating
employers. The assets of the ESPS are held in a separate trustee-administered
fund.
The pension cost relating to the Eastern part of the ESPS is assessed in
accordance with the advice of independent qualified actuaries using the
projected unit method. The latest actuarial valuation was carried out as at 31
March 1995.
The total market value of the assets of the US plans, excluding the
multi-employer and defined contribution plans, was L255 million as at 30
September 1996. The market value of the assets of Eastern's section of the ESPS
was L681 million at 31 March 1995.
The assumptions which had the most significant effect on the results of the
valuations were that the rate of investment return would exceed salary increases
(exclusive of merit awards) by 2 1/2 per cent. per annum for the UK plans and by
an average 3 1/2 per cent. per annum in the US, and with investment returns in
the UK being assumed to exceed future pension increases by 4 per cent. per
annum. The actuarial value of the assets was sufficient to cover 104 per cent.
of the benefits that had accrued to members in the UK and 98 per cent. in the
US.
Provisions for liabilities and charges (Note 19) include a provision of L4
million (provision of L1 million at 30 September 1994 and L10 million at 30
September 1995, prepayment of L1 million at 30 September 1996) representing the
excess of the accumulated amount charged against the Group's profits in respect
of pension costs over the contributions paid to the plans concerned.
POST-RETIREMENT HEALTHCARE
The Group also provides post-retirement health care and life assurance benefits
under plans mainly in the US to certain groups of its retired and active
employees.
As at 31 March 1997 the accumulated post-retirement benefit obligation excluding
pensions, as assessed by independent qualified actuaries, for retirees and the
obligation for prior service costs of currently active employees is
approximately L576 million. The charge for the six months ended 31 March 1997
has been accrued based upon actuarial calculations determined in accordance with
required accounting standards. This resulted in the recognition of service costs
for benefits earned during the period of approximately L2 million, and interest
cost on accumulated benefit obligations of approximately L21 million. The
actuarial assumptions used to estimate the obligations vary according to the
claims experience and economic conditions relevant to each plan. It has been
assumed that the annual per capita cost of benefits will increase 6-8 per cent.
depending on claims experience and economic conditions relevant to each plan.
This rate is assumed to decrease 1/2 per cent. a year to 5 per cent. The
weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7 1/2 per cent. as at 31 March 1997.
24. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------- ----------
1994 1995 1996 1997
----- ----- ------ ----------
(L MILLION)
<S> <C> <C> <C> <C>
Operating profit before exceptional items 99 135 446 317
Depreciation and depletion 113 119 197 100
Profit on sale of fixed assets (4) (8) (16) (3)
Share of profit of associated undertaking -- -- -- (2)
Increase in investments -- -- -- (2)
Increase in stocks (11) (19) (93) (8)
(Increase)/decrease in debtors (62) 197 (94) (83)
Operating lease prepayments -- -- (342) --
Increase/(decrease) in creditors 60 (6) 36 50
Decrease in provisions and other long-term creditors (52) (16) (122) (23)
----- ----- ------ -------
Net cash inflow from operating activities 143 402 12 346
===== ===== ====== =======
</TABLE>
F-28
<PAGE> 32
<TABLE>
<CAPTION>
LONG-TERM
LOANS CURRENT
AND FINANCES LOANS
SHARE LEASE AND NOTES
CAPITAL OBLIGATIONS PAYABLE TOTAL
------- ------------ ---------- -------
(L MILLION)
<S> <C> <C> <C> <C>
As at 1 October 1993 -- 245 51 296
Exchange adjustments -- (12) -- (12)
Cash (outflow)/inflow from financing -- (9) 36 27
---- ------- ----- -------
As at 30 September 1994 -- 224 87 311
Exchange adjustments -- (1) 1 --
Cash inflow/(outflow) from financing -- -- (20) (20)
Loans and finance lease obligations of Eastern -- 688 -- 688
---- ------- ----- -------
As at 30 September 1995 -- 911 68 979
Exchange adjustments -- 3 3 6
Cash inflow from financing -- 31 97 128
---- ------- ----- -------
As at 30 September 1996 -- 945 168 1,113
Additional net debt at 1 October 1996 -- -- 381 381
Non-cash demerger share issue 52 -- -- 52
Additional debt on demerger -- -- 42 42
Exchange movements -- (12) (9) (21)
Cash inflow from financing -- 789 149 938
Other movements -- (54) (6) (60)
Current loan reallocations -- (13) 13 --
---- ------- ----- -------
Balance as at 31 March 1997 52 1,655 738 2,445
==== ======= ===== =======
</TABLE>
Other movements principally comprise the debt of Black Beauty Coal Company which
is now accounted for on an equity accounting basis (see Note 13).
In 1996 the Group distributed its shareholding in National Grid Group to Hanson
as a dividend in specie of L393 million which is reflected in invested capital.
Analysis of net inflow/(outflow) of cash and cash equivalents in respect of the
acquisition of subsidiaries:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------ ----------
1994 1995 1996 1996
------ ------ ------ ----------
(L MILLION)
<S> <C> <C> <C> <C>
Cash consideration for Eastern -- (1) (2,495) --
Cash consideration for the Caballo and Rawhide mines -- (227) -- --
Cash consideration for Teplarny Brno -- -- -- (21)
Deposits acquired on acquisition of Eastern -- 264 -- --
Cash acquired on acquisition of Teplarny Brno -- -- -- 1
------ ------ ------ ----------
-- 36 (2,495) (20)
====== ====== ====== ==========
</TABLE>
F-29
<PAGE> 33
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
26. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
DEBT DUE DEBT DUE
AFTER WITHIN SHORT-TERM
CASH OVERDRAFTS 1 YEAR 1 YEAR DEPOSITS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C> <C> <C>
As at 1 October 1993 79 -- (245) (51) -- (217)
Exchange adjustments (1) -- 12 -- -- 11
Net cash flow 28 -- 9 (36) -- 1
---------- ---------- ---------- ---------- ---------- ----------
As at 30 September 1994 106 -- (224) (87) -- (205)
Exchange adjustments -- -- 1 (1) -- --
Net cash flow 237 -- -- 20 -- 257
Loans and finance leases
acquired -- -- (688) -- -- (688)
---------- ---------- ---------- ---------- ---------- ----------
As at 30 September 1995 343 -- (911) (68) -- (636)
Exchange adjustments 3 -- (3) (3) -- (3)
Net cash flow (173) (119) (31) (97) -- (420)
---------- ---------- ---------- ---------- ---------- ----------
As at 30 September 1996 173 (119) (945) (168) -- (1,059)
Pro forma additional debt at 1
October 1996 -- -- -- (381) -- (381)
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net debt at 1 October
1996 173 (119) (945) (549) -- (1,440)
Additional debt on demerger -- -- -- (42) -- (42)
Exchange adjustments (8) -- 12 9 -- 13
Net cash flow 221 58 (789) (149) 753 94
Other movements (1) -- 67 (7) -- 59
---------- ---------- ---------- ---------- ---------- ----------
As at 31 March 1997 385 (61) (1,655) (738) 753 (1,316)
========== ========== ========== ========== ========== ==========
</TABLE>
27. RECONCILIATION OF NET CASH FLOW MOVEMENT TO MOVEMENT IN NET DEBT (NOTE 26)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------------------ ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Net cash inflow/(outflow) in period 28 237 (292) 279
Increase in liquid cash resources -- -- -- 753
Change in debt resulting from cash flows (27) 20 (128) (938)
---------- ---------- ---------- ----------
1 257 (420) 94
Additional debt on the Demerger -- -- -- (42)
Other movements -- (688) -- 59
Exchange movements 11 -- (3) 13
---------- ---------- ---------- ----------
Movement in net debt in period 12 (431) (423) 124
Opening net debt (217) (205) (636) (1,059)
Opening additional net debt -- -- -- (381)
---------- ---------- ---------- ----------
Closing net debt (205) (636) (1,059) (1,316)
========== ========== ========== ==========
</TABLE>
28. RELATED PARTY TRANSACTIONS
During the six months ended 31 March 1997, a subsidiary of the Group has
purchased coal from Black Beauty Coal Company, a partnership in which the Group
has a 33 per cent. investment. The subsidiary purchased 37,645 tons of coal at a
cost of approximately L1 million during the six months ended 31 March 1997.
F-30
<PAGE> 34
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
28. RELATED PARTY TRANSACTIONS (CONTINUED)
Prior to the Demerger, the Group did not operate as a separate group, and
consequently there were a number of related party transactions between it and
the Hanson Group. These include transactions in respect of treasury, insurance,
taxation and other central services supplied by the Hanson Group to the Group.
These transactions have not been identified individually as it is not practical
to do so.
Hanson has agreed to provide the Group with business development and consultancy
services in the Far East for a period of three years following the Demerger. The
amounts payable for these services are not material.
29. EMPLOYEE SHARE PLANS
The Group has the following employee share plans:
(a) The Energy Group Sharesave Scheme which is available to all UK based
employees of participating companies within the Group and those directors
who are employees of participating companies and who devote more than 25
hours a week to their duties. Employees who participate in this scheme
have to enter into a monthly savings contract.
(b) The Energy Group Executive Share Option Scheme which is administered by
the Remuneration Committee of the Board of Directors of the Company ("the
Remuneration Committee") and is available at its discretion to employees
of the Group and those directors (other than Directors of the Company) who
devote more than 25 hours a week to their duties.
(c) The Energy Group Long-term Incentive Plan operates in conjunction with the
Company's Employee Benefit Trust. The Plan is supervised and administered
by the Remuneration Committee. The Plan may be made available to all
employees and directors of the Group at the discretion of the Remuneration
Committee, but the current intention is to limit it to the executive
directors of the Company and certain senior executives of the Group.
(d) The Energy Group Employee Benefit Trust is for the benefit of employees,
ex-employees and the spouses and dependants of such employees or
ex-employees of the Group. The purpose of the Trust is to facilitate and
encourage ownership of the Company's shares.
(e) The Peabody Plans are voluntary plans open to all applicable US based
employees of Peabody (one plan is also open to hourly paid employees).
Share options outstanding at 31 March 1997:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OUTSTANDING PRICE (PENCE)
----------- -------------
<S> <C> <C>
Executive share options 1,624,572 547.5
Sharesave scheme 871,797 465.0
Sharesave scheme 5,168,260 438.0
</TABLE>
The options listed above were all granted between 25 February and 31 March 1997.
No options lapsed or were exercised prior to 31 March 1997.
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP
The financial statements have been prepared under UK GAAP which differ in
certain respects from US GAAP.
The following is a summary of the principal differences between UK GAAP and US
GAAP that are significant to the Group and adjustments to profit for the year
end equity shareholders' funds (shareholders' equity reserves) which would be
required if the financial statements were to be restated under US GAAP.
GOODWILL
Under UK GAAP, goodwill arising on the acquisition of a subsidiary is set off
against reserves in the year in which that subsidiary is acquired. Under US
GAAP, such goodwill is capitalized and amortized through the profit and loss
account over its estimated useful life, not exceeding 40 years. For the purposes
of the reconciliations set out below, an estimated useful life of 25 years has
been adopted. Under UK GAAP, the gain or loss on the sale of a subsidiary
includes any goodwill previously set off against reserves. Under US GAAP, such
gain or loss includes any unamortized
F-31
<PAGE> 35
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
goodwill relating thereto. For US GAAP purposes, the carrying amount of goodwill
is periodically compared with future potential cash flows over the remaining
amortization period.
TAXATION
Under UK GAAP, deferred tax is provided using the liability method for all
timing differences to the extent that it is probable that the liability will
crystallize in the foreseeable future. US GAAP require deferred taxation to be
provided in full, using the liability method on all temporary differences
between the tax and book bases of assets and liabilities.
Under US GAAP, valuation allowances with respect to deferred tax assets are
provided when it is considered more likely than not that all or a portion of the
deferred tax assets will not be realized. As discussed in Note 9, the tax borne
by the Group may not be representative of the charges it will incur following
Demerger and thus differs from the amount the Group in the three years ended 30
September 1996 would have borne as a stand-alone entity. US GAAP require taxes
to be allocated among the members of a group if they prepare separate financial
statements.
PENSION PLANS
Under both UK GAAP and US GAAP, the cost of providing pensions under the Group's
defined benefit schemes is charged to the consolidated profit and loss account
over the employees' service lives. US GAAP require that the projected benefit
obligations be matched against the fair value of the schemes' assets and that
adjustments be made to reflect any unrecognised obligations or assets in
determining the pension cost or credit for the period. US GAAP also prescribe
the basis for determining curtailment costs. In connection with the acquisition
of Eastern, under US GAAP, a prepaid pension cost of L119 million, equal to the
excess of Eastern's pension scheme assets over the related projected benefit
obligation at 30 September 1995, has been recognised.
PROVISION FOR RESTRUCTURING AND REORGANISATION
Under UK GAAP, the Group charged L20 million against profit in the six months
ended 31 March 1997 (and L29 million in the year ended 30 September 1995) in
relation to provisions for restructuring and reorganisation. Under US GAAP these
provisions would not have been permitted. The 1995 provision was reversed under
UK GAAP in the year ended 30 September 1996 as it was no longer required.
Accordingly, under US GAAP, this reversal has been removed in the reconciliation
below.
IMPAIRMENT OF LONG-LIVED ASSETS
The Group's accounting policy for impairment of long-lived assets was adopted
for the first time in the year ended 30 September 1996. This policy accords with
the requirements of Statement of Financial Accounting Standards ("SFAS") No.
121. Under UK GAAP, the change in accounting policy has been treated as a prior
year adjustment and, accordingly, the financial statements have been presented
on the basis of the revised policy with the effect of the change on prior years
reflected in invested capital at 1 October 1993. Under US GAAP, impairment
losses resulting from the application of SFAS 121 to assets to be held and used
are reported in the period in which the recognition criteria are first applied
and met as a component of continuing operations.
SUBORDINATED INCOME NOTE
Under UK GAAP, the 5 per cent. subordinated income note 2006 is recorded at its
nominal amount. Under US GAAP, this income note has been discounted at a rate of
13 per cent. per annum.
DIVIDEND
Under UK GAAP, dividends are recorded in the financial statements for the period
to which they relate. Under US GAAP, dividends are not recorded until they are
declared.
EXCEPTIONAL ITEMS
Under UK GAAP, the exceptional effects of the flotation of National Grid Group
have been shown separately in the consolidated profit and loss account and
operating profit and earnings per ordinary share are disclosed both before and
after this effect. Further, the gain on sale of First Hydro is reported as a
non-operating exceptional item after operating profit. Under US GAAP, the gain
on sale of First Hydro would have been included in the determination of
operating profit and disclosure of operating profit and earnings per ordinary
share before and after exceptional items is not permitted.
OUTPUT-LINKED LEASE PAYMENTS
Under UK GAAP, the output-linked operating lease payments are charged to the
consolidated profit and loss account over the estimated useful lives of the
related power stations, which exceed the payment periods involved. Under US
GAAP, such payments are considered as contingent rental payments and therefore
are charged as incurred. The amounts shown for 31 March 1997 along with the
related deferred tax effects, have been restated. Previously, no adjustment was
made for such difference between UK and US GAAP.
F-32
<PAGE> 36
PROFIT FOR THE YEAR/PERIOD
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------ ----------
1994 1995 1996 1997
----- ----- ------ ----------
(L MILLION)
<S> <C> <C> <C> <C>
Profit for the year/period as reported in the
consolidated profit and loss accounts 68 68 357 179
Significant adjustments:
Discount on subordinated income note (6) (6) (7) (7)
Goodwill amortization -- -- (55) (23)
Impairment of long lived assets (3) (3) (578) --
Restructuring and reorganisation provision -- 29 (29) 20
Pensions -- -- 5 5
Output-linked lease payments -- -- -- (41)
Taxation--stand-alone adjustment (9) 17 (2) (6)
Deferred taxation:
Effect of the above adjustments 1 (8) 242 (9)
Effect of differences in methodology (3) (7) (41) 18
---- ---- ----- --------
Profit/(loss) for the period (net income/(loss)) as
adjusted to accord with US GAAP 48 90 (108) 136
==== ==== ===== ========
Per ordinary share as so adjusted 9.2p 17.3p (20.7)p 26.2p
Per American Depositary Share as so adjusted 36.8p 69.2p (82.8)p 104.8p
Number of shares used in computing per ordinary share
amounts (millions) 521 521 521 519
==== ==== ===== ========
</TABLE>
Note: Each American Depositary Share represents four ordinary shares.
INVESTED CAPITAL/SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
------------ --------
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Invested capital/shareholders' equity as reported in the
consolidated balance sheets 2,185 1,845
Significant adjustments:
Goodwill--cost 1,147 1,147
--amortization (55) (78)
Tangible fixed assets -- --
Subordinated income note 67 60
Restructuring and reorganization provision -- 20
Pensions 124 132
Fixed asset investments--own shares -- (11)
Taxation--stand-alone adjustment 6 --
Output-linked lease payments -- (41)
Dividend -- 29
Deferred taxation:
Effect of the above adjustments (41) (50)
Effect of differences in methodology (377) (381)
------------ --------
Invested capital/shareholders' equity as adjusted to accord
with US GAAP 3,056 2,672
============ ========
</TABLE>
F-33
<PAGE> 37
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
CONSOLIDATED CASH FLOW STATEMENT
The consolidated statements of cash flows present substantially the same
information as that required under US GAAP. UK GAAP and US GAAP differ, however,
with regard to classification of items within the statements and as regards the
definition of cash and cash equivalents.
In 1996 the UK Accounting Standards Board revised the UK Financial Reporting
Standard No. 1, "Cash Flow Statements". The consolidated cash flow statement for
the six months ended 31 March 1997 set out on page F-4 has been prepared in
conformity with the revised standard and prior years have been restated to
conform with the new presentation. The principal differences between this
statement and cash flow statements presented in accordance with US GAAP are as
follows:
1. Under UK GAAP, net cash flow from operating activities is determined before
considering cash flows from (a) returns on investments and servicing of
finance and (b) taxes paid. Under US GAAP, net cash flow from operating
activities is determined after these items.
2. Under UK GAAP, capital expenditure is classified separately, while under US
GAAP, it is classified as an investing activity.
3. Under UK GAAP, dividends are classified separately, while under US GAAP,
dividends are classified as financing activities.
4. Under UK GAAP, movements in short-term investments are not included in cash,
but classified as management of liquid resources. Under US GAAP, short-term
investments with a maturity of three months or less at the date of
acquisition are included in cash.
The categories of cash flow activity under US GAAP can be summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------- ----------
1994 1995 1996 1997
------ ------ ------ ----------
(L MILLION)
<S> <C> <C> <C> <C>
Cash flows from operating activities 119 387 (30) 216
Cash outflows on investing activities (84) (338) (2,348) (801)
Cash flows from financing activities (34) (77) 2,418 938
------ ------ ------ -------
Decrease/(increase) in cash and cash equivalents 1 (28) 40 353
Effect of foreign exchange rate changes (2) -- -- (8)
Cash and cash equivalents as at start of period 29 28 -- 40
------ ------ ------ -------
Cash and cash equivalents as at end of period 28 -- 40 385
====== ====== ====== =======
</TABLE>
F-34
<PAGE> 38
OPERATING PROFIT
Operating profit under US GAAP is derived as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Operating profit under UK GAAP 99 135 490 297
Profit on disposal of First Hydro -- -- 25 --
Goodwill amortization -- -- (55) (23)
Restructuring and reorganisation provision -- 29 (29) 20
Output-linked lease payments -- -- -- (41)
Pensions -- -- 5 5
Impairment of long-lived assets (3) (3) (578) --
---------- ---------- ---------- ----------
Operating profit/(loss) under US GAAP 96 161 (142) 258
========== ========== ========== ==========
Comprising:
Coal 99 157 (424) 66
Power -- -- 83 88
Networks -- -- 216 127
Other (3) 4 (17) (23)
---------- ---------- ---------- ----------
96 161 (142) 258
========== ========== ========== ==========
</TABLE>
ADDITIONAL INFORMATION ABOUT PROFITS BEFORE TAXATION REQUIRED BY US GAAP
Profit before taxation:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED 31 MARCH 1997
(L MILLION)
<S> <C>
United Kingdom 194
Other 66
------
260
======
</TABLE>
The interest expense prior to the Demerger was affected significantly by the
financing arrangements of Hanson. Accordingly the allocation of interest expense
between the United Kingdom and Other for periods ending on or before 30
September 1996 is not considered meaningful. Consequently the analysis of profit
before taxation is only presented here for the six months ended 31 March 1997.
ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS REQUIRED BY US GAAP
Contracts for differences and electricity forward agreements
Almost all electricity generated in England and Wales must be sold to the Pool,
and electricity suppliers must likewise generally buy electricity from the Pool
for resale to their customers. The Pool is operated under a Pooling and
Settlement Agreement to which all licensed generators and suppliers of
electricity in Great Britain are party.
The Eastern Group utilizes contracts for differences ("CfDs") and electricity
forward agreements ("EFAs") to manage its net exposure to fluctuations in
electricity pool prices. CfDs and EFAs are contracts which fix the price of
electricity for an agreed quantity and duration by reference to an agreed strike
price. EFAs are similar in nature to CfDs, except that they tend to last for
shorter time periods and are based on standard industry terms rather than being
individually negotiated. Long-term CfDs are in place to hedge a proportion of
electricity purchases up to 2009. Up until 1998 the costs of such CfDs are
passed through to customers as part of franchise tariffs. From 1998 such CfDs
represent an annual commitment of approximately five terawatt hours ("TWh"),
falling on a linear basis to two TWh by 2005 and finally expiring in 2010. There
are no similar long-term commitments under EFAs.
F-35
<PAGE> 39
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
Estimates of the fair value of these contracts would be based upon assumptions
of a number of complex factors, in particular the anticipated long-term level of
Pool prices and appropriate market discount rates. It is not possible to
estimate the long-term level of Pool prices with reasonable accuracy because of
their inherent volatility. In addition, there is no readily identifiable market
through which they could be realised in an exchange. In view of the foregoing,
it is not practicable to ascribe a fair value of these contracts.
Approximately 60 per cent by volume of all of the Group's CfDs and EFAs in the
six months ended 31 March 1997 were contracted with National Power plc and
PowerGen plc.
Interest rate swaps
Interest rate swaps are used by the Group to convert fixed into floating rate
debt. The Group is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swaps. This exposure is managed by selecting
counterparties based on their credit ratings and by monitoring total exposure to
each counterparty.
Fair value of financial instruments
US GAAP require the disclosure of estimated fair values for all financial and
derivative financial instruments for which it is practicable to estimate that
value. The carrying amounts and fair values of the material financial
instruments of the Group are as follows:
<TABLE>
<CAPTION>
AS AT 30 SEPTEMBER AS AT 31 MARCH
1996 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(L MILLION)
<S> <C> <C> <C> <C>
Assets
Fixed asset investments 17 17 72 72
Current asset investments 8 8 10 10
Short-term deposits -- -- 753 753
Cash 173 173 385 385
Liabilities
Bank overdrafts, short-term loans and commercial
paper 277 277 793 793
Long-term debt 792 782 1,506 1,502
Off balance sheet instruments interest rate swaps -- 11 -- 5
</TABLE>
The following methods and assumptions were used to determine the above fair
values:
(i) Because of the unusual and specific nature of the fixed asset investments
it is not considered practicable to estimate their fair value;
(ii) The carrying amounts of current asset investments, short-term deposits and
cash approximate their fair value;
(iii) The fair value of the 5 per cent. subordinated income note 2006 is based
on estimated borrowing rates used to discount the cash flows to their
present value. The fair value of the investment bonds is based on their
quoted mid-market prices and excludes the value of the interest rate
swaps; and
(iv) The fair value of the interest rate swaps is based on the cancellation
value of each swap quoted by the relevant bank counterparty.
F-36
<PAGE> 40
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
ADDITIONAL DEFERRED TAX INFORMATION REQUIRED BY US GAAP
The components of the estimated net deferred tax liability that would be
recognised under US GAAP are as follows:
<TABLE>
<CAPTION>
AS AT AS AT
30 SEPTEMBER 31 MARCH
------------ --------
1996 1997
------------ --------
(L MILLION)
<S> <C> <C>
Deferred taxation liabilities
Excess of book value over taxation value of fixed assets 885 866
Other temporary differences 167 33
------ -------
1,052 899
------ -------
Deferred taxation assets
Taxation effect of losses carried forward (2) (7)
Other temporary differences (563) (389)
------ -------
(565) (396)
Less: valuation adjustment 133 108
------ -------
(432) (288)
------ -------
Net deferred tax liability 620 611
====== =======
Of which:
Current (23) (25)
Non-current 643 636
------ -------
620 611
====== =======
</TABLE>
ADDITIONAL PENSIONS AND POST-RETIREMENT HEALTHCARE BENEFITS INFORMATION REQUIRED
BY US GAAP
Pensions
The long-term assumptions used in accounting for pension costs under US GAAP
were:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
----------------------- ----------
1994 1995 1996 1997
----- ----- ----- ----------
% % % %
<S> <C> <C> <C> <C>
US plans:
Expected long-term rate of return on assets 9.0 9.0 9.0 9.0
Rate of salary increases 4.5 4.3 4.3 3.8
Discount rate 8.5 7.5 7.5 7.5
UK plans:
Expected long-term rate of return on assets -- 9.0 9.0 8.5
Rate of salary increases -- 6.5 6.5 5.0
Discount rate -- 9.0 9.0 8.0
Pension increases -- 5.0 5.0 4.0
</TABLE>
F-37
<PAGE> 41
The net periodic cost calculated in accordance with US GAAP, included the
following components:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
-------------------------------------- ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the
period 7 7 23 8
Interest cost on projected benefit
obligations 17 18 74 38
Actual return on plan assets (18) (18) (86) (48)
Net amortisation and deferral 1 -- (1) 1
----- ----- ----- -----
Net periodic cost 7 7 10 (1)
Less employees' contributions -- -- (6) --
----- ----- ----- -----
Group's pension cost 7 7 4 (1)
Additional cost on curtailment under SFAS 88 -- -- 10 --
Defined contribution plans 3 3 3 1
Multi-employer plans 3 3 3 1
----- ----- ----- -----
Total expenses under US GAAP 13 13 20 1
===== ===== ===== =====
</TABLE>
The following table sets forth the funded status and amounts recognised in the
combined balance sheet at 31 March 1997 and 30 September 1996 for the Group's
defined pension plans excluding multi-employer plans. Of the total amounts of
assets shown in the note, approximately 25 per cent. applies to US defined
benefit plans.
Under purchase accounting, a fair value adjustment of L119 million, equal to the
excess of Eastern's pension plan assets over the projected benefit obligation,
was included as a prepaid pension cost under US GAAP at 30 September 1995.
<TABLE>
<CAPTION>
AS AT 30 SEPTEMBER 1996 AS AT 31 MARCH 1997
----------------------------- -----------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(L MILLION)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation 814 34 647 236
Non-vested benefit obligation 9 6 -- 16
------ ----- ----- -----
Accumulated benefit obligation 823 40 647 252
====== ===== ===== =====
Projected benefit obligation 895 47 697 274
Plan assets at fair value 1,025 27 844 251
------ ----- ----- -----
Plan assets in excess of/(less than)
projected benefit obligation 130 (20) 147 (23)
Unrecognised prior service costs (1) 4 -- 5
Unrecognised net gain/(loss) 10 7 1 13
Unrecognised net (asset) obligation at
transition -- -- -- --
Adjustment required to recognise minimum
liability -- (5) -- (6)
Tax effect of liability of pension plans
recorded at acquisition date -- -- -- --
------ ----- ----- -----
Prepaid (accrued) pension cost recognised
in the balance sheet 139 (14) 148 (11)
====== ===== ===== =====
Prepaid/(accrued) pension cost recognised
under UK GAAP 16 15 5 (11)
US GAAP adjustment 123 (1) 143 --
------ ----- ----- -----
Prepaid (accrued) pension cost recognised
under US GAAP 139 (14) 148 (11)
====== ===== ===== =====
</TABLE>
F-38
<PAGE> 42
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
Post-retirement healthcare
The Group also provides post-retirement healthcare and life insurance benefits
under plans mainly in the US to certain groups of its retired and active
employees.
The long-term assumptions used were:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 30 SEPTEMBER ENDED 31 MARCH
--------------------------------------------------- ---------------
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
% % % %
<S> <C> <C> <C> <C>
Healthcare cost trend rate:
Age under 65 9.9 down to 5.5 9.4 down to 5.0 8.6 down to 5.0 8.0 down to 5.0
over 9 years over 8 years over 7 years over 6 years
Age over 65 7.7 down to 5.5 7.4 down to 5.0 7.0 down to 5.0 6.7 down to 5.0
over 9 years over 8 years over 7 years over 6 years
Medicare 6.8 down to 5.5 6.7 down to 5.0 6.3 down to 5.0 6.0 down to 5.0
over 9 years over 8 years over 7 years over 6 years
Discount rate 8.5 7.5 7.5 7.5
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. Increasing the assumed health care cost trend rates
one-percentage-point in each year would increase the accumulated postretirement
benefit obligation as of 31 March 1997 by L73.0 million. The effect of this
change on the aggregate of the service cost and interest cost components of net
periodic post retirement benefit costs for the six months ended 31 March 1997
would be an increase of L3.5 million.
The post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------------------ ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Service cost 7 7 8 2
Interest cost 36 40 40 21
Amortisation of transition obligation 1 -- -- --
Net amortisation and deferral -- (6) (13) (6)
--- --- ----- ---
Group's post-retirement benefit cost 44 41 35 17
=== === ===== ===
</TABLE>
The provisions for post-retirement healthcare and life insurance benefits
included in Note 19 are derived as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED 30 SEPTEMBER 31 MARCH
------------------------------------ ----------
1994 1995 1996 1997
---------- ---------- ---------- ----------
(L MILLION)
<S> <C> <C> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees 277 312 330 343
Fully eligible plan participants 93 65 63 168
Other active plan participants 151 180 185 65
----- ----- ----- -----
521 557 578 576
Unrecognized net gain/(loss) 26 (19) (30) (39)
Unrecognized prior service cost -- 23 25 16
Unrecognized transition obligation (13) -- -- --
----- ----- ----- -----
Accrued post-retirement benefit cost recognized
in the balance sheet 534 561 573 553
===== ===== ===== =====
</TABLE>
F-39
<PAGE> 43
FINANCIAL STATEMENTS -- SECTION 1: THE GROUP
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
ADDITIONAL INFORMATION ABOUT IMPAIRMENT OF LONG-LIVED ASSETS REQUIRED US GAAP
SFAS 121 requires impairment losses to be recognised on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated under various assumptions by those assets
are less than the assets' carrying amount. Impairment losses under SFAS 121 are
measured by comparing the estimated fair value of the assets to their carrying
amount.
During the course of its financial year ended 30 September 1996, Hanson
commissioned independent valuations of each of its principal operating
businesses in connection with formulating its plans for their possible demerger.
These indicated, inter alia, possible impairment in certain of the Group's US
coal assets, arising from the cumulative effects of the Clean Air Amendments Act
1990 and weak demand and lower prices in certain markets. As a result, a
detailed evaluation of the Group's US coal assets was undertaken in accordance
with the principles laid down by SFAS 121.
Under US GAAP, a non-cash charge of L578 million would be recorded in the year
ended 30 September 1996 as a result of adopting the evaluation methodology of
SFAS 121, principally related to impairment of certain inactive and undeveloped
coal reserves.
Under US GAAP, prior to the adoption of SFAS 121, asset impairment was evaluated
at an operating company level based on the contribution of operating profits and
undiscounted cash flows being generated from those operations. Under the Group's
previous policy, assets used in operations, which consisted of multiple
operating companies, were evaluated for impairment based on gross margins and
cash flows generated by each separate operating company in a given business
cycle. No reduction in carrying value was required since, on that basis,
earnings and cash flows indicated no impairment in asset value.
SFAS 121 requires the impairment review to be performed at the lowest level of
asset grouping for which there are identifiable cash flows, a change from the
higher level at which the Group's previous accounting policy measured
impairment. The Group's economic grouping of assets was based on the markets in
which the operations compete, and in the coal segment consisted of both active
and inactive mines, as well as undeveloped properties. Evaluation of assets at
the lower grouping level indicated an impairment of certain of those assets.
This policy does not allow off-setting of surpluses from assets whose future
cash flows exceed current book values. Where shortfalls in cash flows compared
to carrying values arise, the assets are written down to fair value, determined
by discounted future cash flows from the assets or estimated current market
values.
CONCENTRATION OF CREDIT RISK
The Directors did not consider there to be any significant concentration of
credit risk as at 31 March 1997.
IMPACT OF NEW ACCOUNTING STANDARDS
Environmental remediation liabilities
Statement of Position No. 96-1 "Environmental Remediation Liabilities" ("SOP
96-1") was issued in October 1996. The statement provides authoritative guidance
on specific accounting issues that are present in the recognition, measurement,
display and disclosure of environmental liabilities. The provisions of the
statement are effective for fiscal years beginning after 15 December 1996. SOP
96-1 is not expected to have a material impact on the financial position or
results of operations of the Group presented under US GAAP.
Earnings per share
In February 1997, FAS 128 "Earnings per Share" was issued. The provisions of
this statement must be adopted for accounting periods ending after 15 December
1997. Earlier adoption is not permitted. FAS 128 simplifies the provisions
relating to the computation of earnings per share ("EPS") previously found in
APB Opinion No. 15 "Earnings per Share" ("APB 15"). It replaces the presentation
of primary EPS with basic EPS and requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. EPS for US GAAP purposes are not computed using the
methodology prescribed by APB 15 as the impact of doing so is not material. The
adoption of FAS 128 by the Company is not expected to have any material impact
on the EPS amounts previously reported under US GAAP.
F-40
<PAGE> 44
FINANCIAL STATEMENTS -- SECTION 1: THE GROUP
- --------------------------------------------------------------------------------
30. DIFFERENCES BETWEEN UK GAAP AND US GAAP (CONTINUED)
Accounting and disclosure of stock based compensation
FASB Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation" which establishes financial accounting and reporting
standards for stock-based employee compensation plans, is effective for
accounting periods beginning after 15 December 1995. The Statement provides the
option to continue under the accounting provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
providing that proforma footnote disclosures of the effects on net income and
earnings per share, calculated as if the new method had been implemented, are
included. The Company has elected to continue under APB No. 25, but the proforma
disclosures have been omitted, as the effects on net income and earnings per
share are not material.
Additional information required by US GAAP is shown below:
<TABLE>
<CAPTION>
ASSUMED ASSUMED
REMAINING -------- --------- FAIR
CONTRACTUAL EXPECTED RISK-FREE VALUE OF
LIFE LIFE RATE OPTION
(YEARS) (YEARS) (%) (P)
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Executive share options 6.5 3 6.41 100.6
Sharesave scheme 3.3 3 6.41 133.9
Sharesave scheme 5.3 5 6.68 157.4
</TABLE>
The fair values of options granted have been estimated using the Black-Scholes
option-pricing model, assuming a dividend yield of 5.02%, an expected volatility
of 29.5% and the risk-free rates and expected lives shown above.
31. SUBSEQUENT EVENTS
On 14 April 1997 Eastern Electricity plc issued L200 million 8.75% bonds due
2012.
On 24 April 1997 Eastern issued promissory notes of CZK 2,900 million
(approximately L59 million) to Ceska Sporiteina a.s. in the Czech Republic
redeemable no later than 29 April 2004. The notes are secured by the Group's
investments in Severomoravska Energetika a.s. and Teplarny Brno a.s.
On 19 May 1997 the Group completed its acquisition of Citizens Lehman Power
L.L.C., which has been renamed Citizens Power L.L.C. The acquisition involved an
initial payment of L12.5 million in cash, plus a payment deferred until 31 March
2000, equivalent to the net assets as of 30 June 1997. There will be additional
purchase consideration linked to profit goals up to 2002, subject to a maximum
consideration for the entire transaction of $120 million.
At 12 June 1997 the Group's shareholding in Teplarny Brno a.s. had increased to
70.3 per cent. at an additional cost of L4 million.
On 2 July 1997 the UK government confirmed its previously-announced intention to
charge a windfall levy on certain privatised UK utilities. The Directors
estimate Eastern's, and therefore the Group's liability to be approximately L112
million. This amount will be paid in two equal installments which fall due in
December 1997 and December 1998.
On 10 June 1997 the Company announced it was in discussions with PacifiCorp
which might lead to a combination of the two groups through a recommended cash
offer for The Energy Group PLC.
On 13 June 1997 the Company announced that it had agreed terms with PacifiCorp
for a recommended cash offer to be made by a wholly owned subsidiary of
PacifiCorp for The Energy Group PLC.
On 1 August 1997 the UK Secretary of State for Trade and Industry referred the
proposed acquisition of the Group by PacifiCorp to the Monopolies and Mergers
Commission. As a result of the referral, the recommended cash offer
automatically lapsed in accordance with its terms.
UNAUDITED SUBSEQUENT EVENTS DISCLOSURES
On 9 September 1997 Eastern announced that it had acquired a 49% interest in
Zamosc Energy Company which is developing three co-generation projects in
Poland.
On 13 October 1997 Energy Group Overseas B.V. issued $200 million 7 3/8%
Guaranteed Notes due 2017 and $300 million 7 1/2% Guaranteed Notes due 2027,
each series being unconditionally guaranteed by the Company.
F-41
<PAGE> 45
FINANCIAL STATEMENTS -- SECTION 1: THE GROUP
- --------------------------------------------------------------------------------
UNAUDITED SUBSEQUENT EVENTS DISCLOSURES (CONTINUED)
On 4 November 1997 Eastern announced that it had commenced trading in the Nord
Pool, the Scandinavian power market.
At 23 November 1997 the Group's shareholding in Teplarny Brno a.s. had increased
to 83.7% at an additional cost of L6 million.
On 19 December 1997 the proposed acquisition of the Group by PacifiCorp was
cleared by the UK Secretary of State for Trade and Industry following completion
of the investigation by the Monopolies and Mergers Commission.
On 1 January 1998 Eastern completed the sale of Eastern Electricity contracting
division to its management.
On 26 January 1998 the Company announced that it had received approaches from
parties other than PacifiCorp which might lead to an offer being made for the
Company.
On 3 February 1998 PacifiCorp announced a renewed recommended cash offer of 765
pence per share for the Company.
On 2 March 1998 Texas Utilities Company ("Texas") announced a recommended cash
offer of 810 pence per share for the Company, with a limited share alternative
calculated by reference to 835 pence per share. The Company entered into an
agreement with P&L Coal Holdings Corporation ("P&L") dated 2 March 1998,
conditional upon the Texas Offer becoming or being declared wholly
unconditional, to sell its interest in the Peabody group in the US and Australia
and also Citizens Power to P&L for approximately $2.3 billion plus the
assumption of debt.
On 3 March 1998 PacifiCorp increased its offer to 820 pence per share, following
which Texas raised its cash offer to 840 pence per share (and the limited share
alternative to 865 pence).
PacifiCorp announced on 30 April 1998 that it had decided not to increase its
offer for the Company and that offer then lapsed on 5 May 1998.
On 19 May 1998 the sale of Peabody and Citizens Power by the Group to P&L was
completed and Texas declared its offer for the Company wholly unconditional. The
turnover and operating profit of Peabody are set forth in Note 4 as Coal
activities. Citizens Power was acquired in May 1997.
F-42
<PAGE> 46
UNAUDITED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
UNAUDITED PRO FORMA PRO FORMA
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 SEPTEMBER 30 SEPTEMBER 31 MARCH
1997 1996 1997
NOTE LM LM LM
<S> <C> <C> <C> <C>
Turnover -- continuing activities 3 2,007 1,869 4,460
Costs and overheads less other income (1,836) (1,673) (3,975)
------ ------ ------
Operating profit -- continuing activities 3 171 196 485
Net interest payable and similar charges (65) (35) (88)
------ ------ ------
Profit on ordinary activities before taxation 106 161 397
Taxation charge for period -- on results 5 (28) (48) (121)
-- windfall 5 (112) - -
------ ------ ------
(Loss)/profit on ordinary activities after
taxation (34) 113 276
Dividend (41) - (29)
------ ------ ------
(Loss)/profit retained for the period (75) 113 247
------ ------ ------
Earnings per ordinary share
Basic 6 (6.5)P 21.7p 53.2p
Pre-exceptional costs 6 17.7P 21.7p 56.7p
</TABLE>
DIVIDEND
Ordinary shareholders: an interim dividend of 8p per ordinary share will be paid
on 9 January 1998 to those shareholders on the register on 19 December 1997. The
shares are expected to trade ex-dividend on the London Stock Exchange from 15
December 1997.
ADS holders: the dividend will be converted to US dollars on 9 January 1998
using the prevailing exchange rate on that date. Payment will be made on 16
January 1998 to holders on record on 19 December 1997. The ADSs are expected to
trade ex-dividend on the New York Stock Exchange from 17 December 1997.
F-43
<PAGE> 47
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED AT AUDITED AS AT AUDITED AS AT
30 SEPTEMBER 30 SEPTEMBER 31 MARCH
1997 1996 1997
LM LM LM
<S> <C> <C> <C>
FIXED ASSETS
Tangible fixed assets 3,986 3,975 3,910
Investments 83 17 72
------ ------ ------
4,069 3,992 3,982
------ ------ ------
CURRENT ASSETS
Stocks 309 254 256
Debtors 1,714 1,301 1,359
Investments 11 8 10
Short-term deposits 1,129 - 753
Cash 174 173 385
------ ------ ------
3,337 1,736 2,763
------ ------ ------
CREDITORS -- DUE WITHIN ONE YEAR
Short-term borrowings (648) (168) (738)
Overdrafts (70) (119) (61)
Other creditors (1,406) (754) (948)
------ ------ ------
(2,124) (1,041) (1,747)
------ ------ ------
NET CURRENT ASSETS 1,213 695 1,016
------ ------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES 5,282 4,687 4,998
CREDITORS -- DUE AFTER ONE YEAR (2,050) (945) (1,655)
PROVIDES FOR LIABILITIES AND CHARGES (1,506) (1,557) (1,498)
------ ------ ------
NET ASSETS 1,726 2,185 1,845
------ ------ ------
CAPITAL AND RESERVES
Called up share capital 52 52
Other reserves 583 639
Profit and loss account 1,091 1,154
Invested capital 2,185
------ ------ ------
EQUITY SHAREHOLDERS' FUNDS 1,726 2,185 1,845
------ ------ ------
</TABLE>
F-44
<PAGE> 48
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
<TABLE>
<CAPTION>
UNAUDITED AUDITED
SIX MONTHS TO SIX MONTHS TO
30 SEPTEMBER 31 MARCH
1997 1997
LM LM
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES 273 346
---- ----
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received and other income 58 29
Interest paid (91) (83)
Dividends received from investments 3 1
---- ----
(30) (53)
---- ----
TAXATION (8) (23)
---- ----
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (167) (133)
Purchase of investments (9) (39)
Sale of tangible fixed assets 5 4
Sale of investments - 12
---- ----
(171) (156)
---- ----
ACQUISITIONS
Purchase of subsidiary undertakings (14) (20)
---- ----
EQUITY DIVIDENDS PAID (29) -
---- ----
CASH FLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING 21 94
---- ----
MANAGEMENT OF LIQUID RESOURCES
Net cash placed on short-term deposit (373) (753)
---- ----
FINANCING
Net new short-term borrowings (153) 149
Debt due beyond a year:
New long term loans 278 907
Repayment of amounts borrowed - (118)
---- ----
125 938
---- ----
(Decrease)/increase in cash in the period (227) 279
---- ----
</TABLE>
cont. . .
F-45
<PAGE> 49
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION OF ACCOUNTS
The results for the six months to 30 September 1997 are unaudited. The
accounting policies are as stated in the Report and Accounts for the six months
ended 31 March 1997, together with the additional policy described below. The
figures for the six months ended 31 March 1997 are an extract from the full
published financial statements that have been delivered to the Registrar of
Companies, and on which the auditors have issued an unqualified report.
The group's recent acquisition, Citizens Power, provides contract restructuring
services to the energy industry. In connection with these activities, the group
has adopted the following accounting policy:
Assets and liabilities associated with contract restructuring activities are
marked to market. Movements in the market value are recognised in the profit
and loss account in the period of change. In the absence of a readily
available market price, fair value based on discounted cash flows is used.
2. PRO FORMA INFORMATION
a) The pro forma information for the year ended 31 March 1997 and for the six
months ended 30 September 1996 has been extracted from audited financial
returns for the period. The information has been prepared on a consistent
basis to that presented in the group's listing particulars issued in January
1997 and to the pro forma information provided in the group's report and
accounts for the six months ended 31 March 1997.
b) Pro forma central charges of L15 million in the year to 31 March 1997 and L7
million in the six months to 30 September 1996 have been included in pro
forma operating profit for these periods. In the group's listing particulars
these charges were identified, but not included in the pro forma results.
c) Pro forma net interest payable for the year ended 31 March 1997 is based on
the actual interest charges borne by the individual operating entities which
now comprise the group, increased for an additional pro forma interest
charge calculated as 7.5% of the actual additional net debt allocated to the
group by Hanson on demerger.
Pro forma net interest payable for the six months ended 30 September 1996 is
calculated on a similar basis, but using an additional pro forma interest
charge which is based on the additional net debt and average interest rate
assumed in the group's listing particulars.
cont...
F-46
<PAGE> 50
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
d) The pro forma tax charge for the year ended 31 March 1997 has been
calculated at the same effective rate before exceptional items as that which
existed for the six months ended 31 March 1997.
The pro forma tax charge for the six months ended 30 September 1996 has been
calculated at the same effective rate before exceptional items as that
assumed in the pro forma tax charge for the year ended 30 September 1996
which was given in the group's listing particulars.
3. SEGMENTAL ANALYSIS
<TABLE>
<CAPTION>
Unaudited Unaudited pro forma
six months ended six months ended
30 September 1997 30 September 1996
----------------------- -----------------------
Operating Operating
TURNOVER profit Turnover profit
- ----------------------------------------------------------------------------------------------------
Lm Lm Lm Lm
<S> <C> <C> <C> <C>
BY ACTIVITY
Coal 691 85 733 88
Power 1,248 31 1,086 39
Networks 215 81 204 78
Other 13 (10) 15 (9)
Intra-group trading (160) - (169) -
----- ----- ----- -----
2,007 187 1,869 196
Exceptional operating costs (Note 4) - (16) - -
----- ----- ----- -----
2,007 171 1,869 196
----- ----- ----- -----
BY GEOGRAPHICAL LOCATION
United Kingdom 1,296 96 1,136 108
USA 622 73 650 70
Australia 79 17 83 18
Other 10 1 - -
----- ----- ----- -----
2,007 187 1,869 196
----- ----- ----- -----
</TABLE>
Turnover and operating profit for coal include the results for contract
restructuring.
cont . . .
F-47
<PAGE> 51
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
4. EXCEPTIONAL OPERATING COSTS
The exceptional costs in the six month period relate to L7 million of
restructuring costs within the Power segment and costs of L9 million associated
with PacifiCorp's bid.
5. TAXATION
The effective rate of tax for the six month period is 132.0% compared with 31.2%
for the six months ended 31 March 1997. The increase is due mainly to the
exceptional windfall tax charge of L112 million. The underlying rate, excluding
the impact of the exceptional restructuring charge, is 26.3%.
6. EARNINGS PER ORDINARY SHARE
Earnings per ordinary share are calculated using the number of ordinary shares
in issue excluding those held by The Energy Group Employee Benefit Trust which
has waived its right to dividends on the shares it holds. The number of ordinary
shares used to calculate earnings per share was as follows:
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
UNAUDITED PRO FORMA PRO FORMA
SIX MONTHS TO SIX MONTHS TO YEAR TO
30 SEPTEMBER 30 SEPTEMBER 31 MARCH
1997 1996 1997
000'S 000'S 000'S
<S> <C> <C> <C>
Total number of shares in issue 520,858 520,858 520,858
Shares held by Trust (4,101) - (2,250)
------- ------- -------
Total number of shares used in calculation 516,757 520,858 518,608
------- ------- -------
</TABLE>
Earnings per share before exceptional costs is based on profits before the
exceptional windfall tax charge and exceptional operating costs.
7. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE SIX MONTHS ENDED
30 SEPTEMBER 1997
<TABLE>
<CAPTION>
LM
<S> <C>
Opening shareholders' funds 1,845
Retained loss on ordinary activities (75)
Currency differences on foreign net investments 12
Goodwill arising on acquisitions (56)
-----
Closing shareholders' funds 1,726
-----
</TABLE>
cont...
F-48
<PAGE> 52
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
8. CASH FLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
UNAUDITED AUDITED
SIX MONTHS TO SIX MONTHS TO
30 SEPTEMBER 31 MARCH
1997 1997
LM LM
<S> <C> <C>
Operating profit before exceptional costs 187 317
Depreciation and depletion 109 100
Increase in investments (1) (2)
Increase in stocks (52) (8)
Increase in debtors (53) (83)
Increase in creditors 130 50
Provisions (24) (23)
Other movements (23) (5)
--- ---
Net cash inflow from operating activities 273 346
--- ---
</TABLE>
9. ANALYSIS OF MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
ACQUISITIONS
(EXCLUDING
OPENING CASH AND OTHER EXCHANGE CLOSING
BALANCE CASH FLOW OVERDRAFTS) MOVEMENTS MOVEMENTS BALANCE
LM LM LM LM LM LM
<S> <C> <C> <C> <C> <C> <C>
Cash 385 (212) - - 1 174
Overdrafts (61) (15) - - 6 (70)
----
(227)
----
Debt due after 1 year (1,655) (278) (143) 29 (3) (2,050)
Debt due within 1 year (738) 153 (11) (53) 1 (648)
----
(125)
----
Short term deposits 753 373 - - 3 1,129
------ ---- ---- --- -- ------
Net Debt (1,316) 21 (154) (24) 8 (1,465)
====== ==== ==== === == ======
</TABLE>
cont...
F-49
<PAGE> 53
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN UK GAAP AND US GAAP
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
30 SEPTEMBER
PROFIT FOR THE PERIOD 1997 1996
LM LM
<S> <C> <C>
(Loss)/profit for the period as reported in the consolidated
profit and loss account (34) 113
Significant adjustments:
Discount on subordinated income note (3) (3)
Goodwill amortization (24) (28)
Impairment of long lived assets - (578)
Restructuring and reorganisation provision (13) (29)
Pensions 3 3
Output-linked lease payments (21) -
Tax-stand-alone adjustment - (1)
Deferred taxation:
Effect of the above adjustments 4 241
Effect of differences in methodology (15) (20)
----- ------
Loss for the period (net loss) as adjusted to accord with US
GAAP (103) (302)
===== ======
Per ordinary share as so adjusted (19.9)p (57.9)p
Per American Depositary Share as so adjusted (79.6)p (231.6)p
Number of shares used in computing per ordinary share
amounts (millions) 517 521
===== ======
</TABLE>
Note: Each American Depositary Share represents four ordinary shares.
<TABLE>
<CAPTION>
UNAUDITED
AS AT 30 SEPTEMBER
INVESTED CAPITAL/SHAREHOLDERS' EQUITY 1997 1996
LM LM
<S> <C> <C>
Invested capital/shareholders' equity as reported in the
consolidated balance sheets 1,726 2,185
Significant adjustments:
Goodwill - cost 1,205 1,147
- amortization (102) (55)
Subordinated income note 57 67
Restructuring and reorganisation provision 7 -
Pensions 147 124
Fixed asset investments - own shares (20) -
Taxation - stand-alone adjustment - 6
Output-linked lease payments (62) -
Dividend 41 -
Deferred taxation:
Effect of the above adjustments (37) (41)
Effect of differences in methodology (392) (377)
----- -----
Invested capital/shareholders' equity as adjusted to accord
with US GAAP 2,570 3,056
===== =====
</TABLE>
cont...
F-50
<PAGE> 54
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
US $ EQUIVALENT CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
Unaudited Unaudited
Unaudited pro forma pro forma
six months to six months to year to
30 September 30 September 31 March
1997 1996 1997
LM Lm Lm
<S> <C> <C> <C>
TURNOVER
Coal 1,137 1,131 2,232
Power 2,050 1,783 4,741
Networks 353 335 785
Other 21 25 39
Intra-group trading (263) (278) (625)
------ ----- -----
TURNOVER -- CONTINUING ACTIVITIES 3,298 2,996 7,172
------ ----- -----
OPERATING PROFIT
Coal 140 136 242
Power 51 64 276
Networks 133 128 328
Other (17) (14) (28)
------ ----- -----
307 314 818
EXCEPTIONAL CHARGES (26) - (33)
------ ----- -----
OPERATING PROFIT -- CONTINUING ACTIVITIES 281 314 785
NET INTEREST PAYABLE AND SIMILAR CHARGES (107) (57) (145)
------ ----- -----
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 174 257 640
TAXATION CHARGE FOR PERIOD (230) (79) (199)
------ ----- -----
PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION (56) 178 441
DIVIDEND (67) - (48)
------ ----- -----
(LOSS)/PROFIT REGAINED FOR THE PERIOD (123) 178 393
------ ----- -----
EARNINGS PER ADS
Basic $(0.43) $1.43 $3.49
Pre-exceptional $ 1.16 $1.43 $3.72
------ ----- -----
</TABLE>
NOTES:
i For convenience only, sterling figures, other than coal, have been
translated into US dollars at the average rate for the six months ended
30 September 1997 of L1 = $1.6421.
ii Coal figures have been stated in their original US dollar values so as
to eliminate the impact of movements in the L:$ rate from revenues and
earnings which are earned substantially in the United States.
iii For convenience only, sterling earnings per share figures have been
translated into US dollars at the average rate for the six months ended
30 September 1997 of L1 = $1.6421 and multiplied by a factor of four to
give earnings per ADS figures.
F-51
<PAGE> 55
UNAUDITED FINANCIAL RESULTS FOR THE THREE MONTHS AND
NINE MONTHS ENDED DECEMBER 31, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
UNAUDITED FINANCIAL RESULTS
THIRD QUARTER ENDED 31 DECEMBER 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
3 MONTHS TO 3 MONTHS TO 9 MONTHS TO 9 MONTHS TO
31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
1997 LM 1996 LM 1997 LM 1996 LM
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TURNOVER
Coal (Note 1)............................. 323 325 1,014 1,058
Power..................................... 1,005 860 2,253 1,946
Networks.................................. 139 127 354 331
Other..................................... 5 4 18 19
Intra-group............................... (89) (101) (249) (270)
----- ----- ----- -----
1,383 1,215 3,390 3,084
----- ----- ----- -----
OPERATING PROFIT
Coal (Note 1)............................. 27 25 112 113
Power..................................... 107 57 138 96
Networks.................................. 66 56 147 134
Other (Note 2)............................ (8) (4) (18) (13)
----- ----- ----- -----
192 134 379 330
PRE-EXCEPTIONAL OPERATING PROFIT
Bid-related costs (Note 3)................ (1) - (10) -
Restructuring and re-organisation costs
(Note 3).................................. - - (7) -
----- ----- ----- -----
TOTAL OPERATING PROFIT.................... 191 134 362 330
----- ----- ----- -----
Net interest and similar charges.......... (103)
-----
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION................................ 259
Taxation charge for the period on
results................................. (66)
-----
193
Windfall tax.............................. (112)
-----
Profit on ordinary activities after
taxation................................ 81
Dividends................................. (41)
-----
Profit retained for the period............ 40
-----
Earnings per ordinary share (Note 4)
Pre-exceptional........................... 40.0
Basic..................................... 15.7
</TABLE>
Notes:
(1) Turnover and operating profit for coal include the results for contract
restructuring.
(2) Pro forma adjustments have been made to the figures to 31 December 1996 in
respect of the additional administration costs that arose following the
demerger. The directors estimate that such costs amount to approximately L15
million per annum.
(3) Exceptional costs in the nine months ended 31 December 1997 relate to L7
million of restructuring costs within the Power segment and bid-related
costs of L10 million, of which L1 million arose in the quarter ended 31
December 1997.
(4) The earnings per share for the 9 months ended 31 December 1997 are based on
the profits for that period and on 516,756,926 shares which excludes the
4,100,891 shares held by The Energy Group Employee Benefit Trust, which has
waived the right to dividends on the shares it holds.
F-52
<PAGE> 56
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
UNAUDITED FINANCIAL RESULTS
THIRD QUARTER ENDED 31 DECEMBER 1997
<TABLE>
<CAPTION>
PRO FORMA
9 MONTHS
PRO FORMA 9 MONTHS TO TO 31
3 MONTHS TO 31 3 MONTHS TO 31 31 DECEMBER DECEMBER
DECEMBER 1997 DECEMBER 1996 1997 1996
$M $M $M $M
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
TURNOVER
Coal (Note 2).......................... 532 535 1,670 1,743
Power.................................. 1,656 1,417 3,712 3,206
Networks............................... 229 209 583 545
Other.................................. 8 7 30 31
Intra-group............................ (147) (166) (410) (444)
----- ----- ----- -----
2,278 2,002 5,585 5,081
OPERATING PROFIT
Coal (Note 2).......................... 44 41 185 186
Power.................................. 176 94 227 158
Networks............................... 109 92 242 221
Other (Note 3)......................... (13) (6) (30) (21)
----- ----- ----- -----
PRE-EXCEPTIONAL OPERATING PROFIT....... 316 221 624 544
Bid-related costs (Note 4)............. (2) - (16) -
Restructuring and re-organisation costs
(Note 4)............................. - - (12) -
----- ----- ----- -----
TOTAL OPERATING PROFIT................. 314 221 596 544
----- ----- -----
Net interest and similar charges....... (169)
-----
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION............................. 427
Taxation charge for the period on
results.............................. (109)
-----
318
Windfall tax........................... (185)
-----
Profit on ordinary activities after
taxation............................. 133
Dividends.............................. (67)
-----
Profit retained for the period......... 66
Earnings per ordinary ADS (Note 5)
Pre-exceptional........................ 2.64
Basic.................................. 1.03
</TABLE>
- ---------------
(1) The above US$ figures have been translated at the average exchange rate for
the nine months to 31 December 1997 of $1.6474 to the L.
(2) Turnover and operating profit for coal include the results for contract
restructuring.
(3) Pro forma adjustments have been made to the figures to 31 December 1996 in
respect of the additional administration costs that arose following the
demerger. The directors estimate that such costs amount to approximately $25
million per annum.
(4) Exceptional costs in the nine months ended 31 December 1997 relate to $12
million of restructuring costs within the Power segment and bid-related
costs of $16 million, of which $2 million arose in the quarter ended 31
December 1997.
(5) The earnings per ADS for the 9 months ended 31 December 1997 are based on
the profits for that period and on 516,756,926 shares which excludes the
4,100,891 shares held by The Energy Group Employee Benefit Trust, which has
waived the right to dividends on the shares it holds. One ADS is equivalent
to four ordinary shares."
F-53
<PAGE> 57
ITEM 7(b). PRO FORMA FINANCIAL INFORMATION
PRO FORMA FINANCIAL INFORMATION OF TEXAS UTILITIES COMPANY
Texas Utilities Company's (Texas Utilities) Offer for The Energy Group PLC
(TEG) was declared unconditional on May 19, 1998, by which time Texas Utilities
had received acceptances with respect to over 70% of TEG's issued share capital.
Under UK law, there are no rights of withdrawal after the unconditional date.
Therefore, it was determined that, as of May 19, 1998, Texas Utilities had
acquired TEG (Acquisition). Texas Utilities filed a Current Report on Form 8-K,
disclosing the Acquisition pursuant to Item 2, on June 3, 1998. Prior to the
Acquisition by Texas Utilities, TEG completed the sale of its US and Australian
coal business and US energy marketing operations (Peabody Sale). The businesses
acquired by Texas Utilities, following the Peabody Sale, are referred to as "TEG
Businesses Acquired".
TEG publishes its financial statements based on United Kingdom generally
accepted accounting principles (UK GAAP) denominated in pounds sterling. TEG is
a foreign private issuer and has a March 31 fiscal year end. The most recent
public financial information of TEG consists of (1) the audited financial
statements for the period ended March 31, 1997 in its Form 20-F, (2) the
unaudited financial statements for the period ended September 30, 1997 in its
Form 6-K for the month of November 1997, and (3) the unaudited statements of
income for the three months and nine months ended December 31, 1997 included in
its Form 6-K for the month of March 1998.
The Acquisition is a purchase for accounting purposes. The purchase
accounting adjustments contained herein are preliminary and represent estimates
based on information available to Texas Utilities at this time. The final
determination of the purchase accounting adjustments requires additional
information and analysis.
The following unaudited condensed consolidated pro forma financial
statements assume 100% acquisition of the TEG Businesses Acquired and further
assume that 20% of TEG's ordinary shares are exchanged for shares of Texas
Utilities common stock.
The unaudited condensed consolidated pro forma balance sheet at March 31,
1998 combines the consolidated balance sheet of Texas Utilities as of March 31,
1998 with the consolidated balance sheet of TEG Businesses Acquired as of
September 30, 1997, the latest date for which its balance sheet is published.
The unaudited condensed consolidated pro forma statement of income for the year
ended December 31, 1997 combines the consolidated statement of income for that
period of Texas Utilities with the unaudited condensed consolidated pro forma
statement of income for that period of the TEG Businesses Acquired. The
unaudited condensed consolidated pro forma statement of income for the three
months ended March 31, 1998 combines the unaudited consolidated statement of
income of Texas Utilities for the three months ended March 31, 1998 with the
unaudited consolidated statement of income of the TEG Businesses Acquired for
the three months ended December 31, 1997, the latest three month period for
which its consolidated statement of income is available. The unaudited condensed
consolidated pro forma balance sheet as of March 31, 1998 is presented as if the
Acquisition and Peabody Sale had occurred on that date. The unaudited condensed
consolidated pro forma statements of income for the twelve months ended December
31, 1997 and for the three months ended March 31, 1998 assume that the
Acquisition and Peabody Sale occurred at the beginning of each period.
The unaudited condensed consolidated pro forma financial statements should
be read in conjunction with the historical consolidated financial statements of
TEG included elsewhere herein and historical consolidated financial statements
of Texas Utilities included in Texas Utilities' Annual Report on Form 10-K for
the year ended December 31, 1997 and its Quarterly Report on Form 10-Q for the
three months ended March 31, 1998 and "Pro Forma Financial Information of the
TEG Businesses Acquired" included elsewhere herein. The operations of Texas
Utilities and the TEG Businesses Acquired are affected by seasonal weather
patterns. The unaudited condensed consolidated pro forma statements of income
are not necessarily indicative of the financial results that would have occurred
had the above-described events been consummated on the indicated dates, nor are
they necessarily indicative of future financial results. In addition, the
unaudited condensed consolidated pro forma statement of income for the three
months ended March 31, 1998 may not be indicative of a full year's results.
Balance sheet amounts denominated in UK pounds sterling were translated to
US dollars at the rate of L1 = $1.64, which was the exchange rate at September
30, 1997. UK pounds sterling amounts in the statements of income were translated
at the rate of L1 = $1.64, the average exchange rate for the periods presented.
P-1
<PAGE> 58
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
TEXAS TEG TEXAS
UTILITIES BUSINESSES UTILITIES
HISTORICAL ACQUIRED ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Property, Plant and Equipment, Net............ $18,547 $ 2,755 $ $21,302
Investments................................... 924 79 1,003
Investment in The Energy Group................ 1,667 (1,667)(a)
Goodwill...................................... 1,427 1,715 (1,715)(b) 7,958
6,531 (b)
Current Assets:
Cash and cash equivalents................... 67 3,892 (2,048)(d) 1,918
7 (b)
Accounts receivable......................... 699 1,281 1,980
Inventories................................. 409 249 658
Gas marketing risk management assets........ 367 367
Other....................................... 190 18 208
------- ------- ------- -------
Total............................... 1,732 5,440 (2,041) 5,131
------- ------- ------- -------
Deferred Debits............................... 2,064 169 2,233
------- ------- ------- -------
Total Assets........................ $26,361 $10,158 $ 1,108 $37,627
======= ======= ======= =======
Capitalization:
Common stock equity......................... $ 6,865 $ 4,375 $(4,375)(b) $ 8,318
1,463 (c)
(8)(a)
(2)(e)
Preferred stock of subsidiaries............. 211 211
TU Electric obligated, mandatorily
redeemable preferred securities of
subsidiary trusts........................ 823 823
114 (f)
5,786 (c)
Long-term debt, less amounts due
currently................................ 8,775 2,649 (2,048)(d) 15,276
------- ------- ------- -------
Total............................... 16,674 7,024 930 24,628
------- ------- ------- -------
Current Liabilities:
Notes payable and long-term debt due
currently................................ 3,161 1,178 (1,659)(a) 2,680
Accounts payable and other current
liabilities.............................. 1,566 984 112 (e) 2,662
Gas marketing risk management liabilities... 343 343
------- ------- ------- -------
Total............................... 5,070 2,162 (1,547) 5,685
------- ------- ------- -------
Accumulated Deferred Income Taxes............. 3,062 690 (115)(b) 3,637
Other Deferred Credits and Noncurrent
Liabilities................................. 1,555 282 1,840 (b) 3,677
------- ------- ------- -------
Total Capitalization and
Liabilities....................... $26,361 $10,158 $ 1,108 $37,627
======= ======= ======= =======
</TABLE>
See notes.
P-2
<PAGE> 59
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEXAS TEXAS TEG TEXAS
UTILITIES UTILITIES BUSINESSES PRO FORMA UTILITIES
HISTORICAL ADJUSTMENTS(G) ADJUSTED ACQUIRED(H) ADJUSTMENTS PRO FORMA
---------- -------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues................ $ 7,946 $1,370 $ 9,316 $5,468 $ $14,784
(514)(i)
Operating Expenses................ 6,039 1,306 7,345 5,032 80(b) 11,943
------- ------ ------- ------ ----- -------
Operating Income.................. 1,907 64 1,971 436 434 2,841
Other Income
(Deductions) -- Net............. (18) 6 (12) 151 139
------- ------ ------- ------ ----- -------
Income Before Interest and Income
Taxes........................... 1,889 70 1,959 587 434 2,980
416(d)
Interest and Other Charges........ 852 61 913 317 (11)(f) 1,635
------- ------ ------- ------ ----- -------
Income Before Income Taxes........ 1,037 9 1,046 270 29 1,345
Income Tax Expense................ 377 8 385 162 (22)(l) 525
------- ------ ------- ------ ----- -------
Income Before Extraordinary
Item............................ $ 660 $ 1 $ 661 $ 108 $ 51 $ 820
======= ====== ======= ====== ===== =======
Average Shares of Common Stock
Outstanding (thousands)......... 230,958 14,280 245,238 37,595(c) 282,833
Per Share of Common Stock:
Basic earnings.................. $ 2.86 $ 2.70 $ 2.90
Diluted earnings................ $ 2.85 $ 2.69 $ 2.89
</TABLE>
See notes.
P-3
<PAGE> 60
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEXAS TEG TEXAS
UTILITIES BUSINESSES PRO FORMA UTILITIES
HISTORICAL ACQUIRED(H) ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues............................ $ 2,499 $ 1,715 $ $ 4,214
(131)(i)
Operating Expenses............................ 2,073 1,514 20(b) 3,476
------- ------- ------ -------
Operating Income.............................. 426 201 111 738
(8)(j)
Other Income (Deductions) -- Net.............. (2) 46 19(k) 55
------- ------- ------ -------
Income Before Interest and Income Taxes....... 424 247 122 793
(5)(k)
(3)(f)
Interest and Other Charges.................... 223 98 104(d) 417
------- ------- ------ -------
Income Before Income Taxes.................... 201 149 26 376
Income Tax Expense............................ 74 74 2(l) 150
------- ------- ------ -------
Net Income.................................... $ 127 $ 75 $ 24 $ 226
======= ======= ====== =======
Average Shares of Common Stock Outstanding
(thousands)................................. 245,241 37,595(c) 282,836
Per Share of Common Stock:
Basic earnings.............................. $ 0.52 $ 0.80
Diluted earnings............................ $ 0.52 $ 0.80
</TABLE>
See notes.
P-4
<PAGE> 61
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Represents reversal of Texas Utilities investment in TEG at March 31, 1998.
(b) Represents the excess of cost over the fair value assigned to net assets
acquired (goodwill), which is to be amortized over 40 years. The excess
amount is summarized below:
<TABLE>
<S> <C>
Texas Utilities purchase price (see Note c)................. $ 7,249
Estimated costs of Acquisition (see Note e)................. 110
Proceeds from exercise of TEG stock options................. (7)
Estimated purchase accounting adjustments:
Write off TEG goodwill.................................... 1,715
Adjust long-term debt to fair value (see Note f).......... 114
Record present value adjustments for commitments,
obligations and contracts.............................. 1,840
Deferred income tax on temporary differences.............. (115)
-------
Total............................................. 10,906
Net assets of the TEG Businesses Acquired................... (4,375)
-------
Estimated goodwill.......................................... 6,531
Less estimated increases in TEG equity to May 19, 1998...... (292)
-------
Amount for amortization..................................... $ 6,239
=======
Annual amortization over 40 years........................... $ 156
Less goodwill amortization recorded by TEG Businesses
Acquired.................................................. 76
-------
Incremental goodwill amortization -- annual................. $ 80
-- quarter............. 20
</TABLE>
(c) Cost of Acquisition and the assumed 20% of TEG Ordinary Shares to be
exchanged for shares of Texas Utilities common stock, in millions of US
dollars, except per share amounts:
<TABLE>
<CAPTION>
PURCHASED FOR
-----------------
SHARES CASH SHARES
------- ------- -------
<S> <C> <C> <C>
TEG Ordinary Shares outstanding at March 31,
1998 (000).................................... 520,858
TEG Ordinary Shares to be issued in connection
with stock plans (000)........................ 8,641
-------
Pro forma TEG Ordinary Shares (000)............. 529,499 423,599 105,900
Per share price 840p ($13.66) cash.............. $ 13.66
-------
Cash Purchase Cost.............................. $ 5,786
Exchange ratio.................................. .355
-------
Estimated number of shares of Texas Utilities
common stock to be issued..................... 37,595
Per share value of Texas Utilities common
stock......................................... $ 38.90
-------
Common Stock Purchase Cost...................... 1,463 $ 1,463
------- =======
Total purchase price.................. $ 7,249
=======
</TABLE>
(d) The net cash cost of the Acquisition will be financed as follows:
<TABLE>
<CAPTION>
ANNUAL QUARTER
AMOUNT INTEREST INTEREST
------ -------- --------
<S> <C> <C> <C>
Bank borrowings................................. $5,786
TEG cash acquired*.............................. (2,048)
------
Increase in net borrowings (at 7.83% in the UK
and 5.85% in the US)....................... $3,738 $267 $67
====== ==== ===
</TABLE>
- ---------------
* Use of cash is subject to certain UK statutory procedures relating to
financial assistance.
Financing fees to obtain the Acquisition debt total $65 million. Annual
amortization in the first year is $10 million ($3 million quarterly).
P-5
<PAGE> 62
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the present value of commitments, obligations and contracts is
$139 million for the twelve month period ($35 million for the quarter).
The total pro forma increase to interest and other charges is $416 million
($104 for the quarter).
(e) Represents estimated costs associated with the Acquisition. Estimated
expenses of $2 million incurred by Texas Utilities for legal, accounting,
printing and other payments and expenses relating to the registration of
Texas Utilities common stock to be issued in the Acquisition will be
charged directly to common stock equity as stock issuance costs. An
additional $110 million for stamp duty, financial advisory, legal,
accounting, printing and other payments and expenses as a result of the
Acquisition are included in adjustments to Goodwill (see Note b).
(f) Adjustment to reflect outstanding long-term debt at fair value. First year
amortization of the interest related to the adjustment is approximately $11
million ($3 million quarterly).
(g) On August 5, 1997 Texas Utilities completed the acquisition of ENSERCH
Corporation (ENSERCH) and on November 21, 1997 Texas Utilities completed
the acquisition of Lufkin-Conroe Communications Co. (LCC). These
acquisitions were accounted for as purchase business combinations;
accordingly, the assets and liabilities of the acquired companies as of the
acquisition dates were adjusted to fair value and the results of operations
of such companies were included in Texas Utilities' consolidated statement
of income from the date of their acquisition. The adjustment for the twelve
months ended December 31, 1997 assumes that the acquisitions of ENSERCH and
LCC were made at the beginning of the period and consists of such
companies' operations for the period from January 1, 1997 to date of their
acquisition, including amortization of goodwill and purchase accounting
adjustments. No adjustment is necessary for the three months ended March
31, 1998.
In 1997, Texas Utilities reacquired 4,015,000 shares of its common stock
for $148.8 million. In the unaudited condensed pro forma statement of
income for the twelve months ended December 31, 1997, these share
repurchases have been treated as if they had occurred at the beginning of
the period; accordingly, average shares outstanding have been reduced and
pro forma interest expense on the purchase price from January 1, 1997 to
the repurchase date of $7 million, pre-tax has been included.
The impact on the pro forma statement of income of the ENSERCH and LCC
acquisitions and share repurchase for the year ended December 31, 1997 is
as follows (in millions, except shares):
<TABLE>
<CAPTION>
SHARE
ENSERCH LCC REPURCHASE TOTAL
------- ------ ---------- ------
<S> <C> <C> <C> <C>
Operating Revenues..................... $1,277 $ 93 $ $1,370
Operating Expenses..................... 1,235 71 1,306
------ ------ ------
Operating Income....................... 42 22 64
Other Income (Deductions) -- Net....... 1 5 6
------ ------ ------
Income before Interest and Income
Taxes................................ 43 27 70
Interest and Other Charges............. 51 3 7 61
------ ------ ------- ------
Income (Loss) before Income Taxes...... (8) 24 (7) 9
Income Tax Expense (Benefit)........... 1 10 (3) 8
------ ------ ------- ------
Net Income(Loss)....................... $ (9) $ 14 $ (4) $ 1
====== ====== ======= ======
Average Shares of Texas Utilities
Common Stock Outstanding (000)....... 9,430 7,771 (2,921) 14,280
</TABLE>
(h) TEG historical financial statements have been adjusted to reflect the
Peabody Sale. Certain amounts have been reclassified to conform to Texas
Utilities' financial statement presentation.
(i) Represents reversal of certain operating expenses recorded by the TEG
Businesses Acquired, for which a liability for the present value of
commitments, obligations and contracts is made in purchase accounting, and
amortization of fixed lease payments over the revised economic life of
power plants under lease arising from alternative operating methodologies.
(j) Represents reversal of equity in net income of TEG of $8 million recorded
by Texas Utilities for its approximate 22% interest.
P-6
<PAGE> 63
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(k) Represents elimination of expenses of the Acquisition recorded by Texas
Utilities in March 1998 of $24 million.
(l) Represents taxes on temporary differences at the effective rate of 31 per
cent for U.K. taxable adjustments and taxes at 35 per cent for U.S. taxable
adjustments. The U.S. taxes also give effect to the benefit of U.S. foreign
tax credits.
(m) A preliminary determination of purchase accounting adjustments has been
made; the final determination of the fair value and tax basis of assets
acquired and liabilities assumed requires additional information and
analysis. Accordingly, the earnings results will vary from the pro forma
earnings shown.
Estimated costs incurred by Texas Utilities of $46 million as a result of
the Acquisition and Peabody Sale have been excluded from the unaudited
condensed consolidated pro forma statements of income. The unaudited
condensed consolidated pro forma statement of income does not reflect any
operating efficiencies and annual cost savings Texas Utilities and TEG may
achieve as a result of the Acquisition.
P-7
<PAGE> 64
PRO FORMA FINANCIAL INFORMATION
OF THE TEG BUSINESSES ACQUIRED
TEG publishes its financial statements based on UK GAAP denominated in
pounds sterling. TEG is a foreign private issuer and has a March 31 fiscal year
end. The most recent public financial information of TEG consists of (1) the
audited financial statements for the period ended March 31, 1997 in its Form
20-F, (2) the unaudited financial statements for the period ended September 30,
1997 in its Form 6-K for the month of November 1997, and (3) the unaudited
statements of income for the three months and nine months ended December 31,
1997 included in its Form 6-K for the month of March 1998.
In the unaudited condensed consolidated pro forma balance sheet, amounts
applicable to the Peabody Sale are removed and the proceeds from the Peabody
Sale are included. The unaudited condensed consolidated pro forma statements of
income reflect the reclassification of the operating results of coal and energy
marketing operations to "income from discontinued operations".
The following unaudited condensed consolidated pro forma financial
statements give effect to adjustments to convert TEG's financial statements to
the basis of United States generally accepted accounting principles (US GAAP)
and to reflect the Peabody Sale. The financial information for the resulting
businesses acquired in the Acquisition is converted to US dollars for purposes
of combining with Texas Utilities' financial information. Balance Sheet amounts
denominated in UK pounds sterling are translated to US dollars at the rate of L1
= $1.64, which was the exchange rate at September 30, 1997. Statement of income
amounts were translated at the rate of L1 = $1.64, the average exchange rate for
the period presented.
P-8
<PAGE> 65
TEG BUSINESSES ACQUIRED
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
UK PEABODY SALE(b)
GAAP US ------------------ TEG TEG
HISTORICAL GAAP PEABODY SALE BUSINESSES BUSINESSES
TEG ADJUSTMENTS(a) BALANCES ENTRIES ACQUIRED ACQUIRED(d)
---------- -------------- -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Assets......................... L3,986 L (L2,306) L L1,680 $ 2,755
Investments.......................... 83 (35) 48 79
Goodwill............................. 1,046 1,046 1,715
Current Assets:
Cash............................... 895 (180) 1,250 1,965 3,223
Short-term deposits................ 408 408 669
Debtors............................ 1,714 (62) (871) 781 1,281
Stocks and Other Current Assets.... 320 (157) 163 267
------ ------ ------- ------ ------ -------
Total...................... 3,337 (62) (1,208) 1,250 3,317 5,440
------ ------ ------- ------ ------ -------
Other Assets......................... 110 (7) 103 169
------ ------ ------- ------ ------ -------
Total Assets............... L7,406 L1,094 (L3,556) L1,250 L6,194 $10,158
====== ====== ======= ====== ====== =======
Capitalization:
Equity shareholders funds.......... L1,726 L 743 (L1,011) L1,210 L2,668 $ 4,375
Long-term loans.................... 2,050 (435) 1,615 2,649
------ ------ ------- ------ ------ -------
Total...................... 3,776 743 (1,446) 1,210 4,283 7,024
Current Liabilities:
Short-term borrowings and
overdrafts...................... 718 718 1,178
Other creditors.................... 1,406 (846) 40 600 984
------ ------ ------- ------ ------ -------
Total...................... 2,124 (846) 40 1,318 2,162
------ ------ ------- ------ ------ -------
Accumulated Deferred Income Taxes.... 431 (10) 421 690
Provisions for Liabilities and
Charges............................ 1,506 (80) (1,254) 172 282
------ ------ ------- ------ ------ -------
Total Capitalization and
Liabilities.............. L7,406 L1,094 (L3,556) L1,250 L6,194 $10,158
====== ====== ======= ====== ====== =======
</TABLE>
See notes.
P-9
<PAGE> 66
TEG BUSINESSES ACQUIRED
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UK GAAP HISTORICAL TEG US GAAP
------------------------------------ -----------------------------------------------------------
NINE THREE TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED ADJUST TO DEDUCT TEG TEG
DECEMBER 31 MARCH 31 DECEMBER 31 US PEABODY BUSINESSES BUSINESSES
1997 1997 1997 GAAP (b)(c) ADJUSTMENT ACQUIRED ACQUIRED(d)
----------- -------- ----------- --------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Turnover..................... L3,390 L1,304 L4,694 L (L1,360) L L3,334 $5,468
Cost and overheads less other
income..................... 3,028 1,125 4,153 116 (1,192) (9)(e) 3,068 5,032
------ ------ ------ ----- ------- --- ------ ------
Operating profit............. 362 179 541 (116) (168) 9 266 436
Interest income.............. 77 15 92 92 151
------ ------ ------ ----- ------- --- ------ ------
Interest before interest and
income taxes............... 439 194 633 (116) (168) 9 358 587
Interest payable and similar
charges.................... 180 30 210 (17) 193 317
------ ------ ------ ----- ------- --- ------ ------
Profit on ordinary activities
before taxation............ 259 164 423 (116) (151) 9 165 270
Taxation charge for period-on
results.................... 66 51 117 11 (42) 13(f) 99 162
------ ------ ------ ----- ------- --- ------ ------
Profit (loss) from continuing
operations before
extraordinary item......... 193 113 306 (127) (109) (4) 66 108
Discontinued operations...... 109 109 179
Extraordinary
item -- windfall profits
tax........................ (112) (112) (112) (184)
------ ------ ------ ----- ------- --- ------ ------
Net profit (loss)............ L 81 L 113 L 194 L(127) L - (L4) L 63 $ 103
====== ====== ====== ===== ======= === ====== ======
Earnings (loss) per ordinary
share:
Profit from continuing
operations before
extraordinary item....... L 0.37 L 0.13 $ 0.21
====== ====== ======
Average shares outstanding... 517 517 517
====== ====== ======
</TABLE>
See notes.
P-10
<PAGE> 67
TEG BUSINESSES ACQUIRED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Reflects estimated adjustments relating to differences in accounting for
goodwill, leases, income taxes and pensions between UK GAAP and US GAAP.
(b) Reflects the removal of the assets and liabilities of Peabody from the
balance sheet, proceeds from the Peabody Sale of L1,250 million, and the
removal of Peabody's operating results from TEG's unaudited consolidated
statements of income.
(c) Turnover and operating profit were published by TEG. Interest income,
interest payable and similar charges, taxation charge and earnings per
ordinary share for the period were estimated by Texas Utilities from
information in the published financial data.
(d) Converted to US dollars at the exchange rate in effect at September 30,
1997 as to the balance sheet and at the average exchange rate for the
period as to the statement of income.
(e) Eliminate expenses of previous potential merger.
(f) Eliminate group relief provided by previous parent for nil consideration.
P-11
<PAGE> 68
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 thereunto duly authorized.
TEXAS UTILITIES COMPANY
By: /s/ JERRY W. PINKERTON
----------------------------------
Name: Jerry W. Pinkerton
Title: Controller
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23(a) -- Consent of Ernst & Young
</TABLE>
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
(Form S-3 No. 33-55931, 333-27989 and 333-56055, Form S-4 No. 33-47135 and Form
S-8 No. 333-32833, 333-32835, 333-32837, 333-32839, 333-32841, 333-32843,
333-45657 and 333-46671) of Texas Utilities Company of our report dated June 12,
1997, except for Note 31 -- Subsequent Events, as to which the date is August 1,
1997, appearing in Amendment No. 1 to the Current Report (Form 8-K) of Texas
Utilities Company dated May 19, 1998, filed with the Securities and Exchange
Commission.
ERNST & YOUNG
Chartered Accountants
London, England
June 25, 1998
