<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998
REGISTRATION NO. 333-47135
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------
TEXAS UTILITIES COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2669310
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1601 BRYAN STREET
DALLAS, TEXAS 75201
(214) 812-4600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
<TABLE>
<S> <C> <C>
ROBERT A. WOOLDRIDGE, ESQ. PETER B. TINKHAM ROBERT J. REGER, JR., ESQ.
WORSHAM, FORSYTHE TEXAS UTILITIES COMPANY REID & PRIEST LLP
& WOOLDRIDGE, L.L.P. SECRETARY AND ASSISTANT 40 WEST 57TH STREET
1601 BRYAN STREET TREASURER NEW YORK, NEW YORK 10019
DALLAS, TEXAS 75201 1601 BRYAN STREET (212) 603-2000
(214) 979-3000 DALLAS, TEXAS 75201
(214) 812-4600
</TABLE>
(Names and addresses, including zip codes, and telephone numbers, including area
codes, of agents for service)
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without par value... 41,368,470 Shares $12.77 $1,354,552,200 $399,593
==========================================================================================================================
</TABLE>
(1) Based upon (i) the maximum number of shares of Texas Utilities Company
Common Stock, without par value ("Texas Utilities Common Stock"), that may
be issued per ordinary share of The Energy Group PLC ("Energy Group Shares")
and (ii) the maximum number of Energy Group Shares being acquired in
exchange for Texas Utilities Common Stock (20% of the fully diluted share
capital of The Energy Group, or 106,073,000 shares).
(2) The filing fee has been calculated pursuant to Rule 457(c) and (f)(1)
promulgated under the Securities Act of 1933, based on the average of the
middle market quotations of Energy Group ordinary shares on the London Stock
Exchange and the Noon Buying Rate of $1.6455 per L1, on February 24, 1998,
and assuming that 106,073,000 Energy Group shares (20% of the fully diluted
share capital of The Energy Group) are acquired in exchange for Texas
Utilities Common Stock.
(3) Previously paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
OFFER DOCUMENT
[TEXAS UTILITIES LOGO]
CASH OFFER
FOR
THE ENERGY GROUP PLC
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter from Lehman Brothers and Merrill Lynch 9
Appendix I: Conditions and Further Terms of the Texas
Utilities Offer I-1
Part A: Conditions of the Texas Utilities Offer I-1
Part B: Further terms of the Texas Utilities Offer I-7
1. Acceptance period I-7
2. Announcements I-8
3. Rights of withdrawal I-9
4. Limited Share Alternative I-10
5. Loan Note Alternative I-12
6. Effect of elections I-13
7. Revisions of the Texas Utilities Offer, the Loan
Note Alternative and/or the Share Alternative I-14
8. General I-15
9. Overseas shareholders I-16
10. Procedures for tendering Energy Group ADSs I-18
11. Procedures for tendering Energy Group Shares I-21
12. Forms of Acceptance I-23
13. Certain provisions concerning acceptances I-27
14. Substitute Acceptance Forms I-28
15. Settlement I-28
16. Currency of cash consideration I-29
Appendix II: Description of Texas Utilities Capital Stock;
Comparison of Shareholder Rights II-1
Appendix III: Summary of the Terms of the Loan Notes III-1
Appendix IV: Financial and Other Information on The Energy
Group IV-1
Appendix V: Financial and Other Information on TU
Acquisitions and Texas Utilities V-1
Appendix VI: Unaudited Pro Forma Condensed Consolidated
Financial Statements VI-1
Appendix VII: Certain Market, Dividend and Exchange Rate
Information VII-1
Appendix VIII: Additional Information VIII-1
1. Responsibility VIII-1
2. Directors VIII-1
3. Principal purchases VIII-1
4. Shareholdings and dealings VIII-2
5. Other information VIII-9
6. Material contracts VIII-9
7. Background to and reasons for the Texas Utilities
Offer VIII-11
8. Financing arrangements VIII-13
9. Compulsory acquisition VIII-18
10. Certain consequences of the Texas Utilities Offer VIII-19
11. Legal and regulatory matters VIII-20
12. United Kingdom taxation VIII-22
13. United States federal income taxation VIII-25
14. Experts VIII-28
15. Legal matters VIII-29
16. Fees and expenses VIII-29
17. Sources of information and bases of calculation VIII-30
18. Documents available for inspection VIII-30
Appendix IX: Certain provisions of the Companies Act IX-1
Appendix X: Definitions X-1
</TABLE>
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This offer document shall not
constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction.
SUBJECT TO COMPLETION, DATED MARCH 6, 1998
OFFER TO PURCHASE DATED [-] MARCH 1998
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
WHEN CONSIDERING WHAT ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED IMMEDIATELY TO
SEEK YOUR OWN FINANCIAL ADVICE FROM YOUR STOCKBROKER, BANK MANAGER, SOLICITOR,
ACCOUNTANT OR OTHER INDEPENDENT FINANCIAL ADVISOR AUTHORISED UNDER THE FINANCIAL
SERVICES ACT 1986.
If you have sold or otherwise transferred all your Energy Group Securities,
please send this document, together with the accompanying documents but NOT the
Form of Acceptance if it is personalised, as soon as possible, to the purchaser
or transferee, or to the stockbroker, bank or other agent through whom the sale
or transfer was effected for onward transmission to the purchaser or transferee.
HOWEVER, SUCH DOCUMENTS SHOULD NOT BE FORWARDED OR TRANSMITTED IN OR INTO
CANADA, AUSTRALIA OR JAPAN.
Lehman Brothers and Merrill Lynch, which are regulated in the United Kingdom by
The Securities and Futures Authority Limited, are acting for TU Acquisitions and
Texas Utilities and for no one else in connection with the Texas Utilities Offer
and will not be responsible to anyone other than TU Acquisitions and Texas
Utilities for providing the protections afforded to their respective customers
or for giving advice in relation to the Texas Utilities Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE US SECURITIES AND
EXCHANGE COMMISSION OR BY ANY US STATE SECURITIES COMMISSION NOR HAS THE US
SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH US STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFER DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Initial Offer Period will expire at 10.00 pm (London time), 5.00 pm (New
York City time) on [-] 1998, unless extended. At the conclusion of the Initial
Offer Period, including any extension thereof, if all the Conditions of the
Texas Utilities Offer have been satisfied, fulfilled or, where permitted,
waived, the Texas Utilities Offer will be extended for a Subsequent Offer Period
of at least 14 calendar days. Holders of Energy Group Securities will have
withdrawal rights during the Initial Offer Period, including any extension
thereof, but not during the Subsequent Offer Period.
Completed Acceptance Forms should be returned as soon as possible, but in any
event, so as to be received by no later than 10.00 pm (London time), 5.00 pm
(New York City time) on [-] 1998. The procedure for acceptance of the Texas
Utilities Offer is set out on pages [-] to [-] of this document and in the
accompanying Acceptance Form.
The Texas Utilities Offer is not being made, directly or indirectly, in or into
Canada, Australia or Japan. Accordingly, neither this document nor Acceptance
Forms are to be mailed or otherwise distributed or sent into Canada, Australia
or Japan.
The New Texas Utilities Shares to be issued pursuant to the Texas Utilities
Offer have not been, and will not be, the subject of a prospectus under the
securities laws of any province of Canada and will not be registered under any
relevant securities laws of any country other than the federal securities laws
of the United States. The New Texas Utilities Shares are not being offered, sold
or delivered, directly or indirectly, in or into Canada, Australia or Japan.
The Loan Notes to be issued pursuant to the Texas Utilities Offer have not been,
and will not be registered under the Securities Act or under any relevant
securities laws of any state or district of the United States, will not be the
subject of a prospectus under the securities laws of any province of Canada and
will not be registered under any relevant securities laws of any other country.
The Loan Notes are not being offered, sold or delivered, directly or indirectly,
in or into the United States, Canada, Australia or Japan.
1
<PAGE> 5
APPLICABLE DISCLOSURE REQUIREMENTS
The Texas Utilities Offer is made for securities of a United Kingdom company
and, while the Texas Utilities Offer is subject to United Kingdom and US
disclosure requirements, US investors should be aware that this document has
been prepared in accordance with United Kingdom format and style, which differs
from US format and style. In particular, the Appendices to this document contain
information concerning the Texas Utilities Offer responsive to US disclosure
requirements that may be material and which are summarized in the letter from
Lehman Brothers and Merrill Lynch set out on pages 9 to 28 of this document. In
addition, the summary financial statements of The Energy Group therein have been
prepared in accordance with United Kingdom GAAP, and thus may not be comparable
to financial statements of US companies.
AVAILABLE INFORMATION
Texas Utilities has filed with the SEC a Registration Statement with respect to
the offering of the New Texas Utilities Shares. This Offer Document constitutes
a part of the Registration Statement and, in accordance with the rules of the
SEC, omits certain of the information contained in the Registration Statement.
For such information, reference is made to the Registration Statement and the
exhibits thereto.
The Energy Group and Texas Utilities are, and Texas Utilities' predecessors, TEI
(formerly Texas Utilities Company) and ENSERCH, have been, subject to the
informational requirements of the Exchange Act, and in accordance therewith
file, and have filed, reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information filed by The Energy
Group, Texas Utilities and Texas Utilities' predecessors can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the SEC: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. In addition, the SEC maintains
a World Wide Web site (http://www.sec.gov) that contains reports and other
information filed by Texas Utilities, TEI and ENSERCH. Energy Group Shares are
listed on the London Stock Exchange and Energy Group ADRs are listed on the
NYSE. Reports, and other information concerning The Energy Group may be
inspected at such exchanges. The Texas Utilities Common Stock is listed on the
NYSE, the CSE and the PSE, where reports, proxy statements and other information
concerning Texas Utilities and TEI may be inspected. Reports, proxy statements
and other information concerning ENSERCH may be inspected at the NYSE and the
CSE. The Registration Statement also may be inspected at the offices of Norton
Rose, Kempson House, Camomile Street, London EC3A 7AN, England, during normal
business hours on any weekday (English public holidays excepted) while the Texas
Utilities Offer remains open for acceptance.
DOCUMENTS INCORPORATED BY REFERENCE
On 5 August 1997, Texas Utilities became a holding company which owns all of the
outstanding common stock of TEI (SEC File No. 1-3591) and ENSERCH (SEC File No.
1-3183). The following documents previously filed with the SEC by Texas
Utilities (SEC File No. 1-12833), TEI or ENSERCH pursuant to the Exchange Act
are incorporated herein by reference:
(a) TEI's Annual Report on Form 10-K for the year ended 31 December 1996
("TEI 10-K").
(b) TEI's Quarterly Reports on Form 10-Q for the quarterly periods ended 31
March 1997 and 30 June 1997.
(c) ENSERCH's Annual Report on Form 10-K for the year ended 31 December
1996 ("ENSERCH 10-K").
(d) ENSERCH's Quarterly Reports on Form 10-Q for the quarterly periods
ended 31 March 1997 and 30 June 1997.
2
<PAGE> 6
(e) ENSERCH's Current Reports on Form 8-K dated 14 January 1997, 12 March
1997, 5 June 1997, 3 July 1997, 4 August 1997 and 6 August 1997.
(f) Texas Utilities' Quarterly Report on Form 10-Q for the quarterly period
ended 30 September 1997 ("September 1997 10-Q").
(g) Texas Utilities' Current Reports on Form 8-K dated 5 August 1997, 25
August 1997, 21 November 1997, 17 December 1997 and 26 February 1998.
(h) The description of the Texas Utilities Common Stock, which is contained
in a registration statement filed under the Exchange Act, including any
amendment or report filed for the purpose of updating such description.
All documents filed by Texas Utilities pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Offer Document and prior to the
termination of the offering hereunder shall be deemed to be incorporated by
reference in this Offer Document and to be a part hereof from the date of filing
of such documents; provided, however, that the documents enumerated above or
subsequently filed by Texas Utilities pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act prior to the filing with the SEC of Texas Utilities'
most recent Annual Report on Form 10-K shall not be incorporated by reference in
this Offer Document or be a part hereof from and after the filing of such Form
10-K.
The documents which are incorporated by reference in this Offer Document are
sometimes hereinafter referred to as the "Incorporated Documents." Any statement
contained in an Incorporated Document (including, but not limited to, Items 7
and 8 of the TEI 10-K, which have been modified or superseded by the information
contained in the Current Report on Form 8-K of Texas Utilities dated 26 February
1998) shall be deemed to be modified or superseded for purposes of this Offer
Document to the extent that a statement contained herein or in any other
subsequently filed document which is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Offer Document.
THIS OFFER DOCUMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. TEXAS UTILITIES HEREBY UNDERTAKES TO PROVIDE
WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF ENERGY GROUP
SHARES OR ENERGY GROUP ADSS EVIDENCED BY ENERGY GROUP ADRS, TO WHOM A COPY OF
THIS OFFER DOCUMENT HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY
SUCH PERSON, A COPY OF ANY AND ALL OF THE INCORPORATED DOCUMENTS, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS). IN THE UNITED STATES, REQUESTS FOR SUCH
COPIES SHOULD BE DIRECTED TO: SECRETARY, TEXAS UTILITIES COMPANY, ENERGY PLAZA,
1601 BRYAN STREET, DALLAS, TEXAS 75201; TELEPHONE NUMBER (214) 812-4600. IN THE
UNITED KINGDOM, REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO: NORTON ROSE,
KEMPSON HOUSE, CAMOMILE STREET, LONDON EC3A 7AN; TELEPHONE NUMBER 0171-283-6000
(REF: TEXAS UTILITIES OFFER). IN ADDITION, SUCH DOCUMENTS AND INFORMATION MAY
ALSO BE INSPECTED AT THE OFFICES OF NORTON ROSE, KEMPSON HOUSE, CAMOMILE STREET,
LONDON EC3A 7AN, ENGLAND DURING NORMAL BUSINESS HOURS ON ANY WEEKDAY (ENGLISH
PUBLIC HOLIDAYS EXCEPTED) WHILE THE TEXAS UTILITIES OFFER REMAINS OPEN FOR
ACCEPTANCE.
FORWARD-LOOKING STATEMENTS
This Offer Document does, and the Incorporated Documents may, include
forward-looking statements. Although Texas Utilities believes its expectations
are based on reasonable assumptions, no assurance can be given that actual
results will not differ from those in the forward-looking statements contained
herein and in the Incorporated Documents. The forward-looking statements
contained herein may be affected by, among other things, the competitive
environment; local, state and national regulatory initiatives that increase
competition, threaten cost and investment recovery and impact rate structures;
the economic climate and growth in the service territories of service providers
within the Texas Utilities Group and the TEG Group; the weather and other
natural phenomena; conditions in capital markets; changes in technology used and
services offered by service providers within the Texas Utilities Group and the
TEG Group; and the ability to achieve the goals described
3
<PAGE> 7
in paragraph 8 ("Background to and reasons for the Texas Utilities Offer") of
the letter from Lehman Brothers and Merrill Lynch and in paragraph 8 of Appendix
VIII herein, in each case during the periods covered by the forward-looking
statements. For a discussion of factors which may affect forward-looking
statements contained in the Incorporated Documents, see Texas Utilities' most
recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q.
REDUCTION OF THE ACCEPTANCE CONDITION
The Texas Utilities Offer is conditional, amongst other things, on valid
acceptances being received (and not, where permitted, withdrawn) by the Initial
Closing Date in respect of not less than 90 per cent. in nominal value of Energy
Group Shares (including Energy Group Shares represented by Energy Group ADSs) to
which the Texas Utilities Offer relates, or such lesser percentage as TU
Acquisitions may decide, provided that such Condition (the "Acceptance
Condition") shall not be satisfied unless TU Acquisitions and its wholly-owned
subsidiaries shall have acquired or agreed to acquire, whether pursuant to the
Texas Utilities Offer or otherwise, Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) carrying in aggregate more than 50 per
cent. of the voting rights then exercisable at general meetings of The Energy
Group and provided further that the Acceptance Condition shall be capable of
being satisfied only at a time when all other Conditions have been satisfied,
fulfilled or waived. TU Acquisitions expects that it will reduce the percentage
of Energy Group Shares (including Energy Group Shares represented by Energy
Group ADSs) required to satisfy the Acceptance Condition at some time prior to
all the Conditions being satisfied, fulfilled or, where permitted, waived. At
least five Business Days prior to any such reduction, TU Acquisitions will
announce that it has reserved the right so to reduce the Acceptance Condition.
TU Acquisitions will not make such an announcement unless it believes that there
is a significant possibility that sufficient Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs) will be tendered to permit
the Acceptance Condition to be satisfied at such reduced level. Holders of
Energy Group Securities who are not willing to accept the Texas Utilities Offer
if the Acceptance Condition is reduced to the minimum permitted level should
either not accept the Texas Utilities Offer until the Subsequent Offer Period or
be prepared to withdraw their acceptances promptly following an announcement by
TU Acquisitions of its reservation of the right to reduce the Acceptance
Condition.
RULE 10B-13 EXEMPTION
In accordance with normal United Kingdom practice, TU Acquisitions or its
nominees or brokers (acting as agents for TU Acquisitions) or another subsidiary
of Texas Utilities may make certain purchases of Energy Group Securities outside
the United States during the period in which the Texas Utilities Offer remains
open for acceptance and affiliates of [Lehman Brothers], Merrill Lynch will
continue to act as market makers and principal traders for Energy Group Shares
on the London Stock Exchange pursuant to relief granted by the SEC staff from
Rule 10b-13 under the Exchange Act. For further details on this relief, see
paragraph 3 of Appendix VIII ("Principal purchases") below.
CONVERSION OF CASH CONSIDERATION INTO US DOLLARS
Holders of Energy Group Shares may receive US dollars instead of pounds sterling
on the basis described in paragraph 19(f) ("Currency of cash consideration") of
the letter from Lehman Brothers and Merrill Lynch included in this document.
Holders of Energy Group ADSs evidenced by Energy Group ADRs, unless they elect
to receive pounds sterling, will receive US dollars on the basis described in
that paragraph. The attention of all holders of Energy Group Securities is drawn
to the description in that paragraph of the mechanism for converting pounds
sterling into US dollars and of the exchange rate risks attached thereto.
FINANCIAL INFORMATION AND CURRENCY TRANSLATIONS
The extracts from the consolidated financial statements of, and other
information about, Texas Utilities appearing in this Offer Document are
presented in US dollars ($) and have been prepared in accordance with US GAAP.
The extracts from the consolidated financial statements of, and other
information about, The
4
<PAGE> 8
Energy Group appearing in this Offer Document are presented in pounds (L) and
have been prepared in accordance with United Kingdom GAAP. US GAAP and United
Kingdom GAAP differ in certain significant respects. As a result, and for the
convenience of the reader, the financial information of The Energy Group
included herein and used in the preparation of the pro forma information
appearing in this Offer Document has been adjusted to comply with US GAAP and
contains translations of pounds sterling amounts into US dollars at rates
specified in "Information on The Energy Group -- Selected Energy Group Financial
Information." Such translations should not be construed as representations that
the pounds sterling amounts represent, or have been, or could be converted into
US dollars at that or any other rate. Effective on 5 March, 1998 the conversion
rate of pounds sterling (L) to US dollars ($) was $- per L1, as set by the Noon
Buying Rate in New York City for cable transfers in pounds sterling as certified
for customs purposes by the Federal Reserve Bank of New York. This information
is provided for the convenience of the reader and may differ from the actual
rates in effect during the periods covered by The Energy Group financial
information discussed herein. All US GAAP information for The Energy Group
appearing in this Offer Document is unaudited.
RULE 8 NOTICES
Any person who, alone or acting together with any other person(s) pursuant to an
agreement or understanding (whether formal or informal) to acquire or control
securities of The Energy Group or of Texas Utilities, owns or controls, or
becomes the owner or controller, directly or indirectly, of 1 per cent. or more
of any class of securities of The Energy Group or of Texas Utilities is
generally required under the provisions of Rule 8 of the City Code to notify the
London Stock Exchange and the Panel of every dealing in such securities during
the Initial Offer Period. Dealings by The Energy Group or by Texas Utilities or
by their respective "associates" (within the definition set out in the City
Code) in any class of securities of The Energy Group or of Texas Utilities from
26 January 1998 until the end of the Initial Offer Period must also be so
disclosed. Please consult your financial adviser immediately if you believe this
Rule may be applicable to you.
5
<PAGE> 9
LETTER FROM THE CHAIRMAN OF TEXAS UTILITIES
[TEXAS UTILITIES LETTERHEAD]
9 MARCH 1998
To holders of Energy Group Securities and, for information only, to participants
in the Energy Group Share Schemes
Dear Sir/Madam
CASH OFFER FOR THE ENERGY GROUP
On 2 March 1998, the Boards of Texas Utilities and The Energy Group announced
that they had reached agreement on the terms of a recommended cash offer for The
Energy Group at a price of 810 pence per Energy Group Share, surpassing the
recommended offer of 765 pence per Energy Group Share announced by PacifiCorp on
3 February 1998. Texas Utilities also announced that, subject to the SEC
declaring the relevant documentation effective, Texas Utilities would, in
addition to a full loan note alternative, also make available a limited share
alternative.
On 3 March 1998, the Board of Texas Utilities announced, in response to the
increase by PacifiCorp of its offer, an increase in Texas Utilities' offer to
840 pence per Energy Group Share. Texas Utilities further announced that it
would also increase the limited share alternative.
Texas Utilities announced today that the SEC declared the relevant documentation
effective on 6 March 1998. Accordingly, Texas Utilities today confirmed that the
limited share alternative is being made available to holders of Energy Group
Securities who validly accept the Texas Utilities Offer.
1 THE TEXAS UTILITIES OFFER
The Texas Utilities Offer is being made on the following basis:
<TABLE>
<S> <C>
FOR EACH ENERGY GROUP SHARE 840 PENCE; AND
FOR EACH ENERGY GROUP ADS L33.60
</TABLE>
representing a premium of 20 pence per Energy Group Share to the Increased
PacifiCorp Offer.
Under the share alternative, holders of Energy Group Securities who validly
accept the Texas Utilities Offer will be entitled to receive New Texas Utilities
Shares with a value equal to:
<TABLE>
<S> <C>
FOR EACH ENERGY GROUP SHARE 865 PENCE; AND
FOR EACH ENERGY GROUP ADS L34.60
</TABLE>
determined as, and subject to the limitations, set out in paragraph 4 of the
letter from Lehman Brothers and Merrill Lynch.
As an alternative to some or all of the cash consideration receivable under the
Texas Utilities Offer, holders of Energy Group Shares who validly accept the
Texas Utilities Offer (apart from US citizens or residents and certain other
overseas persons) may elect to receive Loan Notes instead of cash on the
following basis:
FOR EVERY L1 OF CASH CONSIDERATION L1 NOMINAL OF LOAN NOTES
A summary of the tax effects for holders of Energy Group Shares resident for tax
purposes in the UK who accept the Texas Utilities Offer is set out in paragraph
12 of Appendix VIII ("United Kingdom taxation") below. A summary of the tax
effects for holders of Energy Group Securities who are citizens or residents of
the US, US domestic corporations or otherwise taxed as United States residents
is set out in paragraph 13 of Appendix VIII ("United States federal income
taxation") below.
6
<PAGE> 10
2 BACKGROUND TO AND REASONS FOR THE TEXAS UTILITIES OFFER
Texas Utilities has formulated a strategy to position itself to thrive in a more
competitive environment and to identify new business investments that both
capitalise on its core competencies and are complementary to its existing
portfolio of businesses in order to grow earnings, broaden its market beyond the
traditional service areas and expend customer services.
The acquisition of The Energy Group is further confirmation of Texas Utilities'
commitment to this strategy. The Energy Group comprises a unique blend of
electricity generation, supply and distribution assets, combined with strengths
in natural gas and energy trading. Texas Utilities believes that the highly
complementary nature of these activities to those of Texas Utilities, combined
with The Energy Group's experience of operating within a deregulating market,
will enable the enlarged group to capitalise upon the sharing of the expertise
and best practices that reside within the two groups in each of these areas.
Texas Utilities expects the transaction to be earnings and cash flow enhancing
in the first complete year following completion of the Acquisition and
thereafter (prior to considering any synergy or other benefits that the
transaction may give rise to). This statement should not be interpreted to mean
that the future earnings per share of Texas Utilities, as enlarged by the
acquisition of The Energy Group, will necessarily be greater than the historical
published earnings per share of Texas Utilities.
3 THE PEABODY SALE AND CERTAIN CONSENTS
Subject to certain regulatory consents and to the Texas Utilities Offer becoming
or being declared unconditional in all respects, The Energy Group has agreed to
sell the Peabody Coal Business to an affiliated company of Lehman Brothers
Merchant Banking Partners II L.P. for a cash consideration of approximately $2.3
billion plus the assumption of debt. The Peabody Sale does not require the
approval of holders of Energy Group Securities in general meeting.
In demonstration of its commitment to acquire The Energy Group and to underline
its expectation that all consents and confirmations relating to the Texas
Utilities Offer and the Peabody Sale will be obtained within the normal
timetable for an offer in the United Kingdom, Texas Utilities has acquired
77,500,000 Energy Group Shares, representing approximately 14.9 per cent. of The
Energy Group's issued share capital.
4 DIRECTORS, MANAGEMENT AND EMPLOYEES
TU Acquisitions has given assurances to the Board of The Energy Group that the
existing employment rights, including pension rights, of all TEG Group
management and employees will be fully safeguarded. Texas Utilities looks
forward to welcoming all TEG Group employees to the Texas Utilities Group.
5 ACTION TO BE TAKEN TO ACCEPT THE TEXAS UTILITIES OFFER
The procedure for acceptance of the Texas Utilities Offer is set out on pages
(--) to (--) of this document and in the Acceptance Form. The Initial Closing
Date will be 10.00 pm (London Time), 5.00 pm (New York City time), on 6 April
1998, unless extended.
6 HELPLINES FOR THE TEXAS UTILITIES OFFER
If you have any questions on the Texas Utilities Offer, please call the
shareholder helplines on (--) (UK) or (--) (US). If you have any questions
regarding the Acceptance Form, please call the UK Receiving Agent on (--) or the
US Depositary on (--).
OUR OFFER REPRESENTS A PREMIUM OF 20 PENCE PER ENERGY GROUP SHARE TO THE
INCREASED PACIFICORP OFFER. HOLDERS OF ENERGY GROUP SECURITIES ARE STRONGLY
URGED TO ACCEPT OUR OFFER AS SOON AS POSSIBLE AND, IN ANY EVENT, BY NO LATER
THAN 10.00 PM (LONDON TIME), 5.00 PM (NEW YORK CITY TIME) ON 6 APRIL 1998.
7
<PAGE> 11
HOLDERS OF ENERGY GROUP SECURITIES WHO HAVE ALREADY ACCEPTED PACIFICORP'S OFFER
MAY WITHDRAW THEIR ACCEPTANCES AT ANY TIME UNTIL PACIFICORP'S INCREASED OFFER
BECOMES OR IS DECLARED WHOLLY UNCONDITIONAL, BY USING THE ENCLOSED NOTICE OF
WITHDRAWAL.
Yours faithfully
Erle Nye
Chairman and Chief Executive
8
<PAGE> 12
<TABLE>
<S> <C>
[Lehman Brothers Logo] [Merrill Lynch Logo]
LEHMAN BROTHERS INTERNATIONAL (EUROPE) Merrill Lynch International
One Broadgate, London EC2M 7HA
Regulated by the Securities and Futures Authority Registered in England (no. 2312079)
Member of the London Stock Exchange and the International Registered Office: 25 Ropemaker Street, London EC2Y 9LY
Securities Market Association A Subsidiary of Merrill Lynch & Co., Inc., Delaware, USA.
Registered in England Regulated by The Securities and Futures Authority Limited
Member of the London Stock Exchange
</TABLE>
9 March 1998
To holders of Energy Group Securities and, for information only, to participants
in the Energy Group Share Schemes
Dear Sir/Madam
CASH OFFER BY LEHMAN BROTHERS AND MERRILL LYNCH ON BEHALF OF TU ACQUISITIONS FOR
THE ENERGY GROUP
1 INTRODUCTION
This letter contains the formal offer from Texas Utilities. The Texas Utilities
Offer and this document are subject to the applicable requirements of both the
United Kingdom City Code and US federal securities laws.
2 THE TEXAS UTILITIES OFFER
On behalf of TU Acquisitions, we hereby offer to purchase, upon the terms and
subject to the Conditions set out in this document and in the relevant
Acceptance Form, all outstanding Energy Group Securities, for 840 pence in cash
per Energy Group Share and L33.60 in cash per Energy Group ADS, together with
the benefits of the Share Alternative and the Loan Note Alternative referred to
in paragraphs 4 and 5 below and the right to elect to receive the consideration
in US dollars set out in paragraph 19 below.
The Texas Utilities Offer values the fully diluted share capital of The Energy
Group at approximately L4.45 billion (assuming the exercise in full of all
outstanding options and the vesting of all outstanding awards under the Energy
Group Share Schemes). The Texas Utilities Offer represents a premium of:
- 20 pence to the Increased PacifiCorp Offer of 820 pence per Energy Group
Share; and
- 49.6 per cent. to the Closing Price of 561.5 pence per Energy Group Share
on 9 June 1997, the last dealing day before the announcement by The
Energy Group that it was in talks with PacifiCorp in relation to the
Original PacifiCorp Offer, and
- 22.9 per cent. to the Closing Price of 685.5 pence per Energy Group Share
on 23 January 1998, the last dealing day prior to the announcement by The
Energy Group that it was in talks with parties other than PacifiCorp
which might lead to an offer.
Energy Group Securities will be acquired under the Texas Utilities Offer fully
paid and free from all liens, charges, equities, encumbrances and other
interests and together with all rights now and hereafter attaching thereto,
including, without limitation, the right to receive and retain all dividends,
interest and other distributions (if any) declared, made or paid on or after 2
March 1998, the date on which the original Texas Utilities offer was announced.
TO ACCEPT THE TEXAS UTILITIES OFFER YOU SHOULD RETURN THE RELEVANT ACCEPTANCE
FORM AS SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO BE RECEIVED BY THE UNITED
KINGDOM RECEIVING AGENT OR THE US DEPOSITARY NO LATER THAN 10.00 PM (LONDON
TIME), 5.00 PM (NEW YORK CITY TIME) ON [-] 1998. THE PROCEDURE FOR ACCEPTANCE OF
THE TEXAS UTILITIES OFFER IS SET OUT IN PARAGRAPH 17 ("PROCEDURE FOR ACCEPTANCE
OF THE TEXAS UTILITIES OFFER") BELOW, IN PARAGRAPHS 10, 11, 12 AND 13 OF PART B
OF APPENDIX I BELOW AND IN THE ACCOMPANYING ACCEPTANCE FORM.
9
<PAGE> 13
IF YOU WISH TO WITHDRAW FROM THE RENEWED PACIFICORP OFFER OR THE INCREASED
PACIFICORP OFFER AND YOU WISH TO ACCEPT THE TEXAS UTILITIES OFFER, YOU SHOULD
DELIVER A WRITTEN NOTICE OF WITHDRAWAL TO THE PACIFICORP AGENT TO WHOM THE
ACCEPTANCE WAS SENT AS SOON AS POSSIBLE --, RETRIEVE ANY ENERGY GROUP SECURITIES
TENDERED TO SUCH PACIFICORP AGENT AND ACCEPT THE TEXAS UTILITIES OFFER AS
PROVIDED IN PARAGRAPHS 10 AND 11 OF PART B OF APPENDIX I BELOW. FOR THIS PURPOSE
YOU MAY USE THE ENCLOSED NOTICE OF WITHDRAWAL.
3 TERMS AND CONDITIONS OF THE TEXAS UTILITIES OFFER
The Texas Utilities Offer is subject to the Conditions and further terms set out
in Appendix I below. The following summary of certain of the Conditions and
terms of the Texas Utilities Offer is subject to and qualified in its entirety
by reference to Appendix I below.
The Texas Utilities Offer is conditional on, amongst other things, valid
acceptances being received (and not, where permitted, withdrawn) by the Initial
Closing Date in respect of not less than 90 per cent. in nominal value of Energy
Group Shares (including Energy Group Shares represented by Energy Group ADSs) to
which the Texas Utilities Offer relates (the "90 per cent. threshold"), or such
lesser percentage as TU Acquisitions may decide, provided that the Acceptance
Condition shall not be satisfied unless TU Acquisitions and its wholly-owned
subsidiaries shall have acquired or agreed to acquire (in accordance with the
requirements of Notes 4 to 6 of Rule 10 of the City Code, to which reference is
made in paragraph 13(b) of Part B of Appendix I below), whether pursuant to the
Texas Utilities Offer or otherwise, Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) carrying in aggregate more than 50 per
cent. of the voting rights then exercisable at general meetings of The Energy
Group and provided further that the Acceptance Condition shall be capable of
being satisfied only at a time when all other Conditions have been satisfied,
fulfilled or waived. If the 90 per cent. threshold is satisfied before the
Initial Closing Date, the Acceptance Condition (subject to any permitted
reduction in the acceptance threshold) must continue to be satisfied on the
Initial Closing Date, by reference to the facts then subsisting.
TU Acquisitions expects that it will reduce the percentage of Energy Group
Shares (including Energy Group Shares represented by Energy Group ADSs) required
to satisfy the Acceptance Condition at some time prior to all the Conditions
being satisfied, fulfilled or, where permitted, waived. At least five Business
Days prior to any reduction in the percentage of Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs) required to satisfy the
Acceptance Condition, TU Acquisitions will announce that it has reserved the
right to reduce the Acceptance Condition. TU Acquisitions will not make such an
announcement unless it believes there is a significant possibility that
sufficient Energy Group Securities will be tendered to permit the Acceptance
Condition to be satisfied at such reduced level. Holders of Energy Group
Securities who are not willing to accept the Texas Utilities Offer if the
Acceptance Condition is reduced to the minimum permitted level should either not
accept the Texas Utilities Offer until the Subsequent Offer Period or be
prepared to withdraw their acceptances promptly following an announcement by TU
Acquisitions of its reservation of the right to reduce the Acceptance Condition.
The Initial Offer Period will expire at 10.00 pm (London time), 5.00 pm (New
York City time), on [-] 1998, unless extended. At the conclusion of the Initial
Offer Period, including any extension thereof, if all Conditions have been
satisfied, fulfilled or, where permitted, waived, the Texas Utilities Offer will
be extended for a Subsequent Offer Period of at least 14 calendar days. Holders
of Energy Group Securities will have the right to withdraw their acceptances of
the Texas Utilities Offer during the Initial Offer Period, but not during the
Subsequent Offer Period, except in certain limited circumstances. TU
Acquisitions reserves the right (but will not be obliged) at any time to extend
the Initial Offer Period, provided that TU Acquisitions may not extend the
Initial Offer Period beyond [-] 1998 without the consent of the Panel. TU
Acquisitions may terminate any extension of the Initial Offer Period (other than
an extension required by the City Code or the Exchange Act) prior to its
scheduled expiry if all Conditions have been satisfied, fulfilled or, where
permitted, waived. In that case, the Initial Offer Period and, consequently,
withdrawal rights, except in certain limited circumstances, will terminate
immediately.
If all of the Conditions are satisfied, fulfilled or, where permitted, waived
within the time permitted, payment for tendered Energy Group Securities will be
made as provided in paragraph 19 ("Settlement") below.
10
<PAGE> 14
If all Conditions are satisfied, fulfilled or, where permitted, waived and TU
Acquisitions acquires or contracts to acquire, pursuant to the Texas Utilities
Offer or otherwise, at least 90 per cent. in nominal value of Energy Group
Shares (including Energy Group Shares represented by Energy Group ADSs) to which
the Texas Utilities Offer relates, it will be entitled to, and intends to,
acquire the remaining Energy Group Securities on the same terms as the Texas
Utilities Offer pursuant to and subject to sections 428 to 430 F (inclusive) of
the Companies Act. See paragraph 11 of Appendix VIII ("Compulsory Acquisition")
below.
Whether or not TU Acquisitions is in a position to effect the compulsory
acquisition of any outstanding Energy Group Shares in accordance with the
Companies Act as referred to above, and irrespective of the size of any
outstanding minority in The Energy Group, TU Acquisitions intends to seek to
procure, after the Texas Utilities Offer becomes or is declared unconditional,
an application by The Energy Group to the London Stock Exchange for Energy Group
Shares to be delisted and an application by The Energy Group to the NYSE for
Energy Group ADSs to be delisted. The London Stock Exchange has confirmed that
it would agree to the delisting of the Energy Group Shares in those
circumstances.
Shareholders of corporations organised under the laws of certain US states have,
subject to a number of significant exceptions, "appraisal rights" with respect
to their shares in connection with certain transactions (including mergers,
consolidations and acquisitions). These appraisal rights typically confer on
dissenting shareholders the right to have a court determine the fair value of
their shares and require the surviving or resulting corporation to pay such fair
value to such shareholders. As The Energy Group is incorporated under the laws
of England and Wales, holders of Energy Group Securities have no such appraisal
rights in connection with the Texas Utilities Offer. However, in the event that
the compulsory acquisition procedures referred to herein are available to TU
Acquisitions, holders of Energy Group Securities whose Energy Group Securities
have not been purchased pursuant to the Texas Utilities Offer will have certain
rights under Section 430C of the Companies Act to object to their acquisition by
TU Acquisitions under the compulsory acquisition procedures. See paragraph 9 of
Appendix VIII ("Compulsory Acquisition") below.
4 LIMITED SHARE ALTERNATIVE
Subject to the limitations set out below, holders of Energy Group Securities who
validly accept the Texas Utilities Offer may elect to receive, instead of cash
consideration for all (but not part) of their Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs), that number of New Texas
Utilities Shares with a value (the "Share Alternative Value") equal to 865 pence
for each Energy Group Share based on the average of the closing prices of shares
of Texas Utilities Common Stock on the NYSE for the 20 consecutive dealing days
ending on the day (the "Calculation Day") falling three dealing days prior to
the date on which, in the absence of unforeseen circumstances, TU Acquisitions
intends to declare the Texas Utilities Offer unconditional in all respects. As
soon as practicable after the Share Alternative Ratio, as defined below, has
been calculated, and in any event no later than 3.00 pm (London time), 10.00 am
(New York City time) on the dealing day immediately following the Calculation
Day, TU Acquisitions will announce the Share Alternative Ratio, as defined
below, and state that, in the absence of unforeseen circumstances, it intends to
declare the Texas Utilities Offer unconditional in all respects on the date
falling two dealing days following such announcement. For the purpose of
determining the number of New Texas Utilities Shares receivable by a holder of
Energy Group ADSs, each Energy Group ADS shall be deemed to represent four
Energy Group Shares.
CALCULATION OF ENTITLEMENTS UNDER THE SHARE ALTERNATIVE
The number of New Texas Utilities Shares receivable by a holder of Energy Group
Securities who validly elects for the Share Alternative will be based on the
number of Energy Group Shares in respect of which the relevant holder has or is
deemed to have accepted the Texas Utilities Offer, scaled down as necessary on
the pro rata basis referred to below under the heading "Limited availability of
the Share Alternative". Such scaled down number of Energy Group Shares will be
multiplied by the Share Alternative Ratio and the resultant figure rounded down
to the nearest whole number to determine the number of New Texas Utilities
Shares that will be issued to the relevant holder of Energy Group Securities.
The Share Alternative Ratio for determining the number of New Texas Utilities
Shares per Energy Group Share will be 865 pence (the "Share Alternative
11
<PAGE> 15
Value") divided by the New Texas Utilities Share Price, rounded down to the
nearest three decimal places and subject to a maximum Share Alternative Ratio of
0.390. The New Texas Utilities Share Price will be calculated as the average of
the closing prices of shares of Texas Utilities Common Stock on the NYSE
Composite Tape on the 20 consecutive dealing days ending on the Calculation Day,
converted into pounds sterling from US dollars at the Noon Buying Rate on the
Calculation Day and expressed by a number of pence.
By the way of illustration, there follows a worked example of the calculation of
an entitlement under the Share Alternative. Assuming the Calculation Day were --
March 1998 (the latest practicable dealing day before the date of this
document): the New Texas Utilities Share Price would be -- pence (based on the
average of the closing price of Texas Utilities Common Stock on the NYSE
Composite Tape on the 20 consecutive dealing days ending on such Calculation Day
and a Noon Buying Rate on that day of $-- per L1) and the Share Alternative
Ratio would be --. Accordingly, a holder of 100 Energy Group Shares or 25 Energy
Group ADSs who validly elected for the Share Alternative in respect of the
entire holding would, assuming no requirement for scaling down of his election,
be entitled to receive -- New Texas Utilities Shares.
The following table illustrates the entitlement of such a holder, assuming the
same Noon Buying Rate of $--per L1, on the basis of the following possible New
Texas Utilities Share Prices:
<TABLE>
<CAPTION>
NEW TEXAS UTILITIES SHARE PRICE ENTITLEMENT
------------------------------------- ---------------------------------
SHARE ALTERNATIVE PRODUCT OF NEW TEXAS
$ L RATIO C X 100 UTILITIES SHARES CASH
(A) (B) (C) (D) (E) (F)
--------------------- -------------- ----------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
[--]
[--]
[--]
[--] 22.18 0.390 39.0 39
[--] [--] 0.390(1) 39.0 39 [--]
</TABLE>
Notes
(E) Represents the result of rounding down to the nearest whole number that
number appearing in column (D)
(1) Represents the maximum Share Alternative Ratio
VALUE OF THE SHARE ALTERNATIVE
The average of the closing prices of shares of Texas Utilities Common Stock for
the 20 consecutive dealing days ending on the Calculation Date may vary from the
average closing price of $-- used in the worked example above.
TU Acquisitions will announce, at or about 12 noon on a daily basis through the
London Stock Exchange, commencing on the day after the posting of this Offer
Document and concluding on the Calculation Day, the rolling average closing
prices of shares of Texas Utilities Common Stock on the NYSE Composite Tape
calculated on the 20 consecutive dealing days ending on the day immediately
preceding the day on which the announcement is made, converted into pounds
sterling from US dollars at the Noon Buying Rate on the Business Day immediately
preceding the date of such announcement. The announcement will also specify the
Share Alternative Ratio that would apply if the day on which such announcement
is made was the Calculation Day and an illustration of the number of New Texas
Utilities Shares to which a holder of Energy Group Securities who validly
elected for the Share Alternative would become entitled assuming no scaling down
of his election.
LIMITED AVAILABILITY OF THE SHARE ALTERNATIVE
The maximum number of Energy Group Shares (including Energy Group Shares
represented by Energy Group ADSs) which can be exchanged for New Texas Utilities
Shares pursuant to the Share Alternative is limited to 20 per cent. of the fully
diluted number of Energy Group Shares (including Energy Group Shares represented
by Energy Group ADSs). As a result, if elections (including Potential Elections,
as defined
12
<PAGE> 16
below) for the Share Alternative exceed the 20 per cent. limit, it will be
necessary to scale down these elections on the basis described below. If it
becomes necessary to calculate such a scale down, the terms of the Texas
Utilities Offer and applicable law requires that there be taken into account not
only those Energy Group Shares (including Energy Group Shares represented by
Energy Group ADSs) in respect of which elections have been made for the Share
Alternative up to and including the tenth day after the Texas Utilities Offer
becomes wholly unconditional, but also those Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs) which may be tendered or
otherwise acquired by TU Acquisitions after such tenth day. The scale down ratio
will be determined using the following formula:
Scale Down Ratio = A
--
B+C
where: A is 20 per cent. of the fully diluted number of Energy Group Shares
(including Energy Group Shares represented by Energy Group ADSs);
B is the actual number of Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) tendered under the Share
Alternative up to and including the tenth day after the Texas Utilities
Offer becomes wholly unconditional; and
C is 100 per cent. of the Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) which may be tendered, or
otherwise acquired by TU Acquisitions, following the tenth day after the
Texas Utilities Offer becomes wholly unconditional ("Potential
Elections").
In order for each holder of Energy Group Shares (including Energy Group Shares
represented by Energy Group ADSs) who has elected for the Share Alternative to
determine the actual number of such tendered Energy Group Shares which will be
exchanged for New Texas Utilities Shares, each such holder would multiply those
Energy Group Shares (including Energy Group Shares represented by Energy Group
ADSs) which he/she tendered by the scale down ratio.
An example of the calculation of the scale down ratio is set out below, based on
the following assumptions:
<TABLE>
<S> <C>
Fully diluted number of Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs)..... 530,000,000
Actual number of Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) tendered for
Share Alternative up to and including the tenth day after
the Texas Utilities Offer becomes wholly unconditional.... 159,000,000
100 per cent. of the Potential Elections of Energy Group
Shares (including Energy Group Shares represented by
Energy Group ADSs)........................................ 79,500,000
Number of Energy Group Shares (including Energy Group Shares
represented by Energy Group ADSs) tendered by an
individual holder for the Share Alternative............... 750
20% (530,000,000) 106,000,000
Scale Down Ratio = --------------------------- = ------------ = .4444
159,000,000 + 79,500,000 238,500,000
Number of individual holder's Energy
Group Shares (including Energy Group
Shares represented by Energy Group
ADSs) permitted to be tendered for
the Share Alternative after 750 X .4444 = 333.3 Energy Group
application of scale down ratio..... Shares
</TABLE>
13
<PAGE> 17
If it becomes necessary to scale down elections for the Share Alternative, each
such election, if validly made, will be scaled down by Lehman Brothers and
Merrill Lynch, as nearly as practicable, by the same proportion as such election
bears to all such elections. Further details of this pro rata scaling down are
set out in paragraph 4 of Part B of Appendix I.
PAYMENT IN THE EVENT OF SCALING DOWN AND/OR IN LIEU OF FRACTIONAL
ENTITLEMENTS
No fractions of New Texas Utilities Shares will be issued. In lieu of any such
fraction, a holder of Energy Group Securities electing for the Share Alternative
will receive cash consideration equivalent to such fraction multiplied by the
New Texas Utilities Share Price.
To the extent that a valid election for the Share Alternative by a holder of
Energy Group Securities is scaled down, such holder will be entitled to receive,
in addition to the New Texas Utilities Shares to which he will be entitled, the
cash consideration in respect of his Energy Group Securities for which he did
not receive New Texas Utilities Shares as a result of the scaling down as if he
had not elected for the Share Alternative in respect of such Energy Group
Securities.
Any cash amounts payable to a holder of Energy Group Securities in lieu of
fractional entitlements and pursuant to any scaling down will be aggregated and
if the aggregate amount is less than L3.00 will not be paid to holders of Energy
Group Securities but will be retained for the benefit of TU Acquisitions.
TEXAS UTILITIES COMMON STOCK
The New Texas Utilities Shares will when issued, rank pari passu in all respects
with the existing issued and outstanding shares of Texas Utilities Common Stock,
including the right to receive any future dividends and other distributions
declared, paid or made after the date of issuance of such shares.
The Texas Utilities Common Stock is listed on the NYSE, the CSE and the PSE, but
is not listed on the London Stock Exchange. Texas Utilities has not applied for
admission of shares of Texas Utilities Common Stock to the Official List of the
London Stock Exchange but retains its discretion to make such application.
Texas Utilities has filed with the SEC a Registration Statement covering the
offer and sale of New Texas Utilities Shares pursuant to the Share Alternative,
and intends to apply for listing of such shares on the NYSE, the CSE and the
PSE. Holders of Energy Group Shares who have no existing arrangements to trade
such shares should take into account the difficulty and expenses associated with
trading Texas Utilities Common Stock when making their investment decision with
respect to the Texas Utilities Offer and in particular the Share Alternative.
Your decision as to whether to elect to receive any New Texas Utilities Shares
under the Share Alternative will depend upon your individual circumstances
including your investment criteria and tax position. You should bear in mind
that the pounds sterling value of an investment in Texas Utilities and any
dividend income from that investment (payable in US dollars and subject to US
withholding tax) will be affected by the prevailing dollar/pounds sterling
exchange rate. A history of the US dollar/pounds sterling exchange rate for the
past five years is set out in Appendix VII of this document.
If you are in any doubt as to the course of action you should follow, you should
consult your professional adviser.
5 LOAN NOTE ALTERNATIVE
A Loan Note Alternative is available to holders of Energy Group Shares (other
than persons who are citizens or residents of the United States and certain
other overseas shareholders) who validly accept the Texas Utilities Offer, on
the basis of L1 nominal of Loan Notes for every L1 of cash that they would
otherwise receive under the Texas Utilities Offer, subject to aggregate valid
elections being received on or before the date on which all the Conditions are
satisfied, fulfilled or waived, as applicable, for in excess of L1 million
nominal value of Loan Notes. If insufficient elections are received, holders of
Energy Group Shares who validly accept the Texas Utilities Offer and elect for
the Loan Note Alternative will instead receive cash in accordance with
14
<PAGE> 18
the terms of the Texas Utilities Offer. Subject as aforesaid, the Loan Note
Alternative will remain open as long as the Texas Utilities Offer is open for
acceptance. Where an Energy Group shareholder elects or is deemed to have
elected for the Loan Note Alternative in respect of all the Energy Group Shares
for which he has accepted the Texas Utilities Offer, fractional entitlements to
Loan Notes will be disregarded and not paid.
Merrill Lynch has advised that, based on market conditions on 9 March 1998 (the
latest practicable date prior to the publication of this document), in their
opinion, if the Loan Notes had then been in issue, the value of each L1 nominal
of Loan Notes would have been approximately 98 pence.
In considering the Loan Note Alternative, holders of Energy Group Shares should
note that the obligations of TU Acquisitions are not guaranteed or secured.
A summary of the terms of the Loan Notes, including provisions relating to the
calculation of the interest rate on the Loan Notes, is set out in Appendix III
below.
6 FINANCIAL EFFECTS OF ACCEPTANCE OF THE TEXAS UTILITIES OFFER
The following table shows, for illustrative purposes only, and on the bases and
assumptions set out in the notes below, the financial effects of acceptance of
the Texas Utilities Offer (either entirely for cash or on the basis that
elections are made in full under the Share Alternative) on capital value and
income for a holder of 100 Energy Group Shares, if the Texas Utilities Offer
becomes or is declared unconditional in all respects:
<TABLE>
<CAPTION>
CASH SHARE
OFFER ALTERNATIVE
NOTES PENCE PENCE
<S> <C> <C> <C>
(a) CAPITAL VALUE
Cash consideration of 840p per Energy Group Share........ 840.00 --
Market value of [-] New Texas Utilities Shares........... (1) -- [-]
Market value of 100 Energy Group Shares.................. (2) 778.50 778.50
------ ------
Increase in capital value................................ 61.50 86.50
====== ======
Representing an increase of.............................. 7.9% 11.1%
====== ======
(b) INCOME
Income from cash consideration........................... (3) [-] --
Dividend income on [-] New Texas Utilities Shares........ (4) -- [-]
------ ------
Net dividend income on 100 Energy Group Shares........... (5) 27.50 27.50
------ ------
Increase in income....................................... [-] [-]
====== ======
Representing an increase of.............................. [-]% [-]%
====== ======
</TABLE>
- ---------------
(1) The market value of a New Texas Utilities Share is based on the closing
price of $[-] as derived from the NYSE Composite Tape and converted into
pounds sterling at the Noon Buying Rate on 5 March 1998, being the latest
practicable date prior to publication of this document.
(2) The market value of an Energy Group Share is based on the Closing Price of
778 1/22p on 27 February 1998, being the last dealing day prior to
announcement of the original Texas Utilities offer.
(3) The income from the cash consideration has been calculated on the
assumption that the cash is re-invested in British Government securities so
as to achieve an income of [-] per cent. per annum, being the average gross
redemption yield on medium coupon British Government fixed interest rate
securities of maturities of 5 to 15 years, as derived from the FT Actuaries
Index as at 5 March 1998 as published in the Financial Times on 6 March
1998, the latest practicable date prior to publication of this document.
For Energy Group Shareholders who are UK basic rate taxpayers, the net
interest income on L[-] cash would be L[-] (assuming a rate of taxation of
23%).
15
<PAGE> 19
(4) The dividend income on a Texas Utilities Share is based on the aggregate
dividend of $2.125 per Texas Utilities Share in respect of the year ended
31 December 1997.
(5) The dividend income on an Energy Group Share is based on dividend of 5.5p
(net) per Energy Group Share in respect of the period from 1 January to 31
March 1997 multiplied by 4 and grossed up by a factor of 100/80.
(6) No account has been taken of any liability to taxation nor the treatment of
fractions in assessing the financial effects of acceptance (except as
mentioned in Note (3) above.)
7 ACCOUNTING TREATMENT
The Acquisition will be accounted for by Texas Utilities as a "purchase" for
financial accounting purposes in accordance with US GAAP. The purchase price
(i.e., the consideration) will be allocated based on the fair value of The
Energy Group's assets acquired and liabilities assumed. Such allocations will be
made based upon valuations and other studies that have not been finalized as of
the date hereof. The excess of the purchase price of the Acquisition over the
amounts so allocated will be allocated to goodwill.
8 REGULATION
The Texas Utilities Offer is subject to certain regulatory consents and
confirmations being obtained. Amongst other approaches to relevant regulatory
authorities, TU Acquisitions is making a submission to the Office of Fair
Trading concerning the Texas Utilities Offer and, together with The Energy
Group, will enter into discussions with the DGES. The Peabody Sale is subject to
the conditions described in paragraph 10 below.
It is currently anticipated that all consents and confirmations required under
the Texas Utilities Offer and the Peabody Sale will be received within the
normal timetable for an offer in the United Kingdom.
TU Acquisitions will not invoke either of Conditions (d) or (e) of the Texas
Utilities Offer in respect of the DGES seeking, or indicating that it is his
intention to seek, modifications to any of The TEG Group's licences under the
Electricity Act 1989 or undertakings or assurances from any member of the Texas
Utilities Group or the TEG Group provided that such modifications, undertakings
or assurances substantially reflect the assurances proposed by the DGES to
PacifiCorp in connection with the referral of the Original PacifiCorp Offer to
the Monopolies and Mergers Commission (as described in the Monopolies and
Mergers Commission Report relating to the Original PacifiCorp Offer published on
19 December 1997) or are substantially in keeping with the proposals outlined by
the DGES in his consultation paper dated 24 February 1998 regarding
modifications to public electricity supply licences following takeovers.
The full text of the Conditions to the Texas Utilities Offer is set out in
Appendix I.
Further details of regulatory issues applicable to the Texas Utilities Offer are
set out in paragraph 12 of Appendix VIII ("Legal and regulatory matters") below.
9 BACKGROUND TO AND REASONS FOR THE TEXAS UTILITIES OFFER
Texas Utilities has formulated a strategy to position itself to thrive in a more
competitive environment and to identify new business investments that both
capitalize on its core competencies and are complementary to its existing
portfolio of businesses in order to grow earnings, broaden its markets beyond
the traditional service areas and expand customer services.
The acquisition of The Energy Group is further confirmation of Texas Utilities'
commitment to this strategy. The Energy Group comprises a unique blend of
electricity generation, supply and distribution assets, combined with strengths
in natural gas and energy trading. Texas Utilities believes that the highly
complementary nature of these activities to those of Texas Utilities, combined
with The Energy Group's experience of operating within a deregulating market,
will enable the enlarged group to capitalise upon the sharing of the expertise
and best practices that reside within the two groups in each of these areas.
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<PAGE> 20
Texas Utilities expects the transaction to be earnings and cash flow enhancing
in the first complete year following completion of the Acquisition and
thereafter (prior to considering any synergy or other benefits that the
transaction may give rise to). This statement should not be interpreted to mean
that the future earnings per share of Texas Utilities, as enlarged by the
acquisition of The Energy Group, will necessarily be greater than the historical
published earnings per share of Texas Utilities.
10 INFORMATION ON THE TEXAS UTILITIES GROUP
TEXAS UTILITIES AND ITS SUBSIDIARIES
Texas Utilities is a Texas corporation organized in 1996 for the purpose of
becoming the holding company for TEI, formerly Texas Utilities Company, and
ENSERCH upon the mergers of TEI and ENSERCH with wholly-owned subsidiaries of
Texas Utilities ("Mergers"). At the effective time of the Mergers, (i) Texas
Utilities changed its name from TUC Holding Company to Texas Utilities Company,
(ii) TEI changed its name from Texas Utilities Company to Texas Energy
Industries, Inc., (iii) all shares of common stock of TEI were automatically
converted into an equal number of shares of Texas Utilities Common Stock, (iv)
ENSERCH distributed to its shareholders ENSERCH's entire interest in its former
subsidiaries, Lone Star Energy Plant Operations, Inc. and Enserch Exploration,
Inc., and (v) each share of common stock of ENSERCH was automatically converted
into approximately 0.225 of a share of Texas Utilities Common Stock.
TEI, a Texas corporation, is a holding company whose principal subsidiary,
TU Electric, is an operating public utility company engaged in the generation,
purchase, transmission, distribution and sale of electric energy in the north
central, eastern and western portions of Texas, an area with a population
estimated at 5,890,000. Two other subsidiaries of TEI are engaged directly or
indirectly in public utility operations: (i) SESCO, which is engaged in the
purchase, transmission, distribution and sale of electric energy in ten counties
in the eastern and central parts of Texas, with a population estimated at
126,900 and (ii) TU Australia, which in 1995 acquired the common stock of
Eastern Energy, a company engaged in the purchase, distribution, marketing and
sale of electric energy to approximately 481,000 customers in the Melbourne area
of Australia. Eastern Energy is not affiliated with The Energy Group or any of
its subsidiaries. Neither SESCO nor Eastern Energy generates any electricity.
TEI also has other wholly-owned subsidiaries which perform specialized functions
within the Texas Utilities Company system.
ENSERCH, a Texas corporation, is an integrated company focused on natural gas.
ENSERCH operate primarily in the north central and eastern parts of Texas. Its
major business operations are natural gas pipelines, processing, marketing and
distribution. Through these business operations, ENSERCH is engaged in owning
and operating interconnected natural gas transmission lines, underground storage
reservoirs, compressor stations and related properties in Texas; gathering and
processing natural gas to remove impurities and extract liquid hydrocarbons for
sale; and the wholesale and retail marketing of natural gas in several areas of
the United States; and owning and operating approximately 550 local gas utility
distribution systems in Texas.
In November 1997, Texas Utilities consummated the acquisition of LCC, a
privately held, independent local exchange telephone company, with sixteen
exchanges that serve approximately 100,000 access lines in the Alto, Conroe and
Lufkin areas of southeast Texas. LCC also provides access services to a number
of interexchange carriers who provide long distance services. LCC owns fiber
optic cable systems which it leases to interexchange carriers, leases radio
communications towers, and provides Internet access, cellular mobile telephone,
radio paging and private branch exchange (PBX) services to local customers. LCC
also provides interchange long distance services, with the primary focus being
on business customers. Approximately 8.7 million shares of Texas Utilities
Common Stock were issued to LCC shareholders in a stock for stock exchange.
Approximately $31 million of LCC's long-term debt remains outstanding.
The principal executive offices of Texas Utilities are located at 1601 Bryan
Street, Dallas, Texas 75201-3411; the telephone number is (214) 812-4600.
17
<PAGE> 21
TU Acquisitions, a wholly-owned subsidiary of Texas Utilities, is a public
limited company incorporated in England and Wales on 27 October 1997.
SELECTED HISTORICAL AND PRO FORMA TEXAS UTILITIES FINANCIAL DATA
The Acquisition will be treated as a purchase for accounting purposes. The
Energy Group assets acquired and liabilities assumed will be recorded at their
fair value.
The following selected historical financial data of Texas Utilities for each of
the five years in the period ended 31 December 1997 is derived from the
consolidated financial statements included in the Texas Utilities Current Report
on Form 8-K dated 26 February 1998, which have been audited by Deloitte & Touche
LLP, independent public accountants, and selected financial data included in the
TEI 10-K, each incorporated by reference herein.
18
<PAGE> 22
The selected unaudited pro forma financial data of Texas Utilities for the year
31 December 1997 is derived from the historical financial statements of Texas
Utilities and The Energy Group and gives effect to the Acquisition, Peabody Sale
and Texas Utilities' acquisitions of ENSERCH and LCC (together, the "Pro Forma
Transactions"). The balance sheet data is presented as if the Pro Forma
Transactions had occurred on 31 December 1997, and the income statement data
assumes the Acquisition and Peabody Sale occurred at the beginning of such
period. This information is not necessarily indicative of the financial results
that would have occurred had the above-described events been consummated on the
indicated dates, or of Texas Utilities' future financial results, and should be
read in conjunction with the historical financial statements of Texas Utilities
and The Energy Group and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Texas Utilities and The Energy Group
incorporated by reference or included herein and "Unaudited Pro Forma Condensed
Consolidated Financial Statements" included elsewhere herein.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
HISTORICAL TEXAS TEXAS
TEI UTILITIES UTILITIES
--------------------------------------------- ---------- ------------
YEAR ENDED 31 DECEMBER YEAR ENDED
---------------------------------------------------------- 31 DECEMBER
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- ---------- ------------
UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BASIC INCOME STATEMENT DATA
Operating Revenues.......... $ 5,434.5 $ 5,663.5 $ 5,638.7 $ 6,550.9 $ 7,945.6 $14,544.0
Net Income (Loss)(a)........ 368.7 542.8 (138.6) 753.6 660.5 778.0
Per Share of Common Stock
Basic Earnings
(Loss)(a).............. 1.66 2.40 (.61) 3.35 2.86 2.95
Diluted Earnings
(Loss)................. 1.66 2.40 (.61) 3.35 2.85 2.93
Dividends Declared....... 3.08 3.08 2.81 2.025 2.125 2.125
BALANCE SHEET DATA (at period
end)
Total Assets................ $21,518.1 $20,893.4 $21,535.9 $21,375.7 $24,874.1 $37,709.0
Long-term Debt, less amounts
due currently............ 8,379.8 7,888.4 9,174.6 8,668.1 8,759.4 15,941.0
Preferred Stock
Not Subject to Mandatory
Redemption............. 1,083.0 870.2 489.7 464.4 304.2 304.2
Subject to Mandatory
Redemption............. 396.9 387.5 263.2 238.4 20.6 20.6
TU Electric Obligated,
Mandatorily Redeemable,
Preferred Securities of
Trusts Holding Solely
Debentures of TU
Electric(b).............. -- -- 381.5 381.3 875.1 875.1
Common Stock Equity......... 6,571.0 6,490.0 5,731.7 6,032.9 6,843.1 7,598.0
--------- --------- --------- --------- --------- ---------
Total Capitalization..... $16,430.7 $15,636.1 $16,040.7 $15,785.2 $16,802.4 $24,738.9
========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(a) The year ended 31 December 1993 was affected by the recording of regulatory
disallowances in TU Electric's Docket 11735. The year ended 31 December
1995 was affected by the impairment of several nonperforming assets,
including TU Electric's partially completed Twin Oak and Forest Grove
lignite-fueled facilities and the New Mexico coal reserves of a subsidiary,
as well as several minor assets. Such impairment, on an after-tax basis,
amounted to $802 million. (See the TEI 10-K). The year ended 31 December
1997 includes a one time base revenue refund of $80 million as a result of
a settlement with the Public Utility Commission of Texas (PUC) and a fuel
disallowance charge of $80 million as a result of a fuel reconciliation
proceeding before the PUC. (See the 26 February 1998 Form 8-K.)
19
<PAGE> 23
(b) The sole assets of such trusts consist of junior subordinated debentures of
TU Electric in principal amounts, and having other payment terms,
corresponding to the securities issued by such trusts.
Further information on Texas Utilities is set out in Appendix V below.
10 INFORMATION ON THE ENERGY GROUP
The TEG Group is a diversified international energy group which includes
Eastern, one of the leading integrated electricity and gas groups in the United
Kingdom, and Peabody, the world's largest private producer of coal. The Energy
Group has entered into an agreement to sell the Peabody Coal Business to an
affiliated company of Lehman Merchant, subject to the conditions summarised in
paragraph 8 below.
Through Eastern, The Energy Group is involved in a wide range of operations:
- Eastern Generation, the fourth largest generator of electricity in Great
Britain, currently owns, operates or has an interest in eight power
stations, representing approximately 10 per cent. of the United Kingdom's
total registered generating capacity as at 31 March 1997;
- Eastern Power & Energy Trading manages for the TEG Group the price and
volume risks associated with the generation, wholesaling and sale to end
users of electricity. These exposures are managed by trading its contract
portfolio and by bidding Eastern's generation output into the Electricity
Pool (the electricity trading market in England and Wales). It also has
small equity interests in three natural gas-producing fields in the North
Sea;
- Eastern Natural Gas is one of the largest suppliers of natural gas in the
United Kingdom after Centrica plc; and
- Eastern Electricity is the largest supplier and distributor of
electricity in England and Wales, with over three million customers and
an authorised area covering approximately 20,300 sq. km. in the east of
England and parts of North London.
Peabody is the largest producer of coal in the United States and operates 25
underground and surface mines in the United States and three surface mines in
Australia:
- as at 31 March 1997, Peabody owned or controlled 9.5 billion tons of
proven and probable coal reserves;
- in the six months ended 31 March 1997, Peabody sold 81.4 million tons of
coal worldwide and had an estimated 14.4 per cent. of the US market; and
- Peabody Australia, one of the ten largest coal producers in Australia,
has interests in four surface mines in New South Wales, three of which
are currently in operation. Peabody's equity share of the coal sales of
these mines amounted to 3.5 million tons in the six months ended 31 March
1997 and its equity share of the proven and probable reserves associated
with these mines as at 31 March 1997 amounted to 466 million tons.
The Peabody Coal Business also includes Citizens Power, one of the leading US
power marketing firms which was acquired by the TEG Group in May 1997. Its
headquarters are in Boston and it has field offices in Milwaukee, Denver and
Toronto.
On a pro forma basis for the year ended 31 March 1997, The Energy Group reported
consolidated turnover of L4,460 million and consolidated profit on ordinary
activities after taxation of L286 million. For the nine months ended 31 December
1997, The Energy Group reported unaudited consolidated turnover of L3,390
million and operating profits of L379 million before exceptional costs
associated with the Original PacifiCorp Offer and restructuring charges.
20
<PAGE> 24
THE PEABODY SALE
Subject to the conditions set out below, The Energy Group has agreed to sell the
Peabody Coal Business to an affiliated company of Lehman Merchant for a cash
consideration of $2.3 billion, payable on completion, plus the assumption of
debt.
Information on the Peabody Coal Business is set out above. For the nine months
ended 31 December 1997, the Peabody Coal Business contributed L1,014 million and
L112 million to TEG Group turnover and operating profits respectively.
The Peabody Sale is conditional on the fulfilment of conditions to the following
effect:
(a) the Texas Utilities Offer becoming or being declared unconditional in
all respects (and the Texas Utilities Offer not at that time being
publicly opposed by the Board of The Energy Group);
(b) the waiting period applicable to the Peabody Sale under the US HSR Act
having expired or been terminated;
(c) the consent of the Treasurer of the Commonwealth of Australia, acting
in such capacity or through the body known as the Foreign Investment
Review Board, having been given to the Peabody Sale (or to any aspect
thereof as is subject to approval pursuant to the Foreign Acquisitions
and Takeovers Act of Australia) either unconditionally or subject to
such conditions as do not have and could not reasonably be expected to
have a material adverse effect on the value of the relevant companies
and their subsidiaries (taken as a whole);
(d) FERC having issued an order approving the Peabody Sale or any aspect
thereof which shall be subject to regulation by FERC on terms that do
not have and could not reasonably be expected to have a material
adverse effect on the value of the relevant companies and their
subsidiaries (taken as a whole); and
(e) no order having been issued (and remaining in effect) by any court or
other governmental authority, and no statute, rule, regulation,
executive order, decree or other order of any kind existing or having
been enacted, entered or enforced by any governmental authority, which
(in any such case to an extent which is material in the context of the
Peabody Sale) prohibits, restrains or restricts completion of the
Peabody Sale.
In the event that (i) the Peabody Sale is not completed because of a breach of
condition (e) above and (ii) the Renewed PacifiCorp Offer (or any revision of
that offer, including the Increased PacifiCorp Offer) lapses, Texas Utilities
will, subject to certain exceptions, pay The Energy Group a break-fee of $50
million on 2 March 1999.
Texas Utilities has entered into an agreement with Lehman Merchant relating to
the Peabody Sale which, (inter alia), provides for the parties to make certain
payments to each other to reflect adjustments to the net assets of the Peabody
Coal Business as shown in a post-completion balance sheet and contains other
payment obligations of Texas Utilities in certain circumstances.
21
<PAGE> 25
SUMMARY TEG GROUP FINANCIAL INFORMATION
The following summary consolidated financial information of the TEG Group
has been extracted from publicly available information and should be read in
conjunction with, and is qualified in its entirety by reference to, the
Financial Statements and Notes thereto appearing elsewhere in this Offer
Document. See Appendix IV for the press release announcing the TEG Group's
results for the nine months ended 31 December 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED AND
YEAR ENDED AND AS AT 30 SEPTEMBER AS AT 31 MARCH
---------------------------------------------------- ----------------------------
1992 1993 1994 1995 1996(1) 1996(1)(2) 1996(1)(2) 1997 1997(2)
----- ----- ----- ----- ------- ---------- ---------- ----- -------
(L) (L) (L) (L) (L) ($) (L) (L) ($)
(UNAUD-
ITED PRO
FORMA)
(IN MILLIONS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROFIT AND LOSS ACCOUNT DATA
AMOUNTS IN ACCORDANCE
WITH UK GAAP
Turnover (sales)(1)...... 1,088 1,087 1,247 1,446 3,635 5,961 1,826 2,519 4,131
Operating profit before
exceptional items...... 137 41 99 135 446 731 243 317 520
Operating profit after
exceptional items...... 137 (552) 99 135 490 804 287 297 487
Profit on disposal of
First Hydro............ -- -- -- -- 25 41 -- -- --
Profit/(loss)............ 88 (600) 68 68 357 585 190 179 294
RATIO OF EARNINGS TO
FIXED CHARGES.......... 10.6 -- 5.6 8.5 5.9 5.9 9.1 3.9 3.9
AMOUNTS IN ACCORDANCE
WITH US GAAP
Sales.................... 1,247 1,446 3,635 5,961 2,519 4,131
Operating
profit/(loss).......... 96 161 (142) (233) 299 490
Net income/(loss)........ 48 90 (108) (177) 177 290
[Dividend info]
BALANCE SHEET DATA
AMOUNTS IN ACCORDANCE
WITH UK GAAP
Total assets............. 2,394 2,671 3,019 5,642 5,728 9,394 6,745 11,061
Creditors due after more
than one year.......... 212 292 234 911 945 1,550 1,665 2,714
Invested capital
shareholders' equity... 896 899 972 2,108 2,185 3,583 1,845 3,026
AMOUNTS IN ACCORDANCE
WITH US GAAP
Total assets............. 3,584 7,689 6,944 11,388 7,935 13,013
Invested capital/
shareholders' equity... 1,224 3,716 3,056 5,012 2,713 4,449
</TABLE>
- ---------------
1. The results of operations of Eastern, which was acquired by Hanson in
September 1995, are included above for periods beginning on or after 1
October 1995. The net assets of Eastern are included above at 30 September
1995 and each subsequent date.
2. Pounds sterling have been translated into US dollars solely for the
convenience of the reader at $1.64 per L1.00, the Noon Buying Rate on 31
March 1997.
22
<PAGE> 26
3. Turnover for the year ended 30 September 1996 is stated net of a special
discount to electricity customers of L132 million relating to the flotation
of National Grid Group plc.
4. Operating exceptional items in the year ended 30 September 1996 arise from
the flotation of National Grid Group plc. See Note 7 to the Financial
Statements.
5. Results for the year ended 30 September 1993 reflect a charge for impairment
of coal assets of L578 million under The Energy Group's accounting policy for
the impairment of long-lived assets which, under UK GAAP, is reflected in the
year such impairment is considered to have been incurred.
6. The principal differences between UK GAAP and US GAAP which affect The Energy
Group are described in Note 30 to Notes to the Financial Statements.
7. For the purposes of computing the ratio of earnings to fixed charges,
earnings consist of income before taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest expense (including
capitalized interest), together with an amount representative of the interest
element of operating lease rentals. Under UK GAAP, fixed charges exceeded
earnings by L566.9 million for the year ended 30 September 1993. Under US
GAAP, fixed charges exceeded earnings by L200.0 million in the year ended 30
September 1996.
8. The pro forma operating results for the six months ended 31 March 1996 have
been prepared on the same basis as that used by The Energy Group for prior
periods adjusted to reflect net interest payable and taxation as if the
Demerger had occurred at the beginning of the period. The pro forma
adjustment to net interest payable reflects an additional pro forma interest
charge calculated at 6.2% of the L381 million of additional net debt which
was assumed would be allocated to The Energy Group on the Demerger. The L381
million of assumed additional net debt increased The Energy Group's net bank
and other borrowings on a pro forma basis at 30 September 1996 to L1,440
million. The effective rate of 6.2% is based on the three month LIBOR at 30
September 1996 together with the margin payable under The Energy Group's
credit facilities. The pro forma adjustment to taxation has been calculated
to reflect the impact of the pro forma adjusted interest charge resulting
from the assumed change in capital structure of The Energy Group following
the Demerger and after allowing for group relief surrendered (L30 million)
for no consideration by other Hanson Group companies.
11 COMPARATIVE PER SHARE DATA AND COMPARISON OF SHAREHOLDER RIGHTS.
Refer to the "Unaudited Pro Forma Condensed Consolidated Financial
Statements" included in Appendix VI.
<TABLE>
<CAPTION>
COMPARATIVE PER SHARE DATA TEXAS TEXAS TEXAS ENERGY GROUP EQUIVALENT
HISTORICAL, PRO FORMA AND UTILITIES UTILITIES UTILITIES HISTORICAL ENERGY GROUP
EQUIVALENT HISTORICAL ADJUSTED PRO FORMA (US GAAP) PRO FORMA(A)
-------------------------- ---------- ---------- --------- --------------- ---------------
$ $ $ L $ L $
---------- ---------- --------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Basic Earnings per share(b)(c).................... 2.86 2.70 2.95 46.1p .76 64.6p 1.06
Dividends declared per share(c)(d)................ 2.125 2.125 2.125 13.5p .22 46.5p .765
As of December 31, 1997
Book value per share(c)........................... 27.90 27.90 28.76 486p 7.97 629p 10.35
</TABLE>
- ---------------
(a) The pro forma equivalent of one Energy Group Share is equal to the Texas
Utilities pro forma combined per share data multiplied by an assumed
exchange ratio of .360, being the Share Alternative Ratio used in the
worked example on page 13 given under the heading "Calculation of
entitlements under the Share Alternative".
(b) Based on Income before Extraordinary Item
(c) Per share of Texas Utilities Common Stock or per Energy Group Share, as the
case may be.
(d) Amounts for Texas Utilities represent historical dividends declared per
share of Texas Utilities Common Stock.
COMPARISON OF SHAREHOLDER RIGHTS
There are a number of differences between the rights attaching to shares of
Texas Utilities Common Stock, as detailed above, and those attaching to Energy
Group Shares. Certain rights attaching to Energy
23
<PAGE> 27
Group Shares, where those differences exist, are identified below. Such
differences may arise from the differences between legislation and regulations
governing The Energy Group and those governing Texas Utilities as well as
between the constitutional documents of the two companies. The following is not
a complete description of the differences between the rights associated with
Energy Group Shares as compared to New Texas Utilities Shares. Further, it does
not address the differing rights of holders of Texas Utilities preference stock.
For a complete understanding of such differences, holders of Energy Group
Securities are referred to the laws and applicable regulations of England, the
United States and the State of Texas, the rules of the London Stock Exchange,
the NYSE, the CSE, the PSE and the constitutional documents of both The Energy
Group and Texas Utilities.
General
The Energy Group is incorporated in England and operates in accordance with
the Companies Act. Rules and regulations governing trading of Energy Group
Shares differ from those relating to shares of Texas Utilities Common Stock.
Dividends
Pursuant to The Energy Group's articles of association, and subject to the
restrictions of English law, dividends may be declared by the Board of The
Energy Group, or by The Energy Group, on the recommendation of the Board, by
ordinary resolution in an amount not to exceed that recommended by the Board.
Meetings
The holders of not less than one tenth of the paid up voting capital of The
Energy Group have the right to requisition general meetings of shareholders.
Transfers
The Energy Group articles of association allow The Energy Group Board, in
its absolute discretion, and without giving any reason for so doing, to refuse
to register certain transfers of shares, being shares which are not fully paid
up, or being shares, whether fully paid up or not, which are in favour of more
than four joint transferees.
12 FINANCING
TU Acquisitions has arranged appropriate financing in connection with the Texas
Utilities Offer. Texas Utilities and other wholly-owned subsidiaries of Texas
Utilities have arranged their own funding to assist in TU Acquisitions'
financing of the Texas Utilities Offer. Details of the financing arrangements
for the Texas Utilities Offer are set out in paragraph 8 of Appendix VIII
("Financing arrangements") below.
13 EMPLOYEE MATTERS AND SHARE SCHEMES
(a) MANAGEMENT AND EMPLOYEES
TU Acquisitions has given assurances to the Board of The Energy Group that the
existing employment rights, including pension rights, of all TEG Group
management and employees will be fully safeguarded. Texas Utilities looks
forward to welcoming all TEG Group employees to the Texas Utilities Group.
(b) THE ENERGY GROUP SHARE SCHEMES
The Texas Utilities Offer will extend to any fully paid Energy Group Shares
which are unconditionally allotted or issued while the Texas Utilities Offer is
open for acceptance, including those unconditionally allotted or issued pursuant
to the exercise of options or vesting of awards under the Energy Group Share
Schemes.
24
<PAGE> 28
Appropriate proposals will be made to participants in the Energy Group Share
Schemes in due course. In relation to the Energy Group Sharesave Scheme, it is
anticipated that, as an additional alternative to the rights provided under the
rules of that scheme, participants will be offered an opportunity to surrender
their existing options in consideration for a cash sum, calculated by reference
to the difference between 840 pence and the exercise price of their options
multiplied by the number of Energy Group Shares that they could have acquired
with their total savings contributions (together with any interest payable
thereon) under the Energy Group Sharesave Scheme up to the date the Texas
Utilities Offer becomes or is declared unconditional in all respects, plus a
further six months' savings contributions.
14 UNITED KINGDOM TAXATION
TU Acquisitions has been advised that, under United Kingdom legislation and
Inland Revenue practice current at the date of this document, the taxation
treatment of acceptance of the Texas Utilities Offer and, where applicable,
election for the Share Alternative and/or the Loan Note Alternative for holders
of Energy Group Shares who are the beneficial owners of their Energy Group
Shares, hold their Energy Group Shares as an investment (otherwise than under a
personal equity plan), and are resident or ordinarily resident in the United
Kingdom for tax purposes will, in summary, be as follows:
(a) TAXATION OF CHARGEABLE GAINS
Liability to United Kingdom taxation on chargeable gains ("CGT") will depend on
the particular circumstances of holders of Energy Group Shares and on the form
of consideration received.
-- Cash
To the extent that a holder of Energy Group Shares receives cash under
the Texas Utilities Offer, this will constitute a disposal, or part
disposal, of his Energy Group Shares for CGT purposes. Such a disposal
or part disposal may, depending on that shareholder's individual
circumstances, give rise to a liability to CGT.
-- Loan Notes
A holder of Energy Group Shares who, either alone or together with
persons connected with him, holds not more than 5 per cent. of shares
in, or of any class of debentures of, The Energy Group, will not be
treated as making a disposal of his Energy Group Shares for CGT purposes
to the extent that he receives Loan Notes by way of consideration.
A holder of Energy Group Shares who, either alone or together with
persons connected with him, holds more than 5 per cent. of shares in, or
of any class of debentures of, The Energy Group is advised that an
application to the Inland Revenue has been made for clearance under
section 138 of the Taxation of Chargeable Gains Act 1992. The Inland
Revenue has not yet granted such clearance. Subject to the granting of
this clearance, such holder of Energy Group Shares will be treated in
the manner described in the previous paragraph.
A subsequent disposal of Loan Notes (including their redemption or
repayment) may give rise to a liability to CGT.
-- New Texas Utilities Shares
To the extent a holder of Energy Group Shares receives New Texas
Utilities Shares under the Texas Utilities Offer, this will constitute a
disposal, or part disposal, of his Energy Group Shares for CGT purposes
for a consideration equal to the market value of the New Texas Utilities
Shares received at the date the Texas Utilities Offer becomes
unconditional, or, if later, the date on which the relevant shareholder
accepts the Texas Utilities Offer. Such a disposal or part disposal may,
depending on that shareholder's individual circumstances, give rise to a
liability to CGT.
25
<PAGE> 29
(b) TAXATION OF INTEREST
Payment of interest on the Loan Notes will be made subject to the deduction of
United Kingdom income tax at the lower rate (currently, 20 per cent.). An
individual holder of Loan Notes will generally be liable to income tax in the
United Kingdom on the gross amount of interest received, credit being allowed
for the tax deducted. A corporate holder of Loan Notes will generally bring
interest on the Loan Notes into account as income for the purposes of
corporation tax in the United Kingdom, credit being allowed for the tax
deducted.
(c) TAXATION OF DIVIDEND INCOME
A holder of Texas Utilities Common Stock will generally be liable to income tax
or corporation tax in the United Kingdom on the aggregate of any dividend
received from Texas Utilities, any tax withheld at source in the US and any tax
withheld in the United Kingdom. In computing that liability to taxation, credit
will be given for any tax withheld in the US and any tax withheld in the United
Kingdom.
FURTHER INFORMATION ON UNITED KINGDOM TAX LAW AND INLAND REVENUE PRACTICE
CURRENT AT THE DATE OF THIS DOCUMENT IS CONTAINED IN PARAGRAPH 13 OF APPENDIX
VIII ("UNITED KINGDOM TAXATION") BELOW. FURTHER INFORMATION ON US FEDERAL INCOME
TAX CURRENT AT THE DATE OF THIS DOCUMENT IS CONTAINED IN PARAGRAPH 15 OF THIS
LETTER ("US TAXATION") AND IN PARAGRAPH 14 OF APPENDIX VIII ("UNITED STATES
FEDERAL INCOME TAXATION") BELOW.
ANY HOLDER OF ENERGY GROUP SHARES WHO IS IN ANY DOUBT ABOUT HIS OWN TAX POSITION
OR WHO IS SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UNITED KINGDOM
OR THE US (OR IN BOTH THE UNITED KINGDOM AND THE US) IS STRONGLY RECOMMENDED TO
CONSULT HIS INDEPENDENT PROFESSIONAL ADVISER IMMEDIATELY.
15 US TAXATION
The paragraphs below address certain current US federal income tax consequences
applicable to holders of Energy Group Securities who are citizens or residents
of the US, US domestic corporations or otherwise taxed as United States
residents. It does not apply to tax issues arising from a holder's particular
circumstances, such as participation in the Energy Group Share Schemes, being a
dealer in securities or holders whose functional currency is not the US dollar.
The receipt of cash or of cash and New Texas Utilities Shares pursuant to the
Texas Utilities Offer will be a taxable transaction for US income tax purposes
and may also be a taxable transaction under applicable state, local, foreign and
other tax laws.
In general, a holder of Energy Group Securities who sells such securities
pursuant to the Texas Utilities Offer will, for US federal income tax purposes,
recognise gain or loss equal to the difference between such holder's adjusted
tax basis in the Energy Group Securities sold and the amount realized as a
result of the disposition. The amount realized will equal the sum of (i) the
dollar value of the pounds sterling received, and (ii) the fair market value of
any New Texas Utilities Shares received. Such gain or loss generally will be
capital gain or loss. An accrual basis holder of Energy Group Securities who
sells such securities pursuant to the Texas Utilities Offer may have a foreign
currency exchange gain or loss for US federal income tax purposes on account of
currency fluctuations between the sale date and the settlement date, in addition
to the gain or loss recognised by the holder on the disposition of Energy Group
Securities pursuant to the Texas Utilities Offer.
FURTHER INFORMATION ON THE APPLICATION OF CURRENT US TAX LAWS IS CONTAINED IN
PARAGRAPH 14 OF APPENDIX VIII ("UNITED STATES FEDERAL INCOME TAXATION") BELOW.
ANY HOLDER OF ENERGY GROUP SECURITIES WHO IS IN ANY DOUBT ABOUT HIS OWN TAX
POSITION OR WHO IS SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UNITED
KINGDOM OR THE US (OR IN BOTH THE UNITED KINGDOM AND THE US) IS STRONGLY
RECOMMENDED TO CONSULT HIS INDEPENDENT PROFESSIONAL ADVISER IMMEDIATELY.
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16 OVERSEAS SHAREHOLDERS
The attention of holders of Energy Group Securities who are citizens or
residents of jurisdictions outside the United Kingdom or the US is drawn to
paragraph 9 of Part B of Appendix I ("Overseas shareholders") below and to the
relevant provisions of the Acceptance Form.
The Texas Utilities Offer is not being made, directly or indirectly, in or into
Canada, Australia or Japan. Persons who are citizens or residents of such
jurisdictions may not accept the Texas Utilities Offer. Any purported acceptance
of the Texas Utilities Offer by holders of Energy Group Securities who are
unable to give the warranty set out in paragraph 12(l) of Part B of Appendix I
to this document will be disregarded.
The New Texas Utilities Shares have been registered under the Securities Act.
However, such shares will not be the subject of a prospectus under the
securities laws of any province of Canada. In addition, no steps have been
taken, or will be taken, to enable the New Texas Utilities Shares to be offered
in Japan in compliance with applicable securities laws of Japan and no
prospectus in relation to the New Texas Utilities Shares has been, or will be,
lodged with or registered by the Australian Securities Commission, nor will the
New Texas Utilities Shares be registered under any relevant securities laws of
any other country. The New Texas Utilities Shares are not being offered, sold or
delivered, directly or indirectly, in or into Canada, Australia or Japan.
The Loan Notes to be issued pursuant to the Loan Note Alternative have not been,
and will not be, registered under the Securities Act or under any relevant
securities laws of any state or district of the United States and will not be
the subject of a prospectus under the securities laws of any province of Canada.
In addition, no steps have been taken, or will be taken, to enable the Loan
Notes to be offered in Japan in compliance with applicable securities laws of
Japan and no prospectus in relation to the Loan Notes has been, or will be,
lodged with or registered by the Australian Securities Commission, nor will the
Loan Notes be registered under any relevant securities laws of any other
country. The Loan Notes are not being offered, sold or delivered, directly or
indirectly, in or into the United States, Canada, Australia or Japan.
17 PROCEDURE FOR ACCEPTANCE OF THE TEXAS UTILITIES OFFER
(a) HOLDERS OF ENERGY GROUP SHARES
The attention of holders of Energy Group Shares is drawn to paragraph 11 of Part
B of Appendix I ("Procedures for tendering Energy Group Shares") below and to
the relevant provisions of the Form of Acceptance.
You should note that, if you hold Energy Group Shares in both certificated and
uncertificated form (that is, in CREST), you should complete a separate Form of
Acceptance for each holding. If you hold Energy Group Shares in uncertificated
form, but under different member account IDs, you should complete a separate
Form of Acceptance in respect of each member account ID. Similarly, if you hold
Energy Group Shares in certificated form, but under different designations, you
should complete a separate Form of Acceptance in respect of each designation.
(i) TO ACCEPT THE TEXAS UTILITIES OFFER
To accept the Texas Utilities Offer, you should complete Box 1 and (if your
Energy Group Shares are in CREST) Box 8, and sign Box 7 of the Form of
Acceptance in accordance with the instructions printed on it. All holders
of Energy Group Shares who are individuals should sign the Form of
Acceptance in the presence of a witness, who should also sign Box 7 in
accordance with the instructions printed on it.
(ii) TO ELECT FOR THE SHARE ALTERNATIVE
To accept the Texas Utilities Offer and elect for the Share Alternative,
you should complete Box 3 in addition to taking the actions described in
paragraph (i) above. The attention of those holders of Energy Group Shares
considering accepting the Share Alternative is drawn to paragraph 4
("Limited Share Alternative") and paragraph 16 ("Overseas shareholders") of
this letter and to paragraphs 4 and 9 of Part B of Appendix I below.
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(iii) TO ELECT FOR THE LOAN NOTE ALTERNATIVE
To elect for the Loan Note Alternative in respect of some or all of the
Energy Group Shares for which you are accepting the Texas Utilities Offer,
you should complete Box 4 in addition to taking the actions described in
paragraph (i) above. The attention of those holders of Energy Group Shares
considering accepting the Loan Note Alternative is drawn to paragraph 5
("Loan Note Alternative") and and to paragraphs 5 and 6 of Part B of
Appendix I below.
(iv) RETURN OF FORM OF ACCEPTANCE
To accept the Texas Utilities Offer, the Form of Acceptance must be
completed and returned, whether or not your Energy Group Shares are in
CREST. The completed, signed and (if you are an individual) witnessed Form
of Acceptance, together with, if your Energy Group Shares are not in CREST,
the share certificate(s) and/or other document(s) of title for your Energy
Group Shares, should be returned by post to The Royal Bank of Scotland plc,
Registrar's Department, New Issues Section, PO Box 859, Consort House, East
Street, Bedminster, Bristol B599 1XZ, or by hand, during normal business
hours only, to The Royal Bank of Scotland plc, Registrar's Department, New
Issues Section, 5-10 Great Tower Street, London EC3R 5ER or by post or by
hand to The Bank of New York, 101 Barclay Street, New York, New York 10286,
marked for the attention of Tenders and Exchanges, as soon as possible but,
in any event, so as to be received no later than 10.00 p.m. (London time),
5.00 p.m. (New York City time) on [-] 1998. A reply-paid envelope is
enclosed for your convenience and may be used by holders of Energy Group
Shares for returning Forms of Acceptance within the United Kingdom and the
US only. The instructions printed on the Form of Acceptance shall be deemed
to form part of the terms of the Texas Utilities Offer.
Any Form of Acceptance received in an envelope postmarked in Canada,
Australia or Japan or otherwise appearing to TU Acquisitions or its agents
to have been sent from Canada, Australia or Japan may be rejected as an
invalid acceptance of the Texas Utilities Offer. For further information
for overseas shareholders, see paragraph 16 ("Overseas shareholders") above
and paragraph 9 of Part B of Appendix I ("Overseas shareholders") below.
(v) ENERGY GROUP SHARES IN UNCERTIFICATED FORM (THAT IS, IN CREST)
If your Energy Group Shares are in uncertificated form (that is, if you do
not have a paper share certificate because your shares are held in CREST),
you should read carefully paragraphs 11(d)-(l) of Part B of Appendix I,
which set out the acceptance procedures for holders of Energy Group Shares
in uncertificated form.
If you are a CREST sponsored member, you should refer to your CREST sponsor
before taking any action.
(vi) SHARE CERTIFICATES NOT READILY AVAILABLE OR LOST
If your Energy Group Shares are in certificated form, but your share
certificate(s) and/or other document(s) of title is/are not readily
available or is/are lost, the Form of Acceptance should nevertheless be
completed, signed and returned as stated in paragraph (iv) above so as to
arrive no later than 10.00 pm (London time), 5.00 pm (New York City time)
on [-] 1998, together with any share certificate(s) and/or other
document(s) of title that you have available, accompanied by a letter
stating that the balance will follow. You should then arrange for the
relevant share certificate(s) and/or other document(s) of title to be
forwarded as soon as possible thereafter. No acknowledgement of receipt of
documents will be given. In the case of loss, you should write as soon as
possible to LLOYDS BANK REGISTRARS, THE CAUSEWAY, GORING-BY-SEA, WORTHING,
WEST SUSSEX BN99 6 DA for a letter of indemnity for lost share
certificate(s) and/or other document(s) of title which, when completed in
accordance with the instructions given, should be returned to The Royal
Bank of Scotland plc as stated above.
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(vii) DEPOSITS OF ENERGY GROUP SHARES INTO, AND WITHDRAWALS OF ENERGY GROUP
SHARES FROM, CREST
Normal CREST procedures (including timings) apply in relation to any Energy
Group Shares that are, or are to be, converted from uncertificated to
certificated form, or from certificated to uncertificated form, during the
course of the Texas Utilities Offer (whether any such conversion arises as a
result of a transfer of Energy Group Shares or otherwise). Holders of Energy
Group Shares who are proposing so to convert any such shares are recommended
to ensure that the conversion procedures are implemented in sufficient time
to enable the person holding or acquiring the shares as a result of the
conversion to take all necessary steps in connection with an acceptance of
the Texas Utilities Offer (in particular, as regards delivery of share
certificate(s) and/or other document(s) of title or transfers to an escrow
balance as described above) prior to 10.00 pm (London time), 5.00 pm (New
York City time) on [-] 1998.
(b) HOLDERS OF ENERGY GROUP ADSS
The attention of holders of Energy Group ADSs is drawn to paragraph 10 of Part B
of Appendix I ("Procedures for tendering Energy Group ADSs") below and to the
relevant provisions of the Letter of Transmittal.
To accept the Texas Utilities Offer, holders of Energy Group ADSs must complete
the Letter of Transmittal in accordance with the instructions printed on it or
comply with the instructions in such Letter of Transmittal applicable to
book-entry transfers. The completed Letter of Transmittal should be sent in the
accompanying reply-paid envelope or delivered by hand together with the required
signature guarantees and any other required documents to the US Depositary at
one of its addresses set forth on the back cover of this document and the Energy
Group ADRs must be either received by the US Depositary at one of such addresses
or delivered in accordance with paragraph 10 of Part B of Appendix I referred to
above.
(c) VALIDITY OF ACCEPTANCE
Subject to the City Code, TU Acquisitions reserves the right to treat as valid
in whole or in part any acceptance of the Texas Utilities Offer which is not
entirely in order or which is not accompanied (as applicable) by the relevant
transfer to escrow or the relevant share certificate(s) and/or other document(s)
of title or which is received by it in a form or at a place or places other than
set out in this document or the Acceptance Form. In that event, no payment of
cash or issue of Loan Notes or certificates for New Texas Utilities Shares under
the Texas Utilities Offer will be made until after (as applicable) the relevant
transfer to escrow has settled or the relevant share certificate(s) and/or other
document(s) of title or indemnities satisfactory to TU Acquisitions have been
received.
(d) GENERAL
No acknowledgement of receipt of Acceptance Forms, share certificates, Energy
Group ADRs or other documents of title will be given.
IF YOU ARE IN ANY DOUBT AS TO THE PROCEDURES FOR ACCEPTANCE, PLEASE CONTACT THE
UNITED KINGDOM RECEIVING AGENT, THE ROYAL BANK OF SCOTLAND PLC BY TELEPHONE ON
117-937-0672 OR AT EITHER OF ITS ADDRESSES STATED IN PARAGRAPH 17(A)(IV) ABOVE
OR THE US DEPOSITARY, THE BANK OF NEW YORK ON (888) 460-7637. YOU ARE REMINDED
THAT, IF YOU ARE A CREST SPONSORED MEMBER, YOU SHOULD CONTACT YOUR CREST SPONSOR
BEFORE TAKING ANY ACTION.
18 RIGHTS OF WITHDRAWAL
With certain exceptions pursuant to an SEC exemptive order, the Texas Utilities
Offer is subject to the US tender offer rules applicable to securities
registered under the Exchange Act, as well as to the City Code. This has
necessitated a number of changes from the procedures which normally apply to
offers for United Kingdom companies, including those applicable to the rights of
holders of Energy Group Securities to withdraw their acceptance of an offer.
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Under the Texas Utilities Offer, holders of Energy Group Securities will be able
to withdraw their acceptances at any time prior to the Initial Closing Date and
in certain other circumstances. The Texas Utilities Offer will not be deemed to
have been validly accepted in respect of any Energy Group Securities which have
been withdrawn.
However, the Texas Utilities Offer may be accepted again in respect of the
withdrawn Energy Group Securities by following one of the procedures described
in paragraph [17] of this letter ("Procedure for acceptance of the Texas
Utilities Offer") above at any time prior to the expiry or lapse of the Texas
Utilities Offer.
Further details of these rights of withdrawal and the procedure for effecting
withdrawals are set out in paragraph 3 of Part B of Appendix I ("Rights of
withdrawal") below.
19 SETTLEMENT
(a) DATE OF PAYMENT
The settlement procedure with respect to the Texas Utilities Offer will be
consistent with United Kingdom practice, which differs from the US tender offer
rules in certain material respects, particularly with regard to the date of
payment.
Subject to the satisfaction, fulfilment or, where permitted, waiver of all the
Conditions, settlement of acceptances from holders of Energy Group Shares and
accepting holders of Energy Group ADSs or other designated agents will be
effected:
(i) in the case of acceptances received complete in all respects by the
Initial Closing Date within 14 calendar days of such date; or
(ii) in the case of acceptances received complete in all respects after
such date, but while the Texas Utilities Offer remains open for
acceptance, within [14] calendar days of such receipt.
(b) ENERGY GROUP SHARES IN UNCERTIFICATED FORM (THAT IS, IN CREST)
Where an acceptance relates to Energy Group Shares in uncertificated form, (i)
the cash consideration to which accepting holders of Energy Group Shares are
entitled will be paid by means of CREST by Texas Utilities procuring the
creation of an assured payment obligation in favour of the accepting
shareholders' payment bank in respect of the cash consideration due, in
accordance with the CREST assured payment arrangement; and (ii) definitive
certificates for any New Texas Utilities Shares or Loan Notes to which the
accepting holder of Energy Group Shares is entitled will be despatched by post
(or by such other method as may be approved by the Panel).
TU Acquisitions reserves the right to settle all or any part of the cash
consideration referred to above, for all or any accepting shareholder(s), in the
manner referred to in paragraph (c) below, if, for any reason, it wishes to do
so.
(c) ENERGY GROUP SHARES IN CERTIFICATED FORM AND ENERGY GROUP ADSS
Where an acceptance relates to Energy Group Shares in certificated form or
Energy Group ADSs evidenced by Energy Group ADRs, cheques for cash due and,
where applicable, definitive certificates for any New Texas Utilities Shares or
Loan Notes or receipts for New Texas Utilities Shares will be despatched by post
(or by such other method as may be approved by the Panel).
(d) LAPSING OF THE TEXAS UTILITIES OFFER
If the Conditions are not satisfied, fulfilled or, where permitted, waived, (i)
in respect of Energy Group Shares in certificated form and Energy Group ADRs in
certificated form, the relevant share certificate(s) and/or other documents of
title will be returned by post (or by such other method as may be approved by
the Panel) within 14 days of the Texas Utilities Offer lapsing, (ii) in respect
of Energy Group Shares in uncertificated
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form (that is, in CREST) The Royal Bank of Scotland plc will, immediately after
the lapsing of the Texas Utilities Offer (or within such longer period as the
Panel may permit, not exceeding 14 days of the lapsing of the Texas Utilities
Offer), give TFE Instructions to CRESTCo to transfer all relevant Energy Group
Shares held in escrow balances and in relation to which it is the escrow agent
for the purposes of the Texas Utilities Offer to the original available balances
of the holders of Energy Group Shares concerned, and (iii) in respect of Energy
Group ADRs in book-entry form, the US Depository will return such Energy Group
ADRs to the tendering holders unless otherwise instructed by such holder.
(e) GENERAL
All documents and remittances sent by, to, or from holders of Energy Group
Securities or their appointed agents will be sent at their own risk.
All mandates and other instructions in force relating to holdings of Energy
Group Securities will, unless and until revoked, continue in force in relation
to payments of principal and interest under the Loan Notes.
(f) CURRENCY OF CASH CONSIDERATION
Instead of receiving cash consideration in pounds sterling under the Texas
Utilities Offer, including cash receivable on the scaling down of elections for
the Share Alternative or in lieu of fractional entitlements to New Texas
Utilities Shares, holders of Energy Group Shares who so wish may elect to
receive US dollars on the following basis: the cash amount payable in pounds
sterling to which such holder would otherwise be entitled pursuant to the terms
of the Texas Utilities Offer will be converted, without charge, from pounds
sterling to US dollars at the exchange rate obtainable by the relevant payment
agent (either the United Kingdom Receiving Agent or the US Depositary) on the
spot market in London at approximately noon (London time) on the date the cash
consideration is made available by TU Acquisitions to the relevant payment agent
for delivery in respect of the relevant Energy Group Shares. A holder of Energy
Group Shares may receive such amount on the basis set out above only in respect
of the whole of any cash amounts payable to him under the Texas Utilities Offer.
Holders of Energy Group Securities may not elect to receive both pounds sterling
and US dollars. Unless they elect to receive pounds sterling, holders of Energy
Group ADSs will receive any such cash consideration converted into US dollars as
described above, as if such holders of Energy Group ADSs had elected to receive
US dollars. Consideration in US dollars may be inappropriate for holders of
Energy Group Securities other than persons in the US and holders of Energy Group
ADSs.
THE ACTUAL AMOUNT OF US DOLLARS RECEIVED WILL DEPEND UPON THE EXCHANGE RATE
PREVAILING ON THE BUSINESS DAY ON WHICH FUNDS ARE MADE AVAILABLE TO THE RELEVANT
PAYMENT AGENT BY TU ACQUISITIONS. HOLDERS OF ENERGY GROUP SECURITIES SHOULD BE
AWARE THAT THE US DOLLAR/POUNDS STERLING EXCHANGE RATE WHICH IS PREVAILING AT
THE DATE ON WHICH AN ELECTION IS MADE OR DEEMED TO BE MADE TO RECEIVE DOLLARS
AND ON THE DATES OF DESPATCH AND RECEIPT OF PAYMENT MAY BE DIFFERENT FROM THAT
PREVAILING ON THE BUSINESS DAY ON WHICH FUNDS ARE MADE AVAILABLE TO THE RELEVANT
PAYMENT AGENT BY TU ACQUISITIONS. IN ALL CASES, FLUCTUATIONS IN THE US DOLLAR/
POUNDS STERLING EXCHANGE RATE ARE AT THE RISK OF ACCEPTING HOLDERS OF ENERGY
GROUP SECURITIES WHO ELECT OR ARE TREATED AS HAVING ELECTED TO RECEIVE THEIR
CONSIDERATION IN US DOLLARS. NEITHER TU ACQUISITIONS NOR ANY OF ITS ADVISERS OR
AGENTS SHALL HAVE RESPONSIBILITY WITH RESPECT TO THE ACTUAL AMOUNT OF CASH
CONSIDERATION PAYABLE OTHER THAN IN POUNDS STERLING.
20 FURTHER INFORMATION
Your attention is drawn to Appendix I to this document, which contains the
Conditions and further terms and information and forms part of this document and
to the other Appendices to this document which contain important information in
connection with the Texas Utilities Offer and form part of this document and to
the accompanying Acceptance Form.
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21 ACTION TO BE TAKEN
YOU ARE URGED TO COMPLETE, SIGN AND RETURN THE ENCLOSED FORM OF ACCEPTANCE OR
LETTER OF TRANSMITTAL (AS APPROPRIATE) AS SOON AS POSSIBLE, BUT IN ANY EVENT SO
AS TO ARRIVE BY NO LATER THAN 10.00 PM (LONDON TIME), 5.00 PM (NEW YORK CITY
TIME) ON [-] 1998.
Yours faithfully for
- ------------------------------------
[-]
Managing Director
Lehman Brothers
- ------------------------------------
[-]
Managing Director
Merrill Lynch
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APPENDIX I
CONDITIONS AND FURTHER TERMS OF THE TEXAS UTILITIES OFFER
PART A
CONDITIONS OF THE TEXAS UTILITIES OFFER
The Texas Utilities Offer, which is being made by Lehman Brothers and Merrill
Lynch on behalf of TU Acquisitions, will comply with the rules and regulations
of the City Code and with US federal securities laws (except to the extent that
exemptive relief has been granted by the SEC) and the rules and regulations made
thereunder, is governed by English law and is subject to the jurisdiction of the
courts of England and the following Conditions:
(a) valid acceptances being received (and not, where permitted, withdrawn) by
not later than 10.00 pm (London time), 5.00 pm (New York City time) on [-]
1998 (or such later time(s) and/or date(s) as TU Acquisitions may, subject
to the rules and regulations of the City Code, decide) in respect of not
less than 90 per cent. in nominal value of Energy Group Shares (including
Energy Group Shares represented by Energy Group ADSs) to which the Texas
Utilities Offer relates (or such lesser percentage as TU Acquisitions may
decide), provided that this Condition shall not be satisfied unless TU
Acquisitions and its wholly-owned subsidiaries shall have acquired or
agreed to acquire, whether pursuant to the Texas Utilities Offer or
otherwise, Energy Group Shares (including Energy Group Shares represented
by Energy Group ADSs) carrying in aggregate more than 50 per cent. of the
voting rights then exercisable at general meetings of The Energy Group and
provided further that this Condition shall be capable of being satisfied
only at a time when all other Conditions have been satisfied, fulfilled or
waived. For the purposes of this Condition: (A) any Energy Group Shares
(including Energy Group Shares represented by Energy Group ADSs) which have
been unconditionally allotted shall be deemed to carry the voting rights
they will carry upon being entered in the register of members of The Energy
Group; (B) the expression "Energy Group Shares (including Energy Group
Shares represented by Energy Group ADSs) to which the Texas Utilities Offer
relates" shall be construed in accordance with sections 428 to 430F of the
Companies Act; and (C) valid acceptances shall be treated as having been
received in respect of any Energy Group Shares which TU Acquisitions shall,
pursuant to section 429(8) of the Companies Act, be treated as having
acquired or contracted to acquire by virtue of acceptances of the Texas
Utilities Offer;
(b) the Peabody Sale Agreement becoming unconditional in all respects (except
for any condition or conditions relating to the Texas Utilities Offer
becoming unconditional in all respects) and not being amended or varied
without the prior approval of TU Acquisitions;
(c) an announcement being made in terms reasonably satisfactory to TU
Acquisitions that it is not the intention of the Secretary of State for
Trade and Industry to refer the Acquisition, or any matters arising from
it, to the Monopolies and Mergers Commission;
(d) the DGES indicating in terms reasonably satisfactory to TU Acquisitions
that it is not his intention to seek modifications to any of Eastern's
licences under the Electricity Act 1989 (except on terms reasonably
satisfactory to TU Acquisitions);
(e) the DGES indicating in terms reasonably satisfactory to TU Acquisitions
that he will not seek undertakings or assurances from any member of the TU
Acquisitions Group or the TEG Group (except on terms reasonably
satisfactory to TU Acquisitions) and that in connection with the
Acquisition he will seek or agree to such modifications (if any) and such
other consents and/or directions (if any) as are in the reasonable opinion
of TU Acquisitions necessary or appropriate with respect to the licences
referred to in Condition (d);
(f) the waiting period applicable to the Texas Utilities Offer under the US HSR
Act having expired or been terminated;
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(g) no relevant authority having intervened in a way which would be likely, or
having failed to institute or implement any action the failure of which
would be likely (to an extent which is, in the case of (i) to (iv) below,
material in the context of the TU Acquisitions Group or of the TEG Group or
of the financing of the Texas Utilities Offer):
(i) to require, prevent or delay the divestiture or materially alter the
terms of any proposed divestiture by TU Acquisitions or The Energy
Group or any member of the TU Acquisitions Group or the wider TEG
Group of all or any portion of their respective businesses, assets or
properties or impose any limitation on the ability of any of them to
conduct any of their respective businesses or to own any of their
respective assets or property or any part thereof;
(ii) to impose any limitation on the ability of any member of the TU
Acquisitions Group or the wider TEG Group to acquire, or to hold or
to exercise effectively, directly or indirectly, any rights of
ownership in respect of shares in, or management control over, any
member of the wider TEG Group;
(iii) otherwise adversely to affect the financial or trading position of
any member of the TU Acquisitions Group or the wider TEG Group;
(iv) to make the Texas Utilities Offer or its implementation or the
acquisition or the proposed acquisition of any Energy Group Shares or
Energy Group ADSs or control of The Energy Group by any member of the
TU Acquisitions Group void, illegal and/or unenforceable, or
otherwise, directly or indirectly, to restrain, restrict, prohibit,
delay or otherwise interfere with the implementation thereof, or
impose additional conditions or obligations with respect thereto, or
otherwise challenge or hinder any thereof;
(v) to result in a delay in the ability of any member of the TU
Acquisitions Group, or render any such person unable, to acquire some
or all of the Energy Group Shares or Energy Group ADSs or require or
prevent or materially delay divestiture by any such person of any
such securities; or
(vi) to require any member of the TU Acquisitions Group or the wider TEG
Group to offer to acquire any shares or other securities (or the
equivalent) in any member of the wider TEG Group owned by any third
party;
and all applicable waiting and other time periods during which any relevant
authority could, in respect of the Texas Utilities Offer or the acquisition
or proposed acquisition of any Energy Group Shares or Energy Group ADSs or
control of The Energy Group by TU Acquisitions, intervene having expired,
lapsed or terminated;
(h) all necessary filings having been made, all regulatory and statutory
obligations having been complied with, all appropriate waiting periods
under any applicable legislation or regulations of any jurisdiction having
expired, lapsed or terminated in each case in respect of the Texas
Utilities Offer or the acquisition of any shares or other securities in, or
control of, The Energy Group by any member of the TU Acquisitions Group and
all authorisations and determinations necessary or appropriate in any
jurisdiction for or in respect of the Texas Utilities Offer (including,
without limitation, its implementation and financing) or proposed
acquisition of any shares or other securities in, or control of, The Energy
Group by any member of the TU Acquisitions Group or in relation to the
affairs of any member of the TU Acquisitions Group or the wider TEG Group
having been obtained in terms and in a form reasonably satisfactory to TU
Acquisitions from all relevant authorities or (without prejudice to the
generality of the foregoing) from any persons or bodies with whom any
member of the TU Acquisitions Group or the wider TEG Group, as the case may
be, has entered into contractual arrangements and such authorisations and
determinations together with all material authorisations and determinations
necessary or appropriate for any member of the TU Acquisitions Group or the
wider TEG Group to carry on a business which is material in the context of
the TU Acquisitions Group or the TEG Group as a whole or of the financing
of the Texas Utilities Offer remaining in full force and effect and all
filings necessary for such purpose having been made and there being no
notice or intimation of any intention to revoke or not to renew any of the
same and all necessary statutory or regulatory obligations in all relevant
jurisdictions having been complied with;
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(i) TU Acquisitions not having discovered (other than by virtue of the same
having been disclosed to it prior to 2 March 1998 by any member of the TEG
Group) any provision of any agreement, arrangement, licence or other
instrument to which any member of the wider TEG Group is a party or by or
to which any member of the wider TEG Group or any part of its assets may be
bound, entitled or subject which would be likely, as a result of the Texas
Utilities Offer, the proposed acquisition by TU Acquisitions of any shares
in, or change in the control or management of, The Energy Group or
otherwise, to result in (to an extent which is material in the context of
the TU Acquisitions Group or the wider TEG Group as a whole or of the
financing of the Texas Utilities Offer):
(i) any moneys borrowed by or any other indebtedness, actual or
contingent, of any member of the wider TEG Group being or becoming
repayable or capable of being declared repayable immediately or prior
to its stated maturity, or the ability of any such member to borrow
moneys or incur any indebtedness being withdrawn or inhibited;
(ii) any such agreement, arrangement, licence or instrument being
terminated or adversely modified or any obligation or liability
arising or any action being taken or arising thereunder;
(iii) the rights, liabilities, obligations or interests of any member of
the wider TEG Group under any such arrangement, agreement, licence or
instrument or the interests or business of any such member in or with
any other person, firm, company or body (or any arrangements relating
to any such interests or business) being terminated or adversely
modified or affected;
(iv) any assets or interests of any such member being or becoming liable
to be disposed of or charged, or any right arising under which any
such asset or interest is required or is likely to be required to be
disposed of or charged, in each case other than in the ordinary
course of business;
(v) the creation of any mortgage, charge or other security interest over
the whole or any part of the business, property or assets of any
member of the wider TEG Group or any such security interest, whenever
arising or having arisen, becoming enforceable;
(vi) the creation of liabilities for any member of the wider TEG Group
other than in the ordinary course of business; or
(vii) the financial or trading position of any member of the wider TEG
Group being prejudiced or adversely affected;
(j) TU Acquisitions not having discovered, save as publicly announced by The
Energy Group in accordance with the Listing Rules prior to 2 March 1998, or
as disclosed to it prior to that date by any member of the TEG Group, that
any member of the wider TEG Group has, since 31 December 1997 to an extent
which is material in the context of the TEG Group as a whole or of the
financing of the Texas Utilities Offer:
(i) save to any member of the TEG Group and save for the issue of Energy
Group Securities on the exercise of options granted under any of the
Energy Group Share Schemes prior to 2 March 1998, issued or agreed to
issue or authorised or proposed the issue of additional shares of any
class, or of securities convertible into, or rights, warrants or
options to subscribe for or acquire, any such shares or convertible
securities or redeemed, purchased or reduced any part of its share
capital;
(ii) recommended, declared, paid or made or proposed to recommend,
declare, pay or make any bonus, dividend or other distribution in
respect of the share capital of The Energy Group;
(iii) merged with any body corporate or acquired or disposed of or
transferred, mortgaged or charged or created any security interest
over any assets or any right, title or interest in any assets
(including shares and trade investments) or authorised or proposed or
announced any intention to propose a merger, demerger, acquisition,
disposal, transfer, mortgage, charge or security interest (in each
case, other than in the ordinary course of business);
(iv) made or authorised or proposed or announced an intention to propose
any change in its share or loan capital save for options granted
under any of the Energy Group Share Schemes prior to 2 March 1998 and
for any Energy Group Securities allotted upon exercise of such
options;
I-3
<PAGE> 39
(v) issued, authorised or proposed or announced an intention to propose
the issue of any debentures or (save in the ordinary course of
business) incurred or increased any indebtedness or contingent
liability;
(vi) otherwise than in the ordinary course of business, entered into any
contract, reconstruction, amalgamation, commitment or other
transaction or arrangement or (save for changes in remuneration
notified to TU Acquisitions prior to 2 March 1998) changed the terms
of any contract with any Director of The Energy Group;
(vii) save in the ordinary course of business, entered into or varied any
contract, transaction or commitment (whether in respect of capital
expenditure or otherwise) which is of a long-term, onerous or unusual
nature or magnitude or which involves or could involve an obligation
of such a nature or magnitude;
(viii)waived or compromised any claim otherwise than in the ordinary course
of business;
(ix) taken any corporate action or had any order made for its winding-up,
dissolution or reorganisation or for the appointment of a receiver,
administrator, administrative receiver, trustee or similar officer of
all or any of its assets or revenues; or
(x) entered into any contract, commitment, agreement or arrangement or
passed any resolution with respect to, or announced an intention to,
or to propose to effect, any of the transactions, matters or events
referred to in this Condition;
(k) since 31 December 1997, save as publicly announced in accordance with the
Listing Rules by The Energy Group prior to 2 March 1998 or as otherwise
disclosed to TU Acquisitions prior to that date by any member of the TEG
Group, none of the following having occurred to an extent which is material
in the context of the wider TEG Group as a whole or of the financing of the
Texas Utilities Offer:
(i) any adverse change or deterioration in the business, assets,
financial or trading position of any member of the wider TEG Group;
(ii) any litigation or arbitration proceedings, prosecution or other legal
proceedings having been instituted or threatened in writing by or
against or remaining outstanding against any member of the wider TEG
Group or to which any member of the wider TEG Group is a party
(whether as plaintiff, defendant or otherwise) and any investigation
by any relevant authority against, or in respect of any member of the
wider TEG Group having been threatened in writing, announced or
instituted or remaining outstanding by, against or in respect of any
member of the wider TEG Group; and
(iii) a contingent or other liability of any member of the wider TEG Group
having arisen which would be likely adversely to affect any member of
the wider TEG Group;
(l) TU Acquisitions not having discovered:
(i) that any financial, business or other information which has been
publicly disclosed at any time by or on behalf of any member of the
wider TEG Group is materially misleading, contains a material
misrepresentation of fact or omits to state a fact necessary to make
the information contained therein not misleading and which in any
such case is material in the context of the wider TEG Group taken as
a whole or of the financing of the Texas Utilities Offer; or
(ii) that any member of the wider TEG Group was, at the date of the Energy
Group Listing Particulars, or has, outside the ordinary course of
business since that date, become subject to any liability (contingent
or otherwise) which is not disclosed or referred to in the Energy
Group Listing Particulars and which is material in the context of the
wider TEG Group taken as a whole or of the financing of the Texas
Utilities Offer; and
I-4
<PAGE> 40
(m) save as publicly announced in accordance with the Listing Rules by The
Energy Group prior to 2 March 1998 or as otherwise disclosed to it prior to
that date by any member of the TEG Group, TU Acquisitions not having
discovered:
(i) that any past or present member of the wider TEG Group has not
complied with all applicable legislation or regulations of any
jurisdiction with regard to the disposal, discharge, spillage, leak
or emission of any waste or hazardous substance or any substance
likely to impair the environment or harm human health, which
non-compliance or any other disposal, discharge, spillage, leak or
emission which has occurred would be likely to give rise to any
liability (whether actual or contingent) on the part of any member of
the wider TEG Group and which is material in the context of the wider
TEG Group taken as a whole or of the financing of the Texas Utilities
Offer; or
(ii) that there is, or is likely to be, any liability (whether actual or
contingent) to make good, repair, reclaim, remediate, reinstate or
clean up property now or previously owned, occupied or made use of by
any past or present member of the wider TEG Group under any
legislation, regulation, notice, circular or order of any relevant
authority relating to the protection of or enhancement of the
environment and which is material in the context of the wider TEG
Group taken as a whole or of the financing of the Texas Utilities
Offer.
For the purposes of these Conditions:
(A) "AUTHORISATIONS" mean authorisations, orders, grants, recognitions,
certifications, confirmations, consents, licences, clearances, permissions
and approvals;
(B) the "TU ACQUISITIONS GROUP" means Texas Utilities and its subsidiary
undertakings, associated undertakings and any other undertaking in which
Texas Utilities and such undertakings (aggregating their interests) have a
substantial interest and, for the purposes of this sub-paragraph (B) and
sub-paragraph (C) below, "SUBSIDIARY UNDERTAKING", "ASSOCIATED
UNDERTAKING", "HOLDING COMPANY" and "UNDERTAKING" have the meanings given
by the Companies Act (but for this purpose ignoring paragraph 20(1)(b) of
Schedule 4A of the Companies Act) and "SUBSTANTIAL INTEREST" means a direct
or indirect interest in 20 per cent. or more of the equity capital of an
undertaking;
(C) the "WIDER TEG GROUP" means The Energy Group and its subsidiary
undertakings, associated undertakings and any other undertakings in which
The Energy Group and such undertakings (aggregating their interests) have a
substantial interest;
(D) "RELEVANT AUTHORITY" means any government, government department or
governmental, quasi-governmental, supranational, statutory or regulatory
body, court, trade agency, professional association or institution or
environmental body in any jurisdiction; and
(E) a relevant authority shall be regarded as having "INTERVENED" if it has
instituted, implemented or threatened to take any action, proceedings,
suit, investigation or enquiry or reference, or made, enacted or proposed
any statute, regulation, decision or order and "INTERVENE" shall be
construed accordingly.
TU Acquisitions will not invoke either of Conditions (d) or (e) in respect of
the DGES seeking, or indicating that it is his intention to seek, modifications
to any of The TEG Group's licences under the Electricity Act 1989 or
undertakings or assurances from any member of the TU Acquisitions Group or the
TEG Group provided that such modifications undertakings or assurances
substantially reflect the assurances proposed by the DGES to PacifiCorp in
connection with the referral of the Original PacifiCorp Offer to the Monopolies
and Mergers Commission (as described in the Monopolies and Mergers Commission
Report relating to the Original PacifiCorp Offer published on 19 December 1997)
or are substantially in keeping with the proposals outlined by the DGES in his
consultation paper dated 24 February 1998 regarding modifications to public
electricity supply licences following takeovers.
TU Acquisitions reserves the right to waive, in whole or in part, all or any of
Conditions (b) to (m) inclusive. TU Acquisitions reserves the right, subject to
the consent of the Panel, to extend the time required under the City Code for
satisfaction of Condition (a) until such time as Conditions (b) to (m) inclusive
have been
I-5
<PAGE> 41
satisfied, fulfilled or waived. TU Acquisitions shall be under no obligation to
waive or treat as satisfied any of the Conditions (b) to (m) inclusive by a date
earlier than the latest date specified below for the satisfaction thereof,
notwithstanding that the other Conditions may at such earlier date have been
waived or fulfilled and that there are at such earlier date no circumstances
indicating that any such Conditions may not be capable of fulfilment.
If TU Acquisitions is required to make an offer for Energy Group Securities
under the provisions of Rule 9 of the City Code, TU Acquisitions may make such
alterations to any of the Conditions, including Condition (a), as are necessary
to comply with that Rule.
The Texas Utilities Offer will lapse unless all the Conditions set out above are
fulfilled or (if capable of waiver) waived or, where appropriate, have been
determined by TU Acquisitions in its reasonable opinion to be or to remain
satisfied no later than the Initial Closing Date (as it may be extended). The
Texas Utilities Offer will also lapse if the Acquisition is referred to the
Monopolies and Mergers Commission before the Initial Closing Date (as it may be
extended). The Initial Closing Date cannot be extended beyond midnight (London
time), 7.00 pm (New York City time) on - 1998 [D+60], except with the consent of
the Panel.
I-6
<PAGE> 42
PART B
FURTHER TERMS OF THE TEXAS UTILITIES OFFER
The following further terms apply, where the context permits, to the Texas
Utilities Offer.
1 ACCEPTANCE PERIOD
(a) The Texas Utilities Offer will initially be open until 10.00 pm (London
time), 5.00 pm (New York City time) on [-] 1998 [D+20 business days]. TU
Acquisitions expressly reserves the right (but will not be obliged, other
than as may be required by the City Code or US federal securities laws and
the rules and regulations thereunder) at any time or from time to time to
extend the Texas Utilities Offer after the Initial Closing Date and, in such
event, will make a public announcement of such extension in the manner
described in paragraph 2 below and give oral or written notice of such
extension to the United Kingdom Receiving Agent and the US Depositary. TU
Acquisitions may terminate any such extension (other than an extension
required by the City Code or US federal securities laws and the rules and
regulations thereunder) prior to its scheduled expiry if all Conditions have
been satisfied or, where permitted, waived. If all Conditions have not been
satisfied, fulfilled or, where permitted, waived by TU Acquisitions by 10.00
pm (London time), 5.00 pm (New York City time) on the Initial Closing Date,
TU Acquisitions currently intends, subject to the rules of the City Code, to
extend the Texas Utilities Offer until such time as all Conditions have been
satisfied, fulfilled or, where permitted, waived. There can be no assurance,
however, that TU Acquisitions will, in such circumstances, extend the Texas
Utilities Offer and, if no such extension is made, the Texas Utilities Offer
will lapse on the Initial Closing Date and no Energy Group Securities will
be purchased pursuant to the Texas Utilities Offer.
(b) Although no revision is envisaged, if the Texas Utilities Offer is revised,
the Initial Offer Period will be extended, if necessary, for a period of at
least 14 calendar days from the date of posting of the revised Texas
Utilities Offer to holders of Energy Group Securities. Except with the
consent of the Panel, no revision of the Texas Utilities Offer may be made
after [-] 1998. [D+46]
(c) The Initial Offer Period cannot (except with the consent of the Panel) be
extended beyond midnight (London time), 7.00 pm (New York City time) on [-]
1998 [D+60] (or any earlier time and/or date beyond which TU Acquisitions
has stated that the Texas Utilities Offer will not be extended and in
respect of which it has not withdrawn that statement). If all Conditions are
not satisfied, fulfilled or, where permitted, waived at such time (taking
account of any prescribed extension of the Initial Offer Period), the Texas
Utilities Offer will lapse in the absence of a competing bid and/or unless
the Panel agrees otherwise. If the Texas Utilities Offer lapses for any
reason, the Texas Utilities Offer shall cease to be capable of further
acceptance and TU Acquisitions and holders of Energy Group Securities shall
cease to be bound by prior acceptances. TU Acquisitions reserves the right,
if appropriate, to seek the Panel's approval to extend the final date for
expiry of the Initial Offer Period to [-] 1998 [D+81], or such later date as
the Panel may agree. Except with the consent of the Panel, TU Acquisitions
may not, for the purposes of determining whether the Acceptance Condition
has been satisfied, take into account acceptances or purchases of Energy
Group Securities made after 1.00 pm (London time), 8.00 am (New York City
time) on [-] 1998 [D+60] (or any other time or date beyond which TU
Acquisitions has stated that the Texas Utilities Offer will not be extended
and in respect of which it has not withdrawn that statement) or such later
time and/or date as TU Acquisitions, with the permission of the Panel, may
determine.
Any scaling down with respect to the Share Alternative shall be based on those
valid elections received by midnight (London time) 7.00 pm (New York City time)
on the date ten days after the Initial Closing Date as extended.
(d) If all Conditions are satisfied, fulfilled or, where applicable, waived and
the Initial Offer Period expires, the Texas Utilities Offer will remain open
for acceptance for the Subsequent Offer Period of not less than 14 calendar
days from the expiry of the Initial Offer Period. If it is stated that the
Texas Utilities Offer
I-7
<PAGE> 43
will remain open until further notice, then not less than 14 calendar days'
notice will be given prior to the closing of the Subsequent Offer Period.
(e) If a competitive situation arises after a no extension and/or a no increase
statement has been made by or on behalf of TU Acquisitions in relation to
the Texas Utilities Offer, TU Acquisitions may, if it has specifically
reserved the right to do so at the same time as such statement is made (or
otherwise with the consent of the Panel), withdraw such statement and be
free to extend the Texas Utilities Offer if it announces such withdrawal
within four Business Days after the announcement of the competing offer and
gives notice to the holders of Energy Group Securities to that effect in
writing or (in the case of holders of Energy Group Securities with
registered addresses outside the United Kingdom or the United States or whom
TU Acquisitions knows to be nominees, trustees or custodians holding Energy
Group Securities for such persons) by announcement in the United Kingdom and
in the United States at the earliest opportunity. TU Acquisitions may choose
not to be bound by the terms of a no extension and/or a no increase
statement if it would otherwise prevent the posting of an increased or
improved Texas Utilities Offer, (i) if it has reserved the right to do so,
and the increased or improved Texas Utilities Offer is recommended for
acceptance by the Board of Directors of The Energy Group or (ii) with the
consent of the Panel.
(f) For the purposes of determining whether the Acceptance Condition has been
satisfied, TU Acquisitions will not be bound (unless otherwise required by
the Panel) to take into account any Energy Group Securities which have been
issued or unconditionally allotted, or which arise as the result of the
exercise of conversion rights, before that determination takes place,
unless written notice containing relevant details of the allotment, issue
or conversion has been received from The Energy Group or its agents before
that time by TU Acquisitions or The Royal Bank of Scotland plc or The Bank
of New York on behalf of TU Acquisitions at one of the addresses specified
at the end of this document. Notification by telex or facsimile or other
electronic transmission will not be sufficient.
(g) In accordance with an SEC exemptive order received by TU Acquisitions, at
least five Business Days prior to any reduction in the percentage of Energy
Group Securities required to satisfy the Acceptance Condition, TU
Acquisitions will announce that it has reserved the right so to reduce the
Acceptance Condition. TU Acquisitions will not make such an announcement
unless TU Acquisitions believes there is a significant possibility that
sufficient Energy Group Securities will be tendered to permit the
Acceptance Condition to be satisfied at such reduced level. Holders of
Energy Group Securities who are not willing to accept the Texas Utilities
Offer if the Acceptance Condition is reduced to the minimum permitted level
should either not accept the Texas Utilities Offer until the Subsequent
Offer Period or be prepared to withdraw their acceptance promptly following
an announcement by TU Acquisitions of its reservation of the right to
reduce the Acceptance Condition.
2 ANNOUNCEMENTS
(a) Without prejudice to paragraph 3 ("Rights of withdrawal") below, by 8.30 am
(London time) in the United Kingdom and 8.30 am (New York City time) in the
United States on the Business Day (the "relevant day") next following the
day on which the Texas Utilities Offer is due to expire or on which all
Conditions become or are declared to have been satisfied, fulfilled or,
where applicable, waived or on which the Texas Utilities Offer is revised
or extended (or such later time and/or date as the Panel may agree), TU
Acquisitions will make an appropriate announcement and inform the London
Stock Exchange and the Dow Jones News Service, respectively, of the
position regarding the Texas Utilities Offer. Such announcements will
(unless otherwise permitted by the Panel) also state the total number of
Energy Group Securities and rights over Energy Group Securities (as nearly
as practicable):
(i)for which acceptances of the Texas Utilities Offer have been received
(showing the extent, if any, to which such acceptances have been
received from persons acting or deemed to be in concert with TU
Acquisitions);
(ii)
acquired or agreed to be acquired by or on behalf of TU Acquisitions and
any person acting or deemed to be in concert with TU Acquisitions; and
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<PAGE> 44
(iii) held prior to the Initial Offer Period by or on behalf of TU
Acquisitions and any persons acting or deemed to be in concert with it;
and will specify the percentages of Energy Group Securities represented by
each of these figures.
In computing the numbers of Energy Group Securities represented by
acceptances and/or purchases for the above purposes, only those acceptances
and/or purchases permitted to be counted towards fulfilling the Acceptance
Condition in accordance with paragraph 13 ("Certain provisions concerning
acceptances") below shall be included in the totals.
(b) Any decision to extend the Initial Offer Period may be made at any time up
to, and will be announced not later than, 8.30 am (London time) in the
United Kingdom and 8.30 am (New York City time) in the United States on the
relevant day (or such later time and/or date as the Panel may agree) and
the announcement will state the next expiry date of the Initial Offer
Period.
(c) References to the making of an announcement by or on behalf of TU
Acquisitions include the release of an announcement by TU Acquisitions, by
public relations consultants retained by TU Acquisitions, or by Lehman
Brothers or Merrill Lynch, to the press and the delivery by hand or
telephone, facsimile or telex transmission or other electronic transmission
of an announcement to the London Stock Exchange and the Dow Jones News
Service, as the case may be. An announcement made otherwise than to the
London Stock Exchange will be notified simultaneously to the London Stock
Exchange.
(d) Without limiting the manner in which TU Acquisitions may choose to make any
public announcement and, subject to TU Acquisitions' obligations under
applicable law (including Rules 14d-4(c) and 14d-6(d) under the Exchange
Act relating to TU Acquisitions' obligation to disseminate promptly public
announcements concerning material changes to the Texas Utilities Offer), TU
Acquisitions will have no obligation to publish, advertise or otherwise
communicate any such public announcement other than by making a release to
the London Stock Exchange and the Dow Jones News Service.
3 RIGHTS OF WITHDRAWAL
(a) Except as otherwise provided in this paragraph, tenders of Energy Group
Securities and elections are irrevocable. Energy Group Securities tendered
pursuant to the Texas Utilities Offer may be withdrawn pursuant to the
procedures set out below at any time during the Initial Offer Period and in
certain other circumstances described below. Energy Group Securities
tendered during the Initial Offer Period and not validly withdrawn prior to
the Initial Closing Date, and Energy Group Securities tendered during the
Subsequent Offer Period, may not be withdrawn. Holders of Energy Group
Securities will not have withdrawal rights during the Subsequent Offer
Period, except in certain limited circumstances described below.
(b) If TU Acquisitions, having announced that the Acceptance Condition has been
satisfied, fails by 3.30 pm (London time), 10.30 am (New York City time) on
the relevant day (or such later time or date as the Panel may agree) to
comply with any of the relevant requirements relating to the Texas
Utilities Offer specified in paragraph 2(a) of this Part B of Appendix I
above, an accepting holder of Energy Group Securities may immediately after
that time withdraw his acceptance of the Texas Utilities Offer by written
notice given by post or by hand to The Royal Bank of Scotland plc or The
Bank of New York, at any of the relevant addresses specified at the end of
this document, in each case receiving such notice on behalf of TU
Acquisitions. This right of withdrawal may be terminated not less than
eight days after the relevant day by TU Acquisitions confirming, if that be
the case, that the Texas Utilities Offer is still unconditional and
complying with the other relevant requirements relating to the Texas
Utilities Offer specified in paragraph 2(a) of this Part B of Appendix I
above. If any such confirmation is given, the [first period of 14 days
referred to in paragraph 1 (b) of this Part B of Appendix I above]
[Subsequent Offer Period] will run from the date of that confirmation and
compliance.
(c) If a no extension and/or a no increase statement is withdrawn in accordance
with paragraph 1(e) of this Part B of Appendix I above, any acceptance of
the Texas Utilities Offer made after the date of that statement may be
withdrawn thereafter in the manner referred to in paragraph 3(b) of this
Part B of
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<PAGE> 45
Appendix I above, for a period of eight days following the date on which
the notice of the withdrawal of such statement is posted to holders of
Energy Group Securities.
(d) Subject to (b) above, to be effective, a written notice of withdrawal must
be received before the end of the Initial Offer Period by the party (either
the United Kingdom Receiving Agent or the US Depositary) to whom the
Acceptance Form was originally sent and must specify the name of the person
who has tendered the Energy Group Securities, the number of Energy Group
Securities to be withdrawn and (if certificates have been tendered) the
name of the registered holder of the relevant Energy Group Securities, if
different from the name of the person who tendered such Energy Group
Securities.
(e) In respect of Energy Group ADSs, if Energy Group ADRs have been delivered
or otherwise identified to the US Depositary, then, prior to the physical
release of such Energy Group ADRs, the serial numbers shown on such Energy
Group ADRs must be submitted and, unless the Energy Group ADSs evidenced by
such Energy Group ADRs have been tendered by an Eligible Institution or by
means of a Letter of Transmittal, the signatures on the notice of
withdrawal must be guaranteed by an Eligible Institution. If interests in
Energy Group ADSs evidenced by Energy Group ADRs have been delivered
pursuant to the procedures for book-entry transfer set out in paragraph 10
of this Part B of Appendix I below, any notice of withdrawal must also
specify the name and number of the account at the appropriate Book-Entry
Transfer Facility to be credited with the withdrawn Energy Group ADSs and
must otherwise comply with such Book-Entry Transfer Facility's procedures.
(f) Withdrawals of tendered Energy Group Securities may not be rescinded
(without TU Acquisitions' consent) and any Energy Group Securities properly
withdrawn and not properly re-tendered will thereafter be deemed not
validly tendered for the purposes of the Texas Utilities Offer. Withdrawn
Energy Group Securities may be subsequently re-tendered, however, by
following one of the procedures described in either paragraph 10 or
paragraph 11 of this Part B of Appendix I below, as the case may be, at any
time whilst the Texas Utilities Offer remains open.
(g) All questions as to the validity (including time of receipt) of any notice
of withdrawal will be determined by TU Acquisitions, whose determination
(except as required by the Panel) will be final and binding. None of TU
Acquisitions, The Energy Group, Lehman Brothers, Merrill Lynch, the US
Depositary, the United Kingdom Receiving Agent or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give such
notification.
4 LIMITED SHARE ALTERNATIVE
(a) The Share Alternative is conditional upon:
(i) the Texas Utilities Offer becoming or being declared unconditional
in all respects;
(ii) New Texas Utilities Shares having been approved for listing, subject
to notice of issuance, on the NYSE, the CSE and the PSE; and
(iii) the Registration Statement remaining effective under the Securities
Act.
(b) If the conditions referred to in paragraphs 4(a) (ii) and (iii) above are
not satisfied at the time the Texas Utilities Offer would otherwise become
or be declared unconditional in all respects, the Share Alternative will
lapse and any holder of Energy Group Securities who has elected for the
Share Alternative will be entitled to receive only the cash consideration
payable under the Texas Utilities Offer (and will be deemed not to have
elected for the Share Alternative).
(i) The maximum aggregate number of Energy Group Securities in respect
of which valid elections for the Share Alternative shall be deemed
to have been made shall be limited, in such manner as TU
Acquisitions may decide, so that the total number of Energy Group
Shares (including Energy Group Shares represented by Energy Group
ADSs) acquired by TU Acquisitions other than for cash or for Loan
Notes, whether pursuant to the Texas Utilities Offer or otherwise
(and having regard to the maximum number of shares which may be
issued as a result of the exercise of options or subscription rights
under the Energy Group Share
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<PAGE> 46
Schemes and the maximum level of elections for New Texas Utilities
Shares which may be made by holders of Energy Group Shares whose
shares are acquired compulsorily under section 429 of the Companies
Act), shall represent a maximum of 20 per cent. of the total number
of Energy Group Shares (including Energy Group Shares represented by
Energy Group ADSs) acquired by TU Acquisitions pursuant to the Texas
Utilities Offer or otherwise. To the extent that total elections for
the Share Alternative exceed or may exceed this limit, elections
will be scaled down on a pro rata basis. For the purposes of
applying the limit on the maximum aggregate number of Energy Group
Shares in respect of which valid elections for the Share Alternative
shall be deemed to have been made and scaling down elections for the
Share Alternative on a pro rata basis, each election for the Share
Alternative with respect to an Energy Group ADS shall be deemed to
be an election for the Share Alternative with respect to four Energy
Group Shares.
(ii) The scaling down (if required) of elections for the Share
Alternative shall be calculated in accordance with the following
formula:
<TABLE>
<S> <C> <C> <C>
B X 0.2
X = A X ( ------- )
C + D
where X is the scaled down number of Energy Group Shares on the
basis of which the entitlement of an accepting Energy Group
Shareholder to receive New Texas Utilities Shares under the
Share Alternative will be calculated;
A is the number of Energy Group Shares in respect of which
such shareholder has elected for the Share Alternative;
B is the fully diluted number of Energy Group Shares;
C is the total number of Energy Group Shares in respect of
which Energy Group Shareholders have elected for the Share
Alternative as at midnight (London time) 7.00 pm (New York
City time) on the date ten days after the Initial Closing
Date as extended; and
D is the total number of Energy Group Shares (on a fully
diluted basis) less the total number of Energy Group Shares
for which valid acceptances have been received as set out in
the announcement declaring the Texas Utilities Offer wholly
unconditional.
</TABLE>
(iii) Any scaling down with respect to the Share Alternative shall be based
on those valid elections received by midnight (London time) 7.00 pm
(New York City time) on the date ten days after the Initial Closing
Date as extended.
(c) The New Texas Utilities Shares will be issued free from all liens, charges
and other encumbrances or other equitable interests. New Texas Utilities
Shares will rank pari passu in all respects with existing shares of Texas
Utilities Common Stock, including the right to receive in full all
dividends, if any, and other distributions declared, paid or made on such
shares after the date of issuance of such shares.
(d) No election for the Share Alternative will be valid unless both a valid
acceptance of the Texas Utilities Offer and a valid election for the Share
Alternative, duly completed in all respects and accompanied by, if
appropriate, all relevant share certificates and/or other document(s) of
title, are duly received by the time and date on which the Share
Alternative closes.
(e) If any acceptance of the Texas Utilities Offer which includes an election
for the Share Alternative is not, or is not deemed to be, valid or
complete in all respects at such time, such election shall for all
purposes be void and the holder(s) of Energy Group Securities purporting
to make such election shall not, for any purpose, be entitled to receive
New Texas Utilities Shares under the Share Alternative, but any such
acceptance which is otherwise valid shall be deemed to be an acceptance of
the Texas Utilities Offer (without the Share Alternative) for the number
of Energy Group Securities which are the subject of the acceptance and the
relevant holder(s) of Energy Group Securities will, on the Texas Utilities
Offer becoming unconditional in all respects, be entitled to receive such
cash consideration as shall become due under the Texas Utilities Offer.
(f) The Share Alternative will remain open for acceptance for as long as the
Texas Utilities Offer remains open for acceptance.
(g) Holders of Energy Group Securities who are entitled to receive New Texas
Utilities Shares pursuant to the Texas Utilities Offer may take advantage
of safekeeping services provided by Texas Utilities Shareholder Services
("Shareholder Services") with respect to such New Texas Utilities Shares.
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<PAGE> 47
Unless the person entitled to such New Texas Utilities Shares elects to
receive certificated securities, all New Texas Utilities Shares to which
such person is entitled will be held by Shareholder Services or its
nominee and credited to such person's account. There will be no charge for
safekeeping of the New Texas Utilities Shares by Shareholder Services.
An owner of New Texas Utilities Shares held by Shareholder Services may
request Shareholder Services at any time to sell all or a portion of his or
her New Texas Utilities Shares by delivering to Shareholder Services a
written request. Shareholder Services will instruct an independent broker
to sell such shares as soon as practicable after processing the request and
will transmit to the owner the proceeds of the sale (less brokerage fees
and commissions, any transfer taxes and a fee of $10 for each such
transfer).
Each owner of New Texas Utilities Shares held by Shareholder Services will
receive a receipt for such New Texas Utilities Shares from Shareholder
Services, together with information about other services provided by
Shareholder Services, mailed as soon as practicable after the end of the
Subsequent Offer Period. Thereafter, Shareholder Services will mail a
quarterly statement of account to each owner of New Texas Utilities Shares
held in safekeeping by Shareholder Services for such owner. Quarterly
statements are the owner's record of the shares of Texas Utilities Common
Stock held by Shareholder Services, including any sales or transfers
thereof, and should be retained for tax purposes.
Certificates for any number of whole New Texas Utilities Shares held by
Shareholder Services for an owner will be issued at no charge upon the
written request of such owner mailed to Shareholder Services. New Texas
Utilities Shares held by Shareholder Services may not be pledged. Any owner
who wishes to pledge such shares must request that certificates for the
shares be issued in such owner's name.
Cash dividends paid on New Texas Utilities Shares held by Shareholder
Services will be paid by cheque mailed to the owner, subject to any
required United States income tax withholding.
For additional information regarding the safekeeping services and available
options, please contact:
Texas Utilities Shareholder Services
P.O. Box 225249
Dallas, TX 75222-5249
(toll free telephone) (800) 828-0812
(local telephone) (214) 812-8100
5 LOAN NOTE ALTERNATIVE
(a) The Loan Note Alternative is conditional upon the Texas Utilities Offer
becoming or being declared unconditional in all respects.
(b) No election for the Loan Note Alternative will be valid unless both a valid
acceptance of the Texas Utilities Offer and a valid election for the Loan
Note Alternative, duly completed in all respects and accompanied by, if
appropriate, all relevant share certificates and/or other document(s) of
title, are duly received by the time and date on which the Loan Note
Alternative closes.
(c) If any acceptance of the Texas Utilities Offer which includes an election
for the Loan Note Alternative is not, and is not deemed to be, valid or
complete in all respects at such time, such election shall for all purposes
be void and the holder(s) of Energy Group Shares purporting to make such
election shall not, for any purpose, be entitled to receive the Loan Note
Alternative, but any such acceptance which is otherwise valid shall be
deemed to be an acceptance of the Texas Utilities Offer (without the Loan
Note Alternative) for the number of Energy Group Shares which are the
subject of the acceptance and the holder(s) of Energy Group Shares will, on
the Texas Utilities Offer becoming unconditional in all respects, be
entitled to receive the cash consideration due under the Texas Utilities
Offer.
(d) The Loan Note Alternative will remain open for acceptance for as long as
the Texas Utilities Offer remains open for acceptance.
(e) The Loan Note Alternative is not available to or for the account or benefit
of any US Person.
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6 EFFECT OF ELECTIONS
(a) The completion of Box 3 on the Form of Acceptance or of the Limited Share
Election box in the Letter of Transmittal shall, subject to the other terms
of the Texas Utilities Offer, be treated as an election for the Share
Alternative described in paragraph 4 of the letter from Lehman Brothers and
Merrill Lynch set out earlier in this Offer Document and paragraph 4 of
Part B of Appendix I above and as an acknowledgement and agreement by the
relevant holder of Energy Group Securities that:
(i) he shall release and discharge TU Acquisitions from any obligation
pursuant to the Texas Utilities Offer to pay cash in respect of
that part of his holding of Energy Group Securities in respect of
which he is entitled to receive New Texas Utilities Shares (except
any amount of L3.00 or over payable as referred to in (ii) below
and/or in respect of a fractional entitlement to a New Texas
Utilities Share) and accepts the undertaking of Texas Utilities to
issue to him the New Texas Utilities Shares to which he is entitled
pursuant to the Share Alternative;
(ii) to the extent that such holder's election for the Share Alternative
is scaled down (in the manner referred to in paragraph 4 of Part B
of Appendix I above), such holder will, in relation to that part of
his holding for which his election for the Share Alternative is
unsuccessful, receive the cash consideration to which he is
entitled, in respect of that part of his holding, under the Texas
Utilities Offer as if he had not elected for the Share Alternative
(other than any amount which, when aggregated with any fractional
entitlement to a New Texas Utilities Share, is less than L3.00);
and
(iii) if the conditions to the Share Alternative referred to in paragraphs
4(a)(ii) and (iii) of Part B of Appendix I above relating to the
listing of New Texas Utilities Shares and the Registration Statement
are not satisfied at the time the Texas Utilities Offer would
otherwise become or be declared unconditional in all respects, the
Share Alternative will lapse and such holder will only be entitled
to receive the cash consideration payable under the Texas Utilities
Offer (and will be deemed not to have elected for the Share
Alternative);
and shall also constitute the acceptance by such holder of an offer to him
by TU Acquisitions and Texas Utilities to enter into an agreement with TU
Acquisitions and Texas Utilities to the effect that:
(iv) he shall release and discharge TU Acquisitions from any obligation
pursuant to the Texas Utilities Offer to pay cash in respect of that
part of his holding of Energy Group Securities in respect of which
he is entitled to receive New Texas Utilities Shares (except any
amount of L3.00 or over payable in respect of a fractional
entitlement to a New Texas Utilities Share) and accepts the
undertaking of Texas Utilities to issue to him the New Texas
Utilities Shares to which he is entitled pursuant to the Share
Alternative;
(v) Texas Utilities agrees to issue to such holder the New Texas
Utilities Shares to which such holder is entitled pursuant to the
Share Alternative; and
(vi) TU Acquisitions accepts the release and discharge of its liability
to pay cash consideration by such holder as specified in (iv) above
and agrees to pay to Texas Utilities an amount equal to the amount
of the cash consideration the obligation to pay which such holder
has agreed to release and discharge TU Acquisitions.
(b) The insertion of a number in Box 4 on the Form of Acceptance shall, subject
to the other terms of the Texas Utilities Offer, be treated in respect of
the relevant number of Energy Group Shares as an election for the Loan Note
Alternative described in paragraph 5 of this Part B of Appendix I above.
(c) An election will not be valid unless the Acceptance Form is completed
correctly in all respects and is received in accordance with paragraph 10
("Procedures for tendering Energy Group ADSs") or paragraph 11 ("Procedures
for tendering Energy Group Shares") below.
(d) To allow TU Acquisitions to pay interest on the Loan Notes without
withholding US income tax, beneficial owners of Loan Notes must certify
that they are not US Persons for the purposes of US federal income tax laws
(see paragraph 15(b) of Appendix VIII below).
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<PAGE> 49
(e) In the event that both Boxes 3 and 4 are completed on a Form of Acceptance,
any election for the Loan Note Alternative will only be effective to the
extent that the shareholder's election for the Share Alternative is scaled
down (in the manner referred to in paragraph 4 of Part B of Appendix I
above) so that there are a number of Energy Group Shares (the "residual
number") in respect of which the relevant shareholder has accepted the
Texas Utilities Offer but will not be entitled to receive New Texas
Utilities Shares. If, in such circumstances the number inserted or deemed
to be inserted in Box 4 on the Form of Acceptance is greater than the
residual number, the election for the Loan Note Alternative will be treated
as being made in respect of a number of Energy Group Shares equal to the
residual number.
7 REVISIONS OF THE TEXAS UTILITIES OFFER, THE LOAN NOTE ALTERNATIVE AND/OR THE
SHARE ALTERNATIVE
(a) Although no revision of the Texas Utilities Offer is envisaged, if the
Texas Utilities Offer (in its original or any previously revised form(s))
is revised (either in its terms or Conditions or in the value or form of
the consideration offered or otherwise) and any such revision represents,
on the date on which such revision is announced (on such basis as Lehman
Brothers and Merrill Lynch may consider appropriate) an improvement (or no
diminution) in the value of the consideration under the Texas Utilities
Offer as so revised compared with the value of the consideration previously
offered, the benefit of the revised Texas Utilities Offer will, subject as
provided in this paragraph 7 below, be made available to holders of Energy
Group Securities who have accepted the Texas Utilities Offer in its
original or any previously revised form(s) and not validly withdrawn such
acceptance (hereinafter called a "Previous Acceptor"). The acceptance by or
on behalf of a Previous Acceptor of the Texas Utilities Offer in its
original or any previously revised form(s) shall, subject as provided in
this paragraph 7 and in paragraph 10 or paragraph 11 of Part B of this
Appendix I below, be deemed to be an acceptance of the Texas Utilities
Offer as so revised and shall constitute the appointment of any director of
TU Acquisitions or of Lehman Brothers and/or Merrill Lynch as his attorney
and/or agent with authority to accept any such revised Texas Utilities
Offer on behalf of such Previous Acceptor and to make such elections as
those made by the Previous Acceptor in relation to the Texas Utilities
Offer in the Acceptance Form previously executed by him or on his behalf
and to execute on behalf of and in the name of such Previous Acceptor all
such further documents and take such further actions (if any) as may be
required to give effect to such acceptances and/or elections. In making any
such acceptance or making any such election, the attorney and/or agent will
take into account the nature of any previous acceptances and/or elections
made by or on behalf of the Previous Acceptor and such other facts or
matters as he may reasonably consider relevant.
(b) The authorities conferred by paragraph 7(a) of Part B of this Appendix I
above shall not be exercised by any director of TU Acquisitions or of
Lehman Brothers and/or Merrill Lynch, as the case may be, if, as a result
thereof, the Previous Acceptor would thereby receive less in cash than he
would have received as a result of his acceptance of the Texas Utilities
Offer (in its original or any previously revised form(s)) in the form in
which it was originally accepted by him and the exercise of the powers of
attorney so conferred by paragraph 7(a) of Part B of this Appendix I above
of any such Previous Acceptor shall be ineffective to the extent that such
Previous Acceptor shall lodge, within [14] calendar days of the posting of
the document pursuant to which the improved consideration referred to in
paragraph 7(a) of Part B of this Appendix I above is made available to
holders of Energy Group Securities, an Acceptance Form validly accepting
the Texas Utilities Offer in which he validly elects to receive the
consideration receivable by him in some other manner than that set out in
his original acceptance.
(c) TU Acquisitions reserves the right (subject to paragraph 7(a) of this Part
B of this Appendix I above) to treat an executed Acceptance Form relating
to the Texas Utilities Offer (in its original or any previously revised
form(s)) which is received (or dated) after the announcement or issue of
the Texas Utilities Offer in any revised form as a valid acceptance and/or
election of the revised Texas Utilities Offer and such acceptance shall
constitute an authority in the terms of paragraph 7(a) of Part B of this
Appendix I above, mutatis mutandis, on behalf of the relevant holder of
Energy Group Securities.
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<PAGE> 50
8 GENERAL
(a) If the Texas Utilities Offer lapses, pursuant to the City Code, neither TU
Acquisitions nor any person acting or deemed to be acting in concert with
TU Acquisitions for the purpose of the Texas Utilities Offer nor any of
their respective affiliates may make an offer (whether inside or outside
the United Kingdom) for Energy Group Securities for a period of one year
following the date of such lapse, except with the consent of the Panel.
(b) Except with the consent of the Panel, settlement of the consideration to
which any holder of Energy Group Securities is entitled under the Texas
Utilities Offer will be implemented in full in accordance with the terms of
the Texas Utilities Offer without regard to any lien, right of set-off,
counterclaim or other analogous right to which TU Acquisitions may
otherwise be, or claim to be, entitled as against such holder of Energy
Group Securities. Consideration due to a holder of Energy Group Securities
who validly accepts the Texas Utilities Offer will (except with the consent
of the Panel) be despatched not later than 14 calendar days after the later
of the Initial Closing Date and the date of receipt of a valid and complete
acceptance from such holder of Energy Group Securities. Cash consideration
will be settled as described in paragraph 15 ("Settlement") below.
(c) Any omission or failure to despatch this document, the Acceptance Form, any
other document relating to the Texas Utilities Offer and/or any notice
required to be despatched under the terms of the Texas Utilities Offer to,
or any failure to receive the same by, any person to whom the Texas
Utilities Offer is made or should be made shall not invalidate the Texas
Utilities Offer in any way. Subject to the provisions of paragraph 9
("Overseas shareholders") below, the Texas Utilities Offer extends to any
such persons to whom this document, the Acceptance Form, and/or any related
offering document may not have been despatched or who may not receive such
documents and such persons may collect copies of those documents from
Lehman Brothers or Merrill Lynch.
(d) All powers of attorney, appointment of agents and authorities on the terms
conferred by or referred to in this Appendix I or in the Acceptance Form
are given by way of security for the performance of the obligations of the
holder of Energy Group Securities concerned and are irrevocable in
accordance with section 4 of the Powers of Attorney Act 1971, except in the
circumstances where the donor of such power of attorney or authority is
entitled to withdraw his acceptance in accordance with paragraph 3 ("Rights
of withdrawal") above and duly does so.
(e) If all Conditions are satisfied, fulfilled or, where permitted, waived and
TU Acquisitions acquires or contracts to acquire, pursuant to the Texas
Utilities Offer or otherwise, at least 90 per cent. in value of the Energy
Group Shares (including Energy Group Shares represented by Energy Group
ADSs) to which the Texas Utilities Offer relates before the end of the
period of four months beginning with the date of the Texas Utilities Offer,
it will be entitled to and intends to acquire the remaining Energy Group
Shares on the same terms as the Texas Utilities Offer pursuant to and
subject to sections 428 to 430F (inclusive) of the Companies Act.
Whether or not TU Acquisitions is in a position to effect the compulsory
acquisition of any outstanding Energy Group Shares in accordance with the
Companies Act as referred to above, and irrespective of the size of any
outstanding minority in The Energy Group, TU Acquisitions intends to seek
to procure, after the Texas Utilities Offer becomes or is declared
unconditional, an application by The Energy Group to the London Stock
Exchange for Energy Group Shares to be delisted and an application by The
Energy Group to the NYSE for Energy Group ADSs to be delisted. [The London
Stock Exchange has confirmed that it would agree to the delisting of the
Energy Group Shares in those circumstances.]
(f) TU Acquisitions, Lehman Brothers and Merrill Lynch reserve the right to
notify any matter, including the making of the Texas Utilities Offer, to
all or any holders of Energy Group Securities with a registered address
outside the United Kingdom and the United States, or whom TU Acquisitions
knows to be a custodian, trustee or nominee holding Energy Group Securities
for persons in Canada, Australia, or Japan, by announcement in the United
Kingdom to the London Stock Exchange and in the United States to the Dow
Jones News Service or in any other appropriate manner, or by paid
advertisement in a
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newspaper published and circulated in the United Kingdom and the United
States, in which event such notice will be deemed to have been sufficiently
given, notwithstanding any failure by any such holders of Energy Group
Securities to receive or see such notice. All references in this document
to notice in writing by or on behalf of TU Acquisitions will be construed
accordingly. No such document will be sent to an address in Canada,
Australia or Japan.
(g) The Texas Utilities Offer is being extended by means of an advertisement to
be inserted in the Financial Times (United Kingdom version only) on [-]
1998 [Date of this document] to all persons to whom this document or an
Acceptance Form may not be despatched (or by whom such documents may not be
received) who hold or are entitled to have allotted or issued to them
Energy Group Securities.
(h) The terms, provisions, instructions and authorities contained in the
Acceptance Form constitute part of the terms of the Texas Utilities Offer.
Words and expressions defined in this document have the same meanings when
used in the Acceptance Form, unless the context otherwise requires.
(i) References to a holder of Energy Group Securities include references to the
person or persons executing any Acceptance Form and in the event of more
than one person executing an Acceptance Form, such references will apply to
them jointly and severally.
9 OVERSEAS SHAREHOLDERS
(a) The making of the Texas Utilities Offer in, or to certain persons who are
citizens, residents or nationals of, jurisdictions outside the United
Kingdom or the United States (and the availability of Loan Notes and/or New
Texas Utilities Shares to such persons and, in the case of Loan Notes, to
citizens or residents of the United States) may be prohibited or affected
by the laws of the relevant overseas jurisdiction. Holders of Energy Group
Securities who are citizens, residents or nationals of jurisdictions
outside the United Kingdom and the United States (and, in the case of Loan
Notes, the United Kingdom only) should inform themselves about and observe
any applicable legal requirements. It is the responsibility of any such
holder of Energy Group Securities wishing to accept the Texas Utilities
Offer, the Share Alternative or the Loan Note Alternative to satisfy
himself as to the full observance of the laws of the relevant jurisdiction
in connection therewith, including the obtaining of any governmental,
exchange control or other consents which may be required, compliance with
other necessary formalities and the payment of any issue, transfer or other
taxes or duties in such jurisdiction. Any such holder of Energy Group
Securities will also be responsible for payment of any issue, transfer or
other taxes or duties or other requisite payments due in such jurisdiction
by whomsoever payable and each of TU Acquisitions and Lehman Brothers,
Merrill Lynch and any person acting on their behalf shall be entitled to be
fully indemnified and held harmless by such holder of Energy Group
Securities for any issue, transfer or other taxes or duties as TU
Acquisitions, Lehman Brothers, Merrill Lynch or such person may be required
to pay.
(b) In particular, the Texas Utilities Offer is not being made, directly or
indirectly, in or into Canada, Australia or Japan, or by use of the mails
or any means or instrumentality (including, without limitation, facsimile
transmission, telex or telephone) of interstate or foreign commerce of, or
any facilities of a national securities exchange of, any of these
jurisdictions. Accordingly, copies of this document, the Acceptance Form
and any related offer documents are not being mailed or otherwise
distributed or sent in or into Canada, Australia or Japan. Persons
receiving such documents (including, without limitation, custodians,
nominees and trustees) must not distribute, send or mail them in, into or
from Canada, Australia or Japan or use any such means, instrumentality or
facilities in connection with the Texas Utilities Offer, and doing so may
render invalid any related purported acceptance of the Texas Utilities
Offer. Persons wishing to accept the Texas Utilities Offer must not use the
Canadian, Australian or Japanese mails or any such means, instrumentality
or facilities for any purpose directly or indirectly related to acceptance
of the Texas Utilities Offer. Envelopes containing the Acceptance Form must
not be postmarked in Canada, Australia or Japan or otherwise despatched
from these jurisdictions and all acceptors must provide addresses outside
Canada, Australia and Japan for the receipt of the consideration to which
they are entitled under the Texas Utilities Offer and which is despatched
by post or for the
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return of the Acceptance Form and (in relation to Energy Group Shares in
certificated form) any Energy Group Share certificate(s) and/or other
document(s) of title.
(c) The provisions of this paragraph 9 and/or other terms of the Texas
Utilities Offer relating to overseas holders of Energy Group Securities may
be waived, varied or modified as regards specific holders of Energy Group
Securities or on a general basis by TU Acquisitions in its absolute
discretion. References in this paragraph 9 to holders of Energy Group
Securities shall include references to the person or persons executing an
Acceptance Form and, in the event of more than one person executing an
Acceptance Form, the provisions of this paragraph 9 shall apply to them
jointly and severally.
(d) If, pursuant to the Texas Utilities Offer, any New Texas Utilities Shares
would otherwise be issued to any person(s) whom TU Acquisitions believes
would be unable to give the representation and warranty set out in
paragraph 12(l) of Part B of this Appendix I below, then such person(s)
shall be deemed to have given an authority to TU Acquisitions and its
agents, as agents and/or attorneys of such person(s) in respect of the New
Texas Utilities Shares to which such person(s) thereby become(s) entitled:
(i) to sell such shares on behalf of such holder in the market within 21
days of such shares being allotted, (ii) to receive the certificate(s)
and/or other document(s) of title therefor and to execute instrument(s) of
transfer in respect of such shares, and (iii) to remit the net proceeds of
such sale(s) (after deducting therefrom the expenses of sale) as soon as
reasonably practicable to the person or agent whose name and address is set
out in the relevant box in the Acceptance Form or, if no name is set out,
to the first-named holder at his registered address. Neither TU
Acquisitions nor any person acting on behalf of it shall have any liability
to any person for any loss or alleged loss arising from the price, timing
or manner of any sale made pursuant to the authority set out above or
otherwise in connection therewith.
(e) The New Texas Utilities Shares to be issued pursuant to the Share
Alternative will not be the subject of a prospectus under the securities
laws of any province of Canada. In addition, no steps have been taken, nor
will be taken, to enable the New Texas Utilities Shares to be offered in
Japan in compliance with applicable securities laws of Japan and no
prospectus in relation to the New Texas Utilities Shares has been, or will
be, lodged with or registered by the Australian Securities Commission, nor
will the New Texas Utilities Shares be registered under any relevant
securities laws of any other country. TU Acquisitions will not authorise
the delivery of any document(s) of title in respect of any New Texas
Utilities Shares falling to be allotted pursuant to the Texas Utilities
Offer to any address in Canada, Australia or Japan or to any person who is,
or whom TU Acquisitions has reason to believe is a person in Canada,
Australia or Japan or who, by completing Box 9 of the Form of Acceptance or
otherwise, does not give the warranty set out in paragraph 12(l) of this
Part B of Appendix I. Any holder of Energy Group Securities accepting the
Texas Utilities Offer who is a person in Canada, Australia or Japan or who
does not give such warranty shall be deemed not to have accepted the Share
Alternative.
(f) The Loan Notes to be issued pursuant to the Loan Note Alternative have not
been, and will not be, registered under the Securities Act or under any
relevant securities law of any state or district of the United States and
will not be the subject of a prospectus under the securities laws of any
province of Canada. In addition, no steps have been taken, or will be
taken, to enable the Loan Notes to be offered in Japan in compliance with
applicable securities laws of Japan and no prospectus in relation to the
Loan Notes has been, or will be, lodged with or registered by the
Australian Securities Commission, nor will the Loan Notes be registered
under any relevant securities laws of any other country. TU Acquisitions
will not authorise the delivery of any document(s) of title in respect of
any Loan Notes falling to be allotted pursuant to the Texas Utilities Offer
to any address in the United States, Canada, Australia or Japan or to any
person who is, or whom TU Acquisitions has reason to believe is, a US
Person or a person in Canada, Australia or Japan or who, by completing Box
9 of the Form of Acceptance or otherwise, does not give the warranty set
out in paragraph 12(l) of this Part B of Appendix I. Any holder of Energy
Group Securities accepting the Texas Utilities Offer who is a US Person or
a person in Canada, Australia or Japan or who does not give such warranty
shall be deemed not to have accepted the Loan Note Alternative.
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10 PROCEDURES FOR TENDERING ENERGY GROUP ADSS
(a) If you are a holder of Energy Group ADSs evidenced by Energy Groups ADRs,
you will have also received a Letter of Transmittal and Notice of
Guaranteed Delivery for use in connection with the Texas Utilities Offer.
This section should be read together with the instructions on the Letter of
Transmittal. The provisions of this section shall be deemed to be
incorporated in, and form a part of, the relevant Letter of Transmittal.
The instructions printed on the relevant Letter of Transmittal shall be
deemed to form part of the terms of the Texas Utilities Offer.
(b) For a holder of Energy Group ADSs evidenced by Energy Group ADRs to tender
such Energy Group ADSs validly pursuant to the Texas Utilities Offer,
either:
(i) a properly completed and duly executed Letter of Transmittal, together
with any required signature guarantees and any other required
documents (or Agent's Message in the case of book-entry transfers),
must be received by the US Depositary at one of its addresses set
forth on the back cover of this document and the Energy Group ADRs
evidencing such Energy Group ADSs must be either received by the US
Depositary at one of such addresses or delivered pursuant to the
procedures for book-entry transfers set out below (and a confirmation
of receipt of such transfer received by the US Depositary); or
(ii) such holder must comply with the "Guaranteed Delivery Procedures" (as
set forth in paragraph 10(h) below).
The Texas Utilities Offer in respect of Energy Group ADSs evidenced by Energy
Group ADRs shall be validly accepted by delivery of a Letter of Transmittal (or
Agent's Message in case of book-entry transfers), the relevant Energy Group ADRs
evidencing Energy Group ADSs and other required documents to the US Depositary
by holders of Energy Group ADSs (without any further action by the US
Depositary), subject to the terms and conditions set out in the Letter of
Transmittal. The acceptance of the Texas Utilities Offer by a tendering holder
of Energy Group ADSs evidenced by Energy Group ADRs pursuant to the procedures
described above, subject to the withdrawal rights described below, will be
deemed to constitute a binding agreement between such tendering holder of Energy
Group ADSs and TU Acquisitions upon the terms and subject to the Conditions of
the Texas Utilities Offer. IF AN ENERGY GROUP ADR EVIDENCING AN ENERGY GROUP ADS
HAS BEEN TENDERED BY A HOLDER OF ENERGY GROUP ADSS, THE ENERGY GROUP SHARES
REPRESENTED BY SUCH ENERGY GROUP ADSS MAY NOT BE TENDERED INDEPENDENTLY. A
LETTER OF TRANSMITTAL AND OTHER REQUIRED DOCUMENTS CONTAINED IN AN ENVELOPE
POSTMARKED IN CANADA, JAPAN OR AUSTRALIA OR OTHERWISE APPEARING TO TU
ACQUISITIONS OR ITS AGENTS TO HAVE BEEN SENT FROM CANADA, JAPAN OR AUSTRALIA MAY
BE REJECTED AS INVALID.
(c)BOOK-ENTRY TRANSFER
The US Depositary will establish an account at the Book-Entry Transfer
Facilities with respect to interests in Energy Group ADSs evidenced by
Energy Group ADRs held in book-entry form for the purposes of the Texas
Utilities Offer within two Business Days from the date of this document.
Any financial institution that is a participant in any of the Book-Entry
Transfer Facility's systems may make book-entry delivery of interests
Energy Group ADSs by causing a Book-Entry Transfer Facility to transfer
such interests in Energy Group ADSs into the US Depositary's account at
such Book-Entry Transfer Facility in accordance with that Book-Entry
Transfer Facility's procedure for such transfer. Although delivery of
interests in Energy Group ADSs evidenced by Energy Group ADRs may be
effected through book-entry transfer into the US Depositary's account at a
Book-Entry Transfer Facility, either:
(i) the Letter of Transmittal, properly completed and duly executed,
together with any required signature guarantees; or
(ii) an Agent's Message (as defined below),
and, in either case, any other required documents must in any case be
transmitted to, and received by, the US Depositary at one of its addresses
set forth on the back cover of this document before Energy Group ADSs
evidenced by Energy Group ADRs will be either counted as a valid acceptance
or purchased, or
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such holder must comply with the Guaranteed Delivery Procedures described
below. The term "Agent's Message" means a message transmitted by a
Book-Entry Transfer Facility to, and received by, the US Depositary and
forming a part of a Book-Entry Confirmation that states that such
Book-Entry Transfer Facility has received an express acknowledgement from
the participant in such Book-Entry Transfer Facility tendering the
interests in Energy Group ADSs that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal. Delivery of
documents to a Book-Entry Transfer Facility does not constitute delivery to
the US Depositary.
(d) METHOD OF DELIVERY
The method of delivery of Energy Group ADRs, the Letters of Transmittal and
all other required documents is at the option and risk of the tendering
holder of Energy Group ADSs. Energy Group ADSs will be deemed delivered
only when the Energy Group ADRs representing such Energy Group ADSs are
actually received by the US Depositary (including in the case of a
book-entry transfer, by Book-Entry Confirmation). If delivery is by mail,
registered mail with return receipt requested, properly insured, is
recommended. In all cases, sufficient time should be allowed to ensure
timely delivery. No acknowledgement of receipt of any Letter of Transmittal
or other required documents will be given by, or on behalf of, TU
Acquisitions.
(e) SIGNATURE REQUESTS
No signature guarantee is required on the Letter of Transmittal if:
(i) the Letter of Transmittal is signed by the registered holder of the
Energy Group ADSs tendered therewith and such registered holder has
not completed either the Box entitled "Special Payment Instructions"
or the Box entitled "Special Delivery Instructions" or the box
entitled "Special Texas Utilities Common Stock Instructions" in the
Letter of Transmittal; or
(ii) such Energy Group ADSs are tendered for the account of an Eligible
Institution.
In all other cases all signatures on Letters of Transmittal must be
guaranteed by an Eligible Institution. See Instruction 1 on the Letter of
Transmittal.
(f) ENERGY GROUP ADSS AND ADRS
If the Energy Group ADSs are registered in the name of a person other than
the person who signs the Letter of Transmittal, then the tendered Energy
Group ADRs must be endorsed or accompanied by appropriate stock powers,
signed exactly as the name or names of the registered owner or owners
appear on the Energy Group ADRs, with the signatures on the Energy Group
ADRs or stock powers guaranteed as aforesaid. See Instructions 1 and 5 on
the Letter of Transmittal.
(g) PARTIAL ACCEPTANCES
If fewer than all of the Energy Group ADSs evidenced by any Energy Group
ADRs delivered to the US Depositary are to be tendered, the holder thereof
should so indicate in the Letter of Transmittal by filling in the number of
Energy Group ADSs which are to be tendered in the box entitled "Number of
Energy Group ADSs Tendered". In such case, a new Energy Group ADR for the
remainder of the Energy Group ADSs represented by the former Energy Group
ADR will be sent to the person(s) signing such Letter of Transmittal (or
delivered as such person properly indicates thereon) as promptly as
practicable following the date the tendered Energy Group ADSs are
purchased. All Energy Group ADSs delivered to the US Depositary will be
deemed to have been tendered unless otherwise indicated. See Instruction 4
to the Letter of Transmittal. In the case of partial tenders, Energy Group
ADSs not tendered will not be reissued to a person other than the
registered holder.
(h) GUARANTEED DELIVERY PROCEDURES
(i) If a holder of Energy Group ADSs evidenced by Energy Group ADRs desires to
tender Energy Group ADSs pursuant to the Texas Utilities Offer and the
Energy Group ADRs evidencing such Energy Group ADSs are not immediately
available or the procedures for book-entry transfer cannot be completed on
a timely basis, or if time will not permit all required documents to reach
the US Depositary prior to the
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expiry of the Subsequent Offer Period, such holder's tender of Energy Group
ADSs may be effected if all the following conditions are met (the
"Guaranteed Delivery Procedures"):
(aa) such tender is made by or through an Eligible Institution;
(bb) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by TU Acquisitions
is received by the US Depositary, as provided below, prior to
the expiry of the Subsequent Offer Period; and
(cc) the Energy Group ADRs evidencing all tendered Energy Group ADSs
(or, in the case of interests in Energy Group ADSs held in
book-entry form, timely confirmation of the book-entry transfer
of such interests in Energy Group ADSs into the US Depositary's
account at a Book-Entry Transfer Facility as described above),
together with a properly completed and duly executed Letter of
Transmittal with any required signature guarantees and any
other documents required by the Letter of Transmittal, are
received by the US Depositary within three Business Days after
the date of execution of such Notice of Guaranteed Delivery.
(ii) The Notice of Guaranteed Delivery may be delivered by hand or mailed
to the US Depositary and must include a signature guarantee by an
Eligible Institution in the form set out in such Notice of Guaranteed
Delivery.
(iii) Receipt of a Notice of Guaranteed Delivery will not be treated as a
valid acceptance for the purpose of satisfying the Acceptance
Condition. To be counted towards satisfaction of this requirement,
Energy Group ADRs evidencing Energy Group ADSs referred to in the
Notice of Guaranteed Delivery must, prior to the Initial Closing
Date, be received by the US Depositary (or, in the case of interests
in Energy Group ADSs evidenced by Energy Group ADRs held in book-
entry form, timely confirmation of a book-entry transfer of such
interests in Energy Group ADSs into the US Depositary's account at a
Book-Entry Transfer Facility pursuant to the procedure set out
above), together with a duly executed Letter of Transmittal with any
required signature guarantees (or, in the case of a book-entry
transfer, an Agent's Message) and any other required documents.
(i) OTHER REQUIREMENTS
By executing the Letter of Transmittal as set out above, the tendering
holder of Energy Group ADSs evidenced by Energy Group ADRs will agree that
effective from and after the date all Conditions are satisfied or, where
permitted, waived:
(i) TU Acquisitions shall be entitled to direct the exercise of any votes
attaching to any Energy Group Shares represented by Energy Group ADSs,
in respect of which the Texas Utilities Offer has been accepted or is
deemed to have been accepted and any other rights and privileges
attaching to such Energy Group Shares, including any right to
requisition a general meeting of The Energy Group or of any class of
its shareholders; and
(ii) the execution of the Letter of Transmittal and its delivery to the US
Depositary (or delivery of an Agent's message to the US Depositary)
will constitute:
(aa) an authority to The Energy Group or its agents from the
tendering holder of Energy Group ADSs to send any notice,
circular, warrant, document or other communication, which may be
sent to him as a holder of Energy Group ADSs, to TU Acquisitions
at its registered office;
(bb) an authority to TU Acquisitions or its agent to sign any consent
to short notice of a general meeting or separate class meeting
on behalf of the tendering holder of Energy Group ADSs and/or to
execute a form of proxy in respect of such Energy Group ADSs
appointing any person nominated by TU Acquisitions to attend
general meetings or separate class meetings of The Energy Group
or its members (or any of them) (or any adjournments thereof)
and to exercise the votes attaching to such Energy Group ADSs on
the holders' behalf; and
(cc) the agreement of the tendering holder of Energy Group ADSs not
to exercise any of such rights without the consent of TU
Acquisitions and the irrevocable undertaking of the tendering
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<PAGE> 56
holder of Energy Group ADSs not to appoint a proxy for or to
attend general meetings or separate class meetings.
(j) If the Texas Utilities Offer lapses, all documents tendered will be
returned within 14 calendar days thereafter at the risk of the holder of
Energy Group Securities concerned.
(k) If you are a holder of Energy Group ADSs and are in any doubt about the
procedure for acceptance, please telephone the Information Agent on
11 PROCEDURES FOR TENDERING ENERGY GROUP SHARES
(a) Holders of Energy Group Shares will have received with this document a Form
of Acceptance. This section should be read together with the Form of
Acceptance. The provisions of this section shall be deemed to be
incorporated in, and to form a part of, the Form of Acceptance. The
instructions printed on the Form of Acceptance shall be deemed to form part
of the terms of the Texas Utilities Offer.
If a holder of Energy Group Shares holds Energy Group Shares in both
certificated and uncertificated form, he should complete a separate Form of
Acceptance for each holding. Similarly, such holder should complete a
separate Form of Acceptance for Energy Group Shares held in uncertificated
form, but under different member account IDs, and for Energy Group Shares
held in certificated form, but under different designations.
(b) To accept the Texas Utilities Offer, any holder of Energy Group Shares,
including any person in the US who holds Energy Group Shares, wishing to
accept the Texas Utilities Offer in respect of all or any portion of such
holder's Energy Group Shares, should complete Box 1 and, if such holder's
Energy Group Shares are in CREST, Box 8, and sign Box 7 on the Form of
Acceptance in accordance with the instructions printed on it. All holders
of Energy Group Shares who are individuals should sign the Form of
Acceptance in the presence of a witness who should also sign Box 7 in
accordance with the instructions printed on it. Unless witnessed, an
acceptance will not be valid.
(c) An accepting holder of Energy Group Shares should return the completed,
signed and witnessed Form of Acceptance, whether or not such Energy Group
Shares are in CREST, to the United Kingdom Receiving Agent or US
Depositary. The completed Form of Acceptance, together, if such holder's
Energy Group Shares are in certificated form, with his share certificate(s)
and/or other document(s) of title, must be lodged with the United Kingdom
Receiving Agent or the US Depositary, as soon as possible, but in any event
so as to arrive not later than 10.00 pm (London time), 5.00 pm (New York
City time) on [-] 1998. If you have any questions as to how to complete the
Form of Acceptance, please contact the United Kingdom Receiving Agent on
0117 937-0672 or the US Depositary on (888) 460-7637.
A person in the US who holds Energy Group Shares may submit the Form of
Acceptance, together with his share certificate(s) and/or other document(s)
of title, to the US Depositary, who will receive such Form(s) of Acceptance
and certificate(s) and/or other document(s) of title on behalf of the
United Kingdom Receiving Agent. A Form of Acceptance contained in an
envelope postmarked Canada, Japan or Australia or otherwise appearing to TU
Acquisitions or its agents to have been sent from Canada, Japan or
Australia may be rejected as invalid.
(d) If Energy Group Shares are in uncertificated form, the holder should insert
in Box 8 of the Form of Acceptance the participant ID and member account ID
under which such Energy Group Shares are held by him in CREST and otherwise
complete and return the Form of Acceptance as described above. In addition,
such holder should take (or procure to be taken) the action set out below
to transfer the Energy Group Shares in respect of which he wishes to accept
the Texas Utilities Offer to an escrow balance, specifying The Royal Bank
of Scotland plc (in its capacity as a CREST participant under the
participant ID referred to below) as the escrow agent, as soon as possible
and in any event so that the transfer to escrow settles not later than
10.00 pm (London time), 5.00 pm (New York City time) on [-] 1998.
(e) If the holder of such Energy Group Shares is a CREST sponsored member, he
should refer to his CREST sponsor before taking any action. Such holder's
sponsor will be able to confirm details of his
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<PAGE> 57
participant ID and the member account ID under which his Energy Group
Shares are held. In addition, only his CREST sponsor will be able to send
the TTE Instruction to CRESTCo in relation to his Energy Group Shares.
(f) The holder of such Energy Group Shares in uncertificated form should send
(or, if he is a CREST sponsored member, procure that his CREST sponsor
sends) a TTE Instruction to CRESTCo which must be properly authenticated in
accordance with CRESTCo's specifications and which must contain, in
addition to the other information that is required for a TTE Instruction to
settle in CREST, the following details:
(i) the number of Energy Group Shares to be transferred to an escrow
balance;
(ii) the member account ID of such holder of Energy Group Shares. This
must be the same member account ID as the member account ID that is
inserted in Box 8 of the Form of Acceptance;
(iii) the participant ID of such holder of Energy Group Shares. This must
be in the same participant ID as the participant ID that is inserted
in Box 8 of the Form of Acceptance;
(iv) the participant ID of the escrow agent (the United Kingdom Receiving
Agent in its capacity as a CREST Receiving Agent). This is RA75;
(v) the member account ID of the escrow agent. This is ENERGY;
(vi) the Form of Acceptance Reference Number. This is the Form of
Acceptance Reference Number that appears on page 3 of the Form of
Acceptance. This Reference Number should be inserted in the first
eight characters of the shared note field on the TTE Instruction.
Such insertion will enable the United Kingdom Receiving Agent to
match the transfer to escrow to your Form of Acceptance. The holder
of such shares should keep a separate record of this Form of
Acceptance Reference Number for future reference;
(vii) the Intended Settlement Date. This should be as soon as possible and
in any event not later than [-] 1998;
(viii) the Corporate Action Number for the Texas Utilities Offer. This is
5-
(g) After settlement of the TTE Instruction, such holder of Energy Group Shares
will not be able to access the Energy Group Shares concerned in CREST for
any transaction or charging purposes. If the Conditions are satisfied,
fulfilled or, where permitted, waived, the escrow agent will transfer the
Energy Group Shares concerned to itself in accordance with paragraph 12(d)
of this Part B of Appendix I below.
(h) Such holder of Energy Group Shares is recommended to refer to the CREST
Manual published by CRESTCo for further information on the CREST procedures
outlined above. For ease of processing, such holder is requested, wherever
possible, to ensure that a Form of Acceptance relates to only one transfer
to escrow.
(i) If no Form of Acceptance Reference Number, or an incorrect Form of
Acceptance Reference Number, is included on the TTE Instruction, TU
Acquisitions may treat any amount of Energy Group Shares transferred to an
escrow balance in favour of the escrow agent specified above from the
participant ID and member account ID identified in the TTE Instruction as
relating to any Form(s) of Acceptance which relate(s) to the same member
account ID and participant ID (up to the amount of Energy Group Shares
inserted or deemed to be inserted on the Form(s) of Acceptance concerned).
(j) Such holder of Energy Group Shares should note that CRESTCo does not make
available special procedures, in CREST, for any particular corporate
action. Normal system timings and limitations will therefore apply in
connection with a TTE Instruction and its settlement. Such holder should
therefore ensure that all necessary action is taken by him (or by his CREST
sponsor) to enable a TTE Instruction relating to his Energy Group Shares to
settle prior to 10.00 pm (London time), 5.00 pm (New York City time) on [-]
1998. In this connection such holder is referred in particular to those
sections of the CREST Manual concerning practical limitations of the CREST
system and timings.
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<PAGE> 58
(k) TU Acquisitions will make an appropriate announcement if any of the details
contained in this paragraph 11 alter for any reason.
(l) Normal CREST procedures (including timings) apply in relation to any Energy
Group Shares that are, or are to be, converted from uncertificated to
certificated form, or from certificated to uncertificated form, during the
course of the Texas Utilities Offer (whether any such conversion arises as
a result of a transfer of Energy Group Shares or otherwise). Holders of
Energy Group Shares who are proposing so to convert any Energy Group Shares
are recommended to ensure that the conversion procedures are implemented in
sufficient time to enable the person holding or acquiring the Energy Group
Shares as a result of the conversion to take all necessary steps in
connection with an acceptance of the Texas Utilities Offer (in particular,
as regards delivery of share certificate(s) or other documents of title or
transfers to an escrow balance as described above) prior to 10.00 pm
(London time), 5.00 pm (New York City time) on [-] 1998.
(m) If the share certificate(s) and/or other document(s) of title is/are not
readily available or is/are lost, the Form of Acceptance should
nevertheless be completed, signed and returned as stated above to the
United Kingdom Receiving Agent or the US Depositary so as to be received as
soon as possible, but in any event no later than 10.00 pm (London time),
5.00 pm (New York City time) on [-] 1998 together with any share
certificate(s) and/or other document(s) of title that is/are available,
accompanied by a letter stating that the balance will follow or that one or
more share certificate(s) and/or other document(s) of title have been lost
and the certificate(s) and/or other document(s) of title should be
forwarded as soon as possible thereafter. If the share certificate(s)
and/or other document(s) of title are lost, the accepting holder should
request the registrar of The Energy Group (Lloyds Bank Registrars, The
Causeway, Goring-by-Sea, Worthing, West Sussex BN99 6DA) to send him a
letter of indemnity for completion in accordance with the instructions
given. When completed the letter of indemnity must be lodged with the
United Kingdom Receiving Agent or the US Depositary, in accordance with
instructions given, in support of the Form of Acceptance.
(n) Subject to the City Code, TU Acquisitions reserves the right to treat as
valid in whole or in part any acceptance of the Texas Utilities Offer which
is not entirely in order or in the correct form or which is not accompanied
by (as applicable) the relevant transfer to escrow or the relevant share
certificate(s) and/or other document(s) of title or which is received by it
at a place or places other than as set out in this document or the
Acceptance Forms. In that event, the consideration under the Texas
Utilities Offer will be despatched only when the acceptance is entirely in
order and (as applicable) the relevant transfer to escrow or the relevant
share certificate(s) and/or document(s) of title or indemnity satisfactory
to TU Acquisitions has/have been received.
(o) If the Texas Utilities Offer lapses, all documents lodged for acceptance
will be returned within 14 calendar days thereafter at the risk of the
holder of Energy Group Shares concerned.
(p) No acknowledgement of receipt of any Form of Acceptance, share certificates
and/or other documents(s) of title will be given by, or on behalf of TU
Acquisitions. The method of delivery of share certificate(s) and/or other
document(s) of title for Energy Group Shares and all other required
documents is at the option and risk of the accepting holder of Energy Group
Shares. In all cases, sufficient time should be allowed to ensure timely
delivery and in any event to ensure delivery by 10.00 pm (London time),
5.00 pm (New York City time) on [-] 1998.
(q) Any holder of Energy Group Shares who is in any doubt as to the procedure
for acceptance should contact the United Kingdom Receiving Agent by
telephone on 0117 937 0672. Such holder is also reminded that, if he is a
CREST sponsored member, he should contact his CREST Sponsor before taking
any action.
12 FORMS OF ACCEPTANCE
Each holder of Energy Group Shares by whom, or on whose behalf, a Form of
Acceptance is executed and lodged with the United Kingdom Receiving Agent or US
Depositary (subject to the rights of withdrawal set
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<PAGE> 59
forth in this document) undertakes, represents, warrants to and agrees with TU
Acquisitions, Lehman Brothers, Merrill Lynch and the United Kingdom Registrar
and US Depositary (so as to bind such holder and his personal or legal
representatives, heirs, successors and assigns) to the following effect:
(a) that execution of the Form of Acceptance and its delivery to the United
Kingdom Receiving Agent or US Depositary constitutes (i) an acceptance of
the Texas Utilities Offer in respect of the number of Energy Group Shares
inserted or deemed to have been inserted in Box 1 of the Form of
Acceptance; (ii) an election under the Loan Note Alternative in respect of
the number of Energy Group Shares inserted, or deemed to be inserted, in
Box 4 of the Form of Acceptance; (iii) an election under the Share
Alternative in respect of the number of Energy Group Shares inserted, or
deemed to be inserted, in Box 3 of the Form of Acceptance; and (iv) an
undertaking to execute any further documents and give any further
assurances which may be required to enable TU Acquisitions to obtain the
full benefit of paragraph 11 of Part B of Appendix I above and this
paragraph 12 and/or to perfect any of the authorities expressed to be given
hereunder on and subject to the terms and Conditions set out or referred to
in this document and the Form of Acceptance;
(b) that such holder has full power and authority to tender, sell, assign or
transfer the Energy Group Shares in respect of which the Texas Utilities
Offer is accepted or deemed to be accepted (together with all rights
attaching to them) and when the same are transferred to TU Acquisitions
pursuant to the terms of the Texas Utilities Offer, TU Acquisitions will
acquire such Energy Group Shares fully paid and free from all liens,
charges, equities, encumbrances and other interests and together with all
rights now or hereafter attaching hereto, including, without limitation,
the right to receive and retain all dividends, interest and other
distributions, if any, declared, made or paid on or after 2 March 1998;
(c) that the execution of the Form of Acceptance and its delivery to the United
Kingdom Receiving Agent or US Depositary constitutes, subject to the
Conditions being satisfied, fulfilled or, where permitted, waived and to
the holder of Energy Group Shares not having validly withdrawn his
acceptance and as security for its obligations to TU Acquisitions under
paragraph 12(a)(iv) above, the irrevocable appointment of any director of,
or other person nominated by, TU Acquisitions to act on its behalf as such
holder's attorney and agent ("attorney"), and an irrevocable instruction to
the attorney, to complete and execute all or any forms of transfer and/or
such other documents at the attorney's discretion in relation to the Energy
Group Shares referred to in paragraph 12(a) above in favour of TU
Acquisitions or such other persons as TU Acquisitions may direct and to
deliver such forms of transfer and/or other document(s) at the attorney's
discretion together with the share certificate(s) and/or other document(s)
of title relating to such Energy Group Shares for registration within six
months of their purchase and to do all such other acts and things as may in
the opinion of such attorney be necessary or expedient for the purpose of,
or in connection with, the acceptance of the Texas Utilities Offer and to
vest in TU Acquisitions or its nominees the Energy Group Shares to which
such Form of Acceptance relates as aforesaid;
(d) that the execution of the Form of Acceptance and its delivery to the United
Kingdom Receiving Agent or US Depositary constitutes, subject to the
Conditions being satisfied, fulfilled or, where permitted, waived, and to
the accepting holder of Energy Group Shares not having validly withdrawn
his acceptance, an irrevocable authority and request:
(i) to transfer to TU Acquisitions (or to such other person or persons as
TU Acquisitions or its agents may direct) by means of CREST all or
any of the Relevant Energy Group Shares (as defined below) (but not
exceeding the number of Energy Group Shares in respect of which the
Texas Utilities Offer is accepted or deemed to be accepted);
(ii) if the Conditions are not satisfied, fulfilled or, where permitted,
waived, to give instructions to CRESTCo, immediately after the
lapsing of the Texas Utilities Offer (or within such longer period as
the Panel may permit, not exceeding 14 days of the lapsing of the
Texas Utilities Offer), to transfer all Relevant Energy Group Shares
to the original available balance of the accepting holder of Energy
Group Shares. "Relevant Energy Group Shares" means Energy Group
Shares in uncertificated form and in respect of which a transfer or
transfers to escrow has or have been effected pursuant to the
procedures described in paragraphs 11(d) to 11(l) of this Part B of
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<PAGE> 60
Appendix I above and where the transfer(s) to escrow was or were made
in respect of Energy Group Shares held under the same member account
ID and participant ID as the member account ID and participant ID
relating to the Form of Acceptance concerned (but irrespective of
whether or not any Form of Acceptance Reference Number, or a Form of
Acceptance Reference Number corresponding to that appearing on the
Form of Acceptance concerned, was included in the TTE Instruction
concerned);
(iii) to The Energy Group or its agents to procure the registration of the
transfer of the Energy Group Shares in certificated form pursuant to
the Texas Utilities Offer and the delivery of the share
certificate(s) and/or other document(s) of title in respect of them
to TU Acquisitions or as it may direct;
(iv) if the Energy Group Shares concerned are in certificated form, or if
either of the provisos to sub-paragraph (v) of this paragraph 12(d)
apply, to TU Acquisitions or its agents to procure the despatch by
post (or by such other methods as may be approved by the Panel) of a
cheque drawn on a branch of a United Kingdom clearing bank for any
cash to which an accepting Energy Group Shareholder is entitled, at
the risk of such shareholder, to the person or agent whose name and
address outside Canada, Australia and Japan is set out in Box 10 of
the Form of Acceptance, or if no name and address is set out in Box
10, to the first-named holder at his registered address outside
Canada, Australia or Japan as set out in Box 2 (or, if applicable, Box
6) on the Form of Acceptance together with a cheque for any cash
payable to such holder of Energy Group Shares in respect of fractional
entitlements;
(v) if the Energy Group Shares concerned are in uncertificated form, to TU
Acquisitions or its agents to procure the creation of an assured
payment obligation in favour of the holder of Energy Group Shares'
payment bank in accordance with the CREST assured payment arrangements
in respect of the cash consideration to which such shareholder is
entitled, provided that (aa) TU Acquisitions may (if, for any reason,
it wishes to do so) determine that all or any part of any such cash
consideration shall be paid by cheque despatched by post and (bb) if
the Energy Group Shareholder concerned is a CREST member whose
registered address is in Canada, Australia or Japan, any cash
consideration to which such shareholder is entitled shall be paid by
cheque despatched by post, and in either of such cases, sub-paragraph
(iii) of this paragraph 12(d) shall apply;
(vi) to TU Acquisitions or its agent(s) to record and act upon any
instructions with regard to payment or notices which have been
recorded in the records of The Energy Group in respect of such holder
of Energy Group Shares as if such instructions had been given in
respect of his entitlement to Loan Notes (if any); and
(vii) to TU Acquisition or its agent(s) to procure that the name of such
holder of Energy Group Shares is entered on the share register of
Texas Utilities in respect of any New Texas Utilities Shares to which
such holder becomes entitled pursuant to this acceptance of the Texas
Utilities Offer and under the Share Alternative (subject to the
provisions of Texas Utilities's restated articles of incorporation
and bylaws) and is to procure the despatch by post (or by such other
method as may be approved by the Panel) of the document(s) of title
for such New Texas Utilities Shares, at the risk of such holder, to
the person whose name and address is set out in Box 2 (or as the case
may be, Box 6 or Box 10) of the Form of Acceptance provided that this
is outside Canada, Australia or Japan.
(e) that subject to the Texas Utilities Offer becoming or being declared wholly
unconditional (or if the Texas Utilities Offer will become unconditional in
all respects or lapses immediately upon the outcome of the resolution in
question) or if the Panel otherwise gives its consent and pending
registration:
(i) TU Acquisitions or its agents shall be entitled to direct the exercise
of any votes attaching to any Energy Group Securities in respect of
which the Texas Utilities Offer has been accepted or is deemed to have
been accepted and not validly withdrawn and any of the rights and
privileges
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attaching to such Energy Group Securities including the right to
requisition a general meeting of The Energy Group or of any class of
its securities; and
(ii) the execution of the Form of Acceptance and its delivery to the United
Kingdom Receiving Agent or US Depositary shall constitute:
(aa) an authority to The Energy Group or its agents from such holder to
send any notice, circular, warrant, document, or other
communication which may be required to be sent to him or her as a
shareholder of The Energy Group to TU Acquisitions at its
registered office;
(bb) an authority to TU Acquisitions or its agents to sign any consent
to short notice of a general meeting or separate class meeting on
his behalf and/or to execute a form of proxy in respect of such
Energy Group Shares appointing any person nominated by TU
Acquisitions to attend general meetings and separate class meetings
of The Energy Group or its members (or any of them) (or any
adjournment of them) and to exercise the votes attaching to such
Energy Group Shares on his behalf, such votes to be cast so far as
possible to satisfy any outstanding Condition or otherwise as TU
Acquisitions or its agents sees fit; and
(cc) the agreement of such holder not to exercise any of such rights
without the consent of TU Acquisitions and the irrevocable
undertaking of such holder not to appoint a proxy for or to attend
general meetings or separate class meetings;
(f) that such holder will deliver, or procure the delivery to the United
Kingdom Receiving Agent or US Depositary of, his share certificates and/or
other documents of title in respect of the Energy Group Shares in
certificated form referred to in paragraph 12(a) above, or an indemnity
acceptable to TU Acquisitions in lieu thereof, as soon as possible and in
any event within six months of the purchase of such Energy Group Shares;
(g) that such holder will take (or procure to be taken) the action necessary to
transfer all Energy Group Shares in respect of which the Texas Utilities
Offer has been accepted or is deemed to have been accepted held by him in
uncertificated form to an escrow balance as soon as possible and in any
event so that the transfer to escrow settles within two months of the Texas
Utilities Offer becoming unconditional in all respects;
(h) that if, for any reason, any Energy Group Shares in respect of which a
transfer to an escrow balance has been effected are converted to
certificated form, he will immediately deliver or procure the immediate
delivery of, the share certificate(s) and/or other document(s) of title in
respect of all such Energy Group Shares as so converted to The Royal Bank
of Scotland plc at one of its addresses set out at the back of this
document;
(i) that the creation of an assured payment obligation in favour of his payment
bank in accordance with the CREST assured payments arrangements as referred
to in paragraph 12(d)(v) of this Part B of Appendix I above shall, to the
extent of the obligation so created, discharge in full any obligation of TU
Acquisitions and/or Lehman Brothers and Merrill Lynch to pay to him the
cash consideration to which he is entitled pursuant to the Texas Utilities
Offer;
(j) that the terms and Conditions contained in this document shall be deemed to
be incorporated in, and form part of, the Form of Acceptance, which shall
be read and construed accordingly;
(k) that such holder agrees to do all such acts and things as shall be
necessary, and execute any additional documents deemed by TU Acquisitions
to be desirable, to complete the purchase and transfer of the Energy Group
Shares and to vest in TU Acquisitions or its nominees the Energy Group
Shares aforesaid and all such acts and things as may be necessary or
expedient to enable the United Kingdom Receiving Agent to perform its
functions as escrow agent for the purposes of the Texas Utilities Offer;
(l) that unless "Yes" is put in Box 9 on the Form of Acceptance, such holder:
(i) has not received or sent copies of this document or any Acceptance
Forms or any related documents
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in, into or from Canada, Japan or Australia and has not otherwise
utilised in connection with the Texas Utilities Offer, directly or
indirectly, the Canadian, Australian or Japanese mails or any means or
instrumentality (including, without limitation, facsimile
transmission, telex and telephone) of interstate or foreign commerce,
or any facilities of a national securities exchange, of Canada,
Australia or Japan;
(ii) is accepting the Texas Utilities Offer from outside Canada, Japan or
Australia; and
(iii)is not an agent or fiduciary acting on a non-discretionary basis for a
principal, unless such agent or fiduciary is an authorised employee of
such principal or such principal has given any instructions with
respect to the Texas Utilities Offer from outside Canada, Japan or
Australia;
(m) that the execution of the Form of Acceptance constitutes an authority to TU
Acquisitions and its agent in the terms of paragraph 7(a) of this Part B of
Appendix I above;
(n) that such holder agrees and acknowledges that he is not a customer (as
defined in the rules of The Securities and Futures Authority Limited) of
Lehman Brothers, Merrill Lynch, Lazard or Morgan Stanley in connection with
the Texas Utilities Offer;
(o) that such holder agrees to ratify each and every act or thing which may be
done or effected by any Director of, or other person nominated by, TU
Acquisitions or their respective agents, as the case may be, in the
exercise of any of his powers and/or authorities hereunder;
(p) that if any provision of this paragraph 12 shall be unenforceable or
invalid or shall not operate so as to afford TU Acquisitions or the United
Kingdom Receiving Agent or the US Depositary or their respective agents the
benefit of the authority expressed to be given herein, he shall with all
practicable speed do all such acts and things and execute all such
documents that may be required to enable those persons to secure the full
benefits of this section;
(q) that the execution of the Form of Acceptance constitutes the submission of
such holder, in relation to all matters arising out of the Texas Utilities
Offer and the Form of Acceptance, to the jurisdiction of the Courts of
England;
(r) that on execution of a Form of Acceptance, it shall take effect as a Deed;
and
(s) that, if such holder elects for the Loan Note Alternative (in whole or in
part), he is not a citizen or resident of the United States, nor acting on
behalf of such person.
DELIVERY OF THE FORM OF ACCEPTANCE AND CERTIFICATES REPRESENTING ENERGY GROUP
SHARES AND/OR OTHER DOCUMENTS OF TITLE TO THE US DEPOSITARY WILL CONSTITUTE
DELIVERY OF THEM TO THE UNITED KINGDOM RECEIVING AGENT FOR THE PURPOSES OF
PARAGRAPH 11 OF THIS PART B OF APPENDIX I ABOVE AND THIS PARAGRAPH.
13 CERTAIN PROVISION CONCERNING ACCEPTANCES
(a) Without prejudice to the right reserved by TU Acquisitions to treat
Acceptance Forms as valid even though not entirely in order or not
accompanied by, where Energy Group Shares are in certificated form, the
relevant share certificates and/or other documents of title, or not
accompanied by the relevant transfer to escrow, except as otherwise agreed
by the Panel:
(i) an acceptance of the Texas Utilities Offer will only be counted towards
fulfilling the Acceptance Condition if the requirements of Note 4 and,
if applicable, Note 6 to Rule 10 of the City Code are satisfied in
respect of such acceptance. For additional information on Note 4 and
Note 6 to Rule 10 of the City Code, see paragraph 13(b) below;
(ii) a purchase of Energy Group Securities by TU Acquisitions or its
nominee(s) (or a person acting in concert with TU Acquisitions or its
nominee(s)), will only be counted towards fulfilling the Acceptance
Condition if the requirements of Note 5 and, if applicable, Note 6 to
Rule 10 of the City Code are satisfied in respect of such purchase.
For additional information on Note 5 and Note 6 to Rule 10 of the City
Code, see paragraph 13(b) below; and
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(iii)the Acceptance Condition will not be declared satisfied until the
United Kingdom Receiving Agent has issued a certificate to TU
Acquisitions (or its agent) which states the number of Energy Group
Securities in respect of which acceptances have been received which
comply with paragraph 13(a)(i) above and the number of Energy Group
Securities otherwise acquired, whether before or during the Initial
Offer Period, which comply with paragraph 13(a)(ii) above.
(b) Notes 4 to 6 to Rule 10 of the City Code contain detailed provisions for
verifying which acceptances and purchases may be counted towards fulfilling
the Acceptance Condition or in determining whether the Acceptance Condition
has been fulfilled and are principally concerned to ensure that the
acceptor is the registered owner of the securities which he is tendering.
The principal requirements of Notes 4 to 6 to Rule 10 are that any
Acceptance Form must be completed to a suitable standard (i.e., it must
constitute a transfer or a valid and irrevocable appointment of TU
Acquisitions of some person on its behalf or as agent or attorney for the
purpose of executing a transfer) and it must be accompanied by, where
Energy Group Shares are in certificated form, the appropriate share
certificate(s) or other document(s) of title and, in all cases, any
relevant supporting documentation (such as powers of attorney). Immediately
prior to the satisfaction of the Acceptance Condition the United Kingdom
Receiving Agent will issue a certificate to TU Acquisitions stating the
number of Energy Group Securities tendered and not validly withdrawn
pursuant to the Texas Utilities Offer and the number of Energy Group
Securities otherwise acquired, on or before the Initial Closing Date as the
case may be, in compliance with the provision referred to in paragraph
13(a) above. Copies of such certificates will be sent to the Panel as soon
as possible after they are issued.
(c) Subject to the City Code, TU Acquisitions reserves the right to treat as
valid in whole or in part any acceptance of the Texas Utilities Offer which
is not entirely in order or which is not accompanied by the (as applicable)
relevant transfer to escrow or the relevant share certificate(s) and/or
other document(s) of title or which is received by it at a place or places
other than set out in this document or the Acceptance Form. In that event,
the consideration under the Texas Utilities Offer will be despatched only
after the relevant transfer to escrow has settled or (as applicable) the
relevant share certificate(s) and/or document(s) of title or indemnities
satisfactory to TU Acquisitions have been received.
14 SUBSTITUTE ACCEPTANCE FORMS
The holders of Energy Group Securities have been sent with this document either
a Letter of Transmittal (accompanied by a Notice of Guaranteed Delivery) and/or
a Form of Acceptance. All holders of Energy Group ADSs have been sent a Letter
of Transmittal and a Notice of Guaranteed Delivery, which they must use to
tender their Energy Group ADSs and accept the Texas Utilities Offer. All holders
of Energy Group Shares, including persons in the US who hold Energy Group
Shares, have been sent a Form of Acceptance, which they must use to tender their
Energy Group Shares and accept the Texas Utilities Offer. Should any holder of
Energy Group Securities receive an incorrect form with which to accept the Texas
Utilities Offer or require any additional forms, that person should contact the
United Kingdom Receiving Agent or the US Depositary at the addresses set out at
the end of this document, who will provide the appropriate forms.
15 SETTLEMENT
Subject to the satisfaction, fulfilment or, where permitted, the waiver of all
Conditions (except as provided in paragraph 9 of this Part B of Appendix I in
the case of certain overseas holders of Energy Group Securities), settlement of
the consideration to which any holder of Energy Group Securities is entitled
under the Texas Utilities Offer will be effected (i) in the case of acceptances
received, complete in all respects, by the Initial Closing Date, within 14 days
of such date, or (ii) in the case of acceptances of the Texas Utilities Offer
received, complete in all respects, after such date, but while the Texas
Utilities Offer remains open for acceptance, within 14 days of such receipt, in
the following manner:
(a) ENERGY GROUP SHARES IN UNCERTIFICATED FORM (THAT IS, IN CREST)
Where an acceptance relates to Energy Group Shares in uncertificated form,
the cash consideration to which the accepting holder of Energy Group Shares
is entitled will be paid by means of CREST by
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TU Acquisitions procuring the creation of an assured payment obligation in
favour of such accepting holder's payment bank in respect of the cash
consideration due, in accordance with the CREST assured payment
arrangements. Loan Notes or receipts or definitive certificates for New
Texas Utilities Shares will be despatched by first class post (or by such
other method as may be approved by the Panel). TU Acquisitions reserves the
right to settle all or any part of the consideration referred to in this
paragraph, for all or any accepting holders of Energy Group Securities, in
the manner referred to in paragraph 14(b) below, if, for any reason, it
wishes to do so.
(b) ENERGY GROUP SECURITIES IN CERTIFICATED FORM
Where an acceptance relates to Energy Group Securities in certificated
form, cheques for cash due or Loan Notes or receipts or definitive
certificates for New Texas Utilities Shares will be despatched by first
class post (or by such other method as may be approved by the Panel).
16 CURRENCY OF CASH CONSIDERATION
Instead of receiving cash consideration in pounds sterling, holders of Energy
Group Shares who so wish may receive US dollars on the following basis: the cash
amount payable in pounds sterling to which such holder would otherwise be
entitled pursuant to the terms of the Texas Utilities Offer will be converted,
without charge, from pounds sterling to US dollars at the exchange rate
obtainable by the relevant payment agent (either the United Kingdom Receiving
Agent or the US Depositary) on the spot market in London at approximately noon
(London time) on the date the cash consideration is made available by TU
Acquisitions to the relevant payment agent for delivery in respect of the
relevant Energy Group Shares. A holder of Energy Group Shares may receive such
amount on the basis set out above only in respect of the whole of his holding of
Energy Group Shares in respect of which he accepts the Texas Utilities Offer.
Holders of Energy Group Securities may not elect to receive both pounds sterling
and US dollars. Unless they elect to receive pounds sterling, holders of Energy
Group ADSs will receive consideration converted into US dollars as described
above, as if such holders of Energy Group ADSs had elected to receive dollars.
Consideration in US dollars may be inappropriate for holders of Energy Group
Shares other than persons in the US and holders of Energy Group ADSs.
THE ACTUAL AMOUNT OF US DOLLARS RECEIVED WILL DEPEND UPON THE EXCHANGE RATE
PREVAILING ON THE BUSINESS DAY ON WHICH FUNDS ARE MADE AVAILABLE TO THE RELEVANT
PAYMENT AGENT BY TU ACQUISITIONS. HOLDERS OF ENERGY GROUP SECURITIES SHOULD BE
AWARE THAT THE US DOLLAR/POUNDS STERLING EXCHANGE RATE WHICH IS PREVAILING AT
THE DATE ON WHICH AN ELECTION IS MADE TO RECEIVE DOLLARS AND ON THE DATES OF
DESPATCH AND RECEIPT OF PAYMENT MAY BE DIFFERENT FROM THAT PREVAILING ON THE
BUSINESS DAY ON WHICH FUNDS ARE MADE AVAILABLE TO THE RELEVANT PAYMENT AGENT BY
TU ACQUISITIONS. IN ALL CASES, FLUCTUATIONS IN THE US DOLLAR/POUNDS STERLING
EXCHANGE RATE ARE AT THE RISK OF ACCEPTING HOLDERS OF ENERGY GROUP SECURITIES
WHO ELECT OR ARE TREATED AS HAVING ELECTED TO RECEIVE THEIR CONSIDERATION IN US
DOLLARS. NEITHER TU ACQUISITIONS NOR ANY OF ITS ADVISERS OR AGENTS SHALL HAVE
RESPONSIBILITY WITH RESPECT TO THE ACTUAL AMOUNT OF CASH CONSIDERATION PAYABLE
OTHER THAN IN POUNDS STERLING.
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APPENDIX II
DESCRIPTION OF TEXAS UTILITIES CAPITAL STOCK; COMPARISON OF SHAREHOLDER RIGHTS
1 DESCRIPTION OF TEXAS UTILITIES CAPITAL STOCK
The authorized capital stock of Texas Utilities consists of Common Stock,
without par value, of which 245,237,559 shares were outstanding at 31 December
1997 and serial preference stock, par value $25 per share, of which none is
outstanding. The following statements with respect to such capital stock of
Texas Utilities are a summary of certain rights and privileges attaching to the
stock under the laws of the State of Texas and the Restated Articles of
Incorporation of Texas Utilities ("Texas Utilities Articles") and Bylaws, as
amended, of ("Texas Utilities Bylaws"). This summary does not purport to be
complete and is qualified in its entirety by reference to such laws, the Texas
Utilities Articles and Texas Utilities Bylaws for complete statements.
Each holder of Texas Utilities Common Stock is entitled to one vote for
each share of Texas Utilities Common Stock held on all questions submitted to
shareholders and to cumulative voting at all elections of directors. The Texas
Utilities Common Stock has no preemptive or conversion rights. Upon issuance and
delivery, the New Texas Utilities Shares, will be fully paid and nonassessable.
The holders of the preference stock are not accorded voting rights, except
that, when dividends thereon are in default in an amount equivalent to four full
quarterly dividends, the holders of the preference stock are entitled to vote
for the election of one-third of the Board of Directors or two Directors,
whichever is greater, and, when dividends are in default in an amount equivalent
to eight full quarterly dividends, for the election of the smallest number of
Directors necessary so that a majority of the full Texas Utilities Board shall
have been elected by the holders of the preference stock. Texas Utilities must
also secure the approval of the holders of two-thirds of the outstanding shares
of preference stock prior to effecting various changes in its capital structure.
After the payment of full preferential dividends on the preference stock,
holders of Texas Utilities Common Stock are entitled to dividends when and as
declared by the Texas Utilities Board of Directors. After payment to the holders
of preference stock of the preferential amounts to which they are entitled, the
remaining assets to be distributed, if any, upon any dissolution or liquidation
of Texas Utilities shall be distributed to the holders of the Texas Utilities
Common Stock. Each share of Texas Utilities Common Stock is equal to every other
share of Texas Utilities Common Stock with respect to dividends and also with
respect to distributions upon any dissolution or liquidation.
The Texas Utilities Common Stock is listed on the NYSE, CSE and PSE.
The transfer agent and registrar for the Texas Common Stock is Texas
Utilities Shareholder Services, Dallas, Texas.
2 COMPARISON OF SHAREHOLDER RIGHTS
There are a number of differences between the rights attaching to shares of
Texas Utilities Common Stock, as detailed above, and those attaching to Energy
Group Shares. Certain rights attaching to Energy Group Shares, where those
differences exist, are identified below. Such differences may arise from the
differences between legislation and regulations governing The Energy Group and
those governing Texas Utilities as well as between the constitutional documents
of the two companies. The following is not a complete description of the
differences between the rights associated with Energy Group Shares as compared
to New Texas Utilities Shares. Further, it does not address the differing rights
of holders of Texas Utilities preference stock.
For a complete understanding of such differences, holders of Energy Group
Securities are referred to the laws and applicable regulations of England, the
United States and the State of Texas, the rules of the London Stock Exchange,
the NYSE, the CSE, the PSE and the constitutional documents of both The Energy
Group and Texas Utilities.
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General
The Energy Group is incorporated in England and operates in accordance with
the Companies Act. Rules and regulations governing trading of Energy Group
Shares differ from those relating to shares of Texas Utilities Common Stock.
Dividends
Pursuant to The Energy Group's articles of association, and subject to the
restrictions of English law, dividends may be declared by the Board of The
Energy Group, or by The Energy Group, on the recommendation of the Board, by
ordinary resolution in an amount not to exceed that recommended by the Board.
Meetings
The holders of not less than one tenth of the paid up voting capital of The
Energy Group have the right to requisition general meetings of shareholders.
Transfers
The Energy Group articles of association allow The Energy Group Board, in
its absolute discretion, and without giving any reason for so doing, to refuse
to register certain transfers of shares, being shares which are not fully paid
up, or being shares, whether fully paid up or not, which are in favour of more
than four joint transferees.
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APPENDIX III
SUMMARY OF THE TERMS OF THE LOAN NOTES
The unsecured floating rate loan notes 1998/2004 of TU Acquisitions will be
created by a resolution of the Board of TU Acquisitions (or a duly authorised
committee of TU Acquisitions) and will be constituted by a loan note instrument
(the "Loan Note Instrument") executed as a deed by TU Acquisitions. The Loan
Notes will not be guaranteed. The issue of the Loan Notes will be conditional on
the Texas Utilities Offer becoming or being declared unconditional in all
respects. Loan Notes will only be issued if the aggregate valid elections for
the Loan Note Alternative received on or before the date on which the Texas
Utilities Offer becomes or is declared unconditional in all respects will result
in TU Acquisitions issuing in excess of L1 million nominal value of Loan Notes.
The Loan Note Alternative is not (subject to certain exceptions) available to
persons with registered addresses in the United States, Canada, Japan or
Australia or to or for the account or benefit of any US Person. The Loan Note
Instrument will contain provisions, among others, to the effect set out below.
1 FORM AND STATUS
The Loan Notes will be issued by TU Acquisitions in registered form in amounts
and integral multiples of L1 and will constitute unsecured obligations of TU
Acquisitions ranking pari passu with its other unsecured obligations apart from
those preferred by law. Fractional entitlements will be disregarded. The Loan
Note Instrument will not contain any restrictions on borrowing, disposals or
charging of assets by TU Acquisitions or any member of the Texas Utilities
Group.
2 INTEREST
a) Interest on the Loan Notes will accrue from day to day and will be calculated
on the basis of a 365-day year (or in the case of a leap year, a 366-day
year) and will be payable (subject to any requirement to deduct income tax
therefrom) twice yearly in arrears on 30 June and 31 December or, if any such
day is not a business day, on the immediately preceding business day
("interest payment dates") in each year in respect of the interest periods
(as defined below) ending on those dates at a rate calculated as provided in
sub-paragraph 2(b) below or, if no rate can be established in accordance with
sub-paragraph 2(b) below, as provided in sub-paragraph 2(c) below, except
that the first payment of interest on any Loan Note, which will be made on 31
December 1998, will be in respect of the period from the date of issue of
such Loan Note to 31 December 1998 (both dates inclusive). The period from
the date of issue of such Loan Notes to 31 December 1998 and the period from
the day following 31 December 1998, or any subsequent interest payment date,
to the next following interest payment date (inclusive of the next following
interest payment date) is herein called an "interest period".
b) The rate of interest on the Loan Notes for each interest period will be that
calculated by TU Acquisitions to be 0.5 per cent. below the rate per annum of
the offer quotation for six months' deposits in sterling for an interest
period which appears on Telerate Page 3750 at or about 12.00 noon (showing
the rate as at or about 11.00 am) on the first day of the relevant interest
period, except that in the case of the first interest period (being from the
date of the issue of each Loan Note to 31 December 1998) such calculation
will be made on the day on which any of the Loan Notes are first issued or,
if any such day is not a business day, on the next succeeding business day
(the "Calculation Day"). If no such offer quotation as at or about 11.00 am
appears on Telerate Page 3750 on or before 3.00 pm on the Calculation Day,
the rate of interest for each interest period shall be the arithmetic mean
(rounded upward to the nearest five decimal places) of the offer quotations
for sterling deposits for a period equal, or as nearly equal as possible, to
an interest period which appear on the Reuters Screen LIBP Page at or about
11.00 am on the Calculation Day. Any calculation of the rate of interest and
of each such interest amount shall, in the absence of manifest error, be
final and binding.
c) If a rate of interest cannot be established in accordance with the provisions
in sub-paragraph 2(b) above for any interest period, then the rate of
interest on the Loan Notes for such interest period shall be calculated by
reference to a rate 0.5 per cent. below such rate as TU Acquisitions shall
determine on the
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basis of quotations made by reference to a London clearing bank or a group of
London clearing banks as selected by TU Acquisitions or (failing which) to
rates offered in any other sterling inter-bank market or markets as TU
Acquisitions may select and if a rate of interest cannot be established in
accordance with the above provisions of this sub-paragraph for any interest
period then the applicable rate of interest shall be the same as that
applicable to the Loan Notes during the previous interest period.
3 REDEMPTION OF LOAN NOTES
a) A holder of Loan Notes ("Noteholder") shall be entitled to require TU
Acquisitions to redeem the whole (whatever the amount) or any part of his
holding of Loan Notes at par, together with accrued interest (subject to any
requirement to deduct income tax therefrom) to (and including) the date of
payment, on 31 December 1998, and on any interest payment date falling
thereafter by giving notice in writing to TU Acquisitions (in the form
endorsed on the Loan Note certificate) not less than 30 days prior to such
interest payment date accompanied by the certificate(s) for all the Loan
Notes to be redeemed, provided that no such notice may be given in respect of
any Loan Notes in respect of which notice of redemption has previously been
given by TU Acquisitions in accordance with sub-paragraph 3(b) below.
b) If, at any time, the nominal amount of all Loan Notes outstanding is 20 per
cent. or less of the total nominal amount of Loan Notes issued, TU
Acquisitions shall have the right on giving to the remaining Noteholders not
less than 30 days' notice in writing, such notice not to take effect prior to
31 December 1998, to redeem, on the expiry of such notice, all (but not some
only) of the outstanding Loan Notes by payment of the nominal amount thereof
together with accrued interest (subject to any requirement to deduct income
tax therefrom) to (and including) the date of redemption.
c) Any Loan Notes not previously so redeemed or purchased will be repaid in full
at par on 31 December 2004.
4 PURCHASE OF LOAN NOTES
TU Acquisitions will be entitled at any time after 31 December 1998 to purchase
Loan Notes at any price by tender, private treaty or otherwise by agreement with
the relevant Noteholder(s).
5 CANCELLATION
Any Loan Notes redeemed under paragraph 3 above or purchased under paragraph 4
above shall be cancelled and shall not be available for re-issue.
6 MODIFICATIONS
The provisions of the Loan Note Instrument and the rights of the Noteholders
will be subject to modification, abrogation or compromise in any respect with
the sanction of an Extraordinary Resolution of the Noteholders, as defined in
the Loan Note Instrument, subject to the consent of TU Acquisitions. TU
Acquisitions may amend the provisions of the Loan Note Instrument without such
sanction or consent if, in the reasonable opinion of the financial adviser to TU
Acquisitions, such amendment would not be materially prejudicial to the
interests of Noteholders or is of a formal, minor or technical nature or
corrects a manifest error.
7 REGISTRATION AND TRANSFER
The Loan Notes will be registered in amounts and multiples of L1. The Loan Notes
will be transferable in amounts or integral multiples of L1.
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8 RESTRICTIONS ON OWNERSHIP AND TRANSFER
Notwithstanding the foregoing, prior to the date occurring 180 days after the
last date of issue of any Loan Notes pursuant to the Texas Utilities Offer or,
where applicable, pursuant to the provisions of sections 428 to 430F of the
Companies Act:
a) no transfer of Loan Notes will be registered until each transferee has
delivered to TU Acquisitions a certificate in the prescribed form to the
effect that such transferee is not a US Person and is not acquiring, and will
not be holding, such Loan Notes for the account or benefit of a US Person or
with a view to the offer, sale or delivery, directly or indirectly, of such
Loan Notes in the United States, Canada, Australia or Japan, or to or for the
account or benefit of any US Person or any other person whom such transferee
has reason to believe is purchasing for the purpose of such offer, sale or
delivery;
b) payments of interest or principal in respect of the Loan Notes will not be
made to addresses in the United States, Canada, Australia or Japan;
c) documents of title in respect of the Loan Notes will not be sent to addresses
in the United States, Canada, Australia or Japan; and
d) registered addresses of holders of Loan Notes must be outside the United
States, Canada, Australia or Japan.
9 PRESCRIPTION
Noteholders will cease to be entitled to amounts in respect of interest which
remain unclaimed for a period of 12 years, and to amounts due in respect of
principal which remain unclaimed for a period of 12 years, in each case from the
date on which the relevant payment first becomes due, and such amounts shall
revert to TU Acquisitions.
10 FURTHER LOAN NOTES
Provision will be made in the Loan Note Instrument to enable TU Acquisitions to
make further issues of the Loan Notes so as to form a single series with the
Loan Notes issued pursuant to the Texas Utilities Offer or to carry such rights
as to interest, redemption and otherwise as TU Acquisitions may think fit.
Each Noteholder will have the right to acquire by subscription at par additional
loan notes, to be issued by a subsidiary of TU Acquisitions (the "Additional
Notes"), having a nominal value of an amount up to or equal to such Noteholder's
holding of Notes, on terms and conditions substantially the same as those
applicable to the Loan Notes, except as follows:
a) the rate of interest will be 1.5 per cent. below the rate per annum described
in paragraph 2(b) above; and
b) the Additional Notes will not carry any right to acquire any additional
securities.
The right to subscribe for Additional Notes will be exercisable on and after 31
December 2003.
11 NO LISTING
No application has been made or is intended to be made to for the Loan Notes to
be listed or dealt in on any stock exchange.
12 EVENTS OF DEFAULT
Each Noteholder shall be entitled to require all or any part of the Loan Notes
held by him to be repaid at par together with accrued interest (subject to any
requirement to deduct any income tax therefrom) whilst any of the following is
continuing:
a) any principal or interest on any of the Loan Notes held by that Noteholder
shall fail to be paid in full within 30 days after the due date for payment
thereof; or
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b) an order is made or an effective resolution is passed for the winding-up or
dissolution (or any equivalent procedure in any other jurisdiction) of TU
Acquisitions (other than for the purposes of an amalgamation or
reconstruction or a members' voluntary winding-up upon terms previously
approved by Extraordinary Resolution); or
c) an encumbrancer takes possession or a trustee, receiver or an administrator,
administrative receiver or similar officer is appointed of all or
substantially all of the undertaking of TU Acquisitions and such person has
not been paid out or discharged within 30 days.
13 SUBSTITUTION
The Loan Notes will contain provisions entitling TU Acquisitions, without the
consent of Noteholders, to substitute any of its subsidiaries or any holding
company or subsidiaries of such holding company resident in the United Kingdom
for tax purposes (other than Eastern or any of its subsidiaries) as the
principal debtor under the Loan Notes or to require all or any of the
Noteholders to exchange their Loan Notes for loan notes issued on the same terms
mutatis mutandis by any such company provided that (a) TU Acquisitions
guarantees such company's obligations thereunder; and (b) following such
substitution or exchange, the Loan Notes or (as the case may be) such loan notes
shall not contain a provision equivalent to this paragraph 13. References to TU
Acquisitions in this summary shall be construed accordingly. TU Acquisitions'
right to require substitution of such company as principal debtor (but not the
right to require exchange of the Loan Notes) will be exercisable only if prior
clearance has been obtained from the Inland Revenue to the effect that the
substitution will not be treated as a disposal of the Loan Notes for the
purposes of United Kingdom taxation of chargeable gains and TU Acquisitions'
right to require such an exchange will be exercisable only if the exchange will
fall within section 135 of the Taxation of Chargeable Gains Act 1992, and to the
extent relevant, clearance has been received from the Inland Revenue under
section 138 of that Act in respect of the exchange.
14 GOVERNING LAW
The Loan Notes and the Loan Note Instrument will be governed by and construed in
accordance with English Law.
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APPENDIX IV
FINANCIAL AND OTHER INFORMATION ON THE ENERGY GROUP
1 RESULTS FOR THE NINE MONTHS ENDED 31 DECEMBER 1997.
The text on pages IV-1 to IV-3 is a reproduction of the announcement made by The
Energy Group on 3 February 1998:
"THE ENERGY GROUP -- THIRD QUARTER RESULTS
FINANCIAL HIGHLIGHTS
- - TURNOVER AT L3.4 BILLION UP 10%
- - OPERATING PROFIT UP 15%
The Energy Group PLC today announces its results for the period 1 October 1997
to 31 December 1997. The results for the quarter have been compared to the pro
forma operating results for the equivalent period in 1996 of certain of the
businesses which were previously reported as part of Hanson plc.
FINANCIAL RESULTS
Group turnover for the nine months to 31 December 1997 was L3,390 million, an
increase of 10 per cent. on the same period last year (pro forma 1996: L3,084
million). Operating profit for the nine month period was L379 million up 15 per
cent. (pro forma 1996: L330 million), before exceptional costs associated with
the Pacificorp bid and restructuring charges. Pre-exceptional earnings per share
for this period were 40.0p.
TRADING
COAL
Third quarter turnover declined slightly to L323 million (pro forma 1996: L325
million) mainly due to adverse exchange rate movements. Operating profit rose 8
per cent. to L27 million (pro forma 1996: L25 million). Peabody sold 40 million
tons (1996: 41 million tons) of steam and metallurgical coal during the quarter
and its steam coal products continue to fuel approximately 9 per cent. of all
electricity produced by US electricity companies.
POWER
Third quarter turnover was up 17 per cent. to L1,005 million (pro forma: L860
million) and operating profit rose 88 per cent. to L107 million (pro forma 1996:
L57 million). This substantial improvement reflects an excellent performance
from our trading activities including Citizens Power and the UK coal-fired power
stations. The new gas-fired power station at King's Lynn was fully commissioned
in December and Eastern's gas and electricity retail business has also shown an
upturn, reflecting improved margins.
NETWORKS
Third quarter turnover rose 9 per cent. to L139 million (pro forma: L127
million) with operating profit increasing 18 per cent. to L66 million (pro forma
1996: L56 million). These improved results are mainly due to property disposal
and other one-off profits. The underlying networks business was broadly flat,
reflecting continuing regulatory price reductions, offset by cost reductions.
Derek Bonham, Chairman, said: "These results demonstrate the strengths of The
Energy Group's businesses. The increases in profit in our three sectors are very
encouraging. With our mix of generating capacity this was always going to be a
good quarter for us.
Today we have announced the terms of a recommended renewed offer by Pacificorp
for The Energy Group. Together we can create a group with the scale and scope of
operations to compete more effectively in international energy markets. Detailed
terms of the offer will be mailed to our shareholders shortly."
IV-1
<PAGE> 72
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.
IV-2
<PAGE> 73
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."
IV-3
<PAGE> 74
2 THE FOLLOWING DOCUMENTS FILED BY THE ENERGY GROUP WITH THE SEC ARE SET FORTH
HEREIN:
a. Transition Report on Form 20-F of TEG for the period ended March 31, 1997,
as filed with the SEC in September 1997;
b. Form 6-K of The Energy Group for the month of August 1997;
c. Form 6-K of The Energy Group for the month of September 1997;
d. Form 6-K of The Energy Group for the month of October 1997;
e. Form 6-K of The Energy Group for the month of November 1997; and
f. Form 6-K of The Energy Group for the month of December 1997.
IV-4
<PAGE> 75
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 20-F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED _________________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1996 TO MARCH 31, 1997
COMMISSION FILE NUMBER 1-14576
---------------------
THE ENERGY GROUP PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------------
ENGLAND AND WALES
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
117 PICCADILLY
LONDON W1V 9FJ, ENGLAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
---------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------- ---------------------
<S> <C>
Ordinary Shares of 10p each New York Stock Exchange*
</TABLE>
- ---------------
* Listed, not for trading, but only in connection with the registration of
American Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
---------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT:
None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of
March 31, 1997, the close of the period covered by the transition report:
Ordinary Shares of 10p each ........................ 520,857,817
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has
elected to follow: [ ] Item 17 [X] Item 18
================================================================================
<PAGE> 76
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I
Item 1. Description of Business..................................... 1
Item 2. Description of Property..................................... 28
Item 3. Legal Proceedings........................................... 29
Item 4. Control of Registrant....................................... 29
Item 5. Nature of Trading Market.................................... 29
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders................................................... 30
Item 7. Taxation.................................................... 30
Item 8. Selected Financial Data..................................... 34
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 37
Item 10. Directors and Officers of Registrant........................ 46
Item 11. Compensation of Directors and Officers...................... 48
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries.............................................. 49
Item 13. Interest of Management in Certain Transactions.............. 50
PART II
Item 14. Description of Securities to be Registered*.................
PART III
Item 15. Defaults Upon Senior Securities............................. 51
Item 16. Changes in Securities and Changes in Security for Registered
Securities................................................ 51
PART IV
Item 17. Financial Statements**...................................... 51
Item 18. Financial Statements........................................ 51
Item 19. Financial Statements and Exhibits........................... 51
DEFINITIONS AND GLOSSARY........................................................ 52
SIGNATURE....................................................................... 59
</TABLE>
- ---------------
* Not applicable.
** The registrant has responded to Item 18 in lieu of responding to this Item.
<PAGE> 77
As used in this Transition Report, "Energy" refers to The Energy Group
PLC and the "Group" refers collectively to Energy and its consolidated
subsidiaries, except as the context otherwise requires. Capitalized terms used
in this Transition Report are defined in "Definitions and Glossary" commencing
on page 50.
The consolidated (combined) financial statements ("Financial
Statements") of the Group appearing in this Transition Report are presented in
pounds sterling and are prepared in accordance with accounting principles
generally accepted in the UK ("UK GAAP"). UK GAAP differ in certain respects
from accounting principles generally accepted in the US ("US GAAP"). The
significant differences between UK GAAP and US GAAP relevant to the Group are
explained in Note 30 of Notes to the Financial Statements.
Merely for the convenience of the reader, this Transition Report
contains translations of certain amounts in pounds sterling ("L") or pence
("p")(1p is equivalent to 1/100 of L1) into US dollars ("US dollars" or "$") or
cents ("c"). The translations of pounds sterling and pence to US dollars or
cents appearing in this Transition Report have been made at the noon buying rate
in New York City for cable transfers in foreign currencies as announced for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate") on March 31, 1997 of $1.6448 = L1.00. On September 22, 1997, the Noon
Buying Rate was $1.6025 = L1.00. For additional information on exchange rates
between the pound sterling and the US dollar, see "Exchange Rates" in Item 8 of
this Transition Report.
All statements, other than statements of historical fact, included in
this Transition Report including, without limitation, the statements under
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are, or may be deemed to be,
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Important factors that could cause actual results to
differ materially from those discussed in such forward-looking statements
("Cautionary Statements") include: with respect to Peabody's coal operations,
trends in coal prices, coal consumption patterns in the US, Australia and the
Asian Pacific Rim countries, competition from other coal producers and
alternative energy sources, renegotiation and replacement of Peabody's coal
supply contracts, the impact of changes in environmental and other governmental
regulations, and industrial relations and uncertain mining conditions; with
respect to the Group's power operations, regulation of power station emissions,
increasing competition in the electricity supply business in the UK once the
electricity supply industry is progressively opened to competition commencing
from April 1, 1998 and fluctuations in the purchase prices of electricity from
the electricity trading market in England and Wales (the "Pool") and the
continuing availability of counterparties for CfDs, and with respect to
Eastern's networks operations, price regulation of electricity distribution and
environmental and other regulatory changes. All subsequent written and oral
forward-looking statements attributable to the Group or persons acting on behalf
of the Group are expressly qualified in their entirety by such Cautionary
Statements.
ITEM 1. DESCRIPTION OF BUSINESS
Energy, a public limited company incorporated in England and Wales, owns
and operates a diversified international energy group which includes Peabody,
the world's largest private producer of coal, and Eastern, one of the largest
integrated electricity and gas groups in the UK. The registered office of Energy
is located at 117 Piccadilly, London W1V 9FJ, and its telephone number is (44)
171 647 3200.
Energy's strategy is to establish itself as a leading integrated
international energy business in the United States, the United Kingdom,
Australia and elsewhere through building a presence across the value chain in
these markets and by exploiting the potential created by the continuing
privatization of electricity generation, networks and sales in world markets.
COAL
Through Peabody, the largest producer of coal in the US, Energy
operated, as of March 31, 1997, 26 underground and surface mines in the US and
three surface mines in Australia:
- As of March 31, 1997, Peabody owned a controlled 9.5 billion tons
of proven and probable coal reserves which is the largest coal
reserve base of any active private mining company in the US;
- In the six months ended March 31, 1997, Peabody sold 81.4 million
tons of coal representing an estimated 14.4% of the US market; and
- Peabody Australia, one of the ten largest coal producers in
Australia, has interests in four surface mines in New South Wales,
three of which are currently in operation. Peabody's equity share
of
<PAGE> 78
the coal sales of these mines amounted to 3.5 million tons in the six
months ended March 31, 1997 and its equity share of the proven and
probable reserves associated with these mines as of March 31, 1997
amounted to 466 million tons.
POWER AND NETWORKS
Through Eastern, Energy is one of the leading integrated electricity and
gas groups in the UK:
- Eastern Generation, the fourth largest generator of electricity in
Great Britain, currently owns, operates or has an interest in
eight power stations, representing approximately 10% of the total
registered generating capacity of 71,850 MW as of March 31, 1997;
- Eastern Power & Energy Trading manages for the Group 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's generation output into the Pool. Eastern Power &
Energy Trading also has small equity interests in three natural
gas producing fields in the North Sea;
- Eastern Natural Gas is one of the largest suppliers of natural gas
in the UK after Centrica plc (formerly part of British Gas); and
- Eastern Electricity 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.
Energy also owns Citizens Power LLC (formerly Citizens Lehman Power
L.L.C.) ("Citizens"), one of the leading US power marketing firms which was
acquired by the Group in May 1997. Its headquarters are in Boston and it has
field offices in Milwaukee, Denver and Toronto.
Energy has been an independent, publicly owned company since February
24, 1997 when, through Energy, Hanson effected the demerger (i.e., spin-off) of
its energy businesses (the "Demerger"). Pursuant to the Demerger, on February
24, 1997, Hanson transferred Rollalong, a wholly-owned direct subsidiary of
Hanson which owned Eastern, Consolidated Gold Fields (which indirectly owned Lee
Ranch) and the companies which owned Peabody Australia, to Energy in
consideration for Energy issuing Ordinary Shares representing all of its then
outstanding share capital (other than subscriber shares) to holders of Hanson
Shares (including Hanson Shares represented by Hanson ADSs) on a pro rata basis
of one Ordinary Share for every ten Hanson Shares and one ADS for every eight
Hanson ADSs. On March 7, 1997, PUSH, a wholly-owned indirect subsidiary of
Hanson, transferred to Peabody Investments (which was and continues to be
approximately a 99.4% subsidiary of Energy, with subsidiaries of Hanson owning
the remaining 0.6% interest), the entire issued share capital of Peabody in
consideration for $1,637.5 million.
OFFER BY PACIFICORP ACQUISITIONS
On June 13, 1997, Energy announced the terms of a recommended cash offer
(the "Offer") for Energy made on behalf of PacifiCorp Acquisitions, a
wholly-owned subsidiary of PacifiCorp. PacifiCorp is a diversified energy group
based in Portland, Oregon, serving retail electricity customers in Oregon,
Washington, California, Montana, Idaho, Utah and Wyoming. The terms of the
Offer, which was unanimously approved by Energy's Board of Directors, were 690p
per Ordinary Share and L27.60 per ADS, together with the right to retain the
dividend of 5.5p (net) per Ordinary Share paid on July 4, 1997 to those
shareholders on the register of members on June 27, 1997. The Offer valued the
equity of Energy at approximately L3,659 million (assuming the exercise in full
of all outstanding options and the vesting of all outstanding awards under
Energy's employee share schemes). Including the dividend referred to above, the
Offer represented a premium of approximately 31% to the closing price of 529.5p
per Ordinary Share on May 13, 1997, the business day one month before the
announcement of the Offer and a premium of approximately 24% to the closing
price of 561.5p per Ordinary Share on June 9, 1997, the last business day before
the announcement by Energy that it was involved in talks with PacifiCorp in
relation to the Offer.
The Offer was subject to certain conditions and regulatory consents and
confirmations being obtained. On August 1, 1997, the UK Secretary of State for
Trade and Industry (the "Secretary of State") announced that she had concerns
over whether it would be possible to maintain adequate control over the merged
company and that, accordingly, she had decided to refer the proposed acquisition
of Energy by PacifiCorp to the Monopolies and Mergers Commission ("MMC"). The
MMC has a deadline of November 21, 1997 for completing its investigation
2
<PAGE> 79
and reporting to the Secretary of State whether the proposed acquisition of
Energy by PacifiCorp operates or may be expected to operate against the public
interest. Following receipt of the MMC report the Secretary of State will
announce whether the acquisition has been cleared. The Secretary of State is not
required to make her decision within any specified time period. Even if the MMC
were to give the acquisition a conditional clearance, the Secretary of State has
the discretion to reject the MMC's recommendations.
As a result of the referral to the MMC, the Offer immediately lapsed by
its own terms. Prior to the announcement of the referral, holders of Ordinary
Shares and ADSs representing approximately two-thirds of Energy's shares capital
had submitted valid acceptances of the Offer. PacifiCorp and Energy have each
stated that they will cooperate fully in the inquiry and respond promptly to
information requests by the MMC and are communicating with each other as
appropriate for this purpose. In addition, PacifiCorp and Energy are in the
process of complying with a request for additional information in relation to
the Offer by the US Federal Trade Commission (the "FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act in relation to the potential
acquisition of Energy by PacifiCorp. It is uncertain when the FTC will complete
its review.
In addition, there can be no assurance that the regulatory consents and
confirmations mentioned above will be obtained or, if obtained, that such
consents and confirmations will be on satisfactory terms, or that PacifiCorp
will make a new offer for Energy or, if made, that such offer will be on terms
acceptable to the Board of Directors of Energy, which would be required to
consider any new offer by PacifiCorp in the context of the circumstances then
prevailing.
DESCRIPTION OF THE BUSINESSES
COAL
The Group's coal operations are conducted through Peabody. Peabody,
which is the largest producer of coal in the US and the largest private coal
producer in the world, currently operates 25 underground and surface mines in
the US (one small underground mine having been sold in June 1997) and three
surface mines in Australia and 11 processing plants. Since September 30, 1990,
the Group's total US and Australian annual sales have increased from 93 million
tons to 163 million tons in the year ended September 30, 1996 (81.4 million tons
in the six months ended March 31, 1997). The Directors estimate that the Group's
US market share has grown from 9% in the year ended September 30, 1990 to 15% in
the year ended September 30, 1996 with sales increasing from 156 million tons to
163 million tons. In the six months ended March 31, 1997, the Directors estimate
that the Group had a market share of 14% with sales of 74.8 million tons.
Peabody's US operations are managed through four principal units: Powder
River; Peabody Western; Peabody East; and Lee Ranch. Peabody's 25 US mines sell
coal to 141 US power plants and Peabody also exports from the US to customers in
12 other countries, principally power generation plants and industrial users.
Peabody's head office in St. Louis, Missouri, provides general policy overview,
co-ordinates coal sales and business development activities and performs
financial management and consolidation functions, with a view to ensuring that
capital is allocated to the most profitable purposes.
Peabody's base of approximately 9.5 billion tons of proven and probable
owned or controlled coal reserves has increased from approximately 7.0 billion
tons in 1990, and is the largest coal reserve base of any active private mining
company in the US. Certain of Peabody's coal reserves are held by Peabody
Development, a subsidiary of Peabody, which is responsible for acquiring coal
assets for future development and the disposal of coal and surface property
interests which have no further strategic value to the Group.
Peabody has a substantial base of low sulfur coal reserves consisting of
approximately 4.7 billion tons and additional such reserves are available for
lease from private parties or federal, state or tribal governments, especially
in the Powder River Basin. Of the 51% of Peabody's coal reserves which are high
sulfur, many are located near coal-fired power stations which may make them
attractive for development because of the lower transportation costs. The US
Clean Air Act Amendments of 1990 (the "Clean Air Act Amendments"), which are
described under "Regulatory Matters" below, limit the ability of some of
Peabody's customers to burn higher sulfur coals unless they have installed, at
significant cost, "scrubbers", or are able to purchase so-called "emission
allowances". The development of the Group's high sulfur coal reserves is thus
dependent on the cost of such emission allowances, the cost and availability of
low sulfur coal and whether electric utilities install scrubbers to meet the
requirements of Phase II of the Clean Air Act Amendments by 2000 as described
under "Regulatory Matters" below.
Peabody Australia is one of the ten largest coal producers in Australia.
It owns or holds joint venture interests in and also manages four surface mines
in New South Wales, Australia and is well positioned to serve the
3
<PAGE> 80
growing market in the Asian Pacific Rim. One of these mines, Bengalla, is
currently under development and is scheduled to begin operations in 1999. In the
six months ended March 31, 1997, Peabody Australia's equity share of sales from
these mines totaled 3.5 million tons and its share of the proven and probable
reserves associated with these operations amounted to 466 million tons.
COAL RESERVES
The following table provides a summary of Peabody's sales for the six
months ended March 31, 1997 and its recoverable reserves as of March 31, 1997:
<TABLE>
<CAPTION>
SALES IN SIX
MONTHS
ENDED
MARCH 31,
1997 RECOVERABLE RESERVES AS OF MARCH 31, 1997(1)
------------ ----------------------------------------------------------------
------------ --------------------------------------------
PROVEN PROBABLE TOTAL SULFUR CONTENT OWNED LEASED
UNITS LOW HIGH OR
OPTIONED
(MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
US
Powder River 45.4 2,447 46 2,493 2,371 122 86 2,408
Peabody Western 8.3 670 -- 670 486 184 1 669
Peabody East 18.3 1,065 607 1,672 579 1,093 798 874
Lee Ranch 2.1 152 512 664 607 57 659 5
Peabody Development -- 1,756 1,638 3,394 113 3,280 2,699 694
Other(2) 3.8 46 59 105 0 105 8 97
----- ------ ------ ------ ------ ------ ------ ------
Total US 77.9 6,136 2,862 8,998 4,156 4,841 4,251 4,747
Peabody Australia 3.5 147 319 466 466 -- -- 466
----- ------ ------ ------ ------ ------ ------ ------
Total 81.4 6,283 3,181 9,464 4,622 4,841 4,251 5,213
===== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
RECOVERABLE RESERVES AS OF MARCH 31, 1997(1)
----------------------------------------------
SURFACE UNDER- ASSIGNED(2) UNASSIGNED(3)
UNITS GROUND
<S> <C> <C> <C> <C>
US
Powder River 2,493 -- 1,963 531
Peabody Western 567 103 567 103
Peabody East 246 1,426 599 1,073
Lee Ranch 661 4 171 493
Peabody Development 480 2,914 -- 3,393
Other(2) 5 100 105 0
------ ------ ------ ------
Total US 4,452 4,547 3,405 5,593
Peabody Australia 365 101 273 193
------ ------ ------ ------
Total 4,817 4,648 3,678 5,786
====== ====== ====== ======
</TABLE>
- ---------------
(1) Recoverable reserves have been adjusted to take account of all losses
involved in producing a saleable product.
(2) The Roadside Mine, included in "Other", was sold in June 1997.
(3) Assigned reserves are coal reserves which are legally recoverable,
generally through existing facilities using current mining technology.
Unassigned reserves are coal reserves which are also legally
recoverable using current mining technology, but which require
substantial capital investment for facilities to enable recovery of the
coal.
Reserve estimates are based on geological data assembled and analyzed by
Peabody's staff which includes 13 qualified geologists and more than 100
qualified engineers, based both at the individual mines and Peabody's
headquarters, and independent experts. The reserve estimates are reviewed by
them periodically to reflect new drilling or other data received and production
of coal from the reserves. Accordingly, reserve estimates will change from time
to time to reflect mining activities, analysis of new engineering and geological
data, changes in reserve holdings, modifications of mining methods and other
factors. Reserve information, including the quantity and quality (where
available) of reserves as well as production rates, surface ownership, lease
payments and other information relating to the Group's coal reserve and land
holdings, is maintained through the computerized land management system
developed by Peabody.
Peabody's reserve base estimates are based on information obtained from
its extensive drilling program, which totals nearly 500,000 individual drill
holes. Data from individual drill holes are input into a computerized drill hole
system from which the depth, thickness and, where core drilling is used, the
quality of the coal, are determined. The density of the drill pattern determines
whether the reserves will be calculated as proven or probable. The drill hole
data are then input into the computerized land management system which overlays
the geological data with data on ownership or control of the mineral and surface
interests to determine the extent of the reserves in a given area. Drilling
operations are typically undertaken by qualified staff engineers and geologists.
4
<PAGE> 81
The cost and net book value of plant and equipment as extracted from the
Financial Statements included herein were L927 million and L395 million,
respectively, at March 31, 1997. In line with current accounting practice, the
Group's coal reserves and related plant and equipment have been individually
assessed to determine whether their value has been impaired in any way by market
or other circumstances. The carrying value of the reserves as stated in the
Financial Statements included herein reflects the results of that assessment.
Of the Group's reserves, approximately 45% are owned by Peabody,
approximately 16% are leased from private parties and approximately 39% are
leased from federal, state or tribal governments.
The private leases normally have terms of between 10 and 20 years, and
usually give Peabody the right to renew the lease for a stated period or to
maintain the lease in force until the exhaustion of mineable and merchantable
coal contained on the relevant site. These private leases provide for royalties
to be paid to the lessor either as a fixed amount per ton or as a percentage of
the sales price. Many leases also require payment of a lease bonus or minimum
royalty, payable either at the time of execution of the lease or in periodic
installments. Private leases are invariably maintained by active production.
Leases containing unassigned reserves may expire or such leases may be renewed
periodically. As mines deplete or reserves are assigned, production is often
commenced in a new mine to replace the depleted capacity.
Peabody held, as at March 31, 1997, 24 federal coal leases which are
administered by the US Department of the Interior pursuant to the Federal Coal
Leasing Amendments Act of 1976. These leases cover Peabody's principal reserves
in Wyoming and other reserves in Montana and Colorado. Each of these leases
continues indefinitely provided that there is diligent development of the lease
and continued operation of the related mine or mines. The Bureau of Land
Management has asserted the right to adjust the terms and conditions of these
leases, including rents and royalties, after the first 20 years of their life
and at ten yearly intervals thereafter. Annual rents under Peabody's federal
coal leases are now set at $3.00 per acre. Production royalties on federal
leases are set by statute at 12.5% of the gross proceeds of coal mined and sold
for surface mined coal and 8% for underground mined coal. Similar provisions
govern Peabody's three coal leases with the Navajo and Hopi Indian tribes. These
leases cover coal contained in 65,000 acres of land in northern Arizona lying
within the boundaries of the Navajo and Hopi Indian reservations.
Consistent with industry practice, Peabody conducts only limited
investigation of title to its coal properties prior to leasing. Title to lands
and reserves of the lessors or grantors and the boundaries of Peabody's leased
properties are not completely verified until such time as Peabody prepares to
mine such reserves.
The following provides a description of the operating characteristics of
the principal mines and reserves of each of Peabody's US and Australian mining
units.
Powder River
Powder River, which has its headquarters in Gillette, Wyoming, owns and
manages four large surface mines in Wyoming's coal-rich Powder River Basin. The
four mines are North Antelope, Rochelle, Caballo and Rawhide.
Powder River's coal reserves are classified as surface mineable and
subbituminous. Coal is produced from the Wyodak-Anderson seam, which contains
low sulfur coal. The sulfur content of the coal in current production ranges
from 0.19% to 0.40% and the heat value ranges from 8,250 BTU to 8,850 BTU.
The following table provides a summary of the main characteristics of
the principal mines of Powder River:
<TABLE>
<CAPTION>
AVERAGE SALES IN SIX
YEAR MINING SULFUR SEAM MONTHS ENDED
MINE MINE TYPE BEGAN TYPE OF COAL CONTENT THICKNESS MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------ (FEET) (MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
North Antelope surface 1983 steam low 76.0 16.1
Rochelle surface 1985 steam low 75.5 12.1
Caballo surface 1978 steam low 70.0 10.5
Rawhide surface 1977 steam low 105.0 6.7
----
Total 45.4
====
</TABLE>
5
<PAGE> 82
North Antelope. The North Antelope mine, located adjacent to the
Rochelle mine, was opened in late 1983 and in calendar 1996 it was among the ten
largest US coal mines. The mine's approximately 250 employees use a 64-cubic
yard dragline along with truck and shovel methods to mine coal. Raw coal is
crushed and sized and stored in three 15,000 ton storage silos in preparation
for the automatic batch loading system, which can load coal into 100 ton rail
cars in 100 to 115 car unit trains at a rate of 6,000 tons per hour. Under state
regulations, North Antelope's current permitted annual capacity is 35 million
tons.
Rochelle. The Rochelle mine is located 65 miles south of Gillette,
Wyoming. Its approximately 272 employees use modern truck and shovel methods.
The mine has two 15,000-ton silos and a 55,000-ton slot storage facility. Under
state regulations, it is permitted to mine up to 30 million tons of coal
annually. The Rochelle mine produces premium quality coal with a sulfur content
averaging 0.22% and a heat value range of 8,600 BTU to 8,800 BTU.
Caballo. The Caballo mine, located 20 miles south of Gillette, Wyoming
employs approximately 233 persons. Caballo is a truck and shovel operation with
a coal handling system which includes two 12,000-ton silos and two 11,000-ton
silos. Under state regulations, Caballo is permitted to mine 35 million tons of
coal per year.
Rawhide. The Rawhide mine is located ten miles north of Gillette,
Wyoming. Its approximately 155 employees use truck and shovel mining methods,
with four 11,000-ton silos and two 12,000-ton silos. Under state regulations,
Rawhide is permitted to mine 24 million tons of coal per year.
Peabody Western
Peabody Western, headquartered in Flagstaff, Arizona, manages four
surface mines in Arizona, Colorado and Montana: Black Mesa, Kayenta, Big Sky and
Seneca. All of Peabody Western's coal is sold to electricity generating plants.
The following table provides a summary of the main characteristics of
the principal mines of Peabody Western:
<TABLE>
<CAPTION>
AVERAGE SALES IN SIX
YEAR MINING SULFUR SEAM MONTHS ENDED
MINE MINE TYPE BEGAN TYPE OF COAL CONTENT THICKNESS MARCH 31, 1997
- -----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------- (FEET) (MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Black Mesa surface 1970 steam low 6.6 2.4
Kayenta surface 1973 steam low 5.9 2.7
Big Sky surface 1968 steam low/high 21.4 2.4
Seneca surface 1964 steam low 9.9 0.8
---
Total 8.3
===
</TABLE>
Black Mesa. Black Mesa mine employs approximately 337 persons producing
steam coal using two draglines in two mining areas. Its coal is crushed, mixed
with water and then transported 273 miles through the underground Black Mesa
Pipeline to Southern California Edison's Mohave Generating Station near
Laughlin, Nevada under a long-term contract.
Kayenta. Kayenta mine is adjacent to the Black Mesa mine. The Kayenta
mine employs approximately 428 persons using three draglines in three mining
areas and sells steam coal under a long-term contract. The coal is crushed, then
carried 17 miles by conveyor belt to storage silos where it is loaded on to an
electric train and transported 83 miles to the Navajo Generating Station,
operated by The Salt River Project near Page, Arizona.
Big Sky Coal Company. The Big Sky Coal Company mine is located at the
northern end of the Powder River Basin near Colstrip, Montana. The mine employs
approximately 123 people and produces steam coal with two draglines. The coal is
shipped by rail to several major electric utilities.
6
<PAGE> 83
Seneca Coal Company. Seneca Coal Company operates the Seneca mine near
Hayden, Colorado. The mine employs approximately 77 people and produces steam
coal using two draglines in two mining areas. The majority of the Seneca mine's
coal is hauled by truck to a nearby generating station where it is sold pursuant
to a long-term contract.
Peabody East
Peabody East comprises principally Eastern Associated and Peabody Coal
Company.
Eastern Associated, based in Charleston, West Virginia, owns or manages
five business units comprising six mines and related facilities in West
Virginia. These operations sell metallurgical and steam coal to customers in the
US and abroad. Approximately 38% of Eastern Associated's steam and metallurgical
coal is sold to export customers in Canada and approximately 10 other countries
worldwide and the remainder is sold to customers in the US. Approximately 54% of
Eastern Associated's production is sold to domestic electric utilities under
long-term contracts.
Peabody Coal Company, whose headquarters are in Charleston, West
Virginia, operates five business units with eight mines in the midwestern US.
Peabody Coal Company's four underground and four surface mines, along with five
preparation plants and three barge loading facilities, are located in Kentucky,
Illinois and Indiana and currently employ approximately 2,052 people.
Approximately 92% of Peabody Coal Company's coal is shipped to 18
electricity generating plants operated by domestic electric utilities in eight
states, principally in the midwest. Most of this coal is sold under long-term
contracts of five or more years in length. Approximately 8% of sales are to US
industrial customers who use the coal to produce their own electricity and steam
power. About 48% of Peabody Coal Company's coal is transported to customers by
river barge, approximately 49% by rail and most of the balance is carried on
conveyor belts to nearby power plants.
The following table provides a summary of the main characteristics of
the principal mines of Peabody East:
<TABLE>
<CAPTION>
AVERAGE SALES IN SIX
YEAR MINING SULFUR SEAM MONTHS ENDED
MINE MINE TYPE BEGAN TYPE OF COAL CONTENT THICKNESS MARCH 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
(FEET) (MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Eastern Associated
Big Mountain underground 1990 steam low 4.8-5.6 0.5
Robin Hood underground 1971 steam low 4.8-5.6 0.2
Federal No. 2 underground 1968 steam high 6.8 2.1
Harris No. 1 underground 1966 steam/met low 5.2 1.2
Rocklick(1) underground 1938 met low 2.5-5.6 1.9
Kopperston(1) underground 1938 met low 2.5-5.6 0.6
Wells underground 1975 steam/met low 5.2 1.8
Peabody Coal Company
Camp I & II underground 1971/77 steam high 5.1/4.9 3.0
Lynnville surface 1955 steam high 9.0 1.6
Squaw Creek surface 1965 steam high 6.0 0.7
Hawthorn surface 1965 steam high 8.0 1.7
Marissa underground 1979 steam high 6.5 1.8
Martwick underground 1985 steam high 4.5 0.9
Ken surface 1955 steam high 4.8 0.3
----
Total 18.3
====
</TABLE>
(1) These units process coal owned by Peabody and mined by third party
contract mining companies.
Big Mountain/Robin Hood. The Big Mountain/Robin Hood business unit
currently employs approximately 291 people in southern West Virginia. The Big
Mountain mine opened in 1990 near Prenter and uses continuous miners, continuous
face haulage and shuttle cars. The Robin Hood mine uses one continuous miner
section and ram
7
<PAGE> 84
cars for face haulage. A contractor mined approximately 0.7 million tons of coal
in the six months ended March 31, 1997.
Federal No. 2. The Federal No 2 mine in northern West Virginia has
approximately 476 employees and produces steam coal using a longwall unit and
three continuous miner sections for development.
Harris No. 1/Rocklick/Kopperston. The Harris mine in southern West
Virginia uses a longwall and two continuous miner sections for development and
has approximately 289 employees. The Harris preparation plant has the capability
to load onto two different rail systems. The Rocklick/Kopperston business unit
manages the Rocklick and Kopperston operations which process coal produced from
Eastern Associated reserves by contact mining companies. The Rocklick
preparation plant in southern West Virginia employs approximately 60 persons.
Kopperston preparation plant also in southern West Virginia employs
approximately 54 people. The Harris and Rocklick/Kopperston business units have
recently merged into one business unit.
Wells. The Wells business unit in southern West Virginia employs
approximately 395 persons. The business unit consists of the Lightfoot No 1 and
No 2 mines and the Wells preparation plant. Lightfoot No 1 mine, near Wharton,
sold approximately 0.3 million tons of steam and metallurgical coal in the six
months ended March 31, 1997 with two continuous miner sections. Lightfoot No 2
mine, also near Wharton, operates two continuous miner sections and two
continuous haulage systems and shipped approximately 0.6 million tons of steam
and metallurgical coal during the six months ended March 31, 1997.
Camp. The Camp business unit in western Kentucky employs approximately
684 people. Camp No 1 mine has five continuous miner sections using both
continuous haulage systems and shuttle car haulage. Camp No 11 mine has Peabody
Coal Company's only longwall mining machine and uses two continuous miner
sections with battery ram car haulage for development.
Lynnville/Squaw Creek. The Lynnville/Squaw Creek business unit in
southern Indiana employs approximately 424 people. The two operations were
combined into one business unit in February 1996. Squaw Creek, a surface mine,
operates one dragline with a 50-cubic-yard bucket and sold approximately 0.7
million tons of coal in the six months ended March 31, 1997. Lynnville, also a
surface mine, uses two draglines, each with a 34-cubic-yard bucket, and a power
shovel with a 112-cubic-yard bucket. In the six months ended March 31, 1997 the
mine sold 1.6 million tons of coal.
Hawthorn. The Hawthorn business unit in southern Indiana uses three
draglines: a 34-cubic-yard, a 95-cubic-yard and 155-cubic-yard bucket capacity.
Currently there are approximately 263 employees at Hawthorn.
Marissa. The Marissa business unit in Illinois currently employs
approximately 440 people. It consists of the Marissa Underground mine, the
Randolph Preparation Plant and associated transportation facilities. The Marissa
mine sells its coal primarily to an electric utility, Illinois Power, under a
long-term contract and also to industrial customers in Illinois and Missouri.
The mine uses six continuous miner sections, one of which has a flexible
conveyor train for face haulage, and the other five of which use shuttle cars
for haulage.
Midwest. The Midwest business unit in western Kentucky comprises the Ken
surface mine, the Martwick underground mine and the Gibraltar Preparation Plant
and Dock, and includes the reclamation staff responsible for reclaiming Peabody
Coal Company's closed or suspended mining operations throughout the midwest. The
Ken mine in Ohio County, western Kentucky, is a surface operation which has
three active pits. This mine is scheduled to close in late 1997, due to
depletion of its coal reserves. The Martwick mine in Western Kentucky, is an
underground mine using two continuous miner sections.
8
<PAGE> 85
Lee Ranch
The Lee Ranch mine is located near Grants, New Mexico and its main
characteristics are summarized as follows:
<TABLE>
<CAPTION>
AVERAGE SALES IN SIX
YEAR MINING SULFUR SEAM MONTHS ENDED
MINE MINE TYPE BEGAN TYPE OF COAL CONTENT THICKNESS MARCH 31, 1997
- -----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------- (FEET) (MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C> <C>
Lee Ranch surface 1994 steam low/high 5.7 2.1
===
</TABLE>
Coal from the Lee Ranch mine is shipped to two customers in Arizona and
New Mexico under long-term contracts. Although the reserves include high sulfur
coal, there is currently no high sulfur coal mined at Lee Ranch. The
approximately 228 employees at Lee Ranch use a combination of dragline and
truck/shovel for overburden removal to uncover coal in multiple seams ranging
from one to six feet thick.
Other
Patriot Coal Company. The Patriot Coal Company operates one surface mine
and one underground mine in western Kentucky. Patriot Coal Company sold
approximately 0.7 million tons of coal in the six months ended March 31, 1997.
The underground mine has two continuous miner sections. The surface mine uses
truck and shovel equipment. The business unit also has a preparation plant and
dock. There are approximately 143 persons employed at the two mines and related
facilities.
Powderhorn Coal Company. The Powderhorn Coal Company, which operated the
Roadside underground mine near Grand Junction in western Colorado, sold
approximately 0.4 million tons of steam coal in the six months ended March 31,
1997. Powderhorn Coal Company was sold to a subsidiary of Quaker Coal Company on
June 30, 1997. Peabody paid Quaker $2.1 million for it to assume the Powderhorn
Coal Company's liabilities.
Peabody Australia
Peabody Australia, whose headquarters are in Sydney, New South Wales,
operates the Ravensworth, Narama and Warkworth mines in the Hunter Valley.
Approximately 74% of Peabody Australia's joint venture share of the production
of these mines is sold domestically under long-term contracts and approximately
26% is exported to Asian Pacific Rim countries, principally under contracts of
one year or longer. Peabody Australia also manages and holds a 35% interest in a
joint venture which is developing a new surface mine (Bengalla) in the upper
Hunter Valley. In addition, Peabody Australia operates a Mining Services
Division, based in Brisbane, Queensland, which provides specialist tunneling and
underground contract mining services to the mining and civil engineering
industries. The division currently has a number of projects throughout Australia
and employs approximately 284 people.
9
<PAGE> 86
The following table provides a summary of the main characteristics of
Peabody Australia's mines:
<TABLE>
<CAPTION>
SALES IN SIX
MONTHS
ENDED
YEAR MINING AVERAGE SEAM MARCH 31, EQUITY
MINE MINE TYPE BEGAN TYPE OF COAL SULFUR CONTENT THICKNESS(3) 1997 INTEREST
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------- (METERS) (MILLIONS (%)
OF TONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Ravensworth surface 1972 steam low 5.5 2.2 100.00
Narama surface 1993 steam low 4.8 0.6 50.00
Warkworth surface 1981 steam/met low 8.0 0.7 43.75
Bengalla(1) surface -- -- low -- -- 35.00
---
Total(2) 3.5
===
</TABLE>
- ---------------
(1) Under development.
(2) Sales relate to the Group's equity interest by mine. The totals
represent Peabody Australia's equity interest.
(3) Includes multiple seams.
Ravensworth/Narama. Ravensworth mine is managed by Peabody Australia
under a long-term contract which runs to 2001 and requires the company to
produce approximately 4.5 million tons per year from coal reserves which are
under contract to Macquarie Generation, one of New South Wales' state electric
utilities. Ravensworth mines eight coal seams ranging from one to 26 feet thick.
The overburden is pre-stripped using trucks and power shovels followed by
draglines to uncover the lower three seams. The coal is trucked from the pit to
a crushing plant and then shipped raw by overland conveyor belt to Macquarie
Generation's nearby Bayswater and Liddell power stations.
Narama mine opened in January 1993 and is operated as an extension of
the adjacent Ravensworth facility using similar mining techniques in the same
coal seams. Peabody Australia and RGC Limited, an Australian company, each hold
50% of Narama Joint Venture which has a 20-year contract running to 2012 to
supply about 2.3 million tons annually to Macquarie Generation. The mine's
employees come from a combined labor pool with Ravensworth which totals
approximately 364 people.
Warkworth. Warkworth mine, seven miles southwest of Singleton, opened in
1981 and produces steam and met coal primarily for export. Peabody Australia
manages and owns 43.75% of the Warkworth Associates Joint Venture which owns the
mine. The mine is currently being expanded to produce approximately 4.9 million
tons of coal each year by 1999.
Approximately 420 employees produce coal from five pits using truck and
shovel pre-stripping and dragline stripping techniques to uncover four to six
groups of seams. This coal is processed at Warkworth's preparation plant and
blended to customer specifications before being carried by overland conveyor to
the Mount Thorley rail loop and then by rail to the port of Newcastle. Warkworth
owns 13.9% of the Mount Thorley facility and 4.2% of a coal loading terminal at
the port.
Bengalla. Peabody Australia also manages and holds a 35% interest in the
Bengalla joint venture which has been awarded a mining lease and a permit to
develop a new surface mine near Nuswellbrook, New South Wales, in the upper
Hunter Valley. The new mine is expected to produce up to six million tons of
steam coal per year for export beginning in 1999. The joint venture partners
include Taiwanese and Korean electric utilities and Japanese and Korean trading
companies.
Customers, Sales and Marketing
Peabody COALSALES co-ordinates sales and marketing activities for all of
Peabody's US mining operations and also engages in brokerage transactions,
purchasing coal from or acting as agent to sell coal on behalf of other
producers. Its regional sales executives are responsible for marketing in their
assigned regions, while a central team co-ordinates sales activities and
provides marketing support from extensive industry databases.
10
<PAGE> 87
US Sales. Approximately 92% of Peabody's US coal sales volume for the
six months ended March 31, 1997 was sold to domestic electric utilities,
approximately 3% was sold to US industrial customers and approximately 5% was
exported to electric utility and steel making customers in 12 countries.
Approximately 90% of Peabody's US coal production was sold under supply
contracts with remaining terms from one to 17 years, and an average remaining
term of approximately six years. Typically, customers enter into supply
contracts to secure reliable sources of coal at predictable prices, while
Peabody seeks stable sources of revenue to support the investments required to
open, expand, maintain or improve productivity at mines needed to supply such
contracts. Such contracts are negotiated in the ordinary course of business.
Peabody currently has an order book of nearly 1,100 million tons of coal, of
which approximately 65% is scheduled for delivery after 2000.
Most of Peabody's US coal supply contracts which have terms greater than
one year are subject to periodic price adjustments or "reopener" provisions
under which the contract price is subject to periodic adjustment by either party
to reflect the changes in the market price of coal. Furthermore, a majority of
the Group's coal supply contracts with terms greater than one year currently
have prices which exceed the price at which such coal could be sold in the spot
market. Over the last few years, a significant number of these contracts have
been renegotiated bringing the contract prices payable closer to current market
prices, thus leading to a reduction in the revenue received by Peabody albeit,
in many cases, offset to a large extent by one-time payments by the purchaser. A
similar reduction in contract prices has also been experienced in relation to
the replacement of expiring contracts. However, to date, the effect of such
reductions has been mitigated by lower operating costs and expansions and
acquisitions to increase sales volumes. The Directors believe that over the next
five years there is likely to be a continuing adverse impact on revenues under
such contracts because of renegotiation and replacement of existing contracts.
There can be no assurance that any reductions in revenues resulting therefrom
will continue to be mitigated by improvements in productivity or increased sales
volumes.
From time to time, Peabody is involved in disputes with customers under
its long-term coal supply contracts relating to among other things, coal
quality, which have occasionally resulted in arbitration and other legal
proceedings. While customer disputes, if unresolved, could result in termination
or cancellation of the contract involved, Peabody's experience has been that
curative and/or dispute resolution measures decrease the likelihood of
termination or cancellation. In addition, Peabody's development of long-term
business relationships with many of its customers has generally permitted it to
resolve business disputes in a mutually acceptable manner.
Australian Sales. Approximately 66% of the 5.0 million aggregate tons of
coal sold by the Australian mines in which Peabody Australia had an interest in
the six months ended March 31, 1997 (of which Peabody's equity share was 3.5
million tons) was sold under long-term contracts to the New South Wales power
utility, Macquarie Generation. The remainder was exported to Asian Pacific Rim
countries. Coal from the Ravensworth and Narama mines is sold to Macquarie
Generation under contracts which expire in 2000 and 2012, respectively. The
contracts have price adjustment provisions which are based on the qualities of
coal delivered and changes in indices of mining costs. All of the output from
the Warkworth mine is exported; approximately 80% is sold under contracts,
including contracts with the other joint venture partners in Warkworth, and
approximately 20% is sold on the spot market. Peabody Australia's export
contracts normally provide for annual price renegotiations.
Peabody Australia's Mining Services Division provides specialized
tunneling and underground mining services to the civil engineering and mining
industries.
Peabody Development
At March 31, 1997, Peabody Development owned or controlled approximately
3.4 billion tons of Peabody's unassigned proven and probable reserves and
managed approximately 100,000 acres of land. Peabody Development also operates a
computerized land management system which maintains a record of Peabody's US
coal reserves and coal-related land holdings, and is responsible for the
disposal of surplus lands and reserves in the US which no longer have strategic
value. Peabody Development is also responsible for acquiring additional reserves
for the Group, through exploration and the acquisition of additional leases.
Other
Peabody owns Patriot Coal Company, which operates a small surface mine
and a small underground mine in western Kentucky, both of which produce high
sulfur coal. The employees of Patriot Coal Company are not unionized.
In addition to the coal interests described above, Peabody owns a one
third interest in Black Beauty Coal Company ("Black Beauty"), the largest coal
producer in Indiana. The remainder of Black Beauty is owned by The
11
<PAGE> 88
Pittsburgh and Midway Mining Company and Black Beauty Inc. Black Beauty operates
five mines in Indiana and one in Illinois. In the six months ended March 31,
1997, Black Beauty sold approximately 1.5 million tons of low and high sulfur
coal. Two additional mines are under development in Indiana, the annual capacity
of which is expected to be approximately four million tons when they reach full
production later in 1997. The employees of Black Beauty are not unionized.
Transportation
Peabody's US customers are generally responsible for arranging and
paying for the transportation of coal from Peabody's mines to the customers'
locations. The majority of Peabody's coal is transported by railway, although
barge, truck, conveyor belts and coal pipelines are also used.
Peabody's US export customers generally take delivery at several port
facilities, including Dominion Terminals Associates, which operates the US's
largest coal export facility in Newport News, Virginia with approximately 24
million tons of annual capacity and which is used to ship coal from Peabody's
West Virginian mines to its export customers. Peabody owns a 30% interest in
Dominion Terminals Associates.
Peabody Australia's exports are shipped through the Port of Newcastle,
where the joint venture company which owns the Warkworth mine owns 4.2% of a
coal loading terminal.
Competition
The top ten producers in the US coal industry accounted for
approximately 55% of total US coal production in 1996, although there were an
estimated 981 coal producers in the US in that year. The Group's principal
competitors in its coal operations are other large coal producers, including
certain major oil companies which have extensive coal operations.
The markets in which the Group sells its coal are affected by a number
of factors beyond its control. Continued demand for the Group's coal and the
prices obtained by the Group depend primarily on the coal consumption patterns
of the electricity industries in the US and the Asian Pacific Rim countries, the
availability, location (and therefore the cost of transportation) and the price
of competing coal and alternative electricity generation and fuel supply sources
such as natural gas, oil, nuclear and hydroelectric. Coal consumption patterns
are affected primarily by the demand for electricity, environmental and other
governmental regulations and technological developments. In addition, the
Directors believe that the continuing deregulation of US electric utilities,
which accounted for approximately 91% of Peabody's sales by volume in the year
ended September 30, 1996, will continue to cause such utilities to be more
aggressive in negotiating with coal suppliers. In recent years there has been
excess coal production capacity in the US due to increased development of large
surface mining operations in the western US, more efficient mining equipment and
techniques, and reduced consumption of high sulfur coal. Competition resulting
from excess capacity tends to cause producers to reduce prices and to pass
productivity gains achieved at the mines through to customers. Peabody competes
on the basis of coal quality, delivered price, customer service and support and
reliability.
In the six years ended December 31, 1996, Australian saleable coal
production increased by approximately 18.5%. Total Australian coal production
rose approximately 3.4% in 1996 and the top ten producers in the Australian coal
industry accounted for approximately 79% of total Australian production in that
year. The Group's Australian competitors are principally coal companies owned by
large mining or oil producing companies, although one of the top ten competitors
is a state-owned enterprise.
POWER
The Group's power business comprises three core activities: the
generation of electricity, the sale of electricity and the sale of natural gas.
This combination of integrated activities within the electricity and gas
industries provides the Group with opportunities to benefit throughout the
electricity and gas supply chains, from fuel sourcing to customer sales. The
overall financial efficiency of these activities is co-ordinated by the growing
energy trading business of Eastern.
In Great Britain, the Group's power business is:
- the fourth largest generator of electricity;
- one of the largest suppliers of electricity and the largest
supplier of electricity in England and Wales; and
12
<PAGE> 89
- one of the largest suppliers of natural gas after Centrica plc
(formerly part of British Gas).
GENERATION
The Group is the fourth largest generator of electricity in Great
Britain with a share of approximately 11% of total registered generating
capacity of 71,850 MW. It currently owns, operates or has an interest in eight
power stations in Great Britain. It also has a controlling interest in Nedalo
(UK) Limited, the largest supplier of small (up to one MW (electrical)) combined
heat and power ("CHP") plants in the UK, and has a controlling interest in
Teplarny Brno a.s. ("Teplarny Brno"), a heating and generation company in the
Czech Republic.
Further information on the Group's interests in power stations in Great
Britain is set out in the following table:
[CAPTION]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DATE OF EARLIEST
PLANT TYPE CAPACITY(1) COMMISSIONING
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MW
West Burton Coal-fired 2,012 1967
Rugeley B Coal-fired 1,046 1972
Drakelow C Coal-fired 976 1965
Ironbridge Coal-fired 970 1970
High Marnham Coal-fired 945 1959
Peterborough CCGT 360 1993
King's Lynn(2) CCGT 340 1997
Barking(3) CCGT 135 1995
-----
Total 6,784
=====
</TABLE>
Source: Electricity Supply Handbook 1997 and 1997 National Grid Company plc
Seven Year Statement for the years 1996/7 to 2002/3.
(1) All capacity is registered generating capacity except for Peterborough
and King's Lynn, which have registered generating capacities of 405MW
and 380MW respectively, but installed generating capacities of 360MW
and 340MW respectively.
(2) Currently being commissioned and scheduled to commence full commercial
operation in late 1997.
(3) Registered generating capacity is 1,000MW. The Group holds an interest
of approximately 13.5%.
The Group's current portfolio of power stations, a mix of combined cycle
gas turbine ("CCGT") and coal-fired stations, represents both base load (running
throughout most of the year) and mid-merit (running in high demand periods)
plants. The inclusion of coal-fired plants within the Group's portfolio of power
stations has enabled the Group to reduce its fuel supply risk. The energy
trading business of the Group is responsible for setting the level of bids into
the Pool for the output of each of its generating stations (other than Barking)
so as to co-ordinate the operation of its generating stations with its fuel
contract position, and its retail and wholesale electricity and gas sales
portfolios. For further information, see "Energy Trading" below.
West Burton, Rugeley B and Ironbridge
In June 1996, the Group assumed operational and commercial control, by a
combination of operating lease and outright sale, from National Power, of all of
the assets and liabilities of the West Burton, Rugeley B and Ironbridge power
stations (with the exception of trade and certain other debts and liabilities
outstanding at the date of completion). All existing staff at these stations
were transferred to Eastern, which holds a 99 year lease over the land,
buildings and plant at each of the power stations, and has the right to purchase
the freehold land for a nominal sum after 50 years. Under the leases, Eastern is
committed to aggregate fixed payments totalling L737.5 million, of which L337.5
million was paid at commencement of the leases. The balance, together with
interest, is payable over seven years from 2000. Further payments of
approximately L6 per MWh linked to output levels from these stations are also
payable to National Power for the first seven years of operation.
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Drakelow C and High Marnham
The Group has leased, for a period of 99 years, the land, buildings and
plant at the Drakelow C and High Marnham power stations from PowerGen pursuant
to agreements entered into in July 1996. PowerGen is responsible for
decommissioning costs should Eastern decide to close these stations during the
term of the leases. Eastern is committed to fixed payments totalling L230
million (subject to minor adjustments if aggregate capacity falls below certain
threshold) payable in installments (together with interest) over eight years
from 1996. As with the National Power leases, further output-related payments of
approximately L6 per MWh are payable to PowerGen for the first five years of
operation. From August 1, 1997 the Drakelow and High Marnham power stations have
been operated by Eastern.
Peterborough
The power station at Peterborough was developed and constructed as a
joint venture between Eastern and Hawker Siddeley Power (Peterborough) Limited
("Hawker Siddeley") between 1990 and 1993. Eastern acquired Hawker Siddeley's
interest in September 1994. The station's gas requirements are sourced from the
Group's gas business. The Peterborough plant is operated and maintained on
behalf of Eastern by a third party contractor under a seven year contract which
commenced in 1993.
King's Lynn
A new 340MW CCGT power station at King's Lynn has been constructed for
Eastern under a turnkey contract. The station, which is currently being
commissioned, is scheduled to commence commercial generation in late 1997 and
will be operated and maintained by Eastern. The station's gas needs will be
provided by the Group's gas business.
Barking
Eastern has an interest of approximately 13.5% in a 1,000MW CCGT power
station at Barking which became operational in 1995, having been constructed as
a joint venture between Eastern and a number of other companies.
Nedalo
The Group owns 75% of Nedalo (UK) Ltd., which provides small scale CHP
equipment of up to one MW (electrical) as a single unit. Nedalo is estimated to
have a share of approximately 80% of the UK market for this equipment.
Czech Republic
In November 1996, the Group invested approximately L21 million in
acquiring a controlling interest of 52.8% in Teplarny Brno, a heating and
generation company based in Brno, the second largest city in the Czech Republic.
In 1997 the Group acquired a further 30.4% of the share capital of Teplarny Brno
for L6.6 million. A mandatory offer to purchase from the public the balance of
the share capital of Teplarny Brno will be made by the Group within 60 days
after September 14, 1997 and will be open for acceptance for 60 days thereafter.
Teplarny Brno owns coal and gas plants which are capable of generating 1,204MW
of energy in the form of steam and hot water which is sold principally to
industrial and domestic customers. It also owns a 169 kilometer pipe network for
distributing heat to customers' premises. Teplarny Brno also has an electricity
generation capacity of approximately 97MW, the output of which is sold to the
regional electricity company. A CCGT plant is currently under construction for
Teplarny Brno under a turnkey contract to provide 140MW of additional heat
capacity, and to allow 94MW of additional electricity generating capacity. In
addition, as described under "Networks" below, the Group has acquired a minority
interest in Czech electricity distribution company.
Poland
On September 9, 1997 the Group announced that it had agreed (subject to
satisfaction of preconditions) to acquire 49 per cent of Zamosc Energy Company
which is a joint venture with the Polish regional distribution company Zaklod
Energetyczny Zamosc SA and holds the right to develop three 70MW electric
co-generation plants in Chelm, Zamosc and Przemysl in southwest Poland which are
expected to cost approximately US$100 million each to build.
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Other Projects
A number of new generation projects are currently under consideration by
the Group including applications for permission to construct and operate two
additional CCGT units at the King's Lynn site to give an additional capacity of
680MW. Eastern is also considering opportunities for large scale CHP plants and
has recently applied for permission to construct a 240MW CHP power station in
conjunction with a major industrial energy user.
Other opportunities for large and small scale CHP plants and renewable
energy projects are actively being considered together with other conventional
generating projects. These include a project to develop a reduced emission coal
fired ("cleaner coal") power station in Great Britain via a joint venture
arrangement.
Competition
Eastern was the fourth largest generator in Great Britain as of March
31, 1997, with a share of approximately 10% of total registered generating
capacity. This compares to shares of approximately 26%, 25% and 12% for National
Power, PowerGen and British Energy, respectively. Eastern's mix of generating
plants enables it to operate in the mid-merit and base load sectors of the
market and to spread its fuel risk. Its future competitiveness in the generating
market will be affected by the rate at which it brings new, more efficient,
generating capacity onstream and by the impact of other generators and end-users
themselves building and owning new capacity, including CHP.
Given the current relative costs of various generation technologies, the
Directors believe it is likely that most new generating capacity to be built in
the UK over the next few years will be CCGT. The technology, while capable of
running at either base load or mid-merit, is, in the view of the Directors,
likely to be bid into the Pool so as to run at base load. Such an increase in
base load capacity may encourage larger numbers of existing power stations to
run in mid-merit mode, thereby increasing competition in the sector in which the
Group has recently established itself. However, this may be mitigated to the
extent that older power stations running in mid-merit mode are run down or
closed.
Electricity Sales
Eastern supplies electricity to customers in both the franchise market
and the competitive market and is the largest supplier of electricity in England
and Wales.
Franchise Market
Eastern Electricity has the largest franchise market in England and
Wales, supplying electricity to over 3 million customers comprising
approximately 2.9 million domestic customers and 250,000 small businesses.
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The following table shows the approximate number of franchise customers
within the authorized area of each Public Electricity Supply ("PES") License
holder for the year ended March 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
NUMBER OF FRANCHISE
COMPANY CUSTOMERS
=================================================================================
MILLION
<S> <C>
Eastern Electricity plc 3.1
Southern Electric plc 2.6
East Midlands Electricity plc 2.3
Midlands Electricity plc 2.2
NORWEB plc 2.2
Yorkshire Electricity plc 2.0
SEEBOARD plc 2.0
London Electricity plc 1.9
Scottish Power plc 1.8
Northern Electric plc 1.4
Manweb plc 1.3
SWEB plc 1.3
SWALEC plc 1.0
Scottish Hydro-Electric plc 0.6
----
Total 25.7
====
</TABLE>
Source: MarketLine International Limited - "UK Domestic and Commercial
Electricity 1997."
Eastern Electricity's authorized area covers approximately 20,300 square
kilometers in the east of England and parts of north London.
Competitive Market
Eastern is an active participant in the national competitive market.
According to MarketLine International (a research company which produces annual
market statistics on the electricity industry), Eastern has an aggressive
competitive strategy for customer retention. The competitive market currently
comprises over 51,000 sites, which the Directors estimate represents a market
size of approximately L6 billion per annum at current electricity prices. The
Directors estimate that over 50% of the Group's electricity sales to the
competitive market are to customers outside Eastern's authorized area.
Competition
Eastern competes in the competitive market on the basis of quality of
customer service and by competitive pricing. According to MarketLine
International, Eastern's market share for the twelve months ended March 31, 1997
was approximately 9.3% by sales volume and 14.1% by number of sites, making it
one of the leading competitive market suppliers among the PES License holders.
The largest suppliers in the competitive market over the same period were
PowerGen and National Power.
Eastern is currently the largest franchise market supplier in Great
Britain, supplying electricity to over three million customers in its authorized
area and is currently scheduled to remain the sole supplier of electricity to
those customers until March 31, 1998, after which competition for customers in
all areas of Great Britain is expected to be progressively phased in. The full
consequences of such deregulation are unpredictable, including the extent to
which new entrants who are not PES License holders will enter the supply market,
the impact of price competition, if any, and customers' propensity to change
suppliers. There can be no assurance that competition among suppliers of
electricity will not adversely affect the Group. The Group intends to continue
to compete for customers nationally following the introduction of such
competition.
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<PAGE> 93
Energy Trading
Typically, PES License holders are exposed to risk, as they are obliged
to supply electricity to their customers at stable prices, but have to purchase
almost all the electricity necessary to supply those customers from the Pool at
prices which are constantly changing. This potential risk is hedged through the
use of financial instruments such as Contracts for Differences ("CfDs"). In
addition, the ownership of generating assets provides a hedge to this risk.
A CfD is an agreement between two parties calling for payments between
the parties in amounts equal to the product of (a) the difference in each
settlement period between the Pool price and the price ("strike price")
specified in the CfD and (b) the amount of electricity provided for in that
settlement period which is usually expressed in MW of demand. The settlement
period is half an hour. CfDs effectively fix the prices a supplier pays and a
generator receives for electricity and therefore reduce the financial risk
otherwise associated with the sale and purchase of electricity through the Pool.
The energy trading business co-ordinates the Group's activities in
managing risk and provides support to Eastern's electricity and natural gas
retail activities. The Group's risk management activities are also fully
integrated with its natural gas purchase and sales, wholesale and trading
contract portfolios to ensure that the operation of Eastern's power stations is
optimized having regard to relative prices in gas and electricity markets. The
energy trading business also earns revenue by providing risk management services
to other retailers of electricity aimed at removing or reducing their Pool price
risk.
Eastern seeks to manage its financial exposure by trading its portfolio
of CfDs (a small number of which are long-term), bidding Eastern's generation
output into the Pool, in terms of both price and volume, for each half hour of
the day, and by agreeing with the electricity sales division the volume and
pricing of sales in the competitive market. The overall position for each half
hour of the day is monitored by the energy trading business with the aim of
balancing electricity purchases and sales, although the inflexibility of CfDs
available in the market and the physical availability of plant means that an
exact balance for every half hour cannot be achieved. The resulting net position
is subject to risk exposure limits which are monitored independently within
Eastern. Credit checks are also undertaken on counterparties. Although to date
Eastern has successfully managed such risk through management operations and has
reduced its exposure to this risk by building and leasing generation assets,
Eastern's ability to manage such risk in the future will depend, in part, on the
terms of its supply contracts, its ability to implement and manage an
appropriate hedging strategy, the continuation of an adequate market for hedging
instruments and the performance of its generating assets.
The energy trading business purchases coal, oil and natural gas for the
Group's UK power stations and has small equity interests in three natural
gas-producing fields in the North Sea. It also coordinates the purchase and sale
of natural gas on a long and short term basis.
As part of the Group's strategy to exploit opportunities in energy
trading services with third parties, in December 1996, Eastern entered into
agreements with Enron Capital & Trade Resources Limited ("Enron") to provide
certain energy management services to Enron in connection with its proposed new
790MW power station at Sutton Bridge in Lincolnshire. Subject to the
satisfaction of certain conditions precedent, the arrangements will come into
effect in mid-1999 coincidental with scheduled commencement of full operation of
the power station, and will expire 15 years later. Eastern has also agreed to
purchase up to 475 million therms of gas per annum from Enron over the 15 year
term commencing in mid-1999 at prices related to the prevailing market price for
gas at the time, the daily volume of gas supplied being dependent on the
relative market prices of electricity and gas. Under these arrangements, Eastern
may either use this gas in its portfolio or sell some or all of it back to
Enron, the resale volume being related to an associated electricity purchase
agreement. The electricity purchase agreement will, in turn, form another
element in Eastern's electricity portfolio. Overall, these arrangements provide
Eastern with additional flexibility in the management of its energy portfolio as
a whole.
On April 9, 1997 Eastern entered into an energy conversion arrangement
with Rolls Royce Power Ventures Ltd to provide natural gas and take the
electricity output from a mid-merit approximately 100MW gas fired power station
subject to receiving formal consent from the Office of Electricity Regulation
("OFFER"), which has been approved in principle, and other preconditions.
In order to help meet the expected needs of its natural gas wholesale
and retail customers (including the Group's power stations), Eastern has entered
into a range of purchase contracts. As of June 30, 1997, the commitments under
long-term purchase contracts amounted to an estimated L3.0 billion covering
periods of up to 18
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<PAGE> 94
years from such date. Firm sales commitments (including estimated power station
usage) at the same date amounted to L3.0 billion, covering periods up to 18
years from such date.
Energy Marketing
The Group acquired Citizens in May 1997 for an initial cash payment of
$20 million, plus a payment due on March 31, 2000 equivalent to the net assets
of the Citizens companies as of June 30, 1997. In addition, the Group is
required to pay additional amounts based on the achievement of profit goals up
to 2002, subject to a maximum payment for the entire transaction of $120 million
(including the net asset payment).
Citizens, which is headquartered in Boston and employs approximately 100
persons, engages in the purchase, sale and marketing of physical electric power
and transmission rights; the structuring and trading of electricity, gas and
fuel-related risk management products; the restructuring of power sales and
power supply agreements between third party sellers and purchasers; and the
marketing of Orimulsion(R) (a Venezuelan boiler fuel). In the year ended
December 31, 1996, prior to its acquisition by the Group, Citizens had gross
profit of $21.5 million and operating profit of $5.3 million.
Through Citizens Power Sales, Citizens was the fifth largest independent
wholesale electricity marketer in the US during 1996. Citizens purchases and
resells wholesale electric power and designs and applies electricity risk
management tools which include purchases and exchanges of electric capacity
and/or energy; banking, storage, and swaps of physical electricity; swaps of
fuel and electricity; forward purchases of fuel and electricity; and floors,
caps and collars on electricity and fuel pricing. It also engages in fuel to
electricity tolling transactions and electricity/fuel exchanges.
Citizens, through its subsidiaries Hartford Power Sales, L.L.C. ("HPS"),
CL Power Sales One, L.L.C. ("CL One"), CL Power Sales Two, L.L.C. ("CL Two"),
and CL Power Sales Eight, L.L.C. ("CL Eight"), has conducted the restructuring
of power sales agreements between several non-utility generators and electric
utilities in the northeastern US. Citizens is currently pursuing additional
restructuring opportunities throughout the US.
In connection with the Offer by PacifiCorp, Citizens filed an
application to sell Citizens Power Sales and other subsidiaries of Citizens to
Lehman Brothers Holdings, Inc ("Lehman"). Since these entities have received
authorization from the Federal Energy Regulatory Commission (the "FERC"),
transfer of control of these entities is subject to further approval by the
FERC.
The sale of these assets to Lehman is not expected to be completed
unless and until a further offer for Energy is made by PacifiCorp. If the sale
were to take place, it is anticipated that Lehman would purchase Citizens Power
Sales for the amount of $10 million, to be financed by a non-recourse
non-interest bearing note payable to Citizens out of the cash flows of and
proceeds from the disposition of assets of Citizens Power Sales. Citizens would
also receive 80% of the proceeds in excess of the principal amount of the note.
A separate purchase price would be established for each of the other companies
sold, which would be financed by non-recourse notes payable solely out of cash
flows or proceeds from the sale of the projects owned by those companies.
NATURAL GAS RETAILING
The Group, through Eastern Natural Gas and its subsidiaries, is one of
the largest suppliers of natural gas in Great Britain after Centrica plc. The
Directors estimate that as of March 31, 1997 the Group's market share by volume
was approximately 11% of gas delivered to the competitive industrial and
commercial market, an increase from approximately 5% as of March 31, 1996.
The Group is taking advantage of the increased competition progressively
being introduced into the industry by the British Government. It currently has
approximately 100,000 customers in the UK at 120,000 sites, ranging from
domestic households to large industrial companies. The Group's move into the
domestic sector has included supplying customers in the pilot deregulation
scheme in southwest England which began in April 1996 and has since been
extended to other counties in the south of England in the first half of 1997 and
to Scotland and the northeast of England in the second half of the year.
Competition
The gas supply market is highly competitive, with the Group's main
competitors being Centrica plc and the gas marketing arms of certain major oil
companies. Further competition is provided by a number of other electricity
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<PAGE> 95
companies and smaller gas suppliers which are independent of the major oil
companies and which each have a minor presence in the market.
In the six months ended March 31, 1997, the Directors estimate that the
Group maintained its market share of the retail gas supply market (by volume) at
11%. The Group aims to maintain a significant share of this market through
high-quality customer service and competitive pricing, and also utilizing the
economics of scale that its current level of sales provides in purchasing gas.
NETWORKS
ELECTRICITY
Almost all electricity customers in Eastern's authorized area, whether
franchise or competitive, are connected to and dependent upon Eastern's
distribution system. Eastern distributes approximately 31TWh of electricity
annually to over three million customers, representing more than seven million
people. The majority of the Group's owned tangible fixed assets in the UK are
currently employed in the electricity distribution business. The distribution by
Eastern of electricity in its authorized area is regulated by its PES License,
which, save in exceptional circumstances, is due to remain in effect until at
least 2025.
Physical Distribution System
Eastern receives electricity from the National Grid at 21 supply points
within its authorized area and three points in the authorized areas of
neighboring RECs. The majority of this electricity is received at 132kV. It is
then distributed to customers through the Group's system of approximately 35,600
kilometers of overhead line, 53,100 kilometers of underground cable, and
numerous transformers and switchgear, via a series of interconnected networks
operating at successively lower voltages. Eastern also receives electricity
directly from power stations located in its authorized area and, from time to
time, from customers' own generating plants and connections with neighboring
RECs.
Customers
Networks derived approximately 91% of its use of system revenue in the
six months ended March 31, 1997 from Eastern's electricity sales operations. The
remaining 9% was derived from holders of Second Tier Supply Licenses in respect
of the delivery of electricity in those of their customers located in Eastern's
authorized area.
System Performance
The performance of the network is monitored and publicly reported upon
annually by OFFER. According to recent figures, in the year ended March 31,
1996, Eastern achieved the best overall distribution system performance (number
of faults per 100 kilometers of network) of all the PES License holders. It also
achieved one of the best performances for supply restoration following a fault
and reduced the average time a customer was off supply during a fault.
Distribution Charges and Price Control
The distribution charges levied by Eastern and the other RECs consist of
use of system charges and charges for other "excluded services" (i.e., services
outside the scope of the price control) including connection charges.
Distribution and supply charges are regulated by certain conditions in Eastern's
PES License, which sets out a formula for determining the maximum charge per
unit distributed in any financial year. A substantial majority of the sales of
the Group's electricity network business consists of charges for the use of its
distribution system, most of which are charged to its Power business and are
passed through to its customers. Most of the charges for the use of the
distribution system are subject to distribution price controls. See "Regulatory
Matters" below.
Czech Republic
In October 1996, the Group acquired a minority interest in
Severomoravska Energetika a.s., a Czech electricity distribution and supply
company, as part of its plan to develop interests in companies that would enable
it to implement further its integrated energy strategy overseas. As described
under "Generation", the Group acquired an interest in Teplarny Brno, a heating
and generation company in the Czech Republic, in November 1996 and subsequently
increased its interest during 1997.
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<PAGE> 96
Competition
At present, the Group experiences little competition in the operation of
its electricity distribution system. However, in certain limited circumstances,
some customers may establish (or increase) capacity for "own generation", by
becoming directly connected to the National Grid or establishing their own
generating capacity, thereby avoiding use of distribution system charges.
Telecommunications
The Group's telecommunications network comprises an established radio
telemetry network and a recently constructed optical fiber cable network of
approximately 1,100 kilometers which principally covers Eastern Electricity's
authorized area, but also connects to certain other business centers, including
central London. Extensions in the Kent/Sussex area are currently in planning and
implementation and are expected to increase the network to approximately 1,800
kilometers by 1998. Capacity is made available to large business users, cable
operators and public telephone operators. The Group also holds a public
telephone operations license and runs a radio site sharing the optical fiber
renting operation with a number of major telecommunications companies.
Contracting
Eastern's Contracting Division provides electrical contracting services.
These services, to domestic, commercial and industrial customers (including
other PES License holders) for voltages up to and including 132kV, involve the
design, installation and maintenance of heating, security, fire alarm and
prevention, power generation and standby systems, overhead lines, switchgear and
electrical wiring systems. Eastern is in competition with other electrical
contractors, including other RECs.
OTHER ACTIVITIES
The Group is involved in a number of other peripheral activities,
including a gold and copper exploration prospect in northern Chile, a landfill
project in Imperial County, California, and the design, manufacture, sale and
lease of modular buildings.
The first two of these are residual activities conducted by the
Consolidated Gold Fields group which was acquired by Hanson in 1989. The
Consolidated Gold Fields group was established in the 1890s to finance gold
mining prospects in Southern Africa. It subsequently diversified into a range of
other activities including mining, extractive and metal processing operations in
various other countries, including the US, the UK and Australia. In addition to
its continuing interests relating to coal mining, and the gold and copper and
landfill projects mentioned above, Consolidated Gold Fields has a number of
other minor and/or non-trading subsidiaries.
The design, manufacture, sale and lease of modular buildings is
conducted by Rollalong, a UK company, which is also a holding company of Eastern
and Consolidated Gold Fields.
For a discussion of certain contingent liabilities relating to certain
former operations of Consolidated Gold Fields, see "Other Regulatory Matters"
below.
The Group also owns Major Insurance Company Limited ("Major"), a company
incorporated in Bermuda, which formerly acted as a captive insurance company for
certain of Hanson's and the Group's existing and previous US businesses. Prior
to the Demerger, the outstanding insurance business of Major was reconfigured,
reinsured or indemnified by other present or former Hanson entities, so that its
continuing business relates only to Peabody's US operations and Consolidated
Gold Fields' US operations.
EMPLOYEES
The average number of persons employed by the Group during the six
months ended March 31, 1997 was 15,108, of whom approximately 6,770 were based
in the UK, approximately 6,549 were based in the US, approximately 1,120 were
based in Australia and approximately 669 were based in other countries. As of
March 31, 1997, the total number of employees was 15,025.
UNION REPRESENTATION
Approximately 60% of the Group's US coal employees (which produced
approximately 34% of its US sales volume in the six months ended March 31,
1997), all of the Group's Australian coal employees and approximately
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<PAGE> 97
62% of the Group's power and networks employees as of March 31, 1997 were
members of unions. Certain of Peabody's competitors in the US have non-union
workforces. Because of the increased risk of strikes and other related work
stoppages, in addition to higher labor costs which may be associated with union
operations in the coal industry, Peabody's non-union competitors may have a
competitive advantage in areas where they compete with Peabody's unionized
operations.
The workers at Peabody East (approximately 3,010 at March 31, 1997) are
represented by the United Mine Workers of American Union (the "UMWA") and work
under the 1993 National Bituminous Coal Wage Agreement (the "NBCWA"), a
multi-employer agreement negotiated by the Bituminous Coal Operators'
Association (the "BCOA") of which Peabody East is a member. The NBCWA became
effective on December 15, 1993 and is due to expire on August 1, 1998, although
negotiations to extend the contract beyond that date are expected to begin later
in 1997. The previous multi-employer agreement covering the workers at Peabody
East, the National Bituminous Coal Wage Agreement of 1988, expired in February
1993. A new agreement had not been reached when the agreement expired and the
union immediately called a strike. Except for a 60 day period in March and April
1993, the strike continued until December 1993 when the current NBCWA was
signed. The Directors estimate that this resulted in lost profits of L100
million to L120 million in the year ended September 30, 1993 and L70 million to
L80 million in the year ended September 30, 1994. During the 1993 dispute, the
main demands by the UMWA included (a) automatic unionization of new mines opened
by Peabody; (b) rights to non-union jobs; and (c) rights to all jobs available
whenever a new mine was opened by Peabody. Although the BCOA would not agree to
these demands, the parent companies of the BCOA members signed individual
Memoranda of Understanding which gave the UMWA members the right to the first
three out of every five new jobs at non-union bituminous mines. This currently
affects two mines operated by Peabody. The NBCWA provided for two reopener
provisions to be exercised by the UMWA and the BCOA between September and
December 1996 and September and December 1997. Under the reopener provisions,
wages, pensions and medical benefits could be renegotiated. The BCOA settled
both reopeners early in August 1996. The settlements provide for increases in
wages (on a lump sum basis) and pensions and a lower medical deductible. Peabody
East has enjoyed a good relationship with the UMWA since the NBCWA was signed.
Peabody Western employees (approximately 723 at March 31, 1997) are
covered by the Western Surface Agreement of 1992. This agreement was due to
expire in May 1997, but has been extended to August 2000. Peabody Western was
not affected by the strikes in 1993 and no significant production has been lost
at Peabody Western since 1987 as a result of industrial action. No assurance can
be given that the existing NBCWA and the Western Surface Agreement will be
successfully renegotiated upon their expiration without a strike or other work
stoppage. Apart from work stoppages which may occur upon termination of a
collective bargaining agreement, Peabody East and Peabody Western may from time
to time be subject to certain unauthorized work stoppages or wildcat strikes.
The Australian coal mining industry is highly unionized and all the
workers employed at Peabody Australia are members of trade unions. These
employees are represented by three unions, the United Mine Workers which
represents the production employees, and two unions which represent the other
staff. The miners at Warkworth mine have signed a three year labor agreement
which is due to expire in September 1999 and the miners at the Ravensworth and
Narama mines have signed a two year labor agreement which will expire in March
1998. Although production is lost due to industrial action from time to time, in
recent years there have not been any significant disputes or stoppages at mines
operated by Peabody Australia.
Eastern recognizes trade unions for collective bargaining purposes and
approximately 66% of employees of Eastern's businesses are union members.
Eastern Natural Gas and the energy trading businesses do not recognize trade
unions and most workers in these businesses are employed under individual
contracts. There have been no industrial disputes or work stoppages at Eastern
since its privatization in 1990. Eastern has negotiated a two year agreement
relating to pay with employees in the electricity supply and networks businesses
which expires at the end of June 1998.
REGULATORY MATTERS
The Group's operations are subject to extensive and changing regulation
in the UK, the US and Australia regarding production, sale, distribution, health
and safety and environmental matters.
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REGULATORY MATTERS AFFECTING PEABODY
US
The US coal mining industry is subject to regulation by federal, state
and local authorities on matters such as employee health and safety, permitting
and licensing requirements, air quality standards, water pollution, plant and
wildlife protection, the reclamation and restoration of mining properties after
mining has been completed, the discharge of hazardous substances into the
environment, surface subsidence from underground mining and the effects of
mining on groundwater quality and availability. Costs associated with such
regulatory compliance increase the overall cost of mining. While it is not
possible to quantify the costs of compliance with all applicable federal and
state laws, those costs have been and are expected to continue to be
significant. For a discussion of the costs associated with the Group's health
care obligations to employees, reclamation and environmental obligations, see
Notes 19 and 21 of Notes to the Financial Statements included herein.
Mining Health and Safety
Stringent health and safety standards have been imposed by federal
legislation since the Federal Coal Mine Health and Safety Act of 1969 was
adopted. That Act resulted in increased operating costs and reduced
productivity. The Federal Mine Health and Safety Act of 1977 significantly
expanded the enforcement of health and safety standards and imposed health and
safety standards on all aspects of mining operations.
Most of the states in which Peabody operates have state programs for
mine health and safety regulation and enforcement. In combination, federal and
state health and safety regulation in the coal mining industry is a very
comprehensive and pervasive system for protection of employee health and safety.
This regulation has a significant effect on Peabody's operating costs. However,
Peabody's US competitors are subject to the same degree of regulation. Peabody's
accident rate has fallen by approximately 58% during the period from October 1,
1990 to March 31, 1997.
Black Lung
Under the Black Lung Benefits Revenue Act of 1977 and the Black Lung
Benefits Reform Act of 1977, as amended by the Black Lung Benefits and Revenue
Amendment Act of 1981, each coal mine operator is required to secure payment of
federal black lung benefits to claimants who are current and former employees
and to a trust fund for the payment of benefits and medical expenses to
claimants who last worked in the coal industry prior to July 1, 1973. Less than
7% of the miners currently seeking federal black lung benefits are awarded such
benefits by the federal government. The trust fund is funded by an excise tax on
coal sales which is passed on to the purchaser under many of Peabody's coal
sales agreements. The maximum fee is $1.10 per ton on underground mined coal and
$0.55 per ton on surface mined coal.
The US Department of Labor has proposed new regulations which would
liberalize the procedures used to award federal black lung benefits. If the
proposed regulations are finally adopted by the Department of Labor, there is
expected to be a substantial increase in the number of miners that are awarded
federal black lung benefits and Peabody's liability for federal black lung
benefits is likely to increase.
Coal Industry Retiree Health Benefit Act of 1992 ("Health Benefit Act")
The Health Benefit Act was enacted to provide for the funding of health
benefits for certain UMWA retirees and their spouses. The Health Benefit Act
established a fund into which "signatory operators" and "related persons" are
obliged to pay annual premiums for beneficiaries. The Health Benefit Act also
created a second benefit fund ("1992 Fund") for miners who retired between July
21, 1992 and September 30, 1994 and whose former employers are no longer in
business. Companies which are signatories to the NBCWA labor agreement must pay
premiums to the 1992 Fund. Peabody East made payments under the Health Benefit
Act of $4.17 million for the six months ended March 31, 1997 and expects that
total payments for the year ending March 31, 1998 will be approximately $8.4
million. These payments are less than half of the amounts paid prior to the
enactment of that Act.
Environmental Laws
Peabody is subject to various federal and state environmental laws.
These laws require approval of many aspects of coal mining operations, and both
federal and state inspectors regularly visit Peabody's mines and other
facilities to ensure compliance.
22
<PAGE> 99
A risk of environmental liability is inherent in the coal mining
operations of the Group with respect to both current and past operations. The
Group has incurred and will continue to incur expenses for environmental
matters, including those arising from sites relating to former operations or
corporate predecessors of the Group.
Surface Mining Control and Reclamation Act: The Surface Mining Control
and Reclamation Act of 1977 ("SMCRA") requires coal mining companies to reclaim
land after mining has been completed. The mine operator must submit a bond or
otherwise secure performance of its reclamation obligations. Peabody has $629
million of reclamation bonds in place which assure compliance with all
applicable regulations.
Permits for surface mining operations are obtained from the Federal
Office of Surface Mining Reclamation and Enforcement or, where state regulatory
agencies have adopted federally approved state programs under SMCRA, the
appropriate state regulatory authority. Mining permits issued pursuant to SMCRA
must be renewed. The renewal of a mining permit may be denied if there are
violations of SMCRA, or other environmental laws. Although the Group does not
anticipate permit renewal problems, there can be no assurance that Peabody's
mining permits will be renewed in the future. In addition, the Peabody Western
Black Mesa Mine has been operating under a temporary permit since 1978. The mine
has been operating continuously since 1978, and the Group does not anticipate
that the temporary permit status will have an effect on operations at this mine.
There can be no assurance, however, that Peabody will be allowed to continue
operating under this temporary permit in the future, or that other permit issues
will not arise which will adversely affect Peabody's operations.
SMCRA also imposes a tax on coal production to pay for reclamation of
lands mined prior to 1978. The maximum fee is $0.35 per ton on surface mined
coal and $0.15 per ton on underground mined coal. Under many of the coal sales
agreements to which Peabody is a party, the fee is passed on to the purchaser.
Peabody accrues for the liability associated with all end of mine reclamation on
a ratable basis as the coal reserve is being mined. Peabody has won numerous
national and state awards for its reclamation practices. Accrued obligations
were $444.3 million and $429 million for the year ended September 30, 1996 and
the six months ended March 31, 1997, respectively.
Clean Air Act: The Clean Air Act, including the Clean Air Act
Amendments of 1990, extensively regulates the air emissions of coal-fired
electric power generating plants. Title IV of the Clean Air Act Amendments
places limits on sulfur dioxide emissions from electric power generation plants.
The first phase ("Phase I") of reductions, which became effective on January 1,
1995, applies to certain identified facilities. The second phase, which will
became effective in 2000 ("Phase II"), applies to all facilities including those
subject to the 1995 restrictions. The affected utilities will be able to meet
these requirements by switching to lower sulfur fuels, by installing pollution
control devices such as scrubbers, by reducing electricity generating levels or
by purchasing or trading so-called "emission allowances". Specific emissions
sources may use these allowances, which utilities and industrial concerns can
trade or sell, to allow other units to emit higher levels of sulfur dioxide.
Title III of the Clean Air Act Amendments also required certain utility
power plants to reduce their nitrogen oxide emissions with effect from January
1, 1995. The EPA adopted regulations in December 1996 requiring the remaining
utility power plants to reduce their nitrogen oxide emissions. Although
Peabody's customers are affected by these regulations, based on current
information, the Directors do not expect any material loss of sales as a result
of these nitrogen oxide regulations.
The EPA announced in July 1997 that it had adopted changes to the
National Ambient Air Quality Standards ("NAAQS") for particulate matter ("PM")
and ozone ("O(3)"). The NAAQS are set at the level judged to protect the
public's health and welfare. The states will be required to implement changes to
their existing plants to attain and maintain compliance with the revisions to
the standards. Because mining operations emit PM and the electric utility
industry emits sulfur dioxide and nitrogen oxides, which are precursors to PM
and O(3), Peabody's mining operations and electric utility customers are likely
to be affected when the revisions to the NAAQS are implemented by the states.
The extent of such effects, which could be material to Peabody, will depend on
the policies and control strategies associated with the state implementation
process under the Clean Air Act. The impact, if any, on Peabody is unlikely to
occur until after 2000.
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"): CERCLA and similar state laws affect coal mining operations by
imposing clean-up requirements for threatened or actual releases of hazardous
substances that may endanger public health or welfare or the environment. Under
CERCLA, joint and several liability may be imposed on waste generators, site
owners and operators and others regardless of fault or the legality of the
original disposal activity. Waste substances generated by coal mining and
processing are generally not regarded as hazardous substances for purposes of
CERCLA.
23
<PAGE> 100
Clean Water Act: The Federal Water Pollution Control Act, as amended by
the Clean Water Act of 1977, affects coal mining operations by imposing
restrictions on effluent discharge into water. Regular monitoring, reporting
requirements and performance standards are preconditions for the issuance and
renewal of permits governing the discharge of pollutants into water.
Resource Conservation and Recovery Act: The Resource Conservation and
Recovery Act ("RCRA") of 1976, affects coal mining operations by imposing
requirements for the treatment, storage and disposal of hazardous wastes. Coal
mining operations covered by SMCRA permits are exempted from regulation under
RCRA by statute. However, the EPA is considering the possibility of expanding
regulation of mining wastes under RCRA. Any changes in the types of substances
regulated under RCRA could have a material adverse effect on the Group's
business or financial position.
Global Climate Change: The US, Australia and 165 other nations have
signed and ratified the UN Framework Convention on Climate (the "Convention"),
under which the US, Australia and 34 other developed countries have agreed to
implement measures aimed at reducing their greenhouse gas emissions to 1990
levels by 2000. The parties to the Convention are currently working on a further
protocol that is expected to commit the developed nations to adopt policies and
measures and set quantified emission limitations and reduction objectives for
implementation no earlier than 2005. That protocol is expected to be completed
at the end of 1997. Any new protocol adopted by the parties to the Convention
would have to be ratified by the US Senate and the Australian Government before
it became effective in their respective countries. It is unclear what impact
this protocol might have on Peabody's operations, and there is no guarantee that
such impact will not have a material adverse effect upon the Group's business or
financial position.
AUSTRALIA
The Australian mining industry is regulated by Australian federal, state
and local governments with respect to environmental issues such as land
reclamation, water quality, air quality and noise, planning issues such as
approvals to expand existing mines or to develop new mines and health and safety
issues. The Australian federal government retains control over the level of
foreign investment, export approvals and industrial relations. Australian state
governments also require coal companies to post security deposits against land
which has been used for mining, which are refundable after satisfactory
rehabilitation.
REGULATORY MATTERS AFFECTING EASTERN
The electricity industry in Great Britain is subject to regulation,
inter alia, under the Electricity Act and certain UK and EU environmental
legislation. The Group is also subject to existing UK and EU legislation on
competition and regulation in its gas and telecommunications businesses. In
addition, an element of any profit received by Eastern on its disposal of
certain categories of the assets vested in it at the time of its privatization
is subject to clawback by the Secretary of State for Trade and Industry until
March 31, 2000.
In June 1997, the UK Secretary of State for Trade and Industry announced
a review of utility regulation (including price controls) covering gas,
electricity, water and telecommunications. If an internal governmental review
team concludes that change is needed, the Government has stated that it intends
to publish a consultation paper in the fall of 1997. This review may result in
significant changes to the existing regulatory regime. There can be no assurance
regarding the impact of those potential utility regulatory changes, if any, on
Eastern and the Group.
POWER LICENSES
Generation
Unless covered by an exemption, all electricity generators operating a
power station in Great Britain are required to have a Generation License. The
conditions attached to such a license in England and Wales require the holder,
among other things, to be a member of the Pool and to submit relevant generating
sets for central dispatch. Failure to comply with any of the Generation License
conditions may subject the licensee to a variety of sanctions, including
enforcement orders by the Director General of Electricity Supply in Great
Britain ("DGES"), or license revocation if an enforcement order is not complied
with.
The Secretary of State has power under the Electricity Act to require
generators operating power stations with a capacity of not less than 50MW to
maintain stocks of fuel and other materials at power stations. The Secretary of
State is currently reviewing the level of fuel stocks held by generators.
24
<PAGE> 101
In England and Wales, each PES License limits the extent of the
generation capacity in which the relevant REC may hold an interest without the
prior consent of the DGES ("own-generation limits"). These own-generation limits
currently restrict the participation by a REC in generation to a level of
approximately 15% of the simultaneous maximum electricity demand in that REC's
authorized area at privatization, setting Eastern's limit at 1,000MW. Following
a process of consultation on the own-generation limits, the DGES stated in
January 1995 that he would be prepared to consider a REC's request to increase
its generation capacity on condition that it accepted explicit restrictions on
the contracts it signed with its supply business, and that at a minimum it would
be prohibited from passing additional own-generation output into its franchise
market. In August 1995, he published model draft license modifications which he
indicated that he would consider proposing in connection with a relaxation of
own-generation limits of a REC.
In June 1996, the DGES stated that he had indicated to Eastern that he
would consider relaxing its own-generation limits, subject to agreeing license
modifications as set out in his consultation paper of August 1995. The specific
consent of the DGES to the leasing by Eastern of generating capacity from each
of National Power and PowerGen has been confirmed by OFFER, and the Directors
expect consent to be granted on a conditional basis in relation to the Shotton
CCGT and the Dowlais clean coal plants.
Electricity Sales
Subject to certain exceptions, each supplier of electricity in the
franchise market in Great Britain is required to have a PES License for its
authorized area and is required under the Electricity Act to provide a supply of
electricity upon request to any premises in that area, except in specified
circumstances. Each PES License holder is subject to various obligations under
its PES License, including prohibitions on cross-subsidy between its various
regulated businesses and on discrimination in respect of the supply of
customers. Each PES License holder is also required to offer open access to its
distribution network on non-discriminatory terms. This obligation includes a
requirement not to discriminate between its own supply business and other users
of its distribution system. PES License holders are subject to separate revenue
controls on the actual costs they may pass through for the supply of electricity
to franchise customers and in respect of distribution charges.
A supplier of electricity to the competitive market in Great Britain
must, subject to certain exemptions, possess a Second Tier Supply License, or
hold a PES License for the authorized area in which customers are supplied.
Supply charges in the franchise market are regulated by an (RPI-X)+Y
revenue control formula. The RPI-X element relates to the costs of the supply
business, and includes a profit element. For the current control, which was set
for the period April 1994 to March 1998, X has been set at 2%. The Y factor
enables each PES License holder to pass through to customers costs already
regulated (transmission and distribution costs) and certain costs which are
unregulated (electricity purchase costs and the Fossil Fuel Levy). The formula
takes a forward-looking approach and therefore includes a correction factor to
allow for forecasting errors.
The DGES is currently reviewing with the PES License holders, the supply
price restraints to apply to tariff customers from April 1, 1998, when the
process of opening up competition in the under 100KW market is due to begin. The
DGES intends to publish final proposals in early October 1997.
Energy Trading
Eastern Power and Energy Trading Limited ("EPETL") is authorized by the
Securities and Investments Board under the Financial Services Act 1986 to deal
in electricity contracts for differences (including futures and options). A
subsidiary of EPETL is a joint holder of production licenses relating to its
equity interest in three North Sea natural gas fields described above.
Energy Marketing
The purchasing, wholesaling, and transmission of electricity in the US
is regulated by the FERC. Citizens Power Sales has been authorized by the FERC
to engage in wholesale electric power and energy transactions as a marketer of
electricity at rates established by agreement between Citizens Power Sales and
the purchaser. Citizens Power Sales is obligated to notify the FERC of any
changes in status, including ownership of generation or transmission facilities
or affiliation with any entity that has generation or transmission facilities or
a franchised service area in the US. Each of HPS, CL One, CL Two and CL Eight
has received the same authorization from the FERC and is under the same
obligation to advise the FERC of any changes in status.
25
<PAGE> 102
Citizens trades in electricity futures on the New York Mercantile
Exchange. Citizens files periodic reports with the Commodity Futures Trading
Commission.
Restructuring transactions, under which affiliates of Citizens
participate in the restructuring or replacing of power sales agreements between
non-utility generators and utility purchasers, generally require approvals from
state regulatory agencies for the utility purchasers to enter into new power
purchase agreements. Also, long term power purchase contracts from utility
sellers which may be entered into in connection with restructuring transactions
require filing with, and acceptance of filing by, the FERC. These approvals have
been obtained in the restructuring transactions completed to date.
Conversion of generating plants to Orimulsion(R) as a fuel requires
extensive environmental approvals. Final approval for the conversion to
Orimulsion(R) at the 1,600 MW Manatee plant of Florida Power & Light ("FP&L")
was denied by the Florida Siting Board on April 23, 1996. On appeal, the Siting
Board's order was vacated and remanded for reconsideration. On remand, the
Siting Board, on September 9, 1997, by a 5-2 vote, returned the case to the
original hearing officer to consider additional measures to mitigate pollution
and community impacts, which additions are believed acceptable to FP&L. Final
decisions are expected within three months. All other approvals, other than
Siting Board approval, have been obtained by FP&L for the Manatee project.
Gas
The gas supply activities on ENG are principally regulated by the
Director General of Gas Supply under the Gas Acts and by the conditions of ENG's
Gas Licenses. ENG currently holds a public gas transporter's license, a gas
supplier's license and a gas shipper's license. The gas business is not subject
to price regulation.
NETWORKS
Electricity
Approximately 95% of the operating income of Eastern Electricity's
networks business is controlled by a distribution price control formula of
RPI+X(d) which determines the maximum charge per unit that Eastern Electricity
is permitted to charge in any financial year to March 31 for distribution
services which are subject to the control. The X(d) factor for Eastern was
initially related to the numbers of units (kWh) of electricity distributed and
was set at +0.25% for the period 1990 to 1995. Since the distribution price
reviews in August 1994 (effective April 1, 1995) and July 1995 (effective April
1, 1996), price control has been related to the number of customers served and
the number of units sold in equal weightings. These price reviews have resulted
in the X(d) factor being reduced to -11% for 1995/96, -10% for 1996/97 and -3%
for each of the years 1997/98 to 1999/2000. The August 1994 review resulted in
an estimated total reduction of Eastern's prospective revenues of some L350
million over the five years to April 2000 and July 1995 review resulted in an
estimated total reduction of Eastern's revenues of a further L150 million over
the four year period from April 1, 1996 compared with revenue under the previous
distribution price controls. To allow for forecasting errors, an annual
correction factor is built into the control to allow any under-recovery or over-
recovery of income to be recovered in following years, the latter with an
interest penalty. A further distribution price control review is schedule to
take place in 2000. Any additional revenue by the DGES may adversely affect the
Group. Similarly, the DGES may issue further or additional statements or take
further or additional actions which may impact upon the Group's operations.
Distribution costs vary with the voltage at which consumers are
connected and the utilization of the distribution system at the time units are
distributed. Changes in the mix of units distributed at different voltage levels
and between peak and off-peak periods are reflected in the calculation of the
maximum average allowed charge per unit distributed by reference to a "basket"
of distribution categories which take account of the different costs of
distributing electricity at various voltages and at various times of the day.
Electricity distributed to extra high voltage premises is excluded from
the distribution price control formula, as are charges for certain additional
services including connection charges. Connection charges must be set at a level
which enables the licensee to recover no more than the appropriate proportion of
the costs incurred and no more than a reasonable rate of return on the capital
represented by such costs. Any dispute over connection charges may be determined
by the DGES. In addition, income received in respect of National Grid Group exit
charges incurred by a REC and received through use of system charges is not
subject to distribution price control.
In certain circumstances, the DGES may propose amendments to the
distribution price control formula or the terms of the license. In the cases
where a PES License holder is not willing to accept modifications to the
26
<PAGE> 103
distribution price control formula or other license conditions put forward by
the DGES, the normal process would be for the DGES to refer the matter to the
MMC.
Telecommunications
The Group's telecommunications activities are principally regulated by
the Telecommunications Act 1984 and by the conditions of its public telephone
operations license. The UK Secretary of State for Trade and Industry and the
Director General of Telecommunications are the principal regulators of the
telecommunications industry in the UK. The telecommunications business is not
subject to price regulation.
ENVIRONMENTAL REGULATIONS AND EMISSIONS
The electricity generation industry in the UK is subject to a framework
of national and EU environmental laws which regulate the construction, operation
and decommissioning of power stations.
Under these laws, each power station operated by the Group is required
to have an authorization which regulates its releases into the environment and
seeks to minimize pollution of the environment taken as a whole, having regard
to the best practicable environmental option.
The responsibility for these requirements in England and Wales is vested
in the Environment Agency ("EA") whose role is to regulate industrial plants and
to monitor the environment, to obtain environmental information and to promote
the objective of sustainable development. When performing its functions, the EA
is required to take into account the best available techniques for controlling
emissions, the life expectancy and rate of utilization of the plant, and the
desirability of not involving excessive cost.
The principal EU Directive affecting environmental emissions currently
in force is the Large Combustion Plants Directive ("LCPD").
The LCPD requires the UK to reduce sulfur dioxide ("SO(2)") emissions
from existing plants by 60% by 2003 and emissions of nitrogen oxides ("NOx") by
30% by 1998 compared with their 1980 levels. The Large Combustion Plant National
Plan is the mechanism by which this directive has been implemented in the UK and
sets year on year programs of reductions for various industries including the
electricity industry. Each site has an annual limit of emissions. Negotiations
are underway regarding further restrictions on emissions.
In addition, the UK has ratified the second United Nations Economic
Commission Sulfur Protocol. The Protocol commits the UK to a reduction in SO(2)
emissions from all sources by 80% by 2010 compared with their 1980 levels.
At a local level, the UK's Air Quality Strategy provides set targets for
2005 and places a duty on local authorities to review air quality with a view to
setting up management in places where targets are not being met. When adverse
meteorological conditions occur, some power stations may have to introduce
measures to comply with these targets.
The UK is also a signatory to the Greenhouse Gases Convention which
commits it to draw up programs aimed at reducing emissions of carbon dioxide and
other greenhouse gases to their 1990 levels by 2000. Negotiations will take
place in December 1997 aimed at cutting emissions further.
For a discussion of the costs associated with environmental matters
affecting the Group, see Item 9 of this Transition Report and Notes 17 and 19 of
Notes to the Financial Statements included elsewhere herein.
OTHER REGULATORY MATTERS
Certain US subsidiaries of Consolidated Gold Fields are or may become
parties to environmental proceedings which have been commenced or threatened in
the US in relation to certain sites previously owned or operated by those
subsidiaries or companies associated with them. This includes sites formerly
owned or operated by Consolidated Gold Fields and as well as dormant sites that
the Group currently owns. The EPA has placed some of these sites on the National
Priorities List, promulgated pursuant to CERCLA, and some of these sites are on
similar state priority lists. There are a number of further sites in the US
which were previously owned or operated by such companies which could give rise
to environmental proceedings in which members of the Group could incur
liabilities.
27
<PAGE> 104
Where such sites have been identified, the Directors have commissioned a
review of publicly available information by independent environmental
consultants in order to assess the total amount of the liability per site and
the proportion of those liabilities which the members of the Group are likely to
bear. The available information on which to base this review is very limited,
especially in relation to sites which are no longer owned or operated by members
of the Group.
On the basis of that review, the Directors have made a provision against
the above environmental liabilities relating to Consolidated Gold Fields in the
total sum of $73.6 million as of March 31, 1997 (which is included in the
overall provision of L280 million as discussed in Note 19 of Notes to the
Financial Statements included herein), 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. See Note 21
of Notes to the Financial Statements included herein.
In addition to all of the foregoing, the Group may incur environmental
liability and be subject, among other things, to an order requiring the clean-up
of contaminated soils, surface or groundwater, administrative proceedings,
long-term monitoring requirements to evaluate impact on the environment, common
law suits, toxic tort suits, penal proceedings or, in some instances, an
obligation to reimburse governmental agencies or third parties for certain
costs, including natural resource damages.
ITEM 2. DESCRIPTION OF PROPERTY
The principal establishments owned or occupied by the Group as of March
31, 1997 are as follows:
<TABLE>
<CAPTION>
PROPERTY OWNER TENURE TERM OF LEASE PRINCIPAL USE SITE AREA (ACRES)
<S> <C> <C> <C> <C> <C>
117 Piccadilly, London Eastern Energy Freehold -- Head Office --
Limited
St. Louis, Missouri Peabody Leasehold 5 years Offices 0.9
Sydney, Australia Peabody Australia Leasehold 3 years Offices 0.2
Charleston, West Virginia Peabody East Leasehold 1 year Offices 1.1
Flagstaff, Arizona Peabody Western Freehold -- Offices 2.2
Grants, New Mexico Lee Ranch Freehold -- Offices & Mine 3.0
Gillette, Wyoming Powder River Freehold -- Offices 3.0
Carterhatch Lane, Enfleid Eastern Freehold -- Offices and Depot 4.0
Electricity
Milton, Cambridge Eastern Freehold -- Offices and Depot 24.0
Electricity
Wherstead Park, Wherstead, Ipswich Eastern Freehold -- Offices 17.0
Electricity
Peterborough Power Station Eastern Generation Freehold -- Power station 18.1
Limited
King's Lynn Power Station Anglian Power Freehold -- Power station 16.1
Generators Limited
Drakelow C Power Station PowerGen Leasehold 99 years Power station 177.0
High Marnham Power Station PowerGen Leasehold 99 years Power station 178.4
Ironbridge Power Station National Power Leasehold 99 years Power station 212.7
Rugeley B Power Station National Power Leasehold 99 years Power station 299.0
West Burton Power Station National Power Leasehold 99 years Power station 511.5
</TABLE>
28
<PAGE> 105
For information concerning the Group's coal reserves, see "Description
of the Businesses - Coal - Coal Reserves" and for information concerning the
Group's power stations, see "Description of the Businesses - Power Generation"
in Item 1 of this Transition Report.
ITEM 3. LEGAL PROCEEDINGS
Other than as mentioned in "Regulatory Matters -- Other Regulatory
Matters" in Item 1 of this Transition Report, the Group is not involved in any
legal or arbitral proceedings which management believes will have a material
adverse effect upon the Group's business or financial position.
ITEM 4. CONTROL OF REGISTRANT
To its knowledge, Energy is not owned or controlled directly or
indirectly by any government or by any other corporation. For information
concerning a possible change in control of Energy in connection with the Offer
by PacifiCorp Acquisitions, as to which there can be no assurances, see "Offer
by PacifiCorp Acquisitions" in Item 1 of this Transition Report.
The following table sets forth certain information as of September 1,
1997 with respect to those persons that had interests in 3% or more of Energy's
issued Ordinary Shares:
<TABLE>
<CAPTION>
PER CENT OF
ORDINARY SHARES CLASS
--------------- ----------------
(MILLIONS)
---------------
<S> <C> <C>
National City Nominees Limited* 133.1 25.6
Mercury Asset Management Limited 33.4 6.4
Chase Nominees Limited 23.9 4.6
Barrow, Hanley, Mcwhinney & Strauss, Inc. 23.5 4.5
PDFM Limited and UBS International Investment
London Ltd 19.2 3.7
</TABLE>
* Custodian for Citibank, N.A., as Depositary (the "Depositary") under the
Deposit Agreement (the "Deposit Agreement"), dated as of February 21, 1997,
among Energy, the Depositary and all holders and beneficial owners of ADRs
issued thereunder.
As of September 1, 1997, the Directors and officers as a group (10
persons) beneficially owned 139,482 Ordinary Shares (including Ordinary Shares
represented by ADSs), which in the aggregate represented less than 1% of the
outstanding Ordinary Shares.
ITEM 5. NATURE OF TRADING MARKET
The principal trading market for the Ordinary Shares is the London Stock
Exchange ("LSE"), ADSs, each representing four Ordinary Shares, are listed on
the New York Stock Exchange (the "NYSE"). The ADSs are evidenced by American
Depositary Receipts ("ADRs") issued by the Depositary under the Deposit
Agreement.
The following table sets forth, for the periods indicated, (i) the
reported high and low middle market quotations for the Ordinary Shares based on
the Daily Official List of the London Stock Exchange and (ii) the reported high
and low sales prices of the ADSs on the NYSE Composite Tape.
<TABLE>
<CAPTION>
LONDON STOCK EXCHANGE NYSE
---------------------- ------------------
(PENCE PER) (US DOLLARS PER)
ORDINARY SHARE ADS
---------------------- ------------------
HIGH LOW HIGH LOW
------- ------- ----- -----
<S> <C> <C> <C> <C>
Year ended March 31, 1997
*Fourth Quarter (from February 24)........... 568.5 466.5 37.20 29.75
Year ending March 31, 1998
First Quarter................................ 648.0 486.0 43.25 31.25
Second Quarter (through September 2)......... 658.5 617.0 44.00 39.00
</TABLE>
29
<PAGE> 106
* Energy was demerged from Hanson and the Ordinary Shares commenced trading on
the LSE and the ADSs commenced trading on the NYSE on February 24, 1997.
As of September 1, 1997, approximately 430,000 Ordinary Shares and ADRs
evidencing approximately 33.3 million ADSs (representing 133.1 million Ordinary
Shares) were held of record in the US. These Ordinary Shares and ADRs were held
by approximately 375 and 18,424 record holders, respectively, and collectively
represented or evidenced approximately 26% of the total number of Ordinary
Shares outstanding. Energy also believes that as of September 1, 1997,
approximately 4% of its outstanding Ordinary Shares were beneficially owned by
US holders. Since certain of these securities are held by brokers or other
nominees, the number of record holders in the US may not be representative of
the number of beneficial holders or of where the beneficial holders are
resident.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no UK restrictions on the import or export of capital
including foreign exchange controls that affect the remittances of dividends or
other payments to non-resident holders of Ordinary Shares except as otherwise
set forth in Item 7 of this Transition Report and except for certain
restrictions imposed from time to time by HM Treasury pursuant to legislation,
such as The United Nations Act 1946 and the Emergency Laws Act 1964, against the
government or residents of certain countries.
Except for certain restrictions that may be imposed from time to time by
HM Treasury under legislation as described above, under English law and Energy's
Memorandum and Articles of Association, persons who are neither residents nor
nationals of the UK may freely hold, vote and transfer Ordinary Shares in the
same manner as UK residents or nationals.
ITEM 7. TAXATION
The following discussion of taxation is intended only as a descriptive
summary and does not purport to be a complete technical analysis or listing of
all potential tax effects relevant to UK Holders and US Holders of the Ordinary
Shares or ADSs. A US Holder is: (i) a citizen or resident of the US; (ii) a
corporation created or organized in the US under the laws of the US or any
state; (iii) an estate the income of which is included in gross income for US
federal income tax purposes regardless of its source or (iv) a trust if a court
within the United States is able to exercise primary jurisdiction over the trust
and one or more US persons have the authority to control substantial decisions
of the trust. A UK Holder is a person resident or ordinarily resident in the UK
for tax purposes or who is subject to UK taxation on capital gains or income by
virtue of having a trade, profession or vocation in the UK.
The statements of US federal and UK tax laws set forth below are based
on US federal and UK tax laws and UK Inland Revenue practice in force as of the
date of the filing of this Transition Report and are subject to any changes in
UK or US law, and in any double taxation convention between the US and the UK,
occurring after that date.
The following discussion is principally directed at UK tax laws and not
to US tax laws and therefore does not describe all material potential US
federal/or other US/tax consequences. In addition, while this summary is
principally directed to UK tax law, it does not describe all material potential
UK tax consequences. The tax treatment of a shareholder may vary depending on
such shareholder's particular situation, and certain shareholders (including
insurance companies, tax-exempt organizations, dual resident entities, financial
institutions, broker-dealers or entities which, alone or together with one or
more associated corporations, control directly or indirectly more than 10% of
the voting shares of Energy) may be subject to special rules not discussed
below. A US Holder of Ordinary Shares or ADSs should consult its tax advisor in
respect of US tax consequences.
For purposes of the current income tax convention between the UK and the
US (the "Income Tax Convention"), the current estate and gift tax convention
between the UK and the US (the "Estate and Gift Tax Convention") and the US
Internal Revenue Code, holders of ADSs will be treated as the owners of the
underlying Ordinary Shares.
TAXATION OF DIVIDENDS
UK Holders
Under current UK taxation legislation, no withholding tax will be
deducted from dividends paid by Energy, but whenever Energy pays a dividend, it
will be liable to account to the UK Inland Revenue for an amount of tax
30
<PAGE> 107
known as advance corporation tax ("ACT"). The rate of ACT is currently equal to
one quarter of the dividend ACT paid by Energy can be set off against its
liability to corporation tax, subject to certain limits and restrictions. If
Energy receives dividends in respect of which ACT has been accounted for and to
which an equivalent tax credit is attached, it will normally be entitled to set
that tax credit against its own liability to account for ACT.
A UK Holder who is a UK resident individual who receives a dividend on
Ordinary Shares or ADSs will be entitled to a tax credit of an amount equal to
one quarter of the dividend. An individual so resident will be taxed on the
total of the dividend and the related tax credit, which will be regarded as the
top slice of such individual's income. The tax credit will, however, be treated
as discharging the individual's liability to income tax in respect of the
dividend, unless and except to the extent that the dividend and related tax
credit exceeds the individual's threshold for the higher rate of income tax. In
such cases the individual will, to that extent, be liable to tax on the dividend
and related tax credit at a rate equal to the excess of the higher rate
(currently 40%) over the lower rate (currently 20%). If the tax credit exceeds
the individual's liability to income tax on the total dividend and tax credit,
the individual will able to claim payment of the excess. Under current
proposals, the rate of tax credit that will be available to UK Holders (other
than UK resident companies or pension providers) in respect of dividends paid on
or after April 6, 1999 will be halved to 10% and tax credits will no longer be
repayable to UK Holders with no tax liability. Under such proposals, individuals
whose income is within the lower or basic rate tax bands will be liable to tax
at 10% on dividend income and the tax credit will continue to satisfy their
income tax liability on UK dividends. It is further proposed that the higher
rate of tax on dividend income will be reduced to 32.5% from April 6, 1999,
which is intended to leave higher rate taxpayers the same amount of after tax
income as they would have received prior to such changes.
Subject to certain exceptions, a UK Holder of Ordinary Shares or ADSs
which is a UK resident company and which receives a dividend paid by the Group
will not be taxable on the dividend. The dividend and related tax credit in
respect of ACT paid on such dividend will be treated as franked investment
income. Such tax credit will be an amount equal to one quarter of the dividend
(although the amount of the tax credit to which the recipient will be entitled
will be reduced to one ninth of the dividend under the provisions. Under current
proposals, pension providers and most UK resident companies will no longer be
entitled to the payment of tax credits in respect of dividends paid to them on
or after July 2, 1997.
Subject to certain exceptions for individuals who are Commonwealth
citizens, citizens of the Republic of Ireland, residents of the Isle of Man or
the Channel Islands, nationals of states which are part of the European Economic
Area and certain other persons, the right of holders of Ordinary Shares or ADSs
who are not resident in the UK for tax purposes to claim payment from the UK
Inland Revenue for a proportion of the tax credit relating to their dividends
will depend, in general, upon the provisions of any double taxation agreement or
convention which exists between the UK and their country of residence.
The above paragraphs do not address the provisions in Chapter VA of Part
VI of the UK Income and Corporation Taxes Act 1988, relating to a dividend which
the paying company elects to be treated as a foreign income dividend ("FID"). In
the future Energy may receive foreign source income. If such circumstances arise
Energy may consider availing itself of the benefits of the FID rules. In the
event that a FID is declared, a UK Holder that is a UK resident company holding
Ordinary Shares or ADSs will not be subject to UK corporation tax in respect of
a FID paid by Energy. The FID will not, however, constitute franked investment
income for such UK Holders. Under current proposals, the rules for payment of
FIDs may be repealed from April 6, 1999.
US Holders
Under the provisions of the Income Tax Convention and the Arrangement
(as defined and more fully described below), a US Holder who is an individual or
a corporate portfolio holder (which is defined as a shareholder who holds less
than 10% of the voting shares of Energy) of Ordinary Shares or ADSs will be
entitled to receive from the UK Inland Revenue a refund (the "Tax Treaty
Payment") of an amount equal to the tax credit in respect of ACT minus a
withholding tax of 15% of the sum of the cash dividend plus the tax credit. The
rate of ACT is currently 25% of the cash dividend paid. On the basis of an ACT
rate of 25% of the dividend, a L80 dividend (which amount and rate of ACT have
been selected for illustrative proposes only) would result in a L20 payment of
ACT by Energy. The tax credit related to the dividend would be equal to L20 (20%
of the sum of the L80 dividend and the L20 tax credit). The US Holder who is an
individual or corporate portfolio would be entitled to receive a L5 Tax Treaty
Payment, calculated by reducing the L20 tax credit by withholding tax of L15
(15% of the sum of the L80 dividend and the L20 tax credit). Accordingly, such
US Holder would have a total net receipt of L85 (cash dividend of L80 plus a net
tax credit of L5). Under current proposals the rate of tax credits will be
halved from 20% to 10% on dividends paid on or after April 6, 1999 with the
result that a US Holder who is an individual or a corporate portfolio holder
would not be entitled to receive any Tax Treaty Payment.
31
<PAGE> 108
A US Holder of Ordinary Shares of ADSs nonetheless will not be entitled
to claim the Tax Treaty Payment described above if: (i) the holding of Ordinary
Shares of ADSs is effectively connected with (a) a permanent establishment
situated in the UK through which the US Holder carries on business in the UK, or
(b) a fixed base in the UK from which the US Holder performs independent
personal services; or (ii) in the case of a US Holder that is a US corporation,
the US Holder is (a) also a resident of the UK, or (b) in certain circumstances,
an investment or holding company at least 25% of the capital of which is held,
directly or indirectly, by persons that are not individual residents or
nationals of the US. Further, special rules may apply if the US Holder is exempt
from tax in the US on dividends paid by Energy. The refund may not be available
in the case of a US Holder who owns 10% or more of the class of shares in
respect of which the dividend is paid to the extent that the dividend can only
have been paid out of profits which were earned, or from income which was
received, in a period ending 12 months or more before the date on which the US
Holder becomes the owner of 10% or more of the class of shares in question. If
the US Holder of Ordinary Shares or ADSs is a US partnership, trust or estate,
the refund will be available only to the extent that the income derived by such
partnership, trust or estate is subject to US tax either as the income of a US
resident in its hands or the hands of its partners or beneficiaries, as the case
may be.
The aggregate of the dividend paid to a US Holder who is an individual
or a corporate portfolio holder and the gross tax credit in respect of it will
be treated as dividend income for US federal income tax purposes to the extent
made from current or accumulated earnings and profits of Energy as determined
under US federal income tax principles. Such dividend will not be eligible for
the dividends received deduction allowed to US corporations under Section 245 of
the US Internal Revenue Code. However, the 15% withholding tax will be treated
as a foreign income tax eligible for credit or deduction against such US
Holder's US federal income tax liability at such US Holder's option subject to
applicable limitations. US Holders should consult their tax advisors as to the
method of claiming such foreign tax credit or deduction.
For dividends paid before April 6, 1999, a US Holder who is an
individual or a corporate portfolio holder who receives the L80 dividend in the
above example for US federal income tax purposes would be considered to receive
a dividend of L100 (L80 dividend plus L20 tax credit) and would include the
amount in income. Such US Holder also would be considered to have paid L15 of UK
tax that, subject to the applicable limitations, would be creditable against
such US Holder's US federal income tax liability.
For dividends paid on or after April 6, 1999 (assuming that the current
proposals are enacted and no further changes in law occur) a US Holder who is an
individual or a corporate portfolio holder who receives the L80 dividend in the
above example for US federal income tax purposes should be considered to receive
a dividend of L88.89 (L80 dividend plus the L8.89 tax credit) and would include
that amount in income. Such US Holder also should be considered to have paid
L8.89 of UK tax that, subject to the applicable limitations, would be creditable
against such US Holder's US federal income tax liability.
As a result of recently enacted legislation, a US Holder will be denied
a foreign tax credit with respect to income tax withheld from dividends received
in respect of Ordinary Shares is such US Holder has not had the Ordinary Shares
for a minimum period or to the effect such US Holder is under an obligation to
make certain related payments with respect to substantially similar property.
Energy will use reasonable efforts to effect an "H" Arrangement
("Arrangement") with respect to the payments of dividends to a US Holder of
ADSs. An Arrangement applies where shares are held through an American
depositary receipt system and the operator of such system makes arrangements for
the Tax Treaty Payment to be paid by Energy rather than the UK Inland Revenue at
the same time as the dividend is paid to a US Holder of New Ads if such US
Holder completes the necessary declaration of the US residency and US tax
status. This avoids the need for such a US Holder of ADSs, to the extent such US
Holder is entitled to a Tax Treaty Payment to make a claim to the UK Inland
Revenue for a refund of tax. The following categories of US Holders of ADSs will
be excluded from the Arrangement: (i) any person, whether an individual or a
corporation, who will control 10% or more of the Ordinary Shares or ADSs, (ii)
certain bodies exempt from tax in the US on dividends paid by Energy, (iii)
estates or trusts where any of the beneficiaries are not resident in the US,
(iv) an investment or holding company where 25% of the capital is owned directly
or indirectly by persons who are neither residents of the US nor US nationals,
or (v) a corporation which either alone or together with one or more associated
companies, controls at least 10% of the voting power of Energy. US Holders of
ADSs who are excluded from the Arrangement or who do not satisfy the
requirements stated above must, in order to obtain a refund, file in the manner
and at the time described in Revenue Procedure 80-18, 1980-1 C.B. 623 (as
clarified and amplified by Revenue Procedure 90-61, 1990-2 C.B. 657), Revenue
Procedure 81-58, 1981-2 C.B. 678 and Revenue Procedure 84-60, 1984-2 C.B. 504,
summarized below, a claim for refund identifying the dividends with respect to
which the tax credit was paid.
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<PAGE> 109
A US Holder who does not obtain a refund by completing the declaration
referred to in the preceding paragraph generally is entitled to claim, in
accordance with the refund procedures summarized below, a refund from the UK
Inland Revenue with respect to any dividend paid, to the extent such US Holder
is entitled to a Tax Treaty Payment with respect to such dividend.
The first claim of a US Holder for a refund is made by sending the
appropriate UK form in duplicate to the IRS-Philadelphia Service Center, Foreign
Certification Requests PO Box 16347, Philadelphia, PA 94114-0447. Forms may be
obtained by writing to the US Internal Revenue Service, Assistant Commissioner
International 950 L'Enfant Plaza South, SW, Washington DC 20024, Attention:
Taxpayers Service Division, Room 2223. Because a refund claim is not considered
made until the UK tax authorities receive the appropriate form from the US
International Revenue Service, forms should be sent to the US Internal Revenue
Service well before the end of the applicable limitation period. Any claim for
refund of tax credit by a US Holder after the first claim by such US Holder has
been processed should be filed directly with the UK Financial Intermediaries and
Claims Office (International), FitzRoy House, PO Box 46, Nottingham NG2 1BD,
England.
Under current US Treasury regulations, dividends paid on Ordinary Shares
or ADSs will not be subject to US backup withholding tax. However, if proposed
Treasury regulations are adopted in their current form, on a prospective basis,
dividends paid on Ordinary Shares or ADSs to a US or to a non-US holder in the
US or through US or US-related persons may be subject to a 31% US backup
withholding tax in certain circumstances. In addition, under current US Treasury
regulations, the payment of proceeds of a sale, exchange or redemption of
Ordinary Shares or ADSs to a US Holder or non-US holder in the US or through US
or US-related persons may be subject to US information reporting requirements
and/or backup withholding tax.
US Holders can avoid the imposition of backup withholding tax by
reporting their taxpayer identification number to their broker or paying agent
on US Internal Revenue Service Form W-9. Non-US holders can avoid the imposition
of backup withholding tax by providing a duly completed US Internal Revenue
Service Form W-8 to their broker or paying agent. Any amounts withheld under the
backup withholding rules from a payment to a holder will be allowed as a refund
or a credit against such holder's US federal income tax liability, provided that
the required returns are filed with the US Internal Revenue Service on a timely
basis.
GENERAL
Whether holders of Ordinary Shares or ADSs who are resident in countries
other than the US are entitled to refunds of tax credits in respect of dividends
on such shares depends in general upon the provisions of such conventions or
agreements, if any, as may exist between such countries and the UK.
UK TAXATION OF CAPITAL GAINS
UK capital gains tax (or, for companies, corporation tax on chargeable
gains) applies only to a UK Holder on the disposal of Ordinary Shares or ADSs,
if held as a capital asset. On such disposal the capital gain or allowance loss
is calculated by reference to the difference between the acquisition cost for UK
tax purposes and the net proceeds realized. Capital gains in each tax year
realized by UK Holders who are individuals are (subject to exemptions and
reliefs) currently taxed at the highest marginal tax rate applicable to the
individual's income. Chargeable gains of UK Holders who are companies are
currently taxed at 33% to be changed to 31% retrospectively from April 1, 1997
under the provisions in the Finance Bill (subject to lower rates for small
companies). UK Holders which are companies can offset ACT (up to a limit)
against their corporation tax liability on all taxable profits, which include
chargeable gains.
A US Holder that is not resident or ordinarily resident for tax purposes
in the UK will not be liable for UK tax on capital gains on the disposal of
Ordinary Shares or ADSs unless the US Holder carries on a trade, profession or
vocation in the UK through a branch or agency and such Ordinary Shares or ADSs
are or have been used by, held by, or acquired for use by or for the purpose of
such trade, profession, vocation, branch or agency.
A US Holder that is liable for both UK tax (ie, capital gains tax or
corporation tax on chargeable gains) and US federal income tax on a gain on the
disposal of Ordinary Shares or ADSs generally will be entitled to offset a
credit for UK tax against its US federal income tax liability in respect of such
gain.
UK INHERITANCE TAX (ON ESTATES AND GIFTS)
The Estate and Gift Tax Convention provides that the UK tax to which the
Convention applies is Capital Transfer Tax ("CTT") and that it will also apply
to any identical or substantially similar taxes which are imposed
33
<PAGE> 110
subsequently. On January 1, 1985 CTT was replaced by a tax known as Inheritance
Tax ("IHT"). It is understood that in practice the US tax authorities and the UK
Inland Revenue apply the Convention on the basis that IHT has replaced CTT as
the tax to which the Convention now applies, although the Convention has not
been amended to that effect.
On the basis of that practice, Ordinary Shares or ADSs held in the US by
an individual who is domiciled for the purposes of the Estate and Gift Tax
Convention in the US and is not for the purposes of the Convention a national of
the UK, will not, be subject to IHT on the individual's death or on a transfer
of the Ordinary Shares or ADSs during the individual's lifetime (although
special rules apply in the case of Ordinary Shares or ADSs held in trust, or as
part of the business property of a permanent establishment in the UK or related
to the fixed base in the UK of a person providing independent personal
services).
UK STAMP DUTY AND STAMP DUTY RESERVE TAX
Stamp duty is (subject to exceptions for charities) currently payable at
the rate of 1 1/2% on any instrument transferring Ordinary Shares to the
Custodian of the Depositary, on the value of such Ordinary Shares. In accordance
with the terms of the Deposit Agreement relating to the Ordinary Shares, any tax
or duty payable by the Depositary or the Custodian of the Depositary on future
deposits of Ordinary Shares will be charged by the Depositary to the party to
whom ADSs are delivered against such deposits.
No UK stamp duty will be payable on transfer of an ADS, provided that
the ADS (and any separate instrument of transfer) is executed and retained at
all times outside the UK. A transfer of an ADS in the US thus will not give rise
to UK stamp duty provided the instrument of transfer is not brought into the UK.
A transfer of ADSs in the UK may attract stamp duty at a rate of 1/2% of the
consideration. Any transfer (which will include a transfer from the Depositary
to an ADS holder) of the Ordinary Shares, including ordinary Shares underlying
ADSs, may result in a stamp duty liability at the rate of 1/2% of the
consideration. There is no charge to ad valorem stamp duty on gifts. On a
transfer of Ordinary Shares from a nominee to the beneficial owner (the nominee
having at all times held the Ordinary Shares on behalf of the transferee) under
which no beneficial interest passes and which is neither a sale, nor arises
under or following a contract of sale, nor is in contemplation of sale, a fixed
50p stamp duty will be payable. The amount of ad valorem stamp duty payable is
generally calculated at the applicable rate on the purchase price of the
Ordinary Shares.
Stamp duty reserve tax generally at a rate of 1/2% on the
consideration, is currently payable on any agreement to transfer Ordinary Shares
or any interest therein unless: (i) an instrument transferring the Ordinary
Shares is executed; (ii) stamp duty, generally at a rate of 1/2% is paid; and
(iii) the instrument is stamped on or before the last day of the month following
the month in which the agreement is made, or, where the agreement is
conditional, the last day of the month following the month in which it becomes
unconditional. The duty will, however, be refundable if within six years the
agreement is completed by an instrument which has been duly stamped, generally
at the rate of 1/2%. Stamp duty reserve tax will not be payable on any
agreement to transfer ADSs.
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the
three or five (as applicable) years ended September 30, 1996, and as of and for,
the six months ended March 31, 1997, are derived, in part, from the Financial
Statements of the Group included elsewhere in this Transition Report, which have
been audited by Ernst & Young, chartered accountants, the Group's independent
auditors. The selected financial data are qualified in their entirety by
reference to, and should be read in conjunction with, the financial statements,
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Transition Report.
The Group's Financial Statements are prepared in accordance with UK
GAAP, which differ in certain significant respects from US GAAP. Reconciliations
to US GAAP are set forth in Note 30 of Notes to Financial Statements.
34
<PAGE> 111
PROFIT AND LOSS ACCOUNT DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- ---------------------
1992 1993 1994 1995 1996(1) 1996 1997
(UNAUDITED
PRO FORMA)(8)
(L MILLION, EXCEPT PER ORDINARY SHARE AND PER ADS AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH UK GAAP
Turnover (sales)(2) 1,088 1,087 1,247 1,446 3,635 1,826 2,519
Operating profit before exceptional
items 137 44 99 135 446 243 317
Operating profit after exceptional
items(3) 137 (552) 99 135 490 287 297
Profit on disposal of First Hydro -- -- -- -- 25 -- --
Profit/(loss)(4) 88 (600) 68 68 357 190 179
Earnings/(loss) per Ordinary Share(5) 16.9p (115.2)p 13.1p 13.1p 68.5p 36.5p 34.5p
Adjusted earnings/(loss) per Ordinary
Share(6) 16.9p (115.2)p 13.1p 13.1p 60.8p 28.8p 38.2p
AMOUNTS IN ACCORDANCE WITH US GAAP(7)
Sales 1,247 1,446 3,635 2,519
Operating profit/(loss) 96 161 (142) 299
Net income/(loss) 48 90 (108) 177
Net income/(loss) per Ordinary Share 9.2p 17.3p (20.7)p 34.1p
Net income/(loss) per ADS(9) 36.8p 69.2p (82.8)p 136.4p
</TABLE>
(1) The results of operations of Eastern, which was acquired by Hanson in
September 1995, are included above for periods beginning on or after
October 1, 1995.
(2) Turnover for the year ended September 30, 1996 is stated net of a
special discount to electricity customers of L132 million relating to
the flotation of National Grid Group plc.
(3) Operating exceptional items in the year ended September 30, 1996 arise
from the flotation of National Grid Group plc. See Note 7 of Notes to
the Financial Statements.
(4) Results for the year ended September 30, 1993 reflect a charge for
impairment of coal assets of L578 million under the Group's accounting
policy for the impairment of long-lived assets which, under UK GAAP, is
reflected in the year such impairment is considered to have been
incurred.
(5) Per Ordinary Share data for each of the five years in the period ended
September 30, 1996 are based on 520.9 million Ordinary Shares (including
Ordinary Shares represented by ADSs), being the number of Ordinary
Shares (including Ordinary Shares represented by ADSs) issued in respect
of the Demerger, and for the six months ended March 31, 1997 are based
on 518.6 million Ordinary Shares (including Ordinary Shares represented
by ADSs), being the weighted average number of Ordinary Shares
(including Ordinary Shares represented by ADSs) in the period, excluding
Ordinary Shares held by The Energy Group Employee Benefit Trust (which
has waived its right to dividends on such Ordinary Shares) at the end of
the period.
(6) Adjusted earnings per Ordinary Share data are based on the same number
of Ordinary Shares (including Ordinary Shares represented by ADSs) and
the profit for the year after excluding the items relating to the
flotation of the National Grid Group plc, the disposal of the Group's
interest in First Hydro, other exceptional items and the related
taxation.
(7) The principal differences between UK GAAP and US GAAP which affect the
Group are described in Note 30 of Notes to the Financial Statements.
(8) The pro forma operating results for the six months ended March 31, 1996
have been prepared on the same basis as that used by the Group for prior
periods adjusted to reflect net interest payable and taxation as if the
Demerger had occurred at the beginning of the period. The pro forma
adjustment to net interest payable reflects an additional pro forma
interest charge calculated at 6.2% of the L381 million of additional net
debt allocated to the Group on the Demerger based on assumptions
contained in the section captioned "Unaudited Pro Forma Combined
Financial Information" in the Information Statement, dated January 27,
1997, issued by Energy in connection with the Demerger (the "Information
Statement"). The pro forma adjustment to taxation reflects the impact of
the pro forma adjusted interest charge resulting from the assumed change
in capital structure of the Group following the Demerger calculated at
the same effective tax rate before exceptional items as that assumed in
the pro forma tax charge for the twelve months ended September 30, 1995
and contained in the section captioned "Unaudited Pro Forma Combined
Financial Information" in the Information Statement.
(9) One ADS is equivalent to four Ordinary Shares.
35
<PAGE> 112
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
------------------------------------------- MARCH 31,
------------------------------------------- ---------
1992 1993 1994 1995(1) 1996
(L MILLION) 1997
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS IN ACCORDANCE WITH UK GAAP
Total assets 2,394 2,671 3,019 5,642 5,728 6,745
Creditors due after more than one
year 212 292 224 911 945 1,655
Invested capital/shareholders' equity 896 899 972 2,108 2,185 1,845
AMOUNTS IN ACCORDANCE WITH US GAAP(2)
Total assets 3,584 7,689 6,944 7,935
Invested capital/shareholders' equity 1,224 3,716 3,056 2,713
</TABLE>
- ---------------
(1) The net assets of Eastern, which was acquired by Hanson in September
1995, are included above for all dates on or after September 30, 1995.
(2) The principal difference between UK GAAP and US GAAP which affect the
Group are described in Note 30 of Notes to the Financial Statements.
DIVIDENDS
A dividend of 5.5 pence per share for the period January 1, 1997 to
March 31, 1997 was paid on July 4, 1997, to those holders of Ordinary Shares on
the register of members at the close of business (London time) on June 27, 1997.
For ADS holders, the dividend was converted to US dollars on the UK
dividend payment date using the prevailing exchange rate on that day
(L1.00 = $1.6819). Payment of the July 4, 1997 dividend to ADS holders was made
by the Depositary on July 11, 1997 to holders of record on June 27, 1997.
EXCHANGE RATES
The following table sets out, for the periods and dates indicated,
certain information regarding the Noon Buying Rates for pounds sterling in US
dollars per L1 (to the nearest cent):
<TABLE>
<CAPTION>
YEAR ENDED PERIOD END AVERAGE(1) HIGH LOW
<S> <C> <C> <C> <C>
SEPTEMBER 30,
1992 1.78 1.82 2.00 1.70
1993 1.50 1.51 1.73 1.42
1994 1.58 1.51 1.58 1.46
1995 1.58 1.59 1.64 1.53
1996 1.57 1.54 1.57 1.49
SIX MONTHS ENDED
MARCH 31, 1997 1.64 1.65 1.71 1.56
YEAR ENDING MARCH
31, 1998 (THROUGH
SEPTEMBER 22)(2) 1.60 1.63 1.69 1.58
</TABLE>
- ---------------
(1) The average of the exchange rates on the last day of each month during
the period.
(2) On September 22, 1997, the Noon Buying Rate for pounds sterling was
$1.6025 per L1.00.
36
<PAGE> 113
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Financial Statements of the Group for the three years ended
September 30, 1994, 1995 and 1996 have been prepared on the basis of a fiscal
year ending September 30 consistent with Hanson's fiscal year-end. The Group
adopted a March 31 fiscal year-end commencing with the six months ended March
31, 1997, to conform to the business year most commonly adopted in the UK
electricity industry.
The following discussion is based on the Financial Statements and other
financial information included in this Transition Report. The Financial
Statements for the six months ended March 31, 1997 and for each of the years in
the three year period ended September 30, 1996 have been audited by Ernst &
Young, chartered accountants, independent auditors. The pro forma selected
financial information for the six months ended March 31, 1996 is derived from
unaudited combined financial statements of the Group and has been prepared on
the same basis as that used by the Group for prior periods adjusted to reflect
net interest payable and taxation as if the Demerger had occurred at the
beginning of the period. The selected financial information of the Group for the
years ended September 30, 1992 and 1993 is unaudited, but has been derived from
the audited financial returns submitted to Hanson for consolidation purposes
and, in the opinion of management, has been prepared on a basis consistent with
that for subsequent years. See "Selected Financial Data" in Item 8 of this
Transition Report.
The Financial Statements are prepared in accordance with UK GAAP, which
differ in certain respects from US GAAP. See Note 30 of Notes to the Financial
Statements for a description of the significant differences and a reconciliation
to US GAAP of net income, and invested capital/shareholders' equity for the six
month period ended March 31, 1997 and the three years in the period ended
September 30, 1996. The discussion below should be read in conjunction with the
Financial Statements of the Group and Notes thereto appearing elsewhere in this
Transition Report.
The comparability of the Group's results of operations for the periods
discussed below have been significantly affected by the Demerger and acquisition
of Eastern.
THE DEMERGER
Prior to the Demerger, Rollalong (then a wholly-owned subsidiary of
Hanson) acquired, directly or indirectly, 100% of the share capital of each of
Eastern, Consolidated Gold Fields (which indirectly owned Lee Ranch (a single
surface mine)) and Peabody Australia.
The Demerger was effected on February 24, 1997, when Hanson transferred
Rollalong to Energy in consideration for Energy issuing Ordinary Shares
representing all of its then outstanding share capital (other than the
subscriber shares) to holders of Hanson Shares (including Hanson Shares
represented by Hanson ADSs) on a pro rata basis of one Ordinary Share for every
ten Hanson Shares and one ADS for every eight Hanson ADSs. On March 7, 1997,
PUSH, a wholly owned indirect subsidiary of Hanson, transferred to Peabody
Investments (which was and continues to be approximately a 99.4% subsidiary of
Energy, with subsidiaries of Hanson owning the other 0.6% interest), the entire
issued share capital of Peabody, in consideration for $1,637.5 million. The net
effect of the transactions involved in the Demerger was to transfer the energy
business previously conducted by Hanson to the Group and to attribute to the
Group a total of L1,440 million of net indebtedness as of September 30, 1996 on
a pro forma basis.
The Financial Statements for each year in the three year period ended
September 30, 1996 reflect the capital structure in place prior to the Demerger,
which historically was considered appropriate to Hanson, and the capital
position, finance charges and tax liabilities included in such data do not
reflect the capital position, finance charges and tax liabilities which the
Group might have had in respect of any of the periods covered if it had been an
independently financed and managed company during such periods, or which it may
have in respect of any future period.
ACQUISITION OF EASTERN
Although Hanson acquired Eastern on September 18, 1995, its results of
operations and cash flows have been included in the Financial Statements
included herein based on an effective acquisition date of September 30, 1995.
Accordingly, the Group's results of operations and cash flows reflect Eastern
from October 1, 1995 and do not include Eastern for prior years while the
balance sheet of Eastern was included in the Group's balance sheet at
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<PAGE> 114
September 30, 1995 and the years thereafter. The results and cash flows of
Eastern for the period from September 19, 1995 to September 30, 1995 were not
material.
GENERAL BUSINESS TRENDS
Coal
In recent years the coal operations of the Group have generally
experienced declines in the market price of coal, reductions in the average term
of coal supply contracts and reductions in revenues due to the effects of price
reopener provisions, which provide for price increases or decreases to reflect
current market conditions more closely, and expiring coal supply agreements.
These adverse trends have, however, been largely offset by cost reductions and
improved operating efficiencies in the Group's coal operations. The Directors
estimate that price reopener provisions and expiring coal supply contracts have
reduced revenues in excess of $246 million (L150 million) over the six years
since 1990. The Directors believe that the impact on revenues as a result of
contract renegotiations should be less in the coming years than it has been over
the past six years, owing to a decline in the volume of coal represented by
contracts which are due to expire over that period.
Power
Until October 1996, the Group's power operations were only in Great
Britain, where the increase in demand for electricity in recent years has been
modest. However, the Group has managed to increase the profit attributable to
its power operations significantly over the three years to March 31, 1997 by
adding related assets, such as the addition of three power stations leased from
National Power in June 1996 and two power stations leased from PowerGen in July
1996, the two largest generations in the United Kingdom (which increased the
Group's generation capacity by almost 6,000MW), the successful expansion of
electricity and gas sales in markets opened to competition, and the development
of energy trading activities. In addition, the franchise market for electricity
sales is currently scheduled to be fully deregulated over a six month period
commencing from April 1, 1998. Deregulation of the franchise market will allow
Eastern Electricity and other licensed electricity suppliers to compete for
current franchise customers outside their authorized areas. Although Eastern
intends to compete for customers nationally following the introduction of
competition in the franchise market, there can be no assurance that it will be
successful in doing so nor that such competition will not adversely affect
Eastern's operating margins on electricity sales.
Networks
The Group's networks operations have been a predictable source of
operating profits and cashflow and, historically, the growth in units of
electricity distributed has generally matched increases in the gross domestic
product for Great Britain. The networks business is highly regulated and in 1994
and 1995 was the subject of two distribution price reviews by OFFER. The
Directors estimate that the effect of those price reviews will be to reduce
prospective revenues over the five years to March 31, 2000 by some L500 million
compared with expected revenues under the previous distribution price control. A
further distribution price control review is scheduled for 2000. Accordingly,
future increases in profit by the networks operations of the Group will depend
upon unit growth and productivity improvements, which there can be no assurance
the Group will achieve. In addition, any future price reviews by OFFER could
have a material adverse effect on the Group.
OPERATING RESULTS
[CAPTION]
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
-------------------- ----------
1994 1995 1996 1997
--------------------
<S> <C> <C> <C> <C>
Sales (units sold)
Coal (GWh) 102 151 163 81
Electricity (millions of units) -- -- 32,067 13,651
Gas (millions of therms) -- -- 1,520 1,378
Capital expenditure (L millions) 133 140 374 668
</TABLE>
The following table sets out the turnover and operating profit for the
Group's current coal, power and networks operations for the six months ended
March 31, 1996 and 1997 and the three years ended September 30,
38
<PAGE> 115
1994, 1995 and 1996 and the results of Eastern's power and networks operations
for the two years ended September 30, 1994 and 1995.
<TABLE>
<CAPTION>
EASTERN GROUP
------------- ---------------------------------------------------
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
------------- ----------------------------- -------------------
1994 1995 1994 1995 1996 1996 1997
LM LM LM LM LM LM LM
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Coal
Turnover (sales revenue) 1,217 1,415 1,461 656 647
Operating profit 102 160 154 66 66
Power
Turnover (sales revenue) 1,779 2,091 - - 2,178 1,092 1,801
Operating profit (before exceptional
items) 28 51 - - 83 44 129
Networks
Turnover (sales revenue) 514 501 - - 482 278 274
Operating profit (before exceptional
items) 209 198 - - 211 133 122
Operating exceptional items (net) (29) (81) - - 44 44 (20)
Intra-group turnover (431) (398) - - (378) (209) (212)
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH UNAUDITED PRO FORMA SIX MONTHS
ENDED MARCH 31, 1996
For the six months ended March 31, 1997, the Group had turnover of L2.5
billion and operating profit (before exceptional items) of L317.0 million
compared to turnover of L1.8 billion and operating profit (before exceptional
items) of L243.0 million for the six months ended March 31, 1996. The 38.9%
increase in turnover and 30.4% increase in operating profit were primarily
attributable to the addition of three power stations leased from National Power
in June 1996 and two power stations leased from PowerGen in July 1996.
After a detailed consideration of the nature of the Group's 33% interest
in the Black Beauty Coal Company joint venture with the Pittsburgh and Midway
Cola Mining Company and Black Beauty Resources, Inc., as of and for the six
months ended March 31, 1997, the Group began to account for the results and
period-end position of that operation on an equity basis rather than on the
basis of proportional consolidation which had historically been applied. The
Group believes this change in treatment better reflects the nature of its
interest in the operation, its revenues and its assets. The principal effect of
the change has been to reduce overall net debt by L62 million. Further details
are contained in Note 13 of Notes to the Financial Statements included herein.
No change in accounting treatment has been applied to any of the Group's other
joint venture operations which are accounted for on a proportional consolidation
basis.
39
<PAGE> 116
COAL
Coal turnover of L647 million for the six months ended March 31, 1997
decreased 1.4% from L656 million for the six months ended March 31, 1996,
principally as a result of adverse currency movements. Excluding the impact of
currency movements, turnover rose 4%. The positive impact of a 6% growth in
sales volume to 81.4 million tons for the six months ended March 31, 1997 was
partly offset by a decline in spot market coal prices in the Powder River Basin
operations. The mines operated by Peabody Australia had coal sales of 5.0
million tons for the six months ended March 31, 1997, an increase of 19% from
the previous period, resulting from favorable customer demand. Low sulfur coal
sales represented 82% of total coal sales in the six month period ended March
31, 1997 and sales under long term contracts represented 88% of total sales
volume in that period.
Operating profit of L66 million from coal mining operations for the six
months ended March 31, 1997 was the same as for the six months ended March 31,
1996. However, on a US dollar basis, operating profit increased approximately 5%
to $108 million for the six months ended March 31, 1997, primarily as a result
of continued increases in productivity and cost improvements.
Peabody's cost reduction measures and productivity (i.e., tons per man
shift) enhancements continued to have a positive impact on operating profit
which was partly offset by a decline in coal prices. The success of the cost
reduction initiatives improved productivity 13%, with Peabody's US operating
companies averaging 92 tons per employee per manshift for the six-month period
which represents a company record. Peabody Australia's productivity also showed
significant improvement increasing more than 17% from the equivalent period in
the previous year.
POWER
Turnover of L1.8 billion from the Group's power operations for the six
months ended March 31, 1997 increased approximately 65% from L1.1 billion for
the six months ended March 31, 1996. The increase was primarily attributable to
the additional output provided by the three power stations leased from National
Power in June 1996 and two power stations leased from PowerGen in July 1996,
which increased Eastern's generating capacity from 495MW at March 31, 1996 to
6,784MW at March 31, 1997. During the six months ended March 31, 1997, sales
from the Group's retail gas business increased approximately 143.7% from L59.0
million for the six months ended March 31, 1996 to L143.8 million for the six
months ended March 31, 1997.
Operating profit of L129 million for the six months ended March 31,
1997, increased approximately 193% from L44 million for the six months ended
March 31, 1996 primarily as a result of the addition of the power stations.
NETWORKS
Networks turnover of L247 million for the six months ended March 31,
1997 decreased approximately 1% from L278 million for the six months ended March
31, 1996. As a result of the last regulatory price review in 1995 (effective
April 1, 1996), regulated income decreased L20 million during the six months
ended March 31, 1997, which was partially offset by a L15 million growth in
unregulated income.
Operating profit of L122 million for the Group's networks operations for
the six months ended March 31, 1997 decreased approximately 8% from L133.1
million for the six months ended March 31, 1996. The decrease was primarily
attributable to the effect of the regulatory price review in April 1996, which
lowered revenues without a corresponding decrease in fixed operating costs.
EXCEPTIONAL ITEMS
On February 24, 1997, the Group announced the re-opening of Eastern's
voluntary severance scheme in its networks business. The estimated cost of L20
million was provided for at March 31, 1997 and separately identified because of
its size.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
For the year ended September 30, 1996, the Group had turnover (before
special discount to electricity customers of L132 million relating to the
flotation of national Grid) of L3.8 billion and operating profit (before
exceptional items) of L446 million. the 161% increase in turnover (before
special discount) and 230% increase in operating profit (before exceptional
items) reflect the acquisition of Eastern, the result of which is included in
the Group's Financial Statements from October 1, 1995.
40
<PAGE> 117
COAL
Coal sales volume of 163 million tons in the year ended September 30,
1996 increased 8% from 151 million tons in the year ended September 30, 1995.
The Directors estimate that Peabody's market share in the United States rose
from 14% in the year ended September 30, 1995 to 15% in the year ended September
30, 1996. The higher volume was attributable to expansion in Peabody's Powder
River Basin operations, including a full year's contribution from the Caballo
and Rawhide mines acquired in November 1994. Peabody Australia had coal sales
volume of 9.7 million tons in the year ended September 30, 1996. Peabody's
overall production reflected the impact of its continued investment aimed at
improving productivity, in particular at Powder River. Low sulfur coal sales
represented 82% of total sales volume in the year ended September 30, 1996, up
from 80% in 1995. Sales under long-term contracts represented 88% of sales
volume in 1996.
Turnover was L1.5 billion in the year ended September 30, 1996, an
increase of 7.1% from L1.4 billion in the year ended September 30, 1995. The
positive impact of higher sales volumes in 1996 was offset by lower pricing of
certain high sulfur coal contracts. Turnover was also adversely affected by
reduced demand at Peabody Western, as customers purchase lower price
hydro-electric generation that was available due to unusually high rain and
show-fall in the western US.
Operating profit of L154 million from coal mining operations for the
year ended September 30, 1996 decreased 4% from L160 million for the year ended
September 30, 1995. The 1996 results were affected by lower customer demand at
Peabody Western, the re-pricing of certain high sulfur coal contracts (which the
Directors estimate accounted for a decrease in profit of L15 million to L20
million), operational difficulties at two Peabody East mines during the first
nine months of the year and a decline in spot prices for coal from the Powder
River Basin.
Offsetting the above conditions was a reduction in costs due to measures
implemented during 1996 as part of continuing efforts to reduce production
costs. These included employee reductions, improvements in working practices
permitted under new union contracts and the effects of investment in more
efficient equipment. The success of Peabody's cost reduction initiatives was
evidenced by an improvement in productivity, as tons per man shift improved 17%
in absolute terms over 1995 and 3% on a weighted average mine by mine basis
taking into account the shift in sources of production. Firming prices in the
higher sulfur spot markets in the last six months of the year also benefited
profits slightly and the re-negotiation of a coal supply agreement resulted in a
one-off receipt of L14 million.
Operating profit in 1996 also includes the benefit of a provision
reduction of L15 million, part of a L42 million reduction in Peabody's provision
relating to a UMWA Combined Fund established under the Health Benefit Act, which
is being released over three years commencing in 1996. This provision reduction
resulted from Peabody's successful appeal of US government beneficiary
assignments and its active participation in the administrative process with
respect to this fund.
Peabody Australia's operating profits of L28 million for the year ended
September 30 1996 increased its contribution from L25 million for the year ended
September 30 1995.
POWER
Turnover of L2.2 billion from the Group's power operations for the year
ended September 30, 1996 increased 4% from L2.1 billion for the year ended
September 30, 1995. The increase arose mainly from growth in gas sales and also
from sales related to the addition of three power stations leased from National
Power in June 1996 and two power stations leased from PowerGen in July 1996,
which increased Eastern's generating capacity from 495MW to 6,378MW. There was
also an increase in turnover in the franchise market arising from additional
unit volumes and a tariff increase, which took effect in 1996, although this was
partially offset by a small decrease in turnover from electricity sales
resulting from lower sales prices in the competitive market. Gas sales exceeded
L250 million for the year ended September 30, 1996, an increase of 63% from the
year ended September 30, 1995, as market share continued to grow in the
competitive element of the gas market.
This was achieved by Eastern's increased marketing efforts targeted at
large and medium-sized commercial customers. Growth in Eastern's gas sales was
also assisted by Eastern's taking advantage of falling spot market prices for
gas to lock in sales to customers on favorable terms.
Operating profit of L83 million for the year ended September 30, 1996
increased by 63% from L51 million for the year ended September 30, 1995. This
increase reflects the first time (but part year) contribution from the
coal-fired power stations for the period from July 1996 to September 1996.
41
<PAGE> 118
NETWORKS
Networks turnover of L482 million for the year ended September 30, 1996
declined by approximately 4% from L501 million for the year ended September 30,
1995. This decline was mainly due to two changes in the distribution price
control formula imposed by the Director General of Electricity Supply ("DGES"),
which were effective from April 1, 1995 and April 1, 1996. The effect of these
changes was partially offset by an above average increase in the volume of units
distributed. This increase in volume arose principally from considerably colder
weather than normal at the end of 1995 and early 1996.
Despite the effects of the revisions to the distribution price control
formula, operating profits (before exceptional items) of L211 million for the
year ended September 30, 1996 increased by 6.6% from L198 million for the year
ended September 30, 1995, due to significant reductions in operating costs in
the distribution business through reductions in manpower.
EXCEPTIONAL ITEMS
The principal operating exceptional items in the year ended September
30, 1996 related to the flotation of National Grid and comprised a discount to
electricity customers of L132 million offset by dividends received of L176
million. A further exceptional amount of L25 million represents profit
associated with the disposal of the Group's interest in First Hydro.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1994
For the year ended September 30, 1995, the Group had turnover of L1.4
billion and operating profit of L135 million, increases of 16% and 36%,
respectively, over the previous year. As described below, these increases
resulted primarily from Peabody's recovery from the 1993 coal strike which
affected the first quarter of the year ended September 30, 1994.
COAL
The major factor contributing to the improved results of Peabody's coal
operation in 1995 was its recovery from the impact of the previous year's coal
strike, which the Directors estimate reduced operating profit by between L70
million and L80 million in the year ended September 30, 1994. Another
contributing factor was the first time contribution from strategic acquisitions
made by Peabody in low sulfur coal mining operations in the Powder River Basin.
Coal sales by volume of 151 million tons in the year ended September 30,
1995 increased 48% from 102 million tons in the year ended September 30, 1994.
The Directors estimate that Peabody's market share rose to 14% in the US in
1995. The acquisition of Rawhide and Caballo mines in Wyoming's Powder River
Basin in the early part of the year ended September 30, 1995 added 30 million
tons to the sales volume while increasing overall coal reserves by more than one
billion tons. Sales of low sulfur coal increased from 75% of total sales in the
year ended September 30, 1994 to 80% in the year ended September 30, 1995 and
approximately 87% of sales volume for 1995 was attributable to long-term
contracts.
Turnover of L1.4 billion in the year ended September 30, 1995 increased
17% from L1.2 billion in the year ended September 30, 1994. Mid weather and
abundant hydro-electric generation in the western US depressed coal prices by 10
to 15% in the calendar year 1995, and the negative impact of the expiration and
re-negotiation of long-term contracts resulted in an average 5% decline in
Peabody's US sales revenues per ton, although this decline was offset by the
increase in sales volumes.
Operating profit of L160 million from coal mining operations in the year
ended September 30, 1995 increased 57% from L102 million in the year ended
September 30,1994, due principally to increased turnover following the end of
the miner's strike. Major investment in more efficient earth moving equipment in
the US and an increase in the proportion of Peabody's US coal production
represented by Powder River coal (from 36% in the year ended September 30, 1994
to 52% in the year ended September 30, 1995) helped increased overall
productivity at Peabody's facilities by 26% during the year ended September 30,
1996. Productivity per man shift improved at all US operations other than in
West Virginia, which experienced operating and geological difficulties at
several of its mining facilities. Peabody Australia's operations contributed an
operating profit of L25 million in the year ended September 30, 1995 compared
with L27 million in the previous year.
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<PAGE> 119
Operating difficulties as Peabody East's Tygart River, Colony Bay,
Harris and Camp 11 mines had an adverse impact on 1995 operating profit, as
profits at these locations were approximately L30 million lower than anticipated
levels. Profits were also adversely affected by the lower steam coal prices in
the western US and the expiration on re-pricing of long-term contracts.
Peabody Australia acquired an additional 10% interest in the Bengalla
Mine Development in New South Wales during the year, bringing its interest in
the venture to 35%. Bengalla is expected to commence production in 1999.
POWER
Turnover of L2.1 billion from the Group's power operations in the year
ended September 30, 1995 an increase of 17.5% from L1.8 billion in the year
ended September 30, 1994 arose principally from an increase of approximately 10%
in net additional sales volume from the year ended September 30, 1994 the
enlarged national competitive market which opened up (for customers with annual
maximum demands of 100kW or more) on April 1, 1994. Gas sales of L158 million in
the year ended September 30, 1995 increased 229% from L48 million from the year
ended September 30, 1994 as market shares increased due to focused marketing
efforts towards new customers, including trade associations and multiple retail
outlets. The full consolidation of the Peterborough power station, following the
acquisition of the remaining 50% share from Hawker Siddeley in September 1994,
also contributed L75 million to the increase in turnover.
Operating profit of L51 million for the year ended September 30, 1995,
increased by 82% from L28 million for the year ended September 30, 1994. This
reflected the effects of the review by the DGES of the supply price control
(covering the reduced franchise market) and successful entry into the
competitive electricity sales market, both with effect from April 1, 1994, and
the contribution from the additional 50% interest in Peterborough power station
acquired in September 1994.
NETWORKS
Turnover of L501 million from the Group's networks operations for the
year ended September 30, 1995 decreased by 3% from L514 million in the year
ended September 30, 1994. This decrease principally reflected the effect of the
first review of distribution charges applicable from April 1, 1995, which
reduced turnover in the distribution business by approximately 2% compared with
the previous year. The remaining L3 million decline in turnover resulted from a
lower volume of charges for new connections and ancillary networks.
Operating profit of L198 million for the year ended September 30, 1995
decreased by L11 million from L209 million for the year ended September 30,
1994. The principal reason for this decrease was the reduction in the
distribution charges from April 1, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Demerger, the Group financed its operations and capital and
other expenditures from a combination of cash generated from operations,
external borrowings and loans and invested capital provided by Hanson or its US
affiliates. Since the Demerger, the Group has had to meet all of its cash
requirements through internally generated funds and external borrowings. The
Group's ability to generate cash from operations depends upon numerous business
factors, some of which are outside the control of the Group, including changes
in economic and climatic conditions and taxation regimes in force in each
country of operation.
Net cash generated by operating activities was L346 million for the six
months ended March 31, 1997. Net cash generated by operating activities was L12
million for the year ended September 30, 1996 compared with L402 million for the
year ended September 30, 1995. The decrease in 1996 resulted principally from
payments made under the agreements to lease power stations from National Power
amounting to L342 million, an increase in working capital requirements (due
mainly to the purchase of fuel stocks for the coal-fired power stations) and an
increase of L72 million of UK advance corporation tax ("ACT") recoverable. Net
cash provided by operating activities for the year ended September 30, 1995 was
higher by L259 million than the previous year, largely because of improvements
in working capital as well as an operating profit increase of L36 million.
Net cash used by investing activities was L176 million for the six
months ended March 31, 1997. Net cash used by investing activities was L2,605
million for the year ended September 30, 1996 compared with net cash used of L73
million for the year ended September 30, 1995. The increase principally relates
to the payment for the acquisition of Eastern of L2,495 million. In addition,
there were further outflows in 1996 in respect of capital
43
<PAGE> 120
investments made in plant and equipment in the previous year and in the
distribution system of the networks business and capital installments of L93
million paid in respect of the new 340MW gas-fired power station at King's Lynn.
Net cash used in investing activities was L73 million in the year ended
September 30, 1995, compared with L57 million for the year ended September 30,
1994. The principal reason for this increase in net cash used in investing
activities related to the acquisition by Peabody of the Caballo and Rawhide coal
mines in the United States, which was partly offset by cash deposits of L264
million acquired with Eastern.
The Group made capital expenditures of L133 million in the six months
ended March 31, 1997 and L133 million, L140 million and L374 million in the
years ended September 30, 1994, 1995 and 1996, respectively. In addition,
Eastern made capital expenditures of L113 million in the year ended September
30, 1994 and L212 million in the year ended September 30, 1995. As of March 31,
1997, the Group had capital commitments totalling L146 million, including
commitments relating to the completion of the King's Lynn power station. The
Group anticipates funding these capital expenditures with its internally
generated cash and borrowings under its available bank facilities.
Net cash from financing activities was L938 million for the six months
ended March 31, 1997. Net cash from financing activities was L2,418 million in
the year ended September 30, 1996 compared with L77 million used for the year
ended September 1995, principally representing the contribution to invested
capital by Hanson for the acquisition of Eastern. Net cash used in financing
activities of L34 million in 1994 principally relates to repayment of invested
capital to Hanson.
Profit of L150 million was retained and added to shareholders' funds for
the six months ended March 31, 1997, after allowing for the L29 million cost of
the dividend. Overall shareholders' funds have decreased L340 million since
October 1, 1996, with retained earnings being more than offset by the additional
net debt of L423 million attributed to the Group pursuant to the Demerger,
together with adverse currency differences on foreign net investments of L52
million.
FINANCING ARRANGEMENTS
Prior to the Demerger, the Group entered into a credit facility (the
"Credit Facility") with various participating banks for the provision of credit
facilities to the Group and its subsidiaries. As of March 31, 1997, L500 million
of borrowings were outstanding under the Credit Facility.
The Credit Facility consists of a five-year syndicated multi-currency
unsecured revolving credit facility in an amount up to L1 billion including a US
dollar swingline facility (with an acceptance credit option) of the US dollar
equivalent of L300 million. The proceeds of the Credit Facility may be used to
provide working capital to the Group for general corporate purposes of the
Group, including the repayment of debt to Hanson or Hanson subsidiaries.
The interest rates under the revolving credit facility are based upon
either the London Interbank Offered Rate plus Mandatory Liquid Asset Costs in
the case of sterling advances, or the Eligible Bill Discount Rate, plus 0.1875%
per annum, in the case of sterling banker's acceptances. The interest rate under
the swingline facility is the higher of (a) the aggregate of the US Federal
Funds Rate and 0.5% per annum and (b) the prime commercial lending rate from
time to time publicly announced by the agent bank.
The Credit Facility requires the Group to satisfy certain financial
performance criteria. In particular, "operating profit" (as defined) must be a
minimum of 2.25 times the level of net interest expense for each semi-annual
period. The Credit Facility also contains covenants and provisions that
restrict, among other things, the ability of the Group and its material
subsidiaries to: (i) create any security interest on any of its property or
assets, or (ii) dispose of all or substantially all of the assets of Peabody or
Eastern other than to another member of the Group.
In addition to the Credit Facility described above, the Group has
available uncommitted bank facilities of approximately L467 million. As of March
31, 1997, L63 million of borrowings were outstanding under these facilities.
As of March 31, 1997, Eastern Electricity had issued long-term, fixed
rate bonds in the aggregate outstanding principal amount of L727 million and on
April 14, 1997, a further bond issue of L200 million was made at a fixed rate of
8.75% per annum. The Group may from time to time issue additional bonds.
During the six months ended March 31, 1997, certain subsidiaries of
Energy entered into an agreement with commercial banks under which certain
future intra-group rental payments receivable from the leased power station
facilities at Drakelow C, High Marnham, Ironbridge, Rugeley B and West Burton
for a five year period were assigned
44
<PAGE> 121
in return for a capital sum of L1,097 million. Such capital sum was drawn down
on October 28, 1996 and L408 million was used to cash collateralize existing
future obligations to certain banks in respect of the funding of the operating
leases of power stations leased from National Power. The remaining funds are
held within the Group. The payment of the assigned rentals or, in certain
circumstances, their capital value on resale by the banks, is subject to
guarantees and indemnities provided by Energy subsidiaries.
As of March 31, 1997, the Group's gearing was 71%, defined as net debt
divided by net equity. This compares with pro forma gearing as of September 30,
1996 of 80%. The decrease principally reflects the positive cash generation from
the operating businesses and profits retained within the Group.
CERTAIN ENVIRONMENTAL MATTERS
As discussed under "Regulatory Matters" in Item 1 of this Transition
Report, the Group's operations are subject to extensive and changing regulation
in the United States, United Kingdom and Australia regarding environmental
matters. As of March 31, 1997, the Group had a provision of L280 million for
reclamation and environmental obligations. The Group's expenditures relating to
environmental matters were approximately L13 million in the six months ended
March 31, 1997 and L38 million, L43 million and L43 million in the years ended
September 30, 1994, 1995 and 1996, respectively.
Certain US subsidiaries of Consolidated Gold Fields, which are members
of the Group, are or may become parties to environmental proceedings which have
been commenced or threatened in the United States in relation to certain sites
previously owned or operated those subsidiaries or companies associated with
them. This includes sites formerly owned or operated by Consolidated Gold Fields
as well as dormant sites that the Group currently owns. The US Environmental
Protection Agency ("EPA") has placed some of these sites on the National
Priorities List promulgated pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or
"Superfund"), and some of these sites are on similar state priority lists. There
are a number of further sites in the United States which were previously owned,
operated or used by such companies which could give rise to environmental
proceedings in which members of the Group could incur liabilities. Where such
sites have been identified, the Directors have commissioned a review of publicly
available information by independent environmental consultants in order to
assess the total amount of the liability per site and also the proportion of
those liabilities which the members of the Group are likely to bear. The
available information on which to base this review is very limited, especially
in relation to sites which are no longer owned, operated or used by members of
the Group. On the basis of that review the Directors have made a provision
against the above environmental liabilities relating to Consolidated Gold Fields
in the total sum of $73.6 million as of March 31, 1997 (which is included in the
overall provision of L280 million), 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, which could
be greater or less than the Group's provision. See Note 21 of Notes to the
Financial Statements included herein.
While the Group believes that it has identified costs likely to be incurred for
environmental matters, and that those costs are not likely to have a material
adverse effect upon the Group's business or financial position, there can be no
assurance that the Group's total costs and liabilities for environmental matters
will not increase in the future. The magnitude of such additional liabilities
and the costs of complying with environmental laws and containing or remediating
contamination cannot be predicted with certainty due to the lack of specific
information available with respect to many sites, the potential for new or
changed laws and regulations and for the development of new remediation
technologies and the uncertainty regarding the timing of work with respect to
particular sites. As a result, there can be no assurance that material
liabilities or costs related to environmental matters will not be incurred in
the future or that Energy's liquidity will not be adversely impacted by such
environmental liabilities or costs. See "Business - Regulatory Matters".
PENSION SURPLUS CONTINGENCY
In February 1997 final determinations were made against 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 actual valuation of the
National Grid section as of March 31, 1992 to meet certain additional costs
arising from the payment of pensions on early retirement pursuant to
reorganization or redundancy and certain additional contributions. These
determinations were set aside by the High Court on June 10, 1997 and the
arrangements made by National Grid and its trustees in dealing with its
section's surplus were confirmed, although leave to appeal to the Court of
Appeal has been granted to the two pensioners. 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
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<PAGE> 122
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).
WINDFALL TAX
The UK Finance (No 2) Act 1997 introduced a windfall tax on certain
privatized undertakings. This one-time tax applies to companies privatized by
flotation and regulated by statute and therefore includes Eastern. The tax is
charged at a rate of 23% of the difference between company value, calculated by
reference to profits over a period of up to four years following privatization,
and the value placed on the company at the time of flotation. The charge for
Eastern is estimated to be approximately L112 million. The tax is payable in two
equal installments on or before December 1, 1997 and December 1, 1998.
FINANCE ACT 1997
The UK Finance Act 1997 was enacted in March 1997. One of the provisions
of this Act reduces the capital allowances available in relation to certain
types of capital assets, including certain capital assets of the types acquired
after November 1996 by Eastern in connection with its networks business. The
Directors estimate that Eastern's annual tax charge could be increased by
approximately L10 million as a result of this legislation.
FOREIGN CURRENCY MATTERS
The functional currency of each of the Group's non-UK operations
(principally the operations of Peabody in the US and of Peabody Australia in
Australia) is the local currency. The impact of currency translation in
combining the results of operations and financial position of such operations
has not been material to the consolidated (combined) financial position of the
Group. Additionally, the Group generates revenue from exports (see Note 4 of
Notes to the Financial Statements included herein) and revenue from operations
conducted outside the UK which may be denominated in currencies other than
sterling, US dollars or Australian dollars.
EFFECT OF INFLATION
Because of the relatively low level of inflation experienced in the
United Kingdom and the United States, inflation did not have a material impact
on the Group's results of operations for the six months ended March 31, 1997 or
the years ended September 30, 1994, 1995 or 1996.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS
The following table sets forth information as to Energy's Directors and
executive officers as of September 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Derek C Bonham, FCA 54 Chairman and Director
John F Devaney, BSc, C.Eng 51 Chief Executive - Eastern and Director
Irl F Engelhardt, MBA 50 Chief Executive - Peabody and Director
Eric E Anstee, FCA 46 Finance Director
Sir Christopher Harding 57 Non-executive Director
Sarah Hogg, Baroness of Kettlethorpe 51 Non-executive Director
David P Nash 57 Non-executive Director
John Neerhout, Jr 66 Non-executive Director
Martin C Murray 42 Company Secretary
Michael F Andrews 51 Treasurer
</TABLE>
Messrs Bonham, Devaney, Engelhardt and Anstee were appointed Directors
on December 9, 1996 and Sir Christopher Harding, Baroness Hogg, and Messrs Nash
and Neerhout were appointed Directors on December 16, 1996. The Company
Secretary of Energy took office on October 1, 1996 and the Treasurer on February
24, 1997.
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<PAGE> 123
Derek Bonham has served as Executive Chairman of Energy since the
Demerger. Mr. Bonham joined Hanson in 1971, served as the Deputy Chairman from
1993 until the Demerger, as Chief Executive Officer from 1992 until the Demerger
and Finance Director from 1981 until 1992. He is also non-executive Chairman of
Imperial Tobacco Group PLC and a non-executive director of Glaxo Wellcome plc.
John Devaney joined Eastern in 1992 and became its Chief Executive
Officer in 1993 and Executive Chairman in September 1995. Prior to joining
Eastern, from 1989 to 1992 he was Chairman and Chief Executive of Kelsey-Hayes
Corporation, which is the brakes division of Varity Corporation, based in
Detroit. He began his career with Perkins Engines in 1968, gaining wide
experience in the UK and overseas before becoming President in 1983. He is also
a non-executive director of Midland Bank plc and NFC plc.
Irl Engelhardt joined Peabody in 1979 and became its President and Chief
Executive Officer in 1990 and Chairman in 1993. He was formerly Chairman of
Cornerstone Construction & Materials (a subsidiary of Hanson), Chairman of
Suburban Propane Company (which was a subsidiary of Hanson), Chairman of the US
National Mining Association and Chairman of the US National Coal Association. He
is currently Chairman of the Coal Advisory Board to the International Energy
Agency and Vice Chairman of the US Center for Energy and Economic Development.
He is also a non-executive director of Mercantile Bank of St. Louis.
Eric Anstee has served as Finance Director of Energy since the Demerger.
He served as Group Finance Director of Eastern from 1993 until the Demerger.
Before joining Eastern, he was a partner in Ernst & Young from 1984 and latterly
was a member of the management board of Ernst & Young Management Consultants,
gaining substantial experience in the utility sector and in project finance. He
is Chairman of the UK Government's Eastern Region Industrial Development Board
and a member of the Urgent Issues Task Force of the UK Accounting Standards
Board.
Sir Christopher Harding has served as a non-executive director and
Chairman of the Remuneration Committee of Energy since the Demerger. Sir
Christopher Harding joined Hanson from ICI plc in 1969 and served as a
non-executive director of Hanson from 1979 until the Demerger. He was Chairman
of British Nuclear Fuels plc from 1986 to 1992 and has been Chairman of Legal
and General Group Plc since 1994 and of Newarthill plc since 1993. He is also a
non-executive director of The General Electric Company, p.l.c. and of The Post
Office and is Chairman of the trustees of the Prince's Youth Business Trust.
Baroness Hogg has served as a non-executive director of Energy since the
Demerger. Baroness Hogg is Chairman of London Economics Limited. She is a
non-executive director of GKN plc, National Provident Institution and 3i Group
Plc, Chairman of Foreign & Colonial Smaller Companies Investment Trust plc and a
member of the International Advisory Board of National Westminster Bank PLC. She
was head of the Prime Minister's Policy Unit from 1990 to 1995, dealing with
both UK domestic strategy and international economic issues.
David Nash has served as a non-executive director of Energy since the
Demerger. Mr. Nash was group finance director of Grand Metropolitan Plc from
1989 to 1993 and chairman and chief executive of the food sector of that company
from 1993 to 1995. He is non-executive chairman of Amicus Healthcare Group
Limited and of Kenwood Appliances plc and a non-executive director of Cable &
Wireless plc, Sun Life & Provincial Holdings plc and Investment Management
Regulatory Organisation Limited.
John Neerhout, Jr has served as a non-executive director of Energy since
the Demerger. Mr. Neerhout was, until 1996, executive vice-president and
latterly a director of Bechtel Group, Inc. having joined that company in 1966.
He is Managing Director of Union Railways Limited and a non-executive director
of London & Continental Railways Limited and of Homestake Mining Company of San
Francisco.
Martin Murray has served as Company Secretary of Energy since the
Demerger. Mr. Murray was a senior member of Hanson's legal department from 1986
until the Demerger. Prior to this he was assistant company secretary at
Berisford plc, having previously practised as a solicitor with Clifford Chance.
He has law degrees from Cambridge and Harvard Universities.
Michael Andrews has served as Treasurer of Energy since the Demerger.
Mr. Andrews joined Eastern in 1989 as Treasury Manager and served as Eastern's
Group Treasurer from 1995 until the Demerger.
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<PAGE> 124
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the six months ended March 31, 1997, the aggregate compensation paid
or accrued by the Group to or for all Directors and executive officers at March
31, 1997 as a group (10 persons) for services in all capacities was
approximately L1.1 million.
The remuneration of Energy's senior executives consists of:
Base salary - This is set by reference to individual responsibilities,
performance and external market data. In addition certain benefits in kind are
provided, principally a fully expensed motor car and medical and life insurance.
Annual bonus - An annual performance-related cash bonus can be earned,
subject to the achievement of pre-determined annual profit targets. The maximum
amount of annual bonus is 75% of base salary for Irl Engelhardt and 50% of base
salary for Derek Bonham, Eric Anstee and John Devaney. Each of the last three
may elect, at the commencement of the financial year concerned, to take all, or
part, of any bonus to which they become entitled in Ordinary Shares, entitling
them to receive, three years after the bonus would otherwise have been paid,
shares equal to 133.4% of the cash value of that part of the bonus in respect of
which they have made such an election, subject to their remaining in employment
with the Group for that further three year period. A cash bonus was earned by
senior executives (including the executive Directors) for achieving profit
targets for the six month period to March 31, 1997.
The Long Term Incentive Plan ("LTIP") - Certain executives (including
the executive Directors) are granted performance-related awards of Ordinary
Shares up to a maximum market value of 75% of base salary each year. The first
awards, granted in February 1997, require the achievement of a total shareholder
return, normally calculated over three years, which is greater than the return
achieved by at least half of the constituents of the FTSE 100 index for the
awards to vest. 30% of the awards will vest if energy achieves a total
shareholder return greater than that achieved by 50% of the comparator group,
with all of the awards vesting if the total shareholder return is greater than
that achieved by 80% of the comparator group over the same three year period.
Awards will vest proportionately if the shareholder return falls between these
two points.
In recognition of the fact that the first awards under the LTIP will
not, except in special circumstances, vest until after the expiration of the
applicable three year performance period, the Remuneration Committee established
a special additional bonus scheme for certain executives (including the
executive Directors). Under this arrangement, if earnings of Energy increase by
RPI plus 6% or more in each of the years ending on March 31, 1998 and 1999,
participants will be entitled to receive an award of Ordinary Shares, valued at
the beginning of the respective year, equal to 25% of base salary for that year.
The Energy Group Executive Share Option Scheme ("Executive
Scheme") - The maximum value of Ordinary Shares over which options can be
outstanding in favor of any participant under Energy's UK Inland Revenue
approved Executive Share Option Scheme is L30,000. Under Energy's current
policy, participants in the LTIP may not also be granted executive share
options. Also, under the rules of this scheme, Energy's Directors are not
eligible to be granted executive share options.
Savings-related share schemes - Energy operates savings-related share
schemes providing a long-term savings and investment opportunity for all
qualifying employees (including the executive Directors) in the UK and US.
The Energy Group Sharesave Scheme ("Sharesave Scheme"). Under the UK
Inland Revenue approved Sharesave Scheme, options over Ordinary Shares may be
granted at a price equivalent to not less than 80% of the market value of the
shares at the time when participation in the scheme is offered, and are normally
exercisable three or five years after the date of grant.
Peabody Savings Plans ("Peabody Plans"). In the US employees may
participate in retirement savings plans which provide for the purchase of
Ordinary Shares or ADSs in Energy. Employees contribute a percentage of basic
pay in respect of which their employing companies make limited matching
contributions. The value of the matching contributions is restricted under US
regulations.
Pensions. Energy operates or participates in a number of defined benefit
pension schemes for employees (including executive Directors) in the UK, the US
and Australia. Mr Bonham's salary from Energy is not pensionable. Messrs Anstee
and Devaney are members within the Eastern group of the Electricity Supply
Pension Scheme and have been granted special terms which provide for pensions
equal to 1/30 of pensionable salary for each year of
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<PAGE> 125
pensionable service. Mr Engelhardt is a member of the contributory Peabody
Salaried Plan, under which benefits relate to the number of years of service and
compensation limits under US federal tax laws. With the exception of Mr Bonham,
each of the executive Directors is also entitled to unfunded retirement benefit
scheme arrangements to provide for full pensions, depending on years of service.
The total unfunded retirement benefit scheme arrangements which are provided for
amounted to L5 million at March 31, 1997 of which L3 million related to Messrs
Anstee, Devaney and Engelhardt.
The following information is provided in respect of the Directors of
Energy from the dates of their respective appointments as Directors to March 31,
1997:
<TABLE>
<CAPTION>
RATE OF ANNUAL SALARY/ FEES PENSION OTHER
SALARY/ FEES(1) PAID(2) BONUS(3) CONTRIBUTIONS(4) BENEFITS TOTAL
L'000 L'000 L'000 L'000 L'000 L'000
<S> <C> <C> <C> <C> <C> <C>
D C Bonham(5) 450 138 109 -- 6 253
E E Anstee 250 67 51 26 6 150
J F Devaney 350 98 77 59 5 239
I F Engelhardt(6) 337 91 119 16 6 232
Sir Christopher Harding(7) 35 10 -- -- -- 10
Baroness Hogg 30 9 -- -- -- 9
D P Nash(7) 35 10 -- -- -- 10
J Neerhout, Jr 30 9 -- -- -- 9
-------------- ----------- -------- ---------------- -------------- -----
1,517 432 356 101 23 912
============== =========== ======== ================ ============== =====
</TABLE>
Notes:
(1) Rates of annual salary/fees apply from February 24, 1997.
(2) Salary/fees paid relate to the period from the date of appointment to
March 31, 1997. All the executive Directors were appointed on December 9,
1996 and all the non-executive Directors were appointed on December 16,
1996.
(3) Bonuses have been calculated by reference to salaries in the full six
month period to March 31, 1997.
(4) The amounts shown represent contributions paid by Energy, all to defined
benefit schemes.
(5) D C Bonham has agreed with Hanson that it will pay him an amount equal to
the difference between his previous base salary with Hanson and his base
salary for acting as chairman of Energy, after taking account of his fee
for acting as non-executive chairman of Imperial Tobacco Group PLC. This
agreement expires on September 30, 1997. The figure for D C Bonham's
salary includes the assessed element of amounts received from Hanson
during the period from December 9, 1996 to February 24, 1997 relating to
services as a director of Energy or otherwise in connection with the
management of the affairs of Energy.
(6) The amounts shown for I F Engelhardt represent the sterling equivalent of
his US dollar remuneration, translated at the average rate for the period
of $1.6339.
(7) The non-executive Directors receive fees at the rate of L30,000 per
annum. The chairman of the Audit and Remuneration Committees each receive
an additional L5,000 per annum.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
Options to purchase Ordinary Shares may be granted under the Sharesave
Scheme and the Executive Scheme. In addition, grants of Ordinary Shares may be
made pursuant to the LTIP and the Peabody Plans.
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<PAGE> 126
Details of options outstanding under the Sharesave Scheme and the Executive
Scheme at September 1, 1997 are set out below:
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY SHARES EXERCISE PRICE PER
TITLE OF PLAN ISSUABLE UPON EXERCISE ORDINARY SHARE EXPIRATION DATE
<S> <C> <C> <C>
Sharesave Scheme 847,996 465.0p September 2000
Sharesave Scheme 5,126,919 438.0p September 2002
Executive Scheme 1,613,614 547.5p February 2007
Total
</TABLE>
Of the total number of Ordinary Shares subject to outstanding options at
September 1, 1997, 17,746 Ordinary Shares were subject to options held by
Directors and executive officers of Energy (10 persons), all of which were
granted pursuant to the Sharesave Scheme.
The following table sets forth certain information as of September 1,
1997, with respect to the interests of the Directors of Energy at that date in
options to acquire Ordinary Shares, all of which were granted pursuant to the
Sharesave Scheme:
SHARESAVE SCHEME OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY SHARES
UNDERLYING OPTIONS EXERCISE PRICE EXERCISABLE
<S> <C> <C> <C>
D C Bonham 2,363 438p April/Sept 2002
E E Anstee 3,150 438p April/Sept 2002
E E Anstee 419 465p April/Sept 2000
J F Devaney 3,938 438p April/Sept 2002
</TABLE>
The Sharesave Scheme options were granted on March 25, 1997 at option
prices discounted from the middle market price of 547.5p on February 25, 1997 by
20% for five year savings contracts and 15% for three year savings contracts.
The following table sets forth certain information as of September 1,
1997, with respect to the contingent rights of the Directors of Energy at that
date in Ordinary Shares pursuant to performance-related schemes:
CONTINGENT RIGHTS IN ORDINARY SHARES
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES NUMBER OF ORDINARY SHARES
GRANTED PURSUANT TO LTIP GRANTED PURSUANT TO SPECIAL
AWARDS BONUS SCHEME RIGHTS
<S> <C> <C>
D C Bonham 64,285 21,428
E E Anstee 35,714 11,904
J F Devaney 50,000 16,666
I F Engelhardt 48,292 16,097
</TABLE>
The Ordinary Shares subject to each of the above performance-related
schemes were valued at 525p per share.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In addition to providing indemnification pursuant to Energy's Memorandum
and Articles of Association or the by-laws of Energy's subsidiaries, Energy
maintains directors' and officers' liability insurance for Directors and
officers of Energy and its subsidiaries.
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Prior to the expiration of the Offer by PacifiCorp Acquisitions for
Energy, PacifiCorp had stated that it intended to invite Messrs. Bonham and
Devaney to join the board of Directors of PacifiCorp, and to invite Messrs.
Bonham, Devaney, Anstee and Engelhardt to participate in a management committee
to be established to co-ordinate the activities of the combined group. All of
the Directors of Energy who owned Ordinary Shares or ADSs gave irrevocable
undertakings to accept or procure acceptance of the Offer in respect of their
personal holdings. See "Offer by PacifiCorp Acquisitions" in Item 1 of this
Transition Report.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The registrant has responded to Item 18 in lieu of responding to this
item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of financial statements filed as
part of this Transition Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
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 and Consent of Independent Auditors
Consolidated Profit and Loss Accounts
Consolidated Statement of Total Recognized Gains and Losses
Consolidated Balance Sheets
Consolidated Cash Flow Statements
Changes in Invested Capital/Shareholders' Equity
Notes to the Financial Statements
The information required by the Financial Statement Schedules is either
included within the Financial Statements or is inapplicable, and is therefore
omitted.
(b) Exhibit:
Consent of Independent Auditors (included on Page F-1)
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DEFINITIONS AND GLOSSARY
DEFINITIONS
ACT UK advance corporation tax
ADS an American Depositary Share representing four
Ordinary Shares
Articles the Articles of Association of Energy
Citizens Citizens Power LLC (formerly Citizens Lehman Power
L.L.C.)
Clean Air Act Amendments the US Clean Air Act Amendments of 1990
Commission US Securities and Exchange Commission
Companies Act the Companies Act 1985, as amended, of Great
Britain
Consolidated Gold Fields Consolidated Gold Fields Limited and, where the
context permits, its subsidiaries
Demerger the demerger (spin-off) by Hanson of Energy on
February 24, 1997
Demerger Agreement the Demerger agreement, dated as of January 27,
1997, between Hanson and Energy
Demerger Date February 24, 1997
DGES the Director General of Electricity Supply in Great
Britain
Directors the Directors of Energy
Eastern Eastern Group plc and/or its subsidiaries or any of
them from time to time as the context may require
Eastern Associated Eastern Associated Coal Corp., a subsidiary of
Peabody
Eastern Electricity Eastern Electricity plc, a wholly-owned subsidiary
of Eastern
Electricity Act the Electricity Act 1989 of Great Britain
Energy The Energy Group PLC
ENG Eastern Natural Gas Limited, a wholly-owned
subsidiary of Eastern
ESPS Electricity Supply Pension Scheme
FERC Federal Energy Regulatory Commission
FID foreign income dividend
Gas Acts the UK Gas Act 1986 as amended by the Gas Act 1995
Gas Licenses a Gas Shipper's License, Gas Supplier's License
and/or Public Gas Transporter's License issued
under the Gas Acts
Generation Licenses a license granted under the Electricity Act to
generate electricity
Great Britain England, Wales and Scotland
Group Energy and/or its subsidiaries or any of them from
time to time as the context may require
Hanson or Hanson Group Hanson PLC and, where the context permits, its
subsidiaries
Hanson ADS an American Depositary Share of Hanson representing
five Hanson Shares
Hanson Shares ordinary shares of 25p each in Hanson, before such
shares were consolidated into ordinary shares of L2
each in Hanson following the Demerger
Health Benefit Act US Coal Industry Retiree Health Benefit Act of 1992
IRS US Internal Revenue Service
Lee Ranch Lee Ranch Coal Company, an affiliate of Peabody
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London Stock Exchange London Stock Exchange Limited
MMC the Monopolies and Mergers Commission
National Grid Group The National Grid Group plc
National Power National Power plc
NBCWA US National Bituminous Coal Wage Agreement of 1993
Noon Buying Rate the noon buying rate in The City of New York for
cable transfers in pounds sterling as certified for
customs purposes by the Federal Reserve Bank of New
York
NYSE The New York Stock Exchange, Inc.
OFFER the Office of Electricity Regulation covering
England, Wales and Scotland
Ordinary Shares ordinary shares of 10p each in Energy
Peabody Peabody Holding, Lee Ranch and Peabody Australia
Peabody Australia Peabody Resources Limited and its subsidiaries, the
Australian operations of Peabody
Peabody COALSALES Peabody COALSALES Company, a subsidiary of Peabody
Peabody Development Peabody Development Company, a subsidiary of
Peabody
Peabody East Peabody Coal Company, Pine Ridge Coal Company,
Mountain View Coal Company, Eastern Associated and
Martinka Coal Company
Peabody Holding Peabody Holding Company, Inc. and its subsidiaries
Peabody Western Peabody Western Coal Company, Seneca Coal Company
and Big Sky Coal Company
PES License a public electricity supply license issued pursuant
to the Electricity Act in connection with the
supply and distribution of electricity within an
authorised area in Great Britain
Pool the electricity trading market in England and
Wales, the rules and procedures of which are
contained in the Pooling and Settlement Agreement
Pooling and Settlement
Agreement an agreement dated 30 March 1990 (as amended) and
made between the generators named therein, the RECs
named therein, the National Grid Company Limited (a
subsidiary of National Grid Group) and certain of
its subsidiaries, and certain other parties named
therein and which sets out, inter alia, the rules
and procedures for the operation of the Pool and
for the operation of the system of payments
Powder River Powder River Coal Company and its subsidiaries
PowerGen PowerGen plc
PUSH Peabody US Holdings, Inc., a wholly-owned, indirect
subsidiary of Hanson
REC a regional electricity company in England and Wales
Rollalong Rollalong Limited and, where the context admits,
its subsidiary, Rollalong Hire Limited
Second Tier Supply License a license issued pursuant to the Electricity Act to
supply electricity to specified premises or
premises of a specified description outside the
authorised area of a PES License holder
Teplarny Brno Teplarny Brno a.s., a heating and generation
company in the Czech Republic
UK United Kingdom of Great Britain and Northern
Ireland
UK GAAP accounting principles generally accepted in the UK
UMWA the United Mine Workers of America Union
53
<PAGE> 130
US the United States of America and its territories
and possessions
US GAAP accounting principles generally accepted in the US
54
<PAGE> 131
GLOSSARY
assigned reserves coal reserves legally recoverable, generally
through existing facilities, using current mining
technology
authorized area geographical area in which a REC has been
authorised to supply electricity by its PES License
base load refers to generating plant that operates
continuously throughout the day and night and
normally only shuts down for planned routine
inspection and maintenance
bcf billion cubic feet
billion one thousand million (1,000,000,000)
BTU British thermal unit -- a measure of the energy
required to raise the temperature of one pound of
water by one degree Fahrenheit
CCGT combined cycle gas turbine
CfD an agreement between two parties calling for
payments between the parties in amounts equal to
the product of (a) the difference in each
settlement period between the Pool price and the
price ("strike price") specified in the CfD; and
(b) the amount of electricity provided for in that
settlement period which is usually expressed in MW
of demand. The settlement period is half an hour.
CfDs are used to fix the prices a supplier pays and
a generator receives for electricity and are
therefore used to reduce the price risk that would
otherwise be associated with the sale and purchase
of electricity through the Pool
CHP combined heat and power
Fossil Fuel Levy the levy imposed on PES License holders by
regulations made pursuant to section 33 of the
Electricity Act to compensate a PES License holder
for the additional costs incurred as a result of
satisfying Non-fossil fuel orders requiring the
purchase of electricity from Non-fossil fuel
sources
GWh one gigawatt hour, representing one hour's
consumption at a rate of 1,000,000kW
installed generating
capacity the actual generating capacity of 7.5 degrees
centigrade ambient of the plant at a power station
kV one kilovolt (1,000 volts)
kW one kilowatt (1,000 watts)
low sulfur coal coal consisting of 1%, sulfur or less, by weight
MW megawatt (1,000kW)
MWh one megawatt hour, representing one hour's
consumption at a rate of one MW
metallurgical coal the various grades of coal suitable for
carbonisation to make coke for steel manufacture.
Also known as "met" coal, it possesses four
important qualities: volatility, which affects coke
yield; the level of impurities, which affects coke
quality; composition, which affects coke strength;
and basic characteristics, which affect coke oven
safety. Metallurgical coal has a low ash content
mid-merit refers to generating plant that normally operates
daily, typically between 0700 hours and 2300 hours.
This plant is usually shut down during the night
hours when overall system demand falls
National Grid the transmission system for electricity in England
and Wales operated by The National Grid Company
Limited (a subsidiary of National Grid Group)
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overburden ratios the number of cubic yards of earth and rock
overlying the coal that must be removed to uncover
one ton of coal
probable reserves in relation to coal, means reserves for which there
is a moderate degree of geological assurance. Coal
tonnages are computed by projection of data from
available scam measurements for a distance beyond
coal classed as measured or proven. The assurance,
although lower than for proven coal, is high enough
to assume continuity between points of measurement.
The maximum acceptable distance for projection of
indicated probable tonnage is 1/2 to 3/4 mile from
points of observation. Further exploration is
necessary to place these reserves in a proven
category
proven reserves in relation to coal, means reserves for which there
is the highest degree of geological assurance. The
sites for measurement are so closely spaced and the
geological character so well defined that the
thickness, real extent, size, shape and depth of
coal are well established. The maximum acceptable
distance for projections from seam data points
varies with the geological nature of the coal seam
being studied, but generally, a radius of 1/4 mile
is recognized as the standard. Proven reserves may
also be referred to as measured
recoverable reserves the amount of coal that can be recovered from the
reserve base taking into account all losses
involved in producing a saleable product using
existing methods and under current law. In the US
the average recovery factor for underground mines
ranges from 45 to 60% and about 90% from surface
mines
registered generating
capacity the generating capacity of a power station
registered with National Grid Group
resources deposits of coal whose characteristics are
estimated from specific geologic evidence and whose
economic extraction is potentially feasible.
Identified resources may include economic,
marginally economic and subeconomic components
RPI or Retail Price Index the general index of retail prices published by the
UK Office for National Statistics each month (or,
if there is a material change in the basis of such
index, such other index as the DGES may after
consultation determine), or, where the context
requires, the percentage change in such index over
any period for which a calculation fails to be made
scrubber any of several forms of chemical/physical devices
which operate to neutralize sulfur compounds formed
during coal combustion. These devices combine the
sulfur in gaseous emissions with other chemicals to
form inert compounds, such as gypsum, which must
then be removed for disposal. Although effective in
substantially reducing sulfur from combustion
gases, scrubbers require about 3 to 5% of a power
plant's electrical output and thousands of gallons
of water to operate
steam coal coal used by power plan and industrial steam
boilers to produce electricity or process steam. It
generally is lower in BTU content and higher in
volatile matter than metallurgical coal
Superfund National
Priorities List a list of sites, prepared and added to by the US
Environmental Protection Agency pursuant to
administrative rule making, at which the
Environmental Protection Agency or a responsible
state is authorized to disburse funds to clean up
environmental damage and to seek reimbursement from
private parties for the same
surface mine a mine in which the coal lies near the surface and
can be extracted by removing the covering layer of
earth and rock. About 60% of total US coal
production comes from surface mines
therm a unit of energy used in the gas industry. One
therm is approximately equivalent to 29.3kWh
56
<PAGE> 133
ton a short ton equal to 2,000 pounds
TWh one terawatt hour representing one hour's
consumption at a rate of 1,000,000,000kW
unassigned reserves reserves legally recoverable using current mining
technology, but which require substantial capital
investment for facilities to enable recovery of the
coal
underground mine also known as "deep" mine. Usually located several
hundred feet below the earth's surface, coal from
an underground mine is removed mechanically and
usually transferred by conveyor to the surface
Note: In this document, unless otherwise stated:
- - all statistics relating to the US coal industry are taken from reports
published by the relevant agencies within the US Federal Government, the US
National Mining Association and the International Energy Agency;
- - all statistics relating to the Australian Coal Industry are taken from the
Australian Coal Report -- 1996; and
- - all statistics relating to the electricity industry in Great Britain have been
previously published by OFFER.
57
<PAGE> 134
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Transition Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ENERGY GROUP PLC
By: /s/ MARTIN C. MURRAY
----------------------------------
Name: Martin C. Murray
Title: General Counsel and
Secretary
September 26, 1997
58
<PAGE> 135
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
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8, Nos. 333-7032, 333-7034, 333-7036, 333-7038 and 333-7042) pertaining
to the employee share plans named on the facing sheets thereof, of the
references to our firm in Item 8. Selected Financial Data and Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of our report dated 12 June 1997, except for Note 31 -- Subsequent
Events, as to which the date is 1 August 1997, with respect to the consolidated
financial statements of The Energy Group PLC included in the Transition Report
(Form 20-F) for the period ended 31 March 1997.
/s/ ERNST & YOUNG
------------------------------------
ERNST & YOUNG
Chartered Accountants
London, England
26 September 1997
F-1
<PAGE> 136
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> 137
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> 138
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> 139
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> 140
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") was 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> 141
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 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> 142
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> 143
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
probably 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> 144
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> 145
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> 146
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> 147
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 430 430 585 488
----- ----- ----- ----------
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> 148
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> 149
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> 150
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> 151
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
11. DIVIDEND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
31 MARCH
PENCE PER 1997 IN
SHARE 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,
OIL EQUIPMENT
LAND AND AND GAS DISTRIBUTION GENERATING AND WATER
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> 152
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
12. TANGIBLE FIXED ASSETS (CONTINUED)
<TABLE>
<CAPTION>
PLANT,
OIL EQUIPMENT
LAND AND AND GAS DISTRIBUTION GENERATING AND WATER
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> 153
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>
UNFIXED INVESTMENTS
-------------------------------------------------------
LOANS TO ASSOCIATED INVESTMENT IN
MODERATOR 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 data 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> 154
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> 155
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> 156
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> 157
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
19. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
HEALTH CARE RECLAMATION
AND AND
OBLIGATIONS TO ENVIRONMENTAL DEFERRED
EMPLOYEES OBLIGATIONS TANGIBLES 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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
<TABLE>
<CAPTION>
LONG-TERM
LOANS CURRENT
AND FINANCES LOAN
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> 164
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> 165
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> 166
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.
F-32
<PAGE> 167
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
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) 177
==== ==== ===== ========
Per ordinary share as so adjusted 9.2p 17.3p (20.7)p 34.1p
Per American Depositary Share as so adjusted 36.8p 69.2p (82.8)p 136.4p
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 --
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 2,713
============ ========
</TABLE>
F-33
<PAGE> 168
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> 169
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
Pensions -- -- 5 5
Impairment of long-lived assets (3) (3) (578) --
---------- ---------- ---------- ----------
Operating profit/(loss) under US GAAP 96 161 (142) 299
========== ========== ========== ==========
Comprising:
Coal 99 157 (424) 66
Power -- -- 83 129
Networks -- -- 216 127
Other (3) 4 (17) (23)
---------- ---------- ---------- ----------
96 161 (142) 299
========== ========== ========== ==========
</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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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 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.
F-41
<PAGE> 176
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of August, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
117 Piccadilly, London W1V 9FJ, England
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
<TABLE>
<S> <C>
Form 20-F Form 40-F
[X] [ ]
</TABLE>
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
<TABLE>
<S> <C>
Yes No
[ ] [X]
</TABLE>
<PAGE> 177
15:10 01 Aug RNS-Energy Group PLC <TEG.L>Response Re MMC Referral
RNS No 2196v
ENERGY GROUP PLC
1st August 1997
In response to the statement made today by Mrs Beckett referring PacifiCorp
Acquisitions' offer for The Energy Group PLC to the Monopolies and Mergers
Commission, Derek Bonham, Chairman of the Energy Group said:
"We are surprised and disappointed at Mrs Beckett's decision, particularly as
PacifiCorp had indicated their willingness to comply with all assurances
required by the UK regulatory authorities. Over 61 per cent of our shareholders
have already demonstrated their support for this transaction. We will cooperate
with the MMC in their deliberations, meanwhile we will continue to develop the
businesses of the Group in line with our stated strategy to become one of the
world's leading international energy suppliers."
END
Friday, 1 August 1997 15:10:52
ENDS [nRNSA2196V]
<PAGE> 178
[EASTERN ELECTRICITY Letterhead] Corporate
Communications
Eastern Electricity
plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ37D
8th August 1997
TWO NEW BOARD APPOINTMENTS AT EASTERN GROUP
EASTERN GROUP, ONE OF THE COUNTRY'S LEADING GAS AND ELECTRICITY GROUPS, HAS
ANNOUNCED THE APPOINTMENTS OF TWO NEW BOARD DIRECTORS.
Dr David Huber joins the company on September 1, 1997, as Human Resources
Director. He has wide experience in the fields of human resources and retail
markets having previously worked for major corporations including Dunlop and the
Burton Group before becoming HR Director at Safeway Stores.
Jim Whelan was appointed Managing Director, Power and Energy Trading, on July 1.
He joined Eastern in 1993 and has successfully lead the company's power and
energy trading activities to be a prominent force in UK energy markets. His
experience in energy market transactions came to the fore in the 1996
negotiations for Eastern's leasing of five coal-fired power stations from
National Power and PowerGen. Jim has extensive experience of the UK energy
sector and international commodity and energy trading.
John Devaney, Eastern's Executive Chairman, said: "Both appointments bring
significant experience and expertise to the Board at a time when the group
continues to grow rapidly and also meet the challenges of full deregulation in
its gas and electricity markets."
Ends
Media inquiries: Dave Betteridge (01473) 553410.
<PAGE> 179
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
13 AUGUST 1997
THE ENERGY GROUP -- FIRST QUARTER
RESULTS -- IN LINE WITH EXPECTATIONS
FINANCIAL HIGHLIGHTS
(COMPARED ON A PRO FORMA BASIS)
-- TURNOVER UP 19 PER CENT TO L1033 MILLION.
-- OPERATING PROFIT OF L96 MILLION DESPITE ABSORBING SEASONAL FIRST QUARTER
LOSSES ON COAL STATIONS.
-- POSITIVE PROFIT CONTRIBUTIONS FROM RECENT ACQUISITIONS IN THE USA AND THE
CZECH REPUBLIC.
-- CONTINUING POWER STATION AND DEVELOPMENT PROJECTS IN AUSTRALIA, TAIWAN AND
INDIA.
-- ONE OFF WINDFALL TAX PROVISION OF L112 MILLION.
The Energy Group announces results for the period 1 April to 30 June 1997. The
results for the quarter have been compared to the pro forma operating results
for certain of the businesses which were previously reported as part of Hanson
PLC. Previously announced results and retained profits for the six months to 31
March 1997 are also provided for comparison.
Cont . . .
<PAGE> 180
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 2
The Group's businesses have performed above or in line with expectations with
useful profit contributions from acquisitions in the USA and the Czech Republic.
Group turnover for the quarter rose by 19 per cent from L869 million to L1,033
million, and underlying operating profit was 14 per cent above the same period
last year. However, operating profit of L96 million was 2 per cent down after
absorbing approximately L20 million of seasonal losses on the UK coal-fired
power stations. These stations only came into the Group's control in the second
quarter of fiscal 1995/6.
A one off provision of L112 million has been taken for the windfall levy.
COAL
Turnover for the quarter increased to L354 million despite mild spring weather
in the USA that reduced coal consumption and power output by one per cent below
the previous year's level. Profit improved by 5 per cent to L40 million. On a
dollar basis, operating profit increased 11 per cent but was moderated by
exchange rate movements.
POWER
Results from the power business show an increase in turnover to L649 million and
in profit to L17 million despite absorbing first quarter losses at the
coal-fired stations.
Cont . . .
<PAGE> 181
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 3
The coal-fired stations' performance continued to exceed our original
expectations at close to 96 per cent availability.
Citizens Power, the acquisition of which was completed in May 1997, has produced
a positive first quarter contribution and the gas business of Eastern continues
to expand; domestic customers now exceed 120,000.
NETWORKS
Results for the networks business for the first quarter are down on the
comparable period last year, with turnover at L105 million and profit at L45
million. This is largely as a result of the regulatory review which has only
been partly offset by further cost reductions. In addition units distributed
were slightly lower, due mainly to mild weather.
OUTLOOK
Derek Bonham, Chairman of The Energy Group, said:
"Prospects for the Group are in line with those described at the time of
demerger. Our core businesses are continuing to perform strongly and we are
pleased with the initial contribution from our new investments."
FOR FURTHER INFORMATION: Aviva Gershuny-Roth
The Energy Group PLC
Tel: 0171-647 3200
RESULTS ATTACHED
<PAGE> 182
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 4
UNAUDITED FINANCIAL RESULTS
FIRST QUARTER ENDED 30 JUNE 1997
<TABLE>
<CAPTION>
Pro forma
3 months 3 months 6 months
to 30 June 1997 to 30 June 1996 to 31 March 1997
Lmn Lmn Lmn
<S> <C> <C> <C>
Turnover
Coal 354 347 647
Power 649 492 1,801
Networks 105 110 274
Other 5 5 9
Intra-group (80) (85) (212)
----- ---- -----
1,033 869 2,519
----- ---- -----
Operating Profit
Coal 40 38 66
Power 17 12 129
Networks 45 52 122
Other (Note 4) (6) (4) -
----- ---- -----
Pre-exceptional operating profit 96 98 317
Restructuring and reorganisation costs - - (20)
----- ---- -----
Total operating profit 96 98 297
- -- - -
PacifiCorp offer costs (Note 1) (2) -
Net interest and similar charges (33) (37)
----- -----
Profit on ordinary activities before taxation 56 260
Ordinary taxation charge for the period (17) (81)
----- -----
39 179
Exceptional taxation (Note 2) (112) -
----- -----
Profit/(loss) on ordinary activities after taxation (73) 179
Dividends - (29)
----- -----
Profit/(loss) retained for the period (73) 150
-- - -- -
Earnings/(loss) per ordinary share (Note 3)
Pre-exceptional 8.9p 38.2p
Basic (14.1)p 34.5p
</TABLE>
- ---------------
NOTES
1. "PacifiCorp offer costs" reflect the expenditure incurred to date by the
Group in relation to the recommended cash offer by PacifiCorp Acquisitions
for The Energy Group PLC. That offer lapsed on 1 August 1997 upon its
referral to the Monopolies & Mergers Commission.
2. "Exceptional taxation" relates to the Group's estimated share of the
windfall levy announced in the UK Budget on 2 July 1997.
3. The earnings per share for the 3 months ended 30 June 1997 are based on the
profits for that period and on 516,756,626 shares which excludes the
4,100,891 shares held by The Energy Group Employee Benefit Trust, which has
waived its right to dividends on the shares it holds.
The earnings per share for the six months ended 31 March 1997 are based on
the profits for that period and on 518,607,817 shares which excludes the
2,250,000 shares then held by The Energy Group Employee Benefit Trust.
4. Pro forma adjustments have been made to the figures to 30 June 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.
<PAGE> 183
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 5
UNAUDITED FINANCIAL RESULTS
FIRST QUARTER ENDED 30 JUNE 1997
<TABLE>
<CAPTION>
PRO FORMA
3 MONTHS 3 MONTHS 6 MONTHS
TO 30 JUNE 1997 TO 30 JUNE 1996 TO 31 MARCH 1997
--------------- --------------- ----------------
$MN $MN $MN
<S> <C> <C> <C>
Turnover
Coal 582 570 1,064
Power 1,067 809 2,960
Networks 173 181 450
Other 8 8 15
Intra-group (132) (140) (348)
------ ------ ------
1,698 1,428 4,141
------ ------ ------
Operating Profit
Coal 66 62 108
Power 28 20 212
Networks 74 86 201
Other (Note 5) (10) (7) -
------ ------ ------
Pro-exceptional operating profit 158 161 521
Restructuring and reorganisation costs - - (33)
------ ------ ------
Total operating profit 158 161 488
-- -
PacifiCorp offer costs (Note 2) (12) -
Net interest and similar charges (54) (61)
------ ------
Profit on ordinary activities before taxation 92 427
Ordinary taxation charge for the period (28) (133)
------ ------
64 294
------ ------
Exceptional taxation (Note 3) (184) -
------ ------
Profit/(loss) on ordinary activities after taxation (120) 294
Dividends - (47)
------ ------
Profit/(loss) retained for the period (120) 247
-- - -- -
Earnings/(loss) per ADS (Note 4)
Pre-exceptional $ 0.59 $ 2.51
Basic $(0.93) $ 2.27
</TABLE>
- ---------------
NOTES
1. The above US$ figures have been translated at the average exchange rate for
the three months to 30 June 1997 of $1.6438 to the L.
2. "PacifiCorp offer costs" reflect the expenditure incurred to date by the
Group in relation to the recommended cash offer by PacifiCorp Acquisitions
for The Energy Group PLC. That offer lapsed on 1 August 1997 upon its
referral to the Monopolies & Mergers Commission.
3. "Exceptional taxation" relates to the Group's estimated share of the
windfall levy announced in the UK Budget on 2 July 1997.
4. The earnings per ADS for the three months ended 30 June 1997 are based on
the profits for that period and on 518,756,926 shares which includes the
4,100,891 shares held by The Energy Group Employee Benefit Trust, which has
waived its right to dividends on the shares it holds. One ADS is equivalent
to four ordinary shares.
The earnings per share for the six months ended 31 March 1997 are based on
the profits for that period and on 518,607,817 shares which excludes the
2,250,000 shares then held by The Energy Group Employee Benefit Trust.
5. Pro forma adjustments have been made to the figures to 30 June 1996 in
respect of the additional administration costs that arose following the
demerger. The directors estimate that such costs amount to approximately
US$25 million per annum.
<PAGE> 184
[Peabody Letterhead] Peabody Holding Company, Inc.
NEWS RELEASE
CONTACT:
Gayla Hoffman
314-342-7768
FOR IMMEDIATE RELEASE
Aug. 19, 1997
CLIMATE CHANGE TREATY WOULD
CURB U.S. ECONOMIC GROWTH,
JEOPARDIZE ELECTRICITY SUPPLY
ST. LOUIS, Mo., Aug. 18 -- An international climate treaty being negotiated this
year to reduce carbon dioxide (CO(2)) emissions at power plants will curb U.S.
economic growth by jeopardizing the electricity supply, according to a new study
by Resource Data International, Inc. (RDI).
The study examines how growth in the U.S. electricity supply helps drive
economic growth as measured by the Gross Domestic Product (GDP). About 56
percent of all U.S. electricity is generated from coal which is the lowest cost
fuel. Coal's primary component is carbon, and according to the Clinton
Administration, reducing coal use is the most likely scenario to control CO(2)
emissions.
The study considered the effects of removing a significant proportion of
coal from the mix of resources that generate electricity and replacing it with
alternate sources.
RDI concluded that no single alternative resource or combination of natural
gas, nuclear, hydroelectric and renewables such as solar or wind, can replace
coal to generate electricity and sustain current levels of U.S. economic growth
to meet even the most modest climate treaty proposal that would stabilize CO(2)
emissions at 1990 levels.
The Clinton Administration has indicated that stabilizing emissions at 1990
levels by 2010 would require a tax of $100 on each ton of CO(2). The study found
that reducing CO(2) emissions to 1990 levels with a tax of this magnitude
drastically limits electricity supplies after 2005, reducing GDP growth by up to
$1.314 trillion, or 14 percent by 2010, and up to $16.823 trillion over a
10-year period.
- more -
<PAGE> 185
CLIMATE CHANGE TREATY -- ADD ONE
The RDI study also found that the economic impacts of the current CO(2)
reduction proposals will fall unevenly across the United States. The nation's
heartland will be hardest hit because interior regions lack hydroelectric and
nuclear generating resources and rely upon on Inexpensive coal-generated
electricity for 72 percent of their energy. Inexpensive electricity is also why
energy-intensive industries are more heavily concentrated in the U.S. interior.
Seaboard economies tend to be more service-oriented.
RDI, an independent energy research group in Boulder, Colo., was retained
by St. Louis-based Peabody Holding Company, Inc., the world's largest private
coal producer, to study the economic effects of current proposals for a new
treaty on climate change. The new treaty will be considered at the December 1997
United Nations conference in Kyoto, Japan, where binding limits for the
mandatory reduction of carbon dioxide emissions in developed nations will be
debated.
The proposed treaty will require the United States and other developed
nations to control CO(2) emissions, while China and other developing nations --
many of them major international trade competitors -- will be exempt from
binding limitations. The U.S. Department of Energy projects that, under current
conditions, the United States will contribute less than 19 percent of global
CO(2) emissions by 2015 compared to 58 percent from developing nations.
The RDI study concludes that: "In short, there will be no benefit to global
climate. At the same time, the U.S. economy will be more at risk than either the
other [developed] nations or the nations that will be exempt from any potential
Kyoto treaty."
Copies of the RDI study, THE ECONOMIC RISKS OF REDUCING THE U.S.
ELECTRICITY SUPPLY, CO(2) CONTROL AND THE U.S. ELECTRICITY SECTOR, may be
obtained by calling Peabody at (314) 342-7554 or via the Internet at
www.peabodygroup.com/ and select "Company Publications", then "Report."
The Executive Summary of the study is attached.
- 30 -
<PAGE> 186
THE ECONOMIC RISKS OF REDUCING
THE U.S. ELECTRICITY SUPPLY
CO(2) Control and the U.S. Electricity Sector
EXECUTIVE SUMMARY
In response to international efforts to address perceived global climate change
impacts, the United States has expressed commitment to the goal of reducing
carbon dioxide ("CO(2)") emissions to 1990 levels, or lower. To that end, the
Department of Energy and the Environmental Protection Agency have formed an
Interagency Analytical Team ("IAT") to work with outside economists in
determining the impacts associated with various proposals for emission
reductions, timetables, and mechanisms for attaining reductions.
This study focuses on the U.S. electricity sector and identifies the risks that
would be posed to the economy by reducing CO(2) emissions to 1990 levels in that
sector. These risks are quite great and would provide no tangible benefit, since
the nations with the fastest growing CO(2) emissions will be exempt from any
treaty that may be signed in Kyoto, Japan later this year.
Specific findings include:
CURRENT CO2 CONTROL PROPOSALS WILL PUT THE U.S. ECONOMY AT RISK
--Growth in the U.S. economy is tied to growth in electricity supply, with
current electricity-to-Gross Domestic Product ("GDP") ratios at 1.34% growth
in electricity associated with each 1% growth in GDP;
--Reducing CO(2) to 1990 levels will limit the annual growth rate in the supply
of electricity between 1995 to 2015 to 0.83%, down from 1.45% under the
Department of Energy's projected business-as-usual scenario. Neither natural
gas nor CO(2) neutral generating resources will be able to offset this supply
restriction;
--Therefore, up to $1.314 trillion, or 14% of GDP, will be at risk in 2010 and
up to $16.823 trillion cumulatively from 2005 to 2015.
<PAGE> 187
Proposed CO2 Emission Trading Proposals are not a Panacea
--Clinton Administration is using the success of the acid rain sulfur dioxide
("SO(2)") trading program to suggest that CO(2) trading will limit compliance
costs. However, the two programs differ fundamentally;
--While the EPA distributes SO(2) emission allocations at no cost, the
Administration proposes to auction CO(2) allocations. Such an auction would
mimic the effects of a carbon tax, with the federal government collecting at
least $133 billion annually from all sectors and $50 billion from the
electricity sector alone. The idea that "recycling" of these revenues will
counterbalance the economic consequences of both the "tax" and the costs of
compliance is an unproven presumption;
--The success of SO(2) trading lies in the ability of power plants to switch
from high sulfur to low sulfur coal sources. Because low sulfur coal is now
generally cheaper than high sulfur coal, over-compliance with the acid rain
program often comes as a windfall. There are no "low carbon" coal sources,
and natural gas is a higher cost fuel alternative.(1)
CO2 Stabilization will Disproportionately Impact the U.S. Interior
--The Eastern and Western Coastal regions of the country have greater access to
hydroelectric, nuclear, natural gas, and renewable energy resources than the
Interior regions and therefore generate electricity that is less
carbon-intensive than the interior. Where the Interior regions relied on coal
for 72% of their electricity generation in 1995, the Coastal regions relied
on coal for only 35%;
--The economies of the Interior regions are more electricity-intensive than the
economies of the Coastal regions. In 1995, the Interior regions consumed 0.51
terraWatthours of electricity per billion dollars of Gross State Product
("tWh/GSP"), compared to 0.38 tWh/GSP for the Coastal regions;
--Therefore, because the Interior regions rely on more carbon-intensive energy
resources for electricity and require more of this carbon-intensive
electricity per unit of GSP than the Coastal regions, the Interior regions
will bear the brunt of any CO(2) stabilization effort.
- ---------------
(1) There are slight differences between the carbon contents of bituminous
and sub-bituminous coals and lignite, but these are insignificant in
relation to sulfur differentials.
<PAGE> 188
U.S. Efforts to Reduce CO2 will have Diminishing Returns
- ---------------------------------------------------------------
--The U.S. emitted 23% of global CO(2) emissions in 1995, but is projected to
emit only 19% by 2015 under a business-as-usual scenario;
--China and other non-OECD Asian nations emitted 23% of global CO(2) emissions
in 1995, but are projected to emit 33% by 2015 under a business-as-usual
scenario;
--Only the Annex 1 nations (including the U.S. and OECD, as well as certain
Eastern European countries) will be required to control CO(2) emissions under
the Kyoto treaty, while China and all other non-OECD nations will be exempt.
Thus, even if the OECD reduces its carbon emissions by 916 million metric
tonnes ("mmt") by 2015 to meet 1990 levels, the non-OECD nations will still
increase emissions by 2,360 mmt.
<PAGE> 189
SIGNATURES
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.
THE ENERGY GROUP PLC
----------------------------------
(Registrant)
Date: September 2, 1997 By /s/ MARTIN MURRAY
----------------- ----------------------------------
Martin Murray
General Counsel
and Secretary
<PAGE> 190
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of September, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
117 Piccadilly, London W1V 9FJ, England
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
<TABLE>
<S> <C>
Form 20-F Form 40-F
[X] [ ]
</TABLE>
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
<TABLE>
<S> <C>
Yes No
[ ] [X]
</TABLE>
<PAGE> 191
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
September 9, 1997
THE ENERGY GROUP ENTERS AN AGREEMENT TO ACQUIRE
AN INTEREST IN THE ZAMOSC ENERGY COMPANY, POLAND
The Energy Group through its subsidiary Eastern Generation has reached agreement
with Southern Energy Inc., to acquire their development interests in three
co-generation projects in Poland based in Chelm, Zamosc and Przemysl. The
acquisition will take place via a 49 per cent. share purchase of the Zamosc
Energy Company (ZEC).
ZEC is a joint venture with Polish regional distribution company Zaklad
Energetyczny Zamosc SA and holds the rights to develop three 70MW electrical
co-generation plants which will cost approximately $100 million each to build.
Derek Bonham, Chairman of The Energy Group said: "Following our recent
acquisition of a majority stake in Teplarny Brno in the Czech Republic, this
represents another important strategic move into the rapidly developing energy
markets of Eastern Europe."
ENQUIRIES: AVIVA GERSHUNY-ROTH
THE ENERGY GROUP PLC
0171-647 3200
ATTACHMENT: NOTES TO EDITORS
<PAGE> 192
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
NOTES TO EDITORS:
1. Eastern Generation Ltd, part of Eastern Group plc, is a subsidiary of The
Energy Group PLC and is the fourth largest electricity generator in the UK.
2. Zaklad Energeryczny Zamosc SA is a regional distribution company in the
South East of Poland. It has approximately 400,000 customers and for the
year to 31(st) December 1996 had a turnover of PLZ 282,152,700
(approximately L50 million) and made a profit of PLZ 3,375,000
(approximately L600,000).
3. ZEC is the trading name for Zamojska Spolka Elektroenergetyczna Sp zoo.
END
<PAGE> 193
[EASTERN letterhead] Corporate
Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ42
16 September 1997
DUAL-FIRING PLANS FOR DRAKELOW
AND RUGELEY POWER STATIONS
EASTERN GENERATION, BRITAIN'S FOURTH LARGEST ELECTRICITY GENERATOR AND PART OF
EASTERN GROUP, TODAY UNVEILED PLANS TO INTRODUCE NATURAL GAS FIRING ALONGSIDE
COAL AT DRAKELOW AND RUGELEY POWER STATIONS.
The conversion plans, which are being submitted to the Department of Trade and
Industry for approval, will allow the stations to burn gas, coal or a
combination of both.
The L40 million investment includes the cost of laying six kilometres of
underground gas pipelines to each site. The gas pipes will be laid under mainly
agricultural land and care will be taken to minimise any disruption during
construction.
The plant modifications and pipeline laying could begin as early as April 1998
with dual-firing starting in July 1998.
Rugeley (Staffordshire) and Drakelow (South Derbyshire) each generate up to
1,000MW of electricity. Together the stations could burn up to 5.5 million
therms of gas each day.
The gas will be supplied by Eastern Power and Energy Trading from its expanding
portfolio of contracts. The company, one of Britain's largest independent
shippers of natural gas, is a sister company to Eastern Generation within
Eastern Group.
The advanced dual-firing technology will help in the management of station
emissions in the face of increasingly tight regulations. Burning natural gas
produces no sulphur dioxide, less nitrogen oxides and carbon dioxide and no dust
when compared to conventional coal firing.
John Devaney, Eastern Group's Executive Chairman, said: "This significant
investment will help secure the long-term future of generation on both sites."
<PAGE> 194
Ends
NOTE TO EDITORS
Eastern Group currently owns, operates or has interest in eight power stations
in Britain representing around 10 per cent of the country's total generating
capacity. Its portfolio consists of a mix of combined-cycle gas turbine and
coal-fired stations.
The capacity was increased in 1996 as a result of leasing agreements for five
coal-fired stations -- Rugeley, Ironbridge and West Burton from National Power
and High Marnham and Drakelow from PowerGen.
Media Inquiries: Bill Watson, Managing Director, Eastern Generation
Jim Whelan, Managing Director, Eastern Power and Energy Trading
Dave Betteridge or Ian Seaton, Media Relations, Eastern Group
01473 553410.
<PAGE> 195
THE ENERGY GROUP PLC
Announcement to the London Stock Exchange
DATE ANNOUNCEMENT SENT: 25 SEPTEMBER, 1997
The Energy Group PLC expects to announce its interim results for the period of
six months ending 30 September 1997 on 12 November 1997.
The Company's first Annual General Meeting is to be held in London on 13
November 1997. Notice of the meeting will be sent to shareholders shortly.
<PAGE> 196
SIGNATURES
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.
THE ENERGY GROUP PLC
--------------------------------------
(Registrant)
Date October 7, 1997 By /s/ MARTIN MURRAY
------------------------------------
Martin Murray
General Counsel
and Secretary
<PAGE> 197
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of October, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
117 Piccadilly, London W1V 9FJ, England
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
<TABLE>
<S> <C>
Form 20-F Form 40-F
[X] [ ]
</TABLE>
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
<TABLE>
<S> <C>
Yes No
[ ] [X]
</TABLE>
<PAGE> 198
[EASTERN letterhead] Corporate
Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
[News Release]
HQ45
Embargoed until 8 October 1997
EASTERN KICKS-OFF BIG SAVINGS ON GAS
GAS BILL SAVINGS OF AROUND 20% ARE IN THE PIPELINE FOR MILLIONS OF HOMES ACROSS
EASTERN ELECTRICITY'S REGION.
Eastern Natural Gas, sister company to Eastern Electricity, today becomes the
first rival to British Gas to kick-off its sales and customer awareness
campaign -- starting the countdown to full competition next year.
Both companies are part of Eastern Group, a nation-wide supplier of electricity
and natural gas.
Eastern, already one of Britain's biggest gas suppliers, currently offers an
average reduction of 20% off British Gas bills. Customers switching to direct
debit are saving up to 24.6% -- or around L100 on a typical L400 annual gas
bill.
More than 250,000 homes have signed with Eastern in those parts of the country
already free to choose from rival gas suppliers -- the south-west, south-east
and north-east of England and Scotland.
Ofgas, the industry watchdog, plans to see competition "go live" in May next
year in Norfolk, Suffolk, Essex, Cambridgeshire, Buckinghamshire, Bedfordshire
and Hertfordshire. Greater London boroughs are expected to follow in June.
Eastern is kicking-off with football ground advertising. Fully trained sales
representatives are spearheading the campaign region-wide from November 1.
Jonathan Baggott, Eastern's gas sales and marketing manager, said: "One in four
homes are now switching away from British Gas in places where competition has
already started. We have been looking forward to playing on 'home-turf' where
people are already familiar with Eastern as their local electricity supplier."
He added: "Eastern aims to secure more than 1.5 million new gas customers across
Britain by the turn of the century."
<PAGE> 199
more
gas/2
Switching suppliers is simple. Eastern will use existing pipes and meters and
will bill customers directly. BG Transco is still responsible for leaks and
emergencies.
In addition to cheaper gas, Eastern also offers a full range of other services
including boiler servicing and emergency cover and bill payment protection.
A new gas sales inquiry line, charged at the local rate, is now available on
0345 236236.
Ends
Media inquiries: Dave Betteridge or Judith Hanlon, Eastern Group, 01473
553410.
<PAGE> 200
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
October 13, 1997
ENERGY GROUP OVERSEAS B.V. ISSUES $500 MILLION GUARANTEED NOTES
Energy Group Overseas B.V., a wholly owned subsidiary of The Energy Group PLC,
announced today the issue of a total of $500 million Guaranteed Notes. The notes
are in two series, $200 million 7 3/8 per cent due 2017 and $300 million 7 1/2
per cent due 2027, and are unconditionally guaranteed by The Energy Group PLC.
The $200 million notes due 2017 are being issued to investors at a price of
99.524 per cent to yield 95 basis points over the 6 5/8 per cent Treasury Stock
2027 so as to yield 7.421 per cent to investors on a semi-annual basis. Interest
will be payable semi-annually in arrear on April 15 and October 15 in each year
beginning April 1998.
The $300 million notes due 2027 are being issued to investors at a price of
99.987 per cent to yield 103 basis points over the 6 5/8 per cent Treasury Stock
2027 so as to yield 7.501 per cent to investors on a semi-annual basis. Interest
will be payable semi-annually in arrear on April 15 and October 15 in each year
beginning April 1998.
Eric Anstee, Finance Director of The Energy Group said: "The proceeds of this
issue will be used for our general corporate purposes enabling us to repay short
term debt."
<TABLE>
<S> <C> <C>
Enquiries: Eric Anstee Finance Director
Mike Andrews Treasurer
Aviva Gershuny-Roth Head of Corporate Communication
</TABLE>
Tel: 0171-647 3200
The Guaranteed Notes have not been registered under the U.S. Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from registration.
<PAGE> 201
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
October 24, 1997
THE ENERGY GROUP WINS BID FOR TURKISH GENERATION PLANT
The Energy Group, through its subsidiary, Peabody, together with NRG and Koc
Holding, have won a bid to acquire the 450 megawatt Kangal coal-fired generation
plant in central Turkey for $125 million.
The consortium interest is split: Koc 50%, Peabody 25% and NRG 25%. The bids are
subject to the negotiation of definitive agreements. The consortium has
submitted bids for other distribution and generation assets which are still
under evaluation.
Power from the Kangal station will be sold to TEAS, The Turkish national power
company, under a 20-year power purchase agreement. The agreement which will be
denominated in US dollars will contain minimum take-or-pay provisions. The plant
will be retrofitted with up-to-date technology to improve its environmental
performance significantly.
"This project is a further step in the realisation of The Energy Group's
strategy to develop as an international, integrated energy company", said Derek
Bonham, Chairman of The Energy Group. "The Kangal power station represents a
significant opportunity to acquire a quality asset which will produce immediate
earnings enhancement."
<TABLE>
<S> <C> <C>
ENQUIRIES: Aviva Gershuny-Roth Chris Farrand
The Energy Group Peabody
Tel: 0171-647 3200 Tel: 001 314 342 7623
ATTACHMENT: Notes to Editors
</TABLE>
<PAGE> 202
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
NOTES TO EDITORS
The disposal is part of the Turkish government's efforts to ensure a more
reliable and cost-efficient supply of energy by privatising its electric
distribution, generation and related coal mining assets. The Turkish economy is
growing at a rapid pace and growth in electricity demand is projected to be much
higher than that in most of Europe or the United States. The electricity growth
rate in Turkey is projected to be 6 to 8.5 per cent annually.
The Energy Group is a diversified international energy company which includes
Peabody, the world's largest private coal producer; Eastern, one of the leading
integrated electricity and gas companies in Great Britain; and Citizens Power,
one of the top five power marketers in the United States.
NRG is a wholly owned subsidiary of Northern States Power Company, which owns
and operates more than 7000 MW of coal, gas, nuclear, hydro and alternative
fuel-fired plants in the United States. NRG has significant investments in
Germany, Australia, Bolivia, the Czech Republic and the United States.
Koc Holding, founded in 1926, is the largest conglomerate in Turkey and a
Fortune Global 500 corporation.
END
<PAGE> 203
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
October 27, 1997
THE ENERGY GROUP IN L870,000 SPONSORSHIP OF THE NATIONAL
YOUTH THEATRE
The Energy Group today announced its three-year sponsorship of the National
Youth Theatre of Great Britain. The sponsorship programme will provide L250,000
a year for three years and will cover essential core costs as well as money
towards productions. The Government's ABSA "Pairing Scheme" has also awarded a
grant of L40,000 a year for the sponsorship duration, bringing the total funds
available to L870,000.
Derek Bonham, Chairman of The Energy Group, said:
"I have always admired the drive, ambition and enthusiasm of the National Youth
Theatre, qualities which I believe are mirrored at The Energy Group. So I am
delighted that we are able to support them via this sponsorship which will cover
a substantial part of their core costs."
"It is in the best interest of business to encourage young people's creative
potential and not to overlook the benefits which drama and the arts can offer in
terms of training, education, self-confidence and long term contribution to
society."
Cont...
<PAGE> 204
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 2
The Energy Group already provides support to a wide range of causes including
disadvantaged young and elderly people; and those involved in environmental
conservation. In addition the company has contributed to the Wildlife Trust,
Macmillan Cancer Relief and the NSPCC, through Eastern, its UK based electricity
and gas company.
In the U.S.A., The Energy Group provides American Indians with scholarship
funding, while the Smithsonian Institute in Washington, D.C. benefits from
co-sponsorship of a coal and electricity educational exhibit through Peabody,
The Energy Group's U.S. based coal producer which is the largest private coal
producer in the world.
<TABLE>
<S> <C> <C>
ENQUIRIES: Aviva Gershuny-Roth Cathy Barnhill
The Energy Group National Youth Theatre
Tel: 0171-647 3200 Tel: 0171-281 3863
</TABLE>
PRESS RELEASE
<PAGE> 205
THE ENERGY GROUP PLC
Announcement to the London Stock Exchange
DATE ANNOUNCEMENT SENT: 28 OCTOBER, 1997
Following purchases of additional shares on 24 October 1997 UBS UK Holding
Limited notified The Energy Group PLC on 27 October 1997 that UBS Limited and
PDFM Limited had acquired respective interests in 15,691,254 and 18,734,185
ordinary shares of The Energy Group PLC, representing 3.012% and 3.596% of the
issued ordinary share capital of the company, respectively.
UBS Limited and PDFM Limited are subsidiaries of UBS UK Holding Limited which is
also treated as having an interest in these shares.
<PAGE> 206
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
October 28, 1997
The Energy Group announces that Sir Christopher Harding has informed the Board
that he has accepted an invitation to join United Utilities PLC as Deputy
Chairman from November 1, 1997 taking over as Chairman on April 1, 1998. He has
accordingly resigned as a Non-Executive Director of The Energy Group with
immediate effect and the resolution for his re-appointment as a Director of the
company will therefore not be put to the Annual General Meeting of The Energy
Group on November 13, 1997. Derek Bonham, Chairman of The Energy Group, said
that Sir Christopher Harding's contribution would be missed by all his
colleagues and wished him well in his future position.
ENQUIRIES: Aviva Gershuny-Roth
The Energy Group
Tel: 0171-647 3200
<PAGE> 207
[EASTERN ELECTRICITY Letterhead] Corporate
Communications
Eastern Electricity
plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ52
30 October 1997
EASTERN NATURAL GAS SIGNS 200,000 IN
SCOTLAND AND THE NORTH EAST.
Eastern Natural Gas, already one of Britain's biggest gas suppliers, has signed
around 200,000 new customers in Scotland and the North East -- representing
approximately half the households switching from November 1.
ENG, part of Eastern Group, a nation-wide provider of electricity and natural
gas, has signed around 108,000 homes in the North East and 92,000 in Scotland.
Ofgas announced today that more than 400,000 households out of a market of 2.5
million have signed to switch from British Gas in the latest competition phase.
Eastern offers an average reduction of 20% off British Gas bills. Customers
switching to direct debit are saving up to 24.6% -- or around L100 on a typical
L400 annual gas bill.
John Devaney, Executive Chairman, Eastern Group, said: "We're delighted with the
results of our sales campaign particularly in an area where Eastern was a new
name with households. We're already active in the south west and south east of
England and aim to secure 1.5 million new domestic gas customers nation-wide by
the turn of the century."
Ends
Enquiries: Dave Betteridge (01473) 553410.
<PAGE> 208
SIGNATURES
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.
THE ENERGY GROUP PLC
--------------------------------------
(Registrant)
Date: November 3, 1997 By /s/ MARTIN MURRAY
---------------- --------------------------------------
Martin Murray
General Counsel
and Secretary
<PAGE> 209
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
117 Piccadilly, London W1V 9FJ, England
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
<TABLE>
<S> <C>
Form 20-F Form 40-F
[X] [ ]
</TABLE>
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
<TABLE>
<S> <C>
Yes No
[ ] [X]
</TABLE>
<PAGE> 210
[EASTERN ELECTRICITY Letterhead] Corporate
Communications
Eastern Electricity
plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ48
4 November 1997
EASTERN POWERS INTO NORD POOL
Eastern Power and Energy Trading, part of Eastern Group, has become the first
British company to buy and sell electricity in the Norwegian and Scandinavian
power market.
The market, known as Nord Pool, was the world's first commodity exchange for
electrical power when it was established in 1993.
Easter is trading from Ipswich -- making it the first non-Scandinavian Nord Pool
member to operate remotely.
Unlike its UK operations, Eastern is trading for the first time on the
electricity futures market -- where the buying and selling is on paper and there
is no physical delivery of the electricity.
Jim Whelan, Managing Director of Eastern Power and Energy Trading, said:
"Joining Nord Pool is part of our strategic development overseas. It is a very
attractive way of gaining a closely controlled exposure and experience of a
foreign market."
Ends
Media inquiries: Dave Betteridge (01473) 553410.
<PAGE> 211
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
12 November 1997
THE ENERGY GROUP INTERIM RESULTS
FINANCIAL HIGHLIGHTS
- - TURNOVER EXCEEDS L2 BILLION.
- - UNDERLYING OPERATING PROFIT UP BY OVER 12%
- - INTERIM DIVIDEND OF 8.0 PENCE PER SHARE.
- - WELL POSITIONED FOR DOMESTIC COMPETITION IN THE
UK ELECTRICITY AND GAS MARKETS.
- - OVER 300,000 UK GAS CUSTOMERS NOW SIGNED UP.
- - POWER STATION DEVELOPMENT PROJECTS ANNOUNCED
IN POLAND, TURKEY, TAIWAN AND THE UK.
Derek Bonham, Chairman said: "The Energy Group has made an impressive start
to life as an independent company. With underlying operating profit up 12%, the
financial results are both encouraging and in line with expectations. We are
particularly well positioned to profit from the emerging competitive UK gas and
electricity sectors as well as the deregulating US energy market. Developments
in this period underpin our ambitions to become a leading international
integrated energy company."
The Energy Group announces results for the period 1 April to 30 September
1997. The results for the quarter have been compared to the pro forma operating
results for certain of the businesses which were previously reported as part of
Hanson PLC. Previously announced results and retained profits for the six months
to 31 March 1997 are also provided for comparison.
cont...
<PAGE> 212
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 2
FINANCIAL RESULTS
Group turnover for the six months to 30 September 1997 was L2,007 million, an
increase of 7% on the same period last year. Operating profit for the period was
L187 million (pro forma 1996: L196 million) before the exceptional costs
associated with PacifiCorp's bid and restructuring costs within EASTERN.
Earnings per share, before exceptional items, fell to 17.7p (pro forma 1996:
21.7p). As reported in our first quarter results, compared with last year, these
results were adversely affected by some L20 million of normal seasonal losses
associated with the coal-fired power stations we leased in July 1996. Excluding
this, and using consistent exchange rates, underlying operating profit has grown
by more than 12%.
As reported, the L112 million cost of the windfall tax was fully provided for in
the first quarter. The underlying tax rate for ordinary activities in the six
months to 30 September 1997, before the windfall tax, was 26.3%.
In October the group successfully issued $500 million of bonds due for repayment
in 2017/2027, adding to the long term stability of our financial base.
DIVIDEND
An interim dividend of 8.0 pence per share will be paid on 9 January 1998 to
ordinary shareholders on the register on 19 December 1997. Subject to prevailing
circumstances, we expect to pay a further dividend in August 1998.
cont. . .
<PAGE> 213
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 3
PACIFICORP'S OFFER
PACIFICORP'S recommended offer for THE ENERGY GROUP of 690 pence per share
lapsed on 1 August 1997, when the UK Secretary of State for Trade and Industry
referred its bid to the Monopolies and Mergers Commission. We are co-operating
fully with this enquiry and also with the US regulatory authorities, who are
conducting their own reviews of the proposed merger.
REVIEW
The six months to 30 September 1997 have been a period of significant
development for THE ENERGY GROUP. In May we completed the acquisition of
CITIZENS POWER, one of the top ten electricity trading businesses in the USA.
This is a key element in our strategy of building an integrated energy company
in North America. Citizens is already working closely with PEABODY to market
jointly a range of new trading-based products to help utilities compete more
effectively in the deregulating US electricity markets. EASTERN continues to
make considerable headway in the UK gas supply market and is now one of the
largest suppliers after Centrica plc. We intend to be a major national player in
both the electricity and gas markets. The Energy Group has also announced major
energy projects in Poland, Turkey, Taiwan and the UK.
cont . . .
<PAGE> 214
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 4
TRADING
COAL
PEABODY produced 83.5 million (86 million) tons of coal in the period and
continues to lead the US coal industry with a 14% share of the coal market. Its
steam coal products were used to generate over 9% of all electricity produced by
US electric companies. Turnover for the six months decreased 6% to L691 million
(L733 million) and operating profit declined 3% to L85 million (L88 million).
However, these results are distorted by the impact of the strong L:$ exchange
rate in the period. On a US dollar basis, turnover increased 1% to $1,137
million ($1,131 million). Operating profit was also up 3% to $140 million ($136
million) for the period. These figures included the favourable impact of a coal
supply agreement restructuring of $38 million, partially offset by reduced
demand for coal for electricity due to mild weather. Earnings improved at
PEABODY'S Australian operations and at the Powder River Coal Company.
In Australia, PEABODY is continuing to expand the Warkworth Mine and to
construct a new mine at Bengalla in New South Wales to serve the fast-growing
Asia/Pacific Rim market. Initial shipments from Bengalla are expected to begin
in early 1999.
PEABODY is also continuing with its competitiveness initiatives, including
productivity investments and consolidation of production. Our US mines achieved
record safety results, with a 20% year on year improvement, and an 80%
improvement since 1990.
cont. . .
<PAGE> 215
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 5
POWER
Turnover in our POWER business increased by 15% to L1,248 million.
Operating profit fell by L8 million to L31 million due to the adverse impact of
seasonal losses referred to earlier.
EASTERN'S UK power stations, notably the 5,949MW coal-fired portfolio, have
undergone routine summer maintenance during this half year and are well
positioned for the important winter months ahead. The 360MW CCGT power station
at Peterborough continued to achieve very high levels of availability throughout
the period, the 340MW CCGT power station at King's Lynn is completing its
commissioning phase and plans for further development of previously announced
new generation facilities are in advanced stages of the planning and approval
process. Eastern also intends to introduce dual-firing for coal and gas for
2,022MW of existing capacity at Drakelow and Rugeley to manage increasingly
tight emission regulations more effectively.
The growth of EASTERN'S domestic gas retail business has been impressive,
adding to its strong position in the industrial and commercial markets. EASTERN
NATURAL GAS serves domestic customers in those parts of the south west and the
south east of England which are already open to competition and is winning
customers in Scotland and the north east. It has now signed up over 300,000
customers.
EASTERN ELECTRICITY'S retail business continues to perform well in those
parts of the UK electricity market which are open for competition, with around
13% of eligible commercial sites in this market. We are currently on target to
be one of the four REC's fully ready for competition from 1 April 1998. Plans to
serve the national residential and small business electricity markets are well
advanced, including the recent launch of the innovative 'EcoPower' tariff.
cont...
<PAGE> 216
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 6
We are still in discussion with the electricity regulator about his price
proposals for electricity supply for the two years from 1 April 1998, and will
make a further announcement shortly. We welcome in principle the move to maximum
price caps as a means of facilitating competition in both the retail and
wholesale markets.
Following the demerger from Hanson PLC the group retained L68m of provisions
against long-term electricity contracts. We are now examining the implications
of a fully competitive market on these provisions against certain long term
electricity contracts entered into after privatisation, with the possibility
that provisions might need to be increased.
In the USA, CITIZENS POWER increased electricity and gas trading volume by 334%
over the comparable period in 1996. Since its acquisition, Citizens Power has
completed additional non-utility generating restructuring agreements, providing
it with a continuing earnings stream and has established a state-of-the-art
energy trading floor which co-ordinates with PEABODY in the marketing of new
combined fuel/power arrangements for the deregulating US electric utility
industry.
In September we reached an agreement to acquire a 49% interest in the
development of three 70MW co-generation projects in Poland. As part of a
consortium in which we have a 25% interest, we have recently won a bid to
acquire a 450MW coal-fired generation plant in central Turkey with a related
mining facility. In Taiwan, we have entered a joint venture to develop a 550MW
coal-fired plant. THE ENERGY GROUP is the first major western energy company to
become involved in this kind of project in Taiwan.
cont...
<PAGE> 217
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 7
NETWORKS
Another solid performance from the Networks business has contributed L81 million
(L78 million) to profit in the six month period, reflecting a 14% reduction in
operating costs.
EASTERN ELECTRICITY'S 89,000 km network continues to be one of the most reliable
in the UK. Network investment plans are on target and will further improve
performance and reliability.
EASTERN GROUP TELECOMS continues to build a strong position as a network
provider to UK telecoms operators, with additional investments made during the
period.
DIRECTOR
On 28 October 1997, Sir Christopher Harding resigned as a non-executive director
on becoming chairman designate of United Utilities PLC. His contribution will be
missed and we wish him well in his new position.
INTERIM REPORT
The interim report is being mailed to shareholders and ADS holders.
FOR FURTHER INFORMATION: Aviva Gershuny-Roth
The Energy Group PLC
Tel: 0171-647 3200
RESULTS ATTACHED
cont...
<PAGE> 218
Page 8
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.
<PAGE> 219
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 9
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>
<PAGE> 220
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 10
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. . .
<PAGE> 221
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 11
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...
<PAGE> 222
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 12
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 . . .
<PAGE> 223
Page 13
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...
<PAGE> 224
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 14
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...
<PAGE> 225
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
Page 15
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.
<PAGE> 226
PRESS RELEASE
[THE ENERGY GROUP PLC letterhead]
November 14, 1997
EASTERN ELECTRICITY ACCEPTS OFFER PRICE PROPOSALS
The Energy Group announces that Eastern Electricity, part of Eastern Group,
confirmed today that it has accepted OFFER's supply price review proposals.
From April next year Eastern's three million customers can expect to receive an
average reduction in their electricity bills of nearly 12 per cent in real terms
over two years.
For a typical customers -- on the standard domestic tariff with an annual bill
of L260 a year -- this represents a reduction in 1998/99 of L23. There will be a
further reduction of L8 in the following year -- giving a total real terms
reduction of L54 over the two years.
Including the latest reductions, power prices for a typical Eastern domestic
customer will have fallen by 30 per cent in real terms since 1991.
John Devaney, Executive Chairman of Eastern Group, said: "This is excellent news
for customers who will continue to receive an excellent product at a competitive
price. They are now guaranteed price reductions of nearly 12 per cent over the
next two years with no real increase in current standing charges."
INQUIRIES: Ian Seaton or Dave Betteridge (01473) 553400 or 553410
<PAGE> 227
[POWDER RIVER COAL Letterhead]
NEWS RELEASE
CONTACT:
Ryan Tew
307-687-6951
FOR IMMEDIATE RELEASE
Nov. 14, 1997
RAWHIDE MINE IDLED
DUE TO WEAK MARKET CONDITIONS
GILLETTE, Wyo., Nov. 14 -- Rawhide Mine in Wyoming will be idled on April 1,
1998, for an indefinite period due to weak market conditions. Rawhide is
operated by Peabody Holding Company's Powder River Coal Company.
"Although Rawhide's employees have made the mine very productive, we will
not squander the mine's low sulfur reserves by selling its production at today's
spot prices," said Peabody Holding President and Chief Operating Officer Peter
B. Lilly.
Powder River Coal President Larry H. Fox said, "We will consolidate our
business and optimize production at our other mines until market conditions
justify reopening Rawhide. For 1998, contract sales for Rawhide will be shipped
from Powder River Coal's three other mines in Wyoming."
The mine's 154 employees will be offered other jobs at Powder River Coal's
North Antelope, Rochelle and Caballo mines or remain at the mine to continue
reclamation, maintenance or operational activities.
-more -
<PAGE> 228
RAWHIDE MINE IDLED -- ADD ONE
"By idling Rawhide, Powder River Coal Company will avoid participation in
the weak spot markets," Fox said. All of the company's 1997 and 1998 scheduled
coal production has been sold. "Market prices have improved somewhat in recent
weeks but the increase is not sufficient to justify selling Rawhide's coal in
the spot market. We expect that Phase Two of the Clean Air Act and further
penetration of the eastern U.S. coal market will increase demand for Powder
River's coal and allow us to reopen Rawhide Mine."
Rawhide Mine, located nine miles north of Gillette, Wyo., shipped 12
million tons of coal in the 12 months ending September 30, 1997. Powder River
Coal Company sold 91.6 million tons during the year. According to U.S. Labor
Department data, Powder River Coal's four mines -- North Antelope, Rawhide,
Rochelle and Caballo -- were the top four mines in the United States in 1996 in
terms of productivity.
Peabody, the world's largest private coal producer, is part of The Energy
Group PLC, a diversified international energy company, which also includes
Eastern, a leading integrated electricity and gas group in Great Britain, and
Citizens Power, one of the top ten power marketers in the United States.
Peabody's coal products fuel more than 9 percent of U.S. electricity generation.
-30-
<PAGE> 229
[EASTERN Letterhead] Corporate
Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ55
14 NOVEMBER 1997
EASTERN GROUP AGREES COAL DEAL WITH RJB MINING
EASTERN POWER & ENERGY TRADING LTD, PART OF EASTERN GROUP, ANNOUNCED TODAY THAT
IT HAS SUCCESSFULLY CONCLUDED NEGOTIATIONS WITH RJB MINING FOR THE PURCHASE OF 4
MILLION TONNES OF COAL PER ANNUM FOR THE NEXT THREE YEARS, STARTING APRIL 1998.
Eastern Group, through its subsidiary Eastern Generation, is Britain's fourth
biggest electricity generator with around 10 per cent of the country's total
generating capacity. It currently owns, operates or has interests in eight power
stations -- a mix of combined-cycle gas turbine and coal-fired stations.
The capacity increased by almost 6,000MW in 1996 as a result of leasing
agreements for five coal-fired stations -- Rugeley, Ironbridge, West Burton,
High Marnham and Drakelow.
John Devaney, Eastern's Executive Chairman, said: "We are very pleased to have
concluded negotiations with RJB. This contract forms an important part of our
coal portfolio for the next three years."
Ends
Inquiries: Ian Seaton or Dave Betteridge (01473) 553400 or 553410.
<PAGE> 230
[EASTERN Letterhead] Corporate
Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ56D
24TH NOVEMBER 97
GEARING-UP FOR THE MILLENNIUM -- HOLMER GREEN
EASTERN ELECTRICITY, A NATION-WIDE PROVIDER OF ELECTRICITY, IS INVESTING
L250,000 TO REVOLUTIONISE THE ELECTRICITY SUPPLY NETWORK AT HOLMER GREEN IN
BUCKINGHAMSHIRE.
A major scheme to refurbish the 11,000 volt overhead lines which transport power
from Amersham and Great Missenden to Holmer Green is currently underway. The
work will be completed by Christmas.
The work follows an earlier underground cable laying project which included new
switchgear being strategically installed on both high voltage circuits supplying
Holmer Green. This scheme is leading edge technology and a first for Eastern
Electricity and the UK.
The current work will include improving lightning protection, installing vermin
protection and selective undergrounding of high voltage overhead lines in
densely wooded areas. The new technology brings the benefits of greater
flexibility, greater protection and low maintenance.
Much of the new equipment can be controlled remotely from Eastern's Central
Control Centre. Once fitted, the system will mean fewer interruptions and
improved restoration times if a fault occurs.
By the turn of the century the company will have refurbished or replaced the
majority of its 11,000 volt overhead network of wires -- some 19,700 kilometres
in total and the backbone of the rural network.
Eddie Hyams, Managing Director Networks said: "Eastern is looking to the future.
We are half-way through a major programme of investment throughout the region
which serves to reaffirm the company's continuing commitment to reliability and
a quality customer service."
Another innovation, a method of working on overhead lines while they are still
live, is now widely used by Eastern Electricity linesmen. Called 'hot-glove'
working it often enables maintenance to be carried out on overhead lines without
interrupting power supplies.
<PAGE> 231
New diagnostic techniques are being introduced which will pin-point the optimum
time to schedule maintenance work -- again minimising the need to interrupt
customers electricity supplies.
Latest statistics show that the overall reliability of Eastern's network is
continually improving. During 1996/97, for the second year running, the overall
time customers were without electricity was reduced. When faults did occur,
supplies were restored within three hours in 93.1 per cent of cases -- one of
the best performances in the country.
ends
Inquiries: Clare Bacon (01473) 553401.
<PAGE> 232
SIGNATURES
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.
THE ENERGY GROUP PLC
--------------------------------------
(Registrant)
Date: December 2, 1997 By /s/ MARTIN MURRAY
------------------------------------
Martin Murray
General Counsel
and Secretary
<PAGE> 233
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1933
For the month of December, 1997
THE ENERGY GROUP PLC
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
117 Piccadilly, London WIV 9FJ, England
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
<TABLE>
<S> <C>
Form 20-F Form 40-F
[X] [ ]
</TABLE>
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
<TABLE>
<S> <C>
Yes No
[ ] [X]
</TABLE>
<PAGE> 234
THE ENERGY GROUP PLC
Announcements to the London Stock Exchange during December 1997
DATE ANNOUNCEMENT SENT: DECEMBER 9, 1997
On 8 December 1997 National Westminster Bank PLC notified The Energy Group PLC
that it is interested, for the purposes of sections 208 and 209 of the Companies
Act 1985, in a total of 15,898,193 ordinary shares of The Energy Group PLC,
representing 3.05% of the issued ordinary share capital of the company.
DATE ANNOUNCEMENT SENT: DECEMBER 19, 1997
By a letter dated 17 December 1997 (received by the company on 19 December),
National Westminster Bank PLC notified The Energy Group PLC that it no longer
has a notifiable interest, within the meaning of Section 199(2) of the Companies
Act 1985, in the issued ordinary share capital of the company.
DATE ANNOUNCEMENT SENT: DECEMBER 24, 1997
By a letter dated 22 December 1997 (received by the company on 24 December),
National Westminster Bank PLC notified The Energy Group PLC that it is
interested, for the purposes of Sections 208 and 209 of the Companies Act 1985,
in a total of 15,629,214 ordinary shares of The Energy Group PLC, representing
3.0006% of the issued ordinary share capital of the company.
DATE ANNOUNCEMENT SENT: DECEMBER 29, 1997
By a letter dated 23 December 1997 (received by the company on 29 December),
National Westminster Bank PLC notified The Energy Group PLC that it no longer
has a notifiable interest, within the meaning of Section 199(2) of the Companies
Act 1985, in the issued ordinary share capital of the company.
DATE ANNOUNCEMENT SENT: DECEMBER 31, 1997
By a letter dated 30 December 1997, National Westminster Bank PLC notified The
Energy Group PLC that it is interested, for the purposes of Sections 208 and 209
of the Companies Act 1985, in a total of 15,729,341 ordinary shares of The
Energy Group PLC, representing 3.02% of the issued ordinary share capital of the
company.
<PAGE> 235
PRESS RELEASE [THE ENERGY GROUP PLC letterhead]
December 1, 1997
EASTERN GROUP EXPANDS NORTH SEA GAS INTERESTS
THE ENERGY GROUP ANNOUNCES THAT EASTERN NATURAL GAS (OFFSHORE) LTD, A SUBSIDIARY
OF EASTERN POWER & ENERGY TRADING LTD, WHOSE PARENT COMPANY IS EASTERN GROUP,
HAS PURCHASED A 30 PER CENT INTEREST IN THE ESMOND TRANSPORTATION SYSTEM (ETS)
FOR A CONSIDERATION OF APPROXIMATELY L4 MILLION FROM BHP PETROLEUM GREAT BRITAIN
PLC AND BHP PETROLEUM (U.K.) CORPORATION, SUBSIDIARIES OF THE BROKEN HILL
PROPRIETARY COMPANY LIMITED.
ETS is a subsea pipeline, part of the EAGLES transportation system and operated
by ARCO, which transports natural gas from the southern North Sea to the Bacton
terminal in Norfolk. The owners of ETS receive a tariff for the transportation
of gas owned by North Sea gas producers.
Jim Whelan, Managing Director, Eastern Power & Energy Trading, said: "In
addition to tariff revenues and certain capacity rights, this purchase will give
us a closer insight into local operating conditions and the gas market
environment. We will apply this information into our gas operations generally.
This strategic purchase also signals our intention to be an active player
internationally in significant infrastructure projects which generate trading
benefits."
ENQUIRIES: Jim Whelan, Managing Director,
Eastern Energy & Trading
01473 554600
<PAGE> 236
[Peabody letterhead] NEWS RELEASE
CONTACT:
Gayla Hoffman
314-342-7768
e-mail:
[email protected]
FOR IMMEDIATE RELEASE
Dec. 1, 1997
PEABODY WEB SITE WILL FEATURE
DAILY STATUS OF KYOTO TREATY NEGOTIATIONS
ST. LOUIS, Dec. 1 -- The Peabody Group has added two links to its web site
(www.peabodygroup.com) that will publish daily updates on the climate change
treaty negotiations opening today in Kyoto, Japan.
Visitors to the Peabody web site may access information through links to
the Earth Negotiations Bulletin and the Global Climate Coalition. By clicking on
Kyoto Treaty, viewers will be taken to another page with buttons for the Earth
Negotiations Bulletin and the Global Climate Coalition.
Earth Negotiation Bulletin is published by the international institute for
Sustainable Development as an electronic clearing-house for information on past
and upcoming international meetings related to environment and development. The
Global Climate Coalition is an organization of private companies and business
trade associations established to coordinate business participation in the
scientific and policy debate on the global climate change issue.
John M. Wooten, Peabody's vice president-environment and technology, will
attend the Kyoto negotiations as an official Non-Governmental Observer.
- 30 -
<PAGE> 237
[Eastern letterhead]
Corporate
Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ58D
2nd December 1997
GEARING-UP FOR THE MILLENNIUM IN -- NEWTON FLOTMAN
Eastern Electricity, a nation-wide provider of electricity, is rebuilding the
overhead power network in and around Newton Flotman using a new covered
conductor developed in Finland.
It is the first time this type of covered conductor which has been designed to
improve supply reliability in the harshest of environments, has been used on
Eastern Electricity's high voltage network.
A total of 54km of overhead lines will be replaced at a cost of L1.5m. The work
will be completed by the Spring.
The improved insulating properties of the covering greatly reduces the risk of
damage by clashing conductors, tree branches, windbourne debris and vermin.
Eastern Electricity will be rebuilding the existing 11,000 volt overhead lines
in the parishes of Newton Flotman, Swainsthorpe, Shotesham, Stoke Holy Cross,
Poringland, Bracon Ash, Flordon and Saxlingham Nethergate.
Region wide, Eastern Electricity is investing L460 million over the five year
period 1995-2000 to revolutionise its electricity network -- already one of the
most reliable in the country.
Eddie Hyarns, Managing Director Networks said: "Eastern is looking to the
future. We are half-way through a major programme of investment which serves to
reaffirm the company's continuing commitment to reliability and a quality
customer service."
By the turn of the century the company will have renovated or replaced the
majority of its 11,000 volt overhead network of wires -- some 19,700 kilometres
in total and the backbone of the rural network.
<PAGE> 238
Latest statistics show that the overall reliability of Eastern's network is
continually improving. During 1996/97, for the second year running, the overall
time customers were without electricity was reduced. When faults did occur,
supplies were restored within three hours in 93.1 per cent of cases -- one of
the best performances in the country.
ends
Inquiries: Clare Bacon (01473) 553401.
<PAGE> 239
[EASTERN ELECTRICITY letterhead]
<TABLE>
<S> <C>
Corporate Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473) 553401
(01473) 553410
(01473) 553403
</TABLE>
HQ59
9 December 1997
EASTERN GROUP TO SELL CONTRACTING BUSINESS
The Energy Group PLC announces that its subsidiary Eastern Group is selling its
Eastern Electricity Contracting division to its current management.
Eastern Electricity Contracting provides design, installation and maintenance
services for high voltage networks, power generation and standby systems to a
wide range of customers. This business has until recently made small operating
losses. It employs over 800 people and is based at Milton, Cambridgeshire.
As a consequence of the sale, Eastern expects to release in excess of L10mn in
cash. Completion of the transaction is expected to take place by the beginning
of January 1998.
John Devaney, Executive Chairman of Eastern Group, said: "Eastern's policy is to
concentrate on its core activities namely generation, distribution, trading and
the retail sale of energy. We are pleased to have agreed the terms of this sale
to the current management."
Ends
Enquiries: Ian Seaton or Dave Betteridge, Media Relations, 01473 553410.
<PAGE> 240
EASTERN letterhead
CCorporate Communications
Eastern Group plc
Wherstead Park
P.O. Box 40
Wherstead
Ipswich
Suffolk IP9 2AQ
Direct tel: (01473)
553401
(01473) 553410
(01473) 553403
HQ60
Embargoed: 00:01 15 December 1997
EASTERN LAUNCHES ELECTRICITY SALES NATION-WIDE
AND SLICES L150 OFF GAS AND ELECTRICITY BILLS
EASTERN GROUP -- ALREADY A NATION-WIDE SUPPLIER OF ELECTRICITY AND GAS TO
BUSINESSES -- TODAY PLEDGED TO SLICE L150 OR MORE OFF GAS AND ELECTRICITY BILLS
NEXT YEAR FOR MILLIONS OF HOUSEHOLDS PREPARED TO SWITCH SUPPLIERS FOR THE
FIRST-TIME.
The company aims to supply up to six million homes nation-wide by the turn of
the century -- building on its existing three million electricity customers and
450,000 households that have now switched to Eastern Natural Gas as gas
competition is phased-in across Britain.
Eastern is offering 20% or 24.6% off current British Gas standard
prices -- saving at least L100 a year on a L500 bill. Households switching to
Eastern for electricity will receive L30 cash-back plus typical savings of
between L20 and L50 per year. Either deal is available separately.
John Devaney, Executive Chairman, Eastern Group, said: "We are the leading and
fastest growing supplier and aim to be the number one choice for customers
through innovation, competitive pricing and the quality of our service."
This major initiative, under the name Eastern Electricity & Natural Gas, is
already underway and has secured thousands of new electricity customers ahead of
the start of competition.
The early targets include Canterbury, Hull and Chester postcode areas which,
along with Norwich within Eastern's own region, are the first areas to be opened
up to electricity competition in 1998.
Customers can find out more about the savings by calling free-phone 0800 7 313
313. Switching suppliers is simple. Eastern will use existing meters, pipes and
cables and will bill customers directly.
<PAGE> 241
. . . 2 more
Eastern Group is the leading nation-wide supplier of electricity and natural gas
in the industrial and commercial markets which have already opened to
competition. The company has 13% of the 100kW-plus electricity market and 11% of
the competitive business gas market.
Eastern's existing three million domestic customers in north London and the
eastern counties will have seen, by April 1998, average electricity prices fall
by around 30% in real terms since 1991.
Ends
Media inquiries: Dave Betteridge or Ian Seaton (01473) 553410 or
553400.
Notes to editors
- - A household currently spending L500 a year on gas and paying quarterly by cash
or cheque with British Gas would save around 20% (L100) by switching to
Eastern -- or up to 24.6% by switching to direct debit.
- - The customer will receive a one-off L30 cash-back for switching to Eastern
from their local electricity company. Electricity tariffs vary from region to
region. Eastern offers typical savings of between L20-L25 per year for a
customer using 3,300 units per year and L45-L50 per year for a consumption of
7,500 units. Prices are based on latest announced prices.
- - According to the electricity regulator, OFFER, Eastern Electricity is one of
only four electricity companies likely to be prepared for the start of
electricity competition. Customers in the Norwich(NR), Canterbury(CT),
Chester(CH) and Hull(HU) postcode areas should be among the first to be able
to shop around.
<PAGE> 242
PRESS RELEASE [THE ENERGY GROUP PLC letterhead]
December 19, 1997
THE PRESIDENT OF THE BOARD OF TRADE GIVES APPROVAL
FOR PACIFICORP'S PROPOSED OFFER FOR THE ENERGY
GROUP PLC
The Energy Group welcomes the announcement today by the President of the Board
of Trade approving the proposed offer for The Energy Group by PacifiCorp.
Commenting on the announcement, Derek Bonham, Chairman of The Energy Group said:
"We note that approval has been received based on the original undertakings
provided by PacifiCorp. However, approvals from the Federal Trade Commission and
the Federal Energy Regulatory Commission in the USA are still awaited and, until
all the regulatory hurdles have been cleared, we do not intend making any
further comment or announcements. It will be recalled that the offer made by
PacifiCorp in June 1997 lapsed on its referral to the Monopolies and Mergers
Commission.
We continue to believe, however, that the combination of The Energy Group and
PacifiCorp would create a premier global energy company. The Energy Group has an
exciting future and our core businesses continue to perform strongly. Our
success in winning significant numbers of new gas customers demonstrates our
ability to compete in the UK. We intend to be a vigorous competitor in the
electricity markets as they open up.
Cont . . .
<PAGE> 243
PRESS RELEASE [THE ENERGY GROUP PLC letterhead]
Page 2
The combination of Peabody and Citizens Power is already providing the Group
with many opportunities to take advantage of the deregulating US market. We have
an enviable range of skills across the whole of the energy chain and we are
winning new business in targeted international markets."
<TABLE>
<S> <C>
ENQUIRIES: Aviva Gershuny-Roth
The Energy Group PLC
Tel: 0171-647 3200
</TABLE>
<PAGE> 244
[POWDER RIVER COAL letterhead] NEWS RELEASE
<TABLE>
<S> <C>
CONTACT: Ryan Tew
Curt Freeman Powder River Coal Company
Montana Power 307-887-6951
408-497-2368
</TABLE>
FOR IMMEDIATE RELEASE
Dec. 22, 1997
PEABODY GROUP, MONTANA POWER
ANNOUNCE ROCKY BUTTE ACQUISITION
GILLETTE, Wyo., Dec. 22 -- Subsidiaries of the Peabody Group and The Montana
Power Company said today that Caballo Coal Company has acquired from Horizon
Coal Services Inc. 280 million tons of recoverable reserves, known as Rocky
Butte, adjacent to the Caballo Mine south of Gillette.
Caballo Coal Company is a subsidiary of the Peabody Group's Powder River
Coal Company, headquartered in Gillette. Horizon Coal Services is a subsidiary
of Butte-based Montana Power, a broadly diversified energy and
telecommunications services company. Terms of the agreement were not disclosed.
Powder River Coal President Larry H. Fox said, "This is an excellent
addition of a high quality coal reserve to our portfolio. In the short term,
this strategic acquisition will maximize our current coal recovery at Caballo,
while extending the life of the mine by about 10 years. More importantly,
however, the acquisition of the Rocky Butte reserves demonstrates our long-term
commitment to coal development in the Powder River Basin."
Dick Cromer, executive vice president of Montana Power's Energy Supply
Division, said the transaction is good for both companies.
"While the Rocky Butte reserves are no longer a strategic asset for us
because of corporate decisions to focus on other Montana Power energy and
telecommunications business lines, they do represent a logical expansion to an
existing operation in the Power River Basin," he said. "I'm pleased we were able
to reach this agreement with Peabody, a company we consider to be a premiere
coal operation."
- more -
<PAGE> 245
ROCKY BUTTE -- ADD ONE
Caballo Mine, located 15 miles south of Gillette, shipped 20.8 million tons of
coal in the 12 months ending September 30, 1997. Powder River Coal Company sold
91.6 million tons during the year. According to U.S. Labor Department data,
Caballo Mine was the nation's fourth most productive mine in 1996.
Peabody, the world's largest private coal producer, is part of The Energy
Group PLC, a diversified international energy company, which also includes
Eastern, a leading integrated electricity and gas group in Great Britain, and
Citizens Power, one of the top ten power marketers in the United States.
Peabody's coal products fuel more than 9 percent of U.S. electricity generation.
<PAGE> 246
SIGNATURES
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.
THE ENERGY GROUP PLC
-------------------------------
(Registrant)
Date: January 5, 1998 By /s/ MARTIN MURRAY
--------------- -------------------------------
Martin Murray
General Counsel
and Secretary
<PAGE> 247
APPENDIX V
FINANCIAL AND OTHER INFORMATION OF TU ACQUISITIONS AND TEXAS UTILITIES
1 DIRECTORS AND EXECUTIVE OFFICERS OF TU ACQUISITIONS AND TEXAS UTILITIES
Set out in the table below are the names and present principal occupations or
employments, and the material occupations, positions, offices and employments
during the past five years, for the directors and executive officers of TU
Acquisitions and Texas Utilities and the name, principal business and address
for any corporation or other organisation in which such employment is carried
on. Each person listed below is of United States citizenship, and, unless
otherwise indicated, positions have been held for the past five years. Directors
are identified by the year in which such person became a director in
parentheses.
TU ACQUISITIONS
<TABLE>
<CAPTION>
NAME AND RESIDENCE PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT (AND PRINCIPAL BUSINESS);
OR BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING PAST FIVE YEARS
------------------- --------------------------------------------------------------------
<S> <C>
Erle Nye (1998) Chairman of the Board and Chief Executive of Texas Utilities since
Texas Utilities Company May 1997; prior thereto President and Chief Executive of TEI
Energy Plaza (formerly named Texas Utilities Company) (May 1995-May 1997);
1601 Bryan Street, 41st Floor prior thereto President of TEI (February 1987-May 1995).
Dallas, TX 75201-3411
Michael J. McNally (1998) Executive Vice President and Chief Financial Officer of TEI since
Texas Utilities Company August 1997; Executive Vice President and Chief Financial Officer
Energy Plaza of Texas Utilities since May 1997; President of Texas Utilities
1601 Bryan Street, 41st Floor Services, Inc. since May 1997; prior thereto President, TU
Dallas, TX 75201-3411 Electric Transmission Division (February 1996-May 1997); prior
thereto Executive Vice President and General Manager, TU Electric
Transmission Division (October 1995-February 1996); prior thereto
Principal, Enron Development Corp. (October 1994-November 1995);
prior thereto Managing Director of Industrial Services, Enron
Capital and Trade Resources; President of Houston Pipe Line and
Louisiana Resources Company, and President of Enron Gas Liquids,
Inc. (February 1992-September 1994); and prior thereto Vice
President of Marketing, Houston Pipe Line Company (February
1990-January 1992).
H. Jarrell Gibbs (1998) Vice Chairman of the Board of Texas Utilities since November 1997;
Texas Utilities Company Vice Chairman of the Board of TEI since August 1997; prior thereto
Energy Plaza President, TU Electric (February 1996-December 1997); prior
1601 Bryan Street, 41st Floor thereto Vice President and Chief Financial Officer of Texas
Dallas, TX 75201-3411 Utilities (November 1991-February 1996) and President of Texas
Utilities Services, Inc. (March 1994-February 1996); prior thereto
Executive Vice President, Texas Utilities Services, Inc. (October
1991-March 1994); and prior thereto Executive Vice President, TU
Electric (May 1991-March 1994).
Robert A. Wooldridge (1998) Partner of the law firm Worsham, Forsythe & Wooldridge, L.L.P.
Worsham, Forsythe & Wooldridge,
L.L.P.
Energy Plaza
1601 Bryan Street, Suite 30025
Dallas, TX 75201-3411
</TABLE>
V-1
<PAGE> 248
TEXAS UTILITIES
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---- ------------------------------------------
<S> <C>
J. S. Farrington (1983) Chairman Emeritus of Texas Utilities since May 1997; prior
Texas Utilities Company thereto Chairman of the Board of Texas Utilities (May
Energy Plaza 1995-May 1997); prior thereto Chairman of the Board and
1601 Bryan Street, 41st Floor Chief Executive of Texas Utilities (February 1987-May
Dallas, TX 75201-3411 1995); prior thereto President of Texas Utilities (May
1983-February 1987).
Bayard H. Friedman (1991) Friedman & Uhlemeyer, Inc., Investment Adviser, since
500 Throckmorton St., December 1992. Prior thereto, Senior Chairman and
Box 44225 Director, Team Bank (January 1990-November 1992). A
Fort Worth, TX 76102-3708 Director of Justin Industries.
William M. Griffin (1966) Principal, Griffin, Swanson & Company, Inc. (investments).
Griffin, Swanson & Co., Inc. Executive Vice President (until August 1985) and Chairman
1 State Street, Suite 1740 of the Finance Committees (until March 1986) of The
Hartford, CT 06103 Hartford Fire Insurance Company and Subsidiaries. A
Director of The Hartford Fire Insurance Company (until
March 1991) and Shawmut National Corporation (until April
1992).
Kerney Laday (1993) President, The Laday Company (management consulting and
The Laday Company business development) since July 1995; prior thereto Vice
122 W. Carpenter Freeway, Suite 480 President, field operations, Southern Region, U. S.
Irving, TX 75039 Customer Operations, Xerox Corporation (January 1991-June
1995); prior thereto Vice President and region general
manager, Xerox (1986-1991).
Margaret N. Maxey (1984) Director, Clint W. Murchison, Sr. Chair of Free Enterprise
The University of Texas and Professor, Biomedical Engineering Program, College of
CPE 3.168 Engineering, The University of Texas at Austin since 1982;
Austin, TX 78712 prior thereto Assistant Director, Energy Research
Institute, Columbia, South Carolina (1980-1982).
James A. Middleton (1989) Chairman of the Board and Chief Executive Officer, Crown
574 Chapala Drive Energy Company (oil and gas producing and tar sands
Pacific Palisades, CA 90272-4429 processing) since January 1996; prior thereto Executive
Vice President (October 1987-December 1994) and Senior
Vice President (June 1981-October 1987) of Atlantic
Richfield Company. President, ARCO Oil and Gas Company,
(January 1985-October 1990); a Director of ARCO Chemical
Company and Berry Petroleum Corp.
Erle Nye (1987) Chairman of the Board and Chief Executive of Texas Utilities
Texas Utilities Company since May 1997; prior thereto President and Chief
Energy Plaza Executive of Texas Utilities (May 1995-May 1997); prior
1601 Bryan Street, 41st Floor thereto President of Texas Utilities (February 1987-May
Dallas, TX 75201-3411 1995).
J. E. Oesterreicher (1996) Chairman of the Board of J. C. Penney Company, Inc.
J.C. Penney Company, Inc. (department store chain) since January 1997 and Chief
P.O. Box 10001 Executive Officer since January 1995; Vice Chairman of the
Dallas, TX 75301-0005 Board from 1995 to 1997; President, J. C. Penney Stores
and Catalog from 1992 to 1995. Director Brinker
International, Inc.
Charles R. Perry (1985) Oil and gas interests, private investments. Chairman of the
Perry Management, Inc. Board of Perry Management, Inc., Avion Flight Centre, Inc.
P.O. Box 60380 and Perry Gas Companies, Inc.
Midland, TX 79711-0380
</TABLE>
V-2
<PAGE> 249
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---- ------------------------------------------
<S> <C>
Herbert H. Richardson (1992) Associate Vice Chancellor for Engineering and Director,
Office of the Director Texas Transportation Institute, The Texas A&M University
Texas Transportation Institute System; Associate Dean of Engineering, Regents Professor
8th Floor CE/TTI, Suite 802 and Distinguished Professor of Engineering, Texas A&M
College Station, TX 77843-3135 University; Chancellor, The Texas A&M University System
(1991-1993) and Deputy Chancellor for Engineering, The
Texas A&M University System (1986-1991).
</TABLE>
2 REGISTERED/PRINCIPAL OFFICES
The registered office of TU Acquisitions is located at Kempson House,
Camomile Street, London EC3A 7AN United Kingdom.
The principal executive offices of Texas Utilities are located at 1601
Bryan Street, Dallas, Texas 75201, United States.
3 FINANCIAL INFORMATION FOR TEXAS UTILITIES
The following financial information for Texas Utilities has been extracted
from the Form 8-K, dated 26 February 1998:
V-3
<PAGE> 250
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
FORWARD LOOKING STATEMENTS
This report and other presentations made by Texas Utilities Company (the
Company or TUC) contain forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Although the Company
believes that in making any such statement its expectations are based on
reasonable assumptions, any such statement involves uncertainties and is
qualified in its entirety by reference to the following important factors, among
others, that could cause the actual results of the Company to differ materially
from those projected in such forward-looking statement: (i) prevailing
governmental policies and regulatory actions, including those of the Federal
Energy Regulatory Commission, the Public Utility Commission of Texas (PUC), the
Railroad Commission of Texas (RRC), the Nuclear Regulatory Commission, and the
Office of the Regulator General of Victoria, Australia, with respect to allowed
rates of return, industry and rate structure, purchased power and investment
recovery, operations of nuclear generating facilities, acquisitions and
disposals of businesses or assets and facilities, operation and construction of
plant facilities, decommissioning costs, present or prospective wholesale and
retail competition, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies, (ii) weather
conditions and other natural phenomena, (iii) unanticipated population growth or
decline, and changes in market demand and demographic patterns, (iv) competition
for retail and wholesale customers, (v) pricing and transportation of crude oil,
natural gas and other commodities, (vi) unanticipated changes in interest rates,
rates of inflation or in foreign exchange rates, (vii) unanticipated changes in
operating expenses and capital expenditures, (viii) capital market conditions,
(ix) competition for new energy development opportunities, (x) legal and
administrative proceedings and settlements, (xi) inability of counterparties to
meet their obligations with respect to the Company's financial instruments,
(xii) changes in technology used and services offered by the Company, and (xiii)
significant changes in the Company's relationship with its employees and the
potential adverse effects if labor disputes or grievances were to occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for the
Company to predict all of such factors; nor can the impact of each such factor
or the extent to which any factor, or combination of factors, may cause results
to differ materially from those contained in any forward-looking statement be
assessed.
FINANCIAL CONDITION
Mergers and Acquisitions
Certain comparisons in this Annual Report have been affected by the August
1997 acquisition of ENSERCH Corporation (ENSERCH) and the November 1997
acquisition of Lufkin-Conroe Communications Co. (LCC) by the Company and by the
December 1995 acquisition of Eastern Energy Limited (Eastern Energy) by Texas
Utilities Australia Pty. Ltd. (TU Australia), a wholly-owned subsidiary of the
Company. The results of each acquired company are included only for the periods
subsequent to acquisition. (See Note 1 to Consolidated Financial Statements.)
On August 5, 1997, the merger transactions (Merger) between the former
Texas Utilities Company, now known as Texas Energy Industries Inc. (TEI), and
ENSERCH were completed. At the effective time of the Merger: (i) the former
Texas Utilities Company changed its name to TEI, (ii) TEI and ENSERCH merged
with wholly-owned subsidiaries of TUC Holding Company, which, as a result, owned
all the common stock of TEI and of ENSERCH, (iii) TUC Holding Company changed
its name to Texas Utilities Company (now the Company), (iv) each share of TEI's
common stock was automatically converted into one share of common stock of TUC,
and (v) each share of common stock of ENSERCH was automatically converted into
0.225 share of common stock of TUC, with cash issued in lieu of fractional
shares. The share conversions were tax-free transactions.
V-4
<PAGE> 251
In the Merger, approximately 15. 9 million shares of TUC common stock were
issued to former holders of ENSERCH common stock. The value assigned to the TUC
shares issued and costs incurred in connection with the acquisition of ENSERCH
aggregated $579 million. At the date of the Merger, ENSERCH had debt and
preferred stock outstanding of approximately $1.3 billion.
Businesses and subsidiaries acquired in the Merger were Lone Star Gas
Company (Lone Star Gas), a gas distribution company in Texas, Lone Star Pipeline
Company (Lone Star Pipeline) and subsidiaries engaged in natural gas processing,
natural gas marketing, independent power production and international gas
distribution systems development.
On November 21, 1997, the Company acquired LCC. Approximately 8.7 million
shares of TUC common stock were issued to LCC stockholders in a stock-for-stock
exchange. The value assigned to the TUC shares issued and costs incurred in
connection with the acquisition of LCC aggregated $319 million. At the date of
the acquisition, LCC had debt outstanding of approximately $31 million.
The acquisitions of ENSERCH, LCC and Eastern Energy were accounted for as
purchase business combinations. The assets and liabilities of the acquired
companies at the acquisition dates were adjusted to their estimated fair values.
The excess of the purchase price paid by the Company over the estimated fair
value of net assets acquired and liabilities assumed was recorded as goodwill
and is being amortized over 40 years. The process of determining the fair value
of assets and liabilities of ENSERCH and LCC as of the date of acquisition is
continuing, and the final result awaits primarily the resolution of income tax
and other contingencies and finalization of some preliminary estimates.
For financial reporting purposes, the Company is being treated as the
successor to TEI. Unless otherwise specified, all references to the Company
which relate to a period prior to August 5, 1997, shall be deemed to be
references to TEI.
The Company continues to seek potential investment opportunities from time
to time when it concludes that such investments are consistent with its business
strategies and are likely to enhance the long-term return to its shareholders.
In January 1998, the Company announced that it had approached the Energy Group
plc (TEG) in connection with its possible interest in acquiring TEG. TEG is a
diversified international energy group. Discussions between the Company and TEG
are continuing and may or may not lead to an offer being made by the Company.
Likewise, the timing, amount and funding of any specific new business investment
opportunities are presently undetermined.
CAPITAL EXPENDITURES
The primary capital expenditures of the Company and all of its
majority-owned subsidiaries (System Companies) in 1997 and as estimated for 1998
through 2000 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash construction expenditures
(excluding allowance for funds used
during construction)............... $ 577,000 $ 886,000 $ 799,000 $ 852,000
Nuclear fuel (excluding allowance for
funds used during construction).... 71,000 104,000 81,000 92,000
Maturities and redemptions of
long-term debt, sinking fund
requirements, redemptions of
preferred stock and reacquisitions
of common stock.................... 2,276,000 772,000 505,000 1,859,000
---------- ---------- ---------- ----------
Total...................... $2,924,000 $1,762,000 $1,385,000 $2,803,000
========== ========== ========== ==========
</TABLE>
For information concerning construction work contemplated by the System
Companies and the commitments with respect thereto, see Note 15 to the
Consolidated Financial Statements.
V-5
<PAGE> 252
In 1997, the Company bought ENSERCH for $579 million and LCC for $319
million primarily through the issuance of common stock.
LIQUIDITY AND CAPITAL RESOURCES
For 1997, the System Companies generated cash from operations sufficient to
meet operating needs and debt service requirements, pay dividends on capital
stock, pay distributions on preferred securities of trusts and finance capital
expenditures. Factors affecting the continued ability of Texas Utilities
Electric Company (TU Electric), the Company's primary subsidiary, to fund its
capital requirements from operations include responsive regulatory practices
allowing recovery of capital investment through adequate depreciation rates,
recovery of the cost of fuel and purchased power and the opportunity to earn
competitive rates of return required in the capital markets.
External funds of a permanent or long-term nature are obtained through the
issuance of common and preferred stock, preferred securities and long-term debt
by the System Companies. The capitalization ratios of the Company and its
subsidiaries at December 31, 1997, consisted of approximately 52% long-term
debt, 5% TU Electric obligated, mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of TU Electric, 2% preferred stock
and 41% common stock equity.
Proceeds from financings by System Companies in 1997 were used primarily
for the early redemption or reacquisition of debt and preferred stock. The
financings consisted of:
<TABLE>
<CAPTION>
PRINCIPAL CURRENT
DESCRIPTION AMOUNT INTEREST RATES MATURITY
----------- ---------- ---------------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Senior Notes issued by the Company......... $ 300,000 6.20% to 6.375% 2002-2004
Unsecured Debentures issued by TU
Electric................................. 300,000 7.17% 2007
Pollution Control Revenue Bonds (backed by
TU Electric First Mortgage Bonds)........ 212,715 3.70% to 5.60% 2022-2032
TU Electric obligated, mandatorily
redeemable, preferred securities......... 493,273 7.183% to 8.175% 2037
Other...................................... 9,964
----------
Total............................ $1,315,952
==========
</TABLE>
During 1997, the Company purchased and retired 4,015,000 shares of its
common stock at a cost of $148.8 million. In addition, long-term debt and
preferred stock of subsidiary companies totaling $2.1 billion was retired. Early
redemptions of long-term debt and preferred stock may occur from time to time in
amounts presently undetermined. (See Notes 6 and 8 to Consolidated Financial
Statements.)
At December 31, 1997, TUC, TU Electric and ENSERCH had joint lines of
credit under credit facility agreements (Credit Agreements) with a group of
commercial banks. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $570 million outstanding at any one
time at variable interest rates and terminates April 23, 1998. Facility B
provides for short-term borrowings aggregating up to $1,330 million outstanding
at any one time at variable interest rates and terminates April 24, 2002. The
combined borrowings of TUC, TU Electric and ENSERCH under both facilities are
limited to an aggregate of $1,900 million outstanding at any one time. ENSERCH's
borrowings under both facilities are limited to an aggregate of up to $650
million outstanding at any one time. Borrowings under these facilities will be
used for working capital and other corporate purposes, including commercial
paper backup. The total of short-term borrowings authorized by the Board of
Directors of TUC at December 31, 1997, from banks or other lenders, was $2,150
million.
In addition, certain non-U.S. subsidiaries have revolving credit agreements
aggregating approximately $95 million, of which $61 million was outstanding at
December 31, 1997. These revolving credit agreements expire at various dates
through 2000.
V-6
<PAGE> 253
In January 1998, the Company issued $200 million of 6.375% Series C Senior
Notes due 2008, and ENSERCH issued $125 million of 6 1/4% Series A Notes due
2003 and $125 million of Remarketed Reset Notes due 2008 with a variable
interest rate (5.82% at date of issuance). Net proceeds from these borrowings
were used to refinance or redeem like amounts of higher rate debt and preferred
stock.
The System Companies may issue additional debt and equity securities as
needed, including the possible future sale: (i) by TU Electric of up to $148.9
million principal amount of debt securities, (ii) by TU Electric of up to
250,000 shares of Cumulative Preferred Stock ($100 liquidation value), and (iii)
by ENSERCH of up to $250 million aggregate principal amount of securities, all
of which are currently registered with the Securities and Exchange Commission
(SEC) for offering pursuant to Rule 415 under the Securities Act of 1933.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk exposure is primarily a result of changes in
interest rates and commodity price exposures. Derivative instruments including
options, swaps, futures and other contractual commitments are used to reduce and
manage a portion of those risks. With the exception of the marketing activities
of a subsidiary, Enserch Energy Services, Inc. (EES), the Company's
participation in derivative transactions are designated for hedging purposes;
derivative instruments are not held or issued for trading purposes.
Credit Risk -- Credit risk relates to the risk of loss that the Company
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Company maintains credit policies with regard to its
counterparties that management believes significantly minimize overall credit
risk. The Company does not obtain collateral to support the agreements but
monitors the financial viability of counterparties and believes its credit risk
is minimal on these transactions. The Company believes the risk of
nonperformance by counterparties is minimal.
V-7
<PAGE> 254
Interest Rate Market Risk -- The table below provides information
concerning the Company's financial instruments as of December 31, 1997 that are
sensitive to changes in interest rates, which include debt obligations and
interest rate swaps. For debt obligations, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
The Company has entered into interest rate swaps under which it has agreed to
exchange the difference between fixed-rate and variable-rate interest amounts
calculated with reference to the specified notional principal amounts. The
contracts require settlement of net interest receivable or payable at specified
intervals (primarily semi-annually) which generally coincide with the dates on
which interest is payable on the underlying debt. When differences exist between
the swap settlement dates and the dates on which interest is payable on the
underlying debt, the gap exposure, or basis risk, is managed by means of forward
rate agreements. These forward rate agreements are not expected to have a
material effect on the Company's financial position, results of operations or
cash flows. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity dates.
Weighted average variable rates are based on rates in effect at the reporting
date.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------
1998 1999 2000 2001
------ ------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-term Debt (including current maturities)
Fixed Rate ($US).............................. $772.1 $504.7 $868.5 $344.4
Average interest rate...................... 7.18% 8.38% 6.61% 8.00%
Variable Rate ($US)........................... -- -- $990.4 --
Average interest rate...................... -- -- 6.18% --
Interest Rate Swaps (notional amounts)
Variable to Fixed ($US)....................... $ 16.3 $110.5 $ 32.5 --
Average pay rate........................... 5.29% 6.68% 6.14% --
Average receive rate....................... 5.08% 4.89% 4.89% --
Fixed to Variable ($US)....................... -- -- -- --
Average pay rate........................... -- -- -- --
Average receive rate....................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------------
THERE- FAIR
2002 AFTER TOTAL VALUE
------ -------- -------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-term Debt (including current
maturities)
Fixed Rate ($US)......................... $595.1 $4,446.2 $7,531.0 $7,931.7
Average interest rate................. 7.53% 7.54% 7.47% --
Variable Rate ($US)...................... -- $1,010.1 $2,000.5 $2,000.5
Average interest rate................. -- 4.83% 5.50% --
Interest Rate Swaps (notional amounts)
Variable to Fixed ($US).................. $468.2 $ 100.0 $ 727.5 $ (57.0)
Average pay rate...................... 8.45% 7.18% 7.83% --
Average receive rate.................. 5.23% 6.55% 5.34% --
Fixed to Variable ($US).................. -- $ 350.0 $ 350.0 $ 6.1
Average pay rate...................... -- 6.32% 6.32% --
Average receive rate.................. -- 6.89% 6.89% --
</TABLE>
Energy Marketing Market Risk -- As part of its natural gas marketing
activities, EES enters into forward contracts that principally involve physical
delivery of natural gas and derivative financial instruments, including options,
swaps, futures and other contractual arrangements to offset price risks of gas
supply. These activities involve price commitments into the future and,
therefore, give rise to market risk. EES applies mark-to-market accounting to
its business activities. At December 31, 1997, natural gas marketing operations
had net commitments to sell approximately 50.6 billion cubic feet (Bcf) of
natural gas through the year 2003 with offsetting net financial positions to
purchase approximately 61.3 Bcf.
V-8
<PAGE> 255
For purposes of new SEC disclosure requirements, EES has performed a
sensitivity analysis to estimate its exposure to market risk of its commodity
and related financial commitments. The exposure for fixed price natural gas
purchase and sale commitments, and derivative financial instruments, including
options, swaps, futures and other contractual commitments, is based on a
methodology that uses a five-day holding period and a 95% confidence level. EES
uses market-implied volatilities to determine its exposure to volatility risk.
Market risk is estimated as the potential loss in fair value resulting from at
least a 15% change in market factors which may differ from actual results. Using
15%, the most adverse change in fair value at December 31, 1997 as a result of
this analysis, was a reduction of $1.1 million. For additional information
regarding derivative instruments, see Note 9 to Consolidated Financial
Statements.
Nuclear Decommissioning and Disposal of Spent Fuel Trust -- TU Electric has
established an external trust to provide for nuclear decommissioning and
disposal of spent fuel. The trust is invested in marketable fixed income debt
and equity securities. At December 31, 1997, the current market value of the
debt and equity securities was $85.9 million and $74.1 million, respectively. A
hypothetical 10% increase in interest rates and 10% decrease in equity prices
would result in a $10.8 million reduction in the fair value of the trust assets.
However, adjustments to market value result in a corresponding adjustment to
related liability accounts based on current regulatory treatment.
REGULATION AND RATES
Under the current regulatory environment, certain System Companies are
subject to the provisions of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71).
This statement applies to utilities that have cost-based rates established by a
regulator and charged to and collected from customers. In accordance with this
statement, these companies may defer the recognition of certain costs
(regulatory assets) and certain obligations (regulatory liabilities) that, as a
result of the ratemaking process, have probable corresponding increases or
decreases in future revenues. Future significant changes in regulation or
competition could affect these companies' ability to meet the criteria for
continued application of SFAS 71 and may affect these companies' ability to
recover such regulatory assets from, or refund such regulatory liabilities to,
customers. These regulatory assets and liabilities are being amortized over
various periods (5 to 40 years). The amortization is currently, or is expected
to be, included in rates. In the event all or a portion of these companies'
operations fail to meet the criteria for application of SFAS 71, these companies
would be required to write-off all or a portion of their regulatory assets and
liabilities. Should significant changes in regulation or competition occur, the
affected System Companies would be required to assess the recoverability of
certain assets, including plant and regulatory assets, and, if impaired, to
write down the assets to reflect their fair market value. (See Note 2 to
Consolidated Financial Statements.) The System Companies cannot predict the
timing or extent of changes in the business environment that may require the
discontinuation of SFAS 71 application.
Although TU Electric cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in this Annual
Report, that might significantly alter its basic financial position, results of
operation or cash flows. (See Note 15 to Consolidated Financial Statements.)
DOCKET 9300 -- The PUC's final order (Order) in connection with TU
Electric's January 1990 rate increase request (Docket 9300) was reviewed by the
250th Judicial District Court of Travis County, Texas, (District Court) and
thereafter was appealed to the Court of Appeals for the Third District of Texas
and to the Supreme Court of Texas (Supreme Court). As a result of such review
and appeals, an aggregate of $909 million of disallowances with respect to TU
Electric's reacquisitions of minority owners' interests in Comanche Peak, which
had previously been recorded as a charge to the Company's earnings, has been
remanded to the District Court with instructions that it be remanded to the PUC
for reconsideration on the basis of a prudent investment standard. On remand,
the PUC would also be required to reevaluate the appropriate level of TU
Electric's construction work in progress included in rate base in light of its
financial condition at the time of the initial hearing. In January 1997, the
Supreme Court denied a motion for rehearing on the Comanche Peak minority owners
issue filed by the original complainants. TU Electric cannot predict the outcome
of the reconsideration of the Order on remand by the PUC.
V-9
<PAGE> 256
In its decision, the Supreme Court also affirmed the previous $472 million
prudence disallowance related to Comanche Peak. Since the Company has previously
recorded a charge to earnings for this prudence disallowance, the Supreme
Court's decision did not have an effect on the Company's current financial
position, results of operation or cash flows.
DOCKET 11735 -- In July 1994, TU Electric filed a petition in the 200th
Judicial District Court of Travis County, Texas to seek judicial review of the
final order of the PUC granting a $449 million, or 9.0%, rate increase in
connection with TU Electric's January 1993 rate increase request of $760
million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also
filed appeals with respect to various portions of the order.
DOCKETS 15638 AND 15840 -- In May 1996, TU Electric filed with the PUC its
transmission cost information and tariffs for open-access wholesale transmission
service (Docket 15638) in accordance with PUC rules adopted in February 1996.
These tariffs also provide for generation-related ancillary services necessary
to support wholesale transactions. In August 1997, the PUC approved final
tariffs for TU Electric and implemented rates for other transmission providers
within the Electric Reliability Council of Texas (ERCOT) (Docket 15840). Under
rates implemented by the PUC, TU Electric's payments for transmission service
will exceed its revenues for providing transmission service. The PUC has adopted
a rate-moderation plan that will minimize the impact of the new pricing
mechanism for the first three years the rules are in effect. As such, the
current maximum impact on the Company for 1998 is an $8.52 million deficit,
which, in the opinion of the Company, is not expected to have a material effect
on its financial position, results of operation or cash flows.
DOCKET 17250 -- In late 1996, as part of its regular earnings monitoring
process, the PUC staff advised the PUC, after reviewing the 1995 Electric
Investor-Owned Utilities Earnings Report of TU Electric, that it believed TU
Electric was earning in excess of a reasonable rate of return, and the PUC and
TU Electric subsequently began discussions concerning possible remedies. It was
decided to limit negotiations to a resolution of issues concerning TU Electric's
earnings through 1997, and discussion of a longer-term resolution was deferred.
In July 1997, the PUC issued its final written order approving TU Electric's
proposal to make a one-time $80 million refund to its customers (Rate
Settlement) and to leave rates unchanged during the remainder of 1997. TU
Electric recorded the charge to revenues in July 1997 and included the refunds
in August 1997 billings. The proposal was the result of a joint stipulation in
which TU Electric was joined by the PUC General Counsel, on behalf of the PUC
Staff and the public interest, the Office of Public Utility Counsel, the state
agency charged with representing the interests of residential and small
commercial customers, and the Coalition of Cities served by TU Electric.
DOCKET 18490 -- On December 17, 1997, TU Electric, together with the PUC
General Counsel, the Office of Public Utility Counsel and various other parties
interested in TU Electric's rates and services, filed with the PUC a stipulation
and joint application which, if granted, would among other things: (i) result in
permanent retail base rate credits beginning January 1, 1998, of 4% for
residential customers, 2% for general service secondary customers and 1% for all
other retail customers, (ii) result in additional permanent retail base rate
credits beginning January 1, 1999, of 1.4% for residential customers, (iii)
impose a 11.35% cap on TU Electric's rate of return on equity during 1998 and
1999, with any sums earned above that cap being applied as additional nuclear
production depreciation, (iv) allow TU Electric to record depreciation
applicable to transmission and distribution assets in 1998 and 1999 as
additional depreciation of nuclear production assets, (v) establish an updated
cost of service study that includes interruptible customers as customer classes,
(vi) result in the permanent dismissal of pending appeals of prior PUC orders
including Docket No. 11735, if all other parties that have filed appeals of
those dockets also dismiss their appeals, (vii) result in the stay of any
proceedings in the removal of Docket 9300 prior to January 1, 2000, and (viii)
result in all gains from off-system sales of electricity in excess of the amount
included in base rates being flowed to customers through the fuel factor.
The PUC has until March 31, 1998 to approve or reject the stipulation and
joint application. Otherwise, TU Electric may terminate the base rate reductions
and all other aspects of the proposal upon giving two weeks notice to the PUC.
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<PAGE> 257
Fuel Reconciliation Proceedings -- In July 1997, the PUC ruled on TU
Electric's petition seeking final reconciliation of all eligible fuel and
purchased power expenses incurred during the reconciliation period of July 1,
1992 through June 30, 1995 (approximately $4.7 billion). In the ruling, the PUC
disallowed approximately $81 million of eligible fuel related costs (including
interest of $12 million) incurred during the reconciliation period (Fuel
Disallowance). The majority of the Fuel Disallowance (approximately $67 million)
is related to replacement fuel costs as a result of the November 1993 collapse
of the emissions chimney serving Unit 3 of the Monticello lignite-fueled
generating station. In addition, the PUC ruled that approximately $10 million
from the gain on sale of sulfur dioxide allowances should be deferred and
reconsidered at a future date. TU Electric received a final written order from
the PUC and recorded the charge to revenues in August 1997. TU Electric strongly
disagrees with the Fuel Disallowance and has appealed the PUC's order.
Fuel Cost Recovery Rule -- TU Electric in July 1997, petitioned the PUC for
and received interim approval to refund approximately $67 million, including
interest, in over-collected fuel costs for the period October 1995 through May
1997 (Fuel Refund). Such over-collection was primarily due to TU Electric's
ability to use less expensive nuclear fuel and purchased power to offset a
higher-priced natural gas market during the period. Customer refunds were
included in August 1997 billings. A final order confirming the Fuel Refund was
entered by the PUC in October 1997.
Lone Star Gas and Lone Star Pipeline Rates -- In October 1996, Lone Star
Pipeline filed a request with the RRC to increase the rate it charges Lone Star
Gas to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star Gas.
Lone Star Gas also requested that the RRC separately set rates for costs to
aggregate gas supply for these cities. Rates previously in effect were set by
the RRC in 1982. In September 1997, the RRC issued an order reducing the charges
by Lone Star Pipeline to Lone Star Gas for storage and transportation services.
In that order, the RRC did authorize separate charges for the Lone Star Pipeline
storage and transportation services, a separate charge by Lone Star Gas for the
cost of aggregating gas supplies, and a continuation of the 100% flow through of
purchased gas expense. The RRC also imposed some new criteria for affiliate gas
purchases and a new reconciliation procedure that will require a review of
purchased gas expenses every three years. The RRC order has become final, but is
being appealed by several parties including Lone Star Pipeline and Lone Star
Gas. The rates authorized by the order became effective on December 1, 1997, and
will result in an annual margin reduction of approximately $8.2 million.
On August 20, 1996, the RRC ordered a general inquiry into the rates and
services of Lone Star Gas, most notably a review of Lone Star Gas' historic gas
cost and gas acquisition practices since the last rate setting. The inquiry
docket has been separated into different phases. Two of the phases, conversion
to the NARUC account numbering system and unbundling, have been dismissed by the
RRC, and one other phase, rate case expense, is pending RRC action on the basis
of a stipulation of all parties. In the phase dealing with historic gas cost and
gas acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a
motion for summary disposition stating that any retroactive rate action would be
inappropriate and unlawful. Settlement discussions with intervenor cities are
ongoing. If the motion for summary disposition is denied, a hearing has been
scheduled to begin in August 1998. A number of management and transportation
related issues have been placed in a separate phase which still has an undefined
scope and is being held in abeyance pending the resolution of the phase dealing
with gas costs. Management believes that gas costs were prudently incurred and
were properly accounted for and recovered through the gas cost recovery
mechanism previously approved by the RRC. At this time, management is unable to
determine the ultimate outcome of the inquiry.
COMPETITION
The National Energy Policy Act of 1992 (Energy Policy Act) addresses a wide
range of energy issues and is intended to increase competition in electric
generation and broaden access to electric transmission systems. In addition, the
Public Utility Regulatory Act of 1995, as amended (PURA), impacts the PUC and
its regulatory practices and encourages increased competition in some aspects of
the electric utility industry in Texas. Although the Company is unable to
predict the ultimate impact of the Energy Policy Act, PURA and
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<PAGE> 258
any related regulations or legislation on the System Companies' operations, it
believes that such actions are consistent with the trend toward increased
competition in the energy industry.
In order to remain competitive, the System Companies are aggressively
managing their operating costs and capital expenditures through streamlined
business processes and are developing and implementing strategies to address an
increasingly competitive environment. These strategies include initiatives to
improve their return on corporate assets and to maximize shareholder value
through new marketing programs, creative rate design and new business
opportunities. Additional initiatives under consideration include the potential
disposition or alternative utilization of existing assets and the restructuring
of strategic business units.
While TU Electric has experienced competitive pressures in the wholesale
market resulting in a small loss of load since the beginning of 1993, wholesale
sales represented a relatively low percentage of TU Electric's consolidated
operating revenues in 1997. TU Electric is unable to predict the extent of
future competitive developments in either the wholesale or retail markets or
what impact, if any, such developments may have on its operations.
Federal legislation such as the Public Utility Regulatory Policy Act of
1978 (PURPA) and, more recently, the Energy Policy Act, as well as initiatives
in various states, encourage wholesale competition among electric utility and
non-utility power producers. Together with increasing customer demand for lower-
priced electricity and other energy services, these measures have accelerated
the industry's movement toward a more competitive pricing and cost structure.
Competition in the electric utility industry was also addressed in the 1995
session of the Texas legislature. PURA was amended to encourage greater
wholesale competition and flexible retail pricing. PURA amendments also require
the PUC to report to the legislature, during each legislative session, on
competition in electric markets. Accordingly, PUC reports were submitted to the
Texas legislature in January 1997, recommending that the legislature continue
the process of expanding competition in the Texas electricity markets, leading
to expanded retail competition, and authorize the PUC to take numerous steps
toward that goal. The PUC further recommended that full competition not occur
prior to the year 2000 in order to provide an environment through which both
retail customers and utilities in Texas move more smoothly to achieve the
perceived benefits of competition. The PUC is seeking guidance from the
legislature and authority to address the issue of stranded cost recovery. The
PUC's estimate for TU Electric's potentially stranded retail costs ranged from a
projected excess of net book value over market value of $7.7 billion to a
projected excess of market value over net book value of $2.1 billion.
Legislation that would have authorized retail competition was not enacted by the
1997 Texas legislature.
While the Company anticipates legislation being enacted during the 1999
session of the Texas legislature to authorize competition in the retail market,
they cannot predict the ultimate outcome of the ongoing efforts that are taking
place to restructure the electric utility industry or whether such outcome will
have a material effect on their financial position, results of operation or cash
flows.
RESULTS OF OPERATION
For the year ended December 31, 1997, net income for the Company decreased
approximately 12% from the prior period. Results for 1997 were reduced by the
recognition of TU Electric's $80.0 million Rate Settlement refund in July 1997,
the August 1997 $81.1 million Fuel Disallowance (including interest) and a
charge of $10.1 million from the sale of sulfur dioxide allowances previously
recognized. After revenue-related and income taxes, these settlements reduced
income by $103.4 million. Excluding these items, 1997 net income increased
slightly over the 1996 period. For the year ended December 31, 1996, net income
increased approximately 14% over the comparable 1995 period, excluding the
after-tax effect of recording a September 1995 impairment of several
non-performing assets. Such impairment, on an after-tax basis, amounted to $802
million. (See Note 14 to Consolidated Financial Statements.)
TU Electric continued to experience core revenue and sales volume growth in
excess of 3% due to increases in both number of customers and usage. Warmer than
normal summer weather contributed to 1996 results, while summer weather was
normal in 1995 and 1997.
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<PAGE> 259
Operating revenues increased approximately 21% and 16% for the years ended
December 31, 1997 and 1996, respectively. In 1997, the increase in operating
revenues was due primarily to the inclusion of ENSERCH revenues ($1,278.0
million) for the period following the Merger and to TU Electric's transmission
service revenues ($113.8 million) from implementing the PUC's Open Access
Transmission Rule effective January 1, 1997. LCC's revenues after acquisition
were $11.9 million. In 1996, the increase was due primarily to a full year of
Eastern Energy's revenues ($474 million).
Base rate electricity revenues (including unbilled sales) decreased
slightly from 1996 as a result of the Rate Settlement refund mentioned above,
while electric energy sales in megawatt hours (including unbilled sales)
increased approximately 2% and 11% for 1997 and 1996, respectively. Fuel revenue
increased in 1997 and 1996 due primarily to increases in fuel costs driven by
increased energy sales and spot market gas prices, partially offset, in 1997, by
the Fuel Disallowance.
Fuel and purchased power expense increased approximately 4% and 30% for
1997 and 1996, respectively. The increases were primarily due to increased
energy sales and increased spot market gas prices and in 1996 included 13.1%
attributable to Eastern Energy for a full year. (See Consolidated Operating
Statistics.) Gas purchased for resale represents the cost of gas ultimately sold
to ENSERCH gas customers, which is recovered in rates.
Total operating expenses, excluding fuel and purchased power and gas
purchased for resale, increased approximately 15% for 1997 and 9% for 1996
(including 8.6% in 1997 attributable to ENSERCH companies since acquisition and
5.7% in 1996 attributable to Eastern Energy). Operation and maintenance expense
increased in 1997 as result of recording third party transmission expenses in
accordance with the Public Utility Commission's Open Access Transmission Rule,
partially offset by decreased employee benefit expenses. The 1996 increase is
due primarily to increases in employee benefit expenses and payroll expenses.
Taxes other than income increased in 1997 due primarily to the effect of ENSERCH
and LCC amounts subsequent to acquisition. Taxes other than income decreased in
1996 as a result of a reduction in TU Electric's ad valorem tax obligation due
primarily to a property tax rate reduction, partially offset by an increase in
state and local gross receipts tax.
The change in other income (deductions) -- net in 1997 was primarily due to
losses from an interest in a telecommunications partnership. Amounts for 1996
were lower than the previous year due primarily to increased non-utility
property expenses and decreased allowance for equity funds used during
construction, partially offset by gains on the disposition of certain
properties.
Interest expense and distributions on preferred securities and preferred
stock of subsidiaries totaled $860.6 million in 1997, $884.3 million in 1996 and
$792.9 million in 1995. The Company's capital restructuring and debt reduction
programs have favorably affected the comparisons. Year-to-year comparisons are
also affected by the debt incurred or assumed in connection with the 1997
acquisitions of ENSERCH and LCC and the December 1995 acquisition of Eastern
Energy. Interest expense in 1996 included an interest payment related to a
settlement with the Internal Revenue Service, and 1997 interest expense included
a charge related to the settlement on over-recovered fuel. Allowance for funds
used during construction (AFUDC) decreased $2.4 million from 1996 to 1997 and
$4.1 million from 1995 to 1996.
The change in income tax expense (benefit) from 1995 to 1996 was due
primarily to the effects of the recording of the September 1995 asset
impairment. (See Note 10 to Consolidated Financial Statements for a
reconciliation of income taxes (benefit) computed at the statutory rate to
provision for income taxes (benefit)).
CHANGES IN ACCOUNTING STANDARDS
SFAS 130, "Reporting Comprehensive Income," will become effective in 1998.
This statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
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<PAGE> 260
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998. This statement establishes
standards for defining and reporting business segments. The Company is currently
determining its reportable segments.
The adoption of SFAS 130 and SFAS 131 will not affect financial position,
results of operations or cash flows.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or produce erroneous data by or at the Year
2000. The Year 2000 issues affect virtually all companies and organizations.
The Company began its Year 2000 initiative in 1996 by addressing
mainframe-based application systems. In early 1997, an infrastructure project to
address information technology (IT) related equipment and systems software was
begun. In late 1997, a corporate-wide project to address Year 2000 issues
related to embedded systems such as process controls for energy production and
delivery and client-developed applications was begun. Most of the ENSERCH
mainframe applications, infrastructure, embedded systems and client-developed
applications that will not be migrated to existing or planned Company systems
have been incorporated into these projects. These projects extend beyond the
Company's organization in an effort to also work with key vendors, service
suppliers and others so that the Company can appropriately prepare for Year
2000.
The remediation and replacement work on the majority of IT application
systems and infrastructure are expected to be completed by the end of 1998. Much
of the work on the corporate-wide Year 2000 project is expected to be completed
by the end of 1998, although the project will extend into 1999. Based on present
assessments of the IT and infrastructure projects, a cost of $11.25 million was
estimated. These costs are being expensed as incurred over the four-year period
(1996 through 1999) covered by the projects. Assessment of the cost of the
corporate-wide Year 2000 project is in the early stages.
Eastern Energy initiated a Year 2000 project in the third quarter of 1997.
The estimated cost of that project is $1.8 million, with completion anticipated
in early 1999. The cost to either modify or replace LCC application systems
affected by Year 2000 is estimated to be $1.5 million, with completion
anticipated in 1999. The effect on LCC's embedded systems is still being
assessed.
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TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
OPERATING REVENUES..................................... $7,945,608 $6,550,928 $5,638,688
---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power............................... 2,212,689 2,136,309 1,640,990
Gas purchased for resale............................... 1,052,977 - -
Operation and maintenance.............................. 1,548,150 1,256,280 1,109,644
Depreciation and amortization.......................... 666,448 620,505 563,819
Taxes other than income................................ 558,673 534,844 536,608
---------- ---------- ----------
Total operating expenses..................... 6,038,937 4,547,938 3,851,061
---------- ---------- ----------
OPERATING INCOME....................................... 1,906,671 2,002,990 1,787,627
OTHER INCOME (DEDUCTIONS) -- NET....................... (17,588) (1,148) 24,583
---------- ---------- ----------
INCOME BEFORE INTEREST, OTHER CHARGES AND INCOME
TAXES................................................ 1,889,083 2,001,842 1,812,210
---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest............................................... 762,937 797,893 706,182
Allowance for borrowed funds used during
construction......................................... (8,890) (11,248) (15,327)
Impairment of assets................................... - - 1,233,320
Distributions on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric............. 69,701 33,001 1,801
Preferred stock dividends of subsidiaries.............. 27,983 53,358 84,914
---------- ---------- ----------
Total interest and other charges............. 851,731 873,004 2,010,890
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... 1,037,352 1,128,838 (198,680)
INCOME TAX EXPENSE (BENEFIT)........................... 376,898 375,232 (60,035)
---------- ---------- ----------
NET INCOME (LOSS)...................................... $ 660,454 $ 753,606 $ (138,645)
========== ========== ==========
Average shares of common stock outstanding
(thousands).......................................... 230,958 225,160 225,841
Per share of common stock:
Basic earnings (loss)................................ $ 2.86 $ 3.35 $ (0.61)
Diluted earnings (loss).............................. $ 2.85 $ 3.35 $ (0.61)
Dividends declared................................... $ 2.125 $ 2.025 $ 2.81
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 262
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 660,454 $ 753,606 $ (138,645)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization (including amounts charged
to fuel)................................................ 838,606 774,305 725,646
Deferred income taxes -- net.............................. 167,705 184,612 (204,550)
Investment tax credits -- net............................. (22,851) (33,075) (22,774)
Allowance for equity funds used during construction....... (5,236) (1,575) (6,680)
Impairment of assets...................................... - - 1,233,320
Changes in operating assets and liabilities:
Accounts receivable..................................... (441,964) (2,503) (22,898)
Inventories............................................. (13,891) 6,328 18,701
Accounts payable........................................ 333,763 33,388 10,904
Interest and taxes accrued.............................. 39,902 (33,463) (94,158)
Other working capital................................... 90,322 9,912 (25,932)
Over/(under) -- recovered fuel revenue -- net of
deferred taxes........................................ (20,483) (47,368) 94,717
Gas marketing risk management assets and liabilities.... (13,142) - -
Other -- net............................................ 45,933 79,918 5,902
---------- ----------- -----------
Cash provided by operating activities.............. 1,659,118 1,724,085 1,573,553
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds...................................... 212,715 244,225 535,055
Other long-term debt...................................... 609,964 1,199,679 300,000
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely
debentures of TU Electric............................... 493,273 - 381,476
Retirements of securities:
First mortgage bonds...................................... (939,467) (556,847) (684,385)
Other long-term debt...................................... (634,407) (1,273,934) (202,520)
Preferred stock of subsidiaries........................... (553,093) (50,269) (504,781)
Common stock.............................................. (148,780) (51,636) -
Change in notes payable:
Commercial paper.......................................... 1,102,749 (31,894) (78,841)
Banks..................................................... (543,080) (140,378) 731,945
Common stock dividends paid................................. (478,592) (451,063) (695,656)
Debt premium, discount, financing and reacquisition
expenses.................................................. (40,774) (44,043) (123,668)
---------- ----------- -----------
Cash used in financing activities.................. (919,492) (1,156,160) (341,375)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures................................... (586,097) (434,139) (434,338)
Allowance for equity funds used during construction
(excluding amount for nuclear fuel)....................... 2,941 892 3,952
Change in construction receivables/payables -- net.......... (1,688) (706) 2,140
Nuclear fuel (excluding allowance for equity funds used
during construction)...................................... (74,510) (58,895) (55,013)
Acquisitions................................................ 4,777 (9,821) (616,865)
Other investments........................................... (58,753) (75,822) (111,175)
---------- ----------- -----------
Cash used in investing activities.................. (713,330) (578,491) (1,211,299)
---------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 2,294 1,558 (3,452)
---------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 28,590 (9,008) 17,427
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE.............. 15,845 24,853 7,426
---------- ----------- -----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE................. $ 44,435 $ 15,845 $ 24,853
========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 263
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Electric:
Production................................................ $16,294,778 $16,277,151
Transmission.............................................. 1,675,681 1,607,925
Distribution.............................................. 5,779,226 5,655,677
Gas distribution and pipeline............................... 1,068,708 -
Telecommunications.......................................... 145,125 14
Other....................................................... 562,890 503,674
----------- -----------
Total............................................. 25,526,408 24,044,441
Less accumulated depreciation............................... 6,715,662 6,127,610
----------- -----------
Net of accumulated depreciation................... 18,810,746 17,916,831
Construction work in progress............................... 330,184 240,612
Nuclear fuel (net of accumulated amortization:
1997 -- $456,490,000; 1996 -- $369,114,000)............... 242,018 252,589
Held for future use......................................... 24,087 24,483
Less reserve for regulatory disallowances................... 836,005 836,005
----------- -----------
Net property, plant and equipment................. 18,571,030 17,598,510
----------- -----------
INVESTMENTS
Goodwill (net of accumulated amortization:
1997 -- $33,444,000; 1996 -- $15,894,000)................. 1,423,420 528,102
Other investments........................................... 851,320 630,121
----------- -----------
Total investments................................. 2,274,740 1,158,223
----------- -----------
CURRENT ASSETS
Cash and cash equivalents................................... 44,435 15,845
Accounts receivable:
Customers................................................. 941,506 290,111
Other..................................................... 50,883 44,032
Allowance for uncollectible accounts...................... (11,322) (6,262)
Inventories -- at average cost:
Materials and supplies.................................... 209,825 200,601
Fuel stock................................................ 81,490 77,227
Gas stored underground.................................... 156,637 44,472
Gas marketing risk management assets........................ 365,650 -
Prepayments................................................. 59,809 56,324
Deferred income taxes....................................... 76,307 50,972
Other current assets........................................ 19,628 14,084
----------- -----------
Total current assets.............................. 1,994,848 787,406
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets............................... 1,853,016 1,753,418
Deferred income taxes....................................... - 10,997
Other deferred debits....................................... 180,495 89,101
----------- -----------
Total deferred debits............................. 2,033,511 1,853,516
----------- -----------
Total............................................. $24,874,129 $21,397,655
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
V-17
<PAGE> 264
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CAPITALIZATION
Common stock without par value -- net....................... $ 5,587,200 $ 4,787,047
Retained earnings........................................... 1,311,875 1,202,390
Cumulative currency translation adjustment.................. (56,013) 43,476
----------- -----------
Total common stock equity......................... 6,843,062 6,032,913
Preferred stock of subsidiaries:
Not subject to mandatory redemption....................... 304,194 464,427
Subject to mandatory redemption........................... 20,600 238,391
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely
debentures of TU Electric.............................. 875,146 381,311
Long-term debt, less amounts due currently................ 8,759,379 8,668,111
----------- -----------
Total capitalization.............................. 16,802,381 15,785,153
----------- -----------
CURRENT LIABILITIES
Notes payable:
Commercial paper.......................................... 570,000 253,151
Banks..................................................... 44,442 69,788
Long-term debt due currently................................ 772,071 356,076
Accounts payable............................................ 879,593 336,391
Gas marketing risk management liabilities................... 357,044 -
Dividends declared.......................................... 139,994 129,879
Customers' deposits......................................... 91,440 80,390
Taxes accrued............................................... 182,532 143,424
Interest accrued............................................ 193,125 156,758
Deferred income taxes....................................... 7,919 10,951
Over-recovered fuel revenue................................. 11,987 42,984
Other current liabilities................................... 271,853 90,485
----------- -----------
Total current liabilities......................... 3,522,000 1,670,277
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes........................... 2,989,254 2,812,623
Unamortized investment tax credits.......................... 570,283 589,713
Pensions and other postretirement benefits.................. 402,292 195,667
Other deferred credits and noncurrent liabilities........... 587,919 344,222
----------- -----------
Total deferred credits and other noncurrent
liabilities.................................... 4,549,748 3,942,225
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 15)
Total............................................. $24,874,129 $21,397,655
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
V-18
<PAGE> 265
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
COMMON STOCK WITHOUT PAR VALUE -- AUTHORIZED SHARES --
500,000,000:
Balance at beginning of year........................... $4,787,047 $4,806,912 $4,798,797
Issued for acquisitions:
ENSERCH Corporation (15,861,272 shares).............. 565,105 - -
Lufkin-Conroe Communications Co. (8,727,730
shares)........................................... 317,142 - -
Issued for Long-Term Incentive Compensation Plan
(61,000 shares)...................................... 2,594 - -
Net change in unamortized costs of Long-Term Incentive
Compensation Plan.................................... (2,197) - -
Common stock repurchased and retired (4,015,000 shares
in 1997 and 1,238,480 shares in 1996)................ (90,186) (27,980) -
Special allocation to Thrift Plan by trustee........... 8,115 8,137 8,115
Other.................................................. (420) (22) -
---------- ---------- ----------
Balance at end of year (1997 -- 245,237,559 shares;
1996 -- 224,602,557 shares; and 1995 -- 225,841,037
shares).............................................. 5,587,200 4,787,047 4,806,912
---------- ---------- ----------
RETAINED EARNINGS:
Balance at beginning of year........................... 1,202,390 924,444 1,691,250
Net income (loss)...................................... 660,454 753,606 (138,645)
Dividends declared on common stock..................... (496,244) (456,059) (634,613)
Common stock repurchased and retired................... (58,594) (23,633) -
LESOP dividend deduction tax benefit and other......... 3,869 4,032 6,452
---------- ---------- ----------
Balance at end of year................................. 1,311,875 1,202,390 924,444
---------- ---------- ----------
CUMULATIVE CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of year........................... 43,476 397 -
Change during the year -- net of deferred income
taxes................................................ (99,489) 43,079 397
---------- ---------- ----------
Balance at end of year................................. (56,013) 43,476 397
---------- ---------- ----------
COMMON STOCK EQUITY.................................... $6,843,062 $6,032,913 $5,731,753
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
V-19
<PAGE> 266
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS, MERGERS AND ACQUISITIONS
Texas Utilities Company (TUC, or the Company) is a holding company which
owns all of the outstanding common stock of Texas Energy Industries Inc. (TEI)
and ENSERCH Corporation (ENSERCH). TEI is a holding company; the assets of its
primary subsidiary, Texas Utilities Electric Company (TU Electric), and the
Company's other electric utility businesses represent in excess of 85% of the
total assets and in excess of 75% of the total revenues of the Company. TU
Electric is engaged in the generation, purchase, transmission, distribution and
sale of electric energy wholly within Texas. Two other subsidiaries of TEI are
engaged directly or indirectly in public utility operations: Southwestern
Electric Service Company (SESCO) and Texas Utilities Australia Pty. Ltd. (TU
Australia), which in December 1995 acquired the common stock of Eastern Energy
Limited (Eastern Energy), one of five electricity distribution companies
operating in Victoria, Australia. Neither SESCO nor Eastern Energy generate
electric energy. TEI has other wholly-owned service subsidiaries, which support
the operations of the Company and its operating subsidiaries. For 1997, none of
the Company's other businesses are significant individually or in the aggregate
and, accordingly, do not require separate segment disclosure under existing
accounting standards. The Company is currently determining its reportable
segments under Statements of Financial Accounting Standards (SFAS) No. 131,
which becomes effective in 1998.
On August 5, 1997, the merger transactions (Merger) between the former
Texas Utilities Company, now known as TEI and ENSERCH were completed. At the
effective time of the Merger: (i) the former Texas Utilities Company changed its
name to TEI, (ii) TEI and ENSERCH merged with wholly-owned subsidiaries of TUC
Holding Company, which, as a result, owned all the common stock of TEI and of
ENSERCH, (iii) TUC Holding Company changed its name to Texas Utilities Company
(now the Company), (iv) each share of TEI's common stock was automatically
converted into one share of common stock of TUC, and (v) each share of common
stock of ENSERCH was automatically converted into 0.225 share of common stock of
TUC, with cash issued in lieu of fractional shares. The share conversions were
tax-free transactions.
Businesses and subsidiaries acquired in the Merger were Lone Star Gas
Company (Lone Star Gas), a gas distribution company in Texas, serving over 1.3
million customers and providing service through over 23,800 miles of
distribution mains; Lone Star Pipeline Company (Lone Star Pipeline), which has
approximately 7,600 miles of gathering and transmission pipeline in Texas; and
subsidiaries engaged in natural gas processing, natural gas marketing,
independent power production and international gas distribution systems
development.
In the Merger, approximately 15. 9 million shares of TUC common stock were
issued to former holders of ENSERCH common stock. The value assigned to the TUC
shares issued and costs incurred in connection with the acquisition of ENSERCH
aggregated $579 million. At the date of the Merger, ENSERCH had debt and
preferred stock outstanding of approximately $1.3 billion. Effective with the
Merger, under terms specified in the Merger agreement, outstanding options for
ENSERCH common stock were exchanged for options for 532,913 shares of the
Company's common stock exercisable at prices ranging from $7.03 to $37.71 per
share, and ENSERCH was precluded from awarding further options. The estimated
fair value of these options of $3,214,000 was accounted for as a part of the
cost of the acquisition. At December 31, 1997, 402,966 of these options remained
outstanding and exercisable.
On November 21, 1997, the Company acquired Lufkin-Conroe Communications Co.
(LCC). Approximately 8.7 million shares of TUC common stock were issued to LCC
stock holders in a stock-for-stock exchange. The value assigned to the TUC
shares issued and costs incurred in connection with the acquisition of LCC
aggregated $319 million. At the date of the acquisition, LCC had debt
outstanding of approximately $31 million. LCC is the parent company of
Lufkin-Conroe Telephone Exchange, Inc. (LCTX) and Lufkin-Conroe
Telecommunications Corporation (LCT) and its subsidiaries. LCTX is an
independent local exchange carrier that serves approximately 100,000 access
lines in the Alto, Conroe and Lufkin areas of
V-20
<PAGE> 267
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
southeast Texas. It also provides access services to a number of interexchange
carriers who provide long distance services. LCT and its subsidiaries own fiber
optic cable systems which they lease to interexchange carriers, provide Internet
access, radio communications tower rentals, cellular mobile telephones and radio
paging services and private branch exchange service to local customers. LCT,
through a subsidiary, also provides interexchange long distance service, with
primary focus on business customers.
The acquisitions of ENSERCH, LCC and Eastern Energy were accounted for as
purchase business combinations. The assets and liabilities of the acquired
companies at the acquisition dates were adjusted to their estimated fair values.
The excess of the purchase price paid by the Company over the estimated fair
value of net assets acquired and liabilities assumed was recorded as goodwill
and is being amortized over 40 years. The process of determining the fair value
of assets and liabilities of ENSERCH and LCC as of the date of acquisition is
continuing, and the final result awaits primarily the resolution of income tax
and other contingencies and finalization of some preliminary estimates. The
results of operations of ENSERCH, LCC and Eastern Energy, are reflected in the
consolidated financial statements of the Company from the respective dates of
their acquisition.
The Company continues to seek potential investment opportunities from time
to time when it concludes that such investments are consistent with its business
strategies and are likely to enhance the long-term return to its shareholders.
In January 1998, the Company announced that it had approached the Energy Group
plc (TEG) in connection with its possible interest in acquiring TEG. TEG is a
diversified international energy group. Discussions between the Company and TEG
are continuing and may or may not lead to an offer being made by the Company.
Likewise, the timing, amount and funding of any specific new business investment
opportunities are presently undetermined.
Following is a summary of unaudited pro forma results of operations
assuming the ENSERCH and LCC acquisitions had occurred at the beginning of the
periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revenues.................................................... $9,315,952 $8,526,600
Operating income............................................ 1,971,790 2,109,610
Net income.................................................. 665,593 751,333
Earnings per share of common stock:
Basic..................................................... $ 2.68 $ 3.01
Diluted................................................... $ 2.67 $ 2.99
</TABLE>
2 SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of the Company and all of its majority-owned subsidiaries (System Companies).
Prior to August 5, 1997, the date of the Merger, the Company did not have any
assets or operations. Pursuant to the Merger, the Company became the parent of
each of TEI and ENSERCH. For financial reporting purposes, the Company is
treated as the successor to TEI. Unless otherwise specified, all references to
the Company for periods prior to August 5, 1997, are deemed to be references to
TEI since the merger of the Company and TEI is the combination of entities under
common control. The Company's financial statements have been restated in a
manner similar to pooling of interests accounting. Since the acquisitions of
ENSERCH, LCC and Eastern Energy were purchase business combinations, no
financial and other information for those companies are presented for periods
prior to their dates of acquisition.
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method. Certain previously reported amounts have
been reclassified to conform to current classifications.
V-21
<PAGE> 268
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates -- The preparation of the Company's consolidated financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense during the periods
covered by the consolidated financial statements. In the event estimates and/or
assumptions prove to be different from actual amounts, adjustments are made in
subsequent periods to reflect more current information. No material adjustments
were made to previous estimates during the current year.
System of Accounts -- The accounting records of TU Electric and SESCO are
maintained in accordance with the Federal Energy Regulatory Commission's (FERC)
Uniform System of Accounts as adopted by the Public Utility Commission of Texas
(PUC). Lone Star Gas and Lone Star Pipeline, divisions of ENSERCH, are subject
to the accounting requirements prescribed by the National Association of
Regulatory Utility Commissioners.
Property, Plant and Equipment -- Electric and gas utility plant is stated
at original cost less certain regulatory disallowances. The cost of property
additions to electric and gas utility plant includes labor and materials,
applicable overhead and payroll-related costs and an allowance for funds used
during construction (AFUDC). Other property is stated at cost.
Allowance For Funds Used During Construction -- AFUDC is a cost accounting
procedure whereby amounts based upon interest charges on borrowed funds and a
return on equity capital used to finance construction are added to utility
plant. The accrual of AFUDC is in accordance with generally accepted accounting
principles for the industry, but does not represent current cash income.
TU Electric capitalizes AFUDC, compounded semi-annually, on expenditures
for ongoing construction work in progress (CWIP) and nuclear fuel in process not
otherwise allowed in rate base by regulatory authorities. For 1997, 1996 and
1995, TU Electric used rates of 7.9%, 7.4%, and 7.7%, respectively. Other
regulated subsidiaries also capitalize AFUDC.
Depreciation of Property, Plant and Equipment -- Depreciation of the
Company's electric and gas utility plant is generally based upon an amortization
of the original cost of depreciable properties (net of regulatory disallowances)
on a straight-line basis over the estimated service lives of the properties.
Depreciation also includes an amount for TU Electric's Comanche Peak
decommissioning costs which is being accrued over the lives of the units and
deposited to external trust funds. (See Note 15.) Depreciation of all other
plant and equipment generally is determined by the straight-line method over the
useful life of the asset. Consolidated depreciation as a percent of average
depreciable property for the Company and System Companies approximated 2.6% for
1997, 2.7% for 1996 and 2.6% 1995.
Amortization of Nuclear Fuel and Refueling Outage Costs -- The amortization
of nuclear fuel in the reactors (net of regulatory disallowances) is calculated
on the units of production method and is included in nuclear fuel expense. TU
Electric accrues a provision for costs anticipated to be incurred during the
next scheduled Comanche Peak nuclear generating station (Comanche Peak)
refueling outage.
Foreign Currency Translation -- The assets and liabilities of foreign
operations denominated in foreign currencies are translated at rates in effect
at year end. Revenues and expenses are translated at average rates for the
applicable periods. Generally, local currencies are considered to be the
functional currency, and adjustments resulting from such translation are
included in the cumulative currency translation adjustment, a separate component
of common stock equity.
Derivative Instruments -- The Company enters into interest rate swaps to
reduce exposure to interest rate fluctuations. Amounts paid or received under
interest rate swap agreements are accrued as interest rates change and are
recognized over the life of the agreements as adjustments to interest expense.
The Company also enters into derivative contracts in connection with the
wholesale purchases of electric energy by Eastern Energy and defers the impact
of changes in the market value of the contracts, which serve as hedges, until
the related transaction is completed. (See Note 9.)
V-22
<PAGE> 269
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Energy Marketing Activities -- The Company, through its natural gas
marketing subsidiary, Enserch Energy Services, Inc. (EES), is a marketer of
natural gas and natural gas services. As part of these business activities, EES
enters into a variety of transactions, including forward contracts principally
involving physical delivery of natural gas and derivative financial instruments,
including options, swaps, futures and other contractual arrangements. The
derivative transactions are concentrated with established energy companies and
major financial institutions. EES uses the mark-to-market method of valuing and
recognizing earnings from firm contractual commitments to purchase and sell
natural gas in the future and from its portfolio of derivative financial
instruments, including options, swaps, futures and other contractual
commitments. (See Note 9.)
Revenues -- Electric revenues include billings under approved rates
(including a fixed fuel factor) applied to meter readings each month on a cycle
basis and an accrual of base rate revenue for energy provided after cycle
billing but not billed through the end of each month. Revenues also include an
amount for under-or over-recovery of fuel revenue representing the difference
between actual fuel cost and billings under the approved fixed fuel factor and a
provision that generally allows recovery through a Power Cost Recovery Factor,
on a monthly basis, of the capacity portion of purchased power cost and wheeling
cost from qualifying facilities not included in base rates. The fuel portion of
purchased power cost is included in the fixed fuel factor. A utility's fuel
factor can be revised upward or downward every six months, according to a
specified schedule. A utility is required to petition to make either surcharges
or refunds to ratepayers, together with interest based on a twelve month average
of prime commercial rates, for any material cumulative under- or over-recovery
of fuel costs. If the cumulative difference of the under- or over-recovery, plus
interest, is in excess of 4% of the annual estimated fuel costs most recently
approved by the PUC, it will be deemed to be material. A procedure exists for an
expedited change in fuel factors in the event of an emergency. Final
reconciliation of fuel costs must be made either in a reconciliation proceeding,
which may cover no more than three years and no less than one year, or in a
general rate case. (See Note 13.)
The city gate rate for the cost of gas Lone Star Gas ultimately delivers to
residential and commercial customers is established by the Railroad Commission
of Texas (RRC) and provides for full recovery of the actual cost of gas
delivered, including out-of-period costs such as gas-purchase contract
settlement costs. The rates Lone Star Gas charges its residential and commercial
customers are established by the municipal governments of the cities and towns
served, with the RRC having appellate jurisdiction. Lone Star Gas records
revenues on the basis of cycle meter readings throughout the month and accrues
revenues for gas delivered from the meter reading dates to the end of the month.
The rate Lone Star Pipeline charges to Lone Star Gas for transportation and
storage of gas ultimately consumed by residential and commercial customers is
established by the RRC.
Income Taxes -- The Company and its domestic (U.S.) subsidiaries file a
consolidated federal income tax return, and federal income taxes are allocated
to subsidiaries based upon their respective taxable income or loss. Investment
tax credits are normally amortized to income over the estimated service lives of
the properties. Deferred income taxes are currently provided for temporary
differences between the book and tax basis of assets and liabilities (including
the provision for regulatory disallowances). Certain provisions of SFAS 109
provide that regulated enterprises are permitted to recognize such adjustments
as regulatory tax assets or tax liabilities if it is probable that such amounts
will be recovered from, or returned to, customers in future rates. Accordingly,
at December 31, 1997, the consolidated balance sheet includes a net regulatory
tax asset of $1,249,338,000.
Effective January 1, 1997, TU Electric's state franchise tax status changed
from a tax based on net taxable capital to a tax based on net taxable earned
surplus. Certain other subsidiaries of the Company are also taxed on the earned
surplus method. Net taxable earned surplus is based on the federal income tax
return. The portion of the franchise tax calculated under the earned surplus
method is an income tax.
Income Taxes on Undistributed Earnings of Foreign Subsidiaries -- The
Company intends to reinvest the earnings of its foreign subsidiaries into those
businesses. Accordingly, no provision has been made for taxes which would be
payable if such earnings were to be repatriated to the United States.
V-23
<PAGE> 270
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share -- Under the provisions of SFAS 128, which became
effective in December 1997, basic earnings per share applicable to common stock
are based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share since the Merger include the effect of
potential common shares resulting from the assumed conversion of the outstanding
6 3/8% Convertible Subordinated Debentures due 2002 of ENSERCH and the exercise
of all outstanding stock options. For the period from the effective date of the
Merger to December 31, 1997, 999,492 shares were added to the average shares
outstanding for 1997 and $1,545,964 of after-tax interest expense was added to
earnings applicable to common stock for the purpose of calculating diluted
earnings per share. Previously reported earnings per share amounts for prior
years were not affected by the new standard.
Consolidated Cash Flows -- For purposes of reporting cash flows, temporary
cash investments purchased with a remaining maturity of three months or less are
considered to be cash equivalents.
The schedule below details the Company's cash payments and noncash
investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- -------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH PAYMENTS
Interest (net of amounts capitalized)................. $ 630,844 $757,092 $ 677,415
Income taxes.......................................... 174,908 246,556 208,326
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of ENSERCH and LCC (1997) and Eastern
Energy (1995):
Book value of assets acquired....................... $ 2,033,311 $ - $ 1,329,158
Goodwill............................................ 1,005,277 - 302,497
Common stock issued, net of capitalized expenses.... (892,068) 9,821 -
Liabilities assumed................................. (2,124,878) - (1,006,847)
----------- -------- -----------
Cash used........................................ 21,642 9,821 624,808
Cash acquired....................................... (26,419) - (7,943)
----------- -------- -----------
Net cash used (provided).................... $ (4,777) $ 9,821 $ 616,865
=========== ======== ===========
</TABLE>
Regulatory Assets and Liabilities -- SFAS 71 applies to utilities which
have cost-based rates established by a regulator and charged to and collected
from customers. In accordance with this statement, the Company's regulated
subsidiaries may defer the recognition of certain costs (regulatory assets) and
certain obligations (regulatory liabilities) that, as a result of the rate
making process, have probable corresponding increases or decreases in future
revenues. These regulatory assets and liabilities are being amortized over
various periods of 5 to 40 years and are currently included in rates, or are
expected to be included in future rates.
V-24
<PAGE> 271
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant net regulatory assets of the System Companies are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
ITEM 1997 1996
---- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Securities reacquisition costs.............................. $ 397,488 $ 396,335
Canceled lignite unit costs................................. 9,208 12,322
Rate case costs............................................. 56,637 59,444
Litigation and settlement costs............................. 72,685 72,685
Voluntary retirement/severance program...................... 100,337 128,337
Recoverable deferred income taxes -- net.................... 1,249,338 1,167,922
Other regulatory assets (liabilities)....................... 40,008 (10,942)
---------- ----------
Unamortized regulatory assets............................. 1,925,701 1,826,103
Reserve for regulatory disallowances........................ (72,685) (72,685)
Unamortized investment tax credits.......................... (570,283) (589,713)
---------- ----------
Unamortized regulatory assets -- net........................ $1,282,733 $1,163,705
========== ==========
</TABLE>
Future significant changes in regulation or competition could affect the
regulated subsidiaries' ability to meet the criteria for continued application
of SFAS 71 and may affect their ability to recover these regulatory assets from,
or refund these regulatory liabilities to, customers. If the affected System
Companies were to discontinue the application of SFAS 71, they would be required
to assess the recoverability of certain assets, including plant and regulatory
assets, and, if impaired, to write down the assets to reflect their fair market
value. The Company cannot predict the ultimate outcome of the ongoing efforts
that are taking place to restructure the electric utility industry or whether
the outcome of such efforts will have a material effect on its financial
position, results of operation or cash flows. However, the Company has no
current knowledge of planned or impending actions by regulators, including the
legislature of the State of Texas, that would affect recoverability of its plant
and net regulatory assets.
3 SHORT-TERM FINANCING
The Company had outstanding short-term borrowings of $614,442,000,
consisting of commercial paper of $570,000,000 and bank borrowings of
$44,442,000, at December 31, 1997. The weighted average interest rates on such
borrowings was 6.18% at December 31, 1997. During the years 1997, 1996 and 1995,
the Company's average amounts outstanding for short-term borrowings, including
amounts classified as long-term, were $1,222,176,000, $593,660,000 and
$149,806,000, respectively. Weighted average interest rates for short-term
borrowings during such periods were 5.86%, 5.94% and 6.33%, respectively.
At December 31, 1997, the Company, TU Electric and ENSERCH had joint lines
of credit under credit facility agreements (Credit Agreements) with a group of
commercial banks. The Credit Agreements have two facilities. Facility A provides
for short-term borrowings aggregating up to $570,000,000 outstanding at any one
time at variable interest rates and terminates April 23, 1998. Facility B
provides for short-term borrowings aggregating up to $1,330,000,000 outstanding
at any one time at variable interest rates and terminates April 24, 2002. The
combined borrowings of the Company, TU Electric and ENSERCH under both
facilities are limited to an aggregate of $1,900,000,000 outstanding at any one
time. ENSERCH's borrowings under both facilities are limited to an aggregate of
up to $650,000,000 outstanding at any one time. Borrowings under these
facilities will be used for working capital and other corporate purposes,
including commercial paper backup. The total of short-term borrowings authorized
by the Board of Directors of the Company at December 31, 1997, from banks or
other lenders, was $2,150,000,000.
In addition, certain non-U.S. subsidiaries have revolving credit agreements
aggregating approximately $95,000,000, of which $61,000,000 was outstanding at
December 31, 1997. These revolving credit agreements expire at various dates
through 2000.
V-25
<PAGE> 272
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company intends to refinance up to $990,440,000 of its current
short-term borrowings beyond one year of the balance sheet date of December 31,
1997. As a result, such amount has been reclassified from notes
payable -- commercial paper to long-term debt on the Company's 1997 Balance
Sheet (see Note 8). If necessary, the Company would draw upon Facility B if such
amount were not refinanced in the normal course of business.
4 COMMON STOCK
The Company has an Automatic Dividend Reinvestment and Common Stock
Purchase Plan (DRIP) and an Employees' Thrift Plan of the Texas Utilities
Company System (Thrift Plan). During each of the last three years, requirements
under the DRIP and Thrift Plan have been met through open market purchases of
the Company's common stock.
At December 31, 1997, the Thrift Plan had an obligation of $250,000,000
outstanding in the form of a note, which the Company purchased from the original
third-party lender and recorded as a reduction to common equity. At December 31,
1997, the Thrift Plan trustee held 5,375,158 shares of common stock (LESOP
Shares) of the Company under the leveraged employee stock ownership provision of
the Thrift Plan. LESOP Shares are held by the trustee until allocated to Thrift
Plan participants when required to meet the System Companies' obligations under
terms of the Thrift Plan. The Thrift Plan uses dividends on the LESOP Shares
held and contributions from the System Companies, if required, to repay interest
and principal on the note. Common stock equity increases at such time as LESOP
Shares are allocated to participants' accounts although shares of common stock
outstanding include unallocated LESOP Shares held by the trustee. Allocations to
participants' accounts in each of the years 1997 and 1995 increased common stock
equity by $8,115,000; 1996 increased by $8,137,000.
The Long-Term Incentive Compensation Plan was approved and adopted by the
directors of the Company and approved by the shareholders in 1997. The purpose
of the plan is to assist the Company in attracting, retaining and motivating
executive officers and other key employees essential to the success of the
Company through performance-related incentives linked to long-range performance
goals. The plan is a comprehensive, stock-based incentive compensation plan,
providing for discretionary awards (Awards) of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares, performance units, bonus stock and
other stock-based awards. All Awards will be made in, or based on the value of,
the Company's common stock. The maximum number of shares of common stock for
which Awards may be granted under the plan is 2,500,000 subject to adjustment in
the event of a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, or other similar event. During 1997, the Board of
Directors authorized the award of 61,000 shares of restricted common stock,
which were issued in 1997 subject to performance and vesting requirements over a
three to five year period. No stock options were granted.
At December 31, 1997, 14,154,372 shares of the authorized but unissued
common stock of the Company were reserved for issuance and sale pursuant to the
above plans, for conversion of the 6 3/8% Convertible Subordinated Debentures
due 2002 (see Note 8) and for other purposes.
In November 1997, the Company's Board of Directors increased the common
stock repurchase limit to $350 million of which $148,780,000 was used as of
December 31, 1997 to purchase and retire 4,015,000 shares of the Company's
issued and outstanding common stock during 1997. The cost of the repurchased
shares, to the extent it exceeded the estimated amount received upon their
original issuance, has been charged to retained earnings.
The Company has 50,000,000 authorized shares of serial preference stock
having a par value of $25 a share, none of which has been issued.
V-26
<PAGE> 273
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 DIVIDEND RESTRICTIONS OF SUBSIDIARIES
The articles of incorporation and/or the mortgages, as supplemented, and
certain other debt instruments of TU Electric and SESCO contain provisions
which, under certain conditions, restrict distributions on or acquisitions of
common stock. At December 31, 1997, $29,236,000 of retained earnings of TU
Electric, and $13,970,000 of retained earnings of SESCO, were thus restricted as
a result of such provisions.
6 PREFERRED STOCK OF SUBSIDIARIES
<TABLE>
<CAPTION>
REDEMPTION PRICE PER
SHARE (BEFORE ADDING
SHARES OUTSTANDING AMOUNT ACCUMULATED DIVIDENDS)
DECEMBER 31, DECEMBER 31, ------------------------
--------------------- ------------------- DECEMBER 31, EVENTUAL
DIVIDEND RATE 1997 1996 1997 1996 1997 MINIMUM
------------- --------- --------- -------- -------- ------------ ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
NOT SUBJECT TO MANDATORY
REDEMPTION:
TU ELECTRIC (CUMULATIVE, WITHOUT
PAR VALUE, ENTITLED UPON
LIQUIDATION TO $100 A SHARE;
AUTHORIZED 17,000,000 SHARES)
$4.50 series.................... 22,406 74,367 $ 2,242 $ 7,440 $ 110.00 $ 110.00
4.00 series (Dallas Power)..... 20,755 70,000 2,090 7,049 103.56 103.56
4.56 series (Texas Power)...... 52,879 133,628 5,291 13,371 112.00 112.00
4.00 series (Texas Electric)... 69,221 110,000 6,922 11,000 102.00 102.00
4.56 series (Texas Electric)... 22,237 64,947 2,246 6,560 112.00 112.00
4.24 series.................... 18,194 100,000 1,834 10,081 103.50 103.50
4.64 series.................... 25,195 100,000 2,524 10,016 103.25 103.25
4.84 series.................... 15,964 70,000 1,597 7,000 101.79 101.79
4.00 series (Texas Power)...... 27,391 70,000 2,739 7,000 102.00 102.00
4.76 series.................... 23,181 100,000 2,318 10,000 102.00 102.00
5.08 series.................... 27,716 80,000 2,773 8,004 103.60 103.60
4.80 series.................... 20,420 100,000 2,044 10,009 102.79 102.79
4.44 series.................... 33,672 150,000 3,381 15,061 102.61 102.61
7.20 series.................... - 200,000 - 20,044 - -
6.84 series.................... - 200,000 - 20,023 - -
7.24 series.................... - 247,862 - 24,905 - -
8.20 series (a) (c)............ 146,501 338,872 14,138 32,704 (b) 100.00
7.98 series.................... 261,075 474,000 25,774 46,794 (b) 100.00
7.50 series (a)................ 308,308 392,234 29,918 38,062 (b) 100.00
7.22 series (a)................ 220,448 301,132 21,363 29,182 (b) 100.00
Adjustable rate series A........ - 884,700 - 86,878 - -
Adjustable rate series B........ - 440,137 - 43,244 - -
--------- --------- -------- --------
Total................. 1,315,563 4,701,879 129,194 464,427
--------- --------- -------- --------
ENSERCH (ENTITLED UPON
LIQUIDATION TO STATED VALUE
PER SHARE; AUTHORIZED
2,000,000 SHARES) ADJUSTABLE
RATE PREFERRED STOCK:
Series E (c) (d).............. 100,000 - 100,000 - 1,000.00 1,000.00
Series F (d).................. 75,000 - 75,000 - (b) 1,000.00
--------- --------- -------- --------
Total................. 175,000 - 175,000 -
--------- --------- -------- --------
Total................. 1,490,563 4,701,879 $304,194 $464,427
========= ========= ======== ========
TU ELECTRIC -- SUBJECT TO
MANDATORY REDEMPTION (e)
$9.64 series.................... - 400,000 $ - $ 39,981 - -
6.98 series.................... 107,500 1,000,000 10,672 99,199 (b) 100.00
6.375 series................... 100,000 1,000,000 9,928 99,211 (b) 100.00
--------- --------- -------- --------
Total................. 207,500 2,400,000 $ 20,600 $238,391
========= ========= ======== ========
</TABLE>
V-27
<PAGE> 274
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) The preferred stock series is the underlying preferred stock for depositary
shares that were issued to the public. Each depositary share represents one
quarter of a share of underlying preferred stock.
(b) Preferred stock series is not redeemable at December 31, 1997.
(c) Preferred stock series redeemed in January 1998.
(d) Stated value $1,000 per share. The preferred stock series is the underlying
preferred stock for depositary shares that were issued to the public. Each
depositary share represents one-tenth of a share of underlying preferred
stock for Series E ($100 per share) and one-fortieth of a share for Series
F ($25 per share). Dividend rates are determined quarterly, in advance,
based on certain U.S. Treasury rates. At December 31, 1997, the Series E
bears a dividend rate of 7.0% and the Series F bears a dividend rate of
5.54%.
(e) TU Electric is required to redeem at a price of $100 per share plus
accumulated dividends a specified minimum number of shares annually or
semi-annually on the initial/next dates shown below. These redeemable
shares may be called, purchased or otherwise acquired. Certain issues may
not be redeemed at the option of TU Electric prior to 2003. TU Electric may
annually call for redemption, at its option, an aggregate of up to twice
the number of shares shown below for each series at a price of $100 per
share plus accumulated dividends.
<TABLE>
<CAPTION>
INITIAL/NEXT DATE OF
MINIMUM MANDATORY
SERIES REDEEMABLE SHARES REDEMPTION
------ ----------------- --------------------
<S> <C> <C>
$6.98............................................. 50,000 annually July 1, 2003
6.375............................................ 50,000 annually October 1, 2003
</TABLE>
The carrying value of preferred stock subject to mandatory redemption is
being increased periodically to equal the redemption amounts at the mandatory
redemption dates with a corresponding increase in preferred stock dividends.
During the year ended December 31, 1997, TU Electric redeemed or purchased
5,578,816 shares of its preferred stock (including 3,989,640 shares purchased by
the Company in March 1997 pursuant to a tender offer and subsequently sold to TU
Electric) with annual dividend rates ranging from 4.00% to 9.64% at a total cost
of approximately $553,093,000. In January 1998, TU Electric redeemed all of the
outstanding shares of the $8.20 series preferred stock, and ENSERCH redeemed the
Series E Adjustable Rate Preferred Stock, in each case at 100% of the
liquidation price plus accumulated and unpaid dividends.
7 TU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF TU ELECTRIC
Five statutory business trusts, each a TU Electric Trust, have been
established as financing subsidiaries of TU Electric for the purposes, in each
case, of issuing common and preferred trust securities and holding Junior
Subordinated Debentures issued by TU Electric (Debentures). TU Electric Capital
I, II and III preferred trust securities have a liquidation preference of $25
per unit, and TU Electric Capital IV and V preferred trust securities have a
liquidation preference of $1,000 per unit (Capital Securities). The Debentures
held by each TU Electric Trust are its only assets. The interest on Trust assets
matches the dividend rates on the trust securities. Each TU Electric Trust will
use interest payments received on the Debentures it holds to make cash
distributions on the trust securities it has issued.
The preferred securities are subject to mandatory redemption upon payment
of the Debentures at maturity or upon redemption. The Debentures are subject to
redemption, in whole or in part at the option of TU Electric, at 100% of their
principal amount plus accrued interest, after an initial period during which
they may not be redeemed and at any time upon the occurrence of certain events.
The carrying value of the preferred securities is being increased periodically
to equal the redemption amounts at the mandatory redemption dates with a
corresponding increase in preferred securities distributions.
V-28
<PAGE> 275
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the following preferred securities and
related trust assets of the TU Electric Trusts were outstanding:
<TABLE>
<CAPTION>
PREFERRED SECURITIES TRUST ASSETS
--------------------------------------------- -------------------
UNITS OUTSTANDING AMOUNT AMOUNT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------- ------------------- -------------------
COMPANY 1997 1996 1997 1996 1997 1996
------- ---------- ---------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
TU Electric Capital I (8.25%
Series)........................ 5,871,044 5,871,044 $140,851 $140,671 $154,869 $154,869
TU Electric Capital II (9.00%
Series)........................ 1,991,253 1,991,253 47,374 47,301 51,419 51,419
TU Electric Capital III (8.00%
Series)........................ 8,000,000 8,000,000 193,510 193,339 206,186 206,186
TU Electric Capital IV (floating
rate Capital Securities)(a).... 100,000 - 97,570 - 103,093 -
TU Electric Capital V (8.175%
Capital Securities)............ 400,000 - 395,841 - 412,372 -
---------- ---------- -------- -------- -------- --------
Total.................. 16,362,297 15,862,297 $875,146 $381,311 $927,939 $412,474
========== ========== ======== ======== ======== ========
</TABLE>
- ---------------
(a) Floating rate is determined quarterly based on LIBOR. The related interest
rate swap fixes the rate at 7.183%.
At December 31, 1997, TU Electric, with respect to its Capital IV
securities, had an interest rate swap agreement with a notional principal amount
of $100,000,000 expiring 2002 that fixed the rate on the securities at 7.183%
per annum.
The combination of the obligations of TU Electric pursuant to agreements to
pay the expenses of each of the TU Electric Trusts and TU Electric's guarantees
of distributions with respect to trust securities, to the extent the issuing
trust has funds available therefor, constitutes a full and unconditional
guarantee by TU Electric of the obligations of each trust under the trust
securities it has issued. TU Electric is the owner of all the common trust
securities of each trust, which, in each case, constitutes 3% or more of the
liquidation amount of all the trust securities issued by such trust.
In January 1998, TU Electric redeemed all of the outstanding shares of the
TU Electric Capital II preferred trust securities at 100% of the liquidation
amount of $25 per preferred security, plus accumulated and unpaid dividends.
V-29
<PAGE> 276
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
INTEREST SERIES 1997 1996
RATE DUE ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
First mortgage bonds:
5 1/2% series due 1998.................................... $ - $ 125,000
5 3/4% series due 1998.................................... - 150,000
5 7/8% series due 1998.................................... - 175,000
6 1/2% series due 1998.................................... - 1,065
7 3/8% series due 1999.................................... 100,000 100,000
Floating rate series due 1999............................. - 300,000
9 1/2% series due 1999.................................... 200,000 200,000
7 3/8% series due 2001.................................... 150,000 150,000
7.95% series due 2002..................................... 888 900
8% series due 2002........................................ 147,000 147,000
8 1/8% series due 2002.................................... 150,000 150,000
6 3/4% series due 2003.................................... 200,000 200,000
6 3/4% series due 2003.................................... 100,000 100,000
6 1/4% series due 2004.................................... 125,000 125,000
8 1/4% series due 2004.................................... 100,000 100,000
6 3/4% series due 2005.................................... 100,000 100,000
10.44% series due 2008.................................... 3,000 3,000
9 3/4% series due 2021.................................... 135,855 280,855
8 7/8% series due 2022.................................... 125,000 175,000
9% series due 2022........................................ - 100,000
7 7/8% series due 2023.................................... 300,000 300,000
8 3/4% series due 2023.................................... 135,550 195,550
7 7/8% series due 2024.................................... 225,000 225,000
8 1/2% series due 2024.................................... 113,000 163,000
7 3/8% series due 2025.................................... 208,000 208,000
7 5/8% series due 2025.................................... 250,000 250,000
Pollution control series:
Brazos River Authority
7 7/8% series due 2017................................. - 81,305
9 7/8% series due 2017................................. - 28,765
9 1/4% series due 2018................................. 54,005 54,005
8 1/4% series due 2019................................. 100,000 100,000
8 1/8% series due 2020................................. 50,000 50,000
7 7/8% series due 2021................................. 100,000 100,000
Taxable series due 2021 (5.86%) (a)....................... 40,895 65,940
5 1/2% series due 2022................................. 50,000 50,000
6 5/8% series due 2022................................. 33,000 33,000
6.70% series due 2022.................................. 16,935 16,935
6 3/4% series due 2022................................. 50,000 50,000
Series 1997D due 2022 (3.75%) (c)......................... 28,765 -
Taxable series due 2023 (5.85%) (a)....................... 100,000 100,000
6.05% series due 2025.................................. 90,000 90,000
Series 1996A due 2026 (5.10%) (c)......................... 25,060 25,060
6 1/2% series due 2027................................. 46,660 46,660
6.10% series due 2028.................................. 50,000 50,000
Series 1994A due 2029 (3.75% to 3.85%) (b)................ 39,170 39,170
</TABLE>
V-30
<PAGE> 277
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
INTEREST SERIES 1997 1996
RATE DUE ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Series 1994B due 2029 (3.75% to 3.80%)(b).............. $ 39,170 $ 39,170
Series 1995A due 2030 (5.10%) (c)...................... 50,670 50,670
Series 1995B due 2030 (4.60%) (c)...................... 118,355 118,355
Series 1995C due 2030 (5.10%) (c)...................... 118,355 118,355
Series 1996B due 2030 (4.60%) (c)...................... 61,215 61,215
Series 1996C due 2030 (5.10%) (c)...................... 50,000 50,000
Series 1997A due 2032 (5.10%) (c)...................... 50,000 -
Series 1997B due 2032 (4.95%) (c)...................... 31,305 -
Series 1997C due 2032 (5.10%) (c)...................... 25,045 -
Sabine River Authority of Texas
9% series due 2007..................................... - 51,525
8 1/8% series due 2020................................. 40,000 40,000
8 1/4% series due 2020................................. 11,000 11,000
5.55% series due 2022.................................. 75,000 75,000
6.55% series due 2022.................................. 40,000 40,000
5.85% series due 2022.................................. 33,465 33,465
Series 1997A due 2022 (3.70%) (c)...................... 51,525 -
Series 1996A due 2026 (5.10%) (c)...................... 57,950 57,950
Series 1996B due 2026 (5.10%) (c)...................... 25,000 25,000
Series 1995A due 2030 (5.20%) (c)...................... 16,000 16,000
Series 1995B due 2030 (4.50%) (c)...................... 12,050 12,050
Series 1995C due 2030 (4.60%) (c)...................... 18,475 18,475
Trinity River Authority of Texas
9% series due 2007..................................... - 12,000
Series 1997A due 2022 (3.75%) (c)...................... 12,000 -
Series 1996A due 2026 (5.10%) (c)........................... 25,000 25,000
Series 1997B due 2032 (5.95%) (c)........................... 14,075 -
Secured medium-term notes, series A......................... 30,000 30,000
Secured medium-term notes, series B......................... 114,200 114,200
Secured medium-term notes, series D......................... 201,150 201,150
---------- ----------
Total first mortgage bonds........................ 5,063,788 6,205,790
General obligation bonds.................................... 9,646 10,000
Debt assumed for purchase of utility plant (d).............. 153,537 156,182
TU Electric 7.17% Senior Debentures due 2007................ 300,000 -
Senior notes:
TEI (due through 2010 at 10.2% to 10.58%)................. 235,800 239,350
TUC (due through 2004 at 6.20% to 6.375%)................. 300,000 -
ENSERCH (due through 2005 at 6.25% to 8.875%)............. 575,000 -
TUMCO (due through 2005 at 6.5% to 9.42%)................. 367,856 382,142
LLC (due through 2003 at 7.15% to 10.5%).................. 648 -
Eastern Energy (due through 2016 at 6.75% to 7.25%) (e)... 280,994 343,389
6 3/8% Convertible subordinated debentures due 2002......... 90,750 -
Term credit facilities (f).................................. 1,416,728 1,381,290
Unamortized premium and discount and fair value
adjustments............................................... (35,368) (50,032)
---------- ----------
Total long-term debt, less amounts due
currently....................................... $8,759,379 $8,668,111
========== ==========
</TABLE>
V-31
<PAGE> 278
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Interest rates in effect at December 31, 1997 are presented. Taxable
pollution control series are in a flexible rate mode. Series 1991D bonds
due 2021 were remarketed on June 1, 1995 for rate periods up to 180 days
and are secured by an irrevocable letter of credit with maturities in
excess of one year. Series 1993 bonds due 2023 will be remarketed for
periods of less than 270 days and are secured by an irrevocable letter of
credit with maturities in excess of one year.
(b) Interest rates in effect at December 31, 1997 are presented. These series
are in a flexible mode with varying interest rates and, while in such mode,
will be remarketed for periods of less than 270 days and are secured by an
irrevocable letter of credit with maturities in excess of one year.
(c) Interest rates in effect at December 31, 1997 are presented . These series
are in a daily mode with varying interest rates and are supported by either
municipal bond insurance policies and standby bond purchase agreements or
are secured by irrevocable letters of credit with maturities in excess of
one year.
(d) In 1990, TU Electric purchased the ownership interest in Comanche Peak of
Tex-La Electric Cooperative of Texas, Inc. (Tex-La) and assumed debt of
Tex-La payable over approximately 32 years. The assumption is secured by a
mortgage on the acquired interest. The Company has guaranteed these
payments.
(e) Eastern Energy has entered into cross-currency and interest rate swap
agreements expiring on concurrent dates with the underlying fixed rate debt
through 2016. Such agreements effectively convert these fixed rate U.S.
dollar denominated Senior Notes to a floating rate Australian Dollar
liability based on the Australian Bank Bill Swap rate plus a margin. At
December 31, 1997, such floating rates ranged from 5.29% to 8.45%.
(f) Includes the Company's $990,440,000 reclassified short-term debt (see Note
3). Also includes Eastern Energy's $297,837,000 Multi Option Credit
Facility due 2001 with a floating interest rate of 5.44% on December 31,
1997 and Eastern Energy's $128,451,000 reclassified short-term debt (all of
which is included under interest rate swap agreements with notional
principal amounts of $627,539,000 expiring at various dates through 2002
with fixed interest rates ranging from 5.29% to 8.45% per annum and forward
contracts with notional principal amounts of $45,521,000 expiring at
various dates through 1998 with an average rate of 4.8%).
Long-term debt of the Company does not include Junior Subordinated
Debentures held by each TU Electric Trust. (See Note 7.)
The ENSERCH convertible subordinated debentures, which have an interest
rate of 6 3/8%, are due in 2002 and effective with the Merger, each $1,000 of
the $90,750,000 total principal amount outstanding became convertible into
25.947 shares of TUC common stock at the option of the debenture holder. The
debentures may be redeemed at 101.27% of the principal amount, plus accrued
interest, through March 31, 1998 and at declining premiums thereafter. The
Company currently intends to redeem these debentures in 1998.
Sinking fund and maturity requirements for the years 1998 through 2002
under long-term debt instruments in effect at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
SINKING MINIMUM CASH
YEAR FUND MATURITY REQUIREMENT
---- ---------- ---------- ------------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
1998................................................. $ 20,994 $ 751,077 $ 772,071
1999................................................. 24,680 480,012 504,692
2000................................................. 261,040 1,597,891 1,858,931
2001................................................. 22,415 322,012 344,427
2002................................................. 8,546 586,602 595,148
</TABLE>
V-32
<PAGE> 279
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TU Electric's and SESCO's first mortgage bonds are secured by mortgages and
deeds of trust with major financial institutions. Electric plant of TU Electric
and SESCO is generally subject to the liens of their respective mortgages.
9 DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments, including options, swaps,
futures and other contractual commitments to manage market risks related to
changes in interest rates and commodity price exposures. The Company's
participation in derivative transactions, except for the gas marketing
activities, have been designated for hedging purposes and are not held or issued
for trading purposes. (For a discussion of accounting policies relating to
derivative instruments, see Note 2.)
Interest Rate Risk Management -- At December 31, 1997, Eastern Energy had
interest rate swaps outstanding with an aggregate notional amount of
$977,500,000. These swap agreements establish a mix of fixed and variable
interest rates on the outstanding debt and have remaining terms up to 19 years.
(See Note 8.)
At December 31, 1997, TU Electric had an interest rate swap agreement with
respect to preferred securities of TU Electric Capital IV, with a notional
principal amount of $100,000,000 expiring 2002 that fixed the rate at 7.183% per
annum. (See Note 7.)
At December 31, 1997, there were $50,900,000 of net unrealized deferred
hedging losses on interest rate swaps.
Electricity Price Risk Management -- Eastern Energy and the other
distribution companies in Victoria purchase their power from a competitive power
pool operated by a statutory, independent corporation. Eastern Energy purchases
about 95% of its energy from this pool, the cost of which is based on spot
market prices. Eastern Energy and other distribution companies were required to
enter into wholesale market contracts to cover a substantial majority of its
forecasted franchise load through the end of 2000. Eastern Energy also maintains
a strategy that is aimed at seeking hedging contracts with individual generators
to cover forecast contestable loads. These contracts fix the price of energy
within a certain range for the purpose of hedging or protecting against
fluctuations in the spot market price. During 1997, the average spot price for
electric energy from the pool approximated $14 per megawatt-hour (MWh) as
compared with the average fixed price of Eastern Energy's electric energy under
its contracts of approximately $29 per MWh. At December 31, 1997, Eastern
Energy's contracts related to its forecasted contestable and franchise load
cover a notional volume of approximately 15.6 million MWh's for 1998 through
2000. Under these contracts, payments are made between Eastern Energy and the
generators representing the difference between the wholesale electricity market
price and the contract price. The net payable or receivable is recognized in
earnings as adjustments to purchased power expense in the period the related
transactions are completed.
Natural Gas Marketing Activities -- EES's marketing activities involve
price commitments into the future and, therefore, give rise to market risk,
which represents the potential loss that can be caused by a change in the market
value of a particular commitment. Net open portfolio positions often result from
the origination of new transactions or in response to changing market
conditions. The Company closely monitors its exposure to market risk. The
Company utilizes a number of methods to monitor market risk, including
sensitivity analysis. The exposure for fixed price natural gas purchase and sale
commitments, and derivative financial instruments, including options, swaps,
futures and other contractual commitments, is based on a methodology that uses a
five-day holding period and a 95% confidence level. EES uses market-implied
volatilities to determine its exposure to market risk. Market risk is estimated
as the potential loss in fair value resulting from at least a 15% change in
market factors which may differ from actual results. Using 15%, the most adverse
change in fair value at December 31, 1997 as a result of this analysis was a
reduction of $1.1 million.
V-33
<PAGE> 280
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EES enters into contracts to purchase and sell natural gas for physical
delivery in the future. At December 31, 1997, EES had net commitments to sell
approximately 50.6 billion cubic feet (Bcf) of natural gas through the year 2003
with offsetting net financial positions to purchase approximately 61.3 Bcf.
Concurrent with the Merger, EES conformed its accounting for its gas
marketing activities to mark-to-market accounting. Under mark-to-market
accounting, changes (whether positive or negative) in the value of contractual
commitments to purchase and sell natural gas in the future and from its
portfolio of derivative financial instruments, including options, swaps, futures
and other contractual commitments are recognized as an adjustment to operating
revenues in the period of change. The market prices used to value these
transactions reflect management's best estimate of market prices considering
various factors including closing exchange and over-the-counter quotations, time
value of money and volatility factors underlying the commitments. These market
prices are adjusted to reflect the potential impact of liquidating EES's
position in an orderly manner over a reasonable period of time under present
market conditions.
EES has a number of risks and costs associated with the future contractual
commitments included in its natural gas portfolio, including credit risks
associated with the financial condition of counterparties, product location
(basis) differentials and other risks that management policies dictate. EES
continuously monitors the valuation of identified risk and adjusts the portfolio
valuation based on present market conditions. Reserves are established in
recognition that certain risks exist until delivery of natural gas has occurred,
counterparties have fulfilled their financial commitments and related financial
instruments mature or are closed out.
The following table displays the mark-to-market values of EES's natural gas
marketing risk management assets and liabilities at December 31, 1997 and the
average value for the period from August 5, 1997 through December 31, 1997:
<TABLE>
<CAPTION>
ASSETS LIABILITIES NET
-------- ----------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
FAIR VALUE:
Current..................................................... $365,650 $357,044 $ 8,606
Noncurrent.................................................. 41,522 31,324 10,198
Total....................................................... $407,172 $388,368 18,804
======== ========
Less reserves............................................... 9,251
-------
Net of reserves............................................. $ 9,553
=======
AVERAGE VALUE:
Total....................................................... $291,809 $278,332 $13,477
======== ========
Less reserves............................................... 8,134
-------
Net of reserves............................................. $ 5,343
=======
</TABLE>
EES incurred net trading losses of $286,000 from gas marketing activities
for the period from August 5, 1997 through December 31, 1997.
Credit Risk -- Credit risk relates to the risk of loss that the Company
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Company maintains credit policies with regard to its
counterparties that management believes significantly minimize overall credit
risk. The Company does not obtain collateral to support the agreements but
monitors the financial viability of counterparties and believes its credit risk
is minimal on these transactions. The Company believes the risk of
nonperformance by counterparties is minimal.
V-34
<PAGE> 281
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10 INCOME TAXES
The components of the Company's provision for income taxes (benefit) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- -------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal.................................................. $181,632 $198,522 $ 222,358
State.................................................... 39,900 - -
-------- -------- ---------
Total............................................ 221,532 198,522 222,358
-------- -------- ---------
Deferred:
Federal.................................................. 175,573 196,957 (259,445)
State.................................................... (17,102) - -
Foreign.................................................. 19,746 12,828 (174)
-------- -------- ---------
Total............................................ 178,217 209,785 (259,619)
-------- -------- ---------
Investment Tax Credits..................................... (22,851) (33,075) (22,774)
-------- -------- ---------
Total............................................ $376,898 $375,232 $ (60,035)
======== ======== =========
</TABLE>
Reconciliation of income taxes (benefit) computed at the federal statutory
rate to provision for income taxes (benefit).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income (loss) before Income taxes:
Domestic.............................................. $1,001,867 $1,108,386 $(197,373)
Foreign............................................... 35,485 20,452 (1,307)
Total......................................... 1,037,352 1,128,838 (198,680)
Preferred stock dividends of subsidiaries............. 27,983 53,358 84,914
---------- ---------- ---------
Income (loss) before preferred stock dividends of
subsidiaries....................................... $1,065,335 $1,182,196 $(113,766)
========== ========== =========
Income taxes (benefit) at the federal statutory rate
of 35%............................................. $ 372,867 $ 413,769 $ (39,188)
Allowance for funds used during construction.......... (1,821) (542) (2,330)
Depletion allowance................................... (22,691) (25,657) (23,564)
Amortization of investment tax credits................ (22,877) (23,203) (23,036)
Amortization of tax rate differences.................. (6,856) (9,084) (9,648)
Amortization of prior flow-through amounts............ 36,559 35,128 38,974
Foreign operations.................................... 7,326 5,670 283
Prior year adjustments................................ (7,673) (25,250) (4,136)
State income taxes, net of federal tax benefit........ 14,812 - -
Amortization of goodwill.............................. 3,263 - -
Other................................................. 3,989 4,401 2,610
---------- ---------- ---------
Provision for income taxes (benefit).................... $ 376,898 $ 375,232 $ (60,035)
========== ========== =========
Effective tax rate (on income before preferred stock
dividends of subsidiaries)............................ 35.4% 31.7% 52.8%
</TABLE>
The Company had net tax benefits from LESOP dividend deductions of $3.9
million, $4.0 million and $6.5 million in 1997, 1996 and 1995, respectively,
which were credited directly to retained earnings.
V-35
<PAGE> 282
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes provided by the liability method for significant
temporary difference based on tax laws in effect at the December 31, 1997 and
1996 balance sheet dates are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
NON NON
TOTAL CURRENT CURRENT TOTAL CURRENT CURRENT
---------- -------- ---------- ---------- -------- ----------
(THOUSAND OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Unbilled revenues............. $ 28,469 $ 28,469 $ - $ 28,521 $ 28,521 $ -
Over-recovered fuel revenue... 4,530 4,530 - 15,045 15,045 -
Unamortized investment tax
credits..................... 300,871 - 300,871 312,665 - 312,665
Impairment of assets.......... 141,678 - 141,678 143,210 - 143,210
Regulatory disallowance....... 183,729 - 183,729 222,428 - 222,428
Alternative minimum tax....... 589,989 - 589,989 587,052 - 587,052
Tax rate differences.......... 78,477 - 78,477 78,141 - 78,141
Employee benefits............. 163,632 - 163,632 100,397 - 100,397
Net operating loss
carryforwards............... 155,871 - 155,871 - - -
Deferred benefits of state
income tax.................. 156,237 5,129 151,108 - - -
Unrealized currency
translation adjustments..... 27,685 - 27,685 - - -
Other......................... 35,130 35,130 - 35,316 7,406 27,910
---------- -------- ---------- ---------- -------- ----------
Total deferred
federal income tax
asset............. 1,866,298 73,258 1,793,040 1,522,775 50,972 1,471,803
Deferred state income taxes... 52,996 3,170 49,826 - - -
Deferred foreign income
taxes....................... 77,222 5,573 71,649 69,541 2,994 66,547
---------- -------- ---------- ---------- -------- ----------
Total deferred tax
assets............ 1,996,516 82,001 1,914,515 1,592,316 53,966 1,538,350
---------- -------- ---------- ---------- -------- ----------
DEFERRED TAX LIABILITIES:
Depreciation differences and
capitalized construction
costs....................... 4,257,455 - 4,257,455 4,010,105 - 4,010,105
Redemption of long-term
debt........................ 123,354 - 123,354 125,601 - 125,601
Deferred charges for state
income tax.................. 24,433 - 24,433 - - -
Other......................... 122,304 121 122,183 148,720 - 148,720
---------- -------- ---------- ---------- -------- ----------
Total deferred
federal income tax
liability......... 4,527,546 121 4,527,425 4,284,426 - 4,284,426
Deferred state income taxes... 295,246 - 295,246 - - -
Deferred foreign income
taxes....................... 94,590 13,492 81,098 69,495 13,945 55,550
---------- -------- ---------- ---------- -------- ----------
Total deferred tax
liabilities....... 4,917,382 13,613 4,903,769 4,353,921 13,945 4,339,976
---------- -------- ---------- ---------- -------- ----------
Net Deferred Tax
Liability
(Asset)........... $2,920,866 $(68,388) $2,989,254 $2,761,605 $(40,021) $2,801,626
========== ======== ========== ========== ======== ==========
</TABLE>
At December 31, 1997, the Company had approximately $590 million of
alternative minimum tax credit carryforwards available to offset future tax
payments. At December 31, 1997, ENSERCH had $445 million of net operating loss
(NOL) carryforwards which begin to expire in 2003. Such NOL's were generated by
V-36
<PAGE> 283
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ENSERCH and subsidiaries prior to the Merger and can be used only to offset
future taxable income generated by ENSERCH and subsidiaries pursuant to Section
382 of the Internal Revenue Code. The Company expects to fully utilize such
NOL's prior to their expiration date.
Separately, the ENSERCH consolidated income tax returns have been audited
and settled with the Internal Revenue Service (IRS) through the year 1992. The
IRS is currently auditing the year 1993 and as yet no notice of proposed
adjustments has been issued. The IRS has indicated that it will commence an
audit of ENSERCH's returns for the years 1994 through 1997 in 1998. To the
extent that adjustments to income tax accounts for periods prior to the Merger
are required as a result of an IRS audit, the adjustment will be added to or
deducted from goodwill in accordance with the provisions of SFAS 109.
11 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Most employees of System Companies are covered by defined benefit pension
plans which provide benefits based on years of service and average earnings. At
the date of their acquisition by the Company, both ENSERCH and LCC had defined
benefit pensions plans covering most of their employees and providing benefits
similar to those provided to employees of other System Companies. As a part of
the purchase accounting for ENSERCH and LCC, their accrued pension liabilities
were adjusted to recognize all previously unrecognized gains or losses arising
from past experience different from that assumed, the effects of changes in
assumptions, all unrecognized prior service costs and the remainder of any
unrecognized obligation or asset existing at the date of the initial application
of SFAS 87 by the respective company. These adjustments to the accrued pension
liability, to the extent associated with rate-regulated operations, were
recorded as regulatory assets or liabilities and, to the extent associated with
non-regulated operations, as goodwill.
Effective January 1, 1998, the ENSERCH retirement plan was merged into
another retirement plan of the Company. Also, effective during 1998, employees
of certain of the Company's emerging business units will be eligible to
participate in a cash balance plan, rather than the traditional defined benefit
plans. This change, which affects a relatively small percentage of employees,
was made in connection with overall changes in the compensation plans of these
business units designed to bring them closer to the prevailing practices of the
companies in the industries in which they compete.
In connection with the ENSERCH acquisition, certain employees of ENSERCH
and other System Companies were offered and accepted an early retirement option.
Effects of the early retirement option associated with ENSERCH employees were
included in purchase accounting adjustments as regulatory assets or goodwill, as
appropriate. Effects of the early retirement option associated with employees of
other System Companies were recorded as regulatory assets, or liabilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Components of Net Pension Costs (including amounts charged
to fuel cost, deferred and capitalized):
Service cost -- benefits earned during the period....... $ 36,712 $ 36,779 $ 23,515
Interest cost on projected benefit obligation........... 92,121 75,501 65,675
Actual return on plan assets............................ (299,800) (183,390) (241,887)
Net amortization and deferral........................... 190,203 97,988 160,198
--------- --------- ---------
Net periodic pension cost....................... $ 19,236 $ 26,878 $ 7,501
========= ========= =========
Valuation Assumptions:
Discount rate........................................... 7.25% 7.75% 7.25%
Rate of increase in compensation levels................. 4.3% 4.3% 4.3%
Expected long-term rate of return....................... 9.0% 9.0% 9.0%
</TABLE>
V-37
<PAGE> 284
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Amounts Recognized:
Actuarial present value of accumulated benefits:
Accumulated benefit obligation (including vested benefits
of $1,264,450,000 for 1997 and $823,918,000 for
1996).................................................. $(1,337,120) $ (889,057)
=========== ===========
Projected benefit obligation for service rendered to
date................................................... $(1,546,854) $(1,065,396)
Plan assets at fair value -- primarily equity investments,
government bonds and corporate bonds...................... 1,790,715 1,296,025
----------- -----------
Plan assets in excess of projected benefit obligation....... 243,861 230,629
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions........ (422,503) (350,295)
Prior service cost not yet recognized in net periodic
pension expense........................................... 31,574 41,566
Unrecognized plan assets in excess of projected benefit
obligation at initial application......................... (4,700) (5,708)
----------- -----------
Accrued pension cost...................................... $ (151,768) $ (83,808)
=========== ===========
</TABLE>
The Eastern Energy, ENSERCH and LCC plans use economic assumptions similar
to the other System Companies' plans and are included in the tabular information
above.
In addition to the retirement plans, the System Companies offer certain
health care and life insurance benefits to substantially all employees,
including those of ENSERCH and LCC but excluding those of Eastern Energy, and
their eligible dependents at retirement. Benefits received vary in level
depending on years of service and retirement dates. The purchase accounting
adjustments described above for the retirement plans of ENSERCH and LCC were
also applied to the accrued liabilities for the post employment health care and
life insurance benefits.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Components of Net Periodic Postretirement Benefit Costs
(including amounts charged to fuel cost, deferred and
capitalized):
Service cost -- benefits earned during the period......... $ 12,084 $13,513 $ 9,771
Interest cost on the accumulated postretirement benefit
obligation............................................. 43,057 40,809 38,842
Amortization of the transition obligation................. 16,953 16,978 16,978
Actual return on plan assets.............................. (13,260) (7,079) (6,096)
Net amortization and deferral............................. 7,015 8,303 4,646
-------- ------- -------
Net postretirement benefits cost.................. $ 65,849 $72,524 $64,141
======== ======= =======
Valuation assumption:
Discount rate............................................. 7.25% 7.75% 7.25%
Medical cost trend rate................................... 5.0% 5.0% 5.0%
</TABLE>
V-38
<PAGE> 285
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Amounts Recognized:
Accumulated postretirement benefit obligation (APBO):
Retirees.................................................. $(412,919) $(325,672)
Fully eligible active employees........................... (40,901) (38,320)
Other active employees.................................... (137,033) (187,451)
--------- ---------
Total APBO........................................ (590,853) (551,443)
Plan assets at fair value................................... 111,799 81,480
--------- ---------
APBO in excess of plan assets..................... (479,054) (469,963)
Unrecognized net loss....................................... 67,023 92,589
Unrecognized prior service cost............................. 18,557 819
Unrecognized transition obligation.......................... 162,359 271,649
--------- ---------
Accrued postretirement benefits cost.............. $(231,115) $(104,906)
========= =========
</TABLE>
The expected increase in costs of future benefits covered by the plan is
projected using a health care cost trend rate of 5.0% in 1998 and thereafter. A
one percentage point increase in the assumed health care cost trend rate in each
future year would increase the APBO at December 31, 1997 by approximately $65.9
million for the System Companies, and other postretirement benefits cost for
1997 by approximately $9.8 million.
12 SALES OF ACCOUNTS RECEIVABLE
The Company has facilities with financial institutions whereby it is
entitled to sell and such financial institutions may purchase, on an ongoing
basis, undivided interests in customer accounts receivable representing up to an
aggregate of $450,000,000, including $100,000,000 related to ENSERCH in 1997.
Additional receivables are continually sold to replace those collected. At
December 31, 1997 and 1996, accounts receivable was reduced by $400,000,000 and
$300,000,000, respectively, to reflect the sales of such receivables to
financial institutions under such agreements.
13 REGULATION AND RATES
Docket 9300 -- The PUC's final order (Order) in connection with TU
Electric's January 1990 rate increase request (Docket 9300) was reviewed by the
250th Judicial District Court of Travis County, Texas, (District Court) and
thereafter was appealed to the Court of Appeals for the Third District of Texas
and to the Supreme Court of Texas (Supreme Court). As a result of such review
and appeals, an aggregate of $909 million of disallowances with respect to TU
Electric's reacquisitions of minority owners' interests in Comanche Peak, which
had previously been recorded as a charge to the Company's earnings, has been
remanded to the District Court with instructions that it be remanded to the PUC
for reconsideration on the basis of a prudent investment standard. On remand,
the PUC would also be required to reevaluate the appropriate level of TU
Electric's construction work in progress included in rate base in light of its
financial condition at the time of the initial hearing. In January 1997, the
Supreme Court denied a motion for rehearing on the Comanche Peak minority owners
issue filed by the original complainants. TU Electric cannot predict the outcome
of the reconsideration of the Order on remand by the PUC.
In its decision, the Supreme Court also affirmed the previous $472 million
prudence disallowance related to Comanche Peak. Since the Company has previously
recorded a charge to earnings for this prudence disallowance, the Supreme
Court's decision did not have an effect on the Company's current financial
position, results of operation or cash flows.
Docket 11735 -- In July 1994, TU Electric filed a petition in the 200th
Judicial District Court of Travis County, Texas to seek judicial review of the
final order of the PUC granting a $449 million, or 9.0%, rate
V-39
<PAGE> 286
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increase in connection with TU Electric's January 1993 rate increase request of
$760 million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also
filed appeals with respect to various portions of the order.
Dockets 15638 and 15840 -- In May 1996, TU Electric filed with the PUC its
transmission cost information and tariffs for open-access wholesale transmission
service (Docket 15638) in accordance with PUC rules adopted in February 1996.
These tariffs also provide for generation-related ancillary services necessary
to support wholesale transactions. In August 1997, the PUC approved final
tariffs for TU Electric and implemented rates for other transmission providers
within the Electric Reliability Council of Texas (ERCOT) (Docket 15840). Under
rates implemented by the PUC, TU Electric's payments for transmission service
will exceed its revenues for providing transmission service. The PUC has adopted
a rate-moderation plan that will minimize the impact of the new pricing
mechanism for the first three years the rules are in effect. As such, the
current maximum impact on TU Electric for 1998 is an $8.52 million deficit,
which, in the opinion of TU Electric, is not expected to have a material effect
on its financial position, results of operation or cash flows.
Docket 17250 -- In late 1996, as part of its regular earnings monitoring
process, the PUC staff advised the PUC, after reviewing the 1995 Electric
Investor-Owned Utilities Earnings Report of TU Electric, that it believed TU
Electric was earning in excess of a reasonable rate of return, and the PUC and
TU Electric subsequently began discussions concerning possible remedies. It was
decided to limit negotiations to a resolution of issues concerning TU Electric's
earnings through 1997, and discussion of a longer-term resolution was deferred.
In July 1997, the PUC issued its final written order approving TU Electric's
proposal to make a one-time $80 million refund to its customers and to leave
rates unchanged during the remainder of 1997. TU Electric recorded the charge to
revenues in July 1997 and included the refunds in August 1997 billings. The
proposal was the result of a joint stipulation in which TU Electric was joined
by the PUC General Counsel, on behalf of the PUC Staff and the public interest,
the Office of Public Utility Counsel, the state agency charged with representing
the interests of residential and small commercial customers, and the Coalition
of Cities served by TU Electric.
Docket 18490 -- On December 17, 1997, TU Electric, together with the PUC
General Counsel, the Office of Public Utility Counsel and various other parties
interested in TU Electric's rates and services, filed with the PUC a stipulation
and joint application which, if granted would, among other things: (i) result in
permanent retail base rate credits beginning January 1, 1998, of 4% for
residential customers, 2% for general service secondary customers and 1% for all
other retail customers, (ii) result in additional permanent retail base rate
credits beginning January 1, 1999, of 1.4% for residential customers, (iii)
impose a 11.35% cap on TU Electric's rate of return on equity during 1998 and
1999, with any sums earned above that cap being applied as additional nuclear
production depreciation, (iv) allow TU Electric to record depreciation
applicable to transmission and distribution assets in 1998 and 1999 as
additional depreciation of nuclear production assets, (v) establish an updated
cost of service study that includes interruptible customers as customer classes,
(vi) result in the permanent dismissal of pending appeals of prior PUC orders
including Docket No. 11735, if all other parties that have filed appeals of
those dockets also dismiss their appeals, (vii) result in the stay of any
proceedings in the removal of Docket 9300 prior to January 1, 2000, and, (viii)
result in all gains from off-system sales of electricity in excess of the amount
included in base rates being flowed to customers through the fuel factor.
The PUC has until March 31, 1998 to approve or reject the stipulation and
joint application. Otherwise, TU Electric may terminate the base rate reductions
and all other aspects of the proposal upon giving two weeks notice to the PUC.
Lone Star Gas and Lone Star Pipeline Rates -- In October 1996, Lone Star
Pipeline filed a request with the RRC to increase the rate it charges Lone Star
Gas to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star Gas.
Lone Star Gas also requested that the RRC separately set rates for costs to
aggregate gas supply for these cities. Rates
V-40
<PAGE> 287
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
previously in effect were set by the RRC in 1982. In September 1997, the RRC
issued an order reducing the charges by Lone Star Pipeline to Lone Star Gas for
storage and transportation services. In that order, the RRC did authorize
separate charges for the Lone Star Pipeline storage and transportation services,
a separate charge by Lone Star Gas for the cost of aggregating gas supplies, and
a continuation of the 100% flow through of purchased gas expense. The RRC also
imposed some new criteria for affiliate gas purchases and a new reconciliation
procedure that will require a review of purchased gas expenses every three
years. The RRC order has become final, but is being appealed by several parties
including Lone Star Pipeline and Lone Star Gas. The rates authorized by the
order became effective on December 1, 1997, and will result in an annual margin
reduction of approximately $8.2 million.
On August 20, 1996, the RRC ordered a general inquiry into the rates and
services of Lone Star Gas, most notably a review of historic gas cost and gas
acquisition practices since the last rate setting. The inquiry docket has been
separated into different phases. Two of the phases, conversion to the NARUC
account numbering system and unbundling, have been dismissed by the RRC, and one
other phase, rate case expense, is pending RRC action on the basis of a
stipulation of all parties. In the phase dealing with historic gas cost and gas
acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a motion
for summary disposition stating that any retroactive rate action would be
inappropriate and unlawful. Settlement discussions with intervenor cities are
ongoing. If the motion for summary disposition is denied, a hearing has been
scheduled to begin in August 1998. A number of management and transportation
related issues have been placed in a separate phase which still has an undefined
scope and is being held in abeyance pending the resolution of the phase dealing
with gas costs. Management believes that gas costs were prudently incurred and
were properly accounted for and recovered through the gas cost recovery
mechanism previously approved by the RRC. At this time, management is unable to
determine the ultimate outcome of the inquiry.
Fuel Cost Recovery Rule -- Pursuant to a PUC rule, the recovery of TU
Electric's eligible fuel costs is provided through fixed fuel factors. The rule
allows a utility's fuel factor to be revised upward or downward every six
months, according to a specified schedule. A utility is required to petition to
make either surcharges or refunds to ratepayers, together with interest based on
a twelve month average of prime commercial rates, for any material, as defined
by the PUC, cumulative under- or over-recovery of fuel costs. If the cumulative
difference of the under- or over-recovery, plus interest, is in excess of 4% of
the annual estimated fuel costs most recently approved by the PUC, it will be
deemed to be material. In accordance with PUC approvals, TU Electric has, since
the inception of the rule in 1986, made thirteen refunds of over-collected fuel
costs and two surcharges of under-collected fuel costs. The most recent refund
was made pursuant to a petition filed by TU Electric in July 1997 to refund
approximately $67 million, including interest, in over-collected fuel costs for
the period October 1995 through May 1997 (Fuel Refund). Such over-collection was
primarily due to TU Electric's ability to use less expensive nuclear fuel and
purchased power to offset a higher-priced natural gas market during the period.
Customer refunds were included in August 1997 billings. A final order confirming
the Fuel Refund was entered by the PUC in October 1997. The two surcharges (one
in the amount of $147.3 million and the other in the amount of $93 million) have
been appealed by certain intervenors to district courts of Travis County, Texas.
In those appeals, those parties are contending that the PUC is without authority
to allow a fuel cost surcharge without a hearing and resultant findings that the
costs are reasonable and necessary and that the prices charged to TU Electric by
supplying affiliates are no higher than the prices charged by those affiliates
to others for the same item or class of items. TU Electric is unable to predict
their outcome.
Fuel Reconciliation Proceeding -- In July 1997, the PUC ruled on TU
Electric's petition seeking final reconciliation of all eligible fuel and
purchased power expenses incurred during the reconciliation period of July 1,
1992 through June 30, 1995 (approximately $4.7 billion). In the ruling, the PUC
disallowed approximately $81 million of eligible fuel related costs (including
interest of $12 million) incurred during the reconciliation period (Fuel
Disallowance). The majority of the Fuel Disallowance (approximately $67 million)
is related to replacement fuel costs as a result of the November 1993 collapse
of the emissions chimney serving Unit 3 of the Monticello lignite-fueled
generating station. In addition, the PUC ruled that
V-41
<PAGE> 288
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $10 million from the gain on sale of sulfur dioxide allowances
should be deferred and reconsidered at a future date. TU Electric received a
final written order from the PUC and recorded the charge to revenues in August
1997. TU Electric strongly disagrees with the Fuel Disallowance and continues to
vigorously defend its position. TU Electric has appealed the PUC's order to the
District Court of Travis County, Texas.
Flexible Rate Initiatives -- TU Electric continues to offer flexible rates
in over 160 cities with original regulatory jurisdiction within its service
territory (including the cities of Dallas and Fort Worth) to existing
non-residential retail and wholesale customers that have viable alternative
sources of supply and would otherwise leave the system. TU Electric also
continues to offer in those cities an economic development rider to attract new
businesses and to encourage existing customers to expand their facilities as
well as an environmental technology rider to encourage qualifying customers to
convert to technologies that conserve energy or improve the environment. TU
Electric will continue to pursue the expanded use of flexible rates when such
rates are necessary to be price-competitive.
Integrated Resource Plan -- In October 1994, TU Electric filed an
application for approval by the PUC of certain aspects of its Integrated
Resource Plan (IRP) for the ten year period 1995 -- 2004. The IRP, developed as
an experimental pilot project in conjunction with regulatory and customer
groups, included the acquisition of electric energy through a competitive
bidding process of third party-supplied demand-side management resources and
renewable resources. In August 1995, the PUC remanded the case to an
Administrative Law Judge for development of a solicitation plan and to more
closely conform the TU Electric 1995 IRP to new state legislation that required
the PUC to adopt a state-wide integrated resource planning rule by September 1,
1996. In January 1996, TU Electric filed an updated IRP with the PUC along with
a proposed plan for the solicitation of resources through a competitive bidding
process. The PUC issued its final order on TU Electric's IRP in October 1996,
and modified the order in December 1996 and February 1997. The modified order
approved a flexible solicitation plan that will allow TU Electric to conduct up
to three optional resource solicitations for a total of 2,074 MW of demand-side
and supply-side resources prior to the filing of its next IRP in June 1999. TU
Electric is currently reviewing the need and timing for conducting the first of
these resource solicitations.
In addition to its solicitation plan in the IRP docket, TU Electric
requested and received approval from the PUC to expand its Power Cost Recovery
tariff to provide current cost recovery of resource acquisition costs for
demand-side management resources acquired in the solicitations and for eight
previously approved demand-side management contracts entered into by TU Electric
to the extent such costs are not currently reflected in TU Electric's base
rates. OPEN-ACCESS TRANSMISSION -- In February 1996, pursuant to the 1995
amendments to PURA, the PUC adopted rules requiring each electric utility in
ERCOT to provide wholesale transmission and related services to other utilities
and non-utility power suppliers at rates, terms and conditions that are
comparable to those applicable to such utility's use of its own transmission
facilities.
Under the rules, the PUC established a transmission pricing mechanism
consisting of an ERCOT system-wide component and a distance-sensitive component.
The ERCOT system-wide component provides that each load-serving entity in ERCOT
will pay a share of the ERCOT-wide transmission cost of service based on the
entity's load. The distance-sensitive component provides that a
distance-sensitive rate will be paid to utilities that own transmission
facilities, based on the impact of transmitting power and energy to loads. The
rates charged for using the transmission system are designed to ensure that all
market participants pay on a comparable basis to use the system. While all users
of the transmission grid pay rates that are comparably designed, the impact on
individual users will differ.
In May 1996, TU Electric filed with the PUC, under Docket 15638, its
transmission cost information and tariffs for open-access wholesale transmission
service. These tariffs also provide for generation-related ancillary services
necessary to support wholesale transactions. Company-specific proceedings to
determine transmission rates for each transmission provider within ERCOT were
concluded in 1996. In August 1997, the
V-42
<PAGE> 289
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PUC approved final tariffs for TU Electric and implemented rates for other
transmission providers within ERCOT.
As a result of the PUC rules, the organization and structure of ERCOT has
been changed to provide for equal governance among all wholesale electricity
market participants. These changes were made in order to facilitate wholesale
competition while ensuring continued reliability within ERCOT.
14 IMPAIRMENT OF ASSETS
In September 1995, the Company recorded the impairment of several
non-performing assets pursuant to SFAS 121 which prescribes a methodology for
assessing and measuring impairments in the carrying value of certain assets. The
September 1995 impairment of the Company's assets, including the partially
completed Twin Oak and Forest Grove lignite-fueled facilities of TU Electric,
and Chaco Energy Company's (Chaco's) coal reserves in New Mexico, as well as
several minor assets, aggregated $1,233 million ($802 million after-tax). The
Company has determined that the Twin Oak and Forest Grove lignite-fueled
facilities are not necessary to satisfy TU Electric's capacity requirements as
currently projected due to changes in load growth patterns and availability of
alternative generation. The impairment of TU Electric's lignite-fueled
facilities has been measured based on management's current expectations that
these assets will either be sold or constructed outside the traditional
regulated utility business. The Company has determined that the Chaco coal
reserves will no longer be developed through traditional means due to ample
availability of alternative fuels at favorable prices. Chaco's impairment was
measured based on a significant decrease in the market value of the coal
reserves as determined by an external study. A variety of options are being
considered with respect to the Chaco coal reserves. (See Note 15.) The
impairment of these assets involved a write-down to their estimated fair values
using a valuation study based on the discounted expected future cash flows from
the respective assets' use. With respect to the other assets impaired, fair
values were determined based on current market values of similar assets.
15 COMMITMENTS AND CONTINGENCIES
Capital Expenditures -- The Company's construction expenditures, excluding
AFUDC, are presently estimated at $886 million, $799 million and $852 million
for 1998, 1999 and 2000, respectively. Expenditures for nuclear fuel are
presently estimated at $104 million for 1998, $81 million for 1999 and $92
million for 2000.
The re-evaluation of growth expectations, the effects of inflation,
additional regulatory requirements and the availability of fuel, labor,
materials and capital may result in changes in estimated construction costs and
dates of completion. Commitments in connection with the construction program are
generally revocable subject to reimbursement to manufacturers for expenditures
incurred or other cancellation penalties.
Clean Air Act -- The federal Clean Air Act, as amended (Clean Air Act)
includes provisions which, among other things, place limits on the sulfur
dioxide emissions produced by generating units. To meet these sulfur dioxide
requirements, the Clean Air Act provides for the annual allocation of sulfur
dioxide emission allowances to utilities. Under the Clean Air Act, utilities are
permitted to transfer allowances within their own systems and to buy or sell
allowances from or to other utilities. The Environmental Protection Agency
grants a maximum number of allowances annually to TU Electric based on the
amount of emissions from units in operation during the period 1985 through 1987.
TU Electric's capital requirements have not been significantly affected by the
requirements of the Clean Air Act. Although TU Electric is unable to fully
determine the cost of compliance with the Clean Air Act, it is not expected to
have a significant impact on the company. Any additional capital expenditures,
as well as any increased operating costs, associated with these new requirements
are expected to be recoverable through rates, as similar costs have been
recovered in the past.
Purchased Power Contracts -- The System Companies have entered into
purchased power contracts to purchase portions of the generating output of
certain qualifying cogenerators and qualifying small power producers through the
year 2005. These contracts provide for capacity payments subject to a facility
meeting
V-43
<PAGE> 290
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain operating standards and energy payments based on the actual power taken
under the contracts. The cost of these and other purchased power contracts is
recovered currently through base rates, power cost and fuel recovery factors
applied to customer billings. Capacity payments under these contracts for the
years ended December 31, 1997, 1996 and 1995 were $240,174,000, $232,915,000,
and $229,340,000, respectively, for the Company.
Assuming operating standards are achieved, future capacity payments under
the agreements are estimated as follows:
<TABLE>
<CAPTION>
YEARS THOUSANDS OF DOLLARS
----- --------------------
<S> <C>
1998........................................................ $ 248,168
1999........................................................ 220,281
2000........................................................ 168,961
2001........................................................ 139,039
2002........................................................ 106,745
Thereafter.................................................. 140,345
----------
Total capacity payments........................... $1,023,539
==========
</TABLE>
Leases -- The System Companies have entered into operating leases covering
various facilities and properties including combustion turbines, transportation,
mining and data processing equipment, and office space. Lease costs charged to
operation expense for the years ended December 31, 1997, 1996 and 1995 were
$156,710,000, $144,553,000, and $141,775,000, respectively.
Future minimum lease commitments under such operating leases that have
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
YEARS THOUSANDS OF DOLLARS
----- --------------------
<S> <C>
1998........................................................ $ 83,729
1999........................................................ 73,024
2000........................................................ 64,161
2001........................................................ 96,387
2002........................................................ 55,428
Thereafter.................................................. 546,148
--------
Total minimum lease commitments................... $918,877
========
</TABLE>
Financial Guarantees -- TU Electric has entered into contracts with public
agencies to purchase cooling water for use in the generation of electric energy.
In connection with certain contracts, TU Electric has agreed, in effect, to
guarantee the principal, $30,005,000 at December 31, 1997, and interest on bonds
issued to finance the reservoirs from which the water is supplied. The bonds
mature at various dates through 2011 and have interest rates ranging from 5 1/2%
to 7%. TU Electric is required to make periodic payments equal to such principal
and interest, including amounts assumed by a third party and reimbursed to TU
Electric, for the years 1998 through 2001 as follows: $4,435,000 for each of the
years 1998 and 1999, $4,419,000 for 2000 and $4,422,000 for 2001. Payments made
by TU Electric, net of amounts assumed by a third party under such contracts,
for 1997, 1996 and 1995 were $3,750,000, $3,548,000, and $3,628,000,
respectively. In addition, TU Electric is obligated to pay certain variable
costs of operating and maintaining the reservoirs. TU Electric has assigned to a
municipality all contract rights and obligations of TU Electric in connection
with $69,395,000 remaining principal amount of bonds at December 31, 1997,
issued for similar purposes which had previously been guaranteed by TU Electric.
TU Electric is, however, contingently liable in the unlikely event of default by
the municipality. The Company and/or its subsidiaries are the guarantor on
various commitments and obligations of others aggregating some $45,000,000 at
December 31, 1997.
Chaco Coal Properties -- Chaco has a coal lease agreement for the rights to
certain surface minable coal reserves located in New Mexico. The agreement
encompasses a minimum of 228 million tons of coal with
V-44
<PAGE> 291
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions for minimum advance royalty payments of approximately $16 million per
year through 2017. The Company has entered into a surety agreement to assure the
performance by Chaco with respect to this agreement. Because of the present
ample availability of western coal at favorable prices from other mines, Chaco
has delayed plans to commence mining operations, and accordingly, is reassessing
its alternatives with respect to its coal properties, including seeking
purchasers thereof. (See Note 14.)
Nuclear Insurance -- With regard to liability coverage, the Price-Anderson
Act (Act) provides financial protection for the public in the event of a
significant nuclear power plant incident. The Act sets the statutory limit of
public liability for a single nuclear incident currently at $8.9 billion and
requires nuclear power plant operators to provide financial protection for this
amount. As required, TU Electric provides this financial protection for a
nuclear incident at Comanche Peak resulting in public bodily injury and property
damage through a combination of private insurance and industry-wide
retrospective payment plans. As the first layer of financial protection, TU
Electric has purchased $200 million of liability insurance from American Nuclear
Insurers (ANI), which provides such insurance on behalf of a major stock
insurance pool, Nuclear Energy Liability Insurance Association. The second layer
of financial protection is provided under an industry-wide retrospective payment
program called Secondary Financial Protection (SFP).
Under the SFP, each operating licensed reactor in the United States is
subject to an assessment of up to $79.275 million, subject to increases for
inflation every five years, in the event of a nuclear incident at any nuclear
plant in the United States. Assessments are limited to $10 million per operating
licensed reactor per year per incident. All assessments under the SFP are
subject to a 3% insurance premium tax which is not included in the amounts
above.
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.06 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and stable
condition, to decontaminate it pursuant to a plan submitted to and approved by
the NRC before the proceeds can be used for plant repair or restoration or to
provide for premature decommissioning. TU Electric maintains nuclear
decontamination and property damage insurance for Comanche Peak in the amount of
$4.1 billion, above which TU Electric is self-insured. The primary layer of
coverage of $500 million is provided by Nuclear Electric Insurance Limited
(NEIL), a nuclear electric utility industry mutual insurance company. The
remaining coverage includes premature decommissioning coverage and is provided
by ANI and Mutual Atomic Energy Liability Underwriters (MAELU) in the amount of
$1.1 billion and additional insurance from NEIL in the amount of $2.5 billion.
TU Electric is subject to a maximum annual assessment from NEIL of $26 million
in the event NML's and/or NEIL's losses under this type of insurance for major
incidents at nuclear plants participating in these programs exceed the
respective mutual's accumulated funds and reinsurance.
TU Electric maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than seventeen
weeks as a result of covered direct physical damage. The coverage provides for
weekly payments of $3.5 million for the first fifty-eight weeks and $2.8 million
for the next 104 weeks for each outage, respectively, after the initial
seventeen week period. The total maximum coverage is $494 million per unit. The
coverage amounts applicable to each unit will be reduced to 80% if both units
are out of service at the same time as a result of the same accident. Under this
coverage, TU Electric is subject to a maximum annual assessment of $9 million
per year.
Gas Purchase Contracts -- Texas Utilities Fuel Company (Fuel Company) buys
gas under long-term intrastate contracts in order to assure reliable supply to
its customers. Many of these contracts require minimum purchases ("take-or-pay")
of gas. Based on Fuel Company's estimated gas demand, which assumes normal
weather conditions, requisite gas purchases are expected to substantially
satisfy purchase obligations for the year 1998 and thereafter.
V-45
<PAGE> 292
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lone Star Gas buys gas under long-term, intrastate contracts in order to
assure reliable supply to its customers. Many of these contracts require minimum
purchases of gas. Lone Star Gas has made accruals for payments that may be
required for settlement of gas-purchase contract claims asserted or that are
probable of assertion. Lone Star Gas continually evaluates its position relative
to asserted and unasserted claims, above-market prices or future commitments.
Management believes that Lone Star Gas has not incurred losses for which
reserves should be provided at December 31, 1997. Based on estimated gas demand,
which assumes normal weather conditions, requisite gas purchases are expected to
substantially satisfy purchase obligations for the year 1998 and thereafter.
Nuclear Decommissioning and Disposal of Spent Fuel -- TU Electric has
established a reserve, charged to depreciation expense and included in
accumulated depreciation, for the decommissioning of Comanche Peak, whereby
decommissioning costs are being recovered from customers over the life of the
plant and deposited in external trust funds (included in other investments). At
December 31, 1997, such reserve totaled $120,452,000 which includes an accrual
of $18,179,000 for the year ended December 31, 1997. As of December 31, 1997,
the market value of deposits in the external trust for decommissioning of
Comanche Peak was $160,062,000. Any difference between the market value of the
external trust fund and the decommissioning reserve, that represents unrealized
gains or losses of the trust fund, is treated as a regulatory asset or a
regulatory liability. Realized earnings on funds deposited in the external trust
are recognized in the reserve. Based on a site-specific study completed during
1997 using the prompt dismantlement method and then-current dollars,
decommissioning costs for Comanche Peak Unit 1, and Unit 2 and common facilities
were estimated to be $271,000,000 and $404,000,000, respectively.
Decommissioning activities are projected to begin in 2030 and 2033 for
Comanche Peak Unit 1, and Unit 2 and common facilities, respectively. TU
Electric is recovering decommissioning costs based upon a 1992 site-specific
study through rates placed in effect under Docket 11735 (see Note 13). Actual
decommissioning costs are expected to differ from estimates due to changes in
the assumed dates of decommissioning activities, regulatory requirements,
technology and costs of labor, materials and equipment. In addition, the
marketable fixed income debt and equity securities in which assets of the
external trust are invested are subject to interest rate and equity price
sensitivity.
TU Electric has a contract with the United States Department of Energy
(DOE) for the future disposal of spent nuclear fuel. In December 1996, the DOE
notified TU Electric that it did not expect to meet its obligation to begin
acceptance of spent nuclear fuel by 1998. TU Electric is unable to predict what
impact, if any, the DOE delay will have on TU Electric's future operations. The
disposal fee is at a cost to TU Electric of one mill per kilowatt-hour of
Comanche Peak net generation and is included in nuclear fuel expense.
GENERAL
In addition to the above, the Company and System Companies are involved in
various legal and administrative proceedings which, in the opinion of the
Company, should not have a material effect upon its financial position, results
of operation or cash flows.
V-46
<PAGE> 293
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of the Company's
significant financial instruments at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
On balance sheet assets (liabilities):
Long-term debt (including current
maturities)........................... $(9,531,450) $(9,932,157) $(9,024,187) $(9,406,944)
TU Electric obligated, mandatorily
redeemable, preferred securities of
subsidiary trusts holding solely
debentures of TU Electric............. (875,146) (913,447) (381,311) (395,091)
Preferred stock of subsidiary subject to
mandatory redemption.................. (20,600) (22,019) (238,391) (250,098)
Other investments........................ 241,959 248,980 194,652 191,435
LESOP note receivable.................... 250,000 280,910 250,000 262,175
Off-balance sheet assets (liabilities):
Financial guarantees..................... (144,732) (148,628) (107,000) (111,000)
Interest rate swaps...................... - (56,529) - (32,312)
Currency swap*........................... - 76,420 - (1,557)
</TABLE>
- ---------------
* The foreign currency swap is a hedge of a foreign currency transaction. (See
Note 8.)
The fair values of long-term debt and preferred stock subject to mandatory
redemption are estimated at the lesser of either the call price or the market
value as determined by quoted market prices, where available, or, where not
available the present value of future cash flows discounted at rates consistent
with comparable maturities for credit risk. The fair values of preferred
securities are based on quoted market prices. The carrying amounts reflected in
the Consolidated Balance Sheets for financial assets classified as current
assets and the carrying amounts for financial liabilities classified as current
liabilities approximate fair value due to the short maturity of such
instruments.
Other investments include deposits in an external trust fund for nuclear
decommissioning of Comanche Peak. The trust funds are invested primarily in
fixed income debt and equity securities, which are considered as
available-for-sale. Any unrealized gains or losses are treated as regulatory
assets or regulatory liabilities, respectively.
Common stock -- net has been reduced by the note receivable from the
trustee of the leveraged employee stock ownership provision of the Thrift Plan.
The fair value of such note is estimated at the lesser of the Company's call
price or the present value of future cash flows discounted at rates consistent
with comparable maturities adjusted for credit risk.
The fair value of the financial guarantees is based on the present value of
the instruments' approximate cash flows discounted at the year-end risk free
rate for issues of comparable maturities adjusted for credit risk.
Fair values for the System Companies' off-balance-sheet instruments
(interest rate and currency swaps) are based either on quotes or the cost to
terminate the agreements.
The fair values of other financial instruments for which carrying amounts
and fair values have not been presented are not materially different than their
related carrying amounts.
V-47
<PAGE> 294
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17 SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
In the opinion of the Company, the information below includes all
adjustments (constituting only normal recurring accruals) necessary to a fair
statement of such amounts. Quarterly results are not necessarily indicative of
expectations for a full year's operations because of seasonal and other factors,
including rate changes, variations in maintenance and other operating expense
patterns and the charges for regulatory disallowances. Certain quarterly
information has been reclassified to conform to the current year presentation.
For additional information regarding the charges for regulatory disallowances,
see Note 13.
<TABLE>
<CAPTION>
BASIC EARNINGS
PER SHARE OF
OPERATING REVENUES OPERATING INCOME NET INCOME COMMON STOCK*
----------------------- ----------------------- ------------------- ---------------
QUARTER ENDED 1997 1996 1997 1996 1997 1996 1997 1996
------------- ---------- ---------- ---------- ---------- -------- -------- ------ ------
THOUSANDS OF DOLLARS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31............. $1,493,804 $1,463,900 $ 381,807 $ 414,938 $114,799 $126,074 $ 0.51 $ 0.56
June 30.............. 1,588,485 1,691,313 459,929 535,047 160,746 202,957 0.72 0.90
September 30......... 2,264,945 1,930,097 684,063 743,610 289,610 357,983 1.24 1.59
December 31.......... 2,598,374 1,465,618 380,872 309,395 95,299 66,592 0.39 0.30
---------- ---------- ---------- ---------- -------- --------
$7,945,608 $6,550,928 $1,906,671 $2,002,990 $660,454 $753,606
========== ========== ========== ========== ======== ========
</TABLE>
- ---------------
* The sum of the quarters may not equal annual earnings per share due to
rounding. Diluted earnings per share for all quarters are not different from
basic earnings per share.
The difference in operating income for the third quarter 1997 from amounts
previously reported reflects the reclassification of certain costs by ENSERCH to
conform to the Company's presentation.
V-48
<PAGE> 295
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total assets -- end of year.......................... $24,874,129 $21,397,655 $21,535,851 $20,893,408 $21,518,128
Property, plant & equipment -- gross -- end of
year............................................... $26,579,187 $24,931,239 $24,911,787 $24,206,351 $23,836,729
Accumulated depreciation and amortization -- end of
year............................................. 7,172,152 6,496,724 5,857,580 5,228,423 4,710,398
Reserve for regulatory disallowances -- end of
year............................................. 836,005 836,005 1,308,460 1,308,460 1,308,460
Construction expenditures (including allowance for
funds used during construction).................... 586,097 434,139 434,338 444,245 871,450
Capitalization -- end of year
Long-term debt, less amounts due currently......... $ 8,759,379 $ 8,668,111 $ 9,174,575 $ 7,888,413 $ 8,379,826
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding
solely debentures of TU Electric................. 875,146 381,311 381,476 - -
Preferred stock of subsidiaries:
Not subject to mandatory redemption.............. 304,194 464,427 489,695 870,190 1,083,008
Subject to mandatory redemption.................. 20,600 238,391 263,196 387,482 396,917
Common stock equity................................ 6,843,062 6,032,913 5,731,753 6,490,047 6,570,993
----------- ----------- ----------- ----------- -----------
Total........................................ $16,802,381 $15,785,153 $16,040,695 $15,636,132 $16,430,744
=========== =========== =========== =========== ===========
Capitalization ratios -- end of year
Long-term debt, less amounts due currently......... 52.1% 54.9% 57.2% 50.5% 51.0%
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding
solely debentures of TU Electric................. 5.2 2.4 2.4 - -
Preferred stock of subsidiaries.................... 2.0 4.5 4.7 8.0 9.0
Common stock equity................................ 40.7 38.2 35.7 41.5 40.0
----------- ----------- ----------- ----------- -----------
Total........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== ===========
Embedded interest cost on long-term debt -- end of
year............................................... 7.9% 8.1% 8.4% 8.7% 8.7%
Embedded distribution cost on TU Electric obligated,
mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of TU
Electric -- end of year............................ 8.3% 8.7% 8.6% -% -%
Embedded dividend cost on preferred stock of
subsidiaries -- end of year........................ 9.2% 7.5% 7.4% 7.5% 7.6%
Net income (loss).................................... $ 660,454 $ 753,606 $ (138,645) $ 542,799 $ 368,660
Dividends declared on common stock................... $ 496,244 $ 456,059 $ 634,613 $ 695,590 $ 682,438
Common stock data
Shares outstanding -- average...................... 230,957,999 225,159,846 225,841,037 225,833,659 221,555,218
Shares outstanding -- end of year.................. 245,237,559 224,602,557 225,841,037 225,841,037 224,345,422
Basic Earnings (loss) per share.................... $ 2.86 $ 3.35 $ (0.61) $ 2.40 $ 1.66
Diluted Earnings (loss) per share.................. $ 2.85 $ 3.35 $ (0.61) $ 2.40 $ 1.66
Dividends declared per share....................... $ 2.125 $ 2.025 $ 2.81 $ 3.08 $ 3.08
Book value per share -- end of year................ $ 27.90 $ 26.86 $ 25.38 $ 28.74 $ 29.29
Return on average common stock equity.............. 10.3% 12.8% (2.3)% 8.3% 5.6%
Ratio of earnings to fixed charges:
Pre-tax............................................ 2.3 2.4 0.8 2.3 1.9
After-tax.......................................... 1.8 2.0 0.9 1.9 1.6
Ratio of earnings to combined fixed charges and
preferred dividends................................ 2.2 2.2 .7 1.9 1.6
Allowance for funds used during construction as
percent of net income.............................. 2.1% 1.7% -% 4.1% 71.4%
</TABLE>
V-49
<PAGE> 296
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain financial statistics for 1997 were affected by the August 1997
acquisition of ENSERCH and the November 1997 acquisition of LCC: 1996 and 1995
were affected by the December 1995 acquisition of Eastern Energy; for the year
1995, were affected by recording of the impairment of certain assets (see Note
14 to Consolidated Financial Statements); and for the year 1993, were affected
by TU Electric recording a regulatory disallowance in a rate order issued by the
Public Utility Commission of Texas in Docket 11735 (see Note 13 to Consolidated
Financial Statements). Shares outstanding assuming dilution for 1997 was
231,957,491. There were no additional diluted shares for any of the other prior
periods presented.
V-50
<PAGE> 297
APPENDIX VI
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
TEG GROUP INFORMATION
Although Texas Utilities has included information concerning The Energy
Group insofar as it is known or reasonably available to Texas Utilities, Texas
Utilities is not currently affiliated with The Energy Group and The Energy Group
has not to date permitted access by Texas Utilities to The Energy Group's books
and records. The Energy Group has provided Texas Utilities with limited balance
sheet information in response to data requests. Therefore, only limited
information concerning The Energy Group which has not been made public is
available to Texas Utilities. Although Texas Utilities has no knowledge that
would indicate that information relating to The Energy Group contained or
incorporated by reference in this Offer Document in reliance upon publicly
available information or in response to data requests are inaccurate or
incomplete, Texas Utilities was not involved in the preparation of such
information and statements and, for the foregoing reasons, is not in a position
to verify any such information or statements. Accordingly, Texas Utilities takes
no responsibility for the accuracy of such information or statements.
PRO FORMA FINANCIAL INFORMATION OF TEXAS UTILITIES
Texas Utilities' financial information for the year ended 31 December 1997
has been combined with the financial information for the TEG Group's Businesses
to be Acquired. The Energy Group publishes its consolidated financial statements
based on United Kingdom generally accepted accounting principles (UK GAAP)
denominated in pounds sterling. The Energy Group has a March 31 fiscal year.
Public financial information of The Energy Group for the period ended 31
December 1997 is not in sufficient detail to allow separation of Peabody's
financial information. Therefore, The Energy Group's semi-annual financial
statements as of 30 September 1997, and for the six months then ended, which are
more complete, have been combined with its statement of income for the six
months ended 31 March 1997, and have been used for the purpose of presenting pro
forma financial information. The Acquisition will be treated as a purchase for
accounting purposes. The purchase accounting adjustments contained herein are
preliminary and represent estimates based on information available to Texas
Utilities. A final determination of the required purchase accounting adjustments
cannot be made at this time; following the Acquisition, a determination of the
fair value of assets acquired and liabilities assumed will be made.
The following unaudited pro forma financial statements assume 100%
acquisition of the TEG Group's Businesses to be Acquired following the Peabody
Sale and further assume that 10% of The Energy Group ordinary shares are
exchanged for Texas Utilities shares. The unaudited condensed pro forma balance
sheet as of 31 December 1997 is presented as if the Acquisition had occurred on
that date. The unaudited pro forma statement of income for the year ended 31
December 1997 assumes that the Acquisition and Peabody Sale occurred at the
beginning of the year.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of Texas Utilities and The Energy Group
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Texas Utilities and The Energy Group incorporated by reference or
included herein and "Pro Forma Financial Information of Texas Utilities and the
TEG Group's Businesses to be Acquired" included elsewhere herein. The unaudited
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.
Amounts denominated in UK pounds sterling are translated to US dollars at
the rate of L1=$1.64, which was the exchange rate at 30 September 1997 and the
average exchange rate for the year then ended.
VI-1
<PAGE> 298
TEXAS UTILITIES
UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED 31 DECEMBER 1997
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TEG GROUP'S
TEXAS TEXAS BUSINESSES TEXAS
UTILITIES UTILITIES TO BE PRO FORMA UTILITIES
HISTORICAL ADJUSTMENTS(A) ADJUSTED ACQUIRED(B) ADJUSTMENTS PRO FORMA
---------- -------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues........ $ 7,946 $ 1,370 $ 9,316 $ 5,228 $ 14,544
$(233)(h)
Operating Expenses........ 6,039 1,306 7,345 4,708 79(d) 11,899
-------- ------- -------- ------- ----- --------
Operating Income.......... 1,907 64 1,971 520 154 2,645
Other Income
(Deductions) -- Net..... (18) 6 (12) 129 117
-------- ------- -------- ------- ----- --------
Income before Interest and
Income Taxes............ 1,889 70 1,959 649 154 2,762
Interest and Other
Charges................. 852 61 913 265 429(f) 1,607
-------- ------- -------- ------- ----- --------
Income before Income
Taxes................... 1,037 9 1,046 384 (275) 1,155
Income Tax Expense........ 377 8 385 144 (152)(i) 377
-------- ------- -------- ------- ----- --------
Income before
Extraordinary Item...... $ 660 1 661 $ 240 $(123) $ 778(g)
======== ======= ======== ======= ===== ========
Average shares of Common
Stock Outstanding
(thousands)............. 230,958 14,280 245,238 18,925(e) 264,163
Per Share of Common Stock
Basic earnings.......... $ 2.86 $ 2.70 $ 2.95
Diluted earnings........ $ 2.85 $ 2.68 $ 2.93
</TABLE>
See notes.
VI-2
<PAGE> 299
TEXAS UTILITIES
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
31 DECEMBER 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
TEG
GROUP'S
TEXAS BUSINESSES TEXAS
UTILITIES TO BE UTILITIES
HISTORICAL ACQUIRED(B) ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Property, Plant and Equipment, net............ $18,571 $ 2,755 $ $21,326
Investments................................... 851 79 930
Goodwill...................................... 1,424 1,715 (1,715)(d) 7,641
6,217(d)
Current Assets:
Cash and cash equivalents................... 44 3,925 (2,083)(f) 1,922
36(d)
Accounts receivable......................... 981 1,383 2,364
Inventories................................. 448 249 697
Gas marketing risk management assets........ 366 366
Other....................................... 156 18 174
------- ------- ------- -------
Total............................... 1,995 5,575 (2,047) 5,523
Deferred Debits............................... 2,033 169 87(f) 2,289
------- ------- ------- -------
Total Assets........................ $24,874 $10,293 $ 2,542 $37,709
======= ======= ======= =======
Capitalization:
Common stock equity......................... $ 6,843 $ 4,171 $(4,171)(d) $ 7,598
757(e)
(2)(c)
Preferred stock of subsidiaries............. 325 325
Mandatorily redeemable preferred securities
of subsidiary trusts..................... 875 875
6,616(e)
-------
Long-term debt, less amounts due
currently................................ 8,759 2,649 (2,083)(f) 15,941
------- ------- ------- -------
Total............................... 16,802 6,820 1,117 24,739
Current Liabilities:
Notes payable and long-term
debt due currently....................... 1,387 1,178 2,565
Accounts payable............................ 880 880
Gas marketing risk management liabilities... 357 357
87(f)
Other....................................... 898 1,323 138(c) 2,446
------- ------- ------- -------
Total............................... 3,522 2,501 225 6,248
Accumulated Deferred Income Taxes............. 2,989 690 3,679
Other Deferred Credits and
Noncurrent Liabilities...................... 1,561 282 1,200(d) 3,043
------- ------- ------- -------
Total Capitalization and
Liabilities....................... $24,874 $10,293 $ 2,542 $37,709
======= ======= ======= =======
</TABLE>
See notes.
VI-3
<PAGE> 300
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) On August 5, 1997 Texas Utilities completed the acquisition of ENSERCH and
on November 21, 1997 Texas Utilities completed the acquisition of 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 date of acquisition. This adjustment assumes that the
acquisitions of ENSERCH and LCC were made at the beginning of the year and
consists of such companies' operations for the period from January 1, 1997
to date of acquisition, including amortization of goodwill and purchase
accounting adjustments.
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, these share repurchases have been treated as if they had occurred
at the beginning of the year; 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 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 before Income Taxes...................... (8) 24 (7) 9
Income Tax Expense.............................. 1 10 (3) 8
------ ----- ------ -------
Net Income...................................... $ (9) $ 14 $ (4) $ 1
====== ===== ====== =======
Average Shares of Common Stock Outstanding
(thousands)..................................... 9,430 7,771 (2,921) 14,280
</TABLE>
(b) The Energy Group historical financial statements have been adjusted to
reflect the Peabody Sale. See "Pro Forma Financial Information of the TEG
Group's Businesses to be Acquired" included elsewhere herein. Certain
amounts have been reclassified to conform to Texas Utilities' financial
statement presentation.
(c) Represents estimated costs associated with the Acquisition. Includes
estimated expenses of $2 million to be incurred by Texas Utilities for
legal, accounting, printing and similar expenses relating to the
registration of Texas Utilities Common Stock, which will be charged
directly to Common Stock equity as stock issuance costs, and $136 million
for Stamp Duty, financial advisory and other payments as a result of the
Acquisition. Does not include cash payments for executive contracts and
other benefits, severance and out placement costs for employees that may
result from the Acquisition.
VI-4
<PAGE> 301
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(d) 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 e)................. $7,373
Estimated costs of Acquisition (see Note c)................. 136
Proceeds from exercise of The Energy Group stock options.... (36)
Estimated purchase accounting adjustments:
Write off The Energy Group goodwill....................... 1,715
Record present value adjustments for commitments,
obligations and contracts.............................. 1,200
------
Total............................................. 10,388
Net assets of the TEG Group's Businesses to be Acquired..... 4,171
------
Goodwill.................................................... $6,217
======
Annual amortization over 40 years........................... $ 155
Less goodwill amortization recorded by the TEG Group's
Businesses to be Acquired................................. 76
------
Incremental goodwill amortization........................... $ 79
======
</TABLE>
(e) Cost of Acquisition and The Energy Group Ordinary Shares to be converted
into New Texas Utilities Shares, in millions of US dollars, except per
share amounts:
<TABLE>
<CAPTION>
PURCHASED FOR
-----------------
SHARES CASH SHARES
------- ------- -------
<S> <C> <C> <C>
The Energy Group Ordinary Shares outstanding at December
31, 1997 (000)........................................ 520,858
The Energy Group Ordinary Shares to be issued in
connection with stock plans (000)..................... 9,507
-------
Pro forma The Energy Group Ordinary Shares (000)...... 530,365 477,329 53,036
Per share price 840p ($13.86) cash, 865p ($14.27)
stock................................................. $ 13.86 $ 14.27
</TABLE>
<TABLE>
<CAPTION>
TOTAL CASH SHARES
------- ------- -------
<S> <C> <C> <C>
Total purchase price, assuming 100% acceptance.......... $ 7,373 $ 6,616 $ 757
Assumed per share value of Texas Utilities Common Stock.................... $ 40
-------
Assumed New Texas Utilities Shares to be issued............................ 18,925
=======
</TABLE>
The actual number of shares to be issued upon exchange of The Energy Group
Ordinary Shares in the Acquisition will be determined by reference to the
exchange ratio and the actual number of shares of The Energy Group Ordinary
Shares submitted for exchange into New Texas Utilities Shares. The per
share value of New Texas Utilities Shares to be issued will be based on the
average of the closing prices of Texas Utilities Common Stock on the 20
dealing days ending on the Calculation Day and the Noon Buying Rate on the
Calculation Day.
(f) The cash cost of the Acquisition will be financed as follows:
<TABLE>
<CAPTION>
ANNUAL
AMOUNT INTEREST
------ --------
<S> <C> <C>
Use of The Energy Group cash................................ $2,083 $ --
TU Acquisitions borrowing at 8.5%........................... 2,348 200
Texas Utilities borrowing at 6.6%........................... 2,185 144
------ ----
Total............................................. $6,616 $344
====== ====
</TABLE>
Financing fees to obtain the Acquisition debt will total $87 million.
Amortization in the first year is $15 million.
VI-5
<PAGE> 302
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The Energy Group's annual interest requirement on its debt outstanding at
30 September 1997 is L176 million or $288 million; some $23 million greater
than interest expense incurred by The Energy Group's Businesses to be
Acquired.
Interest on the present value of commitments, obligations and contracts is
$47 million for the year, including the impact of non-deductible interest
for tax purposes.
The total pro forma increase to interest and other charges is $429 million.
(g) A final determination of the required purchase accounting adjustments
cannot be made at this time; following the Acquisition, a determination of
the fair value and tax basis of assets acquired and liabilities assumed
will be made. The earnings results will vary from the pro forma earnings
shown.
Estimated costs to be incurred by Texas Utilities and The Energy Group as a
result of the Acquisition and Peabody Sale have been excluded from the
Unaudited Pro Forma Statements of Income. The unaudited pro forma statement
of income does not reflect any operating efficiencies and annual cost
savings Texas Utilities expects to achieve as a result of the Acquisition.
(h) Represents reversal of certain operating expenses recorded by The TEG
Group's Businesses to be Acquired, for which a liability for the present
value of commitments, obligations and contracts will be 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.
(i) Represents taxes on temporary differences at the effective rate of 31.5 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.
VI-6
<PAGE> 303
PRO FORMA FINANCIAL INFORMATION
OF THE TEG GROUP'S BUSINESSES TO BE ACQUIRED
The Energy Group publishes its financial statements based on United Kingdom
generally accepted accounting principles (UK GAAP) denominated in pounds
sterling. The Energy Group has a 31 March fiscal year end. Public financial
information of The Energy Group for the period ended 31 December 1997 is not in
sufficient detail to allow separation of Peabody's financial information.
Therefore, The Energy Group's semi-annual financial statements as of 30
September 1997 and for the six months then ended, which are more complete, have
been combined with its statement of income for the six months ended 31 March
1997, and have been used for the purpose of presenting pro forma financial
information.
The following unaudited condensed pro forma financial statements give effect to
adjustments to convert The Energy Group's financial statements to the basis of
United States generally accepted accounting principles (US GAAP) and to the
Peabody Sale. The financial information for the resulting businesses to be
acquired in the Acquisition is converted to US dollars for purposes of combining
with Texas Utilities' financial information. Amounts denominated in UK pounds
sterling are translated to US dollars at the rate of L1 = $1.64, which was the
exchange rate at 30 September 1997 and the average exchange rate for the year
then ended. The unaudited condensed pro forma balance sheet as of 30 September
1997 is presented as if the Peabody Sale had occurred on that date. The
unaudited condensed pro forma statement of income for the year ended 30
September 1997 is presented as if the Peabody Sale had occurred at the beginning
of the period.
The unaudited pro forma financial statements are based on the assumptions set
forth in the accompanying notes and should be read in conjunction with the
historical financial statements of The Energy Group and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of The Energy
Group included in Appendix IV hereto. The unaudited pro forma statement of
income is not necessarily indicative of the financial results that would have
occurred had the Peabody Sale been consummated on the indicated dates, nor are
they necessarily indicative of future financial results.
VI-7
<PAGE> 304
THE TEG GROUP'S BUSINESSES TO BE ACQUIRED
UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UK GAAP US GAAP
-------------------------------------- ----------------------------------------------------
SIX MONTHS ENDED
----------------------- YEAR ENDED ADJUST TO YEAR ENDED DEDUCT
31 MARCH 30 SEPTEMBER 30 SEPTEMBER US 30 SEPTEMBER PEABODY
1997 1997 1997 GAAP(a) 1997 (b) AND (c) ADJUSTMENTS
-------- ------------ ------------ --------- ------------ ----------- -----------
L L L L L L L
<S> <C> <C> <C> <C> <C> <C> <C>
Turnover................ 2,519 2,007 4,526 4,526 (1,338)
Costs and overheads less
other income.......... 2,222 1,836 4,058 9 4,067 (1,187) (9)(e)
----- ----- ----- --- ----- ------ ---
Operating profit........ 297 171 468 (9) 459 (151) 9
Interest income......... 35 44 79 79
----- ----- ----- --- ----- ------ ---
Income before interest
and income taxes...... 332 215 547 (9) 538 (151) 9
Interest payable and
similar charges....... 72 109 181 14 195 (33)
----- ----- ----- --- ----- ------ ---
Profit on ordinary
activities before
taxation.............. 260 106 366 (23) 343 (118) 9
Taxation charge for
period -- on
results............... (81) (28) (109) 6 (103) 41 (26)(f)
----- ----- ----- --- ----- ------ ---
Profit (loss) before
extraordinary item.... 179 78 257 (17) 240 (77) (17)
Extraordinary item --
windfall profit
taxation.............. (112) (112) (112)
----- ----- ----- --- ----- ------ ---
Net profit (loss)....... 179 (34) 145 (17) 128 (77) (17)
===== ===== ===== === ===== ====== ===
Earnings (loss) per
ordinary share:
Before extraordinary
item.................. 34.5p 15.0p 49.5p 46.1 p
Extraordinary item...... (21.5) (21.5) (21.5)
----- ----- -----
Total........... 34.5p (6.5)p 28.0p 24.6 p
----- ----- -----
Dividends declared per
ordinary share........ 5.5p 8.0p 13.5p 13.5p
<CAPTION>
US GAAP
------------------------
THE TEG THE TEG
GROUP'S GROUP'S
BUSINESSES BUSINESSES
TO BE TO BE
ACQUIRED ACQUIRED(d)
---------- -----------
L $
<S> <C> <C>
Turnover................ 3,188 5,228
Costs and overheads less
other income.......... 2,871 4,708
----- -----
Operating profit........ 317 520
Interest income......... 79 129
----- -----
Income before interest
and income taxes...... 396 649
Interest payable and
similar charges....... 162 265
----- -----
Profit on ordinary
activities before
taxation.............. 234 384
Taxation charge for
period -- on
results............... (88) (144)
----- -----
Profit (loss) before
extraordinary item.... 146 240
Extraordinary item --
windfall profit
taxation.............. (112) (184)
----- -----
Net profit (loss)....... 34 56
===== =====
Earnings (loss) per
ordinary share:
Before extraordinary
item.................. 28.0p $ .46
Extraordinary item...... (21.5) (.35)
----- -----
Total........... 6.5p $ .11
----- -----
Dividends declared per
ordinary share........ 13.5p $ .22
</TABLE>
See notes.
VI-8
<PAGE> 305
THE TEG GROUP'S BUSINESSES TO BE ACQUIRED
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
30 SEPTEMBER 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
UK US PEABODY SALE(b) TEG GROUP'S TEG GROUP'S
GAAP GAAP ------------------ BUSINESSES BUSINESSES
HISTORICAL US GAAP HISTORICAL PEABODY SALE TO BE TO BE
TEG ADJUSTMENTS(a) TEG BALANCES ENTRIES ACQUIRED ACQUIRED(d)
---------- -------------- ---------- -------- ------- ----------- -----------
L L L L L L $
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Assets............. 3,986 3,986 (2,306) 1,680 2,755
Investments.............. 83 83 (35) 48 79
Goodwill................. 1,046 1,046 1,046 1,715
Current Assets:
Cash................... 895 895 (180) 1,270 1,985 3,256
Short-term deposits.... 408 408 408 669
Debtors................ 1,714 1,714 (871) 843 1,383
Stocks................. 309 309 (157) 152 249
Other.................. 11 11 11 18
----- ----- ----- ------ ----- ----- ------
Total.......... 3,337 3,337 (1,208) 1,270 3,399 5,575
----- ----- ----- ------ ----- ----- ------
Other Assets............. 110 110 (7) 103 169
----- ----- ----- ------ ----- ----- ------
Total Assets... 7,406 1,156 8,562 (3,556) 1,270 6,276 10,293
===== ===== ===== ====== ===== ===== ======
Capitalization:
Equity shareholders'
funds............... 1,726 805 2,531 (1,211) 1,223 2,543 4,171
Long-term loans........ 2,050 2,050 (435) 1,615 2,649
----- ----- ----- ------ ----- ----- ------
Total.......... 3,776 805 4,581 (1,646) 1,223 4,158 6,820
Current Liabilities:
Short-term borrowings
and
overdrafts.......... 718 718 718 1,178
Other creditors........ 1,406 1,406 (646) 47 807 1,323
----- ----- ----- ------ ----- ----- ------
Total.......... 2,124 2,124 (646) 47 1,525 2,501
Accumulated Deferred
Income Taxes........... 431 431 (10) 421 690
Provisions for
Liabilities and
Charges................ 1,506 (80) 1,426 (1,254) 172 282
----- ----- ----- ------ ----- ----- ------
Total
Capitalization
and
Liabilities... 7,406 1,156 8,562 (3,556) 1,270 6,276 10,293
===== ===== ===== ====== ===== ===== ======
</TABLE>
See notes.
VI-9
<PAGE> 306
THE TEG GROUP'S BUSINESSES TO BE ACQUIRED
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
(a) Reflects estimated adjustments relating to differences in accounting for
goodwill, 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 L1,270 million, and the
removal of Peabody's operating results from The Energy Group's statement of
income.
(c) Turnover and operating profit were published by The Energy Group. 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 30 September 1997
as to the balance sheet and at the average exchange rate for the year as to
the statement of income.
(e) Eliminate expenses of previous potential merger.
(f) Eliminate group relief provided by previous parent for nil consideration.
VI-10
<PAGE> 307
APPENDIX VII
CERTAIN MARKET, DIVIDEND AND EXCHANGE RATE INFORMATION
1 MARKET PRICE DATA
The principal trading markets for the Texas Utilities Common Stock are the
NYSE, CSE and PSE. The following table sets out for the periods indicated the
reported high and low prices on the NYSE Composite Tape and the Equivalent
prices for Energy Group Securities:
<TABLE>
<CAPTION>
TEXAS UTILITIES
PRICE PER
PRICE PER SHARE OF EQUIVALENT
TEXAS UTILITIES TEXAS UTILITIES PRICE PER EQUIVALENT ENERGY GROUP
COMMON STOCK ENERGY GROUP SHARE* ADS*
------------------ ------------------------------------ ----------------
HIGH LOW HIGH LOW HIGH LOW
------- ------- ---------------- ---------------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
First Quarter........... $35 $30 1/8 L-- $-- L-- $-- $-- $--
Second Quarter.......... 36 1/8 31 5/8
Third Quarter........... 35 32 5/8
Fourth Quarter.......... 41 1/4 34 1/4
1996:
First Quarter........... $42 7/8 $38 7/8
Second Quarter.......... 42 3/4 38 1/2
Third Quarter........... 43 3/4 39 3/8
Fourth Quarter.......... 42 1/8 38 3/4
1997:
First Quarter........... $42 $33 3/4
Second Quarter.......... 37 31 1/2
Third Quarter........... 33 3/16 33 1/2
Fourth Quarter..........
1998:
Through ............
</TABLE>
*Calculated by multiplying the Texas Utilities Common Stock price per share
by an assumed exchange ratio of -- New Texas Utilities Shares for each Energy
Group Share and -- New Texas Utilities Shares for each Energy Group ADS. Prices
for Energy Group Shares have been converted to pounds sterling based on an
assumed exchange rate of $-- per L1.
On 27 February 1998, the last day on which shares of Texas Utilities Common
Stock traded prior to the public announcement of the Texas Utilities Offer, the
closing price per share of Texas Utilities Common Stock on the NYSE Composite
Tape was $--.
Because the market price of Texas Utilities Common Stock is subject to
fluctuation, the market value of the New Texas Utilities Shares may be more or
less than the current estimate. When making their investment decision, holders
of Energy Group Securities are urged to obtain current market quotations for
Texas Utilities Common Stock.
VII-1
<PAGE> 308
The principal trading market for Energy Group Shares is the London Stock
Exchange and the principal trading market for Energy Group ADSs is the NYSE.
Energy Group Shares have been listed and traded on the London Stock Exchange and
Energy Group ADSs have been listed and traded on the NYSE since 24 February
1997. The following table sets out for the periods indicated, the reported high
and low Closing Prices for Energy Group Shares in pence and (on the conversion
basis described below) in US dollars, and high and low closing prices for Energy
Group ADSs on the NYSE as reported on the NYSE Composite Tape. Each Energy Group
ADS represents four Energy Group Shares.
<TABLE>
<CAPTION>
PRICE PER
ENERGY GROUP
PRICE PER ENERGY GROUP SHARE* ADS
-------------------------------- ------------
HIGH LOW HIGH LOW
-------------- -------------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1997:
First Quarter............................ L-- $-- L-- $-- $-- $--
Second Quarter...........................
Third Quarter............................
Fourth Quarter...........................
1998:
First Quarter (to - March)...............
Through ........................
</TABLE>
*Prices have been converted to US dollars based upon an assumed exchange
rate of $- per L1.
On 27 February 1998, the last dealing day prior to the announcement of the
Texas Utilities Offer, the Closing Price for Energy Group Shares was -, and the
closing price on the NYSE Composite Tape for the Energy Group ADSs was $-.
The following table shows the Closing Price for Energy Group Shares and the
closing price on the NYSE Composite Tape for shares of Texas Utilities Common
Stock, in each case for the first dealing day that both the London Stock
Exchange and the NYSE were open for business in each month from August 1997 to
March 1998, for 23 January 1998 (the last dealing day before the commencement of
the offer period) and for - March 1998 (the latest practicable date before
posting this Offer Document):
<TABLE>
<CAPTION>
PRICE PER SHARE
ENERGY GROUP OF TEXAS UTILITIES
SHARE PRICE COMMON STOCK
Date (IN PENCE) Date (in dollars)
---- ------------ ---------------- ------------------
<S> <C> <C> <C>
1 August 1997 -.- 1 August 1997 -.-
1 September 1997 -.- 2 September 1997 -.-
1 October 1997 -.- 1 October 1997 -.-
3 November 1997 -.- 3 November 1997 -.-
1 December 1997 -.- 1 December 1997 -.-
2 January 1998 -.- 2 January 1998 -.-
23 January 1998 -.- 23 January 1998 -.-
2 February 1998 -.- 2 February 1998 -.-
2 March 1998 -.- 2 March 1998 -.-
- - March 1998 -.- - March 1998 -.-
</TABLE>
VII-2
<PAGE> 309
2 DIVIDEND DATA
<TABLE>
<CAPTION>
DIVIDENDS DECLARED
---------------------------------------------------------------
HISTORICAL
------------------------------------
TEXAS PRO FORMA ENERGY GROUP
UTILITIES ENERGY GROUP EQUIVALENT*
--------- ------------------------ ------------------------
ORDINARY SHARE ADS ORDINARY SHARE ADS
---------------- ----- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended 31 December 1993................. $3.08 L $ L $ $
1994............ $3.08
1995............ $2.81
1996............ $2.03
1997............
</TABLE>
*Calculated by multiplying the dividends paid per share of Texas Utilities
Common Stock by an assumed exchange ratio of - New Texas Utilities Shares for
each Energy Group Share and - shares of New Texas Utilities Shares for each
Energy Group ADS. Dividends per equivalent Energy Group Share have been
converted from US dollars to pounds sterling at an assumed exchange rate of $ -
per L1.
Texas Utilities declared common stock dividends payable in cash in each
year since its incorporation in 1945. In February 1998, Texas Utilities declared
a regular quarterly dividend of 55 cents per share payable 1 April 1998 to
shareholders of record on - March 1998. [Holders of Energy Group Securities who
receive Texas Utilities Common Stock in connection with the Texas Utilities
Offer will not be entitled to this dividend or any other dividend subsequently
declared with a record date prior to the date the Texas Utilities Offer becomes
wholly unconditional.]
[History of TEG Dividends].
3 EXCHANGE RATE DATA
The following table shows, for the periods and dates indicated, certain
information regarding the exchange rate for the pound sterling, based on the
Noon Buying Rate, expressed in dollars per L1.
<TABLE>
<CAPTION>
PERIOD AVERAGE
YEAR ENDED 31 DECEMBER END RATE* HIGH LOW
---------------------- -------- ------- ------ ------
<S> <C> <C> <C> <C>
1993................................................
1994................................................
1995................................................
1996................................................
1997................................................
</TABLE>
- ---------------
* The average of the Noon Buying Rates on the last day of each month during the
period.
On 2 March 1998, the date of announcement of the original Texas Utilities
offer, the Noon Buying Rate for the pound sterling was $ - per L1.
VII-3
<PAGE> 310
APPENDIX VIII
ADDITIONAL INFORMATION
1 RESPONSIBILITY
(a) The Directors of TU Acquisitions (namely Erle Nye, Chairman and Chief
Executive of Texas Utilities, H. Jarrell Gibbs [ ], Michael J.
McNally [Chief Financial Officer of TU Acquisitions] and Robert A.
Wooldridge, [General Counsel to TU Acquisitions]), accept responsibility for
the information contained in this document, save that the only
responsibility accepted by them in respect of the information contained in
this document relating to the TEG Group, which has been compiled from
published sources, including the joint press announcement made by the Boards
of Texas Utilities and The Energy Group on 2 March 1998, has been to ensure
that such information has been correctly and fairly reproduced and
presented. Save as aforesaid, to the best of the knowledge and belief of the
Directors of TU Acquisitions (who have taken all reasonable care to ensure
that such is the case), the information contained in this document for which
they are responsible is in accordance with the facts and does not omit
anything likely to affect the import of such information.
(b) The statement set out in paragraph (a) above is included solely to comply
with the requirements of Rule 19.2 of the City Code and shall not be deemed
to establish or expand liability under the Securities Act.
2 DIRECTORS
(a) The Directors of TU Acquisitions are:
<TABLE>
<S> <C>
Erle Nye
H. Jarrell Gibbs
Michael J. McNally
Robert A. Wooldridge
</TABLE>
The registered office of TU Acquisitions is Kempson House, Camomile Street,
London EC3A 7AN.
(b) The Directors of The Energy Group are:
<TABLE>
<S> <C>
Derek C. Bonham -- Chairman
John F. Devaney -- Chief Executive -- Eastern
Irl F. Engelhardt -- Chief Executive -- Peabody
Eric E. Anstee -- Finance Director
Baroness Hogg -- Non-executive Director
David P. Nash -- Non-executive Director
John Neerhout, Jr. -- Non-executive Director
</TABLE>
3 PRINCIPAL PURCHASES
In accordance with normal United Kingdom practice, TU Acquisitions or its
nominees or brokers (acting as agents for TU Acquisitions) or a subsidiary of
Texas Utilities (other than TU Acquisitions) may make certain purchases of
Energy Group Securities outside the United States during the period in which the
Texas Utilities Offer remains open for acceptance, and affiliates of Merrill
Lynch [Note: LEHMAN TO CONFIRM WHETHER THEY NEED THIS RELIEF] will continue to
act as market makers and principal traders for Energy Group Shares on the London
Stock Exchange, pursuant to relief granted by the SEC staff from Rule 10b-13
under the Exchange Act. In accordance with the terms of this relief, among other
things, (i) such purchases may not be effected within the United States, (ii)
information regarding such purchases must be disclosed in the United States by
press release to the extent disclosure is required pursuant to the City Code,
and (iii) TU
VIII-1
<PAGE> 311
Acquisitions and any such other persons must comply with any applicable rules of
United Kingdom regulatory organisations.
4 SHAREHOLDINGS AND DEALINGS
In this paragraph:
"DISCLOSURE PERIOD" means the period commencing 26 January 1997 (the date
12 months prior to the commencement of the Offer period in relation to The
Energy Group) and ending on - - 1998 (the latest practicable date prior to the
publication of this document);
"RELEVANT ENERGY GROUP SECURITIES" means Energy Group Securities, including
any securities convertible into rights to subscribe for, or options (including
traded options) in respect of, or derivatives referenced to, such Energy Group
Securities;
"RELEVANT TEXAS UTILITIES SECURITIES" means Texas Utilities Common Stock,
including any securities convertible into rights to subscribe for, or options
(including traded options) in respect of, or derivatives referenced to, such
Texas Utilities Common Stock;
"ARRANGEMENT" includes indemnity or option arrangements, and any agreement
or understanding, formal or informal, of whatever nature which may be an
inducement to deal or refrain from dealing; and
"ASSOCIATE" means, in relation to any company, any member of the company's
group and any associated company of any member of the company's group, their
banks and financial and other professional advisers (including stockbrokers),
including persons controlling, controlled by or under the same control as such
banks or financial or other professional advisers, their directors and such
directors' close relatives and related trusts and their pension funds.
(A) SHAREHOLDINGS AND DEALINGS IN RELEVANT TEXAS UTILITIES SECURITIES
(a) Texas Utilities
(i) The holdings in relevant Texas Utilities securities including
interests in deferred incentive plans referenced to Texas Utilities
Common Stock in which the Directors of Texas Utilities and the
Directors of TU Acquisitions were interested as at [27 February] 1998
are set out in the table below:
<TABLE>
<CAPTION>
INTEREST IN BENEFIT PLANS
SHARES IN TEXAS REFERENCED TO SHARES OF
UTILITIES TEXAS UTILITIES
NAME COMMON STOCK COMMON STOCK
---- ------------------------- -------------------------
<S> <C> <C>
Jerry S. Farrington..................... 20,414 52,275
Bayard H. Friedman...................... 2,416 4,421
H. Jarrell Gibbs........................ 9,046 28,713
William H. Griffin...................... 30,000 4,421
Kernay Laday............................ 600 4,421
Margaret Maxey.......................... 5,097 4,421
Michael J. McNally...................... 9,012 22,172
James Middleton......................... 3,000 2,013
Erle Nye................................ 49,425 54,462
James E. Oesterricher................... 1,600 2,013
Charles R. Perry........................ 1,000 4,421
Herbert H. Richardson................... 1,700 1,791
Robert A. Wooldridge.................... 6005.241 --
</TABLE>
(ii) As at [26 January 1998] (the latest practicable date prior to
publication of this document) the Texas Utilities Deferred and
Incentive Compensation Plan held 524,465 shares of Texas Utilities
Common Stock;
VIII-2
<PAGE> 312
(iii)As at [26 January 1998] (the latest practicable date prior to
publication of this document), the Texas Utilities Deferred
Compensation Plan for the Outside Directors held 31,592 shares of
Texas Utilities Common Stock;
(iv) As at [25 February] (the latest practicable date prior to publication
of this document) the Texas Utilities Employees' Thrift Plan held
[6,907,028.09] shares of Texas Utilities Common Stock;
(v) As at [27 February 1998] (the latest practicable date prior to
publication of this document), the Texas Utilities Dividend
Reinvestment Plan held 8,378,795 shares of Texas Utilities Common
Stock;
(vi) As at [27 February 1998] (the latest practicable date prior to the
publication of this document), the Texas Utilities ENSAVE Plan held
[ ] shares of Texas Utilities Common Stock;
(vii) As at [27 February 1998] (the latest practicable date prior to the
publication of this document), Lehman Brothers was interested in
[ ] shares of Texas Utilities Common Stock;
(viii) As at [27 February 1998] (the latest practicable date prior to the
publication of this document), Merrill Lynch was interested in
[ ] shares of Texas Utilities Common Stock;
(ix) As at [27 February 1998] (the latest practicable date prior to the
publication of this document), The Texas Utilities Dividend
Reinvestment Plan was interested in [8,267,874] shares of Texas
Utilities Common Stock;
(x) As at [27 February 1998] (the latest practicable date prior to
publication of this document) members of Worsham, Forsythe &
Wooldridge, LLP were interested in the following shares of Texas
Utilities Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF TEXAS
NAME UTILITIES COMMON STOCK
---- -------------------------
<S> <C>
Robert A Wooldridge............................ [6005.241]
Timothy A Mack................................. [628,675]
Brian Dethrow (as beneficiary under trusts).... [705]
Earl F. Forsythe............................... [12,000]
Allen Nye...................................... [245.347]
Don Clevenger.................................. [21,065]
Jos I Worsham.................................. [21,181]
Christina Corbo................................ [20.838]
David C Lonergan (children's trust)............ [85.138]
Neil Anderson (held by children)............... [300]
</TABLE>
(xi) During the period from 26 January 1997 to [27 February] 1998, the
Directors of Texas Utilities and the Directors of TU Acquisitions have
dealt for value in shares of Texas Utilities Common Stock and
derivatives referenced to Texas Utilities Common stock as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES IN
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ------------------- -------
<S> <C> <C> <C> <C>
Jerry S August- Acquisition under Employees' Thrift 458 36.125-
Plan
Farrington December 1997 36.4375
August- Automatic Dividend reinvestment of 300 *
December 1997 derivative securities
Bayard H August- Automatic Dividend reinvestment of 40 *
Friedman December 1997 derivative securities
H Jarrell 01/10/97 Acquisition (Dividend reinvestment) 118 36.307
Gibbs under Employees' Thrift Plan
07/10/97 Contribution under Employees' Thrift 82 36.435
Plan
05/11/97 Contribution under Employees' Thrift 83 35.875
Plan
08/12/97 Contribution under Employees Thrift 62 40.187
Plan
</TABLE>
VIII-3
<PAGE> 313
<TABLE>
<CAPTION>
NUMBER OF SHARES IN
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ------------------- -------
<S> <C> <C> <C> <C>
02/01/98 Acquisition (shares held as cash) under 115 41.625
the Employees' Thrift Plan
02/01/98 Acquisition (shares held as cash) under 9 41.500
the Employees' Thrift Plan
02/01/98 Automatic Dividend reinvestment 1 41.191
09/02/98 Contribution under Employees' Thrift 72 40.687
Plan
01/10/97 Automatic dividend reinvestment 74 35.678
02/01/98 Automatic dividend reinvestment 68 41.191
01/10/97 Automatic dividend reinvestment 100 35.678
02/01/98 Automatic dividend reinvestment 93 41.191
William H August- Automatic dividend reinvestment of 40 *
Griffin December 1997 derivative securities
30.03.97 Purchase 5,000 34.875
06.06.97 Purchase 5,000 32.500
Kernay Laday August- Automatic dividend reinvestment of 40 *
December 1997 derivative securities
21.10.97 Sale 200 37.3125
Margaret N August- Automatic dividend reinvestment of 40 *
Maxey December 1997 derivative securities
18.03.97 Purchase 98 36.625
01.10.97 Purchase 35 35.679
02.01.98 Purchase 32 41.191
Michael J 08/09/97 Contribution under Employees' Thrift 66 35.250
McNally Plan
01/10/97 Dividend reinvestment under Employees' 13 36.307
Thrift Plan
07/10/98 Contribution under Employees' Thrift 64 36.435
Plan
05/11/97 Contribution under Employees' Thrift 21 35.875
Plan
02/01/98 Dividend reinvestment under Employees' 13 41.625
Thrift Plan
02/01/98 Acquisition (shares held as cash) under 8 41.500
Employees' Thrift Plan
09/02/98 Contribution under Employees' Thrift 57 40.687
Plan
01/10/97 Automatic dividend reinvestment 165 35.678
02/01/98 Automatic dividend reinvestment 151 41.191
01/10/97 Automatic dividend reinvestment 91 35.678
01/02/98 Automatic dividend reinvestment 83 41.191
James A August- Automatic dividend reinvestment of 40 *
Middleton December 1997 derivative securities
Erle Nye 06.03.97 Contribution under Employees' Thrift 85 38.50
Plan
04.01.97 Contribution under Employees' Thrift 303 34.151
Plan
31.03.97 Acquisition under qualified plan 4,793 34.250
(intra-plan transfer)
01.10.97 Dividend reinvestment under Employees' 299 36.307
Thrift Plan
01.10.97 Automatic Dividend reinvestment 5 35.679
01.10.97 Automatic Dividend reinvestment 3 35.679
01.10.97 Automatic Dividend reinvestment 43 35.679
</TABLE>
VIII-4
<PAGE> 314
<TABLE>
<CAPTION>
NUMBER OF SHARES IN
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ------------------- -------
<S> <C> <C> <C> <C>
02.01.98 Dividend reinvestment under Employees' 279 41.625
Thrift Plan
02.01.98 Acquisition (shares held as cash) under 20 41.500
Employees' Thrift Plan
02.01.98 Automatic Dividend reinvestment 2 41.191
02.01.98 Automatic Dividend reinvestment 3 41.191
02.01.98 Automatic Dividend reinvestment 40 41.191
09.02.98 Contribution under Employees' Thrift 78 40.687
Plan
01.10.97 Automatic dividend reinvestment 329 $35.678
01.10.97 Automatic dividend reinvestment 257 $35.678
02.01.98 Automatic dividend reinvestment 302 $41.191
02.01.98 Automatic dividend reinvestment 237 $41.191
James E August- Automatic dividend reinvestment of 20 *
Oesterricher December 1997 derivative securities
Charles R August- Automatic dividend reinvestment of 40 *
Perry December 1997 derivative securities
Herbert H August- Automatic dividend reinvestment of 20 *
Richardson December 1997 derivative securities
04.04.97 Purchase 200 34.500
09.06.97 Purchase 200 32.750
02.07.97 Purchase 200 34.875
Robert A 21.03.97 Purchase 1,000 34.750
Wooldridge
01.04.97 Dividend reinvestment 25.627 34.922
01.07.97 Dividend reinvestment 26.522 34.253
01.10.97 Dividend reinvestment 25.834 35.703
02.01.98 Dividend reinvestment 23.787 41.216
</TABLE>
(xii)During the [disclosure period/period from 26 January 1997 to 27
January 1998], the Texas Utilities Deferred and Incentive Compensation
Plan carried out the following dealings for value in shares of Texas
Utilities Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
TEXAS UTILITIES
DATE NATURE OF TRANSACTION COMMON STOCK
---- --------------------- -------------------
<C> <S> <C>
06.02.97 Participant Forfeiture (5,918)
01.04.97 Dividend reinvestment 6,786
14.04.97 Participant Forfeiture (4,490)
01.07.97 Dividend reinvestment 6,954
01.07.97 New Plan Year Allocation 151,222
01.10.97 Dividend reinvestment 7,547
02.01.98 Dividend reinvestment 6,911
</TABLE>
No other transactions took place until 06.03.98 and none are expected until
01.04.98 dividend;
VIII-5
<PAGE> 315
(xiii)
During the [disclosure period/period from 26 January 1997 to 27
January 1998], the Texas Utilities Deferred Compensation Plan for
Outside Directors carried out the following dealings for value in
shares of Texas Utilities Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
TEXAS UTILITIES
DATE NATURE OF TRANSACTION COMMON STOCK
---- --------------------- -------------------
<C> <S> <C>
01.04.97 Dividend reinvestment 303
01.07.97 Dividend reinvestment 314
01.07.97 New Plan Year Allocation 9,948
01.10.97 Dividend reinvestment 452
02.01.98 Dividend reinvestment 416
</TABLE>
No other transactions took place until 25.02.98 and none are expected until
01.04.98 dividend;
(xiv)A summary of the dealings for value carried out by The Texas Utilities
Employees' Thrift Plan during the period 26 January 1997 to [3 March]
1998 is set out below and a full list of such dealings is available
for inspection as described at paragraph [18]:
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
</TABLE>
(xv) A summary of dealings for value carried out by The Texas Utilities
Dividend Reinvestment Plan during the period 26 January 1997 to [3
March 1998] is set out below and a full list of such dealings is
available for inspection as described in paragraph [18];
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
</TABLE>
(xvi)A summary of dealings for value carried out by Lehman Brothers during
the period 26 January 1997 to [3 March 1998] is set out below and a
full list of such dealings is available for inspection as described in
paragraph [18];
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
</TABLE>
(xvii)
A summary of dealings for value carried out by Merrill Lynch during
the period 26 January 1997 to [3 March 1998] is set out below and a
full list of such dealings is available for inspection as described in
paragraph [18];
VIII-6
<PAGE> 316
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
</TABLE>
(xviii)
During the disclosure period, the members of Worsham, Forythe &
Wooldridge, LLP have carried out the following dealings for value in
shares of Texas Utilities Common Stock:
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
Christina Corbo................ 08/09/97 Initial Purchase 14.165 35.25
13/10/97 Purchase 1.391 35.9340
27/10/97 Purchase 1.361 36.7270
01/12/97 Purchase 1.248 40.0550
29/12/97 Purchase 1.223 40.875
02/01/98 Dividend reinvestment .243 41.2160
26/01/98 Purchase 1.207 41.4170
Don Clevenger.................. 02/09/97 14.181 35.2594
01/10/97 Dividend reinvestment .209 35.703
13/10/97 Purchase 1.391 35.9340
27/10/97 Purchase 1.361 35.7270
01/12/97 Purchase 1.248 40.0550
29/12/97 Purchase 1.223 40.875
02/01/98 Dividend reinvestment .245 41.2160
26/01/98 Purchase 1.207 41.4170
David C. Lonergan (Custodian
for Kathleen Lara Lonergan
under the Texas Uniform Gift
to Minors Act)............... 01/04/97 Dividend reinvestment .509 34.9220
01/04/97 Dividend reinvestment .527 34.2530
01/10/97 Dividend reinvestment .514 35.7030
02/01/98 Dividend reinvestment .473 41.2160
David C. Lonergan & Debroah A.
Lonergan (Tenants in
Common)...................... 19/02/97 Sale 75 40.5000
01/04/97 Dividend reinvestment 3.893 34.922
01/07/97 Dividend reinvestment 4.029 34.253
09/09/97 Sale 266.725 35.250
David C. Lonergan (Custodian
for Devin Lonergan under Ohio
Uniform Gifts to Minors
Act)......................... 01/04/97 Dividend reinvestment .699 34.922
01/07/97 Dividend reinvestment .699 34.253
01/10/97 Dividend reinvestment .705 35.703
02/01/98 Dividend reinvestment .649 41.216
Timothy A. Mack 01/04/97 Dividend reinvestment 8.924 34.922
01/07/97 Dividend reinvestment 9.236 34.253
01/10/98 Dividend reinvestment 8.996 35.703
01/02/98 Dividend reinvestment 8.284 41.216
</TABLE>
VIII-7
<PAGE> 317
<TABLE>
<CAPTION>
NO. OF SHARES OF
TEXAS UTILITIES PRICE
NAME DATE NATURE OF TRANSACTION COMMON STOCK ($)
---- ---- --------------------- ---------------- -------
<S> <C> <C> <C> <C>
Allen Nye...................... 01/04/97 Dividend reinvestment 3.483 34.987
01/07/97 Dividend reinvestment 3.605 34.253
01/10/97 Dividend reinvestment 3.511 35.703
01/02/98 Dividend reinvestment 3.233 41.216
Robert A. Wooldridge........... 21/03/97 Dividend reinvestment 1,000 34.750
01/04/97 Dividend reinvestment 25.627 34.922
01/07/97 Dividend reinvestment 26,522 34.253
01/10/97 Dividend reinvestment 25.834 35.703
02/01/98 Dividend reinvestment 23.787 41.216
Jos I. Worsham................. 24/09/97 Gift to Charitable Organisation 4,800 35.6875
</TABLE>
(xix)During the disclosure period, the Texas Utilities Dividend
Reinvestment Plan carried out the following dealings for value in
shares of Texas Utilities Common Stock:
(B) SHAREHOLDINGS AND DEALINGS IN RELEVANT ENERGY GROUP SECURITIES
(a) Texas Utilities
(i)As at [6 March] 1988 (the latest practicable date prior to the
publication of this document), Erle Nye, Chairman and Chief Executive of
Texas Utilities, held 25 Energy Group ADRs;
(ii)As at [3 March] 1998, (the latest practicable date prior to the
publication of this document), Lehman Brothers was interested in
[489,777] Energy Group Shares held at constituents of various baskets
of securities;
(iii)As at [4 March] 1988 (the latest practicable date prior to the
publication of this document), Merrill Lynch and its affiliates were
interested in [10,515,360] Energy Group Shares;
(iv)As at [5 March] 1988 (the latest practicable date prior to the
publication of this document), the Retirement Plan of the Texas
Utilities Company System held 24,375 Energy Group ADRs;
(v)During the period from 26 January 1997 to [3 March] 1998, Lehman
Brothers carried out the following dealings for value in Energy Group
Shares:
<TABLE>
<CAPTION>
NUMBER OF
NATURE OF ENERGY GROUP PRICE
NAME DATE TRANSACTION SHARES (L)
---- ---- ----------- ------------ --------
<S> <C> <C> <C> <C>
</TABLE>
(vi)A summary of dealings for value carried out by Merrill Lynch during the
period 26 January 1997 to [3 March] 1988 is set out below and a full
list of dealings is available for inspection as described in paragraph
[18] of this Appendix VIII.
<TABLE>
<CAPTION>
NUMBER OF
NATURE OF ENERGY GROUP PRICE
NAME DATE TRANSACTION SHARES (L)
---- ---- ----------- ------------ --------
<S> <C> <C> <C> <C>
</TABLE>
VIII-8
<PAGE> 318
(ee) Save as disclosed in this document:
(1)neither TU Acquisitions, nor any Director of TU Acquisitions or any
member of his immediate family or his related trusts, nor any person
acting, or deemed to be acting, in concert with TU Acquisitions, nor
any person who prior to the publication of this document committed
himself to accept the Texas Utilities Offer, owns or controls or (in
the case of a Director of TU Acquisitions) is interested in any
relevant Energy Group securities or any relevant Texas Utilities
securities, nor has any such person dealt for value in such securities
during the disclosure period;
(2)neither TU Acquisitions nor any person acting in concert with TU
Acquisitions has any arrangement with any person in relation to
relevant Energy Group securities or any relevant Texas Utilities
securities; and
5 OTHER INFORMATION
(a)
Save as disclosed in this document there is no agreement, arrangement or
understanding (including any compensation arrangement) between TU Acquisitions
or any person acting in concert with it for the purposes of the Texas Utilities
Offer and any of the directors, recent directors, shareholders or recent
shareholders of The Energy Group having any connection with or dependence upon,
or which is conditional on, the outcome of the Texas Utilities Offer.
(b) No proposal exists in connection with the Texas Utilities Offer for any
payment or other benefit to be made or given by TU Acquisitions or any
person acting in concert with it for the purpose of the Texas Utilities
Offer to any director of The Energy Group as compensation for loss of
office or as consideration for or in connection with his retirement from
office.
(c) The total emoluments receivable by Directors of TU Acquisitions will not be
varied as a result of the Acquisition or any other associated transactions.
(d) There is no agreement, arrangement or understanding whereby the beneficial
ownership of any of the Energy Group Securities to be acquired pursuant to
the Texas Utilities Offer will be transferred to any other person.
(e) Lehman Brothers and Merrill Lynch have given and not withdrawn their
respective written consents to the issue of this document with the
references to their names, including, in the case of Merrill Lynch, the
reference to their valuation of the Loan Notes, in the form and context in
which they appear. Lehman Brothers and Merrill Lynch are regulated in the
United Kingdom by The Securities and Futures Authority Limited.
(f) Save as disclosed in this document, there has been no material change in
the financial or trading position of Texas Utilities since 31 December 1997
or the financial or trading position of The Energy Group since 31 March
1997.
(g) Lehman Brothers and Merrill Lynch are satisfied that the financial
resources necessary to implement the Texas Utilities Offer in full are
available to TU Acquisitions.
6 MATERIAL CONTRACTS
The following contracts, not being contracts entered into in the ordinary course
of business, have been entered into by Texas Utilities and its subsidiaries,
including TU Acquisitions, since 26 January 1996 (being two years prior to the
commencement of the offer period in relation to The Energy Group) and are or may
be material:
(i)the financing arrangements described in paragraph 10 below;
(ii)
an Amended and Restated Agreement and Plan of Merger, dated as of 13
April 1996, by and among Texas Utilities Company, TUC Holding Company
and ENSERCH pursuant to which Texas Utilities issued approximately $550
million of its common stock to ENSERCH stockholders in a stock for stock
transaction;
VIII-9
<PAGE> 319
(iii)
an Agreement and Plan of Merger, dated as of 23 August 1997 between
Texas Utilities and LCC pursuant to which Texas Utilities issued
approximately 8.7 million shares of Texas Utilities Common Stock to LCC
stockholders in a stock for stock transaction and approximately $31
million of LCC's long-term debt remains outstanding; and
(iv)
The Peabody Sale Agreement is dated 2 March 1998 and made between The
Energy Group and P&L Coal Holdings Corporation, a Delaware corporation
(the "Acquisition Entity"). It is conditional on fulfillment of the
conditions set out in paragraph [ ] of Part [ ] of the letter from
Lehman Brothers and Merrill Lynch.
The total consideration payable in respect of the sale of the Peabody
Coal Business is approximately US$2.3 billion, payable in cash on
completion of the Peabody Sale Agreement. Completion is expected to take
place on the same day that the Offer becomes or is declared
unconditional in all respects. Each of the parties to the Peabody Sale
Agreement gives certain warranties concerning, principally, due
execution of the Peabody Sale Agreement and TEG in addition warrants
title to the various shares to be transferred to the Acquisition Entity.
The Energy Group gives certain undertakings to the Acquisition Entity
concerning the conduct of the Peabody Coal Business prior to completion
of the Peabody sale; it is agreed that the relevant companies will be
directed to conduct their business in the ordinary and usual course as
currently carried on by such companies and their subsidiaries and that
no action will be taken with regard to such companies or their
respective subsidiaries which would, if such companies and their
subsidiaries taken as a whole were an offeree company subject to the
City Code, amount to an action requiring the approval of shareholders in
general meeting under Rule 21 of the City Code (namely issuing any
authorised but unissued shares, issuing or granting options in respect
of any unissued shares, creating or issuing securities with rights of
conversion into shares, agreeing to sell or acquire assets of a material
amount and entering into contracts other than in the ordinary course of
business).
(v)On the same day, Texas Utilities also entered into an agreement with
Lehman Merchant relating to the Peabody Sale. This agreement provides
for the parties to make certain payments to each other to reflect the
adjustments to the net assets of the Peabody Coal Business as shown in
the post-completion balance sheet and contains other payment obligations
of Texas Utilities in certain circumstances (including commitment fees
in relation to the finance required by Lehman Merchant and the
Acquisition Entity for the Peabody Sale, which are payable in certain
circumstances). Lehman Merchant agrees to procure that the Acquisition
Entity complies with its obligations under the Peabody Sale Agreement.
This agreement provides for the separation of the Peabody Coal Business
from the retained business of The Energy Group and apportions certain
pre-existing liabilities. Lehman Merchant agrees to indemnify Texas
Utilities from the date of completion with regard to claims, demands,
suits and liabilities of any kind relating to (i) the Peabody Coal
Business and the past, present and future activities of those companies
conducting the Peabody Coal Business; and (ii) any environmental claims
or liabilities relating to activities or operations prior to such date
of Peabody Investments, Inc. or Peabody Global Investments, Inc. or any
of their respective subsidiaries or predecessors. In addition, Texas
Utilities agree to cause The Energy Group to indemnify Lehman Merchant
and the Acquisition Entity against all claims, demand, suits and
liabilities of any kind relating to The Energy Group and its retained
subsidiaries or affiliates.
As a person deemed to be acting in concert with Texas Utilities pursuant
to the provisions of the City Code, Lehman Merchant has given certain
undertakings to Texas Utilities. Lehman Merchant has agreed that neither
it nor any subsidiary will directly or indirectly (whether itself or
through persons acting in concert, as defined for the purposes of the
City Code) be involved in: (a) acquiring or seeking to acquire an
interest (as defined in Part VI of the Companies Act) in the share
capital (as defined) of The Energy Group; (b) announcing or making a
general offer for the share capital of The Energy Group; (c) announcing
or taking any step or action which under the City Code or otherwise
would require the announcement of any proposals for any takeover,
merger, consolidation, share exchange or similar transaction involving
the securities of The Energy Group; or (d) taking any step or action
which might give rise to a breach of Rule 4 of the City Code (which
prohibits
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certain dealings during an offer period) or any obligation on any person
under the City Code or otherwise: (i) to make any offer to acquire all
or part of the share capital of The Energy Group; or (ii) to increase,
revise, or vary the Texas Utilities Offer. These undertakings will
continue in full force and effect for so long as Lehman Merchant and
Texas Utilities are regarded by the Panel as acting in concert as
regards The Energy Group.
Texas Utilities agrees that it will not, without Lehman Merchant's
consent, change the terms and conditions of the Texas Utilities offer in
a manner that could reasonably be expected to materially and adversely
affect Lehman Merchant, the Peabody Coal Business, the purchase of the
relevant shares by the Acquisition Entity or the financing thereof
(with, subject as set out below, it being agreed that this shall not
restrict the waiver of any conditions to the Texas Utilities Offer
and/or an increase to the Texas Utilities Offer and/or a revision or
amendment of the Texas Utilities Offer so as to include a share
alternative). If Lehman Merchant can demonstrate that a matter or
circumstance which could rise to a right to invoke a Condition is (a) a
matter or circumstance which Lehman Merchant discovers after 2 March
1998; (b) a matter or circumstance which could reasonably be expected to
materially and adversely affect the Peabody Coal Business or the
purchase of the relevant shares by the Acquisition Entity or the
financing thereof; and (c) a matter or circumstance which is of material
significance in the context of the Texas Utilities Offer, Texas
Utilities agrees to procure that TU Acquisitions will not waive any
relevant Condition(s) of the Texas Utilities Offer without the prior
consent of Lehman Merchant. Notwithstanding the foregoing, neither Texas
Utilities nor TU Acquisitions are required to invoke any Condition of
the Texas Utilities Offer so as to cause the Texas Utilities Offer to
lapse if the Panel does not agree that any such Condition may be invoked
and/or that the Texas Utilities Offer may lapse as a result of failure
to waive any such Condition provided that Texas Utilities agrees to give
Lehman Merchant all reasonable opportunity and reasonable assistance in
making representations to the Panel that in such circumstances the
Conditions may be invoked so as to cause the Texas Utilities Offer to
lapse. In the absence of Panel agreement, no member of the Texas
Utilities Group shall have any obligation or liability to Lehman
Merchant.
(vi)
In a separate agreement with The Energy Group, Texas Utilities has
agreed that, in the event that the conditions set out below are
fulfilled, it will pay the sum of US$50 million in cash to The Energy
Group. The conditions referred to are (a) the conditions to the Peabody
Sale Agreement referred to in paragraphs (b), (c) and (d) or paragraph
10 of the letter from Lehman Brothers and Merrill Lynch having been
satisfied or waived but the condition set out in paragraph (e) of that
paragraph not remaining satisfied; (b) the Texas Utilities Offer lapsing
or being withdrawn, having not become or been declared unconditional in
all respects in circumstances in which Condition (b) set out in Part A
of Appendix 1 to this document is not fulfilled, Conditions (c) to (m)
have been fulfilled, remain satisfied and/or have been waived and
Condition (a) would, but for the second proviso contained in that
Condition, be capable of being declared satisfied; (c) the Renewed
PacifiCorp Offer (and any revision thereof) lapsing or being withdrawn,
having not become or been declared unconditional in all respects; and
(d) on or prior to 2 March 1999 neither Texas Utilities nor PacifiCorp
nor any associate of Texas Utilities or PacifiCorp (as the case may be)
having acquired control (as defined in Section 416 of the Income and
Corporation Taxes Act 1988) of The Energy Group pursuant to a general
offer at a cash price (or, if such offer is not a cash offer, at a value
of the consideration offered, on the date of announcement of such offer)
equal to or in excess of 765p per Energy Group Share.
7 BACKGROUND TO AND REASONS FOR THE TEXAS UTILITIES OFFER
BACKGROUND TO THE TEXAS UTILITIES OFFER
In December 1997, Texas Utilities was contacted by representatives of Lehman
Brothers to generally discuss the possibility of an acquisition involving The
Energy Group. In those discussions, Lehman Brothers indicated that they had
identified a potential purchaser of the Peabody Coal Business (which includes
Citizens Power).
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In January 1998, Texas Utilities engaged Lehman Brothers and Merrill Lynch as
its financial advisors with respect to evaluating any potential transaction
involving The Energy Group. Lehman Brothers advised at that time that Lehman
Merchant was the potential purchaser of the Peabody Coal Business.
On 12 January 1998, Erle A. Nye, Chairman and Chief Executive of Texas
Utilities, contacted Derek Bonham, Chairman of The Energy Group to indicate
Texas Utilities' interest in exploring a possible acquisition of The Energy
Group. Mr Nye indicated that a team comprised of Texas Utilities'
representatives as well as legal and financial advisors would be arriving in
London to begin conducting due diligence activities.
On 23 January 1998, H. Jarrell Gibbs, Vice-Chairman of Texas Utilities met with
Mr Bonham to discuss further Texas Utilities' interest in exploring a potential
acquisition of The Energy Group. Mr Gibbs and Mr Bonham discussed the background
of the Texas Utilities Group and the strategic advantages of a possible
acquisition as well as the possibility of the sale of the Peabody Coal Business
to a third party. Mr Gibbs requested access to information and representatives
of The Energy Group to begin its due diligence review.
On 23 January 1998, a confidentiality agreement was executed between the
parties, establishing the terms under which further discussions would proceed.
Thereafter, Texas Utilities engaged in a due diligence review of The Energy
Group and conducted negotiations with Lehman Merchant regarding their purchase
of the Peabody Coal Business.
On 23 January 1998, Texas Utilities held a meeting of the Business Development
Committee of its Board of Directors to present its preliminary views on a
possible acquisition of The Energy Group.
On 27 January 1998, Mr Gibbs, Robert S. Shapard, Vice President and Treasurer of
Texas Utilities, and representatives of Texas Utilities' advisors met with Eric
E. Anstee, Financial Director of The Energy Group, and several of his
colleagues. At this meeting, Mr Anstee presented financial and operational
information on The Energy Group.
On 30 January 1998, Mr Gibbs, Mr Shapard and Robert A. Wooldridge, counsel to
Texas Utilities met with John F. Devaney, Chief Executive of Eastern, to
introduce Texas Utilities to Mr Devaney and to further discuss The Energy Group
but did not have substantive discussions relating to a potential transaction.
On 5 February 1998, Mr Gibbs again met with Mr Bonham to present Texas
Utilities' views as to possible structure of a transaction and indicated that
Texas Utilities remained interested in The Energy Group following the Renewed
PacifiCorp Offer.
On 12 February 1998, Mr Gibbs met with Mr Anstee to further discuss their
respective companies but did not have substantive discussions relating to a
potential transaction.
On 13 February 1998, Mr Gibbs again met with Mr Devaney to further discuss
Eastern.
On 19 and 20 February 1998, the Board of Directors of Texas Utilities met.
Senior executives of Texas Utilities and the company's financial and legal
advisers discussed in detail all aspects of a proposed transaction and reported
on the due diligence examination of The Energy Group. Thereupon, the Board of
Directors unanimously approved a resolution granting company management the
authority to make an offer.
On 23 February 1998, Mr Nye met with Mr Bonham to discuss a possible acquisition
of The Energy Group. Mr Nye informed Mr Bonham on the actions taken by the Texas
Utilities Board of Directors and other activities to date in relation to the
possible acquisition. They also discussed the strategic advantages of a possible
acquisition and discussed a range of values for The Energy Group.
On 25 February 1998, Mr Nye met with Mr Devaney and on 26 February, Mr Nye and
Mr Gibbs met with Mr Anstee and in both meetings the parties discussed their
respective companies and various management and corporate matters.
On 1 March 1998, Texas Utilities completed negotiations with Lehman Merchant
regarding the acquisition of the Peabody Coal Business from The Energy Group.
On 1 March 1998, Mr Nye again met with Mr Bonham to present an offer at a price
of 810 pence per Energy Group Share.
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On 2 March 1998, the Board of Texas Utilities announced the terms of an offer at
a price of 810 pence per Energy Group Share. On 3 March 1998 Texas Utilities
announced an offer at a price of 840 pence per Energy Group Share in response to
the Increased PacifiCorp Offer.
REASONS FOR THE TEXAS UTILITIES OFFER
Texas Utilities has formulated a strategy to position itself to thrive in a more
competitive environment and to identify new business investments that both
capitalise on its core competencies and are complementary to its existing
portfolio of businesses in order to grow earnings, broaden its markets beyond
the traditional service areas and expand customer services.
The acquisition of The Energy Group is further confirmation of Texas Utilities'
commitment to this strategy. The Energy Group comprises a unique blend of
electricity generation, supply and distribution assets, combined with strengths
in natural gas and energy trading. Texas Utilities believes that the highly
complementary nature of these activities to those of Texas Utilities combined
with The Energy Group's experience of operating within a deregulating market
will enable the enlarged group to capitalise upon the sharing of the expertise
and best practices that reside within the two groups in each of these areas.
Texas Utilities expects the transaction to be earnings and cash flow enhancing
in the first complete year following completion of the Acquisition and
thereafter (prior to considering any synergy or other benefits that the
transaction may give rise to). This statement should not be interpreted to mean
that the future earnings per share of Texas Utilities, as enlarged by the
acquisition of The Energy Group, will necessarily be greater than the historical
published earnings per share of Texas Utilities.
8 FINANCING ARRANGEMENTS
TU Acquisitions estimates that the total amount of financing necessary to
purchase, pursuant to the Texas Utilities Offer and the compulsory acquisition
procedures referred to in paragraph 10 below or otherwise, all Energy Group
Securities that are outstanding, and to pay all associated fees costs and
expenses, is approximately L4,594 million. Financing arrangements have been
entered into by the indirect holding company of TU Acquisitions, TU Finance No.
1 Ltd ("TUF"), and by Texas Utilities itself which provide committed finance
which is considered to be sufficient for such purposes and TUF and Texas
Utilities have agreed to pass on to TU Acquisitions, by means of a combination
of subscribing for shares and perpetual loan notes in TU Acquisitions and by
making intercompany loans to TU Acquisitions, the proceeds of borrowings to be
made by TUF and Texas Utilities under those arrangements. The principal terms of
those arrangements are as follows:
TUF ARRANGEMENTS
TUF has entered into a Facilities Agreement for L3,625 million Credit Facilities
dated 2 March 1998, as amended by an Amendment Agreement dated 3 March 1998 (the
"TUF Credit Agreement"), arranged by Chase Manhattan plc, Lehman Brothers
International and Merrill Lynch Capital Corporation (the "TUF Arrangers"), under
which The Chase Manhattan Bank, Lehman Commercial Paper Inc. and Merrill Lynch
Capital Corporation are the Underwriters (committing on a several one-third
basis to provide the entire facilities) and Chase Manhattan International
Limited is Facility Agent and Security Agent. Pursuant to the TUF Credit
Agreement, TUF is entitled to borrow up to L2,925 million by way of acquisition
and interim advances for the purpose of financing the acquisition of Energy
Group Securities and associated purposes and TUF and/or any permitted borrower
(which includes the members of the TEG Group) are entitled to borrow up to L700
million by way of revolving advances for the purpose of refinancing borrowings
of the TEG Group and for general corporate purposes (subject to L250 million of
that amount being made available under the REC Facility Agreement as referred to
below).
Pursuant to provisions of the TUF Credit Agreement, on the date the Texas
Utilities Offer becomes or is declared unconditional, a standalone L250 million
revolving credit facility will be granted to Eastern (the "REC Facility
Agreement"). The REC Facility Agreement will not be cross-defaulted to the TUF
Credit Agreement and there will be no cross-guarantee given by Eastern or any of
its subsidiaries in respect of the
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obligations of any of the Borrowers under the TUF Credit Agreement. Advances
under the REC Facility Agreement will bear interest at the aggregate of the
applicable margin, the mandatory liquid asset cost and the relevant London
interbank offered rate as determined in accordance with normal provisions for
large syndicated facilities ("LIBOR"). The applicable margin thereunder is 50
per cent.
All the advances under the TUF Credit Agreement bear interest at the aggregate
of the applicable margin, the mandatory liquid asset costs and LIBOR. The
applicable margin is initially 1.25 per cent. per annum until the interim
advances have been repaid and the leverage ratio is between 65 per cent. and 60
per cent. when the rate reduces to 1 per cent. and if the leverage ratio reduces
to below 60 per cent. the rate will further reduce to 0.75 per cent.
Of the total L2,925 million available to finance the acquisition of Energy Group
Securities, the first L1,775 million is to be drawn by way of acquisition
advances and thereafter the remainder by way of interim advances. The interim
advances are repayable within ten months of the date of the TUF Credit
Agreement. An additional mandatory prepayment will be repaid out of or by
reference to of the proceeds of the Peabody Sale, which are to be upstreamed,
directly or indirectly, to TU Acquisitions and to TUF. The methods available to
TUF and TU Acquisitions in order to upstream such proceeds include any one or
more of intercompany loans out of the TEG Group in accordance with sections 155
to 158 of the Companies Act or the purchase of own shares of The Energy Group,
and TUF and TU Acquisitions have agreed to take the steps necessary to lawfully
upstream such proceeds as soon as practicable after the Texas Utilities Offer
becomes or is declared unconditional.
The acquisition and interim facilities contain an alternative for financing
payments due under the Loan Notes, either by the facilities continuing for five
years to be available for that purpose or for a drawing to be made ten months
after the date of the TUF Credit Agreement and retained in a blocked account for
application in meeting such payments.
Of the remaining acquisition advances, L600 million is repayable on the second
anniversary of the date of the TUF Credit Agreement (such repayment subject to
reduction for previously applied repayments other than repayments of the interim
advances) and the balance is repayable on the fifth anniversary.
The availability of the advances is subject to a number of conditions precedent,
and the majority of these have already been acknowledged by the Facility Agent
as fulfilled. The conditions precedent which had not been fulfilled at the date
of this Offer Document were confined to matters which inevitably would not be
fulfilled until a later stage and which include conditions: that the funds to be
contributed by Texas Utilities to TU Acquisitions and TUF have been duly paid; a
confirmation that the terms and conditions of the Texas Utilities Offer have not
been waived, amended, varied or declared to be satisfied other than in
accordance with the terms of the TUF Credit Agreement; that the Office of Fair
Trading has indicated that it is not the intention of the Secretary of State for
Trade and Industry to refer the Acquisition to the Monopolies and Mergers
Commission; confirmation that the Peabody Sale Agreement has become
unconditional save for conditions relating to the Texas Utilities Offer becoming
unconditional (and that the consideration has been received in escrow by the TEG
Group); and that the Texas Utilities Offer has become or has been declared
unconditional in all respects.
There is a covenant that TU Acquisitions will comply with Rule 10 of the City
Code, which requires, in summary, that it shall not declare the Texas Utilities
Offer unconditional unless TU Acquisitions has acquired or agreed to acquire
Energy Group Shares carrying in aggregate more than 50 per cent. of the voting
rights exercisable at general meetings of The Energy Group. Apart from that
covenant, which does no more than incorporate into the TUF Credit Agreement a
provision which is applicable to all offers in an offer governed by the Code,
there are no covenants or conditions precedent or other provisions which limit
the flexibility of TU Acquisitions to declare the Texas Utilities Offer
unconditional at any level of acceptances which it may in its discretion decide.
Advances under the TUF Credit Agreement for the purpose of acquiring Energy
Group Securities during the Certain Funds Period (which, if the Texas Utilities
Offer has not previously lapsed or been withdrawn, covers the period through to
the fifteenth day after the last closing date of the Texas Utilities Offer
(extended if
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necessary to include any further period during which the compulsory acquisition
procedures referred to in paragraph 10 below are being implemented) but subject
to a final cut-off seven months after the date of the Texas Utilities Offer)
enjoy "certain funds" protection. This means that the only condition to the
lending banks' obligations to make such advances during such period once the
conditions precedent referred to in the preceding paragraph have been satisfied
or waived is that no Major Default has occurred; for these purposes a Major
Default is an insolvency of TU Acquisitions or TUF (which are referred to
together in this section as the "Relevant Offeror Companies"), an amendment of
the Peabody Sale Agreement without the lending banks' consent, a breach of the
covenants given in respect of the conduct of the Texas Utilities Offer, a breach
of representation concerning the validity of the TUF Credit Agreement, a default
which is within the Relevant Offeror Companies' power to remedy within seven
days but which is not remedied within seven days after notice and, in respect of
advances to purchase under the compulsory acquisition procedures referred to in
paragraph 10 below only, insolvency of certain key TEG Group companies.
The TUF Credit Agreement also includes the following provisions:
Representations and warranties as to matters that are normal in such context,
but the only matters represented which would have any effect during the Certain
Funds Period relate to the Relevant Offeror Companies and in particular to
corporate standing and powers, legality and validity of obligations and the
companies being clean companies. The representations given in respect of the TEG
Group do not apply until 120 days after the date the Texas Utilities Offer
becomes or is declared wholly unconditional (the "Unconditional Date").
Financial undertakings to maintain a ratio of earnings before interest, tax,
depreciation and amortisation to net interest costs of not less than 2:1 and a
leverage ratio (expressing borrowings of the group as a percentage of total
capitalisation) of not more than 70 per cent. until 30 September 2000 and 65 per
cent. thereafter. Such undertakings are not relevant to the certain funds
protection.
The covenants given in respect of the Texas Utilities Offer are: to comply with
the Code and applicable law, to keep the Facility Agent informed of progress;
not without the consent of the TUF Arrangers acting on the instructions of a
66 2/3 per cent. (by value) majority of the lending banks to waive, amend, or
agree or decide not to enforce Conditions (b) and (c); not without the consent
of the TUF Arrangers acting on the instructions of a 66 2/3 per cent. (by value)
majority of the lending banks (such consent not to be unreasonably withheld or
delayed) to waive, amend (save for an extension of the offer period), or agree
or decide not to invoke any other material Conditions, provided that there shall
be no breach of this provision if directions of the Panel are being followed; to
lapse the Texas Utilities Offer if grounds to do so exist and the Panel agrees
to such lapse if in the reasonable opinion of the above majority of lending
banks the same would have a material and adverse effect on the ability of the
borrowers to comply with their material obligations under the TUF Credit
Agreement; to lapse the Texas Utilities Offer if grounds to do so exist and the
Panel agrees to such lapse if undertakings and assurances as are referred to in
Condition (e) are required or modifications to the Licences (being licenses
granted under section 6 of the Electricity Act 1989 to carry on distribution,
supply and generation of electricity and under section 7 of the Gas Act of 1986)
as are referred to in Condition (d) are required or any terms are proposed for
any other authorisation or determination which in the reasonable opinion of the
above majority of lending banks would have a material and adverse affect on the
ability of the borrowers to comply with their material obligations under the TUF
Credit Agreement the important proviso is that the lending banks cannot require
the Texas Utilities Offer to be lapsed if the proposed modifications to the said
licences or the terms of the proposed undertakings or assurances are no more
onerous than those set out and required by the DGES from PacifiCorp in
accordance with the terms of the Monopolies and Mergers Commission Report into
the Original PacifiCorp Offer for The Energy Group published on 19 December
1997.
The TUF Credit Agreement also contains a covenant to procure that companies in
the TEG Group shall give guarantees in respect of the indebtedness of the
borrowers thereunder save where: the same would be unlawful or contrary to
regulation and it is not legally possible for the same to be rendered lawful;
the same would reasonably be expected to breach a condition of the Licences and
as a result would entitle the Secretary of State for Trade and Industry to
revoke or withdraw such Licences or amend the Licences in a manner which would
reasonably be expected to have a material adverse effect; the same would cause
the TEG Group's
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public debt to become repayable or subject to put rights to similar effect and
(either) there is not sufficient headroom in available facilities to enable it
to refinance or, even if there is sufficient headroom, the financial
consequences of refinancing would be so materially adverse (whether in terms of
coupon or otherwise) that it would be unreasonable to require such refinancing.
There are standard negative undertakings, including: a negative pledge to which
there are a number of exceptions including any security on TEG Group assets at
the Unconditional Date; a covenant against borrowing to which there are a number
of exceptions including existing TEG Group borrowings or any refinancing
thereof, new borrowings which do not breach the leverage ratio covenant and only
by The Energy Group itself and after it had given a guarantee, and limited
recourse borrowing of project finance subsidiaries; a disposals covenant to
which there are a number of exceptions including the Peabody Sale, disposals in
the ordinary course of trading, disposals of up to 10 per cent. of gross assets
in any financial year and any other disposal the proceeds of which are used to
repay the facilities; covenants relating to the Licences and to compliance with
the terms thereof; restrictions on the payment of dividends by TUF except to the
extent dividends could be paid without breaching the leverage ratio and only
after TU Acquisitions owns at least 90 per cent. of the Energy Group Securities;
restrictions on changing business of the TEG Group outside the electricity, gas,
water, telecommunications industries (save that up to 10 per cent. of the assets
or revenues of the TEG Group may comprise other businesses); ring-fence
covenants restricting the activities that the Relevant Offeror Companies are
permitted to do; restrictions on acquisitions outside core business except
through limited recourse project finance subsidiaries.
No covenant (except the financial undertakings) shall apply to the TEG Group
until the date 120 days after the Unconditional Date but the Relevant Offeror
Companies agree to use their commercially reasonable endeavours to run the TEG
Group as if such covenants did apply.
The events of default include: non-payment (subject to a limited three banking
day grace period), breach of undertaking or misrepresentation (both subject to a
limited ability to remedy defaults within 21 days); cross-default of other
borrowed money over a threshold of L20 million; legal process; insolvency events
(including winding-up, administration, receivership and dissolution); change of
control of TU Acquisitions or TUF; cessation of the distribution business or
changes to the regulatory regime that would be reasonably likely to have a
material adverse effect; loss of the Licence or the modification of it that
would be reasonably likely to have a material adverse effect; repeal or
amendment of the Electricity Act 1989 or non-compliance with an order made under
that Act which, in either case would be reasonably likely to have a material
adverse effect; Eastern or any of TUF or its subsidiaries ceases to be a party
to a pooling and settlement agreement dated 30th March 1990 made between Eastern
and the National Grid Company plc; Eastern or any of TUF or its subsidiaries
ceases to be a party to a gas framework agreement dated 1st March 1991 made
between British Gas Transco and Eastern Natural Gas (Retail) Limited and this
would be reasonably likely to have a material adverse effect; illegality or
unlawfulness; change of control of Texas Utilities; waiver or amendment of the
Peabody Sale Agreement without consent.
An Event of Default will not entitle the lending banks to accelerate the
facilities made available under the TUF Credit Agreement or to cancel their
commitments during the Certain Funds Period; the lending banks would only have
that entitlement if a Major Default occurred, as described above. Additionally,
several of the above events are not applied to the TEG Group until 120 days
after the Unconditional Date.
The TUF Credit Agreement also contains provisions relating to repayment,
prepayment, cancellation and reductions; fees and expenses; payments and taxes;
accounts and calculations, indemnities; unlawfulness, increased costs, and
alternative interest rates; assignment, substitution and lending offices,
clauses relating to the Facility Agent and the Security Agent and notices.
TEXAS UTILITIES ARRANGEMENTS
Texas Utilities together with certain of its subsidiaries (each a "Borrower")
have entered into a 364 Day Competitive Advance and Revolving Credit Facility
Agreement for US$3,600 million credit facilities (the "TU Facility A Agreement")
and a 5 year Competitive Advance and Revolving Credit Facility Agreement (the
"TU Facility B Agreement") for US$1,400 million credit facilities, each dated as
of 2 March 1998, as
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amended on 3 March 1998, and arranged by Chase Securities Inc., Lehman Brothers
Inc. and Merrill Lynch & Co., under which The Chase Manhattan Bank, Lehman
Brothers Commercial Paper and Merrill Lynch Capital Corporation are the
Underwriters (committing on a several one-third basis to provide the entire
facilities), Chase Bank of Texas, National Association is the Administrative
Agent and The Chase Manhattan Bank is the Competitive Advance Facility Agent.
Pursuant to the TU Facility A Agreement, by way of revolving standby loans (each
a "Standby Loan") and competitive loans pursuant to a bidding procedure (each a
"Competitive Loan"), Texas Utilities is entitled to borrow up to $2,930 million
for the sole purpose of financing or refinancing equity or subordinated loan
advances from Texas Utilities to TUF for the purpose of on loaning to TU
Acquisition to finance the acquisition of Energy Group Securities and each of
the Borrowers are entitled to borrow up to an aggregate $800 million for the
purpose of refinancing certain of their existing borrowings and for working
capital and other corporate purposes, including commercial paper back-up.
Borrowings under the TU Facility B Agreement may be applied for refinancing,
working capital and corporate purposes, including borrowings for the purpose of
paying certain expenses incurred in connection with the Texas Utilities Offer.
Each Standby Loan at the option of the Borrower will bear interest at either the
aggregate of the applicable margin and LIBOR (in which case a "Eurodollar
Standby Loan") or at the aggregate of the Alternate Base Rate (being a rate
equal to the greatest of (a) the Federal Funds Effective Rate plus 0.5 per
cent., (b) the Base CD Rate plus 1 per cent. and (c) the Prime Rate publicly
announced by the Chase Manhattan Bank) and the applicable margin (in each case
an "ABR Loan").
Each Competitive Loan, at the option of the Borrower, will bear interest at
either the aggregate of the competitive bid margin and LIBOR (in which case a
"Eurodollar Competitive Loan" and, together with the Eurodollar Standby Loans,
the "Eurodollar Loans") or at the fixed rate specified by the chosen Lender in
its competitive bid (in which case a "Fixed Rate Loan").
The applicable margin for the first six months of the facility is 0% for ABR
Loans, and 1.05% for Eurodollar Loans. After six months the margin varies
according to the debt ratings assigned by S&P and Moody's to Texas Utilities
subject to a maximum for Eurodollar Loans of 1.25% and for ABR Loans of 0.25%.
Each loan is repayable on the earlier of the last day of the interest period
applicable to it and the maturity date. The maturity date will be the 364th
calendar day after execution of the TU Facility A Agreement unless, provided no
default has occurred and is continuing, the Borrowers elect to extend for
another 364 days.
The interest period in respect of Eurodollar Loans shall be 1, 2, 3 or 6 months
except that, until general syndication is completed, it shall be 1 month or such
other period as the arrangers and Texas Utilities shall agree as being necessary
to effect the transfer of participations following syndication. In respect of
ABR Loans the interest period will commence on the date of the borrowing and end
on the earliest of (i) the last day of the next succeeding quarter, (ii) the
maturity date and (iii) the date of repayment or prepayment in accordance with
the provisions of the TU Facility A Agreement. For a Fixed Rate Loan, the
interest period shall commence on the date of the borrowing and end on the date
specified in the competitive bid, being not less than 7 days nor more than 360
days.
The availability of the advances is subject to a number of conditions precedent,
and the majority of these have already been acknowledged by the Competitive
Advance Facility Agent as fulfilled. The outstanding conditions precedent
include satisfaction of the conditions precedent to the advance of funds for the
acquisition of Energy Group Securities under the TUF Credit Facility as
described above and declaration of the Texas Utilities Offer as unconditional.
Advances under the facility for the purpose of acquiring Energy Group Securities
during the period of 364 days after its execution (provided the Texas Utilities
Offer is not previously lapsed or withdrawn, and is posted within 28 days of
satisfaction of the conditions precedent) enjoy "certain funds" protection. This
means that the only condition to the Banks' obligations to make such advances
during such period, once the conditions precedent referred to in the preceding
paragraph have been satisfied or waived is that no Major
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Default has occurred. Major Defaults are the same as those described with
respect to the TUF arrangements above, applied to the Borrowers.
The TU Facility A Agreement also includes the following provisions:
Representations and warranties as to matters that are normal in such context but
the only matters represented which would have any effect during the period of
certain funds protection relate only to the Borrowers and in particular to
corporate standing and powers and legality and validity of obligations.
Financial undertakings by Texas Utilities to maintain a ratio of earnings before
interest, tax, depreciation and amortisation to net interest costs of not less
than 1.5 to 1 and a leverage ratio (expressing consolidated shareholder's equity
of the group as a percentage of the group's total capitalisation) of not less
than 26 per cent. until 30 June 1999, 30 per cent. from 30 June 1999 until 30
June 2000 and 35 per cent. thereafter. Such undertakings are not relevant to the
certain funds protection.
Covenants given by Texas Utilities in respect of the Texas Utilities Offer which
mirror those given by TUF in the TUF Credit Agreement as are detailed above.
There are standard negative undertakings, including limitations on liens,
restrictions on mergers, consolidations and changing the nature of the business
of Texas Utilities or its subsidiaries.
No covenant shall apply to the TEG Group until the date 120 days after the
Unconditional Date but Texas Utilities agrees to use all reasonable endeavours
to cause The Energy Group and all members of the TEG Group to comply with such
covenants on and after the Unconditional Date.
The events of default include: non-payment, breach of representations or
warranties; cross-default of other borrowed money subject to a de minimis amount
of US$40 million; legal judgments rendered against Texas Utilities or a
subsidiary in an aggregate amount in excess of US$50 million; insolvency events
(including winding-up, administration, receivership and dissolution); change of
control of Texas Utilities; Texas Utilities not holding all of the stock of TU
Electric and at least 51% of ENSERCH.
An event of default will not entitle the lending banks to accelerate the
facilities made available under the TU Facility A Agreement or to cancel their
commitments during the period of certain funds protection; the lending banks
would only have that entitlement if a Major Default occurred. Additionally, the
cross-default is not applied to the TEG Group until 120 days after the
Unconditional Date.
The TU Facility A Agreement also contains provisions relating to repayment,
prepayment, cancellation and reductions; fees and expenses; payments and taxes;
accounts and calculations, indemnities; unlawfulness, set-off, increased costs,
and alternative interest rates; assignment, clauses relating to the
Administrative Agent and the Competitive Advance Facility Agent and notices.
9 COMPULSORY ACQUISITION
If, within four months after the date of this document, as a result of the Texas
Utilities Offer or otherwise, TU Acquisitions acquires or contracts to acquire
Energy Group Shares (including Energy Group Shares represented by Energy Group
ADSs) representing at least 90 per cent. in value of Energy Group Shares
(including Energy Group Shares represented by Energy Group ADSs) to which the
Texas Utilities Offer relates, then (a) TU Acquisitions will be entitled and
intends to effect the compulsory acquisition procedures provided for in sections
428 to 430F of the Companies Act to compel the purchase of any outstanding
Energy Group Shares on the same terms as provided in the Texas Utilities Offer
in accordance with the relevant procedures and time limits described in such
Act, and (b) a holder of Energy Group Shares (including Energy Group Shares
represented by Energy Group ADSs) may require TU Acquisitions to purchase his
Energy Group Shares (including Energy Group Shares represented by Energy Group
ADSs) on the same terms as provided in the Texas Utilities Offer in accordance
with the relevant procedures and time limits described in section 430A of the
Companies Act.
If for any reason the above-mentioned compulsory acquisition procedures are not
invoked, TU Acquisitions will evaluate other alternatives to obtain the
remaining Energy Group Shares (including Energy Group Shares
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represented by Energy Group ADSs) not purchased pursuant to the Texas Utilities
Offer or otherwise. Such alternatives could include acquiring additional Energy
Group Securities in the open market, in privately negotiated transactions,
through another offer to purchase, by means of a scheme of arrangement under the
Companies Act or otherwise. Any such additional acquisitions could be for a
consideration greater or less than, or equal to, the consideration for Energy
Group Securities under the Texas Utilities Offer. However, under the City Code,
except with the consent of the Panel, TU Acquisitions may not acquire any Energy
Group Securities on better terms than those of the Texas Utilities Offer within
six months of the termination of the Texas Utilities Offer if TU Acquisitions,
together with any persons acting in concert with it (as defined by the City
Code), holds following the Texas Utilities Offer, shares carrying more than 50
per cent. of the voting rights normally exercisable at general meetings of The
Energy Group.
Holders of Energy Group Securities do not have appraisal rights as a result of
the Texas Utilities Offer. However, in the event that the compulsory acquisition
procedures referred to above are available to TU Acquisitions, holders of Energy
Group Securities whose Energy Group Securities have not been purchased pursuant
to the Texas Utilities Offer will have certain rights to object under section
430C of the Companies Act.
10 CERTAIN CONSEQUENCES OF THE TEXAS UTILITIES OFFER
(a) MARKET EFFECT
The purchase of Energy Group Securities pursuant to the Texas Utilities Offer
will reduce the number of holders of Energy Group Securities and the number of
the Energy Group Securities that might otherwise trade publicly and, depending
upon the number of Energy Group Securities so purchased, could adversely affect
the liquidity and market value of the remaining Energy Group Securities held by
the public. In addition, Energy Group Shares will cease to be listed on the
London Stock Exchange and Energy Group ADSs will cease to be listed on the NYSE
if TU Acquisitions completes the compulsory acquisition procedures referred to
in paragraph 10 above. Whether or not TU Acquisitions is in a position to effect
the compulsory acquisition of any outstanding Energy Group Shares in accordance
with the Companies Act as referred to above, and irrespective of the size of any
outstanding minority in The Energy Group, TU Acquisitions intends to seek to
procure, after the Texas Utilities Offer becomes or is declared unconditional,
an application by The Energy Group to the London Stock Exchange for Energy Group
Shares to be delisted and an application by The Energy Group to the NYSE for
Energy Group ADSs to be delisted. [The London Stock Exchange has confirmed that
it would agree to the delisting of the Energy Group Shares in those
circumstances.]
(b) PUBLIC AVAILABILITY OF INFORMATION
In the event that Energy Group Shares continue to be listed on the London
Stock Exchange following the purchase of Energy Group Securities pursuant to the
Texas Utilities Offer, holders of Energy Group Shares who have not tendered
their Energy Group Shares pursuant to the Texas Utilities Offer will continue to
receive the same financial and other information from The Energy Group that The
Energy Group presently is required by the rules of the London Stock Exchange to
send to such holders. If Energy Group Shares are no longer listed on the London
Stock Exchange following the Texas Utilities Offer, The Energy Group would no
longer be required by those rules to make publicly available such financial and
other information.
Energy Group ADSs are currently registered under the Exchange Act.
Registration of such Energy Group ADSs may be terminated upon application of The
Energy Group to the SEC if Energy Group ADSs are neither listed on a national
securities exchange nor held by 300 or more beneficial owners in the US.
Termination of registration of Energy Group ADSs under the Exchange Act would
substantially reduce the information required to be furnished by The Energy
Group to holders of Energy Group ADSs and to the SEC and would make certain
provisions of the Exchange Act, such as the requirements of Rule 13e-3
thereunder with respect to "going private" transactions, no longer applicable to
The Energy Group. Furthermore, "affiliates" of The Energy Group and persons
holding "restricted securities" of The Energy Group may be deprived of the
ability to dispose of such securities pursuant to Rule 144 promulgated under the
Securities Act. If, as a result of the purchase of Energy Group ADSs pursuant to
the Texas Utilities Offer and prior to
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completing the compulsory acquisition procedures referred to in paragraph 11
above, The Energy Group is not required to maintain registration of Energy Group
ADSs under the Exchange Act, TU Acquisitions intends to cause The Energy Group
to apply for termination of such registration. If registration of Energy Group
ADSs is not terminated prior to completion of the aforementioned compulsory
acquisition procedures, then Energy Group ADSs will cease trading on the NYSE
and the registration of Energy Group ADSs under the Exchange Act would be
terminated following completion of the aforementioned compulsory acquisition
procedures.
(c) MARGIN SECURITIES
Energy Group ADSs are currently "margin securities" under the regulations
of the Board of Governors of the US Federal Reserve System, which status has the
effect, among other things, of allowing US brokers to extend credit on the
collateral of Energy Group ADSs for the purposes of buying, carrying and trading
in securities ("Purpose Loans"). Depending on factors such as the number of
holders of record of Energy Group ADSs and the number and market value of
publicly held Energy Group ADSs following the purchase of Energy Group
Securities pursuant to the Texas Utilities Offer, it is possible that Energy
Group ADSs would no longer be eligible for listing on the NYSE. As a result,
Energy Group ADSs might no longer constitute margin securities and, therefore,
could no longer be used as collateral for Purpose Loans made by US brokers.
11 LEGAL AND REGULATORY MATTERS
(a) GENERAL
Except as set out herein and other than the requirement to comply with the
Panel's requirements in relation to the City Code and with US securities laws,
TU Acquisitions is not aware of (i) any licence or regulatory permit that
appears to be material to the business of the TEG Group taken as a whole, which
might be adversely affected by TU Acquisitions's acquisition of Energy Group
Securities as contemplated herein, or (ii) any approval or other action by any
domestic or foreign governmental, administrative or regulatory agency or
authority that appears to be material to the TEG Group taken as a whole, and
required for the acquisition or ownership of Energy Group Securities by TU
Acquisitions as contemplated herein. Should any such approval or other action be
required, TU Acquisitions currently contemplates that such approval or other
action would be sought. There can be no assurance that any such approval or
other action, if needed, would be obtained without substantial conditions being
attached thereto or that failure to obtain any such approval or other action
might not result in consequences adverse to The Energy Group's business.
(b) UNITED KINGDOM COMPETITION LAWS
The Texas Utilities Offer gives rise to a merger situation qualifying for
investigation under section 75 of the Fair Trading Act 1973. It is therefore
conditional on an announcement being made in terms reasonably satisfactory to TU
Acquisitions that it is not the intention of the Secretary of State to refer the
Acquisition, or any matters arising from it, to the Monopolies and Mergers
Commission. In that connection TU Acquisitions has submitted a merger notice to
the Director General of Fair Trading and, together with The Energy Group, is in
discussions with the DGES.
(c) UNITED KINGDOM ELECTRICITY REGULATION
Eastern and its subsidiary companies hold licences issued under the
Electricity Act 1989. The Texas Utilities Offer is conditional on the DGES
indicating in terms reasonably satisfactory to TU Acquisitions that it is not
his intention to seek modifications to those licences and that he will not seek
undertakings or assurances from any member of the Texas Utilities Group or the
TEG Group except, in either case, on terms reasonably satisfactory to TU
Acquisitions. The Texas Utilities Offer is also conditional on the DGES
indicating in terms reasonably satisfactory to TU Acquisitions that, in
connection with the Acquisition, he will seek or agree to such modifications (if
any) and such other consents and/or directions (if any) as are in the reasonable
opinion of TU Acquisitions necessary or appropriate with respect to those
licences. However, TU Acquisitions will not invoke those Conditions in respect
of the DGES seeking, or indicating that it is his intention to seek,
modifications to any of the TEG Group's licences under the Electricity Act 1989
or
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undertakings or assurances from any member of the Texas Utilities Group or the
TEG Group provided that such modifications, undertakings or assurances
substantially reflect the assurances proposed by the DGES to PacifiCorp in
connection with the referral of the Original PacifiCorp Offer to the Monopolies
and Mergers Commission (as described in the Monopolies and Mergers Commission
Report relating to the Original PacifiCorp Offer published on 19 December 1997)
or are substantially in keeping with the proposals outlined by the DGES in his
consultation paper dated 24 February 1998 regarding modifications to public
electricity supply licences following takeovers.
(d) US ANTITRUST LAWS
The Peabody Sale is subject to the US HSR Act, which provides that certain
acquisition transactions may not be consummated until certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the Federal Trade Commission (the "FTC"). Pursuant to
the US HSR Act, Lehman Merchant expects to file a Notification and Report Form
relating to the Peabody Sale with the Antitrust Division and the FTC on - -. The
waiting period under the US HSR Act applicable to the Peabody Sale will then
expire at 11:59 pm, New York City time, on - -, unless early termination of the
waiting period is granted. However, if the Antitrust Division or the FTC
requests additional information or documentary material from Lehman Merchant,
the waiting period would expire ten calendar days after the date of substantial
compliance with such request. The additional ten calendar day waiting period may
be terminated sooner by the Antitrust Division or the FTC.
The FTC and the Antitrust Division frequently scrutinise the legality under
the US antitrust laws of transactions such as the proposed acquisition of
Peabody by Lehman Merchant pursuant to the Peabody Sale. At any time before or
after the purchase of Peabody, the FTC or the Antitrust Division could take such
action under the US antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the purchase of Peabody pursuant to
the Peabody Sale, or seeking divestiture of Peabody. Private parties may also
bring legal action under the US antitrust laws in certain circumstances. There
can be no assurance that a challenge to the Peabody Sale on US antitrust grounds
will not be made or, if such a challenge is made, of the result.
(e) US POWER MARKETING REGULATION
Certain subsidiaries (the "Power Subsidiaries") of Citizens Power, an
indirect wholly-owned subsidiary of The Energy Group, are engaged in market-rate
based electric power marketing in the US or otherwise hold public utility assets
that are subject to the jurisdiction of the FERC. In a number of similar recent
situations, including the acquisition of Citizens Power by The Energy Group,
FERC has asserted that a transfer of control of a licensed power marketer
requires FERC approval under section 203 of the US Federal Power Act.
Accordingly, the FERC could assert that any transfer of control of the Power
Subsidiaries resulting from completion of the Texas Utilities Offer requires
FERC approval. Pursuant to the provisions of the Peabody Sale Agreement
(summarised in paragraph 7 of this Appendix VIII ("Material Contracts")), Lehman
Merchant will acquire Citizens Power (including the Power Subsidiaries) with
such sale conditional upon, amongst other things, the completion of the Texas
Utilities Offer and FERC approval. Application for approval of the sale of the
Power Subsidiaries to Lehman Merchant has been made to the FERC, and the Texas
Utilities Offer is conditional upon the Peabody Sale Agreement becoming
unconditional.
(f) AUSTRALIAN FOREIGN INVESTMENT REVIEW
The acquisition by Lehman Merchant pursuant to the Peabody Sale Agreement
of ownership of Peabody Australia's coal operations is subject to the Foreign
Acquisitions and Takeovers Act 1975 of Australia. Under that Act, the Treasurer
of Australia has broad powers to prohibit or place conditions on the acquisition
of interests in Australian business operations by foreign investors if such
acquisitions are found to be contrary to the national interest. If a
notification of a proposed acquisition is made to the Australian Foreign
Investment Review Board, the Treasurer is precluded from taking any action with
respect to the acquisition after the expiration of a 40-day review period,
although this period may be extended for up to 90 additional days. The Foreign
Investment Review Board was notified of the proposed acquisition on - ,
- .
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(g) US STATE TAKEOVER LAWS
A number of states of the US have adopted takeover laws and regulations
which purport, in varying degrees, to be applicable to attempts to acquire
securities of corporations which have substantial assets, shareholders,
principal executive offices or principal places of business in such states. TU
Acquisitions believes that no such US state takeover statutes apply to the Texas
Utilities Offer and TU Acquisitions has not attempted to comply with any such US
state takeover statutes in connection with the Texas Utilities Offer. TU
Acquisitions reserves the right to challenge the validity or applicability of
any US state law allegedly applicable to the Texas Utilities Offer and nothing
in this document nor any action taken in connection herewith is intended as a
waiver of that right. In the event that any US state takeover statute is
asserted to be applicable to the Texas Utilities Offer and an appropriate court
does not determine that such law or regulation is not applicable to the Texas
Utilities Offer, TU Acquisitions might be required to file certain information
with, or to receive approvals from, the relevant US state authorities and might
be unable to purchase Energy Group Securities pursuant to the Texas Utilities
Offer or be delayed in continuing or consummating the Texas Utilities Offer. In
such case TU Acquisitions may not be obliged to purchase such Energy Group
Securities.
(h) LAWS OF OTHER JURISDICTIONS
The Energy Group and certain of its subsidiaries conduct business in
certain countries in addition to the United Kingdom and the US where regulatory
filings or approvals may be required in connection with the Texas Utilities
Offer. Certain of such filings or approvals, if required, may not be made or
obtained prior to the expiry of the Texas Utilities Offer. There is no assurance
that any such approvals would be obtained or that adverse consequences to Texas
Utilities's or The Energy Group's business might not result from a failure to
obtain such approvals or from conditions that might be imposed in connection
therewith.
12 UNITED KINGDOM TAXATION
THE FOLLOWING PARAGRAPHS, WHICH ARE INTENDED AS A GENERAL GUIDE ONLY, ARE
BASED ON CURRENT UNITED KINGDOM LEGISLATION AND INLAND REVENUE PRACTICE. THEY
SUMMARISE CERTAIN LIMITED ASPECTS OF THE UNITED KINGDOM TAXATION TREATMENT OF
ACCEPTANCE OF THE TEXAS UTILITIES OFFER AND, WHERE APPLICABLE, ELECTION FOR THE
SHARE ALTERNATIVE AND/OR THE LOAN NOTE ALTERNATIVE, AND THEY RELATE ONLY TO THE
POSITION OF HOLDERS OF ENERGY GROUP SHARES WHO ARE THE BENEFICIAL OWNERS OF
THEIR ENERGY GROUP SHARES, WHO HOLD THEIR ENERGY GROUP SHARES AS AN INVESTMENT
(OTHERWISE THAN UNDER A PERSONAL EQUITY PLAN), AND (EXCEPT INSOFAR AS EXPRESS
REFERENCE IS MADE TO THE TREATMENT OF NON-UNITED KINGDOM RESIDENTS) WHO ARE
RESIDENT OR ORDINARILY RESIDENT IN THE UNITED KINGDOM FOR TAX PURPOSES.
SHAREHOLDERS WHO ARE IN ANY DOUBT AS TO THEIR TAXATION POSITION OR WHO ARE
SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UNITED KINGDOM, SHOULD
CONSULT AN APPROPRIATE PROFESSIONAL ADVISER.
(a) TAXATION OF CHARGEABLE GAINS
Liability to United Kingdom taxation on chargeable gains ("CGT") will
depend on the particular circumstances of holders of Energy Group Shares and on
the form of consideration received.
(i) CASH
To the extent that a holder of Energy Group Shares receives cash under the
Texas Utilities Offer, this will constitute a disposal, or part disposal, of his
Energy Group Shares for CGT purposes. Such a disposal or part disposal may,
depending on that shareholder's individual circumstances, give rise to a
liability to CGT.
(ii) LOAN NOTES
A holder of Energy Group Shares who, either alone or together with persons
connected with him, holds not more than 5 per cent. of the shares in, or of any
class of debentures of, The Energy Group, will not be treated as making a
disposal of his Energy Group Shares for CGT purposes to the extent that he
receives Loan Notes by way of consideration. In the case of a shareholder who is
an individual, the Loan Notes should not constitute "qualifying corporate bonds"
for CGT purposes. Accordingly, any gain or loss which would
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otherwise have arisen on a disposal of his Energy Group Shares will be "rolled
over" into the Loan Notes, and the Loan Notes will be treated as the same asset
as his Energy Group Shares, acquired at the same time and price as his Energy
Group Shares. Indexation relief will continue to accrue during the period of
ownership of the Loan Notes. In the case of a shareholder within the charge to
United Kingdom corporation tax, the Loan Notes will constitute "qualifying
corporate bonds" for CGT purposes. Accordingly, any gain or loss which would
otherwise have arisen on a disposal of its Energy Group Shares for their market
value at the date the Texas Utilities Offer becomes unconditional, or, if later,
the date on which the relevant shareholder accepts the Texas Utilities Offer,
will be calculated, and will be "held over" until such shareholder subsequently
disposes of the Loan Notes. Indexation relief will not accrue on Loan Notes held
by such a shareholder.
A holder of Energy Group Shares who, either alone or together with persons
connected with him, holds more than 5 per cent. of the shares in, or of any
class of debentures of, The Energy Group is advised that an application to the
Inland Revenue has been made for clearance under section 138 of the Taxation of
Chargeable Gains Act 1992. The Inland Revenue has not yet granted such
clearance. Subject to the granting of this clearance, any such holder of Energy
Group Shares will be treated in the manner described in the previous paragraph.
A subsequent disposal of Loan Notes (including their redemption or
repayment) may give rise to a liability to CGT.
(iii) TEXAS UTILITIES COMMON STOCK
To the extent that a holder of Energy Group Shares receives Texas Utilities
Common Stock under the Texas Utilities Offer, this will constitute a disposal,
or part disposal, of his Energy Group Shares for CGT purposes for a
consideration equal to the market value of the Texas Utilities Common Stock
received at the date the Texas Utilities Offer becomes unconditional, or, if
later, the date on which the relevant shareholder accepts the Texas Utilities
Offer. Such a disposal or part disposal may, depending on that shareholder's
individual circumstances, give rise to a liability to CGT.
(iv) NON-UNITED KINGDOM RESIDENT HOLDERS OF ENERGY GROUP SHARES AND/OR
ENERGY GROUP ADSS
Holders of Energy Group Shares and/or Energy Group ADSs who are not
resident or ordinarily resident for tax purposes in the United Kingdom may be
liable to CGT on capital gains realised on the disposal of their Energy Group
Shares or Energy Group ADSs if such shares or ADSs are used, held or acquired
for the purposes of a trade, profession or vocation carried on in the United
Kingdom through a branch or agency or for the purposes of such branch or agency.
Such holders may also be subject to foreign taxation on any gain under local
law.
(b) TAXATION OF LOAN NOTES
(i) WITHHOLDING TAX
Payment of interest on the Loan Notes will be made subject to the deduction
of United Kingdom income tax at the lower rate (currently, 20 per cent.) unless
TU Acquisitions has been directed by the Inland Revenue, in respect of a
particular holding of Loan Notes, to make the payment free from deduction or
subject to a reduced rate of deduction (by virtue of relief under the terms of
an applicable double taxation agreement). Such a direction will only be made
following an application in the appropriate manner to the relevant tax
authorities by the holder of the relevant Loan Notes.
(ii) INDIVIDUALS
The gross amount of interest on the Loan Notes will form part of the
recipient's income for the purposes of United Kingdom income tax, credit being
allowed for the tax deducted. Individuals who are taxable only at the lower rate
or the basic rate (currently, 23 per cent.) will have no further tax to pay in
respect of the interest. Individuals whose income tax liability is less than the
aggregate of the tax deducted from other income paid to them and the tax
deducted in respect of interest on the Loan Notes will be entitled to an
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appropriate repayment of tax. Individuals who are subject to tax at the higher
rate (currently, 40 per cent.) will have to account for additional tax to the
extent that tax at such rate on the gross amount of the interest exceeds the
credit for the tax deducted.
Under the "accrued income scheme", a transfer of Loan Notes may also give
rise to a charge to United Kingdom income tax in respect of an amount
representing interest on the Loan Notes which has accrued since the preceding
interest payment date. Any amount charged to United Kingdom income tax in this
way will be deducted from the proceeds of disposal for CGT purposes.
(iii) CORPORATES
Holders of Loan Notes within the charge to United Kingdom corporation tax
in respect of the Loan Notes will generally bring into account for the purposes
of corporation tax on income, interest and profits, gains and losses arising
from fluctuations in the value of, and disposals of, the Loan Notes in each
accounting period, broadly in accordance with the accounting treatment of such
holders authorised for this purpose. Credit against corporation tax will be
given for any income tax deducted from the payment of interest.
(c) TAXATION OF DIVIDEND INCOME
A holder of Texas Utilities Common Stock will generally be liable to income
tax or corporation tax in the United Kingdom on the aggregate of any dividend
received from Texas Utilities, any tax deducted at source in the US (see below
under "United States federal income taxation") and any tax deducted in the
United Kingdom (see below). In computing that liability to taxation, credit will
be given for any tax deducted in the US and any tax deducted in the United
Kingdom.
Individuals whose income tax liability is less than the aggregate of the
tax deducted from other income paid to them, and the tax deducted in the US in
respect of dividends on the Texas Utilities Common Stock, will not be entitled
to a repayment by the Inland Revenue of the US tax. Individuals whose income tax
liability is less than the aggregate of the tax deducted from other income paid
to them, and the tax deducted in the US and any tax deducted in the United
Kingdom in respect of dividends on the Texas Utilities Common Stock, may be
entitled to a repayment of part or all of the United Kingdom tax. Where United
Kingdom income tax is deducted from such dividends, individuals who are subject
to tax at the lower rate or the basic rate will have no further United Kingdom
tax to pay in respect of the dividend. Where United Kingdom income tax is not
deducted from such dividends, individuals who are subject to tax at the lower
rate or the basic rate will have to account for additional tax to the extent
that tax at the lower rate on the aggregate of the dividend received and the tax
deducted in the US exceeds the tax deducted in the US. Individuals who are
subject to tax at the higher rate (currently, 40 per cent.) will have to account
for additional tax to the extent that tax at such rate on the aggregate of the
dividend received and the tax deducted in the US and, where applicable, the
United Kingdom exceeds the tax deducted in the US and the United Kingdom.
Corporate holders of Texas Utilities Common Stock will generally have to
account for additional tax to the extent that corporation tax at the rate at
which such holder pays tax (currently, 31 per cent. in the case of most
corporate holders) exceeds the tax deducted in the US and the United Kingdom.
Although no repayment from the Inland Revenue of any tax deducted in the US will
be available to a holder of Texas Utilities Common Stock, in the case of a
corporate holder of Texas Utilities Common Stock which controls 10 per cent. or
more of the voting stock of Texas Utilities, credit will also be available
against corporation tax on the dividend for US tax paid by Texas Utilities in
respect of the profits out of which the dividend is paid.
No liability to income tax will arise for individual holders of Texas
Utilities Common Stock who, although United Kingdom resident, are not domiciled
in the United Kingdom, or for Commonwealth citizens or citizens of the Republic
of Ireland who are not ordinarily resident in the United Kingdom, except to the
extent that amounts are remitted to the United Kingdom (or are treated for tax
purposes as remitted to the United Kingdom).
An agent in the United Kingdom who, on behalf of a holder of Texas
Utilities Common Stock, collects a dividend paid by Texas Utilities, may be
required to deduct and account to the United Kingdom Inland
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Revenue for United Kingdom income tax (currently, at the rate of 20 per cent.).
However, credit will be given for tax deducted in the US, thereby reducing the
aggregate deduction to 20 per cent. of the gross dividend.
(D) GENERAL
Special tax provisions may apply to holders of Energy Group Shares who have
acquired or acquire their Energy Group Shares by exercising options under the
Energy Group Share Schemes, including provisions imposing a charge to income
tax.
(E) STAMP DUTY AND STAMP DUTY RESERVE TAX ("SDRT")
These comments are intended as a guide to the general position and do not
relate to persons such as intermediaries and persons connected with depositary
arrangements or clearance services, to whom special rules apply.
(I) ACCEPTANCE OF THE TEXAS UTILITIES OFFER
No stamp duty or SDRT will be payable by holders of Energy Group Shares as
a result of accepting the Texas Utilities Offer.
(II) LOAN NOTES
Under current Inland Revenue practice, no stamp duty or SDRT will be
payable on the issue of, or a transfer or sale of (or an agreement to transfer
or sell) Loan Notes.
(III) TEXAS UTILITIES COMMON STOCK
No stamp duty or SDRT will be payable on the issue of Texas Utilities
Common Stock. No SDRT will be payable on a transfer or sale of (or an agreement
to transfer or sell) Texas Utilities Common Stock. Stamp duty may, in certain
circumstances, be payable on a transfer or sale of Texas Utilities Common Stock,
including where the transfer is executed in the United Kingdom; this will be
payable by the transferee or the purchaser.
13 UNITED STATES FEDERAL INCOME TAXATION
The following paragraphs address certain United States federal income tax
consequences applicable to holders of Energy Group Securities who accept the
Texas Utilities Offer and, except as otherwise noted, are United States Holders
(as defined below). This summary is based on the Internal Revenue Code, and
administrative pronouncements, judicial decisions and existing and proposed
Treasury Regulations thereunder, changes to any of which (which may be
retroactive) may affect the tax consequences described herein. This summary
assumes that the Energy Group Securities have been held as capital assets. It
does not address the tax treatment of individuals who have received Energy Group
Securities in connection with employment, such as by the exercise of options
granted to employees. This summary also assumes that The Energy Group is not and
has never been either a passive foreign investment company or a controlled
foreign corporation for US federal income tax purposes. This summary does not
discuss all tax consequences that may be relevant to a holder of Energy Group
Securities in the light of such holder's particular circumstances or to holders
subject to special rules, such as certain financial institutions, regulated
investment companies, insurance companies, dealers in securities, exempt
organisations, persons holding Energy Group Securities as part of a hedge,
straddle or conversion transaction and holders that are residents of countries
other than the United States or whose functional currency is not the United
States dollar.
(A) UNITED STATES HOLDERS
As used herein, a "United States Holder" means a beneficial owner of Energy
Group Securities that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is
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subject to United States federal income taxation regardless of its source, or a
trust the administration of which is subject to the primary supervision of a
court within the United States and for which one or more US Persons have the
authority to control all substantial decisions. An individual may, subject to
certain exceptions, be deemed to be a resident of the United States (as opposed
to a non-resident alien) by virtue of being present in the United States on at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). A "Non-United States Holder" is a holder that is not
a United States Holder.
(i) ACCEPTANCE OF TEXAS UTILITIES OFFER
In general, a United States Holder of Energy Group Securities that sells
such securities pursuant to the Texas Utilities Offer will, for United States
federal income tax purposes, recognise gain or loss equal to the difference
between such holder's adjusted tax basis in the Energy Group Securities
transferred and the amount realized in exchange therefor. The amount realized
will equal the sum of (i) the dollar value of the pounds sterling received, and
(ii) the fair market value of any Texas Utilities Common Stock received. Such
gain or loss generally will be capital gain or loss. Under the US Taxpayer
Relief Act of 1997, an individual taxpayer who has held a capital asset for more
than 18 months generally will be taxed on gain from the sale of that asset at a
maximum rate of 20 per cent. A 28 per cent. maximum rate generally applies to
the sale of a capital asset held more than one year but not more than 18 months.
In addition, an accrual basis United States Holder of Energy Group
Securities that sells such securities pursuant to the Texas Utilities Offer and
does not elect to be treated as a cash basis taxpayer pursuant to the foreign
currency exchange regulations may have a foreign currency exchange gain or loss
for United States federal income tax purposes because of differences between the
US dollars/pounds sterling exchange rates prevailing on the date of sale and on
the date of payment. Any such currency gain or loss would be treated as ordinary
income or loss and would be in addition to gain or loss realised by the holder
on the disposition of Energy Group Securities pursuant to the Texas Utilities
Offer. Regardless of his method of accounting, a United States Holder will
recognise ordinary income or loss upon the subsequent sale or exchange of any
pounds sterling received as a result of the acceptance of the Texas Utilities
Offer. Such income or loss will equal the difference between the amount realised
from the sale or exchange and such holder's tax basis in the pounds sterling
received, which generally will equal the US dollar value of the pounds sterling
on the date of payment.
(ii) DISTRIBUTIONS
Distributions, if any, made with respect to Texas Utilities Common Stock
will be treated as ordinary dividend income to the extent of Texas Utilities's
current or accumulated earnings and profits, then as a return of capital to the
extent of tax basis, and then as gain from the sale of stock. In the case of
corporate holders, such distributions, to the extent that they are treated as
ordinary dividend income, will generally qualify for the dividends received
deduction (subject to generally applicable exceptions).
(iii) DISPOSAL OF TEXAS UTILITIES COMMON STOCK
Upon the sale or exchange of Texas Utilities Common Stock, United States
Holders will recognise capital gain or loss equal to the difference between the
amount realized from the sale or exchange and such holder's tax basis in the
shares. A United States Holder's tax basis in the Texas Utilities Common Stock
generally will equal its fair market value at the time gain or loss is
recognized upon acceptance of the Texas Utilities Offer.
(iv) INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting will apply with respect to the cash
proceeds of the Texas Utilities Offer to certain non-corporate United States
Holders of Energy Group Securities.
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A United States Holder of Energy Group Securities may be subject to a 31
per cent. US back-up withholding tax with respect to the cash payment if (i) the
holder fails to furnish a taxpayer identification number ("TIN") to the payor or
establish an exemption from back-up withholding, (ii) the US Internal Revenue
Service ("IRS") notifies the payor that the TIN furnished by the holder is
incorrect, (iii) there has been a notified payee underreporting with respect to
interest or dividends described in section 3406(c) of the Internal Revenue Code,
or (iv) there is a failure of the holder to certify under the penalty of perjury
that the holder is not subject to withholding as described in section 3406 of
the Internal Revenue Code.
To prevent back-up withholding on any cash payment delivered pursuant to
the Texas Utilities Offer, each United States Holder of Energy Group ADSs that
accepts the Texas Utilities Offer by means of the Letter of Transmittal and each
United States Holder of Energy Group Shares that accepts the Texas Utilities
Offer by sending the Form of Acceptance to the US Depositary must provide the US
Depositary with that holder's correct taxpayer identification number and certify
that the holder is not subject to US back-up federal income tax withholding by
completing the Substitute Form W-9 included in the Letter of Transmittal or Form
of Acceptance.
(B) NON-UNITED STATES HOLDERS
(I) DISTRIBUTIONS
Distributions, if any, made with respect to Texas Utilities Common Stock
and paid to a Non-United States Holder generally will be subject to withholding
of United States federal income tax at the rate of 30 per cent. of the amount of
the dividend, or such lower rate as may be specified by an applicable double
taxation treaty. Under the provisions of the US/United Kingdom double taxation
treaty, the rate of U.S. federal withholding tax on a dividend paid by Texas
Utilities to a person resident in the United Kingdom for tax purposes who is
beneficially entitled to the dividend and who does not control 10 per cent. or
more of the voting stock of Texas Utilities is, subject to certain exceptions,
reduced to 15 per cent. of the amount of the dividend. However, dividends that
are effectively connected with the conduct of a trade or business by the
Non-United States Holder within the United States, or, if a double taxation
treaty applies (such as the US/United Kingdom double taxation treaty), are
attributable to a United States permanent establishment of the Non-United States
Holder, are not subject to the 30 per cent. withholding tax but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a corporate Non-United States Holder may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30 per
cent. rate or such lower rate as may be specified by an applicable double
taxation treaty.
In the case of dividends paid prior to 1 January 1999, the payor is
responsible for determining whether a reduced rate of withholding is
appropriate. Where Texas Utilities is satisfied that the Non-United States
Holder beneficially entitled to a dividend is resident in the United Kingdom for
purposes of the US/United Kingdom double taxation treaty, Texas Utilities will
withhold US tax at the treaty rate of 15 per cent. of the amount of the
dividend. In the case of dividends paid after 31 December 1998, a Non-United
States Holder who wishes to claim the benefit of an applicable treaty rate must
satisfy certain certification and other requirements. A Non-United States Holder
must comply with certain certification and disclosure requirements in order to
be exempt from withholding under the effectively connected income exemption
discussed above.
If it is subsequently determined that some or all of a distribution on the
Texas Utilities Common Stock should be treated as a return of capital, a
Non-United States Holder may obtain a refund of some or all of the tax withheld
by filing an appropriate claim for refund with the IRS. A Non-United States
Holder eligible for a reduced rate of withholding pursuant to an income tax
treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the IRS.
(II) DISPOSAL OF TEXAS UTILITIES COMMON STOCK
A Non-United States Holder will generally not be subject to United States
federal income tax with respect to gain recognized on a sale, exchange,
redemption or other disposition of the Texas Utilities Common
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Stock unless (i) the gain is effectively connected with a trade or business of
the Non-United States Holder in the United States, or, if a double tax treaty
applies (such as the US/United Kingdom treaty), is attributable to a United
States permanent establishment of the Non-United States Holder, (ii) in the case
of a Non-United States Holder who is an individual and holds the Texas Utilities
Common Stock as a capital asset, such holder is present in the United States for
183 days or more in the taxable year of the sale or other disposition and
certain other conditions are met, (iii) the Non-United States Holder is subject
to tax pursuant to certain provisions of the Internal Revenue Code applicable to
United States expatriates, or (iv) the Non-United States Holder holds more than
5 per cent. of the Texas Utilities Common Stock during a certain prescribed
period.
(III) INFORMATION REPORTING AND BACKUP WITHHOLDING
No information reporting or backup withholding will be required with
respect to any cash payment made pursuant to the Texas Utilities Offer if the
Non-United States Holder completes and sends to the US Depositary a Form W-8,
Certificate of Foreign Status, a copy of which is available, upon request, from
the US Depositary or the IRS.
Information reporting and backup withholding generally will not apply under
current law to dividends paid to a Non-United States Holder of Texas Utilities
Common Stock at an address outside the United States that are subject to the 30
per cent. withholding discussed above (or that are not so subject because (i) a
tax treaty applies that reduces or eliminates such 30 per cent. withholding, or
(ii) such withholding is not required under the effectively connected income
exception discussed above), provided that the payor does not have definite
knowledge that the payee is a United States person. However, in the case of
dividends paid after 31 December 1998, a Non-United States Holder generally
would be subject to information reporting (but not backup withholding) unless
certain certification procedures are complied with, either directly or through
an intermediary.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS INTENDED TO
BE ONLY A SUMMARY OF THE PRINCIPAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS OF THE TEXAS UTILITIES OFFER. EACH HOLDER OF ENERGY GROUP
SECURITIES SHOULD CONSULT HIS OR HER OWN TAX ADVISER CONCERNING THE UNITED
STATES FEDERAL AND APPLICABLE STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
OF THE TEXAS UTILITIES OFFER.
14 EXPERTS
The consolidated financial statements included in Texas Utilities' Current
Report on Form 8-K dated 26 February 1998, incorporated herein by reference,
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
such Form 8-K, and have been incorporated herein in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information included in TEI's and Texas Utilities' Quarterly Reports on Form
10-Q that are incorporated herein by reference, Deloitte & Touche LLP has
applied limited procedures in accordance with professional standards for reviews
of such information. As stated in their reports included in TEI's and Texas
Utilities' Quarterly Reports on Form 10-Q, Deloitte & Touche LLP did not audit
and they did not express an opinion on such interim financial information.
Accordingly, the degree of reliance on any of its reports on such information
should be restricted in light of the limited nature of the review procedures
applied. Deloitte & Touche LLP is not subject to the liability provisions of
Section 11 of the Securities Act, for their reports on such unaudited interim
financial information because such reports are not "reports" or a "part" of the
Registration Statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Securities Act.
The consolidated financial statements included in the ENSERCH 10-K,
incorporated herein by reference, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report included in such ENSERCH 10-K,
and have been incorporated by reference herein in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information included in ENSERCH's Quarterly Reports on Form 10-Q that are
incorporated herein by reference, Deloitte & Touche
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LLP has applied limited procedures in accordance with professional standards for
reviews of such information. As stated in their reports included in ENSERCH's
Quarterly Reports on Form 10-Q, Deloitte & Touche LLP did not audit and they do
not express an opinion on such interim financial information. Accordingly, the
degree of reliance on any of its reports on such information should be
restricted in light of the limited nature of the review procedures applied.
Deloitte & Touche LLP is not subject to the liability provisions of Section 11
of the Securities Act for their reports on such unaudited interim financial
information because such reports are not "reports" or a "part" of the
Registration Statement prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Securities Act.
15 LEGAL MATTERS
The statements made as to matters of law and legal conclusions in the TEI
10-K under part I, Item 1 -- Business-Regulation and Rates, and Environmental
Matters, incorporated herein by reference, have been reviewed by Worsham,
Forsythe & Wooldridge, L.L.P., Dallas, Texas, counsel for Texas Utilities. All
of such statements are set forth, or have been incorporated by reference, herein
in reliance upon the opinion of that firm given upon their authority as experts.
At 31 December 1997, members of the firm of Worsham, Forsythe & Wooldridge,
L.L.P., owned approximately 44,000 shares of the Common Stock of Texas
Utilities. The statements made as to matters of law and legal conclusions in
this Offer Document under paragraph 14 of Appendix VIII ("United States federal
income taxation") have been reviewed by Reid & Priest LLP, New York, New York,
and are set forth herein in reliance upon the opinion of that firm given upon
their authority as experts. The statements made as to matters of law and legal
conclusions in this Offer Document under paragraph 13 of Appendix VIII ("United
Kingdom taxation") have been reviewed by Norton Rose, London, England, and are
set forth herein in reliance upon the opinion of that firm given upon their
authority as experts.
The validity of the Texas Utilities Common Stock is being passed upon for
Texas Utilities by Worsham, Forsythe & Wooldridge, L.L.P. and by Reid & Priest
LLP. However, all matters pertaining to incorporation of Texas Utilities and all
other matters of Texas law relating to Texas Utilities will be passed upon only
by Worsham, Forsythe & Wooldridge, L.L.P.
16 FEES AND EXPENSES
Lehman Brothers and Merrill Lynch are acting as Texas Utilities' financial
advisers in connection with the Texas Utilities Offer.
Pursuant to a letter agreement dated 20 February 1998 between Lehman
Brothers and Texas Utilities, Texas Utilities made an initial payment of
$150,000 upon signing of the letter agreement, a payment of $1,500,000 upon the
announcement of Texas Utilities' first offer and has agreed to pay an additional
fee of $[-] million upon the Texas Utilities Offer becoming or being declared
wholly unconditional.
Pursuant to a letter agreement dated 20 February 1998 between Merrill Lynch
and Texas Utilities, Texas Utilities made an initial payment of $150,000 upon
signing of the letter agreement, a payment of $1,500,000 upon the announcement
of Texas Utilities' first offer and has agreed to pay an additional fee of
$6,550,000 million upon the Texas Utilities Offer becoming or being declared
wholly unconditional.
Each letter agreement further provides that Texas Utilities will reimburse
Lehman Brothers and Merrill Lynch for their respective out-of-pocket expenses,
and indemnify Lehman Brothers and Merrill Lynch, respectively, against certain
expenses and liabilities in connection with the Texas Utilities Offer.
[- Pursuant to a letter dated - March 1998 (the "US Dealer Manager
Agreement"), TU Acquisitions and Texas Utilities have retained Lehman Brothers
Inc. and Merrill Lynch & Co., US affiliates of Lehman Brothers and Merrill
Lynch, as US Dealer Managers for the Texas Utilities Offer in the United States
to perform those services in connection with the Texas Utilities Offer as are
customarily performed in the United States by investment banking concerns acting
as dealer manager in connection with offers of a like nature. Lehman Brothers
Inc. and Merrill Lynch & Co. will not receive additional compensation for acting
in this capacity.]
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TU Acquisitions has retained The Royal Bank of Scotland plc as the United
Kingdom Receiving Agent, The Bank of New York as the US Depositary, and D.F.
King & Co., Inc. as the Information Agent. TU Acquisitions will pay the United
Kingdom Receiving Agent, the US Depositary and the Information Agent reasonable
and customary compensation for their services in connection with the Texas
Utilities Offer, together with reimbursement of out of pocket expenses. TU
Acquisitions will indemnify the US Depositary and the Information Agent against
certain liabilities and expenses in connection therewith, including liabilities
under the US federal securities laws. Brokers, dealers, commercial banks and
trust companies will be reimbursed by Texas Utilities for customary mailing and
handling expenses incurred by them in forwarding material to their customers.
Texas Utilities and TU Acquisitions will not pay any fees or commissions to
any broker or dealer or any other person for soliciting acceptances of the Texas
Utilities Offer (other than to Lehman Brothers, Merrill Lynch and the
Information Agent, as described above.)
17 SOURCES OF INFORMATION AND BASES OF CALCULATION
(a) The value of the fully diluted share capital of The Energy Group is
based upon 520,857,817 Energy Group Shares in issue on 27 February
1998 and 9,048,288 Energy Group Shares which could fall to be issued
on exercise in full of options and vesting of all outstanding awards
granted under the Energy Group Share Schemes.
(b) The pro forma financial information in respect of The Energy Group for
the year ended 31 March 1996 is taken from the unaudited pro forma
consolidated profit and loss account set out in The Energy Group's
report and accounts for the six months ended 31 March 1997. The
financial information in respect of The Energy Group for the nine
months ended 31 December 1997 is taken from the unaudited financial
results for the nine months ended 31 December 1997, as announced by
The Energy Group on 3 February 1998.
(c) The financial information on the Peabody Coal Business for the nine
months ended 31 December 1997 is unaudited and is derived from the
unaudited financial results of The Energy Group for the nine months
ended 31 December 1997 using estimates by Texas Utilities on the basis
of the historical financial results of The Energy Group.
(d) The financial information on Texas Utilities for the year ended and as
of 31 December 1997 is taken from Texas Utilities' Current Report on
Form 8-K dated 26 February 1998.
(e) The equity market capitalisation of Texas Utilities on 27 February
1998 is calculated by reference to the closing price of the Texas
Utilities Common Stock on the NYSE Composite Tape on such date.
(f) References in this announcement to "tons" are to short tons equal to
2,000 pounds.
18 DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the documents listed below may be inspected at the offices of
Norton Rose, Kempson House, Camomile Street, London EC3A 7AN (also being the
registered office of TU Acquisitions). During usual business hours on any
weekday (Saturdays, Sundays and public holidays excepted) whilst the Texas
Utilities Offer remains open for acceptance:
(a) the Memorandum and Articles of Association of TU Acquisitions.
(b) the Memorandum and Articles of Association of The Energy Group.
(c) the audited financial statements of Texas Utilities, together with the
notes thereto, set out in Appendix V of the Offer Document.
(d) the Energy Group Listing Particulars, the audited consolidated
accounts of The Energy Group for the six months ended 31 March 1997
and The Energy Group's third quarter results for the nine months ended
31 December 1997.
(e) the consents referred to in paragraph 5(e) above;
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(f) the material contracts referred to in paragraph 6 above;
(g) documentation relating to the financing arrangements detailed in
paragraph 8 above;
(h) the Loan Note Instrument in substantially final form;
(i) the lists of dealings referred to in paragraph 4 above;
[(j) the derivative contracts referred to in paragraph 4 above;] and
(k) the documents incorporated by reference referred to on pages 3 and 4.
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APPENDIX IX
CERTAIN PROVISIONS OF THE COMPANIES ACT 1985
428. TAKEOVER OFFERS
(1) In this Part of this Act "takeover offer" means an offer to acquire all
the shares, or all the shares of any class or classes, in a company (other than
shares which at the date of the offer are already held by the offeror), being an
offer on terms which are the same in relation to all the shares to which the
offer relates or, where those shares include shares of different classes, in
relation to all the shares of each class.
(2) In subsection (1) "shares" means shares which have been allotted on the
date of the offer but a takeover offer may include among the shares to which it
relates all or any shares that are subsequently allotted before a date specified
in or determined in accordance with the terms of the offer.
(3) The terms offered in relation to any shares shall for the purposes of
this section be treated as being the same in relation to all the shares or, as
the case may be, all the shares of a class to which the offer relates
notwithstanding any variation permitted by subsection (4).
(4) A variation is permitted by this subsection where --
(a) the law of a country or territory outside the United Kingdom
precludes an offer of consideration in the form or any of the forms
specified in the terms in question or precludes it except after compliance
by the offeror with conditions with which he is unable to comply or which
he regards as unduly onerous; and
(b) the variation is such that the persons to whom an offer of
consideration in that form is precluded are able to receive consideration
otherwise than in that form but of substantially equivalent value.
(5) The reference in subsection (1) to shares already held by the offeror
includes a reference to shares which he has contracted to acquire but that shall
not be construed as including shares which are the subject of a contract binding
the holder to accept the offer when it is made, being a contract entered into by
the holder either for no consideration and under seal or for no consideration
other than a promise by the offeror to make the offer.
(6) In the application of subsection (5) to Scotland the words "and under
seal" shall be omitted.
(7) Where the terms of an offer make provision for their revision and for
acceptances on the previous terms to be treated as acceptances on the revised
terms, the revision shall not be regarded for the purposes of this Part of this
Act as the making of a fresh offer and references in this Part of this Act to
the date of the offer shall accordingly be construed as references to the date
on which the original offer was made.
(8) In this Part of this Act "the offeror" means, subject to section 430D,
the person making a takeover offer and "the company" means the company whose
shares are the subject of the offer.
429. RIGHT OF OFFEROR TO BUY OUT MINORITY SHAREHOLDERS
(1) If, in a case in which a takeover offer does not relate to shares of
different classes, the offeror has by virtue of acceptances of the offer
acquired or contracted to acquire not less than nine-tenths in value of the
shares to which the offer relates he may give notice to the holder of any shares
to which the offer relates which the offeror has not acquired or contracted to
acquire that he desires to acquire those shares.
(2) If, in a case in which a takeover offer relates to shares of different
classes, the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire not less than nine-tenths in value of the shares of any
class to which the offer relates, he may give notice to the holder of any shares
of that class which the offeror has not acquired or contracted to acquire that
he desires to acquire those shares.
(3) No notice shall be given under subsection (1) or (2) unless the offeror
has acquired or contracted to acquire the shares necessary to satisfy the
minimum specified in that subsection before the end of the period of
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four months beginning with the date of the offer; and no such notice shall be
given after the end of the period of two months beginning with the date on which
he has acquired or contracted to acquire shares which satisfy that minimum.
(4) Any notice under this section shall be given in the prescribed manner;
and when the offeror gives the first notice in relation to an offer he shall
send a copy of it to the company together with a statutory declaration by him in
the prescribed form stating that the conditions for the giving of the notice are
satisfied.
(5) Where the offeror is a company (whether or not a company within the
meaning of this Act) the statutory declaration shall be signed by a director.
(6) Any person who fails to send a copy of a notice or a statutory
declaration as required by subsection (4) or makes such a declaration for the
purposes of that subsection knowing it to be false or without having reasonable
grounds for believing it to be true shall be liable to imprisonment or a fine,
or both, and for continued failure to send the copy or declaration, to a daily
default fine.
(7) If any person is charged with an offence for failing to send a copy of
a notice as required by subsection (4) it is a defence for him to prove that he
took reasonable steps for securing compliance with that subsection.
(8) When during the period within which a takeover offer can be accepted
the offeror acquires or contracts to acquire any of the shares to which the
offer relates but otherwise than by virtue of acceptances of the offer, then,
if --
(a) the value of the consideration for which they are acquired or
contracted to be acquired ("the acquisition consideration") does not at
that time exceed the value of the consideration specified in the terms of
the offer; or
(b) those terms are subsequently revised so that when the revision is
announced the value of the acquisition consideration, at the time mentioned
in paragraph (a) above, no longer exceeds the value of the consideration
specified in those terms,
the offeror shall be treated for the purposes of this section as having acquired
or contracted to acquire those shares by virtue of acceptances of the offer; but
in any other case those shares shall be treated as excluded from those to which
the offer relates.
430. EFFECT OF NOTICE UNDER s.429
(1) The following provisions shall, subject to section 430C, have effect
where a notice is given in respect of any shares under section 429.
(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer.
(3) Where the terms of an offer are such as to give the holder of any
shares a choice of consideration the notice shall give particulars of the choice
and state --
(a) that the holder of the shares may within six weeks from the date
of the notice indicate his choice by a written communication sent to the
offeror at an address specified in the notice; and
(b) which consideration specified in the offer is to be taken as
applying in default of his indicating a choice as aforesaid;
and the terms of the offer mentioned in subsection (2) shall be determined
accordingly.
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(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can still be
complied with; and if the consideration chosen by the holder of the shares --
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound
or able to provide it,
the consideration shall be taken to consist of an amount of cash payable by the
offeror which at the date of the notice is equivalent to the chosen
consideration.
(5) At the end of six weeks from the date of the notice the offerer shall
forthwith --
(a) send a copy of the notice to the company; and
(b) pay or transfer to the company the consideration for the shares to
which the notice relates.
(6) If the shares to which the notice relates are registered the copy of
the notice sent to the company under subsection (5)(a) shall be accompanied by
an instrument of transfer executed on behalf of the shareholder by a person
appointed by the offeror; and on receipt of that instrument the company shall
register the offeror as the holder of those shares.
(7) If the shares to which the notice relates are transferable by the
delivery of warrants or other instruments the copy of the notice sent to the
company under subsection (5)(a) shall be accompanied by a statement to that
effect; and the company shall on receipt of the statement issue the offeror with
warrants or other instruments in respect of the shares and those already in
issue in respect of the shares shall become void.
(8) Where the consideration referred to in paragraph (b) of subsection (5)
consists of shares or securities to be allotted by the offeror the reference in
that paragraph to the transfer of the consideration shall be construed as a
reference to the allotment of the shares or securities to the company.
(9) Any sum received by a company under paragraph (b) of subsection (5) and
any other consideration received under that paragraph shall be held by the
company on trust for the person entitled to the shares in respect of which the
sum or other consideration was received.
(10) Any sum received by a company under paragraph (b) of subsection (5),
and any dividend or other sum accruing from any other consideration received by
a company under that paragraph, shall be paid into a separate bank account,
being an account the balance on which bears interest at an appropriate rate and
can be withdrawn by such notice (if any) as is appropriate.
(11) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to any consideration held on trust by virtue of
subsection (9) cannot be found and twelve years have elapsed since the
consideration was received or the company is wound up the consideration
(together with any interest, dividend or other benefit that has accrued from it)
shall be paid into court.
(12) In relation to a company registered in Scotland, subsections (13) and
(14) shall apply in place of subsection (11).
(13) Where after reasonable enquiry made at such intervals as are
reasonable the person entitled to any consideration held on trust by virtue of
subsection (9) cannot be found and twelve years have elapsed since the
consideration was received or the company is wound up --
(a) the trust shall terminate;
(b) the company or, as the case may be, the liquidator shall sell any
consideration other than cash and any benefit other than cash that has
accrued from the consideration; and
(c) a sum representing --
(i) the consideration so far as it is cash;
(ii) the proceeds of any sale under paragraph (b) above; and
(iii) any interest, dividend or other benefit that has accrued from
the consideration,
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shall be deposited in the name of the Accountant of Court in a bank account such
as is referred to in subsection (10) and the receipt for the deposit shall be
transmitted to the Accountant of Court.
(14) Section 58 of the Bankruptcy (Scotland) Act 1985 (so far as consistent
with this Act) shall apply with any necessary modifications to sums deposited
under subsection (13) as that section applies to sums deposited under section
57(l)(a) of that Act.
(15) The expenses of any such enquiry as is mentioned in subsection (11) or
(13) may be defrayed out of the money or other property held on trust for the
person or persons to whom the enquiry relates.
430A. RIGHT OF MINORITY SHAREHOLDER TO BE BOUGHT OUT BY OFFEROR
(1) If a takeover offer relates to all the shares in a company and at any
time before the end of the period within which the offer can be accepted --
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares to which the offer
relates; and
(b) those shares, with or without any other shares in the company
which he has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares in the company,
the holder of any shares to which the offer relates who has not accepted the
offer may by a written communication addressed to the offeror require him to
acquire those shares.
(2) If a takeover offer relates to shares of any class or classes and at
any time before the end of the period within which the offer can be accepted --
(a) the offeror has by virtue of acceptances of the offer acquired or
contracted to acquire some (but not all) of the shares of any class to
which the offer relates; and
(b) those shares, with or without any other shares of that class which
he has acquired or contracted to acquire, amount to not less than
nine-tenths in value of all the shares of that class,
the holder of any shares of that class who has not accepted the offer may by a
written communication addressed to the offeror require him to acquire those
shares.
(3) Within one month of the time specified in subsection (1) or, as the
case may be, subsection (2) the offeror shall give any shareholder who has not
accepted the offer notice in the prescribed manner of the rights that are
exercisable by him under that subsection; and if the notice is given before the
end of the period mentioned in that subsection it shall state that the offer is
still open for acceptance.
(4) A notice under subsection (3) may specify a period for the exercise of
the rights conferred by this section and in that event the rights shall not be
exercisable after the end of that period; but no such period shall end less than
three months after the end of the period within which the offer can be accepted.
(5) Subsection (3) does not apply if the offeror has given the shareholder
a notice in respect of the shares in question under section 429.
(6) If the offeror fails to comply with subsection (3) he and, if the
offeror is a company, every officer of the company who is in default or to whose
neglect the failure is attributable, shall be liable to a fine and for continued
contravention, to a daily default fine.
(7) If an offeror other than a company is charged with an offence for
failing to comply with subsection (3) it is a defence for him to prove that he
took all reasonable steps for securing compliance with that subsection.
430B. EFFECT OF REQUIREMENT UNDER s.430A
(1) The following provisions shall, subject to section 430C, have effect
where a shareholder exercises his rights in respect of any shares under section
430A.
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(2) The offeror shall be entitled and bound to acquire those shares on the
terms of the offer or on such other terms as may be agreed.
(3) Where the terms of an offer are such as to give the holder of shares a
choice of consideration the holder of the shares may indicate his choice when
requiring the offeror to acquire them and the notice given to the holder under
section 430A(3) --
(a) shall give particulars of the choice and of the rights conferred
by this subsection; and
(b) may state which consideration specified in the offer is to be
taken as applying in default of his indicating a choice;
and the terms of the offer mentioned in subsection (2) shall be determined
accordingly.
(4) Subsection (3) applies whether or not any time-limit or other
conditions applicable to the choice under the terms of the offer can still be
complied with; and if the consideration chosen by the holder of the shares --
(a) is not cash and the offeror is no longer able to provide it; or
(b) was to have been provided by a third party who is no longer bound
or able to provide it,
the consideration shall be taken to consist of an amount of cash payable by the
offeror which at the date when the holder of the shares requires the offeror to
acquire then is equivalent to the chosen consideration.
430C. APPLICATIONS TO THE COURT
(1) Where a notice is give under section 429 to the holder of any shares
the court may, on an application made by him within six weeks from the date on
which the notice was given --
(a) order that the offeror shall not be entitled and bound to acquire
the shares; or
(b) specify terms of acquisition different from those of the offer.
(2) If an application to the court under subsection (1) is pending at the
end of the period mentioned in subsection (5) of section 430 that subsection
shall not have effect until the application has been disposed of.
(3) Where the holder of any shares exercises his rights under section 430A
the court may, on an application made by him or the offeror, order that the
terms on which the offeror is entitled and bound to acquire the shares shall be
such as the court thinks fit.
(4) No order for costs or expenses shall be made against a shareholder
making an application under subsection (1) or (3) unless the court considers --
(a) that the application was unnecessary, improper or vexatious; or
(b) that there has been unreasonable delay in making the application
or unreasonable conduct on his part in conducting the proceedings on the
application.
(5) Where a takeover offer has not been accepted to the extent necessary
for entitling the offeror to give notices under subsection (1) or (2) of section
429 the court may, on the application of the offeror, make an order authorising
him to give notices under that subsection if satisfied --
(a) that the offeror has after reasonable enquiry been unable to trace
one or more of the persons holding shares to which the offer relates;
(b) that the shares which the offeror has acquired or contracted to
acquire by virtue of acceptances of the offer, together with the shares
held by the person or persons mentioned in paragraph (a), amount to not
less than the minimum specified in that subsection; and
(c) that the consideration offered is fair and reasonable;
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but the court shall not make an order under this subsection unless it considers
that it is just and equitable to do so having regard, in particular, to the
number of shareholders who have been traced but who have not accepted the offer.
430D. JOINT OFFERS
(1) A takeover offer may be made by two or more persons jointly and in that
event this Part of this Act has effect with the following modifications.
(2) The conditions for the exercise of the rights conferred by sections 429
and 430A shall be satisfied by the joint offerors acquiring or contracting to
acquire the necessary shares jointly (as respects acquisitions by virtue of
acceptances of the offer) and either jointly or separately (in other cases);
and, subject to the following provisions, the rights and obligations of the
offeror under those sections and sections 430 and 430B shall be respectively
joint rights and joint and several obligations of the joint offerors.
(3) It shall be a sufficient compliance with any provision of those
sections requiring or authorising a notice or other document to be given or sent
by or to the joint offerors that it is given or sent by or to any of them; but
the statutory declaration required by section 429(4) shall be made by all of
them and, in the case of a joint offeror being a company, signed by a director
of that company.
(4) In sections 428, 430(8) and 430E references to the offeror shall be
construed as references to the joint offerors or any of them.
(5) In section 430(6) and (7) references to the offeror shall be construed
as references to the joint offerors or such of them as they may determine.
(6) In sections 430(4)(a) and 430B(4)(a) references to the offeror being no
longer able to provide the relevant consideration shall be construed as
references to none of the joint offerors being able to do so.
(7) In section 430C references to the offeror shall be construed as
references to the joint offerors except that any application under subsection
(3) or (5) may be made by any of them and the reference in subsection (5)(a) to
the offeror having been unable to trace one or more of the persons holding
shares shall be construed as a reference to none of the offerors having been
able to do so.
430E. ASSOCIATES
(1) The requirement in section 428(1) that a takeover offer must extend to
all the shares, or all the shares of any class or classes, in a company shall be
regarded as satisfied notwithstanding that the offer does not extend to shares
which associates of the offeror hold or have contracted to acquire; but, subject
to subsection (2), shares which any such associate holds or has contracted to
acquire, whether at the time when the offer is made or subsequently, shall be
disregarded for the purposes of any reference in this Part of this Act to the
shares to which a takeover offer relates.
(2) Where during the period within which a takeover offer can be accepted
any associate of the offeror acquires or contracts to acquire any of the shares
to which the offer relates, then, if the condition specified in subsection
(8)(a) or (b) of section 429 is satisfied as respects those shares they shall be
treated for the purposes of that section as shares to which the offer relates.
(3) In section 430A(1)(b) and (2)(b) the reference to shares which the
offeror has acquired or contracted to acquire shall include a reference to
shares which any associate of his has acquired or contracted to acquire.
(4) In this section "associate", in relation to an offeror means --
(a) a nominee of the offeror;
(b) a holding company, subsidiary or fellow subsidiary of the offeror
or a nominee of such a holding company, subsidiary or fellow subsidiary;
(c) a body corporate in which the offeror is substantially interested;
or
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(d) any person who is, or is a nominee of, a party to an agreement
with the offeror for the acquisition of, or of an interest in, the shares
which are the subject of the takeover offer, being an agreement which
includes provisions imposing obligations or restrictions such as are
mentioned in section 204(2)(a).
(5) For the purposes of subsection (4)(b) a company is a fellow subsidiary
of another body corporate if both are subsidiaries of the same body corporate
but neither is a subsidiary of the other.
(6) For the purposes of subsection (4)(c) an offeror has a substantial
interest in a body corporate if --
(a) that body or its directors are accustomed to act in accordance
with his directions or instructions; or
(b) he is entitled to exercise or control the exercise of one-third or
more of the voting power at general meetings of that body.
(7) Subsections (5) and (6) of section 204 shall apply to subsection (4)(d)
above as they apply to that section and subsections (3) and (4) of section 203
shall apply for the purposes of subsection (6) above as they apply for the
purposes of subsection (2)(b) of that section.
(8) Where the offeror is an individual his associates shall also include
his spouse and any minor child or step-child of his.
430F. CONVERTIBLE SECURITIES
(1) For the purposes of this Part of this Act securities of a company shall
be treated as shares in the company if they are convertible into or entitle the
holder to subscribe for such shares; and references to the holder of shares or a
shareholder shall be construed accordingly.
(2) Subsection (1) shall not be construed as requiring any securities to be
treated --
(a) as shares of the same class as those into which they are
convertible or for which the holder is entitled to subscribe; or
(b) as shares of the same class as other securities by reason only
that the shares into which they are convertible or for which the holder is
entitled to subscribe are of the same class.
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APPENDIX X
DEFINITIONS
The following definitions apply throughout this document, unless the context
otherwise requires:
"ACCEPTANCE CONDITION" The Condition as to acceptance set out in paragraph
(a) of Part A of Appendix I
"ACCEPTANCE FORM" The Form of Acceptance and, with respect to holders
of Energy Group ADSs only, the Letter of
Transmittal (or Agent's Message) and Notice of
Guaranteed Delivery accompanying this document
"ACQUISITION" The proposed acquisition of The Energy Group
pursuant to the Texas Utilities Offer
"BOARD" OR "DIRECTORS" The Directors of Texas Utilities, TU Acquisitions
or The Energy Group, as the case may be, and
Director means any one of them
"BOOK-ENTRY CONFIRMATION" The confirmation of a book-entry transfer of The
Energy Group ADSs into the US Depositary's account
at a Book Entry Transfer Facility
"BOOK-ENTRY TRANSFER
FACILITY" The Depository Trust Company
"BUSINESS DAY" Has the meaning given to it in Rule 14d-1 under the
Exchange Act
"CANADA" Canada, its provinces, territories and all areas
subject to its jurisdiction and any other political
sub-division thereof
"CERTIFICATED" OR "IN
CERTIFICATED
FORM" A share or other security which is not in
uncertificated form
"CITIZENS POWER" Citizens Power LLC, previously named Citizens
Lehman Power L.L.C.
"CITY CODE" OR "CODE" The City Code on Takeovers and Mergers of the
United Kingdom
"CLOSING PRICE" The closing middle market quotation of an Energy
Group Share as derived from the Daily Official List
"COMPANIES ACT" The Companies Act 1985 (as amended) of Great
Britain
"CONDITIONS" The conditions of the Texas Utilities Offer
described in Part A of Appendix 1 and "Condition"
means any one of them
"CREST" The relevant system (as defined in the Regulations)
in respect of which CRESTCo is the Operator (as
defined in the Regulations)
"CRESTCO" CRESTCo Limited
"CREST MEMBER" A person who has been admitted by CRESTCo as a
system-member (as defined in the Regulations)
"CREST PARTICIPANT" A person who is, in relation to CREST, a
system-participant (as defined in the Regulations)
"CREST SPONSOR" A CREST participant admitted to CREST as a
sponsored member
"CREST SPONSORED MEMBER" A CREST member admitted to CREST as a sponsored
member
"CSE" The Chicago Stock Exchange
"DAILY OFFICIAL LIST" The London Stock Exchange Daily Official List
"DEALER MANAGERS" Lehman Brothers Inc. and Merrill Lynch & Co., in
their capacities as dealer managers for the Texas
Utilities Offer in the US
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"DEMERGER" The demerger by Hanson of The Energy Group
"DEMERGER AGREEMENT" The agreement dated 27 January 1997 between Hanson
and The Energy Group relating to the Demerger
"DEMERGER DATE" 24 February 1997
"DEMERGER TRANSACTIONS" The transactions described in the Demerger
Agreement, pursuant to which The Energy Group
became the holding company of the TEG Group, as
then constituted, and the Peabody Holding
Transaction
"DEPOSIT AGREEMENT" The deposit agreement between The Energy Group,
Citibank, N.A. and the holders, from time to time,
of Energy Group ADSs
"DGES" The Director General of Electricity Supply of the
United Kingdom
"DTC" The Depositary Trust Company
"EASTERN" Eastern Group plc and/or subsidiaries or any of
them from time to time as the context may require
"EASTERN ENERGY" Eastern Energy Limited, a wholly-owned subsidiary
of Texas Utilities
"ELECTRICITY POOL" The electricity trading market in England and Wales
"ELIGIBLE INSTITUTION" A financial institution (including most banks,
savings and loan associations and brokerage houses)
which is a participant in the Securities Transfer
Agents Medallion Program, or the Stock Exchange
Medallion Program
"ENERGY GROUP ADRS" American Depositary Receipts evidencing Energy
Group ADSs
"ENERGY GROUP ADSS" American Depositary Shares issued in respect of
Energy Group Shares, each representing four Energy
Group Shares, as evidenced by Energy Group ADRs
"ENERGY GROUP LISTING
PARTICULARS" OR "LISTING
PARTICULARS" The listing particulars relating to The Energy
Group dated 27 January 1997, published in
accordance with the Listing Rules
"ENERGY GROUP SECURITIES" Energy Group Shares and Energy Group ADSs
"ENERGY GROUP SHARES" shares of 10p each in the share capital of The
Energy Group in issue or allotted or issued prior
to the date on which the Texas Utilities Offer
closes (or such earlier date , not being earlier
than the Initial Closing Date (as it may be
extended) as TU Acquisitions may, subject to the
City Code, determine)
"ENERGY GROUP SHARE
SCHEMES" The Energy Group Executive Share Option Scheme, the
Energy Group Sharesave Scheme, the Energy Group
Long-term Incentive Plan and the Energy Group
Special Additional Bonus Scheme
"ENERGY GROUP SHAREHOLDERS" Holders of Energy Group Shares
"ENLARGED GROUP" The Texas Utilities Group as enlarged by the
acquisition of The Energy Group
"ENSERCH" ENSERCH Corporation, a wholly-owned subsidiary of
Texas Utilities
"EXCHANGE ACT" The US Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated
thereunder
"FERC" The US Federal Energy Regulatory Commission
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"FIRST HYDRO" The pumped storage business of National Grid Group
"FORM OF ACCEPTANCE" The form of acceptance, election and authority
relating to the Texas Utilities Offer accompanying
this document for use by holders of Energy Group
Shares (but not by holders of Energy Group ADSs)
"FTA ALL SHARE INDEX" [FTSE Actuaries All-Share Index as published]
"GUARANTEED DELIVERY
PROCEDURES" The guaranteed delivery procedures for Energy Group
ADSs set out in paragraph 9 of Part B of Appendix I
"HANSON" Hanson PLC
"HANSON GROUP" Hanson and its subsidiary undertakings from time to
time
"INCREASED PACIFICORP
OFFER" The increased offer made by Goldman Sachs
International on behalf of PacifiCorp Acquisitions
to acquire all the issued and to be issued Energy
Group Securities as announced on 3 March 1998
"INFORMATION AGENT" D.F. King & Co., Inc.
"INITIAL CLOSING DATE" 10.00 pm (London time), 5.00 pm (New York City
time) on [-] 1998, unless and until TU
Acquisitions, in its discretion, shall have
extended the Texas Utilities Offer, in which case
the term "Initial Closing Date" shall mean the
latest time and date at which the Texas Utilities
Offer, as so extended by TU Acquisitions, will
expire, or, if earlier, the time at which the Texas
Utilities Offer becomes or is declared wholly
unconditional
"INITIAL OFFER PERIOD" The period from the date of this document to and
including the Initial Closing Date
"INTERNAL REVENUE CODE" Internal Revenue Code of 1986 of the United States,
as amended
"IRS" The US Internal Revenue Service
"LCC" Lufkin-Conroe Communications Co., a wholly-owned
subsidiary of Texas Utilities
"LEHMAN BROTHERS" Lehman Brothers International (Europe)
"LEHMAN MERCHANT" Lehman Brothers Merchant Banking Partners II L.P.
and, where the context so requires P&L Coal
Holdings Corporation, its affiliate
"LETTER OF TRANSMITTAL" The letter of transmittal relating to the Texas
Utilities Offer accompanying this document for use
by holders of Energy Group ADSs
"LISTING RULES" The rules and regulations made by the London Stock
Exchange under the Financial Services Act 1986
"LOAN NOTE ALTERNATIVE" The alternative under which holders of Energy Group
Shares who validly accept the Texas Utilities Offer
will be entitled to elect to receive Loan Notes
instead of all or part of the cash consideration
otherwise payable to them
"LOAN NOTES" The unsecured floating rate loan notes 1998/2004 of
L1 each of TU Acquisitions to be issued pursuant to
the Loan Note Alternative
"LONDON STOCK EXCHANGE" London Stock Exchange Limited
"LONE STAR GAS" Lone Star Gas Company, a division of ENSERCH
"LONE STAR PIPELINE" Lone Star Pipeline Company, a division of ENSERCH
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"MEMBER ACCOUNT ID" The identification code or number attached to any
member account in CREST
"MERRILL LYNCH" Merrill Lynch International
"NATIONAL GRID GROUP" The National Grid Group plc
"NATIONAL POWER" National Power plc
"NEW TEXAS UTILITIES
SHARES" The shares of Texas Utilities Common Stock to be
issued pursuant to the Share Alternative
"NOON BUYING RATE" The exchange rate for pounds sterling, based on the
noon buying rate in the City of New York for cable
transfers in pounds sterling as certified for
customs purposes by the Federal Reserve Bank of New
York, expressed in dollars per L
"NYSE" The New York Stock Exchange
"OFFER" The Office of Electricity Regulation of the United
Kingdom
"ORIGINAL PACIFICORP OFFER" The offer made by PacifiCorp Acquisitions to
acquire the Energy Group Securities as announced on
13 June 1997
"PANEL" The Panel on Takeovers and Mergers of the United
Kingdom
"PARTICIPANT ID" The identification code or membership number used
in CREST to identify a particular CREST member or
other CREST participant
"PEABODY" Peabody Holding, Lee Ranch Coal Company and Peabody
Australia
"PEABODY AUSTRALIA" Peabody Holding Pty Limited and its subsidiaries
which constitute the Australian operations of
Peabody
"PEABODY COAL BUSINESS' The undertakings conducting the TEG Group's coal
business in the United States and Australia
including Peabody Holding Company, Inc. and its
subsidiaries, Lee Ranch Coal Company and Peabody
Holding Pty Limited and its subsidiaries, and
certain holding and related companies of such
companies, including Citizens Power
"PEABODY HOLDING
TRANSACTION" The transaction whereby Peabody US Holding Inc., a
subsidiary of Hanson, transferred to GFAC
International Holdings Inc. the entire issued share
capital of Peabody Holding for a cash sum of
$1,637.5 million
"PEABODY HOLDING" Peabody Holding Company, Inc. and its subsidiaries
"PEABODY SALE" The sale of the Peabody Coal Business under the
Peabody Sale Agreement
"PEABODY SALE AGREEMENT" The agreement dated 2 March 1998 between The Energy
Group and P & L Coal Holdings Corporation for the
sale of the Peabody Coal Business
"PSE" The Pacific Exchange
"REGISTRATION STATEMENT" The Registration Statement (SEC File No. 333-47135)
filed with the SEC with respect to the Texas
Utilities Common Stock offered pursuant to the
Texas Utilities Offer
"REGULATIONS" The Uncertificated Securities Regulations 1995 (SI
1995 No. 95/3272)
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"RENEWED PACIFICORP OFFER" The renewed offer made by Goldman Sachs
International on behalf of PacifiCorp Acquisitions
to acquire all the issued and to be issued Energy
Group Securities as announced on 3 February 1998
"ROLLALONG" Rollalong Limited and, where the context permits,
its subsidiary, Rollalong Hire Limited
"SEC" The US Securities and Exchange Commission
"SECURITIES ACT" The US Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder
"SESCO" Southwestern Electric Service Company, a
wholly-owned subsidiary of Texas Utilities
"SHARE ALTERNATIVE" The alternative under which holders of Energy Group
Securities who validly accept the Texas Utilities
Offer may elect to receive New Texas Utilities
Shares instead of all (but not part) of the cash
consideration otherwise payable to them, subject to
the limitations described herein
"SUBSEQUENT OFFER PERIOD" The period following the Initial Closing Date
during which the Texas Utilities Offer remains open
for acceptance
"TEG GROUP" The Energy Group and its subsidiaries and
subsidiary undertakings and, where the context
permits, each of them
"TEI" Texas Energy Industries, Inc., a wholly-owned
subsidiary of Texas Utilities
"TEXAS UTILITIES" Texas Utilities Company
"TEXAS UTILITIES COMMON
STOCK" The common stock, without par value, of Texas
Utilities
"TEXAS UTILITIES GROUP" Texas Utilities and its subsidiaries and subsidiary
undertakings and, where the context permits, each
of them
"TEXAS UTILITIES OFFER" The cash offer made by Lehman Brothers and Merrill
Lynch on behalf of TU Acquisitions to acquire the
Energy Group Shares (including those represented by
Energy Group ADSs) and Energy Group ADSs as set out
in this document including, where the context
permits and/or requires, any subsequent revision,
variation, extension, or renewal of such offer
"TFE INSTRUCTION" A Transfer from Escrow instruction (as defined by
the CREST Manual issued by CRESTCo)
"THE ENERGY GROUP" The Energy Group PLC
"TTE INSTRUCTION" A Transfer to Escrow instruction (as defined by the
CREST Manual issued by CRESTCo)
"TU ACQUISITIONS" TU Acquisitions PLC
"TU AUSTRALIA" Texas Utilities Australia, Pty. Ltd., a
wholly-owned subsidiary of Texas Utilities
"TU ELECTRIC" Texas Utilities Electric Company, a wholly-owned
subsidiary of Texas Utilities
"TTE INSTRUCTION" A Transfer to Escrow instruction (as defined by the
CREST Manual issued by CREST)
"UNITED KINGDOM GAAP" United Kingdom generally accepted accounting
principles
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"UNITED KINGDOM RECEIVING
AGENT" The Royal Bank of Scotland plc, in its capacity as
United Kingdom receiving agent to the Texas
Utilities Offer
"UNITED KINGDOM" OR "UK" The United Kingdom of Great Britain and Northern
Ireland
"UNCERTIFICATED" OR "IN
UNCERTIFICATED FORM" Recorded on the relevant register of the share or
security concerned as being held in uncertificated
form in CREST, and title to which, by virtue of the
Regulations, may be transferred by means of CREST
"UNITED STATES" OR "US" The United States of America, its territories and
possessions, any state of the United States of
America, the District of Columbia, and all other
areas subject to its jurisdiction
"US DEPOSITARY" The Bank of New York, in its capacity as US
Depositary
"US GAAP" US generally accepted accounting principles
"US HSR ACT" The US Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the rules and regulations
promulgated thereunder
"US PERSONS" A US person as defined in Regulation S under the
United States Securities Act of 1933, as amended
"$" OR "US DOLLAR" The lawful currency of the United States
"L" OR "POUNDS STERLING" The lawful currency of the United Kingdom
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ACCEPTANCES IN RESPECT OF ENERGY GROUP SHARES
Duly completed Forms of Acceptance, accompanied by certificates in respect of
Energy Group Shares and/or other documents of title, should be delivered to the
United Kingdom Receiving Agent or the US Depositary at one of the addresses set
out below.
The United Kingdom Receiving agent for the Texas Utilities Offer is:
THE ROYAL BANK OF SCOTLAND PLC
REGISTRAR'S DEPARTMENT
NEW ISSUES SECTION
5-10 GREAT TOWER STREET
LONDON EC3R 5ER
FOR INFORMATION CALL:
0117 937 0672
<TABLE>
<S> <C>
BY MAIL: BY HAND:
REGISTRAR'S DEPARTMENT, REGISTRAR'S DEPARTMENT
NEW ISSUES SECTION NEW ISSUES SECTION
P.O. BOX 859 5-10 GREAT TOWER STREET,
CONSORT HOUSE LONDON EC3R 5ER
EAST STREET, BEDMINSTER
BRISTOL B599 1XZ
</TABLE>
ACCEPTANCES IN RESPECT OF ENERGY GROUP ADSS
Manually signed facsimile copies of the Letter of Transmittal will be accepted.
The Letter of Transmittal, Energy Group ADRs and any other required documents
should be sent or delivered by each holder of Energy Group ADSs or his broker,
dealer, commercial bank, trust company or other nominee to the US Depositary at
one of its addresses set out below.
The US Depositary for the Texas Utilities Offer is:
THE BANK OF NEW YORK
FOR INFORMATION CALL:
(888) 460-7637
FACSIMILE TRANSMISSION:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(212) 815-6213
<TABLE>
<S> <C>
BY MAIL: BY HAND OR OVERNIGHT COURIER:
TENDER & EXCHANGE DEPARTMENT TENDER & EXCHANGE DEPARTMENT
P.O. BOX 11248 101 BARCLAY STREET
CHURCH STREET STATION RECEIVE AND DELIVER WINDOW
NEW YORK, NEW YORK 10286-1248 NEW YORK, NEW YORK 10286
</TABLE>
ADDITIONAL INFORMATION
Any questions or requests for assistance or additional copies of the Texas
Utilities Offer to Purchase, the Letter of Transmittal and the Notice of
Guaranteed Delivery or the Form of Acceptance may be directed to Lehman Brothers
or Merrill Lynch, either Dealer Manager or the Information Agent at their
respective addresses and telephone numbers listed below, or to the US Depositary
or the United Kingdom Receiving Agent at their respective addresses and
telephone numbers mentioned above. You may also contact your local broker,
dealer, commercial bank or trust company or other nominee for assistance
concerning the Texas Utilities Offer.
The Information Agent for the Texas Utilities Offer is:
D.F. KING & CO., INC.
<TABLE>
<S> <C>
UNITED STATES: EUROPE
77 Water Street Royex House, Aldermanbary Square
New York, NY 10005 London, England EC2V 7HR
(800) 848-3416 (44) 171-600-5005 (Collect)
</TABLE>
OUTSIDE THE UNITED STATES AND EUROPE
(212) 289-5550 (Collect)
The Texas Utilities Offer is being made on behalf of TU Acquisitions by:
Lehman Brothers and Merrill Lynch
The Dealer Managers for the Texas Utilities Offer is:
Lehman Brothers Inc. and Merrill Lynch & Co.
<PAGE> 355
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
1 -- Form of Dealer Manager Agreement.
4(a) -- Form of Letter of Transmittal
5(c) -- Opinion of Worsham, Forsythe & Wooldridge, L.L.P.,
General Counsel for the Company.
5(d) -- Opinion of Reid & Priest LLP, of counsel to the Company.
23(d) -- Consents of Worsham, Forsythe & Wooldridge, L.L.P. and
Reid & Priest LLP are contained in Exhibits 5(c) and
5(d), respectively.
99(a) -- Form of Depositary Agent Agreement.
99(b) -- Form of letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99(c) -- Form of letter from Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees to their clients.
99(d) -- Form of Notice of Guaranteed Delivery.
99(g) -- Press Release dated 5 March 1996.
</TABLE>
II-1
<PAGE> 356
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 6th day of March, 1998.
TEXAS UTILITIES COMPANY
By /s/ ROBERT J. REGER, JR.
-----------------------------------
(Robert J. Reger, Jr., Esq.,
Attorney-in-fact)
This amendment to the registration statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ERLE NYE* Principal Executive Officer
- ----------------------------------------------------- and Director
(Erle Nye, Chairman of the Board
and Chief Executive)
/s/ MICHAEL J. MCNALLY* Principal Financial Officer
- -----------------------------------------------------
(Michael J. McNally, Executive Vice President
and Chief Financial Officer)
/s/ JERRY W. PINKERTON* Principal Accounting Officer
- -----------------------------------------------------
(Jerry W. Pinkerton, Controller)
/s/ J. S. FARRINGTON* Director
- -----------------------------------------------------
(J. S. Farrington)
/s/ BAYARD H. FRIEDMAN* Director
- -----------------------------------------------------
(Bayard H. Friedman)
/s/ WILLIAM M. GRIFFIN* Director
- ----------------------------------------------------- March 6, 1998
(William M. Griffin)
/s/ KERNEY LADAY* Director
- -----------------------------------------------------
(Kerney Laday)
/s/ MARGARET N. MAXEY* Director
- -----------------------------------------------------
(Margaret N. Maxey)
/s/ JAMES A. MIDDLETON* Director
- -----------------------------------------------------
(James A. Middleton)
Director
- -----------------------------------------------------
(James E. Oesterricher)
/s/ CHARLES R. PERRY* Director
- -----------------------------------------------------
(Charles R. Perry)
/s/ HERBERT H. RICHARDSON* Director
- -----------------------------------------------------
(Herbert H. Richardson)
*By: /s/ ROBERT J. REGER, JR.
------------------------------------------------
(Robert J. Reger, Jr., Esq., Attorney-in-fact)
</TABLE>
II-2
<PAGE> 357
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
1 -- Form of Dealer Manager Agreement.
4(a) -- Form of Letter of Transmittal
5(c) -- Opinion of Worsham, Forsythe & Wooldridge, L.L.P.,
General Counsel for the Company.
5(d) -- Opinion of Reid & Priest LLP, of counsel to the Company.
23(d) -- Consents of Worsham, Forsythe & Wooldridge, L.L.P. and
Reid & Priest LLP are contained in Exhibits 5(c) and
5(d), respectively.
99(a) -- Form of Depositary Agent Agreement.
99(b) -- Form of letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
99(c) -- Form of letter from Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees to their clients.
99(d) -- Form of Notice of Guaranteed Delivery.
99(g) -- Press Release dated 5 March 1998.
</TABLE>
<PAGE> 1
Exhibit 1
DEALER MANAGER AGREEMENT
________, 1998
Lehman Brothers Inc.
3 World Financial Center
200 Vesey Street
New York, New York 10285
Merrill Lynch & Co.
Merrill Lynch, Pierce Fenner & Smith Incorporated
World Financial Center
South Tower
New York, New York 10281-1307
Ladies and Gentlemen:
TU Acquisitions plc ("the Company"), proposes to offer to purchase
(the "Offer") all of the outstanding shares ("TEG Shares") and/or American
Depository Securities ("TEG ADSs" and, hereinafter, together with the TEG
Shares, the "TEG Securities") of The Energy Group PLC ("TEG") for cash, or,
alternatively, in whole or in part, for notes issuable by the Company to
holders of TEG Securities other than citizens of the United States and certain
others ("Loan Notes") or for shares of the Common Stock, without value, (the
"TUC Stock") of Texas Utilities Company ("Texas Utilities") to be exchanged for
TEG Securities representing an aggregate of not to exceed [106,073,000] TEG
Shares. The offer to exchange TUC Stock for TEG Shares is herein referred to
as the "Exchange Offer" and any exchange of TUC Stock for TEG Securities
pursuant to the Exchange Offer is herein referred to as an "Exchange".
The Company hereby confirms its agreement with Lehman Brothers Inc.
and Merrill Lynch, Pierce Fenner & Smith Incorporated (the "Co-Dealer
Managers"), as follows:
1. Registration Statement, Prospectus and Offering Materials.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), under the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder (collectively, the
"Securities Act"), a registration statement on Form S-4 covering the
<PAGE> 2
registration of the TUC Stock, including the related preliminary prospectus
(the "prospectus"). Such registration statement, including the exhibits
thereto and any documents incorporated by reference therein, as amended at the
time it becomes effective or as thereafter amended or supplemented from time to
time, is herein called the "Registration Statement". The final prospectus
included in the Registration Statement (including any documents incorporated in
the prospectus by reference) is herein called the "Prospectus", except that if
the final prospectus furnished to the Co-Dealer Managers for use in connection
with the Offer differs from the prospectus set forth in the Registration
Statement (whether or not such prospectus is required to be filed pursuant to
Rule 424(b)), the term "Prospectus" shall refer to the final prospectus
furnished to the Co-Dealer Managers for such use. The terms "supplement" and
"amendment" or "amend" as used herein with respect to the Prospectus shall
include all documents deemed to be incorporated by reference in the Prospectus
that are filed subsequent to the date of the Prospectus and prior to the
termination of the Offer by the Company with the Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Registration Statement, prospectus, Prospectus, the Texas Utilities
Company Recommended Cash Offer for The Energy Group PLC (the "Offering
Document") and the related letters from the Co-Dealer Managers to securities
brokers, dealers, commercial banks, trust companies and other nominees, letters
to beneficial owners of TEG Securities, letters of transmittal (the "Letters of
Transmittal"), notices of guaranteed delivery (the "Notices of Guaranteed
Delivery") and any newspaper announcements, press releases and other offering
materials and information the Company may use or prepare, approve or authorize
for use in connection with the Offer, as amended or supplemented from time to
time, are herein collectively referred to as the "Offering Materials".
2. Agreement to Act as Co-Dealer Managers. (a) The Company
intends to commence the Offer as soon as practicable by publicly
announcing its commencement and by mailing, or causing to be mailed on
its behalf, copies of the Offering Document, the related Letters of
Transmittal and such of the other Offering Materials as is required or
as the Company elects to each holder of TEG Securities (the date of
the commencement of such mailing being herein called the "Commencement
Date"). The Company intends to commence the Exchange Offer
alternative as soon as practicable after the Registration Statement
becomes effective under the Securities Act by mailing the Prospectus
and such of the other Offering Materials as is required or as the
Company elects to each holder of TEG Securities (the date of the
commencement of such mailing being herein called the "Exchange
Commencement Date").
-2-
<PAGE> 3
(b) The Company retains the Co-Dealer Managers to advise
it with respect to the terms and timing of the Offer in the United
States, including the Exchange Offer, and to assist it in the
preparation of the Offering Materials and retains and authorizes the
Co-Dealer Managers to act as co-dealer managers in the United States
and to assist the Company with the solicitation of purchases of the TEG
Securities and Exchanges in the United States (each a "Solicitation"
and collectively the "Solicitations"). On the basis of the
representations, warranties and agreements of the Company herein
contained and subject to and in accordance with the terms and
conditions hereof and of the Offering Materials, the Co-Dealer Managers
agree to advise the Company with respect to the terms and timing of the
Offer in the United States, including the Exchange Offer, and to act as
co-dealer managers in connection with the Offer in the United States,
including the Exchange Offer, and to assist the Company with the
Solicitations in the United States. The Co-Dealer Managers agree to
use their reasonable best efforts to solicit Exchanges and purchases of
TEG Securities. The Co-Dealer Managers shall have no obligation as
dealer managers to purchase TEG Securities in connection with the
Offer.
(c) The Company shall furnish the Co-Dealer Managers as
soon as practicable after the date hereof (to the extent not
previously furnished), with such information as is available to the
Company as to the names of persons who were the holders of record or,
to the extent available to the Company, the beneficial owners of the
TEG Securities as of a recent date, together with their addresses, and
the number of TEG Securities held by them. Additionally, the Company
shall use its best efforts to update, such information from time to
time during the term of this Agreement as may be reasonably requested
by the Co-Dealer Managers. Except as otherwise provided herein, the
Co-Dealer Managers agree to use such information only in connection
with the Solicitations. The Co-Dealer Managers shall act hereunder as
independent contractors and nothing herein contained shall make the
Co-Dealer Managers agents of the Company in connection with any
Solicitation. Nothing contained in this Agreement shall constitute
the Co-Dealer Managers partners of or joint venturers with the
Company. The obligations of the Co-Dealer Managers hereunder are
several and not joint.
(d) The Company authorizes the Co-Dealer Managers to use
the Offering Materials in connection with the Solicitations and for
such period of time as any Offering Materials are required by law to
be delivered in connection therewith. The Co-Dealer Managers shall
not have any obligation to cause any Offering Materials to be
transmitted generally to the holders of the TEG Securities. The
-3-
<PAGE> 4
Co-Dealer Managers agree not to give any written information and not
to make any representations to holders of the TEG Securities in
connection with any Solicitation that are inconsistent with the
Offering Materials. The Company agrees that it will not use or
furnish to any person Offering Materials that have been amended after
the date hereof without the prior approval of the Co-Dealer Managers,
which approval shall not be unreasonably withheld.
(e) The Company authorizes the Co-Dealer Managers to
communicate with any information agent (each an "Information Agent")
or exchange agent (each a "U.S. Depositary") appointed by the Company
to act in such capacity in connection with the Offer with respect to
matters relating to the Offer.
(f) The Company agrees that any reference to any
Co-Dealer Manager in any Offering Materials or in any newspaper
announcement or press release or other document or communication is
subject to such Co-Dealer Manager's prior consent, which consent shall
not be unreasonably withheld.
3. Compensation. The Company will pay to the Co-Dealer Managers
for services rendered and to be rendered by them in connection with the Offer
only such fees and upon such terms as are set forth in a separate letter
agreement.
4. Certain Covenants of Texas Utilities and the Company.
I. Until termination of the Exchange Offer, Texas Utilities covenants with the
Co-Dealer Managers:
(a) To use its best efforts to cause the Registration
Statement, including any post-effective amendment thereto, to become
effective and to notify the Co-Dealer Managers immediately and, if
requested by any Co-Dealer Manager, to confirm the notice in writing,
(i) when any post-effective amendment to the Registration Statement
shall have become effective, or any supplement to the Prospectus or
any amended Prospectus or any amended or additional Offering Materials
shall have been filed, (ii) of the receipt of any comments from the
Commission relating to the Exchange Offer, (iii) of any request by the
Commission to amend the Registration Statement or amend or supplement
the Prospectus or the other Offering Materials or for additional
information relating to the Exchange Offer and (iv) of (A) the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or (B) the issuance by the
Commission of any order preventing or suspending the use of any of the
Offering Materials or (C) the suspension of the qualification of the
-4-
<PAGE> 5
TUC Stock for offering or sale in connection with the Exchange Offer
in any jurisdiction, (D) the institution or threatening of any
proceedings for any of such purposes or (E) the occurrence of any
event which could cause Texas Utilities to withdraw, rescind,
terminate or modify the Exchange Offer or would permit the Company to
exercise any right not to accept the TEG Securities tendered pursuant
to the Exchange Offer. Texas Utilities will use its reasonable best
efforts to prevent the issuance of any such stop order, the issuance
of any order preventing or suspending such use and the suspension of
any such qualification and, if any such order is issued or
qualification suspended, to obtain the lifting of such order or
suspension at the earliest practicable time.
(b) Prior to the termination of the Exchange Offer,
before amending or supplementing the Registration Statement or the
Prospectus, to furnish copies of drafts to, and consult with, the
Co-Dealer Managers and their counsel within a reasonable time in
advance of filing with the Commission of any amendment or supplement
to the Registration Statement, the Prospectus or the other Offering
Materials. Texas Utilities shall not file any such amendment or
supplement to which counsel for the Co-Dealer Managers shall
reasonably object; provided, however, that the foregoing shall not
apply to any of the Texas Utilities' filings with the Commission
required to be filed pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, copies of which such filings Texas Utilities will
cause to be delivered to each Co-Dealer Manager promptly after being
transmitted for filing with the Commission.
(c) To furnish promptly to each Co-Dealer Manager,
without charge, one signed copy of the Registration Statement, all
amendments thereto and any other filing with the Commission in
connection with the Exchange Offer, whether filed before or after the
Registration Statement becomes effective.
(d) To furnish promptly to each Co-Dealer Manager,
without charge, from time to time until the effective date of the
Registration Statement, as many copies of each preliminary prospectus
as the Co-Dealer Managers may reasonably request, and Texas Utilities
hereby consents to the use of such copies for purposes permitted by
the Securities Act and the Exchange Act. Texas Utilities will furnish
promptly to each Co-Dealer Manager, without charge, as soon as the
Registration Statement shall have become effective and during the
period mentioned in the second sentence of Section 4(e) below such
number of copies of the Prospectus and the other Offering Materials
(as supplemented
-5-
<PAGE> 6
or amended) as such Co-Dealer Manager may reasonably request and will
cause all amendments and supplements filed with the Commission to be
distributed to holders of TEG Securities as may be required by the
Securities Act and the Exchange Act.
(e) To comply in all material respects with the
Securities Act and, the Exchange Act, in connection with the Offering
Materials, the Exchange Offer and the transactions contemplated hereby
and thereby, as applicable. If at any time when the Prospectus is
required by the Securities Act or Exchange Act to be delivered in
connection with any Solicitation or Exchange any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of Counsel for the Co-Dealer Managers or counsel for Texas
Utilities, to amend the Registration Statement or amend or supplement
the Prospectus or any other Offering Materials in order that the
Prospectus or such other Offering Materials will not include an untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements in the Prospectus or such
other Offering Materials, in the light of the circumstances under
which they were made, not misleading or if, in the opinion of either
such counsel, it shall be necessary to amend the Registration
Statement or amend or supplement the Prospectus or any other Offering
Materials to comply with the requirements of the Securities Act or
Exchange Act, Texas Utilities will promptly prepare, file with the
Commission, subject to Section 4(I)(b) of this Agreement, and furnish,
at its own expense, to each Co-Dealer Manager and to the dealers
(whose names and address will be furnished to the Company by the
Co-Dealer Managers) to which TUC Stock may have been exchanged, such
amendment or supplement as may be necessary to correct such untrue
statement or omission or to make the Registration Statement or the
Prospectus or such other Offering Materials comply with such
requirements.
(f) To endeavor, in cooperation with the Co-Dealer
Managers, to qualify the TUC Stock for offering and sale in connection
with the Exchange Offer under the applicable securities or Blue Sky
laws of such jurisdictions as the Company may elect and to maintain
such qualifications in effect for such time as may be required for the
consummation of the Exchange Offer; provided, however, that Texas
Utilities shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject
or to meet any other requirements deemed by Texas Utilities to be
unduly burdensome; provided further that the Co-Dealer Managers shall
not be obligated
-6-
<PAGE> 7
to solicit tenders in jurisdictions where the TUC Stock is not
qualified for offer and sale. Texas Utilities will file such
statements and reports as may be required by the laws of each
jurisdiction in which the TUC Stock has been qualified as above
provided.
(g) To make generally available to its security holders
as soon as practicable an earnings statement of Texas Utilities
covering a twelve-month period beginning on the first day of the first
full fiscal quarter after the date of this Agreement, which earning
statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
(h) To use its best efforts to effect the listing of the
TUC Stock on the New York Stock Exchange ("NYSE"), subject to official
notice of issuance, as soon as practicable after the date hereof.
(i) To timely file any report or other document required
to be filed by Texas Utilities with the Commission pursuant to Section
13, 14 or 15 of the Exchange Act during the period of time referred to
in the second sentence of Section 4(e) hereof.
II. The Company and, with respect to (b) and (c) below, Texas Utilities
covenant with the Co-Dealer Managers:
(a) Prior to the termination of the Offer, before any
circulation of an amended or supplemented Offering Document, to
furnish copies of drafts to, and consult with, the Co-Dealer Managers.
(b) To furnish promptly to each Co-Dealer Manager, without
charge, from time to time until the termination of the Offer, as many
copies of the Offering Document, as amended, as the Co-Dealer Managers
may reasonably request, and the Company and Texas Utilities hereby
consent to the use of such copies for purposes permitted by the
Securities Act and the Exchange Act. The Company or Texas Utilities
will furnish promptly to each Co-Dealer Manager, without charge, until
termination of the Offer, such number of copies of the Offering
Document and the other Offering Materials (as supplemented or amended)
as such Co-Dealer Manager may reasonably request and will cause all
amendments and supplements to be distributed to holders of TEG
Securities as may be required by applicable law.
(c) To pay all costs and expenses incurred in connection
with in connection with this Agreement and the Solicitations including,
without limitation, (i) the
-7-
<PAGE> 8
preparation, printing and filing of the Registration Statement
(including financial statements and exhibits), as originally filed and
as amended, the preliminary prospectuses, the Prospectus and the other
Offering Materials and any amendments or supplements to any of the
foregoing, and the cost of furnishing copies thereof to the Co-Dealer
Managers, (ii) the preparation and distribution of this Agreement,
certificates for the TUC Stock and any Blue Sky surveys (including
fees of counsel to the Co-Dealer Managers not to exceed $5,000) and
the printing of certificates for the TUC Stock, (iii) the distribution
of the Offering Materials to the holders of the TEG Securities, (iv)
the fees and disbursements of counsel to Texas Utilities, counsel for
the Co-Dealer Managers and the Company's and Texas Utilities'
accountants, (v) the qualification of the TUC Stock under the
applicable securities laws in accordance with Section 4(I)(f) and any
filing for review of the Exchange Offer with the NASD (including
filing fees and fees and disbursements of Counsel for the Co-Dealer
Managers in connection with such filing with the NASD), (vi) the fees
and expenses of the Transfer Agent, the Registrar, the Information
Agent and the U.S. Depositary, (vii) the reasonable out-of-pocket
expenses of the Co-Dealer Managers and (viii) all other costs and
expenses incident to the Solicitations incurred by the Company and
Texas Utilities and its subsidiaries. The Company and Texas Utilities
agree to pay all of the aforementioned costs and expenses whether or
not the Offer is consummated.
(d) To advise or cause the Exchange Agent to advise the
Co-Dealer Managers at 5:00 P.M., New York City time, or as promptly as
practicable thereafter, daily (or more frequently if requested), by
telephone or facsimile transmission, as of 4:00 P.M. on such day with
respect to TEG Securities that have been tendered as follows: (i) the
number of TEG Shares and TEG ADSs validly tendered represented by
certificates physically held by the Exchange Agent (or for which the
Exchange Agent has received confirmation of receipt of book-entry
transfer of such TEG Securities into the U.S. Depositary's account at
a book-entry transfer facility pursuant to the procedures set forth in
the Offer) on such day; (ii) the number of TEG Shares and TEG ADSs
represented by Notices of Guaranteed Delivery on such day; (iii) the
number of TEG Shares and TEG ADSs withdrawn on such day; (iv) the
cumulative number of TEG Shares and TEG ADSs in categories (i) through
(iii) above; (v) the number of TEG Shares and TEG ADSs tendered for
cash only, (vi) the number of TEG Shares and TEG ADSs tendered for
Loan Notes and (v) the number of TEG Shares and TEG ADSs tendered for
the Exchange.
-8-
<PAGE> 9
On the day following such oral communication, the Company shall
furnish or cause the Exchange Agent to furnish to the Co-Dealer
Managers a written report confirming the above information which has
been communicated orally. The Company shall furnish or cause the
Exchange Agent to furnish to the Co-Dealer Managers such reasonable
information on the tendering holders of TEG Securities as may be
requested from time to time.
(e) To give the Co-Dealer Managers notice of any change
of the expiration time of the Offer (the "Expiration Time") and the
expiration of the Exchange Offer.
5. Representations and Warranties of the Company and Texas
Utilities. The Company, with respect to itself, and Texas Utilities, with
respect to the Company and itself, each represents and warrants and agrees with
each of the Co-Dealer Managers that:
(a) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 of the Securities Act, will
comply when so filed, in all material respects, as to form with the
Securities Act and the Exchange Act; the Registration Statement at the
time it becomes effective and the Prospectus and any other Offering
Materials, on the Exchange Commencement Date and on the date on which
the Company commences delivery of the TUC Stock or payment in cash
only or Loan Notes for exchange of the TEG Securities pursuant to the
Exchange Offer (such date, the "Exchange Date"), will comply, in all
material respects, as to form with the Securities Act and the Exchange
Act; the Registration Statement when it becomes effective will not
contain, and the Registration Statement, as amended, if applicable,
when such amendment becomes effective will not contain, any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and as of the Exchange Commencement Date and the Exchange
Date, none of the Prospectus or the other Offering Materials will
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth
in this Section 5(a) do not apply to statements or omissions made
based upon and in conformity with information expressly relating to a
Co- Dealer Manager supplied in writing by a Co-Dealer Manager
expressly for use in the Registration Statement, Prospectus, or any
other Offering Materials.
-9-
<PAGE> 10
(b) The Offering Materials at the time they are first
made available to holders of TEG Shares, on the Commencement Date and
on the date on which the Company makes payment in cash only or Loan
Notes for exchange of the TEG Securities pursuant to the Offer, will
comply, in all material respects, with applicable law in the United
Kingdom and elsewhere.
(c) It has the corporate power and authority to make the
Offer and to execute, deliver and perform its obligations under this
Agreement, and this Agreement has been duly authorized, executed and
delivered by it.
(d) The TUC Stock to be issued pursuant to the Exchange
Offer will be duly authorized and, when issued in exchange for TEG
Securities pursuant to the Exchange Offer, will be validly issued and
fully paid and nonassessable, not subject to any preemptive or similar
rights, and will conform in all material respects to all statements
relating thereto contained in the Prospectus.
(e) With respect to the Company, it is a public limited
company, duly authorized by its organizing documents, as amended, to
conduct the business which it is now conducting and to make the Offer.
(f) Its execution and delivery of, and performance of its
obligations under, this Agreement, the issuance by Texas Utilities and
delivery by the Company of the TUC Stock and the Loan Notes and the
consummation of the Exchange Offer and the fulfillment of the terms
herein contemplated will not contravene any provision of applicable
law or the governing documents of the Company or Texas Utilities or
any agreement or other instrument binding upon the Company or Texas
Utilities or any of its subsidiaries or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the
Company or Texas Utilities or any of its subsidiaries, except for such
contraventions that would not, individually or in the aggregate, have
a material adverse effect on the financial condition or results of
operations of the Company or Texas Utilities, and no consent, approval
or authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company or Texas
Utilities of their obligations under this Agreement, the issuance by
Texas Utilities and delivery by the Company of the TUC Stock and the
consummation of the Exchange Offer, except such as will be obtained
under the Securities Act or, the Exchange Act and as may be required
by the securities or Blue Sky laws of the various states or the
securities laws of non-U.S. jurisdictions other than the United
Kingdom in connection with the Exchange Offer.
-10-
<PAGE> 11
(g) Neither the Company nor Texas Utilities is, nor after
giving effect to the consummation of the Exchange Offer, will be, and
neither the Company nor Texas Utilities is directly or indirectly
controlled by, or acting on behalf of any person which is, an
investment company within the meaning of the Investment Company Act of
1940, as amended.
6. Indemnification.
(a) The Company and Texas Utilities jointly and severally
agree to hold harmless and indemnify you and your affiliates and any
officer, director, employee or agent of you or any such affiliates and
any person controlling (within the meaning of Section 20(a) of the
Exchange Act or Section 15 of the Securities Act you or any of such
affiliates (each, a "Co-Dealer Manager Indemnitee") from and against
any and all losses, claims, damages or liabilities, joint or several,
and expenses whatsoever to which they may become subject under any
statute or common law and shall reimburse you and each Co-Dealer
Manager Indemnitee for any and all legal or other expenses (including,
to the extent hereinafter provided, reasonable counsel fees) incurred
in connection with investigating any such losses, claims, damages or
liabilities or in connection with defending any action, insofar as
such losses, claims, damages, liabilities, expenses or actions (A)
arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Offering
Materials or any other solicitation material used by the Company or
Texas Utilities or the omission or alleged omission to state in any
such document a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (other than
statements or omissions made in reliance upon and in conformity with
information expressly relating to you and furnished by you in writing
to the Company or Texas Utilities expressly for use therein), (ii)
any withdrawal or termination by the Company of, or failure by the
Company to make or consummate, the Offer, (iii) any actions taken or
omitted to be taken by you or any other Co-Dealer Manager Indemnitee
with the consent of the Company or Texas Utilities or in conformity
with actions taken or omitted to be taken by the Company or Texas
Utilities or (iv) any breach by the Company or Texas Utilities of any
representation or warranty, or any failure by the Company or Texas
Utilities to comply with any agreement or covenant, contained in this
Agreement or (B) arise out of, relate to or are in connection with or
are alleged to arise out of, relate to or be in connection with the
Offer, any of the other transactions contemplated by the Offering
Materials or the performance of your services as
-11-
<PAGE> 12
Co-Dealer Managers with respect to the Offer. However, neither the
Company nor Texas Utilities will be obligated to indemnify any
Co-Dealer Manager Indemnitee for any loss, claim, damage, liability
or expense pursuant to clause (B) of the preceding sentence which has
been determined in a final judgment by a court of competent
jurisdiction to have resulted directly from willful misconduct or
negligence on the part of such Co-Dealer Manager Indemnitee.
The agreement of the Company and Texas Utilities to so indemnify
contained in this subparagraph (a) shall remain operative and in full
force and effect regardless of any termination of this Agreement or
of any investigation made by or on behalf of the Company, Texas
Utilities, their directors or their officers, or by you or any other
Co-Dealer Manager Indemnitee, and shall survive the termination of
the Offer.
(b) You agree severally and not jointly to indemnify,
defend and hold harmless the Company and Texas Utilities, their
affiliates, officers, directors, employees and agents and each person
who controls the Company or Texas Utilities (within the meaning of
Section 20(a) of the Exchange Act or Section 15 of the Securities Act)
from and against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject
under any statute or common law and shall reimburse each of them for
any legal or other expenses (including, to the extent hereinafter
provided, reasonable counsel fees) incurred by them in connection with
investigating any such losses, claims, damages or liabilities or in
connection with defending any actions, insofar as such losses, claims,
damages, liabilities, expenses or actions arise out of or are based
upon any untrue statement or alleged untrue statement of a material
fact contained in the Offering Materials, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, if
such statement or omission was made in reliance upon and in conformity
with information expressly relating to you and furnished by you to the
Company and Texas Utilities expressly for use therein. Your agreement
to so indemnify contained in this subparagraph (b) shall remain
operative and in full force and effect regardless of any termination
of this Agreement or of any investigation made by or on behalf of the
Company or Texas Utilities, its directors or their officers, or by
you or any other Co-Dealer Manager Indemnitee, and shall survive the
termination of the Offer.
(c) The Company, Texas Utilities and each Co-Dealer
Manager Indemnitee shall, upon the receipt of notice of the
commencement of any action in respect of which indemnity may
-12-
<PAGE> 13
be sought on account of any indemnity agreement contained herein,
promptly give written notice of the commencement thereof to the party
or parties against whom indemnity shall be sought hereunder, but the
omission so to notify such indemnifying party of any such action shall
not relieve such indemnifying party from any liability which it may
have to the indemnified party under this paragraph 6 except to the
extent that it has been prejudiced in any material respect by such
failure and in any event shall not relieve the Company or Texas
Utilities from any other obligation or liability which it may have to
such Co-Dealer Manager Indemnitee otherwise than on account of such
indemnity agreement. In case such notice of any such action shall be
so given, such indemnifying party shall be entitled to participate at
its own expense in the defense, or, if it so elects, to assume the
defense of such action, in which event such defense shall be conducted
by counsel chosen by such indemnifying party and satisfactory to the
indemnified party or parties who shall be defendant or defendants in
such action, and such defendant or defendants shall bear the fees and
expenses of any additional counsel retained by them; but if the
indemnifying party shall elect not to assume the defense of such
action, such indemnifying party will reimburse such indemnified party
or parties for the reasonable fees and expenses of any counsel
retained by them; provided, however, if the defendants in any such
action (including impleaded parties) include both an indemnified party
and the indemnifying party and counsel for the indemnifying party
shall have reasonably concluded that there may be a conflict of
interest involved in the representation by a single counsel of both
the indemnifying party and the indemnified party, the indemnified
party or parties shall have the right to select separate counsel,
satisfactory to the indemnifying party to conduct the defense on
behalf of the indemnifying party (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more
than one separate counsel (in addition to local counsel) representing
the indemnified parties who are parties to such action). The Company,
Texas Utilities and the Co-Dealer Managers agree that without the
other party's prior consent, which consent shall not be unreasonably
withheld, it will not settle, compromise or consent to the entry of
any judgment in any claim in respect of which indemnification may be
sought under the indemnification provision of this Agreement, unless
such settlement, compromise or consent (i) includes an unconditional
release of such other party from all liability arising out of such
claim and (ii) does not include a statement as to or an admission of
fault, culpability or a failure to act by or on behalf of such other
party.
-13-
<PAGE> 14
(d) If the indemnification provided for in subparagraph
(a) or (b) above shall be unenforceable under applicable law, the
indemnifying party agrees to contribute to such indemnified party with
respect to any and all losses, claims, damages, liabilities and
expenses for which each such indemnification provided for in
subparagraph (a) or (b) above shall be unenforceable, in such
proportion as shall be appropriate to reflect (i) the relative fault
of each indemnifying party on the one hand and the indemnified party
on the other in connection with the actions, statements or omissions
which have resulted in such losses, claims, damages, liabilities and
expenses, (ii) the relative benefits received by the Company and Texas
Utilities on the one hand and the Co-Dealer Managers on the other hand
from the Offer as contemplated by this agreement, and (iii) any any
other relevant equitable considerations; provided, however, that no
indemnified party guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any indemnifying party not guilty of such fraudulent
misrepresentation. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by such indemnifying
party or the indemnified party and each such party's relative intent,
knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, Texas Utilities and
you agree that it would not be just and equitable if contributions
pursuant to this subparagraph (d) were to be determined by any method
of allocation which does not take account of the equitable
considerations referred to above.
7. Conditions to Co-Dealer Managers' Obligations. The
obligations of the Co-Dealer Managers hereunder are subject as of the
Commencement Date to the accuracy of the representations and warranties of the
Company and Texas Utilities contained herein or in certificates of any officer
of the Company or Texas Utilities delivered pursuant to the provisions hereof,
to the performance, in all material respects, by the Company and Texas
Utilities of their obligations to be performed hereunder with respect to the
Offer other than the Exchange Offer, and the following additional conditions:
(a) On the Commencement Date, there shall not have been
since the respective date as of which information is given in the
Offering Document, with respect to the Offer, any material adverse
change in the business, property or financial condition of the Company
or Texas Utilities.
-14-
<PAGE> 15
(b) The Co-Dealer Managers shall have received on the
Commencement Date a certificate, dated such date and signed by an
executive officer of each of the Company and Texas Utilities, to the
effect set forth in clause (a) above and to the effect that the
representations and warranties of the Company and Texas Utilities
contained in this Agreement are true and correct in all material
respects as of such date and that the Company and Texas Utilities have
complied in all material respects with all of the agreements and
satisfied in all material respects all of the conditions on its part
to be performed or satisfied on or before such date and that the
Company and Texas Utilities have complied in all material respects
with all of the agreements and satisfied in all material respects all
of the conditions on its part to be performed or satisfied on or
before such date. The officer signing and delivering any such
certificate may rely upon the best of such officer's knowledge as to
proceedings threatened.
(c) On the Commencement Date, the Co-Dealer Managers
shall have received a signed opinion of Norton Rose, United Kingdom
counsel for the Company, dated as of such date, to the effect that:
(i) The Company is a private limited company, duly
authorized by its governing documents, as amended, to conduct
the business which it is now conducting.
(ii) this Agreement has been duly authorized,
executed and delivered by the Company and the Offer and the
other transactions with respect to the Company contemplated by
the Offering Document have been duly authorized by the
Company;
(iii) the Offering Materials comply with the
requirements of all applicable United Kingdom laws;
(iv) other than as stated in the Offering
Document, there are no material pending legal proceedings to
which the Company is a party or of which property of the
Company is the subject which depart from the ordinary routine
litigation incident to the kind of business conducted by the
Company, and to our best knowledge no such proceedings are
contemplated;
(v) such counsel has no reason to believe that the
Offering Materials, as amended or supplemented on the
Commencement
-15-
<PAGE> 16
Date, included an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
With respect to paragraph (v) above, such counsel may state
that it has not independently verified the accuracy, completeness or
fairness of the statements made or included or incorporated by
reference therein and takes no responsibility therefor and that such
opinion is based upon such counsel's examination of the Offering
Materials as amended or supplemented, its investigations made in
connection with the preparation of the Offering Materials and its
participation in conferences with certain officers and employees of
the Company and with representatives of Deloitte & Touche LLP and any
others referred to in such opinion.
(d) On the Commencement Date, the Co-Dealer Managers
shall have received a signed opinion of Worsham, Forsythe &
Wooldridge, L.L.P., general counsel for Texas Utilities and the
Company, dated as of such date, to the effect that:
(i) Texas Utilities is a corporation duly authorized
by its articles of incorporation, as amended, to conduct the
business which it is now conducting.
(ii) this Agreement has been duly authorized,
executed and delivered by Texas Utilities;
(iii) such counsel has no reason to believe that the
Offering Materials as they may have been amended or
supplemented prior to the date of such counsel's opinion
(except as aforesaid), included or include an untrue statement
of a material fact or omitted or omit to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely as to (i)
certain matters of fact on certificates of officers of Texas Utilities
and of public officials and (ii) all matters of New York law on the
opinion of Reid & Priest LLP delivered pursuant to Section 7(e) hereof
and may state that such counsel expresses no opinion as to the laws of
any
-16-
<PAGE> 17
jurisdiction other than the State of Texas and the federal law of the
United States.
With respect to paragraph (iii) above, such counsel may state
that it has not independently verified the accuracy, completeness or
fairness of the statements made or included or incorporated by
reference therein and takes no responsibility therefor and that such
opinion is based upon such counsel's examination of the Offering
Materials, as amended or supplemented, its investigations made in
connection with the preparation of the Registration Statement and
Prospectus and its participation in conferences with certain officers
and employees of the Company and Texas Utilities and with
representatives of Deloitte & Touche LLP and any others referred to in
such opinion.
(e) On the Commencement Date, the Co-Dealer Managers
shall have received a signed opinion of Reid & Priest LLP, of counsel
for Texas Utilities, dated as of such date, as to the matters
described in Section 7(d)(iii) herein and to the effect that such
counsel confirms its opinion under the caption "Certain United States
Federal Income Tax Consequences" in the Offering Document.
In rendering such opinion, such counsel may rely as to certain
matters of fact on certificates of officers of the Company and of
public officials and may state that such counsel expresses no opinion
as to the laws of any jurisdiction other than the State of New York
and the federal law of the United States.
(f) On the Commencement Date, the Co-Dealer Managers
shall have received from the Company's independent public accountants,
in form and substance satisfactory to the Co-Dealer Managers and dated
as of such date, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in or incorporated by reference into the
Offering Document.
8. Conditions to Co-Dealer Managers' Obligations with Respect to
the Exchange Offer. The obligations of the Co-Dealer Managers hereunder are
subject as of the Exchange Commencement Date and as of the Exchange Date to the
accuracy of the representations and warranties of Texas Utilities contained
herein or in certificates of any officer of Texas Utilities delivered pursuant
to the provisions hereof, to the performance, in all material respects, by
Texas Utilities of its obligations
-17-
<PAGE> 18
to be performed hereunder with respect to the Exchange Offer, and the following
additional conditions:
(a) In connection with the Exchange Offer, on the
Exchange Commencement Date and the Exchange Date, the Registration
Statement shall have become effective under the Securities Act; no
stop order suspending the effectiveness of the Registration Statement
shall be in effect, and no proceedings for such purpose shall be
pending before or, to Texas Utilities' or the Company's knowledge,
threatened by the Commission.
(b) On the Exchange Commencement Date and the Exchange
Date, there shall not have been since the respective date as of which
information is given in the Registration Statement, with respect to
the Exchange, or the Offering Document, with respect to the other
portions of the Offer, any material adverse change in the business,
property or financial condition of Texas Utilities.
(c) The Co-Dealer Managers shall have received on the
Exchange Date and the Exchange Commencement Date (i) a certificate,
dated such date and signed by an executive officer of the Company, to
the effect set forth in clause (b) above and to the effect that the
representations and warranties of the Company contained in this
Agreement are true and correct in all material respects as of such
date and that the Company has complied in all material respects with
all of the agreements and satisfied in all material respects all of
the conditions on its part to be performed or satisfied on or before
such date and (ii) a certificate, dated such date and signed by an
executive officer of Texas Utilities, to the effect that the
representations and warranties of the Company and Texas Utilities
contained in this Agreement are true and correct in all material
respects as of such date and that the Company and Texas Utilities have
complied in all material respects with all of the agreements and
satisfied in all material respects all of the conditions on its part
to be performed or satisfied on or before such date. The officer
signing and delivering any such certificate may rely upon the best of
such officer's knowledge as to proceedings threatened.
(d) On the Exchange Commencement Date and the Exchange
Date, the Co-Dealer Managers shall have received a signed opinion of
Worsham, Forsythe & Wooldridge, L.L.P., general counsel for Texas
Utilities and the Company, dated as of such date, to the effect that:
(i) Texas Utilities is a corporation duly authorized
by its articles of
-18-
<PAGE> 19
incorporation, as amended, to conduct the business which it is
now conducting;
(ii) this Agreement has been duly authorized,
executed and delivered by Texas Utilities;
(iii) when issued, in exchange for TEG Shares or TEG
ADSs, the TUC Stock will be duly authorized, validly issued,
fully paid and nonassessable;
(iv) the statements made in the Prospectus under the
captions "Description of the Texas Utilities Common Stock"
insofar as such statements constitute summaries of the legal
matters or documents referred to therein, are accurate in all
material respects;
(v) other than as stated in the Registration
Statement and the Prospectus, there are no material pending
legal proceedings to which Texas Utilities is a party or of
which property of Texas Utilities is the subject which depart
from the ordinary routine litigation incident to the kind of
business conducted by Texas Utilities, and to our best
knowledge no such proceedings are contemplated;
(vi) such counsel (1) has no reason to believe that
(a) the Registration Statement, as of its effective date,
included an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading or (b)
the Prospectus, as it may have been amended or supplemented
prior to the date of such counsel's opinion (except as
aforesaid), included or includes an untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; the Registration Statement has become and is
effective under the Securities Act, and (2) is of the opinion
that the Registration Statement and Prospectus as they may
have been amended and supplemented prior to the
-19-
<PAGE> 20
date of such counsel's opinion (except as aforesaid), as of
their respective effective or issue dates, comply as to form in
all material respects with the Securities Act.
In rendering such opinion, such counsel may rely as to (i)
certain matters of fact on certificates of officers of Texas Utilities
and of public officials and (ii) all matters of New York law on the
opinion of Reid & Priest LLP delivered pursuant to Section 8(e) hereof
and may state that such counsel expresses no opinion as to the laws of
any jurisdiction other than the State of Texas and the federal law of
the United States.
With respect to paragraph (vi)(1) above, such counsel may
state that it has not independently verified the accuracy,
completeness or fairness of the statements made or included or
incorporated by reference therein and takes no responsibility therefor
and that such opinion is based upon such counsel's examination of the
Registration Statement, the Prospectus as amended or supplemented and
any documents incorporated by reference thereto, its investigations
made in connection with the preparation of the Registration Statement
and Prospectus and its participation in conferences with certain
officers and employees of Texas Utilities and with representatives of
Deloitte & Touche LLP and any others referred to in such opinion.
(e) On the Exchange Commencement Date and the Exchange
Date, the Co-Dealer Managers shall have received a signed opinion of
Reid & Priest LLP, of counsel for Texas Utilities, dated as of such
date, as to the matters described in Section 8(d)(vi) herein, the
effectiveness of the Registration Statement and to the effect that
such counsel confirms its opinion under the caption "Certain United
States Federal Income Tax Consequences" in the Offering Document.
(f) The Co-Dealer Managers shall have received the
favorable opinion of counsel for the Co-Dealer Managers, dated as of
the Exchange Commencement Date, covering the incorporation and legal
existence of Texas Utilities, the issuance and delivery of the TUC
Stock, this Agreement, the Registration Statement, the Prospectus and
such other related matters as the Co-Dealer Managers may require. In
giving such opinion such counsel may rely, as to all matters governed
by the laws of the State of Texas, upon the opinion of Worsham,
Forsythe & Wooldridge, L.L.P. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper,
-20-
<PAGE> 21
upon certificates of officers of Texas Utilities and certificates of
public officials.
(g) On the Exchange Commencement Date, the Co-Dealer
Managers shall have received from Texas Utilities' independent public
accountants, in form and substance satisfactory to the Co-Dealer
Managers and dated as of such date, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in or incorporated by
reference into the Prospectus.
(h) At the Exchange Date, the Co-Dealer Managers shall
have received from Texas Utilities' independent public accountants, in
form and substance satisfactory to the Co-Dealer Managers and dated as
of such dates, to the effect that such accountants reaffirm the
statements made in the letter furnished pursuant to Section 8(g).
(i) By the Exchange Date, Texas Utilities shall have
entered into appropriate agreements with the Information Agent and the
Exchange Agent for purposes of the Exchange Offer.
9. Termination. (a) This Agreement shall terminate upon the
earliest to occur of (i) the last Closing Date with respect to TEG Shares and
TEG ADSs, (ii) the date on which the Co-Dealer Managers give notice to the
Company that any of the conditions specified in Section 7 have not been
fulfilled as of any date such conditions are required to be fulfilled pursuant
to Section 7 or (iii) the date on which the Company terminates or withdraws the
Offer for any reason (the earliest to occur of clauses (i), (ii) or (iii) being
referred to as the "Termination Date").
(b) Notwithstanding termination of this Agreement pursuant to
subsection (a) of this Section 9, the obligations of the Company to compensate
the Co-Dealer Managers pursuant to Section 3, the representations and
warranties contained in Section 5 and the provisions of Section 6 shall survive
any termination of this Agreement.
10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered, mailed
or transmitted by any standard form of telecommunication. Notices to the
Co-Dealer Managers shall be directed to Lehman Brothers Inc., 3 World Financial
Center, 200 Vesey Street, New York, NY 10285, attention John Lange and Merrill
Lynch & Co., World Financial Center, South Tower, New York, New York
10281-1307, attention John Thorndike, with a copy to, counsel for the Co-Dealer
Managers and notices to
-21-
<PAGE> 22
the Company or Texas Utilities shall be directed to either of them c/o Texas
Utilities Company, 1601 Bryan Street, Dallas, Texas 75201, attention Treasurer.
Any notice under Section 6 hereof may be made by telex or telephone, but if so
made, shall be subsequently confirmed promptly in writing.
11. Tombstone. The Company acknowledges that the Co-Dealer
Managers may, with the prior review and approval of the Company, which approval
shall not be unreasonably withheld, place an announcement in such newspapers
and periodicals as the Co-Dealer Managers may choose, stating that the
Co-Dealer Managers are or were acting as co-dealer managers and financial
advisors to the Company in connection with the Offer. The costs relating to
any such tombstone shall be borne by the Co-Dealer Managers.
12. Survival of Certain Provisions. The representations,
warranties, indemnities and agreements of the Company will remain operative and
in full force and effect regardless of any investigation made by or on behalf
of any Co-Dealer Manager or any affiliate or controlling person thereof and,
subject to Section 8(b), will survive the consummation of the Offer.
13. Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
giving effect to principles of conflicts of laws.
14. Counterparts. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute one
and the same Agreement.
15. Successors. This Agreement is made solely for the benefit of
the Co-Dealer Managers, the Company and, to the extent expressed, the parties
indemnified pursuant to Section 6, and no other persons shall acquire or have
any right under or by virtue of this Agreement. Nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the
parties hereto or their respective successors and assigns, and, to the extent
expressly set forth herein, the parties indemnified pursuant to Section 6
hereof, any rights or remedies under or by reason of this Agreement. Without
limiting the generality of the foregoing, the parties acknowledge that nothing
in this Agreement, expressed or implied, is intended to confer on holders of
the securities of the Company or creditors of the Company or the respective
successors and assigns of such creditors, any rights or remedies under or by
reason of this Agreement.
-22-
<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company, Texas Utilities
and the Co-Dealer Managers in accordance with its terms.
Very truly yours,
TEXAS UTILITIES COMPANY
By:
---------------------------------------
TU Acquisitions PLC
By:
---------------------------------------
Confirmed and accepted as of
the date first above written:
LEHMAN BROTHERS INC.
By:
---------------------------------
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By:
---------------------------------
-23-
<PAGE> 1
EXHIBIT 4(a)
LETTER OF TRANSMITTAL
TO ACCEPT OFFER FOR AMERICAN DEPOSITARY SHARES
EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS
OF
THE ENERGY GROUP PLC
PURSUANT TO THE CASH OFFER
BY
LEHMAN BROTHERS AND MERRILL LYNCH
ON BEHALF OF
TU ACQUISITIONS PLC
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 10:00 PM (LONDON
TIME), 5:00 PM (NEW YORK CITY TIME) ON APRIL 6, 1998. AT THE CONCLUSION OF THE
INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, IF ALL CONDITIONS HAVE
BEEN SATISFIED, FULFILLED, OR WHERE PERMITTED, WAIVED, THE OFFER WILL BE
EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF AT LEAST 14 CALENDAR DAYS. HOLDERS OF
ENERGY GROUP SECURITIES WILL HAVE THE RIGHT TO WITHDRAW THEIR ACCEPTANCES OF THE
OFFER DURING THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, BUT NOT
DURING THE SUBSEQUENT OFFER PERIOD, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF ENERGY GROUP ADSS TENDERED
- ------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S)
APPEAR(S) ON ADR(S)) ADS(S) TENDERED (ATTACH ADDITIONAL LIST IF NECESSARY)
- ------------------------------------------------------------------------------------------------------------
TOTAL NUMBER
OF ADSS NUMBER
ADR SERIAL REPRESENTED BY OF ADSS
NUMBER(S)* ADR(S)* TENDERED**
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
* Need not be completed for book-entry transfers.
** Unless otherwise indicated, it will be assumed that all Energy Group ADSs delivered to the US Depositary
are being tendered. See Instruction 4.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
The US Depositary for the Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
(For Eligible Institutions
Tender & Exchange Department Only) Tender & Exchange Department
P.O. Box 11248 101 Barclay Street
Church Street Station (212) 815-6213 Receive and Deliver Window
New York, New York 10286-1248 For Information Telephone: New York, New York 10286
(888) 460-7637
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE US DEPOSITARY.
ACCEPTING HOLDERS OF ENERGY GROUP ADSs EVIDENCED BY ENERGY GROUP ADRs WILL
RECEIVE PAYMENT IN DOLLARS INSTEAD OF POUNDS STERLING UNLESS THEY ELECT
OTHERWISE HEREIN TO RECEIVE PAYMENT IN POUNDS STERLING. IF YOU WISH TO RECEIVE
POUNDS STERLING INSTEAD OF DOLLARS, YOU MUST PLACE AN "X" IN THE BOX ENTITLED
"POUNDS STERLING PAYMENT ELECTION."
ACCEPTANCE OF THE OFFER IN RESPECT OF ENERGY GROUP SHARES (EXCEPT INSOFAR
AS THEY ARE REPRESENTED BY ENERGY GROUP ADSs EVIDENCED BY ENERGY GROUP ADRs)
CANNOT BE MADE BY MEANS OF THIS LETTER OF TRANSMITTAL. If you hold Energy Group
Shares that are not represented by Energy Group ADSs, you can obtain a Form of
Acceptance, Authority and Election (the "Acceptance Form") from the Information
Agent, the US Depositary or the UK Receiving Agent. See Instruction 13 of this
Letter of Transmittal.
The undersigned acknowledges that he or she has received and reviewed the
Texas Utilities Offer dated March 9, 1998 (the "Offer to Purchase") of TU
Acquisitions and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute TU Acquisitions' offer (the "Offer") to purchase, upon the
terms and subject to the Conditions set out in the Offer to Purchase, all
outstanding Energy Group Securities, for 840 pence in cash per Energy Group
Share and L33.60 per Energy Group ADS, together with the benefits of the Share
Alternative and the Loan Note Alternative and the right to elect to receive the
consideration in US dollars set out in the Offer to Purchase.
Delivery of a Letter of Transmittal, Energy Group ADRs evidencing Energy
Group ADSs (or book-entry transfer of such Energy Group ADSs evidenced by Energy
Group ADRs) and any other required documents to the US Depositary by Energy
Group ADS holders will be deemed an acceptance of the Offer by such holder with
respect to such Energy Group ADSs evidenced by Energy Group ADRs subject to the
terms and Conditions set out in the Offer to Purchase and this Letter of
Transmittal. Other capitalized terms used but not defined herein have the
meanings given to them in the Offer to Purchase.
This Letter of Transmittal is to be used if Energy Group ADRs evidencing
Energy Group ADSs are to be forwarded herewith. If delivery of Energy Group ADSs
is to be made by book-entry transfer to an account maintained by the US
Depositary at a Book-Entry Transfer Facility as defined in and pursuant to the
procedures for book-entry transfer set forth in "Procedures for Tendering Energy
Group ADSs -- Book-Entry Transfer" in Part B of Appendix I to the Offer to
Purchase, then either this Letter of Transmittal or an Agent's Message (as
defined below) should be used.
2
<PAGE> 3
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility and received by the US Depositary and forming a part of a Book
Entry Confirmation, which states that such Book-Entry Transfer Facility has
received an express acknowledgment from the participant in such Book-Entry
Facility tendering the Energy Group ADSs which are the subject of such
Book-Entry Confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal. The undersigned has completed,
executed and delivered this Letter of Transmittal to indicate the action the
undersigned desires to take with respect to the Offer to Purchase.
[ ] CHECK BOX IF ENERGY GROUP ADSs IN RESPECT OF WHICH THE OFFER IS BEING
ACCEPTED ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT
MAINTAINED BY THE US DEPOSITARY WITH A BOOK-ENTRY TRANSFER FACILITY AND
COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER
FACILITY MAY DELIVER ENERGY GROUP ADSs EVIDENCED BY ENERGY GROUP ADRs BY
BOOK-ENTRY TRANSFER):
Name of Delivering Institution
-----------------------------------------------
Check box opposite name of relevant Book-Entry Transfer Facility:
[ ] The Depository Trust Company
Account Number Transaction Code Number
-------------------- --------------
If a holder of Energy Group ADSs wishes to accept the Offer and Energy
Group ADRs evidencing such Energy Group ADSs are not immediately available or
the procedures for book-entry transfer cannot be completed on a timely basis, or
if time will not permit all required documents to reach the US Depositary prior
to the expiry of the Subsequent Offer Period, such holder's acceptance of the
Offer may nevertheless be effected using the guaranteed delivery procedure set
out under "Procedures for Tendering Energy Group ADSs -- Guaranteed Delivery" in
Part B of Appendix I to the Offer to Purchase. See Instruction 2 of this Letter
of Transmittal. HOWEVER, RECEIPT OF A NOTICE OF GUARANTEED DELIVERY WILL NOT BE
TREATED AS A VALID ACCEPTANCE FOR THE PURPOSE OF SATISFYING THE ACCEPTANCE
CONDITION.
[ ] CHECK BOX ONLY IF ENERGY GROUP ADSs IN RESPECT OF WHICH THE OFFER IS
BEING ACCEPTED ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE US DEPOSITARY AND COMPLETE THE FOLLOWING:
Name(s) of registered owner(s)
-------------------------------------------
Date of execution of Notice of Guaranteed Delivery
----------------------
Name of Institution that guaranteed delivery
----------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
3
<PAGE> 4
Ladies and Gentlemen:
The undersigned hereby instructs the US Depositary to accept the Offer on
behalf of the undersigned with respect to the Energy Group ADSs evidenced by
Energy Group ADRs (which expression in this Letter of Transmittal shall, except
where the context otherwise requires, be deemed to include, without limitation,
the Energy Group Shares represented thereby) specified in the box entitled
"Description of Energy Group ADSs Tendered" subject to the terms and Conditions
set forth in the Offer to Purchase and this Letter of Transmittal, by informing
TU Acquisitions in writing that the Offer has been so accepted. The undersigned
hereby acknowledges that delivery of this Letter of Transmittal, the Energy
Group ADRs evidencing tendered Energy Group ADSs (or book-entry transfer of such
Energy Group ADSs evidenced by Energy Group ADRs) and any other required
documents to the US Depositary by a holder of Energy Group ADSs will be deemed
(without any further action by the US Depositary) to constitute acceptance of
the Offer by such holder in respect of such holder's Energy Group ADSs, subject
to the terms and Conditions set out in the Offer to Purchase and this Letter of
Transmittal.
The undersigned understands that acceptance of the Offer by the undersigned
pursuant to the procedures described herein and in the instructions hereto,
subject to the withdrawal rights described in the Offer to Purchase, will
constitute a binding agreement between the undersigned and TU Acquisitions upon
the terms and subject to the Conditions of the Offer. IF ACCEPTANCE HAS BEEN
MADE IN RESPECT OF THE ENERGY GROUP ADSs THEN A SEPARATE ACCEPTANCE IN RESPECT
OF THE ENERGY GROUP SHARES REPRESENTED BY SUCH ENERGY GROUP ADSs MAY NOT BE
MADE.
The undersigned hereby delivers to the US Depositary the above-described
Energy Group ADSs evidenced by Energy Group ADRs for which the Offer is being
accepted, in accordance with the terms and Conditions of the Offer to Purchase
and this Letter of Transmittal, receipt of which is hereby acknowledged.
Upon the terms of the Offer (including, if the Offer is extended, revised
or amended, the terms or conditions of any such extension, revision or
amendment), and effective at the time that all Conditions to the Offer have been
satisfied, fulfilled or, where permitted, waived (at which time TU Acquisitions
will give notice thereof to the US Depositary), and if he or she has not validly
withdrawn his or her acceptance, the undersigned hereby sells, assigns and
transfers to, or upon the order of, TU Acquisitions all right, title and
interest in and to all Energy Group ADSs evidenced by Energy Group ADRs with
respect to which the Offer is being accepted (and any and all Energy Group ADSs
or other securities or rights issuable in respect of such Energy Group ADSs) and
irrevocably constitutes and appoints the US Depositary the true and lawful agent
and attorney-in-fact of the undersigned with respect to such Energy Group ADSs
(and any such other Energy Group ADSs, securities or rights), with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to (a) deliver Energy Group ADRs for such Energy
Group ADSs (and any such other Energy Group ADSs, securities or rights) or
accept transfer of ownership of such Energy Group ADSs (and any such other
Energy Group ADSs, securities or rights) on the account books maintained by a
Book-Entry Transfer Facility together, in any such case, with all accompanying
evidences of transfer and authenticity to, or upon the order of, TU
Acquisitions, (b) present such Energy Group ADRs for such Energy Group ADSs (and
any other Energy Group ADSs, securities or rights) for transfer, and (c) receive
all benefits and otherwise exercise all rights of beneficial ownership of such
Energy Group ADSs (and any such other Energy Group ADSs, securities or rights),
all in accordance with the terms of the Offer.
The undersigned agrees that its execution hereof (together with any
signature guarantees) and its delivery to the US Depositary shall constitute an
authority to any director of TU Acquisitions or Lehman Brothers and Merrill
Lynch in accordance with the terms of paragraph 7 of Part B of Appendix I to the
Offer to Purchase.
The undersigned agrees that effective from and after the date hereof or, if
later, the date on which all Conditions to the Offer are satisfied, fulfilled
or, where permitted, waived: (a) TU Acquisitions or its agents shall be entitled
to direct the exercise of any votes attaching to the Energy Group Shares
represented by any Energy Group ADSs evidenced by Energy Group ADRs in respect
of which the Offer has been accepted or is deemed to have been accepted (the
"Accepted ADSs") and any other rights and privileges attaching to such Energy
Group Shares, including any right to requisition a general meeting of The Energy
Group or of any class
4
<PAGE> 5
of its shareholders, and (b) the execution of this Letter of Transmittal by a
holder of Energy Group ADSs (together with any signature guarantees) and its
delivery to the US Depositary shall constitute in respect of Accepted ADSs (i)
an authority to The Energy Group or its agents from the undersigned to send any
notice, circular, warrant, document or other communications that may be required
to be sent to him or her as an Energy Group ADS holder to TU Acquisitions at its
registered office, (ii) an authority to TU Acquisitions or its agent to sign any
consent to short notice of a general meeting or separate class meeting on behalf
of the holder of Accepted ADSs and/or to execute a form of proxy in respect of
the Accepted ADSs appointing any person nominated by TU Acquisitions to attend
general meetings and separate class meetings of The Energy Group or its members
(or any of them) (or any adjournments thereof) and to exercise the votes
attaching to the Energy Group Shares represented by such Accepted ADSs on his or
her behalf, and (iii) the agreement of the undersigned not to exercise any such
rights without the consent of TU Acquisitions and the irrevocable undertaking of
the undersigned not to appoint a proxy for or to attend general meetings or
separate class meetings of The Energy Group in respect of such Accepted ADSs.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to accept the Offer and to sell, assign and transfer
the Energy Group ADSs evidenced by Energy Group ADRs (and the Energy Group
Shares represented by such Energy Group ADSs) in respect of which the Offer is
being accepted or deemed to be accepted (and any and all other Energy Group
ADSs, securities or rights issued or issuable in respect of such Energy Group
ADSs) and, when the same are purchased by TU Acquisitions, TU Acquisitions will
acquire good title thereto, free from all liens, equitable interests, charges,
encumbrances and together with all rights attaching thereto, including voting
rights and the right to receive all dividends and other distributions declared,
made or paid on or after March 9, 1998 with respect to the Energy Group Shares
represented by the Energy Group ADSs. The undersigned will, upon request,
execute any additional documents deemed by the US Depositary or TU Acquisitions
to be necessary or desirable to complete the sale, assignment and transfer of
the Energy Group ADSs evidenced by Energy Group ADRs in respect of which the
Offer is being accepted (and any and all other Energy Group ADSs, securities or
rights).
The undersigned irrevocable undertakes, represents, and warrants to and
agrees with TU Acquisitions (so as to bind him or her, his or her personal
representatives, heirs, successors and assigns) to the effect that the
undersigned: (i) has not received or sent copies of this document or any
Acceptance Form or any related documents in, into or from Canada, Japan or
Australia and has not otherwise utilized in connection with the Offer, directly
or indirectly, the Canadian, Australian or Japanese mails or any means or
instrumentality (including, without limitation, facsimile transmission, telex,
and telephone) of interstate or foreign commerce, or any facilities of a
national securities exchange, of Canada, Australia or Japan, (ii) is accepting
the Offer from outside Canada, Japan and Australia and (iii) is not an agent or
fiduciary acting on a nondiscretionary basis for a principal, unless such agent
or fiduciary is an authorized employee of such principal or such principal has
given any instructions with respect to the Offer from outside Canada, Japan and
Australia.
All authority herein conferred or agreed to be conferred pursuant to this
Letter of Transmittal shall be binding upon the successors, assigns, heirs,
executors, administrators and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. Except as stated in the Offer to Purchase, this acceptance is
irrevocable.
Unless otherwise indicated herein under "Special Payment Instructions," the
undersigned hereby instructs the US Depositary to issue, or cause to be issued,
the check for the purchase price in the name(s) of the registered holder(s)
appearing under "Description of Energy Group ADSs Tendered." Similarly, unless
otherwise indicated under "Special Delivery Instructions," the undersigned
hereby instructs the US Depositary to mail, or cause to be mailed, the check for
the purchase price and/or return, or cause to be returned, any Energy Group ADRs
evidencing Energy Group ADSs in respect of which the Offer is not being accepted
or which are not purchased (and accompanying documents, as appropriate) to the
address(es) of the registered holder(s) appearing under "Description of Energy
Group ADSs Tendered." In the event that the "Special Payment Instructions"
and/or the "Special Delivery Instructions" are completed, the undersigned hereby
instructs the US Depositary to (i) issue and/or mail, or cause to be issued
and/or mailed, the check for the purchase price, if any, in the name of, and/or
to the address of, the person or persons so indicated, and/or (ii) return, or
cause to be returned, any Energy Group ADRs evidencing Energy Group ADSs in
respect of
5
<PAGE> 6
which the Offer is not being accepted or which are not purchased, if any, to the
person at the address so indicated. In the case of a book-entry delivery of
Energy Group ADSs evidenced by Energy Group ADRs, the undersigned hereby
instructs the US Depositary to credit the account maintained at the Book-Entry
Transfer Facility indicated above with any Energy Group ADSs in respect of which
the Offer is not being accepted or which are not purchased. The undersigned
recognizes that the US Depositary will not transfer any Energy Group ADSs which
are not purchased pursuant to the Offer from the name of the registered holder
thereof to any other person.
If the box headed "Pounds Sterling Payment Election" is not checked, the
undersigned hereby instructs the relevant payment agent (either the US
Depositary or the UK Receiving Agent) to convert all amounts payable pursuant to
the Offer from pounds sterling to US dollars at the exchange rate obtainable by
the relevant payment agent on the spot market in London at approximately noon
(London time) on the date the cash consideration is made available by TU
Acquisitions to the relevant payment agent for delivery to holders of Energy
Group ADSs and to pay such amounts by check payable in US dollars. The actual
amount of US dollars received will depend upon the exchange rate prevailing on
the day funds are made available to the relevant payment agent by TU
Acquisitions. Energy Group ADS holders should also be aware that the US
dollar/pounds sterling exchange rate which is prevailing at the date on which
the undersigned executes this Letter of Transmittal and on the date of dispatch
of payment may be different from that prevailing on the day funds are made
available to the relevant payment agent by TU Acquisitions. In all cases,
fluctuations in the US dollar/pounds sterling exchange rate are at the risk of
accepting Energy Group ADS holders who do not elect to receive their
consideration in pounds sterling. Such currency exchange will be effected by the
relevant payment agent on behalf of the requesting Energy Group ADS holder and
TU Acquisitions shall have no responsibility or obligation with respect thereto.
SUBJECT TO THE TERMS OF THE OFFER TO PURCHASE, THIS LETTER OF TRANSMITTAL
SHALL NOT BE CONSIDERED COMPLETE AND VALID, AND PAYMENT OF CONSIDERATION
PURSUANT TO THE OFFER SHALL NOT BE MADE, UNTIL THE ENERGY GROUP ADRs EVIDENCING
THE ENERGY GROUP ADSs IN RESPECT OF WHICH THE OFFER IS BEING ACCEPTED AND ALL
OTHER REQUIRED DOCUMENTATION HAVE BEEN RECEIVED BY THE US DEPOSITARY AS PROVIDED
IN THE OFFER TO PURCHASE AND THIS LETTER OF TRANSMITTAL.
[ ] CHECK HERE IF ANY OF THE ENERGY GROUP ADRs REPRESENTING ENERGY GROUP ADSs
THAT YOU OWN HAVE BEEN LOST, STOLEN OR DESTROYED AND SEE INSTRUCTION 12.
Number of Energy Group ADSs represented by the lost, stolen or destroyed
Energy Group ADRs:
-----------------------------
6
<PAGE> 7
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
[ ] Check box ONLY if the check for the purchase price with respect to Energy
Group ADSs purchased is to be issued in the name of someone other than the
undersigned.
Issue to:
Name
-----------------------------------------
(Please Print)
Address
--------------------------------------
(Include Zip Code)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
[ ] Check box ONLY if the check for the purchase price with respect to Energy
Group ADSs purchased and/or the New Texas Utilities Shares for the purchase
price with respect to Energy Group ADSs purchased and/or Energy Group ADRs
evidencing Energy Group ADSs in respect of which the Offer is not accepted
or which are not purchased are to be mailed to someone other than the
undersigned, or to the undersigned at an address other than that shown
above.
Mail [ ] Check [ ] TU Common Stock
[ ] ADR certificates to:
Name
-----------------------------------------
(Please Print)
Address
--------------------------------------
(Include Zip Code)
SPECIAL TEXAS UTILITIES COMMON STOCK INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
[ ] Check box ONLY if the New Texas Utilities Shares delivered with respect to
Energy Group ADSs purchased are to be registered in the name of someone
other than the undersigned.
Register in name of:
Name:
---------------------------------------------------------------------------
(Please Print)
Address:
------------------------------------------------------------------------
(Include Zip Code)
7
<PAGE> 8
LIMITED SHARE ELECTION
[ ] Check box if you wish to receive New Texas Utilities Shares instead of the
cash receivable by you under the terms of the Offer.
Please note that to the extent that elections for this share alternative
are or might be received in excess of the maximum number of New Texas
Utilities Shares offered, elections will be scaled down on a pro rata
basis.
[ ] Certificated Securities Election: Check box if you wish to receive physical
stock certificates for the New Texas Utilities Shares to which you are
entitled under the terms of the Texas Utilities Offer. If you do not check
this box, the New Texas Utilities Shares to which you are entitled under
the terms of the Texas Utilities Offer will be held for you by Texas
Utilities Shareholder Services or its nominee, and credited to your
account.
POUNDS STERLING PAYMENT ELECTION
[ ] Check box ONLY if you wish to receive all (but not part) of the amount of
cash consideration to be paid by a check in pounds sterling. If you do not
check this box you will receive payment by a check in US dollars and the
relevant payment agent (either the US Depositary or the UK Receiving Agent)
will arrange for the conversion of the pound sterling amounts payable to
you to US dollars at the exchange rate obtainable by the relevant payment
agent on the spot market in London at approximately noon (London time) on
the date the cash consideration is made available by TU Acquisitions to the
relevant payment agent for delivery to holders of the Energy Group ADSs.
------------------------------------------------
SIGN HERE
AND COMPLETE SUBSTITUTE FORM W-9 INCLUDED HEREIN
------------------------------------------------
------------------------------------------------
(SIGNATURE(S) OF OWNER(S))
Dated: ,1998
---------------------------------------------------------
(Must be signed by registered holder(s) exactly as name(s) appear(s) on Energy
Group ADR(s) evidencing the Energy Group ADS(s) or by person(s) to whom Energy
Group ADR(s) surrendered have been assigned and transferred, as evidenced by
endorsement, stock powers and other documents transmitted herewith. If signature
is by any trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation or others acting in a fiduciary or representative capacity,
please set forth the following and see Instruction 5.)
8
<PAGE> 9
Name(s)
------------------------------------------------------------------------
------------------------------------------------------------------------
(Please Type or Print)
Capacity (full title)
----------------------------------------------------------
Address
------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
-------------------------------------------------
Tax Identification or
Social Security No.
------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 5)
Authorized Signature
-----------------------------------------------------------
Name
---------------------------------------------------------------------------
(Please Type or Print)
Title
--------------------------------------------------------------------------
Name of Firm
-------------------------------------------------------------------
Address
------------------------------------------------------------------------
Area Code and Telephone No.
----------------------------------------------------
Dated:
-------------------------------------------------------------------------
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. No signature guarantee is required on the
Letter of Transmittal if (a) the Letter of Transmittal is signed by the
registered holder(s) of the Energy Group ADSs evidenced by Energy Group ADRs in
respect of which the Offer is being accepted herewith and such holder(s) have
not completed either the box entitled "Special Payment Instructions" or the box
entitled "Special Delivery Instructions" or the box entitled "Special Texas
Utilities Common Stock Instructions" on this Letter of Transmittal or (b) the
Offer is being accepted in respect of such Energy Group ADSs for the account of
an Eligible Institution. In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by a financial institution (including most banks,
savings and loan associations and brokerage houses) which is a participant in
the Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Program, or the Stock Exchange Medallion Program (an "Eligible
Institution"). See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND ADSS. This Letter of Transmittal
is to be completed either if Energy Group ADRs evidencing Energy Group ADSs are
to be forwarded herewith or if delivery is to be made by book-entry transfer to
an account maintained by the US Depositary at a Book-Entry Transfer Facility
pursuant to the procedures for book-entry transfer set out in "Procedures for
Tendering Energy Group ADSs -- Book-Entry Transfer" in Part B of Appendix I to
the Offer to Purchase. Energy Group ADRs evidencing Energy Group ADSs or
confirmation of a book-entry transfer of such Energy Group ADSs into the US
depositary's account at a Book-Entry Transfer Facility, as well as a properly
completed and duly executed Letter of Transmittal (or facsimile thereof),
together with any required signature guarantees and any other documents required
by this Letter of Transmittal, or Agent's Message must be delivered to the US
Depositary at one of its addresses set forth herein.
Energy Group ADS holders whose Energy Group ADRs are not immediately
available or who cannot deliver their Energy Group ADRs and all other required
documents to the US depositary or complete the
9
<PAGE> 10
procedures for book-entry transfer prior to the expiration of the Subsequent
Offer Period may accept the Offer with respect to their Energy Group ADSs by
properly completing and duly executing the Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedures set out in "Procedures for
Tendering Energy Group ADSs -- Guaranteed Delivery" in Part B of Appendix I to
the Offer to Purchase. Pursuant to the guaranteed delivery procedures: (a)
acceptance must be made by or through an Eligible Institution; (b) a properly
completed and duly executed Notice of Guaranteed Delivery substantially in the
form provided by TU Acquisitions must be received by the US Depositary prior to
the expiration of the Subsequent Offer Period; and (c) the Energy Group ADRs
evidencing the Energy Group ADSs in respect of which the Offer is being accepted
(or, in the case of Energy Group ADSs held in book-entry form, timely
confirmation of the book-entry transfer of such Energy Group ADSs into the US
Depositary's account at a Book-Entry Transfer Facility as described in the Offer
to Purchase) together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantees and
any other documents required by this Letter of Transmittal, are received by the
US Depositary within three business days after the date of execution of such
Notice of Guaranteed Delivery. For these purposes, a "business day" is any day
on which the New York Stock Exchange is open for business.
THE METHOD OF DELIVERY OF ENERGY GROUP ADSs EVIDENCED BY ENERGY GROUP ADRs
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE HOLDERS OF
ENERGY GROUP ADSs ACCEPTING THE OFFER. IF DELIVERY IS BY MAIL, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
No alternative, conditional or contingent acceptance will be accepted and
no fractional Energy Group ADSs will be purchased. All accepting Energy Group
ADS holders, by execution of this Letter of Transmittal (or facsimile thereof),
waive any right to receive any notice of the acceptance of their Energy Group
ADSs for payment.
3. INADEQUATE SPACE. If the space provided herein is inadequate, the serial
numbers of the certificates and/or the number of Energy Group ADSs should be
listed on a separate schedule attached hereto.
4. PARTIAL ACCEPTANCES (NOT APPLICABLE TO BOOK-ENTRY TRANSFERS). If the
Offer is to be accepted in respect of less than all of the Energy Group ADSs
evidenced by any Energy Group ADRs delivered to the US Depositary herewith, fill
in the number of Energy Group ADSs in respect of which the Offer is being
accepted in the box entitled "Number of ADSs Tendered." In such case, a new
Energy Group ADR for the remainder of the Energy Group ADSs (in respect of which
the Offer is not being accepted) represented by the old Energy Group ADR will be
sent to the registered holder as promptly as practicable following the date on
which the Energy Group ADSs in respect of which the Offer has been accepted are
purchased.
The Offer will be deemed to have been accepted in respect of all Energy
Group ADSs evidenced by Energy Group ADRs delivered to the US Depositary unless
otherwise indicated. In the case of partial acceptances, Energy Group ADSs in
respect of which the Offer was not accepted will not be reissued to a person
other than the registered holder.
5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Energy
Group ADSs in respect of which the Offer is being accepted hereby, the
signature(s) must correspond with the name(s) as written on the face of the
certificates without any change whatsoever.
If any of the Energy Group ADSs evidenced by Energy Group ADRs in respect
of which the Offer is being accepted hereby are owned of record by two or more
owners, all such owners must sign this Letter of Transmittal.
If any of the Energy Group ADSs in respect of which the Offer is being
accepted are registered in different names on different Energy Group ADRs, it
will be necessary to complete, sign and submit as many separate Letters of
Transmittal as there are different registrations of Energy Group ADRs.
10
<PAGE> 11
If this Letter of Transmittal or any Energy Group ADRs or stock powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and proper evidence
satisfactory to TU Acquisitions of their authority so to act must be submitted.
When this Letter of Transmittal is signed by the registered holder(s) of
the Energy Group ADSs listed and transmitted hereby, no endorsements of
certificates or separate stock powers are required unless payment of the
purchase price is to be issued to a person other than the registered holder(s).
Signatures on such Energy Group ADRs or stock powers must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Energy Group ADSs listed, the Energy Group ADRs must
be endorsed or accompanied by appropriate stock powers signed exactly as the
name(s) of the registered holder(s) appear(s) on the Energy Group ADRs
evidencing such Energy Group ADSs. Signatures on such Energy Group ADRs or stock
powers must be guaranteed by an Eligible Institution.
6. STOCK TRANSFER TAXES. TU Acquisitions will pay or cause to be paid any
stock transfer taxes with respect to the transfer and sale to it or its order of
Energy Group ADSs evidenced by Energy Group ADRs pursuant to the Offer. If,
however, payment of the purchase price is to be made to any persons other than
the registered holder(s), or if Energy Group ADSs in respect of which the Offer
is being accepted are registered in the name of any person other than the
person(s) signing this Letter of Transmittal, the amount of any stock transfer
taxes (whether imposed on the registered holder(s) or such person(s) payment on
account of the transfer to such person) will be deducted from the purchase price
unless satisfactory evidence of the payment of such taxes or exemption therefrom
is submitted.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Energy Group ADRs listed in this Letter
of Transmittal.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the check for the purchase
price is to be issued in the name of a person other than the signer of this
Letter of Transmittal or if the check or Texas Utilities Common Stock for the
purchase price is to be sent and/or any Energy Group ADRs evidencing Energy
Group ADSs in respect of which the Offer is not being accepted or which are not
purchased are to be returned to a person other than the signer of this Letter of
Transmittal or to an address other than that when on the reverse or the Texas
Utilities Common Stock for the purchase price is to be registered in the name of
a person other than the signer of this Letter of Transmittal, the boxes labeled
"Special Payment Instructions" and/or "Special Delivery Instructions" and/or
"Special Texas Utilities Common Stock Instructions" on this Letter of
Transmittal should be completed.
8. POUNDS STERLING PAYMENT ELECTION. If the check for the purchase price is
to be issued in pounds sterling, please check the box marked "Pounds Sterling
Payment Election." If you do not check such box all pound sterling amounts
payable pursuant to the Offer will be converted by the relevant payment agent
(either the US Depositary or the UK Receiving Agent) into US dollars at the
exchange rate obtainable by the relevant payment agent on the spot market in
London at approximately noon (London time) on the date the cash consideration is
made available by TU Acquisitions to the relevant payment agent for delivery to
holders of Energy Group ADSs.
9. WAIVER OF CONDITIONS. TU Acquisitions reserves the absolute right in its
sole discretion to waive any of the specified conditions of the Offer, in whole
or in part, to the extent permitted by applicable law and the rules of the City
Code.
10. 31% U.S. BACKUP WITHHOLDING. In order to avoid "backup withholding" of
US federal income tax on any cash payment received upon the surrender of Energy
Group ADSs pursuant to the Offer, an Energy Group ADS holder must, unless an
exemption applies, provide the US Depositary with his or her correct Taxpayer
Identification Number ("TIN") on Substitute Form W-9 on this Letter of
Transmittal and certify, under penalties of perjury, that such number is correct
and that he or she is not subject to backup withholding. If the correct TIN is
not provided, a $50 penalty may be imposed by the Internal Revenue Service and
cash payments made in exchange for the surrendered Energy Group ADSs may be
subject to backup withholding.
11
<PAGE> 12
If backup withholding applies, the US Depositary is required to withhold 31% of
any payment made pursuant to the Offer.
Backup withholding is not an additional US federal income tax. Rather, the
US federal income tax liability of persons subject to backup withholding will be
reduced by the amount of such tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be applied for from the Internal Revenue
Service.
The TIN that is to be provided on the Substitute W-9 is that of the
registered holder(s) of the Energy Group ADSs or of the last transferee
appearing on the transfers attached to, or endorsed on, the Energy Group ADSs.
The TIN for an individual is his or her social security number. Each tendering
Energy Group ADS holder generally is required to notify the US Depositary of his
or her correct TIN by completing the Substitute Form W-9 contained herein,
certifying that the TIN provided on Substitute Form W-9 is correct (or that such
holder is awaiting a TIN), and that (1) such holder has not been notified by the
Internal Revenue Service that such holder is subject to backup withholding as a
result of a failure to report all interest or dividends, or (2) the Internal
Revenue Service has notified such holder that such holder is no longer subject
to backup withholding (see Part III of Substitute Form W-9). Notwithstanding
that the "TIN Applied For" box is checked (and the Certification is completed),
the US Depositary will withhold 31% on any cash payment of the purchase price
for the Energy Group ADSs made prior to the time it is provided with a properly
certified TIN.
Exempt persons (including among others, corporations) are not subject to
backup withholding. A foreign individual or foreign entity may qualify as an
exempt person by submitting a statement (on Form W-8), signed under penalties of
perjury, certifying such person's foreign status. Form W-8 can be obtained from
the US Depositary. An Energy Group ADS holder should consult his or her tax
advisor as to his or her qualification for an exemption from backup withholding
and the procedure for obtaining such exemption.
For additional guidance, see the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance or additional copies of the Offer to Purchase, this Letter of
Transmittal, the Notice of Guaranteed Delivery and the Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 may be
directed to the US Depositary at the address and telephone number set forth
above, to the Information Agent or the Dealer Manager at the addresses and
telephone numbers set forth below, or to the UK Receiving Agent at the
appropriate address and telephone number set forth in the Offer to Purchase.
12. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Energy Group ADR
evidencing Energy Group ADSs has been lost, destroyed or stolen, the holder
thereof should promptly notify the US Depositary by checking the box immediately
preceding the special payment/special delivery instructions boxes and indicating
the number of Energy Group ADSs evidenced by such lost, destroyed or stolen
Energy Group ADRs. The holder thereof will then be instructed as to the steps
that must be taken in order to replace such Energy Group ADRs. This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen Energy Group ADRs have been followed.
12
<PAGE> 13
13. HOLDERS OF ENERGY GROUP SHARES NOT REPRESENTED BY ENERGY GROUP
ADSS. Holders of Energy Group Shares have been sent a Form of Acceptance with
the Offer to Purchase and may not accept the Offer in respect of Energy Group
Shares pursuant to this Letter of Transmittal except insofar as those shares are
represented by Energy Group ADSs. If any holder of Energy Group Shares which are
not represented by Energy Group ADSs needs to obtain a copy of a Form of
Acceptance, such holder should contact the UK Receiving Agent at the appropriate
address and telephone number set forth in the Offer to Purchase or the US
Depositary.
PAYER'S NAME: THE BANK OF NEW YORK, AS US DEPOSITARY
THE INFORMATION AGENT FOR THE OFFER IS:
D. F. King & Co., Inc.
77 Water Street
New York, New York 10005
United States: (800) 848-3416
Europe: (44) 171-000-5005 (Collect)
Outside United States and Europe: (212) 289-5550 (Collect)
THE DEALER MANAGERS FOR THE OFFER ARE:
<TABLE>
<S> <C>
LEHMAN BROTHERS MERRILL LYNCH
3 World Financial Center World Financial Center
200 Vesey Street South Tower
New York, New York 10285 New York, New York 10281-1307
</TABLE>
13
<PAGE> 1
EXHIBIT 5(c)
WORSHAM, FORSYTHE & WOOLDRIDGE, L.L.P.
Attorneys and Counselors At Law
Energy Plaza - 1601 Bryan Street, 33rd Floor
Dallas, Texas 75201
March 6, 1998
Texas Utilities Company
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201
Ladies and Gentlemen:
Referring to Amendment No. 1 to the Registration Statement on Form S-4
(Registration No. 333-47135) to be filed by Texas Utilities Company ("Company")
on or about the date hereof with the Securities and Exchange Commission
("Commission") under the Securities Act of 1933, as amended, for the
registration of up to 41,368,470 shares of common stock, without par value
("Stock"), to be issued by the Company in connection with the Company's offer
("Offer") to acquire all the outstanding ordinary shares and American Depositary
Securities of Energy Group PLC ("Energy Group Securities"), we are of the
opinion that:
1. The Company is a corporation validly organized and
existing under the laws of the State of Texas.
2. All necessary action on the part of the Company's
Board of Directors with respect to the issuance of the Stock and the exchange
of shares of Stock for Energy Group Securities pursuant to the Offer has been
taken.
3. The Stock to be issued by the Company will be validly
issued, fully paid and non-assessable when it shall have been issued and
exchanged for the consideration contemplated in the Offer.
<PAGE> 1
EXHIBIT 5(d)
REID & PRIEST LLP
40 West 57th Street
New York, New York 10019-4097
March 6, 1998
Texas Utilities Company
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201
Ladies and Gentlemen:
Referring to Amendment No. 1 to the Registration Statement on Form S-4
(Registration No. 333-47135) to be filed by Texas Utilities Company ("Company")
on or about the date hereof with the Securities and Exchange Commission
("Commission") under the Securities Act of 1933, as amended, for the
registration of up to 41,368,470 shares of common stock, without par value
("Stock"), to be issued by the Company in connection with the Company's offer
("Offer") to acquire all the outstanding ordinary shares and American Depositary
Securities of Energy Group PLC ("Energy Group Securities"), we are of the
opinion that:
1. The Company is a corporation validly organized and
existing under the laws of the State of Texas.
2. All necessary action on the part of the Company's
Board of Directors with respect to the issuance of the Stock and the exchange
of shares of Stock for Energy Group Securities pursuant to the Offer has been
taken.
3. The Stock to be issued by the Company will be validly
issued, fully paid and non-assessable when it shall have been issued and
exchanged for the consideration contemplated in the Offer.
We are members of the New York Bar and do not hold ourselves
out as experts on the laws of the State of Texas. As to all matters of Texas
law, we have, with your
<PAGE> 2
consent, relied upon an opinion of even date herewith addressed to you by
Worsham, Forsythe & Wooldridge, L.L.P. of Dallas, Texas.
We hereby consent to the use of this opinion as an exhibit to
the aforementioned Registration Statement.
Very truly yours,
/s/ Reid & Priest LLP
REID & PRIEST LLP
<PAGE> 1
EXHIBIT 99(a)
, 1998
DEPOSITARY AGENT AGREEMENT
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street -- 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Lehman Brothers and Merrill Lynch, on behalf of TU Acquisitions PLC (the
"Company"), propose to make an offer (the "Offer") to purchase all outstanding
shares of (x) 10p each in the share capital of The Energy Group ("TEG") in issue
or allotted or issued prior to the date the Offer closes ("TEG Shares"), and (y)
American Depositary Shares issued in respect of TEG Shares, each representing
four TEG Shares ("TEG ADSs" and together with TEG Shares, "TEG Securities"), for
cash (in pounds sterling or US dollars) and/or an appropriate number of shares
of Texas Utilities Company common stock ("TUC Stock").
The terms and conditions of the Offer as currently contemplated are set
forth in an Offer to Purchase, dated March 9, 1998 (the "Offer to Purchase"),
proposed to be distributed to all holders of the TEG Securities. Capitalized
terms used herein and not defined shall have the meanings ascribed to them in
the Offer to Purchase or the Letter of Transmittal to be delivered with the
Offer to Purchase to record holders of the TEG Securities ("Letter of
Transmittal").
The Company hereby appoints The Bank of New York to act as depositary agent
(the "US Depositary") in connection with the Offer. References hereinafter to
"you" shall refer to The Bank of New York.
The Offer is expected to be commenced by the Company on or about March 9,
1998. The Letter of Transmittal accompanying the Offer to Purchase (or in the
case of book-entry securities, the ATOP system) is to be used by the holders of
the TEG Securities to accept the Offer and contains instructions with respect to
the delivery of certificates for TEG Securities tendered in connection
therewith.
The Initial Offer Period shall expire at 10:00 P.M. (London Time) and 5:00
P.M. (New York City time), on April 6, 1998, or on such later date or time to
which the Company may extend the Offer (the "Initial Closing Date"). Subject to
the terms and conditions set forth in the Offer to Purchase, the Company
expressly reserves the right to extend the Offer from time to time and may
extend the Offer by giving oral (confirmed in writing) or written notice to you
before 8.30 A.M. (London Time) or 8:30 A.M. (New York City time), on the
business day following the previously scheduled Initial Closing Date.
The Company expressly reserves the right to amend or terminate the Offer,
and not to accept for exchange or purchase any TEG Securities not theretofore
accepted for exchange or purchase, upon the occurrence of any of the conditions
of the Offer specified in the Offer to Purchase. The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
nonacceptance to you as promptly as practicable.
In carrying out your duties as US Depositary, you are to act in accordance
with the following instructions:
1. You will perform such duties and only such duties as are specifically
set forth in the Offer to Purchase and in the Letter of Transmittal or as
specifically set forth herein; provided, however, that in no way will your
general duty to act in good faith and without negligence be discharged by the
foregoing.
2. You will establish an account with respect to the TEG Securities at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Offer within two business days after the date of the Offer to Purchase, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's
<PAGE> 2
systems may make book-entry delivery of the TEG Securities by causing the
Book-Entry Transfer Facility to transfer such TEG Securities into your account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfer. The amount shall be maintained until all TEG Securities tendered
pursuant to the Offer to Purchase shall have been accepted for payment and
transferred to or to the order of the Company or have been returned.
3. You are to examine each of the Letters of Transmittal and certificates
for TEG Securities (or confirmation of book-entry transfer into your account at
the Book-Entry Transfer Facility) and any other documents delivered or mailed to
you by or for holders of the TEG Securities to ascertain whether: (i) the
Letters of Transmittal and any such other documents are duly executed and
properly completed in accordance with instructions set forth therein and (ii)
the TEG Securities have otherwise been properly tendered. In each case where the
Letter of Transmittal or any other document has been improperly completed or
executed or any of the certificates for TEG Securities are not in proper form
for transfer or some other irregularity in connection with the acceptance of the
Offer exists, you will endeavor to inform the presenters of the need for
fulfillment of all requirements and to take any other action as may be necessary
or advisable to cause such irregularity to be corrected.
4. With the approval of the President, Senior Vice President, Executive
Vice President, any Vice President or the Treasurer of the Company (such
approval, if given orally, to be confirmed in writing) or any other party
designated by such an officer in writing, you are authorized to waive any
irregularities in connection with any tender of TEG Securities pursuant to the
Offer.
5. Tenders of TEG Securities may be made only as set forth in the Letter of
Transmittal and in the Offer to Purchase, and TEG Securities shall be considered
properly tendered to you only when tendered in accordance with the procedures
set forth therein. Notwithstanding the provisions of this paragraph 5, TEG
Securities which the President, Senior Vice President, Executive Vice President,
any Vice President or the Treasurer of the Company shall approve as having been
properly tendered shall be considered to be properly tendered (such approval, if
given orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any TEG Securities received
subsequent to the Initial Closing Date and accept its instructions with respect
to disposition of such TEG Securities.
7. You shall accept tenders:
a. in cases where the TEG Securities are registered in two or more
names only if signed by all named holders;
b. in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only
when proper evidence of his or her authority so to act is submitted; and
c. from persons other than the registered holder of TEG Securities
provided that customary transfer requirements, including any applicable
transfer taxes, are fulfilled.
You shall accept partial tenders of TEG Securities when so indicated and as
permitted in the Letter of Transmittal and deliver certificates for TEG
Securities to the transfer agent for split-up and return any untendered TEG
Securities to the holder (or such other person as may be designated in the
Letter of Transmittal) as promptly as practicable after expiration or
termination of the Offer.
8. Upon satisfaction or waiver of all of the conditions to the Offer, the
Company will notify you (such notice if given orally, to be confirmed in
writing) of its acceptance, promptly after the Initial Closing Date, of all TEG
Securities properly tendered and you will assist the Company with respect to the
purchase of such TEG Securities and/or exchange of such TEG Securities for TUC
Stock. Payment for TEG Securities duly tendered and purchased pursuant to the
Offer will be made by check and delivery of TUC Stock on behalf of the Company
as provided in the Offer to Purchase; provided, however, that in all cases, TEG
Securities tendered pursuant to the Offer will be exchanged or purchased only
after timely receipt by you of certificates for such TEG Securities (or timely
confirmation of book-entry transfer into your account at the Book-Entry
2
<PAGE> 3
Transfer Facility), a properly completed and duly executed Letter of Transmittal
(or facsimile thereof) with any required signature guarantees and any other
required documents (or receipt of a proper Agent's Message through the ATOP
System). Immediately available funds will be deposited with you on the day
checks are mailed or delivered by you. After such payment and any delivery of
TUC Stock, you shall promptly transfer and deliver all TEG Securities purchased
pursuant to the Offer to Purchase to or to the order of the Company, together
with your statements for any applicable transfer taxes or other expenses to be
paid by the Company and any other documents reasonably requested by the Company,
including a certificate by you indicating the number of TEG Securities validly
tendered and purchased, all in accordance with written instructions from the
Company.
9. TEG Securities tendered pursuant to the Offer may be withdrawn at any
time prior to the end of the Initial Offer Period.
10. The Company shall not be required to exchange or purchase any TEG
Securities tendered if any of the conditions set forth in the Offer are not met.
Notice of any decision by the Company not to exchange or purchase any TEG
Securities tendered shall be given (and confirmed in writing) by the Company to
you.
11. If, pursuant to the Offer, the Company does not accept for exchange or
purchase all or part of the TEG Securities tendered because of an invalid
tender, the occurrence of certain other events set forth in the Offer to
Purchase or otherwise, you shall as soon as practicable after the expiration or
termination of the Offer return those certificates for unaccepted TEG Securities
(or effect appropriate book-entry transfer), together with any related required
documents and the Letters of Transmittal relating thereto that are in your
possession, to the persons who deposited them (or effected such book-entry
transfer).
12. All certificates for reissued or unpurchased TEG Securities, unaccepted
TEG Securities or for TEG Securities and all checks or drafts for purchased TEG
Securities shall be forwarded by (a) first-class mail under a blanket surety
bond protecting you and the Company from loss or liability arising out of the
non-receipt or non-delivery of such checks, drafts and certificates or (b) by
registered mail insured separately for the replacement value of each of such
checks, drafts and certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons or
to engage or utilize any person to solicit tenders.
14. As US Depositary hereunder you:
a. shall have no duties or obligations other than those specifically
set forth herein or as may be subsequently agreed to in writing between you
and the Company;
b. will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of
any of the certificates or the TEG Securities represented thereby deposited
with you pursuant to the Offer, and will not be required to and will make
no representation as to the validity, value or genuineness of the Offer;
c. shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
d. may reasonably rely on and shall be protected in acting in reliance
upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you
to be genuine and to have been signed by the proper party or parties;
e. may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution
and validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a
proper person or persons;
f. may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
3
<PAGE> 4
g. may consult with your counsel with respect to any questions
relating to your duties and responsibilities and the advice or opinion of
such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by you
hereunder in good faith and in accordance with the advice or opinion of
such counsel; and
h. shall not advise any person tendering TEG Securities pursuant to
the Offer as to the wisdom of making such tender or as to the market value
or decline or appreciation in market value of any TEG Securities.
15. You shall take such action as may from time to time be requested by the
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Offer to Purchase, Letter of Transmittal
and the Notice of Guaranteed Delivery (as described in the Offer to Purchase) or
such other forms as may be approved from time to time by the Company, to all
persons requesting such documents and to accept and comply with telephone
requests for information relating to the Offer, provided that such information
shall relate only to the procedures for accepting (or withdrawing from) the
Offer. The Company will furnish you with copies of such documents at your
request. All other requests for information relating to the Offer shall be
directed to the Company, Attention: Treasurer.
16. You shall advise by facsimile transmission or telephone, and promptly
thereafter confirm in writing to the Treasurer of the Company and such other
person or persons as it may request, daily (and more frequently during the week
immediately preceding the Initial Closing Date and if otherwise requested) up to
and including the Initial Closing Date, as to the principal amount of TEG
Securities which have been tendered pursuant to the Offer and the items received
by you pursuant to this Agreement, separately reporting and giving cumulative
totals as to items properly received and items improperly received. In addition,
you will also inform, and cooperate in making available to, the Company or any
such other person or persons upon oral request made from time to time prior to
the Initial Closing Date of such other information as it or he or she reasonably
requests. Such cooperation shall include, without limitation, the granting by
you to the Company and such person as the Company may request of access to those
persons on your staff who are responsible for receiving tenders, in order to
ensure that immediately prior to the Initial Closing Date the Company shall have
received information in sufficient detail to enable it to decide whether to
extend the Offer. You shall prepare a final list of all persons whose tenders
were accepted, the amount of TEG Securities tendered and the amount of TEG
Securities accepted and deliver said list to the Company.
17. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery shall be stamped by you as to the date and the time of
receipt thereof and shall be preserved by you for a period of time at least
equal to the period of time you preserve other records pertaining to the
transfer of securities. You shall dispose of unused Letters of Transmittal and
other surplus materials by returning them to at the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for
purchase of TEG Securities and the payment of transfer taxes by reasons of
amounts, if any, borrowed by the Company, or any of its subsidiaries or
affiliates pursuant to any loan or credit agreement with you or for compensation
owed to you hereunder.
19. For services rendered as US Depositary hereunder, you shall be entitled
to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Offer to Purchase and the Letter
of Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Offer to Purchase
and the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as US Depositary,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as US Depositary hereunder against any loss, liability, cost or
expense, including reasonable attorneys' fees and expenses, arising out of or in
connection with any act, omission, delay or refusal made by you in reasonable
4
<PAGE> 5
reliance upon any signature, endorsement, assignment, certificate, order,
request, notice, instruction or other instrument or document reasonably believed
by you to be valid, genuine and sufficient and in accepting any tender or
effecting any transfer of TEG Securities reasonably believed by you in good
faith to be authorized, and in delaying or refusing in good faith to accept any
tenders or effect any transfer of TEG Securities; provided, however, that the
Company shall not be liable for indemnification or otherwise for any loss,
liability, cost or expense to the extent arising out of your negligence or
willful misconduct. In no case shall the Company be liable under this indemnity
with respect to any claim against you unless the Company shall be notified by
you, by letter or by facsimile confirmed by letter, of the written assertion of
a claim against you or of any other action commenced against you, promptly after
you shall have received any such written assertion or notice of commencement of
action. The Company shall be entitled to participate at its own expense in the
defense of any such claim or other action, and, if the Company so elects, the
Company shall assume the defense of any suit brought to enforce any such claim.
In the event that the Company shall assume the defense of any such suit, the
Company shall not be liable for the fees and expenses of any additional counsel
thereafter retained by you so long as the Company shall retain counsel
reasonably satisfactory to you to defend such suit, and so long as you shall
have not determined, in your reasonable judgment, that a conflict of interest
exists between you and the Company.
22. You shall arrange to comply with all requirements under the tax laws of
the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required to deduct 31% on payments
to holders who have not supplied their correct Taxpayer Identification Number or
required certification. Such funds will be turned over to the Internal Revenue
Service in accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to each
governmental authority to which any transfer taxes are payable in respect of the
transfer of TEG Securities, your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the transfer of TEG Securities; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
24. This Agreement and your appointment as US Depositary hereunder shall be
construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles, and shall inure to the
benefit of, and the obligations created hereby shall be binding upon, the
successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
5
<PAGE> 6
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
TU Acquisitions PLC
c/o Texas Utilities Company
1601 Bryan Street
Dallas, Texas 75201
Facsimile:
Attention: Treasurer
If to the US Depositary:
By Mail:
The Bank of New York
Tender & Exchange Department
P.O. Box 11248
Church Street Station
New York, New York 10286-1248
By Hand or Overnight Courier:
The Bank of New York
Tender & Exchange Department
101 Barclay Street
Receive and Deliver Window
New York, New York 10286
Telephone: (212) 815-2499
Facsimile: (212) 815-6411
29. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Initial Closing Date. Notwithstanding the
foregoing, Paragraphs 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver to
the Company any certificates for TEG Securities and TUC Stock, funds or property
then held by you as US Depositary under this Agreement.
30. This Agreement shall be binding and effective as of the date hereof.
6
<PAGE> 7
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
TU ACQUISITIONS PLC
By:
----------------------------------
Name:
Title:
Accepted as of the date
first above written:
THE BANK OF NEW YORK, as US Depositary
By:
-----------------------------------------------------
Name:
Title:
7
<PAGE> 1
EXHIBIT 99(b)
CASH OFFER
FOR ALL ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES
EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS
OF
THE ENERGY GROUP PLC
BY
LEHMAN BROTHERS AND MERRILL LYNCH
ON BEHALF OF
TU ACQUISITIONS PLC
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 10:00 PM (LONDON
TIME), 5:00 PM (NEW YORK CITY TIME) ON APRIL 6, 1998, UNLESS EXTENDED. AT THE
CONCLUSION OF THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, IF ALL
CONDITIONS OF THE OFFER HAVE BEEN SATISFIED, FULFILLED, OR WHERE PERMITTED,
WAIVED, THE OFFER WILL BE EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF AT LEAST 14
CALENDAR DAYS. HOLDERS OF ENERGY GROUP SECURITIES WILL HAVE WITHDRAWAL RIGHTS
DURING THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, BUT NOT DURING
THE SUBSEQUENT OFFER PERIOD, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
March 9, 1998
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Lehman Brothers Inc. ("Lehman Brothers") and Merrill Lynch and Co.
("Merrill Lynch") have been appointed by TU Acquisitions to act as dealer
managers in the United States (the "Dealer Managers") in connection with an
offer by Lehman Brothers and Merrill Lynch, on behalf of TU Acquisitions, to
purchase, upon the terms and subject to the conditions set forth in the Texas
Utilities Offer dated March 9, 1998 (the "Offer to Purchase") and the
accompanying Acceptance Forms (collectively, the "Offer"), all outstanding
ordinary shares of 10p each ("Energy Group Shares") of The Energy Group PLC
("The Energy Group") for L8.40 in cash per Energy Group Share, including all
American Depositary Shares ("Energy Group ADSs") of The Energy Group, each
representing four Energy Group Shares and evidenced by American Depositary
Receipts ("Energy Group ADRs"), for L33.60 in cash per Energy Group ADS.
For your information and for forwarding to those of your clients for whom
you hold Energy Group ADSs registered in your name or in the name of your
nominee, we are enclosing the following documents:
1. The Offer to Purchase;
2. A printed form of letter that may be sent to your clients for whose
account you hold Energy Group ADSs registered in your name or in
the name of a nominee, with space provided for obtaining such
clients' instructions with regard to the Offer;
3. The Letter of Transmittal to be used by holders of Energy Group
ADSs to accept the Offer;
4. The Notice of Guaranteed Delivery;
<PAGE> 2
5. Guidelines for Certification of Taxpayer Identification Number of
Substitute Form W-9; and
6. The return envelope addressed to the US Depositary.
THE OFFER CANNOT BE ACCEPTED IN RESPECT OF ENERGY GROUP SHARES BY MEANS OF
A LETTER OF TRANSMITTAL. A FORM OF ACCEPTANCE FOR ACCEPTING THE OFFER IN RESPECT
OF ENERGY GROUP SHARES CAN BE OBTAINED FROM THE US DEPOSITARY OR THE UNITED
KINGDOM RECEIVING AGENT (AS EACH SUCH TERM IS DEFINED IN THE OFFER TO PURCHASE).
In all cases, payment for Energy Group ADSs purchased pursuant to the Offer
will be made only after timely receipt by the US Depositary of Energy Group ADRs
evidencing such Energy Group ADSs or a confirmation of book-entry transfer,
together with a properly completed and duly executed Letter of Transmittal (or a
facsimile copy thereof) properly completed and duly executed, and any other
documents required by the Letter of Transmittal.
TU Acquisitions will not pay any fees or commissions to any broker, dealer,
or other person (other than Lehman Brothers and Merrill Lynch, the Dealer
Managers, the US Depositary and the United Kingdom Receiving Agent and the
Information Agent as described in the Offer to Purchase) in connection with the
solicitation of acceptances of the Offer with respect to Energy Group ADSs
evidenced by Energy Group ADRs. You will, however, be reimbursed for customary
mailing and handling expenses incurred by you in forwarding the enclosed
materials to your client.
Additional copies of the enclosed materials may be obtained from the Dealer
Managers or the Information Agent at their respective addresses and telephone
numbers set forth in the Offer to Purchase.
Terms defined in the Offer to Purchase shall have the same meanings in this
letter.
Very truly yours,
Lehman Brothers Inc.
Merrill Lynch & Co.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF LEHMAN BROTHERS AND MERRILL LYNCH, TU
ACQUISITIONS, TEXAS UTILITIES COMPANY, THE US DEPOSITARY, THE DEALER MANAGERS,
OR THE UNITED KINGDOM RECEIVING AGENT OR AUTHORIZE YOU OR ANY OTHER PERSON TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH
RESPECT TO THE OFFER NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF
TRANSMITTAL.
THIS DOCUMENT SHOULD NOT BE FORWARDED OR TRANSMITTED IN OR INTO AUSTRALIA,
CANADA OR JAPAN.
2
<PAGE> 1
EXHIBIT 99(c)
CASH OFFER
FOR ALL ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES
EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS
OF
THE ENERGY GROUP PLC
BY
LEHMAN BROTHERS AND MERRILL LYNCH
ON BEHALF OF
TU ACQUISITIONS PLC
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
THERE WILL BE AN INITIAL OFFER PERIOD WHICH WILL EXPIRE AT 10:00 PM (LONDON
TIME), 5:00 PM (NEW YORK CITY TIME) ON APRIL 6, 1998) UNLESS EXTENDED. AT THE
CONCLUSION OF THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, IF ALL
CONDITIONS OF THE OFFER HAVE BEEN SATISFIED, FULFILLED, OR WHERE PERMITTED,
WAIVED, THE OFFER WILL BE EXTENDED FOR A SUBSEQUENT OFFER PERIOD OF AT LEAST 14
CALENDAR DAYS. HOLDERS OF ENERGY GROUP SECURITIES WILL HAVE WITHDRAWAL RIGHTS
DURING THE INITIAL OFFER PERIOD, INCLUDING ANY EXTENSION THEREOF, BUT NOT DURING
THE SUBSEQUENT OFFER PERIOD, EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES.
9 March 1998
To Our Clients:
Enclosed for your consideration is the Offer Document dated 9 March 1998
(the "Offer Document"), the Letter of Transmittal and Notice of Guaranteed
Delivery relating to an offer by Lehman Brothers and Merrill Lynch on behalf of
TU Acquisitions, to purchase, upon the terms and subject to the conditions set
forth in the Offer Document and the accompanying Acceptance Forms (as defined in
the Offer Document) (collectively, the "Offer"), all outstanding ordinary shares
of 10p each ("Energy Group Shares") of The Energy Group PLC ("The Energy Group")
for 840 pence in cash per Energy Group Share, including all Energy Group Shares
represented by American Depositary Shares ("Energy Group ADSs") of The Energy
Group, and Energy Group ADSs, each representing four Energy Group Shares and
evidenced by American Depositary Receipts ("Energy Group ADRs"), for L33.60 in
cash per Energy Group ADS.
We are the holder of record of Energy Group ADSs evidenced by Energy Group
ADRs held by us for your account. An acceptance of the Offer in respect of such
Energy Group ADSs can be made only by us as the holder of record and pursuant to
your instructions. Accordingly, we request instructions as to whether you wish
to have us accept the Offer of your behalf in respect of any or all Energy Group
ADSs held by us for your account pursuant to the terms and subject to the
conditions set forth in the Offer.
Your attention is invited to the following:
1. The Offer is being made for all Energy Group Shares and Energy
Group ADSs evidenced by Energy Group ADRs.
2. The Offer is on the terms and subject to the Conditions set forth
in Appendix I to the Offer Document.
<PAGE> 2
3. The Initial Offer Period of the Offer will expire at 10:00 p.m.
(London time), 5:00 p.m. (New York City time) on April 6, 1998, unless
extended (in accordance with the terms thereof).
4. At the conclusion of the Initial Offer Period, including any
extension thereof, if all conditions of the Offer have been satisfied,
fulfilled or, where permitted, waived, the Offer will be extended for a
Subsequent Offer Period of at least 14 calendar days.
5. Energy Group ADS holders will not be obligated to pay brokerage
fees or commissions or, except as otherwise provided in Instruction 6 of
the Letter of Transmittal, stock transfer taxes applicable to a sale of
Energy Group ADSs evidenced by Energy Group ADRs to TU Acquisitions.
If you wish to have us accept the Offer in respect of any or all of the
Energy Group ADSs evidenced by Energy Group ADRs held by us for your account,
please so instruct us by completing, executing and returning to us the
instruction form contained in this letter. If you authorize us to accept the
Offer in respect of your Energy Group ADSs evidenced by Energy Group ADRs, the
Offer will be accepted in respect of all such Energy Group ADSs unless otherwise
indicated in such instruction form. Please forward your instruction form to us
in ample time to permit us to accept the Offer on your behalf prior to the
expiration of the Offer. The specimen Letter of Transmittal is furnished to you
for your information only and cannot be used by you to accept the Offer in
respect of Energy Group ADSs evidenced by Energy Group ADRs held by us for your
account.
INSTRUCTIONS WITH RESPECT TO THE OFFER FOR ALL
ENERGY GROUP SHARES AND ENERGY GROUP ADSs EVIDENCED
BY ENERGY GROUP ADRs
The undersigned acknowledge(s) receipt of your letter and the Offer
Document dated 9 March 1998 (the "Offer Document"), and the related Letter of
Transmittal relating to an offer by Lehman Brothers and Merrill Lynch on behalf
of TU Acquisitions to purchase, upon the terms and subject to the conditions set
forth in the Offer Document and the accompanying Letter of Transmittal
(collectively, the "Offer") all outstanding ordinary shares of 10p each ("Energy
Group Shares") of The Energy Group PLC ("The Energy Group") for 840 pence in
cash per Energy Group Share, including all Energy Group Shares represented by
American Depositary Shares ("Energy Group ADSs") of The Energy Group, and Energy
Group ADSs, each representing four Energy Group Shares and evidenced by American
Depositary Receipts, for L33.60 in cash per Energy Group ADS.
2
<PAGE> 3
This will instruct you to accept the Offer in respect of the number of
Energy Group ADSs indicated below, (or, if no number is indicated below, all
Energy Group ADSs) held by you for the account of the undersigned, upon the
terms and subject to the conditions set forth in the Offer.
Dated:
- ------------------------------ , 1998
Number of Energy Group ADSs to be
tendered(1) Energy Group ADSs:
- ------------------------------------
Signature(s):
------------------------------------
(Please print name(s))
Address(es):
------------------------------------
------------------------------------
------------------------------------
Area Code and Telephone No.
------------------------------------
Employer Identification or Social
Security No.
- ---------------
1 Unless otherwise indicated, it will be assumed that the Offer is to be
accepted in respect of all Energy Group ADSs held by us for your account.
3
<PAGE> 1
EXHIBIT 99(d)
NOTICE OF GUARANTEED DELIVERY
TO ACCEPT OFFER FOR AMERICAN DEPOSITARY SHARES
EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS
OF
THE ENERGY GROUP PLC
PURSUANT TO THE OFFER TO PURCHASE
DATED MARCH 9, 1998
BY
LEHMAN BROTHERS AND MERRILL LYNCH
ON BEHALF OF
TU ACQUISITIONS PLC
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
As set forth in "Procedures for Tendering Energy Group ADSs" in Part B of
Appendix I to the Texas Utilities Offer (the "Offer to Purchase" or the
"Offer"), this form or one substantially equivalent hereto must be used for
acceptance of the Offer in respect of Energy Group ADSs, if American Depositary
Receipts evidencing Energy Group ADSs ("Energy Group ADRs") are not immediately
available or the procedures for book-entry transfer cannot be completed on a
timely basis or if time will not permit all required documents to reach the US
Depositary prior to the expiration of the Subsequent Offer Period (as defined in
the Offer to Purchase). Such form may be delivered by hand or mailed to the US
Depositary and must include a signature guarantee by an Eligible Institution in
the form set out herein. See "Procedures for Tendering Energy Group
ADSs -- Guaranteed Delivery" in Part B of Appendix I to the Offer to Purchase.
The US Depositary for the Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
(for Eligible Institutions
Tender & Exchange Department Only) Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 For Information Telephone: New York, New York 10286
(800) 507-9357
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY.
This form is not to be used to guarantee signatures. If a signature or a
Letter of Transmittal is required to be guaranteed by an Eligible Institution
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
ACCEPTANCE OF THE OFFER IN RESPECT OF ENERGY GROUP SHARES (EXCEPT INSOFAR
AS THEY ARE REPRESENTED BY ENERGY GROUP ADSs) MAY NOT BE MADE WITH THIS FORM.
<PAGE> 2
Ladies and Gentlemen:
The undersigned accepts the Offer in respect of Energy Group ADSs upon the
terms and subject to the conditions set forth below pursuant to the guaranteed
delivery procedure set out in "Procedures for Tendering Energy Group
ADSs -- Guaranteed Delivery" in Part B of Appendix I to the Offer to Purchase.
THE UNDERSIGNED UNDERSTANDS THAT THE ACCEPTANCE OF THE OFFER IN RESPECT OF
ENERGY GROUP ADSs PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES WILL NOT BE
TREATED AS A VALID ACCEPTANCE FOR THE PURPOSE OF SATISFYING THE ACCEPTANCE
CONDITION. SEE "PROCEDURES FOR TENDERING ENERGY GROUP ADSs -- GUARANTEED
DELIVERY" IN PART B OF APPENDIX I TO THE OFFER TO PURCHASE. TO BE COUNTED
TOWARDS SATISFACTION OF THE ACCEPTANCE CONDITION, THE ENERGY GROUP ADRs
EVIDENCING SUCH ENERGY GROUP ADSs MUST, PRIOR TO THE INITIAL CLOSING DATE, BE
RECEIVED BY THE US DEPOSITARY OR, IF APPLICABLE, TIMELY CONFIRMATION OF A
BOOK-ENTRY TRANSFER OF SUCH ENERGY GROUP ADSs INTO THE US DEPOSITARY'S ACCOUNT
AT A BOOK-ENTRY TRANSFER FACILITY PURSUANT TO THE PROCEDURES SET OUT IN
"PROCEDURES FOR TENDERING ENERGY GROUP ADSs -- BOOK-ENTRY TRANSFER" IN PART B OF
APPENDIX I TO THE OFFER TO PURCHASE MUST BE RECEIVED BY THE US DEPOSITARY,
TOGETHER WITH A DULY EXECUTED LETTER OF TRANSMITTAL OR FACSIMILE THEREOF WITH
ANY REQUIRED SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS.
<TABLE>
<S> <C>
Signature(s): Address(es):
- ----------------------------------------------------- -----------------------------------------------------
- ----------------------------------------------------- -----------------------------------------------------
(Include Zip Code)
Name of Record Holder(s): Area Code(s) and Telephone No(s).:
- ----------------------------------------------------- -----------------------------------------------------
- ----------------------------------------------------- -----------------------------------------------------
(Please Type or Print)
Number of Energy Group ADSs: If Energy Group ADSs will be tendered by book- entry
transfer, check box:
- ----------------------------------------------------- [ ] The Depositary Trust Company
Energy Group ADR No.(s) (if available): Account Number:
- ----------------------------------------------------- -----------------------------------------------------
Dated: ----------------------------------------------
</TABLE>
2
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program, hereby guarantees that the undersigned will deliver to the US
Depositary either the Energy Group ADRs representing the Energy Group ADSs with
respect to which the Offer is being accepted hereby, in proper form for
transfer, or confirmation of the book-entry transfer of such Energy Group ADSs
into the US Depositary's account at The Depositary Trust Company, in any such
case together with a properly completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof), with any required signature guarantees
any other required documents, all within three New York Stock Exchange trading
days after the date hereof.
<TABLE>
<S> <C>
- --------------------------------------------------- ---------------------------------------------------
Name of Firm, Agent or Trustee (Authorized Signature)
Name:
- --------------------------------------------------- -------------------------------------------
Address (Please Type or Print)
Title:
- --------------------------------------------------- --------------------------------------------
(Zip Code)
Date:
- --------------------------------------------------- --------------------------------------------
Area Code and Telephone No.
</TABLE>
NOTE: DO NOT SEND ENERGY GROUP ADRs WITH THIS FORM; ENERGY GROUP ADRs SHOULD BE
SENT WITH YOUR LETTER OF TRANSMITTAL.
THIS DOCUMENT SHOULD NOT BE FORWARDED OR TRANSMITTED IN OR INTO
AUSTRALIA, CANADA OR JAPAN.
3
<PAGE> 1
EXHIBIT 99(g)
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION
IN OR INTO CANADA, JAPAN OR AUSTRALIA
5 March 1998
TEXAS UTILITIES COMPANY
INCREASED CASH OFFER FOR
THE ENERGY GROUP PLC
1. THE INCREASED TEXAS UTILITIES OFFER
The Board of Texas Utilities announces the terms of the increased cash offer
for The Energy Group announced on 3 March 1998. The Increased Texas Utilities
Offer will be made by Lehman Brothers and Merrill Lynch on behalf of TU
Acquisitions, a wholly-owned subsidiary of Texas Utilities, on the following
basis:
<TABLE>
<S> <C>
For each Energy Group Share 840 pence; and
For each Energy Group ADS L.33.60
</TABLE>
representing a premium of 20 pence per Energy Group Share to PacifiCorp's
Increased offer.
The Increased Texas Utilities Offer values the fully diluted share capital of
The Energy Group at approximately L.4.45 billion (assuming the exercise in full
of all outstanding options and the vesting of all outstanding awards under the
Energy Group Share Schemes) and includes a full Loan Note Alternative.
Subject to the SEC declaring the relevant documentation effective by not later
than 18 Business Days after the date of the Offer Document (or such later date
as Texas Utilities may determine), Texas Utilities will also make available a
limited share alternative with a value equal to 865 pence for each Energy Group
Share and L.34.60 for each Energy Group ADS determined as, and subject to the
limitations, set out in paragraph 3 below.
In demonstration of its commitment to acquire The Energy Group and to underline
its expectation that all consents and confirmations relating to the Increased
Texas Utilities Offer and the Peabody Sale will be obtained within the normal
timetable for an offer in the United Kingdom, Texas Utilities has acquired
77,500,000 Energy Group Shares, representing approximately 14.9 per cent. of
The Energy Group's issued share capital.
With regard to the Peabody Coal Business, the Peabody Sale to Lehman Merchant
is subject only to certain regulatory consents and, inter alia, to the
Increased Texas Utilities Offer becoming or being declared unconditional in all
respects and does not require the approval of holders of Energy Group
Securities in general meeting.
HOLDERS OF ENERGY GROUP SECURITIES WHO HAVE ALREADY ACCEPTED PACIFICORP'S OFFER
MAY WITHDRAW THEIR ACCEPTANCES AT ANY TIME UNTIL PACIFICORP'S INCREASED OFFER
BECOMES OR IS DECLARED WHOLLY UNCONDITIONAL.
<PAGE> 2
Texas Utilities expects the transaction to be earnings and cash flow enhancing
in the first complete year following completion of the Acquisition and
thereafter (prior to considering any synergy or other benefits that the
transaction may give rise to). This statement should not be interpreted to
mean that the future earnings per share of Texas Utilities, as enlarged by the
acquisition of The Energy Group, will necessarily be greater than the
historical published earnings per share of Texas Utilities.
The Increased Texas Utilities Offer will be subject to the Conditions referred
to in paragraph 6(a) below.
2. LOAN NOTE ALTERNATIVE
A Loan Note Alternative will be available to holders of Energy Group Shares
(other than persons who are citizens or residents of the United States and
certain other overseas shareholders) who validly accept the Increased Texas
Utilities Offer on the basis of, for every L.1 of cash otherwise payable under
the Increased Texas Utilities Offer, L.1 nominal of Loan Notes, subject to
aggregate valid elections being received, on or before the date on which the
Increased Texas Utilities Offer becomes or is declared unconditional in all
respects, for in excess of L.1 million nominal value of Loan Notes. If
insufficient elections are received, holders of Energy Group Shares who elect
for the Loan Note Alternative will instead receive cash in accordance with the
terms of the Increased Texas Utilities Offer. Subject as aforesaid, the Loan
Note Alternative will remain open for as long as the Increased Texas Utilities
Offer is open for acceptance. The interest rate on the Loan Notes will be
calculated as described in paragraph 2 of appendix II to the Original Texas
Utilities Offer Announcement.
Merrill Lynch, as broker to the Increased Texas Utilities Offer, has advised
that, based on market conditions on 4 March 1998 (the latest practicable date
prior to this announcement), in its opinion, if the Loan Notes had then been in
issue, the value of each L.1 nominal of Loan Notes would have been
approximately 98 pence.
In considering the Loan Note Alternative, holders of Energy Group Shares should
note that the obligations of the issuer of the Loan Notes are not guaranteed or
secured.
A summary of the terms of the Loan Notes is set out in appendix II to the
Original Texas Utilities Offer Announcement (all references to the Texas
Utilities Offer in such appendix II being treated for this purpose as
references to the Increased Texas Utilities Offer).
3. PROPOSED LIMITED SHARE ALTERNATIVE
Subject to the SEC declaring the relevant documentation effective by not later
than 18 Business Days after the date of the Offer Document (or such later date
as Texas Utilities may determine), Texas Utilities will make available to
holders of Energy Group Securities a limited share alternative.
The Board of Texas Utilities announced on 3 March 1998 that it would increase
the value of the proposed share alternative. Accordingly, under the share
alternative, holders of Energy Group Securities would be entitled to receive
new shares of Texas Utilities common stock with a value equal to 865 pence for
each Energy Group Share and L.34.60 for each Energy Group ADS, in each case
based on the average of the closing prices of Texas Utilities common stock on
the NYSE on the 20 consecutive dealing days ending on the third dealing day
prior to the date TU Acquisitions intends to declare the Increased Texas
Utilities Offer unconditional in all respects, and the US$/L. sterling exchange
rate on such date; provided
2
<PAGE> 3
that the maximum number of new shares of Texas Utilities common stock which may
be issued with respect to each Energy Group Share and each Energy Group ADS
shall be 0.390 and 1.560, respectively. The share alternative, if not included
in the Offer Document, would be made available by means of a revised offer
which would be posted to holders of Energy Group Securities immediately
following the relevant documentation being declared effective by the SEC. The
share alternative would be available only in respect of a maximum of 20 per
cent. of all Energy Group Shares (including Energy Group Shares represented by
Energy Group ADSs) acquired pursuant to the Increased Texas Utilities Offer or
otherwise. To the extent that actual, and in certain circumstances potential,
elections for the share alternative exceed that maximum, elections would be
scaled down on a pro rata basis.
THE AVAILABILITY OR OTHERWISE OF A SHARE ALTERNATIVE WILL NOT AFFECT THE
ABILITY OF HOLDERS OF ENERGY GROUP SECURITIES TO ACCEPT THE INCREASED TEXAS
UTILITIES OFFER FOR CASH.
4. FINANCING
TU Acquisitions has arranged appropriate financing in connection with the
Increased Texas Utilities Offer. Texas Utilities and other wholly-owned
subsidiaries of Texas Utilities have arranged their own funding to assist in TU
Acquisitions' financing of the Increased Texas Utilities Offer.
5. HOLDINGS IN THE ENERGY GROUP
Neither TU Acquisitions, nor Texas Utilities, nor any of their respective
Directors, nor, so far as TU Acquisitions is aware, any party acting in concert
with TU Acquisitions, owns or controls any Energy Group Securities or holds any
options to purchase Energy Group Securities or holds any derivatives referenced
to Energy Group Securities, other than as set out below:
(a) TU Acquisitions beneficially owns 77,500,000 Energy Group Shares,
representing approximately 14.9 per cent. of The Energy Group's issued
share capital; and
(b) as at 3 March 1998 (the latest practical date prior to this announcement):
(i) Erle Nye, Chairman and Chief Executive of Texas Utilities, held 25
Energy Group ADRs;
(ii) Lehman Brothers was interested in 489,777 Energy Group Shares, held
as constituents of various baskets of securities;
(iii) Merrill Lynch & Co., Inc. and its affiliates were interested in
10,515,360 Energy Group Shares, representing approximately 2.0 per
cent. of The Energy Group's issued share capital; and
(iv) the Retirement Plan for Employees of the Texas Utilities Company
System held 24,375 Energy Group ADRs.
Lehman Merchant has agreed that neither it nor any subsidiary or affiliate will
directly or indirectly be involved in, inter alia, acquiring an interest in
Energy Group Securities as referred to above for so long as Texas Utilities and
Lehman Merchant are regarded by the Panel as acting in concert as regards The
Energy Group.
3
<PAGE> 4
6. GENERAL
(a) The Increased Texas Utilities Offer will comply with the rules and
regulations of the City Code and with US federal securities laws (except
to the extent that exemptive relief has been granted by the SEC) and the
rules and regulations made thereunder, will be governed by English law and
be subject to the jurisdiction of the courts of England and the Conditions
set out in appendix I to the Original Texas Utilities Offer Announcement
save that all references in such Conditions to the Texas Utilities Offer
shall be deemed to be references to the Increased Texas Utilities Offer.
The other provisions of appendix I to the Original Texas Utilities Offer
Announcement (set out below Condition (m) in that appendix) will also
apply to the Increased Texas Utilities Offer, save that all references in
such provisions to the Texas Utilities Offer shall be deemed to be
references to the Increased Texas Utilities Offer.
(b) Paragraphs 5 to 11 inclusive of the Original Texas Utilities Offer
Announcement (dealing with regulation, information on Texas Utilities and
The Energy Group, the Peabody Sale, reasons for the offer, The Energy
Group Share Schemes and management and employees) apply equally to the
Increased Texas Utilities Offer as to the original Texas Utilities Offer
as though all references in such paragraphs to the Texas Utilities Offer
were references to the Increased Texas Utilities Offer (save that in the
third paragraph of paragraph 10 of the Original Texas Utilities
Announcement the reference to 810 pence should be treated as being a
reference to 840 pence).
(c) Lehman Brothers and Merrill Lynch, which are regulated in the United
Kingdom by The Securities and Futures Authority Limited, are acting for
Texas Utilities and TU Acquisitions and no one else in connection with the
Increased Texas Utilities Offer and will not be responsible to anyone
other than Texas Utilities and TU Acquisitions for providing the
protections afforded to their respective customers or for providing advice
in relation to the Increased Texas Utilities Offer or any other matter
referred to herein.
(d) The Offer Document will be posted in due course.
(e) The value of the fully diluted share capital of The Energy Group is based
upon 520,857,817 Energy Group Shares in issue on 27 February 1998 and
9,048,288 Energy Group Shares which could fall to be issued on exercise in
full of options and vesting of all outstanding awards granted under the
Energy Group Share Schemes.
(f) Energy Group Securities will be acquired by TU Acquisitions fully paid and
free from all liens, equities, charges, encumbrances and other interests
and, together with all rights now or hereafter attaching thereto,
including without limitation the right to receive and retain all dividends
and other distributions declared, made or paid hereafter.
(g) The Initial Offer Period is expected to expire at 10.00 pm (London time),
5.00 pm (New York City time) on the 20th Business Day from the date of the
Offer Document, unless extended. At the conclusion of the Initial Offer
Period, including any extension thereof, the Increased Texas Utilities
Offer, if wholly unconditional, will be extended for a Subsequent Offer
Period of at least 14 calendar days. Holders of Energy Group Securities
will have withdrawal rights during the Initial Offer Period, including any
extension thereof, but not during the Subsequent Offer Period, including
any extension thereof.
4
<PAGE> 5
(h) The Increased Texas Utilities Offer will not be made, directly or
indirectly, in or into Canada, Australia or Japan. Accordingly, copies of
this announcement are not being, and must not be, mailed or otherwise
distributed or sent in or into Canada, Japan or Australia.
(i) The Loan Notes to be issued pursuant to the Increased Texas Utilities
Offer have not been, nor will be, registered under the Securities Act or
under any relevant securities laws of any state or district of the United
States, will not be the subject of a prospectus under the securities laws
of any province of Canada and will not be registered under any relevant
securities laws of any other country. The Loan Notes are not to be
offered, sold or delivered, directly or indirectly, in or into the United
States, Canada, Japan or Australia.
(j) This announcement does not constitute an offer or invitation to purchase
any securities.
(k) The definitions set out in appendix IV to the Original Texas Utilities
Offer Announcement, together with those set out below, apply throughout
this announcement (including those parts of the Original Texas Utilities
Offer Announcement which are cross-referred to in this announcement)
unless the context requires otherwise or as is otherwise provided, save
that for the purposes of this announcement all references in such appendix
IV to the Texas Utilities Offer (other than the defined term itself) shall
be deemed to be references to the Increased Texas Utilities Offer:
"INCREASED TEXAS The cash offer to be made by Lehman Brothers and
Merrill Lynch on Behalf of TU Acquisitions to
acquire the Energy Group Shares (including those
represented by Energy Group ADSs) and Energy
Group ADSs as set out in this announcement,
including, where the context permits and/or
requires, any subsequent revision, variation, or
renewal of such offer
"ORIGINAL TEXAS The announcement by the Boards of Texas
UTILITIES OFFER Utilities and The Energy Group released on 2
ANNOUNCEMENT" March 1998
ENQUIRIES:
TEXAS UTILITIES COMPANY
David Anderson (Investors) Telephone: 1-214-812 4641
Joan Hunter (Press) Telephone: 1-214-812 4071
LEHMAN BROTHERS INTERNATIONAL (EUROPE) Telephone: 44-171-601 0011
Richard Collier
Anthony Fobel
MERRILL LYNCH INTERNATIONAL Telephone: 44-171-628 1000
Justin Dowley
Lewis Lee
Martin Falkner
MERRILL LYNCH INTERNATIONAL CORPORATE BROKING Telephone: 44-171-772 1000
Mike Gibson
Stephen Robinson
FINANCIAL DYNAMICS Telephone: 44-171-831 3113
Nick Miles
Andrew Dowler
END
5
