<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) - SEPTEMBER 30, 1998
TEXAS UTILITIES COMPANY
(Exact name of registrant as specified in its charter)
TEXAS 1-12833 75-2669310
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - (214) 812-4600
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<PAGE> 2
ITEM 5. OTHER EVENTS
RATIO OF EARNING TO FIXED CHARGES
Reference is made to Item 6. Selected Financial Data in Texas Utilities
Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1997. The following ratios of earnings to fixed charges replace in their
entirety those pretax and after-tax ratios disclosed on page A-2 of the 1997
Form 10-K:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 2.14 2.18 .72(a) 1.88 1.53
====== ====== ====== ======= ======
</TABLE>
(a) For the year ended December 31, 1995, fixed charges exceeded earnings
by $235 million.
FINANCIAL INFORMATION OF THE ENERGY GROUP LIMITED
AUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1998 AND 1997 AND FOR THE YEAR
ENDED MARCH 31, 1998, THE SIX MONTHS ENDED MARCH 31, 1997 AND THE TWO YEARS IN
THE PERIOD ENDED SEPTEMBER 30, 1996 FOLLOW.
1
<PAGE> 3
[THE ENERGY GROUP LIMITED LETTERHEAD]
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To: The Board of Directors
The Energy Group Limited
We have audited the consolidated balance sheets of The Energy Group Limited as
at 31 March 1997 and 1998, 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 years ended 30 September 1995 and
1996, the six months ended 31 March 1997 and the year ended 31 March 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express 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
Limited as at 31 March 1997 and 1998 and the consolidated results of its
operations and its consolidated cash flows for the years ended 30 September 1995
and 1996, the six months ended 31 March 1997 and the year ended 31 March 1998 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 33 of Notes to the Financial Statements).
ERNST & YOUNG
London, England
12 August 1998
F-1
<PAGE> 4
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
-------------------------- --------- ----------
Note 1995 1996 1997 1998
---------- --------- --------- ----------
(L. million)
<S> <C> <C> <C> <C> <C>
Turnover - continuing operations 22 2,171 1,872 3,498
- discontinued operations 1,424 1,464 647 1,376
---------- --------- --------- ----------
1,446 3,635 2,519 4,874
Add: Special discount -- 132 -- --
---------- --------- --------- ----------
Turnover before special discount 4, 5 1,446 3,767 2,519 4,874
Costs and overheads less other income 6 (1,311) (3,321) (2,222) (4,314)
Operating profit before National Grid
Group flotation
- continuing operations (31) 293 231 381
- discontinued operations 166 153 66 179
135 446 297 560
National Grid Group flotation
dividends received 8 -- 176 -- --
special discount 8 -- (132) -- --
---------- --------- --------- ----------
Operating profit 4 135 490 297 560
Profit on disposal of First Hydro 8 -- 25 -- --
Net interest 9 (11) (43) (37) (134)
---------- --------- --------- ----------
Profit on ordinary activities before taxation 124 472 260 426
Taxation - on results 10 (56) (115) (81) (115)
- windfall 10 -- -- -- (112)
---------- --------- --------- ----------
Profit for the period* 68 357 179 199
Dividend 12 -- -- (29) (41)
---------- --------- --------- ----------
Profit retained for the period 68 357 150 158
---------- --------- --------- ----------
Earnings per share - Basic 11 13.1p 68.5p 34.5p 38.6p
---------- --------- --------- ----------
- Diluted 11 13.1p 68.5p 34.1p 38.1p
---------- --------- --------- ----------
- Adjusted, undiluted 11 13.1p 60.8p 38.2p 67.2p
---------- --------- --------- ----------
- Adjusted, diluted 11 13.1p 60.8p 37.7p 66.5p
---------- --------- --------- ----------
</TABLE>
The net interest expense and taxation in each of the two years in the period
ended 30 September 1996 shown above were affected significantly by the financing
and taxation arrangements of the 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 33 of Notes to the Financial Statements.
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ -------- --------
1995 1996 1997 1998
-------- -------- -------- --------
(L. million)
<S> <C> <C> <C> <C>
Profit for the period 68 357 179 199
Currency differences on foreign net investments -- 20 (52) (43)
-------- -------- -------- --------
Total recognized gains relating to the period 68 377 127 156
-------- -------- -------- --------
</TABLE>
The Notes to the Financial Statements are an integral part of
these Financial Statements
F-2
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As at As at
31 March 31 March
-------- --------
Note 1997 1998
-------- --------
(L. million)
<S> <C> <C> <C>
Fixed Assets
Tangible assets 13 3,910 3,929
Investments 14 72 103
-------- --------
3,982 4,032
-------- --------
Current Assets
Stocks 15 256 282
Debtors
amounts falling due after more than one year 16 561 846
amounts falling due within one year: gross 798 1,359
less non-returnable amounts received 16 -- (200)
798 1,159
Investments 17 10 8
Short term deposits 18 753 1,004
Cash 385 253
-------- --------
2,763 3,552
Creditors: Amounts Falling Due Within One Year 19 (1,747) (2,108)
-------- --------
Net Current Assets 1,016 1,444
-------- --------
Total Assets Less Current Liabilities 4,998 5,476
Creditors: Amounts Falling Due After More Than One Year 19 (1,655) (2,158)
Provisions For Liabilities and Charges 20 (1,498) (1,412)
-------- --------
1,845 1,906
-------- --------
Shareholders' Equity*
Called up share capital 21 52 52
Other reserves 22 639 585
Profit and loss account 22 1,154 1,269
-------- --------
1,845 1,906
-------- --------
</TABLE>
*A summary of the adjustments to 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 33 of
Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of
these Financial Statements
F-3
<PAGE> 6
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
--------------------- -------- --------
Note 1995 1996 1997 1998
-------- -------- -------- --------
(L. million)
<S> <C> <C> <C> <C> <C>
Net Cash Inflow From Operating Activities 27 402 12 346 887
-------- -------- -------- --------
Returns On Investments and Servicing of Finance
Interest received -- -- 29 105
Interest paid (11) (33) (83) (266)
Dividends received from investments -- -- 1 10
National Grid Group flotation -- 44 -- --
-------- -------- -------- --------
(11) 11 (53) (151)
-------- -------- -------- --------
Taxation (4) (128) (23) (90)
-------- -------- -------- --------
Capital Expenditure and Financial Investment
Purchase of tangible fixed assets (140) (374) (133) (356)
Purchase of investments -- -- (39) (26)
Sale of tangible fixed assets 31 29 4 53
Sale if investments -- 235 12 --
-------- -------- -------- --------
(109) (110) (156) (329)
-------- -------- -------- --------
Acquisitions
Purchase of subsidiary undertakings 28 36 (2,495) (20) (14)
-------- -------- -------- --------
Equity Dividends Paid -- -- -- (71)
-------- -------- -------- --------
Cash Flow Before Use of Liquid Resources and Financing 314 (2,710) 94 232
Management of Liquid Resources
Net cash placed on short-term deposit 29 -- -- (753) (248)
Financing
Net new short-term borrowings 29 (20) 97 149 (495)
Debt falling due after more than one year:
New secured loan repayable within 5 years 29 -- -- 907 574
Repayments of amounts borrowed 29 -- 31 (118) (200)
Changes in invested capital from cash funding 29 (57) 2,290 -- --
-------- -------- -------- --------
(77) 2,418 938 (121)
-------- -------- -------- --------
Increase/(decrease) in cash in the period 237 (292) 279 (137)
-------- -------- -------- --------
</TABLE>
The returns on investments and servicing of finance, taxation and financing cash
flows shown above for the two 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 33 of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part
of these Financial Statements
F-4
<PAGE> 7
CHANGES IN INVESTED CAPITAL/SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Invested capital Shareholders' equity
------------------------ ------------------------
Six months Year
ended ended
Year ended 30 September 31 March 31 March
--------------------- -------- --------
1995 1996 1997 1998
-------- -------- -------- --------
(L. million)
<S> <C> <C> <C> <C>
Profit on ordinary activities after taxation 68 357 179 199
Dividend -- -- (29) (41)
Currency differences on foreign net investments -- 20 (52) (43)
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 (57) 2,290 -- --
Non-cash 2,493 (2,418) -- --
Dividend in specie of investment in National Grid Group -- (393) -- --
Goodwill (set off)/write back (1,368) 221 -- (54)
-------- -------- -------- --------
Net increase in invested capital/shareholders' equity 1,136 77 (340) 61
Opening invested capital/shareholders' equity 972 2,108 2,185 1,845
-------- -------- -------- --------
Closing invested capital/shareholders' equity 2,108 2,185 1,845 1,906
-------- -------- -------- --------
</TABLE>
The cumulative amount of goodwill resulting from acquisitions prior to 31 March
1998, net of goodwill attributable to subsidiary undertakings or businesses
disposed of prior to 31 March 1998, amounted to L.1,201 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 1998 was L.3 million in
respect of associated undertakings, all of which arose in the year ended 31
March 1998.
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> 8
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 L. 50,000 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 L.100,000,000 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. A further 18,571 ordinary shares of 10p each were issued during
June 1998 in connection with the satisfaction of rights under the Company's Long
Term Incentive Plan, following the offer by TU Acquisitions being declared
wholly unconditional. As at 7 August 1998, when the Company became a wholly
owned subsidiary of TU Acquisitions, the Company's issued share capital was
520,876,388 ordinary shares of 10p each. On 12 August 1998, the Company was
re-registered as a private limited company.
The Demerger
At the date of the Demerger, 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. 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. Peabody Holding Company, Inc. and its subsidiaries ("Peabody
Holding") were transferred to a subsidiary of Rollalong on 7 March 1997. 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:
Eastern Group plc and its subsidiaries ("Eastern")
Peabody Holding Company, Inc.
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
intermediate holding companies and non-trading companies companies")
Citizens Power LLC and its subsidiaries ("Citizens Power") were acquired by the
Group on 19 May 1997.
On 19 May 1998 the Peabody companies, together with Citizens Power, were
disposed of. On the same date the offer by TU Acquisitions for the Company was
declared wholly unconditional. The Financial Statements have been restated to
include the results of the Peabody companies and Citizens Power as discontinued
operations.
F-6
<PAGE> 9
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 1998 as if it
had been in existence from 1 October 1994 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 quantification 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> 10
3. Principal Accounting Policies
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 venturers 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 consumer
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. Turnover includes the revenue
from trading activities.
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 capitalized 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 capitalized. 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> 11
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 recognized when clean-ups are
probable and the associated costs can be estimated reasonably.
(g) Customers' contributions
Customer contributions to electricity distribution system assets are credited to
the profit and loss account over a 40-year period at a rate of 3 per cent per
annum for the first 20 years followed by 2 per cent per annum for the following
20 years. The unamortized amount of these contributions is deducted from
tangible fixed assets.
(h) Disposals of fixed assets
HM Government is entitled to a proportion of any gain realised by Eastern
Electricity plc ("Eastern Electricity") on certain property disposals made up to
31 March 2000. A provision for clawback 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.
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.
F-9
<PAGE> 12
3. Principal accounting policies (continued)
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
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. Exchange gains and losses arising on long-term
foreign currency borrowings used to finance the Group's foreign currency
investments are also dealt with in reserves. 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 crystalize in
the foreseeable future. No deferred tax asset is recognized 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
During the year, the Group provided 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 and, during the year,
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 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.
Derivative financial instruments
The group defers the effect of changes in the market value of derivative
financial instruments (including contracts for differences and electricity
forward agreements) which are used to hedge future transactions to the period
when the related transaction is completed. The group considers its net open
energy trading position, including derivative financial instruments entered into
as part of the group's energy trading activity, and provides for any anticipated
future losses.
Contract restructuring activities
Assets and liabilities associated with contract restructuring activities are
marked to market. Movements in the market value are recognized 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.
F-10
<PAGE> 13
4. Segmental Information By Activity:
<TABLE>
<CAPTION>
Six months
Year ended 30 September ended 31 March Year ended 31 March
-------------------------------------------------- ----------------------- -----------------------
1995 1996 1997 1998
------------------------- ----------------------- ----------------------- -----------------------
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>
Power - - 2,178 83 1,801 129 3,345 230
Networks - - 482 211 274 122 472 210
Other 22 (31) 21 (1) 9 - 22 (20)
Intra-group trading - - (378) - (212) - (341) -
----------- ------------ -------- ------------- -------- ------------- -------- -------------
Total continuing
operations 22 (31) 2,303 293 1,872 251 3,498 420
Discontinued operations 1,424 166 1,464 153 647 66 1,376 179
----------- ------------ -------- ------------- -------- ------------- -------- -------------
1,446 135 3,767 446 2,519 317 4,874 599
Exceptional items - - (132) 44 - (20) - (39)
----------- ------------ -------- ------------- -------- ------------- -------- -------------
1,446 135 3,635 490 2,519 297 4,874 560
----------- ------------ -------- ------------- -------- ------------- -------- -------------
</TABLE>
Discontinued turnover and operating profit include the results for coal supply
contract renegotiations (note 5). Power turnover includes gas sales of L.258
million in the year ended 30 September 1996, L.251 million in the six months
ended 31 March 1997, and L.507 million in the year ended 31 March 1998.
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
Year ended 30 September ended 31 March Year ended 31 March
-------------------------------------------------- ----------------------- -----------------------
1995 1996 1997 1998
------------------------- ----------------------- ----------------------- -----------------------
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 (31) 2,303 293 1,853 248 3,469 417
Other - - - - 19 3 29 3
---------- ------------- -------- ------------- -------- ------------- -------- -------------
22 (31) 2,303 293 1,872 251 3,498 420
Exceptional items - - (132) 44 - (20) - (39)
---------- ------------- -------- ------------- -------- ------------- -------- -------------
Continuing operations 22 (31) 2,171 337 1,872 231 3,498 381
Discontinued operations 1,424 166 1,464 153 647 66 1,376 179
---------- ------------- -------- ------------- -------- ------------- -------- -------------
1,446 135 3,635 490 2,519 297 4,874 560
---------- ------------- -------- ------------- -------- ------------- -------- -------------
</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 Year
ended 31 ended 31
Year ended 30 September March March
------------------------ ------------ ------------
1995 1996 1997 1998
----------- ----------- ------------ ------------
(L. million)
<S> <C> <C> <C> <C>
United Kingdom 22 2,171 1,854 3,469
Rest of Europe - - 18 29
Discontinued operations 1,424 1,464 647 1,376
----------- ----------- ------------ ------------
1,446 3,635 2,519 4,874
----------- ----------- ------------ ------------
</TABLE>
F-11
<PAGE> 14
4. Segmental information (continued)
<TABLE>
<CAPTION>
As at 30 September As at 31 March
----------------------------------------------- -------------------------------------------
1995 1996 1997 1998
------------------------ ---------------------- --------------------- ---------------------
Capital Capital Capital Capital
Total assets employed Total assets employed Total assets employed Total assets employed
------------- -------- ------------ -------- ------------ -------- ------------ --------
(L. million)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Power 608 273 1,317 889 1,934 1,117 1,850 958
Networks 1,149 1,008 1,192 1,089 1,175 1,063 1,305 1,244
Other 23 2 11 3 105 4 112 4
------------- -------- ---------- -------- ---------- ------- ---------- -------
Total continuing
operations 1,780 1,283 2,520 1,981 3,214 2,184 3,267 2,206
Discontinued operations 3,050 1,374 3,121 1,433 2,975 1,374 3,584 1,505
------------- -------- ---------- -------- ---------- ------- ---------- -------
4,830 2,657 5,641 3,414 6,189 3,558 6,851 3,711
------------- -------- ---------- -------- ---------- ------- ---------- -------
By geographical location:
United Kingdom 1,780 1,283 2,520 1,981 3,121 2,166 3,179 2,203
Other -- -- -- -- 93 18 88 3
------------- -------- ---------- -------- ---------- ------- ---------- -------
Total continuing
operations 1,780 1,283 2,520 1,981 3,214 2,184 3,267 2,206
Discontinued operations 3,050 1,374 3,121 1,433 2,975 1,374 3,584 1,505
------------- -------- ---------- -------- ---------- ------- ---------- -------
4,830 2,657 5,641 3,414 6,189 3,558 6,851 3,711
------------- -------- ---------- -------- ---------- ------- ---------- -------
</TABLE>
<TABLE>
<CAPTION>
As at As at
As at 30 September 31 March 31 March
---------------------- ---------- ----------
1995 1996 1997 1998
----------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Total assets are reconciled to the consolidated balance sheet as
follows:
Assets analysed by activity 4,830 5,641 6,189 6,851
Unallocated cash, investments and other assets 812 87 556 733
---------- --------- --------- ---------
Total assets 5,642 5,728 6,745 7,584
---------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
As at As at
As at 30 September 31 March 31 March
---------------------- ---------- ----------
1995 1996 1997 1998
----------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Capital employed is reconciled to invested capital/ shareholders'
equity as follows:
Capital employed by activity 2,657 3,414 3,558 3,711
Current and deferred taxes (303) (147) (285) (418)
Dividend -- -- (29) --
Borrowings less cash, investments and other unallocated assets
and liabilities (246) (1,082) (1,399) (1,387)
--------- -------- -------- --------
Invested capital/shareholders' equity 2,108 2,185 1,845 1,906
--------- -------- -------- --------
</TABLE>
F-12
<PAGE> 15
4. Segmental information (continued)
<TABLE>
<CAPTION>
Year ended 30 September Six months ended 31 March Year ended 31 March
------------------------------------------------- ------------------------- ------------------------
1995 1996 1997 1998
------------------------ ------------------------ ------------------------- ------------------------
Depreciation Depreciation Depreciation Depreciation
Capital and Capital and Capital and Capital and
Expenditure depletion Expenditure depletion Expenditure depletion Expenditure depletion
----------- ------------ ----------- ------------ ----------- ------------- ----------- ------------
(L. million)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Power -- -- 134 15 26 11 64 27
Networks -- -- 142 61 71 31 199 67
Other -- -- -- -- 10 -- 2 1
--------- ---------- --------- ---------- --------- ----------- --------- ----------
Total continuing operations -- -- 276 76 107 42 265 95
Discontinued operations 140 119 98 121 43 58 97 115
--------- ---------- --------- ---------- --------- ----------- --------- ----------
140 119 374 197 150 100 362 210
--------- ---------- --------- ---------- --------- ----------- --------- ----------
</TABLE>
5. Coal supply contract renegotiations
During the year ended 31 March 1998, a Group undertaking agreed to terminate a
coal supply agreement in exchange for payments from a customer totalling L.30
million which resulted in a gain of L.30 million. This amount was included in
"Turnover - discontinued operations" in the consolidated profit and loss
account.
During the six months ended 31 March 1997, a Group undertaking sold a coal
supply agreement to an unrelated third party in exchange for an initial L.7
million payment, and nominal future consideration, which resulted in a gain of
L.7 million. This amount was included in "Turnover - discontinued operations" in
the consolidated profit and loss account.
During the year ended 30 September 1996, a Group undertaking agreed to terminate
a coal supply agreement in exchange for a L.14 million payment from a customer
which resulted in a gain of L.14 million. This amount was included in "Turnover
- - discontinued operations" in the consolidated profit and loss account.
During the year ended 30 September 1995, a Group undertaking agreed to terminate
a coal supply agreement in exchange for a L.16 million payment from a customer.
This transaction resulted in a gain of L.15 million after deducting the cost of
terminating a related coal purchase agreement as well as certain other costs
related to the transaction. The gain was included in "Turnover - discontinued
operations" in the consolidated profit and loss account.
The Group's coal operations were disposed of on 19 May 1998 and are included as
discontinued operations.
6. Costs and overheads less other income
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
----------------------- ---------- ---------
1995 1996 1997 1998
---------- ----------- ---------- ---------
(L. million)
<S> <C> <C> <C> <C>
Changes in stocks of finished goods and work in progress (18) (19) (10) (34)
Raw materials and consumables 232 1,983 1,334 2,553
Employment costs (Note 7) 321 411 220 478
Depreciation 58 128 64 174
Depletion 61 69 36 40
Restructuring, reorganization and bid-related costs 29 (29) 20 39
Other acquisition-related costs of Eastern -- 31 -- --
Production taxes 138 162 70 126
Other operating charges less other income 490 585 488 938
---------- ----------- ---------- ---------
1,311 3,321 2,222 4,314
---------- ----------- ---------- ---------
</TABLE>
Exceptional restructuring and reorganisation costs of L.25 million in the year
ended 31 March 1998 reflect full provision for the re-opening of Eastern's
voluntary severance and early retirement schemes in its Power and
Networks businesses. Bid-related costs amounted to L.14 million.
The reorganization expense of L.20 million in the six months ended 31 March 1997
reflects full provision for the re-opening of Eastern's voluntary severance
scheme in its Networks business.
F-13
<PAGE> 16
6. Costs and overheads less other income (continued)
The reorganization provision created on the acquisition of Eastern in 1995 of
L.29 million was no longer deemed necessary and was reversed in 1996. A deferred
tax asset of L.11 million, recognized 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 year ended 31 March 1998
includes operating lease rentals payable of L.287 million (six months ended 31
March 1997: L.138 million, years ended 30 September 1996: L.77 million, 1995:
L.20 million) primarily in respect of plant and machinery.
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
----------------------- ---------- --------
1995 1996 1997 1998
----------- ---------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
Audit fees 0.4 0.8 0.6 1.3
Non-audit fees payable to Ernst & Young in the United Kingdom -- 7.3 6.1 5.0
Non-audit fees payable to Ernst & Young outside the United Kingdom
and to other auditors -- -- 1.8 3.3
</TABLE>
7. Employees
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
----------------------- ---------- --------
1995 1996 1997 1998
----------- ---------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
(a) Employment costs
Wages and salaries 288 411 208 437
Employers' social security costs 20 28 14 30
Post-retirement benefits -- -- 17 39
Pension costs (Note 26) 13 17 10 16
----------- ---------- ---------- --------
321 456 249 522
Less: amounts capitalized -- (45) (29) (44)
----------- ---------- ---------- --------
Charged to profit and loss account 321 411 220 478
----------- ---------- ---------- --------
(b) Numbers employed
The average number of persons employed by the Group was:
(Number)
United Kingdom 201 6,195 6,770 6,814
US 7,336 6,824 6,549 6,563
Australia 1,069 1,098 1,120 1,095
Other -- -- 669 622
----------- ---------- ---------- --------
8,606 14,117 15,108 15,094
----------- ---------- ---------- --------
The average number of persons employed by the Group by activity was:
(Number)
Power -- 1,630 2,906 3,178
Networks -- 4,370 4,256 3,952
Other 201 195 277 302
----------- ---------- ---------- --------
Total continuing operations 201 6,195 7,439 7,432
Discontinued operations 8,405 7,922 7,669 7,662
----------- ---------- ---------- --------
8,606 14,117 15,108 15,094
----------- ---------- ---------- --------
</TABLE>
F-14
<PAGE> 17
8. Exceptional items
During 1996, the Group received an interim dividend of L.11 million and special
dividends (net of associated costs) totalling L.165 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 L.132 million.
The profit on disposal of First Hydro of L.25 million in 1996 arose on the
disposal of the Group's interest in the pumped storage business of National Grid
Group.
9. 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 Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- --------
1995 1996 1997 1998
----------- ----------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
Interest expense
On loans wholly repayable within five years 5 68 42 116
On other loans 10 20 35 118
Interest capitalized -- (8) (5) (4)
----------- ----------- ---------- --------
15 80 72 230
Interest income (4) (37) (35) (96)
----------- ----------- ---------- --------
Net interest expense 11 43 37 134
----------- ----------- ---------- --------
</TABLE>
Included in interest payable for the year ended 31 March 1998 is L.7 million
relating to finance leases (six months ended 31 March 1997: L.3 million; year
ended 30 September 1996: L.7 million; year ended 30 September 1995: nil).
10. Taxation charge/(credit)
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- --------
1995 1996 1997 1998
----------- ----------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
United Kingdom
Corporation tax at 31 per cent (1997, 1996 and 1995: 33 per cent) -- 3 68 117
Adjustment in respect of previous years -- (15) -- --
Deferred taxation (11) 22 2 --
Tax credit on franked investment income -- 29 -- --
Windfall tax -- -- -- 112
----------- ----------- ---------- --------
(11) 39 70 229
Overseas
Current taxation 25 19 7 --
Deferred taxation 42 57 4 (2)
----------- ----------- ---------- --------
Charge for the period 56 115 81 227
----------- ----------- ---------- --------
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>
The tax charge for the year ended 31 March 1998 is net of a credit of L.3
million in respect of an exceptional item
(six months ended 31 March 1997: L.1 million).
F-15
<PAGE> 18
10. Taxation charge/(credit) (continued)
If full provision had been made for deferred tax for the year ended 31 March
1998, the tax charge would have increased by L.1 million (six months ended 31
March 1997 decreased by L.71 million, year ended 30 September 1996 increased by
L.31 million, 1995 L.nil). As a result of the stand-alone basis of providing for
deferred tax, the charge for deferred tax shown above was increased by L.57
million for the year ended 30 September 1996 (1995 L.42 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 two 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 Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- --------
1995 1996 1997 1998
----------- ----------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
Profit before taxation 124 472 260 426
----------- ----------- ---------- --------
Notional UK corporation tax at 31 per cent
(1997, 1996 and 1995: 33 per cent) 41 156 86 132
Permanent differences (20) (4) 16 23
Timing differences 3 (31) -- (52)
Free group relief -- (30) (26) --
Effect of overseas tax rates 32 39 4 5
Adjustments in respect of prior years -- (15) -- --
Other -- -- 1 7
----------- ----------- ---------- --------
Actual tax charge 56 115 81 115
----------- ----------- ---------- --------
</TABLE>
11. Earnings per share
Earnings per share are based on the profit for each period and on 521 million
ordinary shares for each of the two 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 had waived its right to
dividends on the shares it held.
Earnings per share for the year ended 31 March 1998 are based on 517 million
ordinary shares. This excludes the 4 million shares held as at 31 March 1998 by
The Energy Group Employee Benefit Trust which had waived its right
to dividends on the shares it held.
The numbers of shares used for the calculation of undiluted and diluted earnings
per share are as follows:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- --------
1995 1996 1997 1998
----------- ----------- ---------- --------
(million)
<S> <C> <C> <C> <C>
Weighted average shares (see notes above) 521 521 519 517
Effect of dilutive securities:
Share options -- -- 6 5
----------- ----------- ---------- --------
Diluted weighted average shares 521 521 525 522
----------- ----------- ---------- --------
</TABLE>
F-16
<PAGE> 19
11. Earnings per share (continued)
Adjusted earnings per share figures are based on 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,
reorganisation and bid-related costs and related taxation, and the windfall tax
as follows:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- --------
1995 1996 1997 1998
----------- ----------- ---------- --------
(L. million)
<S> <C> <C> <C> <C>
Profit for the period as reported 68 357 179 199
Adjusted for:
National Grid Group flotation -- (44) -- --
Profit on disposal of First Hydro -- (25) -- --
Exceptional restructuring, reorganization and bid-related costs -- -- 20 39
Related taxation -- 29 (1) (3)
Windfall tax -- -- -- 112
----------- ----------- ---------- --------
Profit as adjusted 68 317 198 347
----------- ----------- ---------- --------
</TABLE>
Earnings for the six months ended 31 March 1997 and for the year ended 31 March
1998 can be further broken down into continuing and discontinued operations as
follows:
<TABLE>
<CAPTION>
Six months ended Year ended
31 March 1997 31 March 1998
------------------------ ------------------------
Continuing Discontinued Continuing Discontinued
---------- ------------ ---------- ------------
(L. million)
<S> <C> <C> <C> <C>
Profit for the period as reported 126 53 33 166
Adjusted for:
Exceptional restructuring, reorganization and bid-related costs 20 -- 39 --
Related taxation (1) -- (3) --
Windfall tax -- -- 112 --
---------- ------------ ---------- ------------
Profit as adjusted 145 53 181 166
---------- ------------ ---------- ------------
</TABLE>
The interest expense prior to the Demerger was affected significantly by the
financing arrangements of Hanson. Accordingly the allocation of interest expense
between continuing and discontinued operations for periods ending on or before
30 September 1996 is not considered meaningful. Consequently the analyses of
earnings and earnings per share are only presented here for the six months ended
31 March 1997 and the year ended 31 March 1998.
Earnings per share figures for the six months ended 31 March 1997 and the year
ended 31 March 1998 can be broken into continuing and discontinued operations as
follows:
<TABLE>
<CAPTION>
Six months ended Year ended
31 March 1997 31 March 1998
------------------------ ------------------------
Continuing Discontinued Continuing Discontinued
---------- ------------ ---------- ------------
(pence/share)
<S> <C> <C> <C> <C>
Earnings per share:
Basic 24.3 10.2 6.4 32.2
Diluted 24.0 10.1 6.3 31.8
Adjusted, undiluted 28.0 10.2 35.0 32.2
Adjusted, diluted 27.6 10.1 34.7 31.8
</TABLE>
F-17
<PAGE> 20
12. Dividend
<TABLE>
<CAPTION>
Six months Year
ended ended
31 March 31 March
pence per 1997 1998
share L. million L. million
--------- ---------- ----------
<S> <C> <C> <C>
Dividend paid to ordinary shareholders on 4 July 1997 5.5p 29 --
Dividend paid to ordinary shareholders on 9 January 1998 8.0p -- 41
</TABLE>
Prior to the Demerger, the principal businesses comprising the Group were owned
by Hanson and appropriations of cash and other assets have been treated as
diminutions in net assets.
13. Tangible fixed assets
<TABLE>
<CAPTION>
Plant,
Coal equipment
Land and and gas Distribution Generating and motor
buildings assets system stations vehicles Total
--------- -------- ------------ ---------- --------- -----
(L. million)
<S> <C> <C> <C> <C> <C> <C>
COST
As at 1 October 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 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
Exchange adjustments -- (78) -- (12) (48) (138)
Acquisitions -- -- -- -- 1 1
Additions 13 37 114 20 178 362
Disposals and other (2) (23) -- (1) (108) (134)
--------- -------- ------------ ---------- --------- -----
As at 31 March 1998 100 2,232 1,146 409 1,091 4,978
--------- -------- ------------ ---------- --------- -----
</TABLE>
F-18
<PAGE> 21
13. Tangible fixed assets (continued)
<TABLE>
<CAPTION>
Plant,
Coal equipment
Land and and gas Distribution Generating and motor
buildings assets system stations vehicles Total
--------- -------- ------------ ---------- --------- -----
(L. million)
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED DEPRECIATION AND DEPLETION
As at 1 October 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
Exchange adjustments -- (14) -- (6) (24) (44)
Charge for the period 6 66 42 10 86 210
Disposals and other (1) (19) -- (1) (73) (94)
--------- -------- ------------ ---------- --------- -----
As at 31 March 1998 8 419 101 9 512 1,049
--------- -------- ------------ ---------- --------- -----
Net book value
As at 1 October 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
--------- -------- ------------ ---------- --------- -----
As at 31 March 1998 92 1,813 1,045 400 579 3,929
--------- -------- ------------ ---------- --------- -----
</TABLE>
The net book value of land and buildings at 31 March 1998 comprises freeholds of
L.91 million (1997: L.85 million), long leaseholds of L.1 million (1997: L.1
million) and short leaseholds of L.nil (1997: L.nil).
Coal and gas assets at 31 March 1998 include natural gas assets with a cost of
L.45 million (1997: L.40 million), accumulated depletion of L.12 million (1997:
L.8 million) and net book value of L.33 million (1997: L.32 million).
Capitalized interest at 31 March 1998 included within fixed assets amounts to
L.17 million (1997: L.13 million).
The cost of distribution system fixed assets at 31 March 1998 is shown net of
customer contributions of L.390 million (1997: L.359 million). The net book
value of customer contributions at 31 March 1998 was L.287 million (1997: L.267
million).
Assets in the course of construction at 31 March 1998 amounted to L.188 million
(1997: L.298 million).
Generating stations include assets held under finance leases as follows:
<TABLE>
<CAPTION>
As at As at
31 March 31 March
-------- --------
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Cost 128 128
Accumulated depreciation (14) (18)
-------- --------
Net book value 114 110
-------- --------
</TABLE>
F-19
<PAGE> 22
14. Fixed asset investments
<TABLE>
<CAPTION>
Unlisted Investments
------------------------------------------------------
Loans to Associated Investment in
associates undertakings Other own shares Total
---------- ------------ ------ -------------- -----
(L. million)
<S> <C> <C> <C> <C> <C>
As at 1 October 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
Adjustment -- (2) (3) -- (5)
Additions -- 23 2 9 34
Share of retained profit -- 8 -- -- 8
Dividends received -- (6) -- -- (6)
---------- ------------ ------ -------------- -----
As at 31 March 1998 -- 54 29 20 103
---------- ------------ ------ -------------- -----
</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 ("the Trust") was 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 1998
the Trust had acquired 4,063,338 ordinary shares at a cost of L.19.8 million
(1997: 2,250,000 ordinary shares at a cost of L.10.7 million), financed by
interest-free loans from the Company, which at the balance sheet date totalled
L.19.8 million. The Trust waived its right to dividends on the ordinary shares
held by it.
Since 31 March 1998 the Trust has sold 1,296,308 of the shares held by it to
Energy Trustees Limited, a wholly owned subsidiary of the Company, which acted
as trustee of a Qualifying Employee Share Ownership Trust, such trust being
established to satisfy rights under the Group's Savings Related Share Option
("Sharesave") Scheme. The proceeds of such sale (L.10.9 million) were used by
the Trust to reduce the amount of the interest-free loans from the Company. The
remainder of the shares held by the Trust were either assented to the offer by
TU Acquisitions (the proceeds being used in part to repay the balance of the
interest-free loans from the Company, in part to grant replacement deferred
bonus awards and in part to satisfy cash cancellation payments to participants
in various Company employee share plans, following the change in control of the
Company) or transferred to (or assented to the TU Acquisitions offer for the
Company on behalf of) participants in such schemes upon exercise of their rights
under the schemes.
The principal associated undertaking at 31 March 1998 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 L.77m L.13m 43
------- ----------- ------------- -------- -----
</TABLE>
The above interest was sold as part of the disposal of the Group's coal
interests on 19 May 1998 and is treated as a discontinued operation.
15. Stocks
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Raw materials and consumables 118 136
Work in progress 66 75
Finished stock and items for resale 72 71
-------- --------
256 282
-------- --------
</TABLE>
F-20
<PAGE> 23
16. Debtors
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Amounts falling due after more than one year
Trade debtors 6 --
Advance corporation tax recoverable 91 --
Royalties receivable and other debtors 232 662
Operating lease prepayments 232 184
-------- --------
561 846
-------- --------
Amounts falling due within one year
Trade debtors 647 464
Debtors subject to financing -- 273
Less: non-returnable amounts received -- (200)
-------- --------
647 537
Other debtors and prepayments 151 622
-------- --------
798 1,159
-------- --------
</TABLE>
17. Current Asset Investments
At 31 March 1997 and 1998 all current asset investments were in unlisted
entities.
18. Short-Term Deposits
At 31 March 1998, L.408 million (1997: L.408 million) of the short-term deposits
has been 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.
19. Creditors
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Amounts falling due within one year
Bank overdrafts 61 65
Short-term loans and commercial paper 732 237
Finance leases 6 14
Trade creditors 376 457
Corporation tax 105 244
Other taxation and social security 20 10
Other creditors 148 794
Accruals and deferred income 270 287
Dividend 29 --
-------- --------
1,747 2,108
-------- --------
</TABLE>
Weighted average interest rates at 31 March 1998 on bank overdrafts were 13.6
per cent, and on short-term loans and commercial paper, 7.3 per cent.
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.
F-21
<PAGE> 24
19. Creditors (continued)
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(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 170 155
L.350 million 8.375% bonds 2004 348 348
L.200 million 8.5% bonds 2025 197 197
$200 million 7.375% guaranteed notes due 2017 -- 111
$300 million 7.5% guaranteed notes due 2027 -- 166
L.200 million 8.75% bonds due 2012 -- 197
-------- --------
715 1,174
Loans repayable within 5 years 791 844
Net obligations under finance leases 149 140
-------- --------
1,655 2,158
-------- --------
</TABLE>
L.100 million of the L.350 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
1998, the weighted average interest rate payable was 8.0 per cent (1997: 7.4
per cent). Amounts shown above for bonds are net of unamortized issue costs.
Long-term debt and finance leases are repayable as follows:
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(L. million)
<S> <C> <C>
1999 227 --
2000 243 272
2001 261 266
2002 149 155
2003 -- 49
thereafter 775 1,416
-------- --------
1,655 2,158
-------- --------
</TABLE>
Long-term debt and finance leases are denominated in the following currencies:
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Sterling 1,473 1,500
US dollars 174 639
Australian dollars 8 19
-------- --------
1,655 2,158
-------- --------
</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 1998 to more than L.115 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 L.113
million as at 31 March 1998 (1997: L.135 million).
F-22
<PAGE> 25
20. Provisions for liabilities and charges
<TABLE>
<CAPTION>
Health care Reclamation
and other and
obligations to environmental Deferred
employees obligations taxation Other Total
-------------- ------------- ------------ ------------ ------------
(L. million)
<S> <C> <C> <C> <C> <C>
As at 1 October 1994 917 309 87 59 1,372
Exchange adjustments (3) (1) (2) -- (6)
Utilized 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
Utilized in year (80) (43) 7 (62) (178)
Provided/(released) in year 48 19 57 (4) 120
Acquisition adjustment (Note 23) -- -- (86) (77) (163)
-------------- ------------- ------------ ------------ ------------
As at 30 September 1996 899 285 192 181 1,557
Exchange adjustments (43) (14) (9) (1) (67)
Utilized 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
Exchange adjustments (23) (8) (7) (1) (39)
Utilized in period (94) (45) -- (43) (182)
Provided in period 76 13 (2) 45 132
Other -- -- 3 -- 3
-------------- ------------- ------------ ------------ ------------
As at 31 March 1998 807 240 174 191 1,412
-------------- ------------- ------------ ------------ ------------
</TABLE>
Deferred tax provided as at 30 September 1996 included L.142 million in respect
of liabilities recognized 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
31 March 31 March 31 March 31 March
1997 1998 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Excess of capital allowances 87 81 753 708
Post-retirement healthcare benefits -- -- (215) (213)
Other timing differences 93 93 (220) (170)
---------- ---------- ---------- ----------
180 174 318 325
---------- ---------- ---------- ----------
</TABLE>
21. Share capital
The share capital of the Company was:
<TABLE>
<CAPTION>
Allotted, called-up
Authorized and fully paid
---------------------- -----------------------
As at As at As at As at
31 March 31 March 31 March 31 March
1997 1998 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Ordinary shares (10p each) 100 100 52 52
---------- ---------- ---------- ----------
</TABLE>
F-23
<PAGE> 26
22. Reserves
<TABLE>
<CAPTION>
Profit and Other
GROUP loss account reserves Total
------------ ------------ ------------
(L. million)
<S> <C> <C> <C>
As at 1 October 1996
Actual invested capital 1,056 1,129 2,185
Pro forma adjustments -- (383) (383)
------------ ------------ ------------
Pro forma invested capital 1,056 746 1,802
Increase in net debt -- (42) (42)
Issue of share capital -- (52) (52)
Other movements -- (13) (13)
Exchange fluctuations on foreign net investments (52) -- (52)
Profit retained for the period 150 -- 150
------------ ------------ ------------
As at 31 March 1997 1,154 639 1,793
Exchange fluctuation on foreign net investments (43) -- (43)
Profit retained for the year 158 -- 158
Goodwill arising on acquisitions in the year -- (54) (54)
------------ ------------ ------------
As at 31 March 1998 1,269 585 1,854
------------ ------------ ------------
</TABLE>
The cumulative amount of goodwill resulting from acquisitions prior to 31 March
1998, net of goodwill attributable to subsidiary undertakings or businesses
disposed of prior to 31 March 1998, amounted to L.1,201 million (1997: L.1,147
million). This has been 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.
Pro forma invested capital reflects the figures included within the company's
Listing Particulars issued in January 1997.
Prior to demerger the Group's capital structure consisted entirely of invested
capital. A reconciliation of the movements in invested capital for each of the
two years ended 30 September 1996 is shown on page F-5.
23. Acquisitions
On 20 May 1997 the Group acquired Citizens Lehman Power L.L.C. which was renamed
Citizens Power LLC. Citizens Power provides contract restructuring services to
the energy industry. The acquisition involved an initial payment of L.12.5
million in cash, plus a payment deferred until 31 March 2000, equivalent to the
net assets at 30 June 1997. There was to be additional purchase consideration
linked to profit goals up to 2002, subject to a maximum consideration for the
entire transaction of $120 million (but this obligation has been assumed by the
purchaser of Citizens Power following its disposal as described below). For the
period since acquisition, turnover of L.28 million and operating profit of L.18
million in respect of Citizens Power are included within the consolidated profit
and loss account. Citizens Power's operating assets and liabilities were as
follows:
<TABLE>
<CAPTION>
Book value Adjustments Fair value
---------- ----------- ----------
(L. million)
<S> <C> <C> <C>
Tangible fixed assets 1 -- 1
Investments 13 1 14
Working capital (10) (6) (16)
Cash 5 -- 5
---------- ----------- ----------
Cash 9 (5) 4
---------- ----------- ----------
Cash consideration 12
Loan notes issued 18
Deferred purchase consideration 32
----------
62
Goodwill (58)
----------
4
----------
The net cash flow for the acquisition was: (L. million)
Cash consideration 12
Cash acquired (5)
----------
Net cash paid 7
----------
</TABLE>
F-24
<PAGE> 27
23. Acquisitions (continued)
Fair value adjustments were made to the book value of the assets and liabilities
of the above acquisition to bring them into line with the company's accounting
policies and to adjust where applicable the carrying values of certain assets
and liabilities.
For the year prior to acquisition, Citizens Power reported profit after tax of
L.3 million.
Citizens Power was disposed of on 19 May 1998 and therefore has been disclosed
within discontinued operations.
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.("Telparny Brno"), a heating and
generation company based in the Czech Republic. For the period from acquisition
to 31 March 1997, turnover of L.18 million and operating profit of L.3 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 L.21 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.
For the year prior to acquisition. Teplarny Brno reported profit after tax of
L.4 million. A further 31% of Teplarny Brno was acquired during the year ended
31 March 1998 for cash consideration of L.7 million.
There were no significant acquisitions in 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-25
<PAGE> 28
23. 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 L.2,496 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 L.1,368 million was
reduced in 1996 by L.221 million, principally as a result of the release of
provisions no longer considered necessary.
F-26
<PAGE> 29
23. 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
------------
1995
------------
(L. million)
<S> <C>
Turnover 3,640
Profit for the year 132
Earnings per share 25.3p
</TABLE>
The acquisitions of Citizens Power and Teplarny Brno would not have had a
material impact on the Group's results prior to acquisition.
24. Contingent liabilities
Certain properties in the US in which the Group had an interest at 31 March 1998
are subject to actual or potential environmental claims. The companies which had
interests in these properties were sold on 19 May 1998.
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 reorganization 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. This appeal is unlikely to be heard until 1999. 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 L.90
million (exclusive of any applicable interest charges).
The Group is subject to business risks which are actively managed against
exposures.
25. Financial commitments
(a) Capital commitments of the Group were as follows:
<TABLE>
<CAPTION>
As at As at
31 March 31 March
1997 1998
---------- ----------
(L. million)
<S> <C> <C>
Contracted but not provided for 146 104
---------- ----------
</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 1998 the commitments under long-term gas purchase
contracts amounted to an estimated L.2.8 billion (1997: L.2.2 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-27
<PAGE> 30
25. Financial commitments (continued)
(c) The future minimum rental commitments at 31 March 1998, 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
leases leases
----------- --------
Year ending 31 March (L. million)
<S> <C> <C>
1999 74 18
2000 70 19
2001 46 19
2002 43 19
2003 47 19
thereafter 62 106
----------- -------
Total minimum lease payments 342 200
-----------
Less amount representing interest (52)
--------
Present value of minimum lease payments 148
--------
</TABLE>
The majority of the operating lease commitments relate to coal-fired power
stations. Additional payments of approximately L.6 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 31 March
1997 and 1998 were:
<TABLE>
<CAPTION>
31 March 1997 31 March 1998
----------------------- -----------------------
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 2 5 2 9
After five years 1 14 1 62
---------- ---------- ---------- ----------
3 19 3 71
---------- ---------- ---------- ----------
</TABLE>
26. Pension and post-retirement healthcare
Pensions
The Group participates in several defined benefit pension plans in the UK, and,
during the year, 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 1995
and 1996, the six months ended 31 March 1997 and the year ended 31 March 1998,
was L.13 million, L.17 million, L.10 million and L.16 million, respectively. The
amount for 1996 includes L.4 million relating to UK employees and L.10 million
in respect of additional one-off cash retirement costs for US employees.
In the US, Peabody sponsored four main defined benefit pension plans. With the
exception of one plan, assets were set aside in separate trustee-administered
funds. Each of these plans was assessed annually by independent qualified
actuaries using the projected unit method, the latest valuations being as at 30
September 1996. In addition, Peabody participated in two multi-employer plans.
In these plans, the assets contributed by the participating employers were
aggregated and the contributions payable are determined by independent qualified
actuaries in accordance with industry-wide agreements. Peabody also had a number
of defined contribution plans. Costs relating to the multi-employer and the
defined contribution plans were recognized as incurred. As stated elsewhere in
this report, Peabody was disposed of on 19 May 1998.
F-28
<PAGE> 31
26. 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 L.255 million as at 30
September 1996. The market value of the assets of Eastern's section of the ESPS
was L.681 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 20) include a provision of L.8
million (provision of L.10 million at 30 September 1995, prepayment of L.1
million at 30 September 1996, and provision of L.4 million at 31 March 1997)
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
Until the disposal of Peabody, the Group also provided during the year,
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 1998 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 L.582 million (1997: L.576 million). The charge for the year ended
31 March 1998 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 L.4
million (six months ended 31 March 1997: L.2 million), and interest cost on
accumulated benefit obligations of approximately L.42 million (six months ended
31 March 1997: L.2 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 to 5 per cent
over 5 years. The weighted average discount rate used in determining the
accumulated post-retirement benefit obligation was 7 1/2 per cent as at 31 March
1998.
27. Reconciliation of operating profit to net cash inflow from operating
activities
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ----------- ----------
1995 1996 1997 1998
---------- ---------- ----------- ----------
(L. million)
<S> <C> <C> <C> <C>
Operating profit/(loss) before exceptional items (31) 293 251 420
Depreciation and depletion -- 76 41 90
Profit on sales of tangible fixed assets -- (8) -- --
Decrease/(increase) in investments -- -- (2) 2
(Increase)/decrease in stocks (12) (94) 8 (27)
Decrease/(increase) in debtors -- (88) (88) 161
Operating lease prepayments -- (342) -- --
Increase in creditors -- 81 17 83
Provisions -- (62) (7) (22)
---------- ---------- ----------- ----------
(43) (144) 220 707
Discontinued operations 445 156 126 180
---------- ---------- ----------- ----------
Net cash inflow from operating activities 402 12 346 887
---------- ---------- ----------- ----------
</TABLE>
F-29
<PAGE> 32
28. Analysis of changes in financing
<TABLE>
<CAPTION>
Long-term
loans Current
and finance loans
Share lease and notes
Capital obligations payable Total
---------- ----------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
As at 1 October 1994 -- 224 87 311
Exchange adjustments -- (1) 1 --
Cash 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
Exchange movements -- (17) (6) (23)
Cash inflow/(outflow) from financing -- 374 (495) (121)
Other movements -- 146 14 160
---------- ----------- ---------- ----------
Balance as at 31 March 1998 52 2,158 251 2,461
---------- ----------- ---------- ----------
</TABLE>
Other movements during the six months ended 31 March 1997 principally comprise
the debt of Black Beauty Coal Company which became accounted for on an equity
accounting basis during that period.
In 1996 the Group distributed its shareholding in National Grid Group to Hanson
as a dividend in specie of L.393 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 Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(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) (7)
Cash consideration for Citizens Power -- -- -- (12)
Deposits acquired on acquisition of Eastern 264 -- -- --
Cash acquired on acquisition of Teplarny Brno -- -- 1 --
Cash acquired on acquisition of Citizens Power -- -- -- 5
---------- ---------- ---------- ----------
36 (2,495) (20) (14)
---------- ---------- ---------- ----------
</TABLE>
F-30
<PAGE> 33
29. 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 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)
Exchange movements 1 -- 17 6 3 27
Net cash flow (133) (4) (374) 495 248 232
Other movements -- -- (146) (14) -- (160)
---------- ---------- ---------- ---------- ---------- ----------
As at 31 March 1998 253 (65) (2,158) (251) 1,004 (1,217)
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
30. Reconciliation of net cash flow movement to movement in net debt (Note 29)
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Net cash inflow/(outflow) in period 237 (292) 279 (137)
Increase in liquid cash resources -- -- 753 248
Change in debt resulting from cash flows 20 (128) (938) 121
---------- ---------- ---------- ----------
257 (420) 94 232
Additional debt on Demerger -- -- (42) --
Other movements (688) -- 59 (160)
Exchange movements -- (3) 13 27
---------- ---------- ---------- ----------
Movement in net debt in period (431) (423) 124 99
Opening net debt (205) (636) (1,059) (1,316)
Opening additional net debt -- -- (381) --
---------- ---------- ---------- ----------
Closing net debt (636) (1,059) (1,316) (1,217)
---------- ---------- ---------- ----------
</TABLE>
31. Related party transactions
A company which was a subsidiary of the Group as at 31 March 1998 has purchased
coal from Black Beauty Coal Company, a partnership in which the Group had a 43
per cent investment at 31 March 1998. The subsidiary purchased 126,601 tons (six
months ended 31 March 1997: 37,645 tons) of coal at a cost of approximately L.2
million during the year ended 31 March 1998 (six months ended 31 March 1997: L.1
million). The subsidiary concerned was disposed of by the Group on 19 May 1998
along with the rest of its Coal interests.
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
Hanson. These include transactions in respect of treasury, insurance, taxation
and other central services supplied by Hanson to the Group. These transactions
have not been identified individually as it is not practical to do so.
F-31
<PAGE> 34
31. Related party transactions (continued)
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.
32. Employee share plans
The Group had the following employee share plans as at 31 March 1998:
(a) The Energy Group Sharesave Scheme which was available to the UK based
employees of participating companies within the Group and those directors
who were employees of participating companies and who devoted more than 25
hours a week to their duties. Employees who participated in this scheme had
to enter into a monthly savings contract.
(b) The Energy Group Executive Share Option Scheme which was administered by the
Remuneration Committee of the Board of Directors of the Company ("the
Remuneration Committee") and was 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 operated in conjunction with the
Company's Employee Benefit Trust. The Plan was supervised and administered
by the Remuneration Committee. The Plan could be made available to all
employees and directors of the Group at the discretion of the Remuneration
Committee, but it was in practice limited to the executive directors of the
Company and certain senior executives of the Group. A "phantom" Long Term
Incentive Plan was also put in place at Citizens Power LLC upon its
acquisition by the Group.
(d) The Energy Group Employee Benefit Trust was 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 was to facilitate and
encourage ownership of the Company's shares.
(e) The Peabody Plans were voluntary plans open to all applicable US based
employees of Peabody (one plan was also open to hourly paid employees).
The movements in share options outstanding during the year ended 31 March 1998
were:
<TABLE>
<CAPTION>
As at 31 As at 31
Exercise price March 1997 Exercised Lapsed Issued March 1998
-------------- ------------ ------------ ------------ ------------ ------------
(pence) (number)
<S> <C> <C> <C> <C> <C> <C>
Executive share options 547.5 1,624,572 16,437 60,269 -- 1,547,866
Sharesave scheme 465.0 871,797 5,048 70,621 -- 796,128
Sharesave scheme 438.0 5,168,260 16,068 216,770 -- 4,935,422
</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.
Since 31 March 1998 all options or awards then outstanding under the employee
share plans described in (a) to (c) above have, as a consequence of the takeover
of the Company by the Texas Utilities group, either been exercised, waived or
surrendered for a cash cancellation payment or lapsed.
F-32
<PAGE> 35
33. 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
and 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 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
crystalize 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 10, 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 two 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 unrecognized 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 L.119 million, equal to the
excess of Eastern's pension scheme assets over the related projected benefit
obligation at 30 September 1995, has been recognized.
Provision for restructuring and reorganisation
Under UK GAAP, the Group charged L.25 million against profit in the year ended
31 March 1998 (L.20 million in the six months ended 31 March 1997 and L.29
million in the year ended 30 September 1995) in relation to provisions for
restructuring and reorganisation. Under US GAAP these provisions would only have
been permitted in the year ended 31 March 1998. The 1997 provision was utilised
during the year ended 31 March 1998. Under US GAAP this would be charged against
profit in the latter year. 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 and the related Advance Corporation Tax ("ACT") are
recorded in the financial statements for the period to which they relate. Under
US GAAP, dividends and related ACT are not recorded until the dividends are
declared.
F-33
<PAGE> 36
33. Differences between UK GAAP and US GAAP (continued)
Exceptional items
Under UK GAAP, the exceptional effects of the flotation of National Grid Group
have been shown separately in the consolidated profit and loss account and
operating profit and earnings per ordinary share are disclosed both before and
after this effect. Further, the gain on sale of First Hydro is reported as a
non-operating exceptional item after operating profit. Under US GAAP, the gain
on sale of First Hydro would have been included in the determination of
operating profit and disclosure of operating profit and earnings per ordinary
share before and after exceptional items is not permitted.
Output-linked lease payments
Under UK GAAP, the output-linked operating lease payments are charged to the
consolidated profit and loss account over the estimated useful lives of the
related power stations, which exceed the payment periods involved. Under US
GAAP, such payments are considered as contingent rental payments and therefore
are charged as incurred. The amounts shown for 31 March 1997 along with the
related deferred tax effects, have been restated. Previously, no adjustment was
made for such difference between UK and US GAAP.
Customer acquisition costs
Under UK GAAP certain costs associated with acquiring customers in the newly
deregulated gas market are capitalized until the commencement of the relevant
customers' contracts, at which time the costs are charged in full against
profits. Under US GAAP such costs are not able to be capitalized. Accordingly,
the costs capitalized under UK GAAP at 31 March 1998 have been charged to the
profit and loss account for US GAAP.
Profit for the year/period
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
----------------------- -------- --------
1995 1996 1997 1998
-------- -------- -------- --------
(L. million)
<S> <C> <C> <C> <C>
Profit for the year/period as reported in the consolidated profit
and loss accounts 68 357 179 199
Significant adjustments:
Discount on subordinated income note (6) (7) (7) (7)
Goodwill amortization -- (55) (23) (49)
Impairment of long lived assets (3) (578) -- --
Restructuring and reorganisation provision 29 (29) 20 (20)
Pensions -- 5 5 7
Output-linked lease payment -- -- (41) (63)
Customer acquisition costs -- -- -- (30)
Taxation - stand-alone adjustment 17 (2) (6) --
Deferred taxation:
Effect of the above adjustments (8) 242 (9) 5
Effect of differences in methodology (7) (41) 18 (36)
-------- -------- -------- --------
Profit/(loss) for the period (net income/(loss)) as adjusted to
accord with US GAAP 90 (108) 136 6
-------- -------- -------- --------
Per ordinary share as so adjusted 17.3p (20.7)p 26.2p 1.2p
Number of shares used in computing per ordinary share amounts
(millions) 521 521 519 517
-------- -------- -------- --------
</TABLE>
F-34
<PAGE> 37
33. Differences between UK GAAP and US GAAP (continued)
<TABLE>
<CAPTION>
Six months Year
ended ended
31 March 31 March
---------- ----------
1997 1998
---------- ----------
<S> <C> <C>
Net income as adjusted to accord with US GAAP breaks down as follows: (L. million)
Income before extraordinary items
Continuing operations 101 9
---------- ----------
Discontinued operations 56 156
Less: applicable income taxes (21) (47)
---------- ----------
35 109
---------- ----------
Extraordinary item
Windfall tax -- (112)
---------- ----------
Net income adjusted to accord with US GAAP 136 6
---------- ----------
Per ordinary share:
Basic (pence/ordinary share)
Income before extraordinary items
Continuing operations 19.5 1.7
Discontinued operations 6.7 21.1
---------- ----------
26.2 22.8
Extraordinary item -- (21.6)
---------- ----------
Net income 26.2 1.2
---------- ----------
Number of shares used in calculating basic per ordinary share amounts (millions) 519 517
---------- ----------
Diluted (pence/ordinary share)
Income before extraordinary items
Continuing operations 19.2 1.7
Discontinued operations 6.7 20.9
---------- ----------
25.9 22.6
Extraordinary item -- (21.5)
---------- ----------
Net income 25.9 1.1
---------- ----------
Number of shares used in calculating diluted per ordinary share amounts (millions) 525 522
---------- ----------
</TABLE>
A reconciliation between the number of shares used in calculating basic and
diluted per ordinary share amounts is shown in note 11.
The interest expense prior to the Demerger was affected significantly by the
financing arrangements of Hanson. Accordingly the allocation of interest expense
between continuing and discontinued operations for periods ending on or before
30 September 1996 is not considered meaningful. Consequently the analyses of
earnings and earnings per share into continuing and discontinued operations are
only presented here for the six months ended 31 March 1997 and the year ended 31
March 1998.
F-35
<PAGE> 38
33. Differences between UK GAAP and US GAAP (continued)
Shareholders' equity
<TABLE>
<CAPTION>
As at As at
31 March 31 March
-------- --------
1997 1998
-------- --------
(L. million)
<S> <C> <C>
Shareholders' equity as reported in the consolidated balance sheets 1,845 1,906
Significant adjustments:
Goodwill - cost 1,147 1,205
- amortization (78) (127)
Subordinated income note 60 52
Restructuring and reorganization provision 20 --
Pensions 132 162
Fixed asset investments - own shares (11) (20)
Output-linked lease payments (41) (104)
Customer acquisition costs -- (30)
Dividend 29 --
Deferred taxation:
Effect of the above adjustments (50) (59)
Effect of differences in methodology (381) (413)
-------- --------
Shareholders' equity as adjusted to accord with US GAAP 2,672 2,572
-------- --------
</TABLE>
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 statements
for the year ended 31 March 1998 and for the six months ended 31 March 1997 set
out on page F-4 have 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 Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Cash flows from operating activities 387 (30) 216 644
Cash outflows on investing activities (338) (2,348) (801) (585)
Cash flows from financing activities (77) 2,418 938 (192)
---------- ---------- ---------- ----------
Decrease/(increase) in cash and cash equivalents (28) 40 353 (133)
Effect of foreign exchange rate changes -- -- (8) 1
Cash and cash equivalents as at start of period 28 -- 40 385
---------- ---------- ---------- ----------
Cash and cash equivalents as at end of period -- 40 385 253
---------- ---------- ---------- ----------
</TABLE>
F-36
<PAGE> 39
33. Differences between UK GAAP and US GAAP (continued)
Operating profit
Operating profit under US GAAP is derived as follows:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Operating profit under UK GAAP 135 490 297 560
Profit on disposal of First Hydro -- 25 -- --
Goodwill amortization -- (55) (23) (49)
Restructuring and reorganisation provision 29 (29) 20 (20)
Pensions -- 5 5 7
Output-linked lease payments -- -- (41) (63)
Customer acquisition costs -- -- -- (30)
Impairment of long-lived assets (3) (578) -- --
---------- ---------- ---------- ----------
Operating profit/(loss) under US GAAP 161 (142) 258 405
---------- ---------- ---------- ----------
Comprising:
Power -- 83 88 117
Networks -- 216 127 192
Other (2) (16) (23) (80)
---------- ---------- ---------- ----------
(2) 283 192 229
Discontinued 163 (425) 66 176
---------- ---------- ---------- ----------
161 (142) 258 405
---------- ---------- ---------- ----------
</TABLE>
Additional information about profits before taxation required by US GAAP
Profit before taxation:
<TABLE>
<CAPTION>
Six months Year
ended ended
31 March 31 March
---------- ----------
1997 1998
---------- ----------
(L. million)
<S> <C> <C>
United Kingdom 194 261
Other 66 165
---------- ----------
260 426
---------- ----------
</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 represented here for the year ended 31 March 1998 and
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.
Eastern 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. From 1998 such CfDs represent an annual commitment of
approximately five terawatt hours ("TWh"), falling on a linear basis to
approximately two TWh by 2005 and finally expiring in 2010. There are no similar
long-term commitments under EFAs.
F-37
<PAGE> 40
33. 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 to these contracts.
Approximately 38 per cent by volume of all of the Group's CfDs and EFAs in the
year ended 31 March 1998 were contracted with National Power plc and PowerGen
plc (six months ended 31 March 1997: 60 per cent).
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. See Note 19.
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 31 March 1997 As at 31 March 1998
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
(L. million)
<S> <C> <C> <C> <C>
Assets
Fixed asset investments 72 72 103 103
Current asset investments 10 10 8 8
Short-term deposits 753 753 1,004 1,004
Cash 385 385 253 253
Liabilities
Bank overdrafts, short term loans and commercial paper 793 793 302 302
Long-term debt 1,506 1,502 2,018 2,171
Gas swaps 3 3 21 21
Off balance sheet instruments
Interest rate swaps -- 5 -- 11
</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-38
<PAGE> 41
33. 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
recognized under US GAAP are as follows:
<TABLE>
<CAPTION>
As at As at
31 March 31 March
---------- ----------
1997 1998
---------- ----------
(L. million)
<S> <C> <C>
Deferred taxation liabilities
Excess of book value over taxation value of fixed assets 866 789
Other temporary differences 33 222
---------- ----------
899 1,011
---------- ----------
Deferred taxation assets
Taxation effect of losses carried forward (7) (63)
Other temporary differences (389) (355)
---------- ----------
(396) (418)
Less: valuation adjustment 108 53
---------- ----------
(288) (365)
---------- ----------
Net deferred tax liability 611 646
---------- ----------
Of which:
Current (25) 4
Non-current 636 642
---------- ----------
611 646
---------- ----------
</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 Year
ended ended
Year ended 30 September 31 March 31 March
----------------------- ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
% % % %
<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 4.3 4.3 3.8 3.8
Discount rate 7.5 7.5 7.5 7.5
UK plans:
Expected long-term rate of return on assets 9.0 9.0 8.5 7.0
Rate of salary increases 6.5 6.5 5.0 4.0
Discount rate 9.0 9.0 8.0 7.0
Pension increases 5.0 5.0 4.0 3.0
</TABLE>
F-39
<PAGE> 42
33. Differences between UK GAAP and US GAAP (continued)
The net periodic pension cost, calculated in accordance with US GAAP, included
the following components:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the period 7 23 8 15
Interest cost on projected benefit obligations 18 74 38 73
Actual return on plan assets (18) (86) (48) (313)
Net amortization and deferral -- (1) 1 223
---------- ---------- ---------- ----------
Net periodic cost 7 10 (1) (2)
Less employees' contributions -- (6) -- --
---------- ---------- ---------- ----------
Group's pension cost 7 4 (1) (2)
Additional cost on curtailment under SFAS 88 -- 10 -- --
Defined contribution plans 3 3 1 3
Multi-employer plans 3 3 1 3
---------- ---------- ---------- ----------
Total expense under US GAAP 13 20 1 4
---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the funded status and amounts recognized in the
combined balance sheet at 31 March 1998 and 1997 for the Group's defined benefit
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 L.119 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 31 March 1997 As at 31 March 1998
---------------------------- ------------- -------------
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 647 236 992 8
Non-vested benefit obligation -- 16 10 --
------------ ------------ ------------ ------------
Accumulated benefit obligation 647 252 1,002 8
------------ ------------ ------------ ------------
Projected benefit obligation 697 274 1,084 10
Plan assets at fair value 844 251 1,355 2
------------ ------------ ------------ ------------
Plan assets in excess of/(less than) projected benefit obligation 147 (23) 271 (8)
Unrecognized prior service costs -- 5 13 1
Unrecognized net gain/(loss) 1 13 (119) 3
Adjustment required to recognize minimum liability -- (6) (3) (2)
------------ ------------ ------------ ------------
Prepaid/(accrued) pension cost recognized in the balance sheet 148 (11) 162 (6)
------------ ------------ ------------ ------------
Prepaid/(accrued) pension cost recognized under UK GAAP 5 (11) -- (6)
US GAAP adjustment 143 -- 162 --
------------ ------------ ------------ ------------
Prepaid/(accrued) pension cost recognized under US GAAP 148 (11) 162 (6)
------------ ------------ ------------ ------------
</TABLE>
F-40
<PAGE> 43
33. 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 ended
Year ended 30 September 31 March 31 March
---------------------------------- --------------- ---------------
1995 1996 1997 1998
--------------- --------------- --------------- ---------------
(per cent)
<S> <C> <C> <C> <C>
Healthcare cost trend rate:
Age under 65 9.4 down to 5.0 8.6 down to 5.0 8.0 down to 5.0 7.6 down to 5.0
over 8 years over 7 years over 6 years over 5 years
Age over 65 7.4 down to 5.0 7.0 down to 5.0 6.7 down to 5.0 6.5 down to 5.0
over 8 years over 7 years over 6 years over 5 years
Medicare 6.7 down to 5.0 6.3 down to 5.0 6.0 down to 5.0 5.9 down to 5.0
over 8 years over 7 years over 6 years over 5 years
Discount rate 7.5 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 post-retirement
benefit obligation as of 31 March 1998 by L.74.0 million (1997: L.73.0 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 year ended 31
March 1998 would be an increase of L.7.0 million (six months ended 31 March
1997: L.3.5 million).
The post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Service cost 7 8 2 4
Interest cost 40 40 21 42
Net amortization and deferral (6) (13) (6) (6)
---------- ---------- ---------- ----------
Group's post-retirement benefit cost 41 35 17 40
---------- ---------- ---------- ----------
</TABLE>
The provisions for post-retirement healthcare and life insurance benefits
included in Note 20 are derived as follows:
<TABLE>
<CAPTION>
Six months Year
ended ended
Year ended 30 September 31 March 31 March
------------------------ ---------- ----------
1995 1996 1997 1998
---------- ---------- ---------- ----------
(L. million)
<S> <C> <C> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees 312 330 343 338
Fully eligible plan participants 65 63 168 178
Other active plan participants 180 185 65 66
---------- ---------- ---------- ----------
557 578 576 582
Unrecognized net loss (19) (30) (39) (42)
Unrecognized prior service cost 23 25 16 10
---------- ---------- ---------- ----------
Accrued post-retirement benefit cost recognized in the balance sheet 561 573 553 550
---------- ---------- ---------- ----------
</TABLE>
F-41
<PAGE> 44
33. Differences between UK GAAP and US GAAP (continued)
Additional information about impairment of long-lived assets required by US GAAP
SFAS 121 requires impairment losses to be recognized 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 L.578 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 1998.
Impact of new accounting standards
The Financial Accounting Standards Board ("FASB") has issued four new SFASs.
Three of these require new disclosures in financial statements for fiscal years
beginning after 15 December 1997, but none of which will impact the Group's net
income or shareholders' funds as reported under US GAAP.
SFAS 130, "Reporting Comprehensive Income", establishes standards for reporting
and display of comprehensive income and its components. It requires that all
items that are required to be recognized under US GAAP as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. For the Group, such a
statement will present substantially the same information as that in the
consolidated statement of total recognized gains and losses presented under UK
GAAP except that the amounts reflected therein will be those measured under US
GAAP.
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information",
which supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise", establishes standards for the way public business enterprises
report services, geographic areas and major customers in annual financial
statements. Other than in the initial year of application, SFAS 131 also
requires public business enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. The
Group does not expect the adoption of this standard to have any impact on its
segmental disclosures under US GAAP.
SFAS 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits" revises employers' disclosures about pension and other post-retirement
plans. Following the sale of Peabody on 19 May 1998, the Group has no
post-retirement obligations other than those relating to pensions. The principal
effect on the Group of SFAS 132 is that it replaces the existing requirement
under US GAAP for disclosure of the funded status of its defined benefit pension
plan with the requirement to disclose reconciliations of the beginning and
ending balances of the projected benefit obligation and the fair value of the
plan's assets and a statement of the funded status of the plan at the period
end.
F-42
<PAGE> 45
33. Differences between UK GAAP and US GAAP (continued)
The fourth standard issued by FASB is SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after 15 June 1999. This standard requires all derivatives to be
recognized as either assets or liabilities on the balance sheet at their fair
values. It also prescribes the accounting to be followed for the changes in the
fair values of derivatives depending upon their intended use and resulting
designation. It supersedes or amends the existing standards which deal with
hedge accounting and derivatives. The Company has not yet evaluated the effect
adopting this standard will have on the US GAAP amounts reported in its
financial statements.
New UK accounting standards applicable to the Group
In December 1997 the Accounting Standards Board in the United Kingdom (the ASB)
issued Financial Reporting Standard No. 9 "Associates and Joint Ventures" (FRS
9). FRS 9 sets out the definitions and accounting treatments for associated
undertakings, joint ventures and joint arrangements. It requires the Group's
share of results of associated undertakings to be analyzed between operating
income, interest, exceptional items and taxation. Previously the Group's share
of associated undertakings' income before tax was included in the consolidated
statements of income on a single line. FRS 9 requires the turnover and the
Group's share of assets and liabilities of joint ventures to be separately
disclosed, though the underlying accounting is the same as for associated
undertakings. FRS 9 is effective for accounting periods ending on or after 23
June 1998. The Group will comply with FRS 9 for its next accounting period and
prior year figures will be restated at that stage. Following the disposal of the
Peabody companies, the Group does not have any material interests in either
associated undertakings or joint ventures.
In December 1997 the ASB issued Financial Reporting Standard No. 10 "Goodwill
and Intangible Assets" (FRS 10). FRS 10 requires that purchased goodwill and
intangible assets should be capitalised as assets and amortised over the life of
the assets. Goodwill and intangible assets need not be amortised if it can be
demonstrated that the current market value of the goodwill or intangible asset
is not below its carrying value. FRS 10 is effective for accounting periods
ending on or after 23 December 1998. The Group will comply with FRS 10 for its
next accounting period. The standard does not require reinstatement of goodwill
previously set off against reserves and it is not anticipated the Group will
reinstate such goodwill.
In July 1998 the ASB issued Financial Reporting Standard No. 11 "Impairment of
Fixed Assets and Goodwill" (FRS 11). FRS 11 provides guidance on measurement of
the recoverable amount of assets, where any impairment loss should be recorded
and the related disclosures. FRS 11 is effective for accounting periods ending
on or after 23 December 1998. The Group will comply with the standard for its
next accounting period.
Accounting and disclosure of stock based compensation
FASB SFAS 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 pro forma 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 pro forma disclosures have been omitted, as
the effects on net income and earnings per share are not material.
Additional information required by US GAAP as at 31 March 1998 is shown below:
<TABLE>
<CAPTION>
Remaining Assumed Assumed Fair
contractual expected risk-free value of
life life rate option
----------- -------- --------- --------
(years) (years) (%) (p)
<S> <C> <C> <C> <C>
Executive share options 5.5 2 5.31 73.0
Sharesave scheme 2.3 2 5.31 109.8
Sharesave scheme 4.3 4 5.56 133.3
</TABLE>
The fair values of options granted have been estimated using the Black-Scholes
option-pricing model, assuming a dividend yield of 5.48%, an expected volatility
of 27.3% and the risk-free rates and expected lives shown above.
The above calculations have not been adjusted to take any account of the change
in the remaining contractual life which resulted from the acquisition of the
Company by the Texas Utilities group which took effect after the end of that
period (see Note 32).
F-43
<PAGE> 46
34. Subsequent events
On 19 May 1998 the Group sold its investments in Peabody Holding Company, Inc.,
Gold Fields Mining Corporation, Citizens Power LLC and the holding companies of
the Group's Australian interests to P&L Coal Holdings Corporation, an affiliate
of Lehman Merchant Banking Partners II, LLP, for approximately $2.3 billion plus
the assumption of debt.
Immediately following completion of those sales, Texas Utilities declared its
offer for the shares of the Company wholly unconditional.
On 26 June 1998 Texas Utilities instigated and on 7 August 1998 it completed the
procedure to acquire compulsorily the remaining issued shares in the Company
which it did not already own, pursuant to section 429 of the Companies Act 1985.
On 12 August 1998 the Company was re-registered as a private company with the
name The Energy Group Limited.
Unaudited subsequent events disclosures
Following the sale of its former US and Australian coal and energy trading
interests on May 19, 1998, the Company continued to be the guarantor of certain
obligations of former subsidiaries whose results are now treated as
discontinued operations. Some of those guarantees have subsequently been
released, but the Company continues to guarantee certain obligations relating
to former subsidiaries of the Company (the Guarantees).
With effect from the close of business on October 22, 1998, an indirect
wholly-owned subsidiary of the Company sold its shareholdings in each of Eastern
Group plc, Energy Holdings (No. 2) Limited and Energy Group Holdings B.V. to
Suptrade Limited, another wholly-owned subsidiary of TU Acquisitions PLC, for a
total price of L.2,635 million. As a consequence of this restructuring, the
Company and certain other affiliated UK subsidiaries of Texas Utilities may be
required to make certain adjustments to the Guarantees, which the Directors of
the Company do not currently expect to have a material adverse impact on the
Company.
The Company changed its name to Energy Holdings (No. 3) Limited and Suptrade
Limited changed its name to The Energy Group Limited on October 27, 1998.
F-44
<PAGE> 47
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Item 7(c). Exhibits
12 - Computation of Ratio of Earnings to Fixed Charges.
23 - Consent of Ernst & Young.
2
<PAGE> 48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS UTILITIES COMPANY
By: /s/ Jerry W. Pinkerton
-----------------------------------
Name: Jerry W. Pinkerton
Title: Controller
Date: December 10, 1998
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
12 - Computation of Ratio of Earnings to Fixed Charges.
23 - Consent of Ernst & Young.
</TABLE>
<PAGE> 1
EXHIBIT 12
TEXAS UTILITIES COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
THOUSAND OF DOLLARS, EXCEPT RATIOS
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net income (loss) $ 660,454 $ 753,606 $ (138,645) $ 542,799 $ 368,660
Add: Total federal income taxes (benefit) 376,898 375,232 (60,035) 326,638 209,544
Fixed charges (see detail below) 854,822 851,482 732,313 752,892 782,439
Preferred dividends of subsidiaries 27,983 53,358 84,914 101,883 115,232
---------- ---------- ---------- ---------- ----------
Total earnings $1,920,157 $2,033,678 $ 618,547 $1,724,212 $1,475,875
========== ========== ========== ========== ==========
FIXED CHARGES:
Interest expense $ 762,937 $ 797,893 $ 706,183 $ 726,875 $ 752,802
Rentals representative of the interest factor 22,184 20,588 24,329 26,017 29,637
Distributions on preferred trust securities
of subsidiaries (a) 69,701 33,001 1,801 -- --
---------- ---------- ---------- ---------- ----------
Fixed charges deducted from earnings 854,822 851,482 732,313 752,892 782,439
Preferred dividends of subsidiaries (pretax) (b) 43,952 79,926 121,683 163,193 180,729
---------- ---------- ---------- ---------- ----------
Total fixed charges $ 898,774 $ 931,408 $ 853,996 $ 916,085 $ 963,168
========== ========== ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 2.14 2.18 0.72(c) 1.88 1.53
========== ========== ========== ========== ==========
</TABLE>
(a) Distributions on preferred trust securities are deductible for tax purposes.
(b) Preferred dividend requirements of subsidiaries multiplied by the ratio of
pre-tax income to net income.
(c) For the year ended December 31, 1995, fixed charges exceeded earnings by
$235 million.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
(Form S-3 No. 33-55931, 333-27989, 333-32831 and 333-56055 and Form S-8 No.
333-32833, 333-32835, 333-32837, 333-32839, 333-32841, 333-32843, 333-45657 and
333-46671) of Texas Utilities Company of our report dated August 12, 1998,
appearing in the Current Report (Form 8-K) of Texas Utilities Company dated
December 10, 1998, filed with the Securities and Exchange Commission.
ERNST & YOUNG
London, England
December 10, 1998
