================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2 TO FORM 8-K)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) -- MAY 19, 1998
TEXAS UTILITIES COMPANY
(Exact name of registrant as specified in its charter)
TEXAS 1-12833 75-2669310
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
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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FORWARD-LOOKING STATEMENTS
This report and other presentations made by Texas Utilities
Company (Texas Utilities) and its direct or indirect subsidiaries
(together the Texas Utilities System)
contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended.
Although Texas Utilities and such subsidiaries believe that in
making any such statement their
expectations are based on reasonable assumptions, any such
statement involves uncertainties and is qualified in its entirety
by reference to the factors contained in the Forward-Looking
Statements section of Item 7 Management's Discussion and Analysis
of Financial Condition and Results of Operations of Texas
Utilities' most recent Annual Report on Form 10-K and to
following factors, any of which could cause the actual results of
Texas Utilities and such subsidiaries to differ materially from
those projected in such forward-looking statements: the
competitive environment; local, state and national regulatory
initiatives that increase competition, threaten cost and
investment recovery and impact rate structures; the economic
climate and growth in the service territories of service
providers within the Texas Utilities System; the weather and other
natural phenomena; conditions in capital markets and changes in
technology used and services offered by service providers within
the Texas Utilities System.
ITEM 2.Acquisitions or Disposition of Assets
The offer (Offer) by TU Acquisitions PLC (TU Acquisitions), a
wholly owned indirect subsidiary of Texas Utilities Company
(Texas Utilities), for all of the ordinary shares, including
ordinary shares evidenced by American Depositary Receipts (ADRs),
of The Energy Group PLC (TEG) was declared unconditional on May
19, 1998. As of July 14, 1998, TU Acquisitions owns, has rights
over or has received valid acceptances in respect of
approximately 96.5% of TEG's issued ordinary share capital. The
Offer has been extended so that TU Acquisitions may exercise its
right under United Kingdom (UK) law to compulsorily acquire the
remaining share capital of TEG.
The consideration for the TEG shares will be either 840 pence in
cash or 0.355 shares of Texas Utilities common stock per TEG
share, as elected by the holders of the TEG shares and ADRs (or
loan notes in the UK). TU Acquisitions and Texas Utilities will
use cash borrowed from a group of banks, arranged by affiliates
of The Chase Manhattan Bank, Lehman Brothers Inc., and Merrill
Lynch & Co., commercial paper issuances, shares of Texas
Utilities common stock and loan notes to pay for the shares and
ADRs acquired by TU Acquisitions.
Texas Utilities intends to build on Eastern's position in the UK
to exploit the potential created by privatization and
deregulation of global energy markets.
THE ENERGY GROUP PLC AND SUBSIDIARIES
TEG, a public limited company incorporated in England and
Wales in 1996, owns and operates a diversified international
energy business. Substantially all of TEG's operations are
conducted through its subsidiary Eastern Group plc (Eastern), one
of the largest integrated electricity and gas groups in the UK.
TEG and its subsidiaries are referred to herein as the "Group".
The principal office of TEG is located at 117 Piccadilly, London
W1V 9FJ, and its telephone number is (44) 171 647 3200. The
principal office of Eastern is located at Wherstead Park,
Ipswich, Suffolk IP9 2AQ, and its telephone number is (44) 1473
688 688.
TEG's major business operations are conducted through the
following subsidiaries of Eastern:
. Eastern Electricity plc (Eastern Electricity), the largest
supplier and distributor of electricity in England and
Wales, with over three million customers and an authorized
area covering approximately 20,300 square kilometers in the
east of England and parts of north London;
. Eastern Generation Limited (Eastern Generation), the fourth
largest generator of electricity in Great Britain, currently
owns, operates or has an interest in eight power stations,
representing approximately 9.3% of the total registered
generating capacity in the UK of 73,159 MW as of March 31,
1998;
. Eastern Natural Gas Limited (Eastern Natural Gas), one of
the largest suppliers of natural gas in the UK after
Centrica plc; and
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. Eastern Power and Energy Trading Limited (EPETL), which
manages for Eastern the price and volume risks associated
with electricity generation and the supply of fuels required
for electricity generation and with the wholesaling and
retailing of electricity and natural gas. These exposures
are managed by trading its contract portfolio and by bidding
Eastern Generation's output into the electricity trading
market in England and Wales (Pool), the rules and procedures
of which are contained in a Pooling and Settlement
Agreement. EPETL also has small equity interests in three
natural gas producing fields in the North Sea.
Eastern also has interests in other parts of Europe,
including Scandinavia, the Czech Republic, Holland, Poland and
Spain.
DESCRIPTION OF BUSINESSES
The Group's energy business (through Eastern) comprises
three core activities: the generation of electricity, the sale of
electricity and the sale of natural gas. This combination of
integrated activities within the electricity and gas industries
provides Eastern with opportunities to benefit throughout the
electricity and gas supply chains, from fuel sourcing to customer
sales. The overall financial efficiency of these activities is
co-ordinated and optimized by EPETL.
Strategy for the Energy Businesses
The Group's strategy for its energy businesses (Generation,
Retail and Trading) is to continue to increase market share in
both the gas and electricity markets in the UK by strengthening its
existing positions in the energy supply chain. The Group's strategy
involves further developing its balanced and flexible mix of
physical assets, either by outright ownership or through
contractual arrangements and continuing expansion of the Group's
retail customer base. The Group also aims to apply its
integrated energy business concept across Europe so as to develop
an integrated pan-European energy portfolio. This involves,
inter alia, establishing positions through physical assets,
trading, distribution and retail customer bases which will enable
it to take advantage of price, weather, load curve or other
differentials between connected European markets and to operate
profitably within those markets.
GENERATION
Eastern Generation is the fourth largest generator of
electricity in Great Britain with a share of approximately 9.3%
of the total registered generating capacity in the UK. It
currently owns, operates pursuant to leases or has an interest
in eight power stations in Great Britain. It also has a controlling
interest in Nedalo (UK) Limited (Nedalo), the largest supplier of
small (up to one MW (electrical)) combined heat and power (CHP)
plants in the UK, and has a controlling interest in Teplarny Brno
a.s. (Teplarny Brno), a heating and generation company in the Czech
Republic.
Further information on Eastern's interests in power
stations in Great Britain is set out in the following table and
summarized further below:
Date of
earliest
Plant Type Capacity(1) commissioning
----- ---- -------- -------------
MW
West Burton Coal-fired 2,012 1967
Rugeley B Coal-fired 1,046 1972
Drakelow C Coal-fired 976 1965
Ironbridge Coal-fired 970 1970
High Marnham Coal-fired 945 1959
Peterborough(1) CCGT 360 1993
King's Lynn(1) CCGT 340 1997
Barking(2) CCGT 135 1995
-----
Total 6,784
=====
(1) In all cases registered generating capacity is equal to
installed generating capacity except for Peterborough and
King's Lynn, which have registered generating capacities
of 405MW and 380MW, respectively, but installed generating
capacities of 360MW and 340MW, respectively.
(2) Registered generating capacity is 1,000MW. Eastern holds an
interest of approximately 13.5%.
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Eastern's current portfolio of power stations, a mix of
combined cycle gas turbine (CCGT) and coal-fired stations,
represents both base load (running throughout most of the year)
and mid-merit (running in high demand periods) plants. The
addition of coal-fired plants to Eastern's portfolio of power
stations has provided considerably greater flexibility in
managing the price and volume risks of its sales portfolios and
has enabled Eastern to diversify its fuel supply risk. EPETL is
responsible for setting the level of bids into the Pool for the
output of each of its generating stations (other than Barking) so
as to optimize the operation of its generating stations with its
fuel contract position, and its retail and wholesale electricity
and gas sales portfolios. For further information, see "Energy
Trading" below.
West Burton, Rugeley B and Ironbridge
In June 1996, Eastern assumed operational and commercial
control, through a combination of operating lease and outright
sale, from National Power plc (National Power), of all of the
assets and liabilities of the West Burton, Rugeley B and
Ironbridge power stations (with the exception of trade and
certain other debts and liabilities outstanding at the date of
completion). All existing staff at these stations were
transferred to Eastern, which holds a 99 year lease over the
land, buildings and plant at each of such power stations, and has
the right to purchase the freehold land for a nominal sum after
50 years. Under the leases, Eastern was committed to aggregate
fixed payments totaling L737.5 million, of which L337.5 million
was paid at commencement of the leases. The balance, together
with interest, was payable over a seven year period, but Eastern
has agreed to accelerate rental payments to discharge this
liability in 1996. Further payments of approximately L6 per MWh
(indexed to inflation) linked to output levels from these
stations are also payable to National Power for the first seven
years of operation.
Drakelow C and High Marnham
Eastern has leased, for a period of 99 years, the land,
buildings and plant at the Drakelow C and High Marnham power
stations from PowerGen plc (PowerGen) pursuant to agreements
entered into in July 1996. PowerGen is responsible for
decommissioning costs should Eastern decide to close these
stations during the term of the leases. Eastern is committed to
fixed payments totaling L230 million (subject to minor
adjustments if aggregate capacity falls below a certain
threshold) payable in installments (together with interest) over
eight years from 1996. As with the National Power leases, further
output-related payments of approximately L6 per MWh (indexed to
inflation) are payable to PowerGen for the first five years of
operation.
Peterborough
The power station at Peterborough was developed and
constructed as a joint venture between Eastern and Hawker
Siddeley Power (Peterborough) Limited (Hawker Siddeley) between
1990 and 1993. Eastern acquired Hawker Siddeley's interest in
September 1994. EPETL has secured contracts with natural gas
suppliers to meet the station's natural gas requirements.
The Peterborough plant is operated and maintained on behalf of
Eastern by a third party contractor under a seven year contract
which commenced in 1993.
King's Lynn
A new 340MW CCGT power station at King's Lynn was
constructed for Eastern under a turnkey contract. The station
commenced commercial generation in December 1997 and is operated
and maintained by Eastern. EPETL has secured and will continue
to secure contracts with natural gas suppliers to meet the
station's natural gas needs.
Barking
Eastern has an interest of approximately 13.5% in a 1,000MW
CCGT power station at Barking which was constructed as a joint
venture between Eastern and a number of other companies and which
became operational in 1995.
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Nedalo
Eastern owns 75% of Nedalo, which provides small scale CHP
equipment of up to one MW (electrical) as a single unit. Nedalo
is estimated to have a share of approximately 80% of the UK
market for this equipment.
Non-UK Generation Facilities
Czech Republic
Eastern has invested L22.5 million for its interest of 83%
in Teplarny Brno, a heating and generation company based in Brno,
the second largest city in the Czech Republic. Teplarny Brno
owns coal and gas plants which are capable of generating 1,204MW
of energy in the form of steam and hot water which is sold
principally to industrial and domestic (residential) customers.
It also owns a 169 kilometer pipe network for distributing heat
to customers' premises. Teplarny Brno also has an electricity
generation capacity of approximately 97MW, the output of which is
sold to the regional electricity company. A CCGT plant is
currently under construction for Teplarny Brno under a turnkey
contract to provide 140MW of additional heat capacity, and to
allow 94MW of additional electricity generating capacity. In
addition, as described under "Networks" below, Eastern has
acquired a minority interest in a Czech electricity distribution
and supply company.
Poland
Eastern has acquired 49% of Zamosc Energy Company which is a
joint venture with the Polish regional electricity distribution
company, Zaklod Energetyczny Zamosc SA, and holds the right to
develop three 70MW electric co-generation plants in Chelm, Zamosc
and Przemysl in southwest Poland which are expected to cost
approximately US$100 million each to build. Development of these
projects is continuing. Eastern is considering a number of other
generation projects and has submitted a tender to provide
electricity at times of peak demand to the high voltage
electricity transmission network in Poland.
Other Projects
The UK Government has recently imposed a moratorium on
granting approvals for new gas-fired power stations. This
moratorium has delayed the implementation of certain projects
which were being considered by Eastern. However, Eastern
continues to consider other new generation projects. For further
discussion, see "Industry Background -- The Electricity Industry
in Great Britain."
In May 1998 Eastern announced the acquisition of a 1MW wind
turbine in Northern Ireland. Other opportunities for renewable
energy projects and large and small scale CHP plants are actively
being considered together with other conventional generating
projects. These include a project to develop a 380 MW reduced
emission coal fired (cleaner coal) power station in South Wales
in a joint venture with Dowlais Limited.
Competition in the Generation Business
Eastern was the fourth largest generator in Great Britain as
of March 31, 1998, with a share of approximately 9.3% of total
registered generating capacity. This compares to shares of
approximately 22%, 20% and 10% for National Power, PowerGen and
British Energy, respectively. Eastern's mix of generating plants
enables it to operate in the mid-merit and base load sectors of
the market and to spread its fuel risk. Its future
competitiveness in the generating market will be affected by the
outcome of the current review of energy sources by the UK
Government and the regulatory review of electricity trading
arrangements. For further discussion, see "Industry Backround
-- The Electric Industry in Great Britain."
ELECTRICITY SALES
The Electricity Sales business involves the sale of
electricity purchased from EPETL to customers. The supply
business is charged a regulated price by the distribution business
for the physical delivery of electricity supplied by Eastern via
Eastern's distribution network.
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The franchise market currently comprises customers whose
annual maximum demand is less than 100 kW per year and is mainly
households and small businesses. The competitive market currently
consists of customers with annual maximum demand of 100 kW
or more. Eastern supplies electricity to customers in both the
franchise market and the competitive market and is one of the
largest suppliers of electricity in England and Wales. For
further discussion, see "Industry Background -- The Electricity
Industry in Great Britain."
Franchise Market
Eastern Electricity currently supplies electricity to
approximately 3.1 million customers (including approximately 2.9
million domestic (residential) customers and 250,000 small
businesses). The domestic franchise market in Great Britain is
being progressively opened to competition and is expected to be
open to full competition in supply from September 1998. Eastern's
authorized area is one of the four areas in the first group
scheduled to be opened for competition.
Eastern Electricity's authorized area covers approximately
20,300 square kilometers in the east of England and parts of
north London.
Competitive Market
Eastern is an active participant in the competitive UK
electricity supply markets. According to MarketLine International
(a research company which produces annual market statistics on
the electricity industry), Eastern has an aggressive competitive
strategy for customer retention. The competitive market (as
currently constituted) comprises over 51,000 sites, which
Eastern's Directors estimate represents a market size of
approximately L6 billion per annum at current electricity prices.
Eastern's Directors estimate that, of these 51,000 sites, over
85% are outside Eastern's authorized area, and that over 61% of
Eastern's electricity sales to the competitive market are to
customers outside its authorized area. For further discussion,
see "Industry Background -- The Electricity in Great Britain."
Competition in the Electricity Sales Business
At present, a franchise market supply customer can only buy
electricity from the regional electricity company (REC)
authorized to supply the relevant franchise area. Franchise
market supply customers typically include residential and small
commercial customers. Competitive market supply customers are
not limited to buying electricity from the local REC and can
choose to buy from a second-tier supplier. Such customers are
typically larger commercial and industrial electricity users.
Second-tier suppliers compete with one another and with the local
REC to supply customers in this competitive market.
Eastern competes in the competitive market on the basis of
the quality of its customer service and by competitive pricing.
According to MarketLine International, Eastern's market share of
the competitive market for the twelve months ended March 31, 1997
was approximately 12% by sales volume, making it one of the
leading competitive market suppliers among holders of public
electricity supply licenses (PES Licenses). The largest suppliers
in the competitive market over the same period were PowerGen and
National Power.
Eastern is currently the largest franchise market supplier
in Great Britain, supplying electricity to over three million
customers in its authorized area. Competition for customers in
all areas of Great Britain is expected to be progressively phased
in from September 1998. The full consequences of such
deregulation are unpredictable, including the extent to which new
entrants who are not PES License holders will enter the supply
market, the impact of price competition, if any, and customers'
propensity to change suppliers. Eastern intends to continue to
compete nationally for residential and small business customers
following the introduction of such competition and by May 1998
had agreed contracts with 200,000 of such customers.
There can be no assurance that competition among suppliers
of electricity will not adversely affect Eastern.
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NATURAL GAS RETAILING
As a result of the liberalization of natural gas retailing
in the UK, the UK natural gas market is open to competition by
competing retailers. The Group, through Eastern Natural Gas and
its subsidiaries, is one of the largest suppliers of natural gas
in Great Britain after Centrica plc. Estimates as of March 31, 1998
put Eastern's market share by volume at approximately 12% of gas
delivered to the competitive industrial and commercial market.
Eastern Natural Gas is taking advantage of the competition
introduced into the industry by the British Government. At
March 31, 1998, it had agreed terms with approximately 250,000
customers in the UK ranging from households to large industrial
companies. Eastern's move into the domestic sector has included
supplying customers across the UK.
Eastern also recently announced a gas retailing joint venture
in Holland with Energie NoordWest.
Competition in the Natural Gas Retailing Business
The gas supply market is highly competitive, with Eastern's
main competitors being Centrica plc and the gas marketing arms of
certain major oil companies. Further competition is provided by a
number of other electricity companies and smaller gas suppliers
which are independent of the major oil companies and which each
have a minor presence in the market.
Eastern aims to maintain a significant share of this market
through high-quality customer service and competitive pricing,
and also utilizing the flexibility provided by EPETL's overall
portfolio of gas activities.
ENERGY TRADING BUSINESS
Typically, holders of PES Licenses issued pursuant to the
Electricity Act 1989 of Great Britain (Electricity Act) in
connection with the supply and distribution of electricity within
an authorized area in Great Britain, are exposed to risk, as they
are obliged to supply electricity to their customers at stable
prices, but have to purchase almost all the electricity necessary
to supply those customers from the Pool at prices which are
constantly changing. This potential risk is partially hedged
through the use of financial instruments such as Contracts for
Differences (CfDs). The ownership of generating assets provides
an additional hedge to this risk.
A CfD is an agreement between two parties calling for
payments between the parties in amounts equal to the product of
(a) the difference in each settlement period between the Pool
price and the price specified in the CfD (strike price) and (b)
the amount of electricity provided for in that settlement period
which is usually expressed in MW of demand. The settlement period
is half an hour. CfDs effectively fix the prices a supplier pays
and a generator receives for electricity and therefore reduce the
financial risk otherwise associated with the sale and purchase of
electricity through the Pool.
EPETL co-ordinates and optimizes the Group's activities in
managing risk and provides support to Eastern's electricity and
natural gas retail activities taking into account its electricity
and natural gas purchase and sales, wholesale and trading
contract portfolios (including Eastern's physical assets). It
ensures that the operation of Eastern's power stations is
optimized having regard to relative prices in gas and electricity
markets. EPETL also earns revenue by providing risk management
services to other retailers of electricity and gas aimed at
removing or reducing their Pool/market price risk.
EPETL seeks to manage Eastern's electricity financial
exposure by trading its portfolio of CfDs (a small number of
which are long-term), bidding Eastern's generation output into
the Pool, in terms of both price and volume, for each half hour
of the day, and by agreeing with the electricity sales division
the volume and pricing of sales in the competitive and franchise
markets. The overall position for each half hour of the day is
monitored by the energy trading business with the aim of
optimizing the electricity purchases and sales positions within
risk management limits set by the Directors of Eastern. The
resulting net position is subject to risk exposure limits that
are monitored independently within Eastern. Credit checks are
also undertaken on counterparties. Similar processes and
procedures apply to gas market activities, where Eastern has a
substantial and growing retail position as well as its gas-fired
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power stations and a number of long term and short term purchase
contract positions. Although to date Eastern has successfully
managed such risk through risk management operations and has
reduced its exposure to this risk by building and leasing
generation assets, Eastern's ability to manage such risk in the
future will depend, in part, on the terms of its supply
contracts, its ability to implement and manage an appropriate
hedging strategy, the continuation of an adequate market for
hedging instruments and the performance of its generating assets.
EPETL has entered into an agreement with ENRON Capital and
Trade Resources Limited (ENRON) in connection with ENRON's
proposed 790 MW power station at Sutton Bridge, Lincolnshire.
The agreement provides for EPETL to provide energy management
services, subject to certain conditions precedent being
satisfied. Also EPETL purchases gas from ENRON which may be used
or resold to ENRON. The resale volumes are related to an
associated electricity purchase agreement which is a part of
Eastern's electricity portfolio.
EPETL also purchases coal, oil and natural gas for the
Group's UK power stations and has small equity interests in three
natural gas-producing fields in the North Sea.
In order to help meet the expected needs of its natural gas
wholesale and retail customers (including the Group's power
stations), Eastern has entered into a variety of purchase
contracts. As of March 1998, the commitments under long-term
purchase contracts amounted to an estimated L3.0 billion covering
periods of up to 18 years from such date. Firm sales commitments
(including estimated power station usage) at the same date
amounted to L3.0 billion, covering periods up to 18 years from
such date.
The energy trading business also trades on the Nordpool, the
electricity trading market in Scandinavia, and has recently
negotiated access to 189 MW of hydro output in Norway. Trading
joint ventures in Holland and Spain with major utilities in those
countries are also under development.
NETWORKS
Electricity Distribution
The Group's Electricity Networks Business consists of the
ownership, management and operation of the electricity
distribution network within Eastern's authorized area. Eastern
receives electricity from the transmission system for electricity
over 132kV in England and Wales (National Grid) operated
by The National Grid Company, plc (National Grid Group) and
distributes electricity to end users connected to Eastern's power
lines.
Almost all electricity customers in Eastern's authorized
area, whether franchise or competitive, are connected to and
dependent upon Eastern's distribution system. Eastern distributes
approximately 32TWh of electricity annually to over three million
customers, representing about seven million people. The majority
of the Group's owned tangible fixed assets in the UK are
currently employed in the electricity distribution business. The
distribution by Eastern of electricity in its authorized area is
regulated by its PES License, which, save in exceptional
circumstances, is due to remain in effect until at least 2025.
Strategy for the Networks Business
The strategy for the Networks Business in the UK is to
maintain strong contribution and cash flow against a background
of tight regulation through effective cost control and continuing
efficiency improvements whilst sustaining high levels of service
performance. Eastern intends to implement this strategy through
rigorous planning of the network and ensuring appropriate
organization structure and business processes.
In support of the Group's European integrated energy
business strategy, the Networks Business aims to acquire networks
businesses and the related customer bases either through outright
purchase or through joint venture partnerships.
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Physical Distribution System
Eastern receives electricity from the National Grid at 21
supply points within its authorized area and three points in the
authorized areas of neighboring regional electricity companies
(RECs). The majority of this electricity is received at 132kV. It
is then distributed to customers through Eastern's system of
approximately 35,300 kilometers of overhead line, 53,900
kilometers of underground cable, and numerous transformers and
switchgear, via a series of interconnected networks operating at
successively lower voltages. Eastern also receives electricity
directly from power stations located in its authorized area and,
from time to time, from customers' own generating plants and
connections with neighboring RECs.
At March 31, 1998, Eastern's electricity distribution
network (excluding service connections to consumers) included
overhead lines and underground cables at the operating voltage
levels indicated in the table below:
UNDERGROUND
CABLES
OVERHEAD LINES (CIRCUIT
OPERATING VOLTAGE (CIRCUIT KILOMETERS) KILOMETERS)
----------------- -------------------- -----------
132kV . . . . . . . . . 2,341 220
33kV . . . . . . . . . 3,884 2,436
25kV . . . . . . . . . 0 23
11kV . . . . . . . . . 19,547 16,317
6.6kV . . . . . . . . . 0 29
3kV . . . . . . . . . . 0 21
LV . . . . . . . . . . 9,510 34,875
------ ------
Total . . . . . . . . . 35,282 53,921
In addition to the circuits referred to above, Eastern's
distribution facilities also include:
AGGREGATE CAPACITY
TRANSFORMERS NUMBER (MEGA VOLT AMPERES)
------------ ------ -------------------
132kV . . . . . . . . . 229 13,288
33kV . . . . . . . . . . 871 10,392
11kV . . . . . . . . . . 61,240 14,615
------ ------
Total . . . . . . . . . 62,340 38,295
Aggregate capacity
SUBSTATIONS NUMBER (mega volt amperes)
----------- ------ -------------------
132kV . . . . . . . . . 98 13,288
33kV . . . . . . . . . . 439 10,392
11kV . . . . . . . . . . 58,425 14,615
------ ------
Total . . . . . . . . . 58,962 38,295
Customers
Approximately 88% of the revenue from use of the
distribution system in the 12 months ended March 31, 1998 was
derived from Eastern's electricity sales operations. The
remaining 12% was derived from holders of Second Tier Supply
Licenses (as described under "Industry Background -- The
Electricity Industry in the UK") in respect of the delivery of
electricity to those of their customers located in Eastern's
authorized area.
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The following table sets out details of Eastern's
customers and electricity units distributed:
Year ended March 31,
-------------------
1996 1997 1998
---- ---- ----
NUMBERS OF CUSTOMERS
CONNECTED AT YEAR END .
-----------------------
Domestic . . . . . . . . 2,839,592 2,868,090 2,891,030
Commercial . . . . . . . 205,071 205,057 218,057
Industrial . . . . . . . 23,251 23,899 23,893
Other . . . . . . . . . . 22,713 22,111 21,699
--------- --------- ---------
Total . . . . . . . 3,090,627 3,122,157 3,155,679
========= ========= =========
ELECTRICITY DISTRIBUTED
(GWH)
------------------------
Domestic . . . . . . . . 13,061 13,333 12,977
Commercial . . . . . . . 8,836 9,013 9,273
Industrial . . . . . . . 7,850 7,740 8,012
Other . . . . . . . . . . 1,525 1,463 1,495
--------- --------- ---------
Total . . . . . . . 31,072 31,549 31,776
========= ========= =========
System Performance
The performance of the network is monitored and publicly
reported upon annually by the Office of Electricity Regulation
covering England, Wales and Scotland (OFFER). According to
OFFER's Report on Distribution and Transmission System
Performance 1996/97, in the year ended March 31, 1997, Eastern
achieved the best overall distribution system performance (number
of faults per 100 kilometers of network) of all the PES License
holders. For the year ended March 31, 1998, Eastern achieved a
25.6% reduction in customer minutes lost compared to the year
ended March 31, 1995 and a 17.5% reduction in customer
interruption compared to the year ended March 31, 1997.
Distribution Charges and Price Control
The distribution charges levied by Eastern and the other
RECs consist of use of system charges and charges for other
"excluded services" (i.e., services outside the scope of the
price control) including connection charges. Distribution and
supply charges are regulated by certain conditions in Eastern's
PES License, which sets out a formula for determining the maximum
charge per unit distributed in any financial year. A substantial
majority of the sales of Eastern's electricity network business
consists of charges for the use of its distribution system, most
of which are charged to its Electricity Supply business and are
passed through to its customers. Most of the charges for the use
of the distribution system are subject to distribution price
controls. See "Regulatory Matters" below.
Czech Republic
In October 1996, Eastern acquired an 11.6% minority interest
in Severomoravska Energetika a.s., a Czech electricity
distribution and supply company, as part of its plan to develop
interests in companies that would enable it to implement further
its integrated energy strategy overseas. This interest was
increased to 16% in March 1998. As described under "Generation",
Eastern also has an interest in Teplarny Brno, a heating and
generation company in the Czech Republic.
Competition in the Electricity Networks Business
At present, Eastern experiences little competition in the
operation of its electricity distribution system. However, in
certain limited circumstances, some customers may establish (or
increase) capacity for "own generation", by becoming directly
connected to the National Grid or establishing their own
generating capacity, thereby avoiding use of distribution system
charges. However, Eastern's Directors do not consider that this
poses a significant threat to its Networks business.
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TELECOMMUNICATIONS
The Group's telecommunications network comprises an
established radio telemetry network and a recently constructed
optical fiber cable network of approximately 1,100 kilometers
which principally covers Eastern Electricity's authorized area,
but also connects to certain other business centers, including
central London. Extensions in the Kent/Sussex area are currently
nearing completion and will increase the network to approximately
1,800 kilometers. Capacity is made available to large business
users, cable operators and public telephone operators. The Group
also holds a public telephone operations license and runs a radio
site renting operation with a number of major telecommunications
companies.
OTHER ACTIVITIES
Rollalong Limited, a subsidiary of TEG and a holding company
of Eastern, is engaged in the design, manufacture, sale and lease
of modular buildings.
EMPLOYEES
The average number of persons employed by Eastern during the
twelve months ended March 31, 1998 was approximately 7,130. At
March 31, 1998, TEG employed 7,006 persons in its continuing
businesses, including 31 at its head offices.
Eastern recognizes trade unions for collective bargaining
purposes and approximately 54% of employees of Eastern's
businesses are union members. Union membership was inherited
when Eastern was privatized. However, the new companies set up by
Eastern subsequent to privatization have no obligations to
recognize trade unions. Eastern Natural Gas and the energy
trading businesses do not recognize trade unions and most workers
in these businesses are employed under individual contracts.
There have been no industrial disputes or work stoppages at
Eastern since its privatization in 1990. Eastern had a two year
agreement relating to pay with employees in the electricity
supply and networks businesses which expired at the end of June
1998 and Eastern is in the process of negotiating new agreements.
REGULATORY MATTERS
The Group's operations are subject to extensive and changing
regulation in the UK. See "Industry Background."
REGULATORY MATTERS AFFECTING EASTERN
The electricity industry in Great Britain is subject to
regulation, inter alia, under the Electricity Act and certain UK
and European Union (EU) environmental legislation. The Group is
also subject to existing UK and EU legislation on competition and
regulation in its gas and telecommunications businesses. In
addition, an element of any profit received by Eastern on its
disposal of certain categories of the assets vested in it at the
time of its privatization is subject to clawback by the UK
Secretary of State for Trade and Industry until March 31, 2000.
The Group possesses all of the necessary franchises, licenses and
certificates required to enable it to conduct its businesses.
In March 1998, the UK Secretary of State for Trade and
Industry published a Green Paper on utility regulation (including
price controls) covering gas, electricity, water and
telecommunications. Consultation is taking place on the proposals
which may result in significant changes to the existing
regulatory regime. Similarly, the UK government is considering
controls over the future development of gas fired power stations
and the Director General of Electricity Supply in Great Britain
(DGES) is reviewing the operations of the Pool with a view to
promoting alternative trading arrangements. There can be no
assurance regarding the potential impact of regulatory changes,
if any, on Eastern.
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POWER LICENSES
Generation
Unless covered by an exemption, all electricity generators
operating a power station in Great Britain are required to have a
generation license. The conditions attached to such a license in
England and Wales require the holder, among other things, to be a
member of the Pool and to submit relevant generating sets for
central dispatch. Failure to comply with any of the generation
license conditions may subject the licensee to a variety of
sanctions, including enforcement orders by the DGES, or
ultimately license revocation if an enforcement order is not
complied with.
The Secretary of State has power under the Electricity Act
to require generators operating power stations with a capacity of
not less than 50MW to maintain stocks of fuel and other materials
at power stations. The Secretary of State has recently completed
a review of the level of fuel stocks held by generators. No
increase was required but Pool rules were changed as of December
1997 to penalize gas power plants reducing output during times of
insufficient plant margins. The Group does not anticipate that
these changes will have a material adverse effect on its results
of operations.
In England and Wales, each PES License limits the extent of
the generation capacity in which the relevant REC may hold an
interest without the prior consent of the DGES (own-generation
limits). These own-generation limits currently restrict the
participation by a REC in generation to a level of approximately
15% of the simultaneous maximum electricity demand in that REC's
authorized area at privatization, setting Eastern's limit at
1,000MW. Following a process of consultation on the own-
generation limits, the DGES stated in January 1995 that he would
be prepared to consider a REC's request to increase its
generation capacity on condition that it accepted explicit
restrictions on the contracts it signed with its supply business,
and that at a minimum it would be prohibited from passing
additional own-generation output into its franchise market. In
August 1995, he published model draft license modifications which
he indicated that he would consider proposing in connection with
a relaxation of own-generation limits of a REC.
The specific consent of the DGES to the leasing by Eastern
of 6,000 MW of generating capacity from each of National Power
and PowerGen has been confirmed by the Office of Electricity
Regulation (OFFER).
Electricity Sales
Subject to certain exceptions, each supplier of electricity
in the franchise market in Great Britain is required to have a
PES License for its authorized area and is required under the
Electricity Act to provide a supply of electricity upon request
to any premises in that area, except in specified circumstances.
Each PES License holder is subject to various obligations under
its PES License, including prohibitions on cross-subsidy between
its various regulated businesses and on discrimination in respect
of the supply of customers. Each PES License holder is also
required to offer open access to its distribution network on non-
discriminatory terms. This obligation includes a requirement not
to discriminate between its own supply business and other users
of its distribution system. PES License holders are subject to
separate controls on the tariffs to franchise customers and in
respect of distribution charges. A major review of the PES
License structure has begun which is expected to lead to
substantial changes in year 2000. TEG is not able to predict the
outcome of this review or the impact on its results of operations.
For a further discussion, see "Industry Structure -- The Electricity
Industry in Great Britain -- Government Review of Utility
Regulation."
A supplier of electricity to the competitive market in Great
Britain must, subject to certain exemptions, possess a Second
Tier Supply License, or hold a PES License for the authorized
area in which customers are supplied.
-- Supply Price Regulation
Supply charges in the franchise market are regulated by a
maximum price control which applies to each tariff in the
domestic and small business customer market and provides
customers effectively, with price guarantees. On April 1, 1998,
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<PAGE>
Eastern's tariffs were reduced by 8.9%, before inflation.
Eastern's tariffs must be reduced by a further 3%, before
inflation, beginning in April 1999.
As the franchise market is opened to competition, supply
price restraints will no longer be applicable to current
franchise market supply customers. However, the DGES has
indicated in his supply price restraint proposals published in
October 1997, that price regulation for supply to all residential
and smaller business customers within Eastern's authorized area,
whose annual consumption is below 12,000 kWh, would be extended
until an adequate level of competition is established, and, at
least, until March 31, 2000.
Gas
The gas supply activities of Eastern Natural Gas are
principally regulated by the Director General of Gas Supply under
the UK Gas Act 1986, as amended by the Gas Act 1995 (Gas Acts)
and by the conditions of Eastern Natural Gas' Gas Licenses. Eastern
Natural Gas currently holds a public gas transporter's license, a
gas supplier's license and a gas shipper's license. The gas business
is not subject to price regulation.
Energy Trading
EPETL is authorized by the Financial Services Authority
under the Financial Services Act 1986 to deal in electricity CfDs
(including futures and options). A subsidiary of EPETL is a joint
holder of production licenses relating to its equity interest in
the three North Sea natural gas fields described above.
NETWORKS
Distribution Price Regulation
Revenue from the distribution business is controlled by a
formula principally based on P x (1+(RPI-Xd)) where Xd is
currently 3% (Distribution Price Control Formula). P is the
previous year's maximum average price per unit of electricity
distributed. Because the maximum average price in any year is
therefore based in part on the maximum average price in the
preceding year, a price reduction in any given year has an ongoing
effect on the maximum average price for all subsequent years.
RPI is a measure of inflation, and equals the percentage change
in the UK Retail Price Index between the six months period of
July to December of the two pervious years. Because RPI is based
on a weighted average of the prices of goods and services
purchased by a typical household, which bear little resemblance
to the inputs contributing to Eastern's business costs, the RPI
calculation may not accurately reflect the price changes
affecting Eastern. The Xd factor is established by the DGES
following review. This formula determines the maximum average
price per unit of electricity distributed (in pence per kilowatt
hour) which a REC is entitled to charge. This price, when
multiplied by the expected number of units to be distributed,
determines the expected distribution revenues of the REC for the
relevant year. The current Distribution Price Control Formula
permits RECs to partially retain additional revenues due to
increased distributions of units and allows for a pound for pound
increase in operating profit for efficient operations and
reduction of expenses within a review period. However, during
the next Distribution price Control Formula review, the DGES may
reduce any such increase in operating profit to the extent he
determines it not to be a function of efficiency savings or, if
genuine efficiency savings have been made, he determines that
customers should benefit through lower prices in the future.
The Xd factor for Eastern was initially related to the
numbers of units (kWh) of electricity distributed and was set at
+0.25% for the period 1990 to 1995. Since the distribution price
reviews in August 1994 (effective April 1, 1995) and July 1995
(effective April 1, 1996), price control has been related to the
number of customers served and the number of units sold in equal
weightings. These price reviews have resulted in the Xd factor
being reduced to -11% for 1995/96, -10% for 1996/97 and -3% for
each of the years 1997/98 to 1999/2000. The August 1994 review
resulted in an estimated total reduction of Eastern's prospective
revenues of some L350 million over the five years to April 2000
and the July 1995 review resulted in an estimated total reduction
of Eastern's revenues of a further L150 million over the four
year period from April 1, 1996 compared with revenue under the
previous distribution price controls. To allow for forecasting
errors, an annual correction factor is built into the control to
allow any under-recovery or over-recovery of income to be
recovered in following years, the latter with an interest
penalty. A further distribution price control review is scheduled
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<PAGE>
to take place in 2000. Any additional review by the DGES may
adversely affect the Group. Similarly, the DGES may issue
further or additional statements or take further or additional
actions which may impact upon the Group's operations.
Distribution costs vary with the voltage at which consumers
are connected and the utilization of the distribution system at
the time units are distributed. Changes in the mix of units
distributed at different voltage levels and between peak and off-
peak periods are reflected in the calculation of the maximum
average allowed charge per unit distributed by reference to a
"basket" of distribution categories.
Electricity distributed to extra high voltage premises is
excluded from the distribution price control formula, as are
charges for certain additional services including connection
charges. Connection charges must be set at a level which enables
the licensee to recover no more than the appropriate proportion
of the costs incurred and no more than a reasonable rate of
return on the capital represented by such costs. Any dispute over
connection charges may be determined by the DGES. In addition,
income received in respect of National Grid Group exit charges
incurred by a REC and received through use of system charges is
not subject to distribution price control.
In certain circumstances, the DGES may propose amendments to
the distribution price control formula or the terms of the
license. In the cases where a PES License holder is not willing
to accept modifications to the distribution price control formula
or other license conditions put forward by the DGES, the normal
process would be for the DGES to refer the matter to the
Monopolies and Mergers Commission (MMC).
Telecommunications
The Group's telecommunications activities are principally
regulated by the Telecommunications Act 1984 and by the
conditions of its public telephone operations license. The UK
Secretary of State for Trade and Industry and the Director
General of Telecommunications are the principal regulators of the
telecommunications industry in the UK. The telecommunications
business is not subject to price regulation.
ENVIRONMENTAL REGULATIONS AND EMISSIONS
The electricity generation industry in the UK is subject to
a framework of national and EU environmental laws which regulate
the construction, operation and decommissioning of power
stations. Under these laws, each power station operated by the
Group is required to have an authorization which regulates its
releases into the environment and seeks to minimize pollution of
the environment taken as a whole, having regard to the best
practicable environmental option.
Eastern's businesses are subject to numerous regulatory
requirements with respect to the protection of the environment.
The principal laws which have environmental implications for the
Group are the Electricity Act, the Environmental Protection Act
of 1990 and the Environment Act of 1995.
The Electricity Act requires Eastern to consider the
preservation of natural beauty and the conservation of natural
and man-made features of particular interest when it formulates
proposals for development in connection with certain of its
activities. Environmental assessments are required to be carried
out in certain cases including overhead line constructions at
higher voltages and generating station developments. Eastern
has produced Environmental Policy Statements and Electricity Act
Schedule 9 Statements which set forth the manner in which it
complies with its environmental obligations.
Possible adverse effects of electro-magnetic fields (EMFs)
from various sources, including transmission and distribution
lines, have been the subject of a number of studies and
increasing discussion. The current scientific research is
inconclusive as to whether EMFs may cause adverse health effects.
There is the possibility that the passage of legislation and
changing regulatory standards would require measures to mitigate
EMFs, with resulting increases in capital and operational costs.
In addition, the potential exists for public liability with
respect to lawsuits brought by plaintiffs alleging damages caused
by EMFs. The only UK standards for exposure to power frequency
EMFs are those promulgated by the National Radiological
Protection Board and relate to the levels above which
physiological effects have been observed. Eastern fully complies
with these standards.
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<PAGE>
The Group has approximately 200 and 749 miles of fluid-filled
underground cables which operate at 33kV and 132kV, respectively.
These cables generally supply substantial amounts of electricity
to large substations in urban areas and to large customers. The
majority of these cables are between 30 and 50 years old. Eastern
operates these cables in accordance with the "Environment Agency
and Electricity Companies (in England and Wales) operating Code
on the Management of Fluid-Filled Cables," monitoring and
repairing both gradual and substantial leaks, which arise through
age deterioration and third party damage. Eastern has a program
to minimize oil leakage and reduce the possibility of pollution
to watercourses and ground water. This involves establishing a
more effective standard procedure for dealing with cable leaks
and implementation of an effective monitoring system. There is
also a forward plan for gradual replacement of these cables with
more modern solid cables. Eastern believes that the existing
monitoring systems and planned replacement program are sufficient
to avoid major environmental incidents or additional replacement
expenditures. Eastern could incur significant expenditures if it
were required to replace its fluid-filled cables, other than in
the ordinary course of business, pursuant to new or existing
legislation.
The responsibility for these requirements in England and
Wales is vested in the Environment Agency (EA) whose role is to
regulate industrial plants and to monitor the environment, to
obtain environmental information and to promote the objective of
sustainable development. When performing its functions, the EA is
required to take into account the best available techniques for
controlling emissions, the life expectancy and rate of
utilization of the plant and the desirability of not involving
excessive cost.
The principal EU Directive affecting environmental emissions
currently in force is the Large Combustion Plants Directive
(LCPD).
The LCPD requires the UK to reduce sulfur dioxide (SO2)
emissions from existing plants by 60% by 2003 and emissions of
nitrogen oxides (NOx) by 30% by 1998 compared with their 1980
levels. The Large Combustion Plant National Plan is the mechanism
by which this Directive has been implemented in the UK and sets
annual targets for reductions in emissions for the electricity
industry. Each site has an annual limit of emissions for NOx
until 2002 and SO2, until 2005. Emission limits may be affected
by the Government's review of energy sources and electricity
trading arrangements. Negotiations are underway with the EU
regarding introducing new national limits for 2010.
In addition, the UK has ratified the second United Nations
Economic Commission for Europe Sulfur Protocol. The Protocol
commits the UK to a reduction in SO2 emissions from all sources
by 80% by 2010 compared with their 1980 levels. Eastern is
considering the introduction of a flue gas desulfurization plant
in order to assist compliance with reducing these emissions.
At a local level, the UK's Air Quality Strategy provides set
targets for 2005 and places a duty on local authorities to review
air quality with a view to setting up management in places where
targets are not being met. When adverse meteorological conditions
occur, some power stations may have to introduce measures to
comply with these targets.
In December 1997, the Conference of the Parties of the
United Nations Framework Convention on Climate Change adopted the
Kyoto Protocol which specifies targets and timetables for certain
countries to reduce greenhouse gas emissions. The UK is a
signatory to the Kyoto Protocol. The EU has adopted the Kyoto
Protocol. For the UK, this will mean a 12 1/2% reduction in CO2
emissions by 2010. The means of implementing the UK's commitment
is not yet known and TEG is unable to predict to what extent
implementation of the Kyoto Protocol will impact TEG.
The Group believes that it is presently in compliance with,
has taken, and intends to continue to take, measures to comply, in
all material respects with the applicable law and government
regulations for the protection of the environment. There are no
material legal or administrative proceedings pending against the
Group with respect to any environmental matter.
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<PAGE>
Fossil Fuel Levy
All the RECs are obligated to obtain a specified amount of
generating capacity from non-fossil fuel sources (NFFOs).
Because electricity generated from non-fossil fuel plants is
generally more expensive than electricity from fossil fuel
plants, a levy system (Fossil Fuel Levy) has been instituted to
reimburse the generators and the RECs for the extra costs
involved. The DGES sets the rate of the Fossil Fuel Levy
annually. The current Fossil Fuel Levy is 0.9% of the value of
sales of electricity made in England and Wales and 0.8% of the
value of sales of electricity made in Scotland.
UK AND EU COMPETITION LAW
Eastern is subject to the competition rules of both the UK
and the European Community.
Briefly stated, the UK Fair Trading Act 1973 and the UK
Competition Act 1980 both regulate the activities of companies
with market power. The UK Restrictive Trade Practices Act 1976
stipulates that failure to furnish to the Office of Fair Trading
an agreement that is registrable under the Act renders
unenforceable certain restrictions contained in the agreement.
UK competition law, particularly the law relating to restrictive
agreements, is in the processes of reform and is likely to follow
the approach of European Community law.
The Treaty of Rome contains provisions which prohibit anti-
competitive agreements and practices, including the abuse of a
dominant position within the European Union (EU) or a substantial
part of it. Penalties for violation of these provisions include
fines, third party damages and infringing contractual provisions
being unenforceable.
In January 1993, the UK implemented the EU Utilities
Directive on the procedures to be followed for the award of
supply and works contracts by utilities companies, including
electricity utilities. This directive was replaced by EU
Directive 93/36, which was implemented by the UK in December 1996
and which covers service contracts as well as supply and work
contracts. Those contracts that exceed the relevant financial
thresholds have to be advertised in the OFFICE JOURNAL OF THE
EUROPEAN COMMUNITIES.
Disappointed suppliers and contractors who believe they have
suffered harm from a failure to implement the correct procedures
in awarding the contract are able to institute proceedings in the
English High Court. The European Commission also has a role for
ensuring compliance with European community procurement regulations.
GENERAL
Financing Arrangements
At June 30, 1998, TU Finance (No. 1) Limited, TU Finance
(No. 2) Limited, and TU Acquisitions, each a direct or indirect
holding company of TEG and Eastern, had a sterling-denominated
joint line of credit with a group of banking institutions under
credit facility agreements (Credit Agreements) dated March 2,
1998, and amended March 3, 1998, April 21, 1998 and May 19, 1998.
The Credit Agreements total L3,625 million and have three
facilities. The Acquisition Facility provides for short-term
borrowings aggregating L1,775 million outstanding at any one time
and terminates March 2, 2003; however, no new incremental draws can
be made after January 2, 1999. The Interim Facility provides for
short-term borrowings aggregating L1,150 million at any one time
and terminates January 2, 1999. Borrowings under these
facilities provide financing to purchase TEG shares, pursuant to
the Offer or otherwise, and pay acquisition related expenses.
The Revolving Credit Facility provides for short-term borrowings
aggregating L700 million outstanding at any one time and
terminates March 2, 2003. Under this facility, up to L450
million can be used by TU Finance (No. 1) Limited and, subject to
accession to the Revolving Credit Facility, TEG, for general
corporate purposes and for interest payments on the facilities
until six months after the date of acquisition of TEG and for
the issuance of commercial paper. The remaining L250 million
has been carved out for general corporate use by Eastern.
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<PAGE>
In addition to the Credit Facility Agreements described
above, the Group has available uncommitted bank facilities of
approximately L300 million as of June 1, 1998. As of June 30,
1998, no borrowings were outstanding under these facilities.
As of June 30, 1998, TEG had an aggregate principal amount
of L2,010 million long-term debt outstanding. The Group may
consider from time to time the issuance of additional debt.
Certain subsidiaries of TEG are parties to an agreement with
commercial banks under which certain future intra-group rental
payments receivable from the leased power station facilities at
Drakelow C, High Marnham, Ironbridge, Rugeley B and West Burton
for a five year period ending 2001 were assigned in return for a
capital sum of L1,097 million. Such capital sum was drawn down
on October 28, 1996 and L408 million was used to cash
collateralize existing future obligations to certain banks in
respect of the funding of the operating leases of power stations
leased from National Power. The remaining funds are held within
the Group. The payment of the assigned rentals or, in certain
circumstances, their capital value on resale by the banks, is
subject to guarantees and indemnities provided by TEG
subsidiaries.
Windfall Tax
A windfall tax was levied on Eastern according to a formula
contained in the UK Finance (No.2) Act 1997. The liability to
the tax was assessed at L112 million of which half was paid on
December 1, 1997 and the balance is payable on December 1, 1998.
Year 2000
In view of the global nature of the Year 2000 issue, Eastern
established a program of projects in August 1996 to ensure that
all systems within Eastern are Year 2000 compliant. In testing
for conformity, Eastern Group uses the British Standard
definition of Year 2000 conformity (BSI DISC PD2000 - 1).
Eastern's Year 2000 projects are managed by a committee
consisting of Eastern Directors and Senior Managers and most of
the projects are in the correction and testing stages with many
of the older information technology systems having already been
replaced by systems which are Year 2000 compliant.
As part of its compliance program, Eastern is co-operating
with other utility companies, trade associations and its
suppliers and customers sharing information and experience.
Eastern is also an active member of the UK Year 2000 interest
group which together with a wide range of other businesses,
focuses on dealing with the issue of Year 2000 compliance.
DESCRIPTION OF PROPERTY
The principal establishments owned or occupied by the Group's
Continuing Business as of March 31, 1998 are as follows:
Site
Term of Principal Area
Property Owner Tenure Lease Use (acres)
-------- ----- ------ ------- --------- -------
117 Piccadilly, TEG (Head Freehold -- Head ---
London Office) Office
Limited
Carterhatch Eastern Freehold -- Offices 4.0
Lane, Enfleid Electricity and Depot
Milton, Eastern Freehold -- Offices 24.0
Cambridge Electricity and Depot
Wherstead Park, Eastern Freehold -- Offices 17.0
Wherstead, Electricity
Ipswich
Peterborough Eastern Freehold -- Power 18.1
Power Station Generation Station
Limited
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King's Lynn Anglian Freehold -- Power 16.1
Power Station Power Station
Generators
Limited
Drakelow C PowerGen Leasehold 99 years Power 177.0
Power Station Station
High Marnham PowerGen Leasehold 99 years Power 178.4
Power Station Station
Ironbridge National Leasehold 99 years Power 212.7
Power Station Power Station
Rugeley B Power National Leasehold 99 years Power 299.0
Station Power Station
West Burton National Leasehold 99 years Power 511.5
Power Station Power Station
LEGAL PROCEEDINGS
The Group is not involved in any legal or arbitral
proceedings which management believes will have a material
adverse effect upon the Group's business or financial position.
On May 19, 1998 a writ was issued by Optimum Solutions
Limited (OSL) against the National Grid Company, Yorkshire
Electricity Group Plc, Eastern Electricity and Logica Plc.
Yorkshire Electricity Group Plc and Eastern Electricity Plc are
both members of the Pool. OSL alleges breach of confidence in
respect of information supplied in the context of the development
of the trading arrangements for the 1998 liberalization of
electricity supply in England and Wales (Trading Arrangements).
OSL requests an injunction against the continued use of
such confidential information, an unspecified amount of damages
relating to breach of contract, equitable compensation for misuse
of such confidential information and return of material alleged
to contain confidential information.
It is alleged that the Pool has made use of the confidential
information in the development of the Trading Arrangements and
that Eastern Electricity made use of it in using the systems
developed by the Pool for trading purposes. A defense is being
prepared and the action will be strenuously defended.
Litigation is ongoing with respect to another corporation's
use of actuarial surpluses declared in the Electricity Supply
Pension Scheme (ESPS). The Pension Ombudsman (a UK arbitrator
appointed by statute) has issued a "final determination" in favor
of complaints made by members of the ESPS relating to another
corporation's use of the ESPS surplus to offset such
corporation's additional costs of early payment of pensions as a
result of reorganization or redundancy, together with additional
contributions required after a valuation. Under that
determination, the Pension Ombudsman directed such corporation to
pay into ESPS the amount of that use of the surplus plus
interest. The Pension Ombudsman's final determination has been
successfully challenged in the courts. At the same time, the
courts also considered other areas of uncertainty relating to the
uses made of actuarial surpluses arising in the ESPS, including
the ability to reduce or suspend standard employer contributions
to reduce surpluses. The courts ruled that such reductions were
permissible. The final decisions of the courts are subject to
appeal.
If a determination were finally to be made against Eastern
and upheld by the courts, Eastern could have a potential liability
to repay to its section of the ESPS an amount estimated by the
Eastern Directors to be up to L90 million (exclusive of any
applicable interest charge).
INDUSTRY BACKGROUND
The Electricity Industry in Great Britain
Throughout Great Britain, electricity power stations,
together with the transmission and distribution systems,
constitute a single integrated network. Almost all electricity
generated at power stations in Great Britain is delivered through
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the high voltage transmission system owned and operated by the
National Grid Company. It is then transformed for delivery on to
the local distribution networks through the high voltage
transmission owned and operated by PES License holders, such as
Eastern, and then delivered to customers from those networks.
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In the five years to March 31, 1996, demand for electricity
in Great Britain rose by approximately six per cent and is
projected by National Grid Group to rise by approximately seven
per cent in the five years to March 31, 2001.
It is estimated that electricity produced by the UK
generating industry in the year ended March 31, 1991 totaled
approximately 300 TWh (including imports from Electricite de
France), of which approximately 66 per cent was produced by coal-
fired power stations and 18 per cent by nuclear power stations.
At that time no CCGT power stations were in operation. It is
estimated that in the year ended 31 March 1996, the percentage of
total electricity generated by coal-fired power stations had
declined to approximately 37 per cent, whereas the percentage
generated by nuclear power stations had increased to 27 per cent.
CCGT power stations accounted for 20 per cent of total generation
in that year. Reasons for the development of CCGT generating
capacity since 1991 include the availability of large volumes of
natural gas, developments in technology and the privatization of
the UK electricity industry which has allowed new entrants to
participate in the generation market.
In December 1997, the UK government announced a review of
energy sources for power generation, including fuel diversity,
sustainable development and the role of coal. Representations of
interested parties were to be submitted by mid-February 1998.
While the review is underway, the Secretary of State has deferred
decisions on most outstanding or new applications for the
construction of generating stations. The UK government has set
out its interim conclusions but is still consulting in detail.
-- The Pool
The Pool was established in 1990 for bulk trading of
electricity in England and Wales between generators and
suppliers. The Pool reflects two principal characteristics of
the physical generation and supply of electricity from a
particular generator to a particular supplier. First, it is not
possible to trace electricity from a particular generator to a
particular supplier. Second, it is not practicable to store
electricity in significant quantities, creating the need for a
constant matching of supply and demand.
All electricity generated in England and Wales (save for
that generated by small embedded generators) must be sold to the
Pool, and electricity suppliers must likewise generally buy
electricity from the Pool for resale to their customers. Even
groups which are both generators and licensed suppliers (such as
Eastern) must, except in certain limited circumstances, act
through the Pool to sell all the electricity generated by them
and to purchase all their electricity for sale to customers.
The Pool is operated under the Pooling and Settlement
Agreement to which all licensed generators and suppliers of
electricity in Great Britain (and certain others) are party. The
Pooling and Settlement Agreement governs the constitution and
operation of the Pool and the calculation of payments due to and
from generators and suppliers of electricity. The Pool also
provides centralized settlement of accounts and clearing.
Generators sell electricity to the Pool at a price for each
unit of electricity generated and receive availability payments
when they declare themselves as available but are not called upon
to run. Suppliers buy electricity through the Pool at a price
which includes these components and which may also include
additional amounts payable to the National Grid Group.
Prices for electricity are set by the Pool daily for each
half hour of the following day based on the bids of the
generators and a complex set of calculations matching supply and
demand and taking account of system security. Generators make
individual bids into the Pool once each day stating the price and
volume at which they are prepared to generate in any particular
half hour of the following day. The National Grid ranks the
generating sets for each half hour in an order known as the "merit
order". The merit order is primarily ranked according to the price
offered. National Grid then schedules the stations to operate
according to such merit order, calling into service the least
expensive generating units first and continuing to call generating
-18-
<PAGE>
units into service until enough are operating to meet demand.
Factors which may constrain National Grid's ability to order
stations into operation in strict observance of the merit order
include transmission system constraints and the inflexibility of
some generating units. A computerized system (the settlement
system) is used to calculate prices and to process metered,
operational and other data and to carry out the other procedures
necessary to calculate the payments due under the Pool trading
arrangements. The settlement system is administered on a day to
day basis by Energy Settlements and Information Services Limited,
a subsidiary of National Grid, as settlement system administrator.
The price paid to all generators which are called to run is set
primarily by reference to the highest bid price of all the
generators selected to run in that half hour. Pool prices can
vary significantly.
In order to reduce their exposure to Pool prices, generators
and suppliers enter into financial, hedging contracts with each
other. These contracts are in the form of CfDs and electricity
forward agreements (EFAs). CfDs and EFAs in effect fix the price
which a supplier pays and a generator receives for electricity
and are therefore used to reduce the price risk that would
otherwise be associated with the sale and purchase of electricity
through the Pool.
-- UK Electricity Supply Markets
Great Britain currently has two separate, but related,
electricity supply markets, each with a different regulatory
framework: the "franchise market" and the "competitive market".
To be able to supply electricity to the franchise market, a
supplier must have a PES License, which (except in certain
specified circumstances) requires the holder, upon request, to
supply electricity to any premises within its authorized area. A
holder of a PES License currently has a monopoly, with certain
limited exceptions, on the supply of electricity to franchise
customers in its authorized area. However, this monopoly is
currently expected to end over a six month period commencing in
September 1998, when all electricity customers in Great Britain,
including the current franchise customers, will begin to have the
option to choose their electricity supplier.
Franchise customers are generally supplied with electricity
in accordance with published tariffs. Tariff income is limited
by a price control formula set out in the supplier's PES License
and is regulated by the DGES as described above under "Regulatory
Matter -- Power Licenses -- Supply Price Regulation." This
formula is separate from the price control formula applicable to
the distribution business, as described above under "Regulatory
Matters -- Networks -- Distribution Price Regulation". The price
control formula determines the maximum prices which any PES
License holder is permitted to charge in any year to March 31,
2000. A separate price control formula determines the maximum
distribution revenue which a PES License holder may earn from
charges made to its own electricity supply business and other
electricity suppliers for use of its distribution network. This
is due to expire on March 31, 2000.
The competitive market currently consists of customers with
an annual maximum demand of 100kW or more. To be able to supply
electricity to the competitive market, a supplier must either
have a license issued pursuant to the Electricity Act to supply
electricity to specified premises (Second Tier Supply License) or
hold a PES License for the authorized area in which those of its
customers who are eligible to participate in the competitive
market are located. Each customer in this market may be supplied
by any supplier (whether the local PES License holder or a
supplier with a Second Tier Supply License, which could include
any of the other PES License holders). Customers who currently
participate in the competitive market are charged under the terms
of their negotiated supply contracts, which may provide for fixed
or variable prices. Variable prices normally reflect expected
fluctuations in the price paid by suppliers for the purchase of
electricity from the Pool.
All suppliers use the national transmission system (for
which they pay published transmission charges) and the
distribution system of the local PES License holder (for which
they pay published distribution charges) to secure delivery of
electricity to their customers.
As described above, electricity supply and distribution
businesses in Great Britain are subject to price controls. Since
the implementation of the initial price controls in 1990, there
have been two reviews of the supply price control, effective for
the period from April 1, 1994 to March 31, 1998 and from April 1,
1998 to March 31, 2000. These have had only a limited financial
impact. From April 1995 there was a review of the distribution
price control which the Directors of Eastern estimate will result
in a total reduction of some L350 million in Eastern's
prospective revenues over the five years to March 31, 2000
compared with expected revenues under the previous distribution
-19-
<PAGE>
price control. The Directors of Eastern also estimate that a
further review in July 1995 conducted by the DGES implemented
from April 1, 1996, has resulted in a further total reduction of
L150 million in Eastern's prospective revenues for the four years
to March 31, 2000.
In agreement with PES License holders the DGES has modified
the PES Licenses to require that the PES License holders support
the introduction of competition for franchise supply customers
by offering services to competing suppliers. These services
include registration, data collection and aggregation,
emergency reporting, meter operation and provision of prepayment
meter infrastructure. The PES License holders are also being
required to provide collectively a data transfer service.
The RECs are also contributing to a program of work by the
Pool to adopt settlement arrangements for the competitive market
in 1998. It has been agreed that these costs, subject to a cap
above which recovery would be partial, will be recovered from
charges to be made to suppliers by the Pool over a five year
period.
-- Regulation of the Electricity Supply Industry Under the
Electricity Act
The Electricity Act created the institutional framework
under which the industry is currently regulated, including the
office of the DGES, who is appointed by the Secretary of State.
The present DGES, Professor Stephen Littlechild, who holds the
formal title of Director General of Electricity Supply and is
head of OFFER, The Office of Electricity Regulation, was
appointed for a five year term commencing September 1, 1989. He
was reappointed in 1994 for a further five year term ending on
August 31, 1999. He is expected to retire later this year. The
UK government is seeking a replacement who will also be the new
Director General of Gas Supply and is expected to make an
appointment shortly.
The DGES's functions under the Electricity Act include
granting licenses to generate, transmit or supply electricity (a
function which he exercises under a general authority from the
Secretary of State); proposing modifications to licenses and, in
case of non-acceptance of such proposals by licensees, making
license modification references to the MMC; enforcing compliance
with license conditions; advising the Secretary of State in
respect of the setting of each non fossil fuel obligation (which
is a requirement on the PES License holder to purchase
electricity from non fossil sources); calculating the Fossil Fuel
Levy rate and collecting the levy; determining certain disputes
between electricity licensees and customers; and setting
standards of performance for electricity licensees. The term
"supply" as used in the context of the Electricity Act and the
PES License covers both distribution and supply activities.
The DGES exercises concurrently with the Director General of
Fair Trading certain functions relating to monopoly situations
under the Fair Trading Act 1973 and certain functions relating to
courses of conduct which have, or are intended or likely to have,
the effect of restricting,distorting or preventing competition in
the generation, transmission or supply of electricity under the
Competition Act 1980.
The Electricity Act requires the DGES and the Secretary of
State to exercise their functions in the manner each considers is
best calculated to ensure that all reasonable demands for
electricity are satisfied, secure that license holders are able
to finance their licensed activities and promote competition in
the generation and supply of electricity.
Subject to these duties, the Secretary of State and the DGES
are required to exercise their functions in the manner which each
considers is best calculated: to protect the interests of
consumers of electricity supplied by licensed suppliers in
respect of price, continuity of supply, and the quality of
electricity supply services; to promote efficiency and economy on
the part of licensed electricity suppliers and the efficient use
of electricity supplied to consumers; to promote research and
development by persons authorized by license to generate,
transmit or supply electricity; to protect the public from the
dangers arising from the generation, transmission or supply of
electricity; and to secure the establishment and maintenance of
machinery for promoting the health and safety of workers in the
electricity industry. The Secretary of State and the DGES also
have a duty to take into account the effect on the physical
environment of activities connected with the generation,
transmission or supply of electricity.
-20-
<PAGE>
In performing their duties to protect the interests of
consumers in respect of prices and other terms of supply the
Secretary of State and the DGES are required to take into account
in particular the interests of consumers in rural areas. In
performing their duties to protect the interests of consumers in
respect of the quality of electricity supply services, they are
required to take into account in particular the interests of
those who are disabled or of pensionable age.
-- Government Review of Utility Regulation
On June 30, 1997, the UK government announced its intention
to conduct a comprehensive review of the regulatory framework
governing the electricity distribution and supply businesses in
England and Wales, as well as the regulatory framework applicable
to other privatized utilities. The review culminated in the
March 1998 Green Paper which sets forth a number of proposals of
the UK Government designed to re-examine utility regulation in
the UK. Among the main proposals contained within the March 1998
Green Paper are the retention of "RPI-X" as the fundamental basis
for price regulation; increased transparency and consistency of
regulations; the merger of OFFER and OFGAS (the latter being the
Office of Gas Supply); the separate licensing of the distribution
and supply businesses of the RECs; amendment of the statutory
duties of utility regulators to provide a new primary duty to
exercise their functions in the manner best calculated to protect
the interest of the consumers in the short and long term,
wherever possible through promoting competition and adopting
price regulation to distinguish between income earned through
companies' own efforts and income which results from other
factors. Some of these proposals would require primary
legislation. Responses to the March 1998 Green Paper by
interested parties were due by May 31, 1998.
On May 13, 1998, the DGES issued a consultation paper on the
separation of distribution and supply businesses for RECs and the
future treatment of metering and meter reading. The material
proposals and recommendations set out in the consultation paper
are as follows:
1. Full separation of the ownership of the supply and
distribution business was recommended and appropriate
interim arrangements should be contemplated for separate
companies to comprise the distribution and supply
activities, each acting independently of the other.
2. Measures should be introduced to ensure that each PES supply
subsidiary operates at arm's length from the distribution
subsidiary. These measures would include separate contracts
between the supply and distribution businesses avoiding the
sharing of facilities between the businesses, including
requiring separate management teams for the two businesses
and minimizing corporate headquarters activities.
3. The distribution company should be responsible for the
maintenance and operation of the network and have a
statutory duty to develop and maintain an efficient,
coordinated and economical system of electricity
distribution and to facilitate competition in generation and
supply. It should connect any person to the network on
reasonable terms and act as a "last resort" meter reading
service, bought in from meter reading companies, for those
suppliers not wishing to provide the service themselves.
4. All suppliers should be placed on the same legislative
footing and tariff supply should be replaced by supply under
contract. License conditions would be introduced to protect
customers and competitors against dominant suppliers.
5. Metering services should be open to competition and
arrangements for transmission in Scotland should be brought
into line with those in England and Wales.
Responses to this consultation paper were due by June 15,
1998. The DGES intends to have a further consultation on
separation of businesses in July 1998 and to outline proposals on
separation of businesses in September 1998. The DGES intends any
revised definitions of distribution, supply and metering
responsibilities to be taken into account in setting price
controls and revising charging arrangements scheduled for 2000.
The separation of ownership and certain other key elements of the
DGES' proposals require new legislation.
In October 1997, the UK government invited the DGES to
consider parameters for a review of electricity trading
arrangements. Such a review would focus on the wholesale
electricity market in England and Wales and would likely cover
-21-
<PAGE>
existing trading within the Pool, trading arrangements outside
the Pool and price setting mechanisms. The impact on, and
possible need for change to, the framework of regulatory controls
could also be considered, including Pool governance, regulation
of and access to the Grid licenses, the Electricity Act and the
implications of European Union law. A review of certain of these
issues was launched in January 1998 with an announcement that the
DGES and an independent panel had been asked to report to the
Energy Minister by July 1998.
The Group cannot predict the results of any of these reviews,
whether proposals recommended in the consultation paper will be
implemented or the ultimate effects on Eastern or the Group.
The Gas Industry in Great Britain
Natural gas is used for a wide range of domestic and
industrial purposes and also for gas-fired electricity generating
stations. The primary fuel market in Great Britain in 1997 was
282.4 million tons of oil equivalent of which natural gas made
up 87 million tons of oil equivalent (1,000 tons of oil equivalent
is equal to 0.3968 therms).
From the nationalization of the gas industry in Great
Britain in 1948 until 1986, when British Gas was privatized, the
supply of piped gas to customers was a monopoly. In parallel
with the privatization of British Gas, steps were taken to
develop greater competition within the industry, initially by
deregulating the supply of gas to the contract market (customers
using more than 25,000 therms per year). Within the contract
market there are "interruptible" customers, whose supply can be
interrupted in periods of exceptional demand, and "firm"
customers to whom supply is guaranteed.
In 1992, competition was extended to customers who use more
than 2,500 therms a year and has been extended to all users since
May 1998, with pilot schemes being introduced for domestic
customers throughout the United Kingdom.
British Gas divided itself into two separate companies,
Centrica plc and BG plc. The former is a shipper and supplier of
gas, while almost all of the UK gas transmission and distribution
network is owned and operated by BG plc.
Participants in the gas industry are required to hold
licenses granted by the Director General of Gas Supply whose
department is known as OFGAS. These are a "public gas
transporter's license" which permits the licensee to carry gas
through pipes to any premises or to a pipeline system operated by
another public gas transporter, a "gas supplier's license" which
is required to supply gas to customers and a "gas shipper's
license" which allows the licensee to arrange with a public gas
transporter to introduce, convey or take gas out of the
transporter's pipeline system. In addition, the exploration for
and production of gas in the North Sea is subject to license by
the Department of Trade and Industry.
BG plc is required to provide fair access to its network to
all shippers of gas, who pay charges determined by the amount of
capacity they have reserved on the system's entry and exit points
and commodity charges based on the amount of gas actually
transmitted.
Suppliers obtain natural gas directly from offshore fields
(in which they may own equity interests) and from wholesalers.
There are various types of contract for the purchase of gas, but
most of these currently relate directly to physical volumes to be
delivered into the UK gas supply network. Most of these include
"take or pay" obligations, under which the buyer agrees to pay
for a minimum quantity of gas in a year, although the amount it
takes in any specific time period can vary according to its need.
Gas can be purchased for delivery from one day to several years
ahead.
Suppliers in the gas industry are obliged to ensure that
they have sufficient gas, within limited tolerances to meet the
needs of their customers on a daily basis. Failure to do so may
result in additional costs being incurred. Fluctuations in
demand are met by altering the quantity of gas taken from fields
and wholesale purchases contracts, or via storage. Demand may
also be limited by interrupting supplies to certain interruptible
-22-
<PAGE>
customers. Any excess or shortfall in supply has to be sold to,
or bought from the network operator at prices determined on the
day under an agreed pricing formula.
-23-
<PAGE>
Item 7. Financial Statements and Exhibits
ITEM 7(a). Financial Statements of Businesses Acquired
FINANCIAL INFORMATION OF THE ENERGY GROUP PLC
Note 10 to the Unaudited Financial Statements of TEG as of
September 30, 1997 and for the six months ended September 30,
1997 and 1996 contained in Amendment No. 1 to the Current Report
on Form 8-K of Texas Utilities, as filed on June 25, 1998
(Amendment No. 1), is deleted in its entirety and replaced by the
following:
10. DIFFERENCES BETWEEN UK GAAP AND US GAAP
UNAUDITED
SIX MONTHS ENDED
30 SEPTEMBER
----------------
PROFIT FOR THE PERIOD 1997 1996
---- ----
Lm Lm
(Loss)/profit for the period as
reported in the consolidated profit
and loss account (34) 113
Significant adjustments:
Discount on subordinated income note (3) (3)
Goodwill amortization (24) (28)
Impairment of long lived assets -- (578)
Restructuring and reorganisation
provision (13) (29)
Pensions 3 3
Output-linked lease payments (21) --
Generation equalization costs (61) (76)
Tax-stand-alone adjustment -- (1)
Deferred taxation:
Effect of the above adjustments 23 264
Effect of differences in
methodology (15) (20)
----- -----
Loss for the period (net loss) as
adjusted to accord with US GAAP (145) (355)
===== =====
Comprising:
Income before extraordinary item (33) (355)
Extraordinary item (112) --
----- -----
Total (145) (355)
===== =====
Per ordinary share as so adjusted:
Before extraordinary item (6.3)p (68.1)p
Extraordinary item (21.7)p -- p
----- -----
Total (28.0)p (68.1)p
===== =====
Per American Depositary Share as so
adjusted:
Before extraordinary item (25.2)p (272.4)p
Extraordinary item (86.8)p -- p
----- -----
Total (112.0)p (272.4)p
===== =====
Number of shares used in computing per 517 521
ordinary share amounts (millions)
Note: Each American Depositary Share represents four
ordinary shares.
F-1
<PAGE>
UNAUDITED
AS AT 30 SEPTEMBER
------------------
INVESTED CAPITAL/SHAREHOLDERS' EQUITY 1997 1996
---- ----
Lm Lm
Invested capital/shareholders' equity
as reported in the consolidated
balance sheets 1,726 2,185
Significant adjustments:
Goodwill -- cost 1,205 1,147
-- amortization (102) (55)
Subordinated income note 57 67
Restructuring and reorganisation
provision 7 --
Pensions 147 124
Fixed asset investments -- own shares (20) --
Taxation -- stand-alone adjustment -- 6
Output-linked lease payments (62) --
Generation equalization costs (61) (76)
Dividend 41 --
Deferred taxation:
Effect of the above adjustments (18) (18)
Effect of differences in
methodology (392) (377)
----- -----
Invested capital/shareholders' equity
as adjusted to accord with US GAAP 2,528 3,003
===== =====
For interim periods, the Group equalizes generation fixed
costs incurred based on estimated annual generation output for
UK GAAP purposes. The generation equalization costs deferred
at interim periods are eliminated by year end. For US GAAP
purposes such costs are expensed as incurred.
The windfall tax is an extraordinary item under US GAAP.
Cash Flow
The categories of cash flow under US GAAP can be summarized
as follows:
Six months
ended
September 30,
1997
L millions
Cash flows from operating activities 217
Cash outflows on investing activities (554)
Cash flows from financing activities 125
------
Decrease in cash and cash equivalents (212)
Foreign exchange 1
Cash and cash equivalents as at beginning
of period 385
------
Cash and cash equivalents as at end
of period 174
======
F-2
<PAGE>
ITEM 7(b). Pro Forma Financial Information
The Pro Forma Financial information of Texas Utilities and
the TEG Businesses Acquired contained in Amendment No. 1 is
deleted in its entirety and replaced by the following:
PRO FORMA FINANCIAL INFORMATION OF TEXAS UTILITIES COMPANY
Texas Utilities Company's (Texas Utilities) Offer for The
Energy Group PLC (TEG) was declared unconditional on May 19,
1998, by which time Texas Utilities had received acceptances with
respect to over 70% of TEG's issued share capital. Under UK law,
there are no rights of withdrawal after the unconditional date.
Therefore, it was determined that, as of May 19, 1998, Texas
Utilities had acquired TEG (Acquisition). Texas Utilities filed a
Current Report on Form 8-K, disclosing the Acquisition pursuant
to Item 2, on June 3, 1998. Prior to the Acquisition by Texas
Utilities, TEG completed the sale of its US and Australian coal
business and US energy marketing operations (Peabody Sale). The
businesses acquired by Texas Utilities, following the Peabody
Sale, are referred to as "TEG Businesses Acquired".
TEG publishes its financial statements based on United
Kingdom generally accepted accounting principles (UK GAAP)
denominated in pounds sterling. TEG is a foreign private issuer
and has a March 31 fiscal year end. The most recent public
financial information of TEG consists of (1) the audited
financial statements for the period ended March 31, 1997 in its
Form 20-F, (2) the unaudited financial statements for the period
ended September 30, 1997 in its Form 6-K for the month of
November 1997, and (3) the unaudited statements of income for the
three months and nine months ended December 31, 1997 included in
its Form 6-K for the month of March 1998.
The Acquisition is a purchase for accounting purposes. The
purchase accounting adjustments contained herein are preliminary
and represent estimates based on information available to Texas
Utilities at this time. The final determination of the purchase
accounting adjustments requires additional information and
analysis.
The following unaudited condensed consolidated pro forma
financial statements assume 100% acquisition of the TEG
Businesses Acquired and further assume that 20% of TEG's ordinary
shares are exchanged for shares of Texas Utilities common stock.
The unaudited condensed consolidated pro forma balance sheet
at March 31, 1998 combines the consolidated balance sheet of
Texas Utilities as of March 31, 1998 with the consolidated
balance sheet of TEG Businesses Acquired as of September 30,
1997, the latest date for which its balance sheet is published.
The unaudited condensed consolidated pro forma statement of
income for the year ended December 31, 1997 combines the
consolidated statement of income for that period of Texas
Utilities with the unaudited condensed consolidated pro forma
statement of income for that period of the TEG Businesses
Acquired. The unaudited condensed consolidated pro forma
statement of income for the three months ended March 31, 1998
combines the unaudited consolidated statement of income of Texas
Utilities for the three months ended March 31, 1998 with the
unaudited consolidated statement of income of the TEG Businesses
Acquired for the three months ended December 31, 1997, the latest
three month period for which its consolidated statement of income
is available. The unaudited condensed consolidated pro forma
balance sheet as of March 31, 1998 is presented as if the
Acquisition and Peabody Sale had occurred on that date. The
unaudited condensed consolidated pro forma statements of income
for the twelve months ended December 31, 1997 and for the three
months ended March 31, 1998 assume that the Acquisition and
Peabody Sale occurred at the beginning of each period.
The unaudited condensed consolidated pro forma financial
statements should be read in conjunction with the historical
consolidated financial statements of TEG included elsewhere
herein and historical consolidated financial statements of Texas
Utilities included in Texas Utilities' Annual Report on Form 10-K
for the year ended December 31, 1997 and its Quarterly Report on
Form 10-Q for the three months ended March 31, 1998 and "Pro
Forma Financial Information of the TEG Businesses Acquired"
included elsewhere herein. The operations of Texas Utilities and
the TEG Businesses Acquired are affected by seasonal weather
patterns. The unaudited condensed consolidated pro forma
statements of income are not necessarily indicative of the
financial results that would have occurred had the above-
described events been consummated on the indicated dates, nor are
they necessarily indicative of future financial results. In
addition, the unaudited condensed consolidated pro forma
statement of income for the three months ended March 31, 1998 may
not be indicative of a full year's results.
Balance sheet amounts denominated in UK pounds sterling were
translated to US dollars at the rate of 1 = $1.64, which was the
exchange rate at September 30, 1997. UK pounds sterling amounts
in the statements of income were translated at the rate of L1 =
$1.64, the average exchange rate for the periods presented.
P-1
<PAGE>
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1998
(IN MILLIONS)
<TABLE>
TEXAS TEG TEXAS
UTILITIES BUSINESSES UTILITIES
HISTORICAL ACQUIRED ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Property, Plant and
Equipment, Net . . $ 18,547 $2,755 $ $21,302
Investments . . . . . 924 79 1,003
Investment in
The Energy Group . 1,667 (1,667)(a)
Goodwill . . . . . . 1,427 1,715 (1,715)(b) 7,958
6,531(b)
Current Assets:
Cash and cash
equivalents . . . 67 3,892 (2,048)(d) 1,918
7 (b)
Accounts receivable 699 1,181 1,880
Inventories . . . . 409 249 658
Gas marketing risk
management assets 367 367
Other . . . . . . . 190 18 208
-------- -------- -------- --------
Total . . . . . 1,732 5,340 (2,041) 5,031
-------- -------- -------- --------
Deferred Debits . . . 2,064 169 2,233
-------- -------- -------- --------
Total Assets . . $ 26,361 $ 10,058 $ 1,108 $ 37,527
======== ======== ======== ========
Capitalization:
Common stock equity $6,865 $4,375 $(4,375)(b) $8,318
1,463 (c)
(8)(a)
(2)(e)
Preferred stock of
subsidiaries . . 211 211
TU Electric
obligated,
mandatorily
redeemable
preferred
securities of
subsidiary trusts 823 823
114 (f)
5,786 (c)
Long-term debt,
less amounts due
currently . . . . 8,775 2,649 (2,048)(d) 15,276
-------- -------- -------- --------
Total . . . . . 16,674 7,024 930 24,628
-------- -------- -------- --------
Current Liabilities:
Notes payable and
long-term debt
due currently . . 3,161 1,178 (1,659)(a) 2,680
Accounts payable
and other current
liabilities . . . 1,566 984 112 (e) 2,662
Gas marketing risk
management
liabilities . . . 343 343
-------- -------- -------- --------
Total . . . . . 5,070 2,162 (1,547) 5,685
-------- -------- ---------- --------
Accumulated Deferred
Income Taxes . . . 3,062 656 (115)(b) 3,603
Other Deferred
Credits and
Noncurrent
Liabilities . . . . 1,555 216 1,840 (b) 3,611
-------- -------- -------- --------
Total
Capitalization
and
Liabilities . $ 26,361 $ 10,058 $ 1,108 $ 37,527
======== ======== ======== ========
See notes.
P-2
<PAGE>
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
TEXAS TEXAS
UTILITIES UTILITIES
HISTORICAL ADJUSTMENTS(g) ADJUSTED
---------- ----------- ---------
<S> <C> <C> <C>
Operating Revenues . . . . . . . $ 7,946 $1,370 $ 9,316
Operating Expenses . . . . . . . 6,039 1,306 7,345
-------- -------- --------
Operating Income . . . . . . . . 1,907 64 1,971
Other Income
(Deductions) -- Net . . . . . . (18) 6 (12)
-------- -------- --------
Income Before Interest and Income
Taxes . . . . . . . . . . . . 1,889 70 1,959
Interest and Other Charges . . . 852 61 913
-------- -------- --------
Income Before Income Taxes . . . 1,037 9 1,046
Income Tax Expense . . . . . . . 377 8 385
-------- -------- --------
Income Before Extraordinary Item
$ 660 $ 1 $ 661
======== ======== ========
Average Shares of Common Stock
Outstanding (thousands) . . . . 230,958 14,280 245,238
Per Share of Common Stock:
Basic earnings . . . . . . . . $ 2.86 $2.70
Diluted earnings . . . . . . . $ 2.85 $2.69
TEG TEXAS
BUSINESSES PRO FORMA UTILITIES
ACQUIRED(H) ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Operating Revenues . . . . . . . $5,468 $ (514)(i) $ 14,784
Operating Expenses . . . . . . . 5,014 80 (b) 11,925
-------- -------- --------
Operating Income . . . . . . . . 454 434 2,859
Other Income
(Deductions) -- Net . . . . . . 151 139
-------- --------
Income Before Interest and Income
Taxes . . . . . . . . . . . . 605 434 2,998
416 (d)
Interest and Other Charges . . . 317 (11)(f) 1,635
-------- -------- --------
Income Before Income Taxes . . . 288 29 1,363
Income Tax Expense . . . . . . . 167 (22)(l) 530
-------- -------- --------
Income Before Extraordinary Item
$ 121 $ 51 $ 833
======== ======== ========
Average Shares of Common Stock
Outstanding (thousands) . . . . 37,595(c) 282,833
Per Share of Common Stock:
Basic earnings . . . . . . . . $ 2.95
Diluted earnings . . . . . . . $ 2.94
See notes.
P-3
<PAGE>
TEXAS UTILITIES COMPANY
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARES AND PER SHARE AMOUNTS)
TEXAS TEG TEXAS
UTILITIES BUSINESSES PRO FORMA UTILITIES
HISTORICAL ACQUIRED(H) ADJUSTMENTS PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues . . $ 2,499 $ 1,715 $ (131)(i) $ 4,214
Operating Expenses . . 2,073 1,487 20 (b) 3,449
-------- -------- -------- --------
Operating Income . . . 426 228 111 765
(8)(j)
Other Income 55
(Deductions) -- Net (2) 46 19 (k) --------
-------- -------- --------
Income Before Interest
and Income Taxes . . 424 274 122 820
(5)(k)
(3)(f)
Interest and Other
Charges . . . . . . . 223 98 104 (d) 417
-------- -------- -------- --------
Income Before Income 403
Taxes . . . . . . . . 201 176 26
Income Tax Expense . . 74 82 2 (l) 158
-------- -------- -------- --------
Net Income . . . . . . $ 127 $ 94 $ 24 $ 245
======== ======== ======== ========
Average Shares of
Common Stock
Outstanding
(thousands) . . . . . 245,241 37,595(c) 282,836
Per Share of Common
Stock:
Basic earnings . . . $0.52 $ 0.87
Diluted earnings . . $0.52 $ 0.87
See notes.
</TABLE>
P-4
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Represents reversal of Texas Utilities investment in TEG at
March 31, 1998.
(b) Represents the excess of cost over the fair value assigned
to net assets acquired (goodwill), which is to be amortized
over 40 years. The excess amount is summarized below:
Texas Utilities purchase price (see Note c) . . . . $ 7,249
Estimated costs of Acquisition (see Note e) . . . . 110
Proceeds from exercise of TEG stock options . . . . (7)
Estimated purchase accounting adjustments:
Write off TEG goodwill . . . . . . . . . . . . . 1,715
Adjust long-term debt to fair value (see Note f) 114
Record present value adjustments for commitments,
obligations and contracts . . . . . . . . . . 1,840
Deferred income tax on temporary differences . . (115)
--------
Total . . . . . . . . . . . . . . . . . . 10,906
Net assets of the TEG Businesses Acquired . . . . . (4,375)
--------
Estimated goodwill . . . . . . . . . . . . . . . . 6,531
Less estimated increases in TEG equity to (292)
May 19, 1998 . . . . . . . . . . . . . . . . . --------
Amount for amortization . . . . . . . . . . . . . . $ 6,239
========
Annual amortization over 40 years . . . . . . . . . $ 156
Less goodwill amortization recorded by 76
TEG Businesses Acquired . . . . . . . . . . . . --------
Incremental goodwill amortization -- annual . . . . $ 80
-- quarter . . . 20
(c) Cost of Acquisition and the assumed 20% of TEG Ordinary
Shares to be exchanged for shares of Texas Utilities common
stock, in millions of US dollars, except per share amounts:
PURCHASED FOR
--------------------
SHARES CASH SHARES
------ ---- ------
TEG Ordinary Shares outstanding
at March 31, 1998 (000) . . . . 520,858
TEG Ordinary Shares to be issued
in connection with
stock plans (000) . . . . . . 8,641
-------
Pro forma TEG Ordinary
Shares (000) . . . . . . . . . 529,499 423,599 105,900
Per share price 840p $ 13.66
($13.66) cash . . . . . . . . --------
Cash Purchase Cost . . . . . . . $ 5,786
Exchange ratio . . . . . . . . . .355
--------
Estimated number of shares of
Texas Utilities common stock
to be issued . . . . . . . . . 37,595
Per share value of Texas
Utilities common stock . . . . $38.90
--------
Common Stock Purchase Cost . . . 1,463 $ 1,463
-------- ========
Total purchase price . . . . $ 7,249
========
(d) The net cash cost of the Acquisition will be financed as
follows:
Annual Quarter
Amount Interest Interest
------ -------- --------
Bank borrowings . . . . . . . . $ 5,786
TEG cash acquired* . . . . . . (2,048)
--------
Increase in net borrowings (at
7.83% in the UK and 5.85%
in the US). . . . . . . . . . $ 3,738 $ 267 $ 67
======== ======== =======
--------------------
* Use of cash is subject to certain UK statutory procedures
relating to financial assistance.
P-5
<PAGE>
Financing fees to obtain the Acquisition debt total
$65 million. Annual amortization in the first year is
$10 million ($3 million quarterly).
Interest on the present value of commitments, obligations
and contracts is $139 million for the twelve month period
($35 million for the quarter).
The total pro forma increase to interest and other charges
is $416 million ($104 million for the quarter).
(e) Represents estimated costs associated with the Acquisition.
Estimated expenses of $2 million incurred by Texas Utilities
for legal, accounting, printing and other payments and
expenses relating to the registration of Texas Utilities
common stock to be issued in the Acquisition will be charged
directly to common stock equity as stock issuance costs. An
additional $110 million for stamp duty, financial advisory,
legal, accounting, printing and other payments and expenses
as a result of the Acquisition are included in adjustments
to Goodwill (see Note b).
(f) Adjustment to reflect outstanding long-term debt at fair
value. First year amortization of the interest related to
the adjustment is approximately $11 million ($3 million
quarterly).
(g) On August 5, 1997 Texas Utilities completed the acquisition
of ENSERCH Corporation (ENSERCH) and on November 21, 1997
Texas Utilities completed the acquisition of Lufkin-Conroe
Communications Co. (LCC). These acquisitions were accounted
for as purchase business combinations; accordingly, the
assets and liabilities of the acquired companies as of the
acquisition dates were adjusted to fair value and the
results of operations of such companies were included in
Texas Utilities' consolidated statement of income from the
date of their acquisition. The adjustment for the twelve
months ended December 31, 1997 assumes that the acquisitions
of ENSERCH and LCC were made at the beginning of the period
and consists of such companies' operations for the period
from January 1, 1997 to date of their acquisition, including
amortization of goodwill and purchase accounting
adjustments. No adjustment is necessary for the three months
ended March 31, 1998.
In 1997, Texas Utilities reacquired 4,015,000 shares of its
common stock for $148.8 million. In the unaudited condensed
pro forma statement of income for the twelve months ended
December 31, 1997, these share repurchases have been treated
as if they had occurred at the beginning of the period;
accordingly, average shares outstanding have been reduced
and pro forma interest expense on the purchase price from
January 1, 1997 to the repurchase date of $7 million, pre-
tax has been included.
The impact on the pro forma statement of income of the
ENSERCH and LCC acquisitions and share repurchase for the
year ended December 31, 1997 is as follows (in millions,
except shares):
SHARE
ENSERCH LCC REPURCHASE TOTAL
------- --- ---------- -----
Operating Revenues . . $ 1,277 $93 $ $1,370
Operating Expenses . . 1,235 71 1,306
------- ------- -------
Operating Income . . . 42 22 64
Other Income
(Deductions) -- Net . 1 5 6
------- ------- -------
Income before Interest
and Income Taxes . . 43 27 70
Interest and Other
Charges . . . . . . . 51 3 7 61
------- ------- ------- -------
Income (Loss) before
Income Taxes . . . . (8) 24 (7) 9
Income Tax Expense
(Benefit) . . . . . . 1 10 (3) 8
------- ------- ------- -------
Net Income(Loss) . . . $ (9) $ 14 $ (4) $ 1
======= ======= ======== =======
Average Shares of Texas
Utilities Common
Stock Out-
standing (000) . . . 9,430 7,771 (2,921) 14,280
(h) TEG historical financial statements have been adjusted to
reflect the Peabody Sale. Certain amounts have been
reclassified to conform to Texas Utilities' financial
statement presentation.
(i) Represents reversal of certain operating expenses recorded
by the TEG Businesses Acquired, for which a liability for
the present value of commitments, obligations and
contracts is made in purchase accounting, and amortization
of fixed lease payments over the revised economic life of
power plants under lease arising from alternative
operating methodologies.
P-6
<PAGE>
(j) Represents reversal of equity in net income of TEG of $8
million recorded by Texas Utilities for its approximate
22% interest.
(k) Represents elimination of expenses of the Acquisition
recorded by Texas Utilities in March 1998 of $24 million.
(l) Represents taxes on temporary differences at the effective
rate of 31 per cent for U.K. taxable adjustments and taxes
at 35 per cent for U.S. taxable adjustments. The U.S.
taxes also give effect to the benefit of U.S. foreign tax
credits.
(m) A preliminary determination of purchase accounting
adjustments has been made; the final determination of the
fair value and tax basis of assets acquired and
liabilities assumed requires additional information and
analysis. Accordingly, the earnings results will vary from
the pro forma earnings shown.
Estimated costs incurred by Texas Utilities of $46 million
as a result of the Acquisition and Peabody Sale have been
excluded from the unaudited condensed consolidated pro
forma statements of income. The unaudited condensed
consolidated pro forma statement of income does not
reflect any operating efficiencies and annual cost savings
Texas Utilities and TEG may achieve as a result of the
Acquisition.
P-7
<PAGE>
PRO FORMA FINANCIAL INFORMATION
OF THE TEG BUSINESSES ACQUIRED
TEG publishes its financial statements based on UK GAAP
denominated in pounds sterling. TEG is a foreign private issuer
and has a March 31 fiscal year end. The most recent public
financial information of TEG consists of (1) the audited
financial statements for the period ended March 31, 1997 in its
Form 20-F, (2) the unaudited financial statements for the period
ended September 30, 1997 in its Form 6-K for the month of
November 1997, and (3) the unaudited statements of income for the
three months and nine months ended December 31, 1997 included in
its Form 6-K for the month of March 1998.
In the unaudited condensed consolidated pro forma balance
sheet, amounts applicable to the Peabody Sale are removed and the
proceeds from the Peabody Sale are included. The unaudited
condensed consolidated pro forma statements of income reflect the
reclassification of the operating results of coal and energy
marketing operations to "income from discontinued operations".
The following unaudited condensed consolidated pro forma
financial statements give effect to adjustments to convert TEG's
financial statements to the basis of United States generally
accepted accounting principles (US GAAP) and to reflect the
Peabody Sale. The financial information for the resulting
businesses acquired in the Acquisition is converted to US dollars
for purposes of combining with Texas Utilities' financial
information. Balance Sheet amounts denominated in UK pounds
sterling are translated to US dollars at the rate of L1 = $1.64,
which was the exchange rate at September 30, 1997. Statement of
income amounts were translated at the rate of L1 = $1.64, the
average exchange rate for the period presented.
P-8
<PAGE>
TEG BUSINESSES ACQUIRED
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
(IN MILLIONS)
PEABODY SALE(B)
UK ---------------
GAAP US
HISTORICAL GAAP PEABODY SALE
TEG ADJUSTMENTS(a) BALANCES ENTRIES
---------- -------------- -------- -------
Fixed Assets.... L3,986 L (L2,306) L
Investments..... 83 (35)
Goodwill........ 1,103 (57)
Current Assets:
Cash.......... 895 (180) 1,250
Short-term
deposits.... 408
Debtors....... 1,714 (123) (871)
Stocks and Other
Current Assets 320 (157)
-------- -------- ------- ------
Total...... 3,337 (123) (1,208) 1,250
-------- -------- ------- ------
Other Assets.... 110 (7)
-------- -------- ------- ------
Total Assets L7,406 L 1,090 (L3,613) L1,250
======== ======== ======= =======
Capitalization:
Equity
shareholders
funds....... L1,726 L 802 (L1,070) L1,210
Long-term loans 2,050 (435)
-------- ------- ------- ------
Total...... 3,776 802 (1,505) 1,210
Current
Liabilities:
Short-term
borrowings and
overdrafts.... 718
Other creditors 1,406 (846) 40
-------- ------- ------- ------
Total....... 2,124 (846) 40
-------- ------- ------- ------
Accumulated
Deferred Income
Taxes........... 410 (10)
Provisions for
Liabilities and
Charges....... 1,506 (122) (1,252)
-------- ------- ------- ------
Total
Capitalization
and Liabilities L7,406 L 1,090 (L3,613) L1,250
======== ======= ======= ======
TEG TEG
BUSINESSES BUSINESSES
ACQUIRED ACQUIRED(D)
----------- -----------
Fixed Assets ................ L 1,680 $ 2,755
Investments ................. 48 79
Goodwill .................... 1,046 1,715
Current Assets:
Cash ...................... 1,965 3,223
Short-term deposits ....... 408 669
Debtors ................... 720 1,181
Stocks and Other Current Assets 163 267
------- ------
Total ............. 3,256 5,340
------- ------
Other Assets ................ 103 169
------- ------
Total Assets ...... L 6,133 $ 10,058
======= =======
Capitalization:
Equity shareholders funds . L 2,668 $ 4,375
Long-term loans ........... 1,615 2,649
------ -------
Total ............. 4,283 7,024
Current Liabilities:
Short-term borrowings and
overdrafts ............. 718 1,178
Other creditors ........... 600 984
------ -------
Total ............. 1,318 2,162
------ -------
Accumulated Deferred Income Taxes 400 656
Provisions for Liabilities and
Charges ................... 132 216
------ -------
Total Capitalization and
Liabilities ...... L 6,133 $ 10,058
====== =======
See notes.
P-9
<PAGE>
TEG BUSINESSES ACQUIRED
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UK GAAP Historical TEG
----------------------------------------
THREE TWELVE
NINE MONTHS MONTHS MONTHS
ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1997 1997
------------ ------------ ------------
Turnover ............... L 3,390 L 1,304 L 4,694
Cost and overheads less
other income .......... 3,028 1,125 4,153
------ ------ ------
Operating profit ....... 362 179 541
Interest income ........ 77 15 92
------ ------ -----
Income before interest
and income taxes ...... 439 194 633
Interest payable and
similar charges ....... 180 30 210
----- ------ -----
Profit on ordinary
activities
before taxation ...... 259 164 423
Taxation charge for
period-on results ..... 66 51 117
----- ----- -----
Profit (loss) from
continuing
operations before
extraordinary item ... 193 113 306
Discontinued operations
Extraordinary
item -- windfall
profits tax .......... (112) (112)
------ ------ ------
Net profit (loss) ...... L 81 L 113 L 194
====== ====== ======
Earnings (loss) per
ordinary share:
Profit from continuing
operations before
extraordinary item . L 0.37
=======
Average shares
outstanding ........... 517
=======
US GAAP
--------------------------------------------------------
ADJUST TO DEDUCT TEG TEG
USGAAP PEABODY BUSINESSES BUSINESSES
(a) (b)(c) ADJUSTMENT ACQUIRED ACQUIRED(d)
----------- -------- ---------- -------- -----------
Turnover ..... L (L1,360) L L3,334 $5,468
Cost and
overheads less
other income. 105 (1,192) (9)(e) 3,057 5,014
----- ------- ------ ------ ------
Operating profit (105) (168) 9 277 454
Interest income 92 151
----- ------- ------ ------ ------
Income before
interest and
income taxes (105) (168) 9 369 605
Interest payable
and similar
charges .... (17) 193 317
----- ------- ------ ------ ------
Profit on
ordinary
activities
before
taxation .... (105) (151) 9 176 288
Taxation charge
for period-on
results .... 14 (42) 13(f) 102 167
----- ------- ------ ------ ------
Profit (loss)
from
continuing
operations
before
extraordinary
item ........ (119) (109) (4) 74 121
Discontinued 109 109 179
operations
Extraordinary
item --
windfall
profits
tax ........ (112) (184)
----- ------- ------ ------ ------
Net profit
(loss) ...... L (119) L -- (L4) L71 $116
====== ======= ====== ====== ======
Earnings (loss)
per ordinary
share:
Profit from
continuing
operations
before
extraordinary
item ...... L0.14 $0.22
====== ======
Average shares
outstanding. 517 517
====== ======
See notes.
P-10
<PAGE>
TEG BUSINESSES ACQUIRED
TEG BUSINESSES ACQUIRED
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
THREE MONTHS ENDED DECEMBER 31, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UK GAAP
Historical
TEG US GAAP
---------- ------------------------------
Three Months
Ended Deduct TEG
December 31, Adjust to Peabody Businesses
1997 US GAAP(a) (b)(c) Acquired
------------ ---------- ------ ----------
Turnover . . . . . . L1,383 L (L337) L1,046
Cost and overheads
less other income . . 1,192 15 (300) 907
------ ------- ------- ------
Operating profit . . 191 (15) (37) 139
Interest income . . . 28 28
------ ------- ------- ------
Income before
interest and income
taxes . . . . . . . . 219 (15) (37) 167
Interest payable and
similar charges . . . 66 (6) 60
------ ------- ------- -------
Profit on ordinary
activities before
taxation . . . . . . 153 (15) (31) 107
Taxation charge for
period-on results . . 38 17 (5) 50
------ ------- ------- --------
Profit (loss) from
continuing operations 115 ( 32) ( 26) 57
Discontinued
operations . . . . . 26 26
------- ------- ------- --------
Net profit (loss) . . L 115 (L 32) L - L 83
======= ======== ======= ========
Earnings (loss) per
ordinary share:
Profit from
continuing
operations. . . . L0.22
=======
Average shares
outstanding . . . . . 518
=======
US GAAP
--------------
TEG Businesses
Acquired(d)
-------------
Turnover . . . . . . . . . . . . . $1,715
Cost and overheads less other
income . . . . . . . . . . . . . 1,487
-------
Operating profit . . . . . . . . . 228
Interest income . . . . . . . . . . 46
=======
Income before interest and income
taxes . . . . . . . . . . . . . . 274
Interest payable and similar
charges . . . . . . . . . . . . . 98
-------
Profit on ordinary activities
before taxation . . . . . . . . . 176
Taxation charge for period-on
results . . . . . . . . . . . . . 82
-------
Profit (loss) from continuing
operations . . . . . . . . . . . 94
Discontinued operations . . . . . . 43
=======
Net profit (loss) . . . . . . . . . $ 137
=======
Earnings (loss) per ordinary share:
Profit from continuing
operations . . . . . . . . . . $ 0.18
=======
Average shares outstanding . . . . 518
=======
See notes.
P-11
<PAGE>
TEG BUSINESS ACQUIRED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
(a) Reflects estimated adjustments relating to differences in
accounting for goodwill, leases, generation equalization
costs, income taxes and pensions between UK GAAP and US
GAAP.
(b) Reflects the removal of the assets and liabilities of
Peabody from the balance sheet, proceeds from the Peabody
Sale of L1.250 million, and the removal of Peabody's
operating results from TEG's unaudited consolidated
statements of income.
(c) Turnover and operating profit were published by TEG.
Interest income, interest payable and similar charges,
taxation charge and earnings per ordinary share for the
period were estimated by Texas Utilities from information in
the published financial data.
(d) Converted to US dollars at the exchange rate in effect at
September 30, 1997 as to the balance sheet and at the
average exchange rate for the period as to the statement of
income.
(e) Eliminate expenses of previous potential merger.
(f) Eliminate group relief provided by previous parent for nil
consideration.
P-12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 2 to the
Current Report on Form 8-K 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: July 16, 1998
