<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3591
-------------------------
Texas Utilities Company
A Texas I.R.S. Employer Identification No.
Corporation 75-0705930
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201
(214) 812-4600
(FORMERLY 2001 BRYAN TOWER, DALLAS, TEXAS 75201)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
Common stock outstanding at October 31, 1994: 225,841,037 shares, without par
value.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------ ------------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
Thousands of Dollars
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES....................... $1,702,019 $1 ,786,283 $4,433,666 $4,184,729 $5,683,450 $5,360,906
---------- ----------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power................ 504,547 565,575 1,356,136 1,418,798 1,795,392 1,882,391
Operation............................... 215,289 213,782 633,433 587,953 858,035 761,896
Maintenance............................. 70,036 104,519 225,357 252,209 323,153 340,128
Depreciation and amortization........... 137,698 125,170 411,395 340,813 510,130 447,876
Federal income taxes (Notes 5 and 6).... 163,083 188,602 287,807 278,095 331,762 289,793
Taxes other than income................. 122,416 124,155 415,122 325,074 555,423 437,385
---------- ----------- ---------- ---------- ---------- ----------
Total operating expenses............ 1,213,069 1 ,321,803 3,329,250 3,202,942 4,373,895 4,159,469
---------- ----------- ---------- ---------- ---------- ----------
OPERATING INCOME......................... 488,950 464,480 1,104,416 981,787 1,309,555 1,201,437
---------- ----------- ---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Allowance for equity funds used
during construction.................... 3,194 31,479 9,174 146,011 13,288 191,780
Regulatory disallowances (Note 6)....... -- (358,000) -- (358,000) (1,556) (358,000)
Other income and deductions -- net...... 6,463 9,817 22,702 26,455 29,766 34,029
Federal income taxes (Notes 5 and 6).... (2,087) 96,983 (6,736) 114,206 (8,369) 111,247
---------- ----------- ---------- ---------- ---------- ----------
Total other income (loss)........... 7,570 (219,721) 25,140 (71,328) 33,129 (20,944)
---------- ----------- ---------- ---------- ---------- ----------
TOTAL INCOME............................. 496,520 244,759 1,129,556 910,459 1,342,684 1,180,493
---------- ----------- ---------- ---------- ---------- ----------
INTEREST CHARGES
Interest on mortgage bonds.............. 139,318 154,058 429,612 459,119 581,582 607,070
Interest on other long-term debt........ 22,653 27,277 69,973 83,473 95,959 112,681
Other interest.......................... 18,871 7,320 52,370 23,329 61,295 32,127
Allowance for borrowed funds used
during construction.................... (2,697) (23,717) (7,819) (110,011) (10,916) (135,939)
---------- ----------- ---------- ---------- ---------- ----------
Total interest charges.............. 178,145 164,938 544,136 455,910 727,920 615,939
PREFERRED STOCK DIVIDENDS OF
SUBSIDIARY.............................. 24,125 28,150 78,197 87,096 106,334 114,986
---------- ----------- ---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME.................. $ 294,250 $ 51,671 $ 507,223 $ 367,453 $ 508,430 $ 449,568
========== =========== ========== ========== ========== ==========
Average shares of common stock
outstanding (thousands)................. 225,841 222,908 225,831 220,635 225,452 219,805
Earnings and dividends per
share of common stock:
Earnings (on average shares
outstanding)........................... $1.30 $0.23 $2.25 $1.67 $2.26 $2.05
Dividends declared per share
of common stock........................ $0.77 $0.77 $2.31 $2.31 $3.08 $3.07
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1994 1993 1994 1993
---- ---- ---- ----
Thousands of Dollars
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income.............................................. $ 507,223 $ 367,453 $ 508,430 $ 449,568
Adjustments to reconcile consolidated net income to cash
provided by operating activities:
Depreciation and amortization (including amounts charged to fuel).. 536,735 416,948 663,575 534,995
Deferred federal income taxes -- net............................... 218,306 34,702 259,556 48,265
Federal investment tax credits -- net.............................. (20,458) (17,400) (25,442) (23,139)
Allowance for equity funds used during construction................ (9,174) (146,011) (13,288) (191,780)
Regulatory disallowances........................................... -- 358,000 1,556 358,000
Changes in assets and liabilities:
Receivables -- net............................................... (55,393) (250,980) 107,381 (158,393)
Inventories...................................................... 15,946 11,697 15,361 (8,629)
Accounts payable -- net.......................................... (28,830) (22,910) (20,664) 10,932
Interest and taxes accrued....................................... (26,127) 59,961 (71,638) 107,559
Other working capital............................................ (210,050) (84,812) 1,682 (156,754)
Over/(under)-recovered fuel revenue - net of deferred taxes...... 91,598 (63,160) 71,256 (108,600)
Other -- net..................................................... 45,318 34,013 45,242 49,932
----------- ----------- ----------- -----------
Cash provided by operating activities.......................... 1,065,094 697,501 1,543,007 911,956
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of securities:
First mortgage bonds............................................... 378,340 1,740,000 1,086,805 2,143,595
Other long-term debt............................................... -- 325,000 -- 325,000
Preferred stock.................................................... -- 561,650 169,575 561,650
Common stock -- net................................................ 62,102 177,257 125,815 239,802
Retirement of long-term debt and preferred stock.................... (1,125,153) (1,957,637) (2,111,855) (2,073,994)
Change in notes payable............................................. 358,015 (253,100) 358,015 (353,100)
Common stock dividends paid......................................... (520,524) (503,225) (692,168) (667,199)
Debt premium, discount, financing and reacquisition expenses........ (19,201) (101,699) (59,860) (113,085)
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities................ (866,421) (11,754) (1,123,673) 62,669
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures........................................... (310,955) (654,028) (527,120) (936,882)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel).......................................... 3,845 137,772 5,022 180,317
Change in construction receivables/payables -- net.................. (1,102) (26,706) 9,249 (23,351)
----------- ----------- ----------- -----------
Cash construction expenditures................................. (308,212) (542,962) (512,849) (779,916)
Non-utility property -- net......................................... (15,457) (10,324) (15,303) (8,605)
Nuclear fuel (excluding allowance for equity funds used
during construction).............................................. (56,302) (15,235) (57,956) (17,648)
Other investments................................................... (17,912) (12,559) (22,393) (7,799)
----------- ----------- ----------- -----------
Cash used in investing activities.............................. (397,883) (581,080) (608,501) (813,968)
----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............................. (199,210) 104,667 (189,167) 160,657
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE....................... 212,584 97,874 202,541 41,884
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE.......................... $ 13,374 $ 202,541 $ 13,374 $ 202,541
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
(UNAUDITED)
------------- ------------
Thousands of Dollars
<S> <C> <C>
UTILITY PLANT
In service:
Production........................................................... $16,510,045 $16,476,725
Transmission......................................................... 1,563,646 1,542,399
Distribution......................................................... 4,004,445 3,822,202
General.............................................................. 454,455 477,515
----------- -----------
Total.............................................................. 22,532,591 22,318,841
Less accumulated depreciation........................................ 4,928,265 4,595,533
----------- -----------
Utility plant in service less accumulated depreciation............. 17,604,326 17,723,308
Construction work in progress......................................... 1,038,393 1,040,483
Nuclear fuel (net of accumulated amortization: 1994 -- $187,881,000;
1993 -- $114,865,000)................................................. 309,508 320,891
Held for future use................................................... 46,182 41,649
----------- -----------
Utility plant less accumulated depreciation and amortization....... 18,998,409 19,126,331
Less reserve for regulatory disallowances............................. 1,308,460 1,308,460
----------- -----------
Net utility plant.................................................. 17,689,949 17,817,871
----------- -----------
INVESTMENTS
Non-utility property.................................................. 569,826 554,370
Other investments..................................................... 117,143 99,748
----------- -----------
Total investments.................................................. 686,969 654,118
----------- -----------
CURRENT ASSETS
Cash in banks......................................................... 9,075 7,841
Temporary cash investments -- at cost................................. 4,299 204,743
Special deposits...................................................... 52,630 21,975
Accounts receivable:
Customers............................................................ 275,994 224,670
Other................................................................ 31,683 27,439
Allowance for uncollectible accounts................................. (6,569) (6,394)
Inventories -- at average cost:
Materials and supplies............................................... 191,854 194,226
Fuel stock........................................................... 134,806 148,380
Prepaid taxes......................................................... 40,769 17,776
Other prepayments..................................................... 42,631 44,250
Deferred federal income taxes......................................... 43,883 43,543
Other current assets.................................................. 14,071 10,716
----------- -----------
Total current assets............................................... 835,126 939,165
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets:
Debt reacquisition costs............................................. 287,526 287,430
Cancelled lignite unit costs......................................... 18,719 20,678
Rate case costs...................................................... 65,117 66,508
Litigation and settlement costs...................................... 72,685 72,685
Voluntary retirement/severance program............................... 191,340 212,367
Recoverable deferred federal income taxes -- net..................... 1,208,727 1,230,418
Other regulatory assets.............................................. 21,163 21,242
Under-recovered fuel revenue.......................................... 63,852 204,772
Other deferred debits................................................. 76,228 63,559
----------- -----------
Total deferred debits.............................................. 2,005,357 2,179,659
Less reserve for regulatory disallowances............................. 72,685 72,685
----------- -----------
Net deferred debits................................................ 1,932,672 2,106,974
----------- -----------
Total............................................................ $21,144,716 $21,518,128
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
(UNAUDITED)
------------- ------------
THOUSANDS OF DOLLARS
<S> <C> <C>
CAPITALIZATION
Common stock without par value -- net:
Authorized shares -- 500,000,000
Outstanding shares:
September 30, 1994 -- 225,841,037; December 31, 1993 -- 224,345,422...... $ 4,796,751 $ 4,728,580
Retained earnings.......................................................... 1,827,919 1,842,413
----------- -----------
Total common stock equity.............................................. 6,624,670 6,570,993
Preferred stock:
Not subject to mandatory redemption....................................... 870,220 1,083,008
Subject to mandatory redemption........................................... 387,234 396,917
Long-term debt, less amounts due currently................................. 7,953,421 8,379,826
----------- -----------
Total capitalization................................................... 15,835,545 16,430,744
----------- -----------
CURRENT LIABILITIES
Notes payable -- banks..................................................... 50,000 --
Notes payable -- commercial paper.......................................... 308,015 --
Long-term debt due currently............................................... 58,475 151,105
Accounts payable........................................................... 231,357 260,634
Dividends declared......................................................... 197,720 200,410
Customers' deposits........................................................ 51,221 50,798
Taxes accrued.............................................................. 291,118 310,091
Interest accrued........................................................... 187,848 195,002
Refunds due to customers................................................... -- 141,153
Other current liabilities.................................................. 96,116 106,192
----------- -----------
Total current liabilities.............................................. 1,471,870 1,415,385
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes.................................. 2,834,843 2,686,409
Unamortized federal investment tax credits................................. 685,073 705,531
Other deferred credits and noncurrent liabilities.......................... 317,385 280,059
----------- -----------
Total deferred credits and other noncurrent liabilities................ 3,837,301 3,671,999
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
Total.................................................................. $21,144,716 $21,518,128
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Basis of Presentation -- The condensed consolidated financial statements
included herein have been prepared by Texas Utilities Company (Company) on the
same basis as those in the 1993 Annual Report on Form 10-K (except as set forth
in Note 8) and, in the opinion of the Company, all adjustments (constituting
only normal recurring accruals) necessary to a fair statement of the results of
operation have been included therein. The statements are presented pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The Company believes
that the disclosures are adequate to make the information presented not
misleading.
The unaudited financial information included herein has been reviewed by
Deloitte & Touche LLP, independent certified public accountants, whose report
with respect thereto is filed herewith in Part I of this report. The condensed
consolidated financial statements should be considered in conjunction with the
consolidated financial statements, and the notes thereto, of the Company
included in the 1993 Annual Report on Form 10-K and the information under
Management's Discussion and Analysis of Financial Condition and Results of
Operation herein.
Consolidation -- The consolidated financial statements include the Company and
all of its subsidiaries (System Companies):
Texas Utilities Electric Company (TU Electric)
Southwestern Electric Service Company (SESCO)
Texas Utilities Fuel Company (Fuel Company)
Texas Utilities Mining Company (Mining Company)
Texas Utilities Services Inc. (TU Services)
Basic Resources Inc. (Basic)
Chaco Energy Company (Chaco)
Texas Utilities Properties Inc. (TU Properties)
In May 1994, TU Properties, a new wholly-owned subsidiary of the Company, was
incorporated under the laws of the State of Texas. The principal function of TU
Properties is to own or lease real and personal properties which it then leases
to System Companies. TU Properties has leased a 48-story building in Dallas,
Texas from a bank leasing company. The activities of TU Properties are not
expected to have a material effect on the Company's results of operation or
financial position.
All significant intercompany items and transactions have been eliminated in
consolidation.
Reclassification -- Certain financial statement items for 1993 have been
reclassified to conform to the 1994 presentation.
Allowance for Funds Used During Construction -- Effective January 1, 1994, TU
Electric began using a gross rate of 9.25% for Allowance for Funds Used During
Construction (AFUDC) for all construction. In 1993, TU Electric used a gross
rate of 10.4% for all construction to comply with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109). In
1992, TU Electric used a net-of-tax rate of 8.8% on projects commenced before
March 1, 1986, and a gross rate of 10.4% on projects commenced thereafter.
6
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
1. GENERAL -- (concluded)
Consolidated Cash Flows -- The supplemental schedules below detail cash
payments and noncash investing and financing activities:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH PAYMENTS:
Interest (net of amounts capitalized)....... $562,508 $491,200 $715,615 $599,715
Income taxes................................ $134,655 $ 9,634 $199,777 $ 20,634
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of SESCO:
Book value of assets acquired.............. $ -- $ 69,521 $ -- $ 69,521
Goodwill acquired.......................... -- 32,059 -- 32,059
Less: Liabilities assumed................. -- (39,991) -- (39,991)
Less: Stock issued........................ -- (59,976) -- (59,976)
-------- -------- -------- --------
Cash paid................................. -- 1,613 -- 1,613
Less: Cash acquired....................... -- 376 -- 376
-------- -------- -------- --------
Net cash $ -- $ 1,237 $ -- $ 1,237
======== ======== ======== ========
</TABLE>
2. SHORT-TERM FINANCING
At September 30, 1994, the Company and TU Electric had joint lines of credit
aggregating $1,000,000,000 under credit facility agreements (Agreements) with a
group of commercial banks. The Agreements have two facilities, for each of which
the Company pays a fee. Facility A provides for borrowings up to $300,000,000
and terminates April 28, 1995. The Company and TU Electric intend to negotiate
an extension of this facility. Facility B provides for borrowings up to
$700,000,000 and terminates April 29, 1999. The Company's borrowings under the
Agreements are limited to $250,000,000. Borrowings under the Agreements will be
used for working capital and other corporate purposes, including commercial
paper backup.
3. CAPITALIZATION
Common Stock
The Company issued the following shares of common stock during the nine months
ended September 30, 1994:
<TABLE>
<CAPTION>
DESCRIPTION SHARES PROCEEDS
----------- --------- -----------
<S> <C> <C>
Automatic Dividend Reinvestment and Common Stock Purchase Plan........................... 1,364,690 $56,671,000
Employees' Thrift Plan................................................................... 130,925 5,431,000
--------- -----------
Total......................................................................... 1,495,615 $62,102,000
========= ===========
</TABLE>
Requirements under the Automated Dividend Reinvestment and Common Stock
Purchase Plan and the Employees' Thrift Plan of the Texas Utilities Company
System (Thrift Plan) have been met through open market purchases on common
stock since April 1994. Shares of common stock issued to and held by the
trustee in connection with the leveraged employee stock ownership provisions
of the Thrift Plan (LESOP Shares) are allocated to participants' accounts as
needed to meet the obligations of the System Companies under the terms of the
Thrift Plan. Common stock equity increases at such time as LESOP Shares are
allocated to participants' accounts even though common shares outstanding
include unallocated LESOP Shares held by the trustee. Allocations of LESOP
Shares increased common stock equity by $6,070,000 during the nine-month period
ended September 30, 1994.
7
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
3. CAPITALIZATION -- (concluded)
Preferred Stock of TU Electric
At September 30, 1994 and December 31, 1993, TU Electric had 17,000,000 shares
of preferred stock authorized by its articles of incorporation of which
12,787,228 and 15,022,092 shares were issued and outstanding, respectively.
TU Electric redeemed or reacquired 2,234,864 shares of preferred stock with
dividend rates ranging from $7.00 to $9.64 during the nine months ended
September 30, 1994.
Long-Term Debt
TU Electric issued the following long-term debt during the nine months ended
September 30, 1994:
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- --------- ------------- --------
<S> <C> <C> <C>
First mortgage and collateral trust bonds................ $300,000,000 5.25% (a) 1999
Pollution control revenue bonds.......................... 78,340,000 3.20% to 3.40% (b) 2029
------------
Total.................................................. $378,340,000
============
</TABLE>
(a) Such interest rate is reset quarterly and is 6.0625% for the period November
1, 1994 through January 31, 1995.
(b) All of such bonds are currently in a flexible mode in which they are
remarketed for periods of less than 270 days and are secured by an
irrevocable letter of credit.
The System Companies redeemed or reacquired the following long-term debt
during the nine months ended September 30, 1994:
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ --------------- ------------
<S> <C> <C> <C>
First mortgage bonds (TU Electric)..................... $602,850,000 4.50% to 10.45% 1995 to 2019
Taxable pollution control revenue bonds (TU Electric).. 78,340,000 3.90% to 8.49% 2021
Other long-term debt (Fuel Company).................... 89,740,000 4.50% to 8.50% 1996
------------
Total................................................ $770,930,000
============
</TABLE>
In October 1994, TU Electric reacquired $10,000,000 of 9-7/8% First Mortgage
and Collateral Trust Bonds due November 1, 2019.
4. RETAINED EARNINGS
The articles of incorporation and the mortgages, as supplemented, of TU
Electric and SESCO contain provisions which, under certain conditions, restrict
distributions on or acquisitions of their common stock. At September 30, 1994,
$155,637,000 of retained earnings were thus restricted as a result of such
provisions. Retained earnings at such date also includes $431,243,000,
representing the Company's equity in undistributed earnings since acquisition
included in transfers by TU Electric from its retained earnings to stated value
of common stock. The total of such restricted retained earnings at September
30, 1994 is $586,880,000.
8
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
5. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C> <C> <C>
Charged (credited) to operating expenses:
Current................................... $ 79,918 $ 98,183 $167,810 $ 119,860 $174,833 $ 111,563
Deferred -- net........................... 89,213 96,356 140,455 175,635 182,371 201,369
Investment tax credits -- net............. (6,048) (5,937) (20,458) (17,400) (25,442) (23,139)
-------- -------- -------- -------- -------- ---------
Total to operating expenses.............. 163,083 188,602 287,807 278,095 331,762 289,793
-------- -------- -------- -------- -------- ---------
Charged (credited) to other income:
Current................................... (4,966) (6,442) (21,793) (14,829) (30,448) (16,688)
Deferred -- net........................... 7,053 (90,541) 28,529 (99,377) 38,817 (94,559)
-------- -------- -------- -------- -------- ---------
Total to other income.................... 2,087 (96,983) 6,736 (114,206) 8,369 (111,247)
-------- -------- -------- -------- -------- ---------
Credited to retained earnings:
LESOP dividend deduction (1,673) (1,843) (5,081) (5,245) (6,810) (5,245)
-------- -------- -------- -------- -------- ---------
Total federal income taxes $163,497 $ 89,776 $289,462 $ 158,644 $333,321 $ 173,301
======== ======== ======== ========= ======== =========
</TABLE>
6. RATE PROCEEDINGS
Docket 11735
In January 1993, TU Electric made applications to the Public Utility
Commission of Texas (PUC) in Docket 11735 and to its municipal regulatory
authorities for upward adjustments in rates for electric service throughout its
service area, which would have increased annual operating revenues by
approximately $760 million, or 15.3%, based upon the test year ended June 30,
1992. Such request reflected, among other things, costs associated with Unit 2
of TU Electric's Comanche Peak nuclear generating station (Comanche Peak), costs
associated with Comanche Peak Unit 1 after the end of the Docket 9300 (see
below) test year, additional ad valorem taxes and certain postretirement benefit
costs. In August 1993, pursuant to rules of the PUC, TU Electric placed its
requested rate increase into effect, under bond and subject to refund with
interest, applicable to energy sales on and after such date; however, revenues
were recorded net of an estimated reserve for possible refunds.
In October 1993, the PUC issued an order (Order) approving the terms of an
agreement (Settlement Agreement) among TU Electric, the General Counsel's office
of the PUC and applicable intervenors which, among other things, settled all
remaining issues relating to the design, construction and cost of Comanche Peak
through commencement of commercial operation of Unit 2. The Settlement
Agreement provided for the disallowance in Docket 11735 of $250 million of costs
relating to the completion of Comanche Peak. Pursuant to the Order, TU Electric
refunded $5 million in fuel charges previously incurred in order to resolve the
fuel phase of Docket 11735 under which TU Electric was seeking reconciliation of
approximately
9
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
6. RATE PROCEEDINGS -- (continued)
$4.6 billion of fuel costs incurred during the three year period ended June 30,
1992, under the fuel rule in effect prior to May 1993. Further, in order to
resolve the primary issue in another proceeding which resulted from a complaint
filed against TU Electric in October 1992 by the General Counsel's office of the
PUC, as a result of the Order, TU Electric agreed to write off $83 million of
AFUDC, which consisted of the amount subject to dispute in such proceeding and
similar charges subsequently accrued. Also, under the Settlement Agreement and
confirmed in the Docket 11735 final order (see below), TU Electric will recover,
ratably over an eight year period, $197 million of operation and maintenance
expenditures incurred by TU Electric in connection with its recent cost
reduction program. However, an additional $25 million of such expenditures will
not be subject to recovery and was written off by TU Electric. As a result of
the Settlement Agreement, TU Electric recorded a charge against earnings in
September 1993 of approximately $363 million ($265 million after tax).
In January 1994, the PUC issued a final order in Docket 11735, which was
amended by orders on rehearing dated April 20, 1994 and May 27, 1994. The
amended final order provides for a total annual revenue increase of
approximately $449 million, or 9.0%. TU Electric strongly disagrees with the
amended final order and has appealed the outcome in a suit filed in the 200th
Judicial District Court of Travis County, Texas. In May 1994, TU Electric began
billing its customers at rates as approved in the amended final order. As a
result of this amended final order, in September 1994, TU Electric refunded the
difference between the bonded rates and the rates approved in the amended final
order, including interest. Such refunded amount, including interest, was
approximately $237.5 million. Such refund was mitigated by a fuel cost
surcharge approved by the PUC of $147.5 million in under-collected fuel costs
through June 30, 1993, including interest. An appeal contesting the approval of
this surcharge is pending in the suit filed in the 200th Judicial District
Court.
Docket 9300
In November 1991, TU Electric filed a petition in the 250th Judicial District
Court of Travis County, Texas, requesting a reversal and remand of the September
1991 final order of the PUC in connection with TU Electric's rate increase
request in Docket 9300. In September 1992, after a hearing, the District Court
entered a judgment that affirmed a prudence disallowance of $472 million
provided for in the PUC's final order with respect to Comanche Peak, reversed
and remanded to the PUC for reconsideration those portions of the PUC's final
order providing for additional disallowances aggregating $884 million with
respect to TU Electric's reacquisitions of minority owner interests in Comanche
Peak, found that the PUC erred in ordering a refund of $2.5 million with respect
to certain fuel gas costs considered imprudent by the PUC, and recognized that
on remand the PUC may adjust the amount of construction work in progress (CWIP)
included in TU Electric's rate base. TU Electric and other parties to this suit
appealed this District Court judgment to the Court of Appeals for the Third
District of Texas. In June 1994, the Court of Appeals issued its decision in
connection with these appeals which was modified on rehearing. The Court of
Appeals affirmed the prudence disallowance of $472 million, reversed and
remanded the portion of the District Court's judgment that had affirmed a
disallowance of $25 million relating to TU Electric's reacquisitions of the
minority owner interests in Comanche Peak nuclear fuel, and affirmed the remand
of the remainder of the disallowance of $884 million relating to the
reacquisitions of the minority owner interests in Comanche Peak. Therefore, the
Court of Appeals remanded an aggregate of $909 million of disallowances with
respect to TU Electric's reacquisitions of minority owner interests in Comanche
Peak to the PUC for reconsideration and ordered that such
10
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
6. RATE PROCEEDINGS -- (continued)
reconsideration be on the basis of a prudent investment standard. In addition,
the Court of Appeals reversed the District Court's finding that the PUC erred in
ordering a refund of $2.5 million with respect to certain fuel gas costs. Also,
the Court of Appeals specified that, on remand, the PUC will be required to
re-evaluate the appropriate level of TU Electric's CWIP included in rate base in
light of TU Electric's financial condition at the time of the initial hearing
and to reconsider whether the $442 million revenue increase provided for in the
PUC's final order remains the benchmark in light of this re-examination.
The same Court of Appeals had considered an appeal of another utility's rate
case and ruled, in November 1993, that prior court rulings required that tax
benefits generated by costs, including capital costs, not allowed in rates must
be used to reduce rates charged to customers. In its opinion concerning TU
Electric's Docket 9300 rate case, the Court of Appeals maintained that same
position and, accordingly, reversed the District Court in that regard. TU
Electric believes that such rulings are erroneous and not consistent with the
Texas Public Utility Regulatory Act. TU Electric had contended that, according
to a Private Letter Ruling issued to TU Electric by the Internal Revenue Service
(IRS) with respect to investment tax credits, such ratemaking treatment, to the
extent related to property classified for tax purposes as public utility
property, would result in a violation of the normalization rules contained in
the Internal Revenue Code of 1986, as amended. The Court of Appeals said that
it was unpersuaded that its decision conflicts with the normalization rules.
Violation of the normalization rules would result in a significant adverse
effect on TU Electric's results of operation and liquidity. If there are
normalization violations, TU Electric will forfeit its investment tax credits
which remain unamortized as of the date of the violation, plus the ability to
take advantage of accelerated tax depreciation in years to which the violative
order relates. This could result in payments to the IRS of $1.0 to $1.3
billion.
TU Electric disagrees with certain portions of the decision of the Court of
Appeals, including specifically its decision with respect to federal income
taxes, and will file an appeal of the decision to the Supreme Court of Texas.
Other parties may also appeal this decision to the Supreme Court of Texas. TU
Electric cannot predict the outcome of any such appeals or any reconsideration
on remand by the PUC.
Fuel Recovery Rule
In August 1994, in accordance with the rules of the PUC, TU Electric
petitioned the PUC for a recovery of approximately $93 million, including
interest, in under-collected fuel costs for the period July 1993 through June
1994. Such under-collections were primarily due to continued higher natural gas
prices on the spot market and hotter than normal weather in August 1993 and June
1994. In addition, there was decreased availability of lower cost lignite
generation. TU Electric anticipates recovery of this amount over a six-month
period beginning in early 1995.
11
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
6. RATE PROCEEDINGS -- (concluded)
NEW STRATEGIC RATES
In June 1994, TU Electric proposed a package of new strategic rates designed
to retain existing commercial, industrial, and wholesale load, enhance economic
development, improve the environment, and encourage further energy efficiency.
Such proposal was filed with the PUC and cities in TU Electric's service area.
If approved, four new rates will be offered. The first two rates will allow for
negotiated rates to retain existing commercial, industrial, and wholesale
customers who have viable alternative sources of supply and would otherwise
leave the system. The third rate is an economic development rider which will
provide an incentive to attract new businesses and jobs and to encourage
existing customers to expand their facilities within TU Electric's service area.
The fourth rate is an environmental technology service rider that provides an
incentive for qualifying customers to convert to advanced technologies that will
conserve energy or improve the environment. TU Electric's proposed strategic
rates have been approved by over 150 cities within its service territory.
Hearings before the PUC were held in August and September 1994, and TU Electric
expects a decision by the end of the year.
INTEGRATED RESOURCE PLAN
In October 1994, TU Electric filed an application for approval by the PUC of
its Integrated Resource Plan (IRP) for the ten-year period 1995-2004. The IRP
includes initiatives that address demand-side management resources, purchased
power, and future generating capacity which includes renewable energy sources.
TU Electric's IRP includes one lignite-fueled 750 megawatt (MW) unit at Twin
Oak. The second lignite-fueled Twin Oak unit has been deferred beyond the ten
year period. Also included in the IRP are 1,802 MW of gas/oil-
fueled combustion turbine units (including 288 MW of simple cycle combustion
turbines) and 300 MW of wind turbine generation. None of the aforementioned
additions requires significant construction expenditures in the 1994-1996
period. Hearings on this application are expected to begin early 1995.
7. COMMITMENTS AND CONTINGENCIES
Construction Program
Construction expenditures, excluding AFUDC, have been estimated at
approximately $400 million for each of the years 1994, 1995 and 1996,
respectively. The Company presently anticipates that 1994 construction
expenditures will exceed this level by approximately $25 million. The re-
evaluation of growth expectations, the effects of inflation, additional
regulatory requirements, and the availability of fuel, labor, materials and
capital may result in changes in estimated construction costs and dates of
completion. Commitments in connection with the construction program are
generally revocable, subject to reimbursement to manufacturers for expenditures
incurred or other cancellation penalties.
CLEAN AIR ACT
The federal Clean Air Act, as amended (Clean Air Act), includes provisions
which, among other things, place limits on the sulfur dioxide emissions produced
by generating units. To meet these sulfur dioxide requirements, the Clean Air
Act provides for the annual allocation of sulfur dioxide emission
allowances to utilities. Under the Clean Air Act, utilities are permitted to
transfer allowances within their own systems and to buy or sell allowances. The
Environmental Protection Agency grants a maximum number of allowances annually
to TU Electric based on the amount of emissions from units in operation during
the period 1985 through 1987. TU Electric's capital requirements have not been
significantly affected by the requirements of the Clean Air Act. Although TU
Electric is unable to fully determine the cost of compliance with the Clean Air
Act, it is not expected to have a significant impact on the Company. Any
additional capital costs, as well as any increased operating costs associated
with these new requirements, are expected to be recoverable through rates, as
similar costs have been recovered in the past.
COOLING WATER CONTRACTS
TU Electric has entered into contracts with public agencies to purchase
cooling water for use in the generation of electric energy. In connection with
certain contracts, TU Electric has agreed, in effect, to guarantee the
principal, $37,050,000 at September 30, 1994, and interest on bonds issued to
finance the reservoirs from which the water is supplied. The bonds mature at
various dates through 2011 and have interest rates ranging from 5-1/2% to 7%.
TU Electric is required to make periodic payments equal to such principal and
interest, including amounts assumed by a third party and reimbursed to TU
Electric. In addition, TU Electric is
12
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES -- (continued)
obligated to pay certain variable costs of operating and maintaining the
reservoirs. TU Electric has assigned to a municipality all contract rights and
obligations of TU Electric in connection with $89,305,000 remaining principal
amount of bonds at September 30, 1994, issued for similar purposes which had
previously been guaranteed by TU Electric. TU Electric is, however,
contingently liable in the unlikely event of default by the municipality.
Chaco Coal Properties
Chaco has a coal lease agreement for the rights to certain surface mineable
coal reserves located in New Mexico. The agreement provides for minimum advance
royalty payments of approximately $16 million per year through 2017, covering
approximately 228 million tons of coal. The Company has entered into a surety
agreement to assure performance by Chaco with respect to this agreement. At
September 30, 1994 and December 31, 1993, $499,890,000 and $483,855,000,
respectively, of minimum advance royalties paid by Chaco are included in non-
utility property.
Nuclear Insurance
With regard to liability coverage, the Price-Anderson Act (Act) provides
financial protection for the public in the event of a significant nuclear power
plant incident. The Act sets the statutory limit of public liability for a
single nuclear incident currently at $9.0 billion and requires nuclear power
plant operators to provide financial protection for this amount. As required,
TU Electric provides this financial protection for a nuclear incident at
Comanche Peak resulting in public bodily injury and property damage through a
combination of private insurance and industry-wide retrospective payment
plans. As the first layer of financial protection, TU Electric has purchased
$200 million of liability insurance from American Nuclear Insurers (ANI), which
provides such insurance on behalf of two major stock and mutual insurance pools,
Nuclear Energy Liability Insurance Association and Mutual Atomic Energy
Liability Underwriters. The second layer of financial protection is provided
under an industry retrospective payment program called Secondary Financial
Protection (SFP). Under the SFP, each operating licensed reactor in the United
States is subject to an assessment of up to $79.275 million, subject to
increases for inflation every five years, in the event of a nuclear incident at
any nuclear plant in the United States. Assessments are limited to $10 million
per operating licensed reactor per year per incident. All assessments under the
SFP are subject to a 3% insurance premium tax which is not included in the
amounts above.
With respect to nuclear decontamination and property damage insurance,
Nuclear Regulatory Commission (NRC) regulations require that nuclear plant
license-holders maintain not less than $1.06 billion of such insurance and
require the proceeds thereof to be used to place a plant in a safe and stable
condition, to decontaminate it pursuant to a plan submitted to and approved by
the NRC before the proceeds can be used for plant repair or restoration or to
provide for premature decommissioning. TU Electric maintains nuclear
decontamination and property damage insurance for Comanche Peak in the amount of
$2.75 billion, above which TU Electric is self-insured. The primary layer of
coverage of $500 million is provided by ANI. The remaining coverage includes
premature decommissioning coverage and is provided by ANI in the amount of $850
million and Nuclear Electric Insurance Limited (NEIL), a nuclear electric
utility industry mutual insurance company, in the amount of $1.4 billion. TU
Electric is subject to a maximum annual assessment from NEIL of $17 million in
the event NEIL's losses under this type of insurance for major incidents at
nuclear plants participating in this program exceed its accumulated funds and
reinsurance.
13
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES -- (concluded)
TU Electric maintains Extra Expense Insurance through NEIL to cover the
additional costs of obtaining replacement power from another source if one or
both of the units at Comanche Peak are out of service for more than twenty-one
weeks as a result of covered direct physical damage. The coverage provides for
weekly payments of up to $3.5 million for the first and $2.345 million for the
second and third fifty-two week periods of each outage, respectively, after the
initial twenty-one week period. The total maximum coverage is $426 million per
unit. The coverage amounts applicable to each unit will be reduced to 80% if
both units are out of service at the same time as a result of the same accident.
Under this coverage, TU Electric is subject to a maximum assessment of $10
million per year.
Nuclear Decommissioning and Disposal of Spent Fuel
TU Electric has established a reserve, charged to depreciation expense and
accumulated depreciation, for the decommissioning of Comanche Peak, whereby
decommissioning costs are being recovered from customers over the life of the
plant and deposited in external trust funds (included in other investments). At
September 30, 1994, such reserve totaled $50,946,000 which includes an accrual
of $13,634,000 and $17,501,000 for the nine and twelve months ended September
30, 1994, respectively. As of September 30, 1994, the market value of deposits
in the external trust for decommissioning of Comanche Peak was $49,787,000.
Realized earnings on funds deposited in the external trust are recognized in the
reserve. Based on a site-specific study during 1992 using the prompt
dismantlement method and then-current dollars, decommissioning costs for
Comanche Peak Unit 1, and Unit 2 and common facilities were estimated to be
$255,000,000 and $344,000,000, respectively. Decommissioning activities are
projected to begin in 2030 and 2032 for Comanche Peak Unit 1, and Unit 2 and
common facilities, respectively. TU Electric is recovering such costs based
upon the 1992 study through its rates placed in effect under Docket 11735. (See
Note 6.)
TU Electric has a contract with the United States Department of Energy for
the future disposal of spent nuclear fuel at a cost of one mill per kilowatt-
hour of Comanche Peak net generation. The disposal fee is included in nuclear
fuel expense.
General
In addition to the above, the Company and its subsidiaries are involved in
various legal and administrative proceedings which, in the opinion of the
Company, should not have a material effect upon its financial position or
results of operation.
14
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Concluded)
(Unaudited)
8. CHANGES IN ACCOUNTING
In January 1994, the Company began recording a liability for certain types
of postemployment benefits provided to former or inactive employees after
employment but before retirement in accordance with the provisions of Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (Statement 112). Statement 112 did not have a material
effect on the Company's financial position or results of operation.
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (Statement 115). Statement 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Statement 115 did not
have a material effect on the Company's financial position or results of
operation.
In October 1994, the Company adopted Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" (Statement 119). Statement 119 is effective for
fiscal years ending after December 15, 1994. Statement 119 requires disclosures
about the amounts, nature and terms of certain derivative financial instruments
and that a distinction be made between financial instruments held or issued for
trading purposes and those held or issued for other purposes. Statement 119
presently does not have any effect on the Company and is not expected to have a
material effect on the Company in the future.
15
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of Texas
Utilities Company and subsidiaries as of September 30, 1994, and the related
condensed statements of consolidated income for the three-month, nine-month and
twelve-month periods ended September 30, 1994 and 1993, and cash flows for the
nine-month and twelve-month periods ended September 30, 1994 and 1993. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Texas Utilities Company and
subsidiaries as of December 31, 1993, and the related consolidated statements of
income, retained earnings and cash flows for the year then ended (not presented
herein); and in our report dated March 11, 1994, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1993, is fairly stated in all material respects in relation
to the consolidated balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Dallas, Texas
November 8, 1994
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation in the Texas Utilities Company (Company) Form 10-K for the year 1993.
No significant changes or events which might affect the financial condition of
the Company and its subsidiaries (System Companies) have occurred subsequent to
year-end other than as disclosed in this report.
External funds of a permanent or long-term nature are obtained through the
sales of common stock, preferred stock and long-term debt by the System
Companies. The capitalization ratios of the Company and its subsidiaries at
September 30, 1994 consisted of approximately 50% long-term debt, 8% preferred
stock and 42% common stock equity.
The System Companies had financings totaling $440,442,000 to date in 1994.
Proceeds from such financings were used primarily for the early redemption or
reacquisition of higher coupon debt and higher dividend preferred stock.
Financings to date in 1994 by the System Companies consisted of:
<TABLE>
<CAPTION>
LONG-TERM DEBT (TU ELECTRIC):
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- -------------- ------------- --------
<S> <C> <C> <C>
First mortgage and collateral trust bonds......................... $300,000,000 5.25% 1999
Pollution control revenue bonds................................... 78,340,000 3.20% to 3.40% 2029
--------------
Total .................................................... $378,340,000
==============
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK (COMPANY):
NET
DESCRIPTION SHARES PROCEEDS
----------- --------- -----------
<S> <C> <C>
Automatic dividend reinvestment and common stock purchase plan...................... 1,364,690 $56,671,000
Employees' thrift plan.............................................................. 130,925 5,431,000
--------- -----------
Total.......................................................................... 1,495,615 $62,102,000
========= ===========
</TABLE>
To date in 1994, the System Companies redeemed, reacquired or made principal
payments of $1,135,153,000 on long-term debt and preferred stock. Early
redemptions of long-term debt and preferred stock may occur from time to time in
amounts presently undetermined.
The System Companies expect to sell additional debt and equity securities as
needed including (i) the possible future sale by TU Electric of up to
$650,000,000 of First Mortgage Bonds currently registered with the Securities
and Exchange Commission for offering pursuant to Rule 415 under the Securities
Act of 1933 and (ii) the possible future sale by TU Electric of 250,000 shares
of Cumulative Preferred Stock ($100 liquidation value) similarly registered. The
Company and TU Electric have credit facility agreements (Agreements) with a
group of commercial banks. The Agreements have two facilities, for each of which
the Company pays a fee. Facility A provides for borrowings up to $300,000,000
and terminates April 28, 1995. The Company and TU Electric intend to
negotiate an extension of this facility. Facility B provides for borrowings
up to $700,000,000 and terminates April 29, 1999. The Company's borrowings
under the Agreements are limited to $250,000,000. Borrowings under the
Agreements will be used for working capital and other corporate purposes,
including commercial paper backup.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION -- (Continued)
Liquidity and Capital Resources -- (continued)
In June 1994, Texas Utilities Properties Inc., a new wholly-owned subsidiary
of the Company, entered into an operating lease agreement with a bank leasing
company for a 48-story office building which is being utilized as the corporate
headquarters of the System Companies.
In order to remain competitive and in response to the disappointing rate order
in Docket 11735, the Company is continuing its efforts to reduce operating costs
and capital expenditures and is reviewing various alternatives and strategies to
improve future earnings potential and its basic financial position. This review
may result in further initiatives which may include, but not necessarily be
limited to, alternative uses or disposition of existing assets, greater
utilization of short-term and variable rate securities, additional new marketing
and rate initiatives and application for rate increases from regulatory
authorities. It is not possible at this time to predict the effect any of these
possible initiatives might have on the Company's financial position or its
results of operation. The Company believes that internal cash generation will
increase as a result of increased rates authorized in the Docket 11735 amended
final order and through the implementation of the initiatives discussed above.
In August 1993, TU Electric placed Unit 2 of its Comanche Peak nuclear
generating station (Comanche Peak) in commercial operation and implemented,
under bond, the 15.3% rate increase requested in Docket 11735; however, revenues
were recorded net of an estimated reserve for possible refunds. In September
1993, TU Electric recorded a charge against earnings of approximately $363
million ($265 million after tax) related to an agreement (Settlement Agreement)
among the parties involved in TU Electric's Docket 11735.
In January 1994, the Public Utility Commission of Texas (PUC) issued a final
order in Docket 11735, which was amended by orders on rehearing dated April 20,
1994 and May 27, 1994. The amended final order provides for a total annual
revenue increase of approximately $449 million, or 9.0%. TU Electric strongly
disagrees with the amended final order and has appealed the outcome in a suit
filed in the 200th Judicial District Court of Travis County, Texas. In May
1994, TU Electric began billing its customers rates as approved in the amended
final order. As a result of this amended final order, in September 1994, TU
Electric refunded the difference between the bonded rates and the rates approved
in the amended final order, including interest. Such refunded amount, including
interest, was approximately $237.5 million. Such refund was mitigated by a fuel
cost surcharge approved by the PUC of $147.5 million in under-collected fuel
costs through June 30, 1993, including interest. An appeal contesting the
approval of this surcharge is pending in the suit filed in the 200th Judicial
District Court. For additional information regarding the Settlement Agreement
and the rate decision, see Note 6 to Condensed Consolidated Financial
Statements.
In November 1991, TU Electric filed a petition in the 250th Judicial District
Court of Travis County, Texas, requesting a reversal and remand of the September
1991 final order of the PUC in connection with TU Electric's rate increase
request in Docket 9300. In September 1992, after a hearing, the District Court
entered a judgment that affirmed a prudence disallowance of $472 million
provided for in the PUC's final order with respect to Comanche Peak, reversed
and remanded to the PUC for reconsideration those portions of the PUC's final
order providing for additional disallowances aggregating $884 million with
respect to TU Electric's reacquisitions of minority owner interests in Comanche
Peak, found that the PUC erred in ordering a refund of $2.5 million with respect
to certain fuel gas costs considered imprudent by the PUC, and recognized that
on remand the PUC may adjust the amount of construction work in progress (CWIP)
included in TU Electric's rate base. TU Electric and other parties to this
suit appealed this District Court judgment to the Court of Appeals for the
Third District of Texas. In June 1994, the Court of Appeals issued
18
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Liquidity and Capital Resources -- (continued)
its decision in connection with these appeals which was modified on rehearing.
The Court of Appeals affirmed the prudence disallowance of $472 million,
reversed and remanded the portion of the District Court's judgment that had
affirmed a disallowance of $25 million relating to TU Electric's reacquisitions
of the minority owner interests in Comanche Peak nuclear fuel, and affirmed the
remand of the remainder of the disallowance of $884 million relating to the
reacquisitions of the minority owner interests in Comanche Peak. Therefore, the
Court of Appeals remanded an aggregate of $909 million of disallowances with
respect to TU Electric's reacquisitions of minority owner interests in Comanche
Peak to the PUC for reconsideration and ordered that such reconsideration be on
the basis of a prudent investment standard. In addition, the Court of Appeals
reversed the District Court's finding that the PUC erred in ordering a refund of
$2.5 million with respect to certain fuel gas costs. Also, the Court of Appeals
specified that, on remand, the PUC will be required to re-evaluate the
appropriate level of TU Electric's CWIP included in rate base in light of TU
Electric's financial condition at the time of the initial hearing and to
reconsider whether the $442 million revenue increase provided for in the PUC's
final order remains the benchmark in light of this re-examination.
The same Court of Appeals had considered an appeal of another utility's rate
case and ruled, in November 1993, that prior court rulings required that tax
benefits generated by costs, including capital costs, not allowed in rates must
be used to reduce rates charged to customers. In its opinion concerning TU
Electric's Docket 9300 rate case, the Court of Appeals maintained that same
position and, accordingly, reversed the District Court in that regard. TU
Electric believes that such rulings are erroneous and not consistent with the
Texas Public Utility Regulatory Act. TU Electric had contended that, according
to a Private Letter Ruling issued to TU Electric by the Internal Revenue Service
(IRS) with respect to investment tax credits, such ratemaking treatment, to the
extent related to property classified for tax purposes as public utility
property, would result in a violation of the normalization rules contained in
the Internal Revenue Code of 1986, as amended. The Court of Appeals said that
it was unpersuaded that its decision conflicts with the normalization rules.
Violation of the normalization rules would result in a significant adverse
effect on TU Electric's results of operation and liquidity. If there are
normalization violations, TU Electric will forfeit its investment tax credits
which remain unamortized as of the date of the violation, plus the ability to
take advantage of accelerated tax depreciation in years to which the violative
order relates. This could result in payments to the IRS of $1.0 to $1.3
billion.
TU Electric disagrees with certain portions of the decision of the Court of
Appeals, including specifically its decision with respect to federal income
taxes, and will file an appeal of the decision to the Supreme Court of Texas.
Other parties may also appeal this decision to the Supreme Court of Texas. TU
Electric cannot predict the outcome of any such appeals or any reconsideration
on remand by the PUC.
In August 1994, in accordance with the rules of the PUC, TU Electric
petitioned the PUC for a recovery of approximately $93 million, including
interest, in under-collected fuel costs for the period July 1993 through June
1994. Such under-collections were primarily due to continued higher natural gas
prices on the spot market and hotter than normal weather in August 1993 and June
1994. In addition, there was decreased availability of lower cost lignite
generation. TU Electric anticipates recovery of this amount over a six-month
period beginning in early 1995.
In June 1994, TU Electric proposed a package of new strategic rates designed
to retain existing commercial, industrial, and wholesale load, enhance economic
development, improve the environment, and encourage further energy efficiency.
Such proposal was filed with the PUC and cities in TU Electric's service area.
If approved, four new rates will be offered. The first two rates will allow for
negotiated rates to retain existing commercial, industrial, and wholesale
customers who have viable alternative sources of supply and would otherwise
leave the system. The third rate is an economic development rider which will
provide an incentive to attract new businesses and jobs and to encourage
existing customers to expand their facilities within TU Electric's service area.
The fourth rate is an environmental technology service rider that provides an
incentive for qualifying customers to convert to advanced technologies that will
conserve energy or improve the environment. TU Electric's proposed strategic
rates have been approved by over 150 cities within its service territory.
Hearings before the PUC were held in August and September 1994, and TU Electric
expects a decision by the end of the year.
In October 1994, TU Electric filed an application for approval by the PUC of
its Integrated Resource Plan (IRP) for the ten-year period 1995-2004. The IRP
includes initiatives that address demand-side management resources, purchased
power, and future generating capacity which includes renewable energy sources.
TU Electric's IRP includes one lignite-fueled 750 megawatt (MW) unit at Twin
Oak. The second lignite-fueled Twin Oak unit has been deferred beyond the ten
year period. Also included in the IRP are 1,802 MW of gas/oil-fueled combustion
turbine units (including 288 MW of simple cycle combustion turbines) and 300 MW
of wind turbine generation. None of the aforementioned additions require
significant construction expenditures in the 1994-1996 period. Hearings on this
application are expected to begin early 1995.
19
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION -- (Continued)
Liquidity and Capital Resources -- (concluded)
TU Electric's capital requirements have not been significantly affected by the
requirements of the federal Clean Air Act, as amended (Clean Air Act). Although
TU Electric is unable to fully determine the cost of compliance with the Clean
Air Act, it is not expected to have a significant impact on the Company. Any
additional capital costs, as well as any increased operating costs associated
with these new requirements, are expected to be recoverable through rates, as
similar costs have been recovered in the past.
The National Energy Policy Act of 1992 addresses a wide range of energy issues
and is intended to increase competition in electric generation and broaden
access to electric transmission systems. TU Electric and Southwestern Electric
Service Company (SESCO) are unable to predict the impact of regulations
implementing this legislation on their operations until such regulations are
promulgated and approved. However, TU Electric and SESCO believe that such
legislation reflects the trend toward increased competition in the energy
industry.
While TU Electric and SESCO have experienced competitive pressures in the
wholesale market resulting in a minor loss of load, wholesale sales constitute a
relatively low percentage of total sales. TU Electric and SESCO are unable to
predict the extent of future competitive developments or what impact, if any,
such developments may have on operations.
Results of Operation
The following compares operating results for the periods ended September 30,
1994 with the same periods ended September 30, 1993.
Operating revenues decreased 4.7% for the three-month period and increased
5.9% and 6.0% for the nine- and twelve-month periods ended September 30, 1994,
respectively. The following table details the factors contributing to these
changes:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------------------------------------
FACTORS THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
------- ------------------ ----------------- -------------------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Base rate revenue (billed).................. $ 84,144 $421,521 $553,736
Fuel revenue................................ (52,943) (66,467) (96,172)
Power cost recovery factor revenue.......... (11,110) (32,068) (36,743)
Unbilled revenue and other.................. (104,355) (74,049) (98,277)
--------- -------- --------
Total....................................... $ (84,264) $248,937 $322,544
========= ======== ========
</TABLE>
Base rate revenue for all periods was affected by higher sales and higher rate
levels implemented in August 1993. The rate increase placed in effect in August
1993 increased base rate revenues, net of amounts to be refunded, by
approximately $69 million, $323 million and $409 million for the three-, nine-
and twelve-month periods, respectively. Energy sales increased 2.8%, 4.8% and
4.4% for the three-, nine- and twelve-month periods, respectively, due primarily
to increased customer usage resulting from weather conditions more normal than
in prior periods, an increase in customers, and billing cycle differentials.
The decrease in fuel revenue for all periods was primarily due to a reduced fuel
factor implemented in connection with the Docket 11735 rates in August 1993.
The decrease in unbilled revenue and other in all periods resulted from milder
weather conditions than in prior periods during the accrual period and from
billing cycle differentials. The primary reason for the decline in operating
revenues for the three-month period was the decrease in unbilled revenue
and other.
20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION -- (Concluded)
Results of Operation -- (concluded)
Fuel and purchased power expense decreased 10.8%, 4.4% and 4.6% for the
three- , nine- and twelve-month periods, respectively. The decrease was
primarily due to a reduction in gas fuel costs from the prior period and
increased utilization of nuclear fuel which replaced higher cost fuels, offset
by the requirements due to an increase in energy sales.
Total operating expenses, excluding fuel and purchased power, decreased 6.3%
for the three-month period and increased 10.6% and 13.2% for the nine- and
twelve-month periods, respectively. Operation and depreciation expenses
increased in all periods as a result of the commencement of commercial operation
of Comanche Peak Unit 2 in August 1993. Operation expense also increased in all
periods due to increases in uncollectible accounts expense and the amortization
of voluntary retirement/severance costs after the bonding of rates in Docket
11735. Maintenance expense decreased in all periods due to inventory adjustments
made in the prior period. Taxes other than income increased for the nine- and
twelve-month periods due primarily to increased local gross receipts taxes
resulting from higher tax rates and increased revenues, an increase in ad
valorem taxes charged to operation which were previously capitalized, and a
refund of franchise taxes in the prior periods of approximately $23,875,000.
Allowance for funds used during construction (AFUDC) decreased 89.4%, 93.4%
and 92.6% for the three-, nine- and twelve-month periods, respectively. The
decrease in all periods was primarily due to the discontinuation of the accrual
of AFUDC on Comanche Peak Unit 2 when such unit achieved commercial operation in
August 1993 and the reduction in the AFUDC rate in January 1994.
The regulatory disallowance in the twelve-month period reflects charges
resulting from the Settlement Agreement among the parties in Docket 11735. (See
Note 6 to Condensed Consolidated Financial Statements.)
Federal income taxes - other income increased for all periods primarily due
to the effect of the regulatory disallowance taken in the prior period.
Total interest charges, excluding AFUDC, decreased 4.1%, 2.5% and 1.7% for
the three-, nine- and twelve-month periods, respectively. Interest on mortgage
bonds decreased in all three periods as a result of reduced interest
requirements due to the Company's refinancing efforts, partially offset by
increased interest requirements for new issues sold. Interest on other long-term
debt decreased in all three periods due to the continuing retirement of debt
incurred in the purchases of the minority ownership interests in Comanche Peak.
Other interest expense increased in all periods due primarily to interest on the
bonded rates subject to refund to customers and increased amortization of debt
issuance expenses and redemption premiums.
Preferred stock dividends decreased 14.3%, 10.2% and 7.5% for the three-,
nine- and twelve-month periods, respectively, primarily due to the redemption of
certain series of higher dividend rate preferred stock.
The major factors affecting consolidated net income for the three-, nine- and
twelve-month periods were the recording of the regulatory disallowance in the
corresponding period for the prior year, the implementation of the August 1993
rate increase, the discontinuation of the accrual of AFUDC on Comanche Peak Unit
2, and the commencement of depreciation on approximately $668 million of
investment in Comanche Peak Unit 2 incurred after the end of the Docket 11735
test year which is not being recovered currently in rates. The cumulative effect
of the factors mentioned above resulted in an increase in consolidated net
income of 469.5%, 38.0% and 13.1% for the three-, nine- and twelve-month
periods, respectively.
21
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
RATE PROCEEDINGS
Reference is made herein to Note 6 to Condensed Consolidated Financial
Statements and Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation contained in Part I of this Report regarding
Rate Proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 -- Letter from Deloitte & Touche LLP as to unaudited interim
financial information.
27 -- Financial Data Schedule
(b) Reports on Form 8-K filed since June 30, 1994 are as follows:
None
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TEXAS UTILITIES COMPANY
By /s/ H. Dan Farell
-----------------------
H. Dan Farell
Controller
and
Principal Accounting Officer
Date: November 11, 1994
23
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description of Exhibit Page
------- --------------------------- ------------
15- Letter from Deloitte & Touche LLP as to unaudited
interim financial information.
27- Financial Data Schedule
24
<PAGE>
Exhibit 15
Texas Utilities Company:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited condensed consolidated
interim financial information of Texas Utilities Company and subsidiaries for
the periods ended September 30, 1994 and 1993, as indicated in our report dated
November 8, 1994; because we did not perform an audit, we expressed no opinion
on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is
incorporated by reference in Registration Statement No. 33-55408 on Form S-3 and
Registration Statements No. 33-52395, 33-48880 and 33-55931 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
Dallas, Texas
November 8, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED STATEMENTS OF CONSOLIDATED INCOME, CONDENSED STATEMENTS OF
CONSOLIDATED CASH FLOWS, AND CONDENSED CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 17,689,949
<OTHER-PROPERTY-AND-INVEST> 686,969
<TOTAL-CURRENT-ASSETS> 835,126
<TOTAL-DEFERRED-CHARGES> 2,005,357
<OTHER-ASSETS> (72,685)
<TOTAL-ASSETS> 21,144,716
<COMMON> 4,796,751
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,827,919
<TOTAL-COMMON-STOCKHOLDERS-EQ> 6,624,670
387,234
870,220
<LONG-TERM-DEBT-NET> 7,953,421
<SHORT-TERM-NOTES> 50,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 308,015
<LONG-TERM-DEBT-CURRENT-PORT> 58,475
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,892,681
<TOT-CAPITALIZATION-AND-LIAB> 21,144,716
<GROSS-OPERATING-REVENUE> 4,433,666
<INCOME-TAX-EXPENSE> 287,807
<OTHER-OPERATING-EXPENSES> 3,041,443
<TOTAL-OPERATING-EXPENSES> 3,329,250
<OPERATING-INCOME-LOSS> 1,104,416
<OTHER-INCOME-NET> 25,140
<INCOME-BEFORE-INTEREST-EXPEN> 1,129,556
<TOTAL-INTEREST-EXPENSE> 544,136
<NET-INCOME> 585,420
78,197
<EARNINGS-AVAILABLE-FOR-COMM> 507,223
<COMMON-STOCK-DIVIDENDS> 520,524
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 1,065,094
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
</TABLE>
