<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 JUNE 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
2001 BRYAN TOWER, DALLAS, TEXAS 75201
(214) 812-4600
-------------------------
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 July 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 SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
--------------------- ----------------------- -----------------------
1994 1993 1994 1993 1994 1993
---------- ---------- ---------- ---------- ----------- ----------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES......................................$1,430,269 $1,255,952 $2,731,647 $2,398,446 $5,767,713 $5,053,097
---------- ---------- ---------- ---------- ----------- ----------
OPERATING EXPENSES
Fuel and purchased power............................... 434,303 438,758 851,589 853,223 1,856,420 1,792,610
Operation.............................................. 203,832 185,536 418,143 374,171 856,527 738,252
Maintenance............................................ 82,942 79,531 155,321 147,690 357,636 300,605
Depreciation and amortization.......................... 137,100 108,048 273,698 215,643 497,602 428,434
Federal income taxes................................... 81,565 57,815 124,796 89,703 357,390 209,512
Taxes other than income................................ 144,972 112,972 292,634 200,919 557,023 425,803
---------- ---------- ---------- ---------- ----------- ----------
Total operating expenses............................. 1,084,714 982,660 2,116,181 1,881,349 4,482,598 3,895,216
---------- ---------- ---------- ---------- ----------- ----------
OPERATING INCOME........................................ 345,555 273,292 615,466 517,097 1,285,115 1,157,881
---------- ---------- ---------- ---------- ----------- ----------
OTHER INCOME (LOSS)
Allowance for equity funds
used during construction.............................. 3,092 57,816 5,981 114,532 41,574 212,808
Regulatory disallowances
(Note 6).............................................. -- -- -- -- (359,556) --
Other income and deductions - net...................... 6,912 7,381 16,238 16,638 33,119 34,285
Federal income taxes (Notes 5 and 6)................... (1,413) (2,108) (4,649) 17,433 90,671 11,425
---------- ---------- ---------- ---------- ----------- ----------
Total other income (loss)............................ 8,591 63,089 17,570 148,603 (194,192) 258,518
---------- ---------- ---------- ---------- ----------- ----------
TOTAL INCOME............................................ 354,146 336,381 633,036 665,700 1,090,923 1,416,399
---------- ---------- ---------- ---------- ----------- ----------
INTEREST CHARGES
Interest on mortgage bonds............................. 141,603 153,683 290,294 305,062 596,323 598,423
Interest on other long-term debt....................... 23,542 27,772 47,320 56,195 100,582 115,913
Other interest......................................... 19,431 6,863 33,498 16,008 49,744 34,049
Allowance for borrowed funds
used during construction.............................. (2,647) (43,561) (5,121) (86,294) (31,935) (141,766)
---------- ---------- ---------- ---------- ----------- ----------
Total interest charges............................... 181,929 144,757 365,991 290,971 714,714 606,619
PREFERRED STOCK DIVIDENDS OF SUBSIDIARY................. 25,990 28,958 54,072 58,946 110,359 116,923
---------- ---------- ---------- ---------- ----------- ----------
CONSOLIDATED NET INCOME.................................$ 146,227 $ 162,666 $ 212,973 $ 315,783 $ 265,850 $ 692,857
========== ========== ========== ========== =========== ==========
Average shares of common stock outstanding (thousands).. 225,841 220,187 225,826 219,499 224,719 218,018
Earnings and dividends per share of common stock:
Earnings (on average shares outstanding)............... $0.65 $0.74 $0.94 $1.44 $1.18 $3.18
Dividends declared per share of common stock........... $0.77 $0.77 $1.54 $1.54 $3.08 $3.06
</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>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1994 1993 1994 1993
--------- ----------- ----------- -----------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income.............................................. $ 212,973 $ 315,783 $ 265,850 $ 692,857
Adjustments to reconcile consolidated net income to cash
provided by operating activities:
Depreciation and amortization (including amounts charged to fuel).. 350,237 254,421 640,284 494,575
Deferred federal income taxes - net................................ 60,877 47,768 95,482 146,721
Federal investment tax credits - net............................... (14,410) (11,463) (25,330) (22,941)
Allowance for equity funds used during construction................ (5,981) (114,532) (41,574) (212,808)
Regulatory disallowances (Note 6).................................. - - 359,556 -
Changes in assets and liabilities:
Receivables - net................................................. (70,725) (59,138) (101,529) 19,404
Inventories....................................................... 17,003 (6,781) 34,895 (27,018)
Accounts payable - net............................................ (18,605) (17,504) (31,828) 40,682
Interest and taxes accrued........................................ (79,173) (62,623) (2,100) 24,303
Other working capital............................................. 30,128 (52,763) 208,640 (42,033)
Under-recovered fuel revenue - net of deferred taxes.............. (21,991) (44,016) (61,475) (84,006)
Voluntary retirement/severance program............................ - (107) - (119,072)
Other - net....................................................... 48,471 6,847 69,996 35,531
--------- ----------- ----------- -----------
Cash provided by operating activities............................ 508,804 255,892 1,410,867 946,195
--------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of securities:
First mortgage bonds............................................... 378,340 1,240,000 1,586,805 2,143,595
Other long-term debt............................................... - 225,000 100,000 225,000
Preferred stock.................................................... - 268,779 462,446 268,779
Common stock - net................................................. 62,102 121,102 181,970 247,421
Retirement of long-term debt and preferred stock..................... (851,406) (1,173,785) (2,621,959) (1,945,346)
Change in notes payable.............................................. 320,335 (250,000) 317,235 (250,000)
Common stock dividends paid.......................................... (347,795) (333,674) (687,822) (660,044)
Debt premium, discount, financing and reacquisition expenses......... (11,013) (49,713) (103,658) (100,496)
--------- ----------- ----------- -----------
Cash provided by (used in) financing activities.................. (449,437) 47,709 (764,983) (71,091)
--------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures............................................ (200,949) (454,700) (617,699) (1,007,728)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel)............................................ 2,485 107,652 33,782 198,593
Change in construction receivables/payables - net.................... (390) (17,846) 18,822 (28,501)
--------- ----------- ----------- -----------
Cash construction expenditures.................................... (198,854) (364,894) (565,095) (837,636)
Non-utility property - net........................................... (15,655) (10,389) (15,438) (8,512)
Nuclear fuel (excluding allowance for equity funds used
during construction)................................................ (27,911) (4,999) (39,800) (31,045)
Acquisition of SESCO................................................. - - (1,237) -
Other investments.................................................... (9,159) (8,984) (16,151) (9,895)
--------- ----------- ----------- -----------
Cash used in investing activities................................ (251,579) (389,266) (637,721) (887,088)
--------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................... (192,212) (85,665) 8,163 (11,984)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE......................... 212,584 97,874 12,209 24,193
--------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING BALANCE............................ $ 20,372 $ 12,209 $ 20,372 $ 12,209
========= =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
(UNAUDITED) (AUDITED)
----------- -----------
THOUSANDS OF DOLLARS
<S> <C> <C>
UTILITY PLANT
In service:
Production.......................................................... $16,503,528 $16,476,725
Transmission........................................................ 1,557,554 1,542,399
Distribution........................................................ 3,935,301 3,822,202
General............................................................. 456,939 477,515
----------- -----------
Total............................................................. 22,453,322 22,318,841
Less accumulated depreciation....................................... 4,831,759 4,595,533
----------- -----------
Utility plant in service less accumulated depreciation............ 17,621,563 17,723,308
Construction work in progress........................................ 1,054,246 1,040,483
Nuclear fuel (net of accumulated amortization: 1994 - $156,370,000;
1993 - $114,865,000)................................................ 310,793 320,891
Held for future use.................................................. 46,145 41,649
----------- -----------
Utility plant less accumulated depreciation and amortization...... 19,032,747 19,126,331
Less reserve for regulatory disallowances (Note 6)................... 1,308,460 1,308,460
----------- -----------
Net utility plant................................................. 17,724,287 17,817,871
----------- -----------
INVESTMENTS
Non-utility property................................................. 570,025 554,370
Other investments.................................................... 108,562 99,748
----------- -----------
Total investments................................................. 678,587 654,118
----------- -----------
CURRENT ASSETS
Cash in banks........................................................ 8,873 7,841
Temporary cash investments - at cost................................. 11,499 204,743
Special deposits..................................................... 18,525 21,975
Accounts receivable:
Customers........................................................... 296,290 224,670
Other............................................................... 25,997 27,439
Allowance for uncollectible accounts................................ (5,847) (6,394)
Inventories - at average cost:
Materials and supplies.............................................. 193,821 194,226
Fuel stock.......................................................... 131,782 148,380
Prepaid taxes........................................................ 50,293 17,776
Other prepayments.................................................... 39,462 44,250
Deferred federal income taxes........................................ 48,940 43,543
Other current assets................................................. 16,358 10,716
----------- -----------
Total current assets.............................................. 835,993 939,165
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets:
Debt reacquisition costs............................................ 285,621 287,430
Cancelled lignite unit costs........................................ 19,381 20,678
Rate case costs..................................................... 65,696 66,508
Litigation and settlement costs..................................... 72,685 72,685
Voluntary retirement/severance program.............................. 198,341 212,367
Recoverable deferred federal income taxes - net..................... 1,216,635 1,230,418
Other regulatory assets............................................. 21,372 21,242
Under-recovered fuel revenue......................................... 238,604 204,772
Other deferred debits................................................ 62,375 63,559
----------- -----------
Total deferred debits............................................. 2,180,710 2,179,659
Less reserve for regulatory disallowances (Note 6)................... 72,685 72,685
----------- -----------
Net deferred debits............................................... 2,108,025 2,106,974
----------- -----------
Total........................................................... $21,346,892 $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>
JUNE 30, DECEMBER 31,
1994 1993
(UNAUDITED) (AUDITED)
----------- -----------
THOUSANDS OF DOLLARS
<S> <C> <C>
CAPITALIZATION
Common stock without par value - net:
Authorized shares - 500,000,000
Outstanding shares:
June 30, 1994 - 225,841,037; December 31, 1993 - 224,345,422....... $ 4,794,728 $ 4,728,580
Retained earnings..................................................... 1,708,263 1,842,413
----------- -----------
Total common stock equity......................................... 6,502,991 6,570,993
Preferred stock:
Not subject to mandatory redemption.................................. 993,239 1,083,008
Subject to mandatory redemption...................................... 397,115 396,917
Long-term debt, less amounts due currently............................ 8,049,043 8,379,826
----------- -----------
Total capitalization.............................................. 15,942,388 16,430,744
----------- -----------
CURRENT LIABILITIES
Notes payable - banks................................................. 25,000 -
Notes payable - commercial paper...................................... 295,335 -
Long-term debt due currently.......................................... 100,820 151,105
Accounts payable...................................................... 242,294 260,634
Dividends declared.................................................... 199,649 200,410
Customers' deposits................................................... 50,992 50,798
Taxes accrued......................................................... 244,119 310,091
Interest accrued...................................................... 181,801 195,002
Refunds due to customers.............................................. 233,856 141,153
Other current liabilities............................................. 74,106 106,192
----------- -----------
Total current liabilities......................................... 1,647,972 1,415,385
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes............................. 2,751,276 2,686,409
Unamortized federal investment tax credits............................ 691,121 705,531
Other deferred credits and noncurrent liabilities..................... 314,135 280,059
----------- -----------
Total deferred credits and other noncurrent liabilities........... 3,756,532 3,671,999
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
Total............................................................ $21,346,892 $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 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, 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 and the information under Management's
Discussion and Analysis of Financial Condition and Results of Operation.
Consolidation - The consolidated financial statements include the Company and
all of its subsidiaries (System Companies):
Texas Utilities Electric Company (TU Texas Utilities Services Inc.
Electric) (TU Services)
Southwestern Electric Service Company (SESCO) Basic Resources Inc. (Basic)
Texas Utilities Fuel Company (Fuel Company) Chaco Energy Company (Chaco)
Texas Utilities Mining Company (Mining Texas Utilities Properties Inc.
Company) (TU Properties)
On May 16, 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 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>
SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1994 1993 1994 1993
-------- -------- -------- --------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH PAYMENTS:
Interest (net of amounts capitalized)....... $358,922 $277,219 $718,890 $570,715
Income taxes................................ 75,235 314 149,678 28,347
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of SESCO:
Book value of assets acquired.............. $ - $ - $ 69,521 $ -
Goodwill acquired.......................... - - 32,059 -
Less: Liabilities assumed................. - - (39,991) -
Less: Stock issued - - (59,976) -
-------- -------- -------- --------
Cash paid................................. - - 1,613 -
Less: Cash acquired....................... - - 376 -
-------- -------- -------- --------
Net cash.................................. $ - $ - $ 1,237 $ -
======== ======== ======== ========
</TABLE>
2. SHORT-TERM FINANCING
At June 30, 1994, the Company and TU Electric had joint lines of credit
aggregating $1,000,000,000 under a credit facility agreement (Agreement) with a
group of commercial banks. The Agreement, for which the Company pays a fee, has
two facilities. Facility A provides for borrowings up to $300,000,000 and
terminates April 28, 1995. Facility B provides for borrowings up to $700,000,000
and terminates April 29, 1999. The Company's borrowings under the Agreement are
limited to $250,000,000. The Agreement 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 six months
ended June 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>
7
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
3. CAPITALIZATION - (CONCLUDED)
In February 1994, the Company amended its Automatic Dividend Reinvestment and
Common Stock Purchase Plan. The amendments include the option for common stock
to be purchased on the open market to meet requirements under the plan.
PREFERRED STOCK OF TU ELECTRIC
At June 30, 1994 and December 31, 1993, TU Electric had 17,000,000 shares of
preferred stock authorized by its articles of incorporation of which 14,122,617
and 15,022,092 shares were issued and outstanding, respectively.
TU Electric redeemed or reacquired 899,475 shares of preferred stock with
dividend rates ranging from $8.16 to $8.44 during the six months ended June 30,
1994.
In July and August 1994, TU Electric redeemed or reacquired 1,235,389 shares
of preferred stock with dividend rates ranging from $7.00 to $7.80.
LONG-TERM DEBT
TU Electric issued the following long-term debt during the six
months ended June 30, 1994:
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ ----------------- --------
<S> <C> <C> <C>
Floating rate first mortgage and collateral trust bonds.. $300,000,000 4.6875%(a) 1999
Pollution control revenue bonds.......................... 78,340,000 3.30% to 3.35%(b) 2029
------------
Total................................................. $378,340,000
============
</TABLE>
- - --------------------
(a) Such interest rate is reset quarterly and is 5.25% for the period August
1, 1994 through October 31, 1994.
(b) $39,170,000 principal amount of Series 1994A and $39,170,000 principal
amount of Series 1994B were bearing interest at June 30, 1994, at 3.30%
and 3.35%, respectively. 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 six months ended June 30, 1994:
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ ----------------- ------------
<S> <C> <C> <C>
First mortgage bonds (TU Electric)....................... $532,800,000 4-7/8% to 10.45% 1996 to 2019
Taxable pollution control revenue bonds (TU Electric).... 78,340,000 3.90% to 8.49% 2021
Other long-term debt (Fuel Company)...................... 75,000,000 4.50% 1996
------------
Total................................................. $686,140,000
============
</TABLE>
In July 1994, TU Electric reacquired $3,850,000 of 9-7/8% First Mortgage and
Collateral Trust Bonds due November 1, 2019, and Fuel Company prepaid
$14,740,000 of 8.50% Guaranteed Senior Notes due December 1, 1996. In August
1994, TU Electric redeemed $66,200,000 of 10% First Mortgage and Collateral
Trust Bonds due August 1, 2019.
8
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 June 30, 1994,
$165,774,000 of retained earnings were thus restricted as a result of the
provisions of such articles of incorporation. 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 June 30, 1994 is $597,017,000.
5. FEDERAL INCOME TAXES
The details of federal income taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
------------------ ------------------- -------------------
1994 1993 1994 1993 1994 1993
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
THOUSANDS OF DOLLARS
Charged (credited) to operating expenses:
Current................................... $42,389 $11,348 $ 87,964 $ 21,888 $193,206 $ 43,111
Deferred - net............................ 47,524 52,191 51,242 79,278 189,514 189,342
Investment tax credits - net.............. (8,348) (5,724) (14,410) (11,463) (25,330) (22,941)
------- ------- -------- -------- -------- --------
Total to operating expenses.............. 81,565 57,815 124,796 89,703 357,390 209,512
------- ------- -------- -------- -------- --------
Charged (credited) to other income:
Current................................... (3,474) (645) (16,827) (8,597) (31,894) (12,080)
Deferred - net............................ 4,887 2,753 21,476 (8,836) (58,777) 655
------- ------- -------- -------- -------- --------
Total to other income.................... 1,413 2,108 4,649 (17,433) (90,671) (11,425)
------- ------- -------- -------- -------- --------
Credited to retained earnings:
LESOP dividend deduction.................. (1,695) (1,708) (3,408) (3,403) (6,979) (3,403)
------- ------- -------- -------- -------- --------
Total federal income taxes.............. $81,283 $58,215 $126,037 $ 68,867 $259,740 $194,684
======= ======= ======== ======== ======== ========
</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
Comanche Peak Unit 2, 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.
9
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. RATE PROCEEDINGS - (CONTINUED)
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 $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, TU Electric will refund the difference
between the bonded rates and the rates approved in the amended final order,
including interest. Such amount to be refunded, including interest, is
approximately $237.5 million through August 1994, which includes an amount of
approximately $233.9 million at June 30, 1994. Such refund will be 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 through August 1994. An
appeal contesting the approval of this surcharge has been filed by two
municipalities in the 299th Judicial District Court of Travis County, Texas.
10
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. RATE PROCEEDINGS - (CONTINUED)
The following details the effect of the Settlement Agreement and the Docket
11735 amended final order charges on consolidated net income for the twelve
months ended June 30, 1994:
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS
--------------------
<S> <C>
OPERATING REVENUES................ $ (5,000)
---------
OPERATING EXPENSES
Federal income taxes - current... 1,000
Federal income taxes - deferred.. 750
---------
OPERATING INCOME.................. (3,250)
---------
OTHER INCOME (LOSS)
Regulatory disallowances......... (359,556)
Federal income taxes - current... 2,258
Federal income taxes - deferred.. 94,406
---------
Total other income (loss)....... (262,892)
---------
EFFECT ON CONSOLIDATED NET INCOME. $(266,142)
=========
</TABLE>
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 TU Electric's Comanche
Peak nuclear generating station, 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.
On June 15, 1994, the Court of Appeals issued its decision in connection with
these appeals. 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
reevaluate TU Electric's CWIP requirements in light of financial necessity at
the time of remand and to reconsider whether the $442 million revenue increase
provided for in the PUC's final order remains the benchmark in light of changed
circumstances.
11
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. RATE PROCEEDINGS - (CONCLUDED)
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
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.
The 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 has sought a rehearing from the Court of Appeals and, if necessary,
will appeal the decision to the Supreme Court of Texas. Other parties to this
appeal have also sought a rehearing and may appeal this decision to the Supreme
Court of Texas. TU Electric cannot predict the outcome of any such rehearings,
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 January 1995.
7. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM
The Company has taken steps to substantially reduce construction expenditures
from amounts previously estimated. Construction expenditures, excluding AFUDC,
are presently estimated at $400 million for each of the years 1994, 1995 and
1996. Estimated construction expenditures for 1994 through 1996 do not include
$210 million in 1996 to resume active construction of two lignite-fueled units
at Twin Oak which would be necessary to meet the current scheduled in-service
dates of the units. 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
12
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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. The Company'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, $38,590,000 at June 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 which include amounts assumed by a third party. In addition, TU
Electric is obligated to pay certain variable costs of operating and maintaining
the reservoirs. TU Electric has assigned to a municipality all contract rights
and obligations of TU Electric in connection with $89,305,000 remaining
principal amount of bonds at June 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 the performance by Chaco with respect to this agreement. At
June 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.
13
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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 $9.1 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.
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.
14
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES - (CONCLUDED)
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
June 30, 1994, such reserve totaled $46,029,000 which includes an accrual of
$9,089,000 and $17,340,000 for the six and twelve months ended June 30, 1994,
respectively. As of June 30, 1994, $44,429,000 has been deposited in the
external trust funds for decommissioning of Comanche Peak. 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.
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.
15
<PAGE>
[DELOITTE & TOUCHE LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of Texas
Utilities Company and subsidiaries as of June 30, 1994, and the related
condensed statements of consolidated income for the three-month, six-month and
twelve-month periods ended June 30, 1994 and 1993, and cash flows for the six-
month and twelve-month periods ended June 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
Dallas, Texas
August 9, 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
June 30, 1994, consisted of approximately 50% long-term debt, 9% preferred stock
and 41% 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 of
higher coupon debt and higher dividend preferred stock. Financings to date in
1994 by the System Companies included the following:
<TABLE>
<CAPTION>
LONG-TERM DEBT (TU ELECTRIC):
<S> <C> <C> <C>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
- - -----------------------------------------------------------------------------------------------------------
Floating rate first mortgage and collateral trust bonds........ $300,000,000 4.6875% 1999
Pollution control revenue bonds................................ 78,340,000 3.30% to 3.35% 2029
------------
Total........................................................ $378,340,000
============
COMMON STOCK (COMPANY):
NET
DESCRIPTION SHARES PROCEEDS
----------- ------ --------
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 $1,059,214,000 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 (subject to the restriction on the issuance of additional shares of
preferred stock as discussed below) including (i) the possible future sale by TU
Electric of up to $150,000,000 of First Mortgage and Collateral Trust 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. On April 29, 1994, the Company and TU
Electric entered into a new credit facility agreement (Agreement) with a group
of commercial banks. The Agreement, for which the Company pays a fee, has two
facilities. Facility A provides for borrowings up to $300,000,000 and
terminates April 28, 1995. Facility B provides for borrowings up to
$700,000,000 and terminates April 29, 1999. The Company's borrowings under the
Agreement are limited to $250,000,000. The Agreement 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)
On June 1, 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 will be utilized as the
corporate headquarters of the System Companies beginning in August 1994.
In order to remain competitive and in response to the recent 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 will 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 Comanche Peak Unit 2 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 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, TU Electric will refund the difference between the
bonded rates and the rates approved in the amended final order, including
interest. The amount to be refunded, including interest, through August 1994 is
approximately $237.5 million. Such refund will be 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 through August 1994. An appeal
contesting the approval of this surcharge has been filed by two municipalities
in the 299th Judicial District Court of Travis County, Texas. For additional
information regarding the Settlement Agreement and the rate decision, see Note 6
to Condensed Consolidated Financial Statements. As a result of the amended
final order and its effects on earnings, TU Electric is restricted from issuing
additional shares of preferred stock. TU Electric does not believe this
restriction will materially affect its ability to fund its continuing operations
or capital requirements.
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 TU Electric's Comanche
Peak nuclear generating station, 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
18
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Continued).
Liquidity and Capital Resources - (continued)
District of Texas. On June 15, 1994, the Court of Appeals issued its decision
in connection with these appeals. 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 reevaluate TU Electric's CWIP requirements in light
of financial necessity at the time of remand and to reconsider whether the $442
million revenue increase provided for in the PUC's final order remains the
benchmark in light of changed circumstances.
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
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 has sought a rehearing from the Court of Appeals and, if necessary,
will appeal the decision to the Supreme Court of Texas. Other parties to this
appeal have also sought a rehearing and may appeal this decision to the Supreme
Court of Texas. TU Electric cannot predict the outcome of any such rehearings,
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 January 1995.
The Company'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.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES - (CONCLUDED)
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 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 June 30, 1994
with the same periods ended June 30, 1993.
Operating revenues increased 13.9%, 13.9% and 14.1% for the three-, six- and
twelve-month periods ended June 30, 1994, respectively. The following table
details the factors contributing to these changes:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
FACTORS THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
------- ------------------ ---------------- -------------------
THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Base rate revenue (billed)................. $142,099 $337,378 $665,221
Fuel revenue............................... (5,364) (13,524) 28,811
Power cost recovery factor revenue......... (12,726) (20,959) (26,039)
Unbilled revenue and other................. 50,308 30,306 46,623
-------- -------- --------
Total.................................... $174,317 $333,201 $714,616
======== ======== ========
</TABLE>
Base rate revenue for all periods was affected by higher sales and higher rate
levels implemented in August 1993. Energy sales increased 3.4%, 6.2% and 6.9%
for the three-, six- and twelve-month periods, respectively, due primarily to
increased customer usage resulting from weather conditions more normal than in
prior periods and an increase in customers. The rate increase placed in effect
in August 1993 increased base rate revenues, net of amounts to be refunded, by
approximately $107 million, $254 million and $431 million for the three-, six-
and twelve-months ended, respectively. The decrease in fuel revenue for the
three- and six-month periods was primarily due to a reduced fuel factor
implemented in connection with the Docket 11735 rates in August 1993, offset by
increased energy sales. The increase in fuel revenue for the twelve-month
period resulted from increased energy sales offset by a lower fuel factor
implemented in August 1993. The increase in unbilled revenue and other in all
periods resulted from weather conditions more normal than in prior periods
during the accrual period.
Fuel and purchased power expense decreased 1.0% and 0.2% for the three- and
six-month periods, respectively. The decrease was primarily due to increased
utilization of nuclear fuel which replaced higher cost fuels. The increase of
3.6% for the twelve-month period was a result of increased energy sales and a
marginal increase in fuel costs, partially offset by the increased utilization
of nuclear fuel.
20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION - (Concluded).
Results of Operation - (concluded)
Total operating expenses, excluding fuel and purchased power, increased 19.6%,
23.0% and 24.9% for the three-, six- and twelve-month periods, respectively.
Operation, maintenance and depreciation expenses increased in all periods as a
result of the commencement of commercial operation of Unit 2 of Comanche Peak in
August 1993. Operation expense also increased in all periods due to increases
in uncollectible account expense, amortization of voluntary retirement/severance
costs after the bonding of rates in Docket 11735 and employee benefit expenses.
Maintenance expense for the twelve months ended was also affected by inventory
adjustments during the third and fourth quarters of 1993. Taxes other than
income increased for the three-, six- and twelve-month periods due primarily to
increased local gross receipts taxes resulting from higher tax rates on
increased revenues and an increase in ad valorem taxes. The increase in taxes
other than income for all periods was affected by a refund of franchise taxes in
a prior period, of approximately $23,875,000.
Allowance for funds used during construction (AFUDC) decreased 94.3%, 94.5%
and 79.3% for the three-, six- and twelve-month periods, respectively. The
decrease in all periods was primarily due to the discontinuation of the accrual
of AFUDC on Unit 2 of Comanche Peak when such unit achieved commercial operation
in August 1993 and the reduction in the AFUDC rate in January 1994. These
decreases were partially offset by the change to a gross rate in 1993 related to
the adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (Statement 109), for projects commenced before March 1986.
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 the six-month period due to
the effect of adopting Statement 109 in January 1993, including the amortization
of excess deferred income taxes associated therewith, and decreased for the
twelve-month period due to the effect of recording the taxes associated with the
regulatory disallowances.
Total interest charges, excluding AFUDC, decreased 2.0%, 1.6% and 0.2% for the
three-, six- and twelve-month periods, respectively. Interest on mortgage bonds
decreased for the six-and twelve-month 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 refunding of higher interest
rate debt and the continuing retirement of debt incurred in the purchases of the
minority ownership interests in Comanche Peak. Other interest expense increased
in the three-, six- and twelve-month periods due primarily to interest on the
bonded rates subject to refund to customers and increased amortization of debt
issuance expenses and redemption premiums, partially offset by decreased
interest on short-term borrowings and on over-recovered fuel revenues.
Preferred stock dividends decreased 10.3%, 8.3% and 5.6% for the three-, six-
and twelve-month periods, respectively, primarily due to the redemption of
certain series of higher dividend rate preferred stock.
The major factors affecting earnings for the three-, six- and twelve-month
periods were the implementation of the rate increase, the discontinuation 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. In addition, the twelve-month period was significantly affected by the
recording of the regulatory disallowances. The factors mentioned above resulted
in a decrease in consolidated net income of 10.1%, 32.6% and 61.6% for the
three-, six- and twelve-month periods, respectively.
21
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's annual meeting of shareholders was held on May 20, 1994.
(c) The following items were presented to the shareholders with the
following results:
<TABLE>
<CAPTION>
VOTES WITHHELD
VOTES FOR OR AGAINST ABSTENTIONS
----------- -------------- -----------
<S> <C> <C> <C>
Election of Directors
Jack W. Evans 193,866,773 1,978,292 -
J. S. Farrington 194,047,162 1,797,903 -
Bayard H. Friedman 194,002,449 1,842,616 -
William M. Griffin 193,026,763 2,818,302 -
Kerney Laday 193,650,104 2,194,961 -
Margaret N. Maxey 193,994,024 1,851,041 -
James A. Middleton 194,120,434 1,724,631 -
Erle Nye 194,032,680 1,812,385 -
Charles R. Perry 193,610,883 2,234,182 -
Herbert H. Richardson 193,888,791 1,956,274 -
Selection of Deloitte
& Touche as Auditors 193,828,818 716,528 1,299,719
</TABLE>
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 as to unaudited interim
financial information.
(b) Reports on Form 8-K filed since March 31, 1994 are as follows:
Date of Report Item Reported
------------------ ---------------------
June 20, 1994 Item 5. OTHER EVENTS.
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: August 9, 1994
23
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
No. Description of Exhibit Page
- - ------- ----------------------- ------------
<S> <C> <C>
15 --Letter from Deloitte & Touche as to unaudited interim financial information 25
</TABLE>
24
<PAGE>
EXHIBIT 15
[LOGO OF DELOITTE & TOUCHE]
Texas Utilities Company:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited condensed interim
financial information of Texas Utilities Company and subsidiaries for the
periods ended June 30, 1994 and 1993, as indicated in our report dated August 9,
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 June 30, 1994, is
incorporated by reference in Registration Statement No. 33-55408 on Form S-3 and
Registration Statements No. 33-52395, 33-46674 and 33-48880 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
Dallas, Texas
August 9, 1994
