<PAGE> 1
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 MARCH 31, 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 April 30, 1994: 225,841,037 shares, without par
value.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . $1,301,378 $1,142,493 $5,593,397 $4,993,209
---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power . . . . . . . . . . . . . . . . . . 417,285 414,465 1,860,874 1,735,864
Operation . . . . . . . . . . . . . . . . . . . . . . . . . 214,311 188,635 838,231 740,708
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . 72,379 68,159 354,225 298,998
Depreciation and amortization . . . . . . . . . . . . . . . 136,598 107,595 468,550 425,161
Federal income taxes . . . . . . . . . . . . . . . . . . . . 43,230 31,888 333,548 194,416
Taxes other than income . . . . . . . . . . . . . . . . . . 147,663 87,947 525,022 420,632
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . 1,031,466 898,689 4,380,450 3,815,779
---------- ---------- ---------- ----------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . 269,912 243,804 1,212,947 1,177,430
---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Allowance for equity funds used during construction . . . . . 2,889 56,715 96,298 204,507
Regulatory disallowances (Note 6) . . . . . . . . . . . . . -- -- (359,556) --
Other income and deductions -- net . . . . . . . . . . . . . 9,326 9,258 33,587 34,451
Federal income taxes (Notes 5 and 6) . . . . . . . . . . . . (3,237) 19,541 89,883 11,475
---------- ---------- ---------- ----------
Total other income (loss) . . . . . . . . . . . . . . . 8,978 85,514 (139,788) 250,433
---------- ---------- ---------- ----------
TOTAL INCOME . . . . . . . . . . . . . . . . . . . . . . . . . 278,890 329,318 1,073,159 1,427,863
---------- ---------- ---------- ----------
INTEREST CHARGES
Interest on mortgage bonds . . . . . . . . . . . . . . . . . 148,691 151,378 608,404 594,526
Interest on other long-term debt . . . . . . . . . . . . . . 23,777 28,423 104,812 119,229
Other interest . . . . . . . . . . . . . . . . . . . . . . . 14,068 9,146 37,176 35,189
Allowance for borrowed funds used during construction . . . . (2,474) (42,733) (72,850) (126,093)
---------- ---------- ---------- ----------
Total interest charges . . . . . . . . . . . . . . . . 184,062 146,214 677,542 622,851
PREFERRED STOCK DIVIDENDS OF SUBSIDIARY . . . . . . . . . . . . 28,082 29,988 113,327 118,131
---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME . . . . . . . . . . . . . . . . . . . . $ 66,746 $ 153,116 $ 282,290 $ 686,881
========== ========== ========== ==========
Average shares of common stock outstanding (thousands). . . . . 225,812 218,811 223,305 216,476
Earnings and dividends per share of common stock:
Earnings (on average shares outstanding) . . . . . . . . . . $0.30 $0.70 $1.26 $3.17
Dividends declared . . . . . . . . . . . . . . . . . . . . . $0.77 $0.77 $3.08 $3.05
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ------------------------
1994 1993 1994 1993
---------- ---------- ------------ ----------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income . . . . . . . . . . . . . . . . . . . . $ 66,746 $ 153,116 $ 282,290 $ 686,881
Adjustments to reconcile consolidated net income to cash
provided by operating activities:
Depreciation and amortization (including amounts
charged to fuel) . . . . . . . . . . . . . . . . . . . . . . 178,514 125,890 597,264 485,406
Deferred federal income taxes -- net . . . . . . . . . . . . 19,200 8,040 93,532 143,034
Federal investment tax credits -- net . . . . . . . . . . . . (6,062) (5,739) (22,706) (22,954)
Allowance for equity funds used during construction . . . . . (2,889) (56,715) (96,298) (204,507)
Regulatory disallowances (Note 6) . . . . . . . . . . . . . . -- -- 359,556 --
Changes in assets and liabilities:
Receivables -- net . . . . . . . . . . . . . . . . . . . . . 49,552 22,640 (63,646) (36,484)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 12,645 8,392 15,364 (12,865)
Accounts payable -- net . . . . . . . . . . . . . . . . . . (48,090) (64,053) (21,955) 14,016
Interest and taxes accrued . . . . . . . . . . . . . . . . . (110,856) (156,404) 59,997 4,166
Other working capital . . . . . . . . . . . . . . . . . . . (10,562) (37,959) 153,148 (16,566)
Under-recovered fuel revenue -- net of deferred taxes . . . . (522) (14,477) (69,546) (58,002)
Voluntary retirement/severance program . . . . . . . . . . . -- (1,301) -- (120,267)
Other -- net . . . . . . . . . . . . . . . . . . . . . . . . 35,056 1,678 63,803 33,005
---------- ---------- ------------ ----------
Cash provided by (used in) operating activities . . . . . 182,732 (16,892) 1,350,803 894,863
---------- ---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of securities:
First mortgage bonds . . . . . . . . . . . . . . . . . . . . -- 500,000 1,948,465 1,983,595
Other long-term debt . . . . . . . . . . . . . . . . . . . . -- -- 325,000 --
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . -- 120,642 610,701 120,642
Common stock -- net . . . . . . . . . . . . . . . . . . . . . 62,102 62,563 240,510 251,899
Retirement of long-term debt and preferred stock . . . . . . . (362,600) (430,508) (2,876,431) (1,789,818)
Change in notes payable . . . . . . . . . . . . . . . . . . . . 225,000 48,000 (76,100) 48,000
Common stock dividends paid . . . . . . . . . . . . . . . . . . (173,897) (165,161) (682,438) (653,145)
Debt premium, discount, financing and reacquisition expenses. . (2,152) (7,003) (137,507) (104,447)
---------- ---------- ------------ ----------
Cash provided by (used in) financing activities . . . . . (251,547) 128,533 (647,800) (143,274)
---------- ---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures . . . . . . . . . . . . . . . . . . . (98,717) (219,560) (750,607) (1,071,771)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel) . . . . . . . . . . . . . . . . . . . 1,255 52,724 87,481 189,322
Change in construction receivables/payables -- net . . . . . . (806) (14,320) 21,711 (25,410)
---------- ---------- ------------ ----------
Cash construction expenditures . . . . . . . . . . . . . . . (98,268) (181,156) (641,415) (907,859)
Non-utility property -- net . . . . . . . . . . . . . . . . . . (15,838) (15,710) (10,299) (12,103)
Nuclear fuel (excluding allowance for equity funds used
during construction) . . . . . . . . . . . . . . . . . . . . . (9,094) (2,893) (23,091) (33,298)
Acquisition of SESCO . . . . . . . . . . . . . . . . . . . . . -- -- (1,237) --
Other investments . . . . . . . . . . . . . . . . . . . . . . . (6,597) (3,690) (19,055) (9,692)
---------- ---------- ------------ ----------
Cash used in investing activities . . . . . . . . . . . . (129,797) (203,449) (695,097) (962,952)
---------- ---------- ------------ ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . (198,612) (91,808) 7,906 (211,363)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE . . . . . . . . . 212,584 97,874 6,066 217,429
---------- ---------- ------------ ----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE . . . . . . . . . . . $ 13,972 $ 6,066 $ 13,972 $ 6,066
========== ========== ============ ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
(UNAUDITED) (AUDITED)
----------- -----------
THOUSANDS OF DOLLARS
<S> <C> <C>
UTILITY PLANT
In service:
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,491,318 $16,476,725
Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,551,964 1,542,399
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,883,668 3,822,202
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,138 477,515
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,387,088 22,318,841
Less accumulated depreciation . . . . . . . . . . . . . . . . . . 4,710,208 4,595,533
----------- -----------
Utility plant in service less accumulated depreciation . . . . . 17,676,880 17,723,308
Construction work in progress . . . . . . . . . . . . . . . . . . . 1,044,267 1,040,483
Nuclear fuel (net of accumulated amortization: 1994 -- $139,897,000;
1993 -- $114,865,000) . . . . . . . . . . . . . . . . . . . . . . 306,588 320,891
Held for future use . . . . . . . . . . . . . . . . . . . . . . . . 41,649 41,649
----------- -----------
Utility plant less accumulated depreciation and amortization . . 19,069,384 19,126,331
Less reserve for regulatory disallowances (Note 6) . . . . . . . . . 1,308,460 1,308,460
----------- -----------
Net utility plant . . . . . . . . . . . . . . . . . . . . . . . 17,760,924 17,817,871
----------- -----------
INVESTMENTS
Non-utility property . . . . . . . . . . . . . . . . . . . . . . . . 570,208 554,370
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . 106,345 99,748
----------- -----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . 676,553 654,118
----------- -----------
CURRENT ASSETS
Cash in banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,972 7,841
Temporary cash investments -- at cost . . . . . . . . . . . . . . . -- 204,743
Special deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 53,623 21,975
Accounts receivable:
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,102 224,670
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,285 27,439
Allowance for uncollectible accounts . . . . . . . . . . . . . . . (5,222) (6,394)
Inventories -- at average cost:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . 196,672 194,226
Fuel stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,289 148,380
Prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,727 17,776
Other prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 36,417 44,250
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . 44,074 43,543
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 6,295 10,716
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 716,234 939,165
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets:
Debt reacquisition costs . . . . . . . . . . . . . . . . . . . . . 285,717 287,430
Cancelled lignite unit costs . . . . . . . . . . . . . . . . . . . 20,034 20,678
Rate case costs . . . . . . . . . . . . . . . . . . . . . . . . . 66,277 66,508
Litigation and settlement costs . . . . . . . . . . . . . . . . . 72,685 72,685
Voluntary retirement/severance program . . . . . . . . . . . . . . 205,341 212,367
Recoverable deferred federal income taxes -- net . . . . . . . . . 1,223,449 1,230,418
Other regulatory assets . . . . . . . . . . . . . . . . . . . . . 21,030 21,242
Under-recovered fuel revenue . . . . . . . . . . . . . . . . . . . . 205,575 204,772
Other deferred debits . . . . . . . . . . . . . . . . . . . . . . . 57,625 63,559
----------- -----------
Total deferred debits . . . . . . . . . . . . . . . . . . . . . 2,157,733 2,179,659
Less reserve for regulatory disallowances (Note 6) . . . . . . . . . 72,685 72,685
----------- -----------
Net deferred debits . . . . . . . . . . . . . . . . . . . . . . 2,085,048 2,106,974
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,238,759 $21,518,128
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 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:
March 31, 1994 -- 225,841,037; December 31, 1993 -- 224,345,422. . . $ 4,792,727 $ 4,728,580
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,736,974 1,842,413
------------ ------------
Total common stock equity . . . . . . . . . . . . . . . . . . . . 6,529,701 6,570,993
Preferred stock:
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . 1,083,008 1,083,008
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . 397,016 396,917
Long-term debt, less amounts due currently . . . . . . . . . . . . . . . 7,978,689 8,379,826
------------ ------------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . 15,988,414 16,430,744
------------ ------------
CURRENT LIABILITIES
Notes payable -- banks . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 --
Notes payable -- commercial paper . . . . . . . . . . . . . . . . . . . 75,000 --
Long-term debt due currently . . . . . . . . . . . . . . . . . . . . . . 191,185 151,105
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,906 260,634
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,888 200,410
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 50,510 50,798
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,197 310,091
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,040 195,002
Refunds due to customers . . . . . . . . . . . . . . . . . . . . . . . . 197,700 141,153
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 75,239 106,192
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 1,547,665 1,415,385
------------ ------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes . . . . . . . . . . . . . . . 2,700,545 2,686,409
Unamortized federal investment tax credits . . . . . . . . . . . . . . . 699,469 705,531
Other deferred credits and noncurrent liabilities . . . . . . . . . . . 302,666 280,059
------------ ------------
Total deferred credits and other noncurrent liabilities . . . . . 3,702,680 3,671,999
COMMITMENTS AND CONTINGENCIES (Note 7)
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,238,759 $ 21,518,128
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
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):
<TABLE>
<S> <C>
Texas Utilities Electric Company (TU Electric) Texas Utilities Services Inc. (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 Company)
</TABLE>
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> 7
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>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH PAYMENTS:
Interest (net of amounts capitalized) . . . . . . . . . . $210,440 $181,397 $666,231 $609,611
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 2,815 $ (3,942) $ 81,584 $ 44,275
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 March 31, 1994, the Company and TU Electric had joint lines of credit
aggregating $700,000,000 under a credit facility agreement with a group of
commercial banks. On April 29, 1994, the Company and TU Electric entered into
a new credit facility agreement (Agreement) with a group of commercial banks
which replaced the previous joint lines of credit. 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 three
months ended March 31, 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> 8
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. CAPITALIZATION -- (CONCLUDED)
On February 2, 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 March 31, 1994 and December 31, 1993, TU Electric had 17,000,000 shares
of preferred stock authorized by the articles of incorporation of which
15,022,092 shares were issued and outstanding.
In April 1994, TU Electric redeemed 899,475 shares of Cumulative Preferred
Stock with dividend rates ranging from $8.16 to $8.44.
LONG-TERM DEBT
TU Electric redeemed the following long-term debt during the three months
ended March 31, 1994:
<TABLE>
<CAPTION>
QUARTER PRINCIPAL
ENDED AMOUNT INTEREST RATE MATURITY
---------------------------------------- ------------ ---------------- ------------
<S> <C> <C> <C>
First mortgage bonds:
March 31, 1994 . . . . . . . . . . $350,000,000 7-3/8% to 10.45% 2000 to 2006
</TABLE>
In April 1994, TU Electric redeemed $33,800,000 of 10% First Mortgage
and Collateral Trust Bonds due August 1, 2019, and in May 1994 issued
$300,000,000 of First Mortgage and Collateral Trust Bonds, Floating Rate
Series with an initial rate of 4.6875%, due May 1, 1999.
4. RETAINED EARNINGS
The articles of incorporation, the mortgages, as supplemented, and the
debenture agreements of TU Electric and SESCO contain provisions which, under
certain conditions, restrict distributions on or acquisitions of their common
stock. At March 31, 1994, $179,764,000 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 March 31, 1994 is
$611,007,000.
8
<PAGE> 9
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 TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- -------------------
1994 1993 1994 1993
-------- --------- -------- ---------
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
Charged (credited) to operating expenses:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,574 $ 10,540 $162,072 $ 47,215
Deferred -- net . . . . . . . . . . . . . . . . . . . . . . . . 3,718 27,087 194,182 170,155
Investment tax credits -- net . . . . . . . . . . . . . . . . . (6,062) (5,739) (22,706) (22,954)
-------- --------- -------- ---------
Total to operating expenses . . . . . . . . . . . . . . . . 43,230 31,888 333,548 194,416
-------- --------- -------- ---------
Charged (credited) to other income:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,352) (7,952) (28,971) (14,234)
Deferred -- net . . . . . . . . . . . . . . . . . . . . . . . . 16,589 (11,589) (60,912) 2,759
-------- --------- -------- ---------
Total to other income . . . . . . . . . . . . . . . . . . . 3,237 (19,541) (89,883) (11,475)
-------- --------- -------- ---------
Credited to retained earnings:
LESOP dividend deduction . . . . . . . . . . . . . . . . . . . (1,713) (1,695) (6,993) (1,695)
-------- --------- -------- ---------
Total federal income taxes . . . . . . . . . . . . . . . $ 44,754 $ 10,652 $236,672 $ 181,246
======== ========= ======== =========
</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 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 $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
9
<PAGE> 10
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. RATE PROCEEDINGS -- (CONTINUED)
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 an order on rehearing dated April 20, 1994. The final order, as
amended, provides for a total annual revenue increase of approximately $449
million, or 9.0%. TU Electric strongly disagrees with the final order, as
amended, and has filed a second motion for rehearing with the PUC, and will
appeal the outcome, if necessary. TU Electric has continued to bill its
customers under bonded rates while recording revenues net of a refund to
customers. As a result of this final order, as amended, unless changed further
on rehearing, TU Electric will refund the difference between the bonded rates
and the rates approved in the final order, as amended, including interest. The
total amount to be refunded is expected to be determined during the summer of
1994 after approved rates have been implemented. The amount to be refunded at
March 31, 1994 was approximately $197.7 million, including interest. Such
refund will be mitigated by a fuel cost surcharge approved by the PUC of
approximately $144.5 million, including interest, in under-collected fuel costs
through June 30, 1993. An appeal contesting the approval of this surcharge has
been filed by two municipalities in the 299th Judicial District Court of Travis
County, Texas.
The following details the effect of the Settlement Agreement and the Docket
11735 final order (as amended) charges on consolidated net income for the
twelve months ended March 31, 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>
In November 1993, an intermediate appellate court in Texas, considering an
appeal of another utility's rate case, ruled that utilizing tax benefits
generated by costs not allowed in rates to reduce rates charged to customers
was required by prior court rulings for all disallowed costs, including capital
costs. TU Electric believes that such rulings are erroneous and not
consistent with the Texas Public Utility
10
<PAGE> 11
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. RATE PROCEEDINGS -- (CONCLUDED)
Regulatory Act. 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
(Code). Violation of the normalization rules would result in a significant
adverse effect on TU Electric's results of operation and liquidity. The tax
benefits associated with the Comanche Peak costs disallowed in Docket 9300
(currently under appeal) could be affected as a result of the court's method.
In addition, in its final order in Docket 11735, the PUC reduced rates for the
tax benefits generated by certain costs which were not allowed in rates.
However, the PUC recognized the potential for a normalization violation if
investment tax credits and tax depreciation generated by disallowed plant costs
are used to reduce rates. Therefore, the PUC ordered TU Electric to obtain a
Private Letter Ruling from the IRS with respect to tax depreciation on
disallowed plant. Thus, TU Electric's rates would not reflect the tax
depreciation benefit of disallowed plant unless the IRS rules such benefits can
be utilized to reduce rates without violating the normalization rules contained
in the Code. Such a finding by the IRS would require TU Electric to refund the
tax depreciation benefits to its customers. TU Electric does not believe it is
likely that such refund will occur if the IRS maintains a position similar to
that stated in its previous Private Letter Ruling to TU Electric.
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 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.
11
<PAGE> 12
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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 March 31, 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 March 31, 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 March 31, 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 $9.3 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.
12
<PAGE> 13
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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.
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 March 31, 1994, such reserve totaled $40,990,000 which includes an accrual
of $4,545,000 and $14,976,000 for the three and twelve months ended March 31,
1994, respectively. As of March 31, 1994, $40,217,000 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.
13
<PAGE> 14
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES -- (CONCLUDED)
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.
14
<PAGE> 15
INDEPENDENT ACCOUNTANTS' REPORT
Texas Utilities Company:
We have reviewed the accompanying condensed consolidated balance sheet of Texas
Utilities Company and subsidiaries as of March 31, 1994, and the related
condensed statements of consolidated income and cash flows for the three-month
and twelve-month periods ended March 31, 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
May 10, 1994
15
<PAGE> 16
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
March 31, 1994, consisted of approximately 50% long-term debt, 9% preferred
stock and 41% common stock equity.
The System Companies had financings totaling $362,102,000 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:
LONG-TERM DEBT (TU ELECTRIC):
<TABLE>
<CAPTION>
PRINCIPAL
DESCRIPTION AMOUNT INTEREST RATE MATURITY
- - --------------------------------------------------- ------------ ------------- --------
<S> <C> <C> <C>
First mortgage and collateral trust bonds . . . . . $300,000,000 4.6875% 1999
</TABLE>
COMMON STOCK (COMPANY):
<TABLE>
<CAPTION>
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 or made principal payments
of $498,129,000 on long-term debt and preferred stock. On May 20, 1994, TU
Electric intends to redeem $149,000,000 of First Mortgage Bonds with interest
rates ranging from 4-1/2% to 6-1/8% with each redemption subject to the
deposit of the necessary redemption monies by TU Electric. Early redemptions
of long-term debt and preferred stock may occur from time to time in amounts
presently undetermined.
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.
The System Companies expect to sell additional debt and equity securities
as needed (subject to the possible 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, (ii) the
possible future sale by TU Electric of 250,000 shares of Cumulative Preferred
Stock ($100 liquidation value) similarly registered, and (iii) the anticipated
sale on behalf of TU Electric in May 1994 of $78,340,000 of Collateralized
Pollution Control Revenue Refunding Bonds and the retirement by TU Electric of
an equal aggregate principal amount of Collateralized Pollution Control Revenue
Bonds. On April 29, 1994, the Company and TU Electric entered into a new
credit facility agreement (Agreement) with a group of commercial banks which
replaced the previous joint lines of credit. 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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
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, new
marketing and rate initiatives and application for additional 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 internal cash
generation will increase as a result of the Docket 11735 rate 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. 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 an order on rehearing dated April 20, 1994. The final order, as
amended, provides for a total annual revenue increase of approximately $449
million, or 9.0%. TU Electric strongly disagrees with the final order, as
amended, and has filed a second motion for rehearing with the PUC, and will
appeal the outcome, if necessary. TU Electric has continued to bill its
customers under bonded rates while recording revenues net of a refund to
customers. As a result of this final order, as amended, unless changed further
on rehearing, TU Electric will refund the difference between the bonded rates
and the rates approved in the final order, as amended, including interest. The
total amount to be refunded is expected to be determined during the summer of
1994 after approved rates have been implemented. The amount to be refunded at
March 31, 1994 was approximately $197.7 million, including interest. Such
refund will be mitigated by a fuel cost surcharge approved by the PUC of
approximately $144.5 million, including interest, in under-collected fuel costs
through June 30, 1993. 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 final order, as amended, and its effects on earnings, TU
Electric could be restricted from issuing additional shares of preferred stock.
TU Electric does not believe this restriction would materially affect its
ability to fund its continuing operations or capital requirements. Although TU
Electric cannot predict the outcome of its appeal of the Docket 9300 rate
decision or its expected appeal of the Docket 11735 rate decision, future
regulatory actions or any changes in economic and securities market conditions,
no changes are expected in trends or commitments, other than those discussed
above, which might significantly alter its basic financial position.
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. 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
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED)
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 three- and twelve-month
periods ended March 31, 1994 with the same periods ended March 31, 1993.
Operating revenues increased 13.9% and 12.0% for the three- and
twelve-month periods ended March 31, 1994, respectively. The following table
details the factors contributing to these changes:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-----------------------------------------
FACTORS THREE MONTHS ENDED TWELVE MONTHS ENDED
------------ ------------------ -------------------
THOUSANDS OF DOLLARS
<S> <C> <C>
Base rate revenue (billed) . . . . . . . . . $195,278 $539,007
Fuel revenue . . . . . . . . . . . . . . . . (8,160) 85,858
Power cost recovery factor revenue . . . . . (8,232) (11,140)
Unbilled revenue and other . . . . . . . . . (20,001) (13,537)
-------- --------
Total . . . . . . . . . . . . . . . . . . $158,885 $600,188
======== ========
</TABLE>
Base rate revenue increased in both periods due to higher energy sales and
higher rate levels implemented in August 1993. Energy sales increased 8.9% and
7.6% for the three- and twelve-month periods, respectively. The increase in
energy sales for both periods was due primarily to increased customer usage
resulting from more normal weather conditions 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 $147 million and $323 million
for the three and twelve months ended, respectively. The decrease in fuel
revenue for the three-month period was primarily due to a reduced fuel factor
in the current period 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 and increased
fuel costs offset by a lower fuel factor implemented in August 1993. The
decrease in unbilled revenue and other in both periods resulted from a smaller
accrual of unbilled revenue due to an increase in the number of calendar days
billed in the current period.
Fuel and purchased power expense increased 0.7% and 7.2% for the three- and
twelve-month periods, respectively. Fuel and purchased power expense increased
for both periods primarily due to increased energy sales and the increased
price of fuel gas, partially offset by the increased utilization of nuclear
fuel which replaced higher cost fuels.
Total operating expenses, excluding fuel and purchased power, increased
26.8% and 21.1% for the three- and twelve-month periods, respectively.
Operation, maintenance and depreciation expenses increased in both periods as a
result of the commencement of commercial operation of Unit 2 of Comanche Peak
in August 1993. Operation expense also increased in both periods due to
increases in
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (CONCLUDED).
RESULTS OF OPERATION -- (CONCLUDED)
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 in both 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 both
periods was affected by a refund of franchise taxes in the prior period, of
approximately $23,875,000.
Allowance for funds used during construction (AFUDC) decreased 94.6% and
48.8% for the three- and twelve-month periods, respectively. The decrease in
both 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. This decrease
was 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 three-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 1.3% for the three-month
period and increased 0.2% for the twelve-month period, respectively. Interest
on mortgage bonds decreased for the three-month period as a result of reduced
interest requirements due to the Company's refinancing efforts, partially
offset by increased interest requirements for new issues sold, and increased
for the twelve-month period as a result of new issues sold, offset by reduced
interest requirements as a result of the Company's refinancing efforts.
Interest on other long-term debt decreased in both periods due to the refunding
of higher interest rate debt and the continuing retirement of debt incurred on
the purchases of the minority ownership interests in Comanche Peak. Other
interest expense increased in both 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 decreased interest on over-recovered fuel
revenues.
Preferred stock dividends decreased 6.4% and 4.1% for the three- 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- 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 56.4% and 58.9% for the
three- and twelve-month periods, respectively.
19
<PAGE> 20
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:
*10(a) -- Deferred and Incentive Compensation Plan of the Texas
Utilities Company System, as amended June 30, 1992.
(Filed as Exhibit 10(a), file number 0-11442 Form 10-K,
1992.)
*10(b) -- Salary Deferral Program of the Texas Utilities Comany
System, as amended May 31, 1992. (Filed as
Exhibit 10(b), file number 0-11442 Form 10-K, 1992.)
*10(c) -- Restated Supplemental Retirement Plan for the
employees of Texas Utilities Company System, dated as
of January 1, 1991. (Filed as Exhibit 10(c), file
number 0-11442 Form 10-K, 1992.)
15 -- Letter from Deloitte & Touche as to unaudited interim
financial information.
(b) Reports on Form 8-K filed since December 31, 1993 are as follows:
Date of Report Item Reported
------------------ ----------------------
January 14, 1994 Item 5. OTHER EVENTS.
January 31, 1994 Item 5. OTHER EVENTS.
______________________
* Incorporated herein by reference.
20
<PAGE> 21
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: May 10, 1994
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description of Exhibit Page
- - ------- ---------------------- ------------
<S> <C> <C>
10(a) Deferred and Incentive Compensation Plan of the Texas
Utilities Company System, as amended June 30, 1992.
(Filed as Exhibit 10(a), file number 0-11442 Form 10-K,
1992.)
10(b) Salary Deferral Program of the Texas Utilities Company
System, as amended May 31, 1992. (Filed as Exhibit 10(b),
file number 0-11442 Form 10-K, 1992.)
10(c) Restated Supplemental Retirement Plan for the employees of
Texas Utilities Company System, dated as of January 1,1991.
(Filed as Exhibit 10(c), file number 0-11442 Form 10-K,
1992.)
15 Letter from Deloitte & Touche as to unaudited interim 23
financial information.
</TABLE>
22
<PAGE> 1
EXHIBIT 15
Texas Utilities Company:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the condensed unaudited interim
financial information of Texas Utilities Company and subsidiaries for the
three-month and twelve-month periods ended March 31, 1994 and 1993, as
indicated in our report dated May 10, 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 March 31, 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
May 10, 1994
23
