<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 MARCH 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3591
_________________________
TEXAS UTILITIES COMPANY
A Texas I.R.S. Employer Identification No.
Corporation 75-0705930
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201
(214) 812-4600
_________________________
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, 1995: 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 TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1995 1994 1995 1994
---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
OPERATING REVENUES............................................... $1,244,265 $1,301,378 $5,606,430 $5,593,397
---------- ---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power....................................... 390,592 417,285 1,702,398 1,860,874
Operation...................................................... 195,616 214,311 853,577 838,231
Maintenance.................................................... 68,831 72,379 301,393 354,225
Depreciation and amortization.................................. 138,914 136,598 551,855 468,550
Federal income taxes (Note 5).................................. 42,772 43,230 316,570 333,548
Taxes other than income........................................ 138,968 147,663 550,416 525,022
---------- ---------- ---------- ----------
Total operating expenses..................................... 975,693 1,031,466 4,276,209 4,380,450
---------- ---------- ---------- ----------
OPERATING INCOME................................................. 268,572 269,912 1,330,221 1,212,947
---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Allowance for equity funds used during construction............ (54) 2,889 7,832 96,298
Regulatory disallowances....................................... - - - (359,556)
Other income and deductions - net.............................. 4,735 9,326 23,014 33,587
Federal income taxes (Note 5).................................. (2,945) (3,237) (9,352) 89,883
---------- ---------- ---------- ----------
Total other income (loss).................................... 1,736 8,978 21,494 (139,788)
---------- ---------- ---------- ----------
TOTAL INCOME..................................................... 270,308 278,890 1,351,715 1,073,159
---------- ---------- ---------- ----------
INTEREST CHARGES
Interest on mortgage bonds..................................... 136,987 148,691 555,839 608,404
Interest on other long-term debt............................... 23,128 23,777 91,875 104,812
Other interest................................................. 16,405 14,068 69,147 37,176
Allowance for borrowed funds used during construction.......... (5,169) (2,474) (13,956) (72,850)
---------- ---------- ---------- ----------
Total interest charges....................................... 171,351 184,062 702,905 677,542
PREFERRED STOCK DIVIDENDS OF SUBSIDIARY.......................... 23,546 28,082 97,346 113,327
---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME.......................................... $ 75,411 $ 66,746 $ 551,464 $ 282,290
========== ========== ========== ==========
Average shares of common stock outstanding (thousands)........... 225,841 225,812 225,841 223,305
Earnings and dividends per share of common stock:
Earnings (on average shares outstanding)....................... $0.33 $0.30 $2.44 $1.26
Dividends declared............................................. $0.77 $0.77 $3.08 $3.08
</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>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income................................................... $ 75,411 $ 66,746 $ 551,464 $ 282,290
Adjustments to reconcile consolidated net income to cash
provided by operating activities:
Depreciation and amortization (including amounts charged to fuel)....... 177,885 178,514 709,394 597,264
Deferred federal income taxes - net..................................... 46,811 19,200 288,237 93,532
Federal investment tax credits - net.................................... (5,753) (6,062) (26,118) (22,706)
Allowance for equity funds used during construction..................... 54 (2,889) (7,832) (96,298)
Regulatory disallowances................................................ - - - 359,556
Changes in assets and liabilities:
Receivables........................................................... 55,868 49,552 16,729 (63,646)
Inventories........................................................... 17,510 12,645 7,538 15,364
Accounts payable...................................................... (12,817) (48,090) (7,658) (21,955)
Interest and taxes accrued............................................ (71,590) (110,856) (38,529) 59,997
Other working capital................................................. 5,970 (10,562) (113,804) 153,148
Over/(under)-recovered fuel revenue - net of deferred taxes........... 5,751 (522) 119,966 (69,546)
Other - net........................................................... 12,442 35,056 47,092 63,803
--------- --------- ----------- -----------
Cash provided by operating activities............................... 307,542 182,732 1,546,479 1,350,803
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of securities:
First mortgage bonds.................................................... - - 378,340 1,948,465
Other long-term debt.................................................... 300,000 - 300,000 325,000
Preferred stock......................................................... - - - 610,701
Common stock............................................................ - 62,102 - 240,510
Retirement of long-term debt and preferred stock.......................... (139,705) (362,600) (953,128) (2,876,431)
Change in notes payable................................................... (171,886) 225,000 (33,000) (76,100)
Common stock dividends paid............................................... (173,872) (173,897) (695,498) (682,438)
Debt premium, discount, financing and reacquisition expenses.............. (2,862) (2,152) (22,386) (137,507)
--------- --------- ----------- -----------
Cash used in financing activities................................... (188,325) (251,547) (1,025,672) (647,800)
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures................................................. (87,443) (98,717) (432,972) (750,607)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel)................................................. (54) 1,255 3,493 87,481
Change in construction receivables/payables - net......................... 1,097 (806) 4,712 21,711
--------- --------- ----------- -----------
Cash construction expenditures...................................... (86,400) (98,268) (424,767) (641,415)
Non-utility property - net................................................ (15,947) (15,838) (15,076) (10,299)
Nuclear fuel (excluding allowance for equity funds used
during construction)...................................................... (15,663) (9,094) (69,224) (23,091)
Other investments......................................................... (5,996) (6,597) (23,075) (20,292)
--------- --------- ----------- -----------
Cash used in investing activities................................... (124,006) (129,797) (532,142) (695,097)
--------- --------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................................... (4,789) (198,612) (11,335) 7,906
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE............................... 7,426 212,584 13,972 6,066
--------- --------- ----------- -----------
CASH AND CASH EQUIVALENTS - ENDING BALANCE.................................. $ 2,637 $ 13,972 $ 2,637 $ 13,972
========= ========= =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
(UNAUDITED)
----------- ------------
THOUSANDS OF DOLLARS
<S> <C> <C>
UTILITY PLANT
In service:
Production............................................................... $16,537,546 $16,516,326
Transmission............................................................. 1,577,123 1,573,634
Distribution............................................................. 4,103,927 4,048,867
General.................................................................. 446,993 456,212
----------- -----------
Total.................................................................. 22,665,589 22,595,039
Less accumulated depreciation............................................ 5,138,329 5,023,003
----------- -----------
Utility plant in service less accumulated depreciation................. 17,527,260 17,572,036
Construction work in progress.............................................. 244,356 1,060,731
Nuclear fuel (net of accumulated amortization: 1995 - $228,111,000;
1994 - $205,420,000)...................................................... 291,936 298,964
Held for future use........................................................ 852,553 46,197
----------- -----------
Utility plant less accumulated depreciation and amortization............. 18,916,105 18,977,928
Less reserve for regulatory disallowances (Note 6)......................... 1,308,460 1,308,460
----------- -----------
Net utility plant........................................................ 17,607,645 17,669,468
----------- -----------
INVESTMENTS
Non-utility property....................................................... 585,284 569,337
Other investments.......................................................... 128,728 122,906
----------- -----------
Total investments........................................................ 714,012 692,243
----------- -----------
CURRENT ASSETS
Cash in banks.............................................................. 2,637 7,426
Special deposits........................................................... 1,713 1,002
Accounts receivable:
Customers................................................................ 146,260 201,687
Other.................................................................... 36,757 38,712
Allowance for uncollectible accounts..................................... (3,581) (5,095)
Inventories - at average cost:
Materials and supplies................................................... 190,231 194,271
Fuel stock............................................................... 132,192 145,662
Prepaid taxes.............................................................. 40,135 21,629
Other prepayments.......................................................... 36,857 41,871
Deferred federal income taxes.............................................. 32,513 37,113
Other current assets....................................................... 12,646 11,216
----------- -----------
Total current assets..................................................... 628,360 695,494
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets:
Debt reacquisition costs................................................. 281,490 284,563
Cancelled lignite unit costs............................................. 17,368 18,049
Rate case costs.......................................................... 64,120 64,862
Litigation and settlement costs.......................................... 72,685 72,685
Voluntary retirement/severance program................................... 177,340 184,340
Recoverable deferred federal income taxes - net.......................... 1,192,062 1,201,688
Other regulatory assets.................................................. 15,335 15,939
Under-recovered fuel revenue............................................... - 29,860
Other deferred debits...................................................... 29,862 36,902
----------- -----------
Total deferred debits.................................................... 1,850,262 1,908,888
Less reserve for regulatory disallowances (Note 6)......................... 72,685 72,685
----------- -----------
Net deferred debits...................................................... 1,777,577 1,836,203
----------- -----------
Total.................................................................. $20,727,594 $20,893,408
=========== ===========
</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>
MARCH 31, DECEMBER 31,
1995 1994
(UNAUDITED)
----------- ------------
THOUSANDS OF DOLLARS
<S> <C> <C>
CAPITALIZATION
Common stock without par value - net:
Authorized shares - 500,000,000
Outstanding shares:
March 31, 1995 - 225,841,037; December 31, 1994 - 225,841,037........ $ 4,800,843 $ 4,798,797
Retained earnings........................................................ 1,593,582 1,691,250
----------- -----------
Total common stock equity.......................................... 6,394,425 6,490,047
Preferred stock:
Not subject to mandatory redemption.................................... 855,869 870,190
Subject to mandatory redemption........................................ 312,891 387,482
Long-term debt, less amounts due currently............................... 8,155,328 7,888,413
----------- -----------
Total capitalization............................................... 15,718,513 15,636,132
----------- -----------
CURRENT LIABILITIES
Notes payable - banks.................................................... 60,000 -
Notes payable - commercial paper......................................... 132,000 363,886
Long-term debt due currently............................................. 58,740 74,610
Accounts payable......................................................... 207,941 219,661
Dividends declared....................................................... 197,414 197,564
Customers' deposits...................................................... 59,735 56,391
Taxes accrued............................................................ 170,469 243,753
Interest accrued......................................................... 185,239 183,545
Over-recovered fuel revenue.............................................. 39,023 -
Other current liabilities................................................ 74,741 95,329
----------- -----------
Total current liabilities.......................................... 1,185,302 1,434,739
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes................................ 2,862,679 2,852,462
Unamortized federal investment tax credits............................... 673,351 679,104
Other deferred credits and noncurrent liabilities........................ 287,749 290,971
----------- -----------
Total deferred credits and other noncurrent liabilities.............. 3,823,779 3,822,537
COMMITMENTS AND CONTINGENCIES (Note 7)..................................... ----------- -----------
Total................................................................ $20,727,594 $20,893,408
=========== ===========
</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 1994 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 LLP, independent certified public accountants, whose report
with respect thereto is filed herewith in Part I of this report. The condensed
consolidated financial statements should be considered in conjunction with the
consolidated financial statements, and the notes thereto, of the Company
included in the 1994 Annual Report on Form 10-K and the information under
Management's Discussion and Analysis of Financial Condition and Results of
Operation herein.
Consolidation - The consolidated financial statements include the Company
and all of its subsidiaries (System Companies):
Texas Utilities Electric Company Texas Utilities Services Inc.
(TU Electric) (TU Services)
Southwestern Electric Service Company Texas Utilities Properties Inc.
(SESCO) (TU Properties)
Texas Utilities Fuel Company Basic Resources Inc. (Basic)
(Fuel Company)
Texas Utilities Mining Company Chaco Energy Company (Chaco)
(Mining Company)
In May 1994, TU Properties, a new wholly-owned subsidiary of the Company,
was incorporated under the laws of the State of Texas. The principal function of
TU Properties is to own, lease and manage real and personal properties,
primarily for System Companies.
All significant intercompany items and transactions have been eliminated in
consolidation.
Reclassification - Certain financial statement items for 1994 have been
reclassified to conform to the 1995 presentation.
Allowance for Funds Used During Construction (AFUDC) - TU Electric is
capitalizing AFUDC monthly, on expenditures for ongoing construction work in
progress (CWIP) and nuclear fuel in process not otherwise allowed in rate base
by regulatory authorities. Effective January 1, 1995, TU Electric began using a
gross rate of 6.75% for AFUDC for all construction. For 1994 and 1993, the gross
rates were 8.6% and 10.4%, respectively.
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>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
CASH PAYMENTS (RECEIPTS)
Interest (net of amounts capitalized)....... $162,401 $210,440 $627,786 $666,231
Income taxes................................ $(39,441) $ 2,815 $178,060 $ 81,584
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, 1995, the Company and TU Electric had joint lines of credit
aggregating $1,000,000,000 under credit facility agreements with a group of
commercial banks. On April 28, 1995, the Company and TU Electric renegotiated
these credit facility agreements and entered into amendments that extended the
terms of such credit facility agreements (Amended Agreements). The Amended
Agreements have two facilities, for each of which the Company pays a fee.
Facility A provides for borrowings up to $300,000,000 and terminates April 28,
1996. Facility B provides for borrowings up to $700,000,000 and terminates April
28, 2000. The Company's borrowings under the Amended Agreements are limited to
$400,000,000. Borrowings under the Amended Agreements will be used for working
capital and other corporate purposes, including commercial paper backup.
3. CAPITALIZATION
COMMON STOCK
In 1990, the Thrift Plan borrowed $250,000,000 in the form of a note
payable from an outside lender and purchased 7,142,857 shares of common stock
(LESOP Shares) from the Company in connection with the leveraged employee stock
ownership provision of the Thrift Plan. LESOP Shares are held by the trustee
until allocated to Thrift Plan participants when required to meet the System
Companies' obligations under terms of the Thrift Plan. The Company has purchased
the note from the outside lender, which has been recorded as a reduction to
common stock equity. The Thrift Plan uses dividends on the LESOP Shares
purchased and contributions from the System Companies, if required, to repay
interest and principal on the note. Common stock equity increases at such time
as LESOP Shares are allocated to participants' accounts even though shares of
common stock outstanding include unallocated LESOP Shares held by the trustee.
Allocations to participants' accounts during the three months ended March 31,
1995, increased common stock equity by $2,046,000.
7
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. CAPITALIZATION - (CONCLUDED)
PREFERRED STOCK OF TU ELECTRIC
At March 31, 1995 and December 31, 1994, TU Electric had 17,000,000 shares
of preferred stock authorized by its articles of incorporation of which
11,889,553 and 12,787,228 shares were issued and outstanding, respectively.
TU Electric redeemed or purchased 897,675 shares of preferred stock with
annual dividend rates ranging from $7.22 to $10.375 during the three months
ended March 31, 1995.
On May 1, 1995, TU Electric redeemed 125,000 shares of $9.64 Cumulative
Preferred Stock which fulfills its mandatory redemption requirement until
November 1, 1995.
LONG-TERM DEBT
During the three months ended March 31, 1995, TU Electric borrowed
$300,000,000 pursuant to a term credit agreement (Credit Agreement), which
matures on February 28, 1997. The Credit Agreement permits TU Electric to select
between two methods of calculating a variable interest rate. At March 31, 1995
the rate was 6.55% for a one-month period.
TU Electric purchased and retired $25,100,000 aggregate principal amount of
9-7/8% First Mortgage and Collateral Trust Bonds due November 1, 2019 during the
three months ended March 31, 1995, and redeemed the remaining $86,050,000 of
such series in April 1995.
In April 1995, the Brazos River Authority and the Sabine River Authority of
Texas issued $66,670,000 aggregate principal amount of Pollution Control Revenue
Bonds collateralized by an equal amount of TU Electric's First Mortgage and
Collateral Trust Bonds. Such bonds are currently in a flexible mode and secured
by an irrevocable letter of credit. Also in April 1995, an aggregate principal
amount of $9,000,000 of the Brazos River Authority Pollution Control Revenue
Bonds, Taxable Series 1991 was defeased.
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 March 31, 1995,
$153,247,000 of retained earnings were thus restricted as a result of such
provisions. Retained earnings at such date also included $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,
1995 is $584,490,000.
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,
-------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
Charged (credited) to operating expenses:
Current......................................... $ 40,517 $ 45,574 $177,135 $162,072
Deferred - net.................................. 8,008 3,718 165,553 194,182
Investment tax credits - net.................... (5,753) (6,062) (26,118) (22,706)
-------- -------- -------- --------
Total to operating expenses................. 42,772 43,230 316,570 333,548
-------- -------- -------- --------
Charged (credited) to other income:
Current......................................... (11,749) (13,352) (27,723) (28,971)
Deferred - net.................................. 14,694 16,589 37,075 (60,912)
-------- -------- -------- --------
Total to other income....................... 2,945 3,237 9,352 (89,883)
-------- -------- -------- --------
Credited to retained earnings:
LESOP dividend deduction........................ (1,637) (1,713) (6,658) (6,993)
-------- -------- -------- --------
Total federal income taxes.................. $ 44,080 $ 44,754 $319,264 $236,672
======== ======== ======== ========
</TABLE>
6. RATE PROCEEDINGS
DOCKET 11735
In July 1994, TU Electric filed a petition in the 200th Judicial District
Court of Travis County, Texas to seek judicial review of the final order of the
Public Utility Commission of Texas (PUC) granting a $449 million, or 9.0% rate
increase in connection with TU Electric's January 1993 rate increase request of
$760 million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also
filed appeals with respect to various portions of the order. TU Electric is
unable to predict the outcome of such appeals.
9
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. RATE PROCEEDINGS - (CONTINUED)
DOCKET 9300
The PUC's final order (Order) in connection with TU Electric's January 1990
rate increase request (Docket 9300) has been reviewed by the 250th Judicial
District Court of Travis County, Texas (District Court) and thereafter was
appealed to the Court of Appeals for the Third District of Texas (Court of
Appeals). In June 1994, the Court of Appeals affirmed a prudence disallowance of
$472 million provided for in the Order with respect to its Comanche Peak nuclear
generating station (Comanche Peak), 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 District Court's remand of the
remainder of the disallowance of $884 million relating to the reacquisitions of
such minority owner interests. Therefore, the Court of Appeals remanded an
aggregate of $909 million of disallowances with respect to TU Electric's
reacquisitions of minority owner interests in Comanche Peak to the PUC for
reconsideration and ordered that such reconsideration be on the basis of a
prudent investment standard.
In addition, the Court of Appeals reversed the District Court's finding
that the PUC erred in ordering a refund of $2.5 million with respect to certain
fuel gas costs. Also, the Court of Appeals specified that, on remand, the PUC
will be required to re-evaluate the appropriate level of TU Electric's CWIP
included in rate base in light of its financial condition at the time of the
initial hearing and to reconsider whether the $442 million revenue increase
provided for in the PUC's final order remains the benchmark in light of this re-
examination.
The Court of Appeals also ruled in the appeal of TU Electric's Docket 9300
rate case that prior court rulings required that the tax benefits generated by
costs, including capital costs, not allowed in rates, must be used to reduce
rates charged to customers, reversing the District Court's decision. TU Electric
believes that such ruling is erroneous and not consistent with the Texas Public
Utility Regulatory Act (PURA). TU Electric contended that, according to a
Private Letter Ruling issued to TU Electric by the Internal Revenue Service
(IRS) with respect to investment tax credits, such ratemaking treatment, to the
extent related to property classified for tax purposes as public utility
property, would result in a violation of the normalization rules under the
Internal Revenue Code of 1986, as amended. 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, and will also forfeit 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 up 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 filed an
appeal to the Supreme Court of Texas. Other parties have also filed appeals of
this decision to the Supreme Court of Texas. TU Electric cannot predict whether
such appeals will be accepted by the Supreme Court of Texas and cannot predict
the outcome of any such appeals or any resulting reconsideration of these issues
on remand by the PUC.
On April 13, 1995 in an appeal of a rate case involving another utility,
the Supreme Court of Texas held that the PUC has considerable discretion in
determining the fair share of consolidated tax savings to be allocated to a
utility and, accordingly, is not required to include losses of unregulated
affiliates in determining such fair share. The Supreme Court also held that the
PUC could not use the tax benefits generated by disallowed expenses to reduce
rates.
10
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. RATE PROCEEDINGS - (CONCLUDED)
FUEL COST RECOVERY RULE
In August 1994, 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. The PUC approved the recovery of this
amount over a six-month period beginning in January 1995. The PUC's approval of
this surcharge and a previously approved $147.5 million surcharge for fuel cost
recovery for a prior period have been appealed by certain intervenors to the
district courts of Travis County, Texas. In those appeals, those parties are
contending that the PUC is without authority to allow a fuel cost surcharge
without a hearing and findings that the costs are reasonable and necessary and
that the prices charged to TU Electric by affiliated suppliers are no higher
than the prices charged by those affiliates to others for the same items or
class of items. TU Electric will vigorously defend its position in these appeals
but is unable to predict their outcome.
FLEXIBLE RATE INITIATIVES
In June 1994, TU Electric filed with the PUC and municipalities with
original regulatory jurisdiction a package of four proposed flexible rates. Two
of the proposed rates would allow for negotiated competitive pricing through
reductions in demand charges to retain existing non-residential retail and
wholesale customers who have viable alternative sources of supply and would
otherwise leave the system. The remaining two rates are an economic development
rider and an environmental technology service rider. The economic development
rider would provide an incentive to attract new businesses and jobs and to
encourage existing customers to expand their facilities within TU Electric's
service area. The environmental technology service rider would provide an
incentive for qualifying customers to convert to advanced technologies that
conserve total energy or improve the environment. These new rates have been
approved and implemented in over 160 municipalities with original regulatory
jurisdiction, including the cities of Dallas and Fort Worth, within TU
Electric's service territory. Following hearings on the proposed rates, however,
the PUC issued an interim order on the rate package which either rejected or
significantly weakened the proposed flexible rates, rendering them ineffective.
In January 1995, TU Electric withdrew its package of proposed rates from
consideration by the PUC. This action does not affect the over 160
municipalities where the flexible rates are already in effect. The Sunset Review
of PURA by the Texas legislature in 1995 is expected to include several of the
key issues involved in this case. Through its involvement at the legislature and
the PUC, TU Electric will continue to pursue the possibility of offering
flexible rates.
INTEGRATED RESOURCE PLAN
In October 1994, TU Electric filed an application for approval by the PUC
of its Integrated Resource Plan (IRP) for the ten-year period 1995-2004. The IRP
includes initiatives that address demand-side management resources, purchased
power, and future generating capacity that includes renewable energy sources. TU
Electric's IRP includes 288 megawatts (MW) of simple-cycle combustion turbines,
1,514 MW of combined-cycle combustion turbines and 300 MW of wind or other
renewable resources. Assuming these units are financed by TU Electric using
traditional methods, approximately $200 million would be added to capital
expenditures in 1997. TU Electric's IRP also includes one lignite-fueled 750 MW
unit at Twin Oak. The second lignite-fueled Twin Oak unit has been delayed
beyond the ten-year period. Hearings on this application were concluded in March
1995. The PUC'S decision on the IRP is expected in mid-1995.
11
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
Construction expenditures for utility related activities, excluding AFUDC
and expenditures relating to new generating units, are presently estimated at
$400 million for each of the years 1995, 1996 and 1997. Expenditures for nuclear
fuel and non-utility property are presently estimated at $63 million for 1995,
$70 million for 1996, and $96 million for 1997. Active construction and the
accrual of AFUDC on Twin Oak, suspended in 1987 due to forecast changes in load
growth, would need to resume in 1999 in order to meet the current schedule. Due
to the delay, and the possibility of further delays resulting from forecast
changes, in the schedule of Twin Oak, as well as the lignite-fueled Forest Grove
facility which is not included in the ten-year resource plan, TU Electric is
contemplating alternative uses for its investment in these projects, which might
include construction as exempt wholesale generators, construction at different
locations, or sale of the facilities. While the Company currently believes that
its investment in these assets can be recovered if held and ultimately developed
according to existing plans, other alternative uses might contribute more to
the Company's long-term strategy of maximizing shareholder value, and might
include disposition for amounts which may be less than current book value with
respect to these assets. Management has no specific plans for alternative uses.
In March 1995, such investment of approximately $807 million was transferred
from CWIP to Utility Plant Held for Future Use.
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.
The Company plans to seek new investment opportunities from time to time
when it concludes that such investments are consistent with its business
strategies and will likely enhance the long-term returns to its shareholders.
(See Note 9.) The timing and amounts of any specific new business investment
opportunities are presently undetermined.
CLEAN AIR ACT
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. During 1994, installation of continuous emissions monitoring systems
was completed at a total cost of approximately $38 million. Any additional
capital costs, as well as any increased operating costs, associated with these
new requirements or compliance measures, are expected to be recoverable through
rates, as similar costs have been recovered in the past. TU Electric's
environmental expenditures for 1995 are estimated to be $58 million.
12
<PAGE>
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, $36,650,000 at March 31, 1995, and interest on bonds issued to
finance the reservoirs from which the water is supplied. The bonds mature at
various dates through 2011 and have interest rates ranging from 5-1/2% to 7%. TU
Electric is required to make periodic payments equal to such principal and
interest, including amounts assumed by a third party and reimbursed to TU
Electric. In addition, TU Electric is 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 $84,610,000 remaining principal amount of bonds at March 31, 1995, issued
for similar purposes which had previously been guaranteed by TU Electric. TU
Electric is, however, contingently liable in the unlikely event of default by
the municipality.
CHACO COAL PROPERTIES
Chaco has a coal lease agreement for the rights to certain surface mineable
coal reserves located in New Mexico. The agreement provides for minimum advance
royalty payments of approximately $16 million per year through 2017, covering
approximately 228 million tons of coal. The Company has entered into a surety
agreement to assure performance by Chaco with respect to this agreement. At
March 31, 1995 and December 31, 1994, $515,926,000 and $499,890,000,
respectively, of minimum advance royalties paid by Chaco are included in non-
utility property. In addition, Chaco has under lease with the federal government
certain coal reserves with a carrying value of approximately $44 million as of
March 31, 1995. A provision in this lease requires that substantial mining be
completed by September 1997. Chaco is currently reviewing its options with
regard to this provision. Because of the ample availability of western coal at
favorable prices from other mines, Chaco has delayed plans to commence mining
operations, and accordingly, is reassessing its alternatives with respect to its
coal properties including seeking other purchasers thereof.
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 $8.9 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
13
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
provided under an industry-wide 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
$3.6 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 $2.25 billion. TU
Electric is subject to a maximum annual assessment from NEIL of $30 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 $3.5 million for the first and $2.8 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 $473 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, 1995, such reserve totaled $60,646,000 which includes an accrual of
$4,545,000 and $18,179,000 for the three and twelve months ended March 31, 1995,
respectively. As of March 31, 1995, the market value of deposits in the external
trust for decommissioning of Comanche Peak was $62,698,000. Realized earnings on
funds deposited in the external trust are recognized in the reserve. Based on a
site-specific study during 1992 using the prompt dismantlement method and then-
current dollars, decommissioning costs for Comanche Peak Unit 1, and Unit 2 and
common facilities were estimated to be $255,000,000 and $344,000,000,
respectively. Decommissioning activities are projected to begin in 2030 and 2032
for Comanche Peak Unit 1, and Unit 2 and common facilities, respectively. TU
Electric is recovering such costs based upon the 1992 study through its rates
placed in effect under Docket 11735. (See Note 6.)
14
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES - (CONCLUDED)
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. ACCOUNTING CHANGE
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (Statement 121) was issued. Statement 121 is effective for
financial statements for fiscal years beginning after December 15, 1995 and
prescribes a methodology for assessing and measuring impairments in the carrying
value of certain assets. As a result of such standard, the Company will be
subject to a more formal standard for assessing asset impairment in the future.
9. SUBSEQUENT EVENT
On May 9, 1995, Texas Utilities Communications Inc. (TU Communications), a
new wholly-owned subsidiary of the Company entered into an agreement with PCS
PrimeCo (PrimeCo), a partnership between four large telecommunications
companies, to become a 20% equity participant in PrimeCo's personal
communications services (PCS) business in three Federal Communications
Commission-defined Major Trading Areas (MTAs). The Dallas/Ft. Worth, Houston and
San Antonio MTAs cover almost the entire State of Texas, as well as portions of
adjoining states. PrimeCo recently won licenses in these markets to provide PCS,
which are wireless communications services. This partnership provides TU
Communications with access to advanced telecommunications technology which is
expected to be an important part of the System Companies' expanding energy
services in the future.
15
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD APPEARS HERE]
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, 1995, and the related
condensed statements of consolidated income and of cash flows for the three-
month and twelve-month periods ended March 31, 1995 and 1994. 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, 1994, 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 1, 1995, we expressed an unqualified
opinion on those consolidated financial statements, which opinion included an
explanatory paragraph concerning Texas Utilities Company and subsidiaries'
changes in accounting for income taxes, postretirement benefits other than
pensions and in accounting for base rate revenue sold but not billed. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1994, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 10, 1995
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 1994.
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
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, 1995 consisted of approximately 52% long-term debt, 7% preferred stock
and 41% common stock equity.
The System Companies had financings totaling $366,670,000 to date in 1995.
Proceeds from such financings were used primarily for the early redemption or
reacquisition of debt and preferred stock. Financings to date in 1995 by the
System Companies consisted of:
LONG-TERM DEBT (TU ELECTRIC):
<TABLE>
<CAPTION>
PRINCIPAL CURRENT
DESCRIPTION AMOUNT INTEREST RATE MATURITY
----------- ------------ --------------- --------
<S> <C> <C> <C>
Term credit agreement............ $300,000,000 6.55% 1997
Pollution control revenue bonds.. 66,670,000 4.35% to 5.25% 2030
------------
Total.......................... $366,670,000
============
</TABLE>
To date in 1995, the System Companies redeemed, purchased and retired,
defeased or made principal payments of $247,116,000 on long-term debt and
preferred stock. Early redemptions of long-term debt and preferred stock may
occur from time to time in amounts presently undetermined.
The System Companies expect to sell additional debt and equity securities
as needed including (i) the possible future sale by Texas Utilities Electric
Company (TU Electric) of up to $650,000,000 of First Mortgage Bonds currently
registered with the Securities and Exchange Commission for offering pursuant to
Rule 415 under the Securities Act of 1933 and (ii) the possible future sale by
TU Electric of 250,000 shares of Cumulative Preferred Stock ($100 liquidation
value) similarly registered.
On April 28, 1995, the Company and TU Electric renegotiated their credit
facility agreements and entered into amendments that extended the terms of such
credit facility agreements (Amended Agreements). The Amended Agreements have two
facilities, for each of which the Company pays a fee. Facility A provides for
borrowings up to $300,000,000 and terminates April 28, 1996. Facility B provides
for borrowings up to $700,000,000 and terminates April 28, 2000. The Company's
borrowings under the Amended Agreements are limited to $400,000,000. Borrowings
under the Amended Agreements will be used for working capital and other
corporate purposes, including commercial paper backup.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
In order to remain competitive, the Company is aggressively managing its
operating costs and capital expenditures through streamlined business processes
and is developing and implementing strategies to address an increasingly
competitive environment. These strategies include initiatives to improve the
Company's return on corporate assets and to maximize shareholder value through
new marketing programs, creative rate design, and new business opportunities.
Additional initiatives under consideration include the potential disposition or
alternative utilization of existing assets and the restructuring of strategic
business units. Some of the Company's assets, including approximately $807
million invested in partially completed generating facilities on which
construction is temporarily suspended and related mining facilities and
approximately $579 million invested in coal properties of Chaco Energy Company,
are not contributing to earnings and, as a result, the Company is considering
possible alternatives to the scheduled development, operation and recovery of
such assets through traditional means. While the Company currently believes that
its investment in these assets can be recovered if held and ultimately developed
according to existing plans, other alternatives might contribute more to the
Company's long-term strategy of maximizing shareholder value and might include
disposition for amounts which may be less than current book value with respect
to these assets. It is not possible at this time to predict the effect any of
these possible initiatives might have on the carrying value of the Company's
assets or its results of operation.
On May 9, 1995, Texas Utilities Communications Inc. (TU Communications), a
new wholly-owned subsidiary of the Company entered into an agreement with PCS
PrimeCo (PrimeCo), a partnership between four large telecommunications
companies, to become a 20% equity participant in PrimeCo's personal
communications services (PCS) business in three Federal Communications
Commission-defined Major Trading Areas (MTAs). The Dallas/Ft. Worth, Houston and
San Antonio MTAs cover almost the entire State of Texas, as well as portions of
adjoining states. PrimeCo recently won licenses in these markets to provide PCS,
which are wireless communications services. This partnership provides TU
Communications with access to advanced telecommunications technology which is
expected to be an important part of the System Companies' expanding energy
services in the future.
In July 1994, TU Electric filed a petition in the 200th Judicial District
Court of Travis County, Texas to seek judicial review of the final order of the
Public Utility Commission of Texas (PUC) granting a $449 million, or 9.0%, rate
increase in connection with TU Electric's January 1993 rate increase request of
$760 million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also
filed appeals with respect to various portions of the order. TU Electric is
unable to predict the outcome of such appeals.
The PUC's final order (Order) in connection with TU Electric's January 1990
rate increase request (Docket 9300) has been reviewed by the 250th Judicial
District Court of Travis County, Texas (District Court) and thereafter was
appealed to the Court of Appeals for the Third District of Texas (Court of
Appeals). In June 1994, the Court of Appeals affirmed a prudence disallowance of
$472 million provided for in the Order with respect to its Comanche Peak nuclear
generating station (Comanche Peak), 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 District Court's remand of the
remainder of the disallowance of $884 million relating to the reacquisitions of
such minority owner interests. Therefore, the Court of Appeals remanded an
aggregate of $909 million of disallowances with respect to TU Electric's
reacquisitions of minority owner interests in Comanche Peak to the PUC for
reconsideration and ordered that such reconsideration be on the basis of a
prudent investment standard.
In addition, the Court of Appeals reversed the District Court's finding
that the PUC erred in ordering a refund of $2.5 million with respect to certain
fuel gas costs. Also, the Court of Appeals specified that, on remand, the PUC
will be required to re-evaluate the appropriate level of TU Electric's
construction work in progress included in rate base in light of its financial
condition at the time of the initial hearing and to reconsider whether
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION - (CONTINUED )
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
the $442 million revenue increase provided for in the PUC's final order remains
the benchmark in light of this re-examination.
The Court of Appeals also ruled in the appeal of TU Electric's Docket 9300
rate case that prior court rulings required that the tax benefits generated by
costs, including capital costs, not allowed in rates, must be used to reduce
rates charged to customers, reversing the District Court's decision. TU Electric
believes that such ruling is erroneous and not consistent with the Texas Public
Utility Regulatory Act (PURA). TU Electric contended that, according to a
Private Letter Ruling issued to TU Electric by the Internal Revenue Service
(IRS) with respect to investment tax credits, such ratemaking treatment, to the
extent related to property classified for tax purposes as public utility
property, would result in a violation of the normalization rules under the
Internal Revenue Code of 1986, as amended. 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, and will also forfeit 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 up 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 filed an
appeal to the Supreme Court of Texas. Other parties have also filed appeals of
this decision to the Supreme Court of Texas. TU Electric cannot predict whether
such appeals will be accepted by the Supreme Court of Texas and cannot predict
the outcome of any such appeals or any resulting reconsideration of these issues
on remand by the PUC.
On April 13, 1995 in an appeal of a rate case involving another utility,
the Supreme Court of Texas held that the PUC has considerable discretion in
determining the fair share of consolidated tax savings to be allocated to a
utility and, accordingly, is not required to include losses of unregulated
affiliates in determining such fair share. The Supreme Court also held that the
PUC could not use the tax benefits generated by disallowed expenses to reduce
rates.
In August 1994, 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. The PUC approved the recovery of this
amount over a six-month period beginning in January 1995. The PUC's approval of
this surcharge and a previously approved $147.5 million surcharge for fuel cost
recovery for a prior period have been appealed by certain intervenors to the
district courts of Travis County, Texas. In those appeals, those parties are
contending that the PUC is without authority to allow a fuel cost surcharge
without a hearing and findings that the costs are reasonable and necessary and
that the prices charged to TU Electric by affiliated suppliers are no higher
than the prices charged by those affiliates to others for the same item or class
of items. TU Electric will vigorously defend its position in these appeals but
is unable to predict their outcome.
In June 1994, TU Electric filed with the PUC and municipalities with
original regulatory jurisdiction a package of four proposed flexible rates. Two
of the proposed rates would allow for negotiated competitive pricing through
reductions in demand charges to retain existing non-residential retail and
wholesale customers who have viable alternative sources of supply and would
otherwise leave the system. The remaining two rates are an economic development
rider and an environmental technology service rider. The economic development
rider would provide an incentive to attract new businesses and jobs and to
encourage existing customers to expand their facilities within TU Electric's
service area. The environmental technology service rider would provide an
incentive for qualifying customers to convert to advanced technologies that
conserve total energy or improve the environment. These new rates have been
approved and implemented in over 160 municipalities with original regulatory
jurisdiction, including the cities of Dallas and Fort Worth, within TU
Electric's service territory. Following hearings on the proposed rates, however,
the PUC issued an interim
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONCLUDED)
order on the rate package which either rejected or significantly weakened the
proposed flexible rates, rendering them ineffective. In January 1995, TU
Electric withdrew its package of proposed rates from consideration by the PUC.
This action does not affect the over 160 municipalities where the flexible rates
are already in effect. The Sunset Review of PURA by the Texas legislature in
1995 is expected to include several of the key issues involved in this case.
Through its involvement at the legislature and the PUC, TU Electric will
continue to pursue the possibility of offering flexible rates.
In October 1994, TU Electric filed an application for approval by the PUC
of its Integrated Resource Plan (IRP) for the ten year period 1995-2004. The IRP
includes initiatives that address demand-side management resources, purchased
power, and future generating capacity that includes renewable energy sources. TU
Electric's IRP includes 288 megawatts ( MW) of simple-cycle combustion turbines,
1,514 MW of combined-cycle combustion turbines and 300 MW of wind or other
renewable resources. Assuming these units are financed by TU Electric using
traditional methods, approximately $200 million would be added to capital
expenditures in 1997. TU Electric's IRP also includes one lignite-fueled 750 MW
unit at Twin Oak. The second lignite-fueled Twin Oak unit has been deferred
beyond the ten-year planning period. Hearings on this application were concluded
in March 1995. The PUC's decision on the IRP is expected in mid-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. During 1994, installation of continuous emissions monitoring systems
was completed at a total cost of approximately $38 million. Any additional
required capital costs, as well as any increased operating costs, associated
with these new requirements or compliance measures are expected to be
recoverable through rates, as similar costs have been recovered in the past. TU
Electric's environmental expenditures for 1995 are estimated to be $58 million.
The National Energy Policy Act of 1992 (Energy Act) addresses a wide range
of energy issues and is intended to increase competition in electric generation
and broaden access to electric transmission systems. The PUC has initiated a
generic rule making proceeding to address transmission issues within Texas. In
addition, legislation is currently being considered by the Texas legislature
which, if enacted, could impact the structure of the PUC and its regulatory
practices and could lead to increased competition in some aspects of the
electric utility industry. Although TU Electric and Southwestern Electric
Service Company (SESCO) are unable to predict the ultimate impact of the Energy
Act and any related regulations or any potential state legislation or PUC
regulation on their operations, they believe that such actions are consistent
with the trend toward increased competition in the energy industry.
While TU Electric and SESCO have experienced competitive pressures in the
wholesale market resulting in approximately 379 MW loss of load for TU Electric
since the beginning of 1993, wholesale sales represented a relatively low
percentage of total consolidated operating revenues in 1994. TU Electric and
SESCO are unable to predict the extent of future competitive developments in
either the wholesale or retail markets or what impact, if any, such developments
may have on their operations.
RESULTS OF OPERATION
The following compares operating results for the three- and twelve-month
periods ended March 31, 1995 with the same periods ended March 31, 1994.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION - (CONTINUED)
RESULTS OF OPERATION - (CONTINUED)
Operating revenues decreased approximately 4% and increased less than 1%
for the three- and twelve-month periods ended March 31, 1995, 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)............... $(21,983) $ 235,416
Fuel revenue............................. (20,084) (142,002)
Power cost recovery factor revenue....... (3,522) (34,244)
Unbilled revenue and other............... (11,524) (46,137)
-------- ---------
Total................................ $(57,113) $ 13,033
======== =========
</TABLE>
Base rate revenue decreased for the three-month period and increased for
the twelve-month period. Energy sales decreased approximately 2% and increased
approximately 2% for the three- and twelve-month periods, respectively. The
effect on energy sales and base rate revenue for both periods was primarily a
result of mild weather conditions and loss of wholesale power sales, partially
offset by an increase in customers and billing cycle days. For the twelve-month
period, the rate increase placed in effect in August 1993 increased base rate
revenues over the prior period. The decrease in fuel revenue for both periods
was primarily due to a reduction in gas prices and, for the twelve-month period,
increased nuclear generation as compared to the prior period. The decrease in
unbilled revenue and other in both periods resulted from milder weather
conditions than in the prior period and an increase in the number of billing
days.
Fuel and purchased power expense decreased approximately 6% and 9% for the
three- and twelve-month periods, respectively, primarily due to a reduction in
gas prices, purchased power commitments and, for the twelve-month period,
increased utilization of nuclear fuel.
Total operating expenses, excluding fuel and purchased power, decreased
approximately 5% and increased approximately 2% for the three- and twelve-month
periods, respectively. Combined operation and maintenance expense decreased for
both periods due primarily to a decrease in employee benefit expenses and, for
the twelve-month period, a reduction in inventory adjustments taken in the prior
period. For the twelve-month period, such decrease was partially offset by the
effect of the commencement of commercial operation of Unit 2 of Comanche Peak
and the amortization of voluntary retirement/severance costs. Taxes other than
income decreased for the three-month period due primarily to a reduction in
franchise, state gross receipts and estimated ad valorem taxes. The increase in
the twelve-month period was due to increased local gross receipts taxes
resulting from higher tax rates and increased gross receipts revenues partially
offset by a reduction in estimated ad valorem taxes.
Allowance for funds used during construction (AFUDC) decreased
approximately 5% and 87% for the three- and twelve-month periods, respectively.
The decrease in the twelve-month period 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.
The regulatory disallowance in the prior twelve-month period reflects
charges resulting from a settlement agreement among the parties in Docket 11735.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION - (CONCLUDED)
RESULTS OF OPERATION - (CONCLUDED)
Federal income taxes - other income increased for the twelve-month period
primarily due to the effect from the prior period of recording the taxes
associated with the regulatory disallowances on Unit 2 of Comanche Peak.
Total interest charges, excluding AFUDC, decreased approximately 5% and 4%
for the three- and twelve-month periods, respectively. Interest on mortgage
bonds decreased over the prior 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 both periods due primarily to the continuing retirement of
debt incurred on the purchases of the minority ownership interests in Comanche
Peak. Other interest expense increased primarily due to increased average short-
term borrowings and increased amortization of debt issuance expenses and
redemption premiums.
Preferred stock dividends decreased approximately 16% and 14% for the
three-and twelve-month periods, respectively, primarily due to the redemption of
certain series with higher dividend rates.
The major factors affecting earnings for the twelve-month period were the
implementation of the Docket 11735 rate increase offset by 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. The major factors affecting earnings for the three-month period were
continuing cost reduction efforts partially offset by mild weather conditions.
Consolidated net income increased approximately 13% and 95% for the three- and
twelve-month periods, respectively.
ACCOUNTING CHANGE
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (Statement 121) was issued. Statement 121 is effective for
financial statements for fiscal years beginning after December 15, 1995 and
prescribes a methodology for assessing and measuring impairments in the carrying
value of certain assets. As a result of such standard, the Company will be
subject to a more formal standard for assessing asset impairment in the future.
22
<PAGE>
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
RATE PROCEEDINGS
Reference is made herein to Note 6 to Condensed Consolidated Financial
Statements and Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation contained in Part I of this Report regarding
TU Electric's rate proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as a part of Part II are:
15 - Letter from Deloitte & Touche LLP as to unaudited interim
financial information.
27 - Financial Data Schedule.
(b) Reports on Form 8-K filed since December 31, 1994 are as follows:
None
23
<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: May 10, 1995
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ------------
<S> <C>
15 -- Letter from Deloitte & Touche LLP as to
unaudited interim financial information.
27 -- Financial Data Schedule
</TABLE>
25
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD APPEARS HERE]
Texas Utilities Company:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited condensed consolidated
interim financial information of Texas Utilities Company and subsidiaries for
the periods ended March 31, 1995 and 1994, as indicated in our report dated May
10, 1995; 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, 1995, is
incorporated by reference in Registration Statement No. 33-55931 on Form S-3 and
Registration Statements No. 33-52395 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.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 10, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENTS OF CONSOLIDATED INCOME, CONDENSED STATEMENTS OF
CONSOLIDATED CASH FLOWS, AND CONDENSED CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 17,607,645
<OTHER-PROPERTY-AND-INVEST> 714,012
<TOTAL-CURRENT-ASSETS> 628,360
<TOTAL-DEFERRED-CHARGES> 1,850,262
<OTHER-ASSETS> (72,685)
<TOTAL-ASSETS> 20,727,594
<COMMON> 4,800,843
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,593,582
<TOTAL-COMMON-STOCKHOLDERS-EQ> 6,394,425
312,891
855,869
<LONG-TERM-DEBT-NET> 8,155,328
<SHORT-TERM-NOTES> 60,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 132,000
<LONG-TERM-DEBT-CURRENT-PORT> 58,740
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,758,341
<TOT-CAPITALIZATION-AND-LIAB> 20,727,594
<GROSS-OPERATING-REVENUE> 1,244,265
<INCOME-TAX-EXPENSE> 42,772
<OTHER-OPERATING-EXPENSES> 932,921
<TOTAL-OPERATING-EXPENSES> 975,693
<OPERATING-INCOME-LOSS> 268,572
<OTHER-INCOME-NET> 1,736
<INCOME-BEFORE-INTEREST-EXPEN> 270,308
<TOTAL-INTEREST-EXPENSE> 171,351
<NET-INCOME> 98,957
23,546
<EARNINGS-AVAILABLE-FOR-COMM> 75,411
<COMMON-STOCK-DIVIDENDS> 173,872
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 307,542
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
