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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-- OR --
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER; I.R.S. EMPLOYER
FILE NUMBER ADDRESS OF PRINCIPAL EXECUTIVE OFFICES; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ------------------------------------------------------------ ------------------
1-3591 TEXAS UTILITIES COMPANY 75-0705930
Energy Plaza, 1601 Bryan Street
Dallas, Texas 75201-3411
(214) 812-4600
0-11442 TEXAS UTILITIES ELECTRIC COMPANY 75-1837355
Energy Plaza, 1601 Bryan Street
Dallas, Texas 75201-3411
(214) 812-4600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED
---------- ------------------- ------------------------
Texas Utilities Company Common Stock, without par value New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
Texas Utilities Electric Company Depositary Shares, each representing New York Stock Exchange
1/4 of a share of $8.20 Cumulative Preferred
Stock, without par value
Texas Utilities Electric Company Depositary Shares, Series A, each representing New York Stock Exchange
1/4 of a share of $7.50 Cumulative Preferred
Stock, without par value
Texas Utilities Electric Company Depositary Shares, Series B, each representing New York Stock Exchange
1/4 of a share of $7.22 Cumulative Preferred
Stock, without par value
TU Electric Capital I, a subsidiary 8.25% Trust Originated Preferred Securities New York Stock Exchange
of Texas Utilities Electric Company
TU Electric Capital II, a subsidiary 9.00% Trust Originated Preferred Securities New York Stock Exchange
of Texas Utilities Electric Company
TU Electric Capital III, a subsidiary 8.00% Quarterly Income Preferred Securities New York Stock Exchange
of Texas Utilities Electric Company
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Preferred Stock of Texas Utilities Electric Company, without par value
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Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Texas Utilities Company Common Stock held by non-
affiliates, based on the last reported sale price on the composite tape on
February 28, 1997: $9,064,605,462
Aggregate market value of Texas Utilities Electric Company Common Stock held by
non-affiliates: None
Common Stock outstanding at February 28, 1997: Texas Utilities Company -
224,602,557 shares,
without par value
Texas Utilities Electric
Company - 156,800,000 shares,
without par value
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A, which
will be mailed to the Commission for filing on or about April 1, 1997, are
incorporated by reference into Part III of this report.
------------------------------------
THIS COMBINED FORM 10-K IS FILED SEPARATELY BY TEXAS UTILITIES COMPANY AND TEXAS
UTILITIES ELECTRIC COMPANY. INFORMATION CONTAINED HEREIN RELATING TO AN
INDIVIDUAL REGISTRANT IS FILED BY THAT REGISTRANT ON ITS OWN BEHALF EXCEPT THAT
THE INFORMATION WITH RESPECT TO TEXAS UTILITIES ELECTRIC COMPANY, OTHER THAN THE
FINANCIAL STATEMENTS OF TEXAS UTILITIES ELECTRIC COMPANY, IS FILED BY EACH OF
TEXAS UTILITIES ELECTRIC COMPANY AND TEXAS UTILITIES COMPANY. NEITHER TEXAS
UTILITIES COMPANY NOR TEXAS UTILITIES ELECTRIC COMPANY MAKES REPRESENTATION AS
TO INFORMATION FILED BY THE OTHER REGISTRANT.
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
- ---- ----------- ----
PART I
1 Business....................................................... 1
Texas Utilities Company and Subsidiaries..................... 1
Texas Utilities Electric Company and Subsidiaries............ 2
Peak Load and Capability..................................... 3
Fuel Supply and Purchased Power.............................. 4
Regulation and Rates......................................... 7
Competition.................................................. 10
Environmental Matters........................................ 12
2 Properties..................................................... 14
Capital Expenditures......................................... 15
3 Legal Proceedings.............................................. 16
4 Submission of Matters to a Vote of Security Holders............ 16
Executive Officers of the Company.............................. 16
PART II
5 Market for Each Registrant's Common Equity and
Related Stockholder Matters.................................. 17
6 Selected Financial Data........................................ 18
7 Management's Discussion and Analysis of Financial
Condition and Results of Operation........................... 22
8 Financial Statements and Supplementary Data.................... 30
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 67
PART III
10 Directors and Executive Officers of Each Registrant............ 67
11 Executive Compensation......................................... 69
12 Security Ownership of Certain Beneficial Owners
and Management............................................... 75
13 Certain Relationships and Related Transactions................. 75
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 76
PART I
ITEM 1. BUSINESS
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
Texas Utilities Company (Company) was incorporated under the laws of the
State of Texas in 1945 and has perpetual existence under the provisions of the
Texas Business Corporation Act. The Company is a holding company which owns all
of the outstanding common stock of Texas Utilities Electric Company and
Subsidiaries (TU Electric), the principal subsidiary of the Company,
Southwestern Electric Service Company (SESCO), and Texas Utilities Australia
Pty. Ltd. (TU Australia). The Company also has seven other wholly-owned
subsidiaries which perform specialized functions within the Texas Utilities
Company system. The Company and all of its subsidiaries are referred to herein
as "System Companies". References herein to TU Electric include its financing
subsidiaries, TU Electric Capital I, II, III, IV and V.
The Company holds no franchises other than its corporate franchise. TU
Electric, SESCO and TU Australia possess all of the necessary franchises,
licenses and certificates required to enable them to conduct their respective
businesses (see Regulation and Rates).
For information concerning TU Electric, the principal subsidiary of the
Company, see TU Electric below.
In April 1996, the Company announced that it had entered into a merger
agreement with Dallas-based ENSERCH Corporation (ENSERCH). Under the terms of
the agreement, Lone Star Gas Company (Lone Star Gas) and Lone Star Pipeline
Company (Lone Star Pipeline), the local distribution and pipeline divisions of
ENSERCH, and other businesses, excluding Enserch Exploration Inc. (EEX), a
subsidiary of ENSERCH, will be acquired by a new holding company, which will be
named Texas Utilities Company and will own all of the common stock of ENSERCH
and the Company. Shares of the Company's common stock will be automatically
converted into shares of the new holding company common stock on a one-for-one
basis in a tax-free transaction. Lone Star Gas is one of the largest gas
distribution companies in the United States and the largest in Texas, serving
over 1.3 million customers and providing service through over 23,500 miles of
distribution mains. Lone Star Pipeline has one of the largest pipelines in the
United States that consists of 9,200 miles of gathering and transmission
pipelines in Texas. Also included in the acquisition are ENSERCH's subsidiaries
engaged in natural gas processing, natural gas marketing and independent power
production. The new holding company is expected to issue approximately $550
million of the new holding company's common stock to ENSERCH shareholders, and
approximately $1.15 billion of ENSERCH's debt and preferred stock would remain
outstanding after the merger. The transaction is subject to certain conditions
which include the approval by the Securities and Exchange Commission (SEC) and
receipt by ENSERCH of a favorable tax ruling from the Internal Revenue Service
(IRS) to the effect that its distribution of EEX stock is a tax-free
transaction. ENSERCH received this IRS ruling on March 6, 1997. The transaction
was approved at special meetings of the shareholders of ENSERCH, EEX and the
Company held separately on November 15, 1996. The Texas Railroad Commission
(TRC) has been notified of the proposed transaction and has indicated no
objection to it. On March 7, 1997, the Antitrust Division of the U.S. Department
of Justice notified the SEC that it had closed its investigation of the proposed
transaction and indicated that no further action would be required. The
acquisition of ENSERCH will be accounted for as a purchase business combination.
SESCO is engaged in the purchase, transmission, distribution and sale of
electric energy in ten counties in the eastern and central parts of Texas with a
population estimated at 126,900. SESCO generates no electric energy.
TU Australia owns all of the common stock of Eastern Energy Limited
(Eastern Energy), one of five Australian electricity distribution companies
operating in Victoria, Australia. Eastern Energy is engaged in the purchase,
distribution, marketing and sale of electric energy to approximately 481,000
customers in a 31,000 square mile service area extending from the outer eastern
suburbs of the Melbourne metropolitan area to the eastern coastal areas of
Victoria and north to the New South Wales border. Eastern Energy generates no
electric energy. References herein to TU Australia include its subsidiary,
Eastern Energy.
For consolidated energy sales and operating revenues contributed by TU
Electric, SESCO and TU Australia for each customer classification, see Item 6.
Selected Financial Data - Texas Utilities Company and Subsidiaries -Consolidated
Operating Statistics.
1
Texas Utilities Fuel Company (Fuel Company) owns a natural gas pipeline
system, acquires, stores and delivers fuel gas and provides other fuel services
at cost for the generation of electric energy by TU Electric.
Texas Utilities Mining Company (Mining Company) owns, leases and operates
fuel production facilities for the surface mining and recovery of lignite at
cost for the generation of electric energy by TU Electric.
Texas Utilities Services Inc. (TU Services) provides financial, accounting,
information technology, environmental services, customer services, procurement,
personnel and other administrative services at cost to the System Companies. TU
Services acts as transfer agent, registrar and dividend paying agent with
respect to the common stock of the Company, the preferred stock and preferred
securities of TU Electric, and as agent for participants under the Company's
Automatic Dividend Reinvestment and Common Stock Purchase Plan.
Texas Utilities Properties Inc. owns, leases and manages real and personal
properties, primarily the Company's corporate headquarters.
Texas Utilities Communications Inc. was organized to provide access to
advanced telecommunications technology, primarily for the System Companies'
expected expansion of the energy services business.
Basic Resources Inc. was organized for the purpose of developing natural
resources, primarily energy sources and other business opportunities.
Chaco Energy Company (Chaco) was organized to own and operate facilities
for the acquisition, production, sale and delivery of coal and other fuels and
currently leases extensive coal reserves.
At December 31, 1996, the System Companies had 11,451 full-time employees.
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
TU Electric was incorporated under the laws of the State of Texas in 1982
and has perpetual existence under the provisions of the Texas Business
Corporation Act. TU Electric is an electric utility engaged in the generation,
purchase, transmission, distribution and sale of electric energy wholly within
the State of Texas. TU Electric possesses all of the necessary franchises and
certificates required to enable it to conduct its business (see Regulation and
Rates). TU Electric is the principal subsidiary of the Company.
TU Electric's service area is located in the north central, eastern and
western parts of Texas, with a population estimated at 5,890,000 -- about one-
third of the population of Texas. Electric service is provided in 91 counties
and 372 incorporated municipalities, including Dallas, Fort Worth, Arlington,
Irving, Plano, Waco, Mesquite, Grand Prairie, Wichita Falls, Odessa, Midland,
Carrollton, Tyler, Richardson and Killeen. The area is a diversified commercial
and industrial center with substantial banking, insurance, communications,
electronics, aerospace, petrochemical and specialized steel manufacturing, and
automotive and aircraft assembly. The territory served includes major portions
of the oil and gas fields in the Permian Basin and East Texas, as well as
substantial farming and ranching sections of the State. Its service territory
also includes the Dallas-Forth Worth International Airport and the Alliance
Airport. For energy sales and operating revenues contributed by each customer
classification, see Item 6. Selected Financial Data -- Texas Utilities Electric
Company and Subsidiaries -- Consolidated Operating Statistics.
At December 31, 1996, TU Electric had 6,474 full-time employees.
2
PEAK LOAD AND CAPABILITY
THE COMPANY AND TU ELECTRIC
- ---------------------------
The peak load and net capability for the System Companies includes
those for TU Electric contained in the chart below in addition to the peak loads
for SESCO and Eastern Energy. Peak load was 249 megawatts (MW) on July 23, 1996
for SESCO and 910 MW on July 15, 1996 for Eastern Energy. SESCO and TU
Australia generate no electric energy.
TU Electric's net capability, peak load and reserve, in MW, at the
time of peak were as follows during the years indicated:
PEAK LOAD (a)
----------------------
INCREASE
(DECREASE) FIRM
NET OVER PEAK
YEAR CAPABILITY AMOUNT PRIOR YEAR LOAD RESERVE(b)
---- --------------- ------ ---------- ------ ----------
1996... 22,389(c)(d)(e) 19,668 2.5% 18,930 3,459
1995... 22,469(d)(e)(f) 19,180 6.4 18,631 3,619
1994... 22,350(e)(g) 18,030 (1.6) 17,515 4,835
- -----------------------
(a) The 1996 peak load occurred on July 8. TU Electric's peak load includes
interruptible load at the time of peak of 738 MW in 1996, 744 MW in 1995
and 656 MW in 1994.
(b) Amount of net capability in excess of firm peak load at the time of peak.
(c) Included in net capability is 1,164 MW of firm purchased capacity, all of
which is cogeneration and small power production.
(d) In December 1995, TU Electric adjusted the net generating capabilities of
its existing fossil-fueled generating units to more closely reflect actual
operating capability. Included in net capability is the adjustment
amounting to a net increase of 219 MW.
(e) In November 1993, the emissions chimney serving Unit 3 (750 MW) of the
Monticello lignite-fueled generating station collapsed, rendering the unit
inoperable. The unit was rebuilt and returned to service in June 1995.
Such unit is included in net capability.
(f) Included in net capability is 1,244 MW of firm purchased capacity, of which
1,164 MW is cogeneration and small power production.
(g) Included in net capability is 1,344 MW of firm purchased capacity, of which
1,264 MW is cogeneration and small power production. In 1994, one 70 MW
natural gas-fueled unit was retired.
TU ELECTRIC
- -----------
The peak load changes for 1996 as compared to 1995 resulted primarily
from customer growth and warmer temperatures. The peak load changes for 1995 and
1994, compared in each case to the prior year, resulted primarily from customer
growth and weather factors. TU Electric expects to continue to purchase capacity
in the future from various sources. (See Fuel Supply and Purchased Power and
Note 15 to Consolidated Financial Statements.) Firm peak load increases over the
next ten years are expected to average approximately 2% annually, after
consideration of load management programs (including interruptible contracts).
Changes in utility regulation and legislation at the federal and state
levels such as the Public Utility Regulatory Policy Act of 1978 (PURPA), the
National Energy Policy Act of 1992 (Energy Policy Act) and the 1995 amendments
to the Public Utility Regulatory Act (PURA) in Texas have significantly changed
the way in which utilities plan for new resources. TU Electric believes the
results of competitive resource solicitations will be a major factor in
determining future resource additions to serve customer loads. Thus, for
planning purposes, TU Electric can no longer readily identify the ownership and
types of resources to include in its plan before the actual solicitation and
selection of those resources. TU Electric has decided to reflect this
uncertainty through the use of the term "Unspecified Resources." Except for
known contracts, all potential new resource needs are designated as "Unspecified
Resources."
In October 1994, TU Electric filed an application for approval by the
Public Utility Commission of Texas (PUC) of certain aspects of its Integrated
Resource Plan (IRP) for the ten year period 1995 - 2004. The IRP, developed as
an experimental pilot project in conjunction with regulatory and customer
groups, included the acquisition of electric energy through a competitive
bidding process of third party-supplied demand-side management resources and
renewable resources. In August 1995, the PUC remanded the case to an
Administrative Law Judge for development of a solicitation plan and to more
closely conform the TU Electric 1995 IRP to new state legislation that required
the PUC to adopt a state-wide integrated resource planning rule by September 1,
1996. In January 1996, TU Electric filed an updated IRP with the PUC along
with a proposed plan for the solicitation of resources through a competitive
bidding process. The PUC issued its final order on TU Electric's IRP in October
1996, and modified the order in
3
December 1996 and February 1997. The modified order approved a flexible
solicitation plan that will allow TU Electric to conduct up to three optional
resource solicitations for a total of 2,074 MW of demand-side and supply-side
resources prior to the filing of its next IRP in June 1999. TU Electric is
currently reviewing the need and timing for conducting the first of these
resource solicitations.
In addition to its solicitation plan in the IRP docket, TU Electric
requested and received approval from the PUC to expand its Power Cost Recovery
tariff to provide current cost recovery of resource acquisition costs for
demand-side management resources acquired in the solicitations to the extent
such costs are not currently reflected in TU Electric's base rates. The PUC also
approved cost recovery for eight previously approved demand-side management
contracts entered into by TU Electric.
RESOURCE ESTIMATES
The resource additions identified in TU Electric's 1997 ten year forecast
are as follows:
1997-2006
------------------
FIRM
CAPABILITY
RESOURCE ADDITIONS (MW) PERCENT
------------------ ---------- -------
Load Management(a).................................... 714 15.4%
Renewable Resources(b)................................ 4 0.1
Unspecified Resources................................. 3,903 84.5
----- -----
Total.............................................. 4,621 100.0%
===== =====
- -----------------------
(a) TU Electric has negotiated and signed contracts with eight suppliers of
demand-side management services designed to displace a total of 72 MW by
2004.
(b) TU Electric has negotiated and signed one purchased power contract for 40
MW (4 MW firm) of wind-powered resources to be placed in service during
1998.
FUEL SUPPLY AND PURCHASED POWER
GENERAL
THE COMPANY AND TU ELECTRIC
- ---------------------------
Net input for the System Companies during 1996 totalled 106,254 million
kilowatt-hours (kWh) of which 88,130 million kWh were generated by TU Electric.
Average fuel and purchased power cost (excluding capacity charges) per kWh of
net input for the Company and TU Electric were 1.94 and 1.79 cents for 1996,
1.64 and 1.62 cents for 1995 and 1.76 and 1.76 cents for 1994, respectively. The
Company's increase for 1996 primarily reflects increased natural gas costs and
decreased nuclear generation for TU Electric, and the inclusion of Eastern
Energy. A comparison of TU Electric's resource mix for net kWh input and the
unit cost per million British thermal units (Btu) of fuel during the last three
years is as follows:
MIX FOR NET UNIT COST
KWH INPUT PER MILLION BTU
----------------------- ------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Fuel for Electric Generation:
Gas/Oil (a)....................... 33.0% 33.4% 34.5% $2.66 $2.31 $2.53
Lignite/Coal (b).................. 39.6 37.4 37.3 1.03 1.02 1.04
Nuclear........................... 15.0 17.9 15.7 0.56 0.59 0.67
----- ----- ----- ----- ---- ----
Total/Weighted Average Fuel Cost.. 87.6 88.7 87.5 $1.58 $1.43 $1.58
Purchased Power (c)................. 12.4 11.3 12.5
----- ----- -----
Total.......................... 100.0% 100.0% 100.0%
===== ===== =====
- -----------------------
(a) Fuel oil was an insignificant component of total fuel and purchased power
requirements.
(b) Lignite cost per ton to TU Electric was $13.22 in 1996, $13.05 in 1995 and
$13.34 in 1994.
(c) Excludes SESCO's and Eastern Energy's purchased power: 1996 - 616 million
kWh and 5,090 million kWh, respectively; 1995 - 865 million kWh and 335
million kWh, respectively.
4
TU Electric, SESCO and Eastern Energy are unable to predict: (i) whether or
not problems may be encountered in the future in obtaining the fuel and
purchased power each will require, (ii) the effect upon operations of any
difficulty any of them may experience in protecting rights to fuel and purchased
power now under contract, or (iii) the cost of fuel and purchased power. The
reasonable costs of fuel and purchased power of TU Electric and SESCO are
generally recoverable subject to the rules of the PUC. (See Regulation and Rates
for information pertaining to the method of recovery of purchased power and fuel
costs.)
GAS/OIL
TU ELECTRIC
- -----------
Fuel gas for units at nineteen of the principal generating stations of TU
Electric, having an aggregate net gas/oil capability of 13,100 MW, was provided
during 1996 by Fuel Company. Fuel Company supplied approximately 21% of such
fuel gas requirements under contracts with producers at the wellhead and under
other contracts with dedicated reserves and 79% under contracts with commercial
suppliers.
THE COMPANY
- -----------
Fuel Company has acquired under contracts expiring at intervals through
2008, with producers at the wellhead, supplies of gas that are generally
expected to be produced over a ten to fifteen year period. As gas production
under contract declines and contracts expire, new contracts are expected to be
negotiated to replenish or augment such supplies. Fuel Company has negotiated
gas purchase contracts, with terms ranging from one to twenty years, with a
number of commercial suppliers. Additionally, Fuel Company has entered into a
number of short-term gas purchase contracts with other commercial suppliers at
spot market prices; however, these contracts typically do not provide for a firm
supply obligation from the seller or a firm purchase obligation from Fuel
Company. In the past, curtailments of gas deliveries have been experienced
during periods of winter peak gas demand; however, such curtailments have been
of relatively short duration, have had a minimal impact on operations and have
generally required utilization of fuel oil and gas storage inventories to
replace the gas curtailed. During 1996, no curtailments were experienced.
Fuel Company owns and operates an intrastate natural gas pipeline system
that extends from the gas-producing area of the Permian Basin in West Texas to
the East Texas gas fields and southward to the Gulf Coast area. This system
includes a one-half interest in a 36-inch pipeline that extends 395 miles from
the Permian Basin area of West Texas to a point of termination south of the
Dallas-Fort Worth area and has a total estimated capacity of 885 million cubic
feet per day with existing compression facilities. Additionally, Fuel Company
owns a 39% undivided interest in another 36-inch pipeline connecting to this
pipeline and extending 58 miles eastward to one of Fuel Company's underground
gas storage facilities. Fuel Company also owns and operates approximately 1,600
miles of various smaller capacity lines that are used to gather and transport
natural gas from other gas-producing areas. The pipeline facilities of Fuel
Company form an integrated network through which fuel gas is gathered and
transported to certain TU Electric generating stations for use in the generation
of electric energy.
Fuel Company also owns and operates three underground gas storage
facilities with a usable capacity of 27.2 billion cubic feet with approximately
17.5 billion cubic feet of gas in inventory at December 31, 1996. Gas stored in
these facilities currently can be withdrawn for use during periods of peak
demand to meet seasonal and other fluctuations or curtailment of deliveries by
gas suppliers. Under normal operating conditions, up to 400 million cubic feet
can be withdrawn each day for a ten-day period, with withdrawals at lower rates
thereafter.
Fuel oil is stored at eighteen of the principally gas-fueled generating
stations. At December 31, 1996, the System Companies had fuel oil storage
capacity sufficient to accommodate approximately 6.2 million barrels of oil,
with approximately 2.1 million barrels of oil in inventory.
LIGNITE/COAL
TU ELECTRIC
- -----------
Lignite is used as the primary fuel in two units at the Big Brown
generating station (Big Brown), three units at Monticello generating station
(Monticello), three units at the Martin Lake generating station (Martin Lake),
and one unit at the Sandow generating station (Sandow), having an aggregate net
capability of 5,825 MW. TU Electric's lignite units have been constructed
adjacent to surface minable lignite reserves. At the present time, TU Electric
owns in fee or has under lease an estimated 553 million tons of proven reserves
dedicated to the Big Brown, Monticello, and Martin Lake generating stations. TU
Electric also owns in fee or has under lease in excess of 270 million tons of
proven reserves not dedicated to specific generating stations. Mining Company
operates owned and/or leased equipment to
5
remove the overburden and recover the lignite. One of TU Electric's lignite
units, Sandow Unit 4, is fueled from lignite deposits owned by Alcoa, which
furnishes fuel at no cost to TU Electric for that portion of energy generated
from such unit that is equal to the amount of energy delivered to Alcoa (see
Item 6. Selected Financial Data - Consolidated Operating Statistics).
Lignite production operations at Big Brown, Monticello, and Martin Lake are
accompanied by an extensive reclamation program that returns the land to
productive uses such as wildlife habitats, commercial timberland, and pasture
land. For information concerning federal and state laws with respect to surface
mining, see Environmental Matters.
TU Electric is currently supplementing TU Electric-owned lignite fuel at
its Monticello plant with western coal from the Powder River Basin (PRB) in
Wyoming. The coal is purchased and transported on an "as available, as required"
basis. Because current mine capacity in the PRB is greater than demand, ample
amounts of western coal are presently available at favorable prices. TU Electric
is also considering the use of western coal as a supplemental fuel at its other
existing lignite-fueled plants and as a long-term alternative fuel. For
information concerning applicable air quality standards, see Environmental
Matters.
THE COMPANY
- -----------
Chaco has a coal lease agreement for the rights to certain surface mineable
coal reserves located in New Mexico. The agreement encompasses a minimum of 228
million tons of coal with provisions for advance royalty payments to be made
annually through 2017. The Company has entered into a surety agreement to assure
the performance by Chaco with respect to this agreement. During 1996, certain
state and federal coal leases covering approximately 120 million tons of coal
were terminated. Because of the present 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 purchasers thereof. (See Item 2. Properties
and Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation and Note 14 to Consolidated Financial Statements.)
NUCLEAR
TU ELECTRIC
- -----------
TU Electric owns and operates two nuclear-fueled generating units at the
Comanche Peak nuclear generating station (Comanche Peak), each of which is
designed for a net capability of 1,150 MW. (See Peak Load and Capability.)
The nuclear fuel cycle requires the mining and milling of uranium ore to
provide uranium oxide concentrate (U\\3\\O\\8\\), the conversion of U\\3\\O\\8\\
to uranium hexafluoride (UF\\6\\), the enrichment of the UF\\6\\ and the
fabrication of the enriched uranium into fuel assemblies. TU Electric has on
hand, or has contracted for, the raw materials and services it expects to need
for its nuclear units through future years as follows: uranium (2001),
conversion (2003), enrichment (2014), and fabrication (2002). Although TU
Electric cannot predict the future availability of uranium and nuclear fuel
services, TU Electric does not currently expect to have difficulty obtaining
U\\3\\O\\8\\ and the services necessary for its conversion, enrichment and
fabrication into nuclear fuel for years later than those shown above.
The Energy Policy Act has provisions for the recovery of a portion of the
costs associated with the decommissioning and decontamination of the gaseous
diffusion plants used to enrich uranium for fuel. These costs are being
recovered in annual fees paid to the United States Department of Energy (DOE) as
determined by the Secretary of Energy. The total annual assessment for all
domestic utilities is capped at $150 million per federal fiscal year assessable
for fifteen years. TU Electric's assessment for 1997, as calculated by the DOE,
is $973,000.
The Nuclear Waste Policy Act of 1982, as amended (NWPA), provides for the
development by the DOE of interim storage and permanent disposal facilities for
spent nuclear fuel and/or high level radioactive waste materials. In December
1996, the DOE notified program participants that it did not expect to meet its
obligation to begin acceptance of spent nuclear fuel by 1998. TU Electric is
unable to predict what impact, if any, the DOE delay will have on TU Electric's
future operations. Under provisions of the NWPA, funding for the program is
provided by a one-mill per kWh fee currently levied on electricity generated and
sold from nuclear reactors, including the Comanche Peak units.
Currently, TU Electric's onsite storage capability for spent nuclear fuel
is sufficient to accommodate the operation of Comanche Peak through the year
2001. TU Electric is currently pursuing options for increasing its storage
capability, subject to approval by the Nuclear Regulatory Commission (NRC).
6
PURCHASED POWER
THE COMPANY AND TU ELECTRIC
- ---------------------------
In 1996, System Companies purchased a net of 18,119 million kWh or
approximately 17% of their energy requirements. TU Electric and SESCO had
available 1,337 MW of firm purchased capacity under contract. As a result of the
renewable resources solicitation that was part of the IRP filing, TU Electric
has negotiated a 15-year contract with a developer for the purchase of energy
produced from wind turbines equivalent to approximately 40 MW (or approximately
4 MW of firm capacity at peak) beginning in 1998. Recent changes in PURA and PUC
substantive rules require utilities to conduct solicitations for proposals to
provide new resources (both demand-side and supply-side) in developing their
integrated resource plans. Utility provided demand-side resources must be bid in
such solicitations. A utility will be allowed to construct new generating
facilities only if such measures will provide resources less costly than those
proposed in responses to the solicitations for proposals. Thus, it is very
likely that the Company will acquire additional amounts of purchased resources
in the future to adequately and reliably accommodate its customers' electrical
needs. For information concerning the IRP, see Peak Load and Capability and Note
13 to Consolidated Financial Statements.
Eastern Energy and the other distribution companies in Victoria purchase
their electric energy needs from a competitive power pool operated by a
statutory, independent corporation. While the spot price of electric energy from
the pool can vary substantially, Eastern Energy enters into hedging contracts
with electric energy generators and others to manage its exposure to such price
fluctuations (see Note 9 to Consolidated Financial Statements). Eastern Energy
also has arrangements with a number of cogenerators under which it is required
to purchase approximately 45 MW of capacity.
REGULATION AND RATES
THE COMPANY AND TU ELECTRIC
- ---------------------------
REGULATION
The Company is a holding company as defined in the Public Utility Holding
Company Act of 1935. However, the Company and all of its subsidiary companies
are exempt from the provisions of such Act, except Section 9(a)(2) which relates
to the acquisition of securities of public utility companies.
TU Electric and SESCO do not transmit electric energy in interstate
commerce or sell electric energy at wholesale in interstate commerce, or own or
operate facilities therefor, and their facilities are not connected directly or
indirectly to other systems which are involved in such interstate activities,
except during the continuance of emergencies permitting temporary or permanent
connections or under order of the Federal Energy Regulatory Commission (FERC)
exempting TU Electric and SESCO from jurisdiction under the Federal Power Act.
In view thereof, TU Electric and SESCO believe that they are not public
utilities as defined in the Federal Power Act and have been advised by their
counsel that they are not subject to general regulation under such Act.
The PUC has original jurisdiction over electric rates and service in
unincorporated areas and those municipalities that have ceded original
jurisdiction to the PUC and has exclusive appellate jurisdiction to review the
rate and service orders and ordinances of municipalities. Generally, PURA
prohibits the collection of any rates or charges (including charges for fuel) by
a public utility that does not have the prior approval of the PUC.
TU Electric is subject to the jurisdiction of the NRC with respect to
nuclear power plants. NRC regulations govern the granting of licenses for the
construction and operation of nuclear power plants and subject such plants to
continuing review and regulation.
Eastern Energy is subject to regulation by the Office of the Regulator
General (ORG). The ORG has the power to issue licenses for the supply,
distribution and sale of electricity within Victoria and regulates tariffs for
the use of the transmission system, distribution system, and other ancillary
services. The existing tariff under which Eastern Energy operates is in effect
through December 31, 2000. The ORG will review the existing tariff to be
effective after December 31, 2000.
The System Companies are also subject to various other federal, state and
local regulations. (See Environmental Matters.)
7
TU ELECTRIC
- -----------
FUEL COST RECOVERY RULE
Pursuant to a PUC rule, the recovery of TU Electric's eligible fuel costs
is provided through fixed fuel factors. The rule allows a utility's fuel factor
to be revised upward or downward every six months, according to a specified
schedule. A utility is required to petition to make either surcharges or refunds
to ratepayers, together with interest based on a twelve month average of prime
commercial rates, for any material, as defined by the PUC, cumulative under- or
over-recovery of fuel costs. If the cumulative difference of the under- or over-
recovery, plus interest, is in excess of 4% of the annual estimated fuel costs
most recently approved by the PUC, it will be deemed to be material. In
accordance with PUC approvals, TU Electric has refunded to customers an
aggregate of approximately $154 million, including interest, in over-collected
fuel costs for the period June 1994 through September 1995. These over-
collections were primarily due to lower natural gas prices than previously
anticipated. 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 through a surcharge to customers 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 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 resultant findings that the
costs are reasonable and necessary and that the prices charged to TU Electric by
supplying affiliates are no higher than the prices charged by those affiliates
to others for the same item or class of items. TU Electric is vigorously
defending its position in these appeals but is unable to predict their outcome.
The fuel cost recovery rule also contains a procedure for an expedited
change in the fixed fuel factor in the event of an emergency. Final
reconciliation of fuel costs must be made either in a reconciliation proceeding,
which may cover no more than three years and no less than one year, or in a
general rate case. In a final reconciliation, a utility has the burden of
proving that fuel costs under review were reasonable and necessary to provide
reliable electric service, that it has properly accounted for its fuel-related
revenues, and that fuel prices charged to the utility by an affiliate were
reasonable and necessary and not higher than prices charged for similar items by
such affiliate to other affiliates or nonaffiliates. In addition, for generating
utilities like TU Electric, the rule provides for recovery of purchased power
capacity costs through a power cost recovery factor (PCRF) with respect to
purchases from qualifying facilities, to the extent such costs are not otherwise
included in base rates. The energy-related costs of such purchases are included
in the fixed fuel factor. For non-generating utilities like SESCO, the rule
provides for the recovery of all costs of power purchased at wholesale
chargeable under rate schedules approved by a federal or state regulatory
authority and all amounts paid to qualifying facilities for the purchase of
capacity and/or energy, to the extent such costs are not otherwise included in
base rates. Penalties of up to 10% will be imposed in the event an emergency
increase has been granted when there was no emergency or when collections under
the PCRF exceed PCRF costs by 10% in any month or 5% in the most recent twelve
months.
FUEL RECONCILIATION PROCEEDING
On December 29, 1995, in accordance with PUC rules, TU Electric filed a
petition with the PUC seeking final reconciliation of all eligible fuel and
purchased power expenses incurred during the reconciliation period of July 1,
1992 through June 30, 1995, amounting to a total of $4.7 billion. In hearings
completed in December 1996, the PUC Staff recommended a disallowance of $71.9
million. TU Electric believes that all of its eligible fuel and purchase power
expenses have been prudently incurred and no amounts have been accrued for any
disallowance. A final decision is expected by mid-1997. TU Electric is unable to
predict the outcome of such proceeding; however, a disallowance, if any, will
result in a future loss, which could possibly have a material effect on TU
Electric's results of operation or cash flows.
In addition, and as permitted by the PUC rules, TU Electric is also seeking
an accounting order from the PUC that will allow certain costs incurred, and to
be incurred, to facilitate the use of coal as a supplemental fuel at Monticello
to be treated as eligible fuel costs and billed pursuant to TU Electric's fuel
cost factor. By incurring these expenses, TU Electric believes that it can
significantly improve the reliability of the supply of fuel to Monticello and
can, at the same time, lower the fuel costs that would be incurred in the
absence of these expenditures.
FLEXIBLE RATE INITIATIVES
TU Electric continues to offer flexible rates in over 160 cities with
original regulatory jurisdiction within its service territory (including the
cities of Dallas and Fort Worth) to existing non-residential retail and
wholesale customers that have viable alternative sources of supply and would
otherwise leave the system. TU Electric also continues to offer
8
an economic development rider to attract new businesses and to encourage
existing customers to expand their facilities as well as an environmental
technology rider to encourage qualifying customers to convert to technologies
that conserve energy or improve the environment. TU Electric will continue to
pursue the expanded use of flexible rates when such rates are necessary to be
price-competitive.
DOCKET 9300
The PUC's final order (Order) in connection with TU Electric's January 1990
rate increase request (Docket 9300) was reviewed by the 250th Judicial District
Court of Travis County, Texas, and thereafter was appealed to the Court of
Appeals for the Third District of Texas and to the Supreme Court of Texas
(Supreme Court). As a result of such review and appeals, an aggregate of $909
million of disallowances with respect to TU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to the Company's and TU Electric's earnings, has been remanded to
the PUC for reconsideration on the basis of a prudent investment standard. On
remand, the PUC will also be required to reevaluate 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. In January 1997, the
Supreme Court denied a motion for rehearing on the Comanche Peak minority owners
issue filed by the original complainants. TU Electric cannot predict the outcome
of the reconsideration of the Order on remand by the PUC.
In its decision, the Supreme Court also affirmed the previous $472 million
prudence disallowance related to Comanche Peak. Since the Company and TU
Electric each has previously recorded a charge to earnings for this prudence
disallowance, the Supreme Court's decision did not have an effect on the
Company's or TU Electric's current financial position, results of operation or
cash flows.
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
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.
DOCKET 15638
In May 1996, TU Electric filed with the PUC its transmission cost
information and tariffs for open-access wholesale transmission service (Docket
15638) in accordance with PUC rules adopted in February 1996. These tariffs also
provide for generation-related ancillary services necessary to support wholesale
transactions. Upon final PUC approval and the implementation of transmission
rates for each transmission provider within the Electric Reliability Council of
Texas (ERCOT), TU Electric's payments for transmission service will exceed its
revenues for providing transmission service. The PUC is required by the rules to
adopt a rate-moderation plan that will minimize the impact of the new pricing
mechanism for the first three years the rules are in effect. As such, the
current maximum impact on TU Electric for 1997 is a $4.26 million deficit,
which, in the opinion of TU Electric, is not expected to have a material effect
on its financial position, results of operation or cash flows. TU Electric
expects to have its open-access wholesale transmission tariff in place for
service within ERCOT in early 1997. (See Competition.)
OTHER
In connection with the PUC's regular earnings monitoring process, the PUC
Staff has advised the PUC that it believes TU Electric was earning in excess of
a reasonable rate of return and that it was engaged in discussions with TU
Electric concerning possible remedies for such perceived over-earnings. The city
of Sulphur Springs, Texas, which exercises original jurisdiction over TU
Electric's rates within that city's boundaries, has initiated an inquiry into
the reasonableness of TU Electric's rates. TU Electric is currently preparing
the information required by Sulphur Springs in connection with its inquiry. TU
Electric is unable to predict the outcome of either the discussions with the PUC
Staff or the inquiry of Sulphur Springs.
9
COMPETITION
THE COMPANY AND TU ELECTRIC
- ---------------------------
GENERAL
As legislative, regulatory, economic and technological changes occur, the
energy and utility industries are faced with increasing pressure to become more
competitive while adhering to regulatory requirements. The level of competition
is affected by a number of variables, including price, reliability of service,
the cost of energy alternatives, new technologies and governmental regulations.
Federal legislation such as the PURPA and, more recently, the Energy Policy
Act, as well as initiatives in various states, encourage wholesale competition
among electric utility and non-utility power producers. Together with increasing
customer demand for lower-priced electricity and other energy services, these
measures have accelerated the industry's movement toward a more competitive
pricing and cost structure. Competition in the electric utility industry was
also addressed in the 1995 session of the Texas legislature. PURA was amended to
encourage greater wholesale competition and flexible retail pricing. PURA
amendments also require the PUC to report to the legislature, during each
legislative session, on competition in electric markets. Accordingly, PUC
reports were submitted to the Texas legislature in January 1997, recommending
that the legislature continue the process of expanding competition in the Texas
electricity markets, leading to expanded retail competition, and authorize the
PUC to take numerous steps toward that goal. The PUC further recommended that
full competition not occur prior to the year 2000 in order to provide an
environment through which both retail customers and utilities in Texas move more
smoothly to achieve the perceived benefits of competition. The PUC is seeking
guidance from the legislature and authority to address the issue of stranded
cost recovery. In advance of the implementation of full retail competition, the
PUC is requesting authority to create an Electric Service Reseller, a new entity
that purchases power from the incumbent utility, bundles electric service with
other services, and resells the power in the retail market. The PUC is also
requesting authority to: (i) approve or disapprove mergers and acquisitions of
Texas' electric utilities, (ii) allow alternative forms of regulation for
transmission and distribution services, (iii) mandate a minimum set of consumer
rights with regard to reliability, consumer protection and universal service,
(iv) address market power concerns, (v) use alternative fuel recovery
mechanisms, (vi) provide the PUC authority over regional reliability groups, and
(vii) develop rules for a framework of transitioning to full retail competition.
As a result of the shift in emphasis toward greater competition, large and
small industry participants are offering energy services and energy-related
products that are both economically and environmentally attractive to customers.
In Texas, aggressive marketing of competitive prices by rural electric
cooperatives, municipally-owned electric systems, and other energy providers who
are not subject to the traditional governmental regulation experienced by the
energy and utility industries has intensified competition within the state's
wholesale markets and, in multi-certificated areas, retail customer markets.
Furthermore, there is increasing pressure on utilities to reduce costs,
including the cost of power, and to tailor energy services to the specific needs
of customers. Such competitive pressures among electric utility and non-utility
power producers could result in the loss by TU Electric of customers and the
cost of certain of its assets becoming stranded costs (i.e., costs of assets
that may not be recoverable from customers as a result of competitive pricing).
To the extent stranded costs cannot be recovered from customers, it may be
necessary for such costs to be borne partially or entirely by shareholders. In
response to these competitive pressures, many utilities are implementing
significant restructuring and re-engineering initiatives designed to make them
more competitive. Since the implementation of an Operations Review and Cost
Reduction program in April 1992, the System Companies continue to take steps to
reduce costs by streamlining business processes and operating practices. (For
information pertaining to the effects of competition on the treatment of certain
regulatory assets and liabilities, see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation and Note 1 to
Consolidated Financial Statements.)
WHOLESALE MARKET
In the wholesale power market, TU Electric competes with a variety of
utilities and other suppliers, some of which are willing and able to sell at
rates below TU Electric's standard wholesale power service rate as approved by
the PUC. As a result, TU Electric has received notifications of termination of
approximately 750 MW of wholesale load through 1999. In 1996, wholesale revenues
represented about 3% of TU Electric's total consolidated operating revenues.
10
Amendments to PURA made during the 1995 session of the Texas legislature
allow for wholesale pricing flexibility. While wholesale rates for electric
utilities are not deregulated, wholesale tariffs or contracts with charges less
than approved rates but greater than the utility's marginal cost may be approved
by the regulatory authority upon application by the utility. Competitive
wholesale power contracts have been successfully negotiated with two existing
customers, Lyntegar Electric Cooperative and Taylor Electric Cooperative, and
with the City of College Station, a new customer.
OPEN-ACCESS TRANSMISSION
In February 1996, pursuant to the 1995 amendments to PURA, the PUC adopted
rules requiring each electric utility in ERCOT to provide wholesale transmission
and related services to other utilities and non-utility power suppliers at
rates, terms and conditions that are comparable to those applicable to such
utility's use of its own transmission facilities.
Under the rules, the PUC established a transmission pricing mechanism
consisting of an ERCOT system-wide component and a distance-sensitive component.
The ERCOT system-wide component provides that each load-serving entity in ERCOT
will pay a share of the ERCOT-wide transmission cost of service based on the
entity's load. The distance-sensitive component provides that a distance-
sensitive rate will be paid to utilities that own transmission facilities, based
on the impact of transmitting generation resources to loads. The rates charged
for using the transmission system are designed to ensure that all market
participants pay on a comparable basis to use the system. While all users of the
transmission grid pay rates that are comparably designed, the impact on
individual users will differ.
In May 1996, TU Electric filed with the PUC, under Docket 15638, its
transmission cost information and tariffs for open-access wholesale transmission
service. These tariffs also provide for generation-related ancillary services
necessary to support wholesale transactions. Company-specific proceedings to
determine transmission rates were concluded in 1996, and in early 1997, TU
Electric is expected to have its open-access wholesale transmission tariff in
place for service within ERCOT. (See Regulation and Rates.)
As a result of the PUC rules, the organization and structure of ERCOT has
been changed to provide for equal governance among all wholesale electricity
market participants. These changes were made in order to facilitate wholesale
competition while ensuring continued reliability within ERCOT.
At the federal level, the Energy Policy Act empowers the FERC to require
utilities to provide transmission service for the delivery of wholesale power
from other power producers to qualified resellers, such as municipalities,
cooperatives and other utilities. In April 1996, the FERC issued Order No. 888
which requires all FERC-jurisdictional electric utilities to offer third parties
wholesale transmission services under an open-access tariff and provides a
framework for recovery of "legitimate, prudent and verifiable stranded costs"
resulting from the implementation of open-access wholesale transmission service.
RETAIL MARKET
TU Electric and SESCO are experiencing competition for retail load in areas
that are multi-certificated with rural electric cooperatives or municipal
utilities. Except in areas where there is multi-certification by the PUC, TU
Electric and SESCO currently have the exclusive right to provide electric
service to the public within their service areas.
In addition, some energy consumers have the ability to produce their own
electricity or to use alternative forms of energy. Industrial customers may also
be able to relocate their facilities to lower-cost service areas. To some
degree, there is competition among utilities with defined service areas to
attract and retain large customers. TU Electric and SESCO are pursuing efforts
to remain competitive through competitive pricing, economic development and
other initiatives. (See Regulation and Rates.)
Congress, as well as legislatures and regulatory commissions in several
states have begun to examine the possibility of mandated "retail wheeling," the
required delivery by an electric utility over its transmission and distribution
facilities of energy produced by another entity to retail customers in such
utility's service territory. If implemented, such access could allow a retail
customer to purchase electric service from any other electric service provider,
subject to the practical constraints of long distance transmission. To date,
retail wheeling has not been implemented in Texas; however, this issue is being
pursued again during the 1997 session of the Texas legislature and in the 105th
Congress.
11
The Company and TU Electric do not anticipate any legislation being enacted
during the 1997 legislature to authorize competition in the retail market. The
Company and TU Electric cannot predict the ultimate outcome of the ongoing
efforts that are taking place to restructure the electric utility industry or
whether such outcome will have a material effect on their financial position,
results of operation or cash flows.
The energy supply franchise portion of Eastern Energy's business is
gradually being exposed to competition through a phase-in of customers' right to
choose their energy supplier. This phase-in is by customer class and is expected
to be complete by December 31, 2000, at which time all energy customers in
Victoria will have the right to choose their energy supplier. Eastern Energy is
required to offer distribution of electric energy in its service territory on
behalf of other electric suppliers and distribution companies to those customers
having a right to choose their supplier, and Eastern Energy can similarly supply
electric energy to such customers in other service territories by utilizing the
distribution networks of the distribution companies in those service
territories.
TU Electric, SESCO and Eastern Energy are not able to predict the extent of
future competitive developments or what impact, if any, such developments may
have on their operations.
ENVIRONMENTAL MATTERS
THE COMPANY AND TU ELECTRIC
- ---------------------------
GENERAL
The System Companies are subject to various federal, state and local
regulations dealing with air and water quality and related environmental
matters. (See Item 2. Properties - Capital Expenditures and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation for
environmental expenditures.)
AIR
Under the Texas Clean Air Act, the Texas Natural Resource Conservation
Commission (TNRCC) has jurisdiction over the permissible level of air
contaminant emissions from generating facilities located within the State of
Texas. In addition, the new source performance standards of the Environmental
Protection Agency (EPA) promulgated under the federal Clean Air Act, as amended
(Clean Air Act), which have also been adopted by the TNRCC, are applicable to
generating units, the construction of which commenced after August 17, 1971. TU
Electric's generating units have
been constructed to operate in compliance with current regulations and emission
standards promulgated pursuant to these Acts; however, due to variations in the
quality of the lignite fuel, operation of certain of the lignite-fueled
generating units at reduced loads is required from time to time in order to
maintain compliance with these standards.
The Clean Air Act includes provisions which, among other things, place
limits on the sulfur dioxide emissions produced by generating units. In addition
to the new source performance standards applicable to sulfur dioxide, the Clean
Air Act requires that fossil-fueled plants meet certain sulfur dioxide emission
allowances by 1995 (Phase I) and will require more restrictions on sulfur
dioxide emission allowances by 2000 (Phase II). TU Electric's generating units
were not affected by the Phase I requirements. The applicable Phase II
requirements currently are met by 52 out of the 56 of TU Electric's generating
units to which those requirements apply. Because the sulfur dioxide emissions
from the other four units are relatively low and alternatives are available to
enable these units to reduce sulfur dioxide emissions or utilize compensatory
reduction allowances achieved in other units, compliance with the applicable
Phase II sulfur dioxide requirements is not expected to have a significant
impact on TU Electric. In January 1993, the EPA issued its "core" regulations to
implement the sulfur dioxide reduction program. TU Electric is preparing
compliance plans in accordance with these regulations and expects these plans to
be implemented by January 1, 2000.
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 from or to other utilities. The EPA
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 Clean Air Act also provides that TU Electric will be granted additional
annual allowances for Units 1 and 2 of the Twin Oak facility. TU Electric
intends to utilize internal allocation of emission allowances within its system
and, if cost effective, may purchase additional emission allowances to enable
both existing and future electric generating units to meet the requirements of
the Clean Air Act. TU Electric may also sell excess emission allowances. TU
Electric is unable to predict the extent to which it may generate excess
allowances or will be able to acquire allowances from others if needed but does
not anticipate any significant problems in keeping emissions within its allotted
allowances.
12
TU Electric's generating units meet the nitrogen oxide limits currently
required by the Clean Air Act. The TNRCC and the EPA have determined that the
requirements of the Clean Air Act for ozone nonattainment areas will not require
nitrogen oxide emission reductions at TU Electric's generating units in the
Dallas-Fort Worth area. The Clean Air Act also requires studies, which began in
1991, by the EPA to assess the potential for toxic emissions from utility
boilers. TU Electric is unable to predict either the results of such studies or
the effects of any subsequent regulations. Recently, the EPA proposed a more
stringent standard for ambient levels of ozone and of fine particulates. The
impact of these new standards, if adopted, is unknown at this time.
Only certain parts of the regulations implementing the Clean Air Act have
been published as final rules. Until more of these regulations have been
promulgated and specific state requirements developed, TU Electric will not be
able to fully determine the cost or method of compliance with these
requirements. TU Electric believes that it can meet the requirements necessary
to be in compliance with these provisions as they are developed. Estimates for
the capital requirements related to the Clean Air Act are included in TU
Electric's estimated construction expenditures. Any additional capital
expenditures, as well as any increased operating costs associated with new
requirements or compliance measures, are expected to be recoverable through
rates, as similar costs have been recovered in the past.
WATER
The TNRCC and the EPA have jurisdiction over all water discharges
(including storm water) from all System Companies' domestic facilities. The
System Companies' domestic facilities are presently in compliance with
applicable state and federal requirements relating to discharge of pollutants
into the water. TU Electric, Fuel Company, and Mining Company have obtained all
required waste water discharge permits from the TNRCC and the EPA for facilities
in operation and have applied for or obtained necessary permits for facilities
under construction. TU Electric, Fuel Company and Mining Company believe they
can satisfy the requirements necessary to obtain any required permits or
renewals.
OTHER
Diversion, impoundment and withdrawal of water for cooling and other
purposes are subject to the jurisdiction of the TNRCC. Certain System Companies,
including TU Electric, possess all necessary permits for these activities from
the TNRCC for their present operations.
Federal legislation regulating surface mining was enacted in August 1977
and regulations implementing the law have been issued. Mining Company's lignite
mining operations are currently regulated at the state level by the TRC, with
oversight by the United States Department of the Interior's Office of Surface
Mining, Reclamation and Enforcement. Surface mining permits have been issued for
current Mining Company operations that provide fuel for Big Brown, Monticello
and Martin Lake.
Treatment, storage and disposal of solid and hazardous waste are regulated
at the state level under the Texas Solid Waste Disposal Act (Texas Act) and at
the federal level under the Resource Conservation and Recovery Act of 1976, as
amended (RCRA) and the Toxic Substances Control Act (TSCA). The EPA has issued
regulations under the RCRA and TSCA, and the TNRCC and the RCT have issued
regulations under the Texas Act applicable to System Companies' domestic
facilities. The Company has registered its solid waste disposal sites and has
obtained or applied for such permits as are required by such regulations.
Under the federal Low-Level Radioactive Waste Policy Act of 1980, as
amended, the State of Texas is required to provide, either on its own or jointly
with other states in a compact, for the disposal of all low-level radioactive
waste generated within the state. The State of Texas is taking steps to site,
construct and operate a low-level radioactive waste disposal site by 1999 and
submitted a license application in March 1992 for such a facility. The license
application has been finalized and a contested Administrative Hearing on the
adequacy of the application is scheduled to begin in January 1998. The State of
Texas has agreed to a compact with the States of Maine and Vermont, which is
subject to ratification by Congress, for such a facility. Low-level waste
material will be shipped off-site as long as an alternate disposal site is
available. Otherwise the low-level waste material will be stored on-site. TU
Electric's on-site storage capacity is expected to be adequate until other
facilities are available.
Eastern Energy is subject to various Australian federal and Victorian state
environmental regulations, the most significant of which is the Victorian
Environmental Protection Act of 1970 (VEPA). VEPA regulates, in particular, the
discharge of waste into air, land and water, site contamination, the emission of
noise and the storage, recycling and disposal of solid and industrial waste.
VEPA establishes the Environmental Protection Authority (Authority) and grants
13
the Authority a wide range of powers to control and prevent environmental
pollution. These powers include issuing approvals for construction of works
which may cause noise or emissions to air, water or land, waste discharge
licenses and pollution abatement notices. No licenses or works approvals from
the Authority are currently required for activities undertaken by Eastern
Energy.
ITEM 2. PROPERTIES
THE COMPANY AND TU ELECTRIC
- ---------------------------
The Company owns no utility plant or real property. At December 31,
1996, TU Electric owned or leased and operated the following generating units:
ELECTRIC NET
GENERATING CAPABILITY
UNITS FUEL SOURCE (MW) %
- ---------- ----------- ---------- -------
46 Natural Gas (a)........................ 12,105 57.0%
9 Lignite/Coal........................... 5,825 27.5
2 Nuclear................................ 2,300 10.8
15 Combustion Turbines (b)................ 975 4.6
10 Diesel................................. 20 0.1
------ -----
Total................................ 21,225 100.0%
====== =====
- -----------------------
(a) Thirty-seven natural gas units are designed to operate on fuel oil for
short periods when gas supplies are interrupted or curtailed. Five natural
gas units are designed to operate on fuel oil for extended periods.
(b) Natural gas units leased and operated by TU Electric. Such units are
designed to operate on fuel oil for extended periods.
The principal generating facilities and load centers of TU Electric and
SESCO are connected by 3,863 circuit miles of 345,000 volt transmission lines
and 9,327 circuit miles of 138,000 and 69,000 volt transmission lines.
TU Electric is connected by six 345,000 volt lines to Houston Lighting &
Power Company; by three 345,000 volt, eight 138,000 volt and nine 69,000 volt
lines to West Texas Utilities Company; by two 345,000 volt and eight 138,000
volt lines to the Lower Colorado River Authority; by four 345,000 volt and eight
138,000 volt lines to the Texas Municipal Power Agency; by one asynchronous high
voltage direct current interconnection to Southwestern Electric Power Company;
and at several points with smaller systems operating wholly within Texas. SESCO
is connected to TU Electric by three 138,000 volt lines, ten 69,000 volt lines
and three lines at distribution voltage. TU Electric and SESCO are members of
ERCOT, an intrastate network of investor-owned entities, cooperatives, public
entities, non-utility generators and power marketers. ERCOT is the regional
reliability coordinating organization for member electric power systems in Texas
and is responsible for ensuring equal access to transmission service by all
wholesale market participants in the ERCOT region.
Eastern Energy's distribution network is comprised primarily of
subtransmission and distribution assets. It owns no generating or transmission
facilities. Eastern Energy's distribution system is interconnected with an
intrastate power network comprised of the operator of the electric energy pool,
Victorian Power Exchange, and each of the other distribution companies within
Victoria. Eastern Energy has entered into distribution system agreements with
each of the distribution businesses which share the boundaries of its
distribution area to provide for wheeling of electricity on behalf of those
distribution businesses and for the reciprocal provision of other distribution
services.
The generating stations and other important units of property of TU
Electric and SESCO are located on lands owned primarily in fee simple. The
greater portion of the transmission and distribution lines of TU Electric and
SESCO, and of the gas gathering and transmission lines of Fuel Company, has been
constructed over lands of others pursuant to easements or along public highways
and streets as permitted by law. The rights of the System Companies in the
realty on which their properties are located are considered by them to be
adequate for their use in the conduct of their business. Minor defects and
irregularities customarily found in titles to properties of like size and
character may exist, but any such defects and irregularities do not materially
impair the use of the properties affected thereby. TU Electric, SESCO, Fuel
Company and Eastern Energy have the right of eminent domain whereby they may, if
necessary, perfect or secure titles or gain access to privately held land used
or to be used in their operations. Utility plant of TU Electric and SESCO is
generally subject to the liens of their respective mortgages.
14
CAPITAL EXPENDITURES
THE COMPANY AND TU ELECTRIC
- ---------------------------
The Company has taken steps to aggressively manage its construction
expenditures. Such construction expenditures for utility related activities,
excluding allowance for funds used during construction (see Note 1 to
Consolidated Financial Statements) are presently estimated at $513 million, $527
million and $556 million for the Company and $440 million, $470 million and $497
million for TU Electric for each of the years 1997, 1998, and 1999,
respectively. The System Companies are subject to federal, state and local
regulations dealing with environmental protection. (See Item 1. Business -
Environmental Matters.) Such expenditures for construction to meet the
requirements of environmental regulations at existing generating units are
estimated to be $10 million for 1997 (included in the 1997 construction
estimates noted above) and were approximately $14 million in 1996, $64 million
in 1995 and $40 million in 1994. Expenditures for non-utility property are
presently estimated to be $75 million, $44 million and $78 million for the
Company for each of the years 1997, 1998 and 1999, respectively. Expenditures
for nuclear fuel are presently estimated to be $66 million, $78 million and $115
million for the Company and TU Electric for each of the years 1997, 1998 and
1999, respectively.
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. (See Item 1. Business - Peak Load and
Capability.)
The Company and TU Electric each 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
shareholders. The timing and amounts of any specific new business investment
opportunities are presently undetermined.
For information regarding the financing of capital expenditures, see Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation.
15
ITEM 3. LEGAL PROCEEDINGS
THE COMPANY
- -----------
The Antitrust Division of the U.S. Department of Justice submitted to the
Company a civil investigative demand (CID) in October 1995. This CID requests
documents and information relating to an investigation of whether alleged tying
arrangements or other actions that unreasonably deny or condition access to TU
Electric's transmission system by others have occurred in violation of certain
antitrust laws. While the Company intends to comply with requests within the
appropriate purview of the Department of Justice, it believes that it has not
violated such antitrust laws. The Company is unable to predict the outcome of
any such investigation and does not expect it to have a material effect on the
Company's financial position, results of operation or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
THE COMPANY
- -----------
A special meeting of the shareholders of the Company was held on November
15, 1996 for the purpose of approving an Amended and Restated Agreement and Plan
of Merger involving the Company and ENSERCH and the transactions contemplated
therein, including as described in the Joint Proxy Statement/Prospectus sent to
the shareholders of both companies on September 23, 1996, the merger of a wholly
owned subsidiary of TUC Holding Company, a new company owned 50% by the Company
and 50% by ENSERCH, with and into the Company, as a result of which the Company
will become a wholly owned subsidiary of TUC Holding Company. At the effective
time of the merger, TUC Holding Company will change its name to Texas Utilities
Company and the outstanding shares of the Company's Common Stock will be
converted into shares of TUC Holding Company Common Stock on a one-for-one
basis. Voting results of the special meeting were as follows: 173,214,638 shares
were voted FOR the proposal, 1,153,345 shares were voted AGAINST the proposal
and 1,196,009 shares ABSTAINED or were broker non-votes as to the proposal.
TU ELECTRIC
- -----------
None.
- -----------
EXECUTIVE OFFICERS OF THE COMPANY
POSITIONS AND OFFICES DATE FIRST
PRESENTLY HELD ELECTED TO
(CURRENT TERM PRESENT BUSINESS EXPERIENCE
NAME OF OFFICER AGE EXPIRES MAY 23, 1997) OFFICE(S) (PRECEDING FIVE YEARS)
- --------------- --- --------------------- ---------- ---------------------
J. S. Farrington 62 Chairman and Director February 20, 1987 Same and Chief Executive of
the Company.
Erle Nye 59 President, Chief Executive May 19, 1995 Chairman of the Board and
and Director Chief Executive of TU Electric.
There is no family relationship between either of the above named Executive
Officers.
16
PART II
ITEM 5. MARKET FOR EACH REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
THE COMPANY
- -----------
The Company's common stock is listed on the New York, Chicago and Pacific
stock exchanges (symbol: TXU).
The price range of the common stock of the Company on the composite tape,
as reported by The Wall Street Journal, and the dividends paid, for each of the
calendar quarters of 1996 and 1995 were as follows:
Price Range Dividends Paid
---------------------------------------- --------------
Quarter Ended 1996 1995 1996 1995
- ------------- ------------------ ------------------ ----- -----
High Low High Low
------- ------- ------- -------
March 31...... $42 7/8 $38 7/8 $35 $30 1/8 $0.50 $0.77
June 30....... 42 3/4 38 1/2 36 1/8 31 5/8 0.50 0.77
September 30.. 43 3/4 39 3/8 35 32 5/8 0.50 0.77
December 31... 42 1/8 38 3/4 41 1/4 34 1/4 0.50 0.77
----- -----
$2.00 $3.08
===== =====
The Company has declared common stock dividends payable in cash in each
year since its incorporation in 1945. The Board of Directors of the Company, at
its February 1997 meeting, declared a quarterly dividend of $0.525 a share,
payable April 1, 1997 to shareholders of record on March 7, 1997. For
information concerning the Company's dividend policy, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation. Future
dividends may vary depending upon the Company's profit levels and capital
requirements as well as financial and other conditions existing at the time.
Reference is made to Note 5 to Consolidated Financial Statements regarding
limitations upon payment of dividends on common stock of TU Electric and SESCO.
The number of record holders of the common stock of the Company as of
February 28, 1997 was 87,303.
TU ELECTRIC
- -----------
All of TU Electric's common stock is owned by the Company. Reference is
made to Note 5 to Consolidated Financial Statements regarding limitations upon
payment of dividends on common stock of TU Electric.
17
ITEM 6. SELECTED FINANCIAL DATA
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATISTICS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total assets -- end of year............................... $ 21,375,707 $ 21,535,851 $ 20,893,408 $ 21,518,128 $ 19,428,568
- ------------------------------------------------------------------------------------------------------------------------------------
Utility plant - gross -- end of year...................... $ 24,931,239 $ 24,911,787 $ 24,206,351 $ 23,836,729 $ 23,043,778
Accumulated depreciation and amortization -- end of
year................................................... 6,496,724 5,857,580 5,228,423 4,710,398 4,251,002
Reserve for regulatory disallowances -- end of year..... 836,005 1,308,460 1,308,460 1,308,460 1,308,460
Construction expenditures (including allowance for
funds used during construction)......................... 434,139 434,338 444,245 871,450 1,136,971
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization -- end of year
Long-term debt.......................................... $ 8,668,111 $ 9,174,575 $ 7,888,413 $ 8,379,826 $ 7,931,981
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding
solely debentures of TU Electric...................... 381,311 381,476 -- -- --
Preferred stock of subsidiary:
Not subject to mandatory redemption................... 464,427 489,695 870,190 1,083,008 909,564
Subject to mandatory redemption....................... 238,391 263,196 387,482 396,917 418,748
Common stock equity..................................... 6,032,913 5,731,753 6,490,047 6,570,993 6,590,537
------------ ------------ ------------ ------------ ------------
Total................................................ $ 15,785,153 $ 16,040,695 $ 15,636,132 $ 16,430,744 $ 15,850,830
============ ============ ============ ============ ============
Capitalization ratios -- end of year
Long-term debt.......................................... 54.9% 57.2% 50.5% 51.0% 50.0%
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding
solely debentures of TU Electric....................... 2.4 2.4 -- -- --
Preferred stock of subsidiary........................... 4.5 4.7 8.0 9.0 8.4
Common stock equity..................................... 38.2 35.7 41.5 40.0 41.6
----- ----- ----- ----- -----
Total................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
Embedded interest cost on long-term debt -- end of year... 8.1% 8.4% 8.7% 8.7% 9.2%
Embedded distribution cost on TU Electric obligated,
mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of TU
Electric -- end of year................................. 8.7% 8.6% --% --% --%
Embedded dividend cost on preferred stock of subsidiary
-- end of year........................................... 7.5% 7.4% 7.5% 7.6% 8.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle................................. $ 753,606 $ (138,645) $ 542,799 $ 368,660 $ 619,204
Cumulative effect of a change in accounting for unbilled
revenue (net of taxes of $41,679,000)................. -- -- -- -- 80,907
------------ ------------ ------------ ------------ ------------
Consolidated net income (loss)............................ $ 753,606 $ (138,645) $ 542,799 $ 368,660 $ 700,111
============ ============ ============ ============ ============
Dividends declared on common stock........................ $ 456,059 $ 634,613 $ 695,590 $ 682,438 $ 653,146
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock data
Shares outstanding -- average........................... 225,159,846 225,841,037 225,833,659 221,555,218 214,850,225
Shares outstanding -- end of year....................... 224,602,557 225,841,037 225,841,037 224,345,422 217,316,054
Earnings (loss) per share (on average shares
outstanding):
Before cumulative effect of a change in accounting..... $ 3.35 $ (0.61) $ 2.40 $ 1.66 $ 2.88
Cumulative effect of a change in accounting
for unbilled revenue................................... -- -- -- -- 0.38
------------ ------------ ------------ ------------ ------------
Total earnings (loss) per average share.............. $ 3.35 $ (0.61) $ 2.40 $ 1.66 $ 3.26
============ ============ ============ ============ ============
Dividends declared per share............................ $ 2.025 $ 2.81 $ 3.08 $ 3.08 $ 3.04
Book value per share -- end of year..................... $ 26.86 $ 25.38 $ 28.74 $ 29.29 $ 30.33
Return on average common stock equity................... 12.8% (2.3)% 8.3% 5.6% 10.9%
Ratio of earnings to fixed charges:
Pre-tax................................................. 2.4 0.8 2.3 1.9 2.3
After-tax............................................... 2.0 0.9 1.9 1.6 2.0
Allowance for funds used during construction as
percent of consolidated net income...................... 1.7% --% 4.1% 71.4% 43.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Certain financial statistics for 1996 and 1995 were affected by the December
1995 acquisition of Eastern Energy; for the year 1995, were affected by
recording of the impairment of certain assets (see Note 14 to Consolidated
Financial Statements); and for the year 1993, were affected by TU Electric
recording a regulatory disallowance in a rate order issued by the Public Utility
Commission of Texas in Docket 11735 (see Note 13 to Consolidated Financial
Statements).
18
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED OPERATING STATISTICS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
ELECTRIC ENERGY GENERATED AND
PURCHASED (MWh)
Generated -- net station output........... 88,129,637 83,876,565 81,320,922 79,105,495 74,652,339
Purchased and net interchange............. 18,119,171 11,880,174 12,551,167 12,785,246 11,417,251
----------- ---------- ---------- ---------- ----------
Total generated and purchased............ 106,248,808 95,756,739 93,872,089 91,890,741 86,069,590
Company use, losses and unaccounted for... 5,905,076 5,653,698 5,246,480 5,631,085 5,016,596
----------- ---------- ---------- ---------- ----------
Total electric energy sales.............. 100,343,732 90,103,041 88,625,609 86,259,656 81,052,994
=========== ========== ========== ========== ==========
ELECTRIC ENERGY SALES (MWh)
Residential............................... 35,855,314 31,284,477 30,460,307 30,504,991 27,524,621
Commercial................................ 27,946,728 25,899,942 25,073,687 24,269,456 23,176,888
Industrial................................ 25,755,045 23,586,291 23,154,145 21,586,803 21,278,889
Government and municipal.................. 6,161,150 5,752,800 5,619,135 5,427,436 5,080,440
----------- ---------- ---------- ---------- ----------
Total general business................... 95,718,237 86,523,510 84,307,274 81,788,686 77,060,838
Other electric utilities................. 4,625,495 3,579,531 4,318,335 4,470,970 3,992,156
----------- ---------- ---------- ---------- ----------
Total electric energy sales.............. 100,343,732 90,103,041 88,625,609 86,259,656 81,052,994
=========== ========== ========== ========== ==========
OPERATING REVENUES (thousands)
Base rate:
Residential.............................. $2,251,734 $1,920,087 $1,862,525 $1,704,766 $1,478,758
Commercial............................... 1,357,326 1,219,443 1,183,757 1,061,591 972,733
Industrial............................... 690,943 602,518 595,213 536,800 517,896
Government and municipal................. 322,013 287,674 283,783 245,458 209,426
----------- ---------- ---------- ---------- ----------
Total general business................. 4,622,016 4,029,722 3,925,278 3,548,615 3,178,813
Other electric utilities................. 146,358 117,904 155,389 149,289 137,051
----------- ---------- ---------- ---------- ----------
Total base rate revenues............... 4,768,374 4,147,626 4,080,667 3,697,904 3,315,864
Fuel revenue (including over/under-
recovered)............................... 1,670,844 1,418,211 1,513,929 1,657,331 1,540,667
Other operating revenues.................. 111,710 72,851 68,947 79,277 51,345
----------- ---------- ---------- ---------- ----------
Total operating revenues................ $6,550,928 $5,638,688 $5,663,543 $5,434,512 $4,907,876
=========== ========== ========== ========== ==========
ELECTRIC CUSTOMERS (end of year)
Residential............................... 2,558,025 2,504,128 2,053,235 2,020,667 1,952,916
Commercial................................ 274,076 267,579 225,479 221,422 210,185
Industrial................................ 49,390 49,558 21,673 21,954 21,969
Government and municipal................. 31,108 30,458 29,437 29,034 28,204
----------- ---------- ---------- ---------- ----------
Total general business................... 2,912,599 2,851,723 2,329,824 2,293,077 2,213,274
Other electric utilities................. 161 165 212 220 243
----------- ---------- ---------- ---------- ----------
Total electric customers................ 2,912,760 2,851,888 2,330,036 2,293,297 2,213,517
=========== ========== ========== ========== ==========
RESIDENTIAL STATISTICS (excludes
master-metered customers, kWh sales
and revenues)
Average annual kWh per customer.......... 13,551 12,003 14,192 14,594 13,463
Average revenue per kWh.................. 8.02c 8.08c 8.25c 7.56c 7.40c
- ----------------
Industrial classification includes
service to Alcoa-Sandow:
Electric energy sales (Mwh).............. 3,841,904 3,764,658 3,886,258 3,166,797 3,157,852
Operating revenues (thousands)........... $ 46,853 $ 47,739 $ 54,699 $ 53,352 $ 56,043
Certain previously reported operating statistics have been reclassified to
conform to current classifications, and for 1996 and 1995, were affected by the
December 1995 acquisition of Eastern Energy.
19
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATISTICS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total assets -- end of year.............................. $18,794,939 $19,003,374 $19,446,998 $19,870,990 $17,962,812
- ------------------------------------------------------------------------------------------------------------------------------------
Electric plant - gross -- end of year.................... $22,664,086 $22,747,860 $23,063,436 $22,680,508 $21,957,681
Accumulated depreciation and amortization -- end of
year................................................... 5,963,477 5,370,818 4,765,474 4,233,720 3,790,626
Reserve for regulatory disallowances -- end of year..... 836,005 1,308,460 1,308,460 1,308,460 1,308,460
Construction expenditures (including allowance for
funds used during construction)......................... 377,438 407,305 415,290 841,181 1,107,555
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization -- end of year
Long-term debt.......................................... $ 6,310,594 $ 7,212,070 $ 7,220,641 $ 7,607,090 $ 7,280,301
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding
solely debentures of TU Electric....................... 381,311 381,476 -- -- --
Preferred stock:
Not subject to mandatory redemption..................... 464,427 489,695 870,190 1,083,008 909,564
Subject to mandatory redemption......................... 238,391 263,196 387,482 396,917 418,748
Common stock equity..................................... 6,105,907 5,799,898 6,114,261 6,029,217 6,198,208
----------- ----------- ----------- ----------- -----------
Total............................................. $13,500,630 $14,146,335 $14,592,574 $15,116,232 $14,806,821
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
Embedded interest cost on long-term debt --
end of year............................................. 8.3% 8.4% 8.7% 8.8% 9.2%
Embedded distribution cost on TU Electric obligated,
mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of
TU Electric -- end of year.............................. 8.7% 8.6% --% --% --%
Embedded dividend cost on preferred stock --
end of year............................................. 7.5% 7.4% 7.5% 7.6% 8.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated income before cumulative effect of a change
in accounting principle................................. $ 862,695 $ 452,631 $ 658,192 $ 476,526 $ 740,216
Cumulative effect of a change in accounting for unbilled
revenue (net of taxes of $41,679,000)................. -- -- -- -- 80,907
----------- ----------- ----------- ----------- -----------
Consolidated net income.................................. $ 862,695 $ 452,631 $ 658,192 $ 476,526 $ 821,123
----------- ----------- ----------- ----------- -----------
Consolidated net income available for common stock....... $ 809,337 $ 367,717 $ 556,309 $ 361,294 $ 702,705
Dividends declared on common stock....................... $ 503,328 $ 682,080 $ 715,760 $ 707,382 $ 645,260
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges:
Pre-tax................................................. 3.0 2.0 2.5 2.0 2.5
After-tax............................................... 2.5 1.7 2.0 1.7 2.1
Allowance for funds used during construction as a
percent of consolidated net income available for
common stock............................................ 1.6% 6.0% 4.0% 72.9% 43.3%
Return on average common stock equity.................... 13.6% 6.2% 9.2% 5.9% 11.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Certain financial statistics for 1995 were affected by the recording of the
impairment of certain assets (see Note 14 to Consolidated Financial Statements);
and for the year 1993, were affected by TU Electric recording a regulatory
disallowance in a rate order issued by the Public Utility Commission of Texas in
Docket 11735 (see Note 13 to Consolidated Financial Statements).
20
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED OPERATING STATISTICS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
ELECTRIC ENERGY GENERATED AND
PURCHASED (MWh)
Generated -- net station output...................... 88,129,637 83,876,565 81,320,922 79,105,495 74,652,339
Purchased and net interchange........................ 12,417,774 10,683,722 11,663,148 12,431,763 11,417,251
----------- ---------- ---------- ---------- ----------
Total generated and purchased........................ 100,547,411 94,560,287 92,984,070 91,537,258 86,069,590
Company use, losses and unaccounted for.............. 5,804,526 5,532,031 5,131,173 5,572,916 5,016,596
----------- ---------- ---------- ---------- ----------
Total electric energy sales......................... 94,742,885 89,028,256 87,852,897 85,964,342 81,052,994
=========== ========== ========== ========== ==========
ELECTRIC ENERGY SALES (MWh)
Residential.......................................... 33,038,399 30,716,241 30,065,767 30,278,230 27,524,621
Commercial........................................... 26,455,954 25,553,369 24,815,874 24,139,120 23,176,888
Industrial........................................... 24,214,960 23,301,933 22,984,218 21,506,547 21,278,889
Government and municipal............................. 5,929,249 5,615,715 5,505,298 5,365,815 5,080,440
----------- ---------- ---------- ---------- ----------
Total general business............................... 89,638,562 85,187,258 83,371,157 81,289,712 77,060,838
Other electric utilities............................. 5,104,323 3,840,998 4,481,740 4,674,630 3,992,156
----------- ---------- ---------- ---------- ----------
Total electric energy sales......................... 94,742,885 89,028,256 87,852,897 85,964,342 81,052,994
=========== ========== ========== ========== ==========
OPERATING REVENUES (thousands)
Base rate:
Residential......................................... $ 1,993,506 $ 1,875,311 $ 1,832,557 $ 1,686,692 $ 1,478,758
Commercial.......................................... 1,227,271 1,193,561 1,165,498 1,052,227 972,733
Industrial.......................................... 590,174 586,146 585,963 532,076 517,896
Government and municipal............................ 291,020 279,803 276,856 241,600 209,426
----------- ---------- ---------- ---------- ----------
Total general business.............................. 4,101,971 3,934,821 3,860,874 3,512,595 3,178,813
Other electric utilities............................ 165,619 133,359 163,134 157,173 137,051
----------- ---------- ---------- ---------- ----------
Total from base rate revenues....................... 4,267,590 4,068,180 4,024,008 3,669,768 3,315,864
Fuel revenues (including over/under-recovered)....... 1,679,009 1,421,861 1,521,029 1,662,358 1,540,667
Other operating revenues............................. 83,012 70,421 68,138 77,030 50,164
----------- ---------- ---------- ---------- ----------
Total operating revenues............................ $ 6,029,611 $ 5,560,462 $ 5,613,175 $ 5,409,156 $ 4,906,695
=========== ========== ========== ========== ==========
ELECTRIC CUSTOMERS (end of year)
Residential.......................................... 2,109,343 2,061,273 2,019,025 1,986,946 1,952,916
Commercial........................................... 230,253 225,183 219,604 215,621 210,185
Industrial........................................... 21,002 21,253 21,445 21,716 21,969
Government and municipal............................. 30,062 29,429 28,949 28,555 28,204
----------- ---------- ---------- ---------- ----------
Total general business.............................. 2,390,660 2,337,138 2,289,023 2,252,838 2,213,274
Other electric utilities............................. 173 177 219 228 243
----------- ---------- ---------- ---------- ----------
Total electric customers............................ 2,390,833 2,337,315 2,289,242 2,253,066 2,213,517
=========== ========== ========== ========== ==========
RESIDENTIAL STATISTICS (excludes master-metered
customers, kWh sales and revenues)
Average annual kWh per customer..................... 15,100 14,336 14,236 14,604 13,463
Average revenue per kWh............................. 7.91c 8.08c 8.26c 7.55c 7.40c
- -------------------------
Industrial classification includes service to Alcoa-Sandow:
Electric energy sales (Mwh)......................... 3,841,904 3,764,658 3,886,258 3,166,797 3,157,852
Operating revenues (thousands)...................... $ 46,853 $ 47,739 $ 54,699 $ 53,352 $ 56,043
Certain previously reported operating statistics have been reclassified to
conform to current classifications.
21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
This report and other presentations made by Texas Utilities Company
(Company) or Texas Utilities Electric Company and its subsidiaries (TU Electric)
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company and TU
Electric each believes that in making any such statement its expectations are
based on reasonable assumptions, any such statement involves uncertainties and
is qualified in its entirety by reference to the following important factors
that could cause the actual results of the Company or TU Electric to differ
materially from those projected in such forward-looking statement: (i)
prevailing governmental policies and regulatory actions, including those of the
Federal Energy Regulatory Commission, the Public Utility Commission of Texas
(PUC), the Nuclear Regulatory Commission, and, in the case of the Company, the
Office of the Regulator General of Victoria, Australia, with respect to allowed
rates of return, industry and rate structure, purchased power and investment
recovery, operations of nuclear generating facilities, acquisitions and disposal
of assets and facilities, operation and construction of plant facilities,
decommissioning costs, present or prospective wholesale and retail competition,
changes in tax laws and policies and changes in and compliance with
environmental and safety laws and policies, (ii) weather conditions and other
natural phenomena, (iii) unanticipated population growth or decline, and changes
in market demand and demographic pattern, (iv) competition for retail and
wholesale customers, (v) pricing and transportation of crude oil, natural gas
and other commodities, (vi) unanticipated changes in interest rates or in rates
of inflation, (vii) unanticipated changes in operating expenses and capital
expenditures, (viii) capital market conditions, (ix) competition for new energy
development opportunities, and (x) legal and administrative proceedings and
settlements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and neither the Company nor TU Electric undertakes any
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and it
is not possible for the Company or TU Electric to predict all of such factors,
nor can they assess the impact of each such factor or the extent to which any
factor, or combination of factors, may cause results to differ materially from
those contained in any forward-looking statement.
Certain comparisons in this Annual Report on Form 10-K have been affected
by the December 1995 acquisition of Eastern Energy Limited (Eastern Energy) by
Texas Utilities Australia Pty. Ltd. (TU Australia), a wholly-owned subsidiary of
the Company. The results of Eastern Energy are included only for the periods
subsequent to acquisition.
FINANCIAL CONDITION
CAPITAL EXPENDITURES
THE COMPANY AND TU ELECTRIC
- ---------------------------
The primary capital expenditures of the Company and all of its majority-
owned subsidiaries (System Companies) in 1996 and as estimated for 1997 through
1999 are as follows:
1996 1997 1998 1999
---------- ---------- ---------- ----------
THOUSANDS OF DOLLARS
Cash construction expenditures (excluding
allowance for funds used during construction)........ $ 427,000 $ 513,000 $ 527,000 $ 556,000
Nuclear fuel (excluding allowance for funds used
during construction)................................. 54,000 66,000 78,000 115,000
Non-utility property.................................. 3,000 75,000 44,000 78,000
Maturities and redemptions of long-term debt,
sinking fund requirements, redemptions of preferred
stock and reacquisitions of common stock............. 1,933,000 381,000 487,000 655,000
---------- ---------- ---------- ----------
Total $2,417,000 $1,035,000 $1,136,000 $1,404,000
========== ========== ========== ==========
22
The primary capital expenditures of TU Electric in 1996 and as estimated
for 1997 through 1999 are as follows:
1996 1997 1998 1999
---------- -------- ---------- ----------
THOUSANDS OF DOLLARS
Cash construction expenditures (excluding
allowance for funds used during construction).... $ 370,000 $440,000 $ 470,000 $ 497,000
Nuclear fuel (excluding allowance for funds used
during construction)............................. 54,000 66,000 78,000 115,000
Maturities and redemptions of long-term debt,
sinking fund requirements and redemptions
of preferred stock............................... 910,000 363,000 468,000 636,000
---------- -------- ---------- ----------
Total $1,334,000 $869,000 $1,016,000 $1,248,000
========== ======== ========== ==========
See Item 2. Properties -- Capital Expenditures and Note 15 to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
For 1996, the System Companies generated cash from operations sufficient to
meet operating needs, pay dividends on capital stock, pay distributions on
preferred securities of trusts and finance capital expenditures. Factors
affecting the continued ability of TU Electric to fund its capital requirements
from operations include responsive regulatory practices allowing recovery of
capital investment through adequate depreciation rates, recovery of the cost of
fuel and purchased power and the opportunity to earn competitive rates of return
required in the capital markets.
External funds of a permanent or long-term nature are obtained through the
sales of common stock, preferred stock, preferred securities and long-term debt
by the System Companies. The capitalization ratios of the Company and its
subsidiaries at December 31, 1996, consisted of approximately 55% long-term
debt, 2% TU Electric obligated, mandatorily redeemable, preferred securities of
subsidiary trusts holding solely debentures of TU Electric, 5% preferred stock
and 38% common stock equity.
The capitalization ratios of TU Electric at December 31, 1996 consisted of
approximately 47% long-term debt, 3% TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary trusts holding solely debentures
of TU Electric, 5% preferred stock and 45% common stock equity.
Financings by System Companies totaled $1,443,904,000 in 1996. Proceeds
from such financings were used primarily for the early redemption or
reacquisition of debt. The financings consisted of:
PRINCIPAL CURRENT
DESCRIPTION AMOUNT INTEREST RATES MATURITY
----------- -------------- -------------- --------
Credit Agreement - Facility C (the Company)........................... $ 300,000,000 5.825% 2001
Senior Notes (TU Australia)............................................ 343,389,000 6.75% to 7.25% 2006-2016
Term Credit Facility (TU Australia).................................... 556,290,000 6.33% 2001
Pollution Control Revenue bonds (backed by TU Electric First
Mortgage Bonds)....................................................... 244,225,000 3.25% to 3.40% 2026-2030
--------------
Total................................................................ $1,443,904,000
==============
Since December 31, 1995, the System Companies redeemed, reacquired or
made principal payments of $2,049,851,000 (including $1,026,697,000 for TU
Electric) on long-term debt, preferred stock and common stock, including the
Company's June 1996 purchase for $51,636,000, and retirement of, 1,238,480
shares of its issued and outstanding common stock. Early redemptions of long-
term debt and preferred stock may occur from time to time in amounts presently
undetermined. (See Notes 6 and 8 to Consolidated Financial Statements.)
The System Companies expect to sell additional debt and equity securities
as needed including (i) the possible future sale by TU Electric of up to
$350,000,000 of First Mortgage Bonds currently registered with the Securities
and Exchange Commission (SEC) for offering pursuant to Rule 415 under the
Securities Act of 1933 and (ii) the possible future sale by TU Electric of up to
250,000 shares of Cumulative Preferred Stock ($100 liquidation value) similarly
registered. In addition, TU Electric has the ability to issue from time to time
an additional $98,850,000 of First Mortgage Bonds designated as Medium-Term
Notes, Series D.
23
In April 1996, the Company and TU Electric entered into two new credit
agreements (Credit Agreements) with a group of commercial banks. The Credit
Agreements, for each of which the Company pays a fee, have three facilities.
Borrowings under these facilities are used for working capital and other
corporate purposes, including commercial paper backup. Facility A provides for
short-term borrowings of up to $375,000,000 at a variable interest rate and
terminates April 25, 1997. Facility B provides for short-term borrowings of up
to $875,000,000 at a variable interest rate and terminates April 26, 2001. The
Company's borrowings under Facilities A and B are limited to an aggregate of
$750,000,000 outstanding at any one time. Facility C is a separate five-year,
unsecured long-term loan to the Company in the principal amount of $300,000,000
at a variable interest rate.
In January 1997, statutory business trust subsidiaries of TU Electric
issued TU Electric obligated, mandatorily redeemable, preferred securities
having aggregate liquidation preferences of $500,000,000. Distributions on
$100,000,000 in aggregate liquidation preference of such securities are payable
quarterly based on an annual floating rate determined quarterly with reference
to a 3-month LIBOR plus a margin of 0.80%. Distributions on $400,000,000
aggregate liquidation preference of such securities are payable semi-annually at
an annual rate of 8.175%. The proceeds from the issuance of such securities were
used by the subsidiaries to purchase Junior Subordinated Debentures of TU
Electric. The proceeds of such purchases will be used by TU Electric for general
corporate purposes. In February 1997, TU Electric, with respect to its Capital
IV Securities, entered into an interest rate swap agreement with a notional
principal amount of $100,000,000 expiring 2002 with a fixed interest rate of
7.183% per annum. (See Note 7 to Consolidated Financial Statements.)
In February 1997, the Company announced a tender offer for any and all
outstanding shares of 20 series of TU Electric's preferred stock and depositary
shares. The Company expects to fund the purchase of shares tendered and
accepted pursuant to the tender offer through the use of its general funds and
funds borrowed through the issuance of commercial paper, and under its lines of
credit.
In addition to the above, the Company and Texas Utilities Fuel Company have
separate arrangements for uncommitted lines of credit. For more information
regarding short-term financings of the Company and TU Electric, see Note 3 to
Consolidated Financial Statements.
The Company's and TU Electric's operations involve managing market risks
related to changes in interest rates and, for the Company, foreign exchange and
commodity price exposures. Derivative instruments including swaps and forward
contracts are used to reduce and manage a portion of those risks. The Company's
and TU Electric's participations in derivative transactions have been designed
for hedging purposes and are not held or issued for trading purposes. Credit
risk relates to the risk of loss that the Company and TU Electric would incur as
a result of nonperformance by counterparties to their respective derivative
instruments. The Company and TU Electric believe the risk of nonperformance by
counterparties is minimal. (See Note 9 to Consolidated Financial Statements.)
IMPAIRMENT OF ASSETS
The Company and TU Electric are studying alternative uses for their
investment in certain assets, including TU Electric's partially completed Twin
Oak and Forest Grove lignite-fueled facilities and the New Mexico coal reserves
of Chaco Energy Company (Chaco), which, based upon management's current
expectations, might include sale of the reserves or facilities or construction
outside the traditional regulated business. In September 1995, the Company and
TU Electric determined that the partially completed Twin Oak and Forest Grove
lignite-fueled facilities were not necessary to satisfy TU Electric's capacity
requirements due to continuing changes in load growth patterns and availability
of alternative generation. Also, the Company determined that the Chaco coal
reserves would no longer be developed through traditional means due to
availability of ample alternative fuels at favorable prices. The total
impairment of the Company's assets recorded in 1995, including the partially
completed Twin Oak and Forest Grove lignite-fueled facilities and Chaco's coal
reserve, as well as several minor assets, aggregated $802 million after-tax.
(See Note 14 to Consolidated Financial Statements.)
REGULATION AND RATES
GENERAL
-------
Under the current regulatory environment, certain System Companies are
subject to the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This
statement applies to utilities which have cost-based rates established by a
regulator and charged to and collected from customers. In accordance with this
statement, these companies may defer the recognition of certain costs
(regulatory assets) and certain obligations (regulatory liabilities) that, as a
result of the ratemaking process, have probable corresponding increases or
decreases in future revenues. Future significant changes in regulation or
competition could affect these companies' ability to meet the criteria for
continued application of SFAS 71, and may affect these companies' ability to
recover these regulatory assets from, or refund these regulatory liabilities to
customers. These regulatory assets and liabilities, which are being amortized
over various periods (5 to 40 years), are currently included in rates, or are
expected to be included in future rates. In the event all or a portion of these
companies' operations fail to meet the criteria for application of SFAS 71,
these companies would be required to write-off all or a portion of their
regulatory assets and liabilities. Should significant changes in regulation or
competition occur, the affected System Companies would be required to assess the
recoverability of certain assets,
24
including plant and regulatory assets, and, if impaired, to write down the
assets to reflect their then fair market value. (See Note 1 to Consolidated
Financial Statements.) The System Companies cannot predict the timing or extent
of changes in the business environment that may require the discontinuation of
SFAS 71 application.
Although TU Electric cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in this Form
10-K, which might significantly alter its basic financial position, results of
operation or cash flows. (See Note 13 to Consolidated Financial Statements.)
DOCKET 9300
-----------
The PUC's final order (Order) in connection with TU Electric's January 1990
rate increase request (Docket 9300) was reviewed by the 250th Judicial District
Court of Travis County, Texas, and thereafter was appealed to the Court of
Appeals for the Third District of Texas and to the Supreme Court of Texas
(Supreme Court). As a result of such review and appeals, an aggregate of $909
million of disallowances with respect to TU Electric's reacquisitions of
minority owners' interests in Comanche Peak nuclear generating station (Comanche
Peak), which had previously been recorded as a charge to the Company's and TU
Electric's earnings, has been remanded to the PUC for reconsideration on the
basis of a prudent investment standard. On remand, the PUC will also be
required to reevaluate 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. In January 1997, the Supreme Court denied a motion
for rehearing on the Comanche Peak minority owners issue filed by the original
complainants. TU Electric cannot predict the outcome of the reconsideration of
the Order on remand by the PUC.
In its decision, the Supreme Court also affirmed the previous $472 million
prudence disallowance related to Comanche Peak. Since the Company and TU
Electric each has previously recorded a charge to earnings for this prudence
disallowance, the Supreme Court's decision did not have an effect on the
Company's or TU Electric's current financial position, results of operation or
cash flows.
DOCKET 11735
------------
In July 1994, TU Electric filed a petition in the 200th Judicial Court of
Travis County, Texas to seek judicial review of the final order of the 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.
DOCKET 15638
------------
In May 1996, TU Electric filed with the PUC its transmission cost
information and tariffs for open-access wholesale transmission service (Docket
15638) in accordance with PUC rules adopted in February 1996. These tariffs also
provide for generation-related ancillary services necessary to support wholesale
transactions. Upon final PUC approval and the implementation of transmission
rates for each transmission provider within the Electric Reliability Council of
Texas (ERCOT), TU Electric's payments for transmission service will exceed its
revenues for providing transmission service. The PUC is required by the rules to
adopt a rate-moderation plan that will minimize the impact of the new pricing
mechanism for the first three years the rules are in effect. As such, the
current maximum impact on TU Electric for 1997 is a $4.26 million deficit,
which, in the opinion of TU Electric, is not expected to have a material effect
on its financial position, results of operation or cash flows. TU Electric
expects to have its open-access wholesale transmission tariff in place for
service within ERCOT in early 1997. (See Competition below.)
OTHER
-----
In connection with the PUC's regular earnings monitoring process, the PUC
Staff has advised the PUC that it believes TU Electric was earning in excess of
a reasonable rate of return and that it was engaged in discussions with TU
Electric concerning possible remedies for such perceived over-earnings. The
city of Sulphur Springs, Texas, which exercises original jurisdiction over TU
Electric's rates within that city's boundaries, has initiated an inquiry into
the reasonableness of TU Electric's rates. TU Electric is currently preparing
the information required by Sulphur Springs in connection with its inquiry. TU
Electric is unable to predict the outcome of either the discussions with the PUC
Staff or the inquiry of Sulphur Springs.
25
COMPETITION
The National Energy Policy Act of 1992 (Energy Policy Act) addresses a
wide range of energy issues and is intended to increase competition in electric
generation and broaden access to electric transmission systems. In addition,
the Public Utility Regulatory Act of 1995, as amended (PURA), impacts the PUC
and its regulatory practices and encourages increased competition in some
aspects of the electric utility industry in Texas. Although the Company is
unable to predict the ultimate impact of the Energy Policy Act, PURA and any
related regulations or legislation on the System Companies' operations, it
believes that such actions are consistent with the trend toward increased
competition in the energy industry.
In order to remain competitive, the System Companies are aggressively
managing their operating costs and capital expenditures through streamlined
business processes and are developing and implementing strategies to address an
increasingly competitive environment. These strategies include initiatives to
improve their 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.
While TU Electric has experienced competitive pressures in the wholesale
market resulting in a small loss of load since the beginning of 1993, wholesale
sales represented a relatively low percentage of TU Electric's consolidated
operating revenues in 1996. TU Electric is 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 its operations. (See Item 1.
Business - Competition.)
Federal legislation such as the Public Utility Regulatory Policy Act of
1978 and, more recently, the Energy Policy Act, as well as initiatives in
various states, encourage wholesale competition among electric utility and non-
utility power producers. Together with increasing customer demand for lower-
priced electricity and other energy services, these measures have accelerated
the industry's movement toward a more competitive pricing and cost structure.
Competition in the electric utility industry was also addressed in the 1995
session of the Texas legislature. PURA was amended to encourage greater
wholesale competition and flexible retail pricing. PURA amendments also require
the PUC to report to the legislature, during each legislative session, on
competition in electric markets. Accordingly, PUC reports were submitted to the
Texas legislature in January 1997, recommending that the legislature continue
the process of expanding competition in the Texas electricity markets, leading
to expanded retail competition, and authorize the PUC to take numerous steps
toward that goal. The PUC further recommended that full competition not occur
prior to the year 2000 in order to provide an environment through which both
retail customers and utilities in Texas move more smoothly to achieve the
perceived benefits of competition. The PUC is seeking guidance from the
legislature and authority to address the issue of stranded cost recovery. In
advance of the implementation of full retail competition, the PUC is requesting
authority to create an Electric Service Reseller, a new entity that purchases
power from the incumbent utility, bundles electric service with other services,
and resells the power in the retail market. The PUC is also requesting authority
to: (i) approve or disapprove mergers and acquisitions of Texas' electric
utilities, (ii) allow alternative forms of regulation for transmission and
distribution services, (iii) mandate a minimum set of consumer rights with
regard to reliability, consumer protection and universal service, (iv) address
market power concerns, (v) use alternative fuel recovery mechanisms, (vi)
provide the PUC authority over regional reliability groups, and (vii) develop
rules for a framework of transitioning to full retail competition.
The PUC reports include estimates of potentially stranded costs (i.e.,
costs of assets that may not be recoverable from customers as a result of
competitive pricing) for all generating utilities in Texas in the event of full
retail competition. The estimates are based on, and highly dependent on,
various assumptions suggested by the PUC including, but not limited to, the
timing of retail access, future market prices of power, and electric power
generation, operation and maintenance expenses. At the total Texas retail
level, the PUC estimate of stranded costs ranged from a projected excess of net
book value over market value of $22.2 billion to a projected excess of market
value over net book value of $2.6 billion. The PUC estimate for TU Electric's
potentially stranded retail costs ranged from a projected excess of net book
value over market value of $7.7 billion to a projected excess of market value
over net book value of $2.1 billion.
The Company and TU Electric do not anticipate any legislation being enacted
during the 1997 legislature to authorize competition in the retail market. The
Company and TU Electric cannot predict the ultimate outcome of the ongoing
efforts that are taking place to restructure the electric utility industry or
whether such outcome will have a material effect on their financial position,
results of operation or cash flows.
26
BUSINESS MERGERS AND ACQUISITIONS
THE COMPANY
- -----------
In April 1996, the Company announced that it had entered into a merger
agreement with Dallas-based ENSERCH Corporation (ENSERCH). Under the terms of
the agreement, Lone Star Gas Company (Lone Star Gas) and Lone Star Pipeline
Company (Lone Star Pipeline), the local distribution and pipeline divisions of
ENSERCH, and other businesses, excluding Enserch Exploration Inc. (EEX), a
subsidiary of ENSERCH, will be acquired by a new holding company, which will be
named Texas Utilities Company and will own all of the common stock of ENSERCH
and the Company. Shares of the Company's common stock will be automatically
converted into shares of the new holding company common stock on a one-for-one
basis in a tax-free transaction. Lone Star Gas is one of the largest gas
distribution companies in the United States and the largest in Texas, serving
over 1.3 million customers and providing service through over 23,500 miles of
distribution mains. Lone Star Pipeline has one of the largest pipelines in the
United States that consists of 9,200 miles of gathering and transmission
pipelines in Texas. Also included in the acquisition are ENSERCH's subsidiaries
engaged in natural gas processing, natural gas marketing and independent power
production. The new holding company is expected to issue approximately $550
million of the new holding company's common stock to ENSERCH shareholders, and
approximately $1.15 billion of ENSERCH's debt and preferred stock would remain
outstanding after the merger. The transaction is subject to certain conditions
which include the approval by the SEC and receipt by ENSERCH of a favorable tax
ruling from the Internal Revenue Service (IRS) to the effect that its
distribution of EEX stock is a tax-free transaction. ENSERCH received this IRS
ruling on March 6, 1997. The transaction was approved at special meetings of
the shareholders of ENSERCH, EEX and the Company held separately on November 15,
1996. The Texas Railroad Commission has been notified of the proposed
transaction and has indicated no objection to it. On March 7, 1997, the
Antitrust Division of the U.S. Department of Justice notified the SEC that it
had closed its investigation of the proposed transaction and indicated that no
further action would be required. The acquisition of ENSERCH will be accounted
for as a purchase business combination.
In December 1995, the Company's newly formed subsidiary, TU Australia,
acquired all of the common stock of Eastern Energy, one of five electricity
distribution companies operating in Victoria, Australia. Eastern Energy is
engaged in the purchase, distribution, marketing and sale of electric energy to
approximately 481,000 customers in a 31,000 square mile service area extending
from the outer eastern suburbs of the Melbourne metropolitan area to the eastern
coastal areas of Victoria and north to the New South Wales border. Eastern
Energy generates no electric energy. The acquisition by TU Australia was
accounted for as a purchase business combination. Accordingly, a portion of the
purchase price has been allocated to the assets acquired and liabilities assumed
based on their fair values. The excess of the purchase price over the fair
values of the assets acquired is being amortized over 40 years. Eastern
Energy's results of operation subsequent to December 1, 1995, the date of the
acquisition, are reflected in the consolidated financial statements. The
Company's equity investment is approximately $600 million. The remainder of the
acquisition cost was borrowed by Eastern Energy.
RESULTS OF OPERATION
THE COMPANY
- -----------
For the year ended December 31, 1996, consolidated net income for the
Company increased approximately 14% over the prior period (excluding the after-
tax effect of the September 1995 asset impairment). For the Company and TU
Electric, from which most of consolidated earnings is derived, the major factors
affecting earnings for the year ended December 31, 1996, were increased customer
growth and warmer weather.
In September 1995, the Company recorded an impairment of several non-
performing assets, including the partially completed Twin Oak and Forest Grove
lignite-fueled facilities of TU Electric, and Chaco's coal reserves in New
Mexico, as well as several minor assets. Such impairment, on an after-tax
basis, amounted to $802 million. (See Note 14 to Consolidated Financial
Statements.)
The Company's statement of consolidated income for the year ended
December 31, 1996, is affected by a full year's results of operation of Eastern
Energy, which was acquired by TU Australia in December 1995. For 1996, the
Company's statement of consolidated income includes operating revenues of $474
million, operating expenses of $379 million and interest expense of $87 million,
which represent TU Australia's results of operation.
27
TU ELECTRIC
- -----------
Operating revenues increased approximately 8% and decreased approximately
1% for the years ended December 31, 1996 and 1995, respectively. The following
table details the factors contributing to these changes:
INCREASE (DECREASE)
-------------------
FACTORS 1996 1995
------- -------- ---------
THOUSANDS OF DOLLARS
Base rate revenue (including unbilled)............... $199,410 $ 44,172
Fuel revenue and power cost recovery factor revenue.. 257,148 (99,168)
Other revenue........................................ 12,591 2,283
-------- --------
Total operating revenues.......................... $469,149 $(52,713)
======== ========
Energy sales (including unbilled sales) increased approximately 6% and
1% for 1996 and 1995, respectively. The increase in energy sales for 1996 was
generally a result of customer growth, increased usage and warmer weather. The
1995 increase in energy sales was generally a result of customer growth and
increased usage, partially offset by mild weather conditions. Fuel revenue
increased in 1996 due primarily to increases in fuel costs driven by increases
in energy sales and spot market gas prices. Fuel revenue decreased in 1995 due
primarily to a reduction in gas prices and increased nuclear generation.
Fuel and purchased power expense increased approximately 16% and decreased
approximately 6% for 1996 and 1995, respectively. The increase in 1996 was
primarily due to increased energy sales and increased spot market gas prices.
The decrease in 1995 was due to a reduction in gas prices and purchased power
commitments and increased utilization of nuclear fuel. (See Item 1. Business --
Fuel Supply and Purchased Power and Item 6. Selected Financial Data--
Consolidated Operating Statistics.)
Total operating expenses, excluding fuel and purchased power, increased
approximately 4%for 1996 and decreased approximately 1% for 1995. Operation and
maintenance expense increased in 1996 due primarily to increases in employee
benefit expense and payroll expense. Operation and maintenance expense decreased
in 1995 due primarily to a decrease in uncollectible accounts expense and
employee benefit expense. Taxes other than income decreased in 1996 as a result
of a reduction in TU Electric's ad valorem tax obligation due primarily to a
property tax rate reduction, partially offset by an increase in state and local
gross receipts tax. Taxes other than income decreased in 1995 as a result of a
reduction in TU Electric's ad valorem tax obligation due primarily to a
reduction in property valuations.
Allowance for funds used during construction (AFUDC) decreased in 1996
primarily due to a decrease in the AFUDC rate and a reduction in construction
work in progress and nuclear fuel in process balances.
Federal income taxes -- other income, representing tax benefits for 1996
and 1995, decreased in 1996 and increased in 1995 due primarily to the effect of
the recording of tax benefits associated with the September 1995 asset
impairment. (See Note 10 to Consolidated Financial Statements.)
Total interest charges, excluding AFUDC and distributions on preferred
securities of subsidiary trusts, decreased approximately 5% in each of the years
1996 and 1995. Interest on mortgage bonds decreased over the prior period as a
result of reduced interest requirements due to the Company's debt refinancing
and reduction efforts. The decrease in interest on other long-term debt for
1996 was affected by the prepayment of TU Electric's promissory note to Brazos
Electric Power Cooperative in October 1995. Interest on other long-term debt
increased in 1995 due to borrowings on the term credit agreement. Other
interest expense increased in 1996 due to an interest payment related to a
settlement with the IRS, offset in part, by decreased interest on average short-
term borrowings. Other interest expense in 1995 was affected by decreased
interest on bonded rates over the prior period, increased average short-term
borrowings, and increased amortization of debt issuance expenses and redemption
premiums. The increase in distributions on preferred securities for 1996 and
1995 resulted from the issuance, in December 1995, of TU Electric obligated,
mandatorily redeemable, preferred securities of subsidiary trusts holding solely
debentures of TU Electric. (See Note 7 to Consolidated Financial Statements.)
Preferred stock dividends decreased approximately 37% and 17% for 1996 and
1995, respectively, primarily due to the partial redemption of certain series.
28
POSSIBLE CHANGES IN ACCOUNTING STANDARDS AND FRANCHISE TAX STATUS
THE COMPANY AND TU ELECTRIC
- ---------------------------
The Financial Accounting Standards Board (FASB) is currently deliberating a
new accounting standard addressing the accounting for liabilities related to
closure and removal of long-lived assets, which would include nuclear
decommissioning (see Note 15 to Consolidated Financial Statements). Such new
standard is not expected to be effective until sometime after calendar year
1997. Based upon FASB's exposure draft, which is subject to change, any new
standard would likely prescribe a methodology for measuring and recognizing
liabilities related to closure and removal of long-lived assets. Any liability
required to be recognized would have a corresponding asset recognized as an
addition to plant, and depreciation of the long-lived asset would be revised
prospectively. If such new standard were adopted, the application of such
statement would increase total assets and liabilities for the Company and TU
Electric. Such requirements are not expected to have a material effect on the
Company's and TU Electric's financial position, results of operation or cash
flows.
TU Electric is projecting that its state franchise tax status will change
in 1997 from taxes based on net taxable capital to taxes based on net taxable
earned surplus. Net taxable earned surplus is based on the federal tax return.
To the extent any portion of the taxes calculated under the new tax status
method is considered a state income tax, a deferred tax liability would result
under the requirements of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Certain provisions of SFAS 109 provide
that regulated enterprises are permitted to recognize such adjustments as
regulatory tax assets if it is probable that such amounts will be recovered from
customers in future rates. Accordingly, the requirements of SFAS 109, if applied
to any portion of the state franchise tax, will increase both assets and
liabilities. The requirements of SFAS 109, if applied, are not expected to have
a material effect on the Company's and TU Electric's financial position, results
of operation or cash flows.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
THOUSANDS OF DOLLARS
OPERATING REVENUES........................................... $6,550,928 $5,638,688 $5,663,543
---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power................................... 2,136,309 1,640,990 1,729,091
Operation and maintenance.................................. 1,256,280 1,109,644 1,177,213
Depreciation and amortization.............................. 620,505 563,819 549,539
Taxes other than income.................................... 534,844 536,608 559,144
---------- ---------- ----------
Total operating expenses.................................. 4,547,938 3,851,061 4,014,987
---------- ---------- ----------
OPERATING INCOME............................................. 2,002,990 1,787,627 1,648,556
OTHER INCOME AND (DEDUCTIONS)--NET........................... (1,148) 24,583 38,379
---------- ---------- ----------
TOTAL INCOME................................................. 2,001,842 1,812,210 1,686,935
---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest................................................... 797,893 706,182 726,876
Allowance for borrowed funds used during construction...... (11,248) (15,327) (11,261)
Impairment of assets....................................... -- 1,233,320 --
Distributions on TU Electric obligated, mandatorily
redeemable, preferred securities of subsidiary
trusts holding solely debentures of TU Electric........... 33,001 1,801 --
Preferred stock dividends of subsidiary.................... 53,358 84,914 101,883
---------- ---------- ----------
Total interest and other charges.......................... 873,004 2,010,890 817,498
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES............................ 1,128,838 (198,680) 869,437
INCOME TAX EXPENSE (BENEFIT)................................. 375,232 (60,035) 326,638
---------- ---------- ----------
CONSOLIDATED NET INCOME (LOSS)............................... $ 753,606 $ (138,645) $ 542,799
========== ========== ==========
Average shares of common stock outstanding (thousands)....... 225,160 225,841 225,834
Earnings (loss) and dividends per share of common stock:
Earnings (loss) (on average shares outstanding)............ $ 3.35 $ (0.61) $ 2.40
Dividends declared per share of common stock............... $ 2.025 $ 2.81 $ 3.08
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
THOUSANDS OF DOLLARS
BALANCE AT BEGINNING OF YEAR................................. $ 924,444 $1,691,250 $1,842,413
ADD -- Consolidated net income (loss)........................ 753,606 (138,645) 542,799
LESOP dividend deduction tax benefit.................. 4,032 6,452 6,733
DEDUCT -- Dividends declared on common stock (for amounts per
share, see Statements of Consolidated Income)..... 456,059 634,613 695,590
Common stock reacquisition and preferred
stock redemption costs -- net..................... 23,633 -- 5,105
---------- ---------- ----------
BALANCE AT END OF YEAR....................................... $1,202,390 $ 924,444 $1,691,250
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
30
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss)...................................... $ 753,606 $ (138,645) $ 542,799
Adjustments to reconcile consolidated net income (loss) to cash
provided by operating activities:
Depreciation and amortization (including amounts charged to fuel).. 788,295 725,646 710,196
Deferred federal income taxes -- net............................... 183,953 (204,550) 261,452
Federal investment tax credits -- net.............................. (33,075) (22,774) (26,427)
Allowance for equity funds used during construction................ (1,575) (6,680) (10,774)
Impairment of assets............................................... -- 1,233,320 --
Changes in operating assets and liabilities:
Accounts receivable.............................................. (6,501) (22,898) 10,408
Inventories...................................................... 5,846 18,701 2,673
Accounts payable................................................. 36,254 48,079 (43,684)
Interest and taxes accrued....................................... (32,988) (94,158) (77,795)
Other working capital............................................ 10,576 (25,932) (131,506)
Over/(under) - recovered fuel revenue -- net of deferred taxes... (47,368) 94,717 113,693
Other -- net..................................................... 72,136 5,902 68,549
----------- ----------- -----------
Cash provided by operating activities........................... 1,729,159 1,610,728 1,419,584
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds................................................ 244,225 535,055 378,340
Other long-term debt................................................ 1,199,679 300,000 --
TU Electric obligated, mandatorily redeemable, preferred securities
of subsidiary trusts holding solely debentures of TU Electric...... -- 381,476 --
Preferred stock of subsidiary....................................... -- -- 123
Common stock........................................................ -- -- 62,102
Retirements of securities:
First mortgage bonds............................................... (556,847) (684,385) (856,677)
Other long-term debt............................................... (1,273,934) (202,520) (96,578)
Preferred stock of subsidiary...................................... (50,269) (504,781) (222,768)
Common stock....................................................... (51,636) -- --
Change in notes payable.............................................. (169,755) 615,929 363,886
Common stock dividends paid.......................................... (451,063) (695,656) (694,355)
Debt premium, discount, financing and reacquisition expenses......... (44,551) (123,668) (21,799)
----------- ----------- -----------
Cash used in financing activities................................... (1,154,151) (378,550) (1,087,726)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures............................................ (434,139) (434,338) (444,245)
Allowance for equity funds used during construction (excluding
amount for nuclear fuel)............................................. 892 3,952 4,802
Change in construction receivables/payables -- net................... (706) 2,140 3,897
Non-utility property -- net.......................................... (3,683) (69,949) (14,967)
Nuclear fuel (excluding allowance for equity funds used
during construction)................................................. (58,895) (55,013) (62,655)
Acquisition of Eastern Energy........................................ -- (616,865) --
Other investments.................................................... (103,325) (41,226) (23,848)
----------- ----------- -----------
Cash used in investing activities.................................. (599,856) (1,211,299) (537,016)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................... 15,840 (3,452) --
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS............................... (9,008) 17,427 (205,158)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE........................ 24,853 7,426 212,584
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE........................... $ 15,845 $ 24,853 $ 7,426
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
31
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------
1996 1995
----------- -----------
THOUSANDS OF DOLLARS
UTILITY PLANT
In service:
Production............................................................ $16,277,151 $16,661,053
Transmission.......................................................... 1,607,925 1,592,610
Distribution.......................................................... 5,655,677 5,333,396
General............................................................... 503,688 466,474
----------- -----------
Total................................................................ 24,044,441 24,053,533
Less accumulated depreciation.......................................... 6,127,610 5,562,190
----------- -----------
Utility plant in service, less accumulated depreciation.............. 17,916,831 18,491,343
Construction work in progress.......................................... 240,612 271,033
Nuclear fuel (net of accumulated amortization: 1996 -- $369,114,000;
1995 -- $295,390,000)................................................. 252,589 266,735
Held for future use.................................................... 24,483 25,096
----------- -----------
Utility plant, less accumulated depreciation and amortization........ 18,434,515 19,054,207
Less reserve for regulatory disallowances.............................. 836,005 1,308,460
----------- -----------
Net utility plant.................................................... 17,598,510 17,745,747
----------- -----------
INVESTMENTS............................................................. 1,158,223 1,040,004
----------- -----------
CURRENT ASSETS
Cash and cash equivalents.............................................. 15,845 24,853
Special deposits....................................................... 805 19,455
Accounts receivable:
Customers............................................................. 290,111 275,275
Other................................................................. 44,032 51,735
Allowance for uncollectible accounts.................................. (6,262) (5,965)
Inventories -- at average cost:
Materials and supplies................................................ 200,601 200,145
Fuel stock............................................................ 121,699 128,028
Prepayments............................................................ 56,324 55,528
Deferred federal income taxes.......................................... 40,021 84,410
Other current assets................................................... 13,279 14,924
----------- -----------
Total current assets................................................. 776,455 848,388
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets.......................................... 1,753,418 1,828,625
Other deferred debits.................................................. 89,101 73,087
----------- -----------
Total deferred debits................................................ 1,842,519 1,901,712
----------- -----------
Total................................................................ $21,375,707 $21,535,851
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
32
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
DECEMBER 31,
------------------------
1996 1995
----------- -----------
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value -- net:
Authorized shares -- 500,000,000
Outstanding shares : 1996 -- 224,602,557; 1995 -- 225,841,037............................. $ 4,787,047 $ 4,806,912
Retained earnings......................................................................... 1,202,390 924,444
Cumulative currency translation adjustment................................................ 43,476 397
----------- -----------
Total common stock equity............................................................... 6,032,913 5,731,753
Preferred stock of subsidiary:
Not subject to mandatory redemption....................................................... 464,427 489,695
Subject to mandatory redemption........................................................... 238,391 263,196
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric.................................................. 381,311 381,476
Long-term debt, less amounts due currently................................................. 8,668,111 9,174,575
----------- -----------
Total capitalization.................................................................... 15,785,153 16,040,695
----------- -----------
CURRENT LIABILITIES
Notes payable:
Commercial paper.......................................................................... 253,151 321,990
Banks..................................................................................... 69,788 275,000
Long-term debt due currently................................................................ 356,076 61,321
Accounts payable............................................................................ 336,391 300,726
Dividends declared.......................................................................... 129,879 125,929
Customers' deposits......................................................................... 80,390 76,963
Taxes accrued............................................................................... 143,424 167,951
Interest accrued............................................................................ 156,758 165,277
Over-recovered fuel revenue................................................................. 42,984 115,858
Other current liabilities.........,......................................................... 90,485 101,566
----------- -----------
Total current liabilities............................................................... 1,659,326 1,712,581
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes................................................. 2,801,626 2,669,808
Unamortized federal investment tax credits................................................ 589,713 622,786
Other deferred credits and noncurrent liabilities......................................... 539,889 489,981
----------- -----------
Total deferred credits and other noncurrent liabilities................................. 3,931,228 3,782,575
COMMITMENTS AND CONTINGENCIES
Total................................................................................... $21,375,707 $21,535,851
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
33
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
THOUSANDS OF DOLLARS
OPERATING REVENUES..................................................... $6,029,611 $5,560,462 $5,613,175
---------- ---------- ----------
OPERATING EXPENSES
Fuel and purchased power.............................................. 1,965,756 1,697,091 1,798,493
Operation and maintenance............................................. 1,111,911 1,049,034 1,108,815
Depreciation and amortization......................................... 561,902 549,611 540,535
Federal income taxes.................................................. 421,012 382,315 338,465
Taxes other than income............................................... 506,432 512,045 534,430
---------- ---------- ----------
Total operating expenses............................................ 4,567,013 4,190,096 4,320,738
---------- ---------- ----------
OPERATING INCOME....................................................... 1,462,598 1,370,366 1,292,437
---------- ---------- ----------
OTHER INCOME (LOSS)
Allowance for equity funds used during construction................... 1,549 6,658 10,743
Impairment of assets.................................................. -- (486,350) --
Other income and (deductions) -- net.................................. 503 8,625 10,160
Federal income taxes.................................................. 15,513 169,362 (4,222)
---------- ---------- ----------
Total other income (loss)........................................... 17,565 (301,705) 16,681
---------- ---------- ----------
TOTAL INCOME........................................................... 1,480,163 1,068,661 1,309,118
---------- ---------- ----------
INTEREST AND OTHER CHARGES
Interest on mortgage bonds............................................ 486,791 526,977 567,363
Interest on other long-term debt...................................... 26,456 44,071 32,183
Other interest........................................................ 82,459 58,500 62,631
Distributions on TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts holding solely debentures
of TU Electric....................................................... 33,001 1,801 --
Allowance for borrowed funds used during construction................. (11,239) (15,319) (11,251)
---------- ---------- ----------
Total interest and other charges.................................... 617,468 616,030 650,926
---------- ---------- ----------
CONSOLIDATED NET INCOME................................................ 862,695 452,631 658,192
PREFERRED STOCK DIVIDENDS.............................................. 53,358 84,914 101,883
---------- ---------- ----------
CONSOLIDATED NET INCOME AVAILABLE FOR
COMMON STOCK.......................................................... $ 809,337 $ 367,717 $ 556,309
========== ========== ==========
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- -----------
THOUSANDS OF DOLLARS
BALANCE AT BEGINNING OF YEAR................................... $1,067,593 $ 948,136 $1,112,692
ADD -- Consolidated net income................................ 862,695 452,631 658,192
Transfer from common stock............................. -- 433,820 --
DEDUCT -- Preferred stock dividends............................ 53,358 84,914 101,883
Common stock dividends (per share: 1996 -$3.21;
1995 - $4.35; 1994 - $4.60)......................... 503,328 682,080 715,760
Preferred stock redemption costs -- net.............. -- -- 5,105
---------- ---------- -----------
BALANCE AT END OF YEAR......................................... $1,373,602 $1,067,593 $ 948,136
========== ========== ===========
See accompanying Notes to Consolidated Financial Statements.
34
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
THOUSANDS OF DOLLARS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income........................................ $ 862,695 $ 452,631 $ 658,192
Adjustments to reconcile consolidated net
income to cash provided by operating activities:
Depreciation and amortization
(including amounts charged to fuel)......................... 684,710 685,693 675,351
Deferred federal income taxes -- net......................... 149,851 83,621 280,971
Federal investment tax credits -- net........................ (31,501) (21,201) (23,698)
Allowance for equity funds used during
construction................................................ (1,549) (6,658) (10,743)
Impairment of assets......................................... -- 427,478 --
Changes in operating assets and liabilities:
Accounts receivable....................................... 9,190 (24,807) 10,827
Inventories............................................... 3,366 612 5,777
Accounts payable.......................................... 52,126 1,842 (40,009)
Interest and taxes accrued................................ (18,718) (110,455) (60,637)
Other working capital..................................... (1,255) 4,917 (140,210)
Over/(under) - recovered fuel revenue --
net of deferred taxes.................................... (47,368) 94,717 113,693
Other -- net.............................................. 39,908 (2,580) 54,877
----------- ----------- -----------
Cash provided by operating activities.................. 1,701,455 1,585,810 1,524,391
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuances of securities:
First mortgage bonds......................................... 244,225 535,055 378,340
Other long-term debt......................................... -- 300,000 --
TU Electric obligated, mandatorily redeemable,
preferred securities of subsidiary trusts
holding solely debentures of TU Electric................... -- 381,476 --
Preferred stock.............................................. -- -- 123
Common stock................................................. -- -- 249,600
Retirements of securities:
First mortgage bonds......................................... (556,820) (684,385) (856,640)
Other long-term debt......................................... (302,458) (183,947) (3,898)
Preferred stock.............................................. (50,269) (504,781) (222,768)
Change in notes receivable -- affiliates....................... (33,159) 26,238 (28,594)
Change in notes payable -- parent.............................. -- -- (88,434)
Change in notes payable -- commercial paper.................... (68,839) (41,896) 363,886
Preferred stock dividends paid................................. (54,411) (95,304) (105,572)
Common stock dividends paid.................................... (366,912) (682,080) (715,760)
Debt premium, discount, financing and
reacquisition expenses........................................ (37,898) (123,393) (21,931)
----------- ----------- -----------
Cash used in financing activities...................... (1,226,541) (1,073,017) (1,051,648)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures...................................... (377,438) (407,305) (415,290)
Allowance for equity funds used during
construction (excluding amount for
nuclear fuel)................................................. 867 3,929 4,771
Change in construction receivables/payables --
net........................................................... (706) (1,305) 1,343
Non-utility property -- net.................................... 199 21 (4)
Nuclear fuel (excluding allowance for equity
funds used during construction)............................... (58,895) (55,013) (62,655)
Other investments.............................................. (48,569) (37,186) (22,138)
----------- ----------- -----------
Cash used in investing activities...................... (484,542) (496,859) (493,973)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................ (9,628) 15,934 (21,230)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE.................. 22,633 6,699 27,929
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE..................... $ 13,005 $ 22,633 $ 6,699
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
35
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------
1996 1995
----------- -----------
THOUSANDS OF DOLLARS
ELECTRIC PLANT
In service:
Production............................................................................ $15,330,974 $15,699,488
Transmission.......................................................................... 1,601,628 1,586,547
Distribution.......................................................................... 4,442,547 4,229,794
General............................................................................... 432,178 407,897
----------- -----------
Total................................................................................ 21,807,327 21,923,726
Less accumulated depreciation......................................................... 5,594,363 5,075,428
----------- -----------
Electric plant in service, less accumulated depreciation............................. 16,212,964 16,848,298
Construction work in progress......................................................... 210,573 236,913
Nuclear fuel (net of accumulated amortization: 1996 -- $369,114,000;
1995 -- $295,390,000)................................................................ 252,589 266,735
Held for future use................................................................... 24,483 25,096
----------- -----------
Electric plant, less accumulated depreciation and amortization....................... 16,700,609 17,377,042
Less reserve for regulatory disallowances............................................. 836,005 1,308,460
----------- -----------
Net electric plant................................................................... 15,864,604 16,068,582
----------- -----------
INVESTMENTS............................................................................. 508,437 436,122
----------- -----------
CURRENT ASSETS
Cash and cash equivalents.............................................................. 13,005 22,633
Special deposits....................................................................... 552 527
Notes receivable -- affiliates......................................................... 35,515 2,356
Accounts receivable:
Customers............................................................................. 215,706 212,165
Other................................................................................. 23,282 34,906
Allowance for uncollectible accounts.................................................. (5,021) (3,914)
Inventories -- at average cost:
Materials and supplies................................................................ 181,405 179,001
Fuel stock............................................................................ 77,119 82,889
Prepayments............................................................................ 31,758 31,225
Deferred federal income taxes.......................................................... 50,882 79,629
Other current assets................................................................... 2,694 1,455
----------- -----------
Total current assets.................................................................. 626,897 642,872
----------- -----------
DEFERRED DEBITS
Unamortized regulatory assets.......................................................... 1,735,306 1,806,684
Other deferred debits.................................................................. 59,695 49,114
----------- -----------
Total deferred debits................................................................. 1,795,001 1,855,798
----------- -----------
Total................................................................................. $18,794,939 $19,003,374
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
36
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
DECEMBER 31,
------------------------
1996 1995
----------- -----------
THOUSANDS OF DOLLARS
THOUSANDS OF DOLLARS
CAPITALIZATION
Common stock without par value:
Authorized shares -- 180,000,000
Outstanding shares -- 156,800,000........................................................ $ 4,732,305 $ 4,732,305
Retained earnings......................................................................... 1,373,602 1,067,593
----------- -----------
Total common stock equity............................................................... 6,105,907 5,799,898
Preferred stock:
Not subject to mandatory redemption...................................................... 464,427 489,695
Subject to mandatory redemption.......................................................... 238,391 263,196
TU Electric obligated, mandatorily redeemable, preferred securities of subsidiary trusts
holding solely debentures of TU Electric................................................. 381,311 381,476
Long-term debt, less amounts due currently................................................ 6,310,594 7,212,070
----------- -----------
Total capitalization.................................................................... 13,500,630 14,146,335
----------- -----------
CURRENT LIABILITIES
Notes payable -- commercial paper........................................................ 253,151 321,990
Long-term debt due currently............................................................. 338,213 43,458
Accounts payable:
Affiliates.............................................................................. 126,143 101,722
Other................................................................................... 136,401 109,402
Dividends declared....................................................................... 148,379 13,210
Customers' deposits...................................................................... 70,141 63,564
Taxes accrued............................................................................ 132,514 142,364
Interest accrued......................................................................... 132,947 141,815
Over-recovered fuel revenue.............................................................. 42,984 115,858
Other current liabilities................................................................. 57,681 63,716
----------- -----------
Total current liabilities............................................................... 1,438,554 1,117,099
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred federal income taxes.................................................. 2,989,612 2,869,049
Unamortized federal investment tax credits................................................. 577,965 609,466
Other deferred credits and noncurrent liabilities............................................ 288,178 261,425
----------- -----------
Total deferred credits and other noncurrent liabilities.................................... 3,855,755 3,739,940
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total................................................................................... $18,794,939 $19,003,374
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
37
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
- -----------
General -- Texas Utilities Company (Company) is a holding company which
owns all of the outstanding common stock of Texas Utilities Electric Company and
its subsidiaries (TU Electric), Southwestern Electric Service Company (SESCO),
Texas Utilities Australia Pty. Ltd. (TU Australia) and seven other wholly-owned
subsidiaries which perform specialized functions within the Texas Utilities
Company system. TU Electric, the largest subsidiary of the Company, representing
88% of the total assets, is engaged in the generation, purchase, transmission,
distribution and sale of electric energy wholly within Texas.
Consolidation -- The consolidated financial statements include the accounts
of the Company and all of its majority-owned subsidiaries (System Companies).
All significant intercompany items and transactions have been eliminated in
consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method. Certain previously reported amounts have
been reclassified to conform to current classifications.
Business Mergers and Acquisitions -- In April 1996, the Company announced
that it had entered into a merger agreement with Dallas-based ENSERCH
Corporation (ENSERCH). Under the terms of the agreement, Lone Star Gas Company
(Lone Star Gas) and Lone Star Pipeline Company (Lone Star Pipeline), the local
distribution and pipeline divisions of ENSERCH, and other businesses, excluding
Enserch Exploration Inc. (EEX), a subsidiary of ENSERCH, will be acquired by a
new holding company, which will be named Texas Utilities Company and will own
all of the common stock of ENSERCH and the Company. Shares of the Company's
common stock will be automatically converted into shares of the new holding
company common stock on a one-for-one basis in a tax-free transaction. Lone Star
Gas is one of the largest gas distribution companies in the United States and
the largest in Texas, serving over 1.3 million customers and providing service
through over 23,500 miles of distribution mains. Lone Star Pipeline has one of
the largest pipelines in the United States that consists of 9,200 miles of
gathering and transmission pipelines in Texas. Also included in the acquisition
are ENSERCH's subsidiaries engaged in natural gas processing, natural gas
marketing and independent power production. The new holding company is expected
to issue approximately $550 million of the new holding company's common stock to
ENSERCH shareholders, and approximately $1.15 billion of ENSERCH's debt and
preferred stock would remain outstanding after the merger. The transaction is
subject to certain conditions which include the approval by the Securities and
Exchange Commission (SEC) and receipt by ENSERCH of a favorable tax ruling from
the Internal Revenue Service (IRS) to the effect that its distribution of EEX
stock is a tax-free transaction. ENSERCH received this IRS ruling on March 6,
1997. The transaction was approved at special meetings of the shareholders of
ENSERCH, EEX and the Company held separately on November 15, 1996. The Texas
Railroad Commission has been notified of the proposed transaction and has
indicated no objection to it. On March 7, 1997, the Antitrust Division of the
U.S. Department of Justice notified the SEC that it had closed its investigation
of the proposed transaction and indicated that no further action would be
required. The acquisition of ENSERCH will be accounted for as a purchase
business combination.
In December 1995, the Company's newly formed subsidiary, TU Australia,
acquired all of the common stock of Eastern Energy Limited (Eastern Energy), one
of five electricity distribution companies operating in Victoria, Australia.
Eastern Energy is engaged in the purchase, distribution, marketing and sale of
electric energy to approximately 481,000 customers in a 31,000 square mile
service area extending from the outer eastern suburbs of the Melbourne
metropolitan area to the eastern coastal areas of Victoria and north to the New
South Wales border. Eastern Energy generates no electric energy. The acquisition
by TU Australia was accounted for as a purchase business combination.
Accordingly, a portion of the purchase price has been allocated to the assets
acquired and liabilities assumed based on their fair values. The excess of the
purchase price over the fair values of the assets acquired is being amortized
over 40 years. Eastern Energy's results of operation subsequent to December 1,
1995, the date of acquisition, are reflected in the consolidated financial
statements.
38
Income Taxes on Undistributed Earnings of Foreign Subsidiary -- The Company
intends to invest the undistributed earnings of its foreign subsidiary back into
the foreign subsidiary's business. Accordingly, no provision has been made for
taxes which would be payable if such earnings were repatriated to the United
States.
Other Investments -- The difference of $371,379,000 between the amount at
which the investments in subsidiaries is carried by the Company and the
underlying book equity of such subsidiaries at the respective dates of
acquisition is included in other investments.
Foreign Currency Translation -- The assets and liabilities of TU
Australia's operations denominated in the Australian dollar are translated at
rates in effect at year end. Revenues and expenses have been translated at
average rates for the applicable periods. Local currencies are considered to be
the functional currency, and adjustments resulting from such translation are
included in the cumulative currency translation adjustment, a separate component
of common stock equity.
TU ELECTRIC
- -----------
System of Accounts -- The accounting records of TU Electric are maintained
in accordance with the Federal Energy Regulatory Commission's Uniform System of
Accounts as adopted by the Public Utility Commission of Texas (PUC).
Consolidation -- The consolidated financial statements of TU Electric
include all of its business trusts. All significant intercompany items and
transactions have been eliminated in consolidation. Certain previously reported
amounts have been reclassified to conform to current classifications.
Amortization of Nuclear Fuel and Refueling Outage Costs -- The amortization
of nuclear fuel in the reactors (net of regulatory disallowances) is calculated
on the units of production method and, subsequent to commercial operation, is
included in nuclear fuel expense. TU Electric accrues a provision for costs
anticipated to be incurred during the next scheduled Comanche Peak nuclear
generating station (Comanche Peak) refueling outage.
THE COMPANY AND TU ELECTRIC
- ---------------------------
Use of Estimates -- The preparation of the Company's and TU Electric's
consolidated financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
about future events that affect the reporting and disclosure of assets and
liabilities at the balance sheet dates and the reported amounts of revenue and
expense during the periods covered by the consolidated financial statements. In
the event estimates and/or assumptions prove to be different from actual
amounts, adjustments are made in subsequent periods to reflect more current
information. No material adjustments were made to previous estimates during the
current year.
Utility Plant -- Utility plant is stated at original cost less certain
regulatory disallowances. The cost of property additions to utility plant
includes labor and materials, applicable overhead and payroll-related costs and
an allowance for funds used during construction (AFUDC).
Allowance For Funds Used During Construction -- AFUDC is a cost accounting
procedure whereby amounts based upon interest charges on borrowed funds and a
return on equity capital used to finance construction are added to utility
plant. The accrual of AFUDC is in accordance with generally accepted accounting
principles for the industry, but does not represent current cash income.
TU Electric is capitalizing AFUDC, compounded semi-annually, on
expenditures for ongoing construction work in progress (CWIP) and nuclear fuel
in process not otherwise allowed in rate base by regulatory authorities. For
1996, 1995 and 1994, TU Electric used rates of 7.4%, 7.7% and 8.6%,
respectively.
Derivative Instruments -- The Company and TU Electric enter into interest
rate swaps to reduce their exposure to interest rate fluctuations. Amounts paid
or received under interest rate swap agreements are accrued as interest rates
change and are recognized over the life of the agreements as adjustments to
interest expense. The Company enters into currency swaps to reduce its foreign
currency exposure. Gains and losses on currency swap agreements are deferred and
offset against the deferred currency losses and gains of the underlying asset or
liability. Net deferred gains and losses associated with these currency swaps at
December 31, 1996 were not material. The Company also enters into derivative
contracts in connection with the wholesale purchases of electric energy by its
foreign subsidiary and defers
39
the impact of changes in the market value of the contracts, which serve as
hedges, until the related transaction is completed. (See Note 9.)
Depreciation of Utility Plant -- Depreciation is generally based upon an
amortization of the original cost of depreciable properties (net of regulatory
disallowances) on a straight-line basis over the estimated service lives of the
properties. Depreciation as a percent of average depreciable property for the
Company and System Companies approximated 2.7% for 1996 and 2.6% for each of the
years 1995 and 1994. For TU Electric, depreciation as a percent of average
depreciable property approximated 2.6% for each of the years 1996, 1995 and
1994. Depreciation also includes an amount for TU Electric's Comanche Peak
decommissioning costs which is being accrued over the lives of the units and
deposited to external trust funds. (See Note 15.)
Revenues -- Revenues include billings under approved rates (including a
fixed fuel factor) applied to meter readings each month on a cycle basis and an
accrual of base rate revenue for energy provided after cycle billing but not
billed through the end of each month. Revenues also include an amount for under-
or over-recovery of fuel revenue representing the difference between actual fuel
cost and billings under the approved fixed fuel factor and a provision that
generally allows recovery through a Power Cost Recovery Factor, on a monthly
basis, of the capacity portion of purchased power cost and wheeling cost from
qualifying facilities not included in base rates. The fuel portion of purchased
power cost is included in the fixed fuel factor. A utility's fuel factor can be
revised upward or downward every six months, according to a specified schedule.
A utility is required to petition to make either surcharges or refunds to
ratepayers, together with interest based on a twelve month average of prime
commercial rates, for any material cumulative under- or over-recovery of fuel
costs. If the cumulative difference of the under- or over-recovery, plus
interest, is in excess of 4% of the annual estimated fuel costs most recently
approved by the PUC, it will be deemed to be material. A procedure exists for an
expedited change in fuel factors in the event of an emergency. Final
reconciliation of fuel costs must be made either in a reconciliation proceeding,
which may cover no more than three years and no less than one year, or in a
general rate case. In December 1995, TU Electric filed for a fuel reconciliation
proceeding for the reconciliation period of July 1992 through June 1995. (See
Note 13.)
Federal Income Taxes -- The Company and System Companies, excluding TU
Australia, file a consolidated federal income tax return and federal income
taxes are allocated to System Companies based upon their respective taxable
income or loss. Investment tax credits are normally amortized to income over the
estimated service lives of the properties. Deferred federal income taxes are
currently provided for temporary differences between the book and tax basis of
assets and liabilities (including the provision for regulatory disallowances).
The Company and TU Electric have adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Certain provisions
of SFAS 109 provide that regulated enterprises are permitted to recognize such
adjustments as regulatory tax assets or tax liabilities if it is probable that
such amounts will be recovered from or returned to customers in future rates.
Accordingly, at December 31, 1996, the consolidated balance sheets include a
regulatory tax asset of approximately $1.2 billion net of an approximate $600
million regulatory tax liability.
Consolidated Cash Flows -- For purposes of reporting cash flows, temporary
cash investments purchased with a remaining maturity of three months or less are
considered to be cash equivalents.
The supplemental schedule below details the Company's cash payments and
noncash investing and financing activities:
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
THOUSANDS OF DOLLARS
CASH PAYMENTS
Interest (net of amounts capitalized).......................... $ 757,092 $ 677,415 $ 678,682
Income taxes................................................... 246,556 208,326 220,316
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of Eastern Energy:
Book value of assets acquired................................ $ -- $ 1,329,158 $ --
Goodwill acquired............................................ -- 302,497 --
Less: Liabilities incurred.................................. -- 8,503 --
Liabilities assumed................................... -- 1,006,848 --
--------- ----------- ---------
Cash paid................................................ -- 616,304 --
Less: Cash acquired.......................................... -- 7,943 --
Currency translation adjustment.............................. -- 53 --
--------- ----------- ---------
Net cash................................................. $ -- $ 608,414 $ --
========= =========== =========
40
The supplemental schedule below details TU Electric's cash payments:
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
THOUSANDS OF DOLLARS
CASH PAYMENTS
Interest (net of amounts capitalized).......................... $558,039 $602,524 $616,254
Income taxes................................................... 303,204 213,690 198,267
Regulatory Assets and Liabilities -- Under the current regulatory
environment, certain System Companies are subject to the provisions of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). This statement applies to utilities which have
cost-based rates established by a regulator and charged to and collected from
customers. In accordance with this statement, these companies may defer the
recognition of certain costs (regulatory assets) and certain obligations
(regulatory liabilities) that, as a result of the rate making process, have
probable corresponding increases or decreases in future revenues. Future
significant changes in regulation or competition could affect these companies'
ability to meet the criteria for continued application of SFAS 71, and may
affect these companies' ability to recover these regulatory assets from, or
refund these regulatory liabilities to customers. These regulatory assets and
liabilities, which are being amortized over various periods (5 to 40 years), are
currently included in rates, or are expected to be included in future rates. In
the event all or a portion of these companies' operations fail to meet the
criteria for application of SFAS 71, these companies would be required to write-
off all or a portion of their regulatory assets and liabilities.
Significant net regulatory assets are as follows:
THE COMPANY TU ELECTRIC
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
ITEM 1996 1995 1996 1995
---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
Securities reacquisition costs............................. $ 396,335 $ 387,493 $ 394,733 $ 385,287
Cancelled lignite unit costs............................... 12,322 15,266 12,322 15,266
Rate case costs............................................ 59,444 62,211 59,444 62,211
Litigation and settlement costs............................ 72,685 72,685 72,685 72,685
Voluntary retirement/severance program..................... 128,337 156,339 108,884 132,641
Recoverable deferred federal income taxes - net............ 1,167,922 1,192,959 1,173,413 1,199,552
Other regulatory assets (liabilities)...................... (10,942) 14,357 (13,490) 11,727
---------- ---------- ---------- ----------
Unamortized regulatory assets.......................... 1,826,103 1,901,310 1,807,991 1,879,369
Less: Reserve for regulatory disallowances.............. 72,685 72,685 72,685 72,685
Unamortized federal investment tax credits........ 589,713 622,786 577,965 609,466
---------- ---------- ---------- ----------
Unamortized regulatory assets -- net............ $1,163,705 $1,205,839 $1,157,341 $1,197,218
========== ========== ========== ==========
Should significant changes in regulation or competition occur, the affected
System Companies would be required to assess the recoverability of certain
assets, including plant and regulatory assets, and, if impaired, to write down
the assets to reflect their then fair market value.
The Company and TU Electric do not anticipate any legislation being enacted
during the 1997 legislature to authorize competition in the retail market. The
Company and TU Electric cannot predict the ultimate outcome of the ongoing
efforts that are taking place to restructure the electric utility industry or
whether such outcome will have a material effect on their financial position,
results of operation or cash flows.
2. AFFILIATES
TU ELECTRIC
- -----------
The Company provides common stock capital and partial requirements for
short-term financing to TU Electric. The Company has other subsidiaries which
perform specialized services for the System Companies, including TU Electric;
Texas Utilities Services Inc. (TU Services) which provides financial,
accounting, information technology, environmental services, customer services,
procurement, personnel, shareholder services and other administrative services
at cost; Texas Utilities Fuel Company (Fuel Company) which owns a natural gas
pipeline system, acquires, stores and delivers fuel gas and provides other fuel
services at cost for the generation of electric energy by TU Electric; and Texas
Utilities Mining Company (Mining Company) which owns, leases and operates fuel
production facilities for the surface mining and recovery of lignite at cost for
use at TU Electric's generating stations. TU Electric provided
41
services such as energy sales, wheeling and scheduling to SESCO which is engaged
in the purchase, transmission, distribution and sale of electric energy in ten
counties in the eastern and central parts of Texas with a population estimated
at 125,000. SESCO generates no electric energy.
TU Electric has entered into agreements with Fuel Company for the
procurement of certain fuels and related services and with Mining Company for
the procurement and production of lignite. Payments are at cost for the services
received and are required by the agreements to be "at least equivalent in the
aggregate to the annual charge to income on the books" of Fuel Company and of
Mining Company. TU Electric is, in effect, obligated for the principal,
$396,428,000 at December 31, 1996, and interest on long-term notes of Mining
Company through payments described above. Such notes mature at various dates
through 2005 and have interest rates ranging from 6.50% to 9.42%. At December
31, 1996, TU Electric had recorded as a note receivable on its balance sheet,
$35,515,000 representing operating funds extended to the Fuel Company.
The schedule below details TU Electric's significant billings to and from
affiliates for services rendered and interest on short-term financings:
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
THOUSANDS OF DOLLARS
Billings from:
TU Services.......................................... $263,869 $182,334 $184,537
Fuel Company......................................... 922,200 763,346 850,825
Mining Company....................................... 368,937 327,856 329,108
Billings to:
SESCO................................................ $ 29,171 $ 20,657 $ 21,869
Fuel Company......................................... 1,619 5,669 3,205
3. SHORT-TERM FINANCING
THE COMPANY
- -----------
The Company's and System Companies' amounts outstanding to banks for short-
term borrowings at December 31, 1996 consisted of the following:
THOUSANDS OF DOLLARS
Credit facility agreements (the Company).................................. $520,000
Uncommitted bank lines (Fuel Company)..................................... 15,000
--------
Total............................................................... $535,000
========
Interest rates on such bank borrowings ranged from 5.81% to 5.99% at
December 31, 1996. During the years 1996, 1995 and 1994, the Company's average
amounts outstanding to banks for borrowings were $593,660,000, $149,806,000 and
$66,042,000, respectively. Weighted average interest rates to banks for short-
term borrowings during such periods were 5.94%, 6.33% and 4.92%, respectively.
At December 31, 1996, the total amount of short-term borrowings authorized by
the Board of Directors of the Company from banks or other lenders was
$1,250,000,000.
At December 31, 1996, the Company and TU Electric had joint lines of credit
under two credit agreements (Credit Agreements) with a group of commercial
banks. The Credit Agreements, for each of which the Company pays a fee, have
three facilities. Borrowings under these facilities will be used for working
capital and other corporate purposes, including commercial paper backup.
Facility A provides for short-term borrowings of up to $375,000,000 at a
variable interest rate and terminates April 25, 1997. Facility B provides for
short-term borrowings of up to $875,000,000 at a variable interest rate and
terminates April 26, 2001. The Company's borrowings under Facilities A and B are
limited to an aggregate of $750,000,000 outstanding at any one time. Facility C
is a separate five-year, unsecured long-term loan to the Company in the
principal amount of $300,000,000. For more information regarding long-term
financings of the Company and TU Electric, see Note 8 to Consolidated Financial
Statements. In addition to the above, the Company and Fuel Company have separate
arrangements for uncommitted lines of credit.
42
The Company intends to refinance up to $525,000,000 of its current
$535,000,000 short-term borrowings from banks beyond one year of the balance
sheet date of December 31, 1996. As a result, such amount has been reclassified
from notes payable - banks to long-term debt on the Company's 1996 Balance Sheet
(see Note 8). If necessary, the Company would draw upon Facility B if such
amounts were not refinanced in the normal course of business.
TU ELECTRIC
- -----------
At December 31, 1996, TU Electric had $253,151,000 of commercial paper
outstanding with interest rates ranging from 5.48% to 7.30%. TU Electric had no
borrowings from banks in 1996. During the years 1995 and 1994, average amounts
outstanding to banks for borrowings were $11,667,000 and $32,292,000,
respectively and to holders of commercial paper were $254,027,000, $340,579,000
and $238,401,000 for 1996, 1995 and 1994, respectively. During such periods,
weighted average interest rates to banks for borrowings were 6.51% and 4.60%,
respectively, and to holders of commercial paper were 5.53%, 6.10% and 4.94%,
respectively.
4. COMMON STOCK
THE COMPANY
- -----------
During 1994, the Company issued a total of 1,495,615 shares of its
authorized but unissued common stock for $62,102,000. The total issuance was
comprised of 1,364,690 shares pursuant to the Company's Automatic Dividend
Reinvestment and Common Stock Purchase Plan (DRIP) for $56,671,000 and 130,925
shares pursuant to the Employees' Thrift Plan of the Texas Utilities Company
System (Thrift Plan) for $5,431,000. Since March 1994, requirements under the
DRIP and Thrift Plan have been met through open market purchases of the
Company's common stock. As a result, no shares of the authorized but unissued
common stock of the Company were issued in 1995 or 1996.
At December 31, 1996, 1,997,005 shares of the authorized but unissued
common stock of the Company were reserved for issuance and sale pursuant to the
above plans.
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 in each of the years 1996, 1995 and 1994
increased common stock equity by $8,115,000.
In June 1996, the Company purchased for $51,636,000, and retired, 1,238,480
shares of its issued and outstanding common stock.
The Company has 50,000,000 authorized shares of serial preference stock
having a par value of $25 a share, none of which has been issued.
TU ELECTRIC
- -----------
In March 1994, TU Electric issued 4,800,000 shares of its authorized but
unissued common stock to the Company for $249,600,000. No such shares were
issued in 1995 or 1996.
No shares of TU Electric's common stock are held by or for its own account,
nor are any shares of such capital stock reserved for its officers and employees
or for options, warrants, conversions and other rights in connection therewith.
43
5. RETAINED EARNINGS
THE COMPANY AND TU ELECTRIC
- ---------------------------
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 December 31, 1996,
$69,438,000 of retained earnings of TU Electric and $13,969,000 of retained
earnings of SESCO were thus restricted as a result of such provisions.
In 1995, TU Electric transferred approximately $433,820,000 from its
common stock account to retained earnings. Such amount represented the Company's
equity in undistributed earnings, since acquisition, included in previous
transfers by TU Electric.
6. PREFERRED STOCK OF TU ELECTRIC (CUMULATIVE, WITHOUT PAR VALUE, ENTITLED
UPON LIQUIDATION TO $100 A SHARE; AUTHORIZED 17,000,000 SHARES)
REDEMPTION PRICE PER SHARE
SHARES OUTSTANDING AMOUNT (BEFORE ADDING ACCUMULATED DIVIDENDS)
--------------------------------------
DIVIDEND RATE DECEMBER 31, DECEMBER 31, DECEMBER 31,1996 EVENTUAL MINIMUM
- ---------------------------- -------------------- -------------------- ---------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
THOUSANDS OF DOLLARS
NOT SUBJECT TO MANDATORY REDEMPTION
- -----------------------------------
$ 4.50 series...................... 74,367 74,367 $ 7,440 $ 7,440 $110.00 $110.00
4.00 series (Dallas Power)....... 70,000 70,000 7,049 7,049 103.56 103.56
4.56 series (Texas Power)........ 133,628 133,628 13,371 13,371 112.00 112.00
4.00 series (Texas Electric)..... 110,000 110,000 11,000 11,000 102.00 102.00
4.56 series (Texas Electric)..... 64,947 64,947 6,560 6,560 112.00 112.00
4.24 series...................... 100,000 100,000 10,081 10,081 103.50 103.50
4.64 series...................... 100,000 100,000 10,016 10,016 103.25 103.25
4.84 series...................... 70,000 70,000 7,000 7,000 101.79 101.79
4.00 series (Texas Power)........ 70,000 70,000 7,000 7,000 102.00 102.00
4.76 series...................... 100,000 100,000 10,000 10,000 102.00 102.00
5.08 series...................... 80,000 80,000 8,004 8,004 103.60 103.60
4.80 series...................... 100,000 100,000 10,009 10,009 102.79 102.79
4.44 series...................... 150,000 150,000 15,061 15,061 102.61 102.61
7.20 series...................... 200,000 200,000 20,044 20,044 103.21 103.21
6.84 series...................... 200,000 200,000 20,023 20,023 103.05 103.05
7.24 series...................... 247,862 247,862 24,905 24,905 103.42 103.42
8.20 series (a).................. 338,872 338,872 32,704 32,704 (b) 100.00
7.98 series...................... 474,000 500,000 46,794 49,361 (b) 100.00
7.50 series (a).................. 392,234 392,234 38,062 38,062 (b) 100.00
7.22 series (a).................. 301,132 308,632 29,182 29,909 (b) 100.00
Adjustable rate series A (c)........ 884,700 1,000,000 86,878 98,200 100.00 100.00
Adjustable rate series B (c)........ 440,137 548,561 43,244 53,896 100.00 100.00
--------- --------- -------- --------
Total............................ 4,701,879 4,959,103 $464,427 $489,695
========= ========= ======== ========
SUBJECT TO MANDATORY REDEMPTION (D)
- -----------------------------------
$ 9.64 series (e).................. 400,000 650,000 $ 39,981 $ 64,950 (f) (f)
6.98 series...................... 1,000,000 1,000,000 99,199 99,123 (b) 100.00
6.375 series..................... 1,000,000 1,000,000 99,211 99,123 (b) 100.00
--------- --------- -------- --------
Total............................ 2,400,000 2,650,000 $238,391 $263,196
========= ========= ======== ========
_________________________________________
(a) The preferred stock series is the underlying preferred stock for depositary
shares that were issued to the public. Each depositary share represents
one quarter of a share of underlying preferred stock.
(b) Preferred stock series is not redeemable at December 31, 1996.
(c) Adjustable rate series A bears a dividend rate for the period ended January
31, 1997, of $6.50 per annum and adjustable rate series B bears a dividend
rate for the period ended December 31, 1996, of $7.00 per annum.
(d) TU Electric is required to redeem at a price of $100 per share plus
accumulated dividends a specified minimum number of shares annually or
semi-annually on the initial/next dates shown below. These redeemable
shares may be called, purchased or otherwise acquired. Certain issues may
not be redeemed at the option of TU Electric prior to 2003. TU Electric
may annually call for redemption, at its option, an aggregate of up to
twice the number of shares shown below for each series at a price of $100
per share plus accumulated dividends, except for the $9.64 series which may
be redeemed in a minimum amount of 10,000 shares at any time at a price of
$100 per share plus accumulated dividends plus a component at a variable
price per share which is designed to maintain the expected yield at
issuance:
MINIMUM REDEEMABLE INITIAL/NEXT DATE OF
SERIES SHARES MANDATORY REDEMPTION
------ --------------------- --------------------
$ 9.64 125,000 semi-annually 5/1/97
6.98 50,000 annually 7/1/03
6.375 50,000 annually 10/1/03
44
Preferred stock mandatory redemption requirements for the next five years
are $25 million in 1997, $15 million in 1998 and none thereafter. The
carrying value of preferred stock subject to mandatory redemption is being
increased periodically to equal the redemption amounts at the mandatory
redemption dates with a corresponding increase in preferred stock
dividends.
(e) Under certain circumstances relating to a change in federal tax law
governing the dividends received deduction applicable to eligible
corporations, the dividend rate of the $9.64 series may increase to a
maximum of $10.74.
(f) The redemption price is calculated on the business day next preceding the
settlement date at a price of $100 per share plus accumulated dividends
plus a component which is designed to maintain the expected yield at
issuance.
In February 1997, the Company announced a tender offer for any and all
outstanding shares of 20 series of TU Electric's preferred stock and depositary
shares. The Company expects to fund the purchase of shares tendered and
accepted pursuant to the tender offer through the use of its general funds and
funds borrowed through the issuance of commercial paper, and under its lines of
credit.
45
7. TU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY DEBENTURES OF TU ELECTRIC
Three statutory business trusts, TU Electric Capital I, TU Electric Capital
II and TU Electric Capital III (each a TU Electric Trust), were established in
1995 as financing subsidiaries of TU Electric for the purposes, in each case, of
issuing common and preferred trust securities, with a liquidation preference of
$25 per unit, and holding Junior Subordinated Debentures issued by TU Electric
(Debentures). The Debentures held by each TU Electric Trust are its only
assets. Each TU Electric Trust will use interest payments received on the
Debentures it holds to make cash distributions on the trust securities.
At December 31, 1996 and 1995, the following Trust Originated Preferred
Securities of TU Electric Capital I and II and Quarterly Income Preferred
Securities of TU Electric Capital III were outstanding:
UNITS OUTSTANDING AMOUNT
DECEMBER 31, DECEMBER 31,
----------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
COMPANY Thousands of Dollars
-------
TU Electric Capital I (8.25% Series)(a).... 5,871,044 5,871,044 $140,671 $140,880
TU Electric Capital II (9.00% Series)(b)... 1,991,253 1,991,253 47,301 47,374
TU Electric Capital III (8.00% Series)(c).. 8,000,000 8,000,000 193,339 193,222
---------- --------- -------- --------
Total................................ 15,862,297 15,862,297 $381,311 $381,476
========== ========== ======== ========
________________________________________
(a) Trust assets are $154,869,150 principal amount, Junior Subordinated
Debentures Series A, 8.25% due 9/30/30
(b) Trust assets are $51,418,575 principal amount, Junior Subordinated
Debentures Series B, 9.00% due 9/30/30.
(c) Trust assets are $206,185,575 principal amount, Junior Subordinated
Debentures Series C, 8.00% due 12/31/35.
The preferred trust securities are subject to mandatory redemption upon
payment of the Debentures at maturity or upon redemption. The Debentures are
subject to redemption, in whole or in part at the option of TU Electric, at 100%
of their principal amount plus accrued interest, after an initial period during
which they may not be redeemed and at any time upon the occurrence of certain
events. The carrying value of preferred securities subject to mandatory
redemption is being increased periodically to equal the redemption amounts at
the mandatory redemption dates with a corresponding increase in preferred
securities distributions.
In January 1997, two statutory business trusts, TU Electric Capital IV and
TU Electric Capital V were established for the purpose of issuing common and
preferred trust securities, with a liquidation preference of $1,000 per unit
(Capital Securities), and holding Debentures. TU Electric Capital IV issued
floating rate Capital Securities having an aggregate liquidation preference of
$100,000,000. Distributions on Capital Securities of TU Electric Capital IV are
payable quarterly based on an annual floating rate determined quarterly with
reference to a 3-month LIBOR plus a margin of 0.80%. TU Electric Capital V
issued fixed rate Capital Securities having an aggregate liquidation preference
of $400,000,000. Distributions on Capital Securities of TU Electric Capital V
are payable semi-annually at an annual rate of 8.175%. Except for certain
differences with respect to redemption rights, the Capital Securities and the
related Debentures have terms substantially similar to those of the TU Electric
Trusts described above. In February 1997, TU Electric, with respect to its
Capital IV securities, entered into an interest rate swap agreement with a
notional principal amount of $100,000,000 expiring 2002 with a fixed interest
rate of 7.183% per annum.
The Debentures held by each of these trusts are its only assets. Each of
these trusts will use interest payments received on the Debentures it holds to
make cash distributions on the trust securities. The trust assets of TU
Electric Capital IV are $103,093,000 principal amount of floating rate Junior
Subordinated Debentures, Series D, due January 30, 2037. The trust assets of TU
Electric Capital V are $412,372,000 principal amount of 8.175% Junior
Subordinated Debentures, Series E, due January 30, 2037.
The combination of the obligations of TU Electric pursuant to agreements to
pay the expenses of each of TU Electric Capital I, II, III, IV and V and TU
Electric's guarantees of distributions with respect to trust securities, to the
extent the issuing trust has funds available therefor, constitutes a full and
unconditional guarantee by TU Electric of the obligations of each trust under
the trust securities it has issued. TU Electric is the owner of all the common
trust securities of each trust, which, in each case, constitutes 3% or more of
the liquidation amount of all the trust securities issued by such trust.
46
8. LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY
THE COMPANY TU ELECTRIC
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
INTEREST SERIES
RATE DUE 1996 1995 1996 1995
-------- ------ ---- ---- ---- ----
THOUSANDS OF DOLLARS
First mortgage bonds:
6-3/8% series due 1997.............................. $ -- $ 175,000 $ -- $ 175,000
7-1/8% series due 1997.............................. -- 150,000 -- 150,000
5-1/2% series due 1998.............................. 125,000 125,000 125,000 125,000
5-3/4% series due 1998.............................. 150,000 150,000 150,000 150,000
5-7/8% series due 1998.............................. 175,000 175,000 175,000 175,000
6-1/2% series due 1998.............................. 1,065 1,080 -- --
7-3/8% series due 1999.............................. 100,000 100,000 100,000 100,000
Floating rate series due 1999 (a)................... 300,000 300,000 300,000 300,000
9-1/2% series due 1999.............................. 200,000 200,000 200,000 200,000
7-3/8% series due 2001.............................. 150,000 150,000 150,000 150,000
7.95 % series due 2002.............................. 900 912 -- --
8 % series due 2002.............................. 147,000 147,000 147,000 147,000
8-1/8% series due 2002.............................. 150,000 150,000 150,000 150,000
6-3/4% series due 2003.............................. 200,000 200,000 200,000 200,000
6-3/4% series due 2003.............................. 100,000 100,000 100,000 100,000
6-1/4% series due 2004.............................. 125,000 125,000 125,000 125,000
8-1/4% series due 2004.............................. 100,000 100,000 100,000 100,000
6-3/4% series due 2005.............................. 100,000 100,000 100,000 100,000
10.44% series due 2008.............................. 3,000 150,000 3,000 150,000
9-3/4% series due 2021.............................. 280,855 300,000 280,855 300,000
8-7/8% series due 2022.............................. 175,000 175,000 175,000 175,000
9 % series due 2022.............................. 100,000 100,000 100,000 100,000
7-7/8% series due 2023.............................. 300,000 300,000 300,000 300,000
8-3/4% series due 2023.............................. 195,550 200,000 195,550 200,000
7-7/8% series due 2024.............................. 225,000 225,000 225,000 225,000
8-1/2% series due 2024.............................. 163,000 175,000 163,000 175,000
7-3/8% series due 2025.............................. 208,000 300,000 208,000 300,000
7-5/8% series due 2025.............................. 250,000 250,000 250,000 250,000
Pollution control series:
Brazos River Authority
8-1/4% series due 2016.............................. -- 111,215 -- 111,215
7-7/8% series due 2017.............................. 81,305 81,305 81,305 81,305
9-7/8% series due 2017.............................. 28,765 28,765 28,765 28,765
9-1/4% series due 2018.............................. 54,005 54,005 54,005 54,005
8-1/4% series due 2019.............................. 100,000 100,000 100,000 100,000
8-1/8% series due 2020.............................. 50,000 50,000 50,000 50,000
7-7/8% series due 2021.............................. 100,000 100,000 100,000 100,000
Taxable series due 2021(b)......................... 65,940 91,000 65,940 91,000
5-1/2% series due 2022.............................. 50,000 50,000 50,000 50,000
6-5/8% series due 2022.............................. 33,000 33,000 33,000 33,000
6.70 % series due 2022.............................. 16,935 16,935 16,935 16,935
6-3/4% series due 2022.............................. 50,000 50,000 50,000 50,000
Taxable series due 2023(b)......................... 100,000 100,000 100,000 100,000
6.05 % series due 2025.............................. 90,000 90,000 90,000 90,000
Series 1996A due 2026(d)............................ 25,060 -- 25,060 --
6-1/2% series due 2027.............................. 46,660 46,660 46,660 46,660
6.10 % series due 2028.............................. 50,000 50,000 50,000 50,000
Series 1994A due 2029(c)............................ 39,170 39,170 39,170 39,170
Series 1994B due 2029(c)............................ 39,170 39,170 39,170 39,170
Series 1995A due 2030(d)............................ 50,670 50,670 50,670 50,670
Series 1995B due 2030(d)............................ 118,355 118,355 118,355 118,355
Series 1995C due 2030(d)............................ 118,355 118,355 118,355 118,355
Series 1996B due 2030(d)............................ 61,215 -- 61,215 --
Series 1996C due 2030(d)............................ 50,000 -- 50,000 --
Sabine River Authority of Texas
9 % series due 2007.............................. 51,525 51,525 51,525 51,525
7-3/4% series due 2016.............................. -- 57,950 -- 57,950
8-1/8% series due 2020.............................. 40,000 40,000 40,000 40,000
8-1/4% series due 2020.............................. 11,000 11,000 11,000 11,000
47
THE COMPANY TU ELECTRIC
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
INTEREST SERIES
RATE DUE 1996 1995 1996 1995
-------- ------ ---- ---- ---- ----
THOUSANDS OF DOLLARS
Sabine River Authority of Texas (continued)
5.55 % series due 2022............................ $ 75,000 $ 75,000 $ 75,000 $ 75,000
6.55 % series due 2022............................. 40,000 40,000 40,000 40,000
5.85 % series due 2022............................. 33,465 33,465 33,465 33,465
Series 1996A due 2026(d).......................... 57,950 -- 57,950 --
Series 1996B due 2026(d).......................... 25,000 -- 25,000 --
Series 1995A due 2030(d).......................... 16,000 16,000 16,000 16,000
Series 1995B due 2030(d).......................... 12,050 12,050 12,050 12,050
Series 1995C due 2030(d).......................... 18,475 18,475 18,475 18,475
Trinity River Authority of Texas
9 % series due 2007................................ 12,000 12,000 12,000 12,000
Series 1996A due 2026(d).......................... 25,000 -- 25,000 --
Secured medium-term notes, series A.................... 30,000 30,000 30,000 30,000
Secured medium-term notes, series B.................... 114,200 125,000 114,200 125,000
Secured medium-term notes, series C.................... -- 47,000 -- 47,000
Secured medium-term notes, series D.................... 201,150 201,150 201,150 201,150
---------- ---------- ---------- ----------
Total first mortgage bonds....................... 6,205,790 6,813,212 6,203,825 6,811,220
General obligation bonds................................. 10,000 10,000 -- --
Debt assumed for purchase of utility plant (e)........... 156,182 158,595 156,182 158,595
Senior notes (f)......................................... 964,881 639,328 -- --
Term credit facilities (g)............................... 1,381,290 1,612,200 -- 300,000
Unamortized premium and discount......................... (50,032) (58,760) (49,413) (57,745)
---------- ---------- ---------- ----------
Total long-term debt, less amounts
due currently.................................. $8,668,111 $9,174,575 $6,310,594 $7,212,070
========== ========== ========== ==========
_________________________
(a) Floating rate series due May 1, 1999 bears an interest rate for the period
November 1, 1996 to January 31, 1997 of 5.8906%. Such interest rate is
reset on a quarterly basis.
(b) Taxable pollution control series consist of two series: $65,940,000 of
flexible rate series 1991D due 2021 with interest rates on December 31,
1996 ranging from 5.43% to 5.45% and $100,000,000 of flexible rate series
1993 due 2023 at 5.45% on December 31, 1996. Series 1991D bonds were
remarketed on June 1, 1995 in a flexible mode for rate periods up to 180
days and are secured by an irrevocable letter of credit with maturities in
excess of one year. Series 1993 bonds are in a flexible mode and, while in
such mode, will be remarketed for periods of less than 270 days and are
secured by an irrevocable letter of credit with maturities in excess of one
year.
(c) Series 1994A and Series 1994B due 2029 are in a flexible mode with
interest rates on December 31, 1996 ranging from 3.45% to 3.65% and, while
in such mode, will be remarketed for periods of less than 270 days and are
secured by an irrevocable letter of credit with maturities in excess of one
year.
(d) Series 1996A, Series 1996B and Series 1996C due 2026 and Series 1995A,
Series 1995B and Series 1995C due 2030 are in a daily mode with interest
rates on December 31, 1996 ranging from 4.70% to 5.30%. The 1996 Series
are supported by municipal bond insurance policies and standby bond
purchase agreements. The 1995 Series are secured by irrevocable letters of
credit with maturities in excess of one year.
(e) In 1990, TU Electric purchased the ownership interest in Comanche Peak of
Tex-La Electric Cooperative of Texas, Inc. (Tex-La) and assumed debt of
Tex-La payable over approximately 32 years. The assumption is secured by a
mortgage on the acquired interest. The Company has guaranteed these
payments.
(f) Consists of the Company's $239,350,000 aggregate principal amount maturing
on various dates through 2010 with interest rates ranging from 10.20% to
10.58%, Mining Company's $382,142,000 aggregate principal amount maturing
on various dates through 2005 with interest rates ranging from 6.50% to
9.42% and Eastern Energy's $343,389,000 aggregate principal amount maturing
on various dates through 2016 with fixed interest rates ranging from 6.75%
to 7.25%. The Eastern Energy debt is covered under cross-currency and
interest rate swap agreements, each with an aggregate notional principal
amount of $343,389,000 expiring on concurrent dates with the underlying
fixed rate debt through 2016. Such agreements effectively convert these
fixed rate U.S. Dollar-denominated Senior Notes to a floating rate
Australian Dollar liability based on the Australian Bank Bill Swap rate
plus a margin. At December 31, 1996, such floating rates ranged from 6.8%
to 7.0%.
(g) Includes the Company's $300,000,000 Credit Agreement-Facility C due 2001
with an interest rate on December 31, 1996 of 5.95%, the Company's
$525,000,000 reclassified short-term debt (see Note 3) and Eastern Energy's
$556,290,000 Term Credit Facility due 2001 with a floating interest rate of
6.3386% on December 31, 1996 (all of which is included under an interest
rate swap agreement with a notional principal amount of $572,184,000
expiring 2002 with a fixed interest rate of 8.4475% per annum).
Long-term debt of the Company and TU Electric does not include Junior
Subordinated Debentures held by each TU Electric Trust. (See Note 7.)
48
Sinking fund and maturity requirements for the years 1997 through 2001
under long-term debt instruments in effect at December 31, 1996, were as
follows:
THE COMPANY TU ELECTRIC
--------------------------------- --------------------------------
SINKING MINIMUM CASH SINKING MINIMUM CASH
YEAR FUND MATURITY REQUIREMENT FUND MATURITY REQUIREMENT
- ---- -------- -------- ------------ ------- -------- ------------
THOUSANDS OF DOLLARS
1997............. $ 20,276 $335,800 $356,076 $2,413 $335,800 $338,213
1998............. 21,216 451,065 472,281 2,645 450,000 452,645
1999............. 24,540 630,000 654,540 5,906 630,000 635,906
2000............. 260,900 576,150 837,050 3,199 156,150 159,349
2001............. 22,275 778,290 800,565 3,502 222,000 225,502
In February 1997, the Brazos River Authority issued $106,350,000 aggregate
principal amount of Pollution Control Revenue Bonds collateralized by TU
Electric's First Mortgage Bonds. All such bonds mature on February 1, 2032,
have variable interest rates and are subject to mandatory tender and remarketing
from time to time. The remarketing of the bonds is supported by standby bond
purchase agreements. Scheduled payments of interest and of principal at
maturity or on mandatory redemption, upon the occurrence of certain events, is
supported by municipal bond insurance policies. Interest rates on all the bonds
are determined daily. Such rates currently range from 3.25% to 3.40%.
TU Electric's first mortgage bonds are secured by the Mortgage and Deed of
Trust dated as of December 1, 1983, as supplemented, between TU Electric and
Irving Trust Company (now The Bank of New York), Trustee. SESCO's first mortgage
bonds are secured by the Mortgage and Deed of Trust dated as of May 1, 1945, as
supplemented, between SESCO and BankOne, Texas, NA, successor Trustee. Electric
plant of TU Electric and SESCO is generally subject to the liens of their
respective mortgages.
9. DERIVATIVE INSTRUMENTS
THE COMPANY AND TU ELECTRIC
- ---------------------------
The Company's and TU Electric's operations involve managing market risks
related to changes in interest rates and, for the Company, foreign exchange and
commodity price exposures. Derivative instruments including swaps and forward
contracts are used to reduce and manage a portion of those risks. The Company's
and TU Electric's participations in derivative transactions have been designed
for hedging purposes and are not held or issued for trading purposes.
INTEREST RATE RISK MANAGEMENT
At December 31, 1996, Eastern Energy had interest rate swaps outstanding
with an aggregate notional amount of $915,573,000. These swap agreements
establish a mix of fixed and variable interest rates on the outstanding debt and
have remaining terms between 6 and 20 years. (See Note 8.)
In February 1997, TU Electric entered into an interest rate swap agreement
with a notional principal amount of $100,000,000 expiring 2002 with a fixed
interest rate of 7.183% per annum. (See Note 7.)
FOREIGN EXCHANGE RISK MANAGEMENT
The Company's foreign exchange exposures result from transactions
denominated in currencies other than the local currency of its foreign
subsidiary. At December 31, 1996, Eastern Energy had cross-currency swap
agreements outstanding with an aggregate notional amount of $343,389,000
expiring on various dates through 2016. (See Note 8.)
ELECTRICITY PRICE RISK MANAGEMENT
Eastern Energy and the other distribution companies in Victoria purchase
their power from a competitive power pool operated by a statutory, independent
corporation. Eastern Energy purchases about 95% of its energy from this pool,
the cost of which is based on spot market prices. Eastern Energy has entered
into wholesale market contracts to cover a substantial majority of its
forecasted load through the end of 2000. These contracts fix the price of energy
within a certain range for the purpose of hedging or protecting against
fluctuations in the spot market price. During 1996, the average spot price for
electric energy from the
49
pool approximated $15 per megawatt-hour (MWh) as compared to the average fixed
price of Eastern Energy's electric energy under its contracts of approximately
$31 per MWh. At December 31, 1996, Eastern Energy's contracts related to its
forecasted contestable and franchise load cover a notional volume of
approximately 18 million MWh's for 1997 through 2000. Under these contracts,
payments are made between Eastern Energy and the generators representing the
difference between the wholesale electricity market price and the contract
price. The net payable or receivable is recognized in earnings as adjustments to
purchased power expense in the period the related transactions are completed.
CREDIT RISK
Credit risk relates to the risk of loss that the Company and TU Electric
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Company and TU Electric believe the risk of
nonperformance by counterparties is minimal.
10. FEDERAL INCOME TAXES
The components of the Company's and TU Electric's federal income taxes are
as follows:
THE COMPANY
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
THOUSANDS OF DOLLARS
Charged (credited) to consolidated net income (loss):
Current........................................................ $198,522 $222,358 $152,833
Deferred -- Domestic.......................................... 196,957 (259,445) 200,232
Foreign........................................... 12,828 (174) --
Investment tax credits......................................... (33,075) (22,774) (26,427)
-------- -------- --------
Total to consolidated net income (loss)...................... 375,232 (60,035) 326,638
-------- -------- --------
Charged (credited) to consolidated retained earnings.............. (4,032) (6,452) (6,733)
-------- -------- --------
Total federal income taxes................................ $371,200 $(66,487) $319,905
======== ======== ========
TU ELECTRIC
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
THOUSANDS OF DOLLARS
Charged (credited) to operating expenses:
Current........................................................ $291,807 $260,988 $182,107
-------- -------- --------
Deferred:
Depreciation differences and capitalized construction
costs....................................................... 151,391 205,280 222,762
Over/under-recovered fuel revenue............................ 25,506 (49,798) (59,224)
Alternative minimum tax...................................... 15,000 (30,937) (121,948)
Other........................................................ (32,024) 17,983 138,466
-------- -------- --------
Total deferred - net....................................... 159,873 142,528 180,056
-------- -------- --------
Investment tax credits......................................... (30,668) (21,201) (23,698)
-------- -------- --------
Total to operating expenses.............................. 421,012 382,315 338,465
-------- -------- --------
Charged (credited) to other income:
Current........................................................ (30,164) (59,454) (35,474)
-------- -------- --------
Deferred:
Impairment of assets......................................... -- (149,617) --
Regulatory disallowance...................................... 13,623 -- --
Other........................................................ 1,861 39,709 39,696
-------- -------- --------
Total deferred - net....................................... 15,484 (109,908) 39,696
-------- -------- --------
Investment tax credits............................................ (833) -- --
-------- -------- --------
Total to other income.................................... (15,513) (169,362) 4,222
-------- -------- --------
Total federal income taxes............................. $405,499 $212,953 $342,687
======== ======== ========
50
The significant components of deferred federal income tax assets and
liabilities reflected net in the balance sheets are as follows:
THE COMPANY TU ELECTRIC
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
THOUSANDS OF DOLLARS
CURRENT
Deferred tax assets:
Unbilled revenues......................................... $ 28,521 $ 27,323 $ 28,521 $ 27,323
Over-recovered fuel revenue............................... 15,045 40,550 15,045 40,550
Foreign operations........................................ 2,994 4,832 -- --
Other..................................................... 7,406 11,705 7,316 11,756
---------- ---------- --------- ----------
Total current deferred tax assets..................... 53,966 84,410 50,882 79,629
---------- ---------- --------- ----------
Deferred tax liabilities:
Foreign operations........................................ 13,945 -- -- --
---------- ---------- --------- ----------
Total current deferred tax liabilities................ 13,945 -- -- --
---------- ---------- --------- ----------
NET CURRENT DEFERRED TAX ASSETS............................. $ 40,021 $ 84,410 $ 50,882 $ 79,629
========== ========== ========= ==========
NON-CURRENT
Deferred tax assets:
Unamortized ITC........................................... $ 312,665 $ 329,994 $ 307,153 $ 323,685
Impairment of assets...................................... 143,210 174,003 71,791 71,968
Regulatory disallowances.................................. 222,428 237,521 222,428 237,521
Alternative minimum tax................................... 587,052 611,934 431,277 454,222
Tax rate difference....................................... 78,141 83,111 77,248 82,108
Employee benefits......................................... 100,397 38,611 76,060 22,341
Foreign operations........................................ 66,547 -- -- --
Other..................................................... 27,910 20,993 12,348 11,641
---------- ---------- --------- ----------
Total non-current deferred tax assets................ 1,538,350 1,496,167 1,198,305 1,203,486
---------- ---------- --------- ----------
Deferred tax liabilities:
Depreciation differences and capitalized
construction costs....................................... 4,010,105 3,920,888 3,938,325 3,850,545
Foreign operations........................................ 55,550 593 -- --
Redemption of long-term debt.............................. 125,601 120,290 125,123 119,608
Other..................................................... 148,720 124,204 124,469 102,382
---------- ---------- --------- ----------
Total non-current deferred tax liabilities........... 4,339,976 4,165,975 4,187,917 4,072,535
---------- ---------- --------- ----------
NET NON-CURRENT DEFERRED TAX LIABILITY...................... $2,801,626 $2,669,808 $2,989,612 $2,869,049
========== ========== ========= ==========
Federal income taxes were less than the amount computed by applying the
federal statutory rate to pre-tax book income (loss) as follows:
THE COMPANY TU ELECTRIC
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
Federal income taxes at statutory rate (35%)........ $413,769 $(39,188) $339,962 $443,868 $233,585 $350,308
-------- -------- -------- -------- -------- --------
Increases(decreases) in federal income taxes
resulting from:
Allowance for funds used during construction... (542) (2,330) (3,760) (542) (2,330) (3,760)
Depletion allowance............................ (25,657) (23,564) (23,361) (25,657) (23,564) (23,361)
Amortization of investment tax credits......... (23,203) (23,036) (24,213) (21,629) (21,463) (21,484)
LESOP dividend deduction....................... (5,000) (7,700) (7,700) -- -- --
Amortization of tax rate differences........... (9,084) (9,648) (9,732) (8,740) (9,288) (9,143)
Reversal of prior book/tax differences......... 35,128 38,974 43,157 34,896 38,630 42,899
Foreign operations............................. 5,670 283 -- -- -- --
Prior year adjustments......................... (25,250) (4,136) 233 (21,813) (5,669) 2,902
Other.......................................... 5,369 3,858 5,319 5,116 3,052 4,326
-------- -------- -------- -------- -------- --------
Total increase (decrease)................... (42,569) (27,299) (20,057) (38,369) (20,632) (7,621)
-------- -------- -------- -------- -------- --------
Total federal income taxes.......................... $371,200 $(66,487) $319,905 $405,499 $212,953 $342,687
======== ======== ======== ======== ======== ========
Effective tax rate.................................. 31.4% 59.4% 32.9% 32.0% 31.9% 34.2%
The System Companies and TU Electric have approximately $587 million and
$431 million, respectively, of alternative minimum tax credit carryforwards
which are available to offset future taxes.
51
As a part of its ongoing large case audit program, the IRS has audited the
consolidated Federal income tax returns of the System Companies for the years
1987 through 1990. During the course of the audit, the IRS proposed a number of
adjustments to the returns as filed, the most significant of which related to a
proposed reclassification of certain costs incurred in connection with the
construction of Comanche Peak Unit 1 as costs incurred to procure a nuclear
operating license. In accordance with an agreement reached by both parties in
May 1996, the Company made an additional tax payment to the IRS which resolved
all issues proposed in the audit. The additional payment did not have a material
effect on the Company's financial position, results of operation or cash flows.
11. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The System Companies and TU Electric have defined benefit pension plans
covering substantially all employees. Generally, plan benefits are based on
years of accredited service and average annual earnings received during the
three years of highest earnings. Contributions to the domestic plans were
determined using the frozen attained age method which is one of several
actuarial methods allowed by the Employee Retirement Income Security Act of
1974. The costs of the plans were determined by independent actuaries. For
financial reporting purposes, pension cost has been determined using the
projected unit credit actuarial method. The cumulative difference between
pension cost as determined for financial reporting purposes and contributions to
the plans is recorded either as prepaid pension cost or as accrued pension
liability.
Total pension cost, including amounts charged to fuel cost, deferred and
capitalized, were comprised of the following components:
THE COMPANY TU ELECTRIC
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
Service cost -- benefits earned during the period.. $ 36,779 $ 23,515 $ 27,185 $ 21,731 $ 16,047 $ 18,667
Interest cost on projected benefit obligation...... 75,501 65,675 64,142 55,999 53,684 52,907
Actual return on plan assets....................... (183,390) (241,887) 5,641 (143,416) (199,436) 4,772
Net amortization and deferral...................... 97,988 160,198 (72,700) 79,261 132,147 (60,560)
-------- -------- -------- -------- -------- --------
Net periodic pension cost........................ $ 26,878 $ 7,501 $ 24,268 $ 13,575 $ 2,442 $ 15,786
======== ======== ======== ======== ======== ========
The table below details the plans' funded status and amount recognized in
the balance sheets:
THE COMPANY TU ELECTRIC
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
THOUSANDS OF DOLLARS
Actuarial present value of accumulated benefits:
Accumulated benefit obligation (including vested benefits for the
System Companies of $823,918,000 for 1996 and $809,869,000 for
1995; and for TU Electric of $638,162,000 for 1996 and $629,679,000
for 1995)................................................................. $ (889,057) $ (874,345) $(685,419) $(676,236)
=========== =========== ========= =========
Projected benefit obligation for service rendered to date................. $(1,065,396) $(1,062,619) $(797,044) $(803,815)
Plan assets at fair value -- primarily equity investments,
government bonds and corporate bonds...................................... 1,296,025 1,139,688 994,370 881,014
----------- ----------- --------- ---------
Plan assets in excess of projected benefit obligation....................... 230,629 77,069 197,326 77,199
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions........................ (350,295) (180,444) (309,042) (168,104)
Prior service cost not yet recognized in net periodic pension expense....... 41,566 17,061 39,226 17,015
Unrecognized plan assets in excess of projected benefit obligation at
initial application....................................................... (5,708) (6,375) (3,327) (3,765)
----------- ----------- --------- ---------
Accrued pension cost...................................................... $ (83,808) $ (92,689) $ (75,817) $ (77,655)
=========== =========== ========= =========
52
Assumptions used in determination of the projected benefit obligation for
System Companies (excluding Eastern Energy) include a discount rate of 7.75% for
1996 and 7.25% for 1995 and an increase in compensation levels of 4.3% for 1996
and 1995. The assumed long-term rate of return on plan assets was 9.0% for 1996,
1995 and 1994.
Eastern Energy's employees participate in the Victorian Electricity
Industry Superannuation Fund (Eastern Plan). The Eastern Plan meets the
definition of a single-employer defined benefit pension plan and is included
above in the Company's plan as the economic assumptions of the Eastern Plan are
similar to those of the other System Companies. The Company's net periodic
pension cost and accrued pension cost for 1996 include $2,371,000 and $2,525,000
respectively, representing Eastern Energy's 1996 pension costs. The Company's
net periodic pension cost and accrued pension cost for 1995 include $175,000 and
$3,018,000, respectively, representing Eastern Energy's December 1995 pension
costs. Assumptions for the Eastern Plan used in the determination of the
projected benefit obligation include a discount rate of 6.50% for 1996 and 7.50%
for 1995 and an increase in compensation levels of 5.0% for 1996 and 6.0% for
1995. The assumed long-term rate of return on plan assets for the Eastern Plan
was 7.5% for 1996 and 8.5% for 1995.
In addition to the retirement plans, the System Companies, excluding
Eastern Energy, offer certain health care and life insurance benefits to
substantially all its employees and their eligible dependents at retirement
which normally is age 65 but may be as early as age 55 with 15 years of service.
Retirees currently pay a portion of the cost of providing such benefits and are
expected to continue to do so in the future. In January 1993, the Company
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which requires a
change in the accounting for a company's obligation to provide health care and
certain other benefits to its retirees from the "pay-as-you-go" method to an
accrual method and requires the cost of the obligation to be recognized in the
period from employment date until full eligibility for benefits.
Net periodic postretirement benefits cost other than pensions, including
amounts charged to fuel cost, deferred and capitalized, were comprised of the
following components:
THE COMPANY TU ELECTRIC
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
Service cost -- benefits earned during the
period......................................... $13,513 $ 9,771 $11,525 $ 8,437 $ 6,559 $ 7,669
Interest cost on the accumulated postretirement
benefit obligation............................. 40,809 38,842 33,120 31,394 31,109 26,063
Amortization of the transition obligation....... 16,978 16,978 16,900 13,633 13,633 13,557
Actual return on plan assets.................... (7,079) (6,096) 44 (4,816) (4,520) 34
Net amortization and deferral................... 8,303 4,646 1,313 5,746 3,662 977
------- ------- ------- ------- ------- -------
Net postretirement benefits cost............. $72,524 $64,141 $62,902 $54,394 $50,443 $48,300
======= ======= ======= ======= ======= =======
The table below details the funded status for other postretirement benefits
and amount recognized by the System Companies (excluding Eastern Energy) and TU
Electric:
THE COMPANY TU ELECTRIC
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------
1996 1995 1996 1995
---- ---- ---- ----
THOUSANDS OF DOLLARS
Accumulated postretirement benefit obligation
(APBO):
Retirees...................................... $(325,672) $(344,045) $(280,541) $(296,996)
Fully eligible active employees............... (38,320) (27,779) (22,701) (17,241)
Other active employees........................ (187,451) (193,407) (120,452) (133,783)
--------- --------- --------- ---------
Total APBO.................................. (551,443) (565,231) (423,694) (448,020)
Plan assets at fair value....................... 81,480 56,786 60,862 43,969
--------- --------- --------- ---------
APBO in excess of plan assets............... (469,963) (508,445) (362,832) (404,051)
Unrecognized net loss........................... 92,589 144,833 68,977 119,216
Unrecognized prior service cost................. 819 902 -- --
Unrecognized transition obligation.............. 271,649 288,627 218,126 231,759
--------- --------- --------- ---------
Accrued postretirement benefits cost.......... $(104,906) $ (74,083) $ (75,729) $ (53,076)
========= ========= ========= =========
53
The expected increase in costs of future benefits covered by the plan is
projected using a health care cost trend rate of 5.0% in 1997 and thereafter. A
one percentage point increase in the assumed health care cost trend rate in each
future year would increase the APBO at December 31, 1996 by approximately $73.7
million for the System Companies and $56.6 million for TU Electric, and other
postretirement benefits cost for 1996 by approximately $9.4 million for System
Companies and $6.9 million for TU Electric. The assumed discount rate used to
measure the APBO is 7.75% for 1996 and 7.25% for 1995.
12. SALES OF ACCOUNTS RECEIVABLE
TU ELECTRIC
- -----------
TU Electric has a facility with financial institutions whereby it is
entitled to sell and such financial institutions may purchase, on an ongoing
basis, undivided interests in customer accounts receivable representing up to an
aggregate of $350,000,000. Additional receivables are continually sold to
replace those collected. At December 31, 1996 and 1995, accounts receivable was
reduced by $300,000,000 to reflect the sales of such receivables to financial
institutions under such agreements.
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). Its provisions relating to sales of
receivables are effective for transactions occurring after December 31, 1996.
SFAS 125 requires that in order for a transfer of receivables to be treated as a
sale, the transferor must surrender control over the receivables. This
requirement of SFAS 125 is not expected to have a material effect on the
Company's and TU Electric's financial position, results of operation or cash
flows.
13. REGULATION AND RATES
TU ELECTRIC
- -----------
DOCKET 9300
The PUC's final order (Order) in connection with TU Electric's January
1990 rate increase request (Docket 9300) was reviewed by the 250th Judicial
District Court of Travis County, Texas, and thereafter was appealed to the Court
of Appeals for the Third District of Texas and to the Supreme Court of Texas
(Supreme Court). As a result of such review and appeals, an aggregate of $909
million of disallowances with respect to TU Electric's reacquisitions of
minority owners' interests in Comanche Peak, which had previously been recorded
as a charge to the Company's and TU Electric's earnings, has been remanded to
the PUC for reconsideration on the basis of a prudent investment standard. On
remand, the PUC will also be required to reevaluate 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. In January 1997, the Supreme Court denied a motion
for rehearing on the Comanche Peak minority owners issue filed by the original
complainants. TU Electric cannot predict the outcome of the reconsideration of
the Order on remand by the PUC.
In its decision, the Supreme Court also affirmed the previous $472 million
prudence disallowance related to Comanche Peak. Since the Company and TU
Electric each has previously recorded a charge to earnings for this prudence
disallowance, the Supreme Court's decision did not have an effect on the
Company's or TU Electric's current financial position, results of operation or
cash flows.
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
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.
54
DOCKET 15638
In May 1996, TU Electric filed with the PUC its transmission cost
information and tariffs for open-access wholesale transmission service (Docket
15638) in accordance with PUC rules adopted in February 1996. These tariffs also
provide for generation-related ancillary services necessary to support wholesale
transactions. Upon final PUC approval and the implementation of transmission
rates for each transmission provider within the Electric Reliability Council of
Texas (ERCOT), TU Electric's payments for transmission service will exceed its
revenues for providing transmission service. The PUC is required by the rules to
adopt a rate-moderation plan that will minimize the impact of the new pricing
mechanism for the first three years the rules are in effect. As such, the
current maximum impact on TU Electric for 1997 is a $4.26 million deficit,
which, in the opinion of TU Electric, is not expected to have a material effect
on its results of operation or cash flows. TU Electric expects to have its open-
access wholesale transmission tariff in place for service within ERCOT in early
1997.
OTHER
In connection with the PUC's regular earnings monitoring process, the PUC
Staff has advised the PUC that it believes TU Electric was earning in excess of
a reasonable rate of return and that it was engaged in discussions with TU
Electric concerning possible remedies for such perceived over-earnings. The
city of Sulphur Springs, Texas, which exercises original jurisdiction over TU
Electric's rates within that city's boundaries, has initiated an inquiry into
the reasonableness of TU Electric's rates. TU Electric is currently preparing
the information required by Sulphur Springs in connection with its inquiry. TU
Electric is unable to predict the outcome of either the discussions with the PUC
Staff or the inquiry of Sulphur Springs.
FUEL COST RECOVERY RULE
In accordance with PUC approvals, TU Electric has refunded to customers an
aggregate of approximately $154 million, including interest, in over-collected
fuel costs for the period June 1994 through September 1995. These over-
collections were primarily due to lower natural gas prices than previously
anticipated. 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 through a surcharge to customers 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 resultant findings that the
costs are reasonable and necessary and that the prices charged to TU Electric by
supplying affiliates are no higher than the prices charged by those affiliates
to others for the same item or class of items. TU Electric is vigorously
defending its position in these appeals but is unable to predict their outcome.
FUEL RECONCILIATION PROCEEDING
On December 29, 1995, in accordance with PUC rules, TU Electric filed a
petition with the PUC seeking final reconciliation of all eligible fuel and
purchased power expenses incurred during the reconciliation period of July 1,
1992 through June 30, 1995, amounting to a total of $4.7 billion. In hearings
completed in December 1996, the PUC Staff recommended a disallowance of $71.9
million. TU Electric believes that all of its eligible fuel and purchased power
expenses have been prudently incurred and no amounts have been accrued for any
disallowance. A final decision is expected by mid-1997. TU Electric is unable to
predict the outcome of such proceeding; however, a disallowance, if any, will
result in a future loss, which could possibly have a material effect on TU
Electric's results of operation or cash flows.
In addition, and as permitted by the PUC rules, TU Electric is also seeking
an accounting order from the PUC that will allow certain costs incurred, and to
be incurred, to facilitate the use of coal as a supplemental fuel at its
Monticello lignite-fueled generating station (Monticello) to be treated as
eligible fuel costs and billed pursuant to TU Electric's fuel cost factor. By
incurring these expenses, TU Electric believes that it can significantly improve
the reliability of the supply of fuel to Monticello and can, at the same time,
lower the fuel cost that would be incurred in the absence of these expenditures.
55
FLEXIBLE RATE INITIATIVES
TU Electric continues to offer flexible rates in over 160 cities with
original regulatory jurisdiction within its service territory (including the
cities of Dallas and Fort Worth) to existing non-residential retail and
wholesale customers that have viable alternative sources of supply and would
otherwise leave the system. TU Electric also continues to offer an economic
development rider to attract new businesses and to encourage existing customers
to expand their facilities as well as an environmental technology rider to
encourage qualifying customers to convert to technologies that conserve energy
or improve the environment. TU Electric will continue to pursue the expanded use
of flexible rates when such rates are necessary to be price-competitive.
INTEGRATED RESOURCE PLAN
In October 1994, TU Electric filed an application for approval by the PUC
of certain aspects of its Integrated Resource Plan (IRP) for the ten-year period
1995-2004. The IRP, developed as an experimental pilot project in conjunction
with regulatory and customer groups, included the acquisition of electric energy
through a competitive bidding process of third party-supplied demand-side
management resources and renewable resources. In August 1995, the PUC remanded
the case to an Administrative Law Judge for development of a solicitation plan
and to more closely conform the TU Electric 1995 IRP to new state legislation
that required the PUC to adopt a state-wide integrated resource planning rule by
September 1, 1996. In January 1996, TU Electric filed an updated IRP with the
PUC along with a proposed plan for the solicitation of resources through a
competitive bidding process. The PUC issued its final order on TU Electric's IRP
in October 1996, and modified the order in an Order on Rehearing on December 20,
1996. The modified order approved a flexible solicitation plan that will allow
TU Electric to conduct up to three optional resource solicitations for a total
of 2,074 MW of demand-side and supply-side resources prior to the filing of its
next IRP in June 1999. TU Electric is currently reviewing the need and timing
for conducting the first of these resource solicitations.
In addition to its solicitation plan in the IRP docket, TU Electric
requested and received approval from the PUC to expand its Power Cost Recovery
tariff to provide current cost recovery of resource acquisition costs for
demand-side management resources acquired in the solicitations to the extent
such costs are not currently reflected in TU Electric's base rates. The PUC also
approved cost recovery for eight previously approved demand-side management
contracts entered into by TU Electric.
THE COMPANY AND TU ELECTRIC
- ---------------------------
OPEN-ACCESS TRANSMISSION
In February 1996, pursuant to the Public Utility Regulatory Act of 1995, as
amended, the PUC adopted rules requiring each electric utility in ERCOT to to
provide wholesale transmission and related services to other utilities and non-
utility power suppliers at rates, terms and conditions that are comparable to
those applicable to such utility's use of its own transmission facilities.
Under the rules, the PUC established a transmission pricing mechanism
consisting of an ERCOT system-wide component and a distance-sensitive component.
The ERCOT system-wide component provides that each load-serving entity in ERCOT
will pay a share of the ERCOT-wide transmission cost of service based on the
entity's load. The distance-sensitive component provides that a distance-
sensitive rate will be paid to utilities that own transmission facilities, based
on the impact of transmitting generation resources to loads. The rates charged
for using the transmission system are designed to ensure that all market
participants pay on a comparable basis to use the system. While all users of the
transmission grid pay rates that are comparably designed, the impact on
individual users will differ.
14. IMPAIRMENT OF ASSETS
THE COMPANY AND TU ELECTRIC
- ---------------------------
In September 1995, the Company and TU Electric recorded the impairment of
several non-performing assets based on the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" which prescribes a
methodology for assessing and measuring impairments in the carrying value of
certain assets.
56
THE COMPANY
- -----------
The September 1995 impairment of the Company's assets, including the
partially completed Twin Oak and Forest Grove lignite-fueled facilities of TU
Electric, and Chaco Energy Company's (Chaco's) coal reserves in New Mexico, as
well as several minor assets, aggregated $802 million after tax. The Company has
determined that the Twin Oak and Forest Grove lignite-fueled facilities are not
necessary to satisfy TU Electric's capacity requirements as currently projected
due to changes in load growth patterns and availability of alternative
generation. The impairment of TU Electric's lignite-fueled facilities has been
measured based on management's current expectations that these assets will
either be sold or constructed outside the traditional regulated utility
business. The Company has determined that the Chaco coal reserves will no longer
be developed through traditional means due to ample availability of alternative
fuels at favorable prices. Chaco's impairment has been measured based on a
significant decrease in the market value of the coal reserves as determined by
an external study performed and completed in the quarter ended September 30,
1995. The external study was precipitated by a third party inquiry regarding the
possible sale of the coal reserves. A variety of options are being considered
with respect to the Chaco coal reserves. (See Note 15.) The impairment of these
assets involved a write-down to their estimated fair values using a valuation
study based on the discounted expected future cash flows from the respective
assets' use. With respect to the other assets impaired, fair values were
determined based on current market values of similar assets.
TU ELECTRIC
- -----------
The September 1995 impairment of TU Electric's assets, including its
partially completed Twin Oak and Forest Grove lignite-fueled facilities, as well
as several minor assets, aggregated $316 million after tax. TU Electric has
determined that the Twin Oak and Forest Grove lignite-fueled facilities are not
necessary to satisfy its capacity requirements as currently projected due to
changes in load growth patterns and availability of alternative generation. Such
impairment has been measured based on management's current expectations that
these assets will either be sold or constructed outside the traditional
regulated utility business. The impairment of these assets involved a write-down
to their estimated fair values using a valuation study based on the discounted
expected future cash flows from the respective assets' use. With respect to the
other assets impaired, fair values were determined based on current market
values of similar assets.
15. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
THE COMPANY
- -----------
The Company's construction expenditures for utility related activities,
excluding AFUDC, are presently estimated at $513 million, $527 million and $556
million for 1997, 1998 and 1999, respectively. Expenditures for non-utility
property are presently estimated at $75 million for 1997, $44 million for 1998
and $78 million for 1999. Expenditures for nuclear fuel are presently estimated
at $66 million for 1997, $78 million for 1998 and $115 million for 1999.
TU ELECTRIC
- -----------
TU Electric's construction expenditures for utility related activities,
excluding AFUDC, are presently estimated at $440 million, $470 million and $497
million for 1997, 1998 and 1999, respectively. Expenditures for nuclear fuel are
presently estimated at $66 million for 1997, $78 million for 1998 and $115
million for 1999.
THE COMPANY AND TU ELECTRIC
- ---------------------------
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 and TU Electric each 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
shareholders. The timing and amounts of any specific new business investment
opportunities are presently undetermined.
57
CLEAN AIR ACT
TU ELECTRIC
- -----------
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 from or to
other utilities. The Environmental Protection Agency grants a maximum number of
allowances annually to TU Electric based on the amount of emissions from units
in operation during the period 1985 through 1987. TU Electric's capital
requirements have not been significantly affected by the requirements of the
Clean Air Act. Although TU Electric is unable to fully determine the cost of
compliance with the Clean Air Act, it is not expected to have a significant
impact on the company. Any additional capital expenditures, 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.
PURCHASED POWER CONTRACTS
THE COMPANY AND TU ELECTRIC
- ---------------------------
The System Companies have entered into purchased power contracts to
purchase portions of the generating output of certain qualifying cogenerators
and qualifying small power producers through the year 2005. These contracts
provide for capacity payments subject to a facility meeting certain operating
standards and energy payments based on the actual power taken under the
contracts. The cost of these and other purchased power contracts is recovered
currently through base rates, power cost and fuel recovery factors applied to
customer billings. Capacity payments under these contracts for the years ended
December 31, 1996, 1995 and 1994 were $232,915,000, $229,340,000 and
$236,991,000, respectively, for the Company, and $228,336,000, $223,910,000 and
$231,081,000, respectively, for TU Electric.
Assuming operating standards are achieved, future capacity payments under
the agreements are estimated as follows:
THE COMPANY TU ELECTRIC
----------- -----------
YEARS THOUSANDS OF DOLLARS
1997......................... $ 240,588 $ 237,014
1998......................... 246,311 244,796
1999......................... 199,963 199,963
2000......................... 134,784 134,784
2001......................... 104,330 104,330
Thereafter................... 215,565 215,565
---------- ----------
Total capacity payments.. $1,141,541 $1,136,452
========== ==========
LEASES
THE COMPANY AND TU ELECTRIC
- ---------------------------
The System Companies have entered into operating leases covering various
facilities and properties including combustion turbines, transportation, mining
and data processing equipment, and office space. Lease costs charged to
operation expense for the years ended December 31, 1996, 1995 and 1994 were
$144,553,000, $141,775,000 and $140,370,000, respectively, for the Company, and
$56,376,000, $60,156,000 and $62,704,000, respectively, for TU Electric.
Future minimum lease commitments under such operating leases that have
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1996, were as follows:
58
THE COMPANY TU ELECTRIC
----------- -----------
YEARS THOUSANDS OF DOLLARS
- -----
1997................................ $ 72,273 $ 31,145
1998................................ 59,895 30,396
1999................................ 54,830 30,522
2000................................ 52,098 30,265
2001................................ 99,937 41,189
Thereafter.......................... 568,633 471,696
-------- --------
Total minimum lease commitments... $907,666 $635,213
======== ========
COOLING WATER CONTRACTS
TU ELECTRIC
- -----------
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, $32,365,000 at December 31, 1996, 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, for the years 1997 through 2001 as follows: $4,435,000 for each of the
years 1997, 1998 and 1999, $4,419,000 for 2000 and $4,422,000 for 2001.
Payments made by TU Electric, net of amounts assumed by a third party under such
contracts, for 1996, 1995 and 1994 were $3,548,000, $3,628,000 and $3,615,000,
respectively. 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 $74,780,000 remaining principal amount of bonds at December 31, 1996,
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
THE COMPANY
- -----------
Chaco has a coal lease agreement for the rights to certain surface mineable
coal reserves located in New Mexico. The agreement encompasses a minimum of 228
million tons of coal with provisions for minimum advance royalty payments of
approximately $16 million per year through 2017. The Company has entered into a
surety agreement to assure the performance by Chaco with respect to this
agreement. During 1996, certain state and federal leases covering approximately
120 million tons of coal were terminated. Because of the present 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 purchasers
thereof. (See Note 14.)
NUCLEAR INSURANCE
TU ELECTRIC
- -----------
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 (MAELU). The second layer of financial protection is
provided under an industry-wide retrospective payment program called Secondary
Financial Protection (SFP).
59
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
$3.85 billion, above which TU Electric is self-insured. The primary layer of
coverage of $500 million is provided by Nuclear Mutual Limited (NML), a nuclear
electric utility industry mutual insurance company. The remaining coverage
includes premature decommissioning coverage and is provided by ANI and MAELU in
the amount of $1.1 billion and Nuclear Electric Insurance Limited (NEIL),
another nuclear electric utility industry mutual insurance company, in the
amount of $2.25 billion. TU Electric is subject to a maximum annual assessment
from NML of $14 million and NEIL of $18 million in the event NML's and/or NEIL's
losses under this type of insurance for major incidents at nuclear plants
participating in these programs exceed the respective mutual's 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 $9 million per year.
GAS PURCHASE CONTRACTS
THE COMPANY
- -----------
Fuel Company buys gas under long-term intrastate contracts in order to
assure reliable supply to its customers. Many of these contracts require minimum
purchases ("take-or-pay") of gas. Based on Fuel Company's estimated gas demand,
which assumes normal weather conditions, requisite gas purchases are expected to
substantially satisfy purchase obligations for the year 1997 and thereafter.
NUCLEAR DECOMMISSIONING AND DISPOSAL OF SPENT FUEL
TU ELECTRIC
- -----------
TU Electric has established a reserve, charged to depreciation expense and
included in 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 December 31, 1996, such reserve totaled $97,114,000 which
includes an accrual of $18,179,000 for the year ended December 31, 1996. As of
December 31, 1996, the market value of deposits in the external trust for
decommissioning of Comanche Peak was $117,441,000. Any difference between the
market value of the external trust fund and the decommissioning reserve, that
represents unrealized gains or losses of the trust fund, is treated as a
regulatory asset or a regulatory liability. 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 2033 for Comanche
Peak Unit 1, and Unit 2 and common facilities, respectively. TU Electric is
recovering such costs based upon the 1992 study through rates placed in effect
under Docket 11735 (see Note 13). An updated site-specific study will be
performed and completed by the end of 1997. Actual decommissioning costs are
expected to differ from estimates due to changes in the assumed dates of
decommissioning activities, regulatory requirements, technology and costs of
labor, materials and equipment.
60
TU Electric has a contract with the United States Department of Energy
(DOE) for the future disposal of spent nuclear fuel. In December 1996, the DOE
notified TU Electric that it did not expect to meet its obligation to begin
acceptance of spent nuclear fuel by 1998. TU Electric is unable to predict what
impact, if any, the DOE delay will have on TU Electric's future operations. The
disposal fee is at a cost to TU Electric of one mill per kilowatt-hour of
Comanche Peak net generation and is included in nuclear fuel expense.
GENERAL
THE COMPANY AND TU ELECTRIC
- ---------------------------
In addition to the above, the Company and TU Electric are involved in
various legal and administrative proceedings which, in the opinion of each,
should not have a material effect upon its financial position, results of
operation or cash flows.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
THE COMPANY AND TU ELECTRIC
- ---------------------------
The carrying amounts and related estimated fair values of the Company and
System Companies' and TU Electric's significant financial instruments at
December 31, 1996 and 1995, are as follows:
THE COMPANY
------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----- ----- ------ -----
THOUSANDS OF DOLLARS
Long-term debt............................................... $8,668,111 $9,050,868 $9,174,575 $9,875,881
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely debentures
of TU Electric............................................. 381,311 395,091 381,476 405,729
Preferred stock of subsidiary subject to mandatory
redemption................................................. 238,391 250,098 263,196 280,106
LESOP note receivable........................................ 250,000 262,175 250,000 280,713
Interest rate and currency swaps............................. -- (33,869) -- --
Other investments............................................ 194,652 191,435 118,526 134,949
TU ELECTRIC
------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----- ----- ------ -----
THOUSANDS OF DOLLARS
Long-term debt............................................... $6,310,594 $6,657,126 $7,212,070 $7,836,861
TU Electric obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely debentures
of TU Electric............................................. 381,311 395,091 381,476 405,729
Preferred stock subject to mandatory redemption.............. 238,391 250,098 263,196 280,106
Other investments............................................ 172,779 169,820 103,888 118,415
The fair values of long-term debt and preferred stock subject to mandatory
redemption are estimated at the lesser of the call price or the present value of
future cash flows discounted at rates consistent with comparable maturities for
credit risk. The fair values of preferred securities are based on quoted market
prices. The carrying amounts reflected in the Consolidated Balance Sheets for
financial assets classified as current assets, and the carrying amounts for
financial liabilities classified as current liabilities, approximate fair value
due to the short maturity of such instruments. The fair values of other
financial instruments for which carrying amounts and fair values have not been
presented are not materially different than their related carrying amounts.
Other investments includes deposits in an external trust fund for nuclear
decommissioning of Comanche Peak. The trust funds are invested primarily in
equity securities which are classified as available-for-sale. Any unrealized
gains or losses are treated as regulatory assets or regulatory liabilities,
respectively.
61
THE COMPANY
- -----------
Common stock -- net has been reduced by the note receivable from the
trustee of the leveraged employee stock ownership provision of the Thrift Plan.
The fair value of such note is estimated at the lesser of the Company's call
price or the present value of future cash flows discounted at rates consistent
with comparable maturities adjusted for credit risk. Fair values for the System
Companies' off-balance-sheet instruments (interest rate and currency swaps) are
based either on quotes or the cost to terminate the agreements.
TU ELECTRIC
- -----------
TU Electric has agreed, in effect, to guarantee the principal and interest
on bonds used to finance the reservoirs from which TU Electric uses cooling
water for certain generating units. TU Electric is also the guarantor for the
principal amount of certain bonds issued for similar purposes which were
assigned to a municipality. The outstanding principal at December 31, 1996 and
1995 of the bonds for which TU Electric is contingently liable is approximately
$107,000,000 and $114,000,000, respectively. The fair value of the bonds,
approximately $111,000,000 and $121,000,000 for December 31, 1996 and 1995,
respectively, is based on the present value of the instruments' approximate cash
flows discounted at the year-end risk free rate for issues of comparable
maturities adjusted for credit risk.
17. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
THE COMPANY AND TU ELECTRIC
- ---------------------------
In the opinion of the Company and TU Electric, respectively, the
information below includes all adjustments (constituting only normal recurring
accruals) necessary to a fair statement of such amounts. Quarterly results are
not necessarily indicative of expectations for a full year's operations because
of seasonal and other factors, including rate changes, variations in maintenance
and other operating expense patterns, the impact of the change in AFUDC accruals
(see Note 1) and the charges for regulatory disallowances. Certain quarterly
information has been reclassified to conform to the current year presentation.
For additional information regarding the charges for regulatory disallowances,
see Note 13.
THE COMPANY
- ----------------
EARNINGS (LOSS)
CONSOLIDATED NET PER SHARE OF
OPERATING REVENUES OPERATING INCOME INCOME (LOSS) COMMON STOCK*
---------------------- ---------------------- ------------------- -----------------
QUARTER ENDED 1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS (EXCEPT PER SHARE AMOUNTS)
March 31....................... $1,463,900 $1,244,265 $ 414,938 $ 311,344 $126,074 $ 75,411 $0.56 $ 0.33
June 30........................ 1,691,313 1,353,998 535,047 422,305 202,957 148,432 0.90 0.66
September 30................... 1,930,097 1,775,669 743,610 742,699 357,983 (441,716) 1.59 (1.96)
December 31.................... 1,465,618 1,264,756 309,395 311,279 66,592 79,228 0.30 0.35
---------- ---------- ---------- ---------- -------- ---------
$6,550,928 $5,638,688 $2,002,990 $1,787,627 $753,606 $(138,645)
========== ========== ========== ========== ======== =========
- ---------------
* The sum of the quarters may not equal annual earnings per share due to
rounding.
TU ELECTRIC
- -----------
CONSOLIDATED
OPERATING REVENUES OPERATING INCOME NET INCOME
-------------------- ------------------ ----------------
QUARTER ENDED 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
THOUSANDS OF DOLLARS
March 31...................... $1,348,330 $1,233,772 $ 305,057 $ 255,391 $152,785 $101,758
June 30....................... 1,558,778 1,341,245 391,019 328,621 227,869 174,219
September 30.................. 1,787,412 1,761,378 522,270 534,167 379,438 68,172
December 31................... 1,335,091 1,224,067 244,252 252,187 102,603 108,482
---------- ---------- ---------- ---------- -------- --------
$6,029,611 $5,560,462 $1,462,598 $1,370,366 $862,695 $452,631
========== ========== ========== ========== ======== ========
62
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of Texas Utilities Company is responsible for the preparation,
integrity and objectivity of the consolidated financial statements of the
Company and its subsidiaries and other information included in this report. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. As appropriate, the statements
include amounts based on informed estimates and judgments of management.
The management of the Company has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance with
management's authorization and financial records are reliable for preparing
consolidated financial statements. Management believes that the system of
control provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period. Key elements in this system include the
effective communication of established written policies and procedures,
selection and training of qualified personnel and organizational arrangements
that provide an appropriate division of responsibility. This system of control
is augmented by an ongoing internal audit program designed to evaluate its
adequacy and effectiveness. Management considers the recommendations of the
internal auditors and independent certified public accountants concerning the
Company's system of internal control and takes appropriate actions which are
cost-effective in the circumstances. Management believes that, as of December
31, 1996, the Company's system of internal control was adequate to accomplish
the objectives discussed herein.
The Board of Directors of the Company addresses its oversight responsibility
for the consolidated financial statements through its Audit Committee, which is
composed of directors who are not employees of the Company. The Audit Committee
meets regularly with the Company's management, internal auditors and independent
certified public accountants to review matters relating to financial reporting,
auditing and internal control. To ensure auditor independence, both the
internal auditors and independent certified public accountants have full and
free access to the Audit Committee.
The independent certified public accounting firm of Deloitte & Touche LLP is
engaged to audit, in accordance with generally accepted auditing standards, the
consolidated financial statements of the Company and its subsidiaries and to
issue their report thereon.
/s/ J. S. FARRINGTON
-------------------------------------------------------
J. S. Farrington, Chairman of the Board
/s/ ERLE NYE
-------------------------------------------------------
Erle Nye, President and Chief Executive
/s/ PETER B. TINKHAM
-------------------------------------------------------
Peter B. Tinkham, Treasurer and Assistant
Secretary and Principal Financial Officer
/s/ MARC D. MOSELEY
-------------------------------------------------------
Marc D. Moseley, Acting Controller
and Principal Accounting Officer
63
TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENT OF RESPONSIBILITY
The management of Texas Utilities Electric Company is responsible for the
preparation, integrity and objectivity of the financial statements of TU
Electric and its subsidiaries and other information included in this report. The
financial statements have been prepared in conformity with generally accepted
accounting principles. As appropriate, the statements include amounts based on
informed estimates and judgments of management.
The management of TU Electric has established and maintains a system of
internal control designed to provide reasonable assurance, on a cost-effective
basis, that assets are safeguarded, transactions are executed in accordance with
management's authorization and financial records are reliable for preparing
financial statements. Management believes that the system of control provides
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected within a timely period.
Key elements in this system include the effective communication of established
written policies and procedures, selection and training of qualified personnel
and organizational arrangements that provide an appropriate division of
responsibility. This system of control is augmented by an ongoing internal audit
program designed to evaluate its adequacy and effectiveness. Management
considers the recommendations of the internal auditors and independent certified
public accountants concerning TU Electric's system of internal control and takes
appropriate actions which are cost-effective in the circumstances. Management
believes that, as of December 31, 1996, TU Electric's system of internal control
was adequate to accomplish the objectives discussed herein.
The independent certified public accounting firm of Deloitte & Touche LLP
is engaged to audit, in accordance with generally accepted auditing standards,
the financial statements of TU Electric and to issue their report thereon.
/s/ ERLE NYE
-------------------------------------------------------
Erle Nye, Chairman of the Board
and Chief Executive
/s/ ROBERT S. SHAPARD
-------------------------------------------------------
Robert S. Shapard, Treasurer and Assistant
Secretary and Principal Financial Officer
/s/ MARC D. MOSELEY
-------------------------------------------------------
Marc D. Moseley, Acting Controller
and Principal Accounting Officer
64
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Texas Utilities
Electric Company and subsidiaries (TU Electric) as of December 31, 1996 and
1995, and the related consolidated statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of TU Electric's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of TU Electric at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, in 1995, TU
Electric changed its method of accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of to conform with Statement of
Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 12, 1997
65
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Texas Utilities
Company and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, retained earnings and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, in 1995, the
Company changed its method of accounting for the impairment of long-lived assets
and for long-lived assets to be disposed of to conform with Statement of
Financial Accounting Standards No. 121.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 12, 1997
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company and TU Electric
- ---------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF EACH REGISTRANT
THE COMPANY
- -----------
Information with respect to this item is found under the heading Election
of Directors in the definitive proxy statement to be filed by the Company with
the Commission on or about April 1, 1997.
TU ELECTRIC
- -----------
Identification of Directors, business experience and other directorships:
OTHER POSITIONS AND DATE FIRST ELECTED PRESENT PRINCIPAL OCCUPATION
OFFICES PRESENTLY HELD AS DIRECTOR (CURRENT OR EMPLOYMENT AND PRINCIPAL
WITH TU ELECTRIC (CURRENT TERM EXPIRES BUSINESS (PRECEEDING FIVE YEARS),
NAME OF DIRECTOR AGE TERM EXPIRES MAY 23, 1997) MAY 23, 1997) OTHER DIRECTORSHIPS
- ---------------- --- -------------------------- -------------------- ---------------------------------
T. L. Baker 51 President, Electric February 20, 1987 President, Electric Service Division of TU
Service Division Electric; prior thereto, Executive Vice
President of TU Electric; prior thereto,
Senior Vice President of TU Electric.
J. S. Farrington 62 None September 17, 1982 Chairman of the Board of the Company;
prior thereto, Chairman of the Board and
Chief Executive of the Company; other
directorships: the Company.
H. Jarrell Gibbs 59 President May 24, 1989 President of TU Electric; prior thereto,
Vice President and Principal Financial
Officer of the Company and President of
TU Services; prior thereto, Executive
Vice President of TU Electric; prior
thereto, Executive Vice President of
Texas Electric Service Division of TU
Electric.
Michael J. McNally 42 President, Transmission February 16, 1996 President, Transmission Division of TU
Division Electric; prior thereto, Executive Vice
President of TU Electric; prior thereto,
Principal of Enron Development
Corporation; prior thereto, Managing
Director of Industrial Services (Enron
Capital and Trade Resources); President
of Houston Pipe Line; President of Enron
Gas Liquids, Inc; Vice President of
Marketing for Houston Pipe Line Company.
Erle Nye 59 Chairman and September 17, 1982 President and Chief Executive of the
Chief Executive Company; other directorships: the Company.
W. M. Taylor 54 President, Generation May 20, 1986 President, Generation Division of TU
Division Electric; prior thereto, Executive Vice
President of TU Electric; prior thereto,
President of Dallas Power Division of TU
Electric.
E. L. Watson 62 Vice Chairman February 20, 1987 Vice Chairman of TU Electric; prior
thereto, Executive Vice President of TU
Electric; prior thereto, Senior Vice
President of TU Electric.
Directors of TU Electric receive no compensation in their capacity as Directors
of TU Electric.
67
Identification of Executive Officers and business experience:
POSITIONS AND OFFICES
PRESENTLY HELD (CURRENT DATE FIRST ELECTED BUSINESS EXPERIENCE
NAME OF OFFICER AGE TERM EXPIRES MAY 23, 1997) TO PRESENT OFFICES (PRECEEDING FIVE YEARS)
- --------------- --- -------------------------- ------------------ -----------------------
Erle Nye 59 Chairman and February 20, 1987 Same and President and Chief
Chief Executive Executive of the Company.
H. Jarrell Gibbs 59 President February 16, 1996 President of TU Electric; prior thereto,
Vice President and Principal Financial
Officer of the Company and President of
TU Services; prior thereto, Executive
Vice President of TU Electric; prior
thereto, Executive Vice President of
Texas Electric Service Division of TU
Electric.
T. L. Baker 51 President, Electric Service February 16, 1996 President, Electric Service Division of
Division TU Electric; prior thereto, Executive
Vice President of TU Electric; prior
thereto, Senior Vice President of TU
Electric.
Michael J. McNally 42 President, Transmission February 16, 1996 President, Transmission Division of TU
Division Electric; prior thereto, Executive Vice
President of TU Electric; prior thereto,
Principal of Enron Development
Corporation; prior thereto, Managing
Director of Industrial Services (Enron
Capital and Trade Resources); President
of Houston Pipe Line; President of Enron
Gas Liquids, Inc.; Vice President of
Marketing for Houston Pipe Line Company.
W. M. Taylor 54 President, Generation Division February 16, 1996 President, Generation Division of TU
Electric; prior thereto, Executive Vice
President of TU Electric; prior thereto,
President of Dallas Power Division of TU
Electric.
E. L. Watson 62 Vice Chairman November 1, 1992 Vice Chairman of TU Electric; prior
thereto, Executive Vice President of TU
Electric; prior thereto, Senior Vice
President of TU Electric.
There is no family relationship between any of the above named Directors or
Executive Officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
All required reports relating to changes in beneficial ownership have been
timely filed except that, as a result of an administrative oversight, a Form 3
was not filed with the Securities and Exchange Commission on a timely basis for
Robert S. Shapard, Treasurer and Assistant Secretary of TU Electric regarding
his election as TU Electric's principal financial officer. Mr. Shapard owns none
of TU Electric's equity securities.
68
ITEM 11. EXECUTIVE COMPENSATION
THE COMPANY
- -----------
Information with respect to this item is found under the heading Executive
Compensation of the Company in the definitive proxy statement to be filed by the
Company with the Commission on or about April 1, 1997.
TU ELECTRIC
- -----------
TU Electric and its affiliates have paid or awarded compensation during the
last three calendar years to the following Executive Officers for services in
all capacities:
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation (3)
--------------------------------------- --------------------------
Awards Payouts
---------- ----------
Name and Other Annual Restricted All Other
Principal Compensation Stock LTIP Compensa-
Position Year Salary ($) Bonus($)(2) ($) Awards ($) Payouts ($) tion ($) (4)
--------- ---- ---------- ----------- ------------ ---------- ----------- ------------
Erle Nye, 1996 723,333 185,000 - 351,500 0 117,908
Chairman of the Board 1995 679,167 140,000 - 266,000 25,602 87,810
and Chief Executive of 1994 618,750 0 - 217,000 0 67,275
TU Electric (1)
H. Jarrell Gibbs, 1996 321,250 113,000 - 189,500 0 53,203
President of 1995 282,917 67,200 - 120,300 9,102 38,702
TU Electric 1994 245,167 40,000 - 97,880 0 29,017
W. M. Taylor, President, 1996 312,500 83,500 - 156,625 0 49,530
Generation Division- 1995 282,917 64,700 - 117,800 10,809 38,278
TU Electric 1994 249,333 40,000 - 97,880 0 30,333
T. L. Baker, 1996 275,833 60,500 - 123,500 0 46,319
President, Electric Service 1995 261,667 44,900 - 93,500 11,947 34,465
Division-TU Electric 1994 245,833 25,000 - 80,000 0 28,183
Michael J. McNally, 1996 229,166 75,000 - 131,250 0 22,399
President, Transmission 1995 170,833 0 - 0 0 0
Division-TU Electric 1994 0 0 - 0 0 0
(1) Amounts reported in the table for Mr. Nye consist entirely of compensation
paid by the Company.
(2) Amounts reported as Bonus in the Summary Compensation Table are
attributable, beginning in 1995, to the named officer's participation in
the Annual Incentive Plan (AIP). Officers of the Company and its
subsidiaries with a title of Vice President or above are eligible to
participate in the AIP. Under the terms of the AIP, target incentive awards
ranging from 35% to 50% of base salary, and a maximum award of 100% of base
salary, are established. The percentage of the target or the maximum
actually awarded, if any, is dependent upon the attainment of per share net
income goals established in advance by the Organization and Compensation
Committee (Committee) as well as the Committee's evaluation of the
participant's and the Company's performance. One-half of each such award is
paid in cash and is reflected as Bonus in the Summary Compensation Table.
Payment of the remainder of the award is deferred under the Deferred and
Incentive Compensation Plan (DICP) discussed below.
(3) Amounts reported as Long-Term Compensation are attributable to the named
officer's participation in the DICP. Officers of the Company and its
subsidiaries with the title of Vice President or above are eligible to
participate in the DICP. Participants in the DICP may defer a percentage of
their base salary not to exceed a maximum percentage determined by the
Committee for each Plan year and in any event not to exceed 15% of the
participant's base salary. The Company makes a matching award (Matching
Award) equal to 150% of the participant's deferred
69
salary. In addition, one-half of any AIP award (Incentive Award) is
deferred and invested under the DICP. The Matching Awards and Incentive
Awards are subject to forfeiture under certain circumstances. Under the
DICP, a trustee purchases Company common stock with an amount of cash equal
to each participant's deferred salary, Matching Award and Incentive Award
and accounts are established for each participant containing performance
units (Units) equal to such number of common shares. DICP investments,
including reinvested dividends, are restricted to Company common stock. On
the expiration of the applicable maturity period (three years for the
Incentive Awards and five years for deferred salary and Matching Awards)
the values of the participant's accounts are paid in cash based upon the
then current value of the Units; provided, however, that in no event will a
participant's account be deemed to have a cash value which is less than the
sum of such participant's deferred salary together with a 6% per annum
(compounded annually) interest equivalent thereon. The maturity period is
waived if the participant dies or becomes totally and permanently disabled
and may be extended under certain circumstances.
Salary deferred under the DICP is included in amounts reported as Salary in
the Summary Compensation Table. Amounts shown in the table below represent
the number of shares purchased under the DICP with such deferred salaries
for 1996:
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
PERFORMANCE
OR OTHER
NUMBER OF PERIOD UNTIL
SHARES, UNITS OR MATURATION
NAME OTHER RIGHTS (#) OR PAYOUT
---- ---------------- ------------
Erle Nye 2,620 5 Years
H. Jarrell Gibbs 1,203 5 Years
W. M. Taylor 1,150 5 Years
T. L. Baker 991 5 Years
Michael J. McNally 885 5 Years
Incentive Awards and Matching Awards that have been made under the DICP are
included under Restricted Stock Awards in the Summary Compensation Table.
As a result of these awards, undistributed Incentive Awards and Matching
Awards made under the Plan in prior years, and dividends reinvested
thereon, the number and market value of such units at December 31, 1996
(each of which is equal to one share of common stock) held in the DICP
accounts for Messrs. Nye, Gibbs, Taylor, Baker and McNally were 30,816
($1,255,786), 14,113 ($575,142), 13,423 ($546,997), 11,455 ($466,831) and
3,136 ($127,828), respectively.
Amounts reported as LTIP Payouts in the Summary Compensation Table
represent payouts maturing during such years of earnings on salary deferred
under the DICP in prior years.
(4) Amounts reported as All Other Compensation are attributable to the named
officer's participation in certain plans described hereinafter in this
footnote:
Under the Employees' Thrift Plan of the Texas Utilities Company System
(Thrift Plan) all employees with at least six months of eligible service
with the Company or any of its subsidiaries may invest up to 16% of their
regular salary or wages in common stock of the Company, or in a variety of
selected mutual funds. Under the Thrift Plan, the Company matches a portion
of an employee's savings in an amount equal to 40%, 50% or 60% (depending
on the employee's length of service) of the first 6% of such employee's
savings. All matching amounts are invested in common stock of the Company.
The amounts reported under All Other Compensation in the Summary
Compensation Table includes these matching amounts which, for Messrs. Nye,
Gibbs, Taylor, Baker and McNally totaled $5,400, $4,500, $5,400, $5,400 and
$3,240, respectively, during 1996.
The Company has a Salary Deferral Program (Program) under which each
employee of the Company and its subsidiaries whose annual salary is equal
to or greater than amount established under the Program ($91,740 for the
Program Year beginning April 1996) may elect to defer a percentage of
annual salary for a period of seven years, a period ending with the
retirement of such employee, or for a combination thereof. Such deferrals
may not exceed in the aggregate 10% of the employee's annual salary. Salary
deferred under the program is included in amounts reported under Salary in
the Summary Compensation Table. The Company makes a matching award,
70
subject to forfeiture under certain circumstances, equal to 100% of the
salary deferred under the Program. The trustee for the Program distributes,
at the end of the applicable maturity period, cash equal to the greater of
the actual earnings of Program assets, or the average yield during the
applicable maturity period of U.S. Treasury Notes with a maturity of ten
years. The distribution of the amounts due under the Program are in a lump
sum if the maturity period is seven years or, if the retirement option is
elected, in twenty annual installments. The Company is financing the
retirement portion of the Program through the purchase of corporate-owned
life insurance on the lives of the participants. The proceeds from such
insurance are expected to allow the Company to fully recover the cost of
the retirement option. During 1996, matching awards, which are included
under All Other Compensation in the Summary Compensation Table, were made
for Messrs. Nye, Gibbs, Taylor, Baker and McNally in the amounts of
$72,333, $32,125, $31,250, $27,583 and $17,083, respectively.
Under the Split-Dollar Life Insurance Program of the Texas Utilities
Company System (Insurance Program), split-dollar life insurance policies
are purchased for officers of the Company and its subsidiaries with a title
of Vice President or above, with a death benefit equal to four times their
annual compensation. Effective in October 1996, new participants vest in
the policies issued under the Insurance Program over a 5 year period. The
Company pays the premiums for these policies and has received a collateral
assignment of the policies equal in value to the sum of all of its
insurance premium payments. Although the Insurance Program is terminable at
any time, it is designed so that if it is continued, the Company will fully
recover all of the insurance premium payments it has made either upon the
death of the participant or, if the assumptions made as to policy yield are
realized, upon the later of fifteen years of participation or the
participant's attainment of age sixty-five. During 1996, the economic
benefit derived by Messrs. Nye, Gibbs, Taylor, Baker and McNally from the
term insurance coverage provided and the interest foregone on the remainder
of the insurance premiums paid by the Company amounted to $40,175, $16,578,
$12,880, $13,336 and $2,076, respectively.
PENSION PLAN TABLE
YEARS OF SERVICE
- ------------------------------------------------------------------------
Remuneration 20 25 30 35 40
- ------------ -- -- -- -- --
$ 100,000 $ 29,688 $ 37,110 $ 44,532 $ 51,954 $ 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
The Company and its subsidiaries maintain retirement plans (Plans) which
are qualified under applicable provisions of the Internal Revenue Code of 1986,
as amended (Code). Annual retirement benefits are computed as follows: for
each year of accredited service up to a total of 40 years of service, 1.3% of
the first $7,800, plus 1.5% of the excess over $7,800 of the participant's
average annual earnings during his or her three years of highest earnings.
Amounts reported under Salary for the named officers in the Summary Compensation
Table approximate earnings as defined by the Plans. Benefits paid under the
Plans are not subject to any reduction for Social Security payments but are
limited by provisions of the Code. The Company maintains a Supplemental
Retirement Plan (Supplemental Plan) which provides for the payment of retirement
benefits which would otherwise be limited by the Code or by the definition of
earnings in the Plans. Under the Supplemental Plan, retirement benefits are
calculated in accordance with the same formula used under the Plans, except that
earnings also include AIP awards. (50% of the AIP award is reported under Bonus
for the named officers in the Summary Compensation Table). As of February 28,
1997, years of accredited service under the plans for Messrs. Nye, Gibbs,
Taylor, Baker and McNally were 34, 34, 29, 26 and 5 months, respectively. The
above table illustrates the total annual benefit payable at retirement under the
Plans and Supplemental Plan prior to any reduction for a contingent beneficiary
option which may be selected by the participant.
The following report and performance graph are presented herein for
informational purposes only. This information is not required to be included
herein and shall not be deemed to form a part of this report or be "filed" with
the Securities and Exchange Commission. The report set forth hereinafter is the
report of the Organization and Compensation Committee of the Board of Directors
of the Company and is illustrative of the methodology utilized in establishing
the compensation of executive officers of the Company and TU Electric.
71
ORGANIZATION AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors is
responsible for reviewing and establishing the compensation of the executive
officers of the Company. The Committee consists of all of the nonemployee
directors of the Company and is chaired by James A. Middleton. The Committee
has directed the preparation of this report and has approved its contents and
submission to the shareholders.
As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation plans
should align executive compensation with returns to shareholders with due
consideration accorded to balancing both long-term and short-term objectives.
The Committee has determined that, as a matter of policy to be implemented over
time, the base salaries of the officers will be established at the median, or
50th percentile, of the top ten electric utilities in the United States and that
opportunities for total direct compensation to reach the 75th percentile, or
above, of such utilities will be provided through performance-based compensation
plans. Such compensation principles and practices have allowed, and should
continue to allow, the Company to attract, retain and motivate its key
executives.
In furtherance of these policies, a nationally recognized compensation
consultant has been retained since 1994 to assist the Committee in its periodic
reviews of compensation and benefits provided to officers. The consultant's
prior recommendations, including the Annual Incentive Plan (referred to as AIP
and described hereinafter and in footnote 2 to the Summary Compensation Table),
as well as changes in life insurance coverage and retirement benefits, have
generally been implemented. The consultant has recommended, and assisted the
Committee in the development of, the Long-Term Incentive Compensation Plan (the
Long-Term Plan) which has been approved by the Committee and the Board and which
is being recommended to the shareholders for their approval.
The compensation of the officers of the Company has consisted principally
of base salaries, the opportunity to participate in the Deferred and Incentive
Compensation Plan (referred to as the DICP and described in footnote 3 to the
Summary Compensation Table) and the opportunity to earn an incentive award under
the AIP. Benefits provided under the DICP and the AIP represent a substantial
portion of officers' compensation, and the value of future payments under the
DICP, as well as the value of the deferred portion of any award under the AIP,
is directly related to the future performance of the Company's common stock. It
is anticipated that performance-based incentive awards under the AIP, and, if it
is approved by the Company's shareholders, the Long-Term Plan, will, in future
years, constitute an increasing percentage of the officers' total compensation.
The AIP is administered by the Committee and provides an objective
framework within which annual Company and individual performance can be
evaluated by the Committee. Depending on the results of such performance
evaluations, and the attainment of the per share net income goals established in
advance, the Committee may provide annual incentive compensation awards to
eligible officers. The evaluation of each individual participant's performance
is based upon the attainment of individual and business unit objectives. The
Company's performance is evaluated, compared to the ten largest electric
utilities and/or the electric utility industry, based upon its total return to
shareholders and return on invested capital as well as other measures relating
to competitiveness, service quality and employee safety. The combination of
individual and Company performance results, together with the Committee's
evaluation of the competitive level of compensation which is appropriate for
such results, determines the amount, if any, actually awarded.
As previously noted, the Committee and the Board have adopted, subject to
shareholder approval, the Long-Term Plan. The Long-Term Plan is a
comprehensive, stock-based incentive compensation plan under which all awards
will be made in, or based on the value of the Company's common stock. The
Committee believes that the Long-Term Plan is necessary in order to continue to
be able to attract, motivate and retain officers and other key employees through
stock-based compensation. The Long-Term Plan is designed such that the value of
awards will be directly related to long-term returns to shareholders and the
Plan will, thereby, constitute an appropriate component of the Company's overall
compensation program.
72
In establishing levels of executive compensation at its May 1996 meeting,
the Committee reviewed various performance and compensation data including the
performance measures under the AIP and the report of its compensation
consultant. Information was also gathered from industry sources and other
published and private materials which provided a basis for comparing the largest
electric and gas utilities and other survey groups representing a large variety
of business organizations. Included in the data considered was that in 1995, TU
Electric, the Company's principal subsidiary, was the second largest electric
utility in the United States as measured by megawatt hour sales and, compared to
other electric utilities in the United States, was seventh in electric revenues,
sixth in total assets, fourth in net generating capability, eighth in number of
customers and eleventh in number of employees. This information provided a
basis for comparing the Company with the largest electric and gas utilities,
including companies generally comparable in size represented in the Moody's 24
utilities whose comparative investment return is depicted in the graph herein.
Compensation amounts were established by the Committee based upon its subjective
evaluation of Company and individual performance at levels consistent with the
Committee's policy relating to total direct compensation.
In May 1996, the Committee increased Mr. Nye's base salary as Chief
Executive to an annual rate of $740,000, representing a $40,000, or 5.7%,
increase over the amount established for Mr. Nye in May 1995. Based upon the
Committee's evaluation of individual and Company performance, as called for by
the AIP, the Committee also provided Mr. Nye with an AIP award of $370,000
compared to the prior year's award of $280,000. This level of compensation was
established based upon the Committee's subjective evaluation of the information
described in this report.
In discharging its responsibilities with respect to establishing executive
compensation, the Committee normally considers such matters at its May meeting
held in conjunction with the Annual Meeting of Shareholders. Although Company
management may be present during Committee discussions of officers'
compensation, Committee decisions with respect to the compensation of the
President and Chief Executive and the Chairman of the Board are reached in
private session without the presence of any member of Company management.
Section 162(m) of the Code limits the deductibility of compensation which a
publicly traded corporation provides to its most highly compensated officers.
As a general policy, the Company does not intend to provide compensation which
is not deductible for federal income tax purposes. Awards under the AIP in 1996
and subsequent years, as well as awards under the Long-Term Plan, are expected
to be fully deductible, and the DICP and the Salary Deferral Program have been
amended to require the deferral of distributions of amounts earned in 1995 and
subsequent years until the time when such amounts would be deductible. Awards
provided under the AIP in 1995 and distributions under the DICP and the Salary
Deferral Program which were earned in plan years prior to 1995, may not be fully
deductible but such amounts are not expected to be material.
Shareholder comments to the Committee are welcomed and should be addressed
to the Corporate Secretary of the Company at the Company's offices.
ORGANIZATION AND COMPENSATION COMMITTEE
JAMES A. MIDDLETON, CHAIR MARGARET N. MAXEY
BAYARD H. FRIEDMAN J. E. OESTERREICHER
WILLIAM M. GRIFFIN CHARLES R. PERRY
KERNEY LADAY HERBERT H. RICHARDSON
73
PERFORMANCE GRAPH
The following graph compares the performance of the Company's common stock
to the S&P 500 Index and to the Moody's 24 Utilities for the last five years.
The graph assumes the investment of $100 at December 31, 1991 and that all
dividends were reinvested. The amount of the investment at the end of each year
is shown in the graph and in the table which follows.
[PERFORMANCE GRAPH APPEARS HERE]
CUMULATIVE TOTAL RETURNS
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Texas Utilities 100 110 119 97 134 140
- -------------------------------------------------------------------
S&P 500 Index 100 108 118 120 165 203
- -------------------------------------------------------------------
Moody's 24 Utilities 100 105 115 98 129 131
- -------------------------------------------------------------------
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
THE COMPANY
- -----------
Information with respect to this item is found under the headings
Beneficial Ownership of Common Stock of the Company in the definitive proxy
statement to be filed by the Company with the Commission on or about April 1,
1997. Additional information with respect to Executive Officers of the
Registrant is found at the end of Part I.
TU ELECTRIC
- -----------
Security ownership of certain beneficial owners at February 28, 1997:
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ------------------- ----------------- -------
Common Stock, Texas Utilities Company 156,800,000 shares 100.0%
without par value, Energy Plaza, 1601 Bryan Street sole voting and
of TU Electric Dallas, Texas 75201 investment power
Security ownership of management at February 28 ,1997:
The following lists the common stock of the Company owned by the Directors
and Executive Officers of TU Electric. The named individuals have sole voting
and investment power for the shares of common stock reported. Ownership of such
common stock by the Directors and Executive Officers, individually and as a
group, constituted less than 1% of the outstanding shares at February 28, 1997.
None of the named individuals own any of the preferred stock of TU Electric or
the preferred securities of any subsidiaries of TU Electric.
NUMBER OF SHARES
-----------------------------------
BENEFICALLY DEFERRED
OFFICER OWNED PLAN * TOTALS
------- ----------- -------- -------
T. L. Baker 3,012 16,544 19,556
J. S. Farrington 19,365 50,961 70,326
H. Jarrell Gibbs 7,032 19,340 26,372
Michael J. McNally 5,462 4,084 9,546
Erle Nye 20,114 43,594 63,708
W. M. Taylor 8,304 18,703 27,007
E. L. Watson 6,225 15,333 21,558
------ ------- -------
All Directors and Executive
Officers as a group (7) 69,514 168,559 238,073
====== ======= =======
- -----------------
* Share units held in deferred compensation accounts under the Deferred and
Incentive Compensation Plan. Although this plan allows such units to be paid
only in the form of cash, investments in such units create essentially the
same investment stake in the performance of the Company's common stock as do
investments in actual shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMPANY
- -----------
Information with respect to this item is found under the heading Beneficial
Ownership of Common Stock of the Company in the definitive proxy statement to be
filed by the Company with the Commission on or about April 1, 1997. Additional
information with respect to Executive Officers of the Registrant is found at the
end of Part I.
TU ELECTRIC
- -----------
None.
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a) Documents filed as part of this Report:
THE COMPANY
- -----------
1. Financial Statements (included in Item 8, Financial Statements
and Supplementary Data):
Statements of Consolidated Income for each of the three years
in the period ended December 31, 1996...........................30
Statements of Consolidated Retained Earnings for each of the
three years in the period ended December 31, 1996.............. 30
Statements of Consolidated Cash Flows for each of the three
years in the period ended December 31, 1996.....................31
Consolidated Balance Sheets, December 31, 1996 and 1995...........32
Notes to Consolidated Financial Statements........................38
Statement of Responsibility.......................................63
Independent Auditors' Report......................................65
TU ELECTRIC
- -----------
2. Financial Statements (included in Item 8, Financial Statements
and Supplementary Data):
Statements of Consolidated Income for each of the three years
in the period ended December 31, 1996...........................34
Statements of Consolidated Retained Earnings for each of the three
years in the period ended December 31, 1996.......................34
Statements of Consolidated Cash Flows for each of the
three years in the period ended December 31, 1996...............35
Consolidated Balance Sheets, December 31, 1996 and 1995...........36
Notes to Consolidated Financial Statements........................38
Statement of Responsibility.......................................64
Independent Auditors' Report......................................66
All financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements or notes thereto.
76
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 1996, are as follows:
THE COMPANY
- -----------
Date of Report Item Reported
-------------- -------------
None.
TU ELECTRIC
- -----------
Date of Report Item Reported
-------------- -------------
None.
(c) Exhibits:
THE COMPANY AND TU ELECTRIC
- ---------------------------
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
2(a) 33-12391 2(a) - Amended and Restated Agreement and
Plan of Merger, dated as of April 13,
1996, among the Company, ENSERCH
Corporation and TUC Holding Company.
3(a) 33-48880 4(a) - Restated Articles of Incorporation
of the Company.
3(b) 33-48880 4(b) - Bylaws, as amended, of the Company.
3(c) 0-11442 3(a) - Restated Articles of Incorporation
Form 10-K of TU Electric.
(1993)
3(d) 33-64694 4(c) - Bylaws of TU Electric, as amended.
4(a) 2-90185 4(a) - Mortgage and Deed of Trust, dated as
of December 1, 1983, between TU
Electric and Irving Trust Company
(now The Bank of New York), Trustee.
4(a)(1) - Supplemental Indentures to Mortgage
and Deed of Trust:
2-90185 4(b) First April 1, 1984
2-92738 4(a)-1 Second September 1, 1984
2-97185 4(a)-1 Third April 1, 1985
2-99940 4(a)-1 Fourth August 1, 1985
2-99940 4(a)-2 Fifth September 1, 1985
33-01774 4(a)-2 Sixth December 1, 1985
33-9583 4(a)-1 Seventh March 1, 1986
33-9583 4(a)-2 Eighth May 1, 1986
33-11376 4(a)-1 Ninth October 1, 1986
33-11376 4(a)-2 Tenth December 1, 1986
33-11376 4(a)-3 Eleventh December 1, 1986
33-14584 4(a)-1 Twelfth February 1, 1987
33-14584 4(a)-2 Thirteenth March 1, 1987
33-14584 4(a)-3 Fourteenth April 1, 1987
33-24089 4(a)-1 Fifteenth July 1, 1987
33-24089 4(a)-2 Sixteenth September 1, 1987
33-24089 4(a)-3 Seventeenth October 1, 1987
33-24089 4(a)-4 Eighteenth March 1, 1988
33-24089 4(a)-5 Nineteenth May 1, 1988
33-30141 4(a)-1 Twentieth September 1, 1988
33-30141 4(a)-2 Twenty-first November 1, 1988
77
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-1 Twenty-third August 1, 1989
33-35614 4(a)-2 Twenty-fourth November 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-35614 4(a)-4 Twenty-six February 1, 1990
33-39493 4(a)-1 Twenty-seventh September 1, 1990
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-39493 4(a)-3 Twenty-ninth October 1, 1990
33-39493 4(a)-4 Thirtieth March 1, 1991
33-45104 4(a)-1 Thirty-first May 1, 1991
33-45104 4(a)-2 Thirty-second July 1, 1991
33-46293 4(a)-1 Thirty-third February 1, 1992
33-49710 4(a)-1 Thrity-fourth April 1, 1992
33-49710 4(a)-2 Thirty-fifth April 1, 1992
33-49710 4(a)-3 Thirty-sixth June 1, 1992
33-49710 4(a)-4 Thirty-seventh June 1, 1992
33-57576 4(a)-1 Thirty-eighth August 1, 1992
33-57576 4(a)-2 Thirty-ninth October 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-57576 4(a)-4 Forty-first December 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-1 Forty-third April 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-64692 4(a)-3 Forty-fifth May 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
33-68100 4(a)-4 Forty-eighth November 1, 1993
33-68100 4(a)-5 Forty-ninth May 1, 1994
33-68100 4(a)-6 Fiftieth May 1, 1994
33-68100 4(a)-7 Fifty-first August 1, 1994
0-11442 99 Fifty-second April 1, 1995
Form 10-Q
(Quarter ended
March 31, 1995)
0-11442 99 Fifty-third June 1, 1995
Form 10-Q
(Quarter ended
June 30, 1995)
0-11442 4 Fifty-fourth October 1, 1995
Form 8-K (Dated
September 26, 1995)
0-11442 4(a) Fifty-fifth March 1, 1996
Form 10-Q
(Quarter ended
March 31, 1996)
0-11442 4(a) Fifty-sixth September 1, 1996
Form 10-Q
(Quarter ended
September 30, 1996)
4(a)(2) Fifty-seventh February 1, 1997
4(b)(1) - Agreement to furnish certain debt
instruments (the Company).
4(b)(2) - Agreement to furnish certain debt
instruments (TU Electric).
78
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
4(c) 33-68104 4(b)-16 - Deposit Agreement between TU Electric
and Chemical Bank, dated as of January
11, 1993.
4(d) 33-68104 4(b)-17 - Deposit Agreement between TU Electric
and Chemical Bank, dated as of August
4, 1993.
4(e) 0-11442 4(e) - Deposit Agreement between TU Electric
Form 10-K and Chemical Bank, dated as of October
(1993) 14, 1993.
4(f) 0-11442 4(f) - Indenture (For Unsecured Subordinated
Form 10-K Debt Securities relating to Trust
(1995) Securities), dated as of December 1,
1995, between TU Electric and The
Bank of New York, as Trustee.
4(g) 0-11442 4(g) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 12, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank of
New York (Delaware) and the
Administrative Trustees thereunder,
as Trustees for TU Electric Capital I.
4(h) 0-11442 4(h) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital I, dated as of
(1995) December 12, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
4(i) 0-11442 4(i) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 12,
(1995) 1995, between TU Electric and TU
Electric Capital I.
4(j) - Officer's Certificate, dated as of
December 12, 1995, establishing
the terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital I.
4(k) 0-11442 4(j) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 12, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank
of New York (Delaware) and the
Administrative Trustees thereunder, as
Trustees for TU Electric Capital II.
4(l) 0-11442 4(k) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital II, dated as of
(1995) December 12, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
4(m) 0-11442 4(l) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 12,
(1995) 1995, between TU Electric and TU
Electric Capital II.
4(n) - Officer's Certificate, dated as of
December 12, 1995, establishing the
terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital II.
4(o) 0-11442 4(m) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 13, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank of
New York (Delaware), and the
Administrative Trustees thereunder, as
Trustees for TU Electric Capital III.
4(p) 0-11442 4(n) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital III, dated as of
(1995) December 13, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
4(q) 0-11442 4(o) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 13,
(1995) 1995, between TU Electric and TU
Electric Capital III.
4(r) - Officer's Certificate, dated as of
December 13, 1995, establishing the
terms of the Junior Subordinated
Debentures issued used in connection
with the preferred securities of
TU Electric Capital III.
4(s) - Amended and Restated Trust Agreement,
dated as of January 30, 1997,
between TU Electric, as Depositor,
and The Bank of New York (Delaware),
and the Administrative Trustee
thereunder, as Trustees for TU
Electric Capital IV.
79
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
4(t) - Guarantee Agreement with respect to TU
Electric Capital IV, dated as of
January 30, 1997, between TU Electric,
as Guarantor, and The Bank of New
York, as Trustee.
4(u) - Agreement as to Expenses and
Liabilities, dated as of January 30,
1997, between TU Electric and TU
Electric Capital IV.
4(v) - Officer's Certificate, dated as of
January 30, 1997, establishing the
terms of the Junior Subordinated
Debentures issued used in connection
with the preferred securities of TU
Electric Capital IV.
4(w) - Amended and Restated Trust Agreement,
dated as of January 30, 1997, between
TU Electric, as Depositor, and The
Bank of New York (Delaware), and the
Administrative Trustee thereunder, as
Trustees for TU Electric Capital V.
4(x) - Guarantee Agreement with respect to TU
Electric Capital V, dated as of
January 30, 1997, between TU Electric,
as Guarantor, and The Bank of New
York, as Trustee.
4(y) - Agreement as to Expenses and
Liabilities, dated as of January 30,
1997, between TU Electric and TU
Electric Capital V.
4(z) - Officer's Certificate, dated as of
January 30, 1997, establishing the
terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital V.
10(a)** 1-3591 10(a) - Deferred and Incentive Compensation
Form 10-Q Plan of the Texas Utilities Company
(Quarter ended System, as amended January 1, 1995.
June 30, 1995)
10(b)** 1-3591 10(f) - Salary Deferral Program of Texas
Form 10-Q Utilities Company System as amended
(Quarter ended January 1, 1995.
June 30, 1995)
10(c)** 1-3591 10(c) - Restated Supplemental Retirement Plan
Form 10-Q for Employees of the Texas Utilities
(Quarter ended Company System, as restated effective
June 30, 1995) January 1, 1995.
10(d)** 1-3591 10(b) - Deferred Compensation Plan for Outside
Form 10-Q Directors of the Company, effective as
(Quarter ended of July 1, 1995.
June 30, 1995)
10(e)** 1-3591 10(d) - Annual Incentive Plan of the Texas
Form 10-Q Utilities Company System, dated as of
(Quarter ended May 19, 1995.
June 30, 1995)
10(f)** 1-3591 10(e) - Management Transition Agreement, dated
Form 10-Q as of May 19, 1995 between the Company
(Quarter ended and J. S. Farrington.
June 30, 1995)
12(a) - Computation of Ratio of Earnings to
Fixed Charges for the Company.
12(b) - Computation of Ratio of Earnings to
Fixed Charges, and to Fixed Charges
and Preferred Dividends for TU
Electric.
21 - Subsidiaries of the Company.
23(a) - Consent of Counsel to the Company.
23(b) - Consent of Counsel to TU Electric.
23(c) - Independent Auditor's Consent for the
Company.
80
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
23(d) - Independent Auditor's Consent for TU
Electric.
27(a) - Financial Data Schedule for the
Company.
27(b) - Financial Data Schedule for TU
Electric.
99(a) 1-3591 28(b) - Agreement, dated as of February 12,
Form 10-K 1988, between TU Electric and Texas
(1987) Municipal Power Agency.
99(b) 33-55408 99(a) - Agreement, dated as July 5, 1988,
between TU Electric and Electric and
Tex-La Electric Cooperative of Texas,
Inc.
99(d) 33-59988 2 - Agreement and plan of merger, dated as
of January 25, 1993, by and among the
Company, TUA, Inc., and Southwestern
Electric Service Company.
99(e) 33-23532 4(c)(i) - Trust Indenture, Security Agreement
and Mortgage, dated as of December 1,
1987, as supplemented by Supplement
No. 1 thereto dated as of May 1, 1988
among the Lessor, TU Electric and the
Trustee.
99(f) 33-24089 4(c)-1 - Supplement No. 2 to Trust Indenture,
Security Agreement and Mortgage, dated
as of August 1, 1988.
99(g) 33-24089 4(e)-1 - Supplement No. 3 to Trust Indenture,
Security Agreement and Mortgage, dated
as of August 1, 1988.
99(h) 0-11442 99(c) - Supplement No. 4 to Trust Indenture,
Form 10-Q Security Agreement and Mortgage,
(Quarter ended including form of Secured Facility
June 30,1993) Bond, 1993 Series.
99(i) 33-23532 4(d) - Lease Agreement, dated as of December
1, 1987 between the Lessor and TU
Electric as supplemented by Supplement
No. 1 thereto dated as of May 20, 1988
between the Lessor and TU Electric.
99(j) 33-24089 4(f) - Lease Agreement Supplement No. 2,
dated as of August 18, 1988.
99(k) 33-24089 4(f)-1 - Lease Agreement Supplement No. 3,
dated as of August 25, 1988.
99(l) 33-63434 4(d)(iv)- Lease Agreement Supplement No. 4,
dated as of December 1, 1988.
99(m) 33-63434 4(d)(v) - Lease Agreement Supplement No. 5,
dated as of June 1, 1989.
99(n) 0-11442 99(d) - Lease Agreement Supplement No. 6,
Form 10-Q dated as of July 1, 1993.
(Quarter ended
June 30,1993)
99(o) 33-23532 4(e) - Participation Agreement dated as of
December 1, 1987, as amended by a
Consent to Amendment of the
Participation Agreement, dated as of
May 20, 1988, each among the Lessor,
the Trustee, the Owner Participant,
certain banking institutions, Capcorp,
Inc. and TU Electric.
99(p) 33-24089 4(g) - Consent to Amendment of the
Participation Agreement, dated as of
August 18, 1988.
99(q) 33-24089 4(g)-1 - Supplement No. 1 to the Participation
Agreement, dated as of August 18,
1988.
99(r) 33-24089 4(g)-2 - Supplement No. 2 to the Participation
Agreement, dated as of August 18,
1988.
99(s) 33-63434 4(e)(v) - Supplement No. 3 to the Participation
Agreement, dated as of December 1,
1988.
81
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
99(t) 0-11442 99(e) - Supplement No. 4 to the Participation
Form 10-Q Agreement, dated as of June 17, 1993.
(Quarter ended
June 30, 1993)
99(u) 0-11442 99(t) - Competitive Advance and Revolving
Form 10-Q Credit Facility Agreement, "Facility
(Quarter ended A", dated as of April 29, 1994, among
September 31, 1994) the Company, TU Electric, certain
banks and Chemical Bank, Agent
(Facility A).
99(v) 0-11442 99(a) - Amendment, dated as of April 28, 1995,
Form 10-Q to Facility A.
(Quarter ended
March 31, 1995)
99(w) 0-11442 99(w) - Second Amendment, dated as of November
Form 10-K 24, 1995, to Facility A.
(1995)
99(x) 0-11442 99(u) - Competitive Advance and Revolving
Form 10-Q Credit Facility Agreement, "Facility
(Quarter ended B", dated as of April 29, 1994, among
September 31, 1994) the Company, TU Electric, certain
banks and Chemical Bank, Agent
(Facility B).
99(y) 0-11442 99(b) - Amendment, dated as of April 28, 1995,
Form 10-Q to Facility B.
(Quarter ended
March 31, 1995)
99(z) 0-11442 99(z) - Second Amendment, dated as of November
Form 10-K 24, 1995, to Facility B.
(1995)
99(aa) 0-11442 99(v) - Credit Agreement, dated as of February
Form 10-K 24, 1995, among TU Electric, Bank of
(1994) America and The Bank of New York.
99(bb) 0-11442 99(bb) - Competitive Advance and Revolving
Form 10-K Credit Facility Agreement, dated as of
(1995) November 22, 1995, among the Company
and Chemical Bank and Texas Commerce
Bank National Association, as Agents.
99(cc) 0-11442 99(a) - Amended and Restated Competitive
Form 10-Q Advance and Revolving Credit Facility
(Quarter ended Agreement, Facility A, dated as of
March 31, 1996) April 26, 1996, among the Company, TU
Electric, certain banks, Chemical Bank
and Texas Commerce Bank National
Association, as Agents.
99(dd) 0-11442 99(b) - Amended and Restated Term Loan and
Form 10-Q Competitive Advance and Revolving
(Quarter ended Credit Facility Agreement, Facilities
March 31, 1996) B and C, dated as of April 26, 1996,
among the Company, TU Electric,
certain banks, and Chemical Bank and
Texas Commerce Bank National
Association, as Agents.
99(ee) 0-11442 4(b) - Supplement No. 1, dated October 25,
Form 10-Q 1995, to Trust Indenture, Security
(Quarter ended Agreement and Mortgage, dated as of
March 31, 1996) December 1, 1989, among the Owner
Trustee, TU Electric and the Indenture
Trustee.
82
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
99(ff) 0-11442 4(c) - Supplement No. 1, dated October 19,
Form 10-Q 1995, to Amended and Restated
(Quarter ended Participation Agreement, dated as of
March 31, 1996) November 28, 1989, among the Owner
Trustee, The First National Bank of
Chicago, as Original Indenture
Trustee, the Indenture Trustee, the
Owner Participant, Mesquite Power
Corporation and TU Electric.
___________________
* Incorporated herein by reference.
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to item 14(c) of Form 10-K.
83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, TEXAS UTILITIES COMPANY HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TEXAS UTILITIES COMPANY
Date: March 12, 1997 By: /s/ J. S. FARRINGTON
-------------------------------------
(J. S. FARRINGTON, CHAIRMAN OF
THE BOARD)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERONS ON BEHALF OF TEXAS
UTILITIES COMPANY AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. S. FARRINGTON Chairman of the Board
- -------------------------------
(J. S. FARRINGTON, CHAIRMAN
OF THE BOARD)
/s/ ERLE NYE Principal Executive Officer
- ------------------------------- and Director
(ERLE NYE, PRESIDENT AND
CHIEF EXECUTIVE)
/s/ PETER B. TINKHAM Principal Financial Officer
- -------------------------------
(PETER B. TINKHAM, TREASURER
AND ASSISTANT SECRETARY)
/s/ MARC D. MOSELEY Principal Accounting Officer
- -------------------------------
(MARC D. MOSELEY, ACTING
CONTROLLER)
/s/ BAYARD H. FRIEDMAN Director
- -------------------------------
(BAYARD H. FRIEDMAN)
/s/ WILLIAM M. GRIFFIN Director March 12, 1997
- -------------------------------
(WILLIAM M. GRIFFIN)
/s/ KERNEY LADAY Director
- -------------------------------
(KERNEY LADAY)
/s/ MARGARET N. MAXEY Director
- -------------------------------
(MARGARET N. MAXEY)
/s/ JAMES A. MIDDLETON Director
- -------------------------------
(JAMES A. MIDDLETON)
/s/ J. E. OESTERREICHER Director
- -------------------------------
(J. E. OESTERREICHER)
/s/ CHARLES R. PERRY Director
- -------------------------------
(CHARLES R. PERRY)
/s/ HERBERT H. RICHARDSON Director
- -------------------------------
(HERBERT H. RICHARDSON)
84
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, TEXAS UTILITIES COMPANY HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TEXAS UTILITIES ELECTRIC COMPANY
Date: March 12, 1997 By: /s/ ERLE NYE
-------------------------------------
(ERLE NYE, CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERLE NYE Principal Executive
- ------------------------------- Officer and Director
(ERLE NYE, CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE)
/s/ ROBERT S. SHAPARD Principal Financial Officer
- -------------------------------
(ROBERT S. SHAPARD, TREASURER
AND ASSISTANT SECRETARY)
/s/ MARC D. MOSELEY Principal Accounting Officer
- -------------------------------
(MARC D. MOSELEY, ACTING
CONTROLLER)
/s/ T. L. BAKER Director
- -------------------------------
(T. L. BAKER)
/s/ J. S. FARRINGTON Director March 12, 1997
- -------------------------------
(J.S. FARRINGTON)
/s/ H. JARRELL GIBBS Director
- -------------------------------
(H. JARRELL GIBBS)
/s/ MICHAEL J. MCNALLY Director
- -------------------------------
(MICHAEL J. MCNALLY)
/s/ W. M. TAYLOR Director
- -------------------------------
(W. M. TAYLOR)
/s/ E. L. WATSON Director
- -------------------------------
(E. L. WATSON)
85
INDEX TO EXHIBITS
THE COMPANY AND TU ELECTRIC
- ---------------------------
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
2(a) 33-12391 2(a) - Amended and Restated Agreement and
Plan of Merger, dated as of April 13,
1996, among the Company, ENSERCH
Corporation and TUC Holding Company.
3(a) 33-48880 4(a) - Restated Articles of Incorporation
of the Company.
3(b) 33-48880 4(b) - Bylaws, as amended, of the Company.
3(c) 0-11442 3(a) - Restated Articles of Incorporation
Form 10-K of TU Electric.
(1993)
3(d) 33-64694 4(c) - Bylaws of TU Electric, as amended.
4(a) 2-90185 4(a) - Mortgage and Deed of Trust, dated as
of December 1, 1983, between TU
Electric and Irving Trust Company
(now The Bank of New York), Trustee.
4(a)(1) - Supplemental Indentures to Mortgage
and Deed of Trust:
2-90185 4(b) First April 1, 1984
2-92738 4(a)-1 Second September 1, 1984
2-97185 4(a)-1 Third April 1, 1985
2-99940 4(a)-1 Fourth August 1, 1985
2-99940 4(a)-2 Fifth September 1, 1985
33-01774 4(a)-2 Sixth December 1, 1985
33-9583 4(a)-1 Seventh March 1, 1986
33-9583 4(a)-2 Eighth May 1, 1986
33-11376 4(a)-1 Ninth October 1, 1986
33-11376 4(a)-2 Tenth December 1, 1986
33-11376 4(a)-3 Eleventh December 1, 1986
33-14584 4(a)-1 Twelfth February 1, 1987
33-14584 4(a)-2 Thirteenth March 1, 1987
33-14584 4(a)-3 Fourteenth April 1, 1987
33-24089 4(a)-1 Fifteenth July 1, 1987
33-24089 4(a)-2 Sixteenth September 1, 1987
33-24089 4(a)-3 Seventeenth October 1, 1987
33-24089 4(a)-4 Eighteenth March 1, 1988
33-24089 4(a)-5 Nineteenth May 1, 1988
33-30141 4(a)-1 Twentieth September 1, 1988
33-30141 4(a)-2 Twenty-first November 1, 1988
33-30141 4(a)-3 Twenty-second January 1, 1989
33-35614 4(a)-1 Twenty-third August 1, 1989
33-35614 4(a)-2 Twenty-fourth November 1, 1989
33-35614 4(a)-3 Twenty-fifth December 1, 1989
33-35614 4(a)-4 Twenty-six February 1, 1990
33-39493 4(a)-1 Twenty-seventh September 1, 1990
33-39493 4(a)-2 Twenty-eighth October 1, 1990
33-39493 4(a)-3 Twenty-ninth October 1, 1990
33-39493 4(a)-4 Thirtieth March 1, 1991
33-45104 4(a)-1 Thirty-first May 1, 1991
33-45104 4(a)-2 Thirty-second July 1, 1991
33-46293 4(a)-1 Thirty-third February 1, 1992
33-49710 4(a)-1 Thrity-fourth April 1, 1992
33-49710 4(a)-2 Thirty-fifth April 1, 1992
33-49710 4(a)-3 Thirty-sixth June 1, 1992
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
33-49710 4(a)-4 Thirty-seventh June 1, 1992
33-57576 4(a)-1 Thirty-eighth August 1, 1992
33-57576 4(a)-2 Thirty-ninth October 1, 1992
33-57576 4(a)-3 Fortieth November 1, 1992
33-57576 4(a)-4 Forty-first December 1, 1992
33-60528 4(a)-1 Forty-second March 1, 1993
33-64692 4(a)-1 Forty-third April 1, 1993
33-64692 4(a)-2 Forty-fourth April 1, 1993
33-64692 4(a)-3 Forty-fifth May 1, 1993
33-68100 4(a)-1 Forty-sixth July 1, 1993
33-68100 4(a)-3 Forty-seventh October 1, 1993
33-68100 4(a)-4 Forty-eighth November 1, 1993
33-68100 4(a)-5 Forty-ninth May 1, 1994
33-68100 4(a)-6 Fiftieth May 1, 1994
33-68100 4(a)-7 Fifty-first August 1, 1994
0-11442 99 Fifty-second April 1, 1995
Form 10-Q
(Quarter ended
March 31, 1995)
0-11442 99 Fifty-third June 1, 1995
Form 10-Q
(Quarter ended
June 30, 1995)
0-11442 4 Fifty-fourth October 1, 1995
Form 8-K (Dated
September 26, 1995)
0-11442 4(a) Fifty-fifth March 1, 1996
Form 10-Q
(Quarter ended
March 31, 1996)
0-11442 4(a) Fifty-sixth September 1, 1996
Form 10-Q
(Quarter ended
September 30, 1996)
4(a)(2) Fifty-seventh February 1, 1997
4(b)(1) - Agreement to furnish certain debt
instruments (the Company).
4(b)(2) - Agreement to furnish certain debt
instruments (TU Electric).
4(c) 33-68104 4(b)-16 - Deposit Agreement between TU Electric
and Chemical Bank, dated as of January
11, 1993.
4(d) 33-68104 4(b)-17 - Deposit Agreement between TU Electric
and Chemical Bank, dated as of August
4, 1993.
4(e) 0-11442 4(e) - Deposit Agreement between TU Electric
Form 10-K and Chemical Bank, dated as of October
(1993) 14, 1993.
4(f) 0-11442 4(f) - Indenture (For Unsecured Subordinated
Form 10-K Debt Securities relating to Trust
(1995) Securities), dated as of December 1,
1995, between TU Electric and The
Bank of New York, as Trustee.
4(g) 0-11442 4(g) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 12, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank of
New York (Delaware) and the
Administrative Trustees thereunder,
as Trustees for TU Electric Capital I.
4(h) 0-11442 4(h) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital I, dated as of
(1995) December 12, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
4(i) 0-11442 4(i) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 12,
(1995) 1995, between TU Electric and TU
Electric Capital I.
4(j) - Officer's Certificate, dated as of
December 12, 1995, establishing
the terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital I.
4(k) 0-11442 4(j) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 12, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank
of New York (Delaware) and the
Administrative Trustees thereunder, as
Trustees for TU Electric Capital II.
4(l) 0-11442 4(k) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital II, dated as of
(1995) December 12, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
4(m) 0-11442 4(l) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 12,
(1995) 1995, between TU Electric and TU
Electric Capital II.
4(n) - Officer's Certificate, dated as of
December 12, 1995, establishing the
terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital II.
4(o) 0-11442 4(m) - Amended and Restated Trust Agreement,
Form 10-K dated as of December 13, 1995,
(1995) between TU Electric, as Depositor,
and The Bank of New York, The Bank of
New York (Delaware), and the
Administrative Trustees thereunder, as
Trustees for TU Electric Capital III.
4(p) 0-11442 4(n) - Guarantee Agreement with respect to TU
Form 10-K Electric Capital III, dated as of
(1995) December 13, 1995, between TU
Electric, as Guarantor, and The Bank
of New York, as Trustee.
4(q) 0-11442 4(o) - Agreement as to Expenses and
Form 10-K Liabilities, dated as of December 13,
(1995) 1995, between TU Electric and TU
Electric Capital III.
4(r) - Officer's Certificate, dated as of
December 13, 1995, establishing the
terms of the Junior Subordinated
Debentures issued used in connection
with the preferred securities of
TU Electric Capital III.
4(s) - Amended and Restated Trust Agreement,
dated as of January 30, 1997,
between TU Electric, as Depositor,
and The Bank of New York (Delaware),
and the Administrative Trustee
thereunder, as Trustees for TU
Electric Capital IV.
4(t) - Guarantee Agreement with respect to TU
Electric Capital IV, dated as of
January 30, 1997, between TU Electric,
as Guarantor, and The Bank of New
York, as Trustee.
4(u) - Agreement as to Expenses and
Liabilities, dated as of January 30,
1997, between TU Electric and TU
Electric Capital IV.
4(v) - Officer's Certificate, dated as of
January 30, 1997, establishing the
terms of the Junior Subordinated
Debentures issued used in connection
with the preferred securities of TU
Electric Capital IV.
4(w) - Amended and Restated Trust Agreement,
dated as of January 30, 1997, between
TU Electric, as Depositor, and The
Bank of New York (Delaware), and the
Administrative Trustee thereunder, as
Trustees for TU Electric Capital V.
4(x) - Guarantee Agreement with respect to TU
Electric Capital V, dated as of
January 30, 1997, between TU Electric,
as Guarantor, and The Bank of New
York, as Trustee.
4(y) - Agreement as to Expenses and
Liabilities, dated as of January 30,
1997, between TU Electric and TU
Electric Capital V.
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
4(z) - Officer's Certificate, dated as of
January 30, 1997, establishing the
terms of the Junior Subordinated
Debentures issued in connection with
the preferred securities of TU
Electric Capital V.
10(a)** 1-3591 10(a) - Deferred and Incentive Compensation
Form 10-Q Plan of the Texas Utilities Company
(Quarter ended System, as amended January 1, 1995.
June 30, 1995)
10(b)** 1-3591 10(f) - Salary Deferral Program of Texas
Form 10-Q Utilities Company System as amended
(Quarter ended January 1, 1995.
June 30, 1995)
10(c)** 1-3591 10(c) - Restated Supplemental Retirement Plan
Form 10-Q for Employees of the Texas Utilities
(Quarter ended Company System, as restated effective
June 30, 1995) January 1, 1995.
10(d)** 1-3591 10(b) - Deferred Compensation Plan for Outside
Form 10-Q Directors of the Company, effective as
(Quarter ended of July 1, 1995.
June 30, 1995)
10(e)** 1-3591 10(d) - Annual Incentive Plan of the Texas
Form 10-Q Utilities Company System, dated as of
(Quarter ended May 19, 1995.
June 30, 1995)
10(f)** 1-3591 10(e) - Management Transition Agreement, dated
Form 10-Q as of May 19, 1995 between the Company
(Quarter ended and J. S. Farrington.
June 30, 1995)
12(a) - Computation of Ratio of Earnings to
Fixed Charges for the Company.
12(b) - Computation of Ratio of Earnings to
Fixed Charges, and to Fixed Charges
and Preferred Dividends for TU
Electric.
21 - Subsidiaries of the Company.
23(a) - Consent of Counsel to the Company.
23(b) - Consent of Counsel to TU Electric.
23(c) - Independent Auditor's Consent for the
Company.
23(d) - Independent Auditor's Consent for TU
Electric.
27(a) - Financial Data Schedule for the
Company.
27(b) - Financial Data Schedule for TU
Electric.
99(a) 1-3591 28(b) - Agreement, dated as of February 12,
Form 10-K 1988, between TU Electric and Texas
(1987) Municipal Power Agency.
99(b) 33-55408 99(a) - Agreement, dated as July 5, 1988,
between TU Electric and Electric and
Tex-La Electric Cooperative of Texas,
Inc.
99(d) 33-59988 2 - Agreement and plan of merger, dated as
of January 25, 1993, by and among the
Company, TUA, Inc., and Southwestern
Electric Service Company.
99(e) 33-23532 4(c)(i) - Trust Indenture, Security Agreement
and Mortgage, dated as of December 1,
1987, as supplemented by Supplement
No. 1 thereto dated as of May 1, 1988
among the Lessor, TU Electric and the
Trustee.
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
99(f) 33-24089 4(c)-1 - Supplement No. 2 to Trust Indenture,
Security Agreement and Mortgage, dated
as of August 1, 1988.
99(g) 33-24089 4(e)-1 - Supplement No. 3 to Trust Indenture,
Security Agreement and Mortgage, dated
as of August 1, 1988.
99(h) 0-11442 99(c) - Supplement No. 4 to Trust Indenture,
Form 10-Q Security Agreement and Mortgage,
(Quarter ended including form of Secured Facility
June 30,1993) Bond, 1993 Series.
99(i) 33-23532 4(d) - Lease Agreement, dated as of December
1, 1987 between the Lessor and TU
Electric as supplemented by Supplement
No. 1 thereto dated as of May 20, 1988
between the Lessor and TU Electric.
99(j) 33-24089 4(f) - Lease Agreement Supplement No. 2,
dated as of August 18, 1988.
99(k) 33-24089 4(f)-1 - Lease Agreement Supplement No. 3,
dated as of August 25, 1988.
99(l) 33-63434 4(d)(iv)- Lease Agreement Supplement No. 4,
dated as of December 1, 1988.
99(m) 33-63434 4(d)(v) - Lease Agreement Supplement No. 5,
dated as of June 1, 1989.
99(n) 0-11442 99(d) - Lease Agreement Supplement No. 6,
Form 10-Q dated as of July 1, 1993.
(Quarter ended
June 30,1993)
99(o) 33-23532 4(e) - Participation Agreement dated as of
December 1, 1987, as amended by a
Consent to Amendment of the
Participation Agreement, dated as of
May 20, 1988, each among the Lessor,
the Trustee, the Owner Participant,
certain banking institutions, Capcorp,
Inc. and TU Electric.
99(p) 33-24089 4(g) - Consent to Amendment of the
Participation Agreement, dated as of
August 18, 1988.
99(q) 33-24089 4(g)-1 - Supplement No. 1 to the Participation
Agreement, dated as of August 18,
1988.
99(r) 33-24089 4(g)-2 - Supplement No. 2 to the Participation
Agreement, dated as of August 18,
1988.
99(s) 33-63434 4(e)(v) - Supplement No. 3 to the Participation
Agreement, dated as of December 1,
1988.
99(t) 0-11442 99(e) - Supplement No. 4 to the Participation
Form 10-Q Agreement, dated as of June 17, 1993.
(Quarter ended
June 30, 1993)
99(u) 0-11442 99(t) - Competitive Advance and Revolving
Form 10-Q Credit Facility Agreement, "Facility
(Quarter ended A", dated as of April 29, 1994, among
September 31, 1994) the Company, TU Electric, certain
banks and Chemical Bank, Agent
(Facility A).
99(v) 0-11442 99(a) - Amendment, dated as of April 28, 1995,
Form 10-Q to Facility A.
(Quarter ended
March 31, 1995)
99(w) 0-11442 99(w) - Second Amendment, dated as of November
Form 10-K 24, 1995, to Facility A.
(1995)
PREVIOUSLY FILED*
-----------------
WITH
FILE AS
EXHIBITS NUMBER EXHIBIT NUMBER DATED
- -------- ------ ------- ------ -----
99(x) 0-11442 99(u) - Competitive Advance and Revolving
Form 10-Q Credit Facility Agreement, "Facility
(Quarter ended B", dated as of April 29, 1994, among
September 31, 1994) the Company, TU Electric, certain
banks and Chemical Bank, Agent
(Facility B).
99(y) 0-11442 99(b) - Amendment, dated as of April 28, 1995,
Form 10-Q to Facility B.
(Quarter ended
March 31, 1995)
99(z) 0-11442 99(z) - Second Amendment, dated as of November
Form 10-K 24, 1995, to Facility B.
(1995)
99(aa) 0-11442 99(v) - Credit Agreement, dated as of February
Form 10-K 24, 1995, among TU Electric, Bank of
(1994) America and The Bank of New York.
99(bb) 0-11442 99(bb) - Competitive Advance and Revolving
Form 10-K Credit Facility Agreement, dated as of
(1995) November 22, 1995, among the Company
and Chemical Bank and Texas Commerce
Bank National Association, as Agents.
99(cc) 0-11442 99(a) - Amended and Restated Competitive
Form 10-Q Advance and Revolving Credit Facility
(Quarter ended Agreement, Facility A, dated as of
March 31, 1996) April 26, 1996, among the Company, TU
Electric, certain banks, Chemical Bank
and Texas Commerce Bank National
Association, as Agents.
99(dd) 0-11442 99(b) - Amended and Restated Term Loan and
Form 10-Q Competitive Advance and Revolving
(Quarter ended Credit Facility Agreement, Facilities
March 31, 1996) B and C, dated as of April 26, 1996,
among the Company, TU Electric,
certain banks, and Chemical Bank and
Texas Commerce Bank National
Association, as Agents.
99(ee) 0-11442 4(b) - Supplement No. 1, dated October 25,
Form 10-Q 1995, to Trust Indenture, Security
(Quarter ended Agreement and Mortgage, dated as of
March 31, 1996) December 1, 1989, among the Owner
Trustee, TU Electric and the Indenture
Trustee.
99(ff) 0-11442 4(c) - Supplement No. 1, dated October 19,
Form 10-Q 1995, to Amended and Restated
(Quarter ended Participation Agreement, dated as of
March 31, 1996) November 28, 1989, among the Owner
Trustee, The First National Bank of
Chicago, as Original Indenture
Trustee, the Indenture Trustee, the
Owner Participant, Mesquite Power
Corporation and TU Electric.
___________________
* Incorporated herein by reference.
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to item 14(c) of Form 10-K.