ITEM 1. BUSINESS (CONTINUED).
REGULATION AND RATES -- (CONTINUED)
difference between bonded rates and rates approved in the final order. (See Docket 11735 below, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and Note 10 to Consolidated Financial Statements.)
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, the rule provides for recovery of purchased power capacity costs with respect to purchases from qualifying facilities, to the extent such costs are not otherwise included in base rates. Recovery is made on a monthly basis through a Power Cost Recovery Factor (PCRF). The energy-related costs of such purchases are included in the fixed fuel factor. 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.
DOCKET 11735
In January 1993, TU Electric made applications to the PUC (Docket 11735) and to its municipal regulatory authorities for upward adjustments in rates for electric service throughout its service area, which would have increased annual operating revenues by approximately $760 million, or 15.3%, based upon the test year ended June 30, 1992. Such request reflected, among other things, costs associated with Comanche Peak Unit 2, costs associated with Comanche Peak Unit 1 after the end of the Docket 9300 (see below) test year, additional ad valorem taxes and certain postretirement benefit costs. In August 1993, pursuant to rules of the PUC, TU Electric placed its requested rate increase into effect, under bond and subject to refund with interest, applicable to energy sales on and after such date. Revenues were recorded net of an estimated reserve for possible refunds.
In October 1993, the PUC issued an order (Order) approving the terms of an agreement (Settlement Agreement) among TU Electric, the General Counsel's office of the PUC and applicable intervenors which, among other things, settled all remaining issues relating to the design, construction and cost of Comanche Peak through commencement of commercial operation of Unit 2. The Settlement Agreement provided for the disallowance in Docket 11735 of $250 million of costs relating to the completion of Comanche Peak. Pursuant to the Order, TU Electric refunded $5 million in fuel charges previously incurred in order to resolve the fuel phase of Docket 11735 under which TU Electric was seeking reconciliation of approximately $4.6 billion of fuel costs incurred during the three year period ended June 30, 1992, under the fuel rule in effect prior to May 1993. Further, in order to resolve the primary issue in another proceeding which resulted from a complaint filed against TU Electric in October 1992 by the General Counsel's office of the PUC, as a result of the Order, TU Electric agreed to write off $83 million of allowance for funds used during construction (AFUDC), which consisted of the amount subject to dispute in such proceeding and similar charges subsequently accrued. Also, under the Settlement Agreement and confirmed in the Docket 11735 final order (see below), TU Electric will recover, ratably over an eight year period, $197 million of operation and
ITEM 1. BUSINESS (CONTINUED).
REGULATION AND RATES -- (CONTINUED)
maintenance expenditures incurred by TU Electric in connection with its recent cost reduction program. However, an additional $25 million of such expenditures will not be subject to recovery and was written off by TU Electric. As a result of the Settlement Agreement, TU Electric recorded a charge against earnings in September 1993 of approximately $363 million ($265 million after tax).
On January 28, 1994, the PUC issued a final order in Docket 11735 which provided for a total annual revenue increase of approximately $435 million, or 8.7%. TU Electric strongly disagrees with the final order and has filed a motion for rehearing with the PUC, and will appeal the outcome, if necessary. As a result of this final order, unless the order is changed on rehearing, TU Electric will refund the difference between the bonded rates and the rates approved in the final order, including interest, all of which is being fully reserved by TU Electric. The total amount to be refunded will be determined once approved rates have been implemented, which is expected to be during the second quarter of 1994. The amount to be refunded at December 31, 1993 was approximately $141.2 million. Such refund will be mitigated by a fuel cost surcharge approved by the PUC of approximately $144.5 million, including interest, in under-collected fuel costs through June 30, 1993. (See Fuel Cost Recovery Rule.)
In November 1993, an intermediate appellate court in Texas, considering an appeal of another utility's rate case, ruled that utilizing tax benefits generated by costs not allowed in rates to reduce rates charged to customers was required by prior court rulings for all disallowed costs, including capital costs. TU Electric believes that such rulings are erroneous and not consistent with the Texas Public Utility Regulatory Act. According to a Private Letter Ruling issued to TU Electric by the Internal Revenue Service (IRS) with respect to investment tax credits, such ratemaking treatment, to the extent related to property classified for tax purposes as public utility property, would result in a violation of the normalization rules contained in the Internal Revenue Code of 1986, as amended (Code). Violation of the normalization rules would result in a significant adverse effect on TU Electric's results of operation and liquidity. The tax benefits associated with the Comanche Peak costs disallowed in Docket 9300 (see below) could be affected as a result of the court's method. In addition, in its final order in Docket 11735, the PUC reduced rates for the tax benefits generated by certain costs which were not allowed in rates. However, the PUC recognized the potential for a normalization violation if investment tax credits and tax depreciation generated by disallowed plant costs are used to reduce rates. Therefore, the PUC ordered TU Electric to obtain a Private Letter Ruling from the IRS with respect to tax depreciation on disallowed plant. Thus, TU Electric's rates would not reflect the tax depreciation benefit of disallowed plant unless the IRS rules such benefits can be utilized to reduce rates without violating the normalization rules contained in the Code. Such a finding by the IRS would require TU Electric to refund the tax depreciation benefits to its customers. TU Electric does not believe it is likely that such refund will occur if the IRS maintains a position similar to that stated in its previous Private Letter Ruling to TU Electric.
DOCKET 9300
In September 1991, the PUC issued a final order in TU Electric's prior rate case (Docket 9300), which provided for a total revenue increase of approximately $442 million and included $695 million of CWIP in rate base to support the revenue increase. It also included a prudence disallowance of $472 million with respect to certain Comanche Peak costs relating to 87.8% of TU Electric's ownership interest in both units of Comanche Peak. With respect to TU Electric's reacquisition of the remaining 12.2% minority owner interests in Comanche Peak, the order included an additional disallowance of $909 million.
ITEM 1. BUSINESS (CONTINUED).
REGULATION AND RATES -- (CONCLUDED)
In November 1991, TU Electric filed a petition in the 250th Judicial District Court of Travis County, Texas, requesting a reversal and remand of the Docket 9300 final order. Other parties to the PUC proceeding also filed appeals with respect to various portions of the order. In September 1992, after a hearing, the Court entered a judgment in the appeals which affirmed the prudence disallowance of $472 million but reversed and remanded to the PUC for reconsideration those portions of the PUC's final order providing for additional disallowances aggregating $884 million with respect to TU Electric's reacquisition of minority owner interests in Comanche Peak. The Court recognized that on remand the PUC may adjust the amount of CWIP included in TU Electric's rate base to be consistent with the PUC's redeterminations regarding the minority owner reacquisitions and the amount of cash working capital. Therefore, TU Electric does not expect this judgment to affect the rates approved in the Docket 9300 final order. Other parties to this suit have appealed this judgment. TU Electric disagrees with certain portions of this judgment and also has appealed. It is unable to predict the outcome of such appeals and any reconsiderations by the PUC.
COMPETITION
The electric utility industry in general has become, and is expected to be, increasingly competitive due to a variety of regulatory and economic developments. The level of competition is affected by, among other things, price, reliability of service, the cost of energy alternatives, new technologies and governmental regulations. TU Electric and SESCO's electric businesses are exposed to certain competitive forces in varying degrees.
TU Electric and SESCO, like the electric industry generally, face increasing competition in the supply of bulk power at wholesale. Electric utilities have historically sought to sell surplus capacity and energy outside their traditional service territories. The Energy Act was designed, among other things, to foster competition in the wholesale market by (a) facilitating, through amendments to the Public Holding Company Act of 1935, the ownership and operation of generating facilities by "exempt wholesale generators" (which may include independent power producers as well as affiliates of electric utilities) and (b) authorizing, through amendments to the Federal Power Act, the FERC under certain conditions to order utilities which own transmission facilities to provide wholesale transmission services to or for other utilities and other entities selling electric energy. While TU Electric and SESCO have experienced competitive pressures in the wholesale market, resulting in a minor loss of load, wholesale sales constitute a relatively low percentage of total sales. See Item 6. Selected Financial Data - - Consolidated Operating Statistics.
The legislatures and/or the regulatory commissions in several states have considered or are considering "retail wheeling" which, in general terms, means the transmission by an electric utility of energy produced by another entity over its transmission and distribution system to a retail customer in such utility's service territory. A requirement to transmit directly to retail customers would have the result of permitting retail customers to purchase electric capacity and energy from, at the election of such customers, the electric utility in whose service area they are located or from any other electric utilities or independent power producers. This issue has not been actively pursued in the Texas legislature or by the PUC.
ITEM 1. BUSINESS (CONTINUED).
COMPETITION -- (CONCLUDED)
TU Electric and SESCO generally have the right, through PUC certification, to provide electric service to the public within their service areas. However, some energy consumers in their service areas have the ability to produce their own electricity or use alternative forms of energy. Additionally, TU Electric and SESCO operate in some dually certified areas with other utilities.
Neither TU Electric nor SESCO are able to predict the extent of future competitive developments or what impact, if any, such developments may have on their operations.
ENVIRONMENTAL MATTERS
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.
ITEM 2. PROPERTIES.
The Company owns no utility plant or real property. At December 31, 1993, TU Electric owned or leased and operated the following units:
The principal generating facilities and load centers of TU Electric are connected by 3,861 circuit miles of 345,000 volt transmission lines and 9,098 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, seven 138,000 volt and one 69,000 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; and at several points with smaller systems operating wholly within Texas. SESCO is connected to TU Electric by three 138,000 volt lines, eight 69,000 volt lines and two lines at distribution voltage. TU Electric and SESCO are members of the Electric Reliability Council of Texas (ERCOT), an intrastate network of investor-owned entities, cooperatives and public entities. ERCOT is the regional reliability coordinating organization for member electric power systems in Texas.
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 and Fuel Company have the right of eminent domain whereby they may, if necessary, perfect or secure titles 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.
ITEM 2. PROPERTIES (CONTINUED).
CONSTRUCTION PROGRAM
The Company has taken steps to substantially reduce construction expenditures from amounts previously estimated. Such expenditures, excluding AFUDC (see Note 1 to Consolidated Financial Statements), are presently estimated at $400 million for each of the years 1994, 1995 and 1996. The System Companies are subject to federal, state and local regulations dealing with environmental protection (see Item 1. Business--Environmental Matters). Expenditures for construction to meet the requirements of such regulations at existing generating units are estimated to be $55 million for 1994 and were approximately $34 million in 1993, $25.4 million for 1992 and $10.4 million for 1991.
TU Electric's Resource Plan includes two lignite-fueled 750 MW units at Twin Oak currently scheduled for service for the peak seasons of 2000 and 2001, respectively. However, estimated construction expenditures, excluding AFUDC, for the 1994-1996 period do not include any significant amounts for the resumption of construction of these units. Active construction and the accrual of AFUDC on Twin Oak, suspended in 1987 due to forecast changes in load growth, would need to resume in 1996 in order to meet the current schedule. Assuming the units are financed by TU Electric using traditional methods, approximately $210 million would be added to construction expenditures in 1996.
TU Electric's Resource Plan also includes 1,502 MW of gas/oil-fueled combustion turbine units (including 272 MW of simple cycle combustion turbines planned for completion during the peak season of 1999), none of which requires significant construction expenditures in the 1994-1996 period reflected above.
The reevaluation 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.)
For information regarding financing of the construction program, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
THE TU ELECTRIC AND SESCO SYSTEMS DECEMBER 31, 1993
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In May 1990, Nancy F. King and Rodney B. Shields, allegedly as shareholders of the Company, filed suit in the United States District Court for the Northern District of Texas derivatively on behalf of the Company against the Company as a nominal defendant and James K. Dobey, Jack W. Evans, J. S. Farrington, William M. Griffin, Margaret N. Maxey, Erle Nye, Charles R. Perry and William H. Seay, directors of the Company, and Burl B. Hulsey, Jr. and Charles N. Prothro, former directors of the Company. The plaintiffs allege mismanagement involving gross negligence, willful misconduct, breaches of fiduciary duty and waste of corporate assets on the part of the defendants in connection with activities relating to Comanche Peak. In September 1991, the Court entered an order which stayed this suit until thirty days after entry of a final judgment by the District Court in TU Electric's appeal of the final order of the PUC in Docket 9300. In September 1992, a final judgment in this appeal was entered by the District Court. (See Item 1. Business -- Regulation and Rates.) The plaintiff refused to extend the stay pending the appeals of this judgment, filed an amended complaint which claimed damages in excess of $1.247 billion, added as defendants two former directors of the Company, Perry G. Brittain and James H. Zumberge, and one current director of the Company, James A. Middleton, and removed Rodney B. Shields as a plaintiff. In response, the Company moved to extend the stay through resolution of the appeals or alternatively to dismiss the suit. In December 1992, this suit was consolidated with a similar suit described below. In January 1993, the Court entered an order which stays the consolidated suit until thirty days after the disposition of all appeals from the final order of the PUC in Docket 9300. (See Item 1. Business -- Regulation and Rates.)
In November 1991, Sheree Anne Meyer, as custodian for Adam Joseph Davenport, allegedly as a shareholder of the Company, filed suit in the United States District Court for the Northern District of Texas derivatively on behalf of the Company and TU Electric against the Company and TU Electric as nominal defendants and J. S. Farrington, Erle Nye, James K. Dobey, Jack W. Evans, William M. Griffin, Margaret N. Maxey, James A. Middleton, Charles R. Perry and William H. Seay, directors of the Company, and James H. Zumberge, a former director of the Company, S. S. Swiger, a former officer of the Company, and T. L. Baker, an officer of TU Electric. The plaintiff alleges breaches of fiduciary duty and negligence primarily relating to Comanche Peak, which the plaintiff claims have resulted in damages in an amount not less than $1.381 billion. In December 1991, the Court entered an order which stayed this suit until thirty days after entry of a final judgment by the District Court in TU Electric's appeal of the final order of the PUC in Docket 9300. In September 1992, a final judgment in this appeal was entered by the District Court. (See Item 1. Business -- Regulation and Rates.) The plaintiff refused to extend the stay pending the appeals of this judgment and the Company moved to extend the stay through resolution of the appeals or alternatively to dismiss the suit. In December 1992, this suit was consolidated into the suit described above. In January 1993, the Court entered an order which stays the consolidated suit until thirty days after the disposition of all appeals from the final order of the PUC in Docket 9300. (See Item 1. Business - Regulation and Rates.)
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 1993 and 1992 were as follows:
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 1994 meeting, declared a regular quarterly dividend of $0.77 a share. Future dividends, however, 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 4 to Consolidated Financial Statements regarding limitations upon payment of dividends on common stock of TU Electric and SESCO.
The approximate number of record holders of the common stock of the Company as of February 28, 1994, was 113,078.
Item 6.
Item 6. SELECTED FINANCIAL DATA.
CONSOLIDATED FINANCIAL STATISTICS
* Certain financial statistics for the years 1993 and 1991 were affected by TU Electric recording regulatory disallowances in the rate orders issued by the Public Utility Commission of Texas in Dockets 11735 and 9300, respectively. (See Note 10 to Consolidated Financial Statements.)
Item 6. SELECTED FINANCIAL DATA (Concluded).
CONSOLIDATED OPERATING STATISTICS
* In 1992, other operating revenues do not include $122,586,000 of unbilled base rate revenues which were reclassified as a cumulative effect of a change in accounting principle effective January 1, 1992.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
LIQUIDITY AND CAPITAL RESOURCES
The primary capital requirements of Texas Utilities Company (Company) in 1993 and as estimated for 1994 through 1996 are as follows:
For information concerning construction work contemplated by the Texas Utilities Company System (System Companies) and the commitments with respect thereto, see Item 2. Properties -- Construction Program and Note 11 to Consolidated Financial Statements.
The System Companies have generated cash from operations sufficient to meet operating needs, pay dividends on capital stock and finance a portion of capital requirements. Factors affecting the ability of Texas Utilities Electric Company (TU Electric) to continue to fund a portion of its capital requirements from operations include adequate rate relief in the future reflecting regulatory practices allowing recovery of capital investment through adequate depreciation rates, normalization of federal income taxes, recovery of the cost of fuel and purchased power and the opportunity to earn competitive rates of return required in the capital markets.
In order to remain competitive and in response to the recent disappointing rate order in Docket 11735, the Company has taken steps to reduce operating costs and capital expenditures and is reviewing various alternatives and strategies to improve future earnings potential and its basic financial position. This review may result in further initiatives which may include, but not necessarily be limited to, alternative uses or disposition of existing assets, somewhat greater utilization of short-term and variable rate securities, new marketing and rate initiatives and application for additional rate increases from regulatory authorities. It is not possible at this time to predict the effect any of these possible initiatives will have on the Company's financial position or its results of operation. For 1993, approximately 68% of the cash needed for construction expenditures was generated from operations by the System Companies. The Company believes internal cash generation will increase as a result of the Docket 11735 rate order and through the implementation of the initiatives discussed above.
In August 1993, TU Electric placed Comanche Peak Unit 2 in commercial operation and implemented, under bond, its 15.3% rate increase requested in Docket 11735. In September 1993, TU Electric recorded a charge against earnings of approximately $363 million ($265 million after tax) related to an agreement (Settlement Agreement) among the parties involved in TU Electric's Docket 11735. The Settlement Agreement resolved all issues in the prudence and fuel phases of Docket 11735 and also permits TU Electric to recover, ratably over an eight year period, $197 million of expenditures incurred in connection with the Company's recent cost reduction program. The Settlement Agreement also resolved the difference between TU Electric and the Public Utility Commission of Texas (PUC) staff that was the primary issue in another proceeding related to the accrual of an allowance for funds used during
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
construction (AFUDC), during the bonded rate period of Docket 9300, on construction work in progress (CWIP) that was subsequently included in rate base pursuant to the final order in Docket 9300.
On January 28, 1994, the PUC issued a final order in Docket 11735 which provided for a total annual revenue increase of approximately $435 million, or 8.7%. TU Electric strongly disagrees with the final order and has filed a motion for rehearing with the PUC, and will appeal the outcome, if necessary. As a result of this final order, unless the order is changed on rehearing, TU Electric will refund the difference between the bonded rates and the rates approved in the final order, including interest, all of which is being fully reserved by TU Electric. The total amount to be refunded will be determined once approved rates have been implemented, which is expected to be during the second quarter of 1994. The amount to be refunded at December 31, 1993 was approximately $141.2 million. Such refund will be mitigated by a fuel cost surcharge approved by the PUC of approximately $144.5 million, including interest, in under-collected fuel costs through June 30, 1993. For additional information regarding the rate decision, see Item 1. Business -- Regulation and Rates and Note 10 to Consolidated Financial Statements.
As a result of the final order and its effects on earnings, TU Electric could be restricted from issuing additional shares of preferred stock. TU Electric does not believe this restriction would materially affect its ability to fund its continuing operations or capital requirements. Although TU Electric cannot predict the outcome of its appeal of the Docket 9300 rate decision or its expected appeal of the Docket 11735 rate decision, future regulatory actions or any changes in economic and securities market conditions, no changes are expected in trends or commitments, other than those discussed above, which might significantly alter its basic financial position.
On November 14, 1993, the emissions chimney for Unit 3 of the Monticello Steam Electric Station collapsed. The cause of the collapse has not been determined but such unit and the associated lignite mining operation will be inoperative until completion of repairs. TU Electric is formulating the engineering, procurement and construction plans that will return the unit to service in 1995. The cost of repairs is covered by TU Electric's insurance which includes a $2,000,000 deductible. Therefore, the Company does not expect the accident to materially effect its results of operation or financial position.
On July 1, 1993, Southwestern Electric Service Company (SESCO) became a wholly-owned subsidiary of the Company pursuant to approval by shareholders of SESCO and the Securities and Exchange Commission. The acquisition was accounted for as a purchase business combination with the resulting goodwill being amortized evenly over forty years. The operations of SESCO after the date of acquisition have been reflected in the consolidated financial statements. The acquisition of SESCO did not have a material effect on the Company's results of operation or financial position.
External funds of a permanent or long-term nature are obtained through the sales of common stock, preferred stock and long-term debt by the System Companies. The capitalization ratios of the Company and its subsidiaries at December 31, 1993 consisted of approximately 51% long-term debt, 9% preferred stock and 40% common stock equity.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
The System Companies had financings totaling $3,805,754,370 in 1993. Proceeds from such financings were used primarily for the early redemption of higher coupon debt and higher dividend preferred stock. The System Companies redeemed or made principal payments of $2,944,339,000 on long-term debt and preferred stock. Financings in 1993 by the System Companies included the following:
LONG-TERM DEBT:
______________________________ * The taxable pollution control series 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. TU Electric has sufficient unused existing lines of credit that would allow refinancing of the bonds on a long-term basis should remarketing prove unsuccessful.
COMMON STOCK (COMPANY):
______________________________ * Four depositary shares have been issued with respect to each of 5,000,000 of such underlying shares of preferred stock.
The replacement of higher coupon debt and higher dividend preferred stock during 1993 reduced interest and dividend requirements by approximately $45,000,000 on an annualized basis. TU Electric redeemed $15,000,000 of 10.45% First Mortgage and Collateral Trust Bonds, Secured Medium-Term Notes on March 16, 1994 and intends to redeem $335,000,000 of First Mortgage Bonds with interest rates ranging from 7-3/8% to 9-1/2% on April 1, 1994 with each redemption subject to the deposit of the necessary redemption monies by TU Electric. Additional early redemptions of long-term debt and preferred stock may occur from time to time in amounts presently undetermined. (See Notes 5 and 6 to Consolidated Financial Statements.)
On February 2, 1994, the Company amended its Automatic Dividend Reinvestment and Common Stock Purchase Plan. The amendments include the option for the purchase of common stock on the open market through an independent broker to meet share requirements under the plan.
The System Companies expect to sell additional debt and equity securities as needed (subject to the possible restriction on the issuance of additional shares of preferred stock as discussed above) including the possible future sale by TU Electric of up to $450,000,000 of First Mortgage and Collateral Trust Bonds currently registered with the Securities and Exchange Commission for offering pursuant to Rule 415 under the Securities Act of 1933. TU Electric also has 250,000 shares of Cumulative Preferred Stock ($100 liquidation value) similarly registered. It is the intent of the Company and TU Electric to negotiate a new credit facility prior to the scheduled reduction in June 1994 in the joint lines of credit of the
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED)
Company and TU Electric. The new facility would be used for working capital, as back-up for commercial paper and for other corporate purposes. For information regarding short-term financings of the Company, see Note 2 to Consolidated Financial Statements.
The Company's capital requirements have not been significantly affected by the requirements of the federal Clean Air Act, as amended (Clean Air Act). Although TU Electric is unable to fully determine the cost of compliance with the Clean Air Act, it is not expected to have a significant impact on the Company. Any additional capital costs, as well as any increased operating costs associated with these new requirements, are expected to be recoverable through rates, as similar costs have been recovered in the past.
The National Energy Policy Act of 1992 addresses a wide range of energy issues and is intended to increase competition in electric generation and broaden access to electric transmission systems. TU Electric and SESCO are unable to predict the impact of regulations implementing this legislation on their operations until such regulations are promulgated and approved. However, TU Electric and SESCO believe that such legislation reflects the trend toward increased competition in the energy industry.
While TU Electric and SESCO have experienced competitive pressures in the wholesale market resulting in a minor loss of load, wholesale sales constitute a relatively low percentage of total sales. TU Electric and SESCO are unable to predict the extent of future competitive developments or what impact, if any, such developments may have on operations. (See Item 1. Business -- Competition.)
See Item 6. Selected Financial Data -- Consolidated Financial Statistics for additional information.
RESULTS OF OPERATION
Operating revenues increased 10.7% and 0.3% for the years ended December 31, 1993 and 1992, respectively. The following table details the factors contributing to these changes:
Base rate revenue increased in 1993 due to higher energy sales and higher rate levels implemented in August 1993 as compared to a decrease in base rate revenues in 1992 as a result of lower energy sales. Energy sales increased 6.4% for 1993 and decreased 2.5% for 1992. The increase in energy sales in 1993 was due primarily to increased customer usage resulting from more normal weather conditions and an increase in customers, while the decrease in 1992 resulted from milder than normal weather and unfavorable economic conditions, partially offset by an increase in customers. The rate increase placed in effect in August 1993 increased base rate revenues, net of amounts to be refunded, by approximately $177 million in 1993. The increase in fuel revenue for 1993 resulted from increased energy sales and increased fuel costs. The increase in fuel revenue in 1992 was primarily due to fuel refunds in 1991, partially offset by decreased energy sales in 1992. The increase in unbilled revenue and other resulted from a larger accrual of unbilled revenue in both periods. (See Note 12 to Consolidated Financial Statements.)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED).
RESULTS OF OPERATION -- (CONTINUED)
Fuel and purchased power expense increased 10.7% and 0.9% for 1993 and 1992, respectively. Fuel and purchased power expense increased for 1993 primarily due to increased energy sales and the increase in the price of gas partially offset by an increased utilization of nuclear fuel. The 1992 increase in fuel and purchased power was primarily the result of an increased price of gas which more than offset the decrease in generation. (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 15.7% for 1993 and decreased 1.3% for 1992. Operation, maintenance and depreciation expenses increased in 1993 as a result of the commencement of commercial operation of Unit 2 of Comanche Peak in August 1993. Operation expense in 1993 also increased due to higher pension costs and other postretirement benefits costs associated with Financial Accounting Standards Board (FASB) Statement 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", partially offset by lower employee labor costs. Maintenance expense was also affected by inventory adjustments during the third and fourth quarters of 1993. Operation and maintenance expenses decreased in 1992 primarily due to decreased employee related costs and management's efforts to further reduce other costs through a cost reduction program. Depreciation expense decreased in 1992 as a result of recording the disallowances associated with Comanche Peak Unit 1 in TU Electric's Docket 9300 rate order. Taxes other than income increased in 1993 due primarily to increased local gross receipts taxes resulting from higher tax rates on increased revenues and an increase in ad valorem taxes. The increase in 1993 was partially offset by a refund of prior years franchise taxes of approximately $23,875,000.
AFUDC decreased 13.5% and 16.4% in 1993 and 1992, respectively. The decrease in 1993 was primarily due to the discontinuation of the accrual of AFUDC on Unit 2 of Comanche Peak when such unit achieved commercial operation in August 1993. This decrease was partially offset by the change to a gross rate in 1993 related to the adoption of FASB Statement 109, "Accounting for Income Taxes", for projects commenced before March 1986 (see Notes 1 and 7 to Consolidated Financial Statements). The decrease in 1992 was caused by the implementation of the Docket 9300 rate order placing $695 million of CWIP in rate base and the exclusion of $485 million of CWIP disallowed on Unit 2 of Comanche Peak. (See Note 10 to Consolidated Financial Statements.)
The regulatory disallowances reflect charges resulting from the Settlement Agreement among the parties in Docket 11735. (See Note 10 to Consolidated Financial Statements.)
Other income and deductions -- net decreased for both periods due to reduced interest income on temporary cash investments partially offset by an increase in interest income on under-recovered fuel revenue in 1993.
Federal income taxes -- other income decreased in 1993 due to the effect of recording the taxes associated with the regulatory disallowances and increased in 1992 because 1991 was affected by the recording of taxes associated with the provision for regulatory disallowances. (See Notes 7 and 10 to Consolidated Financial Statements.)
Total interest charges, excluding AFUDC, decreased 0.2% and 7.4% for 1993 and 1992, respectively. Interest on mortgage bonds increased in 1993 as a result of new issues sold and the annualization of interest on bond issues sold in the prior period, partially offset by reduced interest requirements as a
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONCLUDED).
RESULTS OF OPERATION -- (CONCLUDED)
result of the Company's refinancing efforts. The decrease in 1992 resulted from retirements and redemptions of certain higher rate issues. Interest on other long-term debt decreased in both periods due to the continuing retirement of debt incurred on the purchases of the minority ownership interests in Comanche Peak and refunding of higher interest rate debt. Other interest expense decreased in all periods due primarily to decreased interest on short-term borrowings and decreased interest on over-recovered fuel revenues partially offset by increased amortization of debt issuance expenses and redemption premiums.
Preferred stock dividends decreased 2.7% and 2.6% for 1993 and 1992, respectively, primarily due to the redemption of series with higher dividend rates partially offset by dividends on new issues.
The cumulative effect of recording unbilled revenue reflects the accounting change made on January 1, 1992, by TU Electric to begin recording base rate revenue for energy sales sold but not billed.
The major factors affecting earnings in 1993 were the implementation of the rate increase, the recording of the regulatory disallowances, the discontinuation of AFUDC on Unit 2 of Comanche Peak and the commencement of depreciation on approximately $668 million of investment in Comanche Peak Unit 2 incurred after the end of the Docket 11735 test year which was not included in rates. The factors mentioned above resulted in a decrease in consolidated net income of 47.3% for 1993. The change in accounting for unbilled revenue in 1992 and the recording of the provision for regulatory disallowances in 1991 (see Note 10 to Consolidated Financial Statements) resulted in an increase to consolidated net income in 1992 over 1991. The change in accounting for unbilled revenue increased consolidated net income $0.48 per share, of which $0.38 per share represents the cumulative effect of the change in accounting principle at January 1, 1992. The consolidated net loss in 1991 was due to the recognition of the provision for regulatory disallowances and the provision for refunds and related interest. Another major factor affecting earnings in 1992 and 1991 was the discontinuation of the accrual of AFUDC on approximately $1.3 billion of investment in Comanche Peak Unit 1, incurred after the end of the test year, which was not reflected in rates until Docket 11735 bonded rates were implemented.
ACCOUNTING CHANGES
In November 1993, Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (Statement 112) was issued. Statement 112 is effective for fiscal years beginning after December 15, 1993. Statement 112 applies to certain types of postemployment benefits provided to former or inactive employees after employment but before retirement. The Company does not expect Statement 112 to have a material effect on the Company's financial position or results of operation.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
See accompanying Notes to Consolidated Financial Statements.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying Notes to Consolidated Financial Statements.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
See accompanying Notes to Consolidated Financial Statements.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
System of Accounts -- The accounting records of Texas Utilities Electric Company (TU Electric), the principal subsidiary of Texas Utilities Company (Company), and Southwestern Electric Service Company (SESCO) 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 include the Company and its subsidiaries (System Companies). All significant intercompany items and transactions have been eliminated in consolidation. Certain financial statement items for 1992 and 1991 have been reclassified to conform to the 1993 presentation.
On July 1, 1993, SESCO became a wholly-owned subsidiary of the Company pursuant to approval by shareholders of SESCO and the Securities and Exchange Commission. The acquisition was accounted for as a purchase business combination with the resulting goodwill being amortized evenly over forty years. The acquisition of SESCO did not have a material effect on the Company's results of operation or financial condition.
Utility Plant -- Utility plant is stated at original cost. 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.
Allowance For Funds Used During Construction -- 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. Effective January 1, 1993, TU Electric began using a gross rate of 10.4% for AFUDC for all construction to comply with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109). In 1992 and 1991, TU Electric used a net-of-tax rate of 8.8% and 10.4%, respectively, on projects commenced before March 1, 1986, and a gross rate of 10.4% and 12.0%, respectively, on projects commenced thereafter. Rates were determined on the basis of, but are less than, the cost of capital used to finance the construction program.
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 approximated 2.5%, 2.8% and 2.9% for 1993, 1992 and 1991, respectively. Depreciation also includes an amount for Comanche Peak nuclear generating station (Comanche Peak) decommissioning costs which is being accrued over the lives of the units and deposited to external trust funds. (See Note 11.)
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 refueling outage.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Other Investments -- The difference of $46,153,000 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.
Revenues -- Revenues include billings under approved rates (including a fixed fuel factor) applied to meter readings each month on a cycle basis and, beginning January 1, 1992, an accrual of base rate revenue for energy provided after cycle billing but not billed through the end of each month (see Note 12). Revenues also include an amount for under- or over-recovery of fuel revenue representing the difference between actual fuel cost and billings on 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 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. Each six months, 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 between 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.
Federal Income Taxes -- The System Companies file a consolidated federal income tax return and federal income taxes are allocated to all System Companies based upon their taxable income or loss. Deferred federal income taxes are currently provided for temporary differences between book and the tax basis of assets and liabilities (including the provision for regulatory disallowances). Generally, such differences result primarily from the use of liberalized depreciation and cost recovery deductions allowable under the Internal Revenue Code, the under- or over-recovery of fuel revenue and unbilled revenues accrued for tax purposes. Temporary differences in earlier years for which deferred federal income taxes were not provided approximated $184,000,000 at December 31, 1993. Investment tax credits are normally amortized to income over the estimated service lives of the properties. For 1992 and 1991, the System Companies' taxes were provided for under the provisions of Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes". (See Note 7 for change in accounting for income taxes.)
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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED)
The supplemental schedule below details cash payments and noncash investing and financing activities:
2. SHORT-TERM FINANCING
At December 31, 1993, the Company and TU Electric had joint lines of credit aggregating $700,000,000 under a credit facility agreement with a group of commercial banks. The facility, for which the Company pays a fee, is scheduled by such agreement to be reduced by $350,000,000 in June 1994 and June 1995. It is the intent of the Company and TU Electric to negotiate a new credit facility prior to the scheduled reduction in June 1994. The new facility would be used for working capital, as backup for commercial paper and for other corporate purposes. At December 31, 1993, the total of short-term borrowings authorized by the Board of Directors of the Company from banks or other lenders was $1,075,000,000.
At December 31, 1993, SESCO had lines of credit aggregating $5,500,000 under agreements with commercial banks. These agreements will expire in 1994.
3. COMMON STOCK
The Company issued shares of its authorized but unissued common stock as follows:
______________________________ * Shares issued for public offering in 1993 were used in connection with the acquisition of SESCO.
At December 31, 1993, 3,492,620 shares of the authorized but unissued common stock of the Company were reserved for issuance and sale pursuant to the above plans.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMON STOCK -- (CONCLUDED)
On February 2, 1994, the Company amended its Automatic Dividend Reinvestment and Common Stock Purchase Plan. The amendments include the option for purchase of common stock on the open market through an independent broker to meet share requirements under the plan.
The trustee of the Employees' Thrift Plan of the Texas Utilities Company System (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 from the Company in connection with the leveraged employee stock ownership provision of the Thrift Plan. Such 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 shares purchased and contributions from the System Companies, if required, to repay the note. Common stock equity increases as shares are allocated to participants. Such allocations in 1993, 1992 and 1991 increased common stock equity by $8,115,000, $8,072,000 and $7,976,000, respectively.
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.
4. RETAINED EARNINGS
TU Electric's and SESCO's articles of incorporation, mortgages, as supplemented, and debenture agreements contain provisions which, under certain conditions, restrict distributions on or acquisitions of their common stock. At December 31, 1993, $181,228,000 of retained earnings were thus restricted as a result of the provisions of such articles of incorporation. Retained earnings at such date also includes $431,243,000 representing the Company's equity in undistributed earnings since acquisition included in transfers by TU Electric from its retained earnings to stated value of common stock. The total of such restricted retained earnings at December 31, 1993 is $612,471,000.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREFERRED STOCK OF TU ELECTRIC (CUMULATIVE, WITHOUT PAR VALUE, ENTITLED UPON LIQUIDATION TO $100 A SHARE; AUTHORIZED 17,000,000 SHARES)
______________________________ (a) Adjustable rate series A bears a dividend rate for the period ended January 31, 1994, of 6.50% per annum and adjustable rate series B bears a dividend rate for the period ended December 31, 1993, of 7.00% per annum, both of which are based on a fixed liquidation price of $100 per share. (b) 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 1995. 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:
Preferred stock mandatory redemption requirements for the next five years are $25 million in 1995 and $45 million annually in 1996, 1997 and 1998. 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. (c) 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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREFERRED STOCK OF TU ELECTRIC (CUMULATIVE, WITHOUT PAR VALUE, ENTITLED UPON LIQUIDATION TO $100 A SHARE; AUTHORIZED 17,000,000 SHARES) -- (CONCLUDED)
The table below details changes in preferred stock of TU Electric:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY
____________________ (a) Taxable pollution control series consist of four series: $18,000,000 at 3.35% and $10,340,000 at 3.40% of flexible rate Series 1991A at December 31, 1993; $50,000,000 of Series 1991C at 8.49% through June 1, 1994; $100,000,000 of Series 1991D at 8.85% through June 1, 1995; and $100,000,000 at 3.425% of flexible rate Series 1993 at December 31, 1993. Series 1991A and 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. The interest rates on Series 1991C and Series 1991D bonds will be repriced on the mandatory tender dates of June 1, 1994 and 1995, respectively. TU Electric has existing lines of credit that would allow refinancing of bonds not supported by the letter of credit on a long-term basis should remarketing prove unsuccessful. (b) In 1988, TU Electric purchased the ownership interest in Comanche Peak of Brazos Electric Power Cooperative and issued a promissory note payable over 33 years. The note is secured by a mortgage on the acquired interest. 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 various payments. (c) The interest rate is reset at the beginning of each period, with the duration of each period being selected by Texas Utilities Fuel Company.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY -- (CONCLUDED)
Sinking fund and maturity requirements for the years 1994 through 1998 under long-term debt instruments in effect at December 31, 1993, were as follows:
____________________ (a) The maturity requirements do not include the mandatory tenders of TU Electric's taxable pollution control series, equal to $50,000,000 in 1994 and $100,000,000 in 1995, which are expected to be remarketed. (b) The minimum cash requirement does not include the sinking fund requirements that may be satisfied by certification of property additions at the rate of 167% of such requirements, except for twelve issues at 100%.
From time to time, various principal amounts of first mortgage bonds have been redeemed by TU Electric prior to maturity. In 1993, the System Companies refunded $1,810,000,000 of higher coupon debt. The debt reacquisition costs have been deferred and are being amortized over the remaining lives of the bonds retired pursuant to current regulatory treatment.
Electric plant of TU Electric and SESCO is generally subject to the liens of their respective mortgages.
7. FEDERAL INCOME TAXES
In January 1993, the Company adopted Statement 109, which among other things, requires the liability method of recognition for all temporary differences, requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates and prohibits net-of-tax accounting and reporting. Certain provisions of Statement 109 provide that regulated enterprises are permitted to recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts will be recovered from or returned to customers in future rates. Accordingly, at December 31, 1993, the Company's consolidated balance sheet reflects a regulatory asset of approximately $1.2 billion net of an approximate $0.6 billion regulatory liability. The cumulative effect on consolidated net income of adopting Statement 109 is not considered material to the annual results of operation.
In August 1993, Congress passed the Revenue Reconciliation Act of 1993 which increased the top corporate income tax rate from 34% to 35% retroactive to January 1, 1993.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FEDERAL INCOME TAXES -- (CONTINUED)
The details of federal income taxes are as follows:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FEDERAL INCOME TAXES -- (CONTINUED)
The significant components of the Company's deferred tax assets and liabilities reflected net in the consolidated balance sheet at December 31, 1993 are:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FEDERAL INCOME TAXES -- (CONCLUDED)
Federal income taxes were less than the amount computed by applying the federal statutory rate to pre-tax book income (loss) as follows:
The System Companies have net operating loss carryforwards of approximately $379 million that are available to offset future ordinary taxable income. Approximately $122 million of these loss carryforwards expire in 2006 and the remaining $257 million expire in 2007. In addition, the System Companies have approximately $12 million of general business credit carryforwards which expire in 2006 and $418 million of minimum tax credit carryforwards which are available to offset future taxes.
As a part of its ongoing large case audit program, the Internal Revenue Service (IRS) is currently auditing the consolidated Federal income tax returns of the System Companies for the years 1987 through 1990. During the course of the audit, the IRS has proposed a number of adjustments to the returns as filed, the most significant of which relates 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. The Company is unable to predict the ultimate resolution of the issues raised in the audit and therefore is unable to predict at this time the amount of any additional tax payment which may be required. While the making of additional tax payments would have an impact on the Company's cash position, the Company does not expect the outcome of the audit to have a material effect on its results of operation.
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The System Companies have uniform retirement plans covering substantially all employees. An employee's benefits are based on years of accredited service and average annual earnings received during the three years of highest earnings. The costs of the plans were determined by independent actuaries. Contributions to the plans were determined using the frozen attained age method which is one of the several actuarial methods allowed by the Employee Retirement Income Security Act of 1974. 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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The table below details the plans' funded status and amount recognized in the Company's consolidated balance sheets:
Assumptions used in determination of the projected benefit obligation include the following:
Total pension costs, including amounts charged to fuel cost, deferred and capitalized, were comprised of the following components:
The assumed long-term rate of return on plan assets was 8.75% for 1993, 1992 and 1991.
In addition to the retirement plans, the System Companies 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" (Statement 106), 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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONCLUDED)
The System Companies' net periodic postretirement benefits cost other than pensions for the year ended December 31, 1993, including amounts charged to fuel cost and capitalized, were comprised of the following components:
The table below details the funded status for other postretirement benefits and amount recognized by the System Companies at December 31, 1993:
The expected increase in costs of future benefits covered by the plan is projected using a health care cost trend rate of 7.5% in 1994, 6.5% in 1995, 5.5% in 1996 and 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, 1993 by approximately $68.6 million and other postretirement benefits cost for 1993 by approximately $8.8 million.
The assumed discount rate used to measure the APBO is 7.875%.
The Company's cost of providing other postretirement benefits in 1992 and 1991, which was recognized on a "pay-as-you-go" basis, was approximately $13,766,000 and $14,499,000, respectively. The Company was granted recovery of its Statement 106 cost in Docket 11735 (see Note 10). Funding of the other postretirement benefits obligation will begin by the third quarter of 1994.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SALES OF ACCOUNTS RECEIVABLE
In November 1993, TU Electric terminated its then existing receivables facility to sell receivables to certain financial institutions and entered into a new facility with other financial institutions. Under such new facility, TU Electric 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, 1993 and 1992, accounts receivable was reduced by $300,000,000 to reflect the sales of such receivables to financial institutions under such agreements.
10. RATE PROCEEDINGS
DOCKET 11735
In January 1993, TU Electric made applications to the PUC in Docket 11735 and to its municipal regulatory authorities for upward adjustments in rates for electric service throughout its service area, which would have increased annual operating revenues by approximately $760 million, or 15.3%, based upon the test year ended June 30, 1992. Such request reflects, among other things, costs associated with Comanche Peak Unit 2, costs associated with Comanche Peak Unit 1 after the end of the Docket 9300 (see below) test year, additional ad valorem taxes and certain postretirement benefit costs. In August 1993, pursuant to rules of the PUC, TU Electric placed its requested rate increase into effect, under bond and subject to refund with interest, applicable to energy sales on and after such date. Revenues were recorded net of an estimated reserve for possible refunds.
In October 1993, the PUC issued an order (Order) approving the terms of an agreement (Settlement Agreement) among TU Electric, the General Counsel's office of the PUC and applicable intervenors which, among other things, settled all remaining issues relating to the design, construction and cost of Comanche Peak through commencement of commercial operation of Unit 2. The Settlement Agreement provides for the disallowance in Docket 11735 of $250 million of costs relating to the completion of Comanche Peak. Pursuant to the Order, TU Electric refunded $5 million in fuel charges previously incurred in order to resolve the fuel phase of Docket 11735 under which TU Electric was seeking reconciliation of approximately $4.6 billion of fuel costs incurred during the three year period ended June 30, 1992, under the fuel rule in effect prior to May 1993. Further, in order to resolve the primary issue in another proceeding which resulted from a complaint filed against TU Electric in October 1992 by the General Counsel's office of the PUC, as a result of the Order, TU Electric agreed to write off $83 million of AFUDC, which consists of the amount subject to dispute in such proceeding and similar charges subsequently accrued. Also, under the Settlement Agreement and confirmed in the Docket 11735 final order (see below), TU Electric will recover, ratably over an eight year period, $197 million of operation and maintenance expenditures incurred by TU Electric in connection with its recent cost reduction program. However, an additional $25 million of such expenditures will not be subject to recovery and was written off by TU Electric. As a result of the Settlement Agreement, TU Electric recorded a charge against earnings in September 1993 of approximately $363 million ($265 million after tax).
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RATE PROCEEDINGS -- (CONTINUED)
On January 28, 1994, the PUC issued a final order in Docket 11735 which provided for a total annual revenue increase of approximately $435 million, or 8.7%. TU Electric strongly disagrees with the final order and has filed a motion for rehearing with the PUC, and will appeal the outcome, if necessary. As a result of this final order, unless the order is changed on rehearing, TU Electric will refund the difference between the bonded rates and the rates approved in the final order, including interest, all of which is being fully reserved by TU Electric. The total amount to be refunded will be determined once approved rates have been implemented, which is expected to be during the second quarter of 1994. The amount to be refunded at December 31, 1993 was approximately $141.2 million. Such refund will be mitigated by a fuel cost surcharge approved by the PUC of approximately $144.5 million, including interest, in under-collected fuel costs through June 30, 1993.
The following details the effect on 1993 consolidated net income of the Settlement Agreement and the Docket 11735 final order charges:
In November 1993, an intermediate appellate court in Texas, considering an appeal of another utility's rate case, ruled that utilizing tax benefits generated by costs not allowed in rates to reduce rates charged to customers was required by prior court rulings for all disallowed costs, including capital costs. TU Electric believes that such rulings are erroneous and not consistent with the Texas Public Utility Regulatory Act. According to a Private Letter Ruling issued to TU Electric by the IRS with respect to investment tax credits, such ratemaking treatment, to the extent related to property classified for tax purposes as public utility property, would result in a violation of the normalization rules contained in the Internal Revenue Code of 1986, as amended (Code). Violation of the normalization rules would result in a significant adverse effect on TU Electric's results of operation and liquidity. The tax benefits associated with the Comanche Peak costs disallowed in Docket 9300 (see below) could be affected as a result of the court's method. In addition, in its final order in Docket 11735, the PUC reduced rates for the tax benefits generated by certain costs which were not allowed in rates. However, the PUC recognized the potential for a normalization violation if investment tax credits and tax depreciation generated by disallowed plant costs are used to reduce rates. Therefore, the PUC ordered TU Electric to obtain a Private Letter Ruling from the IRS with respect to tax depreciation on disallowed plant. Thus, TU Electric's rates would not reflect the tax depreciation benefit of disallowed plant unless
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RATE PROCEEDINGS -- (CONCLUDED)
the IRS rules such benefits can be utilized to reduce rates without violating the normalization rules contained in the Code. Such a finding by the IRS would require TU Electric to refund the tax depreciation benefits to its customers. TU Electric does not believe it is likely that such refund will occur if the IRS maintains a position similar to that stated in its previous Private Letter Ruling to TU Electric.
DOCKET 9300
In September 1991, the PUC issued a final order in Docket 9300 which provided for a total revenue increase of approximately $442 million and included $695 million of CWIP in rate base to support the revenue increase. It also included a prudence disallowance of $472 million with respect to certain Comanche Peak costs relating to 87.8% of TU Electric's ownership interest in both units of Comanche Peak. With respect to TU Electric's reacquisition of the remaining 12.2% minority owner interests in Comanche Peak, the order included an additional disallowance of $909 million. In September 1991, TU Electric recorded a charge against earnings, as a provision for regulatory disallowances, of $1.381 billion ($1.011 billion after tax) as a result of the Docket 9300 final order.
In November 1991, TU Electric filed a petition in the 250th Judicial District Court of Travis County, Texas, requesting a reversal and remand of the Docket 9300 final order. Other parties to the PUC proceeding also filed appeals with respect to various portions of the order. In September 1992, after a hearing, the Court entered a judgment in the appeals which affirmed the prudence disallowance of $472 million but reversed and remanded to the PUC for reconsideration those portions of the PUC's final order providing for additional disallowances aggregating $884 million with respect to TU Electric's reacquisition of minority owner interests in Comanche Peak. The Court recognized that on remand the PUC may adjust the amount of CWIP included in TU Electric's rate base to be consistent with the PUC's redeterminations regarding the minority owner reacquisitions and the amount of cash working capital. Therefore, TU Electric does not expect this judgment to affect the rates approved in the Docket 9300 final order. Other parties to this suit have appealed this judgment. TU Electric disagrees with certain portions of the judgment and also has appealed. TU Electric is unable to predict the outcome of such appeals and any reconsideration by the PUC.
11. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM
The Company has taken steps to substantially reduce construction expenditures from amounts previously estimated. Construction expenditures, excluding AFUDC, are presently estimated at $400 million for each of the years 1994, 1995 and 1996. Estimated construction expenditures for 1994 through 1996 do not include $210 million in 1996 to resume active construction of two lignite-fueled units at Twin Oak which would be necessary to meet the current scheduled in service dates of the units. The reevaluation 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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
CLEAN AIR ACT
The federal Clean Air Act, as amended (Clean Air Act) includes provisions which, among other things, place limits on the sulfur dioxide emissions produced by generating units. To meet these sulfur dioxide requirements, the Clean Air Act provides for the annual allocation of sulfur dioxide emission allowances to utilities. Under the Clean Air Act, utilities are permitted to transfer allowances within their own systems and to buy or sell allowances. The 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 be granted additional annual allowances for certain TU Electric units under construction based on part of their anticipated emissions. The Company's capital requirements have not been significantly affected by the requirements of the Clean Air Act. Although TU Electric is unable to fully determine the cost of compliance with the Clean Air Act, it is not expected to have a significant impact on the Company. Any additional capital costs, as well as any increased operating costs associated with these new requirements, are expected to be recoverable through rates, as similar costs have been recovered in the past.
PURCHASED POWER CONTRACTS
TU Electric and SESCO 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, 1993, 1992 and 1991 were $251,610,000, $240,341,000 and $229,953,000, respectively.
Assuming operating standards are achieved, future capacity payments under the agreements are estimated as follows:
LEASES
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, 1993, 1992 and 1991 were $138,184,000, $127,446,000 and $126,690,000, respectively.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company's 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, 1993, were as follows:
______________________________ * Minimum lease commitments have not been reduced by $3,833,000 due to the Company under noncancellable subleases.
COOLING WATER CONTRACTS
TU Electric has entered into contracts with public agencies to purchase cooling water for use in the generation of electric energy. In connection with certain contracts, TU Electric has agreed, in effect, to guarantee the principal, $38,590,000 at December 31, 1993, 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 for the years 1994 through 1998 which includes amounts assumed by a third party as follows: $4,423,000 for 1994; $4,431,000 for 1995; $4,430,000 for 1996; $4,435,000 for 1997 and $4,435,000 for 1998. Payments made by TU Electric, net of amounts assumed by a third party under such contracts, for 1993, 1992 and 1991 were $2,954,000, $2,849,000 and $2,596,000, 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 $86,450,000 remaining principal amount of bonds at December 31, 1993, issued for similar purposes which had previously been guaranteed by TU Electric. TU Electric is, however, contingently liable in the unlikely event of default by the municipality.
CHACO COAL PROPERTIES
Chaco Energy Company (Chaco) has a coal lease agreement for the rights to certain surface mineable coal reserves located in New Mexico. The agreement provides for minimum advance royalty payments of approximately $16 million per year through 2017, covering approximately 228 million tons of coal. The Company has entered into a surety agreement to assure the performance by Chaco with respect to this agreement. At December 31, 1993 and 1992, $483,855,000 and $467,819,000, respectively, of minimum advance royalties paid by Chaco are included in non-utility property.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
NUCLEAR INSURANCE
With regard to liability coverage, the Price-Anderson Act (Act) provides financial protection for the public in the event of a significant nuclear power plant incident. The Act sets the statutory limit of public liability for a single nuclear incident currently at $9.4 billion and requires nuclear power plant operators to provide financial protection for this amount. As required, TU Electric provides this financial protection for a nuclear incident at Comanche Peak resulting in public bodily injury and property damage through a combination of private insurance and industry-wide retrospective payment plans. As the first layer of financial protection, TU Electric has purchased $200 million of liability insurance from American Nuclear Insurers (ANI), which provides such insurance on behalf of two major stock and mutual insurance pools, Nuclear Energy Liability Insurance Association and Mutual Atomic Energy Liability Underwriters. The second layer of financial protection is provided under an industry retrospective payment program called Secondary Financial Protection (SFP). Under the SFP, each operating licensed reactor in the United States is subject to an assessment of up to $79.275 million, subject to increases for inflation every five years, in the event of a nuclear incident at any nuclear plant in the United States. Assessments are limited to $10 million per operating licensed reactor per year per incident. All assessments under the SFP are subject to a 3% insurance premium tax which is not included in the amounts above.
With respect to nuclear decontamination and property damage insurance, NRC regulations require that nuclear plant license-holders maintain not less than $1.06 billion of such insurance and require the proceeds thereof to be used to place a plant in a safe and stable condition, to decontaminate it pursuant to a plan submitted to and approved by the NRC before the proceeds can be used for plant repair or restoration or to provide for premature decommissioning. TU Electric maintains nuclear decontamination and property damage insurance for Comanche Peak in the amount of $2.75 billion, above which TU Electric is self-insured. The primary layer of coverage of $500 million is provided by ANI. The remaining coverage includes premature decommissioning coverage and is provided by ANI in the amount of $850 million and Nuclear Electric Insurance Limited (NEIL), a nuclear electric utility industry mutual insurance company, in the amount of $1.4 billion. TU Electric is subject to a maximum annual assessment from NEIL of $17 million in the event NEIL's losses under this type of insurance for major incidents at nuclear plants participating in this program exceed its accumulated funds and reinsurance.
TU Electric maintains Extra Expense Insurance through NEIL to cover the additional costs of obtaining replacement power from another source if one or both of the units at Comanche Peak are out of service for more than twenty-one weeks as a result of covered direct physical damage. The coverage provides for weekly payments of up to $3.5 million for the first and $2.345 million for the second and third fifty-two week periods of each outage, respectively, after the initial twenty-one week period. The total maximum coverage is $426 million per unit. The coverage amounts applicable to each unit will be reduced to 80% if both units are out of service at the same time as a result of the same accident. Under this coverage, TU Electric is subject to a maximum assessment of $10 million per year.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONCLUDED)
NUCLEAR DECOMMISSIONING AND DISPOSAL OF SPENT FUEL
TU Electric has established a reserve (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, 1993, such reserve totaled $35,978,000 which includes an accrual of $12,612,000 for the year ended December 31, 1993. At December 31, 1993, $35,720,000 has been deposited in the external trust funds for decommissioning of Unit 1 and Unit 2. Realized earnings on funds deposited in the external trust are recognized in the reserve. Based on a site-specific study during 1992 using the prompt dismantlement method and then-current dollars, decommissioning costs for Comanche Peak Unit 1, and Unit 2 and common facilities were estimated to be $255,000,000 and $344,000,000, respectively. Decommissioning activities are projected to begin in 2030 and 2032 for Comanche Peak Unit 1, and Unit 2 and common facilities, respectively. TU Electric is recovering such costs based upon the 1992 study through the rates placed in effect under Docket 11735 (see Note 10).
TU Electric has a contract with the United States Department of Energy for the future disposal of spent nuclear fuel at a cost of one mill per kilowatt-hour of Comanche Peak net generation. The disposal fee is included in nuclear fuel expense.
GENERAL
In addition to the above, the Company and its subsidiaries are involved in various legal and administrative proceedings which, in the opinion of the Company, should not have a material effect upon its financial position or results of operation.
12. CHANGE IN ACCOUNTING FOR UNBILLED REVENUE
Effective January 1, 1992, TU Electric began recording base rate revenue for energy sold but not billed through the end of each month to achieve a better matching of revenues and expenses. Prior to the change in accounting method, revenues were recognized based on customer billings on a cycle basis. The change in accounting increased consolidated net income in 1992 by $102,044,000 ($0.48 per share), of which $80,907,000 ($0.38 per share) represents the cumulative effect of the change in accounting principle at January 1, 1992. Pro forma effects, assuming retroactive application of recording unbilled revenues, are presented below:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (Statement 107) to provide readers of the financial statements another method of valuing financial instruments on a current basis. The following information represents the Company's estimate of the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced sale.
The amounts reflected in the consolidated balance sheet for cash, temporary cash investments and special deposits approximate fair value due to the short maturity of such instruments. The fair values of financial instruments for which estimated fair values have not been specifically presented is not materially different than their related book value.
Other investments includes amounts principally for nuclear decommissioning fund assets and funds invested pursuant to certain incentive and compensation agreements. The fair values of the nuclear decommissioning assets and incentive and compensation assets are estimated based on quoted market prices at year-end for the instruments in which such funds are invested.
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 values of such note, long-term debt and preferred stock subject to mandatory redemption are 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.
The carrying amount of other financial liabilities classified as current on the consolidated balance sheet, such as notes payable and long- term debt due currently, approximates fair value due to the short maturity of such instruments. Customer deposits have no defined maturities and, therefore, are reflected at the amount payable on demand at the balance sheet date.
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, 1993 and 1992 of the bonds for which TU Electric is contingently liable is $125,000,000 and $131,000,000, respectively. The fair value of the bonds, approximately $136,000,000 and $131,000,000 for December 31, 1993 and 1992, 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.
The estimated fair value of the System Companies' significant financial instruments are as follows:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
14. SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
In the opinion of the Company, the information below includes all adjustments (constituting only normal recurring accruals and the change in accounting, see Note 12) 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. For additional information regarding the charges for regulatory disallowances, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and Note 10.
- --------------- * Quarterly earnings per share of common stock are based on the weighted average number of shares outstanding during the quarter and, as a result, the sum of the quarters may not equal annual earnings per share.
INDEPENDENT AUDITORS' REPORT
Texas Utilities Company:
We have audited the accompanying consolidated balance sheets of Texas Utilities Company and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in Item 14.(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 Texas Utilities Company and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Notes 7 and 8 to the consolidated financial statements, in 1993, the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions to conform with Statements of Financial Accounting Standards No. 109 and No. 106, respectively. Also discussed in Note 12 to the consolidated financial statements, in 1992, the Company changed its method of accounting for base rate revenue sold but not billed.
/s/ DELOITTE & TOUCHE
Dallas, Texas March 11, 1994
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, 1993, 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 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 and Chief Executive
/s/ ERLE NYE Erle Nye, President
/s/ H. JARRELL GIBBS H. Jarrell Gibbs, Vice President and Principal Financial Officer
/s/ H. DAN FARELL H. Dan Farell, Controller and Principal Accounting Officer
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to these items is found under the headings Election of Directors, Executive Compensation, and Beneficial Ownership of Common Stock of the Company in the definitive proxy statement to be mailed by the registrant to the Commission for filing on or about April 1, 1994. Additional information with respect to Executive Officers of the Registrant is found at the end of Part I.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following 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 Financial Statements or notes thereto: I, II, III, IV, VII, XI, XII and XIII.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 1993, are as follows:
DATE OF REPORT ITEMS REPORTED -------------- --------------
October 26, 1993 Item 5. OTHER EVENTS November 24, 1993 Item 5. OTHER EVENTS January 14, 1994 Item 5. OTHER EVENTS January 31, 1994 Item 5. OTHER EVENTS
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
(C) EXHIBITS:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED).
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONCLUDED)
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE V -- UTILITY PLANT
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
_______________ (a) Other changes to utility plant and CWIP represents acquisition of SESCO. (See Note 1 to Consolidated Financial Statements.) (b) Other changes to nuclear fuel includes $65,259,000, $24,214,000 and $25,393,000 deducted for amortization in 1993, 1992 and 1991, respectively. (c) Disallowed Comanche Peak related costs. (See Note 10 to Consolidated Financial Statements.)
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
__________________ (a) Includes depreciation on lignite fuel production facilities charged to fuel and decommissioning expense for Comanche Peak. (b) Depreciation and depletion charged to various accounts, including depreciation of transportation and work equipment, based on estimated lives thereof, are charged to clearing accounts and allocated on the basis of the use of such equipment.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
____________________ (a) Deductions represents uncollectible accounts written off net of recoveries of amounts previously written off.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
______________________ (a) Weighted averages are based upon daily amounts outstanding and equivalent annual interest thereon.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY INFORMATION
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1993
______________________________ Maintenance and repairs, depletion, amortization, royalties, research and development, and advertising, other than amounts set out separately in the financial statements, are not material.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
TEXAS UTILITIES COMPANY
Date: By: /s/ J. S. FARRINGTON __________________________________ (J. S. FARRINGTON, 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 PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
A map outlining the service systems is displayed on page 17 of this report on Form 10-K. This map appears in the paper format version of the document and not in this electronic filing.