ITEM 1. BUSINESS (CONTINUED)
REGULATION AND RATES -- (CONTINUED)
FUEL COST RECOVERY RULE
Pursuant to a PUC rule governing the recovery of fuel costs, the recovery of TU Electric's eligible fuel costs is provided through fixed fuel factors. The rule allows a utility's fuel factor to be revised upward or downward every six months, according to a specified schedule. A utility is required to petition to make either surcharges or refunds to ratepayers, together with interest based on a twelve month average of prime commercial rates, for any material, as defined by the PUC, cumulative under- or over-recovery of fuel costs. If the cumulative difference of the under- or over-recovery, plus interest, is in excess of 4% of the annual estimated fuel costs most recently approved by the PUC, it will be deemed to be material. Accordingly, in August 1993 TU Electric petitioned the PUC for recovery of under-collected fuel costs for the period July 1992 through June 1993. The PUC approved recovery of $147.5 million of such costs, including interest through August 1994. This recovery was applied to mitigate the refund made by TU Electric in connection with the final order of the PUC in TU Electric's Docket 11735 rate case.(See Docket 11735.) In August 1994, TU Electric petitioned the PUC for a recovery of approximately $93 million, including interest, in under-collected fuel costs for the period July 1993 through June 1994. The PUC approved recovery of this amount over a six-month period beginning in January 1995. The PUC's approvals of both of these surcharges have been appealed by certain intervenors to the district courts of Travis County, Texas. In those appeals, those parties are contending that the PUC is without authority to allow a fuel cost surcharge without a hearing and findings that the costs are reasonable and necessary and that the prices charged to TU Electric by supplying affiliates are no higher than the prices charged by those affiliates to others for the same item or class of items. TU Electric will vigorously defend its position in these appeals but is unable to predict their outcome.
The fuel cost recovery rule also contains a procedure for an expedited change in the fixed fuel factor in the event of an emergency. Final reconciliation of fuel costs must be made either in a reconciliation proceeding, which may cover no more than three years and no less than one year, or in a general rate case. In a final reconciliation, a utility has the burden of proving that fuel costs under review were reasonable and necessary to provide reliable electric service, that it has properly accounted for its fuel-related revenues, and that fuel prices charged to the utility by an affiliate were reasonable and necessary and not higher than prices charged for similar items by such affiliate to other affiliates or nonaffiliates. In addition, for generating utilities like TU Electric, the rule provides for recovery of purchased power capacity costs with respect to purchases from qualifying facilities, to the extent such costs are not otherwise included in base rates. The energy-related costs of such purchases are included in the fixed fuel factor. For non-generating utilities like SESCO, the rule provides for the recovery of all costs of power purchased at wholesale chargeable under rate schedules approved by a federal or state regulatory authority and all amounts paid to qualifying facilities for the purchase of capacity and/or energy, to the extent such costs are not otherwise included in base rates. Penalties of up to 10% will be imposed in the event an emergency increase has been granted when there was no emergency or when collections under the PCRF exceed PCRF costs by 10% in any month or 5% in the most recent twelve months.
FLEXIBLE RATE INITIATIVES
In June 1994, TU Electric filed with the PUC and its municipalities with original regulatory jurisdiction a package of proposed flexible rates. Two of the proposed rates would allow for negotiated competitive pricing through reductions in demand charges to retain existing large retail and wholesale customers who have viable alternative sources of supply and would otherwise leave the system. The remaining two rates are an economic development rider and an environmental technology service rider. The economic development rider would provide an incentive to attract new businesses and jobs and to encourage existing customers to expand their facilities within TU Electric's service area. The environmental technology service rider would provide an incentive for qualifying customers to convert to advanced technologies that conserve total energy or improve
ITEM 1. BUSINESS (CONTINUED)
REGULATION AND RATES -- (CONTINUED)
the environment. These new rates have been approved and implemented in over 160 municipalities with original regulatory jurisdiction, including the cities of Dallas and Ft. Worth, within TU Electric's service territory. Following hearings on the proposed rates, however, the PUC issued an interim order on the rate package which either rejected or significantly weakened the proposed flexible rates, rendering them ineffective. In January 1995, TU Electric withdrew its package of proposed rates from consideration by the PUC. This action does not affect the over 160 municipalities with original regulatory jurisdiction where the flexible rates are already in effect. The Sunset Review of PURA by the Texas legislature in 1995 will include several of the key issues involved in this case. Through its involvement at the legislature and the PUC, TU Electric will continue to pursue the possibility of offering flexible rates.
DOCKET 11735
In July 1994, the TU Electric filed a petition in the 200th Judicial District Court of Travis County, Texas to seek judicial review of the final order of the PUC granting a $449 million, or 9.0%, rate increase in connection with TU Electric's January 1993 rate increase request of $760 million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also filed appeals with respect to various portions of the order. TU Electric is unable to predict the outcome of such appeals.
DOCKET 9300
The PUC's final order (Order) in connection with TU Electric's January 1990 rate increase request (Docket 9300) has been reviewed by the 250th Judicial District Court of Travis County, Texas (District Court) and thereafter was appealed to the Court of Appeals for the Third District of Texas (Court of Appeals). In June 1994, the Court of Appeals affirmed a prudence disallowance of $472 million provided for in the Order with respect to Comanche Peak, reversed and remanded the portion of the District Court's judgment that had affirmed a disallowance of $25 million relating to TU Electric's reacquisitions of the minority owner interests in Comanche Peak nuclear fuel, and affirmed the District Court's remand of the remainder of the disallowance of $884 million relating to the reacquisitions of such minority owner interests. Therefore, the Court of Appeals remanded an aggregate of $909 million of disallowances with respect to TU Electric's reacquisitions of minority owner interests in Comanche Peak to the PUC for reconsideration and ordered that such reconsideration be on the basis of a prudent investment standard.
In addition, the Court of Appeals reversed the District Court's finding that the PUC erred in ordering a refund of $2.5 million with respect to certain fuel gas costs. Also, the Court of Appeals specified that, on remand, the PUC will be required to re-evaluate the appropriate level of TU Electric's CWIP included in rate base in light of its financial condition at the time of the initial hearing and to reconsider whether the $442 million revenue increase provided for in the PUC's final order remains the benchmark in light of this re-examination.
The same Court of Appeals had considered an appeal of another utility's rate case and ruled, in November 1993, that prior court rulings required that tax benefits generated by costs, including capital costs, not allowed in rates must be used to reduce rates charged to customers. In its opinion concerning TU Electric's Docket 9300 rate case, the Court of Appeals maintained that same position and, accordingly, reversed the District Court in that regard. TU Electric believes that such rulings are erroneous and not consistent with PURA. TU Electric contended that, according to a Private Letter Ruling issued to TU Electric by the Internal Revenue Service (IRS)
ITEM 1. BUSINESS (CONTINUED)
REGULATION AND RATES -- (CONCLUDED)
with respect to investment tax credits, such ratemaking treatment, to the extent related to property classified for tax purposes as public utility property, would result in a violation of the normalization rules under the Internal Revenue Code of 1986, as amended. Violation of the normalization rules would result in a significant adverse effect on TU Electric's results of operation and liquidity. If there are normalization violations, TU Electric will forfeit its investment tax credits which remain unamortized as of the date of the violation, and will also forfeit the ability to take advantage of accelerated tax depreciation in years to which the violative order relates. This could result in payments to the IRS of up to $1.3 billion.
TU Electric disagrees with certain portions of the decision of the Court of Appeals, including specifically its decision with respect to federal income taxes, and has filed an appeal to the Supreme Court of Texas. Other parties have also filed appeals of this decision to the Supreme Court of Texas. TU Electric cannot predict whether such appeals will be accepted by the Supreme Court of Texas, and cannot predict the outcome of any such appeals or any resulting reconsideration of these appeals on remand by the PUC.
COMPETITION GENERAL
As legislative, regulatory, economic and technological changes occur, the energy and utility industries are faced with increasing pressure to become more competitive while adhering to regulatory requirements. The level of competition is affected by a number of variables, including price, reliability of service, the cost of energy alternatives, new technologies and governmental regulations.
Federal legislation such as the Public Utility Regulatory Policies Act of 1978 (PURPA) and, more recently, the Energy Act as well as initiatives in various states encourage competition among electric utility and non-utility power producers. Together with increasing customer demand for lower-priced electricity and other energy services, these measures have accelerated the industry's movement toward a more competitive pricing and cost structure.
As a result of the shift in emphasis toward greater competition, large and small industry participants are attempting to penetrate wholesale, industrial and commercial markets, by offering energy services and energy-related products that are both economically and environmentally attractive to customers. In Texas, aggressive marketing of competitive prices by rural electric cooperatives, municipally-owned electric systems, and energy providers who are not subject to the traditional governmental regulation experienced by the energy and utility industries has intensified competition within the state's wholesale markets and, in multi-certificated areas, retail customer markets.
Furthermore, there is increasing pressure on utilities to reduce costs, including the cost of power, and to tailor energy services to the specific needs of customers. Such competitive pressures among electric utility and non-utility power producers could result in the loss of customers and the cost of certain assets becoming stranded investment (i.e., assets, the full cost of which may not be recoverable from customers as a result of competitive pricing). To the extent stranded investment cannot be recovered from customers, it would be necessary for it to be borne by shareholders. In response to these competitive pressures, many utilities are implementing significant restructuring and re- engineering initiatives designed to make them more competitive. Since the implementation of an Operations Review and Cost Reduction program in April 1992, the System Companies continue to take competitive steps to reduce costs by streamlining business processes and operating practices (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation).
ITEM 1. BUSINESS (CONTINUED)
COMPETITION -- (CONTINUED)
WHOLESALE MARKET AND TRANSMISSION ACCESS
In the wholesale power market, TU Electric and SESCO compete with a variety of utilities and other suppliers, some of which are willing and able to sell at rates below TU Electric's standard wholesale power service rate as approved by the PUC. As a result, TU Electric has lost approximately 379 MW of wholesale load since the beginning of 1993. However, in 1994, wholesale revenues represented only approximately 4% of the Company's total consolidated operating revenues. TU Electric is responding to these load losses by proposing to competitively price its wholesale power so as to retain existing customers, and attract new wholesale business. At present, any competitive offer is made subject to appropriate regulatory approval. In connection with its Sunset Review, the Texas legislature is expected to consider legislation which, among other things, would deregulate future wholesale power generation. (See Regulation and Rates.)
The Energy Act empowers the FERC to require utilities to provide transmission service for the delivery of wholesale power from other power producers to qualified resellers, such as municipalities, cooperatives, and other utilities. In December 1993, Tex-La Electric Cooperative of Texas, Inc. (Tex-La) filed with the FERC an application seeking an order under the Federal Power Act that would require TU Electric and SESCO to provide transmission, distribution and control area services necessary to enable Tex-La to purchase power from a competitor. In December 1994, the FERC ordered that the service be provided under a rate methodology that TU Electric and SESCO consider to be unduly favorable to Tex-La and in abrogation of a power supply agreement between TU Electric and Tex-La. TU Electric and SESCO have petitioned for a rehearing of the FERC's December order with respect to these issues. TU Electric and SESCO continue to pursue a rate methodology that more accurately reflects the cost of service to Tex-La. Tex-La represents approximately 80 MW of wholesale load which will no longer be supplied by TU Electric, but by a competitor; and an associated amount of generating costs or purchased power commitments will no longer be supported by Tex-La.
RETAIL MARKET
TU Electric and SESCO are experiencing competition for retail load in areas which are multi-certificated with rural electric cooperatives or municipal utilities. Except in areas where there is multi-certification by the PUC, TU Electric and SESCO currently have the exclusive right to provide electric service to the public within their service areas.
Legislatures and regulatory commissions in several states have begun to examine the possibility of mandated "retail wheeling", or the required delivery by an electric utility over its transmission and distribution facilities of energy produced by another entity to retail customers in such utility's service territory. If implemented, such access could allow a retail customer to purchase its electric service from any other electric service provider, subject to the practical constraints of long distance transmission. This issue has not been actively pursued by the PUC, although as a part of its Sunset Review, the Texas legislature may consider the issue.
In addition, some energy consumers have the ability to produce their own electricity or to use alternative forms of energy. Industrial customers may also be able to relocate their facilities to a lower cost service area. To some degree, there is competition among utilities with defined service areas to attract and retain large customers. The System Companies are pursuing efforts to remain competitive through competitive pricing, economic development and other initiatives. (See Regulation and Rates.) Industrial customers represented approximately 17% of the Company's total consolidated operating revenues in 1994.
ITEM 1. BUSINESS (CONTINUED)
COMPETITION -- (CONCLUDED)
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, 1994, TU Electric owned or leased and operated the following units:
____________________ (a) Thirty-seven natural gas units are designed to operate on fuel oil for short periods when gas supplies are interrupted or curtailed. Five natural gas units are designed to operate on fuel oil for extended periods. In 1994, one 70 MW natural gas unit was retired. (b) Includes the Monticello Unit 3 (750 MW), expected to return to service in mid-1995.(See Peak Load and Capability.) (c) Natural gas units leased and operated by TU Electric. Such units are designed to operate on fuel oil for extended periods.
The principal generating facilities and load centers of TU Electric and SESCO are connected by 3,861 circuit miles of 345,000 volt transmission lines and 9,293 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, ten 69,000 volt lines and three 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.
CAPITAL EXPENDITURES
The Company has taken steps to substantially reduce construction expenditures from amounts previously estimated. Such construction expenditures for utility related activities, excluding AFUDC (see Note 1 to Consolidated Financial Statements), and expenditures related to new generating units are presently estimated at $400 million for each of the years 1995, 1996, and 1997. The System Companies are subject to federal, state and local regulations dealing with environmental protection. (See Item 1. Business - Environmental
ITEM 2. PROPERTIES (CONTINUED)
CAPITAL EXPENDITURES -- (CONCLUDED)
Matters.) Expenditures for construction to meet the requirements of such regulations at existing generating units are estimated to be $58 million for 1995 and were approximately $40 million in 1994, $34 million for 1993 and $25 million for 1992. Expenditures for nuclear fuel and non-utility property are presently estimated to be $63 million for 1995, $70 million for 1996, and $96 million for 1997.
TU Electric's IRP includes 288 MW of simple-cycle combustion turbines and 214 MW of combined-cycle combustion turbines planned for completion during the peak season of 1999, a total of 1,300 MW of combined-cycle combustion turbines planned for completion during the peak seasons of 2000, 2001 and 2002, and a total of 300 MW (or 30 MW of firm capability) of wind or other renewable resources (100 MW planned for completion during each of the peak seasons of 1999, 2003 and 2004). Assuming these units are constructed and financed by TU Electric using traditional methods, approximately $200 million would be added to construction expenditures in 1997.
TU Electric's IRP also includes one lignite-fueled 750 MW unit at Twin Oak currently scheduled for service for the peak season of 2003. Estimated construction expenditures, excluding AFUDC, for the 1995-1997 period do not include any significant amounts for the resumption of construction of this unit. Active construction and the accrual of AFUDC on Twin Oak, suspended in 1987 due to forecast changes in load growth, would need to resume in 1999 in order to meet the current schedule. Due to the delay, and the possibility of further delays resulting from forecast changes, in the schedule of Twin Oak, as well as the lignite-fueled Forest Grove facility which is not included in the ten-year resource plan, TU Electric is contemplating alternative uses for its investment in the projects, which might include construction as exempt wholesale generators, construction at different locations, or sale of the facilities. Management has no specific plans for alternative uses for, or any knowledge of an impairment of, such facilities. Some alternative uses, while contributing to the Company's long-term strategy for maximizing shareholder value, might not provide for the complete recovery of the Company's current investment in these facilities and related mining facilities. Such investment was approximately $807 million as of December 31, 1994.
The re-evaluation of growth expectations, the effects of inflation, additional regulatory requirements and the availability of fuel, labor, materials and capital may result in changes in estimated construction costs and dates of completion. Commitments in connection with the construction program are generally revocable subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. (See Item 1. Business - Peak Load and Capability.)
The Company plans to seek new investment opportunities from time to time when it concludes that such investments are consistent with its business strategies and will likely enhance the long-term returns to its shareholders. The timing and amounts of any specific new business investment opportunities are presently undetermined.
For information regarding financing of capital expenditures, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
ITEM 2. PROPERTIES (CONCLUDED)
THE TU ELECTRIC AND SESCO SYSTEMS
DECEMBER 31, 1994
[A MAP OUTLINING THE SERVICE SYSTEMS OF TU ELECTRIC AND SESCO APPEARS IN THE PAPER FORMAT VERSION OF THE DOCUMENT.]
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 alleged 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 stayed 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 alleged breaches of fiduciary duty and negligence primarily relating to Comanche Peak, which the plaintiff claims had 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 stayed 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.)
The plaintiffs, the Company and the individual defendants have entered into a settlement agreement with respect to the consolidated suit. The settlement is conditioned upon approval by the Court. A special litigation committee of the Company's Board of Directors, following an extensive evaluation, has approved the settlement. In February 1995, the Court approved the settlement on a preliminary basis and ordered the Company to notify its shareholders of the settlement and their opportunity to object to it. A final hearing on the settlement has been scheduled for May, 1995. Although such settlement agreement has not been finalized, tentative amounts of the settlement are considered to be immaterial.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. ______________________
There is no family relationship between any of the above named executive officers.
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 1994 and 1993 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 1995 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, 1995, was 107,048.
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 1994 and as estimated for 1995 through 1997 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 -- Capital Expenditures 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 capital requirements. For 1994, all of the cash needed for construction expenditures was generated from operations by the System Companies. Factors affecting the continued ability of Texas Utilities Electric Company (TU Electric) to fund its capital requirements from operations include responsive regulatory practices allowing recovery of capital investment through adequate depreciation rates, normalization of federal income taxes (see Note 10 to Consolidated Financial Statements), 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, the Company is aggressively managing its operating costs and capital expenditures through streamlined business processes and is developing and implementing strategies to address an increasingly competitive environment (see Item 1. Business - Competition). These strategies include initiatives to improve the Company's return on corporate assets and to maximize shareholder value through new marketing programs, creative rate design, and new business opportunities. Additional initiatives under consideration include the potential disposition or alternative utilization of existing assets and the restructuring of strategic business units. Some of the Company's assets, including approximately $807 million invested in partially completed generating facilities on which construction is temporarily suspended and related mining facilities (see Item 2. Properties - Capital Expenditures) and approximately $563 million invested in coal properties of Chaco Energy Company (see Item 1. Business - Fuel Supply and Purchased Power and Note 11 to Consolidated Financial Statements), are not contributing to earnings and, as a result, the Company is considering possible alternatives to the scheduled development, operation and recovery of such assets through traditional means. While the Company currently believes that its investment in these assets can be recovered, such alternatives, while contributing to the Company's long-term strategy for maximizing shareholder value, might include disposition for amounts which may be less than current book value with respect to these assets. It is not possible at this time to predict the effect any of these possible initiatives might have on the carrying value of the Company's assets or its results of operation.
Although TU Electric cannot predict the outcome of its appeals of the Docket 9300 and 11735 rate decisions, 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. (See Note 10 to Consolidated Financial Statements.)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES -- (CONTINUED)
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, 1994, consisted of approximately 50% long-term debt, 8% preferred stock and 42% common stock equity.
Financings by System Companies totalled $440,442,000 in 1994. Proceeds from such financings were used primarily for the early redemption or reacquisition of debt and preferred stock. Financings in 1994 by the System Companies included the following:
_______________________ (a) Beginning March 1994, common stock requirements for these plans have been met through open market purchases. The Company does not anticipate the need to issue new shares for these plan requirements.
Since December 31, 1993, the System Companies redeemed, reacquired or made principal payments of $1,223,723,000 on long-term debt and preferred stock. Early redemptions of long-term debt and preferred stock may occur from time to time in amounts presently undetermined. (See Notes 5 and 6 to Consolidated Financial Statements.)
On February 24, 1995, TU Electric entered into a two-year term credit agreement with commercial banks for borrowings up to $300,000,000.
The System Companies expect to sell additional debt and equity securities as needed including (i) the possible future sale by TU Electric of up to $650,000,000 of First Mortgage Bonds currently registered with the Securities and Exchange Commission for offering pursuant to Rule 415 under the Securities Act of 1933 and (ii) the possible future sale by TU Electric of up to 250,000 shares of Cumulative Preferred Stock ($100 liquidation value) similarly registered. The Company and TU Electric have credit facility agreements (Agreements) with a group of commercial banks. The Agreements have two facilities, for each of which the Company pays a fee. Facility A provides for borrowings up to $300,000,000 and terminates April 28, 1995. The Company and TU Electric intend to negotiate an extension of this facility. Facility B provides for borrowings up to $700,000,000 and terminates April 29, 1999. The Company's borrowings under the Agreements are limited to $250,000,000. Borrowings under the Agreements will be used for working capital and other corporate purposes, including commercial paper backup. For more information regarding short-term financings of the Company, see Note 2 to Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES -- (CONCLUDED)
In June 1994, Texas Utilities Properties Inc., a wholly-owned subsidiary of the Company, entered into an operating lease agreement with a bank leasing company for a 48-story office building which is being utilized as the corporate headquarters of the System Companies.
The Company's capital requirements have not been significantly affected by the requirements of the federal Clean Air Act, as amended (Clean Air Act). Although TU Electric is unable to fully determine the cost of compliance with the Clean Air Act, it is not expected to have a significant impact on the Company. During 1994, installation of continuous emissions monitoring systems was completed at a total cost of approximately $38 million. Any additional required capital costs, as well as any increased operating costs, associated with these new requirements or compliance measures are expected to be recoverable through rates, as similar costs have been recovered in the past. Environmental expenditures for 1995 are estimated to be $58 million.
The National Energy Policy Act of 1992 (Energy Act) addresses a wide range of energy issues and is intended to increase competition in electric generation and broaden access to electric transmission systems. In addition, legislation is currently being considered by the Texas legislature which, if enacted, could impact the structure of the Public Utility Commission of Texas (PUC) and its regulatory practices and could lead to increased competition in some aspects of the electric utility industry. Although TU Electric and Southwestern Electric Service Company (SESCO) are unable to predict the ultimate impact of the Energy Act and any related regulations or any potential state legislation on their operations, they believe that such actions are consistent with the trend toward increased competition in the energy industry.
While TU Electric and SESCO have experienced competitive pressures in the wholesale market resulting in approximately 379 MW loss of load for TU Electric since the beginning of 1993, wholesale sales represented a relatively low percentage of total consolidated operating revenues in 1994. TU Electric and SESCO are unable to predict the extent of future competitive developments in either the wholesale or retail markets or what impact, if any, such developments may have on their operations. (See Item 1. Business - Competition.)
RESULTS OF OPERATION
Operating revenues increased approximately 4% and 11% for the years ended December 31, 1994 and 1993, respectively. The following table details the factors contributing to these changes:
Base rate revenue increased during the last two years due to increased energy sales and higher rate levels implemented in August 1993. Energy sales increased approximately 4% and 6% for 1994 and 1993, respectively. The increase in energy sales in 1994 was due primarily to increased billing days and an increase in commercial and industrial usage, partially offset by milder than normal weather. The increase in 1993 resulted from more normal weather conditions and an increase in customers. The rate increase placed in effect in August 1993 increased TU Electric's base rate revenues, net of amounts ultimately refunded, by approximately $343 million and $177 million in 1994 and 1993, respectively. Fuel revenue decreased in 1994
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)
RESULTS OF OPERATION -- (CONTINUED)
due primarily to a reduction in gas prices and increased nuclear generation as compared to 1993. The increase in fuel revenue in 1993 resulted from increased energy sales and fuel costs. The decrease in unbilled revenue and other in 1994 resulted from milder than normal weather in December 1994 and an increase in the number of billing days in 1994. (See Note 12 to Consolidated Financial Statements.)
With respect to operating expenses, fuel and purchased power expense decreased approximately 7% and increased approximately 11% for 1994 and 1993, respectively. Fuel and purchased power expense decreased in 1994 primarily due to a reduction in gas prices, lignite requirements, and purchase power commitments, and an increased utilization of nuclear fuel, offset by increased energy sales. Fuel and purchased power expense increased for 1993 primarily due to increased energy sales and gas prices partially offset by increased utilization of nuclear fuel. (See Item 1. Business -- Fuel Supply and Purchased Power and Item 6. Selected Financial Data -- Consolidated Operating Statistics.)
Total operating expenses, excluding fuel and purchased power, increased approximately 9% and 16% for 1994 and 1993, respectively. Operation and depreciation expenses increased in 1994 primarily as a result of a full year's operation of Comanche Peak Unit 2, and increases in uncollectible accounts expense and demand-side management program costs. Operation, maintenance and depreciation expenses increased in 1993 as a result of the commencement of commercial operation of Comanche Peak Unit 2 in August 1993. Operation expense in 1993 also increased due to higher pension costs and other postretirement benefits costs, partially offset by lower employee labor costs. Maintenance expense for both periods was also affected by a 1993 review of TU Electric's inventory and subsequent adjustments recorded during the third and fourth quarters of 1993. Taxes other than income increased in both periods due primarily to increased local gross receipts taxes resulting from higher tax rates and increased revenues and an increase in ad valorem taxes charged to operation which were previously capitalized, and increased in 1994, due to a refund of franchise taxes in the prior period of approximately $23,875,000.
AFUDC decreased approximately 92% and 14% in 1994 and 1993, respectively. The decrease in both periods was primarily due to the discontinuation of the accrual of AFUDC on Comanche Peak Unit 2 when such unit achieved commercial operation in August 1993.
The regulatory disallowances in 1993 reflect charges resulting from a settlement agreement among the parties in Docket 11735.
Other income and deductions -- net decreased over the prior period primarily due to changes in interest income on temporary cash investments and a decrease in interest income on under-recovered fuel revenue.
Federal income taxes -- other income increased in 1994 and decreased in 1993 due primarily to the effect of recording taxes associated with the regulatory disallowance recorded in 1993. (See Note 7 to Consolidated Financial Statements.)
Total interest charges, excluding AFUDC, decreased approximately 3% and less than 1% for 1994 and 1993, respectively. Interest on mortgage bonds decreased over the prior period as a result of reduced interest requirements due to the Company's refinancing efforts, partially offset by increased interest requirements for new issues sold. Interest on other long-term debt decreased in both periods due to the continuing retirement
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Concluded)
RESULTS OF OPERATION -- (CONCLUDED)
of debt incurred on the purchases of the minority ownership interests in Comanche Peak. Other interest expense increased over the prior period due primarily to interest on bonded rates refunded, an increase in short-term interest rates, and increased amortization of debt issuance expenses and redemption premiums.
Preferred stock dividends decreased approximately 12% and 3% for 1994 and 1993, respectively, primarily due to the redemption of series with higher dividend rates partially offset, in 1993, by dividends on new issues.
The major factors affecting earnings in 1994 and 1993 were the implementation of the Docket 11735 rate increase, the effect of recording regulatory disallowances, the discontinuation of the accrual of AFUDC on Comanche Peak Unit 2 and the commencement of depreciation on approximately $668 million of investment in Comanche Peak Unit 2 incurred after the end of the Docket 11735 test year which was not included in rates. Consolidated net income increased and decreased over the prior periods by approximately 47% for 1994 and 1993, respectively.
POSSIBLE CHANGE IN ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) is expected to issue during 1995 a new accounting standard addressing the impairment of long-lived assets. Based upon FASB's exposure draft, which is subject to change, and its deliberations, any new standard would likely prescribe a methodology for assessing and measuring impairments in the carrying values of certain assets. If such new standard were adopted, the Company may be subject to a stricter standard for assessing asset impairment in the future.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEXAS UTILITIES COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
TEXAS UTILITIES COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS
TEXAS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
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 1993 and 1992 have been reclassified to conform to the 1994 presentation.
In May 1994, Texas Utilities Properties Inc. (TU Properties), a new wholly- owned subsidiary of the Company, was incorporated under the laws of the State of Texas. The principal function of TU Properties is to own, lease and manage real and personal properties, primarily for System Companies. The activities of TU Properties are not expected to have a material effect on the Company's results of operation or financial position.
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. In connection with the implementation of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109) in 1993, TU Electric uses a rate that reflects the cost of funds plus a component for income taxes (gross rate). For 1994, a gross rate of 8.6% was used to capitalize AFUDC. This rate was effective in December 1994, retroactive to January 1994. Prior to the implementation of this rate, AFUDC was capitalized at a rate of 9.25% in 1994. In 1993, a gross rate of 10.4% was used for all CWIP. In 1992, TU Electric used a net-of-tax rate of 8.8% on projects commenced before March 1, 1986, and a gross rate of 10.4% on projects commenced thereafter. 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 2.6%, 2.5% and 2.8% for 1994, 1993 and 1992, 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.)
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
Other Investments -- The difference of $45,462,000 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 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 under the approved fixed fuel factor and a provision that generally allows recovery through a Power Cost Recovery Factor, on a monthly basis, of the capacity portion of purchased power cost and wheeling cost from qualifying facilities not included in base rates. The fuel portion of purchased power cost is included in the fixed fuel factor. A utility's fuel factor can be revised upward or downward every six months, according to a specified schedule. A utility is required to petition to make either surcharges or refunds to ratepayers, together with interest based on a twelve month average of prime commercial rates, for any material cumulative under- or over-recovery of fuel costs. If the cumulative difference of the under- or over-recovery, plus interest, is in excess of 4% of the annual estimated fuel costs most recently approved by the PUC, it will be deemed to be material. A procedure exists for an expedited change in fuel factors in the event of an emergency. Final reconciliation of fuel costs must be made either in a reconciliation proceeding, which may cover no more than three years and no less than one year, or in a general rate case. TU Electric plans to file for a fuel reconciliation proceeding by the end of 1995 for the reconciliation period of July 1992 through June 1995.
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 the book and 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. Investment tax credits are normally amortized to income over the estimated service lives of the properties. For 1992, 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, 1994, the Company and TU Electric had joint lines of credit aggregating $1,000,000,000 under credit facility agreements (Agreements) with a group of commercial banks. The Agreements have two facilities, for each of which the Company pays a fee. Facility A provides for borrowings up to $300,000,000 and terminates April 28, 1995. The Company and TU Electric intend to negotiate an extension of this facility. Facility B provides for borrowings up to $700,000,000 and terminates April 29, 1999. The Company's borrowings under the Agreements are limited to $250,000,000. Borrowings under the Agreements will be used for working capital and other corporate purposes, including commercial paper backup.
At December 31, 1994, TU Electric had $363,886,000 of commercial paper outstanding with interest rates ranging from 5.99% to 6.80%. During the years 1994, 1993 and 1992, average amounts outstanding to banks for borrowings were $66,042,000, $84,934,000 and $277,306,000, respectively and to holders of commercial paper were $238,401,000, $54,401,000 and $8,069,000, respectively. During such periods, weighted average interest rates to banks for borrowings were 4.92%, 3.84% and 4.28%, respectively and to holders of commercial paper were 4.94%, 3.72% and 3.79%, respectively. At December 31, 1994, 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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 1994, 1,997,005 shares of the authorized but unissued common stock of the Company were reserved for issuance and sale pursuant to the above plans.
In February 1994, the Company amended its Automatic Dividend Reinvestment and Common Stock Purchase Plan. The amendments included, among other things, the option to purchase common stock in the open market through an independent broker to meet share requirements under the plan. Beginning in March 1994, requirements under the Automatic Dividend Reinvestment and Common Stock Purchase Plan and the Employees' Thrift Plan of the Texas Utilities Company System (Thrift Plan) have been met through open market purchases of common stock.
In 1990, the Thrift Plan borrowed $250,000,000 in the form of a note payable from an outside lender and purchased 7,142,857 shares of common stock (LESOP Shares) from the Company in connection with the leveraged employee stock ownership provision of the Thrift Plan. LESOP Shares are held by the trustee until allocated to Thrift Plan participants when required to meet the System Companies' obligations under terms of the Thrift Plan. The Company has purchased the note from the outside lender, which has been recorded as a reduction to common stock equity. The Thrift Plan uses dividends on the LESOP Shares purchased and contributions from the System Companies, if required, to repay interest and principal on the note. Common stock equity increases at such time as LESOP Shares are allocated to participants' accounts even though shares of common stock outstanding include unallocated LESOP Shares held by the trustee. Allocations to participants' accounts in 1994, 1993 and 1992 increased common stock equity by $8,115,000, $8,114,000 and $8,072,000, 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
The articles of incorporation and the mortgages, as supplemented, of TU Electric and SESCO, contain provisions which, under certain conditions, restrict distributions on or acquisitions of their common stock. At December 31, 1994, $154,542,000 of retained earnings were thus restricted as a result of such provisions. Retained earnings at such date also included $431,243,000, representing the Company's equity in undistributed earnings since acquisition included in transfers by TU Electric from its retained earnings to stated value of common stock. The total of such restricted retained earnings at December 31, 1994 was $585,785,000.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. AUTHORIZED PREFERRED STOCK OF TU ELECTRIC (CUMULATIVE, WITHOUT PAR VALUE, ENTITLED UPON LIQUIDATION TO A $100 SHARE; 17,000,000 SHARES)
- ----------------------------------------- (a) The preferred stock series is the underlying preferred stock for depositary shares that were issued to the public. Each depositary share represents one quarter of a share of underlying preferred stock. (b) Preferred stock series is not redeemable at December 31, 1994. (c) Adjustable rate series A bears a dividend rate for the period ended January 31, 1995, of $6.50 per annum and adjustable rate series B bears a dividend rate for the period ended December 31, 1994, of $7.00 per annum. (d) TU Electric is required to redeem at a price of $100 per share plus accumulated dividends a specified minimum number of shares annually or semi-annually on the initial/next dates shown below. These redeemable shares may be called, purchased or otherwise acquired. Certain issues may not be redeemed at the option of TU Electric prior to 2003. TU Electric may annually call for redemption, at its option, an aggregate of up to twice the number of shares shown below for each series at a price of $100 per share plus accumulated dividends, except for the $9.64 series which may be redeemed in a minimum amount of 10,000 shares at any time at a price of $100 per share plus accumulated dividends plus a component at a variable price per share which is designed to maintain the expected yield at issuance:
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)
Preferred stock mandatory redemption requirements for the next five years are $25 million in 1995, $45 million in 1996, $45 million in 1997, $35 million in 1998 and $20 million in 1999. The carrying value of preferred stock subject to mandatory redemption is being increased periodically to equal the redemption amounts at the mandatory redemption dates with a corresponding increase in preferred stock dividends. (e) Under certain circumstances relating to a change in federal tax law governing the dividends received deduction applicable to eligible corporations, the dividend rate of the $9.64 series may increase to a maximum of $10.74. (f) The redemption price is calculated on the business day next preceding the settlement date at a price of $100 per share plus accumulated dividends plus a component which is designed to maintain the expected yield at issuance.
In January 1995, TU Electric reacquired 62,500 shares of the $7.22 series and 23,750 shares of the $7.50 series.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. LONG-TERM DEBT, LESS AMOUNTS DUE CURRENTLY - (CONTINUED)
_____________________________ (a) Floating rate series due May 1, 1999 bears an interest rate for the period November 1, 1994 to January 31, 1995 of 6.0625%. Such interest rate is reset on a quarterly basis. (b) Taxable pollution control series consist of two series: $100,000,000 of series 1991D due 2021 at 8.85% through June 1, 1995 and $100,000,000 of flexible rate series 1993 due 2023 at 5.50% on December 31, 1994. 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 Series 1991D bonds will be repriced on the mandatory tender date of June 1, 1995. 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. (c) Series 1994A and Series 1994B due 2029 are in a flexible mode with interest rates on December 31, 1994 ranging from 3.65% to 4.50% and, while in such mode, will be remarketed for periods of less than 270 days and are secured by an irrevocable letter of credit with maturities in excess of one year. (d) 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. (e) 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)
In January and February 1995, TU Electric reacquired $18,500,000 of 9-7/8% First Mortgage and Collateral Trust Bonds due November 1, 2019. On February 24, 1995, TU Electric entered into a two-year term credit agreement with commercial banks for borrowings up to $300,000,000.
Sinking fund and maturity requirements for the years 1995 through 1999 under long-term debt instruments in effect at December 31, 1994, were as follows:
________________________ * The maturity requirement does not include in 1995, which is expected to be the mandatory tender of TU Electric's remarketed. taxable pollution control series, equal to $100,000,000 in 1995, which is expected to be remarketed.
TU Electric first mortgage bonds are secured by the Mortgage and Deed of Trust dated as of December 1, 1983, as supplemented, between TU Electric and Irving Trust Company (now The Bank of New York), Trustee. SESCO first mortgage bonds are secured by the Mortgage and Deed of Trust dated as of May 1, 1945, as supplemented, between SESCO and NationsBank of Texas, N.A., successor Trustee. 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, 1994, 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 was not considered material to the annual results of operation.
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 federal income tax assets and liabilities reflected net in the consolidated balance sheets are as follows:
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 as follows:
The System Companies have net operating loss carryforwards of approximately $87 million that are available to offset future ordinary taxable income. These loss carryforwards expire in 2007. In addition, the System Companies have approximately $567 million of alternative 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) has audited the consolidated Federal income tax returns of the System Companies for the years 1987 through 1990. During the course of the audit, the IRS proposed a number of adjustments to the returns as filed, the most significant of which 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 financial position or 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
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
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.
Total pension costs, including amounts charged to fuel cost, deferred and capitalized, were comprised of the following components:
The table below details the plans' funded status and amount recognized in the Company's consolidated balance sheets as follows:
Assumptions used in determination of the projected benefit obligation include a discount rate of 8.75% for 1994 and 7.875% for 1993 and an increase in compensation levels of 4.7% for each year. The assumed long-term rate of return on plan assets was 9.0% for 1994 and 8.75% for 1993 and 1992.
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
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONCLUDED)
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.
The System Companies' net periodic postretirement benefits cost other than pensions, including amounts charged to fuel cost, deferred 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 :
The expected increase in costs of future benefits covered by the plan is projected using a health care cost trend rate of 6.5% in 1995, 5.5% in 1996, 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, 1994 by approximately $57.4 million and other postretirement benefits cost for 1994 by approximately $6.9 million. The assumed discount rate used to measure the APBO is 8.75% for 1994 and 7.875% for 1993.
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, 1994 and 1993, 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 July 1994, TU Electric filed a petition in the 200th Judicial District Court of Travis County, Texas to seek judicial review of the final order of the PUC granting a $449 million, or 9.0%, rate increase in connection with TU Electric's January 1993 rate increase request of $760 million, or 15.3% (Docket 11735). Other parties to the PUC proceedings also filed appeals with respect to various portions of the order. TU Electric is unable to predict the outcome of such appeals.
DOCKET 9300
The PUC's final order (Order) in connection with TU Electric's January 1990 rate increase request (Docket 9300) has been reviewed by the 250th Judicial District Court of Travis County, Texas (District Court) and thereafter was appealed to the Court of Appeals for the Third District of Texas (Court of Appeals). In June 1994, the Court of Appeals affirmed a prudence disallowance of $472 million provided for in the Order with respect to Comanche Peak, reversed and remanded the portion of the District Court's judgment that had affirmed a disallowance of $25 million relating to TU Electric's reacquisitions of the minority owner interests in Comanche Peak nuclear fuel, and affirmed the District Court's remand of the remainder of the disallowance of $884 million relating to the reacquisitions of such minority owner interests. Therefore, the Court of Appeals remanded an aggregate of $909 million of disallowances with respect to TU Electric's reacquisitions of minority owner interests in Comanche Peak to the PUC for reconsideration and ordered that such reconsideration be on the basis of a prudent investment standard.
In addition, the Court of Appeals reversed the District Court's finding that the PUC erred in ordering a refund of $2.5 million with respect to certain fuel gas costs. Also, the Court of Appeals specified that, on remand, the PUC will be required to re-evaluate the appropriate level of TU Electric's CWIP included in rate base in light of its financial condition at the time of the initial hearing and to reconsider whether the $442 million revenue increase provided for in the PUC's final order remains the benchmark in light of this re-examination.
The same Court of Appeals had considered an appeal of another utility's rate case and ruled, in November 1993, that prior court rulings required that tax benefits generated by costs, including capital costs, not allowed in rates must be used to reduce rates charged to customers. In its opinion concerning TU Electric's Docket 9300 rate case, the Court of Appeals maintained that same position and, accordingly, reversed the District Court in that regard. TU Electric believes that such rulings are erroneous and not consistent with the Texas Public Utility Regulatory Act (PURA). TU Electric contended that, 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
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. RATE PROCEEDINGS - (CONTINUED)
related to property classified for tax purposes as public utility property, would result in a violation of the normalization rules under the Internal Revenue Code of 1986, as amended. Violation of the normalization rules would result in a significant adverse effect on TU Electric's results of operation and liquidity. If there are normalization violations, TU Electric will forfeit its investment tax credits which remain unamortized as of the date of the violation, plus the ability to take advantage of accelerated tax depreciation in years to which the violative order relates. This could result in payments to the IRS of up to $1.3 billion.
TU Electric disagrees with certain portions of the decision of the Court of Appeals, including specifically its decision with respect to federal income taxes, and has filed an appeal to the Supreme Court of Texas. Other parties have also filed appeals of this decision to the Supreme Court of Texas. TU Electric cannot predict whether such appeals will be accepted by the Supreme Court of Texas, and cannot predict the outcome of any such appeals or any resulting reconsideration of these issues on remand by the PUC.
FUEL COST RECOVERY RULE
In August 1993, in accordance with the rules of the PUC, TU Electric petitioned the PUC for recovery of under-collected fuel costs for the period July 1992 through June 1993. The PUC approved recovery of $147.5 million of such costs, including interest through August 1994. This recovery was applied to mitigate the refund made by TU Electric in connection with the final order of the PUC in TU Electric's Docket 11735 rate case. In August 1994, TU Electric petitioned the PUC for a recovery of approximately $93 million, including interest, in under-collected fuel costs for the period July 1993 through June 1994. The PUC approved the recovery of this amount over a six-month period beginning in January 1995. The PUC's approvals of both these surcharges have been appealed by certain intervenors to the district courts of Travis County, Texas. In those appeals, those parties are contending that the PUC is without authority to allow a fuel cost surcharge without a hearing and findings that the costs are reasonable and necessary and that the prices charged to TU Electric by supplying affiliates are no higher than the prices charged by those affiliates to others for the same items or class of items. TU Electric will vigorously defend its position in these appeals but is unable to predict their outcome.
FLEXIBLE RATE INITIATIVES
In June 1994, TU Electric filed with the PUC and municipalities with original regulatory jurisdiction a package of proposed flexible rates. Two of the proposed rates would allow for negotiated competitive pricing through reductions in demand charges to retain existing large retail and wholesale customers who have viable alternative sources of supply and would otherwise leave the system. The remaining two rates are an economic development rider and an environmental technology service rider. The economic development rider would provide an incentive to attract new businesses and jobs and to encourage existing customers to expand their facilities within TU Electric's service area. The environmental technology service rider would provide an incentive for qualifying customers to convert to advanced technologies that conserve total energy or improve the environment. These new rates have been approved and implemented in over 160 municipalities with original regulatory jurisdiction, including the cities of Dallas and Fort Worth, within TU Electric's service territory. Following hearings on the proposed rates, however, the PUC issued an interim order on the rate package which either rejected or significantly weakened the proposed flexible rates, rendering them ineffective. In January 1995, TU Electric withdrew its package of proposed rates from consideration by the PUC. This action does not affect the over 160 municipalities where the flexible rates are already in effect. The Sunset Review of PURA by the Texas legislature in 1995 will include several of the key issues involved in this case. Through its involvement at the legislature and the PUC, TU Electric will continue to pursue the possibility to offer flexible rates.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RATE PROCEEDINGS -- (CONCLUDED)
INTEGRATED RESOURCE PLAN
In October 1994, TU Electric filed an application for approval by the PUC of its Integrated Resource Plan (IRP) for the ten-year period 1995-2004. The IRP includes initiatives that address demand-side management resources, purchased power, and future generating capacity which includes renewable energy sources. TU Electric's IRP includes 288 MW of simple-cycle combustion turbines and 1,514 MW of combined-cycle combustion turbines and 300 MW of wind or other renewable resources. Assuming these units are financed by TU Electric using traditional methods, approximately $200 million would be added to capital expenditures in 1997. TU Electric's IRP also includes one lignite-fueled 750 MW unit at Twin Oak. The second lignite-fueled Twin Oak unit has been delayed beyond the ten-year period. TU Electric expects to obtain approval of this application by mid-1995.
11. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES
The Company has taken steps to substantially reduce construction expenditures from amounts previously estimated. Such expenditures for utility related activities, excluding AFUDC and expenditures relating to new generating units, are presently estimated at $400 million for each of the years 1995, 1996 and 1997. Active construction and the accrual of AFUDC on Twin Oak, suspended in 1987 due to forecast changes in load growth, would need to resume in 1999 in order to meet the current schedule. Due to the delay, and the possibility of further delays resulting from forecast changes, in the schedule of Twin Oak, as well as the lignite-fueled Forest Grove facility which is not included in the ten-year resource plan, TU Electric is contemplating alternative uses for its investment in the projects, which might include construction as exempt wholesale generators, construction at different locations, or sale of the facilities. Management has no specific plans for alternative uses for, or any knowledge of an impairment of, such facilities. Some alternative uses, while contributing to the Company's long-term strategy for maximizing shareholder value, may not provide for the complete recovery of the Company's investment in these facilities and related mining facilities. Such investment was approximately $807 million as of December 31, 1994. Expenditures for nuclear fuel and non-utility property are presently estimated at $63 million for 1995, $70 million for 1996, and $96 million for 1997. The re-evaluation of growth expectations, the effects of inflation, additional regulatory requirements and the availability of fuel, labor, materials and capital may result in changes in estimated construction costs and dates of completion. Commitments in connection with the construction program are generally revocable subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties.
The Company plans to seek new investment opportunities from time to time when it concludes that such investments are consistent with its business strategies and will likely enhance the long-term returns to its shareholders. The timing and amounts of any specific new business investment opportunities are presently undetermined.
CLEAN AIR ACT
The federal Clean Air Act, as amended (Clean Air Act) includes provisions which, among other things,
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
place limits on the sulfur dioxide emissions produced by generating units. To meet these sulfur dioxide requirements, the Clean Air Act provides for the annual allocation of sulfur dioxide emission allowances to utilities. Under the Clean Air Act, utilities are permitted to transfer allowances within their own systems and to buy or sell allowances from or to other utilities. The 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 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. During 1994, installation of continuous emissions monitoring systems was completed at a total cost of approximately $38 million. Any additional capital costs, as well as any increased operating costs, associated with these new requirements 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, 1994, 1993 and 1992 were $236,991,000, $251,610,000 and $240,341,000, 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, 1994, 1993 and 1992 were $140,370,000, $138,184,000 and $127,446,000, respectively.
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, 1994, were as follows:
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
COOLING WATER CONTRACTS
TU Electric has entered into contracts with public agencies to purchase cooling water for use in the generation of electric energy. In connection with certain contracts, TU Electric has agreed, in effect, to guarantee the principal, $36,650,000 at December 31, 1994, and interest on bonds issued to finance the reservoirs from which the water is supplied. The bonds mature at various dates through 2011 and have interest rates ranging from 5-1/2 to 7%. TU Electric is required to make periodic payments equal to such principal and interest, including amounts assumed by a third party and reimbursed to TU Electric, for the years 1995 through 1999 as follows: $4,431,000 for 1995; $4,430,000 for 1996; $4,435,000 for 1997; $4,435,000 for 1998 and $4,435,000 for 1999. Payments made by TU Electric, net of amounts assumed by a third party under such contracts, for 1994, 1993 and 1992 were $3,615,000, $2,954,000 and $2,849,000, 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 $84,610,000 remaining principal amount of bonds at December 31, 1994, issued for similar purposes which had previously been guaranteed by TU Electric. TU Electric is, however, contingently liable in the unlikely event of default by the municipality.
CHACO COAL PROPERTIES
Chaco 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, 1994 and 1993, $499,890,000 and $483,855,000, respectively, of minimum advance royalties paid by Chaco are included in non-utility property. In addition, Chaco has under lease with the federal government certain coal reserves with a carrying value of approximately $44 million as of December 31, 1994. A provision in this lease requires that substantial mining be completed by September 1997. Chaco is currently reviewing its options with regard to this provision. Because of the ample availability of western coal at favorable prices from other mines, Chaco has delayed plans to commence mining operations, and accordingly, is reassessing its alternatives with respect to its coal properties including seeking other purchasers thereof.
NUCLEAR INSURANCE
With regard to liability coverage, the Price-Anderson Act (Act) provides financial protection for the public in the event of a significant nuclear power plant incident. The Act sets the statutory limit of public liability for a single nuclear incident currently at $8.9 billion and requires nuclear power plant operators to provide financial protection for this amount. As required, TU Electric provides this financial protection for a nuclear incident at Comanche Peak resulting in public bodily injury and property damage through a combination of private insurance and industry-wide retrospective payment plans. As the first layer of financial protection, TU Electric has purchased $200 million of liability insurance from American Nuclear Insurers (ANI), which provides such insurance on behalf of two major stock and mutual insurance pools, Nuclear Energy Liability Insurance Association and Mutual Atomic Energy Liability Underwriters. The second layer of financial protection is provided under an industry-wide retrospective payment program called Secondary
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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 $3.6 billion, above which TU Electric is self- insured. The primary layer of coverage of $500 million is provided by ANI. The remaining coverage includes premature decommissioning coverage and is provided by ANI in the amount of $850 million and Nuclear Electric Insurance Limited (NEIL), a nuclear electric utility industry mutual insurance company, in the amount of $2.25 billion. TU Electric is subject to a maximum annual assessment from NEIL of $30 million in the event NEIL's losses under this type of insurance for major incidents at nuclear plants participating in this program exceed its accumulated funds and reinsurance.
TU Electric maintains Extra Expense Insurance through NEIL to cover the additional costs of obtaining replacement power from another source if one or both of the units at Comanche Peak are out of service for more than twenty-one weeks as a result of covered direct physical damage. The coverage provides for weekly payments of $3.5 million for the first and $2.8 million for the second and third fifty-two week periods of each outage, respectively, after the initial twenty-one week period. The total maximum coverage is $473 million per unit. The coverage amounts applicable to each unit will be reduced to 80% if both units are out of service at the same time as a result of the same accident. Under this coverage, TU Electric is subject to a maximum assessment of $10 million per year.
NUCLEAR DECOMMISSIONING AND DISPOSAL OF SPENT FUEL
TU Electric has established a reserve, charged to depreciation expense and accumulated depreciation, for the decommissioning of Comanche Peak, whereby decommissioning costs are being recovered from customers over the life of the plant and deposited in external trust funds (included in other investments). At December 31, 1994, such reserve totaled $55,880,000 which includes an accrual of $18,179,000 for the year ended December 31, 1994. As of December 31, 1994, the market value of deposits in the external trust for decommissioning of Comanche Peak was $54,477,000. Realized earnings on funds deposited in the external trust are recognized in the reserve. Based on a site-specific study during 1992 using the prompt dismantlement method and then-current dollars, decommissioning costs for Comanche Peak Unit 1, and Unit 2 and common facilities were estimated to be $255,000,000 and $344,000,000, respectively. Decommissioning activities are projected to begin in 2030 and 2032 for Comanche Peak Unit 1, and Unit 2 and common facilities, respectively. TU Electric is recovering such costs based upon the 1992 study through the rates placed in effect under Docket 11735 (see Note 10).
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. COMMITMENTS AND CONTINGENCIES -- (CONCLUDED)
TU Electric has a contract with the United States Department of Energy for the future disposal of spent nuclear fuel at a cost of one mill per kilowatt-hour of Comanche Peak net generation. The disposal fee is included in nuclear fuel expense.
GENERAL
In addition to the above, the Company and its subsidiaries are involved in various legal and administrative proceedings which, in the opinion of the Company, should not have a material effect upon its financial position or results of operation.
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.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board 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 sheets 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.
The fair values of long-term debt and preferred stock subject to mandatory redemption are estimated at the lesser of the call price or the present value of future cash flows discounted at rates consistent with comparable maturities adjusted for credit risk.
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.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONCLUDED)
The carrying amount of other financial liabilities classified as current on the consolidated balance sheets, 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 date of the balance sheets.
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, 1994 and 1993 of the bonds for which TU Electric is contingently liable is approximately $121,000,000 and $125,000,000, respectively. The fair value of the bonds, approximately $115,000,000 and $136,000,000 for December 31, 1994 and 1993, 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) 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.
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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, 1994, the Company's system of internal control was adequate to accomplish the objectives discussed herein.
The Board of Directors of the Company addresses its oversight responsibility for the consolidated financial statements through its Audit Committee, which is composed of directors who are not employees of the Company. The Audit Committee meets regularly with the Company's management, internal auditors and independent certified public accountants to review matters relating to financial reporting, auditing and internal control. To ensure auditor independence, both the internal auditors and independent certified public accountants have full and free access to the Audit Committee.
The independent certified public accounting firm of Deloitte & Touche LLP is engaged to audit, in accordance with generally accepted auditing standards, the consolidated financial statements of the Company and its subsidiaries and to issue their report thereon.
/s/ J. S. FARRINGTON ----------------------------------------- J. S. Farrington, Chairman of the Board 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
INDEPENDENT AUDITORS' REPORT
Texas Utilities Company:
We have audited the accompanying consolidated balance sheets of Texas Utilities Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in Item 14.(a)2. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents 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 as 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 LLP
Dallas, Texas March 1, 1995
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 March 28, 1995. 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
All other 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.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 1994, are as follows:
N/A
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)
____________________________ * Incorporated herein by reference. ** Management contract or compensation plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
TEXAS UTILITIES COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For Each of the Three Years in the Period Ended December 31, 1994
_____________ (a) Deductions represents uncollectible accounts written off net of recoveries of amounts previously written off.
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: March 2, 1995 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.
SIGNATURE TITLE DATE --------- ----- ----
INDEX TO EXHIBITS