ML20101D888

Forwards Securities & Exchange Commission Annual Rept Form 10K

ML20101D888
Person / Time
Site:	Comanche Peak
Issue date:	03/22/1996
From:	John Marshall, Terry C TEXAS UTILITIES ELECTRIC CO. (TU ELECTRIC)
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
TXX-96092, NUDOCS 9603210334
Download: ML20101D888 (85)

Text

.

Lag # TXX 96092

_rm File # 10045 841.1 Ref. # 10CFR50.71(b) l 1UELECTRIC l

Mar'.h 22, 1996

c. tanu Terry G mp Mce Presidre U. S. Nuclear Regulatory Commission Attention:

Document Control Desk Washington, DC 20555

SUBJECT:

COMANCHE PEAK STEAM ELECTRIC STATION (CPSES)

DOCKET NOS. 50 445 AND 50 446 SUBMITTAL OF SECURITIES AND EXCHANGE COMMISSION ANNUAL REPORT FORM 10K l

Gentlemen:

Pursuant to 10CFR50.71(b), TV Electric hereby submits five (5) copies of the Form 10K Annual Report.

Sincerely, J

C. L.

ry By:-

J. S. Marshall Generic Licensing Manager JDR/grp Enclosures c-Mr. L. J. Callan, Region IV (clo)

Mr. W. D. Johnson, Region IV (clo) l Mr. T. J. Polich, NRR (clo) l Resident Inspector, CPSES (clo) l w,

j 9603210334 960322 1

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Energy Plaza 1601 Bryan Street Dallas, Texas 75201-3411

l FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

[/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31,1995 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR IS(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Exact name of registrant as specified in its charter; I.R.S. Employer File Number address of principal executive offices and telephone number Identification Number 1-3591 Texas Utilities Company 75-0705930 i

Energy Plaza,1601 Bryan Street, Dallas, Texas 75201 Telephone Number (214) 812-4600 i

0-11442 Texas Utilities Electric Company 75-1837355 Energy Plaza,1601 Bryan Street, Dallas, Texas 75201 Telephone Number (214) 812-4600 Securities registered pursuant to Section 12(b) of the Act:

Repstrant Title of each rian Name of each exchante on whleh verinered Texas Utilities Company Common Stock, without par value New York Stock Exchange The Chicago Stock Exchange The Pacific Stock Exchange Texas Utilities Electric Company Depositary Shares, each representing % of a share of $8.20 New York Stock Exchange Cumulative Preferred Stock, without par value Texas Utilitss Electric Company Depositary Shares, Series A, each representing % of a share New York Stock Exchange of $7.50 Cumulative Preferred Stock, without par value Texas Utilities Electric Company Depositary Shares, Series B, each representing % of a share New York Stock Exchange of $7.22 Cumulative Preferred Stock, without par value TU Electric CapitalI, a subsidiary 8.25% Trust Originated Preferred Securities New York Stock Exchange cf Texas Utilities Electric Company TU Electric Capital II, a subsidiary 9.00% Trust Originated Preferred Securities New York Stock Exchange of Texas Utilities Electric Company TU Electric Capital III, a subsidiary 8.00% Quarterly Income Preferred Securities New York Stock Exchange of Texas Utihties Electric Company Securities registered pursuant to Section 12(g) of the Act:

Preferred Stock of Texas Utilities Electric Company, without par value Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filirig requirements for the past 90 days.

Yes i No __,

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-E is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part til of this Form 10-K or any amendment to this Form 10-K. [ ]

Aggregate market value of Texas Utilities Company Common Stock held by non-affiliates, based on the last reported sale price on the composite tape on February 29,1996: $9,118,331,869 Aggregate market value of Texas Utilities Electric Company Common Stock held by non-affiliates: None Common Stock outstanding at February 29,1996: Texas Utilities Company - 225,841,037 shares without par value Texas Utilities Electric Company - 156,800,000 shares, without par value DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement pursuant to Regulation 14A, which will be mailed to the Commission for filing on or about April 1,1996, stre incorporated by reference into Part 111 of this report.

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TABLE OF CONTENTS Item Description

_Page PARTI I

B u s i ne s s............................................

1 Texas Utilities Company and Subsidiaries.......

1 TU Electric............................

2 Peak Load and Capability..................

.3 Fuel Supply and Purchased Power.

......................4 Regulation and Rates............

7 Competition.................

10 Environmental Matters..............................

..........12 2

Properties.....

... 15 Capital Expenditures................................................... 16 3

Legal Proceedings.........

17 4

Submission of Matters to a Vote of Security Holders.......

. 17 Executive Officers of the Company...............

. 17 PARTII 5

Market for Each Registrant's Common Equity and Related Stockholder Matters........... 18 6

Selected Financial Data...........

........................................19 7

Management's Discussion and Analysis of Financial Condition and Results of 0peration..

..... 23 8

Financial Statements and Supplementary Data...................................

28 9 Changes in and Disagreements with Accountants on Accounting-and Financial Disclosure....

. 65 PART III 10 Directors and Executive Officers of Each Registrant....

.........,65 11 Executive Compensation..........

.. 67 12 Security Ownership of Certain Beneficial Owners and Management................... 73 13 Certain Relationships and Related Transactions.

. 73 PARTIV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.........

.... 74

This cambin:d Ftrm 10.K is fil;d c:p2rately by Tcxn Utilitin Camp ny cnd Tcso UGliti:a El:ctric Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf except that the information with respect to Texas Utilities Electric Company, other than the financial statements of Texas Utilities Electric Company,is filed by each of Texas Utilities Electric Company and Texas Utilities Company. Neither Texas Utilities Company nor Texas Utilities Electric Company makes any representation as to information filed by the other registrant.

PARTI Item I. BUSINESS TEXAS UTILITIES COMPANY AND SUBSIDIARIES Texas Utilities Company (Company) was incorporated under the laws of the State of Texas in 1945 and has perpetual existence under the provisions of the Texas Business Corporation Act. The Company is a holding company which owns all of the outstanding common stock of Texas Utilities Electric Company (TU Electric), the principal subsidiary of the Company, Southwestern Electric Service Company (SESCO), and Texas Utilities Australia Pty. Ltd. (TU Australia). The Company also has seven other wholly-owned subsidiaries which perform specialized functions within the Texas Utilities Company system. The Company and all ofits subsidiaries are referred to herein as " System Companies". References herein to TU Electric include its financing subsidiaries, TU Electric Capital 1 TU Electric Capital 11 and TU Electric Capital 111.

The Company holds no franchises other than its corporate franchise. TU Electric, SESCO and TU Australia possess all of the necessary franchises, licenses and certificates required to enable them to conduct their respective businesses (see Regulation and Rates).

For information concerning TU Electric, the principal subsidiary of the Company, see TU Electric below.

In December 1995, the Company's newly formed subsidiary, TU Australia, acquired the common stock of Eastern Energy Limited (Eastern Energy), a major Australian electricity distribution company. Eastern Energy is engaged in the purchase, distribution and sale o f electric energy to approximately 475,000 customers in a service area in Australia extending from the outer eastern suburbs of the Melbourne metropolitan area to the eastern coastal areas of Victoria and the New South Wales border to the north. Eastern Energy generates no electric energy. All financial and operational information with respect to TU Australia is as of December 31,1995 and for the period from December 1,1995 (date of acquisition) to December 31,1995. References herein to TU Australia include its subsidiary, Eastern Energy.

SESCO is engaged in the purchase, transmission, distribution and sale of electric energy in ten counties in the eastern and central parts of Texas with a population estimated at 125,000. SESCO generates no electric energy.

For consolidated energy sales and operating revenues contributed by TU Electric, SESCO and TU Australia for each customer classification, see item 6. Selected financial Data - Texas Utilities Company and Subsidiaries -

Consolidated Operating Statistics.

Texas Utilities Fuel Company (Fuel Company) owns a natural gas pipeline system, acquires, stores and delivers fuel gas and provides other fuel services at cost for the generation of electric energy by TU Electric.

Texas Utilities Mining Company (Mining Company) owns, leases and operates fuel production facilities for the surface mining and recovery oflignite at cost for the generation of electric energy by TU Electric.

Texas Utilities Services Inc. (TU Services) provides financial, accounting, information technology, customer services, procurement, personnel and other administrative services at cost to the System Companies. TU Services acts as transfer agent registrar and dividend paying agent with respect to the common stock of the Company and the preferred stock and preferred securities of TU Electric and as agent for participants under the Company's Automatic Dividend Reinvestment and Common Stock Purchase Plan.

Texas Utilities Properties Inc. owns, leases and manages real and personal properties, primarily the Company's corporate headquarters.

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litm 1. BUSINESS (Centinued)

TEXAS UTILITIES COMPANY AND SUBSIDIARIES-(ConclMed) in March 1995, Texas Utilities Communications Inc. (TU Communications), was incorporated under the laws of the State of Delaware. TU Communications was organized to provide access to advanced telecommunications j

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technology, primarily for the System Companies' expected expansion of the energy services business.

i Basic Resources Inc. was organized for the purpose of developing natural resources, primarily energy sources and other business opportunities.

Chaco Energy Company (Chaco) was organized to own and operate facilities for the acquisition, production, sale and delivery of coal and other fuels and currently leases extensive coal reserves.

At December 31,1995, the System Companies had i 1,729 full-time employees.

TU ELECTRIC TU Electric was incorporated under the laws of the State of Texas in 1982 and has perpetual existence under the provisions of the Texas Business Corporation Act. TU Electric is an electric utility engaged in the generation, purchase, transmission, distribution and sale of electric energy wholly within the State of Texas. TU Electric possesses all of the necessary franchises and certificates required to enable it to conduct its business (see Regulation and Rates). TU Electric is the principal subsidiary of the Company.

TU Electric's service area is located in the north central, eastern and western parts of Texas, with a population estimated at 5,820,000- about one-third of the population of Texas. Electric service is provided in 91 counties and 372 incorporated municipalities, including Dallas, Fort Worth, Arlington, Irving, Plano, Waco, Mesquite, Grand Prairie, Wichita Falls, Odessa, Midland, Carrollton, Tyler, Richardson and Killeen. The area is a diversified commercial and industrial center with substantial banking, insurance, communications, electronics, aerospace, petrochemical and specialized steel manufacturing, and automotive and aircraft assembly. The territory served includes major portions of the oil and gas fields in the Permian Basin and East Texas, as well as substantial farming and ranching sections of the State. It also includes the Dallas-Forth Worth international Airport and the Alliance Airport. For energy sales and operating revenues contributed by each customer classification, see item 6. Selected Financial Data-Texas Utilities Electric Company and Subsidiaries - Consolidated Operating Statistics.

j At December 31,1995, TU Electric had 7,425 full-time employees.

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Item 1. BUSINESS (Ccntinued)

PEAK LOAD AND CAPABILITY The Comnany and TU Electric The peak load and capability for the System Companies includes the information for TU Electric contained in the chart below along with peak loads for SESCO and TU Australia. Peak load was 253 MW on July 28,1995 for SESCO and 974 MW on July 10,1995 for TU Australia. SESCO and TU Australia generate no electricity.

TU Electric's net capability, peak load and reserve, in megawatts (MW), at the time of peak were as follows during the years indicated:

Peak Lead (a)

Inercase (Decrease)

Firm Net Over Peak Mr Ca pa bility Amount Prior Yea r Load Reserve (b) 1995..

22,250(c)(d) 19,180 6.4 %

18,631 3,619 1994 22,350(d)(c) 18,030 (1.6) 17,515 4,835 1993 21,697(d)(f) 18,324 4.6 17,852 3,845 (a) The 1995 peak load occurred on July 28. TU Electric's peak load includes interruptible load at the time of peak of 744 MW in 1995. 656 MW in 1994 and 499 MW in 1993.

(b) Amount of net capability in excess of firm peak load at the time of peak.

(c) included in net capability was 1,244 MW of firm purchased capacity, of which 1.164 MW was cogeneration and small power production.

(d) In November 1993, the emissions chimney serving Unit 3 (750 MW) of the Monticello lignite-fueled generating station collapsed, rendermg the unit inoperable. The unit was rebuilt and returned to service in June 1995. Such unit is included in net capability.

(e) included in net capability was 1.344 MW of firm purchased capacity, of which 1.264 MW was cogeneration and small power production.

In 1994, one 70 MW natural gas-fueled unit was retired.

(f) included in net capability was 1.771 MW of firm purchased capacity, of which I.691 MW was cogeneration and small power production, and excluded was Comanche Peak Unit 2 (1,150 MW) which was placed into commercial service after the 1993 peak load.

TU Electric The peak load changes from 1994 to 1995 resulted primarily from customer growth and warmer temperatures than the prior year. The peak load changes in the prior periods resulted primarily from customer growth in the service area and weather factors. TU Electric expects to continue to purchase capacity in the future from various sources. (See Fuel Supply and Purchased Power and Note 14 to Consolidated Financial Statements.) Firm peak load increases over the next ten years are expected to average approximately 2% annually, after consideration of load management programs (including interruptible contracts).

Changes in utility regulation and legislation at the federal and state levels such as the Public Utility Regulatory Policy Act of 1978 (PURPA), the National Energy Policy Act of 1992 (Energy Policy Act), the 1995 amendments to the Public Utility Regulatory Act (PURA) in Texas, and the Federal Energy Regulatory Commission (FERC)

Notice of Proposed Rulemaking have significantly changed the way in which utilities plan for new resources. TU Electric believes the results of competitive resource solicitations will be a major factor in determining future resource additions to serve customer loads. Thus, for planning purposes, TU Electric can no longer readily identify the ownership and types of resources to include in its plan before the actual solicitation and selection of those resources. TU Electric has decided to reDect this uncertainty through the use of the term " Unspecified Resources."

Except for known contracts, all potential new resource needs will be designated as " Unspecified Resources." The primary change in the current resource plan is the designation of" Unspecified Resources" in the place of specified resources.

In October 1994, TU Electric Gled an application for approval by the Public Utility Commission of Texas (PUC) of certain aspects ofits Integrated Resource Plan (IRP) for the ten year period 1995 - 2004. The IRP, developed as an experimental pilot project in conjunction with regulatory and customer groups, includes initiatives that address demand-side management resources, purchased power, combustion turbine resources, lignite / coal resources, and rene.vable resources. Hearings on this application were concluded in March 1995. In August 1995, the PUC remanded the case for development of a solicitation plan and to conform the TU Electric 1995 IRP to new state legislation that requires the PUC to adopt a state-wide integrated resource planning rule by September 1,1996.

In January 1996, TU Electric filed an updated IRP with the PUC along with a proposed plan for the solicitation 3

Item 1. BUSINESS (Certinurd)

PEAK LOAD AND CAPABILITY-(Concluded) of resources through a competitive bidding process. The PUC's decision on the solicitation plan is expected in July 1996. The resource needs identified in the updated IRP are as follows:

Integrated Resource Plan 1996-2005 Firm Capability Resource Additions (MW)

Percent i

Load Management (a)(c) 638 13.1 %

Renewable Resources (b)...

4 0.1 Unspecified Resources..

4.223 86.8 To tal..............

4.865 100.0 %

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(a) TU Electric has negotiated and signed contracts with eight suppliers of demand side management services designed to displace a total of 72 MW by 2004.

(b) TU Electric has negotiated and signed one purchased power contract for 40 MW (4 MW firm) of wind-powered resources to be placed in i

service by 1997.

J (c) Subject to the approval by the PUC.

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FUEL SUPPLY AND PURCHASED POWER l

i The Comnay and TU Flectrie l

l Net input for the Company's systems for 1995 totalled 95,761 million kilowatt-hours (kWh) of which 83,877

(

million kWh were generated by TU Electric. Average fuel and purchased power cost (excluding capacity charges) per kWh ofnet input for the Company and TU Electric were 1.64 and 1.62 cents for 1995,1.76 and 1.76 cents for 1994 and 1.92 and 1.92 cents for 1993, respectively. The decrease for 1995 primarily reflects the reduction in natural gas costs and increased nuclear generation. A comparison of TU Electric's resource mix for net kWh input and the unit cost per million British thermal units (Btu) of fuel during the last three years is as follows:

Mix for Net Unit Cost LWh Input Per Million Stu 1995 1994 1993 1995 1994 1993 Fuel for Electric Generation:

Gas / Oil (a)....

33.4 % 34.5 % 33.7 %

$2.31 $2.53

$2.81 Lignite / Coal (b)....

37.4 37.3 40.3 1.02 1.04 1.10 Nuclear 17.9 15.7 12.4 0.59 0.67 0.71 (c)

Total / Weighted Average FuelCost 88.7 87.5 86.4

$ 1.43 $ 1.58

$1.73 Purchased Power (d)..

11.3 12.5 13.6 Total....

100.0 % 100.0 % 100.0 %

(a) Fuct oil was an insignificant component of total fuel and purchased power requirements.

(b) Lignite cost per ton to the Company was $13.05 in 1995. 513.34 in 1994 and $13.98 in 1993.

(c) Unit cost per million Btu in 1993 includes avoided cost ol' fuel during trial operations. The 1993 cost excluding costs associated with Comanche Peak Unit 2 while in trial operations, was 50.62.

(d) Excludes SESCO and TU Australia purchased power of 865 million and 335 million LWh. respectively for 1995.

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ltem 1. BUSINESS (Continued)

FUEL SUPPLY AND PURCH ASED POWER-(Continued)

' General TU Electric, SESCO and TU Australia are unable to predict: (i) whether or not problems may be encountered in the future in obtaining the fuel and purchased power they will require,(ii) the effect upon their operations of any difficulty they may experience in protecting their rights to fuel and purchased power now under contract, or (iii) the cost of fuel and purchased power. The reasonable costs of fuel and purchased power of TU Electric and SESCO are generally recoverable subject to the rules of the PUC. (See Regulation and Rates for information pertaining to the method of recovery of purchased power and fuel costs.)

Gas /Oll The Comnany and TU Electric Fuel gas for units at nineteen of the principal generating stations of TU Electric, having an aggregate net gas / oil capa bility of 13,100 MW, was provided during 1995 by Fuel Company. Fuel Company supplied approximately 29% of such fuel gas requirements under contracts with producers at the wellhead and under other contracts with dedicated reserves and 71% under contracts with commercial suppliers.

Fuel Company has acquired under contracts expiring at intervals through 2008, with producers at the wellhead, supplies of gas which are generally expected to be produced over a ten to fifteen year period. As gas production under contract declines and contracts expire, new contracts are expected to be negotiated to replenish or augment such supplies. Fuel Company has negotiated gas purchase contracts, with terms ranging from one to twenty years, with a number of commercial suppliers. Additionally, Fuel Company has entered into a number of short-term gas purchase contracts with other commercial suppliers at spot market prices; however, these contracts typically do not provide for a firm supply obligation from the seller or a firm purchase obligation from Fuel Company. In the past, curtailments of gas deliveries have been experienced during periods of winter peak gas demand; however, such curtailments have been of relatively short duration, have had a minimal impact on operations and have generally required utilization of fuel oil and gas storage inventories to replace the gas curtailed. During 1995, no curtailments were experienced.

Fuel Company owns and operates an intrastate natural gas pipeline system which extends from the gas-producing area of the Permian Basin in West Texas to the East Texas gas fields and southward to the Gulf Coast area. This system includes a one-halfinterest in a 36-inch pipeline which extends 395 miles from the Permian Basin area of West Texas to a point of termination south of the Dallas-Fort Worth area and has a total estimated capacity of 885 million cubic feet per day with existing compression facilities. Additionally, Fuel Company owns a 39%

undivided interest in another 36 inch pipeline connecting to this pipeline and extending 58 miles eastward to one of Fuel Company's underground gas storage facilities. Fuel Company also owns and operates approximately 1,600 miles of various smaller capacity lines which are used to gather and transport natural gas from other gas-producing areas. The pipeline facilities of Fuel Company form an integrated network through which fuel gas is gathered and transported to certain TU Electric generating stations for use in the generation of electric energy.

Fuel Company also owns and operates three underground gas storage facilities with a usable capacity of 27.2 billion cubic feet with approximately 19.8 billion cubic feet of gas in inventory at December 31,1995. Gas stored in these facilities currently can be withdrawn for use during periods of peak demand, to meet seasonal and o%

fluctuations or curtailment of deliveries by gas suppliers. Under normal operating condition.,'no to 400.nillion cubic feet can be withdrawn each day for a ten-day period, with withdrawals at lower rates thereafter.

Fuel oilis stored at eighteen of the principally gas fueled generating stations. At December 31,1995, the System Companies had fuel oil storage capacity sufficient to accommodate approximately 6.2 million barrels of oil, with approximately 2.3 million barrels of oil in inventory.

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i It:m 1. BUSINESS (Centinxed)

FUEL SUPPLY AND PURCHASED POWER-(Continued)

I Lignite / Coal TU Electric Lignite is used as the primary fuel in two units at the Big Brown generating station (Big Brown), thre: units at Monticello generating station (Monticello), three units at the Martin Lake generating station (Martin Lake), and one unit at the Sandow generating station (Sandow), having an aggregate net capability of 5,825 MW. TU Electric's lignite unis have been constructed adjacent to surface minable lignite reserves. At the present time, TU Electric owns in fee or has under lease an estimated 567 million tons of proven reserves dedicated to the Big Brown, l

Monticello, and Martin Lake generating stations. TU Electric also owns in fee or has under lease in excess of 271 million tons of proven reserves not dedicated to specific generating stations. Mining Company operates owned l

and/or leased equipment to remove the overburden and recover the lignite. One of TU Electric's lignite units, Sandow Unit 4, is fueled from lignite deposits owned by Alcoa, which furnishes fuel at no cost to TU Electric for that portion of energy generated from such unit which is equal to the amount of energy delivered to Alcoa (see item

6. Selected Financial Data - Consolidated Operating Statistics).

Lignite production operations at Big Brown, Monticello, and Martin Lake re accompanied by an extensive reclamation program which returns the land to productive uses such as wildlife habitats, commercial timberland, and pasture land. For information concerning federal and state laws with respect to surface mining, see Environmental Matters.

TU Electric supplemented TU Electric-owned lignite fuel at its Monticello, Martin Lake and Big Brown plants with western coal from the Powder River Basin (PRB)in Wyoming. The coal was purchased and transported on an "as available, as required" basis. Because current mine capacity in the PRB is greater than demand, ample amounts of western coal are presently available at favorable prices fuel requirements at Monticello were reduced as a result of the November 1993 collapse of the emissions chimney at Unit 3. Consequently, deliveries of western coal were discontinued and lignite mining operations at the Monticello mines were reduced. With the return to i

service of Monticello Unit 3 in June 1995, lignite mining operations have resumed and western coal deliveries to Monticello will take place in 1996. TU Electric is also considering the use of western coal as a supplemental fuel at its other existing lignite-fueled plants and as a long-term alternative fuel. For information concerning applicable air quality standards, see Environmental Matters.

The Comnany Chaco has rights to sub-bituminous coal reserves totaling more than 120 million recoverable tons located in the Star Lake region of San Juan and McKinley counties in northwest New Mexico. In 1990, Chaco entered into a revised lease agreement with a major mineral interest owner, Hospah Coal Company (Hospah), a subsidiary of Santa Fe Industries,Inc. (Santa Fe), estimated to cover more than 300 million additional tons of recoverable coal in the same area of New Mexico. Chaco and Santa Fe also entered into a separate agreement providing for the transportation of coal mined from both of these deposits. In 1993, Santa Fe transferred the coal-related assets of Hospah to Hanson Natural Resources Company. This transfer of assets includes the lease agreement between Chaco and Hospah. This agreement will continue in accordance with its terms. Becau.se of the present ample availability of western coal at favorable prices from other mines, Chaco has delayed plans to commence mining operations, and accordingly,is reassessing its alternatives with respect to its coal properties including seeking other purchasers thereof. (See item 2. Properties and item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and Note 14 to Consolidated Financial Statements.)

Nuc* ear TU Electrig TU Electric owns and operates two nuclear-fueled generating units at the Comanche Peak nuclear generating station (Comanche Peak), each of which is designed for a net capability of 1,150 MW. (See Peak Load and Capability.)

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Item 1. BUSINESS (Centinued)

FUEL SUPPLY AND PURCHASED POWER-(Concluded)

The nuclear fuel cycle requires the mining and milling of uranium ore to provide uranium oxide concentrate (U 0.),

3 the conversion of U 0, to uranium hexafluoride (UF.), the enrichment of the UF. and the fabrication of the enriched j

3 uranium into fuel assemblies. TU Electric has on hand, or has contracted for, the raw materials and services it expects to need for its nuclear units through future years as follows: uranium (2001), conversion (2003), enrichment (20l4),

and fabrication (2002). Although TU Electric cannot predict the future availability of uranium and nuclear fuel services.

TU Electric does not currently expect to have difficulty obtaining U 0, and the services necessary for its conversion, 3

enrichment and fabrication into nuclear fuel for years later than those shown above.

The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the i

decommissioning and decontamination of the gaseous diffusion plants used to enrich uranium for fuel. These costs are being recovered in fees paid to the Department of Energy as determined by the Secrctary of Energy. The total annual assessment for all domestic utilities is capped at $150 million per federal fiscal year assessable for fifteen years. TU Electric's share, as established by the Department of Energy, is estimated to be about $1,556,000 per year.

The Nuclear Waste Policy Act of 1982, as amended (NWPA), provides for the development by the federal government ofinterim storage and permanent disposal facilities for spent nuclear fuel and/or high level radioactive waste materials. TU Electric is unable to predict when the federal government will be able to provide such storage and disposal facilities. Under provisions of the NWPA, funding for the program is provided by a one-mill per kWh fee currently levied on electricity generated and sold from nuclear reactors, ir.cluding the Comanche Peak units.

Onsite storage capability for spent fuel is sufficient to accommodate the operation of Comanche Peak through the year 2001. TU Electric is currently pursuing options for increasing its storage capability, subject to approval by the Nuclear Regulatory Commission (NRC).

Purchased Power The Comnany and TU Electric in 1995, the Company purchased an aggregate of 11,884 million kWh or approximately 12% of the Company's energy requirements. TU Electric and SESCO had available 1,362 MW of firm purchased capacity under contract.

As a result of the ren wable resources solicitation that was part of the IRP filing, TU Electric has negotiated a 15-year contract with a developer for the purchase of energy produced from wind turbines equivalent to approximately 40 MW (or approximately 4 MW of firm capacity at peak) beginning in 1997. The Company may also acquire purchased power capacity in the future to accommodate a portion of system load and continues to investigate potential available sources. For information concerning the IRP, see Peak Load and Capability and Note 12 to Consolidated Financial Statements.

TU Australia and the other distribution companie,s.in Victoria purchase their power from a competitive power pool operated by a statutory, independent corporation. While the price of power from the pool can vary substantially, TU Australia attempts to manage price fluctuations with other contracts. TU Australia also has arrangements with a number of cogenerators under which it is required to purchase approximately 52 MW of capacity.

REGULATION AND RATES Regulation The Comnany and TU Electric The Company is a holding company as defined in the Public Utility Holding Company Act of 1935. However, the Company and all ofits subsidiary companies are exempt from the provisions of such Act, except Section 9(a)(2) which relates to the acquisition of securities of public utility companies.

TU Electric and SESCO do not transmit electric energy in interstate commerce or sell electric energy at wholesale in interstate commerce, or own or operate facilities therefor, and their facilities are not connected directly or indirectly to other systems which are involved in such interstate activities, except during the continuance of 7

IIIm 1. BUSINESS (Continu:d)

REGULATION AND RATES-(Continued) emergencies permitting temporary or permanent connections or under order of the FERC exempting TU Electric and SESCO fromjurisdiction under the Federal Power Act. In view thereof, TU Electric and SESCO believe that they are not public utilities as denned in the Federal Power Act and have been advised by their counsel that they are not subject to general regulation under such Act.

The PUC has originaljurisdiction over electric rates and service in unincorporated areas and those municipalities that have ceded originaljurisdiction to the PUC and has exclusive appellate jurisdiction to review the rate and service orders and ordinances of municipalities. Generally, PURA prohibits the collection of any rates or charges (including charges for fuel) by a public utility that does not have the prior approval of the PUC.

The construction of new production facilities owned by TU Electric is subject to PUC certification. TU Electric filed and received approval of Notice ofIntent (NOI) applications in connection with its IRP for 1,802 MW of combustion turbine capacity and 100 MW of renewable resources (wind turbines). Prior to the enactment of I

revisions in PURA, an NOl was the first step in the process leading to PUC approval for construction of utility plant.

l However, because PURA now requires the utilities to use solicitations to procure new resources, the NOI requirement was eliminated. Thus, TU Electric's updated 1995 IRP does not specifically include the combustion turbine or the renewable resources. Instead, all new resource additions 'exr:pt known contracts) are designated as " Unspecified Resources" that will be "specified" upon completion of the required solicitations. (See Peak Load and Capabilities and item 2. Properties - Capital Expenditures.)

TU Electric is subject to the jurisdiction of the NRC with respect to nuclear power plants. NRC regulations govern the granting oflicenses for the construction and operation of nuclear power plants and subject such plants to continuing review and regulation.

TU Australia is subject to regulation by the Office of the Regulator General (ORG). The ORG has the power to issue licenses for the supply, distribution and sale of electricity within Victoria and regulates tariffs for the use i

of the transmission system, distribution system, and other ancillary services. The existing tariff under which TU Australia operates is in effect through December 31,2000.

The System Companies are also subject to various other federal, state and local regulations. (See Environmental Matters.)

l FuelCost Recovery Rule TU Electric Pursuant to a PUC rule governing the recovery of fuel costs, the recovery of TU Electric's eligible fuel costs is l

provided through fixed fuel factors. The rule allows a utility's fuel factor to be revised upward or downward every J

six months, according to a specified schedule. A utility is required to petition to make either surcharges or refunds l

to ratepayers, together with interest based on a twelve month average of prime commercial rates, for any material, l

as defined by the PUC, cumulative under-or over-recovery of fuel costs. If the cumulative difference of the under-l or over-recovery, plus interest, is in excess of 4% of the annual estimated fuel costs most recently approved by the l

PUC, it wit' be deemed to be material. TU Electric filed a petition with the PUC in November 1995 to refund to customers approximately $65 million, including interest, in over-collected fuel costs for the period June 1995 through September 1995. PUC approval was granted in January 1996 and refunds were included in February 1996 billings. In June 1995, TU Electric petitioned the PUC for approval of a fuel refund to customers of approximately

$89 million, including interest, in over-collected fuel costs for the period June 1994 through May 1995. PUC approval was granted in August 1995 and refunds were included in September 1995 billings. These over-collections l

were primarily due to lower natural gas prices than previously anticipated. In August 1994, TU Electric petitioned l

the PUC for a recovery of approximately $93 million, including interest, in under-collected fuel costs for the period 1

July 1993 through June 1994. The PUC approved the recovery of this amount through a surcharge to customers over l

a six-month period beginning in January 1995. The PUC's approval of this surcharge and a previously approved S 147.5 million surcharge for fuel cost recovery for a prior period have been appealed by certain intervenors to th-i district courts of Travis County, Texas. In those appeals, those parties are contending that the PUC is without authority to allow a fuel cost surcharge without a hearing and resultant findings that the costs are reasonable and

)

l

\\

8 l

ltem 1. BUSINESS (Continued)

REGULATION AND RATES-(Continued) l 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 itera or :: lass ofiteris. TU Electric is vigorously defending its position in these appeals but is unable to predict their outcome.

The fuel cost recovery rule also contains a proc: dure for an expedited change in the fixed fuel factor in the event of an emergency. Final reconciliation of fuel costs must be made either in a reconciliation proceeding, which may cover no more than three years and no less than one year, or in a general rate case. In a final reconciliation, a utility has the burden of proving that fuel costs under review were reasonable and necessary to provide reliable electric service, that it has properly accounted for its fuel-related revenues, and that fuel prices charged to the utility by an affiliate were reasonable and necessary and not higher than prices charged for similar items by such affiliate to other affiliates or nonaffiliates, in addition, for generating utilities like TU Electric, the rule provides for recovery of purchased power capacity costs through a power cost recovery factor (PCRF) with respect to purchases from i

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 j

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 j

PCRF costs by 10% in any month or 5% in the most recent twelve months.

FuelReconcillation On December 29,1995, in accordance with the PUC rules, TU Electric filed a petition with the PUC seeking final reconciliation of all eligible fuel and purchased power expenses incurred during the reconciliation period of July 1,1992 through June 30,1995, amounting to a total of $4,7 bilbn. TU Electric is unable to predict the outcome of such proceeding.

In addition, and as permitted by the PUC rules, TU Electric is also seeking an accounting order from the PUC that will allow certain costs incurred, and to be incurred, to facilitate the use of coal as a supplemental fuel at its Monticello plant to be treated as eligible fuel costs and billed pursuant to TU Electric's fuel cost factor. By incurring these expenses, TU Electric believes that it can significantly improve the reliability of the supply of fuel to Monticello and can, at the same time, lower the fuel expense that would be incurred in the absence of these investments.

Flexible Rate initiatives TU Electric TU Electric continues to offer flexible rates in over 160 cities with original regulatory jurisdiction within its service territory (including the cities of Dallas and Fort WorthK to existing non-residential rctail and wholesale customers that have viable alternative sources of supply and would otherwise leave the system. TU Electric also continues to offer an economic development rider to attiact new businesses and to encourage existing customers to expand their facilities as well as an environmental technology rider to encourage qualifying customers to convert to technologies that conserve energy or improve the environment. To date, TU Electric has contracted to serve 91 commercial, industrial and municipal flexibly-priced loads, eight economic development loads, and one environmental technology load under these rates. TU Electric will continue to pursue the expanded use of flexible rates when such rates are necessary to be price-competitive.

As a result of recent legidation, flexible retail and wholesale pricing may be approved by the PUC at levels lower than the utility's approve i rates but higher than the utility's marginal cost. In September 1995, TU Electric filed an application for sucF. a wholesale rate with the PUC for service to two rural electric cooperatives it has served since 1963. The preposed rate includes provisions for a five-year term of service. If approved by the PUC, the proposed rate will enable TU Electric to retain a combined load of approximately 23 MW. The cooperatives have informed TU Electric that they will transfer their load to alternative suppliers if the proposed rate is not approved.

9

. ~ - _- -.

Item 1. BUSi:< ESS (Centinued) 4 REGULATION AND RATES-(Concluded) l TU Electric is actively pursuing several other opportunities through flexible pricing to enhance its ability to i

compete for new wholesale loads, as well as to retain existing wholesale loads.

Docket 11735 i

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 l

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.

i l

Docket 9300

\\

The PUC's final order (Order)in connection with TU Electric's January 1990 rate increase request (Docket 9300) was reviewed by the 250th Judicial District Court of Travis County, Texas and thereafter was appealed to the 1

Court of Appeals for the Third District of Texas (Court of Appeals) and to the Supreme Court of Texas (Supreme l

Court). As a result of such review and appeals, an aggregate of $909 million of disallowances with respect to TU 1

Electric's reacquisitions of minority owners' interests in Comanche Peak has been remanded to the PUC for 4

reconsideration on the basis of a prudent investment standard. On remand, the PUC will also be required to reevaluate the appropriate level of TU Electric's construction work in progress included in rate base in light ofits i

financial condition at the time of the initial hearing.

j h

The Court of Appeals' holding that tax benefits generated by costs, including capital costs, not allowed in rates i

must be used to reduce rates charged to customers was reversed by the Supreme Court in a February 9,1996 decision. The Supreme Court's ruling eliminates th t potential normalization violation that two Private Letter I

Rulings issued by the Internal Revenue Service said would have resulted from the treatment that previously had been ordered by the Court of Appeals.

TU Electric cannot predict the outcome of any possible rehearing of the Supreme Court decision or the reconsideration of this Order on remand by the PUC.

COMPETITION General The Comnany and TU Electric As legislative, regulatory, economic and technological changes occur, the energy and utility industries are faced with increasing pressure to become more competitive while adhering to regulatory requirements. The level of competition is affected by a number of variables, including price, reliability of service, the cost of energy alternatives, new technologies and governmental regulations.

Federal legislation such as the PURPA and, more recently, the Energy Policy Act, as well as initiatives in various states, encourage wholesale competition among electric utility and non-utility power producers. Together with j

increasing customer demand for lower priced electricity and other energy services, these measures have accelerated j

the industry's movement toward a more competitive pricing and cost structure. Competition in the electric utility industry was also addressed in the 1995 session of the Texas legislature. PURA was amended to encourage greater wholesale competition and flexible retail pricing. PURA amendments also require the PUC to report to the J

I legislature, during each legislative session, on competition in electric markets. The PUC's report is to include ecommendations for legislation to promote "the public interest in the context of a partially competitive electric i

I m ark et. In addition, PURA requires the PUC to report to the 1997 legislature on methods for quantifying, allocating and recovering costs that may be stranded as a result of competition. In prep: ration for its January 1997 reports, the PUC has initiated an investigation of utility industry restructuring. TU Electric is an active participant in this proceeding.

10

Item 1. BUSINESS (Centinuid)

COMPETITION -(Continued)

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 other energy providers who are not subject to the traditional governmental regulation experienced by the energy and utility industries has intensified competition within the state's wholesale markets and, in multi-certificated areas, retail customer markets.

Furthermore, there is increasing pressure on utilities to reduce costs, including the cost of power, and to tailor energy services to the specific needs of customers. Such competitive pressures among electric utility and non-utility power producers could result in the loss of customers and the cost of certain assets becoming stranded costs (i.e.,

costs of assets which may not be recoverable from customers as a result of competitive pricing). To the extent stranded costs cannot be recovered from customers, it may be necessary for such costs to be borne partially or entirely by shareholders. In response to these competitive pressures, many utilities are implementing significant restructuring and re-engineering initiatives designed to make them more competitive. Since the implementation of an Operations Review and Cost Reduction program in April 1992, the Systera Companies continue to take steps to reduce costs by streamlining business processes and operating practices. (For information pertaining to the effects of competition on the treatment of certain regulatory assets and liabilities, see item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and Note 1 to Consolidated Financial Statements.)

Wholesale Afarket and Transmission Access In the wholesale power market, TU Electric competes with a variety of utilities and other suppliers, some of which are willing and able to sell at rates below TU Electric's standard wholesale power service rate as approved by the PUC. As a result TU Electric has lost approximately 327 MW of wholesale load since the beginning of 1993 and received notifications of possible termination of approximately 610 MW through 1999. In 1995, wholesale revenues represented only about 2% of TU Electric's total consolidated operating revenues.

Amendments to PURA made during the 1995 session of the Texas legislature allow for wholesale pricing flexibility. While wholesale rates for electric utilities are not deregulated, wholesale tariffs or contracts with charges less than approved rates but greater than the utility's marginal cost may be approved by the regulatory authority upon application by the utility. TU Electric is responding to wholesale load losses by competitively pricing its wholesale power so as to retain existing customers and attract new wholesale business. Competitive wholesale power contracts have been successfully negotiated with two existing customers, Lyntegar Electric Cooperative and Taylor Electric Cooperative. TU Electric has applied for approval of these contracts by the PUC.

TU Electric also entered into a wholesale power contract with the City of College Station to serve a load of approximately 125 MW. TU Electric began serving this load on January 1,1996.

2 PURA, as amended, provides the PUC with the authority to require a utility to provide transmission services at wholesale to another utility, a qualifying facility, an exempt wholesale generator or a power marketer at rates, terms and conditions that are comparable to the utility's own use ofit's system. According to PURA, rules governing comparable open-access wholesale transmission services must be in place within 180 days of September 1,1995.

As a result, the PUC has initiated a generic rulemaking proceeding to address wholesale transmission issues within Texas that will require transmission owners to file wholesale open-access transmission tariffs. Final adoption of the rule is expected by the end of February 1996 and tariffs pursuant to the rule will be filed within 60 days of the effective date of the rule.

At the federal level, the Energy Policy Act empowers the FERC to require utilities to provide transmission service for the delivery of wholesale power from other power producers to qualified resellers, such as municipalities, cooperatives, and other utilities. The FERC has issued a Notice of Proposed Rulemaking (NOPR) 11

Item 1. BUSINESS (Centinued)

COMPETITION-(Concluded) with respect to open-access transmission service and the recovery of stranded costs resulting from open-access.

The proposed rules would require FERCjurisdictional utilities to file tariffs for open-access transmission service.

Utilities would be required to use these same tariffs for their own wholesale sales. Although the NOPR provides a framework for recovery of " legitimate, prudent and verifiable stranded costs" resulting from the implementation of the new tariffs, it is expected that the recovery of stranded investment will be implemented at the state level. The FERC is expected to issue final rules en this issue in 1996.

RetallMarket TU Electric and SESCO are experiencing competition for retail load in areas that are multi-certificated with rural electric cooperatives or municipal utilities. Except in areas where there is multi-certification by the PUC, TU Electric and SESCO currently have the exclusive right to provide electric service to the public within their service areas.

1 Legislatures and regulatory commissions in several states have begun to examine the possibility of mandated

" retail wheeling", the required delivery by an electric utility over its transmission and distribution facilities of i

energy produced by another entity to retail customers in such utility's service territory. Ifimplemented, such access could allow a retail customer to purchase electric service from any other electric service provider, subject to the practical constraints of long distance transmission. This issue was pursued in the 1995 session of the Texas legislature during its review of PURA as required by state law; however, retail wheeling has not been implemented in Texas, 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. TU Electric and SESCO are pursuing efforts to remain competitive through competitive pricing, economic development i

and other initiatives. (See Regulation and Rates.)

I TU Australia's retail distribution business is gradually being exposed to competition. As a result of rules promulgated by the ORG, the level of competition experienced by TU Australia is expected to increase after December 31,2000. TU Australia is currently required to offer dioibution of electricity in its service area on behalf of other distribution businesses. In addition, the ORG r a. issue further licenses to operate a separate distribution network in some or all of TU Australia's distribution area.

TU Electric, TU Australia, and SESCO are not able to predict the extent of future competitive developments or what impact, if any, such developments may have on their operations.

ENVIRONMENTAL M ATTERS The Comnany and TU Electric The System Companies are subject to various federal, state and local regulations dealing with air and water quality and related environmental matters. (See item 2. Properties - Capital Expenditures and item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation for environmental expenditures.)

Air Under the Texas Clean Air Act, the Texas Natural Resource Conservation Commission (TNRCC) has jurisdiction over the permissible level of air contaminant emissions from generating facilities located within the State of Texas. In addition, the new source perfonnance standards of the Environmental Protection Agency (EPA) promulgated under the federal Clean Air Act, as amended (Clean Air Act), which have also been adopted by the TNRCC, are applicable to generating units, the construction of which commenced after September 18,1978. TU 12

Item 1. BUSINESS (Crntinued)

ENVIRONMENTAL M ATTERS -(Continued)

Electric's generating units have been constructed to operate in compliance with current regulations and emission standards promulgated pursuant to these Acts; however, due to variations in the quality of the lignite fuel, operation of certain of the lignite-fueled generating units at reduced loads is required from time to time in order to maintain compliance with these standards.

The Clean Air Act includes provisions which, among other things, place limits on the sulfur dioxide emissions produced by generating units. In addition to the new source performance standards applicable to sulfur dioxide, the Clean Air Act required that fossil-fueled plants meet certain sulfur dioxide emission allowances by 1995 (Phase I) and will require additional sulfur dioxide emission allowances by 2000 (Phase II). TU Electric's generating units were not affected by the Phase I requirements. The applicable Phase 11 requirements currently are met by 52 out j

of the 56 of TU Electric's generating units to which those requirements apply. Because the sulfur dioxide emissions from the other four units are relatively low and alternatives are available to enable these units to reduce sulfur j

dioxide emissions or utilize compensatory reduction allowances achieved in other units, compliance with the applicable Phase 11 sulfur dioxide requirements is not expected to have a significant impact on TU Electric. In January 1993, the EPA issued its " core" regulations to implement the sulfur dioxide reduction program. TU Electric is preparing compliance plans in accordance with these regulations and expects these plans to be implemented by January 1,2000.

To meet these sulfur dioxide requirements, the Clean Air Act provides for the annual allocation of sulfur dioxide emission allowances to utilities. Under the Clean Air Act, utilities are permitted to transfer allowances within their own systems and to buy or sell allowances from or to other utilities. The EPA grants a maximum number of allowances annually to TU Electric based on the amount of emissions from units in operation during the period 1985-1987. The Clean Air Act also provides that TU Electric will be granted additional annual allowances for Unit 1 of the Twin Oak facility. TU Electric intends to utilize internal allocation of emission allowances within its system and, if cost effective, may purchase additional emission allowances to enable both existing and future electric generating units to meet the requirements of the Clean Air Act. TU Electric may also sell excess emission allowances. TU Electric is unable to predict the extent to which it may generate excess allowances or will be able to acquire allowances from others if needed but does not anticipate any significant problems in keeping emissions within its allotted allowances.

TU Electric's lignite-fired generating units meet the nitrogen oxide limits currently required by the Clean Air Act. The TNRCC and the EPA have determined that the requirements of the Clean Air Act for ozone nonattainment areas will not require nitrogen oxide emission reductions at TU Electric's natural gas-fired units in the Dallas-Fort Worth area. The Clean Air Act also requires studies, which began in 1991, by the EPA to assess the potential for toxic emissions from utility boilers. TU Electric is unable to predict either the results of such studies or the effects of any subsequent regulations.

Only certain parts of the regulations implementing the Clean Air Act have been published as final rules. Until more of these regulations have been promulgated and specific state requirements developed, TU Electric will not be able to fully determine the cost or method of compliance with these requirements. TU Electric believes that it can meet the requirements necessary to be in compliance with these provisions as they are developed. Estimates for the capital requirements related to the Clean Air Act are included in TU Electric's estimated construction expenditures. Any additional required capital costs, as well as any increased operating costs associated with new requirements or compliance measures, are expected to be recoverable through rates, as similar costs have been recovered in the past.

Water The TNRCC and the EPA have jurisdiction over all water discharges (including storm water) from all System Companies' facilities. The Company's facilities are presently in compliance with applicable state and federal requirements relating to discharge of pollutants into the water. TU Electric, Fuel Company, and Mining Company 13

k L

[

item 1. BUSINESS (Canclud:d) 1 ENVIRONMENTAL MATTERS-(Concluded) have obtained all required waste water discharge permits from the TNRCC and the EPA for facilities in operation and have applied for or obtained necessary permits for facilities under construction. TU Electric, Fuel Company, and Mining Company believe they can satisfy the requirements necessary to obtain any required permits or renewals.

{

Other l

Diversion, impoundment and with'drawal of water for cooling and other purposes are subject to the jurisdiction of the TNRCC. The Company possesses all necessary permits for these activities from the TNRCC for its present

}

operations.

I U

Federal legislation regulating surface mining was enacted in August 1977 and regulations implementing the law have been issued. Mining Company's lignite mining operations are currently regulated at the state level by the Railroad Commission of Texas, with oversight by the United States Department of the Interior's Office of Surface l

Mining, Reclamation and Enforcement. Surface mining permits have been issued for current Mining Company l

operations that provide fuel for Big Brown, Monticello and Martin Lake.

7 j

Treatment, storage and disposal of solid and hazardous waste are regulated at the state level under the Texas d

Solid Waste Disposal Act (Texas Act) and at the federallevel under the Resource Conservation and Recovery Act of 1976, as amended (RCRA). The EPA has issued regulations under the RCRA and the TNRCC has issued regulations under the Texas Act applicable to System Companies' facilities. The Company has registered its solid waste disposal sites and has obtained or applied for such permits as are required by such regulations.

4 Under the federal Low Level Radioactive Waste Policy Act of 1980, as amended, the State of Texas is required i

to provide, either on its own orjointly with other states in a compact, for the disposal of all low-level radioactive j

waste generated within the state. The State of Texas is taking steps to site, construct and operate a low-level radioactive waste disposal site by 1997 and submitted a license application in March 1992 for such a facility. The license application has been revised and the TNRCC is charged with processing the application and granting the 3

permit. The State of Texas has agreed to a compact with the States of Maine and Vermont, which is subject to ratification by Congress, for such a facility. Low-level waste material will continue to be shipped off-site as long i

as an alternate disposal site is available. Otherwise the low level waste material will be stored on-site. TU Electric's on site storage capacity is expected to be adequate until other facilities are available.

l TU Australia is subject to various Australian federal and Victorian state environmenta! regulations. the most

]

r,ignificant of which is the Victorian Environmental Protection Act of 1970 (VEPA). VEPA regulates, in particular, the discharge of waste into air, land and water, site contamination, the emission of noise and the storage, recycling and disposal of solid and industrial waste. VEPA establishes the Environmental Protection Authority (Authority) and grants this Authority a wide range of powers to control and prevent environmental pollution. These powers include issuing approvals for construction of works which may cause noise or emissions to air, water or land, waste discharge licenses and pollution abatement notices. No licenses or works approvals from this Authority are currently required for activities undertaken by TU Australia.

14

_ ~-

3 Item 2. PROPERTIES The Comnany and TU Electric The Company owns no utility plant or real property. At December 31,1995, TU Electric owned or leased and operated the following generating units:

l Electrie Net I

Generating Capa bility j

tinits FuelSource

, 'OfW) 46 Natural Gas (a).

12.105(d) 57.0 %

9 Lignite / Coal (b) 5.825(d) 27.5 2

Nuclear.

2.300 10.8 15 Combustion Turbines (c).

975 4.6 j

10 Diesel 20 0.1 Total.

21.225 100.0 %

4

?

(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.

l (b) Includes the Monticello Unit 3 (750 MW), which was returned to service in June 1995 (see Item 1. Busmess-Peak Load and Capabihty).

(c) Natural gas units leased and operated by TU Electric. Such units are designed to operate on fuel oil for extended periods.

(d) in December 1995. TU Electric adjusted the net generating capabilities ofits existing fossil fueled generating units to more closely reflect actual operating capability. Natural gas-fueled unit capability increased 239 MW and lignite-fueled unit capabihty decreased 20 MW for a net increase of 219 MW.

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 9,324 circuit miles of 138,000 and 69,000 volt transmission lines.

2 l

TU Electric is connected by six 345,000 volt li 2es 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 4

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 j

three lines at distribution voltage. TU Electric and SESCO are members of the Electric Reliability Council of I

Texas (ERCOT), an intrastate network ofinvestor-owned entities, cooperatives and public entities. ERCOT is the

+-

regional reliability coordinating organization for member electric power systems in Texas.

TU Australia's distribution networl;is comprised primarily of subtransmission and distribution assets. It owns no generating or transmission facilities. TU Australia's distribution system is interconnected with an intrastate power network comprised of the operator of the electric energy pool, Victorian Power Exchange, and each of the other distribution companies within Victoria. TU Australia has entered into distribution system agreements with each of the distribution businesses which share the boundaries ofits distribution area :o provide for wheeling of electricity on behalf of those distribution businesses and for the reciprocal provision of other dir tribution services.

The generating stations and other important units of property of TU Electric and SESCO are located on lands owned primarily in fee simple. The greater portion of the transmission and distributien 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 oflike size and character may exist, but any such defects and irregularities do not materially impair the use of the properties affected thereby. TU Electric, SESCO, Fuel Company and TU Australia 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, SESCO and TU Australia is generally subject to the liens of their respective mortgages.

15

Item 2. PROPERTIES (Concluded)

CAPITAL EXPENDITURES The Comnany and TU Electric The Company has taken steps to aggressively manage its construction expenditures. Such construction expenditures for utility related activities, excluding allowance for fu;d t:nd during construction (see Note I to Consolidated Financial Statements) are presently estimated at $457 million,0445 million and $448 million for the Company and $399 million, $388 million and $389 million for TU Electric for och of the years 1996,1997, and 1998, respectively. The System Companies are subject to federal, state and local regulations dealing with environmental protection. (See item 1. Business - Environmental Matters.) Such expenditures for construction i

to meet the requirements of environmental regulations at existing generating units are estimated to be $16 million for 1996 (included in the 1996 construction estimates noted above) and were approximately $64 million in 1995,

$40 million in 1994 and $34 million for 1993. Expenditures for non utility property are presently estimated to be

)

$60 million, $40 million, and $26 million for the Company for each of the years 1996,1997 and 1998, respectively.

Expenditures for nuclear fuel are presently estimated to be $55 million,547 million and $60 million for the Company and TU Electric for each of the years 1996,1997 and 1998, respectively.

In September 1995, the Company determined that the Twin Oak and Forest Grove lignite-fueled facilities of TU Electric are not necessary to satisfy TU Electric's capacity requirements as currently projected due to changes in load growth patterns and availability of alternative generation. The Company determined that Chaco's coal j

reserves in New Mexico will no longer be developed through traditional means due to ample availability of i

alternative fuels at favorable prices. Impairment of the Company's assets, including partially completed Twin Oak and Forest Grove lignite fueled facilities and Chaco coal reserves, as well as several minor assets, aggregated $802 million after tax. Impairment of TU Electric's assets, including its partially completed Twin Oak and Forest Grove lignite-fueled facilities, as well as several minor assets, aggregated $316 million after tax. Such impairment has j

been measured based on management's current expectations that these assets will either be sold or constructed outside the traditional regulated utility business. (See item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation and Note 13 to Consolidated Financial Statements.)

The re-evaluation of growth expectations, the efrects ofinflation, additional regulatory requirements and the availability of fuel, labor, materials and capital may result in changes in estimated construction costs and dates of completion. Commitments in connection with the construction program are generally revocable subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. (See item 1. Business -

Peak Load and Capability.)

The Company and TU Electric each plans to seek new investment opportunities from time to time when it concludes that such investments are consistent with its business strategies and will likely enhance the long-term returns to shareholders. The timing and amounts of any specific new business investment opportunities are presently undetermined.

For information regarding the financing of capital expenditures, see item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

l 16 i

l

-. - = - =

item 3. LEGAL PROCEEDINGS l

The Com nany The Antitrust Division of the U.S. Department of Justice submitted to the Company a civil investigative l

demand (CID) in October 1995. This CID appears to request documents and information relating to an i

investigation of whether alleged tying arrangements or other actions that unreasonably deny or condition access to TU Electric's transmission system by others have occurred in violation of certain antitrust laws. While the Company intends to comply with requests within the appropriate purview of the Department of Justice, it believes that it has not violated such antitrust laws. The Company is unable to predict the outcome of any such investigation and does not expect it to have any material effect on the Company's results of operation or financial position.

Item 4. SUBMISSION OF M ATTERS TO A VOTE OF SECURITY HOLDERS The Comnany and TU Electric None.

EXECUTIVE OFFICERS OF THE COMPANY Positions and Offices Date First Presently Held (Current Term Elected to Present Business Experience Na me of Officer g

Empires May 17.1996)

Office (s)

(Preceding Five Years) j J. S. Farrington 61 Chairman and Director February 20,1987 Same and Chief Executive of the Company.

Eric Nye

$8 President, Chief Executive May 19,1995 Same and Chief Executive of and Director TU Electric.

There is no family relationship between any of the above named executive officers.

j 17

PART 11 Item 5. M ARKET FOR EACH REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER.S 1

The Com nany 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 li'allStreet Journal, and the dividends paid, for each of the calendar quarters of 1995 and 1994 were as follows:

Price Range Dividends Paid Ouarter Ended 1995 1994 1995 1994 fligh Low High Low M a rc h 31...............................

$35

$30%

$43%

$36 %

50.77

$0.77 June 30......

36 %

31 %

38 29 %

0.77 0.77 September 30 35 32 %

34 %

29 %

0.77 0.77 December 31...

41%

34 %

34 %

30 %

0.77 0.77 j

1

$3.08

$3.08 The Company has declared common stock dividends payable in cash in each year since its incorporation in 1945. The Board of Directors of the Company, at its February 1996 meeting, declared a quarterly dividend of 50.50 a share, payable April 1,1996 to shareholders of record on March 7,1996. For information concerning the Company's dividend policy, see item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. Future dividends may vary depending upon the Company's profit levels and capital requirements as well as financial and other conditions existing at the time. Reference is made to Note 5 to Consolidated Financial Statements regarding limitations upon payment of dividends on common stock of TU Electric and SESCO.

The number of record holders of the common stock of the Company as of February 29,1996 was 97,348.

TU Electric All of TU Electric's common stock is owned by the Company.

Reference is made to Note 5 to Consolidated Financial Statements regarding limitations upon payment of dividends on common stock of TU Electric.

18

Item 6. SELECTED FINANCIAL DATA 8

TEXAS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCI AL STATISTICS Year Ended December 31, ly*

1994 1993*

1992 1991e (Dollars in Thousands, except per share amounts)

Total assets - end of year

$21,535,851

$20.893,408 521.518,128

$19,428,568 $18.792,782 Utility plant - gross - end of year

$24,911,787

$24.2%,351

$23.836.729

$23.043,778 $21,927,788 Accumulated deprecianon and amortization - end of year 5,857.580 5.228,423 4.710,398 4.251.002 3,851,330 Reserve for regulatory disallowances - end of year.

1,308.460 1,308,460 1.308,460 1,308,460 1,308,460 Construction expenditures (including allowance for funds used during construcuon).

434.338 444.245 871.450 1,136.971

.1.232.239 Capitalization - end of year Long-term debt.

$ 9,174.575

$ 7.888,413 5 8,379,826

$ 7.931.981 5 7,951,086 TU Electric obligated, mandatorily redeemable, preferred securities of trusts 381.476 Preferred stock:

Not subject to mandatory redemption.

489.695 870.190 1,083.008 909.564 1,007.728 Subject to mandatory redemption 263.1 %

387,482 3 %.917 418,748 425.758 Common stock eqmry 5.731.753 6.490.047 6,570.993 6.590.537 6.283.675 Total

$16.040.695 515.636.132

$16.430,744 515.850.830 $15.668.247 Capitalization ratios - end of year Long-term debt.

57.2 %

50.5 %

51.0 %

50.0 %

50.8 %

TU Electric obligated, mandatorily redeemable, preferred securines of trusts.

2.4 Preferred stock.

4.7 8.0 9.0 8.4 9.1 Common stock equity 35.7 41.5 40.0 41.6 40.1 Total 100.0 %

100.0 %

100.0 %

100.0 %

100.0 %

Embedded mterest cost on long-term debt - end of year.

8.4%

8.7 %

8.7 %

9.2 %

9.7 %

Embedded interest cost on TU Electric obligated, mandatorily redeemable, preferred securities of trusts - end of year.

8.5 %

Embedded dividend cost on preferred stock - end of year.

6.9%

7.5 %

7.6%

8.4 %

8.5 %

income (loss) before cumulative effect of a change in accountmg prmciple,

5(138.645) 5542.799

$368.660 5619,204 5(409,964)

Cumulative effect of a change in accounting for unbilled revenue (Net of taxes of $41.679.000).

80.907 Consohdated net income (loss) 5(138.645) 5542.799 5368.660

$700,111 5(409.964)

Dividends declared on common stock 5 634.613 5695,590 5682,438 5653,146 5 624.261 Common stock data Shares outstMng - average.

225.841.037 225.833.659 221,555.218 214.850.225 207,357,881 Shares outstandmg - end of year 225,841.037 225.841.037 224.345,422 217.316.054 210.700.373 Earmngs (loss) per share (on average shares outstanding):

Before cumulative effect of a chanFe m accountmg 5(0.61) 52.40 51.66

$2.88 5(1.98)

Cumulauve effect of a change in accountmg for unbilled revenue.

0.38 Total earmngs (loss) per average share 5(0.61)

$M 51.66

$3.26 5(1.98)

Dividends declared per share 5 2.81

$3.08

$3.08

$3.04 5 3.00 Book value per tharc - end of year

$25.38

$28.74

$29.29

$30.33

$29.82 Return on averare common stock equity (2.3)%

8.3 %

5.6%

10 9 %

(6.3)%

Ratio of earmngs to fixed charges:

Pre-tat.

0.8 2.3 1.9 2.3 0.4 After-tax 0.9 1.9 1.6 2.0 0.7 Allowance for funds used durmg construction as percent of consohdated net mcome 4.1 %

71.4 %

43.5 %

• Certain fmancial stausucs for 1995 were affected by the recordmF of the impairment of certain assets (see Note 13 to Consohdated Fmancial Statements) and the acquisition of Eastern Energy. and for the years 1993 and 1991, were affected by TU Electric recordmg regulatory disallowances in rate orders issued by the Pubhc Utthry Commission of Texas m Dockets !!735 and 9300, respeenvely (see Note 12 to Consohdated Financial Statements).

19

I l.

Item 6. SELECTED FINANCIAL DATA (Centinued) l TEXAS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED OPERATING STATISTICS Year Ended December 31, 1995 1994 1993 1992 1991 ELECTRIC ENERGY GENERATED AND PURCHASED (MWh)

Generated - net station output 83.876.565 81,320,922 79.105.495 74,652,339 76,326,601 l

Purchased and net mterchange..

11,883.965 12.551.167 12.785.246 11,417,251 11.027.061 Total generated and purchased 95.760,530 93,872.089 91,890,741 86, % 9.590 87,353.662 i

Company use, josses and unaccounted for..

5.657,489 5.246.480 5.631.085 5.747,156 4.996,123 i

Total electric energy sales 90.103.(M1 88,625.609 86,259,656 80.322,434 82.357.539 ELECTRIC ENERGY SALES (MWh)

Residential..

31,280.920 30,471,009 30,492,453 27,266.411 28,505,885 Commercial.

25.893,275 25,082,497 24,259,480 22.959,464 23.012,114 Industrial.,

23.5 %,406 23.138,750 21,607.606 21,108,894 21,482,750 Government and municipal,

5,753.515 5.621.110 5.425,206 5.032,780 5,056.868 Total general business 86.524.116 84,313.366 81,784,745 76,367,549 78.057.617 Other electne utilities 3,578,925 4.312,243 4.474,911 3,954.885 4,299.922 Total electric energy sales 90,103.041 88.625.609 86,259,656 80,322.434 82,357.539 OPERATING REVENUES (thousands)

Base rate:

Residential

$1.919,195

$1,871,226

$1,703,894

$1,464.227

$1,505,386 Commercial 1.218.918 1,189.286 1,063,519

% 3.175 957,190 Industrial 603,745 597,737 535,685 513,358 521,480 Government and mut icipal.

287.825 285.108 245.394 207,368 208.060 Total general business 4.029,683 3,943,357 3.548,492 3,148,128 3,192.116 Other clectric utilities 114.293 148.889 144,385 135,709 149,489 Total base rate revenues.

4,143.976 4,092.246 3,692.877 3,283,837 3,341.605 Fuel revenue (including over/under-recovered) 1,421.861 1,521,030 1,690, % 1 1.540,667 1,498.595 Other operstmg revenues

• 72.851 50.267 51,574 83,372 52.973 Total operating revenues

$5.638.688

$5,663,543

$5.434.512

$4,907,876

$4.893.173 ELECTRIC CUSTOMERS (end of year)

Residential 2.504.128 2,053.235 2.020,667 1,952,916 1,921,119 Commercial 267.579 225,479 221,422 210.185 205,555 Industrial 49.558 21,673 21,954 21,% 9 22,156 Government and municipal.

30.458 29.437 29.034 28,204 27.719 Total eneral business 2,851,723 2,329,824 2,293,077 2.213,274 2.176,549 F

Other electric utilities..

165 212 220 243 247 Total electric customers,

2.851.888 2.330.036 2.293.297 2.213.517 2,176.7 %

RESIDENTIAL STATISTICS (excludes master-metered customers, kWh sales and revenues)

Average kWh per customer 12.002 14,283 15.210 13,329 14,099 Average revenue per kWh 8.18c 8.23c 7.59c 7,4 t c 7.26c Industrial classification includes service to Alcoa Sandow:

Elecinc energy sales (MWh:

3.764,658 3,886,258 3,166,797 3,157,852 3,359,824 Operstmg revenues (thousands)

$47.739

$54.699

$53.352

$56.043

$55.987 l

• In 1992, other operaung revenues do not include $122,586.000 of unbilled base rate revenues which were reclassified as a cumulative effect of a change in accountmg prmeiple effective January 1,1992.

Certain operstmg statistics for the years 1994 through 1991 have been reclassified to conforn? to the current year presentation, and for 1995 were effected by the acquisition of Eastern Energy.

20 I

=

l Item 6. SELECTED FINANCIAL DATA (Centinued)

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCI AL STATISTICS Year Ended December 31, 1995*

1994 1993*

1992 1991*

(Dollars in Thousands)

Total assets - end of year

$19.003,374

$19,446,998

$19,870',990

$17,%2,812

$17.093,474 -

Electric plant - gross - end of year

$22,747,860 $23 M3,436 $22,680,508 $21,957,681

$20,865,047 Accumulated depreciation and amortization - end of year.

5.370,818

' 4,765,474 4,233,720 3,790,626 3.417,856 Reserve for regulatory disallowances - end of year.

1,308,460 1,308,460 1,308,460 1,308,460 1,308,460 Construction expenditures (including allowance for funds used during construction) 407,305 415,290 841,181 1,107.555 1,195,680 Capitalization - end of year Long term debt

$ 7,212,070 $ 7,220,641

$ 7,607,090

$ 7.280,301

$ 7,253,626 TU Electric obhgated, mandatorily redeemable, preferred securities of trusts,

381,476 Preferred stock:

Not subject to mandatory redemption 489,695 870,190 1,083,008 909,564 1,007.728 Subject to mandatory redemption.

263,1%

387,482 3 %,917 418,748 425.758 Common stock equiry,,

5.799,898 6.114,261 6.029,217 6,198,208 5,741,437 Total,...

$14.146,335

$14.592,574

$15,116.232

$14,806.821

$14,428.549 Embedded interest cost on long-term debt - end of year.

8.4 %

8.7 %

8.8 %

9.2 %

9.7 %

Embedded interest cost on TU Electric obligated, mandatorily redeemable, preferred securtties of trusts - end of year 8.5 %

Embedded dividend cost on preferred stock - end of year.

6.9%

7.5 %

7.6 %

8.4 %

8.5 %

Consolidated income (loss) before cumulative effect of a change in accountmg prmetple

$454,432

$658,192

$476,526

$740,216

$(289,173)

Cumulauve effect of a change in accountmg for unbilled revenue (Net of taxes of $41,679,000) 80.907 Consolidated net income (loss)

$454.432

$658,192

$476,526

$821,123

$(289,173)

Dividends declared on common stock,,

$682,080

$715,760

$707,382

$645,260

$ 650,940 Rauo of carrungs to fixed charges:

Pre-tax.

2.0 2.5 2.0 2.5 0.3 After-tax 1.7 2.0 1.7 2.1 0.6 Allowance for funds used durmg construction as a percent of consohdated net income available for common stock,

6.0%

4.0%

72.9 %

43.3 %

Return on averate common stock equity 6.2 %

9.2 %

5.9%

11.8 %

(6.7)%

Certam fmancial staustics for 1995 were affected by the recording of the impairment of certam assets (see Note 13 to Consolidated Financial Statements), and for the years 1993 and 1991, were affected by TU Electric recordmg regulatory disallowances in rate orders issued by the Public Utihty Commission of Texas in Dockets 11735 and 9300, respectively (see Note 12 to Consolidated Financial Statements).

21

Item 6, SELECTED FINANCIAL DATA (Concluded)

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED OPERATING STATISTICS Year Ended December 31, g

1994 1993 1992 1991 ELECTRIC ENERGY GENERATED AND PURCilASED (MWh)

Generated - net stauon output 83,876.565 81,320,922 79,105,495 74.652,339 76,326.601 Purchased and net in'erchange,

10.682,722

!!,663.148 12.431.763 11.417.251 11.027.061 Total generated and purchased.

94.560,287 90 984,070 91.537,258 86.069,590 87.353,662 Company use, losses and unaccounted for..

5.532.031 5.131,173 5.572.916 5.747.156 4.996.123 Total electric energy sales 89.028.256 87.852.89]

85.964.342 80.322,434 82.357.539 ELECTRIC ENERGY SALES (MWh)

Residential.,

30,716,945 30.076,510 30,265,559 27,266,411 28,505,885 Commercial.

25,553,954 24,824,741 24.129,019 22,959,464 23,012,114 Industrial.

23,300,922 22, % 8,710 21,527,656 21,108,894 21,482.750 Government and municipal 5.615.843 5,507.265 5.363.570 5.032.780 5.056M8 Total general business 85,187,664 83,377.226 81,285,804 76,367,549 78,057,63 Other clectric utilities...

3,840,592 4.475.671 4.678.538 3,954.885 4.299.922 Total electric energy sales 89.028,256 87.852.897 85.964,342 80.322,434 82.357,539 OPERATING REVENUES (thousands)

Base rate:

Residential

$1,875.306

$1,832,735

$1,685.885

$1,464,227

$1,505,386 Commercial 1,193,558 1,165.611 1,051,723

% 3,175 957,190 Industrial 586.152 585,758 532,655 513,358 521,48; Government and municipal.

279.802 276.883 241,484 207,368 209.060 Total general business 3,934,818 3,860,987 3.511,747 3,148,128 Y92,Il6 Other electric utiliues,

133.362 163.021 157,341 135.709 149,489 Total from base rate revenues.

4,068,180 4,024,008 3,669,088 3.283,837 3,341,605 Fuel revenues (includmg over/under-recovered).

1,421,861 1,521,030 1,690,061 1,540,667 1,498,585 Other operating revenues

• 70.421 68.137 50.007 82.191 51.322 Total operating revenues.

$5.560.462

$5.613.175

$5.409.156

$4.906.695

$4.891,522 ELECTRIC CUSTOMERS (end of year)

Residential 2,061,273 2,019.025 1,986,946 1,952.916 1,921.119 Commercial 225,183 219.604 215,621 210,185 205,555 Industrial 21,253 21,445 21,716 21.% 9 22,156 Government and municipal,

29.429 28.949 28.555 28.204 27.719 Total general business 2,337,138 2.289.023 2.252,838 2.213,274 2,176,549 Other electric utilities,

177 219 228 243 247 Total electric customers.

2.337,315 2.289.242 2.253.066 2,213.517 2.176,796 RESIDENTIAL STATISTICS (cxcludes master. metered customers. kWh sales and revenues)

Average kWh per customer 14,336 14,328 14,459 13.329 14,099 Ascrage revenue per kWh 8.18c 8.24C 7.59c 7.41c 7.26c Industrial classification includes service to Alcoa-Sandow:

Electric energy sales (MWh) 3,764.658 3.886,258 3,166,797 3,157,852 3,359,824 Operatmg revenues (thousands)

$47.739

$54.699

$53,352

$56,043

$55,987 In 1992, other operstmg revenues do not mclude $122,586,000 of unbstled base rate revenues which were reclassified as a cumulative effect of a change in accountmg prmciple effective January 1,1992.

Certam operatmg staustics for the years 1994 through 1991 have been reclassified to conform to the current year presentation.

22

)

l Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Liquidity and Capital Resources The Comnany and TU Electric The primary capital requirements of Texas Utilities Company and its subsidiaries (System Companies) in 1995 and as estimated for 19% through 1998 are as follows:

1995 1996 1997 1998 Thousands of Dollars Cash construction expenditures (excludmg allowance for funds used during construction)

$ 421,000

$457,000

$ 445,000

$ 448,000 Nuclear fuel (excludmg allowance for funds used during construction).

49.000 55,000 47.000 60.000 Non-utility property.

70.000 60.000 40.000 26.000 Maturities and redemptions of long term debt, sinkmg fund requirements and redemptions of preferred s:ock 1,392.000 86.000 681.000 487.000 Total.

$1.932.000

$658.000

$1.213.000

$1.021.000 The primary capital requirements of Texas Utilities Electric Company and its subsidiaries (TU Electric) in 1995 and as estimated for 1996 through 1998 are as follows:

1995 1996 1997 1998 Thousands of Dollars Cash construction expenditures (excluding allowance for funds used during construction)

$ 394,000

$399,000

$ 388.000

$389.000 Nuclear fuel (excludmg allowance for funds used ourW construction).

49,000 55.000 47,000 60.000 M useies and redemptions of long-term debt, sinki..f und requirements and redemptions f

of preferred stock 1.373.000 68.000 663.000 468.000 Total,

$1.816.000

$522.000

$1.098.000

$917.000 See item 2. Properties - Capital Expenditures and Note 14 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 1995, all of the cash needed for construction expenditures was generated from operations by the System Companies. Factors affecting the continued ability of TU Electric to fund its capital requirements from operations include responsive regulatory practices allowing recovery of c.'pital investment through adequate depreciation rates, recovery of the cost of fuel and purchased power and the op portunity to earn competitive rates of return required in the capital markets.

in order to remain competitive, the Company and TU Electric are aggressively managing their operating costs and capital expenditures through streamlined business processes and are developing and implementing strategies to address an increasingly competitive environment. These strategies include initiatives to improve their return on corporate assets and to maximize shareholder value through new marketing programs, creative rate design, and new business opportunities. Additional initiatives include the potential disposition or alternative utilization of existing assets and the restructuring of strategic business units. The Company and TU Electric are studying alternative uses for their investment in certain assets, including TU Electric's partially completed Twin Oak and Forest Grove lignite-fueled facilities and the New Mexico coal reserves of Chaco Energy Company (Chaco), which, based upon management's current expectations, might include sale of the reserves or facilities or construction outside the traditional regulated business. In September 1995 the Company and TU Electric determined that the partially completed Twin Oak and Forest Grove lignite-fueled facilities are not necessary to satisfy TU Electric's capacity requirements due to continuing changes in load growth patterns and availability of alternative generation. Also, the Company determined that the Chaco coal reserves would no longer be developed through traditional means due to availability of ample alternative fuels at favorable prices. A variety of options are being considered with respect to the Chaco coal reserves. The total impairment of the Company's assets, including the partially completed Twin Oak and Forest Grove lignite-fueled facilities and Chaco's coal reserves, as well as several minor assets, aggregated

$802 million after-tax (see Note 13 to Consolidated Financial Statements).

23

1 I

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Liquidity and Capital Resources - (Continued)

Under the current regulatory environment, TU Electric and Southwestern Electric Service Company (SESCO) i l

are subject to the provisions of Statement of Financial Accounting Standards No. 71, " Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In the event the companies no longer meet the criteria for application of SFAS 71 due to significant changes in regulation or competition, the companies would discontinue the application of SFAS 71. If a portion of either company's operations continues to meet the criteria for application of SFAS 71, only that portion would be subject to SFAS 71 treatment. Should significant changes in regulation or competition occur, TU Electric and SESCO would also be required to assess the recoverability of other assets, including plant, and, if impaired, to write down the assets to reflect their fair market value. (See Note I to Consolidated Finmcial Statements.) Neither TU Electric nor SESCO can predict the timing or extent of changes in the business environment that may require the discontinuation of SFAS 71 application.

The Public Utility Commission of Texas' (PUC's) final order in connection with TU Electric's January 1990 rate increase request (Docket 9300) was reviewed by the 250th Judicial District Court of Travis County, Texas and thereafter was appealed to the Court of Appeals for the Third District of Texas (Court of Appeals) and to the Supreme Court of Texas (Supreme Court). As a result of such review and appeals, an aggregate of 5909 million of disallowances with respect to TU Electric's reacquisitions of minority owners' interests in Comanche Peak nuclear-generating station (Comanche Peak) has been remanded to the PUC for reconsideration on the basis of a prudent investment standard. On remand, the PUC will also be required to reevaluate the appropriate level of TU Electric's construction work in progress included in rate base in light ofits financial condition at the time of the initial hearing.

The Court of Appeals' holding that tax benefits generated by costs, including capital costs, not allowed in rates must be used to reduce rates charged to customers was reversed by the Supreme Court in a February 9,1996 decision. The Supreme Court's ruling eliminates the potential normalization violation that two Private Letter Rulings issued by the Internal Revenue Service said would have resulted from the treatment that previously had been ordered by the Court of Appeals.

Although TU Electric cannot predict the outcome of any appeal or reconsideration of the Dockets 9300 and i1735 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 in this Form 10-K, which might significantly alter its basic financial position or results of operation. (See Note 12 to Consolidated Financial Statements.)

External funds of a permanent or long-term nature are obtained through the sales of common stock, preferred stock, preferred securities and long term debt by the System Companies. The capitalization ratios of the Company and its subsidiaries at December 31,1995, consisted of approximately 57% long-term debt,2% TU Electric obligated, mandatorily redeemable, preferred securities of trusts,5% preferred stock and 36% common stock equity.

The capitalization ratios of TU Electric at December 31,1995 consisted of approximately 51 % long-term debt, 3 % TU Electric obligated, mandatorily redeemable, preferred securities of trusts,5 % preferred stock and 41 %

common stock equity.

Proceeds from TU Electric financings in 1995 were used primarily for the early redemption or reacquisition of debt and preferred stock. These financings consisted of:

Principal Current Description Amount Interest Rates Maturity Term eredit agreement.

5 300.000.000 6.050% and 6.ll3%

1997 Pollution control revenue bonds (backed by first mortgage bonds) 333.905.000 3.50% to 3.60%

2030 First mortsage bonds (designated medium term notes).

201,150.000 6.25% to 6.58%

Various TU Electric obligated, mandatorily redeemable. preferred securities of trusts.

381.476.000 8.00% to 9.00%

2030-2035 Total

$1.216.531.000 24

==

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND l

RESULTS OF OPERATION (Continued)

Liquidity and Capital Resources - (Continued) l Since December 31, 1994, the System Companies redeemed, reacquired or made principal payments of

$1,443,364,000 (including $1,424,803,000 for TU Electric) on long-term debt and preferred stock. Early I

redemptions of long-term debt and preferred stock may occur from time to time in amounts presently

(

undetermined. (See Notes 6 and 8 to Consolidated Financial Statements.)

i l

The System Companies expect to sell additional debt and equity securities as needed including (i) the possible

)

future sale by TU Electric of up to $350,000,000 of First Mortgage Bonds currently registered with the Securities and Exchange Commission for offering pursuant to Rule 415 under the Securities Act of 1933 and (ii) the possible future sale by TU Electric of up to 250,000 shares of Cumulative Preferred Stock ($100 liquidation value) similarly registered. In addition, TU Electric has the ability to issue from time to time an additional $98,850,000 l

of First Mortgage Bonds designated as Medium-Term Notes, Series D.

The Company and TU Electric have credit facility agreements (Agreements) with a group of commercial i

banks. The Agreements have two facilities, for each of which the Company pays a fee. Facility A provides for l

borrowings up to $300,000,000 and terminates April 26,1996. The Company and TU Electric intend to negotiate an extension or replacement of this facility. Facility B provides for borrowings up to $700,000,000 and terminates April 28,2000. The Company's borrowings under the Agreements are limited to $600,000,000.

Borrowings under the Agreements are used for working capital and other corporate purposes, including commercial paper backup.

In November 1995, the Company entered into a Competitive Advance and Revolving Credit Facility Agreement with a group of commercial banks. This facility, for which the Company pays a fee, provides for borrowings, on a standby basis, up to $200,000,000 and terminates April 26,1996. Borrowings under this facility are used for corporate purposes. In addition to the above, the Company and Fuel Company have separate arrangements for uncommitted lines of credit. For more information regarding short-term financings of the Company and TU Electric, see Note 3 to Consolidated Financial Statements.

TU Electric'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 TU Electric. Any additional required capital costs, as well as any increased operating costs, associated with these requirements or compliance measures are expected to be recoverable through rates - Similar costs have been recovered in the past.

l Environmental expenditures for 1996 are estimated to be 516 niillion.

The National Energy Policy Act of 1992 (Energy Policy Act) addresses a wide range of energy issues and is i

mtended to increase competition in electric generatio.n and broaden access to electric transmission systems. In j

addition, the Public Utility Regulatory Act of 1995', as amended (PURA). impacts the PUC and its regulatory l

practices and encourages increased competition in some aspects of the electric utility industry in Texas. Although l

TU Electric and SESCO are unable to predict the ultimate impact of the Energy Policy Act, PURA and any related regulations or 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 a small loss of load for TU Electric since the beginning of 1993, wholesale sales represented a relatively low percentage of TU Electric's consolidated operating revenues in 1995. 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 j

developments may have on their operations. (See item 1. Business - Competitio.i )

25

ltem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued)

Liquidity and Capital Resources - (Concluded)

The Comnanv in October 1995, the Company announced a modification ofits dividend policy as a part of a financial strategy supporting the Company's overall business plan. As a result, a quarterly dividend of 50.50 per share payable January 2,1996, was declared by the Company's Board of Directors. The previous quarterly dividend was $0.77 per share.

In December 1995, the Company's newly formed Australian subsidiary, Texas Utilities Australia Pty. Ltd.,

acquired the common stock of Eastern Energy Limited (Eastern Energy) for $1.55 billion. Eastern Energy is an Australian electric dietribution company serving approximately 475,000 customers, including a portion of the Melbourne, Victoria metropolitan area. The Company's equity investment is approximately $600 million. The remainder of the acquisition cost was borrowed by Eastern Energy under a A$1.2 billion (Australian dollar) term credit facility with a group of banks. Eastern Energy also has a A$100 million facility with a group of banks used j

for working capital purposes. Both facilities are non-recourse to the Company but are secured by all of the property, assets and rights of Eastern Energy both present and future.

Results of Operation The Comnany and TU Electric For the year ended December 31,1995, consolidated net income for the Company (excluding the after-tax effect of the September 1995 asset impairment) increased approximately 23% over the prior period. For the Company and TU Electric, from which most of consolidated earnings is derived, the major factors affecting earnings for the twelve-month period were continuing cost reduction efforts and customer growth, partially offset by mild weather conditions.

In September 1995, the Company recorded an impairment of several non-performing assets, including the partially completed Twin Oak and Forest Grove lignite-fueled facilities of TU Electric, and Chaco's coal reserves in New Mexico, as well as several minor assets. Such impairment, on an after-tax basis, amounted to $802 million. (See Note 13 to Consolidated Financial Statements.)

TU Electric Operating revenues decreased approximately 1% and increased approximately 4% for the years ended December 31,1995 and 1994, respectively. The following table details the factors contributing to these changes:

Increase (Decrease)

Factors 1995 1994 Thousands of Dollars Base rate revenue.

$ 31.635 5 427.217 Fuel revenue.

(91.425)

(130.077)

Power cost recovery factor revenue.

(7.744)

(38.955)

Unbilled revenue and other 14.821 (54.166)

Total

$(52.713) 5 204.019 Energy sales (including unbilled sales) increased approximately 1 % and 4% for 1995 and 1994, respectively.

The increase in energy sales for 1995 was generally a result of customer growth and increased usage, partially offset by mild weather conditions. The increase in energy sales in 1994 was due primarily to an increase in commercial and industrial usage, partially offset by milder than normal weather. Fuel revenue dectened in 1995 and 1994 due primarily to a reduction in gas prices and increased nuclear generation. 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.

s 26

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Concluded)

Results of Operation -(Concluded)

With respect to operating expenses, fuel and purchased power expense decreased approximately 6% and approximately 8% for 1995 and 1994, respectively. The decrease in 1995 was due to continued reduction in gas prices and purchased power commitments and increased utilization of nuclear fuel. Fuel and purchased power expense decreased in 1994 primarily due to a reduction in gas prices, lignite r'equirements and purchase power commitments, and an 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, exc!'uding fuel and purchased power, ' ecreased approximately 1 % and increased d

approximately 9% for 1995 and 1994, respectively. Operation and maintenance expense decreased in 1995 due primarily to a decrease in uncollectible accounts expense and employee benefit expenses. 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 expenses. Taxes other than income decreased in 1995 as a result of a reduction in TU Electric's ad valorem tax obligation due primarily to a reduction in property valuations and increased in 1994 due primarily to increased local gross receipt's taxes, an increase in ad valorem taxes charged to operation which were previously capitalized, and a refund of franchise taxes in the prior period.

Allowance for funds used during construction (AFUDC) decreased approximately 92% in 1994. Such decrease 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.

Federal income taxes - other income decreased in 1995 due to the effect of recording the taxes associated with the asset impairment, and increased in 1994 due primarily to the effect of recording the taxes associated with the regulatory disallowance in 1993. (See Note 9 to Consolidated Financial Statements.)

Total interest charges, excluding AFUDC, decreased approximately 5% and 3% for 1995 and 1994, 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 increased in 1995 due to borrowings on the term credit agreement and decreased in the prior period due to the continuing retirement of debt incurred on the purchases of the minority ownership interests in Comanche Peak. Other interest expense in 1995 was affected by decreased interest on bonded rates over the prior period, increased average short-term borrowings, and increased amortization of debt issuance expenses and redemption premiums. For 1994, other interest expense increased over the prior period due primarily to interest on bonded rates refunded, an increase in short-term rates, and increased amortization of debt issuance expenses and redemption premiums.

Preferred stock dividends decreased approximately 17% and 12% for 1995 and 1994, respectively, primarily due to the redemption of certain series.

l Possible Change in Accounting Standards The Comnany and TU Electric The Financial Accounting Standards Board (FASB)is currently deliberating a new accounting standard addressing the accounting for liabilities related to closure and removal of long-lived assets, which would include nuclear decommissioning (see Note 14 to Consolidated Financial Statements). Such new standard is not expected to be effective before calendar year 1997. Based upon FASB's exposure draft, which is subject to change, any new standard would likely prescribe a methodology for measuring and recognizing liabilities related to closure and removal of long-lived assets. Any liability required to be recognized would have a corresponding asset recognized as an addition to plant and depreciation of the long-lived asset would be revised prospectively. If such new standard were adopted, the application of such statement would increase total assets and liabilities for the Company and TU Electric. Such requirements are not expected to have a material effect on the Company's and TU Elect ic's financial position or resuus of operations.

27

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TEXAS UTILITIES COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME i

Year Ended December 31.

1995 1994 1993 Thousands of Dollars OPERATING REVENUES

$5.638.688

$5.663.543

$5.434.512 OPERATING EXPENSES Fuel and purchased power...

1,640,990 1.729,091 1,858,054 Operation 819,633 872,272 812,555 Maintenance 290,011 304.941 350,004 Depreciation and amortization.

563,819 549,539 439.548 Taxes other than income

'.s.,

536.608 559.144 465,307 Total operating expenses 3.851.061 4.014.987 3.925.468

)

OPERATING INCOME,,

I,787,627 1,608.556 1,509.044 OTHER INCOME AND (DEDUCTIONS)- NET.

24.583 38.379 183.643 TOTAL INCOME.

1.812.210 1.686.935 1.692.687 INTEREST AND OTHER CHARGES

- Interest 706.182 726,876 752,803 1

Allowance for borrowed funds used during construction...

(15,327)

(11,261)

(113.108)

Impairment of assets.,

1.233.320 Regulatory disallowances 359,556 TU Electric obligated, mandatorily redeemable, preferred securities 1

of trusts distributions.

1,801 Preferred stock dividends of subsidiary 84,914 101.883

!!5.232 Total interest and other charges.

2.010,890 817.498 1.114,483 INCOME (LOSS) BEFORE INCOME TAXES (198,680) 869,437 578.204 i

INCOME TAXES (60.035) 326.638 209.544 1

CONSOLIDATED NET INCOME (LOSS)

$ (138.645)

$ 542.799

$ 368.660

]

Average shares of common stock outstanding (thousands) 225,841 225,834 221,555 Earnings (loss) and dividends per share of common s:ock:

Earnings (loss)(on average shares outstanding).

$(0.61)

$2.40

$1.66 Dividends declared per share of common stock

$ 2.81

$3.08

$3.08 l

l STATE'1ENTS OF CONSOLIDATED RETAINED EARNINGS l

Year Ended December 31.

1995 1994 1993 Thousands of Dollars BALANCE AT DEGINNING OF YEAR,

$1,691,250

$1,842,413

$2,171.018 ADD - Consolidated net income (loss)

(138,645) 542,799 368.660 LESOP dividend deduction tax benefit 6.452 6,733 6,975 DEDUCT - Davidends declared on common stock (for amounts per share, see Statements of Consolidated Income).

634.613 695,590 682,438 Preferred stock redemption costs - net 5.105 21.802 BALANCE AT END OF YEAR

$ 924.444

$1.691.250

$1.842.413 See accompanying Notes to Consolidated Financial Statements.

28

l TEXAS UTILITIES COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS Year Ended December 31.

13 1994 1993 Thousands of Dollars CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income (loss) 5 (138,645)

$ 542.799 5 368,660 Adjustments to reconcile consolidated net income (loss) to cash provided by operanng activities:

Depreciation and amortization (mcludmg amounts charged to fuel)..

725.646 710,1 %

543,441 Deferred federal income taxes - net.

(204.550) 261,452 82.290 Federal investment tax credits - net,....

(22,774)

(26,427)

(22.383)

Allowance for equity funds used during constructiori..

(6.680)

(10.774)

(150.125)

Impairment of assets 1.233.320 Regulatory disallowances 359,556 Changes in assets and liabilities:

Receivables..

(22,898) 10,408 (90,561)

Inventones.........

18,701 2,673 11,112 Accounts payable 48,079 (43.684) -

2.797 Interest and taxes accrued.

(94.158).

(77.795) 14,449 Other working capital..

(25.932)

(131,506) 126,919 Over/(under) recovered fuel revenue - net of deferred taxes.

94.717 113.693 (83,501)

Other - net.

5.902 68.549 29.751 Cash provided by operatmg activities

_1.610,728 1.419.584 1.192.405 CASH FLOWS FROM FINANCING ACTIVITIES Sales of securities:

First mortgage bonds.

535,055 378.340 2.448,465 Other long-term debt 300,000 325.000 TU Electric obligated, mandatority redeemable, preferred securities of trusts.

381,476 Preferred stock 123 731.342 Common stock 62,102 240,971 Retirement of long-term debt and preferred stock (1.391,686)

(1,176.023)

(2.944,339)

Change in notes payable 615,929 363,886 (253,100)

Common stock dividends paid (695.656)

(694.355)

(674,869)

Debt premium, discount, financing and reacquisition expenses.

(123.668)

(21.799)

(141,545)

' Cash used in fmancing activities.

(378,550)

(1,087.726)

(268,075)

CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures.

(434,338)

(444.245)

(871,450)

Allowance for equity funds used durmg construction (excluding amount for nuclear fuel).

3,952 4,802 138,950 Change in construction receivables /payables - net 2.140 3.897 (32,847)

Non-utility property - net.

(69.949)

(14.967)

(10,171)

Nuclear fuel (excluding allowance for equity funds used during construction).

(55.013)

(62,655)

(16,889)

Acquisition of Eastern Energy (616,865)

Other investments.

(41,226)

(23.848)

(17.213)

Cash used in investmg activities (1.211,299)

(537.016)

(809.620)

(DECREASE)IN CASH DUE TO EXCHANGE RATE CHANGES (3,452)

NET CllANGE IN CASH AND CASH EQUIVALENTS 17.427 (205,158) 114,710 CASH AND CASH EQUIVALENTS - BEGINNING BALANCE 7,426 212.584 97,874 CASH AND CASH EQUIVALENTS - ENDING BALANCE

$ 24.853 7.426

$ 212.584 I

See accompanying Notes to Consolidated Financial Statements.

29 1

1 TEXAS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31.

1995 1994 Thousands of Dollars UTILITY PLANT in service:

Product' ion..

$16.661.053

$16.516.326 Transmission..

1.592.610 1.573.634 Distribution.

5.333.3 %

4.048.867 General.

466.474 456.212 Total 24.053.533 22.595.039 Less accumulated depreciation 5.562.3 5.023.003 Utility plant in service less accumulated depreciation 18.491.343 17.572.036 Construction work in progress 271.033 1.060.731 Nuclear fuel (net of accumulated amorttzation: 1995 - $295.390.000; 1994 - $205.420.000)..

266.735 298.964 Heid for future use....

25.096 46,197 Utility plant less accumulated depreciation and amortization..

19.054.207 18,977.928 Less reserve for regulatory disallowances..

1.308.460 1.308.460

)

Net utility plant..

17.745.747 17.669.468 INVESTMENTS Non-utility property.

422,421 569.337 j

Other investments 617.583 122.906 Totalinvestments 1.040.004 692,243 CURRENT ASSETS Cash in banks.

24.853 7,426 Special deposits.

19.455 1,002 Accounts receivable:

Customers..

275.275 201.687 i

Other.

51.735 38.712 Allowance for uncollectible accounts...

(5,%5)

(5,095)

Inventones - at average cost:

Materials and supplies...

200.145 194,271 Fuel stock.

128.028 145.662 Prepaid taxes.

18.696 21,629 Other prepayments.

36,832 41.871 Deferred federalincome taxes 84.410 37,113 Other current assets..

14.924 11.216 Total current assets 848.388 695.494 DEFERRED DEBITS Unamortized regulatory assets 1.828,625 1,769,441 Under-recovered fuel revenue.

29.860 Other deferred debits.,.

73.087 36.902 Total deferred debits 1.901.712 1.836.203 Total.

$21.535.851

$20.893.408 See accompanying Notes to Consolidated Financial Statements.

30

1 TEXAS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES December 31.

1995 1994 Thousands of Dollars CAPITALIZATION Common stock without par value - net:

Authorized shares - 500.000.000 Outstandmg shares-225.841.037.

$ 4.806,912

$ 4.798,797 Retained carnmgs 924.444 1.691.250 Cumulative currency translation adjustment..

397 Total common stock equity...

5,731.753 6.490.047 Preferred stock:

Not subject to mandatory redemption.

489.695 870.190 1

263,1%

387,482 Subject ro mandatory redemption...

TU Electric obligated, mandatorily redeemable, preferred securities of trusts 381.476 I

Long-term debt. less amounts due currently.

9.174.575 7.888.413 Total capitalization 16.040.695 15,636.132

)

CURRENT LIABILITIES Notes payable:

Commercial paper.

321,990 363,886 Banks......

275,000 Long term debt due currently 61.321 74.610 Accounts payable..

300,726 219.661 Dividends declared 125,929 197,564 Customers' deposits.

76.% 3 56.391 Taxes accrued 167.951 243,753 Interest accrued.

165.277 183.545 Over recovered fuel revenue I15,858 Other current tiabilities..

101.566 95.329 Total current liabihties.

1.712.581 1.434.739 DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES Accumulated deferred federalincome taxes.

2.669,808 2.852.462 Unamortized federal investment tax credits 622,786 679.104 Other deferred credits and noncurrent liabilities.

489.981 290.971 Total deferred credits and other noncurrent habilities 3.782,575 3,822.537 COMMITMENTS AND CONTINGENCIES (Note 14)

Total.

521.535.851

$20.893.408 See acccmpanying Notes to Consolidated Financial Statements.

31

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME Year Ended December 31, 1995 1994 1993 Thousands of Dollars OPERATING REVENUES.

$5.560.462

$$,613.175

$5.409.156 OPERATING EXPENSES Fuel and purchased power.

1,697,091 1,798,493 1.946.049 Operation 767,750 813.057 756.596 Maintenance 281;284 295.758 341.840 Deprecianon and amortization,

549,611 540.535 427.992 Federalincome taxes,

382,315 338,465 343.485 Taxes other than income.

512.045 534.430 445.220 Total operatmg eapenses 4.190.096 4.320.738 4.261.182 OPERATING INCOME.

1.370.366 1.292.437 1.147.974 OTilER INCOME (LOSS)

Allowance for equity funds used during construction..,

6,658 10,743 150,115 Impairment of assets,

(486,350)

Regulatory disallowances (359.556)

Other income and deducuans - net 8,625 10.160 9,114 Federal income taxes 169.362 (4.222) 101.745 Total other income (loss).

(301.705) 16.681 (98.582)

TOTAL INCOME,

1,068.661 1.309,118 1.049.392 INTEREST CHARGES Interest on mortgage bonds 526.977 567,363 610,999 Interest on other long term debt.

44,071 32,183 45,787 Other interest.

58,500 62.631 29,186 Allowance for borrowed funds used during construction.

(15,319)

(11,251)

(113.106)

Total interest charges 614.229 650,926 572.866 CONSOLIDATED NET INCOME 454,432 658,192 476.526 TU ELECTRIC OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF TRUSTS DISTRIBUTIONS.

1.801 PREFERRED STOCK DIVIDENDS,

84.914 101.883 115.232 CONSOLIDATED NETINCOME AVAILABLE FOR COMMON STOCK

$ 367.717 5 556,309

$ 361.294 STATEMENTS OF CONSOLIDATED RETAINED EARNINGS Year Ended December 31, 1995 1994 1993 Thousands of Dollars BALANCE AT BEGINNING OF YEAR,

5 948,136

$1,112,692

$1,480,582 ADD - Consolidated net income 454,432 658.192 476.526 Transfer from common stoc k.

433,820 DEDUCT - TU Electric obligated, ciandatority redeemable.

preferred securities of custs distributions.

1.801 Preferred stock dividends 84,914 101,883 115.232 Common stock dividends (per share: 1995 -54.35 1994 - $4.60; 1993 - $4.68) 682.080 715,760 707,382 Preferred stock redemption costs - net 5,105 21.802 BALANCE AT END Or2 YEAR.

$1.067.593

$ 948,136

$1.112.692 See accompanying Notes to Consolidated Financial Statements.

32

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS Year Ended December 31, 1995 1994 1993 Thousands of Dollars CASH FLOWS FROM OPERATING ACTIVITIES Consolidated net income 5 454,432 5 658,192 5 476,526 Adjustments to reconcile consolidated net income to cash provided by operating activities:

Depreciation and amortization 685,693 675,351 512.195 Deferred federal income taxes - net.

83,621 280,971 118.368 Federal investment tax credits - net,,

(21,201)

(23.698)

(19,698)

Allowance for equity funds used during construction.

(6,658)

(10,743)

(150.115)

Impairment of asscts 427,478 Regulatory disallowances 359.556 Chsnges in assets and habilities:

Receivables.

(24,807) 10.827 (88,104)

Inventories.

612 5.777 10.557 Accounts payable 1,842 (40.009)

(5.763)

Interest and taxes accrued (110,455)

(60,637) 16.471 Other working capital 4.917 (140,210) 123,918 Over/(under)- recovered fuel revenue - net of deferred taxes..

94,717 113,693 (83.501)

Other - net.

(2.580) 54,877 10.025 Cash provided by operating activities.

1.587.t.Il 1,524.391 1.280.435 CASH FLOWS FROM FINANCING ACTIVITIES Sales of securities:

First mortgage bonds 535,055 378,340 2.448.465 I

Other long-term debt 300,000 TU Electric obligated, mandatorily redeemable, preferred securities of trusts...

381,476 Preferred stock 123 731,342 Common stock.

249.600 198.900 Retirement of long-term debt and prefer:cd stock.

(1,373,113)

(1,083,306)

(2.702,847)

Change in notes receivable - affilmes.

26,238

.(28,594)

)

Change in notes payable - partat (88,434) 36,684 Change in notes payable - other (41,8%)

363,886 (250,000)

TU Electric obligated. mandato ily redeemable, preferred securities of trusts distributions paid,

(1.801)

Preferred stock dividends paid.

(95,304)

(105.572)

( ' ! *,'?3 3 ',

Common stock dividends paid..

(682,080)

(715,760)

(707.382)

Debt premium 'hcount, financing and reacquisition expenses (123.393)

(21,931)

(132.366)

Cash used in fmancing activities (1,074.818)

(1.051.648)

(492.137)

CASH FLOWS FROM INVESTING ACTIVITIES Construction expetxhtures (407.305)

(415.290)

(841,181) i Allowance for equity funds used during construction (cxcludmg

)

amount for nuclear fuel).

3,929 4,771 138.941 Change in construction receivables /payables - net (1,305) 1,343 (33.976)

Non-utility property - net.

21 (4)

(6)

Nuclear fuel (excluding allowance for equity funds used durmg construction).

($5,013)

(62,655)

(16,889)

Other investments.

(37.186)

(22.138)

(12.944)

Cash used in investmg activities.

(4%.859)

(493.973)

(766.055)

NET CHANGE IN CASH AND CASH EQUIVALENTS 15,934 (21,230) 22.243 CASH AND CASH EQUIVALENTS - BEGINNING BALANCE 6.699 27.929 5.686 CASil AND CASH EQUIVALENTS - ENDING BALANCE,

5 22.633 5

6.699 S 27.929 See accompanying Notes to Consolidated Financial Statements.

33

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31.

1995 1994 Thousands of Dollars ELECTRIC PLANT in service:

Production

$15.699.488

$15.553.422 l

Transmission.

1.586.547 1.567.617

)

Distribution.

4,229,794 3.997,061 i

General 407.897 425.973 Total 21.923.726 21.544.073 Less accumulated depreciation 5.075.428 4.560.054 Electric plant in service less accumulated depreciation 16.848.298 16.984.019 Construction work in progress 236.913 971.429 Nuclear fuel (net of secumulated unortization: 1995- $295.390,000; 1994 - $205.420.000) 266.735 298.964 lictd for future use..

25.096 43.550 Electric plant i:ss accumulated depociation and amortization 17,377.042 18.297. % 2 Less reserve for regulatory disallowances 1.308.460 1.308.460 Net electric plant.

16.068.582 16.989.502 INVESTMENTS Non-utihty property..

332,234 4.383

)

Other investments 103.888 66.702 Total investments.

436.122 71.085 CURRENT ASSETS Cash in banks 22.633 6.699 Special deposits.

527 527 a

Notes receivable - affiliates.

2,356 28.594 Accounts receivable:

Customers.

212.165

!%.507 Other...

34.906 26.aM Allowance for uncollectible accounts.

(3.914)

(5.026)

'. Inventories - at average cost:

Materials and supplies.

179.001 178.977 Fuel stock.

82.889 83.525 Prepaid taxes..

18.664 21.614 Deferred federal income taxes 79.629 37.202 Other current assets.

14.016 16.379 Total current assets 642.872 591.867 DEFERRED DEBITS Unamortized regulatory assets 1.806 684 1.741.818 Under-recovered fuel revenue..

29.860 Other deferred debits.

49.114 22.866 Total deferred debits 1,855.798 1.794.544 Total

$19.003,374

$19.446.998 See accompanying Notes to Consolidated Financial Statements.

34

_ ~.

i TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS r

CAPITALIZATION AND LIABILITIES December 31, 1995 1994 j

Thousands of Dollars-Common stock without par value:

Authorized shares - 180,000.000 Outstandmg shares - 156.800.000

$ 4,732.305

$ 5.166.125 Retained earmngs.

1.067.593 948,136 Total common stock equwy..

5.799,898 6,114.261 Preferred stock:

Not subject to mandatory redemption 489,695 870.190 Subject to mandatory redemption.

263.1 %

387,482 TU Electric obligated, mandatorily redeemable. preferred securities of trusts 381,476 Long term debt. lcss amounts due currently.....

7,212.070 7.220.641 Total capitalization 14,146.335 14,592.574 l

i CURRENT LIABILITIES Notes payable - commercial paper.

321.990 363.886 Long-term debt due currently 43.458 56.037 Accounts payable:

J Affiliates 101.722 97.443 Other.

109,402 113.144 4.

Dividends declared 13.210 23,600 Customers' deposits 63.564 55.726 Taxes accrued 142.364 234.840 Interest accrued 141.815 159.794 Over recovered fuci revenue 115.858 Other current liabilines.

63.716 71.950 Total current tiabilities 1.117,099 1.176,420 DEFERRED CREDITS AND OTilER NONCURRENT LIABILITIES Accumulated deferred federat income taxes 2.869.049 2.761.772 Unamoruzed federal investment tax credits 609,466 664,209 Other deferred credits and noncurrent liabilities 261.425 252,023 Total deferred credits and other noncurrent liabilities 3.739.940 3,678.004 i

COMMITMENTS AND CONTINGENCIES (Note 14)

{

Total

$19,003.374

$19.446,998 See accompanying Notes to Consolidated Financial Statements.

35

TEXAS UTILITIES COMPANY AND SI:BSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND 5UBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STA'IEMENTS 1.

SIGNIFICANT ACCOUNTING PouCIES The Comnany General - Texas Utilities Company (Company) is a holding company which owns all of the outstanding common stock of Texas Utilities Electric Company and its subsidiaries (TU Electric), Southwestern Electric Service Company (SESCO), Texas Utilities Australia Pty. Ltd. (TU Australia) and seven other wholly-owned i

subsidiaries which perform specialized functions within the Texas Utilities Company system. TU Electric, the i

largest subsidiary of the Company, representing 88% of the total assets, is engaged in the generation, purchase, i

transmission, distribution and sale of electric energy wholly within Texas.

Consolidation - The consolidated financial statements include the Company and all of its subsidiaries (System Companies). Ali significant intercompany items and transactions have been eliminated in consolidation.

Certain financial statem ent items have been reclassified to conform to the current year presentation.

In March 1995, Te xas Utilities Communications Inc. (TU Communications), a new wholly-owned subsidiary of the Company, was !ncorporated under the laws of the State of Delaware. TU Communications was organized to provide access to advanced telecommunications technology, primarily for the System Companies' expected j

expansion of the energy services business.

l Eusiness Acquisition - In December 1995, the Company's newly formed subsidiary, TU Australia, acquired the common stock of Eastern Energy Limited (Eastem Energy), a major Australian electricity distribution company. Eastern Energy is engaged in the purchase, distribution and sale of electric energy to approximately 475,000 customers in a service area in Australia extending from the outer eastern suburbs of the Melbourne metropolitan area to the eastern coastal areas of Victoria and the New South Wales border to the north. Eastern Energy generates no electric energy. The acquisition by TU Australia was accounted for as a purchase business combination. Accordingly, a portion of the purchase price has been tentatively allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the estimated fair values of the assets acquired is being amortized over 40 years. The operations of Eastern Energy aftet December 1,1995, the date of acquisition, have been reflected in the consolidated financial statements. The acquisition of Eastern Energy did not have a material effect on the Company's 1995 results of operation or financial position.

Income Taxes on Undistributed Earnings of Foreign Subsidiary - The Company intends to invest the undistributed earnings of its foreign subsidiary back into the foreign subsidiary's business. Accordingly, no provision has been made for taxes which would be payable if such earnings were repatriated to the United States.

Interest Rate Swap - The Company is required to maintain an interest rate swap agreement for a portion of its foreign debt to hedge floating rate exposure (see Note 8). The notional principal amount and length of the agreement corresponds with the debt to which it relates. Amounts paid or received under the interest rate swap agreement are accrued as interest rates change and are recognized over the life of the agreement as an adjustment to interest exper.se. The Company's risk related to this transaction is minimal.

Other Investments - The difference of $348,517,000 between the amount at which the investments in subsidiaries is carried by the Company and the underlying book equity of such subsidiaries at the respective dates of acquisition is included in other investments.

Foreign Currency Translation - The assets and liaoilities of TU Australia's operatiore denominated in the Australian dollar are translated at. rates in effect at year end. Revenues and expenses have been translated at average rates for the applicable periods. Local currencies are considered to be the fi.nctional currency, and adjustments resulting from such translation are included in the cumulative currency translation adjustment, a separate component of common stock equity.

36

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES FLECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1.

SIGNIFICANT ACCOUNTING POUCIES - (Continued) 2 TU Electric Systern ofAccounts - The accounting records of TU Electric are maintained in accordance with the Federal Energy Regulatory Commission's Uniform System of Accounts as adopted by the Public Utility Commission of Texas (PUC).

Consolidation-The consolidated financial statements of TU Electric include all of its business trusts. All significant intercompany items and transactions have been climinated in consolidation. Certain financial statement items have been reclassified to conform to the current year presentation.

In September and October 1995 TU Electric established three financing subsidiaries, TU Electric Capital I, TU Electric Capital II, and TU Electric Capital III, in the form of Delaware statutory business trusts, for the purpose of issuing securities and holding Junior Subordinated Debentures issued by TU Electric. (See Note 7.)

Arnortization ofNuclear Fuel and Refueling Outage Costs - The amortization oi nuclear fuel in the reactors (net of regulatory disallowances) is calculated on the units of production method and, subsequent to commercial operation, is included in nuclear fuel expense. TU Electric accrues a provision for costs anticipated to be incurred during the next scheduled Comanche Peak nuclear generating station (Comanche Peak) refueling outage.

ac Comnany and TU Electric i

Use offstimates - The preparation of the Company's and TU Electric's consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods.

In the event estimates and/or assumptions prove to be different from actual amounts, appropriate adjustments will be made in subsequent periods.

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 UsedDuring 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,toutility plant. The accrual of AFUDC is in accordance with generally accepted accounting principles for the industry, but does not represent current cash income.

TU Electric is capitalizing AFUDC, compounded semi-annually, on expenditures for ongoing construction work in progress (CWIP) and nuclear fuel in process not otherwise allowed in rate base by regulatory authorities.

For 1995,1994 and 1993, TU Electric " sed gross rates of 7.7%,8.6% and 10.4%, respectively..lates were determined on the basis of, but are less tl.an, 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 for the Company and System Companies approximated 2.6%,2.6% and 2.5% for 1995,1994 and 1993, respectively. For TU Electric, depreciation as a percent of average depreciable property approximated 2.6%,2.6% and 2.4% for 1995,1994 and 1993, respectively. Depreciation also includes an amount for TU Electric's Comanche Peak decommissioning costs which is being accrued over the lives of the units and deposited to external trust funds. (See Note 14.)

37

l l

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1, SIGNIFICANT ACCOUNTING POLICIES - (coratinued)

Revenues - Revenues include billings under approved rates (including a fixed fuel factor) applied to meter readings each month on a cycle basis and an accrual of base rate revenue for energy provided after cycle billing but not billed through the end of each month. Revenues also include an amount for under-or over reco,ery 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.

j The fuel portion of purchased power cost is included in the fixed fuel factor. A utility's fuel factor can be revised j

upward or downward every six months, according to a specified schedule. A utility is required to p:tition to make either surcharges or refunds to ratepayers, together with interest based on a twelve month ave, rage of prime commercial rates, for any material cumulative under-or over-recoven 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 exped%d 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, ar in a general rate case in December 1995, TU Electric filed for a fuel reconciliation proceeding for the reconciliation period of July 1992 through June 1995. (See Note 12.)

Federal /ncome Taxes - The Company and System Companies, excluding TU Australia, file a consolidated federal income tax return and federal income taxes are allocated to System Companies based upon their taxable income or loss. Investment tax credits are normally amortized to income over the estimated service lives of the properties. Deferred federal income taxes are currently provided for temporary differences between the book and tax basis of assets and lidilities (including the provision for regulatory disallowances). In January 1993, the Company and TU Electric adopted Statement of Financial Accounting Standards No.109, " Accounting for Income Taxes" (SFAS 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 SFAS 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, 1995, the consolidated balance sheets include a regulatory asset of approximately $1.2 billion net of an approximate $0.6 billion regulatory liability.

Consolidated Cash Flows - For purposes of reporting cash flows, temporary cash investments purchased with a remaining maturity of three months or less are considered to be cash equivalents.

The supplemental schedule below details the Company's cash payments and mncash investing and financing activities:

Year Ended December 31, y

1994 1993 Thousands or Dollars CASH PAYMENTS Interest (net of amounts capitalued).

$677.415

$678.682

$637,186 Income taxes 208.326 220.316 74,756 NON-CASH INVESTING AND FINANCING ACTIVITIES Acquisition of Eastern Energy - 1995 and SESCO 1993:

Dook vaiue of assets acquired.

$1.329.158

$ 69.521 Goodwill acquired.

302,497 32.o59 Less: Liabiinies incurred 8.503 Liabilities ar umed 1.006.848 39,991 Stock issued 59.976 Cash paid 616.304 1.613 Less: Cash acquired 7.943 376 Currency translation adjustment 53 Net cash

$ 608.414

$ 1.237 38

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

1. SIGNIFICANT ACCOUNTING POLICIES - (concluded)

The supplemental schedule below details TU Electric's cash payments:

Year Ended December 31, 1995 1994 1993 Thousands of Dollars CASH PAYMENTS Interest (net of amounts capitalized)

$602.524

$616.254

$$72,208 Income taxes..

213,690 198,267 76,933 Regulatory Assets and Liabilities - Under the current regulatory environment. TU Electric and SESCO are subject to the provisions of Statement of Financial Accounting Standards No. 71, " Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This statement applies to utilities which have cost-based rates established by a regulator and charged to and collected from customers. In accordance with this statement, these companies may defer the recognition of certain costs (regulatory assets) and certain obligations (regulatory liabilities) that, as a result of the ratemaking process, have probable corresponding increases or decreases in future revenues, Future significant changes in regulation or competition could affect these companies' ability to meet the criteria for continued application of SFAS 71, and may affect these companies' ability to recover these regulatory assets from, or refund these regulatory liabilities to customers. These regulatory assets and liabilities, which are being amortized over various periods (5 to 40 years), are currently included in rates, or are expected to be included in future rates. In the event all or a portion of these companies' operations fail to meet the criteria for application of SFAS 71, these companies' would be required to write-off all or a portion of their regulatory assets and liabilities.

Significant net regulatory assets are as follows:

The Company TU Electric December 31, December 31 Item 1995 1994 1995 1994 Thousands of Dollars Securities reacquisition costs

$ 387,493

$ 284,563

$ 385.287

$ 281,023 Cancelled ligmte unit costs.

15.266 18.049 15,266 18,o49 Rate case costs 62.211 64,862 62,211 64,862 Litigation and settlement costs 72,685 72,685 72.685 72,685 Voluntary retircment/ severance program,

156.339 184.340 132,641 156.397 Recoverable deferred federal income taxes - net (Note 1) 1,192,959 1,201,688 1,199,552 1,208.833 Other regulatory assets 14.357 15.939 11.727 12.654 Unamortized regulatory assets 1,901,310 1,842,126 1,879.369 1,814,503 Less - Reserve for regulatory disallowances 72,685 72,685 72.685 72.685 Unamortized federal invesunent tax credits 622,786 679,104 609.466 664.209 Unamortized regulatory assets - net

$1.205.839

$1.090.337

$1.197,218 51.077.609 i

Should significant changes in regulation or competition occur. TU Electric and SESCO would also be required to assess the recoverability of other assets, including plant, and, if impaired, write down the assets to reflect their fair market value, 2.

AFFILIATES TU Electric The Company provides common stock capital and partial requirements for short-term financing to TU Electric.

The Company has three other subsidiaries which perform specialized services for the System Companies, including TU Electric: Texas Utilities Services Inc. which provides financial, accounting, information technology, customer services, procurement, personnel, shareholder services and other administrative services at cost; Texas Utilities 39

l l

TEXAS UTILITIES COMPANY AND SUBSIDIARIES I

i TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) i 2.

AFFILIATES-(concluded)

Fuel Company (Fuel Company) which owns a natural gas pipeline system, acquires, stores and delivers fuel gas and provides other fuel services at cost for the generation of electric energy by TU Electric; and Texas Utilities Mining Company (Mining Company) which owns, leases and operates fuel production facilities for the surface mining and recovery oflignite at cost for use at TU Electric's generating stations TU Electric provided services such as energy sales, wheeling and scheduling to SESCO which is engaged in the purchase, transmission, distribution and sale of electric energy in ten counties in the eastern and central parts of Texas with a population estimated at 125,000.

SESCO generates no electric energy.

TU Electric has entered into agreements with Fuel Company for the procurement of certain fuels and related services and with Mining Company for the procurement and production oflignite. Payments are at cost for the services received and are required by the agreements to be "at least equivalent in the aggregate to the annual charge to income on the books" of Fuel Company and of Mining Company. TU Electric is, in effect, obligated for the principal, $410,714,000 at December 31,1995, and interest on long-term notes of Mining Company through 4

payments described above. Such notes mature at various dates through 2005 and have interest rates ranging from 6.50% to 9.42%. At December 31,1995, TU Electric had extended $2,356,000 of operating funds to the Fuel Company recorded as a note receivable on the balance sheet.

The schedule below details TU Electric's billings to and from affiliates for services rendered and interest on short-term financings:

Year Ended December 31, 1995 1994 1993 Thousands of Dollars I

Billings from:

The Company.

5 123 5 1,074 5 1,122 TU Services 182,334 184.537 162,735 Fuel Company 763,346 850.825 901,76i Mining Company.

327,856 329,108 374.464 Billings to.

SESCO

$20.657

$21.869

$38.286 Fuel Company 5.669 3,205 3.

SilORT. TERM FINANCING The Comnany The schedule below details the Company's amounts outstanding to banks for borrowings at December 31, 1995:

Thousands of Dollars Credit facility agreements.

$320.000 Revolving credit facility 200,000 Uncommitted bank lines:

The Company.

90.000 Fuel Company.

85.000 Total 5695.000 At December 31,1995, 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 26,1996. The Company and TU Electric intend to negotiate an extension or replacement of this 40

i TEXAS UTILITIES COMPANY AND SUBSIDIARIES l

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES l

i NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3.

SIIORT-TERM FINANCING-(concluded) facility. Facility B provides for borrowings up to $700,000,000 and terminates April 28,2000. The Company's borrowings under the Agreements are limited to $600,000,000. Borrowings under the Agreements are used for working capital and other corporate purposes, including commercial paper backup.

In November 1995, the Company entered into a Competitive Advance and Revolving Credit Facility Agreement with a group of commercial banks. This acility, for which the Company pays a fee, provides for r

borrowings, on a standby basis, up to $200,000,000 an1 terminates April 26,1996. Borrowings under this facility are used for corporate purposes. In addition to tha above, the Company and Fuel Company have separate arrangernents for uncommitted lines of credit.

During the years 1995,1994 and 1993, the Company's average amounts outstanding to banks for borrowings were $149,806,000, $66,042,000 and $84,934,000, respectively. Weighted average interest rates to banks for borrowings during such periods were 6.33%,4.92% and 3.84%, respectively, At December 31,1995, 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.

The Company intends to refinance up to $420,000,000 ofits current $695,000,000 short-term borrowings from banks beyond one year of the balance sheet date of December 31,1995. As a result, such amount has been reclassified from notes payable - banks to long-term debt on the Company's 1995 Balance Sheet. (See Note 8.)

i TU Electric At December 31,1995, TU Electric had $321,990,000 of commercial paper outstanding with interest rates ranging from 5.85% to 6.35%. During the years 1995,1994 and 1993, average amounts outstanding to banks for borrowings were $ 11,667,000, $32,292,000 and $55,611,000, respectively and to holders of commercial paper were

$340,579,000, $238,401,000 and $54,401,000, respectively. During such periods, weighted average interest rates to banks for borrowings were 6.51%,4.60% and 3.92%, respectively, and to holders of commercial paper were 6.10%,4.94% and 3.72%, respectively, 4.

COMMON STOCK The Comonny The Company issued shares ofits authorized but unissued common stock as follows:

Automatic Dividend Employees' Thrift Plan Reinvestment and Common and Employee Public Offering Stock Purchase Plan Stock Ow nership Pla n Total gr Shares

• Amount Shares Amount Shares Amount Shares Amount 1995 1994 1.364.690

$ 56.671,000 130,925 5 5.431.000 1,495.615 $ 62.102,000 1993 1.420.316 559,976.000 5.163.587 220.848.000 445,465 20.123.000 7.029.368 300,947.000

• Shares issued for public offering in 1993 were used in connection with the acquisition of SESCO.

At December 31,1995,1,997,005 shares of the authorized but unissued common stock of the Company were reserved for issuance and sale pursuant to the above plans.

41

1 TEXAS UI'ILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4, COMMON stock-(concluded) 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 thtough an independent broker to meet share requirements under the plan. Since March 1994, requirements under the Automatic Dividend Reinvestment and Common Stock Purchase Plan and the Employees' Thrift Plan of the Texas Utilities Company System (Thrif t 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 intere" 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 1995,1994 and 1993 increased common stock equity by $8,115,000, $8,115,000 and $8,114,000, 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.

TU Electric TU Electric issued shares ofits authorized but unissued common stock to the Company as follows:

Net Mr Shares Proceeds

!995.

l994.

4,800.000

$249,600,000 t993.

3,400.000 198,900.000 No shares of TU Electric's common stock are held by or for its own account, nor are any shares of such capital stock reserved for its officers and employees or for options, warrants, conversions and other rights in connection therewith.

5.

RETAINED EARNINGS The Comnany and TU Electric The articles of incorporation and the mortgages, as supplemented, of TU Electric and SESCO, contain provisions which, under certain conditions, restrict distributions on or acquisitions of their commen stock. At December 31,1995, $94,283,000 of retained earnings of TU Electric and $13,969,000 of retained earnings of SESCO were thus restricted as a result of such provisions.

In 1995, TU Electric transferred approximately $433,820,000 from its common stock account to retained earnings. Such amount represented the Company's equity in undistributed earnings, since acquisition, included in previous transfers by TU Electric.

42

l TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) l 6.

PREFERRED STOCKOFTU ELECTRIC (cumulative, without par value, entitled upon liquidation to $100 a l

share; authorized 17,000,000 shares)

Redemption Price Per Share Shares Outstanding Amount (Before Adding Accumulated Dividends)

Dividend Rate December 31.

December 31.

December 31.1995 Eventual Minimum 1995 1994 1995 1994 Thousands of Dollars Not Subject to Mandatory Redemption 5 4.50 cries 74.367 74.367 5 7,440

$ 7.440

$110.00

$110.00 4 00 series (Dallas Power) 70.000 70.000 7.049 7,049 103.56 103.56 4.56 series (Texas Power),

133,628 133,628 13.371 13.371 112.00 112.00 1

4 00 series (Texas Elcetric)

I10.000 110.000 11,000 11,000 102.00 102.00 4.56 series (Texas Electric),

64,947 64.947 6.560 6,560 I12.00 112.00 4.24 series,

100.000 100.000 10.081 10.081 103.50 103.50 4.64 series,

100.000 100.000 10.016 10.016 103.25 103.25 4.84 series.

70,000 70,000 7.000 7.000 101.79 101.79 4.00 series (Texas Power).

70.000 70,000 7.000 7.000 102.00 102.00 4.76 serics..

100,000 100,000 10.000 10.000 102.00 102.00 5 08 series.

80,000 80,:D0 8,004 8.004 103.60 103.60 4.80 series,

100.000 100,000 10,009 10.009 102.79 102.79 4 44 series.

150.000 150.000 15.061 15,061 102 61 102.61 7.20 series.

200,000 200.000 20.044 20,044 103.d 103.21 l

6.84 series.

200,000 200.000 20.023 20.023 103.05 103.05 7.24 series.

247,862 249,800 24,905 25,100 103.42 103.42 8.20 series (a).

338,872 1,250.000 32,704 120,637 (b) 100.00 7.98 series.

500,000 500.000 49.361 49,361 (b) 100.00 7.50 series (a)..

392,234 2,000,000 38,062 194,048 (b) 100.00 7.22 series (a).

308,632 1,715,925 29.909 166.290 (b) 100.00 Adjustable rate series A (c),,

1,000.000 1.000,000 98,200 98,200 100.00 100.00 Adjustable rate series D (c).

548.561 548.561 53.896 53.896 103.00 100.00 Total.

, 4.959.103 8.887.228

$489.695

$f>70.190 Subiert to Mandatory Redemntion idl

$ 9 64 series (c),

650,000 900.000

$ 64.950

$ 89.902 (f)

(f) 10.375 series 750.000 74,656 9 875 series 250.000 24.843 6.98 series.

1.000.000 1.000,000 99,123 99,047 (b) 100 00 6.375 series 1,000.000 1.000.000 99.123 99.034 (b) 100.00 Total.

2.650.000 3.900.000

$263.196

$387.482 (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 31.1995.

Adjustable rate series A bears a dividend rate for the period ende! anuary 31,1996, of $6.50 per annum and adjustable rate series D bears

!J (c) a dividend rate for the period ended December 31,1995, of 57.00 per annum.

(d) TU Electric is required to redeem at a price of $100 per share plus accumulated dividends a specined 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. TV 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 59.64 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 ditidends plus a component at a variable price per share which is designed to mamtain the expected yield at issuance:

Minimum Redeemable initial / Nest Date of Series Shares Mandatory Redemption 5 9.64 125.000 semi-annually 5/1/96 6 98 50.000 annually 7/1/03 6.375

$0.000 annually 10/1/03 Preferred stock mandatory redemption requirements for the next Ove years are $25 million in 1996, $25 million in 1997, $15 million in 1998 and none thereafter. The carrying value of preferred stock subject to mandatory redemption is being increased periodically to equal the redemption amounts at the mandatory redemption dates with a corresponding increase in preferred stock dividends.

(c) Under certain circumstances relating to a change in federal tax law governing the dividends received deduction applicable to eligible corporations, the dividend rate of the 59 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.

43

i TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7.

TU F.LECTRIC OBLIGATED. MANDATORILY REDEEMABLE, PREFERRED SECL'RITIES OF TRifSTS (Liquidation preference, $25 per unit)

Three statutory business trusts, TU Electric Capital I, TU Electric Capital 11 and TU Electric Capital 111 (each a TU Electric Trust), were established in 1995 as financing subsidiaries of TU Electric for the purposes, in each case, of issuing common and preferred trust securities and holding Junior Subordinated Debentures issued by TU Electric (Debentures). The Debentures held by each TU Electric Trust are its only assets. Each TU Electric Trust will use interest payments received on the Debentures it holds to make cash distributions on the trust securities.

The combination of the obligations of TU Electric pursuant to agreements to pay the expenses of each TU Electric Trust and TU Electric's guarantees of distributions with respect to trust securities, to the extent a TU Electric Trust has funds r.vailable therefor, constitute a full and unconditional guarantee by TU Electric of the obligations of each TU Electric Trust under the trust securities it has issued. TU Electric is the owner of all the common trust securities of each TU Electric Trust, which constitutes 3% or more of the liquidation amount of all the trust securities issued by such TU Electric Trust.

At December 31,1995, the following Trust Originated Preferred Securities of TU Electric Capital I and 11 and Quarterly income Preferred Securities of TU Electric Capital UI were outstanding:

Compsny Units Amount Description of Debentures Thousands of Dollars TU Electric CapitalI(8.25% Series).

5.871.044

$140.880

$154.869,150 Series A. 8.25% due 9/30/30 TU Electric CapitalII (9.00% Series) 1,991.253 47,374

$51,418.575 Series D. 9.00% due 9/30/30 TU Electric Capital III(8.00% Series).

8,000.000 193.222

$206.185,575 Series C,8.00% duc 12/31/35 Total.

15.862.297

$381.476 The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures are subject to redemption, in whole or in part at the option of TU Electric, at 100% of their principal amount plus accrued interest, after an ini'tial period during which they may not be redeemed and at any time upon the occurrence of certain events.

i O

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8.

LONG-TERM DEBT,less amounts due currently The Company TU Electric December 31, December 31, 1995 1994 1995 1994 Thousands of Dollars First mortgage bonds:

$ 175,000

$ 175,000

)

6-3/8 %

series due 1997 5 175,000

$ 175,000 71/8%

senes due 1997,

150,000 150,000 150,000 150,000 51/2%

series duc 1998.

125,000 125,000 125,000 125,000 5,3/4 %

series due 1998.

150,000 150,000 150,000 150,000 5-7/8 %

series due 1998 175,000 175,000 175,000 175,000

)

6-1/2 %

senes duc 1998,

1,080 1,095 7-3/8 %

series due 1999 100,000 100.000 100,000 100,000 i

Floatmg rate series due 1999 (a) 300,000 300,000 300,000 300,000 9-1/2 %

series due 1999,

200,000 200,000 200,000 200,000 73/8%

senes due 2001 150,000 150,000 150,000 150,000 7,95 %

series due 2002 912 924 8

series due 2002 147,000 147,000 147,000 147,000 81/8%

series due 2002 150,000 150,000 150,000 150,000 6-3/4 %

series due 2003 200,000 200,000 200,000 200,000 6-3/4 %

serien due 2003 100.000 100,000 100.000 100,000 61/4%

series due 2004 125,000 125,000 125,000 125,000 81/4%

series due 2004 100,000 100,000 100,000 100,000 6-3/4 %

series duc 2005 100,000 100,000 100,000 100,000 10.44 %

series due 2008 150,000 150,000 150,000 150,000 9-7/8 %

senes due 2019 111,150 111.150 10-5/8 %

series due 2020,,,

250,000 250,000 9-3/4 %

series due 2021 300,000 300,000 300,000 300,000 87/8%

series due 2022 175,000 175,000 175,000 175,000 9 %

series due 2022 100,000 100,000 100,000 100,000 77/8%

series due 2023 300,000 300,000 300,000 300,000 83/4%

series due 2023 200,000 200,000 200,000 200,000 77/8%

series due 2024 225,000 225,000 225,000 225,000 8-1/2 %

series due 2024 175,000 175,000 175,000 175,000 7-3/8 %

series due 2025.

300,000 300,000 300,000 300,000 7-5/8 %

series due 2025 250,000 250,000 250,000 250,000 Pollution control senes, i

Brazos River Authonry 8-1/4 %

series due 2016 111,215 200,000 111,215 200,000 7-7/8 %

senes duc 2017 81,305 100,000 81,305 100,000 97/8%

senes duc 2017 28,765 112,000 28,765 112,000 9-1/4 %

series duc 2018 54,005 100,000 54,005 100,000 81/4%

series due 2019 100,000 100,000 100,000 100,000 8-1/8 %

series due 2020 50,000 50,000 50,000 50,000 7-7/8 %

senes due 2021 100,000 100,000 100,000 100,000 Taxable senes duc 2021 (b) 91,000 100,000 91,000 100,000 5-1/2 %

series due 2022 50,000 50,000 50,000 50,000 6-5/8 %

series due 2022 33,000 33,000 33,000 33,000 6,70 %

senes due 2022 16,935 16,935 16,935 16,935 6-3/4 %

series duc 2022 50,000 50,000 50,000 50,000 Taxable seriesdue 2023 (b) 100,000 100,000 100,000 100,000 6.05 %

senes duc 2025 90,000 90,000 90,000 90,000 6-1/2 % series due 2027 46,660 46,660 46,660 46,660 6.10 %senes duc 2028 50,000 50,000 50,000 50,000 Series 1994A due 2029(c) 39,170 39,170 39,170 39,170 Senes 1994B due 2029(c) 39,170 39,170 39,170 39,170 Series 1995A duc 2030(d) 50,670 50.670 Senes 1995B duc 2030(d) 118,355 118.355 Senes 1995C due 2030(d) 118,355 118.355 Sabine River Authonty of Texas 9 %

series due 2007 51,525 55,000 51,525 55,000 7-3/4 %

series duc 2016 57,950 70,000 57,950 70,000 81/B%

senes due 2020 40,000 40,000 40,000 40,000 81/4%

series due 2020 11,000 11,000 11,000 11,000 45

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILrrIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 8.

LONG TERM DEBT,less amounts due currently -(continued)

The Company TU Electric December 31.

December 31, 1995 1994 1995 1994 Thousands of Dollars Sabinc River Authority of Texas (continued) 5.55 %

series duc 2022,

5 75.000 5 75.000

$ 75.000 5 75,000 6.55%

series duc 2022.

40.000 40.000 40,000 40.000 5.85 %

series duc 2022.

33.465 33.465 33.465 33.465 Series 1995A duc 2030(d).

../

16.000 16,000 Series 1995D duc 2030(d).

12.050 12.050

]

Series 1995C due 2030(d).

18.475 18,475

)

Trinity River Authority of Texas 1

9%

series due 2007, 12.000 12,000 12,000 12,000 Secured medium-term notes, series A 30,000 30,000 30,000 30,000 Secured medium-term notes, series D 125,000 130,000 125.000 130.000 Secured medium-term notes, series C.

47,000 95,000 47,000 95,000 Secured medium-term notes, series D,

201.150 201.150 Total first mortgage bonds.

6.813.212 6,953,569 6,811,220 6,951,550 General obligation bonds 10,000 10.000 Promissory note and debt assumed for purchase of utility plant (c) 158.595 338,963 158,595 338,963 -

Senior notes.

639.328 657,164 Term credit facilities (f).

1,612.200 300,000 Unamortized premium and discount.

(58.760)

(71.283)

(57.745)

(69,872)

Total long-term debt, less amounts due currently 59,174.575 57.888.413 57.212.070 57.220.641 (a) Floating rate series due May 1,1999 bears an interest rate for the period November I,1995 to January 31,1996 of 6.3828%. Such interest rate is reset on a quarterly basis.

(b) Taxable pollution control series consist of two series: 591,000.000 of flexible rate series 1991D duc 2021 with interest rates on December 31,1995 ranging from 5.72% to 5.76% and $100.000,000 of ficxible rate series 1993 duc 2023 at 5.65% on December 31,1995. Series 1991 D bonds were remarketed on June 1,1995 in a flexible mode for rate periods up to I 80 days and are secured by an irrevocable letter of credit with maturities in excess of one year. Series 1993 bonds are in a flexible mode and, while in such mode, will be remarketed for periods ofless than 270 days and are secured by an irrevocable letter of credit with maturities in excess of one year.

(c) Series 1994 A and Series 1994B due 2029 are in a flexible mode with interest rates on December 31,1995 ranging from 3.50% to 4 00% and.

while in such mode, will be remarketed for periods ofless than 270 days and are secured by an irrevocable letter of credit with maturities in excess of one year.

(d) Series 1995A, Series 1995D and Series 1995C due 2030 are in a daily mode with interest rates on December 31,1995 ranging from 5.50%

to 6.15% and are secured by an irrevocable letter of credit with maturities in excess of one year.

(c) 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.

(f) includes TU Electric's 5300.000.000 Term Credit Agreement duc 1997 with interest rates on December 31,1995 ranging from 6.050% to 6.1125%. the Company's $420.000.000 rcelassified short-term debt (see Note 3), and Eastern Energy's 5892.200.000 (including a notional principal amount of 5535,320,000 under an interest rate swap agreement expiring 2002 with a fixed interest rate of 8.4475% per annum) Term Credit Facihty due 2002 with a floatmg interest rate of 7.5114% on December 31,1995.

Long-term debt of the Company and TU Electric doss not includejunior subordinated debentures held by each TU Electric Trust. (See Note 7.)

Sinking fund and maturity requirements for the years 1996 through 2000 under Icng-term debt instruments in effect at December 31,1995, were as follows:

The Company TU Electric SinLing Minimum Cash Sinking Minimum Cash Venr Fund

. Maturity Requirement Fund Maturity Requirement Thousands of Dollars 1996.

5 20.053 5 41,000 5 61.053 5 2,190 5 41,000 5 43,190 1997.

20.276 635.800 656.076 2,413 635.800 638.213 1998.

21.216 451,065 472.281 2.645 450.000 452,645 1999.

73.715 630.000 703.715 17,906 630,000 647.906

2000, 313,075 576.150 889.225 18,199 156,150 174,349 46

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued) 8.

LONG. TERM DEBT, less amounts due currently - (concluded)

TU Electric's first mortgage bonds are secured by the Mortgage and Deed of Trust dated as of December 1, 1983, as supplemented, between TU Electric and Irving Trust Company (now The Bank of New York), Trustee.

SESCO's first mortgage bonds are secured by the Mortgage and Deed of Trust dated as of May 1,1945, as supplemented, between SESCO and BankOne, Texas, NA, successor Trustee. Electric plant of TU Electric and SESCO is generally subject to the liens of their respective mortgages.

9.

FEDERAL INCOME TAXES The components of the Company's federal income taxes are as follows:

Year Ended December 31, 1995 1994 1993 Thousands of Dollars Charged (credited) to consolidated net income (loss):

Current.

1222,358

$152.833

$103.466 Deferred-Domestic (259.445) 200.232 128.461 Foreign (174)

Investment tax credits..

(22.774)

(26.427)

(22.383)

Total to consolidated net income (loss).....

(60.035) 326.638 209.544 Charged (credited) to consolidated retained earnings.

(6,452)

(6.733)

(6.975)

Total federalincome taxes.

$ (66.487)

$319.905

$202.569 The components of TU Electric's federalincome taxes are as follows:

Year Ended December 31, 1995 1994 1993 Thousands of Dollars Charged (credited) to operstmg expenses:

Current.

$260.988

$182.107

$127.169 Deferred:

Depreciation differences ano capitalized construction costs 205.280 222.762 241.573 Over/under. recovered fuel revenue (49.798)

(59.224) 43.436 Alternative mimmum tax (30.937)

(121.948)

(88.519)

Other 17.983 138.466 39.534 Total deferred - net 142.528 180.056 236.014 investment tax credit (21.201)

(23.698)

(19.698)

Total to operstmg expenses.

382.315 338.465 343.485 Charged (credited) to other income:

Current.

(59.454)

(35.474)

(30.218)

Deferred:

Impairment of assets.

(149,617)

Regulatory disallowance.

(102.034)

Other 39.709 39.696 30.507 Total deferred - net (109.908) 39.6 %

(71.527)

Total to other mcome (169.362) 4.222 (101.745) f Total federalincome taxes.

1212.953

$342.687

$241.740 47

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TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) l

9. FEDERAL INCOME TAXES - (continued) l I

The significant components of deferred federal income tax assets and liabilities reflected net in the balance sheets are as follows:

The Company TU Electric December 31.

December 31, 1995 1994 1995 1994 Thousands of Dollars DEFERREDTAX ASSETS Current; Unbdied revenues 5 27,323

$ 27,552

$ 27,323

$ 27.552 Over-recovered fuel revenue.

40,550 40,550 Foreign operations.

4,832 Other 11.705 9,561 11,756 9.650 Total current deferred tax assets 5 84,410

$ 37.113

$ 79.629 5 37.202 Non-Current:

Unamortized ITC,

$ 329,994

$ 359,839 5 323,685 5 352,732 Impairment of assets.

174.003 71, % 8 Regulatory disallowances 237,521 276,717 237,521 276,717 Alternative mirumum tax 611,934 566,707 454,222 425,290 Tax rate differences,

83,111 89.289 82,108 88,111 Net operatmg loss carryforward 30,474 22,589 Other 59.604 55.295 33.982 34.977 Total non current deferred tax assets.

1.4 % 167 1,378.321 1,203.486 1.200.416 DEFERRED TAX LIABILITIES Non-Current:

i Depreciation differences and capitalized construction costs 3,920,888 3.845,677 3.850.545 3,772,752 Foreign operations,

593 Other 244.494 385,106 221.990 189.436 Total non-current deferred tax liabilities 4.165.975 4.230,783 4.072.535 3, % 2.188 NET TOTAL NON CURRENT DEFERRED TAX LIABILITY

$2.669.808

$2.852.462

$2.869.049

$2.761.772 Federalincome taxes were less than the amount computed by applying the federal statutory rate to pre-tax book income as follows:

The Company TU Electric Year Ended December 31, Year Ended December 31, 1995 1994 1993 1995 1994 1993 Thousands of Dollars Federal income taxes at statutory rate (35 %)

$(39.188) $339.962 $242.703

$233.585 $350.308 $251.393 Increases (decreases) in federal mcome taxes resulting from:

Allowance for funds used durmg construction.

(2.330)

(3.760)

($2.540)

(2,330)

(3,760)

(52,540)

Depletion allowance.

(23.564) (23,361)

(12.6%)

(23.564) (23.361) (22,696)

Amortization of mvestment tax credits.

(23.036) (24,213) (22.336)

(21,463) (21,484) (19,698)

LESOP dividend deduction.

(7.700)

(7,700)

(7,675)

Amortization of tax rate differences.

(9,648)

(9,732)

(2,420)

(9,288)

(9,143) 17.316 Reversal of prior book / tax differences:

ReFulatory disallowances 21,553 21,553 Other 38,974 43,157 27,811 38.630 42,899 27,454 Foreign operations.

283 i

Other (278) 5.552 18.169 (2.617) 7.228 18.958 j

Total mcrease (decrease)

(27,299)

(20.057)

(40.134)

(20.632)

(7.621)

(9.653)

Total federal income taxes

$(66.487) $319.905 $202.569

$212.953 $342.687 $241.740 Effective tax rate.

59.4%

32.9 %

29.2 %

31.9 %

34.2 %

33.7 %

~.

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UITLITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

I l

l 9.

FEDERAL INCOME TAXES - (concluded)

The System Companies and TU Electric have approximately $612 million and $454 million, respectively, 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 j

consolidated Federalincome 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 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 therefor 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.

10. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The System Companies and TU Electric have defined benefit pension plans covering substantially all employees. Generally, plan benefits are based on years of accredited service and average annual earnings received during the three years of highest earnings. Contributions to the domestic plans were determined using the frozen attained age method which is one of several actuarial methods allowed by the Employee Retirement income Security Act of 1974. The costs of the plans were determined by independent actuaries. For financial reporting purposes, pension cost has been determined using the projected unit credit actuarial method. The cumulative difference between pension cost as determined for financial reporting purposes and contributions to the plans is recorded either as prepaid pension cost or as accrued pension liability.

Total pension cost including amounts charged to fuel cost, deferred and capitalized, were comprised of the following components:

The Company TU Electric Year Ended December 31.

Year Ended December 31.

1995 1994 1993 1995 1994 1993 Thousands of Dollars Service cost - benefits carned during the period

$ 23,515

$ 27,185

$ 23,872

$ 16.047

$ 18.667

$ 17,764 Interest cost on projected benefit obligation 65.675 64,142 62.017 53.684 52.907 52,695 Actual return on plan assets (241,887) 5.64I (93,850)

(199,436) 4,772 (80,495)

Net amortization and deferral 1603 98 (72.700) 37.722 132.147 (60.560) 32.465 Net periodic pension cost 5 7.501 5 24.268 5 29.761 5 2.442

$ 15.786

$ 22.429 49

i TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued)

10. RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS - (continued)

The table below details the plans' funded status and amount recognized in the balance sheets:

The Company TU Electric December 31 December 31.

1995 1994 1995 1994 Thousands of Dollars Actuarial present value of accumulated benefits:

Accumulated benefit obhgation (includmg vested benefits for the System Compames of 5809.869.000 for 1995 and 5599,439.000 for 1994; and for TU Electric of $629.679.000 for 1995 and 5514.418.000 for 1994).

$ (874.345) 5(646. % 7) 5(676.236) 5(549.416)

Projected benefit obligation for service rendered to date 5(1,062.619) 5(782,446) 5(803,815) $(644.205)

Plan assets at fair value - primarily equiry investments, government bonds and corporate bonds 1.139.688 845.881 881.014 704.510 Plan assets in excess of projected benefit obligation 77,069 63.435 77.199 60,305 Unrecogmzed net gain from past experience different from that assumed and effects of changes in assumptions.

(180.444) (193,802)

(168.104) (171.535)

Prior service cost not yet recogmzed in net penodic pension expense 17.061 18.616 17.015 18.543 Unrecogmzed plan assets in excess of projected benefit obligation at application (6.375)

(7.042)

(3.765)

(4.203)

Accrued pension cost.

5 (92.689) 5(118.793) 5 (77.655) 5 (96.890)

Assumptions used in determination of the projected benefit obligation for System Companies (excluding Eastern Energy) include a discount rate of 7.25 % for 1995 and 8.75 % for 1994 and an increase in compensation levels of 4.3 % for 1995 and 4.7% for 1994. The assumed long-term rate of return on plan assets was 9.0% for 1995 and 1994 and 8.75% for 1993.

Eastern Energy's employees participate in the Victorian Electricity industry Superannuation Fund (Eastern Plan). The Eastern Plan meets the definition of a single-employer defined benefit pension plan and is included above in the Company's plan. The Company's net periodic pension cost and accrued pension cost for 1995 include $175,000 and $3,018,000, respectively, representing Eastern Energy's December 1995 pension costs.

Assumptions for the Eastern Plan used in the determination of the projected benefit obligation include a discount rate of 7.50% for 1995 and an increase in compensation levels of 6.0% for 1995. The assumed long-term rate of return on plan assets for the Eastern Plan was 8.5% for 1995.

In addition to the retirement plans, the System Companies, excluding Eastern Energy, offer certain health care and life insurance benefits to substantially all its employees and their eligible dependents at retirement which normally is age 65 but may be as early as age 55 with 15 years of service. Retirees currently pay a portion of the cost of providing such benefits and are expected to continue to do so in the future. In January 1993, the Company adopted Statement of Financial Accounting Standards No.106, " Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires a change in the accounting for a company's obligation to provide health care and certain other benefits to its retirees from the " pay-as-you-go" method to an accrual method and requires the cost of the obligation to be recognized in the period from employment date until full eligibility for benefits.

50

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPWY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued)

10. RETIREMENT PLANS AND OTHER POSTRETIREnfENT BENEFITS - (concluded)

Net periodic postretirement benefits cost other than pensions, including amounts charged to fuel cost, deferred and capitalized, were comprised of the following components:

The Company TU Electric Year Ended Decemter 31, Year Ended December 31, 1995 1994 1995 1994 Thousands of Dollars Service cost - benefits earned during the period

$ 9,771

$11,525

$ 6.559

$ 7,669 Interest cost on the accumulated postreurement benefit obligation 38,842 33,120 31,109 26.063 Amortization of the transition obhgation.

16.978 16,C 13.633 13.557 Actual return on plan assets (6,096) 44 (4,520) 34 Net amortization and deferral,

4.646 1.313 3.662 977 j

Net postreurement benefits cost

$64.141

$62.902

$50.443

$48.300 The table below details the funded status for other postretirement benefits and amount recognized by the System Companies (excluding Eastern Energy) and TU Electric:

The Company TU Electric Year Ended December 31, Year Ended December 31, 1995 1994 1995 1994 Accumulated postreurement benefit obligation (APBO):

Thousands of Dollars Reurces

$(344,045) $(295,910)

$(296,996)

$(257,706)

Fully eligible active employees (27,779)

(16,150)

(17.24!)

(9,635)

Other active employees (193,407)

(145.766)

(133.783)

(100.332)

Total APBO (565.2M)

(457.826)

(448,020)

(367,673)

Plan assets at fair value,

52.786 21.577 43.969 16,453 APBO in excess of plan assets..

(50s,*45)

(436.249)

(404.051)

(351,220)

Unrecognized netloss.

144,833 78.082 119,216 70.314 Unrecognized prior service cost 1)2 986 UnrecoFnized transition obhgation 288.627 305.605 231,759 245.392 Accrued postretirement benefits cost,,

5 (74,083)

$ (51.576)

$ (53.076)

$ (35.514)

The expected increase in costs of future benefits covered by the plan is projected using a health care cost trend rate of 5,5% in 1996 and 5.0% in 1997 and thereafter, A one percentage point increase in the assumed health care cost trend rate in each future year would increase the APBO at December 31,1995 by approximately

$79.4 million for the System Companies and $62.9 million for TU Electric, and other postretirement benefits cost for 1995 by approximately $6.9 million for System Companies and $5.4 million for TU Electric. The assumed discount rate used to measure the APBO is 7.25% for 1995 and 8.75% for 1994,

11. SALES OF ACCOUNTS RECEIVABLE TU Electric TU Electric has a facility with financial institutions whereby it is entitled to sell and such financial institutions may purchase, on an ongoing basis, undivided interests in customer accounts receivable representing up to an aggregate of $350,000,000. Addttional receivables are continually sold to replace those collected. At December 31,1995 and 1994, accounts receivable was reduced by $300,000,000 to reflect the sales of such receivables to financial institutions under such agreements, 51

l TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued) l I

12, RATE PROCEEDINGS l

TU Electric 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.

1 Docket 9300 The PUC's final order (Order) in connection with TU Electric's January 1990 rate increase request (Docket 9300) was reviewed by the 250th Judicial District Court of Travis County, Texas and thereafter was appealed to the Court of Appeals for the Third District of Texas (Court of Appeals) and to the Supreme Court of Texas (Supreme Court). As a result of such review and appeals, an aggregate of $909 million of disallowances with respect to TU Electric's reacquisitions of minority owners' interests in Comanche Peak has been remanded to the PUC for reconsideration on the basis of a prudent investment standard. On remand, the PUC will also be required to reevaluate the appropriate level of TU Electric's CWIP included in rate base in light of its financial condition at the time of the initial hearing.

The Court of Appeals' holding that tax benefits generated by costs, including capital costs, not allowed in rates must be used to reduce rates charged to customers was reversed by the Supreme Court in a February 9,1996 decision. The Supreme Court's ruling eliminates the potential normalization violation that two Private Letter Rulings issued by the IRS said would have resulted from the treatment that previously had been ordered by the Court of Appeals, j

TU Electric cannot predict the outcome of any possible rehearing of the Supreme Court decision or the reconsideration of this Order on remand by the PUC.

Fuel Cost Recovery Rule TU Electric filed a petition with the PUC in November 1995 to refund to customers approximately $65 million, including interest, in over-collected fuel costs for the period June 1995 through September 1995. PUC approval was granted in January 1996 and refunds were included in February 1996 billings. In June 1995, TU Electric petitioned the PUC for approval of a fuel refund to customers of approximately $89 million, including interest, in over-collected fuel costs for the period June 1994 through May 1995. PUC approval was granted in August 1995 and refunds were included in September 1995 billings. These over-collections were primarily due to lower natural gas prices than previously anticipated. In August 1994 TU Electric petitioned the PUC for a recovery of approximately $93 million, including interest, in under-collected fuel costs for the period July 1993 through June 1994. The PUC approved the recovery of this amount through a surcharge to customers over a six-month period beginning in January 1995. The PUC's approval. of this surcharge and a previously approved $147.5 million surcharge for fuel cost recovery for a prior period have been appealed by certain intervenors to the district courts of Travis County, Texas. In those appeals, those parties are contending that the PUC is without authority to allow a fuel cost surcharge without a hearing and resultant findings that the costs are reasonable and necessary and that the prices charged to TU Electric by supplying affiliates are no higher than the prices charged by those affiliates to others for the same item or class of items. TU Electric is vigorously defending its position in these appeals but is unable to predict their outcome.

52

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12, RATE PROCEEDINGS - (concluded)

FuelReconciliation On December 29,1995, in accordance with the PUC rules, TU Electric filed a petition with the PUC seeking final reconciliation of all eligible fuel and purchased power expenses incurred during the reconciliation period of July 1,1992 through June 30,1995, amounting to a total of $4.7 billion. TU Electric is unable to predict the outcome of such proceeding.

In addition, and as permitted by the PUC rules, TU Electric is also seeking an accounting order from the PUC that will allow certain costs incurred, and to be incurred, to facilitate the use of coal as a supplemental fuel at its Monticello lignite-fueled generating station (Monticello) to be treated as eligible fuel costs and billed pursuant to TU Electric's fuel cost factor. By incurring these expenses, TU Electric believes that it can significantly improve the reliability of the supply of fuel to Monticello and can, at the same time, lower the fuel expense that would be incurred in the absence of these investments.

Flexible Rate initiatives TU Electric continues to offer flexible rates in over 160 cities with original regulatory jurisdiction within its service territory (including the cities of Dallas and Fort Worth), to existing non-residential retail and wholesale customers that have viable alternative sources of supply and would otherwise leave the system. TU Electric also continues to offer an economic development rider to attract new businesses and to encourage existing customers to expand their facilities as well as an environmental technology rider to encourage qualifying customers to convert to technologies that conserve energy or improve the environment. To date, TU Electric has contracted to serve 91 commercial, industrial and municipal flexibly-priced loads, eight economic development loads, and one environmental technology load under these rates. TU Electric will continue to pursue the expanded use of i

flexible rates when such rates are necessary to be price-competitive.

As a result of recent legislation, flexible retail and wholesale pricing may be approved by the PUC at levels j

lower than the utility's approved rates but higher than the utility's marginal cost. In September 1995, TU Electric j

filed an application for such a wholesale rate with the PUC for service to two rural electric cooperatives it has served since 1963. The proposed rate includes provisions for a five-year term of service, if approved by the j

PUC, the proposed rate will enable TU Electric to retain a combined load of approximately 23 megawatts. The cooperatives have informed TU Electric that they will transfer their load to alternative suppliers if the proposed i

rate is not approved. TU Electric is actively pursuing several other opportunities through flexible pricing to enhance its ability to compete for new wholesale loads, as well as to retain existing wholesale loads.

integrated Resource Plan in October 1994, TU Electric filed an application for approval by the PUC of certain aspects of its integrated Resource Plan (IRP) for the ten-year period 1995-2004. The IRP, developed as an experimental pilot project in conjunction with regulatory and customer groups, includes initiatives that address demand-side management resources, purchased power, combustion turbine resources, lignite / coal resources and renewable resources.

Hearings on this application were concluded in March 1995. In August 1995, the PUC remanded the case for development of a solicitation plan and to conform the TU Electric 1995 IRP to new state legislation that requires the PUC to adopt a state-wide integrated resource planning rule by September 1,1996. In January 1996, TU Electric filed an updated IRP with the PUC along with a proposed plan for *he solicitation of resources through a competitive bidding process. The PUC's decision on the solicitation plan is expected in July 1996.

53 i

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TEXAS UTILITIES COMPANY AND SUBSIDIARIES l

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued)

13. IMPAIRMENT OF ASSETS The Comnany and TU Electric In September 1995, the Company and TU Electric recorded the impairment of several non-performing assets in accordance with the early adoption of Statement of Financial Accounting Standards No.121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which prescribes a methodology for assessing and measuring impairments in the carrying value of certain assets.

The Comnany The total impairment of the Company's assets, includir.g the partially completed Twin Oak and Forest Grove lignite-fueled facilities of TU Electric, and Chaco Energy Company's (Chaco's) coal reserves in New Mexico, as well as several minor assets, aggregated $802 million after tax. The Company has determined that the Twin Oak and Forest Grove lignite-fueled facilities are not necessary to satisfy TU Electric's capacity requirements as currently projected due to changes in load growth patterns and availability of alternative generation. The impairment of TU Electric's lignite-fueled facilities has been measured based on management's current expectations that these assets will either be sold or constructed outside the traditional regulated utility business.

The Company has determined that the Chaco coal reserves will no longer be developed through traditional means due to ample availability of alternative fuels at favorable prices. Chaco's impairment has been measured based on a significant decrease in the market value of the coal reserves as determined by an external study performed and completed in the quarter ended September 30,1995. The external study was precipitated by a third party inquiry regarding the possible sale of the coal reserves. A variety of options are being considered with respect to the Chaco coal reserves. (See Note 14.) The impairment of these assets involved a write-down to their estimated fair values using a valuation study based on the discounted expected future cash flows from the respective assets' use. With respect to the other assets impaired, fair values were determined based on current market values of similar assets.

TU Electric The rotal impairment of TU Electric's assets, including its partially completed Twin Oak and Forest Grove lignite-fueled facilities, as well as several minor assets, aggregated $316 million after tax. TU Electric has determined that the Twin Oak and Forest Grove lignite-fueled facilities are not necessary to satisfy its capacity requirements as currently projected due to changes in load growth patterns and availability of alternative generation. Such impairment has been measured based on management's current expectations that these assets will either be sold or constructed outside the traditional regulated utility business. The impairment of these assets involved a write-down to their estimated fair values using a valuation study based on the discounted expected future cash flows from the respective assets' use. With respect to the other assets impaired, fair values were determined based on current market values of similar assets.

14. COMMITMENTS AND CONTINGENCIES Capital Expenditures The Comnany The Company's construction expenditures for utility related activities, excluding AFUDC, are presently estimated at $457 million,5445 million and $448 million for 1996,1997 and 1998, respectively. Expenditures for non-utility property are presently estimated at $60 million for 1996 $40 million for 1997 and $26 million for 1998. Expenditures for nuclear fuel are presently estimated at $55 million for 1996, $47 million for 1997 and $60 million for 1998.

54

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TEXAS UTILITIES COMPANY AND SUBSIDIARIES l

TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) l i

i

14. COMMITMENTS AND CONTINGENCIES-(continued) l TU Electric TU Electric's construction expenditures for utility related activities, excluding AFUDC, are presently estimated at $399 million, $388 million and $389 million for 1996,1997 and 1998, respectively. Expenditures for nuclear fuel are presently estimated at $55 million for 1996, $47 million for 1997, and $60 million for 1998.

i The Comnany and TU Electric

)

The re-evaluation of growth expectations, the effects of inflation, addit.onal regulatory requirements and the availability of fuel, labor, materials and capital may result in changes in estimated construction costs and dates j

of completion. Commitments in connection with the construction program are generally revocable subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties.

The Company and TU Electric cach plans to seek new investment opportunities from time to time when it concludes that such investments are consistent with its business strategies and will likely enhance the long-term returns to shareholders. The timing and amounts of any specific new business investment opportunities are presently undetermined.

Oak Knoll and Monument Draw Construction Cancellation In 1995, the Company and TU Electric announced the cancellation and abandonment of the previously planned Oak Knoll and Monument Draw generating stations which had been scheduled for service beyond the IRP's ten-year period of 1995-2004. This cancellation did not have a material effect on the Company's or TU Electric's financial position or results of operation.

Clean Air Act TU Electric The federal Clean Air Act, as amended (Clean Air Act) includes provisions which, among other things, place limits on the sulfur dioxide emissions produced by generating units. To meet these sulfur dioxide requirements, the Clean Air Act provides for the annual allocation of sulfur dioxide emission allowances to utilities. Under the Clean Air Act, utilities are permitted to transfer allowances within their own systems and to buy or sell allowances from or to other utilities. The Environmental Protection Agency grants a maximum number of allowances annually to TU Electric based on the amount of emissions from units in operation during the period 1985 through 1987. TU Electric's capital requirements have not be,en 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 1995, installation of continuous emissions monitoring systems was completed at a total cost of approximately $41 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

'Ihe Comnant and TU Electric The System Companies have entered into purchased power contracts to purchase portions of the generating output of certain qualifying cogenerators and qualifying small power producers through the year 2005. These contracts provide for capacity payments subject to a facility meeting certain operating standards and energy payments based on the actual power taken under the contracts. The cost of these and other purchased power contracts is recovered currently through base rates, power cost and fuel recovery factors applied to customer billings Capacity payments under these contracts for the years ended December 31,1995,1994 and 1993 were 55

i l

TEXAS IIITLITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

14. COMMITMENTS AND CONTINGENCIES - (continued)

$229,340,000, $236,991,000 and $251,610,000, respectively, for the Company, and $223,910,000, $231,081,000

)

and $249,110,000, respectively, for TU Electric.

Assuming operating standards are achieved, future capacity payments under the agreements are estimated as.

follows:

l The Company TU Electric Years Thousands of Dollars 19%.

$ 232,915

$ 228,337 1997.

240,812 237.014 l

1998.

246,536 244,7 %

1999.

199, % 3 199, % 3 2000.

134,784 134,784 j

Thereafter.

319.895 319.895

)

Totalcapacity payments,

$1,374.905

$1.364,789 Leases The Comnany and TU Electric The System Companies have entered into operating leases covering various facilities and properties including I

combustion turbines, transportation, mining and data processing equipment, and office space. Lease costs charged to operation expense for the years ended December 31,1995,1994 and 1993 were $141,775,000, $140,370,000 and $138,184,000, respectively, for the Company, and $60,156,000, $62,704,000 and $66,219,000, respectively, for TU Electric.

Future minimum lease commitments under such operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31,1995, were as follows:

The Company TU Electric Years Thousands of Dollars 19%.

$ 73,980

$ 29,986 1997.

67,101 30,519 1998.

54,700 29.544 1999.

49,933 30.202 2000.

50,859 30,606 Thereafter.

650.790 511.089 j

Total mmimum lease commitments

$947.363

$661.946 Cooling Water Contracts TU Electric TU Electric has entered into contracts with public agencies to purchase cooling water for use in the generation of electric energy. In connection with certain contracts, TU Electric has agreed, in effect, to guarantee the principal, $34,575,000 at December 31,1995, and interest on bonds issued to finance the reservoirs from which the water is supplied. The bonds mature at various dates through 2011 and have interest rates ranging from 5-1/2 to 7 %. TU Electric is required to make periodic payments equal to such principal and interest, including amounts assumed by a third pasty and reimbursed to TU Electric, for the years 1996 through 2000 as follows:

$4,430,000 for 1996: $4,435,000 for 1997: $4,435,000 for 1998; $4,435,000 for 1999 and $4,419,000 for 2000.

Payments made by TU Electric, net of amounts assumed by a third party under such contracts, for 1995,1994 and 56

i TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS III'ILITIES ELECTRIC COMPANY AND SUBSIDIARIES l

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Contine. d)

14. COktMITMENTS AND CONTINGENCIES-(continued) 1993 were $3,628,000, $3,615,000 and $2,954,000, respectively. In addition, TU Electric is obligated to pay certain variable costs of operating and maintaining the reservoirs. TU Electric has ashigned to a municipality all contract rights and obligations of TU Electric in connection with $79,865,000 remaining principal amount of l

bonds at December 31,1995, issued for similar purposes which had previously been guaranteed by TU Electric.

TU Electric is, however, contingently liable in the unlikely event of default by the municipality.

l l

Chaco Coal Properties The Comnany 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. In addition, Chaco has under lease with the federal government certain coal reserves. 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 present ample availability of western coal at favorable prices from other mines, Chaco has delayed plans to commence mining operations, and accordingly, is reassessing its alternatives with respect to its coal properties, including seeking other purchasers thereof. (See Note 13.)

Nuclear insurance TU Electric With regard to liability coverage, the Price-Anderson Act (Act) provides financial protection for the public in the event of a significant nuclear power plant incident. The Act sets the statutory limit of public liability for a single nuclear incident currently at $8.9 billion and requires nuclear power plant operators to provide financial protection for this amount. As required, TU Electric provides this financial protection for a nuclear incident at Comanche Peak resulting in public bodily injury and property damage through a combination of private insurance and industry-wide retrospective payment plans. As the first layer of financial protection, TU Electric has purchased $200 million of liability insurance from American Nuclear Insurers (ANI), which provides such insurance on behalf of two major stock and mutual insurance pools, Nuclear Energy Liability Insurance Association and Mutual Atomic Energy Liability Underwriters. The second layer of financial protection is provided under an industry-wide retrospective payment program called Secondary Financial Protection (SFP).

Under the SFP, each operating licensed reactor in the United States is subject to an assessment of up to $79.275 million, subject to increases for inflation every five years, in the event of a nuclear incident at any nuclear plant in the United States. Assessments are limited to $10 million per operating licensed reactor per year per incident.

All assessments under the SFP are subject to a 3% insurance premium tax which is not included in the amounts above.

With respect to nuclear decontamination and property damage insurance, Nuclear Regulatory Commission (NRC) regulations require that nuclear plant license-holders maintain not less than $1.06 billion of such insurance and require the proceeds thereof to be used to place a plant in a safe and stable condition, to decontaminate it pursuant to a plan submitted to and approved by the NRC before the proceeds can be used for plant repair or restoration or to provide for premature decommissioning. TU Electric maintains nuclear decontamination and property damage insurance for Comanche Peak in the amount of $3.85 billion, above which TU Electric is self-insured. The primary layer of coverage of $500 million is provided by Nuclear Mutual Limited (NML), a nuclear electric utility industry mutual insurance company. The remaining coverage includes premature decommissioning coverage and is provided by ANI in the amount of $1.1 billion and Nuclear Electric insurance Limited (NEIL),

another nuclear electric utility industry mutual insurance company, in the amount of $2.25 billion. TU Electric is subject to a maximum annual assessment from NML of $14 million and NEIL of $27 million in the event NML's 57

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

?

l

14. COMMITMENTS AND CONTINGENCIES - (concluded) and/or NEIL's losses under this type of insurance for major incidents at nuclear plants participating in these l

programs exceed the respective mutual's accumulated funds and reinsurance.

l TU Electric maintains Extra Expense Insurance through NEIL to cover the additional costs of obtaining replacement power from another source if one or both of the units at Comanche Peak are out of service for more than twenty-one weeks as a result of covered direct physical damage. The coverage provides for weekly payments of $3.5 million for the first and $2.8 million for the second and third fifty-two week periods of each outage, respectively, after the initial twenty-one week period. The total maximum coverage is $473 million per unit. The coverage amounts applicable to each unit will be reduced to 80% if both units are out of service at the same time as a result of the same accident. Under this coverage, TU Electric is subject to a maximum assessment of $9 millioa per year.

Gas Purchase Contracts i

The Comnany i

Fuel Company buys gas under long-term intrastate contracts in order to assure reliable supply to its customers.

Many of these contracts require minimum purchases ("take-or-pay") of gas. Based on Fuel Company's estimated gas demand, which assumes normal weather conditions, requisite gas purchases are expected to substantially satisfy purchase obligations for the year 1996 and thereafter.

Nuclear Decommissioning and Disposal of Spent Fuel TU Electric TU Electric has established a reserve, charged to depreciation expense and included in accumulated depreciation, for the decommissioning of Comanche Peak, whereby decommissioning costs are being recovered from customers over the life of the plant and deposited in external trust funds (included in other intestments).

At December 31,1995, such reserve totaled $76,363,000 which includes an accrual of $18,179,000 for the year ended December 31,1995. As of December 31,1995, the market value of deposits in the external trust for decommissioning of Comanche Peak was $88,094,000. 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 2033 for Comanche Peak Unit 1, and Unit 2 and common facilities, respectively. TU Electric is recovering such costs based upon the 1992 study through the rates placed in effect under Docket 11735 (see Note 12).

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 The Comnany and TU Electric In addition to the above, the Company and TU Electric are involved in various legal and administrative proceedings which, in the opinion of each, should not have a material effect upon its f' ancial position or results m

ofoperation.

58

i l

1 i'

TEXAS UTILITIES COMPANY AND SUBSIDIARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES l

NOTES TO CONSOLIDATED FINANCI AL STATEMENTS - (Continued) l 4

15. FAIR VALUE OF FINANCIAL INSTRUMENTS 1

The Comnany and TU Electric 1

The following information represents the Company's and TU Electric's respective estimates of the amount at which their financial instruments could be exchanged in a current transaction between willing parties, other than in a forced sale.

The amounts reflected in the 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 1

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 oflong-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.

The carrying amount of other financial liabilities classified as current on the consolidated balance sheets, such i

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 31,1995 and 1994 of the bonds for which TU Electric is contingently liable is approximately $114,000,000 and $121,000,000, respectively. The fair value of the bonds, approximately

$121,000,000 and $115,000,000 for December 31,1995 and 1994, 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 Comnany Common stock - net has been reduced by the note receivable from the trustee of the leveraged employee stock ownership provision of the Thrift Plan. The fair values of such note, long-term debt and preferred stock subject to mandatory redemption are estimated at the lesser of the Company's call price or the present value of future cash flows discounted at rates consistent with comparable maturities adjusted for credit risk.

The estimated fair value of the System Companies'significant financial instruments are as follows:

December 31.1995 December 31,1994 Carrying Fair Carrying Fair Amount Value Amount Value Thousands of Dollars long-term debt.

59.174,575 $9.875.881

$7,888.413 $7,688.189 TU Electric obhgated. mandatority redeemable, preferred securities of trusts.

381.476 405,729 Preferred stock subject to mandatory redemption 263,196 280,106 387.482 377,621 LESOP note receivable.

250,000 280.713 250,000 235.392 Other investments.

I18.526 134.949 77,443 77,522 59

.=. -_

TEXAS UTILITIES COMPANY AND SUBSIDI ARIES TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCI AL STATEMENTS-(Concluded) l l

(

15. FAIR VALUE OF FINANCIAL INSTRUMENTS -(concluded)

TU Electric The estimated fair value of TU Electric's significant financialinstruments are as follows:

December 31,1995 Decem ber 31,1994 Carrying Fair Carrying Fair Amount Value Amount Value Thousands of Dollars Long term debt.,.

57,212.070 $7.836,861

$7,220,641 $7,030.321 TU Electric obligated, mandatorily redeemable, preferred securities of trusts,

381.476 405,729 Preferred stock subject to mandatory redemption 263,196 280,106 387,482 377,621 Other investments.

103,888 118,415 66,702 66,798

16. SUPPLEMENTARY FINANCIALINFORMATION (Unaudited)

The Comnany and TU Electric in the opinion of the Company and TU Electric, respectively, the information below includes all adjustments (constituting only normal recurring accruals) necessary to a fair statement of such amounts, Quarterly results are not necessarily indicative of expectations for a full year's operations because of seasonal and other factors, including rate changes, variations in maintenance and other operating expense patterns, the impact of the change in AFUDC accruals (see Note 1) and the charges for regulatory disallowances. Certain quarterly information has been reclassified to conform to the current year presentation. For additional information regarding the charges for regulatory disallowances, see Note 12.

The Comnany Earnings Per Consolidated Share of Operating Revenues Operating income Net Income Common Stock

• Quarter Ended 1995 1994 1995 1994 1995 1994 1995 1994 Thousands of Dollars (except per share amounts)

March 31

$1.244.265

$1,304.098 5 311.344 $ 313.071 5 75,4I I

$ 66,746

$0 33

$0.30 June 30.

1.353,998 1.436.738 422.305 427,120 148,432 146.227 0.66 0.65 September 30,

1.775.669 1,702.019 742,699 652.033 (441,716) 294,250 (1.96) 1.30 December 31 1.264.756 1.220.688 311.279 256.332 79.228 35,576 0.35 0.16

$5.638.688

$5.663.543 $1.787.627 $1.648.556 $(138.645) 5542.799

' The sum of the quarters may not equal annual earnings per share due to rounding.

TU Electric Consolidated Operating Revenues Operating income Net lucome Quarter Ended 1995 1994 1995 I'/94 1995 1994 Thousands of dollars March 31

, $1,233,772

$1.290.615 5 255.391 5 262.118

$101.758 $ 98.761 June 30.

1,341,245 1,417,175 328.621 335,583 174.219 174.352 September 30.

1.761.378 1,687.405 534,167 478.538 68,172 321.146 December 31 1.224.067 1.217.980 252.187 216.198 110.283 63.933

$5.560.462

$5.613.175

$1.370.366

$ 1.292.437

$454.432 $658.192 60

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 irregulatities 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 31,1995, the Company's system of internal control was adequate to accomplish the objectives discussed herein.

The Board of Directors of the Company addresses its oversight responsibility for the consolidated financial statements through its Audit Committee, which is composed of directors who are not employees of the Company.

The Audit Committee meets regularly with the Company's management, internal auditors and independent certified public accountants to review matters relating to financial reporting, auditing and internal control. To ensure auditor independence, both the internal auditors and independent certified public accountants have full and free access to the Audit Committee.

The independent certified public accounting firm of Deloitte & Touche LLP is engaged to audit, in accordance with generally accepted auditing standards, the consolidated financial statements of the Company and its subsidiaries and to issue their report thereon.

/s/ J. S. FARRINGTON J. S. Farrington, Chairman of the Board

/s/ ERLE NYE Erle Nye, President and Chief Executive

/s/ PETER B. TINKH AM Peter B. Tinkham, Treasurer and Assistant Secretary and Principal Financial Officer

/s/ C ATHRYN C. HULEN Cathryn C. Hulen, Controller and Principal Accounting Officer 61

-..~

r TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES STATEMENT OF RESPONSIBILITY The management of Texas Utilities Electric Company is responsible for the preparation, integrity and i

l.

objectivity of the financial statements of TU Electric and its subsidiaries and other information included in this report. The financial statements have been prepared in conformity with generally accepted accounting principles.

As appropriate, the statements include amounts based on informed estimates and judgments of management.-

t The management of TU Electric has established and maintains a system of internal control designed to provide reasonable assurance, on a cost-effective basis, that assets are safeguarded, transactions are executed in accordance with management's authorization and financial records are reliable for preparing financial statements.

Management believes that the system of control provides reasonable a'ssurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. Key elements in this system include the effective communication of established written policies and procedures, selection and training of qualified personnel and organizational arrangements that provide an appropriate division of responsibility. This system of control is augmented by an ongoing internal audit program designed to evaluate its adequacy and effectiveness. Management considers the recommendations of the internal auditors and independent certified public accountants concerning TU Electric's system ofinternal control and takes appropriate actions which are cost-effective in the circumstances. Management believes that, as of December 31,1995, TU Electric's system of internal control was adequate to accomplish the objectives discussed herein.

The independent certified public accounting firm of Deloitte & Touche LLP is engaged to audit, in accordance with generally accepted auditing standards, the financial statements of TU Electric and to issue their report thereon.

/s/ ERLE NYE Erle Nye, Chairman of the Board and Chief Executive

/s/ ROBERT S. SHAPARD Robert S. Shapard, Treasurer and Assistant Secretary and Principal Financial Officer

/s/ CATHRYN C. HULEN Cathryn C. Hulen, Controller and Principal Accounting Officer 62

l i

l l

l INDEPENDENT AUDITORS' REPORT l

We have audited the accompanying consolidated balance sheets of Texas Utilities Company and subsidiaries as of December 31,1995 and 1994, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31,1995. 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.

l 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.

)

i in our opinion, such consolidated financial statements present fairly,'in all material respects. the financial position of Texas Utilities Company and subsidiaries at December 31,1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31.1995, 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 Note 13 to the consolidated financial statements, in 1995, the Company changed its method of accounting for the impairment oflong-lived assets and for long-lived assets to be disposed of to conform with Statement of Financial Accounting Standards No.121.

1 l

DELOITTE & TOUCHE LLP Dallas. Texas February 29.1996 l

63

=

1 d

4

' INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Texas Utilities Electric Company and subsidiaries (TU Electric) as of December 31,1995 and 1994, and the related consolidated statements ofincome. retained earnings and cash flows for each of the three years in the period ended December 31,1995. Our audits also included the financial statement schedule I

listed in item 14.(a)4. These financial statements and the financial statement schedule are the responsibility of TU Electric'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 accord,ance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TU Electric at December 31,1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 Note 13 to the consolidated f'mancial statements,in 1995, TU Electric changed its method of accounting for the impairment oflong-lived assets and for long-lived assets to be disposed of to conform with Statement of Financial Accounting Standards No.121.

DELOITTE & TOUCHE LLP Dallas. Texas February 29.1996 64

Ittm 9.

CliANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCisOSURE The Comnany and TU Electric

None, i

j PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF EACH REGISTRANT The Comoggy Information with respect to this item is found under the heading Election of Directors in the definitive proxy statement to be filed by the Company with the Commission on or about April 1,1996.

TU Elecidc Identification of directors, business experience and other directorships:

Other Positions and Offices Present Principal Occupation Presently lleid With TU or Employment and Principal Electrie (Current Term Empires Date First Elected Business (preceding 5 yrs,),

Name of Director g

May 19,1996) as Director Other Directorships T. L !!aker 50 President, Electric Service February 20,1987 Executive Vice President of TU Division Electric; prior thereto, Senior Vice President ofTU Electric.

J. S. Farrington 61 None September 17,1982 Chairman of the Board and prior thereto, Chief Executive of the Company, other directorships: the Company.

11. Jarrell Gibbs 58 President May 24,1989 Vice President and Principal Financial Officer of the Company and President of TU Services; and prior thereto, Executive Vice President of TU Electric; prior thereto, Executive Vice President of Texas Electric Service Division; prior thereto, Vice President of TU Electric.

Michael J. McNally 41 President, Transmission February 16,1996 Executive Vice President of TU Electric; Division prior thereto, Principal of Enron Development Corporation and prior thereto, Managing Director ofindustrial Services (Enron Capital and Trade Resources); President of flouston Pipe Line; President of Enron Gas Liquids, Inc. Vice President of Marketing for Houston Pipe Line Company.

Erle Nye 58 Chairman and September 17,1982 President and Chief Executive of the ChiefExecutive Company; other directorships: the Company.

W. M. Taylor 53 President, Generation May 20,1986 Executive Vice President of TU Division Electric; prior thereto, President of Dallas Power Division.

E. L. Watson 61 Vice Chairman February 20,1987 Executive Vice President of TU Electric; prior thereto, Senior Vice President of TU Electric.

Directors of TU Electric receive no compensation in their capacity as directors of TU Electric.

65

l l

item 10. DIRECTORS AND EXECUTIVE OFFICERS OF EACH REGISTRANT-(Concluded)

Identification of executive officers and business experience:

l Positions and Offices Presently Held (Current Term Espires May 19,19%)

Date First Elected Business Experience Name of Officer A

to Present Omces (Preceding Five Years) y Eric Nye.

58 Chairman and February 20,1987 Same and President and Chief ChiefExecutive Executive of the Company.

H. Jarrell Gibbs 58 President February l6,1996 Vice President and Principal Financial Ofiicer of the Company and President of TU Services; and prior thereto. Executive Vice President of j

TU Electric; prior thereto. Executive i

Vice President of Texas Electric l

Service Division; prior thereto, Vice President ofTU Electric.

T. L. Baker 50 President. Electric Service February 16,1996 Executive Vice President of TU Division Electrie; prior thereto, Senior Vice President of TU Electric.

Michael) McNally 41 President, Transmission February l6,1996 Executive Vice President of TU Division Electric; prior thereto, Principal of Enron Development Corporation and prior thereto, Managing Director of Industrial Services (Enron Capital and Trade Resources); President of Houston Pipe Line; President of Enron Gas Liquids, Inc.; and Vice President of Marketing for Houston 1

Pipe Line Company.

W. M. Taylor 53 President, Generation Division February 16,1996 Executive Vice President - of TU Electric; prior thereto, President of Dallas Power Division.

E. L. Watson 61 Vice Chairman November 1,1992 Executive Vice President of TU Electric; prior thereto, Senior Vice President ofTU Electric.

There is no family relationship betu ny of the above named executive officers.

66

l Item 11. EXECUTIVE COMPENSATION The Comnany Information with respect to this item is found under the heading Executive Compensation of the Company in the definitive proxy statement to be filed by the Company with the Commission on or about April 1,1996.

Til Electric TU Electric and its affiliates have paid or awarded compensation during the last three calendar years to the following executive officers for services in all capacities:

SUMMARY

COMPENSATION TABLE Annual Comoensation 1.one Term Co-,- n (3)

Awards Pavouts Narne and Other Annual Restricted All Other Principal Compensation Stock LTIP Compensa-Position Xsat Salan ($1 nonusttV2)

A Ag.;s ?

Pavouts (1) tion (1) (4)

Erle Nye, 1995 679,167 140,000 266,000 25.602 87,810 Chairman of the 1994 6l 8,750 0

217.000 0

67,275 lloard and Chief 1993 554,167 100,000 203,500 61,938 63,907 Executive of TU Electric (1)

II. Jarrell Gibbs, 1995 282,917 67,200 120,300 9,102 38.702 President of 1994 245,167 40.000 97,880 0

29.017 TtJ Electric 1993 203,083 45,000 58,880 15,989 25.070 W. M. Taylor, 1995 282,917 64,700 117,800 10,809 38,278 Preside nt, Generation 1994 249,333 40.000 97,880 0

30,333 Division -

1993 217,250 65,000 60,680 28,815 21.296 TU Electric T. L. Baker, 1995 261,667 44,900 93.500 11.947 34,465 President, Electric 1994 245,833 25,000 80,000 0

28.183 Service Division -

1993 237,083 25,000 58,200 29.720 26,042 TU Electric E. L. Watson, 1995 243,000 51.380 95.120 11,006 35.746 Vice Chairman TU 1994 238.417 25.000 68.740 0

29.242 Electric 1993 227,000 27.000 56,760 29,682 28.944 (1)

Amounts reported in the table for Mr. 'Nye consist entirely of compensation paid by the Company.

(2)

Amounts reported as Bonus in the Summary Compensation Table are attributable, beginning in 1995, to the named officer's participation in the Annual Incentive Plan (AIP). Officers of the Company and its subsidiaries with a title of Vice President or above are eligible to participate in the AIP, Under the terms of the AIP, target incentive awards ranging from 35% to 50% of base salary, and a maximum award of 100% of base salary, are established. The percentage of the target or the maximum actually awarded, if any, is dependent upon the attainment of per share net income goals established in advance by the Organization and Compensation Committee (Committee) as well as the Committee's evaluation of the participant's and the Company's performance. One-half of each such award is paid in cash and is reflected as Bonus in the Summary Compensation Table. Payment of the remainder of the award is deferred under the Deferred and incentive Compensation Plan (DICP) discussed below.

(3)

Amounts reported as Long-Term Compensation are attributable to the named officer's participation in the DICP. Officers of the Company and its subsidiaries with the title of Vice President or above are eligible to participate in the DICP. Participants in the DICP may defer a percentage of their base salary not to exceed 67

itsm II. EXECUTIVE COMPENSATION-(Continued) a maximum percentage determined by the Committee for each Plan year and in any event not to exceed 15% '

of the panicipant's base salary. The Company makes a matching awrrd (Matching Award) equal to 150% of the participant's deferred salary. In addition, the deferred portion of any AIP award (Incentive Award) is invested under the DICP. The Matching Awards and incentive Awards are subject to forfeiture under certain circumstances. Under the DICP, a trustee purchases Company common stock with an amount of cash equal to each participant's deferred salary, Matching Award and incentive Award and accounts are established for each panicipant containing performance units (Units) equal to such number of common shares. DICP investments, including reinvested dividends, are restricted to Company common stock. On the expiration of the applicable maturity period (three years for the incentive Awards and five years for deferred salary and Matching Awards) the values of the participant's accounts are paid in cash based upon the then current value of the Units; provided, however, that in no event will a participant's account be deemed to have a cash value which is less than the sum of such participant's deferred salary together with a 6% per annum (compounded annually) interest equivalent thereon. The maturity period is waived if the participant dies or becomes totally i

and permanently disabled and may be extended under certain circumstances.

Salary deferred under the DICP is included in amounts reponed as Salary in the Summary Compensation Table. Amounts shown in the table below represent the number of shares purchased under the DICP with such deferred salaries for 1995:

l Long-Term incentive Plan - Awards in Last Fiscal Year Performance or Other Number of Period Until I

Shares, Units or -

Maturation Namt Other Rights (#)

or Pavout i

Erle Nye 2,447 5 Years i

H. Jarrell Gibbs 1,031 5 Years W. M. Taylor 1,031 5 Years T. L. Baker 944 5 Years E. L. Watson 849 5 Years j

Incentive Awards and Matching Awards that have been made under the DICP are included under Restricted Stock Awards in the Summary Compensation Table. As a result of these awards, undistributed Incentive Awards and Matching Awards made under the Plan in prior years, and dividends reinvested thereon, at December 31,1995 the number and market value of Units (each of which is equal to one share of i

common stock) held in the DICP accounts for Messrs. Nye, Gibbs, Taylor, Baker and Watson were 24,006 1

($984,260),9,662 ($396,149),9,752 ($399,861), 8,500 ($348,509) and 8,039 ($329,603), respectively.

Amounts reported as LTIP Payouts in the Summary Compensation Table represent payouts maturing during such years of earnings on salary deferred under the DICP in prior years.

(4)

Amounts reported as All Other Compensation are attributable to the named officer's participation in certain plans described hereinafter in this footnote:

Under the Employees' Thrift Plan of the Texas Utilities Company System (Thrift Plan) all employees with at least six months of eligible service with the Company or any ofits subsidiaries may invest up to 16%

of their regular salary or wages in common stock of the Company, or in a variety of selected mutual funds.

Under the Thrift Plan, the Company matches a portion of an employee's savings in an amount equal to 40%,

50% or 60% (depending on the employee's length of service) of the first 6% of such employee's savings. All matching amounts are invested in common stock of the Company. The amounts reponed under All Other Compensation in the Summary Compensation Table includes these matching amounts which, for Messrs. Nye, Gibbs, Taylor, Baker and Watson totaled $5,400, $4,500, $5,400, $3,686 and $5,400, respectively, during 1995.

68

Item 11. EXECUTIVE COMPENSATION-(Cc tined)

The Company has a Salary Deferral Program (Program) under which each employee of the Company and its subsidiaries whose annual salary is $80,000 ($89,510 for the Program Year beginning April 1995) or more may elect to defer a percentage of annual salary for a period of seven years, a period ending with the retirement of such employee, or for a combination thereof, Such deferrals may not exceed in the aggregate 10% of such annual salary. Salary deferred under the program is included in amounts reported under Salary in the Summary Compensation Table. The Company makes a matching award, subject to forfeiture under certain circumstances, equal to 100% of the deferred salary. A trustee will' distribute at the end of the applicable maturity period cash equal to the greater of the actual camings of Program assets, or the average yield during the applicable maturity period of U.S. Treasury Notes with a maturity of ten years. The distribution of the amounts due under the Program will be in a lump sum if the maturity period is seven years or, if the retirement option is elected, in twenty annual installments. The Company is financing the retirement portion of the Program through the purchase of corporate-owned life insurance on the lives of the participants.

The proceeds from such insurance are expected to allow the Company to fully recover the cost of the retirement option. During 1995, matching awards, which are included under All Other Compensation in the Summary Compensation Table, were made for Messrs. Nye, Gibbs, Taylor, Baker and Watson in the amount of $67,917, $28,292, $28,292, $26,167 and $24,300, respectively, Under the Split-Dollar Life Insurance Program (Insurance Program) of the Texas Utilities Company System, split-dollar life insurance policies are purchased for officers of the Company and its subsidiaries with a title of Vice President or above, with a death benefit equal to four times their annual compensation. The Company pays the premiums for these policies and has received a collateral assignment of the policies equal in value to the sum of all ofits insurance premium payments. Although the Insurance Program is terminable at any time, it is designed so that ifit is continued, the Company will fully recover all of the insurance premium payments it has made either upon the death of the participant or, if the assumptions made as to policy yield are realized, upon the later of fifteen years of participation or the participant's attainment of age sixty-five. During 1995, the economic benefit derived by Messrs. Nye, Gibbs, Taylor, Baker and Watson from the term insurance coverage provided and the foregone interest on the remainder of the insurance premiums paid by the Company amounted to S14,493, $5,910, $4,586, $4,612 and $6,046.

PENSION PLAN TABLE Years of Service Remuneration 2Q M

JQ H

fQ 5100.000 5 29,688 5 37.110

$ 44.532 5 51.954 5 59,376 200.000 59.688 74.610 89.532 104.454 119,376 400,000

!!9.688 149.610 179.532 209,454 239.376 800.000 239.688 299.610 359.532 419.454 479.376 1.000.000 299.688 374.610 449,532 524.454 599.376 1.400.000 419.688 524.610 629.532 734,454 839.376 The Company and its subsidiaries maintain retirement plans (Plans) which are qualified under applicable provisions of the Internal Revenue Code of 1986, as amended (Code). Annual retirement benefits are computed as follows: for each year of accredited service up to a total of 40 years of service,1.3% of the first $7,800, plus 1.5% of the excess over $7,800 of the participant's average annual earnings during his or her three years of highest earnings.

Amounts reported under Salary for the named officers in the Summary Compensation Table approximate earnings as defined by the Plans. Benefits paid under the Plans are not subject to any reduction for Social Security payments but are limited by provisions of the Code. The Company maintains a Supplemental Retirement Plan (Supplemental Plan) which provides for the payment of retirement benefits which would otherwise be limited by the Code or by the definition of earnings in the Plans. Under the Supplemental Plan, retirement benefits are calculated in accordance with the same formula used under the Plans, except that camings also include AIP awards. One-half of the AIP award is reported under Bonus for the named officers in the Sammary Compensation Table. As of February 29,1996, years of accredited service under the plans for Messrs. Nye, Gibbs, Taylor, Baker r.nd Watson were 33,33,28,25 and 36, respectively.

The above table illustrates the total annual benefit payable at retirement under the Plans and Supplemental Plan prior l

to any reduction for a contingent beneficiary option which may be selected by the participant.

l 69 l

l Item 11. EXECUTIVE COMPENSATION-(Continued)

The following report and performance graph are presented herein for informational purposes only. This information is not required to be included herein and shall not be deemed to form a part of this report or be " filed" with the Securities and Exchange Commission. The repon set forth hereinafter is the repon of the Organization and Compensation Committee of the Board of Directors of the Company and is illustrative of the methodology utilized in establishing the compensation of executive officers of the Company and TU Electric.

ORGANIZA TION AND CO3IPENSA TION COSI3IITTEE REPOR T ON EXECUTIVE COhfPENSATION The Organi:ation and Compensation Committee ofthe Board ofDirectors is responsiblefor reviewing and establishing the compensation of the executive oficers of the Company. The Committee consists of all of the nonemployee directors of the Company and is chaired by James A. Aliddleton. The Committee has directed the preparation ofthis report and has approved its contents andsubmission to the shareholders.

As a matter ofpolicy, the Committee believes that levels ofexecutive compensation should be based upon an evaluation of the performance of the Company and its officers generally, as well as in comparison to persons with comparable responsibilities in similar business enterprises. Compensation plans should align executive compensation with returns to shareholders with due consideration accorded to balancing both long-term and short-term objectives.

The Committee has determined that, as a matter ofpolicy to be implemented over time, the base salaries of the oficers will be established at the median, or 50th percentile, ofthe top ten electric utilities and that opportunitiesfor total direct compensation to reach the 75th percentile, or above, ofsuch utilities will be provided through performance-based compensation plans. Such compensation principles andpractices have allowed, and should continue to allow, the Company to attract, retain and motivate its key executives.

As previously reported, a nationally recogni:edcompensation comultant was retained, in late 1994, to conduct a comprehensive review ofthe compensation and benefits provided by the Company to its oficers. The consultant's report included recommended revisions to the Company 's compensation and benefits program principally so as to place a greater emphasis on performance-based incentive compensation and to provide, thereby,for an appropriate and competitive balance between base salaries, annual incentives and long-term incentives.

The consultant's recommendations, including the Annual Incentive Plan (referred to as the AIP and described infootnote 2 to the Summary Compensation Tabic) as well as improvements in hfe insurance coverage and retirement benefits, have generally been implemented The compensation of the oficers of the Company consists principally of base salaries, the opportunin to participate in the Deferred and incentive Compensation Plan (referred to as the DICP and described mfootnote 3 to the Summary Compensation Table) and the opportunity to earn an incentive award under the AIP. Benefits provided under the DICP and the AIP represent a substantialportion ofoficers ' compensation; and the value offuture payments under the DICP, as well as the value ofthe deferredportion ofany award under the AIP, is directly related to thefuture performance ofthe Company 's common stock. It is anticipated that performance-based incentive awards under the AIP will, inji ture years, constitute an increasing percentage ofofficers ' total compensation.

The AIP, as approved by shareholders at the annual meeting in Afar I 995, is administered by the Committee and provides an objectiveframework within which Company and individual performance can be evaluated by the Committee. Dependmg on the results ofsuch performance evaluatiom, and the attainment ofthe per share net income goals established in advance, the Committee mayprovide annualincentive compensation awards to eligible oficers.

The evaluation ofeach individualparticipant 's performance is based upon the attainment ofindividual and business unit objectives. The Company's performance is evaluated, compared to the ten largest electric utihties and/or the electric utihn' industry, based upon its total return to shareholders and return on invested capital as well as other measures relating to competitiveness, service quahn" and employee safen'. The combination ofindividual and Company performance results, together with the Committee's evaluation of the competitive level of compensation which is appropriatefor such results, determines the amount, ifany, actually awarded.

70

Item 11. EXECUTIVE COMPENSATION-(Continued) l in establishing levels ofexecutive compensation at its Afay 1995 meeting, the Committee reviewed various

.. performance and compensation data includmg the performance measures under the AIP and the report ofits j

compensation consultant. Information was also gatheredfrom industry sources and other published and private materials which provided a basis for comparing the largest electric and gas utilities and other survey groups representing a large variety ofbusiness organi:ations. Includedin the data considered was that, in i994 TU Electric, the Company s principalsubsidiary, was the largest electric utility in the UnitedStates as measured by megawatt hour sales and, compared to other electric utilities in the UnitedStates, was sixth in electric revenues, sixth in total assets.

thirdin net generating capabihty, ninth in number ofcustomers andpjieenth in number ofemployees. This information provided a basisfor comparing the Company with the largest electric and gas utilities, including companies generally comparable in si:e represented in the Afoody 's 24 utilities whose comparative investment return is depicted in the graph herein. Compensation amounts were established by the Committee based upon its subjective evaluation ofCompany and individualperformance at levels consistent with the Committee 's policy relating to total direct compensation.

In Afav 1995, Afr. J.S Far, ston,formerly Chairman ofthe Boardand ChiefExecutive, was elected Chairman i

of the Board and Afr. Nye, formerly President, was elected President and ChiefExecutive. In connection with this chang:, Afr. Farrington 's compensation was providedfor pursuant to a management transition agreement described infootnote 4 [to the Summary Compensation Table setforth in the Company's 1996 proxy statement). Based upon the Committee 's subjective evaluation ofthe information described herein, the Committee also provided Afr. Farrington with an ALP of$330,000 compared to the prior year 's incentive award under the DICP of$125,000. The Committee established Afr. Nye 's base salary as ChiefExecutive at the annual rate of$700,000, representing a $50,000, or 7. 7%,

increase over the amount establishedfor Afr. Nye in Afay 1994. The Committee also provided Afr. Nye with an AIP award of $280,000 compared to the prior year *: incentive award under the DICP of $100,000. This amount of compensation was established in recognition of Afr. Nye's election as Chief Executnve and was based upon the Committee 's subjective evaluation ofthe information described herein.

}

In discharging its responsibilities with respect to establishing executive compensation, the Committee normally considers such matters at its Afay meeting held in conjunction with the Annual Afeeling ofShareholders. Ahhough Company management may be present during Committee discussions ofoficers ' compensation, Committee decisions with respect to the compensation ofthe President and ChiefExecutive and the Chairman ofthe Board are reached m j

private session without thepresence ofany member ofCompany management.

Section 162(m) of the Code limits the deductibility of compensation which a publicly traded corporation provides to its most highly compensated oficers. As a general policy, the Company does not intend to provide compensation which is not deductibleforfederalincome taxpurposes. Awards under the AIP in i996 and subsequent years are expected to befully deductible, and the DICP and the Salary Deferral Program have been amended to require the deferral ofdistributions ofamounts earnedin 1995 andsubsequentyears until the time when such amounts would be deductible. Awards provided under the AIP in 1995 and distributions under the DICP and the Salary Deferral Program which wre earned in plan years prior to 1995, may not befully deductiblc but such amoums are not expected to be material.

Shareholder comments to the Committee are welcomed and should be addressed to the Corporate Secretary ofthe Company at the Company's ofices.

Organi:ation and Compensation Committee James A. Afiddleton, Chair Kerney Laday Jack li'. Evans AfargaretN. Afaxey Bayard11. Friedman Charles R. Perry li'illiam Af. Griffin flerbert II. Richardson 71

i Item 11. EXECUTIVE COMPENSATION-(Concluded)

PERFORMANCE GRAPH The following graph compares the perfonnance of the Company's common stock to the S&P 500 Index and to the Moody's 24 Utilities for the last five years. The graph assumes the investment of $100 at December 31,1990 and that all dividends were reinvested. The amount of the investment at the end of each year is shown in the graph and in the table which follows.

Cumulative Total Returns for the Five Years Ended 12/31/95 225 A

/

200 f

/

/

/

175 f

gg)

L

/

n

/

gg i

4------t

= 1*o l Q

,,,,, " " " ~

'2s t

p y

100-75 1990 1991 1992 1993 1994 1995 Legend Texas Utilities S&P 500 Index Moody's 24 Utilities l

4 l

1 1990 1991 1992 1993 1994 1995 Texas Utilities 100 123 135 147 119 166 S&P 500 lndex 100 131 140 154 156 216 Moody's 24 Utilities 100 129 135 149 126 166 72

4 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Comnany Information with respect to this item is found under the headings Beneficial Ownership of Common Stock of the Company in the definitive proxy statement to be filed by the Company with the Commission on or about April 1,1996. Additional information with respect to Executive Officers of the Registrant is found at the end of Part I.

TU Electric Security ownership of certain beneficial owners at February 29,1996:

Amount and Nature a

Name and Address of Beneficial 1

Title of Class of Beneficial Owner Ownershin Percent of Class Common Stock.

Texas Utilities Company 156.800.000 shares 100.0 %

witinout par value.

Energy Plaza,1601 Bryan Street sole voting and of TU Electric Dallas. Texas 75201 investment power Security ownership of management at February 29,1996:

The following lists the common stock of the Company owned by the Directors and Executive Officers of TU q

Electric. The named individuals have sole voting and investment power for the shares of common stock reported.

Ownership of such common stock constituted less than 1% of the outstanding shares for each individual. None of the named individuals own any of the preferred stock of TU Electric.

Number of Shares Name of Com mon Stock a

T. L Baker 2.749 J. S. Farrington 18,575 IL Jarrell Gibbs 6.254 1

Michael J. McNally 5.250 Erle Nye 19.053 W. M. Taylor 7.807 E. L. Watson 7.698 All Directors and Executive g

j Officers as a group (7) 67.386 I

4 i

j Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 4

The Comnany t

Information with respect to this item is found under the heading Beneficial Ownership of Common Stock of the j

Company in the definitive proxy statement to be filed by the Company with the Commission on or about April 1, 1996. Additional information with respect to Executive Officers of the Registrant is found at the end of Part I.

4 TU Electric None.

4 73 J

PART IV Item 14. EXillBITS, FINANCI AL STATEMENT SCilEDULES AND REPORTS ON FORM 8.K Page (a)

Documents filed as pan of this Report:

Ihe Comnany 1.

Financial Statements (included in item 8, Financial Statements and Supplementary Data):

Statements of Consolidated Income for each of the three years in the period ended December 31,1995 28 Statements of Consolidated Retained Earmngs for each of the three years in the period ended December 31,1995...

. 28 Statements of Consolidated Cash Flows for each of the three years in the period ended December 31,1995

. 29 Consolidated Balance Sheets, December 31,1995 and 1994

. 30 Notes to Consolidated Financial Statements............

36 Statement of Responsibility

. 61

)

Independent Auditors' Report.....

63 i

j 2.

Financial Statement Schedule -

i For each of the three years in the period ended December 31,1995:

Schedule Il-Valuation and Qualifying Accounts....

80 TU Electric 3.

Financial Statements (included in Item 8, Financial Statements and Supplementary Data):

Statements of Consolidated Income for each of the three years in the period ended December 31,1995..

32 Statements of Consolidated Retained Earnings for each of the three years in the period ended December 31,1995 32 Statements of Consolidated Cash Flows for each of the three years in the period ended December 31,1995 33 Consolidated Balance Sheets, December 31,1995 and 1994 34 Notes to Consolidated Financial Statements 36 Statement of Responsibility 62 Independent Auditors' Report..

64 4.

Financial Statement Schedule -

For each of the three years in the period ended December 31,1995:

Schedule Il-Valuation and Qualifying Accounts.

80 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 Consolidated Financial Statements or notes thereto.

74

.. ~..

~

i Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - (Continued) l (b)

Reports on Form 8-K:

Reports on Form 8-K filed since September 30,1995, are as follows:

l The Comnany l

1 Date of Renort item Renorted October 17,1995 Item 5. OTHER EVENTS TU Electric Date of Reoort item Reoorted October 17,1995 Item 5. OTHER EVENTS October 26,1995 Item 5. FINANCIAL STATEMENTS AND EXHIBITS (c)

Exhibits:

MComnany and TU Electric

+

Previously Filed

• With File As Exhibits Number Ethlbit Number Dated i

3(a) 33-48880 4(a)

Restated Articles ofincorporation of the Company.

3(b) 33-48880 4(b)

Bylaws, as amended, of the Company.

3(c) 0-11442 3(a)

Restated Articles ofincorporation of TU Electric.

Form 10-K

]

(1993) 3(d) 33-64694 4(c)

Bylaws of TU Electric, as amended.

4(a) 2-90185 4(a)

Mortgage and Deed of Trust, dated as of December 1,1983, between TU Electric and Irving Trust Company (now The Bank of New York), Trustee.

4(a)(1)

Supplemental Indentures to Mortgage and Deed of Trust:

2-90185 4(b)

First April 1,1984 2-92738 4(a)-1 Second September 1,1984 2-97185 4(a)-1 Third April 1,1985 2-99940 4(a)-1 Fourth August 1,1985 2-99940 4(a)-2 Fifth September 1,1985 33-01774 4(a) 2 Sixth December 1,1985 33-9583 4(a)-1 Seventh March 1,1986 33-9583 4(a)-2 Eighth May 1,1986 33-11376 4(a)-1 Ninth October 1,1986 33-11376 4(a)-2 Tenth December 1,1986 33-11376 4(a)-3 Eleventh December 1,1986 33-14584 4(a)-1 Twelfth February 1,1987 33-14584 4(a)-2 Thirteenth March 1,1987 33-14584 4(a)-3 Fourteenth April 1,1987 33-24089 4(a)-1 Fifteenth July 1,1987 33-24089 4(a)-2 Sixteenth September 1,1987 33-24089 4(a)3 Seventeenth October 1,1987 33 24089 4(a)-4 Eighteenth March 1,1988 33-24089 4(a)-5 Nineteenth May 1,1988 75

Item 14. EXillBITS, FINANCIAL STATEMENT SCIIEDULES AND REPORTS ON FORM 8-K -(Centinue@

l PreviousIv Filed

• With File As Exhibits Number Exhibit Number Dated 33-30141 4(a)-1 Twentieth September 1,1988 33-30141 4(a)-2 Twenty-first November 1,1988 33-30141 4(a)-3 Twenty-second January 1,1989 33-35614 4(a)-1 Twenty-third August 1,1989 33-35614 4(a)-2 Twenty-fourth November 1,1989 33-35614 4(a)-3 Twenty-fifth December 1,1989 33-35614 4(a)-4 Twenty-six February 1,1990 33-39493 4(a)-1

. Twenty-seventh September 1,1990 j

33-39493 4(a)-2 Twenty-eighth October 1,1990 j

33-39493 4(a)-3 Twenty-ninth October 1,1990 33-39493 4(a)-4 Thirtieth March 1,1991 33-45104 4(a)-1 Thirty-first May 1,1991

)

33-45104 4(a)-2 Thirty-second July 1,1991 l

33 46293 4(a)-1 Thirty-third February 1,1992 33-49710 4(a)-1 Thrity-fourth April 1,1992 33-49710 4(a)-2 Thirty-fifth April 1,1992 33-49710 4(a)-3 Thirty-sixth June 1,1992 33-49710 4(a)-4 Thirty-seventh June 1,1992 33-57576 4(a)-1 Thirty-eighth August 1,1992 33-57576 4(a)-2 Thirty-ninth October 1,1992 33-57576 4(a)-3 Fortieth November 1,1992 33-57576 4(a)-4 Forty-first December 1,1992 33-60528 4(a)-1 Forty-second March 1,1993 33-64692 4(a)-1 Forty-third April 1,1993 33-64692 4(a)-2 Forty-fourth April 1,1993 33-64692 4(a)-3 Forty-fifth May 1,1993 33-68100 4(a)-1 Forty-sixth July 1,1993 33-68100 4(a)-3 Forty-seventh October 1,1993 33-68100 4(a)-4 Forty-eighth November 1,1993 33-68100 4(a)-5 Forty-ninth May 1,1994 33-68100 4(a)-6 Fiftieth May 1,1994 33-68100 4(a)-7 Fifty-first August 1,1994 33-68100 4(a)-8 Fifty-second April 1,1995 33-68100 4(a)-9 Fifty-third June 1,1995 4(b)(1)

Agreement to furnish certain debt instruments (the Company).

4(b)(2)

Agreement to furnish certain debt instruments (TU Electric).

4(c) 33-68104 4(b) Deposit Agreement between TU Electric and Chemical Bank, dated as of January 11,1993.

4(d) 33-68104 4(b) Deposit Agreement between TU Electric and Chemical Bank, dated as of August 4,1993.

4(e) 0-11442 4(h)

Deposit Agreement between TU Electric and Chemical Bank, dated Form 10-K as of October 14, 1993.

(1993) 4(f)

Indenture (For Unsecured Subordinated Debt Securities relating to Trust Securities), dated as of December 12,1995, between TU Electric and The Bank of New York, as Trustee.

4(g)

Amended and Restated Trust Agreement, dated as of December 12, 1995, between TU Electric, as Depositor, and The Bank of New York, The Bar.k of New York (Delaware) and the Administrative Trustees thereunder, as Trustees for TU Electric Capital 1.

76

f item 14. EXHIBITS, FINANCI AL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -(Centinuid)

Previoudy Filed

• With File As 1

Eihibits Number Exhible Number Dated 4(h)

Guarantee Agreement with respect to TU Electric Capital I, dated as of December 12, 1995, between TU Electric, as Guarantor, and The Bank of New York, as Trustee.

4(i)

Agreement as to Expenses and Liabilities, dated as of December 1

l 12,1995, between TU Electric and TU Electric Capital 1.

4(j)

Amended and Restated Trust Agreement, dated as of December 12,1995, between TU Electric, as Depositor, and The Bank of New York, The Bank of New York (Delaware) and the Administrative Trustees thereunder, as Trustees for TU Electric Capital 11.

4(k)

Guarantee Agreement with respect to TU Electric Capital II, dated as of December 12, 1995, between TU Electric, as e

Guarantor, and The Bank of New York, as Trustee.

4(1)

Agreement as to Expenses and Liabilities, dated as of December 12,1995, between TU Electric and TU Electric Capital II.

4(m)

Amended and Restated Trust Agreement, dated as of December 13,1995, between TU Electric, as Depositor, and The Bank of New York, The Bank of New York (Delaware), and the Administrative Trustees thereunder, as Trustees for TU Electric

)

Capital 111.

4(n)

Guarantee Agreement with respect to TU Electric Capital Ill, dated as of December 13, 1995, between TU Electric. as Guarantor, and The Bank of New York, as Trustee.

4(o)

Agreement as to Expenses and Liabilities, dated as of December l

13,1995, between TU Electric and TU Electric Capital III.

i 10(a)*

• l-3591 10(a)

Deferred and incentive Compensation Plan of the Texas Utilities Form 10-Q Company System, as amended January 1,1995.

(Quarter ended June 30,1995) 10(b)**

l-3591 10(f)

Salary Deferral Program of the Texas Utilities Company System Form 10-Q as amended January 1,1995.

(Quarter ended June 30,1995) 10(c)**

l-3591 10(c)

Restated Supplemental Retirement Plan for Employees of the Form 10-Q Texas Utilities Company System, as restated effective January 1, (Quarter ended 1995.

1 i

June 30,1995) 10(d)"

l-3591 10(b)

Deferred Compensation Plan for Outside Directors of the J

[

Form 10-Q Company, effective as of July 1,1995.

(Quarter ended June 30,1995) 10(e)*

• l-3591 10(d)

Annual Incentive Plan of the Texas Utilities Company System, Form 10-Q dated as of May 19,1995.

3 (Quarter ended June 30,1995) 10(f)"

l-3591 10(e)

Management Transition Agreement, dated as of May 19,1995 Form 10-Q between the Company and J.S. Farrington.

J (Quarter ended i

June 30,1995) 12 Computation of Ratio of Earnings to Fixed Charges for TU Electric.

77

i Item 14. EXHIBITS, FINANCI AL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -(Continued)

Previousiv Filed

• With File As Exhibits Number F.shibit Number Dated 21 Subsidiaries of the Company.

23(a)

Consent of Counsel to the Company.

23(b)

Consent of Counsel to TU Electric.

23(c)

Independent Auditor's Consent for the Company.

23(d)

Independent Auditor's Consent for TU Electric.

27(a)

Financial Data Schedule for the Company, 27(b)

Financial Data Schedule for TU Electric.

27(c)

Restated Financial Data Schedule of the Company 09-30-94.

27(d)

Restated Financial Data Schedule of the Company, 12-31-94.

27(e)

Restated Financial Data Schedule of the Company,03-31-95.

27(O Restated Financial Data Schedule of the Company,06-30-95.

27(g)

Restated Financial Data Schedule of the Company,09-30-95.

99(a) 1-3591 28(b)

Agreement, dated as of February 12,1988, between TU Electric Form 10-K and Texas Municipal Power Agency.

(1987) 99(b) 33-55408 99(a)

Agreement, dated as of July 5,1988, between TU Electric and the Brazos Electric Power Cooperative, Inc.

99(c) 33-55408 99(b)

Agreement, dated as of January 30,1990, between TU Electric and Tex-La Electric Cooperative of Texas, Inc.

99(d) 33-59988 2

Agreement and plan of merger, dated as of January 25,1993, by and among the Company, TUA, Inc., and Southwestern Electric Service Company.

99(e) 33-23532 4(c)(i) -

Trust Indenture, Security Agreement and Mortgage, dated as of December 1,1987, as supplemented by Supplement No. I thereto dated as of May 1,1988 among the Lessei. TU Electric and the Trustee.

99(O 33-24089 4(c)-1 Supplement No. 2 to Trust Indenture, Security Agreement and Mortgage, dated as of August 1,1988.

99(g) 33-24089 4(e)-1 Supplement No. 3 to Trust Indenture, Security Agreement and Mortgage, dated as of August 1,1988.

99(h) 0-11442 99(c)

Supplement No. 4 to Trust Indenture Security Agreement and Form 10-Q Mortgage, including form of Secured Facility Bond,1993 Series.

(Quarter ended June 30,1993) 99(i) 33-23532 4(d)

Lease Agreement, dated as of December 1,1987 between the Lessor and TU Electric as supplemented by Supplement No. I thereto dated as of May 20,1988 between the Lessor and TU Electric.

99(j) 33-24089 4(O Lease Agreement Supplement No. 2, dated as of August 18, 1988.

99(k) 33-24089 4(0-1 Lease Agreement Supplement No. 3, dated as of August 25, 1988.

99(1) 33-63434 4(d)(iv) -

Lease Agreement Supplement No. 4, dated as of De.; ember 1, 1988.

99(m) 33-63434 4(d)(v) -

Lease Agreement Supplement No. 5, dated as of June 1,1989.

99(n) 0-11442 99(d)

Lease Agreement Supplement No. 6, dated as of July 1,1993.

Form 10-Q (Quarter ended June 30,1993) 78

l l

Item 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 K -(Concluded)

I Previousiv Filed

• With File A:

Exhibits Number Exhibit N umber Dated 99(o) 33-23532 4(e)

- Participation Agreement dated as of December 1,1987, as amended by a Consent to Amendment of the Participation i

Agreement, dated as of May 20.1988, each among the Lessor, the Trustee, the Owner Participant, certain banking institutions, Capcorp, Inc. and TU Electric.

99(p) 33-24089 4(g)

- Consent to Amendment of the Participation Agreement, dated as of August 18,1988.

99(q) 33-24089 4(g)-1

- Supplement No. I to the Participation Agreement, dated as of August 18,1988.

99(r) 33-24089 4(g)-2

- Supplement No. 2 to the Participation Agreement, dated as of 4

August 18,1988.

99(s) 33-63434 4(e)(v) - Supplement No. 3 to the Participation Agreement, dated as of i

December 1,1988.

l 99(t) 0-11442 99(e)

- Supplement No. 4 to the Participation Agreement, dated as of l

Form 10-Q June 17,1993.

(Quarter ended June 30,1993) 99(u) 0-11442 99(t)

- Competitive Advance and Revolving Credit Facility Agreement, Form 10-Q

" Facility A", dated as of April 29,1994, among the Company. TU (Quarter ended Electric, certain banks and Chemical Bank, Agent (Facility A).

September 31,1994) 99(v) 0-11442 99(a)

- Amendment, dated as of April 28,1995, to Facility A.

(Form 10-Q Quarter ended March 31,1995) 99(w)

- Second Amendment, dated as of November 24,1995, to Facility A.

99(x) 0-11442 99(u)

- Competitive Advance and Revolving Credit Facility Agreement, Form 10-Q

" Facility B", dated as of April 29,1994, among the Company, (Quarter ended TU Electric, certain banks and Chemical Bank, Agent (Facility September 31,1994)

B).

99(y) 0-11442 99(b)

- Amendment, dated as of April 28,1995, to Facility B.

Form 10-Q (Quarter ended March 31,1995) 99(z)

- Seconil Amendment, dated as of November 24,1995, to Facility B.

99(aa) 0-11442 99(v)

- Credit Agreement, dated as of February 24,1995, among TU Form 10-K Electric, Bank of America and The Bank of New York.

(1994) 99(bb)

- Competitive Advance and Revolving Credit Facility Agreement, dated as of November 22, 1995, among the Company and Chemical Bank and Texas Commerce Bank National Association, as Agents.

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.

79

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS TEXAS UTILITIES COMPANY AND SUBSIDIARIES For Each of the Three Years I t the Period Ended December 31,1995 COLUMN A COLUMS B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged Beginning Costs and to Other Balance at Classification of Year Expenses Accounts Deductions (a)

End of Year Thousands of Dollars Valuation account, deducted from related asset on the balance sheet -

Year Ended December 31,1995 Reserve for regulatory disallowance,

, $1,381.145

$1,381,145 Allowance for uncollectible accounts.

5,095 20,335 12 19,477 5,%5 Year Ended December 31,1994 Reserve for regulatory disallowances

$1,381,145

$1,381.145

- Allowance for uncollectible accounts,

6,394

$30,020

$31,319 5,095 Year Ended December 31,1993 Reserve for regulatory disallowances,

$1,381,145

$1,381,145 Allowance for uncollectible accounts,

1,613

$21,607

$16,826 6,394 TEXAS UTILITIES ELECTRIC COMPANY AND SUBSIDIARIES For Each of the Three Years in the Period Ended December 31,1995 COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions Balance at Charged to Charged Beginning Costs and to Other Balance at Classification of Year Expenses Accounts Deductions (a) End of Year Thousands of Dollars Valuation account, deducted from related asset on the balance sheet -

Year Ended December 31,1995 Reserve for regulatory disallowance

$1,381.145

$1,381,145 Allowance for uncollectible accounts,

5,026

$18,163

$19,275 3,914 Year Ended December 31,1994 Reserve for regulatory disallowances

$1,381,145

$1,381,145 Allowance for uncollectible accounts,

6,304

$29,854

$31,132 5,026 Year Ended December 31,1993 Reserve for regulatory disallowances

$1,381.145

$1,381,145 i

Allowance for uncollectible accounts,

1,613

$21,430

$16,739 6,304 l

(a)

Deductions represents uncollectible accounts written off net of recoveries of amounts previously written off.

80

l SIGNATURES i

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Texas l

Utilities Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly l

authorized.

j i

TEXAS UTILmES COMPANY Date: March 5,1996 By:

/s/ J. S.'FARRINGTON j

(J. S. Farrington, Chairman of the Board)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Texas Utilities Company and in the capacities and on the date indicated.

Signature Title Date

/s/

J. S. FARRINGTON Chairman of the Board (J. S. Farrmgton, Chairman of the Board)

/s/

ERLE NYE Principal Executive (Erle Nye President and Chief Execuuve)

Officer and Director

/s/

PETER B. TINKHAM Principal Financial (Peter B. Tinkham. Treasurer and Assistant Secretary)

Officer

/s/

CATHRYN C. HtJLEN Principal Accounting (Cathryn C. Hulen. Controller)

Officer

/s/

BAYARD H. FRIEDMAN Director (Bayard H. Friedman)

/s/

W ILLIAM M. GRIFFIN Director March 5,1996 (William M. Griffin)

/s/

KERNEY LADAY Director (Kerney Laday)

/s/

M ARGARET N. MAXEY Director (Margaret N. Maxey)

/s/

JAMES A. MIDDLETON Director (James A. Middleton)

/s/

J. E. OESTERRE!CHER Director 4

(J. E. Oesterreicher)

/s/

CHARLES R. PERRY Director (Charles R. Perry)

/s/

HERBERT H. RICHARDSON Director j

(Herbert H. Richardson) s 81

r 1

l 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 UTILmES ELECTRIC COMPANY Date: March 5,1996 By:

/s/ ERLE NYE (Erle Nye, Chairman of the Board and Chief Executive)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature Title Date

/s/

ERLE NYE Principal Executive (Erle Nye, Chairman of the Board and Chief Eaeeutive)

Officer and Director

/s/

ROBERT S. SHAPARD principal Financial (Robert S. Shapard. Treasurer and Assistant Secretary)

Officer

/s/

CATHRYN C. HtJLEN Principal Accounting (Cathryn C. Hulen, Controller)

Officer

/s/

T. L. BAKER Director (T. L. Baker)

/s/

J. S. FARRINGTON Director March 5,1996 (LS. Farrington)

/s/

H. J ARRELL GIBBS Director (H. Jarrell Gibbs)

/s/

MICHAEL J. MCNALLY Director (Michael J. McNally)

/s/

W. M. TAYLOR Director (W. M. Taylor)

/s/

E. L. WATSON Director (E. L. Watson) 82