ML20214H257

Texas Utilities Co 1986 Annual Rept

ML20214H257
Person / Time
Site:	Comanche Peak
Issue date:	12/31/1986
From:	Farrington J, Nye E TEXAS UTILITIES ELECTRIC CO. (TU ELECTRIC)
To:
Shared Package
ML20214H218	List: ML20214H257 ML20214H280 ML20214H299 TXX-6462, Forwards Util,Texas Municipal Power Agency & Brazos Electric Power Cooperative,Inc Annual Repts for 1986
References
NUDOCS 8705270327
Download: ML20214H257 (43)

Text

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1986 1985 Change Utility Plant *........ $13,566,133,000 $12,144,563,000 11.7 % Construction Expenditures........................... $ 1,519,619,000 $ 1,108,861,000 37.0 Electric Energy Sales in Kilowatt-hours (000's)...... 75,254,775 73,369,8 % 2.6 Peak Demand (Kilowatts)t............................ 16,537,000 15,898,000 4.0 Operating Revenues..... $ 3,932,045,000 $ 4,170,157,000 (5.7) Fuel and Purchased Power............. $ 1,479,213,000 $ 1,788,884,000 (17.3) Operating Ex pensest............................... $ 1,643,272,000 $ 1,580,325,000 4.0 Consolidated Net Income...... 626,851,000 $ 587,758,000 6.7 Earnings per Share................................ $ 4.45 $ 4.35 2.3 Dividends Declared per Share..... $ 2.68 $ 2.52 6.3 Book Value per Share *.......................... $31.24 $29.46 6.0 Cu stomers*............................................ 2,074,766 2,015,023 3.0 Employees *.... 16,927 16,528 2.4

• End of war t 1966 and 1985 inc'ude 130,000 and 129,000 kilouarts of intem< pine demand, respectitely
• Erdudes fud and pachased tuuer Contents 2

Management's Ixtrer System Companies... 4 System Report 5 Operations. 5 Fuel.. 7 Resource Plan.. 9 Comanche Peak. 11 Rates and Regulation. 13 Research and Development. 15 Financial Report. 16 x Shareholder Information 40 Directors and Officers 41 1

To the Shareholders: year. To facilitate the operation operation in time for the 1988 of the Electric Company as one peak season. In order to better While the Company company and to encourage manage capital requirements, continued to face obstacles in further efficiencies, the name construction of Twin Oak Unit 1986, primarily in matters "TU Electric" was adopted I and the combustion turbines related to nuclear licensing, the throughout the Electric will be financed by others. TU year was one of progress. Company in early 1987. After a Electric will purchase Twin Oak Advances were made in the period of transition, public use after it is built to specifications. Company's operating efficiency of the division names will be After construction, the and in the technologies used to phased out. combustion turbine units will provide electric service. These technological be leased. Additional The Company's commitments innovations and operating combustion turbines and lignite to providing low-cost, reliable improvements are helping the units, the Comanche Peak electricity and a fair return to Company adapt successfully to nuclear plant, cogeneration, and investors depends on employees' today's rapidly changing load management programs are dedication to serving customers, business environment. Electric other elements that will help as well as developing and utilities are operating in an provide the flexibility needed to adopting technologies that will increasingly competitive climate control cost and assure our improve efficiency and and must think and act customers reliable electric service economy. Improvements to accordingly - as low-cost in a changing utility increase lignite mining suppliers of reliable electric environment. productivity, to better monitor service. Comanche Peak remains a and control delivery of natural The Company demonstrated cornerstone of our resource gas to power plants, and to that competitive instinct in plan, and we made progress allow earlier detection of 1986. Falling market prices of during 1986 in the reinspection potential plant operating natural gas presented an and corrective action effort to problems are recent opportunity to lower costs, and resolve all concerns about plant technological achievements. our employees responded by safety. Because of expansions in in addition, the Company aggressively seeking lower-priced the program, TU Electric continued to build on the fuel supplies and renegotiating announced in mid-1986 that its efficiencies brought about by existing contracts. Also, previous cost and schedule the System reorganization of productivity of the lignite estimates, made in November 1984. The reorganization began generating units was improved, 1985, could not be achieved with the merger of Dallas increasing lignite's share of total and that Unit I would not be Power & Light Company, fuel requirements to 54%. As a available for the peak season of Texas Electric Service result, overall customer rates 1988. Company, Texas Power & have been reduced more than Since that time, the Light Company, and Texas 10% since the first of 1986 and construction adequacy phase of Utilities Generating Company about $319 million in fuel cost the program has been as divisions of a new utility, savings has been refunded to essentially completed, and the Texas Utilities Electric customers. design adequacy phase is well Company. Flexibility continues to be a along. The flaws found to date The consolidation of key goal of the System's can be corrected, and the functions and elimination of resource plan for providing likelihood of finding serious duplication continued during reliable service to customers in problems diminishes as the 1986, with the reorganization the future. Construction program progresses. having achieved millions of accelerated during the year on dollars in direct savings per the Twin Oak lignite generating plant, and plans were announced to place nine combustion turbine units in 2

i In November 1986, the customers. Earnings per share of Continuing to provide Company estimated that the common stock were $4.45, customers reliable, low-cost reinspection and corrective compared to $4.35 in 1985. The service remains a priority, action, plus all related plant Company's summer peak whether through productivity modifications that are necessary, demand increased 4% in 1986 improvements and the use of should be complete in time to and electric energy sales were new technologies to hold down support con mercial operation in up 2.6%. costs or through the direct day-early 1989, assuming the Construction expenditures to-day contact between licensing process has been during the year totalled about employees and customers. completed. Unit 2 is not $1.520 billion. Funds from Success in serving customers expected to be in full operations provided 32.9% of and in providing results commercial operation until after 1986 construction expenditures. expected by shareholders is due the 1989 summer peak season. During 1986, the System to the continuing loyalty and If this schedule is met, the raised about $1.3 billion hard work of our employees. Company's share of the project through long-term financing, Their efforts are appreciated, will cost $6.7 billion, or $3,300 including about $145 million and so are the interest and per kilowatt. The cost is about from participation in the support of shareholders as we average for nuclear plants dividend reinvestment and continue to adapt to a scheduled for service in the employee savings plans. A changing operating same time frame. portion of these funds was used environment. Concerns about the licensing to retire $232 million of high-of Comanche Peak and interest debt. March 9,1987 uncertainties about the During 1986, Perry G. responsiveness of state Brittain, chairman of the board m _^, regulation led to further and chief executive officer, [ negative actions on the credit announced his plans to retire in ratings of TU Electric during the spring of 1987. Mr.

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= the year. Major agencies Brittain's 37 years of valued " i' T lowered their ratings of service to the Company and company bonds to Single A the industry are deeply levels and, in one case, a high appreciated. Triple B. In August 1986, the Board of Economic conditions Directors elected Jerry t permitting, we hope to avoid a Farrington chairman and chief rate increase request until executive officer to succeed Mr. JERRY FARRINGTON Comanche Peak Unit I can be Brittain. Mr. Farrington had Chairmm of the Board included in rates. Programs to been president and a director of improve productivity, as well as the Company since 1983. Erle efficiencies brought about by Nye, executive vice president, consolidating functions, are was elected president. Both helping hold down increases in appointments were effective at our operating costs. Growth in the February 1987 board the service area, while still meeting. healthy, moderated to a more In February 1987, the Board comfortable level in 1986, with raised the regular quarterly h almost 60,000 new customers dividend from 67 cents per being added. share to 70 cents. The new Operating results for 1986 quarterly rate is payable April reflect the effects of cost

1. Dividends declared on the controls and continued growth common stock have been l

in the total number of increased for 40 consecutive ggLg syg years. I' resident -O.. 3

city-and Fort Worth, Texas Utilities Fuel Midland-Odessa, Wichita Falls, Company owns a natural gas Texas Utilities Company is Arlington, Irving, Plano, pipeline system; acquires, investor-owned and is a holding Waco, Tyler, and Killeen. The stores, and delivers fuel gas; company for an electric utility economy of the service area is and provides other services for system. The Company provides highly diversified. Major the generation of electric its six wholly owned subsidiaries industries include defense, energy by TU Electric. with common stock capital and electronics, aerospace short-term funds required for manufacturing, and oil and gas Texas Utilities Mining their construction programs. At development. In addition, the Company owns and operates year-end, the common stock of area is a center for banking, fuel production facilities for the Company was owned by insurance, commerce, the surface mining and some 91,300 registered distribution, farming and recovery of lignite for use as fuel f r TU Electncs shareholders. The Company's ranching, and recreational and principal subsidiary is Texas cultural activities. Dallas-Fort generating stations. Utilities Electric Company, now Worth International Texas Utilities Services known as TU Electric. Airport-the world's fourth-Inc. furnishes financial, busiest airport-has helped accounting, and other Texas Utilities Electric m ke the Dallas-Fort htth administrative services at cost Company (TU Electric) is third in the nation in to the System companies. are engaged in the generation, concentration of corporate purchase, transmission, headquarters. Basic Resources Inc. is distnbution, and sale of The Generating Division is engaged primarily in the electricity through its four responsible for the planning, development of energy divisions. engineering, construction, and resources, related technology, .TU Electnc,s three operating operation of all generating nd services. divisions-Dallas Power & stati ns; g r p; nning t;Te Chaco Energy Company is j Light, Texas Electric Service, tr nstnission system; and for organized to own and operate and Texas Power & directing the dispatch and facilities for the acquisition, Light-provide electric energy to about 5'110'000 e nty I f the transmission production, sale, and delivery facilines of TU Electnc. of coal and other fuels. people-about one-third of the state's population. The service territory extends 600 miles ~ a nu h c c '"^"" from far West Texas eastward a. to near Louisiana, and is

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A about 250 miles deep, from A c ,5 r.,*. the Oklahoma border southward into Central Texas. Service is provided in 87 counties to 353 incorporated Pia ,A, cities, including Dallas-the nation's seventh-largest GENERATING STATIONS E Lignite O Lignite under construction A Gas / Oil O Nuclea under construction 4

OPIRATR m higher than the peak set in Employees of System August 1985. System capability companies and divisions earned TU Electric provided at the time of the peak was recognition for numerous safety customers a record 75 billion 18,854,000 kilowatts; this achievements including kilowatt-hours of electricity in included 850,000 kilowatts of prestigious national honors. 1986, an increase of 2.6% over short-term cogeneration 1985. The company was again contracts. first in the nation in energy A new daily usage record was Woogmes M sales among investor owned set on July 31 when customers Early in 1987, a new utilities. used 315,567,000 kilowatt-hours corporate identity, "TU of electricity, surpassing 1985's Electric," and logo were maximum usage by 3.4%. announced for all of Texas ~ Because weather conditions for Utilities Electric Company. Although the economy of the the summer of 1986 were System's service territory slowed comparable to 1985's summer, in 1986 from the feverish pace the increases in peak demand mag n y - of the past few years, its and energy usage were primarily assumur m ummme diversity continued to make it the result of customer growth. m e attractive for relocation and Meeting the demands of the growth. Almost 60,000 hot July weather was customers were added during accomplished through the 1986. Over one-half of the new efforts of System employees, residential housing from customer-service ayggcf cpi I \\ lv7ofp authori:ations in the state were representatives who fielded NULLLv granted in the System's service inquiries to distribution, Public use of division names area. In fact, the Dallas-Fort transmission, and power plant and identities will be phased hrth area ranked third in the employees whose work started out over a period of time. The nation in housing starts and long before hot weather hit to use f singj .dentity wilI help i second in the amount of office ensure equipment would be du wmpany saw customas as space leased. available when needed. ick nt, hm-wst At the end of 1986, the Spring storms also demanded supplier. Substantial savings unemployment rate in the area that employees respond in an ham aba@ 6 n add. l the System serves was 6.6%, around-the-clock effort to from the reorganization of the considerably lower than the restore service after tornadoes c mp ny, and this is a further state-wide rate of 8.7%. and thunderstorms played step toward obtaining additional grySorts meetm7 havoc with System electncal e [M penh4" economies. "A [ f M 'ior7 E 3 t e. s. t Customers set a record peak r - r 3 ts i im " ** y C demand for electricity on July {Empbeest sd wk @- m 30, the sixth consecutive day of Et@e_ttproductivity:] Since reorganization in 1984, temperatures above 100* The The safety ethic System the System has continued to new hourly peak of 16,537,000 employees have incorporated consolidate certain functions in kilowatts, which included into their jobs produced order to serve customers more 130,000 kilowatts of another year of distinguished efficiently and at a lower cost. interruptible demand, was 4% safety records and contributed This consolidation has already to high productivity. In 19S6, achieved significant savings. the safety performance of employees placed the System in the top ten percent of the electric-utility industry. 5

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The merger of the System's Declining fuel costs have E[ { g ", 3gp"~1 four data processing allowed the System to lower organizations into one was total rates by 10.3% since completed in 1986, climinating hiarch 1986. These reductions The hiining Company's duplication of hardware, have rolled the System's rates newest innovation, the cross-pit software, and personnel. On back to about where they were spreader, completed a 240-hour January 1,1987, realignment of in 1982. From May 1986 production test in October 1986 accounting and treasury through February 1987, that proved its capability as an operations in TU Electric went customers received about $319 economical and safe excavation into effect, providing savings million in refunds because of and conveyer system. In the and improved management and lower fuel costs. test, the spreader system accounting information to the During the year, lignite surpassed expectations by organization. supplied 54% of the System's excavating more than 2,000 Additional organi:ational total fuel requirements and cubic yards of dirt per hour consolidations that will improve natural gas supplied 46%. and being operational more than 80% of the test period. efficiency and bring added r~ignise~ delivery sees recordq ~~--- tL a Th's one-of-a-km' d tecimo1ogy economy were announced m. i u------a late 1986. During 1987, System In 1986, the hiining helps recover deep lignite communications and personnel Company delivered a record 30 deposits mere economically and functions will be centralized. million tons of lignite to System efficiently than other methods. Planning is underway to power plants - two-thirds of r r I 8" M. tm T N*P""8'8" ' consolidate purchasing efforts as the total amount mined in the well. state. That production kept the WNIncrease_s MMw Niining Company the fourth-The Fuel Company provides FN largest coal miner in the all of TU Electric's natural gas Customers continued to nation. requirements through various benefit in 1986 from declining Even with the record pipeline contracts, its 2,200-mile natural gas prices and the Fuel production, proven recoverable pipeline system, and its Company's success in lignite under System ownership underground facilities with a renegotiating contracts and or lease totalled 760 million usable storage capacity of about making favorable spot-market tons at year-end. Those reserves 28 billion cubic feet of gas. gas purchases. This situation are adequate to provide fuel for The 380 billion cubic feet of resulted in natural gas that the lives of existing System natural gas supplied to System averaged $2.77 per million Btu lignite plants and those planned power plants in 1986 was down in 1986, down 19% from 1985's for the future. from 1985 because of increases $3.41 per million Btu. ? M IEH Eid Q ns.

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in purchased power and greater The expertise of the hiining Lproduction .j pr ducnon from lignite power Company kept the cost of "" gam plants. lignite coal low at $0.98 per in hi y 1986, an electnc-A new 58-mile natural gas million Bru. Use of lignite has pamd loconmtive delivered pipeline, completed in early saved System customers more Oak Hill mine's first 1,500 tons 1987, gives the Fuel Company than $4 billion compared to of lignite about i1 miles to the better access to East Texas gas what they would have paid for hiartin Lake power plant in supplies and enhances the East Texas. The new rnine will company's operating flexibility the same amount of generation over the years using higher, provide about half of the and utili:ation of storage priced natural gas, plant's fuel supply by the facilities. This 36-inch pipeline mid 1990s. About 129 million The composite fuel cost for t ns of lignite will be produced 1986 was $1.84 per million Btu I"'m this mine over the next compared to $2.25 in 1985. 30 years. 7

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connects the Fuel Company's uneconomical. The suit seeks to 'c' Mr underground storage facility east have the agreements declared n* of the Big Brown lignite plant void and unenforceable and ' ~- to the North Texas pipeline also seeks damages and other The plan con inues to near Ennis south of Dallas. It is relief. provide fuel diversity with jointly owned by the Fuel In January 1983, the lignite and nuclear units, which Company, with a 39% share, Company and Chaco settled all are expected to supply 36% of and two other gas companies. claims against Thercol and the additional energy needs. The Comanche Peak nuclear PevvMww 9 Pealxxly. The settlement did L + A *" "* not affect the claims asserted plant will contribute 17% and the Twin Oak and Forest Nuclear fuel assemblies against Santa Fe Industries and needed for the initial operation its subsidiaries. Grove lignite plants, now under of Comanche Peak's Unit I are construction, will provide the MN P stored at the plant site. other 19% in the new resource Assemblies needed for the start-The 1987 resource plan, plan, the service dates for Twin up of Unit 2 are in storage at announced in November 1956, Oak 2 and Forest Grove have the vendor's fabrication facility. details the way TU Electric been delayed one year to 1993 Fuel for the first 17 years of plans to meet its service area's and 1994, respectively. A fou-th the plant's operation is under increasing electricity needs unit planned at the Martin contract, and the System is through 1996. Under this plan, Lake facility will not be built. planning for the purchase of the company estimates that "g' " " ~ - future supplies. without load management it n "^ Spent fuel for more than 20 would need 11,783,000 kilowatts rch ,the Pu h. ity Comm@ission approved I" years of plant operation can be of new generating capacity to Util. safely stored on site. This serve its customers over the TU Electnc's request to build storage capacity can be next 10 years. increased if needed until the This estimate, adjusted for combustion turbine generating federal government opens a load management, provides for units at three of its power permanent disposal facility, an annual growth rate in firm pl nts. The small generators, d d f li i l 1 1 " 3% fueled by gas or oil are 4-at d f r the repla e it f rel tively !aw in cost, e sy to install, and well-suited for Discovery is being conducted expiring purchase power on an escalating basis in contracts, the retirement of periods of peak demand became litigation involving Chaco older gas-fired generating units, they can be started quickly. Energy Company, a nonutility and the maintenance of an The cmnpany plans a) place a total of 975,000 k;lowatts of subsidiary of the Company, and adequate generating reserve combustion turbine generating trial is expected sometime in margin. 1988. capacity in operation by 1990. Chaco signed agreements in Of the total, 390,000 kilowatts 1977 for more than 320 million Resource plan 1987 1996 at the Ntorgan Creek power tons of coal in northwestern cwam plant and 195,000 kilowatts at @" *" 9 """""' the Permian Basin facility are New Niexico. In December 1981, the Company and Chaco bj", planned to be in service for the 1988 summer peak load. in filed suit against Santa Fe G=bu~n tmhun mm in Industries, Inc., and two of its $jfl,',"Z'"l ".a" M' addition, another 190,000 subsidiaries and against Thercol uhn nm hs un v m. kilowatts is scheduled for 1990. U"3 " " """"' ' A"# Under the 1987 resource Energy Company and Peabody plan, combustion turbines are Coal Company, alleging, among ra

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""' luJn wud du,.nd 4" """ expected to meet 16% of the and state antitrust laws and additional needs by 1996. other unlawful conduct involving these agreements, which have made the commercial mining of this coal 9

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Construction schedule COMANCHE PEAK The reinspection program is p,k designed to be self-expanding, carability seawn At the end of 1986, and it has been expanded when Ma3 1Kikmang Sede Comanche Peak Unit I was findin s in an area have had cunbu n ruranes sss,0cc m mom t1 Tan 99 6 comp 1ete and implications for design or Gimanche Peak 1 1,010,000* IW comanthe Peak 2 1,010,000* Iwo Unit 2 was 83%, making the construction work in other areas. comsu n turhne, w.000 iwo entire project 94% complete. The corrective action program Tmn Oak I 750,000 IW1 Twm Oak 2 7s0,000 im hinjor emphas.is during 1986 has included rework of some Yasbliav' to TU Eleter installed hardware. Two remspecnon, reanalysis, and examples of rework begun in {g{g"gg corrective action program. 1986 are modification of about Through this effort, which 40% of the Unit I pipe ___am d began in late 1984, the supports and the replacement of The 1987 resource plan calls Comanche Peak Response Team containment electrical for TU Electnc to increase its has been addressing all concerns penetrations. use of cogeneration and other about the plant's construction By the end of 1986, the purchases over the next 10 and design adequacy raised by construction adequacy phase of years to provide approximateIV the Nuclear Rebvulatoiy the reinspection program was 19%' of dte adtiitional eIectricitY Commission's Technical Review essentially complete. Twenty-needs. TU Electnc now has Team and others-nme or 31 action plan results 7our gong-term contracts 7or in January 1986, TU Electric reports detailing findings had cogeneration, two of which filed a third revision of its been completed by early 1987, were negotiated m 1986. When CPRT program plan. In hiay, w th the remainder scheduled the facilities are all in service, the NRC staff issued a for completion in the third they will provide a total of Supplemental Safety Evaluation quarter of 1987. The reports (28,000 kilowatts. In addinon, Report expressing substantial generally focus on the adequacy TU Electnc has short-term agreement with the plan. of construction and the quality contracts to purchase up to 850,000 kilowatts of cogenerated "**"'"" P" W "*' electricity during 1987 and 1988. Construction expenditures Estimated rg~@ ' g ]3j 6 g 1986 198t 1988 1989 --.uww.J hlillions of Dollars Load management programs Electric property: will be used to offset 18% of Production $ 840 $ 733 $ 539 $ 517 the 11,783,000 kilowatts of new Transmission 53 84 120 119 capacity requirements projected Distribution 248 260 272 279 over the next 10 years. Load General. 30 37 32 36 management programs, which iryclude energy conservation, are Other utility property 45 75 28 67 """"'""'"'I"" Total. $1,216 $1,189 $ 991 $1,018 of expensive new generating capacity that would have to be AFUDC*. 304 411 509 282 built by holding down growth in the use of electricity during Total construction expenditurest $1,520 $1,600 $1,500 $b300 peak periods. Through Such expenditures do not include: incentives and information, TU Nuclear fuel $(3) $23 $28 $4 Electric's Energy Action Nonutility property 21 34 36 47 programs help encourage the

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The design adequacy portion the Comanche Peak units can in October, the ASLB admitted of the program is well be met or that their estimated an amended version of the underway and is expected to be completion costs will not be contention. The amended finished by the fall of 1987. All exceeded. contention also was appealed by anticipated corrective actions 7)g;g~gm the company and NRC staff. needed for fuel load and As of early 1987, the Appeal identified rework are scheduled Hearings on an operating Board had not ruled on the for completion by the end of license before the Atomic Safety appeal. 1987. and Licensing Board were In addition, in hiarch 1986, The company is committed suspended in January 1985 so the intervenor filed a lawsuit to resolving all problems and to that the Comanche Peak against the NRC in U.S. the safe operation of Comanche Response Team could address District Court for the District Peak. concerns that had been raised of Columbia challenging about the plant's design and extension of the construction a c _s construction. permit. Oral arguments were Because of expansions of the in hiarch 1986, TU Electric heard in December, and a reinspection and corrective filed a proposed schedule with ruling is pending. action program, TU Electric the ASLB under which r- - - m - m q announced in April 1986 that hearings would be resumed and L L M ~ the cost and schedule estimates conducted on CPRT action in hiay 1986, TU Electric made in November 1985 were plan results reports in the order filed suit in State District Court no longer achievable. In July, in which they are filed. in Dallas County against the the company further announced Subsequently, the NRC staff minority owners of Comanche that Unit I would not be and the intervenor in the Peak-Texas hiunicipal Power available for the peak season of hearing process filed alternate Agency, Bra:os Electric Power 1988. proposals for resuming hearings. Cooperative, Inc., and Tex-La Revised cost and schedule As of early 1987, the ASLB Electric Cooperative of Texas, estimates were announced in had not decided which proposal Inc. The suit asks the court to November 1986. TU Electric to adopt and had not resolve disagreements over the estimates the reinspection and scheduled further hearings. Comanche Peak Joint corrective action effort, plus all Through an oversight, TU Ownership Agreement, related plant modifications, and Electric did not apply for an in resp >nse, cross-actions and the licensing hearing process extension of the Unit I lawsuits against TU Electric and shouki be complete in time to construction permit before the the Company were filed in June support commercial operation of permit expired on August 1, by the minority owners, asking Unit 1 in early 1989. Unit 2 is 1985. After notification by the that the Joint Ownership not expected to be in full NRC staff that no application Agreement lx rescinded, that commercial operation until after had been received, the all amounts paid on account of the 1989 summer peak season. company applied for the Comanche Peak be refundcJ, if this schedule is achieved, extension in January 1986. In and that other damages be TU Electric's share of the total February 1986, the NRC considered. plant cost will be about $3,300 extended the construction per kilowatt of capacity, or $6.7 permit for Unit I until August .$ f((g billion. Even at the higher 1,1988. ~ estimate, the cost of the plant Subsequently, the intervenor TU Electric filed no requests is still about average for nuclear in the operating license for increases in operating plants scheduled for operation proceeding and a former plant revenues in 1986. The during the same time period. employee filed contentions company's current rate levels, Because the company has challenging the extension of the excluding fuel charges, were set only limited control over the permit. In hiay, the ASLB by the PUC in November timing of the licensing process, accepted one centention and 1984. Future rate filings will no assurance can be given that admitted the petitioners as depend on economic conditions, the presently estimated intervenors in hearings on the TU Electric, however, does not commercial operation dates of issue. TU Electric and the NRC staff appealed this action. 13

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plan to include Comanche Peak F~ g *~ @~%"" In 1986, the System Unit 1 in a rate increase k,,,, cases introduced the research program request until it is ready to PEQ LOADSHIIT to determine the operate. The Company believes One of the System s most technical and economic the initial rate increase that will ambitious research projects feasibility of large-scale use of be necessary to place Unit 1 moved out of R&D and int direct control to reduce peak into base rates can be held to commercial application dunng demand. About 1,000 customers about 10%. 1986. At the Marun Lake have volunteered to allow Because of the Fuel plant, a waste byproduct from control over some or all of Company's aggressive program burning lignite, scrubber sludge, their major electric appliances, to obtain lower-priced gas n bemg converted to a which include air conditioners, supplies and the greater use of synthetic gypsum and sold to a water heaters, furnaces, and wallboard manufacturer with a lignite, TU Electric was able to swimming pool pumps. These apply twice during 1986 for facility adjacent to the Martin appliances are being turned off authorization to reduce the fuel Lake plant. The finished and on for short periods of charge portion of its rates. product exceeds every industry time, especially when demand is TU Electric received standard for gypsum wallboard high. The key is to control the authorization from the Public and can sell for a lower pnce appliances without lessening Utility Commission to reduce than natural gypsum because convenience or comfort. the fixed fuel charge in March there are no minmg costs and g g,m_ _ _ _ _-,_- f 1986 and again in February transportation costs are minimal. n-y m 1987. The overall rate reduction The System and its customers [jmPmesM M g ] was 10.3%. benefit because the disposal cost Since the summer of 1984, Declining fuel costs also of unwanted scrubber sludge is engineers a thousand miles allowed TU Electric to make avoided, saving about $2 for away have used artificial four refunds of fuel charges to every ton sold. The sale of the intelligence to monitor seven of customers totalling $319 million product is expected to produce the System's turbine-generators between May 1986 and about $1 million of revenue a and diagnose conditions as they February 1987. These refunds year, thus saving customers develop-in seconds or minutes were made in accordance with even more. instead of the days it would PUC rules and approval. The System has already been take by conventional methods. successful in marketing Predicting potential problems RESE ARUll AND substantial amounts of lignite before they become acute and DIXEl OPMEN l' Oy ash and bottom ash, two cause damage can save millions Research and development aJJitional waste byproducts, for of dollars and days of down plays a key role in meeting the odwr commercial applications. time for the unit. System's overall objectives. @ I5SHIFF may Ee'dinTI The artificial intelligence system also helps plant R&D is instrumental in " peak M [ personnel plan maintenance by "~"""U preserving and improving the On very hot or cold days, telling them if a problem must performante of the System's existing assets, in protecting the

• ". the demand for electricity be corrected immediately, n at m Wwa. all the System s requiring an unscheduled unit environment, and in providing genemdng ba,n.o am ca outage, or if the repair can wait technological options for the I"'" "I" 8"eml Wan ago, until a scheduled outage, future. The System meets its the System recognized that the Monitoring systems such as unique R&D needs through cost of building new generating the one being tested make projects it plans and manages.

units to serve those peak available knowledge from the h also supports R&D of interest to a broad spectrum of PC'IO """kl 'I. greatly and best power plant experts in the so began mwaMung ways to world. unlities as a member of the ndow dw peak danand and Elettric Power Research saw cunonwn nmney. One Institute. method mvolved remote control by the System over household appliances that use large amounts of ekttricity. 15

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.;e>, m MANAGElWENT'S D@CUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The primary capital requirements for 1986 and as estimated for 1987 through 1989 are as follows: 1986 1987 1988 1,989 %unds of Dhars Construction e iditures (exduding AFUDC).. $1,216,000 $1,189,N0 $ 991,000 $1,018,M natihty property...., 18,000 57,000 64,000 51,000 Nudear fuel an r Maturities of long4crm debt and sinking fund requirements (indudes early redemptions in 1986 of $232,000,000). 306,000 55,000 56,0C0 53,0C0 Total.. $_1,540,000 $1,301,000 $1,111,000 $1,122,000 For detail concerning major construction work now in progress or contemplated by the System Com-panics and commitments with respect thereto, see Resource Plan. He System Companies generate funds from operations sufficient to meet operating needs, pay dividends on capital stock and finance a portion of capital requirements. These funds are derived from conmlidated net income, depreciation, deferred taxes and investment tax credits. Factors affecting the ability of TU Electric to continue to fund a portion of its capital requirements from operations include adequate rate relief and regulatory practices allowing a substantial portion of construction work in pro-gress in rate base, adequate depreciation rates, normalization of federal income taxes, recovery of the cost of fuel and purchased power and the opportunity to earn competitive rates of return required in the capital markets. For 1986, approximately 33% of the funds needed for construction was generated from operations. External funds of a permanent or long-term nature are obtained through the sale of common stock by the Company, and the sales of preferred stock and long-term debt by the System Companies. The capitali:ation ratios of the Company and its subsidiaries at December 31, 1986, consisted of approximately 44% long<erm debt,11% preferred stock and 45% common stock equity. Similar ratios are expected to be maintained in the future. For information regarding bank lines of credit and short-term borrowings of the Company, see Note 2 to Financial Statements. Financings in 1986 by TU Electric induded the following: ImgTenn Dilt: Principal hionth Anwunt Iberiptkm h tar. h $2tY,aV,AV 9%% Firs NLew and G4 lateral Trus nnb Jue 20I6 A;ul 20',dV,dV 9%% hrt htortw and G41ater,d Trus nnh due 2016 a tober 70,AY,AV 7\\% G4lateralmd ibl!utun Gurnd Pustnue Reftalms nnb Jue 2016 Ik mdst 2ai,dV,SV 6% G4aterabd Polluton Gorn4 ihsenue nsis Joe 20!6 [k mdu Jy,tW,ap %% hr< htcw and G4ttneral Trug nob Jue 2016 Taal $%\\y,AV IMrmi Stoik: htmth %res Nt Procmb Ibcrigwim I ebruary 1,aV4W ? W79,AV $ 449 Cumularne IMmd. Subnt to htaalwory Ibskmpon Julv W,0V 44,411,AO $10W Cumularne IMmd, Subst to htntmn Rahmpon Julv W,av 44,417,AV $ M2 Cumulune Pn*rml, Subnt to htalirory thkmpun Total $197,728.AV Early redemptions of long-term debt by TU Electric in 1986 induded the following: 1%winal 161cmptun Ntoruh. Amount. Gw Ibcnpriin Aln- $ 56W,dV $ 64,2M.AY lit % hrst htcw ikuls duc 2010 June SMV,dV taV,dV 15L,% hre htcw nnb Joe 2011 Spemhv 12#74W [4,1%dV 17h% hrs Ntcw not Jue 2011 Nowinh r 70,aV.AY 71,+V,av !%% G4Lmtalad ILIloton Gnerol Iberme nnb Jue 201! Ik emht Y,AV,AV %275 W 1%% hrw NLew Ikub &c 2011 Tot J $2 4257#W $252,Wl 3W 17 l

Financings to date in 1987 include the sale by RJ Electric in February of $250,000,000 principal amount of 9%% first mortgage and collateral trust bonds due 2017. He Company anticipates the sale to the public of 5,000,000 shares of its authorized but unissued common stock in March 1987 and the is-suance in March 1987 by the Brazos River Authority of $100,000,0(X) principal amount of pollution con-trol raenue bonds to be collateralized by the issuance of an equal principal amount of TU Electric's first mortgage and collateral trust bonds. In addition to the maturities of long-term debt during 1987, the Board of Directors of TU Electric authori:cd in February 1987 the redemption by TU Electric of $32,531,000 principal amount of its 16% first mortgage bonds due April 2012 at 112.27% of the principal amount thereof plus accrued interest. Additional early redemptions may occur from time to time in amounts presently undetermined. Le System Companies expect to sell securities as needed, including the possible future sale by TU Electric of up to $350,000,000 principal amount of first mortgage and collateral trust bonds and up to 1,000,000 shares of cumulative preferred stock, both currently registered with the Securities and Exchange Commission for offering pursuant to Rule 415 under the Securities Act of 1933, sales of additional shares of common stock of the Company pursuant to various plans described in Note 3 to Financial Statements and sales of additional securities from time to time, in amounts and of types presently undetermined. The Tax Reform Act of 1986 was enacted in October 1986. He Act, among other things, repealed the investment tax credit, lengthened depreciation lives, created an alternative minimum tax and lowered the corporate tax rate subject to certain transition rules. Other tax accounting changes were required in-cluding the capitalization of items previously expensed and a change in the timing of income recognition for certain items. Substantially all of the tax changes, with the exception of the rate reduction, will result in the Company paying more taxes currently, will eliminate sources of internally generated funds for the Company and thereby increase fmancing requirements in the future. The Act did not have a material ef-fect on the Company for the year ended December 31, 1986. Although TU Electric cannot predict future regulatory practices, the extent of any further delays in the licensing of Comanche Peak or any changes in economic and securities market conditions, no changes are expected in trends or commitments which might significantly alter its basic financial position or ability to fmance capital requirements. However, TU E!ectric has indicated that it does not currently plan to in-ciude any additional Comanche Peak costs in a rate increase request until Unit 1 is ready for commercial operation and has stated that it believes the initial rate increase that will be necessary to place Unit 1 in-to base rates can be held to about 10%. Therefore, prior to the completion of Comanche Peak and its inclusion in rate base, a lesser percentage of capital requirements may be generated internally. (See Notes 10 and 11 to Financial Statements.) See Financial Statistics for additional information. Results of Operations Operating revenues decreased $238,112,000 in 1986 and increased $237,922,000 in 1985. He following l table details the factors contributing to the decrease and increase: Increase (Decrease) Factors 1986 _1985 Tlvmands of Darrs Fuel and purchased power revenue $(299,261) $103,598 Increaxd energy sales. 69,904 135,051 Other (8,755) (727) Totat. $(238,112) $237,922 The decrease in operating revenues for 1986 was the result of decreased fuel revenue partially offset by in-creased energy sales. lower cost of fuel had a significant impact on the decrease in revenues, despite an increase in energy sales of 2.6% attributable to a 3.0% growth in customers. Milder than normal weather and a softness in the service area's economy have also affected sales. Operating revenues for 1985 increas-ed as a result of increased energy sales due primarily to a 5.3% increase in customers and a fairly stable economy, despite milder than normal weather in the service area. See Operating Statistics. 18

Fuel and purchased power expense decreased $309,671,000 in 1986 and increased $106,185,000 in 1985. lower fuel expenw for 1986 reflects the decrease in the unit cost of gas from $3.41 per million Btu in 1985 to $2.77 in 1986 offset in part by increased purchased power. The increase for 1985 was due primarily to increased purchased power and increased consumption of gas. See Operating Statistics. Operation expense increased $38,901,000 and $25,117,000 for 1986 and 1985, respectively. Operation expense was affected by increases in the cost of laix>r, materials and sersices. Increases in wheeling costs and liability and property insurance had a significant impact on operation expense for 1986. The increase for 1985 reflects increases in wheeling costs and costs associated with removing and resetting line transformers. Maintenance expense for 1986 and 1985 increased $19,540,000 and $29,590,000, respectively. Le in-crease in maintenance for 1986 was the result of increases in power production expenses associated with lignite and gas plants and programs to improve and ensure the availability of all generating units. Increas-ed distribution maintenance also added to the increase for 1986. The 1985 increase was the result of in-creased power pnxluction expenses of gas plants to ensure the availability of all gas units and increased tree trimming and distribution maintenance. Taxes other than income increased $4,117,000 and $31,769,000 for 1986 and 1985, respectively. Le increase for 1986 resulted primarily from increases in franchise and property based taxes offset in part by decreased revenue based taxes. The 1985 increase was due primarily to increases in revenue and property based taxes. Allowance for funds used during construction (AFUDC) increased as a result of the ongoing con-struction program and the resultant increase in the level of construction work in progress of RJ Electric not included in rate base. Other income and deductions net for 1086 increased $11,585,000. Le increase in 1986 was primarily due to a sale of certain properties at a gain. The decrease for 1985 was attributable to the writedown of certain property to estimated market value and a decrease in interest income. Interest on first mortgage bonds increased in 1986 due to new issues sold during the year and an-nualized interest of issues sold during 1985, partially offset by the retirements and redemptions of certain high interest rate issues. For 1985, the increase was primarily the result of new issues sold during the year. Other interest charges increased $9,570,000 for 1986 and decreased $2,221,000 for 1985. Le increase for 1986 reflects increawd interest costs on over-recovered fuel revenue offset in part by decreased interest on short-term borrowings. Le decrease for 1985 was primarily the result of a decrease in interest on federal income tax settlements in the prior year. Preferred stock dividends increased for 1986 and 1985, $12,099,000 and $5,618,000, respectively, due to new issues sold during these periods and the full year's effect of prior period issuances, offset in part by lower dividend rates on the adjustable rate series. Consolidated net income increased $39,093,000 in 1986 and $61,717,000 in 1985 which represents a culmination of the factors described above. Included in consolidated net income were increases in AFUDC of $74,114,000 in 1986 and $57,952,0LV in 1985 which represents non< ash eamings to the Company. 19

e a 1 f i ' * '\\ STATEMENT OF CONSOLIDATED INCOME - \\ War I nded I Aymiwr 51. 1 1986 1985 1984 l l Thoitunds of Dbilars l OPERATING REVENUES. $3,932,045 $4,170,157 $3,932,235 OPERATING EXPENSES Fuel and purchased p>wer 1,479,213 1,788,SN 1,682,699 Onration 557,938 519,037 493,920 Maintenance. 319,070 299,530 269,H0 Depreciation 220,381 207,592 202,755 Federal income taxes (Note 7). 264,311 276,711 279,858 Taxes other than income 281,572 277,455 245,686 Total operating expenses. 3,122,485 3,369,209 3,174,858 OPERATING INCOME. 809,560 800,H8 757,377 OTHER INCOME Alk3wance for equity funds used during construction. 231,880 173,N6 129,983 Other income and deductions-net 5,012 (6,573) 2,026 Federal inmme taxes (Note 7). 3,034 2,165 (403) i l Total other income - 239,926 169,438 131,611 TOTAL INCOME. 1,049,486 970,386 888,968 INTEREST CHARGES Interest on mortgage Innds - 317,978 285,693 256,397 Interest on other k>ng<erm debt. 71,073 68,H0 67,858 Other interest 27,155 17,585 19,806 Alk>wance for turrowed funds used during construction - (71,946) (55,866) (41,772) Total interest charps 344,260 316,352 302,289 PREFERRED STOCK DIVIDENDS OF SUl3SIDIARY 78,375 66,276 (0.658 CONSOUDATED NET INCOME. L626,851 $_58L~d8 } 526,011 Average shares of common stak outstandng (thousands) 140,982 135,267 126,626 Earnings and diviJends per share of common stock: Earnings (on average shares outstandng). 34,45 $4,35 $4,15 Dividends drlarnl. 2.68 2.52 2.36 STATEMENT OP CONSOLIDATED RETAINED EA.RNINOS War Ended t h t ember H. 1986 1985 19M Thmnis of D>llm 13AIANCE AT BEGINNING OF YEAR. $1,931,307 $1,686,013 $1,459,750 ADD-Conolidatal net income 626p 1 587,758 526f3 Total. 2,558,158 2,274,671 1,985,701 l DEDL'CT-lhidends ihlaral on tommon stak (for amounts nr share, sir Statement of Conelidated inc ome) 377p_65 343,3M 208,878 IlALANCE AT END OF YEAR (Note 4). $2,1H0,29 3 $1fj3ly $lgy See twmpmyow NotcS to Fin.nul St. wen 20 i

y y 4 g.. f.

c.

t.3 ; STATEMENT OF CONSOLIDATED SOURCE OF FUNDS FOR CONSTRUCTION 't Year Ended Dec ember H. 1986 1985 1934 Thuunds of DJars IUNDS FROM OPERA 110NS Consolidated net income $ 626,851 $ 587,758 $526,041 Depreciation (including amounts charged to fuel). 248,329 231,711 226,177 Dderred faleral income taxes-net. 140,479 124,325 113,685 Federal investment tax credits-nw. 66,302 77,285 59,635 Alk3wance for funds usal during construction. (303,826) (229,712) (171,760) Total funds from operations 778,135 791,367 753,778 Ins-Dividends declared on common stock 377,865 M3,364 298,878 Net funds from operations 400,270 448,003 454,900 FUNDS FROM FINANCING Saks of suunties: First mortgage bonds. 970,000 475,0tV 250,000 Otl er kingaerm delt. 75,000 50,856 PreftTred stock. 197,728 83,513 98,200 Common stock 145,171 249,167 110,565 Retirement of longerm saurities (Note 6). (305,792) (258,156) (65,967) Increase kktrease) in notes payable-commercial paper. 11.300 (59,700) 33,200 Net funds from fmancing 1,018,407 564,824 476,854 OlllER SOURCES (USES) OF FUNDS Changes in working capital, extluding notes payable, long<erm debt due currently and over-resuvenxi fuel revenue: Cash in banks and tenprary tash investments (129,345) 0 9,613) 0,306) Accounts raeivable-net. 10,944 07,4&l) (32,623) Inventories. 9,397 9,795 (75,433) Accounts payaNe 43,034 18,777 83,435 Taxes aurued (41,209) (18,420) 29,442 Other-net. (25,049) 5,408 (2,281) Net (hange. (132,228) (61,537) (766) Nonutility property-net (20,880) (19,925) (19,+43) Nudear fuel. 2,760 (54,803) (43,833) Purt base of utility plant (Note 9) (119,H4) Over/under-rauveral fuel nxenue (net of deferral income taus) (12,309) 52,301 13,441 Un.inwirti:al loss on n acquiral debt-twt (Note 6). (23,398) (32,021) Ot her-net (16,829) (17,693) 18,3M Net other soun es (uxs) of funds. (202,884) (133,678) (152,191) Total. $1,2 5,793 $__879,l49 $g{,563 CONSTRUQlON EXi'ENDfTURES Utthty plant. $1,519,619 $1,108,S61 $951,323 All,mante for funds osal sluring constru< tion. (303,826) (229,712) (171,7N) CONSTRUGlON EX1'ENDfiURES (evludng a!!owante for funds usal Junna sonoruaion) $1,215,79 3 $ 879,149 $779,%3 h 9 5 4 k 5 21

CONSOLIDATED BALANCE SHEET Det ember 51. 1986 1985 Thuunds of Daars ASSE13 UTTUTY PLANT in service: Pnxluaion $ 3,902,898 $ 3,779,908 Transmission. 1,166,066 1,111,704 Distnbution. 2,543,163 2,331,7M Ceneral. 343,347 297,M9 Total 7,955,474 7,521,025 Construaion work in prtyress (Notes 10 and 11). 5,351,565 4,362,615 Nuclear fuel 251,964 254,724 Hek! for future use. 7,130 6,199 Total utihty plant 13,566,133 12,144, % 3 Ir.s accumulatal dyrttiation. 2,522,016 2,331,783 Utility plant, less accumulated &preciation _11,044,117 9,812,780 INVESTMENTS-at cost Nonctihty property (Note 11). 206,615 185,735 Other inerments (Note 1). 15,113 15,40) Total investments 221,728 201,144 CURRENT ASSETS Cash in lunks (Note 2). 6,494 6,M9 Temiurary cash investments-at uwt 184,200 55,300 S;xual Apwits. 35,299 19,836 Anounts rncivable: Customers. 212,153 276,786 Minonty owners (>f Comarwhe Peak (Note 10). 58,826 16,310 Other 33,847 23,&6 Allowance for uncollettibk annunts. (13,817) (15,011) Inventories-at average unt: Materials and supphes. 126,865 123,891 Fuel stak 177,665 IT,036 l D&rral faleral inu>me tam (over-rnuvemi fuel revenue) 29,253 39,739 i Other current assets. 76,586 44,155 l l Total current assets. 927,371 780,959 l l DEFERRED DEBfTS Unamorti:nl kms on reautuirtd debt (Note 6) 55,419 32,021 Cantellullignite unit uwes (Note 11). 36,810 Other aferral Ahts. 32,747 40,118 Total deferralik hts 124,976 72,139 Total. $12,318,192 $10M7,022 Sr enputying Nac3 to Fususial &artwamts. 1 22

i 1986 1985 Thmsands of Dears CAPITALIZATION AND LIABILITIES CAPITAUZATION Common stock-without par value (Note 3): Authori:cd shares-200,000,000 Outstanding shares-1986,142,805,206; 1985,138,M3,162 $ 2,280,528 $ 2,135,357 Retained earnings (Note 4). 2,180,293 1,931,307 Total common stock equity. 4,460,821 4,066,6M I'refermi stock (Note 5): Not subjett to mandatory redemption.. 811,418 811,418 Subject to mandatory rulemption 232,424 34,696 long<erm delt, less amounts due currently (Note 6). 4,283,791 3,615,669 Total capitah:ation 9,788,454 8,528,447 CURRENT UABillilES Notes payable-<ommercial paper (Note 2).. 11,300 lengwrm debt due currently 54,480 72,480 Total (to be refinanad)... 65,780 72,k%) Accounts payable. 305,775 262,741 Dividetxis (k11arn!.. 116,821 IM,258 Customers' tkrosits 44,877 37,934 Taxes aarued. 142,297 183,506 Interest accrued 107,707 98,206 Overmovern! fuel revenue. 63,594 86,389 Otlut wrrent liahhties. 23,856 30,018 Total current liahhties 870,707 875,532 DEIERRED CREDITS AND OlllER NONCURRENT LIABILITIES Accumulatal Metral ftJeral income taxes... 931,938 791,473 Unamorti:nl fakTal investment tax cmhts.. 712,193 M6,743 Other defatni(mhts and noncurrent hahheies. 14,900 22,827 Total Mermi cral:ts and other noncurrent hahhties 1,659,031 1,463,M 3 COMMilhlENTS AND CONTINGENCIES (Notes 10 and !!) Total $12,318,192 $10,%7.022 Scc aunnpinww Notes to finarud Staranan l 23

_.,9lI NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies Gmsoudation-ne consolidated financial statements include Texas Utilities Company (Company) and all of its subsidiaries; all significant intercompany items and transactions have been eliminated in consolidation.

Urdity Plant-Utility plant is stated at original cost. He cost of property additions charged to utility plant indudes labor and materials, applicable overhead and payroll-related costs and an allowance for funds used during construction. Allouunce Ibr Funds Used During Oxutnerion-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 charged to utility plant. He accrual of AFUDC is in accord with generally accepted accounting principles for the industry, but does not represent current cash income. In January 1984, Texas Utilities Electric Company (TU Electric) began capitalizing AFUDC at a net of tax rate of 9%%, compounded semi-annually, of expenditures incurred, except for that portion of construction work in progress allowed in rate base by regulatory authorities. This rate was determined on the basis of, but is less than, the cost of capital used to finance the construction program. Dcpreciation-Depreciation is based upon an amortization of the original cost of depreciable proptities on a straight-line basis over the estimated service lives of the properties. Depreciation as a percent of average depreciable property approximated 3.4% for 1986 and 1985 and 3.5% for 1984. Other Intestments-ne difference between the amount at which the investment in a subsidiary is carried by the Company and the underlying book equity of such subsidiary at the respective dates of acquisition of $14,439,000 is induisi in other investments. Retenac3-Revenues include billings under approved rates (including a fuel cost recovery factor) applied to meter readings each month on a cycle basis and an amount for under or over recovery of fuel representing the difference between actual fuel cost and billings on the approved fuel recovery factor. Pur-suant to a rule adopted in January 1984 by the Public Utility Commission of Texas (PUC), TU Electric had been required to request reconciliation of any over-recovery of fuel costs and may request reconcilia-tion of any under-recovery of fuel costs no less than twelve months after implementing a change in fuel cost recovery. Under the current rule aJopted in July 1986, TU Electric is required to refund over-recovered fuel revenue if the amount of c tr-recovery, including interest, is the leswr of $40 million or 4% of its annual known or reasonably predictable fuel cmts most recently approved by the PUC. Recon. ciliation of fuel costs is to be made in a general rate case or a raunciliation proceeding. Reconaliation may be requested if the utility has miterially under-recovered its known or reasonably predictable fuel costs. Federal hame T.ucs-Be Company and its subsidiary companies file a consolidated faleral income tax return, and federal income taxes are alkrated to all subsidiary companies basd upon taxable income or loss. Deferru! federal income taxes are currently provi&si for timing differences Irtween book and taxable income; such differences result primarily from the use of hberali:ed depreciation and accelerated cmt I rauvery allowable under the Internal Revenue Code and the under or over recovery of fuel revenue. Cumulauve timing differences in earlier years for which deferred federal income taxes were not provided approximatal $D9,000,000 at December 31, 1986. Investment tax credits are being amorti:al to income over the estimatal servi e lives of the properties. The enattment in Octoirr of the Tax Reform Att of 1986 induded, among other things, the repeal of the investment tax craht effective January 1,1986, subject to certain transition rules. Le Act did not have a material ethe on the financial statements presented herein for the year ended De ember 31, 1986. l 24

4 e

2. Bank Balances and Short. Term Borrowings At December 31,1986 and 1985, the Company had lines of credit aggregating $600,000,000 under a credit facility agreement with several commercial banks. The lines of credit may be used for either backup lines for commercial paper or for bank loans. This facility, for which the Company pays a fee, will be reduced ratably each year beginning in 1991 by $200,000,000. The total amount of borrowings authorized by the I30ard of Directors of the Company from banks or other lenders at December 31,1986 was

$650,000,000.

3. Common Stock The Company issued and sold shares of its authori:cd but unissued common stock during the years 1986,1985 and 1984 as follows:

Automatic Dividend Reimestment and Employees' Thrift Plan Common Stock and Employee Public Offerint Purchase Plan Stock Ownership _P_lan Total Year Shares Amount Shares Amount Shares Amount Shares Amount 1986 - 3,826,687 $115,148,000 935,357 $30,023,000 4,762,(M4 $145,171,0LV 1985 5.000,000 $130,650,000 1,431,846 90,199,0LV I,025,M7 28,318,000 9,457,493 249,167,000 19M - 3,875,799 86,450,000 1,024,812 24,115,000 4,900,611 Il0,565,0LV At December 31, 1986, 5,919,663 shares of the authorized but unissued common stock of the Com-pany were reserved for issuance and sale pursuant to the above plans. The Company has 50,000,000 authori:ed shares of serial preference stock having a par value of $25 a share, none of which has been issued.

4. Retained Earnings The articles of incorporation, the mortgages, as supplemented, and the debenture agreements of TU Electric contain provisions which, under certain conditions, restrict distributions on or acquisitions of its common stock, At December 31,1986, $123,613,000 of retained earnings of TU Electric were thus restricted as a result of the provisions of such articles of incorporation. Retained earnings at such date also indudal $431,243,000, representing the Company's equity in undistributed earnings since acquisition induded in transfers by TU Electric from its retained earnings to stated value of common stock, making a total of retained earnings which was restricted of $554,856,000 at December 31, 1986.

25

NOTES TO FINANCIAL STATEMENTS <cononuem

5. Preferred Stock of TU Electric (cumulative, without par value, entitled upon liquidation to $100 a share)

Redemption Price Per Share (before adding Shares Outstanding Amount accumulated dividends) December 31, December 31 Eventual 1986 1985 1986 1985 Current Minimum Thatuands of Dollars Not Subject to Mandatory Redemption $ 4.50 wries. 74,367 74,367 $ 7,440 $ 7,440 $110.00 $110.00 4.00 senes. 70,000 70,000 7,000 7,000 102.00 102.00 4.56 series. 133,628 133,628 13,371 13,371 112.00 112.00 4.00 series. I10,000 110,000 11,000 11,000 102.00 102.00 4.56 senes. 64,947 64,947 6,561 6,561 112.00 112.00 4.24 series. 100,000 100,000 10,081 10,081 103.50 103.50 (64 senes. 100,000 100,000 10,016 10,016 103.25 103.25 4.84 senes. 70,000 70,000 7,000 7,000 101.79 101.79 4.00 senes. 70,000 70,000 7,049 7,049 103.56 103.56 4.76 series. 100,000 100,000 10,000 10,000 102.00 102.00 5.08 senes. 80,000 80,000 8,004 8,004 103.60 103.60 4.60 senes. 100,000 100,000 10,009 10,009 102.79 102.79 4.44 senes. 150,000 150,000 15,061 15,061 102.61 102.61 7.20 senes. 200,000 200,000 20,044 20,044 103.21 103.21 7.80 senes. 299,875 299,875 30,021 30,021 103.25 103.25 8.92 series. 200,000 200,000 20,076 20,076 103.60 103.60 6.84 senes. 200,000 200,000 20,022 20,022 103.05 103.05 7.24 series. 249,800 249,800 25,100 25,100 105.23 103.42 7.44 series. 300,000 300,000 30,006 30,006 104.26 102.40 7.48 senes. 300,000 300,000 30,073 30,073 104,82 102.95 8.20 senes. 300,000 300,000 30,t 08 30,108 105.34 103.29 8.44 series. 300,000 300,000 30,046 30,046 105.29 103.18 9.32 senes. 300,000 300,000 29,625 29,625 104.66 102.33 9.36 wnes. 300,000 300,000 29,625 29,625 104.68 102.34 8.68 series. 300,000 100,000 29,550 29,550 104.09 101.92 8.16 series. 299,475 299,475 29,616 29,616 106.12 102.04 8.32 series. 300,000 3N,000 29,655 29,655 105.88 101.00 8.84 senes. 300,000 300,000 29,591 29,591 106.13 102.05 10.92 senes. 300,000 300,000 29,670 29,670 108.19 102.73 10.12 senes. 350,000 350,000 34,615 34,615 106,75 100.00 11.12 senes. 300,000 3N,000 29,670 29,670 111.32* 100.00 AdjustaNe rate senes A. 1,000,000 1,000,000 98,200 98,200 (a) 100.00 AJ ustable rate senes Il. 850,000 850,000 83,513 81,511 (a) 100f0 i Tot al. 8,172,092_ 8,172,092 _$811,418 $811,418 l Subject to Mandatory Redemption (b) 510.08 senes. 350,000 350,000 $ 34,(96 5 34,696 $ 110.08 * $ 100.00 9.43 senes. 1,000,000 98,878 t 09.48

• 100.00 10.00 senes.

500,000 49,413 110.00* 100.00 8.92 senes. 500,000 49,437 108.92* 100.00 Total. 2,350,000 150,000 523_2,424 $ 14,696

• bbnnen nuv. tr aun!,um.rdv ebringh icewn n4urdrw qrrma u Aind ir rare en "A" tem a Jukrd ree h the pnd mkd I.unwy 11,1+7 4 6M pr arunan Altu,#aNe rac m, *lf lem a.linbd r.we W the pnd crdd thenht it,1 N. if 7.A% p r annum, the um we i.e mbmNr gne to } ire 1,1 Fe and f arv 1,14, ry endy, mm!.wr h ed oa the bel Inudnin in c 44 tid'E pt bre.

04 IU LLen m maand to rnkm a Al meemm nonht (4 Junn arnuliv omwn uw on the c!fo rm der, Jo n Id>*. cuqt 6 e the M en wha h d es r= 4 h.ne e au lu s 6 al p. w.n. IU thm may,uanully mb3n, a n quin, an ammac it or to ru e the nuinh,, if 4 wi% 4ewn 6e e= h ens M % h mbnpens a m a in e 4 $1NE pt die sbn uurnul.ani diukwh. %rumum RakemAle inical Ibee of l Nrn __ Jhare. Niniatory Rakureyn i WM 142U anindy 41 A6 9 44 tGO anmu!!y 4 1 '42 h' x XAU ms.u..lly 7IW H2 A3 ruirwa, dog 4:ans 'I+ 26

. 3 4

W Electric issued and sold shares of its authori:ed preferred stock as follows: July 1986,500,000 shares of $10.00 series cumulative preferred stock, subject to mandatory redemption, for $49,413,000; Ju-ly 1986, 500,000 shares of $8.92 series cumuhtive preferred stock, subject to mandatory redemption, for $49,437,000; February 1986, 1,000,000 shares of $9.48 series cumulative preferred stock, subjxt to man-datory redemption, for $98,878,000; June 1985, 850,000 shares of adjustable rate series B preferred stock for $83,513,000; and May 1984, 1,000,000 shares of adjustable rate series A preferred stock for $98,200,000.

6. Longterm Debt of Subsidiaries, less amounts due currently December 31, hiaturity Groups Interest Rate Groups 1936 1%5 From To From To T7mmands of Duns Fint mortgage borA:

1987 1991 4%% 4% % $ ' 34,500 $ 50,500 1932 1996 4% 5% 142,000 142,000 19n 2001 5% 9% 304,000 3N,000 2002 20M 7% 10 % 750,000 750,000 2007 2011 8% 175 275,000 437,467 2012 2016 9% 16 1,757,531 1,057,531 Pellution control wries: 20!! 2016 7N 135 310,000 110,000 Sinking fund debenture: 1987 1989 4% 4% 18,454 24,5 % 1913 19M 6% 7h 32,448 33,151 Total 3,623,933 2,909,245 Pollution control rewnue lunds:....... 20M 2009 5.70 7%. 160,000 160,000 Senior notes: 19 0 14N 8.50 12.20 534,860 567,340 Unamorti:cd prtmium and discount. (35,002) (20,916) Total king <erm debt, less amounts due currently. $4,283,791 $3,615,669 Sinking fund and maturity requirements for the years 1987 threugh 1991 under long-term debt instru-ments in effect at December 31, 1986, were as follows: Sinking hiinimum Cash Year Fund (a) Maturity Requirement (b) hunds of a&m 1987. $46,350 $ 22,000 $ 54,4S0 1988. 48,2II 22,500 56,029 1989 47,550 18,000 51,180 19 0. 47,456 10),000 133,180 1991 47,456 12,000 45,180 (a) Excluding requirements satisfied prior to December 31, 1986: $2,433,000 for 1987, $571,000 for 19S8, $320,000 for 1989, $320,000 for 1990 and $320,000 for 1991. (b) Other requirements may be satisfied by certification of property additions at the rate of 167% of such re-quirements, except for sixteen issues at 100% In February 1987, TU Electric sold $250,030,000 principal amount of 9%% tirs: mortgage and collateral trust Ernes due 2017. In 19d6 and 1985, $232,467,000 and $180,003,000, respectively, principal amount of first mortgage Lunds were redamed by W Electric prior to maturity. Pursuant to expected regulatory treatment, the net kw,es on reacquired debt have been deferred and are being amorti:ed over the remaining lives of the bonds retired. UnL6 plant of TU Electric is generally subject to the liens of its nr>rtgmys. 27

^ NOTES TO FINANCIAL STATEMENTS a-ru.o

7. Federal Income Taxes The details of federal income taxes are as follows:

Year Ended December 31, 1986 1985 19M Thxuands of Dilars Charged to operating expenses: Current. $ 55,545 $127,114 $128,398 Deferred-net: Differences between depreciation methods and lives. 79,148 85,950 78,274 Certain capitalced construction costs.. 19,320 19,390 18,415 Over/under<ecovered fuel revenue.. 11,935 (44,553) (12,899) Cancelled lignite unit..... 12,293 Early redemptions oflong<erm debt. 10,763 14,730 Other.. 9,005 (3,205) 8,035 Total.......... 142,464 72,312 91,825 Investment tax credits-net. 66,302 77,285 59,635 Total to operating expenses. 264,311 276,711 279,858 Charged (created) to other income-Current.. (11,535) (9,625) (10,007) Deferred-net.. 8,501 7,4@ 10,410 Total to other income.. (3,034) (2,165) 403 Total federal inmme taxes.. $261,277 $274,546 $280,261 Federal income taxes were less than the amount computed by applying the federal statutory rate to pre. tax book income as follows: Year Ended December 31, 19f/> M 19M Thnaands of Dilars Federal inmme taxes at statutory rate of 46%.. $444,591 $427,147 $398,802 Reduaions in federal income taxes resulting from: Allowance for funds used during construction. 139,760 105,668 79,010 Depletion allowance.. 24,006 25,442 24,834 Amorti:ation ofinvestment tax credits. 14,982 13,781 13,826 Ot her.. 4,566 7,710 871 Total reductions.. 183,314 152,@l 118,541 Total federal income taxes.. $261,277 $274,546 $280,261 Effective tax rate. 27.0% 29.6 % 32.3 %

8. Retirement Plans and Other Postretirement Benefits The System Companies have uniform retirement plans covering substantially all employees. The benefits are based on years of accredited service and the empicyee's average annual earnings received during the three years of highest earnings. The costs of the plans are determined by independent actuaries. Con-tributions to the plans were determined using the fro en attained age method which is one of the several actuarial methods allowed by the Employee Retirement Income Security Act of 1974. During 1986, the Systei.: Companies adopted the Financial Accounting Standards Bxrd's Statement of Financial Account-ing Standards No. 87, " Employers' Accounting for Pensions." He new standard requires, among other things, the use of the projected unit credit actuarial method for determining pension cost for financial rep)rting purposes. The difference between pension cost as determined under the new standard and con-tributions to the plans in 1986 is recorded as prepaid pension cost and included in other current assets.

The adoption of the new accounting standard did not have a material etibet upon the Company's finan-cial position or results of operations. I 28

ne following table sets forth the plans' funded status and amount recognized in the Company's con-solidred balance sheet: %,nbec n,1986 Thmads of D4.as Atuanal peuw value d anumulated hex 4ts: Aaumulaitd h4x4r dham, induJing vesed hufta d $187.775.. 5 446,129) Projnted hnft dagaram ir scrde rerdent to date... h654,102) Man amts at fair value. pnmanly equity irnusmerits. awmnwtw hud arxl awpvate hwa.. 729.003 nan awts in extes d pteted haft ingaram.. 74,90! Unnuend rxt pn fmm pu expum ditiivent fnun that amunnd arxl etInts d c.hanges in (51,6111 = .wumpa ss.. Prue wrne an ist vet rnogncal in rut 17 C42 pmL mm expnc.. Unnuwined plan ants in extem d popicd haft ingatum at January 1.1%6.. (22,584) Prepud pmin un iru ttad in other awes $ 17.723 Assumptions used for 1986 included a discount rate of 8.0%, an expected long<erm rate of return on assets of 8.0% and a 6.3% increase in compensation levels. Net periodic pension cost for 1986, including amounts capitalized, was comprised of the following components: S<tne uw hnfts cansd dunng the pnd.. $ 32,752 Intere a as on pontal hnft d%nm.. 46,295 Atual return on plan awes.. (ICO.2SS) Net ansetcaram arxi deferral.. SIN) Net pnde pmin uw.. $___k_g The costs of plans, including amounts capitali:ed, approximated $48,283,000 for 1985 and $45,300,000 for 1984. In addition to retirement plans, the System Companies ofter certain health care and life insurance benefits to active and retired employees. He costs of such benefits are generally recogni:cd as claims are paid. Le costs of prosiding such benefits to retired employees, net of employee contributions, approx-imated $6,759.000 for 1986, $4,831,000 for 1985 and $3,993,000 for 1984

9. Purchase of Utility Plant In October 1984, TU Electric purchased Alcoa's 30% interest in the partially completed Twin Oak generating station and asmciated lignite reserves, and Texas Utilities Mining Company (Mining Company) purchawd the associated lignite mining fa<ilities and equipment. The purchase price of Alcoa's interest in the station, related lignite reserves and mining racilities and equipment was $119,944,0tn

10. Comanche Peak Nuclear Generating Station TU Electric is constructing two nuclear-fueled generating units at Comanche Peak Nuclear Generating Station (Comanche Peak). TU Electric is subject to the jurisdiction of the Nuclear Regulatory Commis-sion (SRC) with respect to nuclear power plants. NRC regulations govern the granting of licenses for the construction and operation of nuclear power plants and subject such power plants to continuing review and nyulation. Pursuant to such regulations, a review is being conducted by the NRC of RJ Electric's application for licenses to operate the Comanche Peak units. As a part of that review, a proceeding was initiated before an Atomic Safety and Licensing Board (ASLB) and hearings on various issues have been ongoing since December 1981. After completion of the ASLB proceeding, the ASLB will make recom-mendations to the NRC regarding the issuance of operating licenses for the Comanche Peak units. An intervenor is actively involved in this ASLB proceeding.

He one remaining Contention before the ASLB in the operating license proceeding relates to TU Electric's quality assurance / quality control (QA/QC) program for the design and construction of the plant. In December 1983, the ASLB issued a memorandum questioning the QA program for design of 29

/ a ' NOTES TO FINANCIAL STATEMENTS (coniinue+

10. Comanche Peak Nuclear Generating Station kontinua certain portions of the plant and requested that TU Electric offer additional proof of adequate design and design review procedures. The ASLB is also resiewing several other related issues and has indicated its in-tent to review the results of the NRC's Technical Review Team (TRT) investigation discussed below. In July 1984, a separate ASLB, including two of the three members of the original ASLB, was convened to receive testimony on allegations that QC inspectors at the plant have been subjected to an atmosphere of harassment and intimidation which is alleged to have affected the implementation of TU Electric's QA program. In January 1986, this separate ASLB was disestablished with all issues thereafter to be resolved by the original ASLB.

As a separate part of the NRC's review of'IU Electric's operating license application, in March 1984 the NRC established a task force to consolidate and carry out the various reviews necessary for the NRC Staff to reach its decision regarding the operating licenses. This effort inmtved the establishment of the ET which began an intensive onsite investigation in July 1984 and subsequently has issued reports re-questing additional information from TU Electric with respect to several functional areas of the plant's construction program. TU Electric then formed a special team, the Comanche Peak Response Team (CPRT), which includes a number of independent experts in each area addressed by the TRT, and sub-mitted a Program Plan to respond to the questions raised. Such Plan, which is described further below, is presently being implemented and has been expanded to address the design and other ASLB issues described herein. In January 1985, the TRT issued a report on its review of the QA/QC programs at Comanche Peak. The report stated that although the QA program documentation met NRC requirements, the implemen-tation of the QA program demonstrated that TU Electric has lacked the commitment to aggressively im-plement an effective QA/QC program in several areas. The TRT indicated that it has found evidence of faulty construction and ineffective QA and QC inspections. Questions were also raised concerning the training and qualification of QC personnel and in the reporting of deficiencies. The RT further found that prior to July 1984 problems had existed in the control of documentation. In addition, deficiencies in several other areas were described. TU Electric was requested to submit to the NRC a program and schedule for completing a detailed and thorough assessment of these QA/QC issues presented by the TRT. TU Electric also was asked to consider the use of management personnel with a fresh perspective to evaluate the TRT findings and implement corrective action, and to consider the use of an indepen-dent consultant to oversee the corrective action program. In June 1985, TU Electric filed with the NRC and the ASLB a comprehensive Program Plan which will be utili:ed by the CPRT to address all outstanding design and construction concerns. This Plan, which was substantially revised and reissued in January 19S6, calls for the inspection, on a sa:npling basis, of numerous safety related systems in the plant, for the determination of root causes and generic implica-tions of any safety significant deviations found in the inspection process, and for the development of a corrective action program as required. In hiay 1986, the StatT of the NRC issued a Supplemental Safety Evaluation Report (SSER) containing an evaluation of this Plan. The SSER concludes that the Plan pro-vides an overall structure and process for addressing and resching all existing construction and design issues and any future issues that may be identified from further evaluations. TU Electric has made several key management changes in the nuclear program for Comanche Peak, including the addition of several new officers who bring substantial nudear experience to TU Electric. This new management team is responsible for oversight and implementation of the reinspection and corrective action program. Also in June 1985, TU Electric filed with the NRC and the ASLB a Case hianagement Plan (hianage-ment Plan) which recommended that the results of the CPRT effort be used to provide the ASLB with reasonable assurance that Comanche Peak has been safely constructed and suggested that numerous cur-rent issues before the ASLB no longer need to be considered in light of the significant reinspection effort now underway. In August 1985, the ASLB issued a hiemorandum and Order addressing issues raised by the hianagement Pim. The hiemorandum denied TU Electric's motion to adopt the Management Plan stating that the ASL3 finds that it would not be proper to adopt such hianagement Plan as the sole basis for continued litigation of TU Electric's application for operating licenses for the Comanche Peak units. In addition, the hiemorandum described other areas of the CPRT Program Plan that concern the ASLB. The hiemorandum indicated, however, that if the CPRT Program Plan is revised to address the ASLB's concerns and if it is appropriately implemented, the CPRT Program Plan may demonstrate the quality of the plant. The ASLB further stated that it is difficult to forecast when hearings in the case will be concluded but that the ruling may necessitate substantial proceedings that will delay the operation of 30 Comanche Peak.

e r ~ e' In June 1986, the ASLB issued a Memorandum which addressed " Board Concerns" about the ade-quacy of the CPRT program. He Memorandum stated that, based upon the ASLB's current knowledge of the program, after having reviewed the first results reports and the SSER on the CPRT program, the ASLB continued to have the concerns expressed in earlier memoranda, as described above. The ASLB also raised additional concerns about how findings in one area of the reinspection effort may affect W Electric's programs in other areas, whether sufficient attention is being paid to problems of quality assurance and quality control regarding design, the adequacy of the CPRT sampling program, and perceived oversights in one of the results reports that had been issued. TU Electric is addressing these concerns and has submitted a response. In August 1986, the ASLB issued a ruling concerning the scheduling of issues for hearing. Under the ruling, the intervenor can and has initiated discovery relating to the overall adequacy of the CPRT program. Within thirty days following W Electric's completion of responses to the intervenor's discovery requests, the intervenor is permitted to file a motion with the ASLB for summary disposition on the issue of the adequacy of the CPRT program. Following receipt of such motion, the ASLB will determine whether to proceed with determining the overall adequacy of the CPRT program or whether to address the specific findings and results of the CPRT program. In May 1985, TU Electric found a report in its file, relating to certain deficiencies in the QA program, which it believed should have been provided in response to a 1980 discovery request of the intervenor, and sent the report to the ASLB. In June 1985, TU Electric indicated that an error in judgment was made in failing to produce the report earlier and took appropriate steps to assure that a similar situation does not recur. His matter has been investigated by the NRC's Office of Investigations which concluded that the omission was a material false statement but that it was not intentional. His matter has also been the subject of discovery requests before the ASLB. In January 1986, TU Electric filed an application with the NRC for an extension of the construction permit for Unit I to reflect a new " latest date for completion" of August 1,1988; previously such date had been August 1,1985. In the application, TU Electric stated that the reason the request for extension of the construction permit was not filed at an earlier time was administrative oversight. In February 1986, the NRC issued an order extending the " latest date for completion" of Unit I to August 1,1988. Subse-quently, the intervenor involved in the operating license ASLB proceeding filed with the NRC a request to stay the effectiveness of the construction permit extension and to require TU Electric to file a new ap-plication for a construction permit for Unit 1 or to order that hearings be held prior to any decision on whether to grant the construction permit extension. He request for a stay was denied by the NRC and the question of whether to hold such hearings was remanded to an ASLB, the members of which are the same as the ASLB for the operating license. In May 1986, the ASLB issued a Memorandum and Order in which it accepted for litigation a new Contention, raised by two intervenors which alleged that the delay in completing Comanche Peak, which has occurred and has necessitated the extension of the construction permit by the NRC, is the result of dilatory action on the part of TU Electric and that, therefore, goal cause did not exist for the extension of such permit. TU Electric appealed this ruling to the NRC's Atomic Safety and Licensing Appeal Board (Appeal Board). In July 1986, the Appeal Board certified to the NRC Commissioners a question regarding the validity of the Contention which had been accepted by the ASLB; and in September 1986, the Commissioners issued a ruling supportive of TU Electric's position and remanded this matter to the Appeal Board. In November 1986, while such appeal was pending, the ASLB, at the request of the intervenor, granted an amendment to an earlier Conten-tion which had previously been disallowed. He amended Contention also relates to the question of good cause to extend the construction permit. TU Electric has appealed this action to the Appeal Board. In March 1986, the intervenors also filed a motion to stay the effectiveness of the February 1986 NRC order and a petition for review thereof with the U.S. Court of Appeals for the District of Columbia Cir-cuit. He motion for stay was denied in April 1986, and the petit on for review is still pending before i the Court. In June 1986, TU Electric decided no longer to contest, and therefore paid, a civil penalty of $40,000 which was part of an aggregate of $120,000 in civil penalties previously proposed by the Staff of the NRC relating to allegations of harassment and intimidation at Comanche Peak. TU Electric requested the Staff to revisit the other alleged violations to determine whether they did in fact occur and to con-sider mitigating the amount of the penalties. In August 19S6, TU Electric decided to no longer contest, and therefore paid, a civil penalty of $200,000 previously proposed by the Staff of the NRC relating to the findings of the TRT, described above. TU Electric at the same time requested mitigation of another proposed civil penalty of $50,000, relating to two alleged violations in TU Electric's reinspection and cor-rective action effort, which request was denied; and this penalty has also been paid. 31

s . NOTES TO FINANCIAL STATEMENTS %.4

10. Comanche Peak Nuclear Generating Station (conerue in December 1986, a portion of a report was released by the Office of Inspector and Auditor of the NRC (OIA Report) containing the results of its investigation of allegations of misconduct by the manage-ment of Region IV of the NRC with respect to Comanche Peak. The OIA Report expressed concern about allegations of harassment and intimidation by Region IV management to pressure Region IV in-spectors to downgrade or delete proposed inspection fmdings at Comanche Peak. In addition, the OIA Report concluded that it would not be pmsible to rely on the Region IV QA inspection as esidence of the safe construct.on of Comanche Peak. Consequently, it stated that it will be necessary for the NRC to l

rely largely on recent detailed technical inspections conducted by the NRC at Comanche Peak. The OIA Report also indicated that the data contained in an internal NRC report on inspection procedures was inaccurate and unreliable due to a lack of understanding by NRC inspectors of the proper method of completing a certain NRC form. NRC officials have indicated that a thorough assessment of the results of this investigation will be made. The OIA Report's findings are restricted to activities in the NRC's Region IV and do not question other NRC regulatory activities with respect to Comanche Peak, in-cluding the detailed technical inspections recently conducted by the 'IRT as discussed above. TU Electric is unable to predict the impact, if any, that the OIA Report might have on future NRC inspection and regulatory activities with respect to Comanche Peak. The NRC has announced that it is creating a new Office of Special Projects to manage all aspects of the NRC's licensing and inspection efforts for Comanche Peak and certain other nuclear power plants, and has named a current regional administrator to head this team. The NRC announced that this office is expected to be operational by hiarch 1,1987. TU Electric cannot at this time predict what effect, if any, this reorganization will have on the Comanche Peak licensing process. TU Electric, Texas hiunicipal Power Agency (Th1PA), Bra:os Electric Power Cooperative, Inc. (BEPC), and Tex-La Electric Cooperative of Texas, Inc. (Tex-La) are the owners of 8M%, 6.2%, 3.8% and 25% interests, respectively, m Comanche Peak under the terms of a joint Ownership Agreement (Agree-ment) which provides that TU Electric is the Project hianager for Comanche Peak. BEPC has failed to make numerous payments of its portion of the costs of Comanche Peak. BEPC has been experiencing dif-ficulty in obtaining additional financing for Comanche Peak from the Rural Electrification Administration. In addition, since hiay 1986, Tex-La has failed to make paytnents to TU Electric for its portion of Com-anche Peak and Th1PA has been making payments under protest. Accounts receivable at December 31, 1986 induJed $55,736,000 of amounts due from BEPC and Tex-La. The portion of future construction expenditures due from BEPC and Tex-La are estimated to be $44,745,000 in 1987, $25,526,000 in 1988 and $6,401,000 in 1989. In hiay 1986, TU Ekctric filed suit in the 14th Judicial District Court of Dallas County, Texas, against ThiPA, BEPC and Tex-La because of controversies which exist under the Agree-ment with respect to the obligations of the parties. TU Electric asserts that each of the defendants has either claimed that it has no further obligation to pay its share of the remaining costs of construction of Comanche Peak, or has claimed that TU Electric has failed to properly construct Comanche Peak or l otherwise has breached its obligations under the Agreement. TU Electric seeks recovery of damages l against Tex-La for its anticipatory breach of the Agreement and asks for a declaratory judgment against Tex La, BEPC and ThiPA declaring among other things that they are obligated to pay their share of the remaining costs of construction of Comanche Peak and that TU Electric has not failed to use prudent utility practices in constructing Comanche Peak in accordance with the Agreement. ThiPA, BEPC and Tex-La have filed cross-actions in such suit against TU Electric and the Company asserting various causes I of action, including a number of alleged breaches of the Agreement by TU Electric and violations of the Texas Deceptive Trade Practices Act (DTPA). In September 1986, the Court in the Dallas County suit ruk11 in favor of TU Electric with regard to a plea of the defendants attempting to change the venue of such suit. In June 1986, ThiPA and Tex-La filed suit in the 98th Judicial District Court of Travis County, Texas against TU Electric and the Company. The petition asserts various causes of action, including a number of alkged breaches of the Agreement by TU Electric and violations of the DTPA. ThiPA and Tex-La ask for rescission and modification of the Agreement and payment for damages, including treble damages based upon violation of the DTPA. TU Electric and the Company intend to vigorously contest this suit, which has been stayed as a result of the ruling in the Dallas County suit. Also in June 1986, BEPC fikd suit in the 345th Judicial District Court of Travis County, Texas against TU Electric, the Company and hiining Company and Texas Utilities Services Inc., also subsidiaries of the Company. BEPC alkves that the defendants have breached the Agreement, certain implied warranties 32 and fiduciary duties, and have been grossly negligent, acted with willful misconduct and have siolated the l

/ DTPA and Texas and federal securities laws. BEPC asks for an injunction against efforts by the defen-dants to recover additional payments, rescission and reformation of the Agreement and payment fcir damages, trebled pursuant to the DTPA. BEPC alleges actual damages to date of at least $216 million. He defendants intend to vigorously contest this suit, which has been stayed as a result of the ruling in the Dallas County suit. As a result of the Company's regular annual review of its construction program, in November 1986, the Company estimated that all reanalysis, reinspection, rework and testing activity prerequisite to the loading of fuel in Unit 1 of Comanche Peak will be complete in early 1988. Based on this estimate, the Company estimated that commercial operation of this unit will be achievable in early 1989. He Com-pany also estimated that Unit 2 will not be ready for commercial operation until after the 1989 summer peak season. If licensing approvals are obtained so as to permit commercial operation of these units at these times, the total cost for TU Electric's share of the plant, excluding AFUDC, is estimated to be $4.63 billion. TU Electric's estimated cost for its share, including AFUDC, is $6.70 billion or about $3,300 per kilowatt. He total cost of the plant, excluding AFUDC, is estimated to be $5.27 billion. Becauw of uncertainties regarding payments by the other owners of Comanche Peak of their share of the remaining construction costs, no estimate of the amount of AFUDC that may be attributable to their in-terests in the plant has been made. The Company had previously estimated in November 1985, that commercial operation of Unit I would be achievable by mid-1987 and Unit 2 by the end of 1987 if the necessary licensing approvals were obtained. The total cost of TU Electric's share of the plant was estimated at that time to be $4.64 billion, including AFUDC, or $2,297 per kilowatt. However, in April 1986, the Company announced that such schedule was no longer achievable and in July 1986, announc-ed that the reanalysis, reinspection, corrective action program, and the hearing process before the ASLB could not be completed in time for commercial operation of Unit I for the 1988 summer peak season and that, therefore, it was making other arrangements to obtain additional capacity in the interim. Failure to secure timely and favorable regulatory approvals or further dehys occasioned by additional reanalysis, reinspection or rework will increase the cost of the plant and will likely increase financing re-quirements. At December 31,1986 and 1985, TU Electric's irwestment in Comanche Peak was $4,600,000,000 and $3,615,000,000, respectively, of which $1,284,000,000 has been allowed in rate base by regulatory authorities. TU Electric has indicated that it does not currently plan to include any additional Comanche Peak costs in a rate increase request until Unit 1 is ready for commercial operation and has stated that it believes the initial rate increase that will be necessary to place Unit 1 into base rates can be held to about 10% Such rate application may be subject to challenge with respect to the prudence of certain costs, for which an estimate is not present!y determinable. (See Note 12.)

11. Commitments and Contingencies Constmction Pmgram-For major construction work now in progress or contemplated by the System Companies, and commitments with respect thereto, see Resource Plan.

Cmling Water Contraas-TU Electric has entered into contracts with public agencies to purchase cooling water for use in the generation of electric energy and has agreed, in effect, to guarantee the principal, $49,130,000 at December 31, 1986, 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@ to 9% W Electric is required to make periodic payments equal to such principal and interest for the years 1987 through 1991 as follows: $4,387,000 for 1987, $4,387,000 for 1988, $4,396,000 for 1989, $4,423,N)0 for 1990 and $4,435,000 for 1991. In addition, TU Electric is obligated to pay certain variable costs of operating and maintaining the reservoirs. Total payments, including amounts capitali:ed, under such contracts for 1986,1985 and 1984 were $4,833,000, $4,779,000 and $4,766,000, respectively. In July 1983, TU Electric received regulatory approval of an agreement with a municipality for that municipality to assume all contract rights and obligations of W Electric in connection with $102,950,000 remaining principal amount of bonds issued for similar purposes which had previously been guaranteed by TU Elec-tric; E Electric is, however, contingently liable in the event of default by the municipality. Chu Gul Pmpetics-Chaco Energy Company (Chaco) entered into an agreement in 1977 for the rights to over 200 million tons of surface mineable coal krated in New Mexico. The agreement provides, subject to certain limitations, for advance royalty payments, payable over a period of approximately 35 years, which are based upon annual quantities ranging from approximately 4.8 million tons in 1987 to a maximum of approximately S.3 million tons in 1991. Such payments approximated $6.10 per ton in 1986 and are subject to escalation in the future due to inflation. In connection with the foregoing, the 33

NOTES TO FINANCIAL STATEMENTS (conciudedi s

11. Commitments and Contingencies - (condual)

Company entered into a surety agreement pursuant to which it has undertaken to assure the performance by Chaco with respect to this agreement. Non-utility property at December 31,1986 and 1985 includes $114,400,000 and $90,700,000, respectively, of minimum advance royalties paid by Chaco under the terms of this agreement. Capacity and Energy Piechase-TU Electric entered into an agreement in 1982 with Tex-La, a 2%% owner of Comanche Peak, whereby TU Electric agreed to purchase an assignment of portions of Tex-La's entitlement to capacity and energy from Comanche Peak in declining amounts over the first eight years of commercial operation of each generating unit. Under the agreement, TU Electric is required to make annual payments to Tex La comprising a pro rata share of operating costs plus a capital charge on Tex-La's net investment applicable to the portion of Tex-Ids entitlement assigned. (See Note 10 concerning litigation proceedings regarding Tex-La's participation in Comanche Peak.) hianin Lake Unit 4 Constmcrion Can llarion-In November 1986, TU Electric announced that it was not economically feasible to construct a fourth unit at the hiartin Lake Steam Electric Station (Niartin Lake Unit 4) and cancelled the project which was scheduled for service in 1994. Pursuant to expected regulatory treatment, expenditures through October 1986, of approximately $36,810,000, including contrac-tor termination costs, have been recorded as a deferred asser to be amortized as approved by regulatory authorities. (See Note 12.) General - In addition to the above, the Company and its subsidiaries are imulved in various legal and administrative proceedings which, in the opinion of the Company, should not have a material effect upon its financial position or results of operations.

12. Financial Accounting Standards Board Statement No. 90 in December 1986, the Financial Accounting Standards Board issued Statement of Financial Accoun-ting Standards No. 90 entitled " Regulated Enterprises - Accounting for Abandonments and Disallowances of Plant Costs" which becomes effective for fiscal year 1988.

The Statement requires that when it is probable that an operating asset or an asset under construction will be abandoned that the cost of the asset be removed from plant in service or construction work in progress. At that time, the present value (derived by using the company's incremental borrowing rate) of future revenues expected to be allowed by regulatory authorities for recovery of such cost would be recorded as a separate asset and any difference would be recogrized as a loss. Such calculation would re-quire estimates of when recovery would begin and the length of the recovery period. Application of the Statement to the accounting for the abandonment of hiartin Lake Uni 4 is not expected to have a t material effect on the Company's financial statements. He Statement also requires that when it becomes probable that part of the cost of a recently com-pleted plant will be disallowed for rate-making purposes and a reasonable estimate of the amount of the disallowance can be made, that amount shall be deducted from the reported cost of the plant and recognized as a loss. The final provision of the Statement requires that an allowance for funds used dur-ing construction be capitalized only if it is probable that those costs are allowable for rate-making purposes.

13. Supplementary Financial Information (Unaudited)

In the opinion of the Company, the following information 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, in-cluding rate changes and variations in maintenance and other operating expense patterns. Earnings Per Shan of Consohdated Conunon __Op_eracing Revenues Orerating income Net Income Stock Quarter Endal 19 4 1%5 1986 1%5 1986 1%5 1986 1%5 Tkah o' D&as kutt pv Are emnN h h31- $ a30,298 $ T7,1N $169081 $170,N2 $119,167 $116,H5 $0.86 50N0 June 30.. 942,481 W3,165 173,711 174,%1 122,682 121,170 0.8N 030 Squemlxt 30... 1,248,119 1,328,203 297,056 284,323 249,299 2 %,346 1.76 1.75 thenk 31. 911,147 HI,610 169,712 165,872 135,703 !!),297 0.95 0.82 Taal.. $ 3,9 32.N5 $4,170,157 $H09,540 sq%s $626,851 $587,7s8 $4.45 $435

STATEMENT OF RESPONSIBILITY Re management of Texas Utilities Company is responsible for the preparation, integrity and objectisity of the consolidated financial statements of the Company and its subsidiaries and other information in-cluded in this report. Le consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. As appropriate, the statements in-clude amounts based on informed estimates and judgments of management. He Company's system of internal accounting control is designed to provide reasonable assurance, on a cost effective basis, that assets are safeguarded, transactions are executed in accordance with management's authori:ation and financial records are reliable for preparing consolidated financial statements. Manage-ment believes that the system of control provides reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would in 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 in-ternal audit program designed to evaluate its adequacy and effectiveness. The Board of Directors of the Company addresses its oversight responsibility for the consolidated finan-cial statements through its Audit Committee, which is composed of dirxtors 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 controls. 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 Haskins & Sells is engaged to examine, in accordance with generally accepted auditing standards, the consolidated financial statements of the Com-pany and its subsidiaries and to express an opinion thereon. ' ACCOUNTANTS' OPINJON. ~ ~ s DELOrITE HASKINS & SELLS CERTIFIED It'BLIC ACCOUNTANTS To the Shareholders of Texas Utilities Company: We have examined the consolidated balance sheet of Texas Utilities Company and subsidiaries as of December 31,1986 and 1985 and the related consolidated statements of income, retained earnings and source of funds for construction for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, in-cluded such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the consolidated financial statements referred to above present fairly the financial posi-tion of the companies at December 31,19S6 and 1985 and the results of their operations and the source of their funds for construction for each of the three years in the period ended December 31,1986, in confonnity with generally accepted accounting principles applied on a consistent basis. DELOfrTE HAsKINs & SELLS Dallas, Texas February 23, 1987 35

ll FISANCIAL STATISTICS l l 1986 1985 1984 l TOTAL ASSETS end of year (thsands). $12,318,192 $10,867,022 $9,759,148 i UTIllTY PI/MT end of year (thsands). $13,566,133 $12,144,563 $11,031,699 Accumulated depreciation end of year... 2,522,016 2,331,783 2,143,863 Construction expendtures (includng allowance for funds I used during construction). 1,519,619 1,108,861 951,323 i CAPITAUZATION end of year (thousands) long<erm debt. $4,283,791 $3,615,669 $3,322,925 l Preferred stock: Not subject to mandatory redemption 811,418 811,418 727,911 Subject to mandatory redemption. 232,424 34,696 34,696, Common stock equity 4,460,821 4,066,661 3,573,103 Total. $9,788,454 $8,528,447 $7,658,635 CAPTTAUZATION RATIOS end of year long4erm debt. 43.7% 42.4 % 43.4 % Preferred stock.. 10.7 9.9 10.0 Common stock equity 45.6 47.7 46.6 Total. 100.0 % 100.0 % 100.0 % EhiBEDDED INTEREST CO5F ON LONG-TERhi DEBT end of year. 10.0 % 10.3 % 10.1 % EhiBEDDED DIVIDEND COST ON PREFERRED STOCK end of year. 8.1% 8.2% 8.3% CONSOUDATED NET INCONIE (thousands). $626,851 $587,758 $526,041 DIVIDENDS DECLARED ON COhih!ON STOCK (thousands). $377,865 $343,361 $298,878 COhihiON STOCK DATA Shares outstanding-average. 140,981,671 135,266,534 126,626,241 Shans outstanding-end of year. 142,805,206 138,(>D,162 128,585,669 Earnings per average share. $4.45 $4.35 $1.15 Dividends declared per share. $2.68 $2.52 $2.36 Book value per share-end of year. $31.24 $29.46 $27.79 Return on average common stock equity. 14.7 % 15.4 % 15.5 % AI.LOTANG FOR FUNDS USED DURING CONSTRU(.flON AS PERCENT OF CONSOUDATED NET INCOhiE. 48.5 % 39.1 % 32.7 % 1 NET FUNDS FROh! OPERATIONS AS PERCENT OF CONSTRUCTION EXPENDTTURES (excluding alknvance for funds used during construction). 32.9 % 51.0 % 58.4 % Gmtructkm Expnditum as a Rxent of I%w har Getructim Expnditum Total Captah:atim y c.n w ~v.n - c.e- ,-e-~-~~m-< 36 " * *~~'~~"" ~~--~~""

- m.,- z ? 1983 1982 1981 1980 1979 1978 1977 1976 $8,780,9% $8,021,407 $7,306,658 $6,552,972 $5,821,933 $5,161,808 $4,563,806 $3,878,180 $9,967,653 $9,051,442 $8,194,803 $7,438,877 $6,631,618 $5,862,096 $5,111,037 $4,393,695 1,958,103 1,758,156 1,560,754 1,378,6 % 1,213,927 1,057,068 917,637 813,837 906,930 891,560 792,268 807,008 872,916 737,353 734,282 671,708 $3,103,452 $2,973,253 $2,713,863 $2,527,716 $2,368,612 $2,038,654 $1,859,057 $1627,403 629,779 (00,109 600,109 600,109 535,824 506,233 476,578 446,923 34,696 3,235,375 2,810,195 2,421,864 2,090,520 1,830,472 1,624,298 1,432,830 IJ66,086 $7,003,302 $6,383,557 $5,735,836 $5,218,345 _$4,734,908 $4,169,185 $3,768,465 $3,340,412 44.3 % 46.6 % 47.3 % 48.4 % 50.0 % 48.9 % 49.3 % 48.7 % 9.5 9.4 10.5 11.5 ' l.3 12.1 12.7 13.4 46.2 44.0 42.2 40.1 38.7 39.0 38.0 37.9 _ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 9.7% 9.5% 9.0% 8.3% 7.9% 7.5% 7.3% 7.2% 8.0% 7.7% 7.7% 7.7% 7.4% 7.3% 7.2% 7.1% $461,468 $428,646 $359,398 $297,844 $211,151 $200,738 $175,919 $147,920 $262,659 $227,076 $192,306 $164,527 $142,262 $119,945 $103,250 $ 85,800 118,454,666 111,356,815 102,292,239 93,719,257 86,319,3 % 79,026,787 73,194,444 64,625,000 123,685,058 114,182,319 105,236,301 %,088,645 87,985,@ 8 80,665,889 75,000,000 70,000,000 $3.90 $3.85 $3.51 $3.18 $2.45 $2.54 $2.40 $2.29 $2.20 $2.01 $1.88 $1.76 $1.61 $1.52 $1.40 $1.32 $26.16 $24.61 $23.01 $21.76 $20.80 $20.14 $19.10 $18.09 15.3 % 16.4 % 15.9 % 15.2 % 12.2 % 13.1 % 13.0 % 12.9 % 34.4 % 31.7 % 26.1 % 26.2 % 28.2 % 26.9 % 33.3 % 33.7 % 53.9 % M.0% 58.8 % 52.7 % 40.3 % 44.1 % 36.4 % 29.7 % m$ m ExpmLm C ? i. eo 10 77 e N w M m2 el me el se 77 7s M so m m2 et se et se

7Fr [ n rnts wx:y dxrev ' ' ' ' ~ s OPERATING STATISTICS . 'l ~b 1986 1985 1984 EECTRIC ENERGY GENERATED AND PURCHASED (megauctthxas) Gene.ated-net stanon output 75,467,871 76,355,3 % 72,582,63' Purchased and net interchange. 4,712,082 2,057,490 382,65 Total generated and purchased.. 80,179,953 78,412,886 72,%5,2% Company use, kxses and unaccounted for. 4,925,178 5,(>t2,990 3,839,51 Total electric energy sales. 75,254,775 73,369,896 69,125,77 EECTRIC ENEReiY SAI.ES (megauutthxas) Residential... 24,tiO4,109 24J00,788 22,693,2% Commercial. 21,453,435 20,349,334 19,026,26' Industrial 21,013,278 20,921,530 20J43,5$ Government and municipal 2.385,168 2,324,785 1,920,42( Total general business. 69,455,990 67,896,437 63,983,53) Other electric utilitics. 5,798,785 5,473,459 5,142,23t Total electric energy sales. 75,254,775 73,369,896 69,125,77) OPERATING REVENUES (tbands) Residential.. $1,530,258 $1,673,378 $1,546,00 Commercial. 1,137,944 1,207,784 1,127,74 822,831 935,849 893,531 industria' Government and municipal 134,927 145,256 117,7$ 17 Total general business. 3,625,960 3,962,267 3fxs5,$ Other electric utilities. 222,644 250,857

233, Total froni electric energy sdes.................

3,848,604 4,213,124 3,918,4d Other operating revenues (induding over/under-recovered fuel revenue). 83,441 (42,%7) 13,7( Total operating revenues. $1,932,045 $4,170,157 $3,932,2) EECTRIC CUSTOMERS end of year Residennal 1,820,381 1,761,346 1,669,7] Commerc J 217,232 214,386 208,47, Industrial 23,912 24,148 24,0$ Government and municipal 13,180 12,080 11,4$ Total general business. 2,074,705 2,014,9 @ 1,913,7) Other electric utilities. 61 63 d Total electric customers. 2,074,766 2,015,023 1,913,74 RESIDEbTTIA1. STATISTICS (exdudes master metered customers, megawatt. hour sales cnd revenues) Average kilowatt-hours per customer 12,749 13,062 12,86 Average revenue per kik3 watt-hour. 6.31c 6.99e 6.91 Industrial classification includes sersice to Alcoa-Sandow (interrupable prior to May 1981)- Electric energy sales (megaucttbes) 3,092,696 2,861,454 2,989,21 Operating revenues (tbands). $65,664 $68,946 $70,8) l 38

~ g / 1983 1982 1981 1980 1979 1978 1977 1976 67,706,5H M,224,726 62,447,413 62,865,641 58,051,429 57,1%,077 53,156,235 47,573,856 343,581 371,100 91,091 56,388 75,695 79,688 72,M5 46,656 68,050,175 M,595,916 62,538,5N 62,922,029 58,127,124 57,275,765 53,229,080 47,620,512 5,340,248 4,215,774 _4,166,327 4,422,762 4,001,6M 4,N1,486 3,M9,76S 3,290,124 62,709,927 60J80,142 58,372,177 58,499,267 54,125,440 53,234,279 49,679,312 44,330,388 20,162,506 19,H5,087 18,676,240 19,M4,409 17,3H,402 17,H3,224 16,M2,382 14,548,407 17,366,563 16,475,253 15,383,162 14,683,1N 13,264,436 13,117,202 12,347,755 11,338,371 18,690,077 17,526,412 17,992,261 17,581,265 17,275,859 16,469,536 15,678,254 13,917,588 1,790,476 1,730,273 1,692,106 1,796,988 1,669,726 1,728,056 1,565,518 1,425,665 58,009,622 55,677,025 53,743,769 53,905,766 49,6N,423 49,258,118 46,233,909 41,230,031 4,700,305 4,703,117 4,628,408 4,593,501 4,521,017 3,976,161 3,445,403 3,100,357 62,709,927 60,380,142 58,372,177 58,499,267 54,125,440 53,234,279 49,679,312 +1,330,388 $1,306,912 $1,237,632 $1,N4,761 $ 877,555 $ 672,340 $ 640,611 $ 552,331 $ 442,2M 998J62 911,487 778,008 590,921 488,170 439,146 375,822 303,785 808,016 745,243 659,678 482,919 419,224 373,456 310,811 238,426 104,730 95,673 83,077 68,3 % M,%5 49,623 40,331 32,390 3,218,020 2,990,035 2,565,524 2,019,791 1,634,299 1,502,836 1,279,295 1,016,805 202,387 190,727 161,998 123,188 105,306 87,592 69,975 53.052 3,420,407 3,160,762 2,727,522 2,142,979 1,739,605 1,590,428 1,349,270 1,069,857 67,509 57,263 10,855 31,574 16,684 13,928 18,508 12,4_7_3 $3,487,916 $3,238,025 $2,738,377 $2,174,553 $1,756,289 $1,@l,356 $1,367,778 $1,082,330 1,556,760 1,477,097 1,421,273 1,356,651 1,287,701 1,221,468 1,159,885 1,122,358 198,548 187,065 177,269 171,495 1M,291 160,170 153,658 146,287 22,761 21,478 20,692 19,590 18,6M 17,953 17,216 16,688 10,210 10,148 10,263 10,488 11,257 II,2M 11,274 11,121 1,788,279 1,695,7SS 1,629,497 1,558,224 1,481,903 1,410,851 1,342,033 1,2 %,4 54 68 75 78 80 80 62 60 59 1,788,347 1,t95,863 1,629,575 1,558.3G 1,481,983 1,410,913 1.342,093 1,2 %,513 12,073 12,3,'0 11,862 13,125 11,897 12,747 12,213 10,860 6.60e 6.34e 5.72e 4.54e 3.98e 3.70e 3.45e 3.20e 2,6N,5M 2,316,308 2,848,997 2,918,7H 3,076,399 2,891,259 2,786,027 1,822,488 $68,121 $68,035 $M,016 $48,813 $48,400 $11,572 $36,878 $20,052 39

Consolidated Earnings 1987 Annual Meeting Dividends Declared harhSider Quarterly Market Price Ranges Sd* f t e C mpany n p h will be held at 9:30 a.m. on Pn.ce Range 4 00 Quarter Endet! 1986 198) ' jj:I Friday, May 15,1987, at the Fairmont Hotel, Ross Avenue liigh low High low 350 ( _M-d and Akard Street, Dallas, htarth 31. $34% $29% $28% $25% j H jSid Texas. Shareholders are M d d hs 9 d d cordially invited to be present June 30. 35% 29 % 31% 27S 300 Septemkr 30.. 37% 30% 31 % 25% g q at the annual meeting. Those T}g u Dttember 31. 34% 31% 31 % 26% b >g q s, unable to attend are urged to 1 2m h exercise their right to vote by

• • hhf proxy. Notice of meeting Dividends Paid per Share

?F L and proxy statement and form ) of Common Stock ij H I 4,, of proxy will be mailed shortly 4g after March 27, the record date Dividends Paid 150 for the meeting. Following the Qu ner Ended 1986 1985 meeting, a report of the proceedings will be prepared htarch 31. $0.63 $0.59 and distributed to all June 30.. 0.67 0.63 50 shareholders. September 30.. 0.67 0.63 December 31.. 0.67 033 .00 The Annual Report has been prepared for $2.64 --$2.43 77 78 79 80 81 82 83 84 85 86 the purpose of proiid ng shareholders with I. 1 EamingsPerShare information concerning the Company and not in connection with any sale or purchase of, g ge The Company has dorlared comnun stock or any offer or solicitatwn of an offer to buy dividends payable in cash in each year since or sell, any securities. its incorporation in 1945 and has continued Directory its retord of annual dividend increases, Texas Utilities Company disenbutes a which commenced in 1948. At its February TRANSFER AGENTS AND booUer containing detailed System financial 1987 meeting, the Puard of Direttors again REGISTRARS and operating data, uhich hate been com-raised the quarterly dividend by three cents hiBank Dallas, N.A. pded for the contenience of financial analysts; per share, from 67 cents to 70 cents. This Dallas, Texas a copy u2fl be famished upon request. regular quarterly dnidenJ is payable Apnl I, htorgan Shareholder Services Trust 1987, to shareholders of avord on hiarch Company A copy of the Annual Report to the

23. Dividends are paid in cash to New York, New York Secunties and Exchange Commission, Form shareholJets who are not participating in 10-K, uill be fumished by the Company the Automatic Dtvidend Reinvestment and DIVIDEND DISBURSING AGENT upon request.

Common Snxk Purchaw Plan, all dividends N1 organ Shareholder Services Trust are reportable for federal income tax pur-Company Requests for copies or other shareholder poses as ordmary dividend income. Reference 30 West Broadway information should be directed to: is made to Note 4 to Financial Statements New York, New York 10015 Shareholder Relations regardmg limitations upon payment of Texas Utilities Company dividends on common stock. AGENT FOtt PARTICIPANTS 2001 Bnan Touer AUTOhtATIC DIVIDEND Nfas, Texas 75201 REINVESThiENT AND COhthiON (214) 653-4646 STOCK PURCHASE PLAN hiorgan Shareholder Services Troist Company DividenJ Reinvestment Plans P.O. Box 3506, Church Street Station New York, New York 10008 STOCK EXCHANGE LISTINGS New York Stock Exchange, Inc. New York, New York hiidwest Stock Exchange, incorporated Chicago, Illinois The Pacific Stock Enhange Incorporated l Los Angeles and San Francisco, Cahfornia Ticker Symbol - TXU 40

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