UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_______________TO_________________
Commission File No. 1-3183
ENSERCH CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-0399066
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
ENSERCH Center, 300 South St. Paul, Dallas, Texas 75201
(Address of principal executive offices) (Zip Code)
214-651-8700
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock of Registrant outstanding as of
November 7, 1996: 69,658,205.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands except per share amounts)
Revenues
Natural gas and oil exploration and production. . . . . . $ 83,246 $ 66,807 $ 243,593 $ 156,455
Natural gas pipeline & GPM. . . . . . . . . . . . . . . . 201,790 235,107 771,006 737,620
Natural gas distribution. . . . . . . . . . . . . . . . . 121,113 132,522 624,381 640,503
Power and other . . . . . . . . . . . . . . . . . . . . . 9,127 10,938 26,380 28,462
Less intercompany revenues. . . . . . . . . . . . . . . . (28,639) (30,827) (184,925) (139,692)
-------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 386,637 414,547 1,480,435 1,423,348
-------- --------- --------- ---------
Costs and Expenses
Gas purchase. . . . . . . . . . . . . . . . . . . . . . . 193,372 241,861 827,185 877,532
Operating expenses. . . . . . . . . . . . . . . . . . . . 117,508 98,623 344,593 289,768
Depreciation and amortization . . . . . . . . . . . . . . 51,868 50,940 147,074 120,698
Gross receipts and production taxes . . . . . . . . . . . 9,657 8,438 41,166 37,822
Payroll, ad valorem and other taxes . . . . . . . . . . . 9,536 10,571 30,254 29,820
-------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 381,941 410,433 1,390,272 1,355,640
-------- --------- --------- ---------
Operating Income . . . . . . . . . . . . . . . . . . . . . . 4,696 4,114 90,163 67,708
Other Income (Expense) - Net . . . . . . . . . . . . . . . . (3,324) (536) (5,974) (1,352)
Interest and Other Financing Costs . . . . . . . . . . . . . 24,376 26,018 70,637 62,523
-------- -------- --------- ---------
Income (Loss) Before Income Taxes and Minority Interest. . . (23,004) (22,440) 13,552 3,833
Income Taxes (Benefit) . . . . . . . . . . . . . . . . . . . (8,068) (8,857) 4,522 1,033
Minority Interest. . . . . . . . . . . . . . . . . . . . . . 345 188 1,235 387
-------- -------- --------- ---------
Income (Loss) Before Extraordinary Loss. . . . . . . . . . . (15,281) (13,771) 7,795 2,413
Extraordinary Loss on Extinguishment of Debt . . . . . . . . (2,096) (2,096)
-------- -------- --------- ---------
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . (17,377) (13,771) 5,699 2,413
Provision for Dividends on Preferred Stock . . . . . . . . . 2,886 2,866 8,462 8,883
-------- -------- --------- ---------
Loss Applicable to Common Stock. . . . . . . . . . . . . . . $(20,263) $(16,637) $ (2,763) $ (6,470)
======== ======== ========= =========
Per Share of Common Stock
Loss before extraordinary loss after
provision for dividends on preferred stock. . . . . . . $ (.26) $ (.24) $ (.01) $ (.09)
Extraordinary loss. . . . . . . . . . . . . . . . . . . . (.03) .03)
-------- -------- --------- ---------
Loss applicable to common stock . . . . . . . . . . . . . $ (.29) $ (.24) $ (.04) $ (.09)
======== ======== ========= =========
Cash dividends declared . . . . . . . . . . . . . . . . . $ .05 $ .05 $ .15 $ .15
======== ======== ========= =========
Average Common and Dilutive Common
Equivalent Shares Outstanding. . . . . . . . . . . . . . . 69,413 68,271 68,900 68,193
======== ======== ========= =========
Operating Income (Loss) of Major Businesses
Natural gas and oil exploration and production . . . . . . $ 7,916 $ (971) $ 25,717 $ (4,961)
Natural gas pipeline & GPM
Pipeline . . . . . . . . . . . . . . . . . . . . . . . . 3,630 5,002 35,325 34,526
Gas marketing. . . . . . . . . . . . . . . . . . . . . . (3,517) 208 (11,783) 4,032
Gas processing . . . . . . . . . . . . . . . . . . . . . 4,582 698 12,911 3,195
Natural gas distribution . . . . . . . . . . . . . . . . . (4,217) (1,561) 38,427 34,561
Power and other. . . . . . . . . . . . . . . . . . . . . . (1,557) 2,509 (3,571) 1,994
<FN>
See accompanying Notes.
</FN>
1
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
----------------------------
1996 1995
---- ----
(In thousands)
OPERATING ACTIVITIES
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . $ 7,795 $ 2,413
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 147,074 120,698
Deferred income-tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . (468) (7,850)
Recoveries of gas-purchase contract settlements. . . . . . . . . . . . . . . . . 6,762 31,964
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,477) 14,662
Changes in current operating assets and liabilities
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,509 75,010
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 26,653
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98,717) (72,225)
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,328 (11,105)
--------- ---------
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . 184,871 180,220
--------- ---------
INVESTING ACTIVITIES
Purchases of businesses, net of cash acquired. . . . . . . . . . . . . . . . . . (341,650)
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . (260,666) (198,034)
Sales and retirements of property, plant and equipment . . . . . . . . . . . . . 111,867 15,570
Investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . (57,171) (324)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,816) (31,235)
--------- ---------
Net cash flows used for investing activities . . . . . . . . . . . . . . . . (216,786) (555,673)
--------- ---------
FINANCING ACTIVITIES
Change in commercial paper and other short-term borrowings . . . . . . . . . . . (24,412) 65,259
Borrowings under EEX bank revolving credit agreement and bridge loan . . . . . . 125,000 500,000
Repayment of borrowings under EEX bank revolving credit agreement
and bridge loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155,000) (360,000)
Repayment of bank debt assumed at acquisition. . . . . . . . . . . . . . . . . . (115,000)
Issuance of mandatorily redeemable preferred securities of subsidiary. . . . . . 150,000
Issuance of EEX common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 121 207,872
Issuance of senior long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 160,000 150,000
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (786) (968)
Borrowings under revolving credit agreement. . . . . . . . . . . . . . . . . . . 25,000
Retirement of senior long-term debt. . . . . . . . . . . . . . . . . . . . . . . (66,607) (156,697)
Prepayment premium on early extinguishment of debt . . . . . . . . . . . . . . . (3,226)
Change in advances under lease arrangements. . . . . . . . . . . . . . . . . . . (8,282) (2,224)
Change in assignments of future gas purchase credits . . . . . . . . . . . . . . (10,520)
Issuance of ENSERCH common stock . . . . . . . . . . . . . . . . . . . . . . . . 14,953 3,432
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,746) (19,150)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (850)
--------- ---------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . 48,017 411,154
--------- ---------
Net Cash Flows used for Discontinued Operations. . . . . . . . . . . . . . . . . . (12,309) (36,774)
. --------- ---------
Net Increase (Decrease) in Cash and Equivalents. . . . . . . . . . . . . . . . . . 3,793 (1,073)
Cash and Equivalents at Beginning of Period. . . . . . . . . . . . . . . . . . . . 8,561 9,811
--------- ---------
Cash and Equivalents at End of Period. . . . . . . . . . . . . . . . . . . . . . . $ 12,354 $ 8,738
========= =========
<FN>
See accompanying Notes.
</FN>
2
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(September 30, 1996 Unaudited)
September 30 December 31
1996 1995
------------ -----------
(In thousands)
ASSETS
Current Assets
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,354 $ 8,561
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,022 296,178
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,220 107,633
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,068 121,544
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 415,664 533,916
---------- ----------
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,305 64,974
---------- ----------
Property, Plant and Equipment (full-cost
method for gas and oil properties) . . . . . . . . . . . . . . . . . . . . . 4,554,450 4,414,189
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . 1,830,296 1,687,409
---------- ----------
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . 2,724,154 2,726,780
---------- ----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,750 55,424
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,309,873 $3,381,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper and other short-term borrowings . . . . . . . . . . . . . . $ 162,588 $ 187,000
Current portion of senior long-term debt . . . . . . . . . . . . . . . . . . 1,539 14,760
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,931 329,844
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,965 22,436
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 130,407 123,212
Liabilities for discontinued operations. . . . . . . . . . . . . . . . . . . 30,173 42,120
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 554,603 719,372
---------- ----------
Senior Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972,310 870,476
---------- ----------
Convertible Subordinated Debentures. . . . . . . . . . . . . . . . . . . . . . 90,750 90,750
---------- ----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,065 277,076
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209,098 222,804
---------- ----------
Mandatorily Redeemable Preferred Securities of Subsidiary of EEX . . . . . . . 150,000 150,000
---------- ----------
Minority Interest in Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 158,612 156,434
---------- ----------
Shareholders' Equity
Adjustable rate preferred stock. . . . . . . . . . . . . . . . . . . . . . . 175,000 175,000
---------- ----------
Common shareholders' equity
Common stock (100,000 shares authorized;
69,533 and 68,516 shares outstanding). . . . . . . . . . . . . . . . . . 309,422 304,897
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351,331 338,857
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,791 76,941
Foreign currency translation adjustment. . . . . . . . . . . . . . . . . . (109)
Unamortized restricted stock compensation. . . . . . . . . . . . . . . . . (1,513)
---------- ----------
Common shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 724,435 719,182
---------- ----------
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 899,435 894,182
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,309,873 $3,381,094
========== ==========
<FN>
See accompanying Notes.
</FN>
3
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Notes to Condensed Financial Statements
1. Earnings per share applicable to common stock are based on the weighted
average number of common shares outstanding during the periods, including
common equivalent shares when dilutive. Fully diluted earnings per share
are not presented since the assumed exercise of stock options and
conversion of debentures would not be dilutive.
2. On April 15, 1996, ENSERCH Corporation announced that it has entered into
a definitive agreement with Texas Utilities Company (TUC) providing for a
strategic business combination. The merger is to be preceded by the
distribution of ENSERCH's approximate 83% interest in Enserch Exploration,
Inc. to the ENSERCH shareholders.
3. In September 1996, the Corporation used $60 million borrowed under its
bank lines of credit to prepay the $58.9 million principal balance of its
9.06% Notes, plus a prepayment premium. The early redemption of the Notes
will allow the merger with TUC to go forward without the renegotiation of
certain terms of the borrowing and will reduce future interest expense.
The prepayment premium of $3.2 million ($2.1 million after tax) has been
accounted for as an extraordinary loss.
4. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the interim periods included herein have been made.
Certain prior-period amounts have been reclassified to conform to the 1996
presentation.
4
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiary companies as of September 30, 1996, and the
related condensed statements of consolidated income for the three months and
nine months ended September 30, 1996 and 1995, and the condensed statements
of consolidated cash flows for the nine months ended September 30, 1996 and
1995. These financial statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of ENSERCH Corporation and
subsidiary companies as of December 31, 1995, and the related statements of
consolidated income, cash flows and common shareholders' equity for the year
then ended (not presented herein); and in our report dated February 9, 1996,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1995, is fairly stated
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 25, 1996
5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
CONSOLIDATED RESULTS - Merger-related costs caused ENSERCH Corporation's
third-quarter results to fall below results for the third quarter of 1995.
The loss applicable to common stock for the third quarter of 1996 of
$20 million ($.29 per share) compares with a loss of $17 million ($.24 per
share) for the third quarter of 1995. Third-quarter results this year include
a $2.1 million after-tax ($.03 per share) extraordinary charge from the early
extinguishment of debt because of the pending merger with Texas Utilities
Company (TUC) and other expenses related to the merger of $1.7 million after-
tax ($.02 per share). Excluding merger related costs, third-quarter results
were essentially the same as in the prior-year period.
Revenues for the third quarter of 1996 were $387 million versus
$415 million for the same period last year, and operating income was
$4.7 million, compared with $4.1 million in the third quarter of 1995.
Operating results for the natural gas and oil exploration and production
segment were significantly improved from last year due to higher average
prices for both natural gas and oil and increased oil sales volumes; however,
results for all other business segments were below the year-earlier period.
Other income/expense for the third quarter of 1996 includes pretax expenses
of $2.6 million associated with ENSERCH's pending merger with TUC. Interest
and other financing costs for the third quarter of 1996 of $24 million were
$1.6 million less than in the prior-year period, which was impacted by the
interim financing for a major acquisition in June 1995 by Enserch Exploration,
Inc. (EEX). EEX partially repaid this financing in September 1995 with
proceeds from the sale of its common stock.
For the first nine months of 1996, there was a loss applicable to common stock
of $2.8 million ($.04 per share), compared with a loss of $6.5 million ($.09
per share) for the like period in 1995. The after-tax earnings detraction for
charges and expenses associated with the TUC merger, including the early
extinguishment of debt, was $5.8 million ($.08 per share) for the 1996 year-
to-date period. Revenues for the nine-month period of 1996 of $1.5 billion
were up 4%, and operating income was $90 million versus $68 million for the
year-ago period. Year-to-date operating results for both the natural gas and
oil exploration and production and the natural gas distribution segments
showed improvement from the year-earlier period; however, lower margins from
gas marketing activities caused the nine-month results for the natural gas
pipeline & GPM segment to be lower than in the year-ago period. Interest and
other financing costs for the first nine months of 1996 of $71 million were
$8.1 million higher than in the prior-year period, principally due to debt
associated with the financing of the mid-year 1995 acquisition.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION - Operating income from
exploration and production operations, which are conducted through EEX, was
$7.9 million for the third quarter of 1996, improved substantially from the
$1.0 million loss in the 1995 period. Third-quarter revenues rose to
$83 million from $67 million for the third quarter of 1995, with a
$5.4 million improvement in natural-gas revenues and an $11.0 million increase
6
in oil and other revenues. The average price received for natural gas for the
third quarter was $2.04 per thousand cubic feet (Mcf), up 27% from $1.61 per
Mcf in the third quarter last year. The volume of natural gas sold for the
third quarter of 1996 was 26 billion cubic feet (Bcf) versus 29 Bcf sold in
the year-earlier period, with the decline in volumes primarily due to lower
output from a non-operated offshore property due to water encroachment and a
completion failure, increased requirements from East Texas fields for
balancing partner's gas entitlements sold in prior periods and the sale of
Rocky Mountain area properties. Oil sales of 1.4 million barrels (MMBbls)
were 33% higher than for the third quarter last year, with more than half of
the increase in volumes due to production from the Cooper project in the
Garden Banks area in the Gulf of Mexico. The average sales price for oil rose
19% to $19.92 per barrel.
Operating expenses for the third quarter of 1996 of $75 million were
$7.6 million higher than in the third quarter of 1995, with direct costs
related to the Cooper project adding some $9.2 million. The $1.6 million net
decrease in all other expenses was primarily due to lower amortization expense
as a result of reduced production from other properties.
For the first nine months of 1996, exploration and production operations had
operating income of $26 million, compared with an operating loss of $5 million
for the same period a year ago. Revenues for the nine-month period of 1996
of $244 million were $87 million (56%) greater than in the same period of
1995. Natural-gas revenues for the nine months were $50 million higher than
in the 1995 period, with the average sales price of $2.15 per Mcf and sales
volumes of 77 Bcf both some 20% higher than in the year-earlier period. The
volume increase was primarily due to production from the properties acquired
in June 1995. Oil revenues for the first nine months of 1996 of $71 million
were 88% greater than in the year-ago period, with the average sales price of
$19.02 per barrel up 13% and sales volumes of 3.7 MMBbls some 67% above the
same period of 1995 primarily due to production from the acquired properties
and the Cooper project. Operating expenses for the year-to-date period were
$218 million versus $161 million in the 1995 period. About $37 million of the
increase was attributable to costs associated with the acquired properties,
and some $25 million of the increase was related to direct costs of the Cooper
project. There was a $5 million net decrease in all other expenses, with
decreased production costs and lower amortization expense resulting from less
production from other properties more than offsetting increases in other
expense categories.
For the first nine months of 1996, losses from the Cooper project during ramp-
up of production detracted $5.2 million from operating income, while the
project added $.3 million to operating income in the third quarter of 1996.
Production from this project was interrupted 12 days in August 1996 for
maintenance and other required operations, which reduced third-quarter oil
production and operating income by some 60 thousand barrels and $1.2 million,
respectively. The equipment lease costs and some production costs are
essentially fixed, declining on a per unit basis as production increases. In
late July 1996, it was announced that mechanical difficulties had prevented
completion of the A-1 development well at the Cooper project. Numerous
attempts to remedy the problems were unsuccessful. EEX and its partner in the
project, Mobil Exploration and Producing U.S. Inc. (Mobil), will evaluate
7
alternate drilling strategies to develop the extensive proven hydrocarbon
column at this location. Currently, the A-2 development well is in progress
at the Cooper project. The drilling of the SB-3 exploratory well on Garden
Banks Block 387 has been completed and logged approximately 40 to 50 feet of
natural-gas pay. This well is expected to be completed in the fourth quarter
of 1996, with production to commence immediately, as subsea tie-backs are in
place to transport hydrocarbons to the facility. Prior to drilling out of
intermediate casing, Mobil elected to participate fully in this well. Based
on the results of this well, EEX and Mobil are evaluating the potential for
additional opportunities in adjoining, but separate, fault blocks to the
reservoir penetrated by the SB-3 well and are working to assess the total size
of the prospect.
It was also announced in late July 1996 that EEX and its partners had
identified alternate development scenarios for the Allegheny project in the
Green Canyon Block 254 area. A joint project team was formed to evaluate the
various alternatives which are currently available for the design and
construction of production facilities. The project team will also design and
implement a development plan to optimize production from this project. The
additional engineering study and design will delay the project from its
previously planned early 1999 start up. However, the design changes should
enhance the project's economics. A revised schedule for development will be
announced later.
EEX manages a portion of the risk associated with fluctuations in the price
of natural gas and oil through the use of hedging techniques such as gas and
oil swaps, collars and futures agreements. As a result of such hedging to fix
the net prices received, losses or gains occur and either offset or add to
actual prices received to achieve the net fixed prices. In total, gas and oil
price hedging activities reduced revenues for the third quarter of 1996 by
$3.3 million but increased revenues by $2.1 million in the third quarter of
1995. For the first nine months of 1996, gas and oil price hedging activities
reduced total revenues by $11.0 million but increased revenues by $5.6 million
in the year-ago period. At September 30, 1996, EEX had outstanding swaps,
collars and futures agreements that were entered into as hedges extending
through July 31, 1997 to exchange payments on 3.3 Bcf of natural gas and
.9 MMBbls of oil. At September 30, 1996, there were $2.1 million of net
unrealized and unrecognized hedging costs based on the difference between the
strike price and the NYMEX futures price for the applicable trading month.
In addition, there were $.2 million of net realized gains on hedging
activities which were deferred and will be applied as an increase in revenues
in the month of physical sale of production.
Gas and oil prices are subject to seasonal and other fluctuations. A decline
in prices from September 1996 levels or other factors, without mitigating
circumstances, could cause a future write-down of capitalized costs and a non-
cash charge against income under the full-cost accounting method cost center
ceiling limitation.
EEX has agreements to sell substantially all of its Rocky Mountain area
properties for approximately $120 million. The majority of the sales, which
were effective April 1, 1996, had closed by the end of September 1996.
Through September 1996, sales proceeds of $96 million, less approximately
8
$3 million in closing costs and income from the April effective date to the
closing date, were received and used to reduce EEX debt. The remaining sales
will close in the fourth quarter of 1996. Most of these properties were
acquired in the 1995 acquisition and were sold because they were not within
the core area of EEX's other properties. The properties sold represented
proved reserves of approximately 150 Bcf of natural gas equivalent and average
daily production of approximately 45 million cubic feet of natural gas
equivalent. In accordance with the full-cost accounting method, EEX credited
the net proceeds from the sales to the carrying value of gas and oil
properties.
NATURAL GAS PIPELINE & GPM - Third-quarter 1996 operating income for the
natural gas pipeline & GPM segment was $4.7 million versus $5.9 million for
the third quarter of 1995, with improved results for gas processing operations
more than offset by lower results from pipeline and gas marketing operations.
For the first nine months of 1996, operating income for this business segment
was $36 million versus $42 million in the year-ago period. Pipeline and gas
processing operations both reported better results; however, lower results for
gas marketing activities were more than offsetting.
Pipeline operations, which are conducted through Lone Star Pipeline Company,
had third-quarter operating income of $3.6 million, compared with $5.0 million
in the third quarter last year. Pipeline revenues for the third quarter this
year of $30 million were $1.4 million higher than in the third quarter of
1995, with pipeline throughput of 159 Bcf up 21% from the year-earlier period.
However, other revenues declined $1.6 million, and expenses increased by
$1.2 million. For the first nine months of 1996, operating income from
pipeline operations was $35 million, slightly higher than in the like period
a year ago. A $13 million increase in pipeline revenues was mostly offset by
a $3.9 million decrease in other revenues and by higher operating expenses,
including increased costs associated with gas lost in transmission. Pipeline
throughput for the nine-month period of 500 Bcf was 20% greater than in the
1995 period.
Gas marketing operations, which are conducted through Enserch Energy Services,
Inc. (EES), had a third-quarter operating loss of $3.5 million versus
operating income of $.2 million for the third quarter of 1995. The margin on
gas sales for the third quarter of 1996 of $2.7 million was $3.0 million lower
than in the 1995 period. Third-quarter revenues from natural gas marketing
activities declined $43 million from the 1995 third quarter due to a 46%
reduction in sales volumes, mostly associated with a decision to de-emphasize
some wholesale marketing, partially offset by higher gas prices. Operating
expenses of $6.3 million were $.7 million higher than in the third quarter
last year. For the first nine months of 1996, gas marketing operations had
an operating loss of $11.8 million, compared with operating income of
$4.0 million for the 1995 period, with the lower results precipitated by
unusual weather patterns and resulting markets in the first quarter this year.
The year-to-date margin on gas sales was $6.2 million versus $17.5 million for
the year-earlier period, and year-to-date operating expenses were $4.9 million
higher primarily due to operations acquired in June 1995.
As part of its natural gas marketing activities, EES enters into forward
contracts principally involving physical delivery of natural gas and
9
derivative financial instruments, including swaps, options, futures and other
contractual arrangements to offset price risks of gas supply. These
activities involve price commitments into the future and, therefore, give rise
to market risk. At September 30, 1996, natural gas marketing operations had
net commitments to sell approximately 18.5 Bcf of natural gas through the
year 2000 with offsetting net financial positions to purchase approximately
20.0 Bcf, including commitments to purchase approximately .7 Bcf from EEX and
financial positions to sell the same quantity. There was a net unrealized and
unrecognized gain of $7.4 million at September 30, 1996 on these
contracts.
Third-quarter operating income for natural gas processing operations of
Enserch Processing Company increased to $4.6 million from $.7 million in the
third quarter last year, primarily due to a $3.7 million (66%) improvement in
plant margin. The average natural gas liquids (NGL) sales price for the third
quarter of $16.09 per barrel was up 43% from the same period last year, while
third-quarter sales volumes of 1.4 MMBbls were 5% less than in the prior-year
period. For the first nine months of 1996, natural gas processing operations
had operating income of $12.9 million, compared with $3.2 million for the same
period last year, reflecting a $7.5 million (41%) improvement in plant margin
and a $2.4 million increase in margin on gas purchased for resale. The
average NGL sales price for the nine months of $14.42 per barrel was up 23%
from the 1995 period, and sales volumes of 4.6 MMBbls were slightly higher
than in the year-earlier period.
NATURAL GAS DISTRIBUTION - Lone Star Gas Company had an operating loss of
$4.2 million for the 1996 third quarter, compared with a loss of $1.6 million
for the like period of 1995. The overall margin on gas sales of $38 million
was virtually unchanged from the year-earlier period, and other revenues
increased $1.8 million. However, operating expenses were $4.5 million above
the 1995 period. Total gas sales volumes for the third quarter of 19 Bcf were
down 9% from the 1995 third quarter. For the first nine months of 1996,
operating income was $38 million versus $35 million for the year-earlier
period. Overall margin on gas sales of $181 million was $9.1 million (5%)
above the same period of 1995, reflecting residential and commercial rate
improvements and near normal heating weather in the first quarter this year
versus the first quarter last year, which experienced unusually warm winter
weather. A reduction in the cost of gas lost in transmission also contributed
to the margin improvement. Total gas sales volumes for the year-to-date
period were 109 Bcf versus 105 Bcf for the 1995 period, with sales volumes to
residential and commercial customers up 10% from the year-earlier period.
POWER AND OTHER - ENSERCH's power and other activities had an operating loss
for the third quarter of $1.6 million versus operating income of $2.5 million
for the third quarter last year. For the first nine months of 1996, this
business segment had an operating loss of $3.6 million, compared with income
of $2.0 million for the year-ago period. Results for the 1995 periods reflect
a $1.0 million credit to business insurance expense resulting from favorable
experience from prior years' injuries and damages claims and the recognition
of $1.3 million of previously deferred revenues for development fees on
projects completed in prior years as a result of certain contingencies being
satisfied.
10
LIQUIDITY AND FINANCIAL RESOURCES - Operating activities for the first nine
months of 1996 provided net cash flows of $185 million, compared with
$180 million for the same period of 1995. Income before depreciation and
amortization and deferred income taxes for the nine months was $39 million
higher than for the same period of 1995; however, recoveries of producer
settlements, which are now substantially complete, were $25 million less than
the year-earlier period, and changes in other assets and liabilities resulted
in a year-to-year reduction in cash flows of $20 million. Additionally,
changes in current operating assets and liabilities for the first nine months
this year provided $29 million versus $18 million provided in the 1995 period,
which benefited from the recovery of expenditures on the Cooper project as a
result of reimbursements by the leasing program and the collection of
previously deferred billings on a cogeneration facility developed by Enserch
Development Corporation.
Investing activities required net cash flows of $217 million, compared with
$556 million in the first nine months of 1995, which included $342 million for
business acquisitions. Current year additions to property, plant and
equipment were $63 million higher than in the first nine months last year,
with increases of $44 million for EEX, $8 million for natural gas pipeline &
GPM and $11 million for natural gas distribution. Sales and retirements from
property, plant and equipment provided $112 million in the first nine months
of 1996, including the $93 million received by EEX from sales of its Rocky
Mountain area properties, which it used to reduce debt incurred in the 1995
acquisition. Additional proceeds of approximately $20 million from sales of
Rocky Mountain properties are expected to be received in the fourth quarter
of 1996, which will also be used to reduce debt. Investments in
unconsolidated affiliates include $32 million invested in gas distribution and
transmission projects in Chile and Mexico and $25 million invested in a
geothermal power project in Indonesia.
In July 1996, ENSERCH borrowed $100 million under its bank lines of credit and
reduced outstanding commercial paper by the same amount. In September 1996,
ENSERCH used $60 million borrowed under its bank lines of credit to prepay the
$58.9 million principal balance of its 9.06% Notes, plus a prepayment premium.
The early redemption of the Notes will allow the merger with TUC to go forward
without the renegotiation of certain terms of the borrowing and will reduce
future interest expense. The prepayment premium of $3.2 million
($2.1 million after tax) has been accounted for as an extraordinary loss.
As a percentage of total capitalization, common shareholders' equity plus
minority interest in subsidiaries was 38.9% at September 30, 1996, compared
with 40.2% at year-end 1995. At September 30, 1996, the current ratio was .75
versus .74 at December 31, 1995.
ENSERCH has bank lines in the form of a three-year revolving agreement
totaling $600 million, $440 million of which was unused at September 30, 1996.
In addition, EEX has a $350 million four-year revolving credit agreement,
$220 million of which was unused at September 30, 1996.
Planned property, plant and equipment additions for 1996 total $320 million,
including $210 million for EEX, $43 million for natural gas pipeline & GPM,
$65 million for natural gas distribution and $2 million for other
11
requirements. The planned expenditures are expected to be funded from
internal cash flow and external financings as required.
MERGER WITH TUC - On April 15, 1996, ENSERCH announced that it had entered
into a definitive agreement to enter into a business combination with TUC
through a merger. As a result of this strategic action, the ENSERCH business
units Lone Star Gas Company and Lone Star Pipeline Company, the local
distribution and pipeline companies of ENSERCH, and other businesses will
become a part of TUC. TUC will acquire these operations through the issuance
of approximately $550 million of TUC common stock and the assumption of
ENSERCH debt and preferred stock which approximated $1.27 billion at
September 30, 1996. Prior to the merger, ENSERCH's approximate 83% interest
in EEX, represented by approximately 105 million shares of EEX common stock,
will be distributed to ENSERCH shareholders.
Within a range of a 10% variation above or below the April 12 closing price
of TUC common stock ($39.625 per share), each ENSERCH shareholder will receive
sufficient shares of TUC common stock to provide $8.00 of value. Above or
below the 10% threshold, the value received will move up or down with the
price of TUC common stock. In addition, ENSERCH shareholders will receive
approximately 1.5 shares of EEX common stock for each share of ENSERCH common
stock. The final value of the TUC and EEX shares cannot be determined until
closing.
The Plan of Merger and related transactions will be submitted for approval by
ENSERCH and TUC shareholders at special meetings to be held on November 15,
1996. The Plan of Merger is also subject to a favorable ruling from the
Internal Revenue Service as to the tax-free nature of the distribution of EEX
shares, and a request for that ruling has been submitted. The requisite
filings with the Federal Trade Commission and the Department of Justice under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 have been made. The
required filing with the Securities and Exchange Commission (SEC) under the
Public Utilities Holding Companies Act of 1935 has been made. In connection
with this 1935 Act filing, the Railroad Commission of Texas (RRC) has advised
the SEC that it has no objection to the proposed transaction and will rely on
its existing authority and resources to protect the public interest and
ratepayers subject to its jurisdiction, that there is no hindrance under Texas
natural gas utility regulatory law to the proposed transaction and that the
RRC intends to exercise its authority in accordance with applicable law.
Closing of the transaction is expected to occur around year-end 1996.
REQUEST FILED FOR RATE RELIEF - In October 1996, Lone Star Pipeline Company
filed a request with the RRC to increase the rate it charges to transport gas
to residential and commercial customers in the 550 Texas cities and towns
served by Lone Star Gas Company. Lone Star Gas also requested that the RRC
set rates for costs to aggregate gas supply for these cities. Rates currently
in effect were set by the RRC in 1982. If approved, the rate adjustment would
increase annual revenues by approximately $24.2 million. The purpose of the
rate request is to allow for the recovery of a substantial increase in the
cost of doing business since 1982 and to cover significant capital investments
of approximately $420 million made during the past 14 years to maintain and
improve the reliability and safety of the pipeline system and help reduce
natural-gas supply costs.
12
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas and Oil Exploration and Production Operating Data (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ------ ---- ------
Operating Income (Loss)(in millions) . . . . . . . . . . . . . . $ 7.9 $ (1.0) $ 25.7 $ (5.0)
====== ====== ====== ======
Revenues (in millions) . . . . . . . . . . . . . . . . . . . . . $ 83.2 $ 66.8 $243.6 $156.4
====== ====== ====== ======
Sales Volumes
Natural gas (MMcf). . . . . . . . . . . . . . . . . . . . . . 25,591 29,083 76,501 63,536
Oil and condensate (MBbls). . . . . . . . . . . . . . . . . . 1,352 1,018 3,726 2,236
Average Sales Price
Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . $ 2.04 $ 1.61 $ 2.15 $ 1.79
Oil and condensate (per Bbl). . . . . . . . . . . . . . . . . 19.92 16.72 19.02 16.86
Net Wells
Drilled . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 14 84 53
Productive. . . . . . . . . . . . . . . . . . . . . . . . . . 22 7 64 33
Data in Equivalent Energy Content (per Mcfe) (a)
Production revenue. . . . . . . . . . . . . . . . . . . . . . $ 2.35 $ 1.81 $ 2.36 $ 1.96
Production and operating costs (b). . . . . . . . . . . . . . .58 .36 .60 .41
Depreciation and amortization . . . . . . . . . . . . . . . . 1.10 1.07 1.04 1.07
<FN>
(a) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the basis of one barrel equals
6.0 Mcfe.
(b) Excludes related production, severance and ad valorem taxes.
</FN>
OPERATING INCOME RECONCILIATION FROM EEX TO ENSERCH SEGMENT
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
---- ------ ---- ------
Operating income (loss) of EEX . . . . . . . . . . . . . . . . . $ 9.0 $ 2.9 $ 29.1 $ (1.5)
Amortization of costs capitalized by ENSERCH not incurred
by EEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.1) (3.7) (.2) (2.9)
Effects of intercompany lease transactions . . . . . . . . . . (.9) - (2.9) -
Activities not conducted through EEX . . . . . . . . . . . . . . (.1) (.2) (.3) (.6)
----- ----- ----- -----
Operating income (loss) of ENSERCH's natural gas and oil
exploration and production segment . . . . . . . . . . . . . . $ 7.9 $ (1.0) $ 25.7 $ (5.0)
===== ===== ===== =====
13
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Pipeline & Gathering, Processing and Marketing Operating Data (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
---- ------ ---- ------
Operating Income (Loss)(in millions)
Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.6 $ 5.0 $ 35.3 $ 34.5
Natural Gas Marketing. . . . . . . . . . . . . . . . . . . . . (3.5) .2 (11.8) 4.0
Natural Gas Processing . . . . . . . . . . . . . . . . . . . . 4.6 .7 12.9 3.2
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.7 $ 5.9 $ 36.4 $ 41.7
====== ====== ====== ======
Revenues (in millions)
Pipeline (a) . . . . . . . . . . . . . . . . . . . . . . . . . $ 30.2 $ 28.8 $117.5 $104.3
Natural Gas Marketing. . . . . . . . . . . . . . . . . . . . . 139.1 181.8 551.1 558.3
Natural Gas Processing - Natural gas liquids (b) . . . . . . . 23.2 17.0 65.7 52.4
Other (c). . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 7.5 36.7 22.6
------ ------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . . . $201.8 $235.1 $771.0 $737.6
====== ====== ====== ======
Volumes
Pipeline throughput (Bcf). . . . . . . . . . . . . . . . . . . 158.6 130.9 499.6 417.2
Natural Gas Marketing (Bcf). . . . . . . . . . . . . . . . . . 58.7 108.0 223.5 321.7
Natural Gas Processing (MMBbls). . . . . . . . . . . . . . . . 1.4 1.5 4.6 4.5
Average Sales Prices
Natural Gas Marketing (per Mcf). . . . . . . . . . . . . . . . $ 2.37 $ 1.68 $ 2.47 $ 1.74
Natural Gas Liquids (per Bbl). . . . . . . . . . . . . . . . . 16.09 11.22 14.42 11.73
<FN>
(a) Includes transportation services for affiliates and third-parties and other miscellaneous revenues.
(b) Represents revenues from sales of plant production.
(c) Includes revenues from natural-gas products purchased for resale, gathering fees and other miscellaneous
revenues.
</FN>
14
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Distribution Operating Data (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
----------------- ----------------
1996 1995 1996 1995
----- ------ ----- ------
Operating Income (Loss)(in millions) . . . . . . . . . . . . . . $ (4.2) $ (1.6) $ 38.4 $ 34.6
====== ====== ====== ======
Natural Gas Sales Revenues by Customer (in millions)
Residential & commercial . . . . . . . . . . . . . . . . . . . $ 90.0 $ 95.8 $549.3 $547.7
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 10.5 22.1 43.1
Electric generation. . . . . . . . . . . . . . . . . . . . . . 19.5 21.2 32.2 34.5
------ ------ ------ ------
Total gas sales revenues . . . . . . . . . . . . . . . . . . 114.4 127.5 603.6 625.3
Gas transportation revenues(a) . . . . . . . . . . . . . . . . . 3.1 2.7 9.9 8.5
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 2.3 10.9 6.7
------ ------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . . $121.1 $132.5 $624.4 $640.5
====== ====== ====== ======
Natural Gas Sales Volumes by Customer (Bcf)
Residential & commercial . . . . . . . . . . . . . . . . . . . 12.8 13.2 94.9 86.3
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 2.5 5.7 10.4
Electric generation. . . . . . . . . . . . . . . . . . . . . . 5.2 5.3 8.7 8.4
------ ------ ------ ------
Total gas sales volumes. . . . . . . . . . . . . . . . . . . 19.2 21.0 109.3 105.1
====== ====== ====== ======
Natural Gas Sales Revenues (per Mcf)
Residential & commercial . . . . . . . . . . . . . . . . . . . $ 7.03 $ 7.29 $ 5.79 $ 6.35
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 4.25 4.20 3.89 4.14
Electric generation. . . . . . . . . . . . . . . . . . . . . . 3.73 3.99 3.71 4.12
Natural Gas Purchase Cost (per Mcf). . . . . . . . . . . . . . . $ 3.84 $ 4.14 $ 3.76 $ 4.18
Heating Degree Days. . . . . . . . . . . . . . . . . . . . . . . 14 22 1,576 1,279
<FN>
(a) Represents the portion of transportation revenues attributable to the distribution system. Related volumes
are included within Natural Gas Pipeline & Gathering, Processing and Marketing statistics.
</FN>
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 1, 1996, the Texas Natural Resource Conservation Commission
advised Enserch Exploration, Inc. ("EEX"), a subsidiary of the Corporation,
that EEX had been named as one of several potentially responsible parties for
the McBay Oil & Gas State Superfund site. This site is located near
Grapeland, Texas, where a waste-oil reclamation plant existed from 1959 to
1987. This matter is currently being investigated by EEX. EEX has
insufficient information at this time to determine the extent of it's
responsibility, if any, for the clean-up of this site.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (15) - Letter of Deloitte & Touche LLP dated
November 12, 1996, regarding unaudited
interim financial statements.
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 31, 1996. (News release
regarding deep-water project.)
Current Report on Form 8-K dated September 20, 1996. (Financial
information in connection with the business combination of ENSERCH
Corporation and TUC and merger of Enserch Exploration Inc. with
and into Lone Star Energy Plant Operations.)
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSERCH Corporation
(Registrant)
Date: November 13, 1996 By /s/ Keith Mond
-------------------------------
Keith Mond,
Vice President,
Date: November 13, 1996 By /s/ J. W. Pinkerton
------------------------------
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
-17-