UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 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
May 13, 1997: 70,487,840.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended
March 31
----------------------------
1997 1996
---- ----
(In thousands except
per share amounts)
Revenues
Natural gas distribution. . . . . . . . . . . . . . . . . . . $ 412,525 $362,848
Natural gas pipeline. . . . . . . . . . . . . . . . . . . . . 50,616 63,537
Natural gas processing. . . . . . . . . . . . . . . . . . . . 32,919 29,328
Gas marketing . . . . . . . . . . . . . . . . . . . . . . . . 343,920 252,550
Power and other . . . . . . . . . . . . . . . . . . . . . . . 6,014 7,866
Natural gas and oil exploration and production. . . . . . . . 85,170 75,416
Less intercompany revenues. . . . . . . . . . . . . . . . . . (63,197) (112,902)
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 867,967 678,643
--------- --------
Costs and Expenses
Gas purchase. . . . . . . . . . . . . . . . . . . . . . . . . 601,086 422,318
Operating expenses. . . . . . . . . . . . . . . . . . . . . . 113,809 110,889
Write-down of gas and oil properties. . . . . . . . . . . . . 426,229 -
Depreciation and amortization . . . . . . . . . . . . . . . . 42,139 46,401
Gross receipts and production taxes . . . . . . . . . . . . . 18,653 17,938
Payroll, ad valorem and other taxes . . . . . . . . . . . . . 10,171 10,705
--------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212,087 608,251
--------- --------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . . . (344,120) 70,392
Other Expense - Net . . . . . . . . . . . . . . . . . . . . . . (2,086) (782)
Interest and Other Financing Costs. . . . . . . . . . . . . . . (24,809) (22,656)
--------- --------
Income (Loss) Before Income Taxes and Minority Interest . . . . (371,015) 46,954
Income Taxes (Benefit). . . . . . . . . . . . . . . . . . . . . (130,641) 17,170
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . (39,449) 7
--------- --------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . (200,925) 29,777
Provision for Dividends on Preferred Stock. . . . . . . . . . . 2,862 2,759
--------- --------
Earnings (Loss) Applicable to Common Stock. . . . . . . . . . . $(203,787) $ 27,018
========= ========
Per Share of Common Stock
Earnings (loss) applicable to common stock. . . . . . . . . . $ (2.89) $ .39
========= ========
Cash dividends declared . . . . . . . . . . . . . . . . . . . $ .05 $ .05
========= ========
Average Common and Dilutive Common
Equivalent Shares Outstanding . . . . . . . . . . . . . . . . 70,449 68,475
========= ========
Operating Income (Loss) by Business Segments
Businesses to be merged with TUC
Natural gas distribution. . . . . . . . . . . . . . . . . . . $ 47,997 $ 51,135
Natural gas pipeline (before credit). . . . . . . . . . . . . 24,844 24,570
Credit to customers . . . . . . . . . . . . . . . . . . . . (8,568) -
Natural gas processing. . . . . . . . . . . . . . . . . . . . 3,921 4,150
Natural gas marketing . . . . . . . . . . . . . . . . . . . . (11,423) (11,629)
Power and other . . . . . . . . . . . . . . . . . . . . . . . (1,856) (507)
General corporate . . . . . . . . . . . . . . . . . . . . . . (2,159) (2,336)
--------- --------
Total operating income of businesses to be merged with TUC. 52,756 65,383
Natural gas and oil exploration and production and other
businesses to be distributed to ENSERCH shareholders
(before impact of write-down) . . . . . . . . . . . . . . . . 23,177 5,009
Impact of write-down of capitalized costs . . . . . . . . . . (420,053) -
--------- --------
Consolidated operating income (loss). . . . . . . . . . $(344,120) $ 70,392
========= ========
<FN>
See accompanying Notes.
</FN>
-1-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
----------------------------
1997 1996
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(200,925) $ 29,777
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,449) 7
Write-down of gas and oil properties . . . . . . . . . . . . . . . . . . . . . 426,229
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 42,139 46,401
Deferred income-tax expense (benefit). . . . . . . . . . . . . . . . . . . . . (132,280) 15,512
Recoveries of gas-purchase contract settlements. . . . . . . . . . . . . . . . 132 5,462
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,667 2,172
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,249 (23,019)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,269 7,721
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144,390) (7,641)
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (52,213) 13,671
-------- --------
Net cash flows from operating activities. . . . . . . . . . . . . . . . . 75,428 90,063
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . (56,421) (51,239)
Sales and retirements of property, plant and equipment . . . . . . . . . . . 2,721 15,468
Investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . (9,747) (7,018)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,710) (19,998)
-------- --------
Net cash flows used for investing activities. . . . . . . . . . . . . . . (84,157) (62,787)
-------- --------
FINANCING ACTIVITIES
Change in commercial paper and other short-term borrowings . . . . . . . . . 49,500 (34,313)
Borrowings by EEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 55,000
Repayment of borrowing by EEX. . . . . . . . . . . . . . . . . . . . . . . . (55,000) (20,000)
Borrowings under ENSERCH revolving credit agreement. . . . . . . . . . . . . 100,000
Retirement of senior long-term debt. . . . . . . . . . . . . . . . . . . . . (100,399) (330)
Change in advances under lease arrangements. . . . . . . . . . . . . . . . . (1,737) (12,233)
Issuance of ENSERCH common stock . . . . . . . . . . . . . . . . . . . . . . 3,613 672
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,388) (6,231)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 49
-------- --------
Net cash flows from (used for) financing activities . . . . . . . . . . . 9,591 (17,386)
-------- --------
Net Cash Flows from (used for) Discontinued Operations . . . . . . . . . . . . 1,985 (6,276)
-------- --------
Net Increase in Cash and Equivalents . . . . . . . . . . . . . . . . . . . . . . 2,847 3,614
Cash and Equivalents at Beginning of Period. . . . . . . . . . . . . . . . . . . 19,073 8,561
-------- --------
Cash and Equivalents at End of Period. . . . . . . . . . . . . . . . . . . . . $ 21,920 $ 12,175
======== ========
<FN>
See accompanying Notes.
</FN>
-2-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(March 31, 1997 Unaudited)
March 31 December 31
1997 1996
--------- -----------
(In thousands)
ASSETS
Current Assets
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,920 $ 19,073
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 273,861 382,404
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . 102,472 119,178
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,918 121,837
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 469,171 642,492
---------- ----------
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,104 115,633
---------- ----------
Property, Plant and Equipment (full-cost
method for gas and oil properties) . . . . . . . . . . . . . . . . . . . . 4,424,290 4,805,293
Less accumulated depreciation and amortization . . . . . . . . . . . . . . (1,896,872) (1,861,914)
---------- ----------
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . 2,527,418 2,943,379
---------- ----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,773 43,073
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,170,466 $3,744,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper and other short-term borrowings . . . . . . . . . . . . . $ 187,500 $ 138,000
Current portion of senior long-term debt . . . . . . . . . . . . . . . . . 1,648 1,598
Payables under leasing arrangements. . . . . . . . . . . . . . . . . . . . 14,508 8,714
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,503 428,354
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 109,753 163,376
Liabilities for discontinued engineering and construction operations . . . 14,506 17,933
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 595,418 757,975
---------- ----------
Senior Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 921,593 956,971
---------- ----------
Convertible Subordinated Debentures. . . . . . . . . . . . . . . . . . . . . 90,750 90,750
---------- ----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,613 288,299
---------- ----------
Capital Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 234,204 241,735
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,129 181,030
---------- ----------
Mandatorily Redeemable Preferred Securities of Subsidiary of EEX . . . . . . 150,000 150,000
---------- ----------
Minority Interest in Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 120,101 159,426
---------- ----------
Shareholders' Equity
Adjustable rate preferred stock. . . . . . . . . . . . . . . . . . . . . . 175,000 175,000
---------- ----------
Common shareholders' equity
Common stock (100,000 shares authorized;
70,485 and 70,280 shares outstanding). . . . . . . . . . . . . . . . . 705 703
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676,381 672,775
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . (133,670) 70,774
Foreign currency translation adjustment. . . . . . . . . . . . . . . . . (758) (861)
---------- ----------
Common shareholders' equity. . . . . . . . . . . . . . . . . . . . . . 542,658 743,391
---------- ----------
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 717,658 918,391
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,170,466 $3,744,577
========== ==========
<FN>
See accompanying Notes.
</FN>
-3-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements
1. On April 15, 1996, ENSERCH Corporation announced that it had entered into
a merger agreement with Texas Utilities Company (TUC). Prior to the
merger, ENSERCH's approximate 83% interest in Enserch Exploration, Inc.
(EEX), represented by approximately 105 million shares of EEX common
stock, will be distributed to ENSERCH shareholders. Lone Star Gas Company
and Lone Star Pipeline Company, the local distribution and pipeline
companies of ENSERCH, and other business will become a part of TUC.
The transaction is subject to certain conditions which include the
approval by the Securities and Exchange Commission (SEC) and receipt by
ENSERCH of a favorable tax ruling from the Internal Revenue Service (IRS)
to the effect that its distribution of EEX stock will be a tax-free
transaction. ENSERCH received this IRS ruling in February 1997. ENSERCH
recently became aware of an inadvertent misstatement of fact it believes
is immaterial in its filing with the IRS and has received an opinion from
outside counsel that it will still be able to rely on the ruling. While
ENSERCH and TUC do not believe the additional facts would change the
IRS's ruling, the situation is being reviewed by the parties and further
communication with the IRS may ensue.
All other approvals have been received, except for approval by the SEC
under the Public Utility Holding Company Act of 1935 where the approval
process is proceeding.
2. The SEC-prescribed full-cost accounting rules require registrants to
calculate the cost center ceiling limitation at the end of each quarter
using current prices and costs. At March 31, 1997, ENSERCH's carrying
value of the unamortized capitalized costs of EEX's U.S. gas and oil
properties was $426 million in excess of the cost center ceiling
limitation based on average March 1997 prices. Considering the associated
reduction in amortization expense, the write-down reduced first quarter
operating income $420 million. After-tax and minority interest, the
impact on ENSERCH earnings of the non-cash write-down was $236 million,
or approximately $3.34 per share of common stock. The write-down will not
affect the ENSERCH merger with TUC or the ENSERCH businesses to be merged.
3. Lone Star Pipeline Company has filed a request with the Railroad
Commission of Texas (RRC) to increase the rate it charges Lone Star Gas
Company to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star
Gas Company. Lone Star Gas Company has also requested that the RRC
separately set rates for costs to aggregate gas supply for these cities.
Rates currently in effect were set by the RRC in 1982. 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.
-4-
Prior to the Companys' filing of these requests for rate increases, the
RRC had ordered a general inquiry into the rates and services of Lone Star
Gas Company. The scope of the inquiry has not been defined, and an
evidentiary hearing has not been held. At the conclusion of the rate
hearing requested by Lone Star Pipeline and Lone Star Gas Company, RRC
examiners indicated that they would inquire about the historical natural
gas acquisition practices and costs.
A preliminary recommendation made by RRC staff examiners on the rate
requests would cut the Company's current margin by 16 percent. In
addition, the examiners' recommendation would impose severe financial
penalties for the prices paid for the natural gas supplied to customers.
The Company has protested the examiners' preliminary recommendation which
it considers to be unreasonable and legally unsupportable. The
commissioners will consider the examiners' recommendation and the
Company's protest to the recommendation during their May meetings and are
expected to issue a decision no later than May 20.
4. 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.
5. 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 1997
presentation.
-5-
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiary companies as of March 31, 1997, and the
related condensed statements of consolidated income and cash flows for the
three months ended March 31, 1997 and 1996. 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, 1996, 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 10, 1997,
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, 1996, 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
May 7, 1997
-6-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
MERGER WITH TUC - On April 15, 1996, ENSERCH Corporation announced that
it had entered into a merger agreement with Texas Utilities Company
(TUC). Prior to the merger, ENSERCH's approximate 83% interest in
Enserch Exploration, Inc. (EEX), represented by approximately 105 million
shares of EEX common stock, will be distributed to ENSERCH shareholders.
Lone Star Gas Company and Lone Star Pipeline Company, the local
distribution and pipeline companies of ENSERCH, and other business will
become a part of TUC.
The transaction is subject to certain conditions which include the
approval by the Securities and Exchange Commission (SEC) and receipt by
ENSERCH of a favorable tax ruling from the Internal Revenue Service (IRS)
to the effect that its distribution of EEX stock will be a tax-free
transaction. ENSERCH received this IRS ruling in February 1997. ENSERCH
recently became aware of an inadvertent misstatement of fact it believes
is immaterial in its filing with the IRS and has received an opinion from
outside counsel that it will still be able to rely on the ruling. While
ENSERCH and TUC do not believe the additional facts would change the
IRS's ruling, the situation is being reviewed by the parties and further
communication with the IRS may ensue.
All other approvals have been received, except for approval by the SEC
under the Public Utility Holding Company Act of 1935 where the approval
process is proceeding.
Within a $4.00 (approximately 10%) price range variation above or below the
April 12, 1996 closing price of TUC common stock ($39.625 per share), each
holder of ENSERCH common stock will receive sufficient shares of TUC common
stock to provide $8.00 of value. Above or below the 10% threshold, the number
of shares received remains fixed and the value received will move up or down
pro rata with the price of TUC common stock. Based on the daily closing price
of TUC common stock through May 8, 1997 each ENSERCH share would be converted
into approximately .225 shares of TUC common stock. Also, based on the
ENSERCH shares outstanding at May 8, 1997 and estimated EEX shares to be owned
by ENSERCH as of the merger date, each holder of ENSERCH common stock would
receive approximately 1.5 shares of EEX common stock for each ENSERCH share.
The final determination of TUC and EEX shares received by ENSERCH shareholders
will be based on the price of the TUC shares for a specified period prior to
closing and the actual number of ENSERCH and EEX shares outstanding on the
closing date.
CONSOLIDATED RESULTS OF OPERATIONS - For the first quarter of 1997, ENSERCH
Corporation had income of $18.6 million from the businesses that will be
merged with TUC. First quarter income was reduced by an $8.6 million pretax,
$5.6 million after-tax, provision for a previously announced voluntary credit
Lone Star Gas Company intends to make to its customers. Excluding this
provision, first quarter income from the businesses to be merged with TUC was
$24 million compared with $29 million for the first quarter of 1996.
-7-
ENSERCH's natural gas and oil exploration and production business, represented
by its 83% interest in EEX, and other businesses which will be distributed to
ENSERCH shareholders immediately prior to the merger with TUC had a first
quarter 1997 loss of $220 million. The loss, which has no effect on the
ENSERCH businesses to be merged with TUC, resulted from the non-cash write-
down of the carrying value of EEX's gas and oil properties required under the
full-cost method of accounting.
After provision for preferred dividends, ENSERCH's consolidated first quarter
loss applicable to common stock was $204 million, or $2.89 per share,
including income of $.22 per share from businesses to be merged with TUC and
a loss of $3.11 per share from businesses to be distributed to ENSERCH
shareholders. Excluding the unusual charges, ENSERCH had consolidated first
quarter earnings applicable to common stock of $40 million or $.56 per share.
For the 1996 first quarter, earnings applicable to common stock were $27
million, or $.39 per share, essentially all from the businesses to be merged
with TUC.
NATURAL GAS DISTRIBUTION - Operating income for Lone Star Gas Company for the
first quarter of $48 million was $3.1 million (6%) under the first quarter of
last year, with gas sales margin down $1.7 million (2%) from the year-ago
period. The decrease in margin reflects the impact of heating weather that
was 10% below normal versus near normal weather the first quarter of 1996.
A higher cost of gas lost in transmission also contributed to the margin
decline. Total gas sales volumes for the first quarter decreased 2% from the
1996 first quarter. Operating expenses of $64 million were $3.7 million
higher than for the 1996 first quarter, principally due to increased employee
and maintenance costs.
NATURAL GAS PIPELINE - Pipeline operations, which are conducted by Lone Star
Pipeline Company, had operating income of $25 million, before recognition of
a credit to Lone Star Gas Company customers for a transportation charge
inadvertently collected in 1991 through 1995. This was approximately the same
as the prior year's first quarter results. Heating degree days for this
year's first quarter were 11% below the first quarter of 1996 and 10% below
normal. Pipeline throughput for the first quarter totaled 173 Bcf, 5% less
than the year-earlier period. Improvement in the cost of gas lost in
transmission mostly offset the effects of the warmer weather.
NATURAL GAS PROCESSING - First-quarter operating income for natural gas
gathering and processing operations of Enserch Processing, Inc. decreased
modestly from $4.2 million in the first quarter last year to $3.9 million,
reflecting a decline in the margin on gas purchased for resale that was
partially offset by lower operating expenses. NGL sales volumes for the first
quarter totaled 1.4 million barrels, 10% under the 1996 first quarter mostly
due to sales from inventory in 1996. Production volumes were little changed
from the 1996 first quarter. The average sales price per barrel for the first
quarter of $16.52 was up 24% from the first quarter last year.
NATURAL GAS MARKETING - Gas marketing operations, which are conducted through
Enserch Energy Services, Inc. (EES), had a first quarter operating loss of
-8-
$11.4 million, little changed from the first quarter of 1996. Sales volumes
increased 11% from the first quarter of 1996 and average prices increased 23%,
resulting in a 36% increase in revenues. The margin improved $1 million but
remained negative at $4.6 million. Operating expenses of $6.7 million were
$.6 million (9%) higher than in the first quarter last year.
As part of its natural gas marketing activities, EES enters into forward
contracts principally involving physical delivery of natural gas and
derivative financial instruments, including swaps, options, futures and other
contractual arrangements. These activities involve price commitments into the
future and, therefore, give rise to market risk. At March 31, 1997, natural
gas marketing operations had net commitments to sell approximately 27 Bcf of
natural gas through the year 1997 with offsetting net financial positions to
purchase approximately the same quantity. There was a net unrealized and
unrecognized gain of $8.2 million at March 31, 1997 on these contracts.
POWER AND OTHER - ENSERCH's power and other activities to be merged with TUC
had an operating loss for the first quarter of $1.9 million, compared with an
operating loss of $.5 million for the first quarter last year. These amounts
exclude the operating income of $.2 million for both 1997 and 1996 of Lone
Star Energy Plant Operations, Inc. (LSEPO), which is to be included in the
distribution of EEX.
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION - Operating income (before the
effect of the write-down) from exploration and production operations, which
are conducted through EEX, was $23 million for the first quarter of 1997, a
significant improvement from the $4.4 million for the first quarter last year.
First-quarter revenues rose to $85 million from $75 million for the first
quarter of 1996, reflecting a $4.1 million improvement in natural-gas revenues
and a $5.8 million increase in oil revenues. Natural-gas sales volumes
decreased to 20 billion cubic feet (Bcf) for the first quarter of 1997,
compared with 25 Bcf sold during the 1996 first quarter. The decline was
partially attributable to the sale of certain non-core properties during the
latter part of 1996. The average price received for natural gas for the first
quarter was $2.85 per thousand cubic feet (Mcf), compared with $2.17 per Mcf
for the year earlier. Oil sales volumes of 1.1 million barrels (MBbls) were
6% higher compared with the first quarter last year and the price received
averaged $21.93 per barrel, a 23% improvement from the first quarter last
year.
Operating expenses for the first quarter of 1997 (before the effect of the
write-down) totaled $62 million versus $71 million for the first quarter of
1996. About $5 million of the decrease is attributable to the refinancing of
operating leases for equipment and facilities as capital leases in late 1996.
In addition, the sale of the non-core properties during 1996 reduced expenses.
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. In total, gas and oil price
hedging activities reduced first quarter 1997 and 1996 revenues by $.5 million
and $5.7 million respectively. At March 31, 1997, EEX had outstanding swaps,
-9-
collars and futures agreements that were entered into as hedges extending
through December 31, 1997 to exchange payments on 19 Bcf of natural gas and
1.6 million barrels of oil. At March 31, 1997, there were $3.8 million of net
unrealized and unrecognized hedging gains based on the difference between the
strike price and the NYMEX futures price for the applicable trading month.
In addition, there were $1.4 million of realized gains on hedging activities
which were deferred and will be applied as an increase in revenues in April
1997, the month of physical sale of production.
LIQUIDITY AND FINANCIAL RESOURCES - Operating activities for the first quarter
of 1997 provided net cash flows of $75 million, compared with $90 million for
the first quarter of 1996. Recoveries of producer settlements, which are now
substantially complete, were $5.3 million less than the year-earlier period,
and changes in current operating assets and liabilities required cash of
$20.4 million in the first quarter this year compared with $7.1 million
required in the first quarter last year.
Investing activities required net cash flows of $84 million versus $63 million
in the first quarter of 1996. The level of capital spending and investments
in unconsolidated affiliates were both slightly higher this year. Proceeds
from sales and retirements of property, plant and equipment provided
$2.7 million in the first quarter this year versus $15.5 million in the 1996
first quarter.
As a percentage of total capitalization, common shareholders' equity plus
minority interest in subsidiaries was 33.1% at March 31, 1997, compared with
39.7% at year-end 1996.
ENSERCH has bank lines in the form of a revolving credit agreement expiring
September 30, 2001 totaling $650 million, $390 million of which was unused at
March 31, 1997. In addition, EEX has a $350 million four-year revolving
credit agreement, $270 million of which was unused at March 31, 1997, and
other affiliates have four-year revolving credit agreements aggregating $30
million, $5 million of which was unused at March 31, 1997.
Planned property, plant and equipment additions for 1997 include $71 million
for natural gas distribution and $42 million for natural gas pipeline,
processing, marketing, and other requirements. The planned expenditures are
expected to be funded from internal cash flow and external financings as
required. Enserch Exploration plans to utilize substantially all of its
internally generated cash flows, plus proceeds from the monetization of non-
core assets, to fund its capital expenditures program.
-10-
PENDING RATE CASE - Lone Star Pipeline Company has filed a request with the
Railroad Commission of Texas (RRC) to increase the rate it charges Lone Star
Gas Company to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star Gas
Company. Lone Star Gas Company has also requested that the RRC separately set
rates for costs to aggregate gas supply for these cities. Rates currently in
effect were set by the RRC in 1982. 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.
Prior to the Companys' filing of these requests for rate increases, the RRC
had ordered a general inquiry into the rates and services of Lone Star Gas
Company. The scope of the inquiry has not been defined, and an evidentiary
hearing has not been held. At the conclusion of the rate hearing requested
by Lone Star Pipeline and Lone Star Gas Company, RRC examiners indicated that
they would inquire about the historical natural gas acquisition practices and
costs.
A preliminary recommendation made by RRC staff examiners on the rate requests
would cut the Company's current margin by 16 percent. In addition, the
examiners' recommendation would impose severe financial penalties for the
prices paid for the natural gas supplied to customers. The Company has
protested the examiners' preliminary recommendation which it considers to be
unreasonable and legally unsupportable. The commissioners will consider the
examiners' recommendation and the Company's protest to the recommendation
during their May meetings and are expected to issue a decision no later than
May 20.
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OPERATIONS TO BE DISTRIBUTED TO ENSERCH SHAREHOLDERS - The merger of ENSERCH
with TUC will be preceded by the distribution of EEX shares to ENSERCH common
shareholders. To facilitate the distribution, LSEPO, a wholly owned
subsidiary of ENSERCH, will merge with EEX; LSEPO will be the surviving
corporation of that merger, and its name will be changed to Enserch
Exploration, Inc. The merger enables the distribution to be tax-free to
ENSERCH and its shareholders. LSEPO, under long-term contracts, operates and
maintains three cogeneration facilities.
Following the distribution, the historical financial statements of ENSERCH
will be restated to reflect the exploration and production segment and LSEPO
as discontinued operations. ENSERCH's restated results of operations will be
as follows:
Quarter Ended March 31
----------------------------
1997 1996
------ ------
Income (Loss) from Continuing Operations. . . . . . . . . . $ 18,576 $ 29,485
Income (Loss) from Discontinued Operations: . . . . . . . . (219,501) 292
--------- --------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . (200,925) 29,777
Provision for Dividends on Preferred Stock. . . . . . . . . 2,862 2,759
--------- --------
Earnings (Loss) Applicable to Common Stock. . . . . . . . . $(203,787) $ 27,018
========= ========
Per Share of Common Stock:
Income from continuing operations after provision
for preferred dividends. . . . . . . . . . . . . . . . $ .22 $ .39
Discontinued operations. . . . . . . . . . . . . . . . . (3.11) -
--------- --------
Earnings applicable to common stock. . . . . . . . . . . $ (2.89) $ .39
========= ========
*The following reconciles net income (loss) of EEX and LSEPO to
income (loss) from the discontinued exploration and production
business segment:
Net income (loss) of EEX. . . . . . . . . . . . . . . . . . $(234,730) $ 84
Net income of LSEPO . . . . . . . . . . . . . . . . . . . . 135 121
Differences in amounts reported by EEX and LSEPO and amounts
reported for the discontinued business by ENSERCH in its
consolidated financial statements (after-tax):
Write-down of gas and oil properties by ENSERCH in
excess of write-down incurred by EEX. . . . . . . . . (26,669) -
Amortization of costs capitalized by ENSERCH not
incurred by EEX . . . . . . . . . . . . . . . . . . . (91) (43)
Effect of property sub-lease transaction. . . . . . . . - 247
Activities not conducted through EEX and other. . . . . 2,405 (110)
Eliminate minority interest . . . . . . . . . . . . . . 39,449 (7)
--------- --------
Income (loss) from discontinued exploration and production
business segment . . . . . . . . . . . . . . . . . . . $(219,501) $ 292
========= ========
-12-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Distribution Operating Data (Unaudited)
Three Months Ended
March 31
--------------------------
1997 1996 (a)
------ --------
Operating Income (in millions). . . . . . . . . . . . . . . $ 48.0 $ 51.1
====== ======
Natural Gas Sales Revenues by Customer (in millions)
Residential & commercial. . . . . . . . . . . . . . . . . $381.8 $334.7
Industrial. . . . . . . . . . . . . . . . . . . . . . . . 8.7 11.2
Electric generation . . . . . . . . . . . . . . . . . . . 13.7 10.9
------ ------
Total gas sales revenues . . . . . . . . . . . . . . 404.2 356.8
Gas transportation revenues (b) . . . . . . . . . . . . . . 3.9 3.7
Other revenues. . . . . . . . . . . . . . . . . . . . . . . 4.4 2.3
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . $412.5 $362.8
====== ======
Natural Gas Sales Volumes by Customer (Bcf)
Residential & commercial. . . . . . . . . . . . . . . . . 61.5 62.2
Industrial. . . . . . . . . . . . . . . . . . . . . . . . 1.9 3.0
Electric generation . . . . . . . . . . . . . . . . . . . 3.1 2.8
------ ------
Total gas sales volumes. . . . . . . . . . . . . . . 66.5 68.0
====== ======
Natural Gas Sales Revenues (per Mcf)
Residential & commercial. . . . . . . . . . . . . . . . . $ 6.21 $ 5.38
Industrial. . . . . . . . . . . . . . . . . . . . . . . . 4.66 3.74
Electric generation . . . . . . . . . . . . . . . . . . . 4.37 3.81
Natural Gas Purchase Cost (per Mcf) . . . . . . . . . . . . $ 4.42 $ 3.60
Heating Degree Days . . . . . . . . . . . . . . . . . . . . 1,292 1,458
<FN>
(a) The 1996 results of the natural gas pipeline and natural gas distribution segments have been restated
to reflect realignment of functions in 1997.
(b) Represents the portion of transportation revenues attributable to the distribution system. Related
volumes are included within Natural Gas Pipeline, Processing and Marketing statistics.
</FN>
-13-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Pipeline, Processing and Marketing Operating Data (Unaudited)
Three Months Ended
March 31
-------------------------
1997 1996 (a)
------ -------
Operating Income (Loss)(in millions)
Natural Gas Pipeline (before credit) . . . . . . . . . . . . . . . $ 24.8 $ 24.6
Credit to customers (b). . . . . . . . . . . . . . . . . . . . . (8.6) -
Natural Gas Processing . . . . . . . . . . . . . . . . . . . . . . 3.9 4.1
Gas Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . (11.4) (11.6)
Revenues (in millions)
Natural Gas Pipeline (c)
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . $ 47.9 $ 49.3
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 14.2
------ ------
Total (before credit) . . . . . . . . . . . . . . . . . . . . . 59.2 63.5
Credit to customers (b). . . . . . . . . . . . . . . . . . . . . (8.6) -
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50.6 $ 63.5
====== ======
Natural Gas Processing
Natural gas liquids (d) . . . . . . . . . . . . . . . . . . . . $ 23.4 $ 21.0
Other (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 8.3
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32.9 $ 29.3
====== ======
Gas Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . $344.0 $252.6
====== ======
Volumes
Pipeline throughput (Bcf). . . . . . . . . . . . . . . . . . . . . 172.9 182.7
Gas Processing (MMBbls). . . . . . . . . . . . . . . . . . . . . . 1.4 1.6
Gas Marketing (Bcf). . . . . . . . . . . . . . . . . . . . . . . . 108.3 97.6
Average Sales Prices
Natural Gas Liquids (per Bbl). . . . . . . . . . . . . . . . . . . $16.52 $13.30
Gas Marketing (per Mcf). . . . . . . . . . . . . . . . . . . . . . 3.18 2.59
<FN>
(a) The 1996 results of the natural gas pipeline and natural gas distribution segments have been restated to
reflect realignment of functions in 1997.
(b) Represents a voluntary credit to customers of Lone Star Gas Company for a transportation charge
inadvertently collected between 1991 and 1995.
(c) Includes transportation services for affiliates and third-parties and other miscellaneous revenues.
(d) Represents revenues from sales of plant production.
(e) Includes revenues from natural-gas products purchased for resale, gathering fees and other miscellaneous
revenues.
</FN>
-14-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas and Oil Exploration and Production Operating Data (Unaudited)
Three Months Ended
March 31
--------------------------
1997 1996
---- ----
Operating Income (Loss)(in millions) . . . . . . . . . . . . . $(397.1) $ 4.4
======= ======
Revenues (in millions) . . . . . . . . . . . . . . . . . . . . $ 85.2 $ 75.4
======= ======
Sales Volumes
Natural gas (Mmcf) . . . . . . . . . . . . . . . . . . . . . 20,426 24,971
Oil and condensate (Mbbls) . . . . . . . . . . . . . . . . . 1,147 1,082
Average Sales Price
Natural gas (per Mcf). . . . . . . . . . . . . . . . . . . . $ 2.85 $ 2.17
Oil and condensate (per Bbl) . . . . . . . . . . . . . . . . 21.93 17.90
Net Wells
Drilled. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 18
Productive . . . . . . . . . . . . . . . . . . . . . . . . . 11 17
Data in Equivalent Energy Content (per Mcfe)(a)
Production revenue . . . . . . . . . . . . . . . . . . . . . $ 3.05 $ 2.31
Production and operating costs (b) . . . . . . . . . . . . . .49 .63
Depreciation and amortization (c). . . . . . . . . . . . . . .99 1.01
<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.
(c) Excludes write-down of gas and oil properties. As a result of the write-down amortization for 1997 was
reduced approximately $.22 per Mcfe.
</FN>
OPERATING INCOME RECONCILIATION FROM EEX TO ENSERCH SEGMENT
Three Months Ended
March 31
--------------------------
1997 1996
------ ------
Operating income of EEX. . . . . . . . . . . . . . . . . . . . $(355.3) $ 5.7
Amortization of costs capitalized by ENSERCH not incurred
by EEX . . . . . . . . . . . . . . . . . . . . . . . . . . . (.7)
Write-down of gas and oil properties by ENSERCH
in excess of write-down incurred by EEX . . . . . . . . . . . (41.0)
Effects of intercompany lease transactions . . . . . . . . . . (1.0)
Activities not conducted through EEX . . . . . . . . . . . . . (.1) (.3)
------ ------
Operating income of ENSERCH's natural gas and oil
exploration and production segment . . . . . . . . . . . . . $(397.1) $ 4.4
====== ======
-15-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 16, 1996, the Corporation and certain directors of the
Corporation were named as defendants in a lawsuit, Frederick Rand vs.
ENSERCH Corporation, et al, filed by an alleged shareholder in the
193rd District Court of Dallas County, Texas. In this action, the
plaintiff sought, among other things, to enjoin the Corporation's
newly adopted shareholder rights plan and the merger agreement between
the Corporation and TUC and to have the lawsuit certified as a class
action. On May 1, 1997, the lawsuit was dismissed without prejudice
by the plaintiff.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (15) - Letter of Deloitte & Touche LLP dated May 7, 1997,
regarding unaudited interim financial statements.
(b) Reports on Form 8-K
Current Report on Form 8-K dated January 8, 1997 and January 13,
1997. (News Releases dated January 8 1997 and January 13, 1997:
Updates Developments at Cooper Project; EEX Chairman, President
and CEO.)
Current Report on Form 8-K dated March 10, 1997. (News Release
dated March 10, 1997, ENSERCH/Texas Utilities merger.)
-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: May 14, 1997 By: /s/ M. E. Rescoe
---------------------------
M. E. Rescoe, Senior Vice
President, Finance and
Chief Financial Officer
Date: May 14, 1997 By /s/ J. W. Pinkerton
---------------------------
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
-17-