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 JUNE 30, 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
August 12, 1997: 70,494,540.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands except per share amounts)
Revenues
Natural gas distribution. . . . . . . . . . . . . . . . . $115,186 $141,139 $ 527,711 $ 503,987
Natural gas pipeline. . . . . . . . . . . . . . . . . . . 28,179 29,564 78,795 93,101
Natural gas processing. . . . . . . . . . . . . . . . . . 32,628 37,570 65,547 66,898
Gas marketing . . . . . . . . . . . . . . . . . . . . . . 194,560 159,861 538,480 412,411
Power and other . . . . . . . . . . . . . . . . . . . . . 2,367 7,700 6,659 13,936
Less intercompany revenues. . . . . . . . . . . . . . . . (24,873) (34,402) (74,332) (98,664)
-------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 348,047 341,432 1,142,860 991,669
-------- --------- --------- ---------
Costs and Expenses
Gas purchase. . . . . . . . . . . . . . . . . . . . . . . 240,948 224,852 856,393 696,124
Operating expenses. . . . . . . . . . . . . . . . . . . . 88,075 83,932 176,934 162,590
Depreciation and amortization . . . . . . . . . . . . . . 14,429 13,324 28,900 26,629
Gross receipts and production taxes . . . . . . . . . . . 11,849 11,239 27,072 25,504
Payroll, ad valorem and other taxes . . . . . . . . . . . 7,515 7,075 15,574 14,430
-------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 362,816 340,422 1,104,873 925,277
-------- --------- --------- ---------
Operating Income (Loss). . . . . . . . . . . . . . . . . . . (14,769) 1,010 37,987 66,392
Other Income (Expense) - Net . . . . . . . . . . . . . . . . (5,327) (1,896) (7,387) (2,766)
Interest Expense . . . . . . . . . . . . . . . . . . . . . . (19,022) (18,662) (37,956) (36,941)
-------- -------- --------- ---------
Income (Loss) Before Income Taxes. . . . . . . . . . . . . . (39,118) (19,548) (7,356) 26,685
Income Taxes (Benefit) . . . . . . . . . . . . . . . . . . . (17,542) (6,743) (4,356) 10,005
-------- -------- --------- ---------
Income (Loss) from Continuing Operations . . . . . . . . . . (21,576) (12,805) (3,000) 16,680
Income (Loss) from Discontinued Operations . . . . . . . . . (8,511) 6,104 (228,012) 6,396
-------- -------- --------- ---------
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . (30,087) (6,701) (231,012) 23,076
Provision for Dividends on Preferred Stock . . . . . . . . . 2,893 2,817 5,755 5,576
-------- -------- --------- ---------
Earnings (Loss) Applicable to Common Stock . . . . . . . . . $(32,980) $ (9,518) $(236,767) $ 17,500
======== ======== ========= =========
Per Share of Common Stock
Income (loss) from continuing operations. . . . . . . . . $ (.35) $ (.23) $ (.12) $ .16
Income (loss) from discontinued operations. . . . . . . . (.12) .09 (3.24) .09
-------- -------- --------- ---------
Earnings (loss) applicable to common stock. . . . . . . . $ (.47) $ (.14) $ (3.36) $ .25
======== ======== ========= =========
Cash dividends declared . . . . . . . . . . . . . . . . . $ .05 $ .05 $ .10 $ .10
======== ======== ========= =========
Average Common and Dilutive Common
Equivalent Shares Outstanding. . . . . . . . . . . . . . . 70,489 68,886 70,469 68,875
======== ======== ========= =========
Operating Income (Loss) by Business Segments
Natural gas distribution . . . . . . . . . . . . . . . . . $ (7,809) $ (141) $ 40,188 $ 50,994
Natural gas pipeline (before credit) . . . . . . . . . . . 2,848 (1,226) 27,692 23,345
Credit to customers. . . . . . . . . . . . . . . . . . . - - (8,568) -
Natural gas processing . . . . . . . . . . . . . . . . . . 2,433 4,576 6,354 8,726
Gas marketing. . . . . . . . . . . . . . . . . . . . . . . (4,772) 3,363 (16,195) (8,266)
Power and other. . . . . . . . . . . . . . . . . . . . . . (4,825) (1,827) (6,681) (2,334)
General corporate. . . . . . . . . . . . . . . . . . . . . (2,644) (3,735) (4,803) (6,073)
-------- -------- --------- ---------
Consolidated operating income (loss). . . . . . . . . . . $(14,769) $ 1,010 $ 37,987 $ 66,392
======== ======== ========= =========
<FN>
See accompanying Notes.
</FN>
-1-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
------------------------
1997 1996
---- ----
(In thousands)
OPERATING ACTIVITIES
Income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . $ (3,000) $ 16,680
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 28,900 26,629
Deferred income-tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . (7,595) 6,868
Recoveries of gas-purchase contract settlements. . . . . . . . . . . . . . . . . 139 5,846
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,900 3,521
Changes in current operating assets and liabilities
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,222 96,714
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,012 5,542
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (157,094) (80,227)
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . (43,922) 8,026
--------- ---------
Net cash flows from continuing operating activities. . . . . . . . . . . . . 29,562 89,599
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . (50,625) (64,717)
Sales and retirements of property, plant and equipment . . . . . . . . . . . . . 713 5,444
Investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . (15,586) (46,926)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,242) (13,659)
--------- ---------
Net cash flows used for investing activities . . . . . . . . . . . . . . . . (75,740) (119,858)
--------- ---------
FINANCING ACTIVITIES
Change in commercial paper and other short-term borrowings . . . . . . . . . . . 65,500 22,500
Borrowings under ENSERCH revolving credit agreement. . . . . . . . . . . . . . . 100,000 25,000
Retirement of senior long-term debt. . . . . . . . . . . . . . . . . . . . . . . (100,784) (7,369)
Issuance of ENSERCH common stock . . . . . . . . . . . . . . . . . . . . . . . . 3,762 9,563
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,773) (12,420)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (54)
--------- ---------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . 55,698 37,220
--------- ---------
Net Cash Flows from (used for) Discontinued Operations
Exploration and production . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,581) 8,909
Engineering and construction . . . . . . . . . . . . . . . . . . . . . . . . . . (6,025) (8,427)
--------- ---------
Net cash flows (used for) from discontinued operations . . . . . . . . . . . (17,606) 482
--------- ---------
Net Increase (Decrease) in Cash and Equivalents. . . . . . . . . . . . . . . . . . (8,086) 7,443
Cash and Equivalents at Beginning of Period. . . . . . . . . . . . . . . . . . . . 17,715 6,996
--------- ---------
Cash and Equivalents at End of Period. . . . . . . . . . . . . . . . . . . . . . . $ 9,629 $ 14,439
========= =========
<FN>
See accompanying Notes.
</FN>
-2-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(June 30, 1997 Unaudited)
June 30 December 31
1997 1996
------- -----------
(In thousands)
ASSETS
Current Assets
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,629 $ 17,715
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,311 336,261
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,345 119,178
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,623 109,672
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,908 582,826
---------- ----------
Other Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,796 113,771
---------- ----------
Net Investment in Discontinued Exploration and Production Operations . . . . . 580,830 797,240
---------- ----------
Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 1,985,738 1,941,283
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . (813,447) (787,459)
---------- ----------
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . 1,172,291 1,153,824
---------- ----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,124 54,353
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,345,949 $2,702,014
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper and other short-term borrowings . . . . . . . . . . . . . . $ 203,500 $ 138,000
Current portion of senior long-term debt . . . . . . . . . . . . . . . . . . 1,721 1,598
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,515 375,726
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 118,494 151,361
Liabilities for discontinued engineering and construction operations . . . . 8,456 17,933
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 531,686 684,618
---------- ----------
Senior Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 841,198 841,971
---------- ----------
Convertible Subordinated Debentures. . . . . . . . . . . . . . . . . . . . . . 90,750 90,750
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,037 166,284
---------- ----------
Shareholders' Equity
Adjustable rate preferred stock. . . . . . . . . . . . . . . . . . . . . . . 175,000 175,000
---------- ----------
Common shareholders' equity
Common stock (100,000 shares authorized;
70,495 and 70,280 shares outstanding). . . . . . . . . . . . . . . . . . . 705 703
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670,144 672,775
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . . (163,759) 70,774
Foreign currency translation adjustment. . . . . . . . . . . . . . . . . . (812) (861)
---------- ----------
Common shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 506,278 743,391
---------- ----------
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 681,278 918,391
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,345,949 $2,702,014
========== ==========
<FN>
See accompanying Notes.
</FN>
-3-
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements
1. On August 5, 1997, ENSERCH Corporation completed its merger with Texas
Utilities Company (TUC). Immediately prior to the merger, ENSERCH's
ownership in Enserch Exploration, Inc. (EEX), represented by approximately
105 million shares of EEX common stock, was distributed to ENSERCH
shareholders. In the distribution, which is tax free, ENSERCH
shareholders of record on August 4, 1997 will receive approximately 1.5
shares of EEX common stock for each share of ENSERCH common stock.
Immediately following the distribution, ENSERCH was merged into TUC.
ENSERCH shareholders will receive .225 shares of TUC common stock for each
share of ENSERCH.
ENSERCH's financial statements for all periods presented have been
restated to reflect EEX as a discontinued operation. In addition, the
June 1997 financial statements include a $14.9 million pretax ($9.7
million after-tax) non-cash provision to increase the expense reserves for
discontinued engineering and construction operations.
The results of operations of discontinued businesses are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
----- ----- ----- -----
(In thousands)
Revenues $74,903 $86,623 $ 161,795 $163,669
======= ======= ========= ========
Operating income (loss) $16,529 $14,065 $(380,347) $ 19,075
======= ======= ========= ========
Income (loss) from operations $ 1,174 $ 6,104 $(218,327) $ 6,396
Provision for additional costs and expenses
for the wind-up of discontinued engineering
and construction business, net of tax
benefit of $5,215 (9,685) - (9,685) -
------- ------- --------- --------
Total $(8,511) $ 6,104 $(228,012) $ 6,396
======= ======= ========= ========
The net investment in discontinued exploration and production operations
consists of the following:
June 30, 1997 December 31, 1996
-------------- -----------------
Current assets $ 49,605 $ 94,780
Property, plant and equipment 1,157,846 1,494,709
Other assets 12,859 12,181
Current liabilities (85,043) (102,269)
Long-term debt (74,848) (95,564)
Deferred income taxes payable (138,986) (258,219)
Noncurrent liabilities (340,603) (348,378)
----------- ----------
Net investment $ 580,830 $ 797,240
=========== ==========
-4-
2. In October 1996, Lone Star Pipeline Company filed a request with the
Railroad Commission of Texas (RRC or the Commission) 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 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 was 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.
On May 20, 1997 the Commission issued an order setting new rates for the
Company that would have reduced the current margin by approximately
7 percent. The order would allow 100 percent recovery of gas cost subject
to a reconciliation procedure in three years and would impose certain
restrictions on the recovery of gas purchased from affiliates. The Company
and other parties to the case filed motions for rehearing of the order. On
August 12, 1997 the Commission issued an order partially granting and
partially denying the motions for rehearing. The August 12 order reduces
the current margin an additional 3 percent beyond the May 20 order.
The August 12 order is now subject to additional motions for rehearing.
Unless there are further modifications to the order, it is anticipated
that the rates will become effective on October 1, 1997. The Company
has 30 days after the final order to appeal the decision.
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 Company and Lone Star
Gas Company, RRC examiners indicated that they would inquire about the
historical natural gas acquisition practices and costs. Management is
unable to determine at this time the ultimate outcome of this inquiry.
3. EEX announced on August 4, 1997 that a review and evaluation of the
commercial feasibility of its non-producing oil and gas properties is being
conducted and that, based upon this preliminary evaluation, EEX expects a
material downward revision of its oil and natural gas reserves. EEX has
indicated that it anticipates at this time that the amount of the downward
revision of its proven non-producing reserves will fall within a range of
500 billion cubic feet equivalent (Bcfe) and 700 Bcfe. EEX anticipates
that this evaluation and the determination of both the extent of the
revision and the financial impact on EEX will be completed by the end of
the third quarter.
Neither ENSERCH nor TUC has any continuing ownership interest in EEX.
-5-
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.
-6-
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiary companies as of June 30, 1997, and the
related condensed statements of consolidated income for the three months and
six months ended June 30, 1997 and 1996 and the condensed statements of
consolidated cash flows for the six months ended June 30, 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
August 13, 1997
-7-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
MERGER WITH TUC - On August 5, 1997, ENSERCH Corporation completed its merger
with Texas Utilities Company (TUC). Immediately prior to the merger,
ENSERCH's ownership in Enserch Exploration, Inc. (EEX), represented by
approximately 105 million shares of EEX common stock, was distributed to
ENSERCH shareholders. As a result of the distribution, which is tax free,
ENSERCH shareholders will receive approximately 1.5 shares of EEX common stock
for each share of ENSERCH common stock. Immediately following the
distribution, ENSERCH was merged into TUC. ENSERCH shareholders will receive
.225 shares of TUC common stock for each share of ENSERCH. ENSERCH's
financial statements for all periods presented have been restated to reflect
EEX and Lone Star Energy Plant Operations, Inc. (LSEPO), which was merged with
EEX immediately prior to the distribution, as discontinued operations. EEX
constituted ENSERCH's "Natural Gas and Oil Exploration and Production"
business segment, and LSEPO was a component of ENSERCH's "Power and Other"
business segment. ENSERCH's discontinued operations also include its
engineering and construction and environmental businesses, the principal
assets of which were sold in prior years.
CONSOLIDATED RESULTS OF OPERATIONS - For the three month periods ended
June 30, 1997 and 1996, ENSERCH's continuing operations had net losses of
$21.6 million and $12.8 million, respectively. For the six month period ended
June 30, 1997, continuing operations had a net loss of $3.0 million compared
with net income of $16.7 million for the 1996 period. Impacting the 1997 six
months results was an $8.6 million pretax, $5.6 million after-tax, provision
for a credit Lone Star Gas Company is making voluntarily to its customers.
Results for 1997 were also negatively impacted by expenses incurred in
connection with the merger with TUC, which totaled $5.1 million and
$5.8 million for the quarter and six months respectively. For the second
quarter, there was an operating loss of $14.8 million in 1997 compared with
operating income of $1.0 million in 1996. For the first six months, operating
income was $38.0 million in 1997 versus $66.4 million in 1996. Operating
results of each of the continuing business segments are discussed below.
For the three and six months periods ended June 30, 1997, ENSERCH's
discontinued operations had losses of $8.5 million and $228.0 million,
respectively. The second quarter loss reflects a $9.7 million ($14.9 million
pre-tax) provision for estimated costs and expenses to wind-up engineering and
construction operations. The loss from discontinued operations for the first
six months also includes a $236 million after-tax impact of a write-down of
the carrying value of EEX's oil and gas properties due to the U.S. cost center
ceiling limitation at March 31, 1997.
NATURAL GAS DISTRIBUTION - Lone Star Gas Company had an operating loss for
the second quarter of $7.8 million, compared with a loss of $.1 million for
-8-
the second quarter of last year. The margin on gas sales declined $3.1 million
(7%) from the year-earlier period. A reduced volume of industrial sales
contributed to the margin decline. Also operating expenses increased $4.1
million from the 1996 second quarter.
For the first half of 1997, operating income was $40 million versus $51 million
for the year-earlier period. The overall margin on gas sales was $4.8 million
(3%) below the same period of 1996, reflecting the impact of less heating
weather in the first quarter of 1997. Heating degree days for this year's
first six months were 6% below the first six months of 1996 and 3% below
normal. Total gas sales volumes were 88 Bcf compared with 90 Bcf for the
first six months of 1996. Also operating expenses increased $7.8 million from
the first six months of 1996.
NATURAL GAS PIPELINE - Pipeline operations, which are conducted by Lone Star
Pipeline Company, had operating income of $2.9 million for the second quarter
of 1997 versus an operating loss of $1.2 million for the year-earlier quarter.
Pipeline throughput for the quarter totaled 138 Bcf, 13% less than the
year-earlier period. For the first six months of 1997, pipeline operations
had operating income of $28 million, before recognition of the $8.6 million
voluntary credit to customers of Lone Star Gas Company for a transportation
charge inadvertently collected between 1991 through 1995. This compares with
operating income of $23 million for the year-earlier period. Pipeline
throughput for the first six months totaled 311 Bcf, 9% less than the
year-earlier period reflecting the decrease in heating weather. A reduction
in expense associated with gas lost in transmission helped to offset the
impact of the warmer weather.
NATURAL GAS PROCESSING - Second-quarter operating income for the natural gas
gathering and processing operations of Enserch Processing, Inc. decreased
from $4.6 million in the second quarter last year to $2.4 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 second quarter totaled
1.5 million barrels, about the same as the 1996 second quarter,but the average
sales price per barrel of $13.40 was down 4% from the second quarter last
year. For the first six months of 1997, natural gas processing had operating
income of $6.4 million versus $8.7 million for the year-earlier period. NGL
sales volumes for the current six months totaled 2.9 million barrels, 8% under
the 1996 first six months. Production volumes were little changed from the
prior year period; however, there were higher sales from inventory in 1996.
The average sales price per barrel for the first six months of 1997 of $14.94
was up 9% from the same period last year.
NATURAL GAS MARKETING - Natural gas marketing operations, which are conducted
through Enserch Energy Services, Inc. (EES), had a second quarter operating
loss of $4.8 million, compared with operating income of $3.4 million for the
second quarter of 1996. The margin on gas sales was $2.6 million, $6.6 million
less than the second quarter of 1996. Operating expenses of $7.4 million were
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$1.4 million (23%) higher than in the second quarter last year. For the first
six months of 1997, gas marketing had an operating loss of $16 million versus
a loss of $8.2 million for the same period last year. For the current six
months, the margin on sales was a negative $2.0 million versus a positive
$3.5 million for the year-earlier period. Operating expenses of $14 million
were $1.9 million higher than for the comparable period of 1996.
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 June 30, 1997, natural gas marketing
operations had net commitments to sell approximately 43.2 Bcf of natural
gas through the year 2003 with offsetting net financial positions to purchase
approximately 41.6 Bcf. There was a net unrealized and unrecognized gain of
$12.7 million at June 30, 1997 on these contracts.
POWER AND OTHER - ENSERCH's power and other activities had an operating loss
for the second quarter of $4.8 million, compared with an operating loss of
$1.8 million for the second quarter last year. For the first six months of
1997 there was an operating loss of $6.7 million versus a loss of $2.3
million for the year-earlier period. The losses primarily reflect expenses
associated with project development activities. The Corporation sold its
interests in three cogeneration projects during the second quarter of 1997
in mostly non- cash transactions. Gains on these sales of some $18 million
have been deferred.
LIQUIDITY AND FINANCIAL RESOURCES - Continuing operations for the first six
months of 1997 provided net cash flows from operating activities of $30
million, compared with $90 million for the same period last year. Recoveries
of producer settlements, which are now substantially complete, were
$5.7 million less than the year-earlier period, and changes in current
operating assets and liabilities provided cash of $3.2 million in the first
half of 1997 compared with $30 million provided in the first six months last
year.
Discontinued exploration and production operations used $11.6 million in net
cash flows for the six month period of 1997 compared with providing cash of
$8.9 million for the same period last year. The discontinued engineering and
construction operations used net cash flows of $6.0 million in the first six
months of 1997 compared with $8.4 million used in the same period of 1996.
Investing activities required net cash flows of $76 million versus $120
million in the first six months of 1996. The level of capital spending and
investments in unconsolidated affiliates were both significantly lower this
year. Proceeds from sales and retirements of property, plant and equipment
provided $.7 million in the current six months versus $5.4 million in the 1996
period.
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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 June 30, 1997. In addition, an ENSERCH subsidiary has a four-year
revolving credit agreement aggregating $30 million, $5 million of which was
unused at June 30, 1997. Following the merger with TUC, the Corporation's
commercial paper program was discontinued, with outstanding balances to be
redeemed at maturity. ENSERCH's future short-term financing requirements
will be provided by TUC.
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 or financings from TUC as
necessary.
PENDING RATE CASE - In October 1996, Lone Star Pipeline Company filed a
request with the Railroad Commission of Texas (RRC or the Commission) 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 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 was 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.
On May 20, 1997 the Commission issued an order setting new rates for the
Company that would have reduced the current margin by approximately 7 percent.
The order would allow 100 percent recovery of gas cost subject to a
reconciliation procedure in three years and would impose certain restrictions
on the recovery of gas purchased from affiliates. The Company and other
parties to the case filed motions for rehearing of the order. On August 12,
1997 the Commission issued an order partially granting and partially denying
the motions for rehearing. The August 12 order reduces the current margin an
additional 3 percent beyond the May 20 order. The August 12 order is now
subject to additional motions for rehearing. Unless there are further
modifications to the order, it is anticipated that the rates will become
effective on October 1, 1997. The Company has 30 days after the final order
to appeal the decision.
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 Company and Lone Star Gas Company, RRC examiners
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indicated that they would inquire about the historical natural gas acquisition
practices and costs. Management is unable to determine at this time the
ultimate outcome of this inquiry.
EEX ANNOUNCEMENT OF EXPECTED RESERVE REVISION - On August 4, 1997 EEX
announced that a review and evaluation of the commercial feasibility of its
non-producing oil and gas properties is being conducted and that, based upon
this preliminary evaluation, EEX expects a material downward revision of its
oil and natural gas reserves. EEX has indicated that it anticipates at this
time that the amount of the downward revision of its proven non-producing
reserves will fall within a range of 500 billion cubic feet equivalent (Bcfe)
and 700 Bcfe. This downward reserve reduction will not affect EEX's current
cash flow. Also, because the revision is expected to only impact behind pipe
and undeveloped reserves, the value impact will be offset to an extent by the
elimination of the future capital expenditures associated with producing these
reserves and thus is not expected to be proportionate to the reserve revision.
EEX anticipates that this evaluation and the determination of both the extent
of the revision and the financial impact on EEX will be completed by the end
of the third quarter. Neither ENSERCH nor TUC has any continuing ownership
interest in EEX.
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ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Pipeline, Processing and Marketing Operating Data (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996(a) 1997 1996(a)
---- ------ ---- ------
Operating Income (Loss)(in millions)
Natural Gas Pipeline . . . . . . . . . . . . . . . . . . . . . $ 2.9 $ (1.2) $ 19.1 $ 23.3
Natural Gas Processing . . . . . . . . . . . . . . . . . . . . 2.4 4.6 6.4 8.7
Gas Marketing. . . . . . . . . . . . . . . . . . . . . . . . . (4.8) 3.3 (16.2) (8.2)
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .5 $ 6.7 $ 9.3 $ 23.8
====== ====== ====== ======
Revenues (in millions)
Natural Gas Pipeline (c)
Transportation . . . . . . . . . . . . . . . . . . . . . . . . $ 25.0 $ 27.1 $ 72.9 $ 76.4
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 2.5 14.5 16.7
------ ------ ------ ------
Total (before credit). . . . . . . . . . . . . . . . . . . . 28.2 29.6 87.4 93.1
Credit to customers (b). . . . . . . . . . . . . . . . . . . . - - (8.6) -
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.2 $ 29.6 $ 78.8 $ 93.1
====== ====== ====== ======
Natural Gas Processing
Natural gas liquids (d). . . . . . . . . . . . . . . . . . . $ 19.3 $ 21.5 $ 42.7 42.5
Other (e). . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 16.1 22.8 24.4
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32.6 $ 37.6 $ 65.5 $ 66.9
====== ====== ====== ======
Gas Marketing. . . . . . . . . . . . . . . . . . . . . . . . . $194.6 $159.9 $538.5 $412.4
====== ====== ====== ======
Volumes
Pipeline throughput (Bcf). . . . . . . . . . . . . . . . . . . 138.1 158.3 311.0 341.0
Natural Gas Processing (MMBbls). . . . . . . . . . . . . . . . 1.5 1.5 2.9 3.1
Gas Marketing (Bcf). . . . . . . . . . . . . . . . . . . . . . 83.6 67.2 191.9 164.8
Average Sales Prices
Natural Gas Liquids (per Bbl). . . . . . . . . . . . . . . . . $13.40 $14.00 $14.94 $13.65
Gas Marketing (per Mcf). . . . . . . . . . . . . . . . . . . . 2.33 2.38 2.81 2.50
<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>
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ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
Natural Gas Distribution Operating Data (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------- ---------------
1997 1996(a) 1997 1996(a)
----- ------ ----- ------
Operating Income (loss)(in millions) . . . . . . . . . . . . . . $ (7.8) $ (.1) $ 40.2 $ 51.0
====== ====== ====== ======
Natural Gas Sales Revenues by Customer (in millions)
Residential & commercial . . . . . . . . . . . . . . . . . . . 100.6 $124.5 $482.4 $459.3
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 6.1 12.7 17.3
Electric generation. . . . . . . . . . . . . . . . . . . . . . 3.1 2.5 16.8 13.4
------ ------ ------ ------
Total gas sales revenues . . . . . . . . . . . . . . . . . . 107.7 133.1 511.9 490.0
Gas transportation revenues(b) . . . . . . . . . . . . . . . . . 3.3 3.1 7.2 6.7
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 4.9 8.6 7.3
------ ------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . . $115.2 $141.1 $527.7 $504.0
====== ====== ====== ======
Natural Gas Sales Volumes by Customer (Bcf)
Residential & commercial . . . . . . . . . . . . . . . . . . . 19.9 19.9 81.4 82.1
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.6 2.9 4.5
Electric generation. . . . . . . . . . . . . . . . . . . . . . .9 .6 4.0 3.5
------ ------ ------ ------
Total gas sales volumes. . . . . . . . . . . . . . . . . . . 21.8 22.1 88.3 90.1
====== ====== ====== ======
Natural Gas Sales Revenues (per Mcf)
Residential & commercial . . . . . . . . . . . . . . . . . . . $ 5.05 $ 6.25 $ 5.93 $ 5.59
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 4.03 3.93 4.45 3.80
Electric generation. . . . . . . . . . . . . . . . . . . . . . 3.57 4.11 4.20 3.87
Natural Gas Purchase Cost (per Mcf). . . . . . . . . . . . . . . $ 2.83 $ 3.76 $ 4.02 $ 3.64
Heating Degree Days. . . . . . . . . . . . . . . . . . . . . . . 171 104 1,463 1,562
<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 operating data.
</FN>
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (15)- Letter of Deloitte & Touche LLP dated August 14,
1997, regarding unaudited interim financial
statements.
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 30, 1997 (News Release dated
May 30, 1997, announcing that ENSERCH will file a supplemental
request with the Internal Revenue Service to confirm the
reliability of its tax ruling in connection with the ENSERCH
Corporation/Texas Utilities Company merger.)
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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: August 14, 1997 By /s/ M. E. Rescoe
---------------------------
M. E. Rescoe, Senior Vice
President, Finance and
Chief Financial Officer
Date: August 14, 1997 By /s/ J. W. Pinkerton
---------------------------
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
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