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 SEPTEMBER 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
November 12, 1997: 1,000.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Predecessor
-----------------------------------------------------
Period From
Period From Period From Three January 1, Nine
Acquisition July 1, 1997 Months 1997 Months
Date to Through Ended Through Ended
Sept. 30 Acquisition Sept. 30 Acquisition Sept. 30
1997 Date 1996 Date 1996
--------- ---------- -------- ---------- ----------
(In thousands)
Operating Revenues. . . . . . . . . . . . . . . . . $276,651 $135,297 $311,040 $1,278,157 $1,302,709
------- ------- ------- --------- ---------
Operating Expenses
Gas purchase . . . . . . . . . . . . . . . . . . 203,754 85,233 202,663 941,626 898,787
Operating expenses . . . . . . . . . . . . . . . 58,878 29,253 86,051 206,187 248,641
Depreciation and amortization. . . . . . . . . . 12,594 4,793 13,298 33,693 39,927
Taxes other than income. . . . . . . . . . . . . 8,354 3,712 13,501 46,358 53,435
------- ------- ------- --------- ---------
Total operating expenses . . . . . . . 283,580 122,991 315,513 1,227,864 1,240,790
------- ------- ------- --------- ---------
Operating Income (Loss) . . . . . . . . . . . . . . (6,929) 12,306 (4,473) 50,293 61,919
Merger Related Expenses . . . . . . . . . . . . . . - (19,310) (2,551) (25,135) (2,551)
Other Income and (Deductions) - Net . . . . . . . . 11 952 (720) (610) (3,486)
Interest Charges. . . . . . . . . . . . . . . . . . (13,058) (6,581) (20,045) (44,537) (56,986)
------- ------- ------- --------- ---------
Loss Before Income Taxes. . . . . . . . . . . . . . (19,976) (12,633) (27,789) (19,989) (1,104)
Income Tax Benefit. . . . . . . . . . . . . . . . . (6,198) (256) (10,391) (4,612) (386)
------- ------- ------- --------- ---------
Loss From Continuing Operations . . . . . . . . . . (13,778) (12,377) (17,398) (15,377) (718)
Income (Loss) From Discontinued Operations. . . . . - 3,321 2,117 (224,691) 8,513
Extraordinary Loss on Extinguishment of Debt. . . . - - (2,096) - (2,096)
------- ------- ------- --------- ---------
Consolidated Net Income (Loss). . . . . . . . . . . (13,778) (9,056) (17,377) (240,068) 5,699
Preferred Stock Dividends . . . . . . . . . . . . . 1,878 970 2,886 6,725 8,462
------- ------- ------- --------- ---------
Consolidated Net Income (Loss) Available for
Common Stock . . . . . . . . . . . . . . . . . . $(15,656) $(10,026) $(20,263) $ (246,793) $ (2,763)
======= ======= ======= ========= =========
<FN>
See accompanying Notes.
</FN>
-1-
ENSERCH CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Predecessor
------------------------
Period from Period From
Acquisition July 1, 1997 Nine Months
Date to Through Ended
Sept. 30 Acquisition Sept. 30
1997 Date 1996
------- --------- --------
(In thousands)
OPERATING ACTIVITIES
Income (loss) from continuing operations . . . . . . . . . . . . . . . . $(13,778) $ (15,377) $ (718)
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 12,594 33,693 39,927
Deferred income-taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 5,188 (8,803) (5,336)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,374) 5,530 12,251
Changes in current operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 6,257 132,763 114,019
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . (41,992) 33,529 (4,869)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 23,579 (148,878) (97,075)
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 14,838 (15,532) (983)
-------- -------- --------
Net cash flows from operating activities . . . . . . . . . . . . . . (2,688) 16,925 57,216
-------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment . . . . . . . . . . . . . . . (21,558) (62,074) (92,504)
Investments in unconsolidated affiliates . . . . . . . . . . . . . . . . (3,222) 12,267 (57,171)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,479) (9,368) 3,734
-------- -------- --------
Net cash flows used for investing activities. . . . . . . . . . . . (30,259) (59,175) (145,941)
-------- -------- --------
FINANCING ACTIVITIES
Change in commercial paper and other short-term borrowings . . . . . . . (204,540) 66,540 (24,412)
Borrowings from parent . . . . . . . . . . . . . . . . . . . . . . . . . 512,300 - -
Issuance of senior long-term debt. . . . . . . . . . . . . . . . . . . . - 100,000 185,000
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . - - (786)
Retirement of senior long-term debt. . . . . . . . . . . . . . . . . . . (260,361) (100,784) (66,607)
Prepayment penalty on early extinguishment of debt . . . . . . . . . . . - - (3,226)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . - 3,757 14,953
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,909) (12,771) (18,746)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (7) (57)
-------- -------- --------
Net cash flows from financing activities. . . . . . . . . . . . . . 44,490 56,735 86,119
-------- -------- --------
Net Cash Flows from (used for) Discontinued Operations
Exploration and production . . . . . . . . . . . . . . . . . . . . . . . - (14,416) (12,309)
Engineering and construction . . . . . . . . . . . . . . . . . . . . . . (1,862) (5,641) 18,788
-------- -------- --------
Net cash flows from (used for) discontinued operations. . . . . . . (1,862) (20,057) 6,479
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . 9,681 (5,572) 3,873
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE. . . . . . . . . . . . . . . 12,143 17,715 6,996
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . . . . $ 21,824 $ 12,143 $ 10,869
======== ======== ========
<FN>
See accompanying Notes.
</FN>
-2-
ENSERCH CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(September 30, 1997 Unaudited)
Predecessor
------------
September 30 December 31
1997 1996
------------ -----------
(In thousands)
ASSETS
Current Assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 21,824 $ 17,715
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,597 350,535
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . 125,112 119,178
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,585 109,672
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 469,118 597,100
--------- ---------
Other Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,692 113,771
--------- ---------
Net Investment in Discontinued Exploration and Production Operations . . . . - 798,229
--------- ---------
Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . 1,189,988 1,942,528
Less accumulated depreciation and amortization . . . . . . . . . . . . . . 8,914 787,205
--------- ---------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . 1,181,074 1,155,323
--------- ---------
Goodwill - Net of Amortization . . . . . . . . . . . . . . . . . . . . . . . 802,914 8,740
--------- ---------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,267 47,979
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,699,065 $2,721,142
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper and other short-term borrowings . . . . . . . . . . . . . $ - $ 138,000
Current portion of senior long-term debt . . . . . . . . . . . . . . . . . 1,786 1,598
Accounts payable- trade. . . . . . . . . . . . . . . . . . . . . . . . . . 219,517 393,097
Accounts payable to parent . . . . . . . . . . . . . . . . . . . . . . . . 16,043 -
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 171,939 152,458
Liabilities for discontinued engineering and constructions operations. . . 17,974 17,933
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 427,259 703,086
--------- ---------
Advances from Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512,300 -
--------- ---------
Senior Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 583,981 841,971
--------- ---------
Convertible Subordinated Debentures. . . . . . . . . . . . . . . . . . . . . 90,609 90,750
--------- ---------
Other Liabilities
Pension and other postretirement benefits. . . . . . . . . . . . . . . . . 153,882 39,597
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,980 13,888
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,521 113,459
--------- ---------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 345,383 166,944
--------- ---------
Shareholders' Equity
Adjustable rate preferred stock. . . . . . . . . . . . . . . . . . . . . . 175,000 175,000
--------- ---------
Common shareholder's equity
Common stock (100,000 shares authorized;
1 and 70,280 shares outstanding, see Note 1) . . . . . . . . . . . . . - 703
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 577,992 672,775
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . (13,778) 70,774
Foreign currency translation adjustment . . . . . . . . . . . . . . . . 319 (861)
--------- ---------
Common shareholder's equity . . . . . . . . . . . . . . . . . . . . . 564,533 743,391
--------- ---------
Shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . 739,533 918,391
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,699,065 $2,721,142
========= =========
<FN>
See accompanying Notes.
</FN>
-3-
ENSERCH CORPORATION
(A wholly owned subsidiary of Texas Utilities Company)
Notes to Condensed Consolidated Financial Statements
1. The condensed consolidated financial statements include the accounts of
ENSERCH Corporation and its wholly-owned subsidiaries (ENSERCH).
On August 5, 1997, all of the common stock of ENSERCH Corporation was
converted into common stock of Texas Utilities Company (TUC), and ENSERCH
became a wholly owned subsidiary of TUC. ENSERCH shareholders became
entitled to receive .225 share of TUC common stock for each share of
ENSERCH. At the effective time of the merger, each of the 1,000
outstanding shares of common stock of ENSERCH Merger Corp. (a transitory
corporation organized to facilitate the merger transaction and owned by
TUC) was converted to one share of ENSERCH Corporation Common Stock,
(ENSERCH common stock). All of the shares of ENSERCH common stock
outstanding prior to the effective time of the merger were converted to
shares of TUC and, upon conversion, were canceled and ceased to exist.
Accordingly, at September 30, 1997, the outstanding common stock of
ENSERCH consisted of 1,000 shares, par value $0.01 per share, all of which
were owned by TUC. Immediately prior to ENSERCH's merger with TUC,
Enserch Exploration, Inc. (EEX), and Lone Star Energy Plant Operations,
Inc. (LSEPO) were merged to form a new company (New EEX) and ENSERCH
distributed to its common shareholders its ownership interest in these
businesses, which was represented by approximately 105 million shares of
New EEX common stock with a carrying value of $583 million. In the
distribution, which was tax free to recipients, ENSERCH shareholders of
record on August 4, 1997 received approximately 1.5 shares of New EEX
common stock for each share of ENSERCH common stock owned.
The value assigned to the TUC shares issued and costs incurred in
connection with the acquisition of ENSERCH aggregated $578 million. TUC
accounted for its acquisition of ENSERCH as a purchase and purchase
accounting adjustments, including goodwill, have been reflected in the
financial statements of ENSERCH and its subsidiaries for the periods
subsequent to August 5, 1997. The financial statements of ENSERCH for the
periods ended before August 5, 1997, were prepared using ENSERCH's
historical basis of accounting and are designated as "predecessor". The
comparability of the operating results for the predecessor and the periods
encompassing push down accounting are affected by the purchase accounting
adjustments including the amortization of goodwill over a period of forty
years.
The predecessor financial statements for all periods presented have been
restated to reflect EEX and LSEPO as a discontinued operation. In
addition, results for the period from January 1, 1997 through acquisition
date included a $14.9 million pretax ($9.7 million after-tax) non-cash
provision to increase the reserves for losses associated with discontinued
engineering and construction operations.
The fair value of the assets and liabilities of ENSERCH's rate-regulated
natural gas utility business (conducted through its Lone Star Gas Company
and Lone Star Pipeline Company divisions) is considered to be equivalent
-4-
to the historical basis of accounting, and accordingly, no adjustment has
been made to the carrying value. The excess of the consideration paid by
TUC over the preliminary estimates of fair value of the assets and
liabilities of ENSERCH at the merger date was approximately $806 million
and is reflected as goodwill in the ENSERCH balance sheet as of
September 30, 1997. The process of determining the fair value of assets
and liabilities at the merger date is continuing, and the final result
awaits the resolution of income tax and other contingencies and
finalization of certain preliminary estimates. The following table
summarizes the preliminary changes made to the accounts of ENSERCH as of
August 5, 1997 as a result of applying push down accounting.
Purchasing Accounting
Adjustments
------------
(In thousands)
Current assets $ (436)
Investments (4,730)
Net property, plant and equipment (10,349)
Goodwill 797,928 *
Other assets 3,599
-------
Total assets $786,012
=======
Current liabilities $ 2,000
Long-term debt 3,259
Deferred income taxes (50,413)
Pension and other postretirement
benefits 116,475
Other liabilities 49,248
Shareholders' equity 665,443
--------
Total liabilities and equity $786,012
========
* Net of write-off of a premerger goodwill balance of $8,128.
-5-
2. The results of operations of ENSERCH's discontinued businesses were as
follows:
Predecessor
------------------------------------------------
Period From
Period From Three January 1, Nine
July 1, 1997 Months 1997 Months
Through Ended Through Ended
Acquisition Sept. 30 Acquisition Sept. 30
Date 1996 Date 1996
------- -------- -------- --------
(In thousands)
Revenues $23,868 $84,897 $ 185,663 $248,566
======= ======= ========= ========
Operating income (loss) $ 4,837 $ 9,169 $(375,510) $ 28,244
======= ======= ========= ========
Income (loss) from operations $ 3,321 $ 2,117 $(215,006) $ 8,513
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) -
------- ------- --------- --------
Total $ 3,321 $ 2,117 $(224,691) $ 8,513
======= ======= ========= ========
The net investment in the discontinued exploration and production business
as of December 31, 1996 consisted of the following (in thousands):
Current assets $ 114,329
Net property, plant and equipment 1,493,210
Other assets 12,161
Current liabilities (118,191)
Long-term debt (95,564)
Deferred income taxes payable (258,712)
Other liabilities (349,004)
---------
Net investment $ 798,229
=========
3. ENSERCH's commercial paper program was discontinued following the merger
with TUC, and the borrowings outstanding at the merger date, which
totaled $204.5 million, were paid off at maturity with funds advanced to
ENSERCH by TUC. In addition, ENSERCH redeemed long-term debt of $260.4
million outstanding under a revolving credit agreement with funds advanced
by TUC. At September 30, 1997, advances from TUC totaled $512.3
million.
4. At September 30, 1997, TUC, Texas Utilities Electric Company (TU
Electric), a wholly-owned indirect subsidiary of T.U.C., and ENSERCH had
joint lines of credit under credit facility agreements (Credit Agreements)
with a group of commercial banks. The Credit Agreements have two
facilities. Facility A provides for short-term borrowings aggregating up
to $570 million outstanding at any time at variable interest rates and
terminates April 23, 1998. Facility B provides for short-term borrowings
-6-
aggregating up to $1,330 million outstanding at any time at variable
interest rates and terminates April 24, 2002. ENSERCH borrowings under
both facilities are limited to an aggregate of $650 million outstanding at
any time. ENSERCH borrowings under these facilities will be used for
working capital and other needs. At September 30, 1997, ENSERCH had no
borrowings under these facilities.
5. Transactions between ENSERCH and TUC for the period from acquisition date
to September 30, 1997 included $3.1 million in interest expense related to
ENSERCH borrowings from TUC. In addition, ENSERCH had revenues of $5.8
million from the sale and transportation of gas to other TUC subsidiaries
during the period.
6. ENSERCH, through its subsidiary, Enserch Energy Services, Inc. (EES), is
a marketer of natural gas and natural gas services. As part of these
business activities, EES enters into a variety of transactions, including
forward contracts principally involving physical delivery of natural gas
and derivative financial instruments, including swaps, options, futures
and other contractual arrangements. The derivative transactions are
concentrated with established energy companies and major financial
institutions.
EES's marketing activities involve price commitments into the future and,
therefore, give rise to market risk, which represents the potential loss
that can be caused by a change in the market value of a particular
commitment. Net open portfolio positions often result from the
origination of new transactions or in response to changing market
conditions.
EES enters into contracts to purchase and sell natural gas for physical
delivery in the future. At September 30, 1997, EES had net commitments to
sell approximately 41.0 billion cubic feet (Bcf) of natural gas through
the year 2003 with offsetting net financial positions to purchase
approximately 48.1 Bcf.
7. Concurrent with the merger with TUC, ENSERCH's natural gas marketing
business conformed its accounting for its gas marketing activities to
TUC's accounting policy, mark-to-market accounting. Hedge accounting was
used previously by predecessor.
8. In October 1996, Lone Star Pipeline Company (a division of ENSERCH) filed
a request with the Railroad Commission of Texas (RRC or the Commission) to
increase the rate it charges Lone Star Gas Company (a division of ENSERCH)
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.
-7-
In May 1997, the Commission issued an order setting new rates for ENSERCH
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 after three years and would impose certain
restrictions on the recovery of gas purchased from affiliates. ENSERCH
and other parties to the case filed motions for rehearing of the order.
In August 1997, the Commission issued an order partially granting and
partially denying the motions for rehearing. The August order reduces the
current margin an additional 3 percent beyond the May 20 order.
The August order was met with additional motions for rehearing, which were
granted in part and denied in part. On September 30, 1997, the RRC issued
a second Order on Rehearing, which did not change the margin set in the
prior order. On November 4, 1997, the RRC acted on the motions for
rehearing filed in response to the September 30, 1997 order by denying the
motions. Pursuant to the tariffs approved by the RRC, the new rates will
become effective on December 1, 1997, if no further changes to the order
are made. ENSERCH has 30 days from November 4 to appeal the decision.
Prior to the ENSERCH filing of a request for a rate increase, the RRC
ordered a general inquiry into the rates and services of Lone Star Gas
Company. The scope of the inquiry has not been defined fully, but it will
focus initially on historical gas costs and unbundling issues. A hearing
on the gas cost issues is set to begin in August 1998. Management is
unable to determine at this time the ultimate outcome of this inquiry.
9. 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.
-8-
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiary companies as of September 30,
1997(Successor Company balance sheet), and the related condensed statements
of consolidated income and consolidated cash flows for the period from
acquisition (August 5, 1997) through September 30, 1997 (Successor Company
Operations), the condensed statements of consolidated income for the periods
from January 1 and July 1, 1997 through the acquisition date, for the period
from the acquisition date through September 30, 1997, and for the three-month
and nine-month periods ended September 30, 1996, and the condensed statements
of consolidated cash flows for the period from January 1, 1997 through the
acquisition date, and for the nine-month period ended September 30, 1996
(Predecessor Company Operations). 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 (Predecessor Company financial statements)(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
November 12, 1997
-9-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS - This report and other presentations made by
ENSERCH Corporation (ENSERCH) contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Although ENSERCH believes that in making any such statement its expectations
are based on reasonable assumptions, any such statement involves
uncertainties and is qualified in its entirety by reference to the following
important factors that could cause the actual results of ENSERCH to differ
materially from those projected in such forward-looking statement: (i)
prevailing governmental policies and regulatory actions, including those of
the Railroad Commission of Texas, acquisitions and disposal of assets and
facilities, operation and construction of plant facilities, present or
prospective wholesale and retail competition, changes in tax laws and policies
and changes in and compliance with environmental and safety laws and policies,
(ii) weather conditions and other natural phenomena, (iii) unanticipated
population growth or decline, and changes in market demand and demographic
patterns, (iv) competition for retail and wholesale customers, (v) pricing and
transportation of natural gas and other commodities, (vi) unanticipated
changes in interest rates, rates of inflation or in foreign exchange rates,
(vii) unanticipated changes in operating expenses and capital expenditures,
(viii) capital market conditions, (ix) competition for new energy development
opportunities, (x) legal and administrative proceedings and settlements, (xi)
inability of various counterparties to meet their obligations with respect to
ENSERCH's financial instruments, and (xii) significant changes in ENSERCH's
relationship with its employees.
Any forward-looking statement speaks only as of the date on which such
statement is made, and ENSERCH undertakes no obligation to update any forward-
looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time and it is not possible for ENSERCH to
predict all of such factors, nor can they assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
MERGER WITH TUC - On August 5, 1997, all of the common stock of ENSERCH
Corporation was converted into common stock of Texas Utilities Company (TUC),
and ENSERCH became a wholly-owned subsidiary of TUC. ENSERCH shareholders
became entitled to receive .225 share of TUC common stock for each share of
ENSERCH. Immediately prior to ENSERCH's merger with TUC, Enserch Exploration,
Inc. (EEX) and Lone Star Energy Plant Operations, Inc. (LSEPO) were merged to
form a new company (New EEX), and ENSERCH distributed to its common
shareholders its ownership interest in New EEX, which was represented by
approximately 105 million shares of New EEX common stock with a carrying value
of $583 million. In the distribution, which was tax free to the recipients,
ENSERCH shareholders of record on August 4, 1997 received approximately 1.5
shares of New EEX common stock for each share of ENSERCH common stock owned.
ENSERCH's financial statements for all periods presented have been restated
to reflect EEX and LSEPO as discontinued operations. ENSERCH's discontinued
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operations also include its engineering and construction and environmental
businesses, the principal assets of which were sold in prior years.
TUC accounted for its acquisition of ENSERCH as a purchase and push down
accounting has been applied, with the result that purchase accounting
adjustments have been reflected in the financial statements of ENSERCH and its
subsidiaries for all periods subsequent to August 5, 1997. Financial
statements for periods prior to that date were prepared using ENSERCH's
historical basis of accounting and are designated as "predecessor". For
purposes of the discussion of quarterly and year-to-date operating results
provided herein, the financial information of the predecessor for the 1997
periods prior to the merger date have been combined with the post-merger
financial information. The business operations of ENSERCH were not
significantly changed as a result of the merger, and post-merger and pre-
merger operating results, except as noted, are comparable.
CONSOLIDATED RESULTS OF OPERATIONS - For the three month periods ended
September 30, 1997 and 1996, ENSERCH's continuing operations had net losses
of $26.2 million and $17.4 million, respectively. For the nine month period
ended September 30, 1997, ENSERCH's continuing operations had a net loss of
$29.2 million compared with income of $.7 million before extraordinary loss
for the 1996 period. The 1997 nine months results were impacted by a first
quarter $8.6 million pretax, $5.6 million after-tax, provision for a credit
Lone Star Gas Company is making voluntarily to its customers and third quarter
income of $12.5 million pretax, $8.1 million after-tax, from the sale of
interests in cogeneration projects. Results for 1997 were also negatively
impacted by merger-related expenses, which totaled $19.3 million pretax,
$17.2 million after-tax, and $25.1 million pretax, $21.3 million after-tax, for
the quarter and nine months, respectively, and the third quarter amortization
of goodwill arising from the purchase of $3.1 million. For the third quarter,
there was operating income of $5.4 million in 1997 compared with an operating
loss of $4.5 million in 1996. For the first nine months, operating income was
$43.4 million in 1997 versus $61.9 million in 1996.
For the three month periods ended September 30, 1997 and 1996, ENSERCH's
discontinued operations had income of $3.3 million and $2.1 million,
respectively. For the nine months ended September 30, 1997, there was a loss
from discontinued operations of $224.7 million which included 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,
and a $9.7 million ($14.9 million pre-tax) provision for estimated costs and
expenses to wind-up engineering and construction operations. For the nine
months ended September 30, 1996, discontinued operations had income of $8.5
million.
Consolidated revenues for the third quarter of 1997 were $411.9 million
compared with $311.0 million for the same quarter of 1996, and year-to-date
revenues for 1997 were $1.6 billion compared with $1.3 billion for the year-
earlier period, primarily from higher natural gas marketing revenues. Natural
gas marketing sales volumes in the third quarter of 1997 increased 83% over
the 1996 third quarter and were up 34% for the nine month period. A
reduction in industrial and electric generation sales partially offset this
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increase. Other sales volumes were not significantly changed from the prior
year period.
LIQUIDITY AND FINANCIAL RESOURCES - Continuing operations for the first nine
months of 1997 provided net cash flows from operating activities of $14
million, compared with $57 million for the same period of 1996. Changes in
current operating assets and liabilities provided cash of $4.6 million in the
first nine months of 1997, compared with $11 million for the first nine months
last year.
Discontinued exploration and production operations used cash of $14 million
in the nine month period of 1997 compared with $12 million used for the
comparable 1996 period. The discontinued engineering and construction
operations used cash of $7.5 million in the first nine months of 1997 but
provided cash of $19 million in the same period of 1996.
Investing activities required $89 million in the first nine months of 1997
versus $146 million in the first nine months of 1996. Capital spending and
investments in unconsolidated affiliates were both significantly lower this
year. Other investing activities used cash of $15 million in 1997 versus
providing cash of $4 million in the 1996 period.
Following the merger with TUC, ENSERCH's commercial paper program and bank
lines in the form of a revolving credit agreement were discontinued. ENSERCH
retired the $204.5 million commercial paper balance and the $260.4 million
long-term debt balance outstanding under the credit agreement. TUC advanced
$512 million to ENSERCH to fund these retirements and to provide for other
cash needs.
At September 30, 1997, TUC, Texas Utilities Electric Company (TU Electric),
a wholly-owned indirect subsidiary of TUC, and ENSERCH had joint lines of
credit under credit facility agreements (Credit Agreements) with a group of
commercial banks. The Credit Agreements have two facilities. Facility A
provides for short-term borrowings aggregating up to $570 million outstanding
at any time at variable interest rates and terminates April 23, 1998.
Facility B provides for short-term borrowings aggregating up to $1,330 million
outstanding at any time at variable interest rates and terminates April 24,
2002. ENSERCH borrowings under both facilities are limited to an aggregate
of $650 million outstanding at any time. ENSERCH borrowings under these
facilities will be used for working capital and other needs. At September 30,
1997, ENSERCH had no borrowings under these facilities.
Two ENSERCH subsidiaries have revolving credit agreements expiring March 31,
2000 which aggregate $30 million, $5 million of which was unused at
September 30, 1997.
Planned property, plant and equipment additions for 1997 include $71 million
for natural gas distribution and $42 million for natural gas pipeline, natural
gas processing and other requirements. The planned expenditures are expected
to be funded from internal cash flows, borrowings under credit lines or
advances from TUC.
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NATURAL GAS MARKETING ACTIVITIES - ENSERCH, through its subsidiary, Enserch
Energy Services, Inc. (EES), is a marketer of natural gas and natural gas
services. As part of these business activities, EES enters into a variety of
transactions, including forward contracts principally involving physical
delivery of natural gas and derivative financial instruments, including swaps,
options, futures and other contractual arrangements. The derivative
transactions are concentrated with established energy companies and major
financial institutions.
EES's marketing activities involve price commitments into the future and,
therefore, give rise to market risk, which represents the potential loss that
can be caused by a change in the market value of a particular commitment. Net
open portfolio positions often result from the origination of new transactions
or in response to changing market conditions.
EES enters into contracts to purchase and sell natural gas for physical
delivery in the future. At September 30, 1997, EES had net commitments to
sell approximately 41.0 billion cubic feet (Bcf) of natural gas through the
year 2003 with offsetting net financial positions to purchase approximately
48.1 Bcf.
PENDING RATE CASE - In October 1996, Lone Star Pipeline Company (a division
of ENSERCH) filed a request with the Railroad Commission of Texas (RRC or the
Commission) to increase the rate it charges Lone Star Gas Company (a division
of ENSERCH) 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.
In May 1997, the Commission issued an order setting new rates for ENSERCH
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 after three years and would impose certain restrictions on the
recovery of gas purchased from affiliates. ENSERCH and other parties to the
case filed motions for rehearing of the order. In August 1997, the Commission
issued an order partially granting and partially denying the motions for
rehearing. The August order reduces the current margin an additional 3
percent beyond the May 20 order.
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The August order was met with additional motions for rehearing, which were
granted in part and denied in part. On September 30, 1997, the RRC issued a
second Order on Rehearing, which did not change the margin set in the prior
order. On November 4, 1997, the RRC acted on the motions for rehearing filed
in response to the September 30, 1997 order by denying the motions. Pursuant
to the tariffs approved by the RRC, the new rates will become effective on
December 1, 1997, if no further changes to the order are made. ENSERCH has
30 days from November 4 to appeal the decision.
Prior to the ENSERCH filing of a request for a rate increase, the RRC ordered
a general inquiry into the rates and services of Lone Star Gas Company. The
scope of the inquiry has not been defined fully, but it will focus initially
on historical gas costs and unbundling issues. A hearing on the gas cost
issues is set to begin in August 1998. Management is unable to determine at
this time the ultimate outcome of this inquiry.
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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 November 13, 1997,
regarding unaudited interim financial statements.
EXHIBIT (27) - Financial Data Schedule
EXHIBIT (99-a) Amended and Restated 364-Day Competitive Advance and
Revolving Credit Facility Agreement, Facility A, dated
as of April 24, 1997, among Texas Utilities Company
(TUC), Texas Energy Industries,Inc.(TEI), TU Electric,
ENSERCH, certain banks and The Chase Manhattan Bank and
Texas Commerce Bank National Association, as Agents.
(Filed as Exhibit 99(a) to Texas Utilities Company
Quarterly Report on Form 10-Q for the period ended
March 31, 1997, Commission File No. 1-3591.)
EXHIBIT (99-b) Amended and Restated 5-Year Competitive Advance and
Revolving Credit Facility Agreement, Facility B, dated
as of April 24, 1997, among TUC, TEI, TU Electric,
ENSERCH, certain banks and The Chase Manhattan Bank and
Texas Commerce Bank National Association, as Agents.
(Filed as Exhibit 99(b) to Texas Utilities Company
Quarterly Report on Form 10-Q for the period ended
March 31, 1997, Commission File No. 1-3591.)
(b) Reports on Form 8-K
Current report on Form 8-K dated July 1, 1997 (Enserch
Exploration, Inc. (EEX) News Release dated July 1, 1997,
announcing that EEX and Enterprise Oil had entered into
a deepwater Gulf of Mexico venture.)
Current report on Form 8-K dated August 4, 1997
reporting issuance of EEX Press Release and filing of a
Form 8-K regarding expected material downward revision
of EEX's oil and natural gas reserves.
Current report on Form 8-K dated August 6, 1997
announcing consummation of the Preliminary Merger
between EEX and Lone Star Energy Plant Operations, Inc.
and ENSERCH's distribution of its ownership in New EEX
and the Merger of ENSERCH and TUC.
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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: November 13, 1997 By /s/ J. W. Pinkerton
------------------------------
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
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