SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ENSERCH Corporation
A Texas Corporation I.R.S. Employer
Commission File Number 1-3183 Identification
No. 75-0399066
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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 12 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
----- -----
Common Stock outstanding at May 8, 1998: 201,000 shares, par value $0.01 per
share.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
ENSERCH Corporation and Subsidiaries
Condensed Statements of Consolidated Income -
Three Months Ended March 31, 1998 and 1997 3
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 5
Notes to Condensed Consolidated Financial
Statements 7
Independent Accountants' Reports 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II.OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Predecessor
-------------
Three Months Ended March 31
----------------------------
1998 1997
---- ----
Thousands of Dollars
OPERATING REVENUES $1,018,978 $ 794,813
---------- ---------
OPERATING EXPENSES
Gas purchased for resale 830,954 615,445
Operation and maintenance 97,949 90,287
Depreciation and amortization 19,128 14,471
Taxes other than income 22,712 23,282
---------- ---------
Total operating expenses 970,743 743,485
---------- ---------
OPERATING INCOME 48,235 51,328
OTHER INCOME (DEDUCTIONS) - NET (68) (632)
INTEREST CHARGES (18,751) (18,934)
---------- ---------
INCOME BEFORE INCOME TAXES 29,416 31,762
INCOME TAX EXPENSE 11,932 13,186
---------- ---------
INCOME FROM CONTINUING OPERATIONS 17,484 18,576
LOSS FROM DISCONTINUED OPERATIONS -- (219,501)
---------- ---------
NET INCOME (LOSS) 17,484 (200,925)
PREFERRED STOCK DIVIDENDS 1,282 2,862
---------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ 16,202 $(203,787)
========== =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
-3-
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Predecessor
-----------
Three Months Ended March 31
----------------------------
1998 1997
---- ----
Thousands of Dollars
CASH FLOWS - OPERATING ACTIVITIES
Income from continuing operations $ 17,484 $ 18,576
Depreciation and amortization 18,661 16,044
Deferred income taxes 6,838 11,547
Changes in operating assets and liabilities:
Accounts receivable 146,069 83,607
Inventories 26,809 15,909
Accounts payable
Affiliates 23,545 --
Other (96,108) (121,490)
Interest and taxes accrued (533) (17,581)
Other working capital (29,446) 13,784
Energy marketing risk management assets and liabilities (19,042) --
Other -- net 1,240 386
--------- --------
Cash provided by operating activities 95,517 20,782
--------- --------
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Long-term debt 250,000 100,000
Common stock -- 3,613
Retirements of securities:
Long-term debt (90,750) (100,399)
Preferred stock (100,000) --
Change in notes payable:
Commercial paper -- 42,500
Banks (3,513) --
Affiliates (118,033) --
Cash dividends paid (2,517) (6,388)
Debt financing expenses (1,060) --
Other -- (7)
--------- --------
Cash provided by (used for) financing activities (65,873) 39,319
--------- --------
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures (21,839) (17,792)
Other investments (6,609) (20,744)
--------- --------
Cash used in investing activities (28,448) (38,536)
CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS 2,741 (24,066)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,937 (2,501)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE 11,770 17,715
--------- --------
CASH AND CASH EQUIVALENTS - ENDING BALANCE $ 15,707 $ 15,214
========= =========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
-4-
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1998 December 31,
(Unaudited) 1997
----------- ------------
Thousands of Dollars
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline $1,077,870 $1,068,708
Other 47,475 46,400
---------- ----------
Total 1,125,345 1,115,108
Less accumulated depreciation 38,742 24,669
---------- ----------
Net of accumulated depreciation 1,086,603 1,090,439
Construction work in progress 95,951 85,635
Held for future use 121 121
---------- ----------
Net property, plant and equipment 1,182,675 1,176,195
---------- ----------
INVESTMENTS 43,486 37,041
---------- ----------
CURRENT ASSETS
Cash and cash equivalents 15,707 11,770
Accounts receivable (net of allowance for uncollectible
accounts: 1998 - $6,045,000; 1997 - $3,902,000) 366,460 524,908
Energy marketing risk management assets 367,089 365,650
Inventories - at average cost:
Materials and supplies 5,890 6,544
Gas stored underground 88,089 114,244
Prepayments 8,896 1,527
Deferred income taxes 22,663 22,663
Other current assets 7,073 7,678
---------- ----------
Total current assets 881,867 1,054,984
---------- ----------
DEFERRED DEBITS
Goodwill (net of accumulated amortization:
1998 - $13,110,000; 1997 - $8,113,000) 786,404 791,401
Unamortized regulatory assets 51,227 52,336
Deferred income taxes 64,465 72,631
Other deferred debits 64,083 55,560
---------- ----------
Total deferred debits 966,179 971,928
---------- ----------
Total $3,074,207 $3,240,148
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
-5-
ENSERCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
March 31,
1998 December 31,
(Unaudited) 1997
-----------------------------
Thousands of Dollars
CAPITALIZATION
Common Stock (par value -- $.01 per share):
Authorized shares -- 100,000,000
Outstanding shares -- 201,000 $ 2 $ 2
Paid in capital 771,401 771,207
Retained earnings (deficit) 6,637 (9,565)
---------- ----------
Total common stock equity 778,040 761,644
Preferred stock not subject to mandatory redemption 75,000 175,000
Advances from parent 175,616 293,843
Long-term debt, less amounts due currently 803,341 646,796
---------- ----------
Total capitalization 1,831,997 1,877,283
---------- ----------
CURRENT LIABILITIES
Notes payable - banks 2,554 6,067
Accounts payable:
Affiliates 28,471 4,926
Other 395,194 491,645
Energy marketing risk management liabilities 343,309 357,044
Taxes accrued 11,558 19,010
Interest accrued 14,033 20,264
Dividends declared 624 1,859
Customers' deposits 7,458 7,751
Other current liabilities 58,823 79,078
---------- ----------
Total current liabilities 862,024 987,644
---------- ----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes 10,414 10,498
Unamortized investment tax credits 3,349 3,364
Pensions and other postretirement benefits 162,806 165,514
Other deferred credits and noncurrent liabilities 203,617 195,845
---------- ----------
Total deferred credits and other noncurrent
liabilities 380,186 375,221
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
---------- ----------
Total $3,074,207 $3,240,148
========== ==========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
-6-
ENSERCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. MERGERS AND DISPOSITIONS
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions between Texas Utilities Company (TUC) and ENSERCH Corporation
(ENSERCH or the Corporation) were completed. All of the common stock of
ENSERCH was converted into common stock of TUC, and ENSERCH became a
wholly-owned subsidiary of TUC. Immediately prior to ENSERCH's merger with
TUC, Enserch Exploration, Inc. (EEX) and Lone Star Energy Plant Operations,
Inc. (LSEPO), former subsidiaries of the Corporation, were merged to form a
new company (New EEX), and ENSERCH distributed to its common shareholders its
ownership interest in these businesses.
TUC accounted for its acquisition of ENSERCH as a purchase, and purchase
accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the
period 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 have been restated to reflect EEX
and LSEPO as a discontinued operation. The historical financial statements of
ENSERCH reflect certain reclassifications made to conform to TUC's
presentation style. On December 31, 1997, ENSERCH sold, to another subsidiary
of TUC, at net book value, the group of companies which had constituted the
Corporation's power development and international gas distribution
operations. For financial reporting purposes, the sale was deemed to have
occurred on August 5, 1997. Accordingly, operating results for periods
following the Merger Date exclude those operations. Prior periods were not
restated to reflect the sale.
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 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
estimated fair value of the assets and liabilities of ENSERCH at the merger
date was approximately $800 million and is reflected as goodwill in the
ENSERCH balance sheet as of December 31, 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 estimates.
-7-
ENSERCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements
of ENSERCH and its subsidiaries have been prepared on the same basis as those
in the 1997 Annual Report on Form 10-K (1997 Form 10-K) and, in the opinion of
ENSERCH, all adjustments (constituting only normal recurring accruals)
necessary to a fair presentation of the results of operation and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to rules and regulations of the Securities and Exchange
Commission.
Certain previously reported amounts have been reclassified to
conform to current classifications.
Energy Marketing Activities -- The Corporation, through its energy
marketing subsidiary, Enserch Energy Services, Inc. (EES), enters into a
variety of transactions, including forward contracts involving physical
delivery of natural gas or electrical power commodities, as well as swaps,
futures, options and other derivative contractual arrangements. As part of
these business activities, EES offers price risk management services to the
energy sector. These transactions are primarily conducted with retail end
users, established energy companies and major financial institutions. EES
uses the mark-to-market method of valuing and accounting for these
activities. Under this method, the current market value of EES' energy
portfolio, net of future servicing costs is reflected within the Corporation's
consolidated balance sheets, with resulting unrealized gains and losses, as
"Energy Risk Management Assets or Liabilities". The actual timing of cash
receipts and payments may however vary as contracts may be settled at
intervals other than their scheduled maturities. (See Note 6).
3.COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Corporation,
comprehensive income is the same as net income reported in the consolidated
statement of income. There are no other items of comprehensive income for the
periods presented.
4.SHORT-TERM FINANCING
At March 31, 1998, TUC, TU Electric 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 $570,000,000 outstanding
at any one time at variable interest rates and terminates April 22, 1999.
Facility B provides for short-term borrowings aggregating up to
$1,330,000,000 outstanding at any one time at variable interest rates and
terminates April 24, 2002. ENSERCH's borrowings under both facilities are
limited to an aggregate of up to $650,000,000 outstanding at any one time.
Borrowings under these facilities will be used for working capital and other
corporate purposes, including commercial paper backup. TUC will amend or
replace this credit facility to provide for a significantly increased level of
borrowing in connection with its pending acquisition
-8-
ENSERCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of The Energy Group. However, ENSERCH is expected to have the same or similar
capacity under the new agreements as it does presently.
5.CAPITALIZATION
In January 1998, the Corporation issued $125,000,000 of 6 1/4% Series A
Notes due January 1, 2003 (Series A Notes) and $125,000,000 of Remarketed
Reset Notes due January 1, 2008 (Reset Notes). Net proceeds from these
borrowings were used to refinance or redeem like amounts of higher rate debt
and preferred stock.
The Series A Notes are redeemable as a whole at any time or in part, from
time to time, at the option of the Corporation, at a redemption price equal to
the sum of (a) the greater of (i) 100% of the principal amount and (ii) the
sum of the present values of the remaining scheduled payments of principal and
interest thereon from the redemption date to the maturity date, plus (b)
accrued interest on the principal amount thereof to the date of redemption.
The Reset Notes were issued at an initial rate of 5.82% per annum for the
period to April 1, 1998. Interest rates are reset for variable rate periods
and may be tendered for remarketing at the end of each such period. After
July 1, 1998, rate periods will not be shorter than six months. The interest
rate for each new rate period is based either on LIBOR or may be fixed for a
succeeding rate period as determined for each such period by the Remarketing
Agent and the Corporation. The interest rate for the period from April 1,
1998 through July 1, 1998 is 5.99%. The Reset Notes may be redeemed in whole
or in part at the option of the Corporation at 100% of the principal amount
thereof, plus accrued interest.
In February 1998, ENSERCH called for redemption on March 27 the
outstanding balance of its 6 3/8% Convertible Subordinated Debentures.
Holders of $3,005,000 principal amount of the debentures elected to convert
the debentures into 77,963 shares of TUC common stock, and the remaining
$87,745,000 principal amount was redeemed for cash.
In January 1998, the Corporation redeemed all of the outstanding shares
of its Adjustable Rate Preferred Stock, Series E, at $1,000 per share,
$100,000,000 principal amount, plus accrued and unpaid dividends of $14.777
per share.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $250,000,000 aggregated principal
amount of securities currently registered with the SEC for offering pursuant
to Rule 415 under the Securities Act of 1933.
6.DERIVATIVE INSTRUMENTS
Energy Marketing Activities --EES' energy portfolio is comprised of
forward commitments, futures, swaps, options and other derivative
instruments. The notional amounts and terms of the portfolio as of March 31,
1998 included financial instruments that provide for fixed price receipts of
2,410 trillion British thermal units equivalent (Tbtue) and fixed price
payments of 2,276 Tbtue, with a maximum term of five years. Additionally,
sales and purchase commitments totaling 574 Tbtue, with terms extending up to
five years are included in the portfolio as of March 31, 1998.
-9-
ENSERCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments.
Accordingly, the notional amounts represented above do not necessarily measure
EES' exposure to market or credit risks. Additionally, the maximum term in
years are not indicative of likely future cash flows as these positions may be
offset in the markets at any time in response to EES' risk management needs.
7.REGULATION AND RATES
Lone Star Gas Rates -- On August 20, 1996, the Railroad Commission of
Texas (RRC) ordered a general inquiry into the rates and services of Lone Star
Gas, most notably a review of historic gas cost and gas acquisition practices
since the last rate setting. The inquiry docket has been separated into
different phases. Two of the phases, conversion to the National Association
of Regulatory Utility Commissioners account numbering system and unbundling,
have been dismissed by the RRC, and one other phase, rate case expense has
been concluded. In the phase dealing with historic gas cost and gas
acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a
motion for summary disposition stating that any retroactive rate action would
be inappropriate and unlawful. Settlement discussions with intervenor cities
are ongoing. In the event the motion for summary disposition is denied, a
hearing is currently scheduled to begin in November 1998. A number of
management and transportation related issues have been placed in a separate
phase which still has an undefined scope and is being held in abeyance pending
the resolution of the phase dealing with gas costs. Management believes that
gas costs were prudently incurred and were properly accounted for and
recovered through the gas cost recovery mechanism previously approved by the
RRC. At this time, management is unable to predict the ultimate outcome of
the inquiry.
8.COMMITMENTS AND CONTINGENCIES
Guarantees -- The Corporation and/or its subsidiaries are the guarantor
on various commitments and obligations of others aggregating approximately
$37,900,000 at March 31, 1998. The Corporation is exposed to loss in the
event of nonperformance by other parties. However, the Corporation does not
anticipate nonperformance by the counterparties.
-10-
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiary companies (the Corporation) as of March 31,
1998, and the related condensed statements of consolidated income and cash
flows for the three months ended March 31, 1998 and 1997 (Predecessor Company
Operations, see Note 1). 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 the Corporation as of
December 31, 1997, and the related consolidated statements of income, cash
flows and common stock equity for the year then ended (not presented herein);
and in our report dated February 24, 1998, 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, 1997, 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 11, 1998
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
This report and other presentations made by ENSERCH Corporation (ENSERCH
or the Corporation) and its subsidiaries 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 factors
contained in the Forward-looking Statements section of Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operation in
ENSERCH's 1997 Annual Report on Form 10-K for the year 1997 (1997 Form 10-K),
among others, that could cause the actual results of ENSERCH to differ
materially from those projected in such forward-looking statement.
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 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 be assessed.
FINANCIAL CONDITION
Merger With TUC and Disposition
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions between Texas Utilities Company (TUC) and ENSERCH Corporation
(ENSERCH or the Corporation) were completed. All of the common stock of
ENSERCH was converted into common stock of TUC, and ENSERCH became a
wholly-owned subsidiary of TUC. Immediately prior to ENSERCH's merger with
TUC, Enserch Exploration, Inc. (EEX) and Lone Star Energy Plant Operations,
Inc. (LSEPO), former subsidiaries of the Corporation, were merged to form a
new company (New EEX), and ENSERCH distributed to its common shareholders its
ownership interest in these businesses.
TUC accounted for its acquisition of ENSERCH as a purchase, and purchase
accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the
period 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 have been restated to reflect EEX
and LSEPO as a discontinued operation. The historical financial statements of
ENSERCH reflect certain reclassifications made to conform to TUC's
presentation style. On December 31, 1997, ENSERCH sold, to another subsidiary
of TUC, at net book value, the group of companies which had constituted the
Corporation's power development and international gas distribution
operations. For financial reporting purposes, the sale was deemed to have
occurred on August 5, 1997. Accordingly, operating results for periods
following the Merger Date exclude those operations. Prior periods were not
restated to reflect the sale.
-12-
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operation in ENSERCH's 1997 Form 10-K. Quarterly results presented herein are
not necessarily indicative of expectations for a full year's operations
because of seasonal and other factors, including variations in maintenance and
other operating expense patterns. No significant changes or events which might
affect the financial condition of the Corporation have occurred subsequent to
year-end other than as disclosed in other reports of ENSERCH or included
herein.
Continuing operations provided cash of $96 million for operating
activities in the first three months of 1998 compared with $21 million in the
same period of 1997. Changes in operating assets and liabilities provided
cash of $53 million in the first quarter of 1998 but used cash of $25 million
in the comparable 1997 period.
Discontinued operations provided cash of $2.7 million in the 1998
first quarter and used cash of $24 million in the 1997 quarter.
Investing activities required $28 million in the first quarter of 1998
versus $39 million in 1997. Capital spending in the first quarter of 1998 was
$4.0 million higher than last year's first quarter. Other investing activities
used cash of $6.6 million in 1998 and $21 million in 1997.
Total capitalization at March 31, 1998 was $1,832 million, down 2% from
year-end 1997. Common stock equity as a percentage of total capitalization
was 42.5% at March 31, 1998 compared with 40.6% at year-end 1997.
In January 1998, ENSERCH issued $125 million of 6 1/4% Series A Notes
due 2003 and $125 million of Remarketed Reset Notes due 2008 with a variable
interest rate (5.99% for the period from April 1, 1998 to July 1, 1998). Net
proceeds from these borrowings were used to refinance or redeem like amounts
of higher rate debt and preferred stock. In January, the Series E Adjustable
Rate Preferred Stock was redeemed at 100% of its liquidation price plus
accrued and unpaid dividends. In February 1998, the Corporation called for
redemption on March 27 the outstanding balance of its 6 3/8% Convertible
Subordinated Debentures. Holders of the debentures elected to convert $3.0
million principal amount of the debentures into 77,963 shares of TUC common
stock, and the remaining $87.7 million principal amount was redeemed for
cash.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $250 million aggregate principal
amount of securities currently registered with the Securities and Exchange
Commission (SEC) for offering pursuant to Rule 415 under the Securities Act of
1933.
At March 31, 1998, TUC, Texas Utilities Electric Company, 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 22, 1999. 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 March 31, 1998, ENSERCH had no borrowings
under these facilities. TUC will amend or replace this credit facility to
provide for an increased level of borrowing in connection with its pending
acquisition of The Energy Group. However, ENSERCH is expected to have the
same or similar capacity under the new agreements as it does presently.
-13-
Regulation and Rates
Lone Star Gas Rates -- On August 20, 1996, the Railroad Commission of
Texas (RRC) ordered a general inquiry into the rates and services of Lone Star
Gas, most notably a review of historic gas cost and gas acquisition practices
since the last rate setting. The inquiry docket has been separated into
different phases. Two of the phases, conversion to the National Association
of Regulatory Utility Commissioners account numbering system and unbundling,
have been dismissed by the RRC, and one other phase, rate case expense, has
been concluded. In the phase dealing with historic gas cost and gas
acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a
motion for summary disposition stating that any retroactive rate action would
be inappropriate and unlawful. Settlement discussions with intervenor cities
are ongoing. In the event the motion for summary disposition is denied, a
hearing is currently scheduled to begin in November 1998. A number of
management and transportation related issues have been placed in a separate
phase which still has an undefined scope and is being held in abeyance pending
the resolution of the phase dealing with gas costs. Management believes that
gas costs were prudently incurred and were properly accounted for and
recovered through the gas cost recovery mechanism previously approved by the
RRC. At this time, management is unable to predict the ultimate outcome of
the inquiry.
RESULTS OF OPERATION
For the first quarter of 1998, ENSERCH had income from continuing
operations of $17.5 million compared with $18.6 million income for the
Predecessor for the same period of 1997. The amortization of goodwill arising
from the acquisition by Texas Utilities was $5.0 million in the 1998 first
quarter. First quarter 1997 income was reduced by an $8.6 million pretax,
$5.6 million after-tax, provision for a credit Lone Star Pipeline Company
made voluntarily to its customers.
Consolidated revenues for the first quarter of 1998 were $1,019 million
compared with $795 million for the first quarter of 1997. The higher revenues
reflect an increase of $339 million in energy marketing revenues. Gas
purchased for resale increased from $615 million in the first quarter of 1997
to $831 million in the same period of 1998, reflecting the increase in natural
gas marketing activity. Quarterly operating income was $48.2 million in 1998
compared with $51.3 million in 1997. Operating income from natural gas
gathering and processing operations decreased $5.1 million in 1998 from
1997. Fluctuations in natural gas liquids (NGL) demand, price volatility for
NGL products and natural-gas feedstock costs are the major factors that
influence financial results in the NGL processing business. Lone Star
Pipeline operating income increased $3.6 million in the 1998 period from the
1997 first quarter, partially attributable to lower operating and maintenance
expenses. The results in 1997 were after a voluntary refund of $8.6 million
made to residential and commercial customers. Lone Star Gas operating income
decreased $7.5 million in 1998 from 1997 primarily due to higher operating
and maintenance expenses. Energy marketing activities reported an
improvement in operating results of some $10.1 million compared with the 1997
first quarter, the result of improved gas margins. Power development and
international gas operations, transferred to another TUC affiliate effective
with the Merger, detracted $1.9 million from operating income in the first
quarter of 1997.
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The loss from discontinued operations of $219.5 million for the
quarter ended March 31, 1997, 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.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and
its components (revenues, expenses, gains and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Corporation,
comprehensive income is the same as net income reported in the statements of
consolidated income, since there are no other items of comprehensive income
for the periods presented.
CHANGES IN ACCOUNTING STANDARDS
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998. This statement establishes
standards for defining and reporting business segments. The Corporation is
currently determining its reportable segments.
The adoption of SFAS 130 and SFAS 131 will not affect the Corporation's
consolidated financial position, results of operations or cash flows.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Corporation is not
significantly different from the information set forth in Item 7A
Quantitative and Qualitative Disclosures About Market Risk included in the
1997 Form 10-K and is therefore not presented herein.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits filed as part of Part II are:
15 -Letter from Deloitte & Touche LLP as to
unaudited interim financial information.
(b)Reports on Form 8-K filed since December 31, 1997:
Date of Report Items Reported
---------------- ----------------------------------------
January 6, 1998 Item 7. Financial Statements and Exhibits
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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
Date: May 13, 1998 By /s/ J. W. Pinkerton
-----------------------------
J. W. Pinkerton,
Vice President and Controller,
Principal Accounting Officer
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