UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File No. 1-11413
ENSERCH EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
75-2556975
(I.R.S. Employer Identification No.)
6688 North Central Expressway, Suite 1000, Dallas, Texas 75206-3922
(Address of principal executive office) (Zip Code)
(214)692-4300
(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 Act
of 1934 during the preceding twelve months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock of Registrant outstanding as of
May 13, 1997: 126,227,796
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH EXPLORATION, INC.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
Three Months
Ended March 31
-------------------
1997 1996
-------- --------
(In thousands except
per share amounts)
Revenues
Natural gas $ 58,181 $ 54,101
Oil and condensate 25,157 19,366
Natural gas liquids 1,714 1,544
Other 95 400
--------- ---------
Total 85,147 75,411
--------- ---------
Costs and Expenses
Production and operating 13,568 19,592
Exploration 2,774 2,860
Depreciation and amortization 26,951 32,825
Write down of gas and oil properties 385,200
General, administrative and other 7,388 8,251
Taxes, other than income 4,612 6,168
--------- --------
Total 440,493 69,696
--------- --------
Operating Income (Loss) (355,346) 5,715
Other Income (Expense) - Net (22) (1)
Interest Income 52
Interest and Other Financing Costs (5,927) (5,651)
--------- --------
Income (Loss) Before Income Taxes (361,243) 63
Income Taxes (Benefit) (126,513) (21)
--------- --------
Net Income (Loss) $(234,730) $ 84
========= ========
Net Income (Loss) Per Share $ (1.86) $ .00
========= ========
Weighted Average Shares Outstanding 125,974 125,841
========= ========
<FN>
See accompanying Notes.
</FN>
1
ENSERCH EXPLORATION, Inc.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
-------------------
1997 1996
-------- --------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $(234,730) $ 84
Write down of gas and oil properties 385,200
Depreciation and amortization 26,951 32,825
Deferred income tax expense (benefit) (131,427) 1,751
Other 2,859 871
Changes in current operating assets
and liabilities
Accounts receivable 29,021 (3,904)
Other current assets 9,593 (3,084)
Accounts payable (17,617) (2,349)
Other current liabilities 5,003 435
--------- ---------
Net cash flows from operating activities 74,853 26,629
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (38,629) (30,085)
Proceeds from disposition of
property, plant and equipment 2,187 13,604
Other (9,479) (7,320)
--------- ---------
Net cash flows used in investing
activities (45,921) (23,801)
--------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving
credit agreement 20,000 55,000
Repayment of borrowings under bank
revolving credit agreement (55,000) (20,000)
Borrowings under short term
financing agreement 7,000
Change in temporary advances with
affiliated companies 6,051 (31,258)
Payments of capital lease obligations (1,173) (1,100)
Decrease in advances under
leasing arrangements (557)
Issuance of common stock 2 30
--------- ---------
Net cash flows from (used in)
financing activities (23,677) 2,672
--------- ---------
Net Increase in Cash 5,255 5,500
Cash at Beginning of Period 1,340 1,546
--------- ---------
Cash at End of Period $ 6,595 $ 7,046
========= =========
<FN>
See accompanying Notes.
</FN>
2
ENSERCH EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(March 31, 1997 Unaudited)
March 31 December 31
1997 1996
--------- ---------
(In thousands)
ASSETS
Current Assets
Cash $ 6,595 $ 1,340
Accounts receivable - trade 41,683 61,654
Accounts receivable - affiliated
companies 7,499 16,549
Temporary advances - affiliated
companies 7,082 13,133
Other 8,588 18,181
---------- ----------
Total current assets 71,447 110,857
---------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties
(full cost method) 2,451,910 2,806,536
Other 21,941 21,957
---------- ----------
Total 2,473,851 2,828,493
Less accumulated depreciation
and amortization 1,102,912 1,081,845
---------- ----------
Net property, plant and equipment 1,370,939 1,746,648
---------- ----------
Other Assets 10,906 14,634
---------- ----------
Total $1,453,292 $1,872,139
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - trade 58,633 $90,922
Accounts payable - affiliated
companies 14,117 8,924
Short term borrowings 7,000
Advances under leasing arrangements 4,900 5,457
Current portion of capital
lease obligations 9,608 3,250
Other 15,587 10,584
---------- ----------
Total current liabilities 109,845 119,137
---------- ----------
Bank Revolving Credit Agreement 80,000 115,000
---------- ----------
Capital Lease Obligations 234,204 241,735
---------- ----------
Deferred Income Taxes 142,373 273,801
---------- ----------
Other Liabilities 27,257 28,249
---------- ----------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary 150,000 150,000
---------- ----------
Common Shareholders' Equity
Common stock (200,000 shares authorized;
126,178 and 126,044 shares
outstanding) 126,178 126,044
Paid in capital 821,681 820,808
Accumulated deficit (236,458) (1,728)
Unamortized restricted stock
compensation (1,788) (677)
Treasury stock (230)
---------- ----------
Common shareholders' equity 709,613 944,217
---------- ----------
Total $1,453,292 $1,872,139
========== ==========
<FN>
See accompanying Notes.
</FN>
3
ENSERCH EXPLORATION, INC.
Notes to Condensed Financial Statements
1. Earnings per share applicable to common stock are based on
the weighted average number of common shares outstanding during
the period, including common equivalent shares when dilutive.
2. At March 31, 1997, the unamortized capitalized costs of U.S. gas and
oil properties exceeded the SEC-prescribed cost center ceiling by
approximately $250 million. Accordingly, a write down of gas and oil
properties of $250 million after-tax ($385 million pre-tax) was recorded
in March 1997.
3. 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.
4
INDEPENDENT ACCOUNTANTS' REPORT
Enserch Exploration, Inc.:
We have reviewed the accompanying condensed consolidated
balance sheet of Enserch Exploration, Inc. and subsidiaries
(the "Company") as of March 31, 1997, and the related condensed
statements of consolidated operations and cash flows for the
three months ended March 31, 1997 and 1996. These financial
statements are the responsibility of the Company'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 Company as of December 31, 1996, and the related statements
of consolidated operations, cash flows and owners' equity for
the year then ended (not presented herein); and in our report
dated February 10, 1997 (March 7, 1997 as to the third
paragraph of Note 4), we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996, is fairly
stated in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 2, 1997
5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Enserch Exploration, Inc. (EEX) had a
first quarter 1997 net loss of $234.7 million ($1.86 per
share), after a Securities and Exchange Commission (SEC)
prescribed non-cash write down of gas and oil properties
under the full cost method of accounting of $250 million after-
tax ($385 million pre-tax), compared with net income of $.1
million($.00 per share) for the first quarter of 1996. EEX
sustained an operating loss of $355 million in 1997 compared
with operating income of $5.7 million in 1996. Excluding the
non-cash write down, first quarter net income was $16 million
and operating income was $30 million, significantly improved
from the prior year.
Results for 1996 include the impact of two significant non-
recurring items. First, the Rocky Mountain area properties
were sold in late 1996. Revenues, costs and expenses and sales
volumes attributable to these properties in the first quarter
of 1996 were:
Revenues Millions Sales Volumes
Natural gas $5.4 3,340 MMcf
Oil and condensate $1.3 80 MBbls
Natural gas liquids $0.4 47 MBbls
Costs and Expenses
Production & operating $1.4
Depreciation &
amortization $4.3
Taxes other than income $0.6
Second, the Cooper Project equipment and facilities were
refinanced and the associated operating sublease was
capitalized in December 1996. The pro forma impact of this
transaction on first quarter 1996 results of operations is a
reduction of production and operating costs of $4.2 million,
an increase in depreciation and amortization of $2 million and
an increase in interest and other financing costs of $2.4
million.
The following comparisons of first quarter revenues and costs
and expenses exclude the 1997 non-cash write down of gas and
oil properties and the income and expenses related to the
Rocky Mountain area properties sold in 1996. Costs and
expenses for 1996 have also been adjusted to reflect the
impact of the refinancing of the Cooper Project as if it had
occurred on January 1, 1996.
Revenues for 1997 were $85 million, a $17 million (25%)
increase from 1996, reflecting a $9.5 million (20%) increase
in natural gas revenues, and a $7.4 million (38%) improvement
in oil and other revenues. Improved revenues were the result
of higher average natural gas and crude oil prices and higher
crude oil production. The average natural gas sales price per
6
thousand cubic feet (Mcf) was $2.85 in 1997 compared with
$2.25 in 1996. Natural gas production for 1997 was 20.4
billion cubic feet (Bcf), down from 21.6 Bcf in 1996,
primarily due to reduced output from a non-operated offshore
property due to water encroachment. Higher oil revenues in
1997 reflect a 22% improvement in the average sales price and
a 14% increase in sales volumes due primarily to the continued
development of the Cooper Project. Overall, oil and gas
production in the 1997 first quarter was reduced somewhat
because the Cooper facility was shut-in for approximately two
weeks to allow for maintenance and repair activities.
Operating expenses were down 10% in the first quarter 1997
compared to 1996 with all categories showing declines.
Production and operating costs were down slightly, reflecting
lower production. General and administrative expenses for 1997
were $7.4 million, 10% less than 1996 due to cost reduction
initiatives begun in late 1996. Taxes, other than income were
$4.6 million, down 17% from 1996 primarily due to lower ad
valorem tax accruals. Depreciation and amortization was $27
million in 1997, a 12% decline from 1996 due to a lower
amortization rate. Assuming the 1997 write down of gas and
oil properties occurred on January 1, 1996, pro forma
depreciation and amortization for the first quarter 1996 would
have been $27 million, the same as 1997.
Interest and other financing costs for 1997 were $5.9 million,
a $2.2 million (27%) reduction from 1996, including the pro
forma Cooper Project adjustment described above. Interest in
1996 included the impact from the debt incurred to finance the
DALEN acquisition which was reduced by proceeds from property
sales in late 1996.
HEDGING ACTIVITIES
A portion of the risk associated with fluctuations in the
price of natural gas and oil is managed through the use of
hedging techniques such as gas and oil swaps, collars and
futures agreements. EEX fixed the price on first quarter 1997
production volumes of 16 Bcf of natural gas (78% of
production) at an average price of $2.93 per Mcf and 385 MBbls
of oil (34% of production) at an average price of $22.78 per
Bbl. In total, gas and oil price hedging activities decreased
first quarter 1997 and 1996 revenues by $.5 million and $5.7
million, respectively. At March 31, 1997, EEX had outstanding
swaps, collars and futures agreements that were entered into
as hedges extending through December 31, 1997, to exchange
payments on 19 Bcf of natural gas and 1,650 MBbls of oil. At
March 31, 1997, there were $3.8 million of net unrealized and
unrecognized hedging gains based on the difference between the
strike price and the New York Mercantile Exchange futures
price for the applicable trading month. In addition, there
were $1.4 million of realized gains on hedging activities
which were deferred and will be applied as an increase in
revenues in April 1997, the month of physical sale of
production.
7
CAPITALIZED COSTS
The SEC-prescribed full cost accounting rules require
registrants to calculate the cost center ceiling limitation at
the end of each quarter using current prices and costs.
Natural gas and oil prices used in the March 31, 1997 cost
center ceiling calculation declined sharply from prices at the
end of 1996. Natural gas decreased to $1.83 per Mcf (46%) and
oil decreased to $18.11 per Bbl (22%). As a result of the
significant decrease in prices required to be used in the cost
center ceiling calculation at March 31, 1997, EEX's
unamortized capitalized costs of U. S. oil and gas properties
exceeded the cost center ceiling limitation by approximately
$250 million. Accordingly, a non-cash write down of gas and
oil properties of $250 million after-tax ($385 million pre-
tax) was recorded in March 1997.
Management believes the low prices required to be used in the
calculation are not representative of the prices EEX will
receive for its production in the future. The non-cash write
down of oil and gas properties will reduce future depreciation
and amortization expense but will not impact future cash
flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
EEX generated sufficient cash flows from operations to fund
its capital requirements and reduce financings by $29 million.
Net cash flows from operating activities were $75 million, an
increase of $48 million over 1996. Investing activities
required net cash flows of $46 million, an increase of $22
million compared with 1996 due to an increase in capital
expenditures and a decrease in proceeds from disposition of
properties.
EEX intends to utilize substantially all of its internally
generated cash flows for growth of the business and expects to
have ample cash flow from operations and the continuous
monetization of non-core assets to fund its business plans.
Borrowings under EEX's credit facilities may be used to
supplement temporary cash flow needs. EEX does not anticipate
paying cash dividends in the foreseeable future.
Capital Structure
Debt and preferred securities of a subsidiary represented 40%
of total capitalization of $1.2 billion at March 31, 1997,
compared to 35% of total capitalization of $1.5 billion at
December 31, 1996. The reduction in total capitalization and
the corresponding increase in debt as a percentage of total
capitalization was due primarily to the reduction in
shareholders' equity from the first quarter 1997 non-cash
write down of gas and oil properties, partially offset by
earnings and reduced bank borrowings.
8
MERGER WITH LONE STAR ENERGY PLANT OPERATIONS, INC.
In April 1996, ENSERCH announced that it had entered into a
merger agreement with Dallas-based Texas Utilities Company
("ENSERCH/TUC Merger"). Under the terms of the agreement, a
new holding company will acquire the businesses of ENSERCH,
excluding the businesses of EEX and Lone Star Energy Plant
Operations, Inc. ("LSEPO"). Immediately prior to the
consummation of the ENSERCH/TUC Merger, and as a condition
thereof, EEX will be merged into LSEPO ("EEX/LSEPO Merger"),
LSEPO will change its name to "Enserch Exploration, Inc."
("New EEX"), shares of EEX will automatically be converted
into shares of New EEX on a one-for-one basis in a tax-free
transaction, and ENSERCH will distribute to its shareholders,
on a pro rata basis, all of the shares of New EEX common stock
it owns ("Distribution"). The mergers, including the
transactions contemplated by the mergers, were approved by the
shareholders of EEX, ENSERCH and TUC, in separate meetings, on
November 15, 1996. The ENSERCH/TUC merger is subject to certain
conditions which include the approval by the Securities and
Exchange Commission (SEC) and receipt by ENSERCH of a favorable
tax ruling from the Internal Revenue Service (IRS) to the effect
that its distribution of EEX stock is a tax-free transaction.
ENSERCH received this IRS ruling in February 1997. ENSERCH has
stated that it recently became aware of an inadvertent misstatement
of fact it believes is immaterial in its filings with the IRS and
has received opinion from outside counsel that it will still be
able to rely on the ruling. ENSERCH and TUC have stated that while
they do not believe the additional facts would change the IRS's
ruling, the situation is being reviewed by the parties and further
communication with the IRS may ensue. All other approvals have
been received, except for approval by the SEC under the Public
Utility Holding Company Act of 1935 where the approval process is
proceeding.
9
ENSERCH EXPLORATION, INC.
SUMMARY OF OPERATING DATA (UNAUDITED)
Three Months
Ended March 31
--------------------
1997 1996
-------- --------
Operating Income (Loss)
(in millions) (a) $ (355.3) $ 5.7
======== =======
Revenues (in millions)
Natural gas $ 58.2 $ 54.1
Oil and condensate 25.1 19.4
Natural gas liquids 1.7 1.5
Other .1 .4
-------- -------
Total $ 85.1 $ 75.4
======== =======
Sales Volumes
Natural gas (MMcf) 20,426 24,971
Oil and condensate (MBbls) 1,147 1,082
Natural gas liquids (MBbls) 96 166
Total volumes (Mmcfe) (b) 27,884 32,459
Average Sales Price
Natural gas (per Mcf) $2.85 $2.17
Oil and condensate (per Bbl) 21.93 17.90
Natural gas liquids (per Bbl) 17.85 9.30
Total (per Mcfe) (b) 3.05 2.31
Cost and Expenses (per Mcfe) (b)
Production and operating (c) $.49 $.60
Exploration .10 .09
Depreciation and amortization .97 1.01
General, administrative and other .26 .25
Taxes, other than income .17 .19
Net Wells
Drilled 16 18
Productive 11 17
<FN>
(a) 1997 includes a write down of gas and oil properties of
$250 million after-tax ($385 million pre-tax).
(b) Oil and natural gas liquids are converted to Mcf
equivalents (Mcfe) on the basis of one barrel equals 6.0 Mcfe.
(c) Excludes related production, severance and ad valorem taxes.
</FN>
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT (15) - Letter of Deloitte & Touche LLP dated
May 14, 1997, regarding unaudited
interim financial statements
EXHIBIT (27) - Financial Data Schedule
(b) Report on Form 8-K
Current Report on Form 8-K dated January 8, 1997/January 13,
1997. (News Releases dated January 8, 1997 and January 13, 1997:
(1) Developments at the Cooper Project and (2) Appointment of
Chairman, President and CEO.)
Current Report on Form 8-K dated March 10, 1997. (News Release
dated March 10, 1997: Developments in merger of ENSERCH and TUC.)
11
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 EXPLORATION, INC.
(Registrant)
Dated May 14, 1997 By /s/R. S. LANGDON
-----------------------------------------
R. S. Langdon
Executive Vice President,
Finance and Administration,
and Chief Financial Officer
Dated May 14, 1997 By /s/R. E. SCHMITZ
-----------------------------------------
R. E. Schmitz
Vice President
and Controller
12