UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 number 1-12108.
Lone Star Energy Plant Operations, Inc.
(Exact name of registrant as specified in its charter)
Texas 75-2421863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1817 Wood Street
Dallas, Texas 75201-5598
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (214) 573-3915
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
informational statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock of the Registrant held by
non-affiliates (excluding voting shares held by officers and directors) was
$0 on March 26, 1997.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock: Common Stock $.01 par value: 10 shares on
March 26, 1997.
Documents Incorporated by Reference: None
PART I
ITEM 1. Business
General
Lone Star Energy Plant Operations, Inc. (the "Company" or "LSEPO"), a
wholly owned subsidiary of ENSERCH Corporation ("ENSERCH"), operates and
maintains, under long-term contracts, a 255-megawatt ("MW") cogeneration
facility located in Sweetwater, Texas, a 62-MW cogeneration facility
located in Buffalo, New York, and a 160-MW cogeneration facility located in
Bellingham, Washington.
Recent Developments
In April 1996, ENSERCH announced that it had entered into a merger
agreement with Dallas-based Texas Utilities Company (the "ENSERCH/TUC
Merger"). Under the terms of the agreement, a new holding company, TUC
Holding Company, will acquire the businesses of ENSERCH, excluding the
businesses of Enserch Exploration, Inc., a 83% owned subsidiary of ENSERCH
("EEX") and the Company.
Immediately prior to the consummation of the ENSERCH/TUC Merger, and
as a condition thereof, EEX will be merged into LSEPO (the "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"). In the EEX/LSEPO Merger,
ENSERCH will receive approximately 778,000 shares of New EEX for the value
of LSEPO. The EEX/LSEPO Merger enables the Distribution to be tax-free to
ENSERCH and its shareholders.
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, and by the shareholders of the Company on
September 10, 1996. All regulatory approvals have been received except for
approval by the Securities and Exchange Commission ("SEC") under the Public
Utility Holding Company Act of 1935 where the approval process is
proceeding. The Railroad Commission of Texas ("RRC") has indicated no
objection to the ENSERCH/TUC Merger, and the Antitrust Division of the U.S.
Department of Justice ("DOJ") has notified ENSERCH and TUC that its
investigation of the proposed merger has been closed without the DOJ taking
any action or requiring TUC or ENSERCH to take any action. ENSERCH has
also announced receipt of a favorable tax ruling from the Internal Revenue
Service to the effect that neither ENSERCH nor its shareholders will
recognize taxable gain in the Distribution.
ITEM 2. Properties
The Company does not own any significant physical property.
ITEM 3. Legal Proceedings.
The Company is not currently a party to any lawsuits.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
ITEM 5. Market for Registrants Common Stock and Related Shareholder Matters.
There is no public trading market for the Company's common equity.
ITEM 6. Selected Financial Data.
The information required hereunder is set forth under "Selected
Financial Data" included in Appendix A to this report.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required hereunder is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Appendix A to this report.
ITEM 8. Financial Statements and Supplementary Data.
The information required hereunder is set forth under "Independent
Auditors' Report," "Statements of Income and Retained Earnings,"
"Statements of Cash Flows," "Balance Sheets," and "Notes to Financial
Statements" included in Appendix A to this Report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The current directors and executive officers of the Company are as
follows:
Name Age Title
---- --- -----
D. W. Biegler 50 Director
D. R. Long 49 Director
M. E. Rescoe 44 Director
W. T. Satterwhite 63 Director
D. R. Martin 56 President
Mr. Biegler has been a Director since March 1993. He also has been
Chairman and President, Chief Executive Officer of ENSERCH Corporation
since 1993. Prior to his election to his present position in 1993, he
served Lone Star Gas Company, the utility division of ENSERCH, as President
from 1985 and as Chairman from 1989 and was elected President and Chief
Operating Officer of ENSERCH in 1991. Mr. Biegler is a Director of ENSERCH
Corporation, EEX, Texas Commerce Bank National Association, and Trinity
Industries, Inc. He has been a Director of ENSERCH since 1991.
Mr. Long has been a Director since May 1995. He has been Senior Vice
President, Administration, of ENSERCH since May 1995. He previously served
Lone Star Gas Company as Vice President, Human Resources and Services, from
January 1995 to May 1995, and as Vice President, Human Resources and
Facility Development, from June 1990 to January 1995.
Mr. Rescoe has been a Director since August 1995. He has been Senior
Vice President, Finance, and Chief Financial Officer of ENSERCH since
September 1995. Previously he served as Senior Managing Director of Bear,
Stearns & Co. from 1992 to July 1995 and was a Senior Vice President,
Finance, of Kidder, Peabody & Co. from 1983 to 1992.
Mr. Satterwhite has been a Director since March 1992. He has been
Senior Vice President and General Counsel, Chief Legal Officer of ENSERCH
since May 1972.
Mr. Martin has been President since May 1995. He served as Chief
Operating Officer from May 1995 to May 1996, and as a Vice President from
March 1992 to May 1995. He has also been a Vice President of Lone Star
Energy Company since January 1990.
There are no family relationships between any of the above officers.
All officers of the Company are elected annually by the Board of Directors.
Officers may be removed by the Board of Directors whenever, in the judgment
of the Board, the best interest of the Company will be served thereby.
ITEM 11. Executive Compensation
Mr. G. R. Bryan served as Chairman and Chief Executive Officer of the
Company from January 1996 to May 1996 when he was elected Chairman and
Chief Operating Officer. Beginning in 1996, a portion of the aggregate
compensation paid by ENSERCH to Mr. Bryan was allocated to the Company.
The total amount of this allocation was $56,565.82. Mr. Bryan resigned on
March 20, 1997. No person was named to succeed Mr. Bryan as Chief
Executive Officer.
The other executive officers of the Company did not receive, directly
or indirectly, compensation from the Company in 1996 in excess of $100,000.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Lone Star Energy Company ("LSEC") owns 100% of the issued and
outstanding common stock of LSEPO, and ENSERCH owns 100% of the issued and
outstanding common stock of LSEC. Accordingly, ENSERCH is deemed to be the
beneficial owner of all the common stock of LSEPO.
Each Director, the named executive officers and all directors and
executive officers as a group reported beneficial ownership at March 24,
1997, of the common stock of the Company and of ENSERCH as follows:
LSEPO ENSERCH
---------------------- ----------------------
Number of Number of
Shares Shares
Beneficially Percent Beneficially Percent
Name Owned(1) of Class Owned (1) of Class
---- ------------ -------- ------------ --------
D. W. Biegler 0 0 307,923(2) *
W. T. Satterwhite 0 0 105,159(2) *
M. E. Rescoe 0 0 28,512(2) *
D. R. Long 0 0 54(2) *
D. R. Martin 0 0 16,888(2) *
All Directors and
Executive Officers
as a Group 0 0 458,536 *
------------
*Less than 1%.
(1) The number of shares owned includes shares held in the ENSERCH's
Employee Stock Purchase and Savings Plan.
(2) The totals include shares subject to stock options exercisable within
60 days of the date hereof; D. W. Biegler 246,948 shares; W. T.
Satterwhite 63,000 shares; M. E. Rescoe 24,000 shares; D. R. Long
0 shares; D. R. Martin 11,100 shares; and all directors and executive
officers as a group 345,048 shares.
ITEM 13. Certain Relationships and Related Transactions
Mr. Biegler is a Director and an executive officer, and Messrs.
Bryan, Long, Rescoe and Satterwhite are each executive officers of ENSERCH.
The Company and ENSERCH, including its affiliates, have in the past entered
into significant arrangements with respect to their businesses and expect
to do so in the future to the extent authorized by the Restated Articles of
Incorporation of the Company.
In the ordinary course of business, the Company engages in various
transactions with ENSERCH companies. See Note 4 of the Notes to Financial
statements in Appendix A for information on these transactions.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements:
The following items appear in the Financial Information section
included in Appendix A to this report:
Item Page
---- ----
Selected Financial Data . . . . . . . . . . . . . . . .A-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .A-3
Independent Auditors' Report. . . . . . . . . . . . . .A-4
Financial Statements:
Statements of Income and Retained Earnings . . . .A-5
Statements of Cash Flows . . . . . . . . . . . . .A-6
Balance Sheets . . . . . . . . . . . . . . . . . .A-7
Notes to Financial Statements. . . . . . . . . . .A-8
(2) Exhibits:
The following exhibits are filed herewith unless otherwise indicated:
Number Description
------ -----------
2* Agreement and Plan of Merger dated as of September 10,
1996 between the Company and Enserch Exploration, Inc.
3.1* Restated Articles of Incorporation of the Company.
3.2* Bylaws of the Company.
4* Form of Common Stock Certificate.
10.1* Form of Distribution Agreement among ENSERCH, EEX, LSEPO
and Holding Company.
10.2* Form of Tax Allocation Agreement among ENSERCH, New EEX
and TUC and attached Tax Sharing Agreement dated as of
January 1, 1995 between ENSERCH and EEX.
10.3* Form of Tax Assurance Agreement between ENSERCH and New
EEX.
10.4* Rights Agreement dated as of September 10, 1996 between
LSEPO and Harris Trust Company of New York as Rights
Agent.
23 Deloitte & Touche LLP consent letter, including consent
to incorporation by reference in Registration Statement
No. 333-13241.
24 Powers of Attorney.
27 Financial Data Schedule.
99** Registration Statement No. 333-13241 of the Company dated
October 2, 1996, as filed with the SEC.
-----------------
* Previously filed as an exhibit to the Registration Statement of the
Company on Form S-4 (No. 333-13241) and incorporated herein by
reference and made a part hereof.
** Incorporated by reference herein and made a part hereof.
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) 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.
LONE STAR ENERGY PLANT OPERATIONS, INC.
Date: March 27 , 1997 By: /s/ D. R. Martin
---- ----------------------------
D. R. Martin, President
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
-------------------- ----
D. W. Biegler, Director; D. R. Long,
Director; M. E. Rescoe, Director;
W. T. Satterwhite, Director; D. R. March 27 , 1997
Martin, President; and J. W. Pinkerton, ----
Vice President and Controller, Chief
Accounting Officer
By: /s/ D. R. Martin
--------------------------
D. R. Martin, Individually
and as Attorney-in-fact
APPENDIX A
LONE STAR ENERGY PLANT OPERATIONS, INC.
INDEX TO FINANCIAL INFORMATION
December 31, 1996
Page
----
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . A-3
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . A-4
Financial Statements:
Statements of Income and Retained Earnings. . . . . . . . . . . . . A-5
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . A-6
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . A-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . A-8
A-1
LONE STAR ENERGY PLANT OPERATIONS, INC.
SELECTED FINANCIAL DATA
As of or for Year Ended December 31,
--------------------------------------------------
1992(a) 1993 1994 1995 1996
------- -------- ------- -------- --------
(In thousands except per share data)
INCOME STATEMENT DATA
Revenues (b) . . . . . . . . . . . . . . . . $8,737 $10,662 $12,726 $16,507 $11,400
Costs and Expenses . . . . . . . . . . . . . 8,815 8,838 11,323 14,258 9,924
------- ------- ------- ------- -------
Operating Income (Loss). . . . . . . . . . . (78) 1,824 1,403 2,249 1,476
Other Income . . . . . . . . . . . . . . . . - - - 97 200
Interest and Other Financing Costs . . . . . - - - (105) (200)
Income Taxes . . . . . . . . . . . . . . . . (34) (734) (590) (871) (543)
------ ------- ------- ------- -------
Net Income (Loss). . . . . . . . . . . . . . (112) 1,090 813 1,370 933
Net Income (Loss) Per Share (c). . . . . . . $(.14) $ 1.40 $ 1.05 $ 1.76 $ 1.20
Weighted Average Shares Outstanding (c). . . 778 778 778 778 778
BALANCE SHEET DATA
Total Assets . . . . . . . . . . . . . . . . $1,092 $4,335 $4,212 $10,132 $5,384
Shareholder's Equity (Deficiency). . . . . . (185) 905 1,718 3,088 4,021
<FN>
(a) Information for 1992 is unaudited. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of operations have been made.
(b) Revenues include contract revenues and expenses incurred on behalf of operating partnerships.
(c) The weighted average shares outstanding and the net income (loss) per share are unaudited pro forma amounts
reflecting shares to be issued in the merger of Enserch Exploration, Inc. with and into Lone Star Energy Plant
Operations, Inc.
</FN>
A-2
LONE STAR ENERGY PLANT OPERATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Lone Star Energy Plant Operations, Inc. ("LSEPO") has three agreements to
operate and maintain cogeneration plants. The agreements were initially
entered into by Lone Star Energy Company ("LSEC") and subsequently assigned
to LSEPO. The financial statements of LSEPO include the results of the three
operating and maintenance agreements for all years in a manner similar to a
pooling-of-interests since these activities were under the common control
of ENSERCH Corporation ("ENSERCH") and LSEC prior to the assignment of these
agreements to LSEPO.
In connection with the pending merger of ENSERCH with TUC Holding Company
(the "ENSERCH/TUC Merger"), ENSERCH will merge the operations of LSEPO and
Enserch Exploration, Inc. ("EEX"), a company approximately 83% owned by
ENSERCH. Immediately prior to the consummation of the ENSERCH/TUC Merger,
and as a condition thereof, EEX will be merged into LSEPO (the "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"). In the EEX/LSEPO Merger,
ENSERCH will receive approximately 778,000 shares of New EEX for the value
of LSEPO. The EEX/LSEPO Merger enables the Distribution to be tax-free to
ENSERCH and its shareholders.
Results of Operations
Revenues include reimbursement of expenses incurred on behalf of Encogen
One Partners Ltd. ("Encogen One") and Encogen Four Partners, L.P.
LSEPO had net income of $.9 million in 1996, compared with $1.4 million
in 1995 and $.8 million in 1994. Operating income for 1996 was $1.5 million
versus $2.2 million in 1995 and $1.4 million in 1994. LSEPO receives incentive
fees based on the Buffalo and Bellingham plants' availability. In 1996, the
Buffalo and Bellingham plants achieved 95.7% and 98.5% availability,
respectively, which resulted in total incentive fees of $.9 million being
earned. In 1995 and 1994, incentive fees of $1.1 million and $.7 million,
respectively, were earned.
Other income in 1996 and 1995 consists principally of interest received
from Encogen One. During 1995, LSEPO incurred extraordinary reimbursable
maintenance expenses for Encogen One, which deferred reimbursement of these
expenses to LSEPO, as allowed under the terms of the operating and maintenance
agreement. ENSERCH financed this temporary working capital requirement for
LSEPO, and interest equal to the interest earned by LSEPO is payable to
ENSERCH. Encogen One repaid the balance of deferred reimbursable expenses
during 1996.
Liquidity and Financial Resources
LSEPO has funded its activities through cash provided from operations and
through advances from ENSERCH. ENSERCH advances cash to LSEPO to meet its
working capital needs and LSEPO remits any excess cash to ENSERCH. Net cash
provided by operating activities in 1996 totaled $5.0 million, compared with
cash required of $2.4 million in 1995 and cash provided of $1.4 million in
1994. Accounts receivable at December 31, 1996 decreased by $3.8 million
compared with the prior year end, largely as a result of lower receivables
from Encogen One for reimbursable expenses.
At December 31, 1996, LSEPO had total assets of $5.4 million and net assets
of $4.0 million, including working capital of $3.9 million. Effective with
the EEX/LSEPO Merger, ENSERCH will make a capital contribution to LSEPO, or
LSEPO will make a distribution to ENSERCH, of such amount needed to cause
LSEPO's working capital to be $3.5 million. Following the EEX/LSEPO Merger,
ENSERCH will no longer fund LSEPO's operations.
A-3
LONE STAR ENERGY PLANT OPERATIONS, INC.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Lone Star Energy Plant
Operations, Inc. (the "Company") as of December 31, 1996 and 1995, and the
related statements of income and retained earnings and of cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 25, 1997
A-4
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ended December 31,
-----------------------------------
1994 1995 1996
------- ------- -------
(In thousands except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . $12,726 $16,507 $11,400
------- ------- -------
Costs and Expenses
Operating expenses. . . . . . . . . . . . . . . . . 6,046 5,857 6,322
Maintenance expenses. . . . . . . . . . . . . . . . 4,913 8,020 3,178
Depreciation. . . . . . . . . . . . . . . . . . . . 12 14 19
Payroll, ad valorem and other taxes . . . . . . . . 352 367 405
------- ------- -------
Total. . . . . . . . . . . . . . . . . . . . . 11,323 14,258 9,924
Operating Income . . . . . . . . . . . . . . . . . . . 1,403 2,249 1,476
Other Income . . . . . . . . . . . . . . . . . . . . . - 97 200
Interest Expense . . . . . . . . . . . . . . . . . . . - (105) (200)
------- ------- -------
Income before Income Taxes . . . . . . . . . . . . . . 1,403 2,241 1,476
Income Taxes . . . . . . . . . . . . . . . . . . . . . 590 871 543
------- ------- -------
Net Income . . . . . . . . . . . . . . . . . . . . . . 813 1,370 933
Retained Earnings, Beginning of Period . . . . . . . . 904 1,717 3,087
------- ------- -------
Retained Earnings, End of Period . . . . . . . . . . . $ 1,717 $ 3,087 $ 4,020
======= ======= =======
Unaudited Pro Forma Information (Note 10)
Net Income Per Share. . . . . . . . . . . . . . . . $ 1.05 $ 1.76 $ 1.20
======= ======= =======
Average Common Shares Outstanding . . . . . . . . . 778 778 778
======= ======= =======
<FN>
See Notes to Financial Statements.
</FN>
A-5
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------
1994 1995 1996
------ ------- ------
(In thousands)
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . $ 813 $ 1,370 $ 933
Depreciation. . . . . . . . . . . . . . . . . . . . . 12 14 19
Deferred income taxes (benefit) . . . . . . . . . . . (2) 1 (16)
Deferred receivable . . . . . . . . . . . . . . . . . - (1,887) 1,887
Other . . . . . . . . . . . . . . . . . . . . . . . . 191 (225) -
Changes in current operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . 94 (4,035) 3,809
Other current assets . . . . . . . . . . . . . . . (31) (24) (19)
Accounts payable . . . . . . . . . . . . . . . . . 353 913 (1,244)
Deferred payable to ENSERCH. . . . . . . . . . . . - 1,107 (1,107)
Other current liabilities. . . . . . . . . . . . . (16) 343 696
------ ------- ------
Net Cash Flows from (used for) Operating Activities 1,414 (2,423) 4,958
------ ------- ------
INVESTING ACTIVITIES
Additions of property, plant and equipment. . . . . . (32) (4) (14)
------ ------- ------
FINANCING ACTIVITIES
Increase (decrease) in non-current portion of deferred
payable to ENSERCH. . . . . . . . . . . . . . . . . - 1,887 (1,887)
Change in working capital advances payable to/receivable
from ENSERCH. . . . . . . . . . . . . . . . . . . . (1,463) 524 (3,058)
------ ------- ------
Net Cash Flows from (used for) Financing Activities (1,463) 2,411 (4,945)
------ ------- ------
Net Decrease in Cash . . . . . . . . . . . . . . . . . . (81) (16) (1)
Cash at Beginning of Period. . . . . . . . . . . . . . . 116 35 19
------ ------- ------
Cash at End of Period. . . . . . . . . . . . . . . . . . $ 35 $ 19 $ 18
====== ======= ======
<FN>
See Notes to Financial Statements.
</FN>
A-6
LONE STAR ENERGY PLANT OPERATIONS, INC.
BALANCE SHEETS
December 31,
----------------------------
1995 1996
--------- ----------
(In thousands, except shares)
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $ 18
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 8,081 4,272
Advances receivable from ENSERCH. . . . . . . . . . . . . . . - 919
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 85
------- ------
Total current assets . . . . . . . . . . . . . . . . . . . 8,166 5,294
------- ------
Property, Plant and Equipment, net of accumulated depreciation of
$38 and $57 . . . . . . . . . . . . . . . . . . . . . . . . . 75 70
------- ------
Other Assets
Deferred receivable . . . . . . . . . . . . . . . . . . . . . 1,887 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 20
------- ------
Total other assets . . . . . . . . . . . . . . . . . . . . 1,891 20
------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $10,132 $5,384
======= ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 1,348 $ 104
Working capital advances payable to ENSERCH . . . . . . . . . 2,139 -
Current portion of deferred payable to ENSERCH. . . . . . . . 1,107 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563 1,259
------- ------
Total current liabilities. . . . . . . . . . . . . . . . . 5,157 1,363
------- ------
Other Liabilities
Deferred payable to ENSERCH . . . . . . . . . . . . . . . . . 1,887 -
------- ------
Commitments and Contingent Liabilities (Note 9)
Common Shareholder's Equity
Common stock, $100 par value; authorized 1,000 shares, issued
10 shares (Note 10) . . . . . . . . . . . . . . . . . . . . 1 1
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 3,087 4,020
------- ------
Common shareholder's equity. . . . . . . . . . . . . . . . 3,088 4,021
------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $10,132 $5,384
======= ======
<FN>
See Notes to Financial Statements.
</FN>
A-7
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business
Lone Star Energy Plant Operations, Inc. ("LSEPO") is a wholly-owned
subsidiary of Lone Star Energy Company ("LSEC"), a wholly-owned subsidiary
of ENSERCH Corporation ("ENSERCH"). In connection with the pending merger of
ENSERCH with TUC Holding Company (the "ENSERCH/TUC Merger"), ENSERCH will
merge the operations of LSEPO and Enserch Exploration, Inc. ("EEX"), a company
approximately 83% owned by ENSERCH. Immediately prior to the consummation of
the ENSERCH/TUC Merger, and as a condition thereof, EEX will be merged into
LSEPO (the "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"). In the EEX/LSEPO
Merger, ENSERCH will receive approximately 778,000 shares of New EEX for the
value of LSEPO. The EEX/LSEPO Merger enables the Distribution to be
tax-free to ENSERCH and its shareholders.
LSEPO has agreements to operate and maintain three cogeneration plants,
which are located in Sweetwater, Texas, in Buffalo, New York, and in
Bellingham, Washington. Each facility was developed by a subsidiary of
ENSERCH. LSEPO has fixed-cost operating and maintenance agreements for
providing labor and certain routine consumables at each plant, with each of
the agreements containing escalation provisions tied to inflation. The
agreements for the Buffalo and Bellingham plants also contain bonus or penalty
provisions based upon plant availability.
The Sweetwater plant produces 255 megawatts per hour of electricity at
345,000 volts. This electricity is sold to the local electric utility
(Texas Utilities Electric Company). The facility also produces sequentially
up to 170 MMBtu's per hour of exhaust gas at 1,000 degrees fahrenheit which is
sold to a gypsum board manufacturing facility for use in its drying process.
The Sweetwater plant commenced commercial operation in June 1989. The initial
term of LSEPO's agreement expires in June 2001.
The Buffalo plant produces 62 megawatts per hour of electricity at 115,000
volts. This electricity is sold to the local electric utility (Niagara Mohawk
Power Corporation). The facility also produces up to 110,000 pounds per hour
of steam which is sold to a brass manufacturing facility for process use and
space heating purposes. The Buffalo plant commenced commercial operation in
May 1992. The initial term of LSEPO's agreement expires in March 2007.
The Bellingham plant produces 160 megawatts per hour of electricity at
115,000 volts. This electricity is sold to the local electric utility (Puget
Sound Power & Light Company). The facility also produces up to 130,000 pounds
per hour of steam which is sold to a paper mill for process purposes. The
Bellingham plant commenced commercial operation in July 1993. The initial term
of LSEPO's agreement expires in June 2008.
2. Basis of Presentation
Each of the three agreements LSEPO currently has to operate and maintain
cogeneration plants was initially entered into by LSEC and subsequently
assigned to LSEPO. The financial statements of LSEPO include the results of
the three operating and maintenance agreements for all years in a manner
similar to a pooling-of-interests since these activities were under the common
control of ENSERCH and LSEC prior to the assignment of these agreements to
LSEPO.
A-8
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies
All dollar amounts in the notes to financial statements are stated in
thousands unless otherwise indicated. The preparation of financial statements
requires the use of significant estimates and assumptions by management;
actual results could differ from those estimates.
Revenues include reimbursement of expenses incurred on behalf of Encogen
One Partners Ltd. ("Encogen One") and Encogen Four Partners, L.P.
Depreciation of property, plant and equipment is provided principally by
the straight-line method over the estimated service lives of the related
assets.
During 1995, LSEPO incurred extraordinary reimbursable maintenance expenses
for Encogen One, which deferred reimbursement of these expenses to LSEPO, as
allowed under the terms of the operating and maintenance agreement. ENSERCH
financed this temporary working capital requirement for LSEPO. Encogen One is
charged interest at the prime rate plus one percent on the outstanding balance.
The interest income is included in other income in the income statement.
Interest equal to the interest earned by LSEPO is payable to ENSERCH and is
included in interest expense in the income statement. Encogen One repaid the
balance of deferred reimbursable expenses during 1996.
4. Related Party Transactions
In the ordinary course of business, LSEPO engages in various transactions
with ENSERCH and its affiliates. LSEPO is charged for direct and indirect
costs incurred by LSEC, ENSERCH and other affiliates that are associated with
LSEPO's business and operations, including general and administrative costs
incurred in the management of operations and in performing accounting,
treasury, internal audit, income tax planning and compliance, legal,
information systems, human resources and other functions. Charges are
determined on a basis that reasonably reflects the actual costs of services
performed for LSEPO and may include allocations based on such factors as the
percentage of time spent on projects or services, the number of employees or
net capital employed. LSEPO believes that the methods used are reasonable and
that allocated costs approximate costs that would have been incurred if LSEPO
had operated as an unaffiliated entity. Charges from LSEC, ENSERCH and other
affiliates were $955, $817 and $1.1 million for 1994, 1995 and 1996,
respectively.
ENSERCH advances cash to LSEPO to meet its working capital needs and LSEPO
remits any excess cash to ENSERCH. No interest is charged on these advances.
Effective with the EEX/LSEPO Merger, ENSERCH will make a capital contribution
to LSEPO, or LSEPO will make a distribution to ENSERCH, of such amount needed
to cause LSEPO's working capital to be $3.5 million. Following the EEX/LSEPO
Merger, ENSERCH will no longer fund LSEPO's operations.
LSEPO has entered into agreements to operate and maintain three cogeneration
plants. Until 1997, indirect wholly-owned subsidiaries of ENSERCH held 100% of
the 1% general partner's interest in all three of the plants and a portion of
the limited partners' interests in two of the plants. (See Notes 1 and 8.)
In connection with the pending ENSERCH/TUC Merger, ENSERCH has disposed, or
will dispose, of a substantial portion of its indirect ownership interests
in these cogeneration plants. Following the dispositions, ENSERCH will
indirectly own 50% of the general partner's interest in Encogen Four
Partners, L.P. (the Buffalo plant) and 100% of the general partner's
interest and 49% of the limited partners' interest in Encogen Northwest, L.P.
(the Bellingham plant).
A-9
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The buyer of ENSERCH's interest in Encogen One Partners Ltd. (the
Sweetwater plant) has agreed not to cancel for convenience the operating and
maintenance agreement with LSEPO prior to the expiration of the initial term
of the agreement. The buyer of ENSERCH's interests in the Buffalo and
Bellingham plants will agree to neither directly nor indirectly cause, or
attempt to cause, the partnerships to cancel for convenience the operating
and maintenance agreements with LSEPO for a period of two years.
Pursuant to a contract entered into at closing of development, the ENSERCH
affiliate that developed the Bellingham cogeneration project receives an
annual operator surcharge fee of $4 million from Encogen Northwest, L.P.
LSEPO receives the payment and remits it to the ENSERCH affiliate.
LSEPO and the ENSERCH affiliate holding the general partner's interest in
the Bellingham plant share incentive fees (or penalties) resulting from the
availability of that plant. LSEPO's share is approximately one third, and the
ENSERCH affiliate's share is approximately two thirds. LSEPO collects the
incentive fees, retains its share and remits the remainder to the ENSERCH
affiliate. Incentive fees earned by LSEPO for the availability of the
Bellingham plant were $.4 million, $.6 million and $.7 million in 1994, 1995
and 1996, respectively.
5. Income Taxes
LSEPO's operations are included in ENSERCH's consolidated federal income
tax return. LSEPO makes tax payments to ENSERCH on the basis of a separate
federal income tax return.
1994 1995 1996
------ ------- ------
Provision (Benefit) for Income Taxes:
Current
Federal . . . . . . . . . . . . . . . . . . . . $ 442 $ 741 $ 522
State . . . . . . . . . . . . . . . . . . . . . 150 129 40
------ ------- ------
Total. . . . . . . . . . . . . . . . . . . . 592 870 562
Deferred Federal. . . . . . . . . . . . . . . . (2) 1 (19)
------ ------- ------
Total. . . . . . . . . . . . . . . . . . . . $ 590 $ 871 $ 543
====== ======= ======
Reconciliation of Income Taxes Computed at the
Federal Statutory Rate to Provision for Income Taxes:
Income before income taxes. . . . . . . . . . . . $1,403 $ 2,241 $ 1,476
------ ------- ------
Income taxes computed at the federal statutory rate
of 35%. . . . . . . . . . . . . . . . . . . . . 491 784 517
State taxes . . . . . . . . . . . . . . . . . . . 98 84 26
Other - net . . . . . . . . . . . . . . . . . . . 1 3 -
------ ------- ------
Provision for income taxes. . . . . . . . . . . $ 590 $ 871 $ 543
====== ======= ======
At December 31, 1996 and 1995, LSEPO had a deferred tax asset of $20 and
of $4, respectively, included in other assets, due to property-related
differences in the financial accounting basis and income tax basis of LSEPO's
assets.
A-10
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Employee Benefit Plans
Substantially all personnel associated with LSEPO are covered by an ENSERCH
pension plan, and LSEPO receives an allocated portion of the plan expenses,
which is included in the amounts disclosed in Note 4. Medical, dental and
similar benefits are also provided under ENSERCH plans. In addition, ENSERCH
provides a voluntary contributory investment plan to substantially all
employees of LSEPO. Following the EEX/LSEPO Merger, LSEPO will provide its
own employee benefit plans.
7. Financial Instruments and Risk Management
The fair value of financial instruments, consisting primarily of cash,
accounts receivable and accounts payable, approximated carrying value at
December 31, 1996 and 1995.
8. Major Customers
LSEPO derives all of its revenues from three limited partnerships, in
each of which an ENSERCH affiliate held the general partner's interest
(see Notes 1 and 4).
The percentage of LSEPO's total revenues, excluding reimbursement of
expenses, from each of its three major customers is summarized below:
1994 1995 1996
---- ---- ----
Encogen One Partners Ltd. (Sweetwater plant) 28% 25% 26%
Encogen Four Partners, L.P. (Buffalo plant) 36% 35% 34%
Encogen Northwest, L.P. (Bellingham plant) 36% 40% 40%
9. Commitments and Contingent Liabilities
In the ordinary course of business, LSEPO is involved in certain legal
proceedings. In the opinion of management, LSEPO will incur no liability from
pending claims or suits that is considered material for financial reporting
purposes.
10. Pro Forma Shares Outstanding (Unaudited)
In the EEX/LSEPO Merger, each outstanding share of EEX Common Stock will
be converted into one share of New EEX Common Stock and the outstanding shares
of LSEPO will be converted into a number of shares of New EEX Common Stock
determined by dividing $7.0 million by the average of the closing sales prices
of EEX Common Stock on the 15 trading days preceding the fifth trading day
prior to the effective time of the EEX/LSEPO Merger. A market price of EEX
shares of $9.00 was assumed to determine the pro forma converted shares
outstanding and to compute pro forma earnings per share.