-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbQ5TrqMk7KbILjiULH8tZH8Zjk+5ItT21LYry1FozqhDSVUfcIkaIfJa8WuhJzg brImJ3AcCTD9ILNNtfhUHQ== 0000033015-96-000014.txt : 19960814 0000033015-96-000014.hdr.sgml : 19960814 ACCESSION NUMBER: 0000033015-96-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENSERCH CORP CENTRAL INDEX KEY: 0000033015 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 750399066 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03183 FILM NUMBER: 96610677 BUSINESS ADDRESS: STREET 1: ENSERCH CTR STREET 2: 300 S ST PAUL CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2146518700 MAIL ADDRESS: STREET 1: 300 S ST PAUL ST CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: LONE STAR GAS CO DATE OF NAME CHANGE: 19751015 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 No. 1-3183 ENSERCH CORPORATION (Exact name of registrant as specified in its charter) Texas 75-0399066 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) ENSERCH Center, 300 South St. Paul, Dallas, Texas 75201 (Address of principal executive offices) (Zip Code) 214-651-8700 (Registrant's telephone number, including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares of Common Stock of Registrant outstanding as of August 12, 1996: 69,387,327. PART I. FINANCIAL INFORMATION Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In thousands except per share amounts) Revenues Natural gas and oil exploration and production. . . . . . $ 84,936 $ 47,987 $ 160,347 $ 89,648 Natural gas pipeline & GPM. . . . . . . . . . . . . . . . 224,320 232,897 569,216 502,513 Natural gas distribution. . . . . . . . . . . . . . . . . 140,943 144,736 503,268 507,981 Power and other . . . . . . . . . . . . . . . . . . . . . 9,387 8,933 17,253 17,524 Less intercompany revenues. . . . . . . . . . . . . . . . (44,431) (38,393) (156,286) (108,865) -------- --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . 415,155 396,160 1,093,798 1,008,801 -------- --------- --------- --------- Costs and Expenses Gas purchase. . . . . . . . . . . . . . . . . . . . . . . 211,495 240,315 633,813 635,671 Operating expenses. . . . . . . . . . . . . . . . . . . . 116,196 98,316 227,085 191,145 Depreciation and amortization . . . . . . . . . . . . . . 48,805 38,543 95,206 69,758 Gross receipts and production taxes . . . . . . . . . . . 13,571 12,961 31,509 29,384 Payroll, ad valorem and other taxes . . . . . . . . . . . 10,013 9,963 20,718 19,249 -------- --------- --------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . 400,080 400,098 1,008,331 945,207 -------- --------- --------- --------- Operating Income (Loss). . . . . . . . . . . . . . . . . . . 15,075 (3,938) 85,467 63,594 Other Income (Expense) - Net . . . . . . . . . . . . . . . . (1,868) 66 (2,650) (816) Interest and Other Financing Costs . . . . . . . . . . . . . (23,605) (18,919) (46,261) (36,505) -------- -------- --------- --------- Income (Loss) Before Income Taxes and Minority Interest. . . (10,398) (22,791) 36,556 26,273 Income Taxes (Benefit) . . . . . . . . . . . . . . . . . . . (4,580) (8,231) 12,590 9,890 Minority Interest. . . . . . . . . . . . . . . . . . . . . . 883 72 890 199 -------- -------- --------- --------- Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . (6,701) (14,632) 23,076 16,184 Provision for Dividends on Preferred Stock . . . . . . . . . 2,817 2,981 5,576 6,017 -------- -------- --------- --------- Earnings (Loss) Applicable to Common Stock . . . . . . . . . $ (9,518) $(17,613) $ 17,500 $ 10,167 ======== ======== ========= ========= Per Share of Common Stock Earnings (loss) applicable to common stock. . . . . . . . $ (.14) $ (.26) $ .25 $ .15 ======== ======== ========= ========= Cash dividends declared . . . . . . . . . . . . . . . . . $ .05 $ .05 $ .10 $ .10 ======== ======== ========= ========= Average Common and Dilutive Common Equivalent Shares Outstanding. . . . . . . . . . . . . . . 68,886 68,198 68,875 68,233 ======== ======== ========= ========= Operating Income (Loss) of Major Businesses Natural gas and oil exploration and production . . . . . . $ 13,213 $ (4,346) $ 17,801 $ (3,990) Natural gas pipeline & GPM Pipeline . . . . . . . . . . . . . . . . . . . . . . . . (1,784) (179) 31,695 29,524 Gas marketing. . . . . . . . . . . . . . . . . . . . . . 3,363 86 (8,266) 3,824 Gas processing . . . . . . . . . . . . . . . . . . . . . 4,375 1,599 8,329 2,497 Natural gas distribution . . . . . . . . . . . . . . . . . 417 1,488 42,644 36,122 Power and other. . . . . . . . . . . . . . . . . . . . . . (1,722) (788) (2,014) (515) See accompanying Notes.
1
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) Six Months Ended June 30 ------------------------ 1996 1995 ---- ---- (In thousands) OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,076 $ 16,184 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 95,206 69,758 Deferred income-tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,411 4,681 Recoveries of gas-purchase contract settlements. . . . . . . . . . . . . . . . . 5,846 20,994 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,002) 16,810 Changes in current operating assets and liabilities Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,626 72,244 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,355 38,893 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,718) (64,001) Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,185 (4,606) --------- --------- Net cash flows from operating activities . . . . . . . . . . . . . . . . . . 136,985 170,957 --------- --------- INVESTING ACTIVITIES Purchases of businesses, net of cash acquired. . . . . . . . . . . . . . . . . . (340,888) Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . (171,944) (135,516) Sales and retirements of property, plant and equipment . . . . . . . . . . . . . 18,989 6,859 Investments in unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . (46,926) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,280) (43,499) --------- --------- Net cash flows used for investing activities . . . . . . . . . . . . . . . . (213,161) (513,044) --------- --------- FINANCING ACTIVITIES Change in commercial paper and other short-term borrowings . . . . . . . . . . . 22,500 (32,038) Borrowings under EEX bank revolving credit agreement and bridge loan . . . . . . 115,000 500,000 Repayment of borrowings under EEX bank revolving credit agreement. . . . . . . . (53,000) Repayment of bank debt assumed at acquisition. . . . . . . . . . . . . . . . . . (115,000) Issuance of senior long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 150,000 Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (944) Borrowings under revolving credit agreement. . . . . . . . . . . . . . . . . . . 25,000 Retirement of senior long-term debt. . . . . . . . . . . . . . . . . . . . . . . (7,369) (155,640) Change in advances under lease arrangements. . . . . . . . . . . . . . . . . . . (6,993) 8,091 Change in assignments of future gas purchase credits . . . . . . . . . . . . . . (5,644) Issuance of ENSERCH common stock . . . . . . . . . . . . . . . . . . . . . . . . 9,563 2,309 Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,420) (13,016) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 --------- --------- Net cash flows from financing activities . . . . . . . . . . . . . . . . . . 92,354 338,118 --------- --------- Net Cash Flows from (used for) Discontinued Operations . . . . . . . . . . . . . . (8,427) 7,965 . --------- --------- Net Increase in Cash and Equivalents . . . . . . . . . . . . . . . . . . . . . . . 7,751 3,996 Cash and Equivalents at Beginning of Period. . . . . . . . . . . . . . . . . . . . 8,561 9,811 --------- --------- Cash and Equivalents at End of Period. . . . . . . . . . . . . . . . . . . . . . . $ 16,312 $ 13,807 ========= ========= See accompanying Notes.
2
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (June 30, 1996 Unaudited) June 30 December 31 1996 1995 ------- ----------- (In thousands) ASSETS Current Assets Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,312 $ 8,561 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,741 296,178 Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,906 107,633 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,746 121,544 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,705 533,916 ---------- ---------- Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,561 64,974 ---------- ---------- Property, Plant and Equipment (full-cost method for gas and oil properties) . . . . . . . . . . . . . . . . . . . . . 4,560,039 4,414,189 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . 1,778,240 1,687,409 ---------- ---------- Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . 2,781,799 2,726,780 ---------- ---------- Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,242 55,424 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,400,307 $3,381,094 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Commercial paper and other short-term borrowings . . . . . . . . . . . . . . $ 209,500 $ 187,000 Current portion of senior long-term debt . . . . . . . . . . . . . . . . . . 16,875 14,760 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,061 329,844 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,779 22,436 Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 123,273 123,212 Liabilities for discontinued operations. . . . . . . . . . . . . . . . . . . 34,761 42,120 ---------- ---------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 633,249 719,372 ---------- ---------- Senior Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948,139 870,476 ---------- ---------- Convertible Subordinated Debentures. . . . . . . . . . . . . . . . . . . . . . 90,750 90,750 ---------- ---------- Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,214 277,076 ---------- ---------- Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,506 222,804 ---------- ---------- Mandatorily Redeemable Preferred Securities of Subsidiary of EEX . . . . . . . 150,000 150,000 ---------- ---------- Minority Interest in Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 157,682 156,434 ---------- ---------- Shareholders' Equity Adjustable rate preferred stock. . . . . . . . . . . . . . . . . . . . . . . 175,000 175,000 ---------- ---------- Common shareholders' equity Common stock (100,000 shares authorized; 69,202 and 68,516 shares outstanding). . . . . . . . . . . . . . . . . . 307,949 304,897 Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,368 338,857 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,540 76,941 Foreign currency translation adjustment. . . . . . . . . . . . . . . . . . (90) Unamortized restricted stock compensation. . . . . . . . . . . . . . . . . (1,513) ---------- ---------- Common shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 742,767 719,182 ---------- ---------- Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 917,767 894,182 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,400,307 $3,381,094 ========== ========== See accompanying Notes.
3 ENSERCH CORPORATION AND SUBSIDIARY COMPANIES 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 periods, including common equivalent shares when dilutive. Fully diluted earnings per share are not presented since the assumed exercise of stock options and conversion of debentures would not be dilutive. 2. On April 15, 1996, ENSERCH Corporation announced that it has entered into a definitive agreement with Texas Utilities Company providing for a strategic business combination. The merger is to be preceded by the distribution of ENSERCH's approximate 83% interest in Enserch Exploration, Inc. to the ENSERCH shareholders. 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. Certain prior-period amounts have been reclassified to conform to the 1996 presentation. 4 INDEPENDENT ACCOUNTANTS' REPORT ENSERCH Corporation: We have reviewed the accompanying condensed consolidated balance sheet of ENSERCH Corporation and subsidiary companies as of June 30, 1996, and the related condensed statements of consolidated income for the three months and six months ended June 30, 1996 and 1995, and the condensed statements of consolidated cash flows for the six months ended June 30, 1996 and 1995. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of ENSERCH Corporation and subsidiary companies as of December 31, 1995, and the related statements of consolidated income, cash flows and common shareholders' equity for the year then ended (not presented herein); and in our report dated February 9, 1996, 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, 1995, 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 July 29, 1996 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CONSOLIDATED RESULTS - ENSERCH Corporation had a loss applicable to common stock for the second quarter of 1996 of $9.5 million ($.14 per share), compared with a loss of $17.6 million ($.26 per share) for the second quarter of 1995. Second-quarter revenues were $415 million versus $396 million for the same period last year, and operating income was $15 million, a significant improvement from the $3.9 million operating loss in the second quarter of 1995. Higher average prices and increased sales volumes for both natural gas and oil boosted the operating results of the natural gas and oil exploration and production segment, and higher margins from gas marketing and gas processing activities improved the results of the natural gas pipeline & GPM segment. Consolidated results for the second quarter of 1996 were negatively impacted by $3.1 million of expense (pre-tax) incurred as a result of the merger agreement with Texas Utilities Company. Second-quarter interest and other financing costs of $24 million were $4.7 million higher than for the second quarter last year, primarily due to outstanding debt incurred by Enserch Exploration, Inc. (EEX) to finance a major acquisition in June 1995. For the first six months of 1996, earnings applicable to common stock were $17.5 million ($.25 per share), compared with $10.2 million ($.15 per share) for the like period of 1995. Revenues for the first half of 1996 of $1.1 billion were up 8%, and operating income was $85 million versus $64 million for the year-ago period. Year-to-date operating results for both the natural gas and oil exploration and production and the natural gas distribution segments showed improvement from the year-earlier period; however, lower margins from gas marketing activities in the first quarter this year caused the six-month results for the natural gas pipeline & GPM segment to be lower than the year-ago period. Interest and other financing costs for the first six months of 1996 of $46 million were $9.8 million higher than in the year-ago period, principally due to the debt incurred by EEX to finance the 1995 acquisition. NATURAL GAS AND OIL EXPLORATION AND PRODUCTION - Operating income from exploration and production operations, which are conducted through EEX, was $13.2 million for the second quarter of 1996, improved from the $4.3 million loss in the 1995 second quarter. Second-quarter revenues rose to $85 million from $48 million for the second quarter of 1995, reflecting a $23 million improvement in natural-gas revenues and a $14 million increase in oil and other revenues. The volume of natural gas sold increased to 26 billion cubic feet (Bcf) for the second quarter of 1996, compared with 20 Bcf sold during the 1995 second quarter, with the increase primarily attributable to properties acquired in the June 1995 acquisition. The average price received for natural gas for the second quarter was $2.23 per thousand cubic feet (Mcf), up 27% from $1.75 per Mcf for the second quarter last year. Oil sales of 1.3 million barrels (MMBbls) were 89% higher than for the second quarter last year due to production from the acquired properties and start-up of production from the Cooper project in the Garden Banks area in the Gulf of Mexico. The average sales price for oil of $19.01 per barrel was up 11% from $17.12 per barrel for the second quarter last year. 6 Operating expenses for the second quarter of 1996 totaled $72 million versus $52 million for the second quarter of 1995. About $16 million of the increase is attributable to production costs, depreciation and amortization and production and ad valorem taxes associated with operating the properties acquired in June 1995, and some $8 million of the increase is related to direct costs of the Cooper project. Lower amortization expense as a result of lower production from other properties partially offset these increases. For the first six months of 1996, exploration and production operations had operating income of $18 million, compared with an operating loss of $4 million for the same period a year ago. Revenues for the first half of 1996 of $160 million were $71 million (79%) greater than in the same period of 1995. Natural-gas revenues for the six months were $45 million higher than in the 1995 period, with the average sales price of $2.20 per Mcf up 13% and sales volumes of 51 Bcf 48% higher than the year-earlier period, primarily due to production from the properties acquired in June 1995. Oil revenues for the first half of 1996 of $44 million were more than double the year-ago period, with the average sales price of $18.51 per barrel up 9% and sales volumes of 2.4 MMBbls 95% greater than the same period of 1995 due to production from the acquired properties and the Cooper project. Operating expenses for the year- to-date period of $142 million were $49 million higher than in the 1995 period, including $38 million attributable to production costs, depreciation and amortization and production and ad valorem taxes associated with the acquired properties and $15 million of direct costs associated with the Cooper project. There was a $4 million net decrease in all other expense categories, primarily due to lower amortization expense as a result of lower production from other properties. Losses from the Cooper project during ramp-up of production detracted $1.0 million from operating income for the 1996 second quarter and $5.5 million for the year-to-date period. The equipment lease costs and some production costs are essentially fixed, declining on a per unit basis as production increases. In late July, it was announced that mechanical difficulties had prevented completion of the A-1 development well at the Cooper project. Numerous attempts to remedy the problems were unsuccessful. EEX and its partner in the project will evaluate alternate drilling strategies to develop the extensive proven hydrocarbon column at this location. An exploratory test well is underway on Garden Banks Block 387. EEX expects to have a 100% interest in this well. It was also announced in late July that EEX and its partners have identified alternate development scenarios that have the potential to significantly reduce the total cost of the Allegheny project in the Green Canyon 254 area. The additional engineering study and design will delay the project from its previously planned early 1999 start up. However, the design changes should substantially enhance the project's economics. A revised schedule for development will be announced later. EEX manages a portion of the risk associated with fluctuations in the price of natural gas and oil through the use of hedging techniques such as gas and oil swaps, collars and futures agreements. As a result of such hedging to fix the net prices received, losses or gains occur and either offset or add to actual prices received to achieve the net fixed prices. In total, gas and oil 7 price hedging activities reduced revenues for the second quarter of 1996 by $2.0 million but increased revenues by $.7 million in the second quarter of 1995. For the first six months of 1996, gas and oil price hedging activities reduced total revenues by $7.7 million but increased revenues by $3.5 million in the first half of 1995. At June 30, 1996, EEX had outstanding swaps, collars and futures agreements that were entered into as hedges extending through July 31, 1996 to exchange payments on 5.1 Bcf of natural gas and 1.8 MMBbls of oil. At June 30, 1996, there were $3.9 million of net unrealized and unrecognized hedging costs based on the difference between the strike price and the NYMEX futures price for the applicable trading month. In addition, there were $.7 million of costs on hedging activities which were deferred and will be applied as a reduction in revenues in the month of physical sale of production. Gas and oil prices are subject to seasonal and other fluctuations. A decline in prices from June 1996 levels or other factors, without mitigating circumstances, could cause a future write-down of capitalized costs and a non- cash charge against income under the full-cost accounting method cost center ceiling limitation. EEX has reached agreements to sell substantially all of its Rocky Mountain area properties. The sales, which are effective April 1, are expected to close by the end of September 1996 and to provide total proceeds of approximately $120 million, less closing costs and income from the April effective date to the closing date of approximately $7 million. EEX intends to use the proceeds from the sales to reduce its debt. These properties were mostly acquired as part of the major acquisition in 1995 and are being sold because they are not within the core area of EEX's other properties. The properties being sold represent proved reserves of approximately 150 Bcf of natural gas equivalent and average daily production of approximately 45 million cubic feet of natural gas equivalent. In accordance with the full- cost accounting method, EEX will credit the proceeds from the sales to the carrying value of gas and oil properties. NATURAL GAS PIPELINE & GPM - Second-quarter 1996 operating income for the natural gas pipeline & GPM segment was $6 million versus $1.5 million for the second quarter of 1995, with improvements in gas marketing and gas processing operations partially offset by lower results from pipeline operations. For the first six months of 1996, operating income for this business segment was $32 million versus $36 million in the year-ago period. Pipeline and gas processing operations reported improved results, which were more than offset by poor results for gas marketing activities in the first quarter this year. Pipeline operations, which are conducted through Lone Star Pipeline Company, had a second-quarter operating loss of $1.8 million, compared with a $.2 million loss for the second quarter last year. Pipeline revenues for the second quarter this year were $27 million versus $24 million for the second quarter of 1995, with pipeline throughput of 158 Bcf up 19% from the year- earlier period. Other revenues declined $2.8 million, and expenses increased $1.9 million. For the first half of 1996, operating income from pipeline operations was $32 million, compared with $30 million for the like period a year ago. An increase of $12 million in pipeline revenues was partially offset by a $2.3 million decrease in other revenues and by higher expenses, 8 including costs associated with gas lost in transmission. Pipeline throughput for the first six months of 1996 of 341 Bcf was 19% greater than in the year- ago period. Gas marketing operations, which are conducted through Enserch Energy Services, Inc. (EES), had second-quarter operating income of $3.4 million versus $.1 million for the second quarter of 1995. The margin on gas sales for the second quarter of 1996 was $9.1 million, a $4.9 million improvement from the 1995 period. Second-quarter revenues from natural gas marketing activities declined $23 million from the 1995 second quarter due to a 37% reduction in sales volumes, mostly associated with a decision to de-emphasize some wholesale marketing, partially offset by higher gas prices. Operating expenses of $6.0 million were $1.8 million higher than in the second quarter last year, principally reflecting costs associated with operations acquired in June 1995. For the first six months of 1996, gas marketing operations had an operating loss of $8.2 million, compared with operating income of $3.8 million for the first half of 1995, with the lower results precipitated by unusual weather patterns and resulting markets in the first quarter this year. The year-to-date margin on gas sales was $3.5 million versus $11.8 million for the year-earlier period, and year-to-date operating expenses were $4.2 million higher primarily due to operations acquired in June 1995. As part of its natural gas marketing activities, EES enters into forward contracts principally involving physical delivery of natural gas and derivative financial instruments, including swaps, options, futures and other contractual arrangements to offset price risks of gas supply. These activities involve price commitments into the future and, therefore, give rise to market risk. At June 30, 1996, natural gas marketing operations had net commitments to sell approximately 3.1 Bcf of natural gas through the year 1998 with offsetting net financial positions to purchase approximately .5 Bcf, including commitments to purchase approximately 3.0 Bcf from EEX and financial positions to sell the same quantity. There was a net unrealized and unrecognized gain of $3.3 million at June 30, 1996 on these contracts. Second-quarter operating income for natural gas processing operations of Enserch Processing Company increased to $4.4 million from $1.6 million in the second quarter last year, primarily due to a $2.0 million (29%) improvement in plant margin. The average natural gas liquids (NGL) sales price for the second quarter of $14.00 per barrel was up 18% from the same period last year, while second-quarter sales volumes of 1.5 MMBbls were down slightly from the year-ago period. For the first six months of 1996, natural gas processing operations had operating income of $8.3 million, compared with $2.5 million for the same period last year, reflecting a $3.8 million (29%) improvement in plant margin and a higher margin on gas purchased for resale. The average NGL sales price for the six months of $13.65 per barrel was up 14% from the 1995 period, and sales volumes of 3.1 MMBbls were slightly higher than the year- earlier period. NATURAL GAS DISTRIBUTION - Lone Star Gas Company had operating income for the second quarter of $.4 million, compared with $1.5 million for the second quarter last year. The overall margin on gas sales of $46 million was only slightly less than in the 1995 second quarter, other revenues increased and operating expenses were up from the 1995 period. Total gas sales volumes for 9 the second quarter of 22 Bcf were slightly less than the 1995 second quarter. For the first half of 1996, operating income was $43 million versus $36 million for the year-earlier period. Overall margin on gas sales of $142 million was $9 million (7%) above the same period of 1995, reflecting residential and commercial rate improvements and near normal heating weather in the first quarter this year versus the first quarter last year, which experienced unusually warm winter weather. A reduction in the cost of gas lost in transmission also contributed to the margin improvement. Total gas sales volumes for the year-to-date period of 90 Bcf increased 7% from the same period of 1995, with sales volumes to residential and commercial customers up 12% from the year-ago period. POWER AND OTHER - ENSERCH's power and other activities had an operating loss for the second quarter of $1.7 million versus an operating loss of $.8 million for the second quarter last year. For the first half of 1996, this business segment had an operating loss of $2.0 million, compared with a loss of $.5 million for the year-ago period. LIQUIDITY AND FINANCIAL RESOURCES - Operating activities for the first six months of 1996 provided net cash flows of $137 million, compared with $171 million for the first half of 1995. Income before depreciation and amortization and deferred income taxes for the six months was $37 million higher than for the same period of 1995; however, recoveries of producer settlements, which are now substantially complete, were $15 million less than the year-earlier period, and changes in other assets and liabilities resulted in a year-to-year reduction in cash flows of $21 million. Additionally, changes in current operating assets and liabilities for the first six months this year provided $7 million versus $43 million provided in the 1995 period, which benefited from the recovery of expenditures on the Cooper project as a result of transfer to the leasing program and the collection of previously deferred billings on a cogeneration facility developed by Enserch Development Corporation. Investing activities required net cash flows of $213 million, compared with $513 million in the first six months of 1995, which included $333 million for the major acquisition by EEX and $8 million for the purchase of a gas marketing business. Current year additions to property, plant and equipment were $36 million higher than in the first six months last year, with increases of $16 million for EEX, $12 million for natural gas pipeline & GPM and $7 million for natural gas distribution. As a percentage of total capitalization, common shareholders' equity plus minority interest in subsidiaries was 39.5% at June 30, 1996, compared with 40.2% at year-end 1995. EEX intends to use the proceeds from the sales of its Rocky Mountain area properties to reduce its debt. At June 30, 1996, the current ratio was .71 versus .74 at December 31, 1995. ENSERCH has bank lines in the form of a three-year revolving agreement totaling $600 million, all unused at June 30, 1996. In addition, EEX has a $350 million four-year revolving credit agreement, $128 million of which was unused at June 30, 1996. In July, ENSERCH borrowed $100 million under the credit agreement and reduced commercial paper outstanding by the same amount. 10 Planned property, plant and equipment additions for 1996 total $296 million, including $187 million for EEX, $43 million for natural gas pipeline & GPM, $64 million for natural gas distribution and $2 million for other requirements. The planned expenditures are expected to be funded from internal cash flow and external financings as required. RECENT EVENT - On April 15, 1996, ENSERCH announced that it had entered into a definitive agreement with Texas Utilities Company (TUC) to merge. As a result of this strategic action, the ENSERCH business units Lone Star Gas Company and Lone Star Pipeline Company, the local distribution and pipeline companies of ENSERCH, and other businesses will become a part of TUC. TUC will acquire these operations for $1.7 billion, composed of the issuance of approximately $550 million of TUC common stock and the assumption of approximately $1.15 billion of net debt and preferred stock. Prior to the merger, ENSERCH's approximate 83% interest in its subsidiary, EEX, represented by approximately 105 million shares of EEX common stock, will be distributed to ENSERCH shareholders. Within a range of a 10% variation above or below the April 12 closing price of TUC common stock ($39.625 per share), each ENSERCH shareholder will receive sufficient shares of TUC common stock to provide $8.00 of value. Above or below the 10% threshold, the value received will move up or down with the price of TUC common stock. In addition, ENSERCH shareholders will receive approximately 1.5 shares of EEX common stock for each share of ENSERCH common stock. The final value of the TUC and EEX shares cannot be determined until closing. The agreement is subject to approval of ENSERCH and TUC shareholders. The agreement is also subject to a favorable ruling from the Internal Revenue Service as to the tax-free nature of the distribution of EEX shares, and a request for that ruling has been submitted. The requisite filings with the Federal Trade Commission and the Department of Justice under the Hart-Scott- Rodino Antitrust Improvements Act of 1976 have been made. The required filing with the Securities and Exchange Commission (SEC) under the Public Utilities Holding Companies Act of 1935 will be made in the near future. In connection with this 1935 Act filing, the Railroad Commission of Texas has advised the SEC that it has no objection to the proposed transaction and will rely on its existing authority and resources to protect the public interest and ratepayers subject to its jurisdiction, that there is no hindrance under Texas natural gas utility regulatory law to the proposed transaction and that the Commission intends to exercise its authority in accordance with applicable law. Closing of the transaction is expected to occur around year-end 1996. 11
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES Natural Gas and Oil Exploration and Production Operating Data (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1996 1995 1996 1995 ---- ------ ---- ------ Operating Income (Loss)(in millions) . . . . . . . . . . . . . . $ 13.2 $ (4.3) $ 17.8 $ (4.0) ====== ====== ====== ====== Revenues (in millions) . . . . . . . . . . . . . . . . . . . . . $ 84.9 $ 48.0 $160.3 $ 89.6 ====== ====== ====== ====== Sales Volumes Natural gas (MMcf). . . . . . . . . . . . . . . . . . . . . . 25,939 20,092 50,910 34,453 Oil and condensate (MBbls). . . . . . . . . . . . . . . . . . 1,292 685 2,374 1,218 Average Sales Price Natural gas (per Mcf) . . . . . . . . . . . . . . . . . . . . $ 2.23 $ 1.75 $ 2.20 $ 1.94 Oil and condensate (per Bbl). . . . . . . . . . . . . . . . . 19.01 17.12 18.51 16.98 Net Wells Drilled . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 24 54 39 Productive. . . . . . . . . . . . . . . . . . . . . . . . . . 25 16 42 26 Data in Equivalent Energy Content (per Mcfe) (a) Production revenue. . . . . . . . . . . . . . . . . . . . . . $ 2.42 $ 1.93 $ 2.37 $ 2.09 Production and operating costs (b). . . . . . . . . . . . . . .57 .45 .60 .46 Depreciation and amortization . . . . . . . . . . . . . . . . 1.01 1.07 1.01 1.07 (a) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the basis of one barrel equals 6.0 Mcfe. (b) Excludes related production, severance and ad valorem taxes.
OPERATING INCOME RECONCILIATION FROM EEX TO ENSERCH SEGMENT Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1996 1995 1996 1995 ---- ------ ---- ------ Operating income (loss) of EEX . . . . . . . . . . . . . . . . . $14.3 $(5.0) $20.0 $(4.4) Amortization of costs capitalized by ENSERCH not incurred by EEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 (.1) .8 Effects of intercompany lease transactions . . . . . . . . . . (1.0) (2.0) Activities not conducted through EEX . . . . . . . . . . . . . . (.1) (.3) (.1) (.4) ----- ----- ----- ----- Operating income (loss) of ENSERCH's natural gas and oil exploration and production segment . . . . . . . . . . . . . . $13.2 $(4.3) $17.8 $(4.0) ===== ===== ===== =====
12
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES Natural Gas Pipeline & Gathering, Processing and Marketing Operating Data (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1996 1995 1996 1995 ---- ------ ---- ------ Operating Income (Loss)(in millions) Pipeline . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.8) $ (.2) $ 31.7 $ 29.5 Natural Gas Marketing. . . . . . . . . . . . . . . . . . . . . 3.4 .1 (8.2) 3.8 Natural Gas Processing . . . . . . . . . . . . . . . . . . . . 4.4 1.6 8.3 2.5 ------ ------ ------ ------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.0 $ 1.5 $ 31.8 $ 35.8 ====== ====== ====== ====== Revenues (in millions) Pipeline (a) . . . . . . . . . . . . . . . . . . . . . . . . . $ 27.4 $ 24.3 $ 87.2 $ 75.4 Natural Gas Marketing. . . . . . . . . . . . . . . . . . . . . 159.7 182.4 412.0 376.6 Natural Gas Processing - Natural gas liquids (b) . . . . . . . 21.5 18.8 42.5 35.4 Other (c). . . . . . . . . . . . . . . . . . . . . . . . . . . 15.7 7.4 27.5 15.1 ------ ------ ------ ------ Total revenues . . . . . . . . . . . . . . . . . . . . . . $224.3 $232.9 $569.2 $502.5 ====== ====== ====== ====== Volumes Pipeline throughput (Bcf). . . . . . . . . . . . . . . . . . . 158.3 133.4 341.0 286.2 Natural Gas Marketing (Bcf). . . . . . . . . . . . . . . . . . 67.2 106.0 164.8 214.9 Natural Gas Processing (MMBbls). . . . . . . . . . . . . . . . 1.5 1.6 3.1 3.0 Average Sales Prices Natural Gas Marketing (per Mcf). . . . . . . . . . . . . . . . $ 2.38 $ 1.72 $ 2.50 $ 1.76 Natural Gas Liquids (per Bbl). . . . . . . . . . . . . . . . . 14.00 11.85 13.65 11.99 (a) Includes transportation services for affiliates and third-parties and other miscellaneous revenues. (b) Represents revenues from sales of plant production. (c) Includes revenues from natural-gas products purchased for resale, gathering fees and other miscellaneous revenues.
13
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES Natural Gas Distribution Operating Data (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ----------------- --------------- 1996 1995 1996 1995 ----- ------ ----- ------ Operating Income (in millions) . . . . . . . . . . . . . . . . . $ .4 $ 1.5 $ 42.6 $ 36.1 ====== ====== ====== ====== Natural Gas Sales Revenues by Customer (in millions) Residential & commercial . . . . . . . . . . . . . . . . . . . $124.5 $123.8 $459.3 $452.0 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 12.6 17.3 32.5 Electric generation. . . . . . . . . . . . . . . . . . . . . . 2.3 3.5 12.7 13.3 ------ ------ ------ ------ Total gas sales revenues . . . . . . . . . . . . . . . . . . 132.9 139.9 489.3 497.8 Gas transportation revenues(a) . . . . . . . . . . . . . . . . . 3.1 2.6 6.7 5.8 Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 2.2 7.3 4.4 ------ ------ ------ ------ Total revenues . . . . . . . . . . . . . . . . . . . . . $140.9 $144.7 $503.3 $508.0 ====== ====== ====== ====== Natural Gas Sales Volumes by Customer (Bcf) Residential & commercial . . . . . . . . . . . . . . . . . . . 19.9 18.8 82.1 73.2 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 3.0 4.5 7.9 Electric generation. . . . . . . . . . . . . . . . . . . . . . .6 .8 3.5 3.0 ------ ------ ------ ------ Total gas sales volumes. . . . . . . . . . . . . . . . . . . 22.1 22.6 90.1 84.1 ====== ====== ====== ====== Natural Gas Sales Revenues (per Mcf) Residential & commercial . . . . . . . . . . . . . . . . . . . $ 6.25 $ 6.58 $ 5.59 $ 6.18 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . 3.93 4.22 3.80 4.12 Electric generation. . . . . . . . . . . . . . . . . . . . . . 3.85 4.52 3.68 4.36 Natural Gas Purchase Cost (per Mcf). . . . . . . . . . . . . . . $ 3.78 $ 4.17 $ 3.75 $ 4.19 Heating Degree Days. . . . . . . . . . . . . . . . . . . . . . . 104 99 1,562 1,257 (a) Represents the portion of transportation revenues attributable to the distribution system. Related volumes are included within Natural Gas Pipeline & Gathering, Processing and Marketing statistics.
14 PART II. OTHER INFORMATION Item 1. Legal Proceedings As previously described in the Corporation's Current Report on Form 8-K dated April 16, 1996, the Corporation and certain directors of the Corporation, were named as defendants in a lawsuit, Frederick Rand vs. ENSERCH Corporation, et al, filed by an alleged shareholder in the 193rd District Court of Dallas County, Texas. In this action, the plaintiff seeks, among other things, to enjoin the Corporation's newly adopted shareholders rights plan and the merger agreement between the Corporation and Texas Utilities Company. The plaintiff also seeks to have the lawsuit certified as a class action. Plaintiff has taken no action since the original filing in the case. Defendants have filed motions to challenge plaintiff's capacity to bring the lawsuit, to determine if his allegations are sufficient to support a lawsuit and to suspend potential discovery activity. Hearings on the defendants' motions and a preliminary setting for the trial have been initially scheduled for early September, but may be rescheduled to a later date or dates. Management believes that the named defendants have meritorious defenses to the claims made in this action. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT (15) - Letter of Deloitte & Touche LLP dated August 12, 1996, regarding unaudited interim financial statements. (b) Reports on Form 8-K Current Report on Form 8-K dated April 13, 1996. (Merger Agreement between ENSERCH Corporation and Texas Utilities Company; spin-off of EEX.) Current Report on Form 8-K dated April 16, 1996. (Lawsuit (Frederick Rand vs. ENSERCH Corporation) in connection with shareholder rights plan and merger with Texas Utilities Company.) 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENSERCH Corporation (Registrant) Date: August 12, 1996 By /s/ M. E. Rescoe --------------------------- M. E. Rescoe, Senior Vice President, Finance and Chief Financial Officer Date: August 12, 1996 By /s/ J. W. Pinkerton --------------------------- J. W. Pinkerton, Vice President and Controller, Chief Accounting Officer 16 EX-15 2 EXHIBIT (15) ENSERCH Corporation: We have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited interim condensed consolidated financial information of ENSERCH Corporation and subsidiary companies for the periods ended June 30, 1996 and 1995, as indicated in our report dated July 29, 1996; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated by reference in Registration Statements No. 2-59259, No. 33- 40589, No. 33-47911 and No. 2-77572 on Form S-8, and in Registration Statements No. 33-15623, No. 33-52525 and No. 33-61635 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Dallas, Texas August 12, 1996 EX-27 3
5 0000033015 ENSERCH CORPORATION 1,000 6-MOS DEC-31-1995 JUN-30-1996 16,312 0 212,741 0 93,906 450,705 4,560,039 (1,778,240) 3,400,307 633,249 948,139 150,000 175,000 742,767 0 3,400,307 0 1,093,798 0 1,008,331 2,650 0 46,261 36,556 12,590 23,076 0 0 0 23,076 .25 .25
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