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.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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)
<FN>
See accompanying Notes.
</FN>
</TABLE>
1
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<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CONSOLIDATED
CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
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
========= =========
<FN>
See accompanying Notes.
</FN>
</TABLE>
2
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<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(June 30, 1996 Unaudited)
June 30 December 31
1996 1995
------- -----------
(In thousands)
<S> <C> <C>
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
========== ==========
<FN>
See accompanying Notes.
</FN>
</TABLE>
3
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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
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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
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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
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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
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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
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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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
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
---- ------ ---- ------
<S> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME RECONCILIATION FROM EEX TO ENSERCH SEGMENT
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1996 1995 1996 1995
---- ------ ---- ------
<S> <C> <C> <C> <C>
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)
===== ===== ===== =====
</TABLE>
12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
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
---- ------ ---- ------
<S> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
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
----- ------ ----- ------
<S> <C> <C> <C> <C>
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
<FN>
(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.
</FN>
</TABLE>
14
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000033015
<NAME> ENSERCH CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 16,312
<SECURITIES> 0
<RECEIVABLES> 212,741
<ALLOWANCES> 0
<INVENTORY> 93,906
<CURRENT-ASSETS> 450,705
<PP&E> 4,560,039
<DEPRECIATION> (1,778,240)
<TOTAL-ASSETS> 3,400,307
<CURRENT-LIABILITIES> 633,249
<BONDS> 948,139
150,000
175,000
<COMMON> 742,767
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,400,307
<SALES> 0
<TOTAL-REVENUES> 1,093,798
<CGS> 0
<TOTAL-COSTS> 1,008,331
<OTHER-EXPENSES> 2,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,261
<INCOME-PRETAX> 36,556
<INCOME-TAX> 12,590
<INCOME-CONTINUING> 23,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,076
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
