<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
SEPTEMBER 20, 1996
ENSERCH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 1-3183 75-0399066
(STATE OR OTHER (COMMISSION (I.R.S. EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
ENSERCH CENTER, 300 S. ST. PAUL, DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-651-8700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SCHEDULES
The financial information listed below is filed herewith in connection with
a proposed merger of ENSERCH Corporation ("ENSERCH") with TUC Holding Company
("TUC"). In a related transaction, the operations of Lone Star Energy Plant
Operations, Inc. ("LSEPO"), an indirect wholly owned subsidiary of ENSERCH,
will merge with Enserch Exploration, Inc. ("EEX"), a company approximately 83%
owned by ENSERCH. LSEPO will be the surviving corporation of that merger (the
"Merger"), in which its name will be changed to Enserch Exploration, Inc.
("New EEX"). In the Merger each outstanding share of EEX Common Stock will be
converted into one share of new EEX Common Stock and the outstanding shares of
LSEPO will be converted into a number of shares of new EEX Common Stock
determined by dividing $7.0 million by the average of the closing sales prices
of EEX Common Stock on the 15 trading days preceding the fifth trading day
prior to the effective time of the Merger. References to the "EEX 1995 Form
10-K" refer to the EEX Annual Report on Form 10-K for the year ended December
31, 1995, and references to the "EEX 1996 Form 10-Q" refer to the EEX
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996.
(a) Selected Historical Financial Data for EEX and LSEPO for each of the
five years in the period ended December 31, 1995 and the six months
ended June 30, 1996 and 1995
(b) Unaudited Pro Forma Financial Information of New EEX:
Selected Financial Data for each of the three years in the period ended
December 31, 1995 and the six months ended June 30, 1996
Capitalization as of June 30, 1996
Condensed Balance Sheet as of June 30, 1996 and Statements of
Operations for the six months ended June 30, 1996 and each of the three
years in the period ended December 31, 1995
(c) Financial Statements of LSEPO:
Selected Financial Data for each of the five years in the period ended
December 31, 1995 and the six months ended June 30, 1996 and 1995
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Balance Sheets as of December 31, 1995 and 1994 and related Statements
of Income and Retained Earnings and of Cash Flows for each of the three
years in the period ended December 31, 1995, together with Independent
Auditors' Report
Unaudited Balance Sheet as of June 30, 1996 and related Statements of
Income and Retained Earnings and of Cash Flows for the six months ended
June 30, 1996 and 1995
2
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
OF EEX
The following selected historical financial data for EEX for each of the
five years in the period ended December 31, 1995 is derived from the
consolidated financial statements included in the EEX 1995 Form 10-K, which
have been audited by Deloitte & Touche LLP, independent public accountants,
and selected financial data also included in the EEX 1995 Form 10-K and
incorporated by reference herein. The historical financial data for the six
months ended June 30, 1996 and 1995 is unaudited and derived from the
unaudited consolidated financial information included in the EEX 1996 Form 10-
Q; however, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation have been made.
This information is not necessarily indicative of EEX's future financial
results and should be read in conjunction with the historical financial
statements of EEX and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of EEX included in the EEX 1995 Form 10-K
and EEX 1996 Form 10-Q and incorporated by reference herein and "Unaudited Pro
Forma Financial Information of New EEX" included elsewhere herein. Results for
interim periods do not necessarily indicate results for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ------------------
UNAUDITED
------------------
1991 1992 1993 1994 1995 (A) 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Natural gas revenues... $ 123.5 $ 118.6 $ 146.4 $ 144.5 $ 157.3 $ 67.0 $ 111.9
Oil and condensate
revenues.............. 54.0 45.1 36.9 30.9 56.5 20.7 43.9
Natural gas liquids
revenues.............. 2.0 6.5 4.1 2.4 4.9 1.7 3.6
Other revenues......... 1.5 1.3 2.4 1.3 2.1 .2 .9
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 181.0 171.5 189.8 179.1 220.8 89.6 160.3
Production and
operating expenses.... 35.1 29.6 31.4 31.7 48.7 20.1 38.6
Exploration............ 12.2 11.2 8.7 9.1 11.8 5.5 6.2
Depreciation and
amortization.......... 73.7 76.7 78.4 80.8 115.7 46.5 68.0
(Sale) write-down of
inactive pipeline..... -- 16.5 -- (7.5) -- -- --
Write-down of gas and
oil properties........ 53.1 -- 10.2 -- .9 -- --
General, administrative
and other............. 23.6 23.1 30.0 19.8 30.7 14.4 16.5
Taxes, other than
income taxes.......... 17.3 15.6 15.9 13.2 19.2 7.5 11.0
-------- -------- -------- -------- -------- -------- --------
Total expenses......... 215.0 172.7 174.6 147.1 227.0 94.0 140.3
Operating income
(loss)................ (34.0) (1.2) 15.2 32.0 (6.2) (4.4) 20.0
Other income (expense)-
net................... 6.0 -- -- (.3) .1 -- --
Interest income........ 3.2 3.7 2.0 .7 1.0 1.0 --
Interest and other
financing costs....... (20.0) (20.7) (30.6) (20.9) (14.6) (3.6) (11.8)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... (44.8) (18.2) (13.4) 11.5 (19.7) (7.0) 8.2
Income taxes
(benefit)............. -- .4 (3.4) (.3) (7.2) (2.5) 2.8
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (44.8) $ (18.6) $ (10.0) $ 11.8 $ (12.5) $ (4.5) $ 5.4
======== ======== ======== ======== ======== ======== ========
Pro Forma Information-
Change in Tax Status
(b)
Income (loss) before
income taxes.......... $ (44.8) $ (18.2) $ (13.4) $ 11.5
Income taxes
(benefit)............. (17.0) (6.4) (4.7) 4.0
-------- -------- -------- --------
Net income (loss)...... $ (27.8) $ (11.8) $ (8.7) $ 7.5
======== ======== ======== ========
Net income (loss) per
share (pro forma for
periods prior to
1995)................. $ (.26) $ (.11) $ (.08) $ .07 $ (.11) $ (.04) $ .04
Weighted average shares
outstanding........... 105.8 105.8 105.8 105.8 111.1 105.7 125.8
CASH FLOW DATA
Net cash provided by
operating activities.. $ 68.3 $ 85.2 $ 79.5 $ 61.7 $ 84.0 $ 37.8 $ 48.2
Net cash used in
investing activities.. (97.7) (58.7) (129.0) (108.8) (388.2) (350.6) (93.1)
Net cash provided by
(used in) financing
activities............ 29.2 (25.7) 48.9 47.0 305.5 316.7 45.1
BALANCE SHEET DATA (at
period end)
Property, plant and
equipment-net......... $1,056.2 $1,018.4 $1,046.4 $1,254.0 $1,670.6 $1,746.2 $1,696.1
Total assets........... 1,126.7 1,068.8 1,111.5 1,381.2 1,776.8 1,841.3 1,822.2
CAPITAL STRUCTURE (at
period end)
Capital lease
obligations (c)....... $ -- $ -- $ -- $ 155.9 $ 98.0 $ 153.9 $ 95.8
Long-term debt (c)..... 234.0 266.0 298.0 -- 160.0 350.0 222.0
Company-obligated
mandatorily redeemable
preferred securities
of subsidiary......... -- -- -- -- 150.0 150.0 150.0
Owners' equity......... 721.4 671.7 630.7 736.0 932.2 731.3 937.9
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 955.4 $ 937.7 $ 928.7 $ 891.9 $1,340.2 $1,385.2 $1,405.7
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------
(a) 1995 includes results of DALEN since acquisition on June 8, 1995.
(b) Prior to 1995, most of EEX's operations were conducted through a
partnership, and the income or loss of the partnership was includable in
the tax returns of the individual partners. Pro forma income and per share
data for periods prior to 1995 include a pro forma provision for income
taxes on partnership operations based on the applicable federal statutory
tax rate.
(c) Including current portion.
3
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
OF LSEPO
The following selected historical financial data for LSEPO for each of the
three years in the period ended December 31, 1995 is derived from the
financial statements of LSEPO, which have been audited by Deloitte & Touche
LLP, independent public accountants, and are included elsewhere herein. The
historical financial data for each of the two years in the period ended
December 31, 1992 and for the six months ended June 30, 1995 and 1996 is
unaudited and derived from the unaudited financial statements included
elsewhere herein; however, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation have been made. This information is not necessarily indicative of
LSEPO's future financial results and should be read in conjunction with the
historical financial statements of LSEPO and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of LSEPO and
"Unaudited Pro Forma Financial Information of New EEX" included elsewhere
herein. Results for interim periods do not necessarily indicate results for
the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ---------------
UNAUDITED UNAUDITED
------------ ----------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Cogeneration operations
revenues (a)................. $ 6.0 $ 8.7 $10.7 $12.7 $16.5 $ 8.1 $ 6.0
Net income (loss)............. $ (.1) $ (.1) $ 1.1 $ .8 $ 1.4 $ .5 $ .2
Net income (loss) per share
(b).......................... $(.10) $(.14) $1.40 $1.05 $1.76 $ .58 $ .23
Weighted average shares
outstanding (b).............. .8 .8 .8 .8 .8 .8 .8
BALANCE SHEET DATA (at period
end)
Total assets.................. $ 1.1 $ 1.1 $ 4.3 $ 4.2 $10.1 $ 2.8 $ 5.3
Shareholders's equity
(deficiency)................. (.1) (.2) .9 1.7 3.1 2.2 3.3
</TABLE>
- --------
(a) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(b) The weighted average shares outstanding and the net income (loss) per
share are pro forma unaudited amounts reflecting shares to be issued in
connection with the Merger with EEX.
4
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
OF NEW EEX
The following selected unaudited pro forma financial data of New EEX is
derived from the historical financial statements of EEX and LSEPO and gives
effect to the Merger. The balance sheet data is presented as if the Merger had
occurred on June 30, 1996, and the income statement data assumes the Merger
occurred at the beginning of each period presented. For purposes of financial
reporting, the Merger will be treated as a combination of entities under
common control. Accordingly, the assets and liabilities of EEX and LSEPO will
be recorded at their historical amounts. This information is not necessarily
indicative of the financial results that would have occurred had the Merger
been consummated on the indicated dates, or of New EEX's future financial
results, and should be read in conjunction with the historical financial
statements of EEX and LSEPO and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of EEX and LSEPO included or
incorporated by reference herein and "Unaudited Pro Forma Financial
Information of New EEX" included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------- JUNE 30,
1993 1994 1995 (A) 1996
--------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Natural gas revenues........... $ 146.4 $ 144.6 $ 157.3 $ 111.9
Oil and condensate revenues.... 36.9 30.9 56.5 43.9
Natural gas liquids revenues... 4.1 2.4 4.9 3.6
Cogeneration operations
revenues (b).................. 10.7 12.7 16.5 6.0
Other.......................... 2.4 1.3 2.2 .9
--------- --------- --------- ----------
Total revenues................. 200.5 191.9 237.4 166.3
Production and operating
expenses...................... 31.4 31.7 48.7 38.6
Exploration.................... 8.7 9.1 11.8 6.2
Depreciation and amortization.. 78.4 80.8 115.7 68.0
Sale of inactive pipeline...... -- (7.5) -- --
Write-down of gas and oil
properties.................... 10.2 -- .9 --
Cogeneration operations
expenses...................... 8.6 11.0 13.9 5.5
General, administrative and
other......................... 30.0 19.8 30.7 16.5
Taxes, other than income
taxes......................... 16.2 13.6 19.6 11.2
--------- --------- --------- ----------
Total expenses................. 183.5 158.5 241.3 146.0
Operating income (loss)........ 17.0 33.4 (3.9) 20.3
Other income (expense)-net..... -- (.3) .2 .1
Interest income................ 2.0 .7 1.0 --
Interest and other financing
costs......................... (30.5) (20.9) (14.7) (12.0)
--------- --------- --------- ----------
Income (loss) before income
taxes......................... (11.5) 12.9 (17.4) 8.4
Income taxes (benefit)......... (2.6) .3 (6.3) 2.9
--------- --------- --------- ----------
Net income (loss).............. $ (8.9) $ 12.6 $ (11.1) $ 5.5
========= ========= ========= ==========
Pro Forma Information-Change in
Tax Status (c)
Income (loss) before income
taxes......................... $ (11.5) $ 12.9
Income taxes (benefit)
(including income
taxes on partnership
operations)................... (3.9) 4.6
--------- ---------
Net income (loss).............. $ (7.6) $ 8.3
========= =========
Net income (loss) per share
(d)........................... $ (.07) $ .08 $ (.10) $ .04
Weighted average shares
outstanding (d)............... 106.6 106.6 111.9 126.6
BALANCE SHEET DATA (at period
end)
Property, plant and equipment-
net........................... $ 1,696.1
Total assets................... 1,827.8
CAPITAL STRUCTURE (at period
end)
Capital lease obligations (e).. $ 95.8
Long-term debt................. 222.0
Company-obligated mandatorily
redeemable preferred
securities of subsidiary...... 150.0
Owners' equity................. 941.5
----------
Total.......................... $ 1,409.3
==========
</TABLE>
- -------
(a) 1995 includes results of DALEN since acquisition on June 8, 1995.
(b) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(c) Prior to 1995, most of EEX's operations were conducted through a
partnership, and the income or loss of the partnership was includable in
the tax returns of the individual partners. Pro forma income and per share
data for periods prior to 1995 include a pro forma provision for income
taxes on partnership operations based on the applicable federal statutory
tax rate.
(d) The weighted average shares outstanding and the net income (loss) per
share are based on historical EEX average shares plus approximately
778,000 shares assumed to be issued in the Merger.
(e) Includes current portion.
5
<PAGE>
PRO FORMA NEW EEX CAPITALIZATION
The capitalization of LSEPO and EEX at June 30, 1996 and the pro forma
capitalization of New EEX giving effect to the Merger are set forth below. See
"Unaudited Pro Forma Financial Information of New EEX" included elsewhere
herein.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
LSEPO EEX NEW EEX
ACTUAL ACTUAL PRO FORMA
------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt
Bank revolving credit agreement............... $ -- $ 222,000 $ 222,000
Capital lease obligations (includes current
portion)..................................... -- 95,794 95,794
------ ---------- ----------
Total long-term debt....................... -- 317,794 317,794
------ ---------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiary............ -- 150,000 150,000
------ ---------- ----------
Common shareholders' equity
Common stock and paid in capital,
200,000 shares authorized, outstanding:
778; 125,933; 126,711........................ 302 945,739 946,041
Retained earnings (deficit)................... 3,269 (7,145) (3,876)
Unamortized restricted stock compensation..... -- (654) (654)
------ ---------- ----------
Common shareholders' equity................ 3,571 937,940 941,511
------ ---------- ----------
Total capitalization....................... $3,571 $1,405,734 $1,409,305
====== ========== ==========
</TABLE>
6
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF NEW EEX
The following unaudited pro forma financial statements give effect to the
Merger. The unaudited condensed pro forma balance sheet as of June 30, 1996 is
presented as if the Merger had occurred on that date. The unaudited pro forma
statements of operations for each of the three years in the period ended
December 31, 1995 and the six months ended June 30, 1996 assume that the
Merger occurred at the beginning of each period presented. For purposes of
financial reporting, the Merger will be treated as a combination of entities
under common control. Accordingly, the assets and liabilities of EEX and LSEPO
will be recorded at their historical amounts.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of EEX and LSEPO and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EEX and LSEPO included or incorporated by reference herein. The unaudited pro
forma statements of operations are not necessarily indicative of the financial
results that would have occurred had the Merger been consummated on the
indicated dates, nor are they necessarily indicative of future financial
results.
On June 8, 1995, EEX acquired all of the capital stock of DALEN Corporation.
The acquisition was accounted for as a purchase. See Note (d) to the Unaudited
Pro Forma Financial Statements for a summary of pro forma results of
operations of New EEX reflecting the DALEN acquisition.
7
<PAGE>
NEW EEX
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO ADJUSTMENTS NEW EEX
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash........................ $ 1,838 $ 35 $-- $ 1,873
Accounts receivable-trade... 67,994 3,967 -- 71,961
Accounts receivable-
affiliates................. 10,834 -- -- 10,834
Temporary advances-ENSERCH
Companies (net)............ 5,573 590 301 (a) 6,464
Other....................... 14,316 166 -- 14,482
---------- ------ ---- ----------
Total..................... 100,555 4,758 301 105,614
---------- ------ ---- ----------
Net Property, Plant and
Equipment.................... 1,696,055 70 -- 1,696,125
---------- ------ ---- ----------
Other Assets.................. 25,609 454 -- 26,063
---------- ------ ---- ----------
Total..................... $1,822,219 $5,282 $301 $1,827,802
========== ====== ==== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable-trade...... $ 87,454 $ 235 $-- $ 87,689
Accounts payable-
affiliates................. 4,080 -- -- 4,080
Current portion of capital
lease obligations.......... 3,859 -- -- 3,859
Other....................... 17,118 1,324 -- 18,442
---------- ------ ---- ----------
Total..................... 112,511 1,559 -- 114,070
---------- ------ ---- ----------
Bank Revolving Credit
Agreement.................... 222,000 -- -- 222,000
---------- ------ ---- ----------
Capital Lease Obligations..... 91,935 -- -- 91,935
---------- ------ ---- ----------
Deferred Income Taxes......... 276,194 -- -- 276,194
---------- ------ ---- ----------
Other Liabilities............. 31,639 453 -- 32,092
---------- ------ ---- ----------
Company-Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary..... 150,000 -- -- 150,000
---------- ------ ---- ----------
Shareholders' Equity
Common stock and paid in
capital.................... 945,739 1 301 (a) 946,041
Retained earnings
(deficit).................. (7,145) 3,269 -- (3,876)
Unamortized restricted stock
compensation............... (654) -- -- (654)
---------- ------ ---- ----------
Shareholders' equity........ 937,940 3,270 301 941,511
---------- ------ ---- ----------
Total..................... $1,822,219 $5,282 $301 $1,827,802
========== ====== ==== ==========
Pro Forma Shares of common
stock outstanding (b)........ 125,933 778 126,711
========== ====== ==========
</TABLE>
See Notes.
8
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas................ $ 111,880 $ -- $ 111,880
Oil and condensate......... 43,933 -- 43,933
Natural gas liquids........ 3,651 -- 3,651
Cogeneration operations.... -- 5,993 5,993
Other...................... 883 -- 883
-------------- ------------ --------------
Total.................... 160, 347 5,993 166,340
-------------- ------------ --------------
Cost and Expenses
Production and operating... 38,618 -- 38,618
Exploration................ 6,168 -- 6,168
Depreciation and
amortization.............. 68,032 7 68,039
Cogeneration operations.... -- 5,465 5,465
General, administrative and
other..................... 16,512 -- 16,512
Taxes, other than income
taxes..................... 10,973 201 11,174
-------------- ------------ --------------
Total.................... 140,303 5,673 145,976
-------------- ------------ --------------
Operating Income............. 20,044 320 20,364
Other Income (Expense)-Net... (52) 168 116
Interest and Other Financing
Costs....................... (11,861) (168) (12,029)
-------------- ------------ --------------
Income Before Income Taxes... 8,131 320 8,451
Income Taxes................. 2,774 138 2,912
-------------- ------------ --------------
Net Income................... $ 5,357 $ 182 $ 5,539
============== ============ ==============
Net Income Per Share......... $ .04 $ .23 $ .04
============== ============ ==============
Pro Forma Weighted Average
Shares Outstanding (b)...... 125,848 778 126,626
============== ============ ==============
</TABLE>
See Notes.
9
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX (D)
-------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas.............. $ 157,308 $ -- $ 157,308
Oil and condensate....... 56,525 -- 56,525
Natural gas liquids...... 4,859 -- 4,859
Cogeneration operations.. -- 16,507 16,507
Other.................... 2,159 -- 2,159
-------------- ------------- --------------
Total.................. 220,851 16,507 237,358
-------------- ------------- --------------
Cost and Expenses
Production and
operating............... 48,695 -- 48,695
Exploration.............. 11,848 -- 11,848
Depreciation and
amortization............ 115,685 14 115,699
Write-down of non-U.S.
gas and oil properties.. 929 -- 929
Cogeneration operations.. -- 13,877 13,877
General, administrative
and other............... 30,658 -- 30,658
Taxes, other than income
taxes................... 19,189 367 19,556
-------------- ------------- --------------
Total.................. 227,004 14,258 241,262
-------------- ------------- --------------
Operating Income (Loss).... (6,153) 2,249 (3,904)
Other Income (Expense)-
Net....................... 64 97 161
Interest Income............ 1,027 -- 1,027
Interest and Other
Financing Costs........... (14,617) (105) (14,722)
-------------- ------------- --------------
Income (Loss) Before Income
Taxes..................... (19,679) 2,241 (17,438)
Income Taxes (Benefit)..... (7,177) 871 (6,306)
-------------- ------------- --------------
Net Income (Loss).......... $ (12,502) $ 1,370 $ (11,132)
============== ============= ==============
Net Income (Loss) Per
Share..................... $ (.11) $ 1.76 $ (.10)
============== ============= ==============
Pro Forma Weighted Average
Shares Outstanding (b).... 111,137 778 111,915
============== ============= ==============
</TABLE>
See Notes.
10
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX (D)
------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas.................... $ 144,550 $ -- $ 144,550
Oil and condensate............. 30,880 -- 30,880
Natural gas liquids............ 2,377 -- 2,377
Cogeneration operations........ -- 12,726 12,726
Other.......................... 1,333 -- 1,333
------------- ------------ -------------
Total........................ 179,140 12,726 191,866
------------- ------------ -------------
Cost and Expenses
Production and operating....... 31,667 -- 31,667
Exploration.................... 9,136 -- 9,136
Depreciation and amortization.. 80,819 12 80,831
Sale of inactive pipeline...... (7,551) -- (7,551)
Cogeneration operations........ -- 10,959 10,959
General, administrative and
other......................... 19,807 -- 19,807
Taxes, other than income
taxes......................... 13,233 352 13,585
------------- ------------ -------------
Total........................ 147,111 11,323 158,434
------------- ------------ -------------
Operating Income................. 32,029 1,403 33,432
Other Income (Expense)-Net....... (314) -- (314)
Interest Income.................. 671 -- 671
Interest and Other Financing
Costs........................... (20,919) -- (20,919)
------------- ------------ -------------
Income Before Income Taxes....... 11,467 1,403 12,870
Income Taxes (Benefit)........... (334) 590 256
------------- ------------ -------------
Net Income....................... $ 11,801 $ 813 $ 12,614
============= ============ =============
Pro Forma Information-Change in
Tax Status (c)
Income before income taxes..... $ 11,467 $ 1,403 $ 12,870
Income taxes (including income
taxes on partnership
operations)................... 3,990 590 4,580
------------- ------------ -------------
Net Income..................... $ 7,477 $ 813 $ 8,290
============= ============ =============
Net Income per Share........... $ .07 $ 1.05 $ .08
============= ============ =============
Pro Forma Weighted Average Shares
Outstanding (b)................. 105,821 778 106,599
============= ============ =============
</TABLE>
See Notes.
11
<PAGE>
NEW EEX
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
EEX LSEPO NEW EEX
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Natural gas..................... $ 146,355 $ -- $ 146,355
Oil and condensate.............. 36,863 -- 36,863
Natural gas liquids............. 4,148 -- 4,148
Cogeneration operations......... -- 10,662 10,662
Other........................... 2,430 -- 2,430
------------- ------------ -------------
Total......................... 189,796 10,662 200,458
------------- ------------ -------------
Cost and Expenses
Production and operating........ 31,404 -- 31,404
Exploration..................... 8,668 -- 8,668
Depreciation and amortization... 78,418 5 78,423
Write-down of non-U.S. gas and
oil properties................. 10,191 -- 10,191
Cogeneration operations......... -- 8,597 8,597
General, administrative and
other.......................... 29,980 -- 29,980
Taxes, other than income taxes.. 15,950 236 16,186
------------- ------------ -------------
Total......................... 174,611 8,838 183,449
------------- ------------ -------------
Operating Income.................. 15,185 1,824 17,009
Interest Income................... 2,041 -- 2,041
Interest and Other Financing
Costs............................ (30,584) -- (30,584)
------------- ------------ -------------
Income (Loss) Before Income
Taxes............................ (13,358) 1,824 (11,534)
Income Taxes (Benefit)............ (3,398) 734 (2,664)
------------- ------------ -------------
Net Income (Loss)................. $ (9,960) $ 1,090 $ (8,870)
============= ============ =============
Pro Forma Information-Change in
Tax Status (c)
Income (loss) before income
taxes.......................... $ (13,358) $ 1,824 $ (11,534)
Income taxes (benefit)
(including income taxes on
partnership operations)........ (4,666) 734 (3,932)
------------- ------------ -------------
Net income (loss)............... $ (8,692) $ 1,090 $ (7,602)
============= ============ =============
Net Income (Loss) Per Share....... $ (.08) $ 1.40 $ (.07)
============= ============ =============
Pro Forma Weighted Average Shares
Outstanding (b).................. 105,821 778 106,599
============= ============ =============
</TABLE>
See Notes.
12
<PAGE>
NEW EEX
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Immediately prior to the effective time of the Merger, ENSERCH will make a
capital contribution to LSEPO, or LSEPO will make a distribution to
ENSERCH, in an amount sufficient to cause LSEPO's working capital to be
$3.5 million. Following the Merger, ENSERCH will no longer fund LSEPO's
operations.
(b) In the Merger each outstanding share of EEX Common Stock will be converted
into one share of New EEX Common Stock and the outstanding shares of LSEPO
will be converted into a number of shares of New EEX Common Stock
determined by dividing $7.0 million by the average of the closing sales
prices of EEX Common Stock on the 15 trading days preceding the fifth
trading day prior to the effective time of the Merger. An average market
price of EEX shares of $9.00 was assumed to determine the pro forma
converted shares outstanding and to compute pro forma earnings per share.
(c) For periods prior to 1995, except for international and SACROC operations,
EEX operated as a partnership, and the income or loss of the partnership
was includable in the tax returns of the individual partners. Accordingly,
no recognition was given to income taxes on partnership operations. EEX,
as a corporation, is a taxable entity. The statements of operations for
periods prior to 1995 include a pro forma provision for income taxes on
the partnership operations based on the applicable corporate federal
statutory rate.
(d) On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
(DALEN) for cash of $340 million and assumed DALEN's bank debt of $115
million. The acquisition was accounted for as a purchase. The assets
acquired and the liabilities assumed were recorded at their estimated fair
value. Essentially all of the valuation adjustment was assigned to gas and
oil properties.
Following is a summary of pro forma results of operations of New EEX
assuming the DALEN acquisition had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.......................................... $ 285,682 $ 335,262
Operating Income (Loss)........................... (3,497) 54,380
Net Income (Loss)................................. (20,831) 24,493
Net Income (Loss) After Pro Forma Income Taxes on
Partnership Operations........................... (20,831) 20,169
Net Income (Loss) Per Share....................... (.19) .19
</TABLE>
13
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
PERIOD ENDED
AS OF OR FOR YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------
1991(A) 1992(A) 1993 1994 1995 1995(A) 1996(A)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues(b)............. $6,000 $8,737 $10,662 $12,726 $16,507 $8,059 $5,993
Costs and Expenses...... 6,113 8,815 8,838 11,323 14,258 7,300 5,673
------ ------ ------- ------- ------- ------ ------
Operating Income
(Loss)................. (113) (78) 1,824 1,403 2,249 759 320
Other Income............ -- -- -- -- 97 -- 168
Interest and Other
Financing Costs........ -- -- -- -- (105) -- (168)
Income (Taxes) Benefit.. 39 (34) (734) (590) (871) (305) (138)
------ ------ ------- ------- ------- ------ ------
Net Income (Loss)....... (74) (112) 1,090 813 1,370 454 182
Net Income (Loss) Per
Share(c)............... $ (.10) $ (.14) $ 1.40 $ 1.05 $ 1.76 $ .58 $ .23
Weighted Average Shares
Outstanding(c)......... 778 778 778 778 778 778 778
BALANCE SHEET DATA
Total Assets............ $1,125 $1,092 $ 4,335 $ 4,212 $10,132 $2,809 $5,282
Shareholder's Equity.... (73) (185) 905 1,718 3,088 2,172 3,270
</TABLE>
- --------
(a) Information for these periods is unaudited. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations have been made.
(b) Revenues include contract revenues and reimbursement of expenses incurred
on behalf of operating partnerships.
(c) The weighted average shares outstanding and the net income (loss) per
share are unaudited pro forma amounts reflecting shares to be issued in
the Merger of Enserch Exploration, Inc. with and into Lone Star Energy
Plant Operations, Inc.
14
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS
OVERVIEW
Lone Star Energy Plant Operations, Inc. ("LSEPO") has three agreements to
operate and maintain cogeneration plants. The agreements were initially
entered into by Lone Star Energy Company ("LSEC") and subsequently assigned to
LSEPO. The financial statements of LSEPO include the results of the three
operating and maintenance agreements for all years in a manner similar to a
pooling-of-interests since these activities were under the common control of
ENSERCH Corporation ("ENSERCH") and LSEC prior to the assignment of these
agreements to LSEPO.
In connection with the proposed merger of ENSERCH with TUC Holding Company,
ENSERCH plans to merge the operations of LSEPO and Enserch Exploration, Inc.
("EEX"), a company approximately 83% owned by ENSERCH. LSEPO will be the
surviving corporation of that merger (the "Merger"), in which its name will be
changed to Enserch Exploration, Inc. ("New EEX"). In the Merger each
outstanding share of EEX Common Stock will be converted into one share of New
EEX Common Stock and the outstanding shares of LSEPO will be converted into a
number of shares of New EEX Common Stock determined by dividing $7.0 million
by the average of the closing sales prices of EEX Common Stock on the 15
trading days preceding the fifth trading day prior to the effective time of
the Merger.
RESULTS OF OPERATIONS
Revenues include contract revenues and reimbursement of expenses incurred on
behalf of Encogen One Partners Ltd. ("Encogen One") and Encogen Four Partners,
L.P.
LSEPO had net income of $1.4 million in 1995, compared with $.8 million in
1994 and $1.1 million in 1993. Operating income for 1995 was $2.2 million
versus $1.4 million in 1994 and $1.8 million in 1993. LSEPO receives incentive
fees based on the Buffalo and Bellingham plants' availability. In 1995, the
Buffalo and Bellingham plants achieved 98.6% and 98.3% availability,
respectively, which resulted in total incentive fees of $1.1 million being
earned. In 1994 and 1993, incentive fees of $.7 million and $.5 million,
respectively, were earned.
LSEPO had net income of $182 thousand for the six months ended June 30, 1996
compared with $454 thousand for the same period in 1995. Operating income for
the first half of 1996 was $320 thousand versus $759 thousand for the first
half of 1995. The period to period reduction in operating income is largely
due to an increase in compensation expense in 1996 of $258 thousand and an
insurance premium refund of $128 thousand in 1995.
Other income in 1995 consists principally of interest due from Encogen One.
During 1995, LSEPO incurred extraordinary reimbursable maintenance expenses
for Encogen One, which deferred reimbursement of these expenses to LSEPO, as
allowed under the terms of the operating and maintenance agreement. ENSERCH
has financed this temporary working capital requirement for LSEPO, and
interest equal to the interest earned by LSEPO is payable to ENSERCH.
LIQUIDITY AND FINANCIAL RESOURCES
LSEPO has funded its activities through cash provided from operations and
through advances from ENSERCH. ENSERCH advances cash to LSEPO to meet its
working capital needs and LSEPO remits any excess cash to ENSERCH. Net cash
required by operating activities for 1995 totaled $2.4 million, compared with
cash provided of $1.4 million in 1994 and cash required of $2.2 million in
1993. Accounts receivable-trade at December 31, 1995 increased by $4.0 million
compared with the prior year end, largely as a result of higher receivables
from Encogen One for reimbursable expenses.
Net cash provided by operating activities in the first six months of 1996
totaled $4.2 million compared with $4.3 million for the same period in 1995.
Accounts receivable-trade and the non-current deferred receivable from Encogen
One Partners Ltd. decreased by $4.1 million and $1.4 million, respectively,
from year-end 1995 to June 30, 1996.
At June 30, 1996, LSEPO had total assets of $5.3 million and net assets of
$3.3 million, including working capital of $3.2 million. Immediately prior to
the Merger, ENSERCH will make a capital contribution to LSEPO, or LSEPO will
make a distribution to ENSERCH, in an amount sufficient to cause LSEPO's
working capital to be $3.5 million. Following the Merger, ENSERCH will no
longer fund LSEPO's operations.
15
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Lone Star Energy Plant
Operations, Inc. (the "Company") as of December 31, 1995 and 1994, and the
related statements of income and retained earnings and of cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
June 19, 1996
16
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $10,662 $12,726 $16,507 $ 8,059 $ 5,993
------- ------- ------- ------- -------
Costs and Expenses
Operating expenses............... 5,535 6,046 5,857 2,842 3,169
Maintenance expenses............. 3,062 4,913 8,020 4,268 2,296
Depreciation..................... 5 12 14 7 7
Payroll, ad valorem and other
taxes........................... 236 352 367 183 201
------- ------- ------- ------- -------
Total.......................... 8,838 11,323 14,258 7,300 5,673
------- ------- ------- ------- -------
Operating Income................... 1,824 1,403 2,249 759 320
Other Income....................... -- -- 97 -- 168
Interest and Other Financing
Costs............................. -- -- (105) -- (168)
------- ------- ------- ------- -------
Income before Income Taxes......... 1,824 1,403 2,241 759 320
Income Taxes....................... 734 590 871 305 138
------- ------- ------- ------- -------
Net Income......................... 1,090 813 1,370 454 182
Retained Earnings (Deficit),
Beginning of Period............... (186) 904 1,717 1,717 3,087
------- ------- ------- ------- -------
Retained Earnings, End of Period... $ 904 $ 1,717 $ 3,087 $ 2,171 $ 3,269
======= ======= ======= ======= =======
Unaudited Pro Forma Information
(Note 10)
Net Income Per Share............... $ 1.40 $ 1.05 $ 1.76 $ .58 $ .23
======= ======= ======= ======= =======
Average Common Shares Outstanding.. 778 778 778 778 778
======= ======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................ $ 1,090 $ 813 $ 1,370 $ 454 $ 182
Depreciation...................... 5 12 14 7 7
Deferred income taxes (benefit)... (9) (2) 1 -- --
Deferred receivable............... -- -- (1,887) -- 1,434
Other............................. (471) 191 (225) (225) 3
Changes in current operating
assets and liabilities
Accounts receivable............. (3,198) 94 (4,035) 4,045 4,114
Other current assets............ 58 (31) (24) 11 (100)
Accounts payable................ 44 353 913 (255) (1,113)
Deferred payable to ENSERCH..... -- -- 1,107 -- (204)
Other current liabilities....... 234 (16) 343 237 (142)
------- ------- ------- ------ -------
Net Cash Flows from (used for)
Operating Activities......... (2,247) 1,414 (2,423) 4,274 4,181
------- ------- ------- ------ -------
INVESTING ACTIVITIES
Additions of property, plant and
equipment........................ (5) (32) (4) (4) (2)
------- ------- ------- ------ -------
FINANCING ACTIVITIES
Increase (decrease) in non-current
portion of deferred payable to
ENSERCH.......................... -- -- 1,887 -- (1,434)
Change in working capital advances
payable to/receivable from
ENSERCH.......................... 2,352 (1,463) 524 (4,286) (2,729)
------- ------- ------- ------ -------
Net Cash Flows from (used for)
Financing Activities......... 2,352 (1,463) 2,411 (4,286) (4,163)
------- ------- ------- ------ -------
Net Increase (Decrease) in Cash..... 100 (81) (16) (16) 16
Cash at Beginning of Period......... 16 116 35 35 19
------- ------- ------- ------ -------
Cash at End of Period............... $ 116 $ 35 $ 19 $ 19 $ 35
======= ======= ======= ====== =======
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- (UNAUDITED)
1994 1995 JUNE 30, 1996
------ ------- -------------
(IN THOUSANDS, EXCEPT
SHARES)
ASSETS
<S> <C> <C> <C>
Current Assets
Cash............................................ $ 35 $ 19 $ 35
Accounts receivable--trade...................... 4,046 8,081 3,967
Advances receivable from ENSERCH................ -- -- 590
Other........................................... 42 66 166
------ ------- ------
Total current assets.......................... 4,123 8,166 4,758
------ ------- ------
Property, Plant and Equipment, net of accumulated
depreciation of $24, $38 and $41................. 85 75 70
------ ------- ------
Other Assets
Deferred receivable............................. -- 1,887 453
Other........................................... 4 4 1
------ ------- ------
Total other assets............................ 4 1,891 454
------ ------- ------
Total....................................... $4,212 $10,132 $5,282
====== ======= ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable--trade......................... $ 435 $ 1,348 $ 235
Working capital advances payable to ENSERCH..... 1,615 2,139 --
Current portion of deferred payable to ENSERCH.. -- 1,107 903
Other........................................... 220 563 421
------ ------- ------
Total current liabilities..................... 2,270 5,157 1,559
------ ------- ------
Other Liabilities
Deferred payable to ENSERCH..................... -- 1,887 453
Other........................................... 224 -- --
------ ------- ------
Total other liabilities....................... 224 1,887 453
------ ------- ------
Commitments and Contingent Liabilities (Note 9)
Common Shareholder's Equity
Common stock, $100 par value; authorized 1,000
shares, issued 10 shares (Note 10)............. 1 1 1
Retained earnings............................... 1,717 3,087 3,269
------ ------- ------
Common shareholder's equity................... 1,718 3,088 3,270
------ ------- ------
Total....................................... $4,212 $10,132 $5,282
====== ======= ======
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Lone Star Energy Plant Operations, Inc. ("LSEPO") is a wholly-owned
subsidiary of Lone Star Energy Company ("LSEC"), a wholly-owned subsidiary of
ENSERCH Corporation ("ENSERCH"). LSEPO has agreements to operate and maintain
three cogeneration plants, which are located in Sweetwater, Texas, in Buffalo,
New York, and in Bellingham, Washington. Each facility was developed by a
subsidiary of ENSERCH. LSEPO has fixed-cost operating and maintenance
agreements for providing labor and certain routine consumables at each plant,
with each of the agreements containing escalation provisions tied to
inflation. The agreements for the Buffalo and Bellingham plants also contain
bonus or penalty provisions based upon plant availability.
The Sweetwater plant produces 255 megawatts per hour of electricity at
345,000 volts. This electricity is sold to the local electric utility (Texas
Utilities Electric Company). The facility also produces sequentially up to 170
MMBtu's per hour of exhaust gas at 1,000 degrees fahrenheit which is sold to a
gypsum board manufacturing facility for use in its drying process. The
Sweetwater plant commenced commercial operation in June 1989. The initial term
of LSEPO's agreement expires in June 2001.
The Buffalo plant produces 62 megawatts per hour of electricity at 115,000
volts. This electricity is sold to the local electric utility (Niagara Mohawk
Power Company). The facility also produces up to 110,000 pounds per hour of
steam which is sold to a brass manufacturing facility for process use and
space heating purposes. The Buffalo plant commenced commercial operation in
May 1992. The initial term of LSEPO's agreement expires in March 2007.
The Bellingham plant produces 160 megawatts per hour of electricity at
115,000 volts. This electricity is sold to the local electric utility (Puget
Sound Power and Light Company). The facility also produces up to 130,000
pounds per hour of steam which is sold to a paper mill for process purposes.
The Bellingham plant commenced commercial operation in July 1993. The initial
term of LSEPO's agreement expires in June 2008.
2. BASIS OF PRESENTATION
Each of the three agreements LSEPO currently has to operate and maintain
cogeneration plants was initially entered into by LSEC and subsequently
assigned to LSEPO. The financial statements of LSEPO include the results of
the three operating and maintenance agreements for all years in a manner
similar to a pooling-of-interests since these activities were under the common
control of ENSERCH and LSEC prior to the assignment of these agreements to
LSEPO.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All dollar amounts in the notes to financial statements are stated in
thousands unless otherwise indicated. The preparation of financial statements
requires the use of significant estimates and assumptions by management;
actual results could differ from those estimates.
Revenues include contract revenues and reimbursement of expenses incurred on
behalf of Encogen One Partners Ltd. ("Encogen One") and Encogen Four Partners,
L.P.
Depreciation of property, plant and equipment is provided principally by the
straight-line method over the estimated service lives of the related assets.
During 1995, LSEPO incurred extraordinary reimbursable maintenance expenses
for Encogen One, which deferred reimbursement of these expenses to LSEPO, as
allowed under the terms of the operating and maintenance agreement. Encogen
One is charged interest at the prime rate plus one percent on the outstanding
20
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
balance. At December 31, 1995, $1.1 million of the deferred receivable is
included in accounts receivable--trade and $1.9 million is included in other
assets. The related interest income is included in other income in the income
statement. The advance from ENSERCH to fund the extraordinary reimbursable
maintenance expenses will not be needed for ongoing working capital and will
be repaid to ENSERCH when the receivable is collected by LSEPO. The deferred
receivable balances (both current and non-current) are offset by deferred
payable balances to ENSERCH of the same amounts. The interest expense in the
income statement represents the interest associated with the deferred payable
balances to ENSERCH.
4. RELATED PARTY TRANSACTIONS
In the ordinary course of business, LSEPO engages in various transactions
with ENSERCH and its affiliates. LSEPO is charged for direct and indirect
costs incurred by LSEC, ENSERCH and other affiliates that are associated with
LSEPO's business and operations, including general and administrative costs
incurred in the management of operations and in performing accounting,
treasury, internal audit, income tax planning and compliance, legal,
information systems, human resources and other functions. Charges are
determined on a basis that reasonably reflects the actual costs of services
performed for LSEPO and may include allocations based on such factors as the
percentage of time spent on projects or services, the number of employees or
net capital employed. LSEPO believes that the methods used are reasonable and
that allocated costs approximate costs that would have been incurred if LSEPO
had operated as an unaffiliated entity. Charges from LSEC, ENSERCH and other
affiliates were $916, $955 and $817 for 1993, 1994 and 1995, respectively.
ENSERCH advances cash to LSEPO to meet its working capital needs and LSEPO
remits any excess cash to ENSERCH. No interest is charged on these advances.
Immediately prior to the Merger, ENSERCH will make a capital contribution to
LSEPO, or LSEPO will make a distribution to ENSERCH, in an amount sufficient
to cause LSEPO's working capital to be $3.5 million. Following the Merger,
ENSERCH will no longer fund LSEPO's operations.
LSEPO has entered into agreements to operate and maintain three cogeneration
plants, in each of which indirect wholly-owned subsidiaries of ENSERCH hold
the general partner's interest (see Notes 1 and 8).
Pursuant to a contract entered into at closing of development, the ENSERCH
affiliate that developed the Bellingham cogeneration project receives an
annual operator surcharge fee of $4 million from Encogen Northwest, L.P. LSEPO
receives the payment and immediately remits it to the ENSERCH affiliate.
LSEPO and the ENSERCH affiliate holding the general partner's interest in
the Bellingham plant share incentive fees (or penalties) resulting from the
availability of that plant. LSEPO's share is approximately one third, and the
ENSERCH affiliate's share is approximately two thirds. LSEPO collects the
incentive fees, retains its share and remits the remainder to the ENSERCH
affiliate. Incentive fees earned by LSEPO for the availability of the
Bellingham plant were $.2 million, $.4 million and $.6 million in 1993, 1994
and 1995, respectively.
21
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
LSEPO's operations are included in ENSERCH's consolidated federal income tax
return. LSEPO makes tax payments to ENSERCH on the basis of a separate federal
income tax return.
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Provision (Benefit) for Income Taxes:
Current
Federal........................................... $ 599 $ 442 $ 741
State............................................. 144 150 129
------ ------ ------
Total........................................... 743 592 870
Deferred Federal.................................... (9) (2) 1
------ ------ ------
Total........................................... $ 734 $ 590 $ 871
====== ====== ======
Reconciliation of Income Taxes Computed at the
Federal Statutory Rate to Provision for Income
Taxes:
Income before income taxes.......................... $1,824 $1,403 $2,241
------ ------ ------
Income taxes computed at the federal statutory rate
of 35%............................................. 638 491 784
State taxes......................................... 94 98 84
Other--net.......................................... 2 1 3
------ ------ ------
Provision for income taxes........................ $ 734 $ 590 $ 871
====== ====== ======
</TABLE>
At December 31, 1995 and 1994, LSEPO had a deferred tax asset of $4,
included in other assets, due to property-related differences in the financial
accounting basis and income tax basis of LSEPO's assets.
6. EMPLOYEE BENEFIT PLANS
Substantially all personnel associated with LSEPO are covered by an ENSERCH
pension plan, and LSEPO receives an allocated portion of the plan expenses,
which is included in the amounts disclosed in Note 4. Medical, dental and
similar benefits are also provided under ENSERCH plans. In addition, ENSERCH
provides a voluntary contributory investment plan to substantially all
employees of LSEPO.
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The fair value of financial instruments, consisting primarily of cash,
accounts receivable and accounts payable, approximated carrying value at
December 31, 1995 and 1994.
8. MAJOR CUSTOMERS
LSEPO derives all of its revenues from three limited partnerships, in each
of which an ENSERCH affiliate holds the general partner's interest (see Notes
1 and 4).
The percentage of LSEPO's total revenues, excluding reimbursement of
expenses, from each of its three major customers is summarized below:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Encogen One Partners Ltd. (Sweetwater plant).............. 31% 28% 25%
Encogen Four Partners, L.P. (Buffalo plant)............... 38% 36% 35%
Encogen Northwest, L.P. (Bellingham plant)................ 31% 36% 40%
</TABLE>
22
<PAGE>
LONE STAR ENERGY PLANT OPERATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
9. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, LSEPO is involved in certain legal
proceedings. In the opinion of management, LSEPO will incur no liability from
pending claims or suits that is considered material for financial reporting
purposes.
10. PRO FORMA SHARES OUTSTANDING (UNAUDITED)
In connection with the proposed merger of ENSERCH with TUC Holding Company,
ENSERCH plans to merge the operations of LSEPO and Enserch Exploration, Inc.
("EEX"), a company approximately 83% owned by ENSERCH. LSEPO will be the
surviving corporation of that merger (the "Merger"), in which its name will be
changed to Enserch Exploration, Inc. ("New EEX"). In the Merger each
outstanding share of EEX Common Stock will be converted into one share of New
EEX Common Stock and the outstanding shares of LSEPO will be converted into a
number of shares of New EEX Common Stock determined by dividing $7.0 million
by the average of the closing sales prices of EEX Common Stock on the 15
trading days preceding the fifth trading day prior to the effective time of
the Merger. A market price of EEX shares of $9.00 was assumed to determine the
pro forma converted shares outstanding and to compute pro forma earnings per
share.
23
<PAGE>
SIGNATURE
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
By: /s/ J. W. Pinkerton
--------------------------------
J. W. Pinkerton,
Vice President and Controller,
Chief Accounting Officer
Date: September 20, 1996
24
