UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Exact Name of Registrant as Specified I.R.S. Employer
File in its Charter; Address of Principal Identification
Number Executive Offices; and Telephone Number No.
1-3183 ENSERCH Corporation 75-0399066
Energy Plaza, 1601 Bryan Street
Dallas, TX 75201-3411
(214) 812-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
ENSERCH Depositary shares, Series F, each New York Stock
Corporation representing 1/40 share of the Adjustable Exchange
Rate Cumulative Preferred Stock, Series F,
liquidation preference $1,000 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[x] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [x]
Aggregate market value of ENSERCH Corporation Common Stock held by
non-affiliates: None
Common Stock outstanding at March 13, 1998: 201,000 shares, par
value $.01 per share
DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gas Distribution Peaking. . . . . . . . . . . . . . . . . . . . 3
Gas Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Regulation and Rates. . . . . . . . . . . . . . . . . . . . . . 4
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Environmental Matters . . . . . . . . . . . . . . . . . . . . . 6
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . 7
Item 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 7
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 8
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . 8
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . 8
PART III
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . 9
Item 11.EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 11
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 15
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . 16
APPENDIX A - Financial Information
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PART 1
Item 1.BUSINESS
ENSERCH Corporation (ENSERCH or the Corporation) is an integrated company
focused on natural gas. Its major business operations consist of the
gathering, processing, transmission, distribution and marketing of natural
gas. ENSERCH is a wholly-owned subsidiary of Texas Utilities Company (TUC).
TUC, a Texas corporation organized in 1996 , which was named TUC Holding
Company, is a holding company for its predecessor companies, Texas Energy
Industries, Inc. (TEI), formerly known as Texas Utilities Company, and
ENSERCH. Through TEI, TUC engages in the generation, transmission and
distribution of electricity; telecommunications; power development and other
businesses.
Merger with TUC
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions (Merger) between the former Texas Utilities Company, now known as
TEI, and ENSERCH were completed. At the effective time of the Merger: (i) the
former Texas Utilities Company changed its name to TEI, (ii) TEI and ENSERCH
merged with wholly-owned subsidiaries of TUC Holding Company, which, as a
result, owned all the common stock of TEI and of ENSERCH, (iii) TUC Holding
Company changed its name to Texas Utilities Company, (iv) each share of TEI's
common stock was automatically converted into one share of common stock of
TUC, and (v) each share of common stock of ENSERCH was automatically converted
into 0.225 shares of common stock of TUC, with cash issued in lieu of
fractional shares. The share conversions were tax-free transactions. In the
Merger, approximately 15.9 million shares of TUC common stock were issued to
former holders of ENSERCH common stock. The value assigned to the TUC shares
issued and costs incurred in connection with the acquisition of ENSERCH
aggregated $579 million. At the date of the Merger, ENSERCH had debt and
preferred stock outstanding of approximately $1.3 billion.
Immediately prior to ENSERCH's merger with TUC, Enserch Exploration, Inc.
(EEX) and Lone Star Energy Plant Operations, Inc. (LSEPO) were merged to form
a new company (New EEX), and ENSERCH distributed to its common shareholders
its ownership interest in New EEX, which was represented by approximately 105
million shares of New EEX common stock with a carrying value of $583 million.
In the distribution, which was tax free to the recipients, ENSERCH
shareholders of record on August 4, 1997 received approximately 1.5 shares of
New EEX common stock for each share of ENSERCH common stock owned.
On December 31, 1997, ENSERCH sold to TEI, at net book value, the group
of companies which had constituted its power development and international gas
distribution operations. As a result, ENSERCH is no longer engaged in these
activities. The sale was effected in order to strengthen the Corporation's
financial position by relieving it of certain indebtedness, as well as its
obligation to make capital expenditures with respect to such operations in the
future. For accounting purposes, the sale was considered to be a merger of
commonly controlled companies, accordingly, it was reflected effective as of
the Merger Date. Operating results for periods following the Merger Date
exclude these operations.
TUC accounted for its acquisition of ENSERCH as a purchase business
combination. The assets and liabilities of ENSERCH at the acquisition date
were adjusted to their estimated fair value. The excess of the purchase price
paid by TUC over the estimated fair value of assets acquired and liabilities
assumed was recorded as goodwill and is being amortized over 40 years. Push
down accounting has been applied, with the result that purchase accounting
adjustments have been reflected in the financial statements of ENSERCH and its
subsidiaries for the period subsequent to August 5, 1997. Financial
statements for periods prior to that date were prepared using ENSERCH's
historical basis of accounting. The process of determining the fair value of
assets and liabilities of ENSERCH as of the date of acquisition is continuing,
and the final results await primarily the resolution of income tax and other
contingencies and finalization of some preliminary estimates.
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Business of ENSERCH
ENSERCH conducts its major business operations through the following
companies:
Enserch Processing, Inc. (EPI) gathers and processes natural gas to
remove impurities and extract natural gas liquids (NGL) for sale. EPI uses
cryogenic and mechanical refrigeration processes at its NGL extraction
facilities. The mixed NGL stream, containing the heavier hydrocarbons ethane,
propane, butane and natural gasoline, is pumped via pipeline to Mt. Belvieu,
Texas. The remaining natural gas, primarily methane, leaves the NGL plants in
gas transmission lines for transportation to end-use customers. About 85% of
NGL product sales are under term contracts of one to three years, with prices
established monthly. NGL prices are influenced by a number of factors,
including supply, demand, inventory levels, the product composition of each
barrel and the price of crude oil. Profitability is highly dependent on the
relationship of NGL product prices to the cost of natural gas lost in the
extraction process, which is commonly termed "shrinkage." To reduce the
impact of shrinkage, EPI strives to replace "keep-whole" gas processing
contracts with "net-proceeds" contracts. Keep-whole contracts are relatively
more profitable during periods of high NGL prices and low gas costs because
they provide the processor with ownership of the entire gas stream. However,
as NGL prices decline relative to gas costs, these contracts become relatively
less profitable because the processor must absorb all the shrinkage costs.
Under net-proceeds contracts, the producer provides shrinkage volumes, while
the processor contributes plant facilities and operational costs. Revenues
from NGL sales are apportioned between the parties, and the processor is no
longer impacted by natural-gas feedstock costs.
Lone Star Pipeline Company (Lone Star Pipeline), a division of ENSERCH,
is a partially rate-regulated business that owns and operates interconnected
natural-gas transmission lines, underground storage reservoirs, compressor
stations and related properties, all within Texas. With a system consisting
of approximately 7,600 miles of gathering and transmission pipelines in Texas,
Lone Star Pipeline is one of the largest pipelines in the United States
(U.S.). Through these facilities, it transports natural gas to distribution
systems of Lone Star Gas Company (Lone Star Gas) and other customers. Rates
for the services to Lone Star Gas are regulated by the Railroad Commission of
Texas (RRC) while rates for services to other customers are generally only
subject to RRC jurisdiction through complaint proceedings.
Lone Star Gas, a partially rate-regulated division of ENSERCH, owns and
operates natural-gas distribution systems and related properties. One of the
largest gas distribution companies in the United States and the largest in
Texas, Lone Star Gas provides service through over 23,800 miles of
distribution mains. Through these facilities, it purchases, distributes and
sells natural gas to over 1.35 million residential, commercial and industrial
customers in approximately 550 cities and towns, including the 11-county
Dallas/Fort Worth Metroplex. The rates Lone Star Gas charges its residential
and commercial customers are established by the municipal governments of the
cities and towns served with the RRC having appellate jurisdiction. Lone Star
Gas' gas sales revenues are influenced by seasonal temperature variations.
The majority of Lone Star Gas' residential and commercial gas customers use
gas for heating, and their needs are directly affected by the mildness or
severity of the heating season, although some 65% of Lone Star Gas'
residential and commercial volumes are subject to weather normalization
adjustments. Sales to electric-generation customers are affected by the
mildness or severity of both cooling and heating seasons. Lone Star Gas also
transports natural gas within its distribution system as market opportunities
require.
Enserch Energy Services, Inc. (EES) is a wholesale and retail marketer of
natural gas in several areas of the U.S.. Its primary U.S. retail markets are
in Texas, the Northeast, the Midwest and the West Coast. EES' marketing
activities typically consist of (i) contracting to purchase specific volumes
of gas from producers, pipelines and other suppliers at various points of
receipt to be supplied to end users over a specific period of time, (ii)
aggregating gas supplies and arranging for the transportation of these gas
supplies, (iii) negotiating to sell specific volumes of gas over a specified
period of time to end users and (iv) providing related risk-management
services to the customer. In January 1998, the Federal Energy Regulatory
Commission (FERC) approved an Order authorizing EES to make physical sales of
electricity in the wholesale market throughout the U.S. other than within the
area of the Electric Reliability Council of Texas.
ENSERCH operates in the liquified and compressed natural-gas vehicular
fuel markets through the Alternative Fuel Division of ENSERCH. This includes
two affiliates, FleetStar of Texas, L.C. (Fleetstar), a fueling affiliate
owned 50% by ENSERCH, and TranStar Technologies, L.C. (TranStar), a vehicle
conversion affiliate owned 100% by ENSERCH.
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FinaStar, which is a partnership
between FleetStar and Fina Oil and Chemical, is 25% owned by ENSERCH. These
entities had 20 public and 9 private natural-gas fueling stations in
commercial operation at the end of 1997 and sold over 3 million equivalent
gallons of natural gas during the year. TranStar provides turnkey natural-gas
vehicle conversions and other related services. ENSERCH also owns and
operates one liquified natural gas fueling station at the American Airlines
DFW Airport maintenance facility and is in the process of constructing two
additional such stations for the Dallas Area Rapid Transit Authority.
ENSERCH possesses all of the necessary franchises and certificates
required to enable it to conduct its business (see Regulation and Rates).
At December 31, 1997, ENSERCH and its direct and indirect wholly-owned
subsidiaries had 2,987 full-time employees.
GAS DISTRIBUTION PEAKING
Lone Star Gas estimates its peak-day availability from long-term
contracts and withdrawals from underground storage to be 1.4 billion cubic
feet (Bcf). Short-term peaking contracts and daily spot contracts raise this
availability level to meet anticipated sales needs.
During 1997, the average daily demand of Lone Star Gas' residential and
commercial customers was .3 Bcf. Lone Star Gas' greatest daily demand in 1997
was on January 13 when the arithmetic-mean temperature was 22 degrees F. and
deliveries to all customers reached 2.3 Bcf, including estimated deliveries to
residential and commercial customers of 2.1 Bcf.
GAS SUPPLY
Lone Star Gas' gas supply consists of contracts for the purchase of
specific reserves, contracts not related to specific reserves or fields, and
gas in storage. The total gas supply as of January 1, 1998, was 489 Bcf,
which is approximately three times Lone Star Gas' purchases during 1997. Of
this total , 130 Bcf are specific reserves and 34 Bcf are working gas in
storage. Management has calculated that 325 Bcf, including 131 Bcf under one
contract, are committed to Lone Star Gas under gas supply contracts not
related to specific reserves or fields. In 1997, Lone Star Gas' gas
requirement was purchased from some 125 independent producers and
non-affiliated pipeline companies, one of which supplied approximately 28% of
total requirements.
To meet peak-day gas demands during winter months, Lone Star Gas utilizes
the service of seven affiliated gas storage fields, all of which are located
in Texas. These fields have a working gas capacity of 47 Bcf and a day-one
storage withdrawal capacity of 1.3 Bcf per day.
Lone Star Gas has historically maintained a contractual right to curtail,
which is designed to achieve the highest load factor possible in the use of
the pipeline system while assuring continuous and uninterrupted service to the
residential and commercial customers. Under the program, industrial customers
select their own rates and relative priorities of service. Interruptible
service contracts include the right to curtail gas deliveries up to 100%
according to a strict priority plan. The last sales curtailment for Lone Star
Gas occurred in 1990 and lasted for only 30 hours.
Estimates of gas supplies and reserves are not necessarily indicative of
Lone Star Gas' ability to meet current or anticipated market demands or
immediate delivery requirements because of factors such as the physical
limitations of gathering and transmission systems, the capacity of its storage
facilities, the duration and severity of cold weather, the availability of gas
reserves from its suppliers, the ability to purchase additional supplies on a
short-term basis and actions by federal and state regulatory authorities.
Curtailment rights provide Lone Star Gas flexibility to meet the human-needs
requirements of its customers on a firm basis. Priority allocations and price
limitations imposed by federal and state regulatory agencies, as well as other
factors beyond the control of Lone Star Gas, may affect its ability to meet
the demands of its customers.
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The Lone Star Gas supply program is designed to contract for new supplies
of gas (and to recontract targeted expiring sources) connected to Lone Star
Pipeline's pipeline system. In addition to being heavily concentrated in the
established gas-producing areas of central, northern and eastern Texas, Lone
Star Pipeline's intrastate pipeline system also extends into or near the major
producing areas of the Texas Gulf Coast and the Delaware and Val Verde Basins
of West Texas. Nine basins located in Texas are estimated to contain a
substantial portion of the nation's remaining onshore natural-gas reserves.
Lone Star Pipeline's pipeline system provides access to all of these basins.
Lone Star Pipeline is well situated to receive large volumes into its system
at the major hubs, such as Katy and Waha, as well as at the major third-party
owned storage facilities where suppliers maintain instantaneous high delivery
capabilities.
Lone Star Gas buys gas under long-term, intrastate contracts in order to
assure reliable supply to its customers. Many of these contracts require
minimum purchases of gas. Presently, based on estimated gas demand which
assumes normal weather conditions, requisite gas purchases are expected to
substantially satisfy purchase obligations for the year 1998 and thereafter.
REGULATION AND RATES
Lone Star Gas and Lone Star Pipeline are wholly intrastate in character
and perform distribution utility operations and transportation services in the
State of Texas subject to regulation by the RRC and municipalities in Texas.
The RRC regulates the charge for the transportation of gas by Lone Star
Pipeline to Lone Star Gas' distribution systems for sale to Lone Star Gas'
residential and commercial consumers. Lone Star Pipeline owns no certificated
interstate transmission facilities subject to the jurisdiction of FERC under
the Natural Gas Act, has no sales for resale under the rate jurisdiction of
FERC and does not perform any transportation service that is subject to FERC
jurisdiction under the Natural Gas Act.
The city gate rate for the cost of gas Lone Star Gas ultimately delivers
to residential and commercial customers is established by the RRC and provides
for full recovery of the actual cost of gas delivered, including out-of-period
costs such as gas purchase contract settlement costs. The rates Lone Star Gas
charges its residential and commercial customers are established by the
municipal governments of the cities and towns served, with the RRC having
appellate jurisdiction.
Lone Star Gas employs a continuing program of rate review for all classes
of customers in its regulatory jurisdictions. Rate relief amounting to about
$500 thousand in annualized revenue increases, exclusive of changes in gas
cost, was achieved in Texas in 1997. Weather normalization adjustment clauses
have been approved by 287 of the cities served by Lone Star Gas, representing
over 65% of Lone Star Gas' residential and commercial sales volumes. These
clauses allow rates to be adjusted to reflect the impact of warmer or
colder-than-normal weather during the winter months, minimizing the impact of
variations in weather on Lone Star Gas' earnings.
Lone Star Gas' sales to industrial customers are provided under rates
reflected in standard rate schedules and contracts. Transportation services
to industrial and electric-generation customers are provided under
competitively negotiated contracts. Industrial customers also have standard
rate schedules for transportation services. Regulatory authorities in Texas
have jurisdiction to revise, review and regulate rates to industrial and
electric-generation customers but, historically, have not actively exercised
this jurisdiction because of the existing competitive market. Sales contracts
with these customers permit automatic adjustment on a monthly basis for the
full amount of increases or decreases in the cost of gas.
In October 1996, Lone Star Pipeline filed a request with the RRC to
increase the rate it charges Lone Star Gas to store and transport gas
ultimately destined for residential and commercial customers in the 550 Texas
cities and towns served by Lone Star Gas. Lone Star Gas also requested that
the RRC separately set rates for costs to aggregate gas supply for these
cities. Rates previously in effect were set by the RRC in 1982. In September
1997, the RRC issued an order reducing the charges by Lone Star Pipeline to
Lone Star Gas for storage and transportation services. In that order, the RRC
did authorize separate charges for the Lone Star Pipeline storage and
transportation services, a separate charge by Lone Star Gas for the cost of
aggregating gas supplies, and a continuation of the 100% flow through of
purchased gas expense. The RRC also imposed some new criteria for affiliate
gas purchases and a new reconciliation procedure that will require a review of
purchased gas expenses every three years. The RRC order has become final, but
is being appealed by several
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parties including Lone Star Pipeline and Lone Star Gas. The rates authorized
by the order became effective on December 1, 1997, and will result in
an annual margin reduction of approximately $8.2 million.
On August 20, 1996, the RRC ordered a general inquiry into the rates and
services of Lone Star Gas, most notably a review of Lone Star Gas' historic
gas cost and gas acquisition practices since the last rate setting. The
inquiry docket has been separated into different phases. Two of the phases,
conversion to the National Association of Regulatory Utility Commissioners
(NARUC) account numbering system and unbundling, have been dismissed by the
RRC, and one other phase, rate case expense, is pending RRC action on the
basis of a stipulation of all parties. In the phase dealing with historic gas
cost and gas acquisition practices, Lone Star Gas and Lone Star Pipeline have
filed a motion for summary disposition stating that any retroactive action
would be inappropriate and unlawful. Settlement discussions with intervenor
cities are ongoing. If the motion for summary disposition is denied, a
hearing has been scheduled to begin in August 1998. A number of management
and transportation related issues have been placed in a separate phase which
still has an undefined scope and is being held in abeyance pending the
resolution of the phase dealing with gas costs. Management believes that gas
costs were prudently incurred and were properly accounted for and recovered
through the gas cost recovery mechanism previously approved by the RRC. At
this time, management is unable to determine the ultimate outcome of the
inquiry.
COMPETITION
As legislative, regulatory, economic and technological changes occur, the
energy and utility industries are faced with increasing pressure to become
more competitive while adhering to regulatory requirements. The level of
competition is affected by a number of variables, including price, reliability
of service, the cost of energy alternatives, new technologies and governmental
regulations.
In order to remain competitive, ENSERCH aggressively manages its
operating costs and capital expenditures through streamlined business
processes and is developing and implementing strategies to address an
increasingly competitive environment. These strategies include initiatives to
improve return on assets and to maximize value through new marketing programs.
Customer sensitivity to energy prices and the availability of
competitively priced gas in the non-regulated markets continue to provide
intense competition in the electric-generation and industrial-user markets.
Natural gas faces varying degrees of competition from electricity, coal,
natural gas liquids, oil and other refined products throughout Lone Star Gas'
service territory. Pipeline systems of other companies, both intrastate and
interstate, extend into or through the areas in which Lone Star Gas' markets
are located, creating competition from other sellers of natural gas.
Competitive pressure from other pipelines and alternative fuels has caused a
decline in sales by Lone Star Gas to industrial and electric-generation
customers. Sales by ENSERCH's non-regulated companies, along with
transportation services provided by Lone Star Pipeline, have served to offset
much of the effects of this decline. As developments in the energy industry
point to a continuation of these competitive pressures, Lone Star Gas
maintains its focus on customer service and the creation of new services for
its customers in order to remain its customers' supplier of choice.
Lone Star Pipeline is the sole transporter of natural gas to Lone Star
Gas' distribution systems. Lone Star Pipeline competes with other pipelines
in Texas to transport natural gas to off-system markets. This business is
highly competitive and greatly influenced by the demand to move natural gas
across Texas to supply Northeast and upper Midwest U.S. markets.
Natural gas liquids processing is highly competitive and includes
competition among producers, third-party owners and processors for
cost-sharing and interest-sharing arrangements.
EES pursues markets connected to pipelines other than Lone Star
Pipeline's. As natural-gas markets continue to evolve following the
implementation of the 1992 Order 636 of the FERC, additional opportunities are
created in the broader, more active trading markets and in serving
non-regulated customers. This highly competitive market demands that
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a wide array of services be offered, including term contracts with
interruptible and firm deliveries, risk management, aggregation of supply,
nominations, scheduling of deliveries and storage.
Lone Star Pipeline has been an open access transporter under Section 311
of the Natural Gas Policy Act of 1978 (NGPA) on its intrastate transmission
facilities since July 1988. Such transportation is performed pursuant to
Section 311(a)(2) of the NGPA and is subject to an exemption from the
jurisdiction of the FERC under the Natural Gas Act, pursuant to Section 601 of
the NGPA.
ENVIRONMENTAL MATTERS
ENSERCH is subject to various federal, state and local regulations
dealing with air and water quality and related environmental matters. (See
Item 2. Properties - Capital Expenditures and Management's Discussion and
Analysis of Financial Condition and Results of Operation included in Appendix
A to this report.)
Air
Under the Texas Clean Air Act, the Texas Natural Resource Conservation
Commission (TNRCC) has jurisdiction over the permissible level of air
contaminant emissions from facilities located within the State of Texas. In
addition, certain performance standards of the Environmental Protection Agency
(EPA) promulgated under the federal Clean Air Act, as amended (Clean Air Act),
which have also been adopted by the TNRCC, are also applicable. In 1997, the
Clean Air Act required ENSERCH to submit Title V Operating Permit applications
for certain of its facilities. ENSERCH anticipates the approval of all such
permit applications.
Additional Clean Air Act regulations have been proposed and others are
not yet finalized by the EPA. ENSERCH believes that the requirements
necessary to be in compliance with additional regulatory provisions can be met
as they are developed. Estimates for the capital requirements related to the
Clean Air Act are included in the estimated construction expenditures. (See
Item 2. Properties - Capital Expenditures and Management's Discussion and
Analysis of Financial Condition and Results of Operation included in Appendix
A to this report.) Any additional capital expenditures, as well as any
increased operating costs associated with new requirements or compliance
measures, are expected to be recoverable through rates, as similar costs have
been recovered in the past. Certain emission sources may be required to
reduce emissions or to install monitoring equipment under proposed rules and
regulations. ENSERCH currently believes, however, that if the rules and
regulations under the Clean Air Act are adopted as proposed, operating costs
that will be incurred under operating permits, new permit fee structures,
capital expenditures associated with equipment modifications to reduce
emission, or any expenditures on monitoring equipment, in the aggregate, will
not have a materially adverse effect on the Corporation's financial position,
results of operation or cash flow.
Water
The TNRCC, the EPA and RRC have jurisdiction over water discharges
(including storm water) from the Corporation's facilities. The Corporation's
facilities are presently in compliance with applicable state and federal
requirements relating to discharge of pollutants into the water. ENSERCH has
obtained all required waste water discharge permits from the TNRCC, the EPA
and the RRC for facilities in operation and has applied for or obtained
necessary permits for facilities under construction. ENSERCH believes it can
satisfy the requirements necessary to obtain any required permits or renewals.
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Item 2.PROPERTIES
At December 31, 1997, Lone Star Pipeline operated approximately 7,600
miles of transmission and gathering lines and operated 22 compressor stations
having a total rated horsepower of approximately 76,455. Lone Star Pipeline
also owns seven active gas-storage fields, all located on its system in Texas,
and three major gas-treatment plants to remove undesirable components from the
gas stream. At December 31, 1997, EPI had interests in 15 processing plants,
10 of which were wholly owned, and operated approximately 1,714 miles of
gathering lines. At December 31, 1997, Lone Star Gas operated approximately
23,800 miles of distribution mains.
ENSERCH owns a five-building office complex in Dallas, containing
approximately 453,000 square feet of space that is occupied by ENSERCH and
some of its affiliates. In addition, ENSERCH leases a 21-story, 400,000
square-foot building in Houston under a two-year lease that is automatically
extended each year unless terminated. This building is sub-leased, primarily
to non-affiliated parties.
CAPITAL EXPENDITURES
The primary capital expenditures of the Corporation and its subsidiaries
in 1997 and as estimated for 1998 through 2000 are as follows:
1997 $119,000,000
1998 143,000,000
1999 133,000,000
2000 140,000,000
The planned expenditures are expected to be funded from internal cash
flows, borrowings under credit lines or advances from TUC.
Item 3.LEGAL PROCEEDINGS
ENSERCH and its subsidiaries are party to lawsuits arising in the
ordinary course of its business. ENSERCH believes, based on its current
knowledge and the advice of counsel, that all such lawsuits and resulting
claims would not have a material adverse effect on its financial position,
results of operation or cash flow.
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable. All of ENSERCH's common stock is owned by TUC.
Item 6.SELECTED FINANCIAL DATA
The information required hereunder for the Corporation is set forth under
Selected Financial Data included in Appendix A of this report.
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Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required hereunder for the Corporation is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operation included in Appendix A of this report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Corporation is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operation included in Appendix A of this report.
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder for the Corporation is set forth under
Independent Auditors' Report, Statements of Consolidated Income, Statements of
Consolidated Cash Flows, Consolidated Balance Sheets, Statements of
Consolidated Common Stock Equity, and Notes to Consolidated Financial
Statements included in Appendix A of this report.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
<PAGE>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Identification of Directors, business experience and other directorships:
Other Positions and
Offices Presently Held Date First Elected as Present Principal Occupation or
With ENSERCH Director Employment and Principal
(Current Term Expires (Current Term Expires Business (Preceding Five Years),
Name of Director Age May 8, 1998) May 8, 1998) Other Directorships
<S> <C> <C> <C> <C>
David W. Biegler 51 President and Chief
Operating Officer September 1, 1991 President and Chief Operating Officer of
TUC, TU Electric and ENSERCH;
prior thereto, Chairman, President and
Chief Executive Officer of
ENSERCH; other directorships:
Trinity Industries, Inc. and TU Electric
Barbara B. Curry 43 None August 5, 1997 Executive Vice President of TU Services;
prior thereto, Vice President of TU
Services and, prior thereto, Assistant
to the Chairman of TUC; other
directorship: TU Electric.
H.Jarrell Gibbs 60 None August 5, 1997 Vice Chairman of the Board of TUC; prior
thereto, President of TU Electric and
prior thereto, Vice President and
Principal Financial Officer of TUC.
Michael J. McNally 43 None August 5, 1997 Executive Vice President and Chief
Financial Officer of TUC; prior
thereto, President, Transmission
Division of TU Electric; prior thereto,
Executive Vice President of TU
Electric; prior thereto, Principal of
Enron Development Corporation; prior
thereto, Managing Director of
Industrial Services (Enron Capital and
Trade Resources) and President of
Houston Pipe Line Company and
Enron Gas Liquids, Inc.; other
directorship: TU Electric.
Erle Nye 60 Chairman of the Board and
Chief Executive August 5, 1997 Chairman of the Board and Chief Executive
of TUC, TU Electric and ENSERCH;
prior thereto, President and Chief
Executive of TUC and Chairman of
the Board and Chief Executive of TU
Electric; other directorships: TUC and
TU Electric.
Robert A. Wooldridge 60 None August 5, 1997 Partner in the law firm of Worsham,
Forsythe & Wooldridge, L.L.P.
</TABLE>
Directors of ENSERCH receive no compensation in their capacity as Directors.
9
<PAGE>
<PAGE>
<PAGE>
Identification of Executive Officers and business experience:
<TABLE>
<CAPTION>
Positions and Offices Date First Elected to
Presently Held Present Offices
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age May 8, 1998) May 8, 1998) (Preceding Five Years)
<S> <C> <C> <C> <C>
Erle Nye 60 Chairman of the Board and
Chief Executive January 1, 1998 Chairman of the Board and Chief
Executive of TUC, TU Electric and
ENSERCH ; prior thereto, President
and Chief Executive of TUC and
Chairman of the Board and Chief
Executive of TU Electric.
David W. Biegler 51 President and Chief
Operating Officer January 1, 1998 President and Chief Operating Officer of
TUC, TU Electric and ENSERCH;
prior thereto, Chairman of the Board,
President and Chief Executive
Officer of ENSERCH.
T. L. Baker 52 President of Lone Star Gas January 1, 1998 President of Lone Star Gas and the
Electric Service Division of TU
Electric; prior thereto, Executive
Vice President of TU Electric and
prior thereto, Senior Vice President
of TU Electric.
Michael T. Hunter 48 President of Lone Star
Pipeline January 1, 1998 President of Lone Star Pipeline; prior
thereto, President and Chief
Operating Officer of Lone Star
Pipeline; and prior thereto, President
and Chief Operating Officer of
Mississippi River Transmission
Corporation, a subsidiary of Noram
Energy Corp.
There is no family relationship between any of the above named Directors and Executive Officers.
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
All required reports relating to changes in beneficial ownership have been
timely filed.
10
<PAGE>
<PAGE>
Item 11. EXECUTIVE COMPENSATION
<TABLE>
<captions>
ENSERCH and its affiliates have paid or awarded compensation during the
last three calendar years to the following Executive Officers for services
in all capacities:
Long-Term Compensation
------------------------------------
Annual Compensation Awards (4) Payouts
----------------------------- ------------------------- ---------
Other
Annual Securities
Compen- Restricted Underlying LTIP All Other
Name and Salary Bonus sation Stock Awards Options/ Payouts Compensation
Principal Position Year ($) ($) ($) (3) ($) SAR?s (#) ($) (6) ($) (7)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David W. Biegler, 1997 600,378 0 0 0 0 0 3,701,060
President and Chief 1996 600,000 330,000 3,600 556,800 50,000 1,009,208 768,525
Operating Officer (1) 1995 593,750 245,822 8,400 (5) 25,000 0 27,525
Michael T. Hunter, 1997 320,000 95,124 0 0 0 0 4,000
President of Lone Star 1996 310,000 150,000 1,000 185,600 24,000 185,600 7,408
Pipeline Company (2) 1995 175,000 90,035 1,500 (5) 15,000 0 450
William T. Satterwhite, 1997 282,178 67,062 0 0 0 0 812,407
Executive Vice President 1996 282,000 112,800 735 92,800 15,000 225,970 245,320
of Texas Utilities 1995 270,667 87,080 1,940 (5) 5,000 0 24,642
Company (1)
Jerry W. Pinkerton, 1997 225,000 40,131 0 0 0 0 4,175
Vice President and 1996 225,000 67,500 580 64,960 7,000 168,711 3,919
Controller 1995 225,000 54,400 1,620 (5) 5,000 0 2,000
Melvin E. Wentz, 1997 172,500 90,569 0 0 0 0 44,967
President of Enserch 1996 133,333 22,000 0 0 0 0 1,360
Development 1995 88,333 0 0 0 0 0 701
<FN>
(1)Mr. David W. Biegler was Chairman, President and Chief Executive Officer through December 31, 1997. Mr. Erle Nye was
elected Chairman of the Board and Chief Executive of ENSERCH effective January 1, 1998. Mr. Satterwhite served as
Senior Vice President and General Counsel through December 31, 1997. Messrs. Biegler and Satterwhite were elected
President and Executive Vice President, respectively, of TUC on August 5, 1997 and compensation thereafter represents
compensation paid by TUC.
(2)Mr. Michael T. Hunter joined ENSERCH as an executive officer on June 1, 1995. Melvin E. Wentz joined the Company
March 13, 1995, and became an executive officer March 21, 1997. Enserch Development Corporation was a subsidiary
of ENSERCH through December 31, 1997.
(3)Other Annual Compensation column includes non-preferential dividends paid on non-vested restricted stock. All outstanding
restricted stock vested in 1996.
(4)The Awards columns include the restricted stock awards to named executive officers under the ENSERCH Corporation 1991
Incentive Plan (1991 Plan). Restrictions were lifted in 1996 under the change in control provisions of the 1991 Plan and
the numbers and value of shares reported are at market on the date such restrictions were lifted. No awards have
subsequently been made and at December 31, 1997 all restricted stock had been paid out.
(5)Restricted stock awards made in 1995 were reported under the "Long-Term Incentive Plan Awards" table for such year.
11
<PAGE>
<PAGE>
(6)The Long-Term Incentive Payouts column represents payouts of all remaining restricted stock awarded prior to 1996, the
restrictions on which were lifted under change in control provisions of the 1991 Plan.
(7)Amounts reported as All Other Compensation are attributable to the named executive officer's participation in certain plans
and as otherwise described hereinafter: Contributions in 1997 under the Employee Stock Purchase and Savings Plan for
Messrs. Biegler, Hunter, Satterwhite, Pinkerton and Wentz for 1997 were $560, $800, $560, $800 and $2,363, respectively.
Contributions in 1997 under the Deferred Compensation program for Messrs. Biegler, Hunter, Satterwhite, Pinkerton and
Wentz were $10,500, $3,200, $4,935, $3,375 and $0, respectively. TUC's contribution in 1997 under the Employees'
Thrift Plan of the Texas Utilities Company System for the account of Mr. Satterwhite was $1,410. Change in control
payments were made in 1997 to Messrs. Biegler and Satterwhite in the amounts of $3,690,000 and $805,502, respectively
as described hereafter. Mr. Wentz was paid a relocation amount of $42,604.
</FN>
</TABLE>
Aggregated Option Exercise Table
The table below shows, for each of the named executive officers, the
information specified with respect to exercised, exercisable and unexercisable
options under all existing stock option plans, converted into shares of TUC
common stock into which such options became exercisable at the time of the
Merger.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired on Value December 31, 1997 December 31, 1997
Exercise Realized (#) ($)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
David W. Biegler 0 0 156,333 0 2,438,116 0
Michael T. Hunter 0 0 0 0 0 0
Willaim T. Satterwhite 0 0 39,883 0 585,198 0
Jerry W. Pinkerton 8,229 108,125 14,931 0 155,117 0
Melvin E. Wentz 0 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
ENSERCH PENSION PLAN TABLE
Years of Service
Remuneration 20 25 30 35 40 45
<S> <C> <C> <C> <C> <C> <C>
$275,000 $ 91,854 $114,818 $137,782 $160,745 $167,620 $174,495
350,000 118,104 147,631 177,157 206,683 215,433 224,183
425,000 144,354 180,443 216,532 252,620 263,245 273,870 Years of Service
500,000 170,604 213,256 255,907 298,558 311,058 323,558
575,000 196,854 246,068 295,282 344,495 358,870 373,245
650,000 223,104 278,881 334,657 390,433 406,683 422,933
725,000 249,354 311,693 374,032 436,370 454,495 472,620
800,000 275,604 344,506 413,407 482,308 502,308 522,308
875,000 301,854 377,318 452,782 528,245 550,120 571,995
950,000 328,104 410,131 492,157 574,183 597,933 621,683
</TABLE>
12
<PAGE>
<PAGE>
TUC PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
Remuneration 20 25 30 35 40
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 14,688 $ 18,360 $ 22,032 $ 25,704 $ 29,376
100,000 29,688 37,110 44,532 51,954 59,376
200,000 59,688 74,610 89,532 104,454 119,376
400,000 119,688 149,610 179,532 209,454 239,376
800,000 239,688 299,610 359,532 419,454 479,376
1,000,000 299,688 374,610 449,532 524,454 599,376
1,400,000 419,688 524,610 629,532 734,454 839,376
</TABLE>
The Retirement and Death Benefit Program of ENSERCH and Participating
Subsidiary Companies ("ENSERCH Retirement Plan") was merged into, and became
a part of, the Retirement Plan for Employees of the Texas Utilities Company
System ("TUC Retirement Plan") effective December 31, 1997. Except for
Messrs. Biegler and Satterwhite who became employees of TUC on August 5, 1997
and began accruing pension benefits under the TUC Retirement Plan on that day,
ENSERCH Retirement Plan participants continued to accrue pension benefits
under the ENSERCH Retirement Plan through December 31, 1997, at which
time such accruals ceased and they began accruing service under the TUC
Retirement Plan. Under the terms of the TUC Retirement Plan, as amended
effective January 1, 1998, the pension benefit of employees who were
participating in the ENSERCH Retirement Plan on December 31, 1997, will equal
the sum of their accrued benefit under the ENSERCH Retirement Plan through
December 31, 1997 and their accrued benefit under the TUC Retirement Plan
beginning January 1, 1998; provided that the aggregate pension benefit
can be no less than the pension which the employees would have earned if they
had remained under the ENSERCH Retirement Plan for their entire careers.
The above tables illustrate the amount of annual compensation benefit
payable on a normal retirement basis beginning at normal retirement age to a
person in specified average salary and years-of-service classifications under
the ENSERCH Retirement Plan and the TUC Retirement Plan, respectively. The
amounts shown include the portion of the pension payable under the Income
Restoration Plan and any annuities previously purchased in satisfaction of
the Corporation's pension obligations.
Covered compensation under the ENSERCH Retirement Plan includes base wages
and annual performance-based bonuses under the Corporation's incentive
performance plan. Covered compensation under the TUC Retirement Plan includes
base wages and excludes bonuses, overtime and extraordinary payments. The
normal pension benefit under the ENSERCH Retirement Plan is a monthly
annuity guaranteed for ten years and life thereafter. The normal pension
benefit under the TUC Retirement Plan is a monthly annuity for life. The
accredited years of service as of February 28, 1998, for Messrs. Biegler,
Hunter, Satterwhite, Pinkerton and Wentz under the ENSERCH Retirement Plan
were 29, 2, 31, 9 and 2, respectively and the highest average covered
compensation during any consecutive five-year period for each of them was
$856,335, $483,986, $362,548, $278,600 and $163,113, respectively.
Messrs. Biegler, Hunter, Satterwhite, Pinkerton and Wentz each has less
than one year of accredited service under the TUC Retirement Plan
and average annual earnings attributable under the TUC Retirement Plan of
$592,857, $320,004, $278,643, $225,000 and $195,000, respectively.
13
<PAGE>
<PAGE>
Employment and Change in Control Agreements and Other Arrangements
TUC entered into employment agreements with Messrs. Biegler and Satterwhite,
effective as the date of the Merger was consummated in August 1997, with
terms of two years and which provide for minimum annual salaries of $600,000
in the case of Mr. Biegler and $282,000 in the case of Mr. Satterwhite and a
minimum amount of incentive compensation for 1997 equal to $330,000 and
$112,800, respectively. The employment agreement of Mr. Satterwhite also
provides for the payment of retention bonuses of $141,000 and $282,000
upon the attainment of six and eighteen months, respectively, of employment
after August 1997.
Mr. Hunter, Mr. Pinkerton and certain other key employees of ENSERCH have
entered into retention bonus arrangements, effective as of August 1997,
pursuant to which ENSERCH will pay the employee a bonus equal to a percentage
of the employee's current annual salary (typically 50% and 100%, respectively)
upon the attainment of six and eighteen months of employment. Mr. Biegler was
paid a retention bonus of $900,000 by ENSERCH for services up until the
consummation of the Merger in August 1997.
ENSERCH entered into change in control agreements with certain employees,
including Messrs. Biegler, Hunter, Pinkerton and Satterwhite. As a result,
if the employee is terminated or if, under certain circumstances, the employee
resigns, within three years of a change in control, the employee will be
entitled to a lump sum severance payment of up to three times the sum of the
employee's base salary and target bonus (but not in excess of the aggregate
base salary that could be earned up to the employee's normal retirement
date), a prorated bonus in the year of termination, any unpaid balance and
deferred compensation held in certain employee benefit plans, the value of
any unexercised stock options, a three-year continuation of employee benefits,
the equivalent of two years of service credit under the retirement program,
and the reimbursement of certain legal fees, expenses and excise taxes.
Shareholder approval of the Merger in November 1996 constituted a change in
control under these agreements. Messrs. Biegler and Satterwhite agreed to
modify their respective change in control agreements, pursuant to which
ENSERCH paid them $2,790,000 and $805,502, respectively, during 1997 in
lieu of certain rights under such agreements.
In accordance with the terms of various stock option, incentive and
deferred compensation plans of ENSERCH, the vesting or payment of certain
benefits were accelerated by the Merger.
14
<PAGE>
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners at February 28, 1998:
Amount and Nature
Name and Address of Beneficial Percent
Title of Class of Beneficial Owner Ownership of Class
Common Stock, Texas Utilities Company 201,000 shares 100%
$0.01 par value, Energy Plaza, sole voting and
of ENSERCH 1601 Bryan Street investment power
Dallas, Texas 75201
Security ownership of management at February 28, 1998:
The following lists the common stock of TUC owned by the Directors and
Executive Officers of ENSERCH. The named individuals have sole voting and
investment power for the shares of common stock reported. Ownership of such
common stock by the Directors and Executive Officers, individually and as a
group, constituted less than 1% of the outstanding shares at February 28,
1998. None of the named individuals own any of the preferred stock of ENSERCH
or the preferred securities of any subsidiaries of ENSERCH.
<TABLE>
<CAPTION>
Number of Shares
-------------------------------------
Beneficially Deferred
Name Owned Plan * Total
<S> <C> <C> <C>
T. L. Baker 8,575 18,752 27,327
David W. Biegler 15,272 0 15,272
Barbara B. Curry 2,444 3,612 6,056
H. Jarrell Gibbs 14,323 23,494 37,817
Michael T. Hunter 4,319 0 4,319
Michael J. McNally 20,551 10,688 31,239
Erle Nye 49,466 54,462 103,928
Jerry W. Pinkerton 2,617 0 2,617
William T. Satterwhite 8,236 0 8,236
Melvin E. Wentz 21 0 21
Robert A. Wooldridge 5,955 0 5,955
--------- -------- --------
All Directors and Executive
Officers as a group (11) 131,779 111,008 242,787
========= ======== ========
_________________
<FN>
* Share units held in deferred compensation accounts under the TUC Deferred
and Incentive Compensation Plan. Although this plan allows such units to
be paid only in the form of cash, investments in such units create
essentially the same investment stake in the performance of the TUC's
common stock as do investments in actual shares of common stock.
</FN>
</TABLE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert A. Wooldridge, a Director of ENSERCH, is a partner in Worsham,
Forsythe & Wooldridge, L. L. P., which provides legal services to ENSERCH.
15
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)Financial Statements (included in Appendix A to this report):
Item Page
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operation . . . . . . . . . . . . . . . . . . . . . . A-3
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . A-9
Statements of Consolidated Income for each of the three
years in the period ended December 31, 1997. . . . . . . . . . . . . A-10
Statements of Consolidated Cash Flows for each of the three
years in the period ended December 31, 1997. . . . . . . . . . . . . A-11
Consolidated Balance Sheets, December 31, 1997 and 1996 . . . . . . . . A-12
Statements of Consolidated Common Stock Equity for each of
the three years in the period ended December 31, 1997. . . . . . . . A-13
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . A-14
The consolidated financial statement schedules are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or notes
thereto.
(b) Reports on Form 8-K:
Reports on Form 8-K filed since September 30, 1997, are as follows:
Date of Report Item Reported
January 6, 1998 Item 7. Financial Statements and Schedules
(c) Exhibits:
<TABLE>
<captions>
Previously Filed*
With
File As
Exhibits Number Exhibit Number Dated
<S> <C> <C> <C>
2(a) 333-12391 2(a) - Amended and Restated Agreement and Plan of Merger, dated as
of April 13, 1996, among Texas Utilities Company, ENSERCH
Corporation and TUC Holding Company.
2(b) 333-12391 - Form of Agreement and Plan of Distribution included as
Exhibit A to the Plan of Merger attached as Annex I to the
Corporation's Proxy Statement dated September 23, 1996.
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
<captions>
<PAGE>
Previously Filed*
With
File As
Exhibits Number Exhibit Number Dated
<S> <C> <C> <C>
3(a) 1-3183 3.1 - Restated Articles of Incorporation of the Corporation.
Form 10-K
(1996)
3(b) 1-3183 3.2 - Bylaws, as amended, of the Corporation.
Form 10-K
(1994)
4(a) - Agreement to furnish certain debt instruments.
4(b) 1-12833 4(kk) - Indenture (For Unsecured Debt Securities), dated as of January
1, Form 10-K 1998, between ENSERCH Corporation and The Bank of New
(1997) York.
4(c) 1-12833 4(ll) - Officer's Certificate establishing the ENSERCH 6 1/4% Series A
Form 10-K Reset Notes due January 1, 2003.
(1997)
4(d) 1-12833 4(mm) - Officer's Certificate establishing the ENSERCH Remarketed
Form 10-K Reset Notes due January 1, 2008.
(1997)
4(e) 33-45688 4.2 - Indenture, dated February 15, 1992, between ENSERCH
Corporation and The First National Bank of Chicago.
4(f) 1-12833 4(oo) - ENSERCH Corporation 7% Note due 1999, dated August 18,
Form 10-K 1992.
(1997)
4(g) 1-12833 4(pp) - ENSERCH Corporation 8-7/8% Note due 2001, dated March 17,
Form 10-K 1992.
(1997)
4(h) 1-12833 4(qq) - ENSERCH Corporation 6-3/8% Note due 2004, dated February 1,
Form 10-K 1994.
(1997)
4(i) 1-12833 4(rr) - ENSERCH Corporation 7-1/8% Note due 2005, dated June 6,
Form 10-K 1995.
(1997)
10(a)** 1-3183 10.5 - Forms of trust agreements relating to compensation and
Form 10-K supplemental retirement income arrangements executed by
(1991) certain executive officers of the Corporation.
10(b)** 1-3183 10.6 - ENSERCH Corporation 1981 Stock Option Plan, as amended.
Form 10-K
(1991)
10(c)** 1-3183 10.5 - Forms of Change of Control Agreement executed by certain
Form 10-K executive officers of the Corporation.
(1996)
10(d)** 1-3183 10.6 - ENSERCH Corporation, Lone Star Gas Company and Lone Star
Form 10-K Pipeline Company, Lone Star Pipeline Company - Processing
(1996) Division, and Power Group Performance Incentive Plans -
Calendar Year 1997.
</TABLE>
17
<PAGE>
<PAGE>
<TABLE>
<captions>
Previously Filed*
With
File As
Exhibits Number Exhibit Number Dated
<S> <C> <C> <C>
10(e)** 1-3183 10.12 - ENSERCH Corporation 1991 Stock Incentive Plan
Form 10-K
(1990)
10(f)** 1-3183 10.8 - ENSERCH Corporation Deferred Compensation Plan dated
Form 10-K September 30, 1994 and Amendment No. 1 thereto dated
(1996) March 28, 1995, Amendment No. 2 dated January 1, 1996,
Amendment No. 3 dated September 23, 1996, Amendment No. 4
dated November 6, 1996 and Amendment No. 5 dated
February 18, 1997.
10(g)** 1-3183 10.9 - ENSERCH Corporation Deferred Compensation Trust dated
Form 10-K September 30, 1994, and Amendment No. 1 thereto effective
(1996) January 1, 1996.
10(h)** 1-3183 10.10 - ENSERCH Corporation Retirement Income Restoration Plan
Form 10-K dated December 28, 1990, and Amendment No. 1 thereto dated
(1996) September 30, 1994, Amendment No. 1-A dated February 13, 1996,
and Amendment No. 2 effective January 1, 1996.
10(i)** 1-3183 10.11 - ENSERCH Corporation Retirement Income Restoration Trust
Form 10-K dated September 30, 1994 and Amendment No. 1 thereto
(1996) effective January 1, 1996.
10(j) 333-12391 - Form of Tax Allocation Agreement included as Exhibit B to the
Plan of Merger attached as Annex I to the Corporation's
Proxy Statement dated September 23, 1996.
10(k) 333-12391 - Form of Tax Assurance Agreement included as Exhibit C to the
Plan of Merger attached as Annex I to the Corporation's Proxy
Statement dated September 23, 1996.
12 - Computation of Ratio of Earnings to Fixed Charges, and to
Fixed Charges and Preferred Dividends.
21 - Subsidiaries of the Corporation.
23 - Independent Auditors' Consent for the Corporation.
27 - Financial Data Schedule.
</TABLE>
* Incorporated herein by reference.
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, ENSERCH Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ENSERCH CORPORATION
Date: March 30, 1998 By: /s/ ERLE NYE
(Erle Nye, Chairman of the Board and
Chief Executive)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of ENSERCH
Corporation and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ ERLE NYE Principal Executive
(Erle Nye, Chairman of the Board and Chief Executive) Officer
/s/ R. S. SHAPARD Principal Financial
(R. S. Shapard, Treasurer and Assistant Secretary) Officer
/s/ JERRY W. PINKERTON Principal Accounting Officer
(Jerry W. Pinkerton, Vice President and Controller)
/s/ D. W. BIEGLER Director
(D. W. Biegler)
/s/ BARBARA CURRY Director
(Barbara Curry)
/s/ H. JARRELL GIBBS Director March 30, 1998
(H. Jarrell Gibbs)
/s/ MICHAEL J. McNALLY Director
(Michael J. McNally)
/s/ ROBERT A. WOOLDRIDGE Director
(Robert A. Wooldridge)
</TABLE>
19
<PAGE>
<PAGE>
Appendix A
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
INDEX TO FINANCIAL INFORMATION
December 31, 1997
Page
Selected Financial Data.................................................. A-2
Management's Discussion and Analysis of Financial Condition and Results
of Operation............................................................ A-3
Independent Auditors' Report............................................. A-9
Statements of Consolidated Income........................................ A-10
Statements of Consolidated Cash Flows.................................... A-11
Consolidated Balance Sheets.............................................. A-12
Statements of Consolidated Common Stock Equity........................... A-13
Notes to Consolidated Financial Statements............................... A-14
A-1
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------------------------
Period from Period from
Acquisition January 1,
Date to 1997 to Year Ended December 31,
December 31, Acquisition -----------------------------------------------------------------
1997 Date 1996 1995 1994 1993
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets -- end of year.. $3,236,784 $2,721,142 $2,535,400 $2,640,573 $2,315,400
========== ========== ========== ========== ==========
Capitalization -- end of
year
Long-term Debt.............. $ 646,796 $ 932,721 $ 801,226 $ 806,471 $ 720,100
Advances from Parent........ 293,843 -- -- -- --
Preferred Stock............. 175,000 175,000 175,000 175,000 175,000
Common Stock Equity......... 761,644 743,391 719,182 726,187 647,600
---------- ---------- ---------- ---------- ----------
Total...................... $1,877,283 $1,851,112 $1,695,408 $1,707,658 $1,542,700
========== ========== ========== ========== ==========
Capitalization ratios -
end of year
Long-term Debt.............. 34.5% 50.4% 47.3% 47.2% 46.7%
Advances from Parent........ 15.6 -- -- -- --
Preferred Stock............. 9.3 9.4 10.3 10.3 11.3
Common Stock Equity......... 40.6 40.2 42.4 42.5 42.0
---------- ---------- ---------- ---------- ----------
Total...................... 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
Sales Volumes:
Gas distribution (million
cubic feet):
Residential................ 33,417 52,891 83,054 76,896 76,741 86,324
Commercial................. 20,996 33,162 52,265 48,765 49,013 53,023
Industrial................. 2,094 3,148 7,380 13,566 15,251 16,899
Electric generation........ 463 4,179 11,199 11,023 10,983 12,377
---------- ---------- ---------- ---------- ---------- ----------
Total gas distribution.... 56,970 93,380 153,898 150,250 151,988 168,623
========== ========== ========== ========== ========== ==========
Pipeline transportation
(million cubic feet)....... 255,391 362,020 652,339 561,134 541,590 542,772
Gas liquids (thousand
barrels)................... 2,521 3,352 6,114 5,984 5,913 5,958
Gas marketing (million
cubic feet)................ 292,264 223,207 315,332 419,243 488,415 306,675
Operating Revenues
Gas distribution:
Residential................ $ 205,760 $ 335,647 $ 514,724 $ 496,993 $ 480,272 $ 536,925
Commercial................. 108,650 178,897 275,045 269,448 264,053 286,899
Industrial................. 8,594 13,861 28,647 55,724 63,482 69,555
Electric generation........ 6,424 23,317 48,139 50,929 53,183 58,732
---------- ---------- ---------- ---------- ---------- ----------
Total gas distribution.... 329,428 551,722 866,555 873,094 860,990 952,111
Pipeline transportation..... 57,544 77,307 133,930 143,487 141,002 143,350
Gas liquids................. 36,514 49,345 97,391 69,751 68,870 73,551
Gas marketing............... 858,566 601,826 825,009 750,463 997,418 666,221
Other....................... 41,952 83,628 134,140 85,600 80,922 85,138
Less intercompany revenues.. (47,897) (85,671) (162,765) (131,354) (134,826) (129,774)
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues... $1,276,107 $1,278,157 $1,894,260 $1,791,041 $2,014,376 $1,790,597
========== ========== ========== ========== ========== ==========
Income (Loss) from
Continuing Operations....... $ (9,565) $ (15,377) $ 9,751 $ 21,362 $ (5,661) $ 22,260
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges..................... 0.66 0.58 1.31 1.46 0.82 1.52
Ratio of earnings to
combined fixed charges and
preferred dividends......... 0.57 0.49 1.01 1.18 0.58 1.18
</TABLE>
Financial information of Predecessor for all periods prior to the Acquisition
Date (August 5, 1997) have been restated to reflect the results of Enserch
Exploration, Inc. and Lone Star Energy Plant Operations, Inc., as well as
engineering and construction and environmental businesses, as discontinued
operations.
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
This report and other presentations made by ENSERCH Corporation (ENSERCH or
the Corporation) contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although
ENSERCH believes that in making any such statement its expectations are based on
reasonable assumptions, any such statement involves uncertainties and is
qualified in its entirety by reference to the following important factors that
could cause the actual results of ENSERCH to differ materially from those
projected in such forward-looking statement: (i) prevailing governmental
policies and regulatory actions, including those of the Railroad Commission of
Texas (RRC), acquisitions and disposal of assets and facilities, operation and
construction of plant facilities, present or prospective wholesale and retail
competition, changes in tax laws and policies and changes in and compliance with
environmental and safety laws and policies, (ii) weather conditions and other
natural phenomena, (iii) unanticipated population growth or decline, and changes
in market demand and demographic patterns, (iv) competition for retail and
wholesale customers, (v) pricing and transportation of natural gas and other
commodities, (vi) unanticipated changes in interest rates or rates of inflation,
(vii) unanticipated changes in operating expenses and capital expenditures,
(viii) capital market conditions, (ix) competition for new energy development
opportunities, (x) legal and administrative proceedings and settlements, (xi)
inability of various counterparties to meet their obligations with respect to
ENSERCH's financial instruments, (xii) changes in technology used and services
offered by ENSERCH and (xiii) significant changes in ENSERCH's relationship with
its employees and the potential adverse effects if labor disputes or grievances
were to occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and ENSERCH undertakes no obligation to update any forward-
looking statement to reflect events or circumstances after the date on, which
such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time, and it is not possible for ENSERCH to
predict all of such factors, nor can the impact of each such factor or the
extent to which any factor, or combination of factors, may cause results to
differ materially from those contained in any forward-looking statement be
assessed.
FINANCIAL CONDITION
Merger With TUC
On August 5, 1997 (Merger Date or Acquisition Date), all of the common stock
of ENSERCH Corporation was converted to common stock of Texas Utilities Company
(TUC), and ENSERCH became a wholly-owned subsidiary of TUC. ENSERCH shareholders
received .225 share of TUC common stock for each share of ENSERCH. Immediately
prior to ENSERCH's merger with TUC, Enserch Exploration, Inc. (EEX) and Lone
Star Energy Plant Operations, Inc. (LSEPO) were merged to form a new company
(New EEX), and ENSERCH distributed to its common shareholders its ownership
interest in New EEX, which was represented by approximately 105 million shares
of New EEX common stock with a carrying value of $583 million. In the
distribution, which was tax free to the recipients, ENSERCH shareholders of
record on August 4, 1997 received approximately 1.5 shares of New EEX common
stock for each share of ENSERCH common stock owned. ENSERCH's financial
statements for all periods presented have been restated to reflect EEX and LSEPO
as discontinued operations. ENSERCH's discontinued operations also include its
engineering and construction and environmental businesses, the principal assets
of which were sold in prior years. On December 31, 1997, ENSERCH sold to Texas
Energy Industries, Inc., a wholly-owned subsidiary of TUC, at net book value,
the group of companies which had constituted its power development and
international gas distribution operations. As a result, ENSERCH is no longer
engaged in these activities. The sale was effected in order to strengthen the
Corporation's financial position by relieving it of certain indebtedness as well
as its obligation to make capital expenditures in the future. For accounting
purposes, the sale was considered to be a merger of commonly controlled
companies, accordingly, it was reflected effective as of the Merger Date.
Operating results for periods following the Merger Date exclude these
operations.
A-3
<PAGE>
TUC accounted for its acquisition of ENSERCH as a purchase, and push down
accounting has been applied, with the result that purchase accounting
adjustments have been reflected in the financial statements of ENSERCH and its
subsidiaries for the period subsequent to August 5, 1997. Financial statements
for periods prior to that date were prepared using ENSERCH's historical basis of
accounting and are designated as "Predecessor". For purposes of the discussion
of operating results provided herein, the financial information of the
Predecessor for the 1997 periods prior to the Merger Date have been combined
with the post-merger 1997 financial information. The business operations of
ENSERCH were not significantly changed as a result of the merger, and post-
merger and pre-merger operating results, except as noted in the discussion, are
comparable.
Capital Expenditures
The primary capital expenditures of the Corporation and its subsidiaries in
1997 and as estimated for 1998 through 2000 are as follows:
1997.......................... $119,000,000
1998.......................... 143,000,000
1999.......................... 133,000,000
2000.......................... 140,000,000
The planned expenditures are expected to be funded from internal cash flows,
borrowings under credit lines or advances from TUC.
Liquidity and Financial Resources
Continuing operations used cash of $12.2 million for operating activities in
1997 compared with providing cash of $105.0 million in 1996 and $127.8 million
in 1995. Changes in operating assets and liabilities used cash of $71.0 million
in 1997 and $15.3 million in 1995 but provided cash of $16.0 million in 1996.
Discontinued exploration and production operations used cash of $21.8 million
in 1997 compared with providing cash of $19.6 million and $37.6 million in 1996
and 1995, respectively. The discontinued engineering and construction
operations used cash of $12.2 million in 1997, $5.0 million in 1996 and $28.1
million in 1995.
Investing activities required $125.6 million in 1997 versus $176.4 million in
1996 and $120.1 million in 1995. Capital spending in 1997 was about 10% lower
than in 1996 but 11% greater than in 1995. Also, investments in unconsolidated
affiliates provided cash in 1997 but required significant cash in 1996. Other
investing activities used cash of $14.3 million in 1997 and $.9 million in 1995
versus providing cash of $8.6 million in 1996.
Total capitalization at December 31, 1997 was $1.9 billion, up slightly from
year-end 1996. Common stock equity as a percentage of total capitalization was
40.6% at December 31, 1997 compared with 40.2% at year-end 1996.
Shortly after the merger with TUC, ENSERCH's commercial paper program and
bank lines in the form of a revolving credit agreement were discontinued.
ENSERCH retired $204.5 million of commercial paper outstanding at the Merger
Date and $260.4 million of long-term debt outstanding under the credit
agreement, using advances from TUC to fund the retirements. In December 1997,
TUC purchased additional shares of ENSERCH common stock for $200 million. These
funds were used to reduce borrowings from TUC.
In January 1998, ENSERCH issued $125 million of 6 1/4% Series A Notes due
2003 and $125 million of Remarketed Reset Notes due 2008 with a variable
interest rate (5.82% at date of issuance). Net proceeds from these borrowings
were used to refinance or redeem like amounts of higher rate debt and preferred
stock. Also in January, the Series E Adjustable
A-4
<PAGE>
Rate Preferred Stock was redeemed at 100% of its liquidation price plus accrued
and unpaid dividends. On February 25, 1998, the Corporation called for
redemption the 6 3/8% Convertible Subordinated Debentures. ENSERCH may issue
additional debt and equity securities as needed, including the possible future
sale of up to $250 million aggregate principal amount of securities currently
registered with the Securities and Exchange Commission (SEC) for offering
pursuant to Rule 415 under the Securities Act of 1933.
At December 31, 1997, TUC, Texas Utilities Electric Company, a wholly-owned
indirect subsidiary of TUC, and ENSERCH had joint lines of credit under credit
facility agreements (Credit Agreements) with a group of commercial banks. The
Credit Agreements have two facilities. Facility A provides for short-term
borrowings aggregating up to $570 million outstanding at any time at variable
interest rates and terminates April 23, 1998. Facility B provides for short-
term borrowings aggregating up to $1,330 million outstanding at any time at
variable interest rates and terminates April 24, 2002. ENSERCH borrowings under
both facilities are limited to an aggregate of $650 million outstanding at any
time. ENSERCH borrowings under these facilities will be used for working
capital and other needs. At December 31, 1997, ENSERCH had no borrowings under
these facilities.
Quantitative and Qualitative Disclosure About Market Risk
The Corporation's market risk exposure is primarily a result of changes in
interest rates and commodity price exposures. Derivative instruments including
options, swaps, futures and other contractual commitments are used to reduce and
manage a portion of those risks. With the exception of the marketing activities
of a subsidiary, Enserch Energy Services, Inc. (EES), the Corporation's
participation in derivative transactions is designated for hedging purposes;
derivative instruments are not held or issued for trading purposes.
CREDIT RISK -- Credit risk relates to the risk of loss that the Corporation
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Corporation maintains credit policies with regard
to its counterparties that management believes significantly minimize overall
credit risk. The Corporation does not obtain collateral to support the
agreements but monitors the financial viability of counterparties and believes
its credit risk is minimal on these transactions. The Corporation believes the
risk of nonperformance by counterparties is minimal.
INTEREST RATE MARKET RISK -- The table below provides information concerning
the Corporation's financial instruments as of December 31, 1997 that are
sensitive to changes in interest rates, which consist only of debt obligations.
The table presents principal cash flows and related weighted average interest
rates by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------------------------------
There- Fair
1998 1999 2000 2001 2002 after Total Value
------ ------ ----- ------ ------ ------- ------- ------
Millions of Dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt (including current maturities)
Fixed Rate................................. $ -- $150.0 $ -- $100.0 $90.8 $306.0 $646.8 $649.1
Average interest rate...................... -- 7.00% -- 8.88% 6.38% 6.62% 7.02% --
</TABLE>
ENERGY MARKETING MARKET RISK -- As part of its natural gas marketing
activities, EES enters into forward contracts that principally involve physical
delivery of natural gas and derivative financial instruments, including options,
swaps, 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. EES applies mark-to-market accounting to
its business activities. At December 31, 1997, natural gas marketing operations
had net commitments to sell approximately 50.6 billion cubic feet (Bcf) of
natural gas through the year 2003 with offsetting net financial positions to
purchase approximately 61.3 Bcf.
A-5
<PAGE>
EES has performed a sensitivity analysis to estimate its exposure to market
risk of its commodity and related financial commitments. The exposure for fixed
price natural gas purchase and sale commitments, and derivative financial
instruments, including options, swaps, futures and other contractual
commitments, is based on a methodology that uses a five-day holding period and a
95% confidence level. EES uses market-implied volatilities to determine its
exposure to volatility risk. Market risk is estimated as the potential loss in
fair value resulting from at least a 15% change in market factors which may
differ from actual results. Using 15%, the most adverse change in fair value at
December 31, 1997 as a result of this analysis, was a reduction of $1.1 million.
For additional information regarding derivative instruments, see Note 7 to
Consolidated Financial Statements.
Regulation and Rates
In October 1996, Lone Star Pipeline Company, a division of ENSERCH (Lone Star
Pipeline), filed a request with the RRC to increase the rate it charges Lone
Star Gas Company, a division of ENSERCH (Lone Star Gas), to store and transport
gas ultimately destined for residential and commercial customers in the 550
Texas cities and towns served by Lone Star Gas. Lone Star Gas also requested
that the RRC separately set rates for costs to aggregate gas supply for these
cities. Rates previously in effect were set by the RRC in 1982. In September
1997, the RRC issued an order reducing the charges by Lone Star Pipeline to Lone
Star Gas for storage and transportation services. In that order, the RRC did
authorize separate charges for the Lone Star Pipeline storage and transportation
services, a separate charge by Lone Star Gas for the cost of aggregating gas
supplies, and a continuation of the 100% flow through of purchased gas expense.
The RRC also imposed some new criteria for affiliate gas purchases and a new
reconciliation procedure that will require a review of purchased gas expenses
every three years. The RRC order has become final, but is being appealed by
several parties including Lone Star Pipeline and Lone Star Gas. The rates
authorized by the order became effective on December 1, 1997, and will result in
an annual margin reduction of approximately $8.2 million.
On August 20, 1996, the RRC ordered a general inquiry into the rates and
services of Lone Star Gas, most notably a review of Lone Star Gas' historic gas
cost and gas acquisition practices since the last rate setting. The inquiry
docket has been separated into different phases. Two of the phases, conversion
to the NARUC account numbering system and unbundling, have been dismissed by the
RRC, and one other phase, rate case expense, is pending RRC action on the basis
of a stipulation of all parties. In the phase dealing with historic gas cost
and gas acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a
motion for summary disposition stating that any retroactive rate action would be
inappropriate and unlawful. Settlement discussions with intervenor cities are
ongoing. If the motion for summary disposition is denied, a hearing has been
scheduled to begin in August 1998. A number of management and transportation
related issues have been placed in a separate phase which still has an undefined
scope and is being held in abeyance pending the resolution of the phase dealing
with gas costs. Management believes that gas costs were prudently incurred and
were properly accounted for and recovered through the gas cost recovery
mechanism previously approved by the RRC. At this time, management is unable to
determine the ultimate outcome of the inquiry.
RESULTS OF OPERATION
For purposes of the discussion of operating results provided herein, the
financial information of the Predecessor for the 1997 periods prior to the
Merger Date have been combined with the post-merger 1997 financial information.
The business operations of ENSERCH were not significantly changed as a result of
the merger, and post-merger and pre-merger operating results, except as noted in
the discussion, are comparable.
For the year ended December 31, 1997, ENSERCH had a loss from continuing
operations of $24.9 million compared with income of $9.8 million in 1996 and
income of $21.4 million in 1995. The 1997 results were reduced by a first
quarter $8.6 million pretax, $5.6 million after-tax, provision for a credit Lone
Star Gas made voluntarily to its customers, and were improved by third quarter
income of $12.5 million pretax, $8.1 million after-tax, from the sale of
interests in cogeneration projects. Also, results for 1997 were reduced by
merger-related expenses, which totaled $25.1 million pretax, $21.3 million
after-tax, and the amortization of goodwill of $8.1 million arising from the
merger with TUC.
A-6
<PAGE>
Consolidated revenues for 1997 were $2.6 billion compared with $1.9 billion
for 1996 and $1.8 billion for 1995. The higher revenues reflect an increase of
$.6 billion in gas marketing revenues. (The table of Selected Financial Data
provides additional information on revenues.) Gas purchased for resale
increased from $1.3 billion in 1996 to $2.0 billion in 1997, reflecting the
increase in natural gas marketing activity. Operating income was $66.7 million
in 1997 compared with $105.1 million in 1996 and $100.1 million in 1995.
Operating income from natural gas gathering and processing operations decreased
$12 million in 1997 from 1996 but increased $18 million in 1996 from 1995.
Fluctuations in natural gas liquids (NGL) demand, price volatility for NGL
products and natural-gas feedstock costs are the major factors that influence
financial results in the NGL processing business. Lone Star Pipeline operating
income increased $10 million in 1997 from 1996 but decreased $3 million in 1996
from 1995. The higher results in 1997, which were after a voluntary refund of
$8.6 million made prior to the Merger to residential and commercial customers,
were primarily attributable to lower operating and maintenance expenses and
lower costs of gas lost in transmission, while the decline from 1995 to 1996 was
principally due to higher operating and maintenance expenses. Lone Star Gas
operating income decreased $15 million in 1997 from 1996 after increasing $15
million in 1996 from 1995. The 1997 decline from 1996 was primarily due to
higher operating and maintenance expenses. Results for 1996 were improved from
1995 because of the higher volume of residential and commercial sales, which
have the highest margins. Natural gas marketing activities reported an
increased operating loss of $32 million in 1997 from 1996 and an increased loss
of $12 million in 1996 from 1995. Those losses were the result of low margins,
inadequate systems infrastructure and costs associated with new systems that
were implemented around year-end 1997. Natural gas marketing operations are
expected to be profitable in 1998. Power development income (prior to the
transfer of these operations to a TUC affiliate effective with the Merger)
improved $16 million in 1997 mostly due to the income from the sale of interests
in projects. The Corporation's 1997 operating results also include $8.1 million
of amortization of goodwill resulting from the Merger.
Other income (deductions) - net in 1997 included $2.4 million in gains from
the sale of cogeneration plants. Other amounts consisted principally of gains
on disposals of assets and interest income, less losses from unconsolidated
affiliates.
Interest charges for 1997 were $76.3 million compared with $76.7 million in
1996 and $71.4 million in 1995. Interest charges for 1997 included $10.7
million related to advances from TUC.
The extraordinary loss in 1996 of $2.1 million represented a premium incurred
in connection with the prepayment of ENSERCH's 9.06% Notes to facilitate the
merger with TUC.
For the year ended December 31, 1997, there was a loss from discontinued
operations of $224.7 million which included a $236 million after-tax impact of
a write-down of the carrying value of EEX's oil and gas properties due to the
U.S. cost center ceiling limitation at March 31, 1997, and a $9.7 million ($14.9
million pre-tax) provision for estimated costs and expenses to wind-up
engineering and construction operations. For the years 1996 and 1995,
discontinued operations had income of $11.4 million and a loss of $8.3 million,
respectively. (See Note 12 to consolidated financial statements.)
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," (SFAS 130) will become effective in 1998. This statement
requires companies to report and display comprehensive income and its components
(revenues, expenses, gains and losses). Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners.
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998. This statement establishes
standards for defining and reporting business segments. The Corporation is
currently determining its reportable segments.
The adoption of SFAS 130 and SFAS 131 will not affect the Corporation's
consolidated financial position, results of operations or cash flows.
A-7
<PAGE>
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or produce erroneous data by or at the Year 2000. The
Year 2000 issues affect virtually all companies and organizations.
As a result of the Merger, many of the Corporation's existing computer
applications and systems will be migrated to existing or planned TUC systems.
TUC began its Year 2000 initiative in 1996 by addressing mainframe-based
application systems. In early 1997, an infrastructure project to address
information technology (IT) related equipment and systems software was begun.
In late 1997, a corporate-wide project to address Year 2000 issues related to
embedded systems such as process controls for energy production and delivery
and client-developed applications was begun. Most of the ENSERCH mainframe
applications, infrastructure, embedded systems and client-developed applications
that will not be migrated to existing or planned TUC systems have been
incorporated into these projects. These projects extend beyond the TUC
organization in an effort to also work with key vendors, service suppliers and
others so that TUC and ENSERCH can appropriately prepare for Year 2000.
The remediation and replacement work on the majority of IT application
systems and infrastructure are expected to be completed by the end of 1998.
Much of the work on the TUC Year 2000 project is expected to be completed by the
end of 1998, although the project will extend into 1999. Based on present
assessments of the IT and infrastructure projects, a cost of $11.25 million for
TUC was estimated. ENSERCH will be billed for its share of the costs. The TUC
costs are being expensed as incurred over the four-year period (1996 through
1999) covered by the projects. Assessment of the cost of the TUC Year 2000
project is in the early stages.
A-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
ENSERCH Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ENSERCH
Corporation and subsidiaries (the Corporation) as of December 31, 1997 and also
1996 (Predecessor Company balance sheet), and the related statements of
consolidated income, cash flows and common stock equity for the period from
August 5, 1997 (acquisition date) to December 31, 1997, and the period from
January 1, 1997 to the acquisition date and for each of the two years in the
period ended December 31, 1996 (Predecessor Company Operations). These
financial statements are the responsibility of the Corporation'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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ENSERCH Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the period from the acquisition date to
December 31, 1997, the period from January 1, 1997 to the acquisition date and
for the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 24, 1998
A-9
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------
Period From
Period From January 1, 1997 Year Ended
Acquisition To December 31,
Date to Acquisition -------------------------------
December 31, 1997 Date 1996 1995
------------------ ----------- ---------------- -------------
Thousands of Dollars
<S> <C> <C> <C> <C>
OPERATING REVENUES.......................... $1,276,107 $1,278,157 $1,894,260 $1,791,041
---------- ---------- ---------- ----------
OPERATING EXPENSES
Gas purchased for resale............... 1,052,658 941,626 1,316,137 1,260,191
Operation and maintenance.............. 150,569 209,596 348,830 313,633
Depreciation and amortization.......... 29,720 33,693 53,802 48,272
Gross receipts taxes................... 12,312 29,134 43,212 41,415
Payroll, ad valorem and other taxes.... 11,024 17,224 27,186 27,479
---------- ---------- ---------- ----------
Total operating expenses......... 1,256,283 1,231,273 1,789,167 1,690,990
---------- ---------- ---------- ----------
OPERATING INCOME............................ 19,824 46,884 105,093 100,051
MERGER RELATED EXPENSES..................... -- (25,135) (6,790) --
OTHER INCOME (DEDUCTIONS) -- NET............ 881 2,799 (1,575) 4,106
INTEREST CHARGES............................ (31,755) (44,537) (76,700) (71,380)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........... (11,050) (19,989) 20,028 32,777
INCOME TAX EXPENSE (BENEFIT)................ (1,485) (4,612) 10,277 11,415
---------- ---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.... ( 9,565) (15,377) 9,751 21,362
INCOME (LOSS) FROM DISCONTINUED OPERATIONS.. -- (224,691) 11,387 (8,309)
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT................................ -- -- (2,096) --
---------- ---------- ---------- ----------
NET INCOME (LOSS)........................... (9,565) (240,068) 19,042 13,053
PREFERRED STOCK DIVIDENDS................... 4,677 6,725 11,339 11,690
---------- ---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCK................................. $ (14,242) $ (246,793) $ 7,703 $ 1,363
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
A-10
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Period From
Period From January 1,
Acquisition 1997 Year Ended
Date to To December 31,
December 31, Acquisition --------------------------
1997 Date 1996 1995
----------- ---------- ------------ ------------
Thousands of Dollars
<S> <C> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
Income (loss) from continuing operations.... $ (9,565) $ (15,377) $ 9,751 $ 21,362
Adjustments to reconcile income (loss) from
continuing operations to cash provided by
operating activities:
Depreciation and amortization............. 29,720 33,693 53,802 48,272
Deferred income-tax expense (benefit)..... 18,718 (8,803) 5,317 5,043
Recoveries of gas-purchase contract
settlements............................. 318 27 7,926 51,297
Other..................................... 4,587 5,503 12,224 17,161
Changes in operating assets and liabilities
Accounts receivable..................... (340,758) 132,763 (101,288) (13,456)
Other current assets.................... 22,683 33,529 (24,995) (24,029)
Accounts payable
Affiliates............................ 4,926 -- -- --
Other................................. 279,756 (148,859) 98,148 10,960
Other current liabilities............... (33,737) (8,194) 44,121 11,209
Gas marketing risk management assets and
liabilities........................... (13,142) -- -- --
--------- --------- --------- ---------
Cash provided by (used for) operating
activities.......................... (36,494) 24,282 105,006 127,819
--------- --------- --------- ---------
CASH FLOWS -- INVESTING ACTIVITIES
Additions to property, plant and equipment.. (56,690) (62,074) (132,262) (106,854)
Sales and retirements of property, plant
and equipment............................. (250) 171 6,863 5,132
Investments in unconsolidated affiliates.... 188 12,267 (59,627) (8,785)
Sale of subsidiaries to an affiliated
company................................... (4,891) -- -- --
Purchases of businesses, net of cash
acquired.................................. -- -- -- (8,762)
Other....................................... (4,777) (9,539) 8,605 (875)
--------- --------- --------- ---------
Cash used for investing activities...... (66,420) (59,175) (176,421) (120,144)
--------- --------- --------- ---------
CASH FLOWS -- FINANCING ACTIVITIES
Change in commercial paper and other
short-term borrowings..................... (198,473) 66,540 (49,000) 32,759
Advances from parent........................ 382,641 -- -- --
Issuance of senior long-term debt........... -- 100,000 160,000 150,000
Debt issuance costs......................... -- -- (786) (944)
Borrowings under revolving credit agreement. -- -- 25,000 --
Retirement of senior long-term debt......... (269,335) (100,784) (66,960) (162,677)
Change in assignments of future gas purchase
credits................................... -- -- -- (17,191)
Issuance of common stock
Parent.................................... 200,000 -- -- --
Other..................................... -- 3,757 27,678 4,408
Cash dividends paid......................... (5,728) (12,771) (25,144) (25,401)
Other....................................... -- (7) (3,289) (702)
--------- --------- --------- ---------
Cash from (used for) financing activities. 109,105 56,735 67,499 (19,748)
--------- --------- --------- ---------
CASH PROVIDED BY (USED FOR) DISCONTINUED
OPERATIONS
Exploration and production.................. -- (21,773) 19,636 37,636
Engineering and construction................ (6,564) (5,641) (5,001) (28,102)
--------- --------- --------- ---------
Cash from (used for) Discontinued
Operations.............................. (6,564) (27,414) 14,635 9,534
--------- --------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... (373) (5,572) 10,719 (2,539)
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE 12,143 17,715 6,996 9,535
--------- --------- --------- ---------
CASH AND EQUIVALENTS -- ENDING BALANCE........ $ 11,770 $ 12,143 $ 17,715 $ 6,996
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
A-11
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONSOLIDATED BALANCE SHEETS
Predecessor
-----------
December 31,
-----------------------
1997 1996
---------- ---------
In thousands
ASSETS
Current Assets
Cash and cash equivalents......................... $ 11,770 $ 17,715
Accounts receivable............................... 506,284 350,535
Gas marketing risk management assets.............. 365,650 --
Gas stored underground............................ 114,244 119,178
Deferred income taxes............................. 22,663 20,683
Other............................................. 35,094 88,989
---------- ----------
Total current assets........................ 1,055,705 597,100
---------- ----------
Investments......................................... 37,041 113,771
---------- ----------
Net Investment in Discontinued Exploration and
Production Operations.............................. -- 798,229
---------- ----------
Property, Plant and Equipment....................... 1,200,864 1,942,528
Less accumulated depreciation and amortization... 24,669 787,205
---------- ----------
Net property, plant and equipment........... 1,176,195 1,155,323
---------- ----------
Goodwill (net of accumulated amortization:
1997 -- $8,113,000; 1996 -- $901,000).......... 791,401 8,740
---------- ----------
Other Assets
Unamortized regulatory assets for pension and
other postretirement benefits.................. 52,336 --
Deferred income taxes........................... 69,267 26,306
Other........................................... 54,839 21,673
---------- ----------
Total other assets.......................... 176,442 47,979
---------- ----------
Total....................................... $3,236,784 $2,721,142
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Commercial paper and short-term bank loans....... $ 6,067 $ 138,000
Current portion of long-term debt................ -- 1,598
Accounts payable
Affiliates.................................. 4,926 --
Other....................................... 491,645 393,097
Gas marketing risk management liabilities........ 357,044 --
Other current liabilities........................ 115,030 152,458
Liabilities for discontinued engineering and
construction operations......................... 12,932 17,933
---------- ----------
Total current liabilities................... 987,644 703,086
---------- ----------
Advances from Parent................................ 293,843 --
---------- ----------
Long-term Debt...................................... 646,796 932,721
---------- ----------
Other Liabilities
Pension and other postretirement benefits........ 165,514 48,075
Deferred income taxes............................ 10,498 13,888
Other............................................ 195,845 104,981
---------- ----------
Total other liabilities..................... 371,857 166,944
---------- ----------
Commitments and Contingent Liabilities (Note 10)....
Shareholders' Equity
Adjustable rate preferred stock.................. 175,000 175,000
Common stock equity.............................. 761,644 743,391
---------- ----------
Shareholders' equity........................ 936,644 918,391
---------- ----------
Total....................................... $3,236,784 $2,721,142
========== ==========
See Notes to Consolidated Financial Statements.
A-12
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
<TABLE>
<CAPTION>
Predecessor
---------------------------------
Period From
Period From January 1,
Acquisition 1997 Year Ended
Date to To December 31,
December 31, Acquisition -------------------
1997 Date 1996 1995
------------ ----------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
COMMON STOCK -- authorized 100 million shares
Balance at beginning of period ............................................... $ -- 703 $304,897 $303,301
Issuance of common stock to parent (2,000,000 shares) ................... 2 -- -- --
Issued for stock plans (0; 215,000; 1,764,000; and 358,000 shares) ...... -- 2 7,363 1,596
Reclassify par value of common stock canceled at
acquisition date ...................................................... -- (705) -- --
Change in par value to $.01 from $4.45 per share ........................ -- -- (311,557) --
-------- --------- --------- --------
Balance at end of period (par value: $.01; $.01; $.01; and $4.45 per share -
outstanding shares: 201,000; 1,000; 70,280,000; and 68,516,000) ......... 2 -- 703 304,897
-------- --------- --------- --------
PAID IN CAPITAL
Balance at beginning of period ............................................ 579,126 672,775 338,857 334,672
Issuance of common stock to parent ................................... 199,998 -- -- --
Excess of proceeds over par value of
common stock issued for stock plans ................................ -- 3,755 21,794 3,866
Dividends declared ................................................... (4,677) (9,202) -- --
Change in par value of common stock .................................. -- -- 311,557 --
Other ................................................................ (3,240) -- 567 319
Distribution of EEX to common shareholders ........................... -- (582,574) -- --
Reclassify common stock and accumulated loss at acquisition date ..... -- (172,205) -- --
Purchase accounting adjustments ...................................... -- (132,937) -- --
-------- --------- --------- --------
Subtotal .......................................................... 771,207 (220,388) 672,775 338,857
Excess of purchase price over paid in capital at acquisition date..... -- 799,514 -- --
-------- --------- --------- --------
Balance at end of period .................................................. 771,207 579,126 672,775 338,857
-------- --------- --------- --------
RETAINED EARNINGS
Balance at beginning of period ............................................ -- 70,774 76,941 89,054
Net income (loss) .................................................... (9,565) (240,068) 19,042 13,053
Dividends declared ................................................... -- (3,616) (25,209) (25,162)
Reclassify accumulated loss at acquisition date ...................... -- 172,910 -- --
Other ................................................................ -- -- -- (4)
-------- --------- --------- --------
Balance at end of period .................................................. (9,565) -- 70,774 76,941
-------- --------- --------- --------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of year .............................................. -- (861) -- --
Change during the year ............................................... -- 76 (1,325) --
Deferred income tax effects .......................................... -- (27) 464 --
Purchase accounting adjustments ...................................... -- 812 -- --
-------- --------- --------- --------
Balance at end of period .................................................. -- -- (861) --
-------- --------- --------- --------
UNAMORTIZED RESTRICTED STOCK COMPENSATION
Balance at beginning of period ............................................ -- -- (1,513) (840)
Shares granted ....................................................... -- -- (1,284) (865)
Cancellations ........................................................ -- -- -- 64
Market valuation adjustments ......................................... -- -- (73) (332)
Amortization ......................................................... -- -- 2,870 460
-------- --------- --------- --------
Balance at end of period .................................................. -- -- -- (1,513)
-------- --------- --------- --------
COMMON STOCK EQUITY ............................................................ $761,644 $ 579,126 $ 743,391 $719,182
======== ========= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
A-13
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS , MERGERS AND DISPOSITIONS
ENSERCH Corporation (ENSERCH or the Corporation) is an integrated company
focused on natural gas. Substantially all of its business operations consist of
the gathering, processing, transmission, distribution and marketing of natural
gas. Businesses and subsidiaries of ENSERCH include Lone Star Gas Company
(Lone Star Gas), a gas distribution company in Texas, serving over 1.35
million customers and providing service through over 23,800 miles of
distribution mains; Lone Star Pipeline Company (Lone Star Pipeline), which has
approximately 7,600 miles of gathering and transmission pipeline in Texas; and
subsidiaries engaged in natural gas processing (Enserch Processing, Inc.) and
natural gas marketing (Enserch Energy Services, Inc.).
On August 5, 1997 (Merger Date or Acquisition Date), the merger transactions
between Texas Utilities Company (TUC) and ENSERCH were completed. All of the
common stock of ENSERCH was converted into common stock of TUC, and ENSERCH
became a wholly-owned subsidiary of TUC. ENSERCH shareholders became entitled
to receive .225 share of TUC common stock for each share of ENSERCH. At the
effective time of the merger, each of the 1,000 outstanding shares of common
stock of ENSERCH Merger Corp. (a transitory corporation organized to facilitate
the merger transaction and owned by TUC) was converted to one share of ENSERCH
Corporation Common Stock, (ENSERCH common stock). All of the shares of ENSERCH
common stock outstanding prior to the effective time of the merger were
converted to shares of TUC and, upon conversion, were canceled and ceased to
exist. Accordingly, upon completion of the merger the outstanding common stock
of ENSERCH consisted of 1,000 shares, par value $0.01 per share, all of which
were owned by TUC. Immediately prior to ENSERCH's merger with TUC, Enserch
Exploration, Inc. (EEX) and Lone Star Energy Plant Operations, Inc. (LSEPO),
former subsidiaries of the Corporation, were merged to form a new company (New
EEX), and ENSERCH distributed to its common shareholders its ownership interest
in these businesses, which was represented by approximately 105 million shares
of New EEX common stock with a carrying value of $583 million. In the
distribution, which was tax free to recipients, ENSERCH shareholders of record
on August 4, 1997 received approximately 1.5 shares of New EEX common stock for
each share of ENSERCH common stock owned.
The value of the TUC shares issued and costs incurred by TUC in connection
with the acquisition of ENSERCH aggregated $579 million. TUC accounted for its
acquisition of ENSERCH as a purchase, and purchase accounting adjustments,
including goodwill, have been pushed down and are reflected in the financial
statements of ENSERCH and its subsidiaries for the period subsequent to August
5, 1997. The financial statements of ENSERCH for the periods ended before
August 5, 1997, were prepared using ENSERCH's historical basis of accounting and
are designated as "Predecessor". The comparability of the operating results for
the Predecessor and the periods encompassing push down accounting are affected
by the purchase accounting adjustments including the amortization of goodwill
over a period of forty years.
The Predecessor financial statements for all periods presented have been
restated to reflect EEX and LSEPO as a discontinued operation. The historical
financial statements of ENSERCH reflect certain reclassifications made to
conform to TUC's presentation style. On December 31, 1997, ENSERCH sold, to
another subsidiary of TUC, at net book value, the group of companies which had
constituted the Corporation's power development and international gas
distribution operations. For financial reporting purposes, the sale was deemed
to have occurred on August 5, 1997. Prior periods were not restated to reflect
the sale.
The fair value of the assets and liabilities of ENSERCH's rate-regulated
natural gas utility business (conducted through its Lone Star Gas Company and
Lone Star Pipeline Company divisions) is considered to be equivalent to the
historical basis of accounting and accordingly, no adjustment has been made to
the carrying value. The excess of the consideration paid by TUC over the
estimated fair value of the assets and liabilities of ENSERCH at the merger date
was approximately $800 million and is reflected as goodwill in the ENSERCH
balance sheet as of December 31, 1997. The process of determining
A-14
<PAGE>
the fair value of assets and liabilities at the merger date is continuing, and
the final result awaits the resolution of income tax and other contingencies and
finalization of certain estimates. The following table summarizes the changes
made to the accounts of ENSERCH as of August 5, 1997 as a result of the merger
and application of push down accounting.
Purchase Accounting
Adjustments
--------------------
Thousands of Dollars
Investments $ (4,730)
Net property, plant and equipment (35,357)
Goodwill 791,386 *
Other assets 57,794
--------
Total assets $809,093
========
Current liabilities $ 9,732
Long-term debt 8,299
Deferred income taxes (45,728)
Pension and other postretirement benefits 125,892
Other liabilities 43,509
Shareholders' equity 667,389
--------
Total liabilities and equity $809,093
========
* Net of write-off of a premerger goodwill balance of $8,128 thousand.
The following is a summary of unaudited pro forma results of operations
assuming the distribution to shareholders and the Merger with TUC had occurred
at the beginning of the periods presented.
Year Ended December 31,
-------------------------
1997 1996
------------ -----------
Thousands of Dollars
Revenues............................ $2,553,564 $1,887,774
Operating income.................... 62,318 86,710
Income (loss) before income taxes... (12,034) 10,945
Income taxes (benefit).............. (235) 11,816
Net income (loss)................... (11,799) (871)
Net loss after preferred dividends.. (23,201) (12,210)
On June 29, 1995, ENSERCH purchased the principal operating assets of a
nonregulated marketer of natural gas for approximately $9 million in cash,
including some $8 million of cost in excess of net assets acquired. The
acquisition was accounted for as a purchase. The goodwill was written off as a
purchase adjustment in connection with the merger with TUC. Operations of the
acquired company are included in the accompanying consolidated financial
statements from the date of acquisition.
Effective June 30, 1995, the Corporation exchanged 1,204,098 shares of
ENSERCH common stock for 100% of the outstanding shares of a company, which,
through its subsidiary, is a marketer of natural gas and natural-gas services.
The transaction was accounted for as a pooling-of-interests.
A-15
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
Consolidation -- The consolidated financial statements include the accounts
of the Corporation and its majority-owned subsidiaries. All significant
intercompany items and transactions have been eliminated in consolidation.
Investments in significant unconsolidated affiliates are accounted for by the
equity method.
System of Accounts and Other Policies -- Lone Star Gas and Lone Star Pipeline
are subject to the accounting requirements prescribed by the National
Association of Regulatory Utility Commissioners (NARUC).
Use of Estimates -- The preparation of the Corporation's consolidated
financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions about future
events that affect the reporting and disclosure of assets and liabilities at the
balance sheet dates and the reported amounts of revenue and expense during the
periods covered by the consolidated financial statements. In the event
estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
Revenue Recognition -- The city gate rate for the cost of gas Lone Star Gas
ultimately delivers to residential and commercial customers is established by
the Railroad Commission of Texas (RRC) and provides for full recovery of the
actual cost of gas delivered, including out-of-period costs such as gas purchase
contract settlement costs. The rates Lone Star Gas charges it residential and
commercial customers are established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction. Lone Star Gas
records revenues on the basis of cycle meter readings throughout the month and
accrues revenues for gas delivered from the meter reading dates to the end of
the month. Gas stored underground is valued at average cost. The rate Lone
Star Pipeline charges to Lone Star Gas for transportation and storage of gas
ultimately consumed by residential and commercial customers is established by
the RRC.
Depreciation of Property, Plant and Equipment -- The pipeline and
distribution systems are depreciated by the straight line method over the
useful life of the asset; approximately 30 to 40 years from original
acquisition, respectively.
Energy Marketing Activities -- The Corporation, through its natural gas
marketing subsidiary, Enserch Energy Services, Inc. (EES), is a marketer of
natural gas and natural gas services. As part of these business activities, EES
enters into a variety of transactions, including forward contracts principally
involving physical delivery of natural gas and derivative financial instruments,
including options, swaps, futures and other contractual arrangements. The
derivative transactions are concentrated with established energy companies and
major financial institutions. Concurrent with the Merger, EES conformed its
accounting for such activities to the mark-to-market accounting method of
valuing and recognizing earnings from firm contractual commitments to purchase
and sell natural gas in the future and from its portfolio of derivative
financial instruments, including options, swaps, futures and other contractual
commitments. Hedge accounting was used previously by Predecessor.
Stock-Based Compensation -- Statement of Financial Accounting Standards
(SFAS) No. 123 encourages companies to record compensation cost for stock-based
employee compensation plans at fair value but permits other methods. Prior to
the Merger, the Corporation chose to account for stock-based compensation using
the intrinsic value method. Accordingly, compensation cost for stock options was
measured as the excess, if any, of the quoted market price of the Corporation's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The final compensation cost for restricted stock awards was based on
the quoted market price of the Corporation's stock at the date the award became
vested. As a result of the Merger, unexercised stock options at the Merger date
that had been granted under an ENSERCH plan were exchanged for options to
acquire TUC shares, and the estimated fair value assigned to such options as of
the Merger date was accounted for by TUC as a part of the cost of the
acquisition.
Consolidated Cash Flows -- For purposes of reporting cash flows, temporary
cash investments purchased with a remaining maturity of three months or less are
considered to be cash equivalents.
A-16
<PAGE>
The schedule below details the Corporation's cash payments and noncash
investing and financing activities:
<TABLE>
<CAPTION>
Predecessor
-----------------------------------
Period From
Period From January 1,
Acquisition 1997 Year Ended
Date to To December
December 31, Acquisition ------------------
1997 Date 1996 1995
------------ ---------- ------- --------
Thousands of Dollars
<S> <C> <C> <C> <C>
Cash payments (refunds):
Interest costs (net of amounts capitalized) ....... $ 33,535 $45,960 $75,833 $ 85,063
========= ======= ======= ========
Income taxes -- net ............................... $ (9,776) $ 4,415 $ 1,585 $ 4,187
========= ======= ======= ========
Non-cash investing and financing activities:
Sales and purchases of businesses:
Book value of assets (sold) acquired ........... $(105,878) $ -- $ -- $ 13,680
Goodwill ....................................... -- -- -- 8,325
Reduction in advances due parent ............... 20,143 -- -- --
Liabilities sold (assumed) ..................... 85,735 -- -- (12,481)
--------- ------- ------- --------
Cash required ................................ -- -- -- 9,524
Cash sold (acquired) ........................... 4,891 -- -- (762)
--------- ------- ------- --------
Net cash used ................................ $ 4,891 $ -- $ -- $ 8,762
========= ======= ======= ========
</TABLE>
3. AFFILIATES
Transactions between ENSERCH and TUC for the period from acquisition date
through December 31, 1997 included $10,674,000 in interest expense related to
ENSERCH borrowings from TUC. In addition, ENSERCH had revenues of $8,576,000
from the sale and transportation of gas to other TUC subsidiaries during the
period. The outstanding net amount payable to TUC (including advances) was
$298,769,000 at December 31, 1997.
4. BORROWINGS AND LINES OF CREDIT
ENSERCH's commercial paper program was discontinued following the merger with
TUC, and the borrowings outstanding at the Merger Date, which totaled
$204,500,000, were paid off at maturity with funds advanced to ENSERCH by TUC.
In addition, ENSERCH redeemed long-term debt of $260,400,000 outstanding under a
revolving credit agreement with funds advanced by TUC. At December 31, 1997,
advances from TUC totaled approximately $293,843,000.
At December 31, 1997, TUC, Texas Utilities Electric Company (TU Electric), a
wholly-owned indirect subsidiary of TUC, and ENSERCH had joint lines of credit
under credit facility agreements (Credit Agreements) with a group of commercial
banks. The Credit Agreements have two facilities. Facility A provides for
short-term borrowings aggregating up to $570,000,000 outstanding at any time at
variable interest rates and terminates April 23, 1998. Facility B provides for
short-term borrowings aggregating up to $1,330,000,000 outstanding at any time
at variable interest rates and terminates April 24, 2002. The combined
borrowings of TUC, TU Electric and ENSERCH under both facilities are limited to
an aggregate of $1,900,000,000 outstanding at any one time. ENSERCH borrowings
under both facilities are limited to an aggregate of $650,000,000 outstanding at
any time. ENSERCH borrowings under these facilities will be used for working
capital and other needs. At December 31, 1997, ENSERCH had no borrowings under
these facilities.
A-17
<PAGE>
<TABLE>
<CAPTION>
Predecessor
------------
December 31,
----------------------------
1997 1996
-------- --------
Thousands of Dollars
<S> <C> <C>
Senior Long-term Debt:
8% Notes due 1997........................................................ $ -- $100,000
7% Notes due 1999........................................................ 150,000 150,000
Subsidiary Revolving Credit Agreement Maturing 2000...................... -- 25,000
ENSERCH Revolving Credit Agreement Maturing 2001......................... -- 160,000
8 7/8% Notes due 2001.................................................... 100,000 100,000
6 3/8% Notes due 2004.................................................... 150,000 150,000
7 1/8% Notes due 2005.................................................... 150,000 150,000
6 3/8% Convertible Subordinated Debentures due 2002.......................... 90,750 90,750
Unamortized premium and discount and fair value adjustments.................. 6,046 8,569
-------- --------
Total..................................................................... 646,796 934,319
Less current maturities...................................................... -- 1,598
-------- --------
Noncurrent................................................................ $646,796 $932,721
======== ========
<CAPTION>
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Maturities (for next 5 years) $ -- $150,000 $ -- $100,000 $90,750
</TABLE>
The carrying value of ENSERCH debt has been adjusted to reflect fair value
as of the Merger date.
In connection with the Merger, the 6 3/8% Convertible Subordinated Debentures
Due in 2002 became convertible into shares of TUC common stock at $38.54 per
share (equal to 25.947 shares per $1,000 principal amount). The debentures may
be redeemed at 101.27% of the principal amount, plus accrued interest, through
March 31, 1998 and at declining premiums thereafter. The Corporation currently
intends to redeem these debentures in 1998.
In January 1998, the Corporation issued $125,000,000 of 6 1/4% Series A Notes
due 2003 and $125,000,000 of Remarketed Reset Notes due 2008 with a variable
interest rate (5.82% at date of issuance). Net proceeds from these borrowings
were used to refinance or redeem like amounts of higher rate debt and preferred
stock.
ENSERCH may issue additional debt and equity securities as needed, including
the possible future sale of up to $250,000,000 aggregate principal amount of
securities currently registered with the SEC for offering pursuant to Rule 415
under the Securities Act of 1933.
In September 1996, the Corporation paid off the outstanding balance of the
9.06% Notes due through 1999, including a prepayment premium of $3,200,000
($2,100,000 after-tax) which has been accounted for as an extraordinary loss on
early extinguishment of debt.
<TABLE>
<CAPTION>
Interest Charges were as follows: Predecessor
-------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition -----------------------
1997 Date 1996 1995
------------ ------------ ---- ----
Thousand of Dollars
<S> <C> <C> <C> <C>
Interest costs incurred ................................... $31,801 $44,668 $76,763 $71,614
Interest capitalized ...................................... (46) (131) (63) (234)
------- ------- ------- -------
Charged to expense ........................................ $31,755 $44,537 $76,700 $71,380
======= ======= ======= =======
</TABLE>
A-18
<PAGE>
5. SHAREHOLDERS' EQUITY
Common Stock -- On August 5, 1997, all of the common stock of ENSERCH
Corporation was converted into common stock of TUC, and ENSERCH became a wholly
owned subsidiary of TUC. At the effective time of the merger, each of the 1,000
outstanding shares of common stock of ENSERCH Merger Corp. (a transitory
corporation organized to facilitate the merger transaction and owned by TUC) was
converted to one share of ENSERCH Corporation Common Stock, (ENSERCH common
stock). All of the shares of ENSERCH common stock outstanding prior to the
effective time of the merger were converted to shares of TUC and, upon
conversion, were canceled and ceased to exist. Accordingly, at August 5, 1997,
the outstanding common stock of ENSERCH consisted of 1,000 shares, par value
$0.01 per share, all of which were owned by TUC.
In December 1997, TUC purchased an additional 200,000 shares for $200,000,000.
At the special shareholders meeting on November 15, 1996, shareholders of the
Corporation approved a change in the par value of ENSERCH common stock from
$4.45 per share to $.01 per share to facilitate the distribution of the
Corporation's interest in EEX. The reduction in par value was recorded by the
transfer of $312,000,000 to the paid-in-capital account.
<TABLE>
<CAPTION>
Adjustable Rate Preferred Stock
at December 31, 1997 and 1996: Stated Value Per Shares Outstanding
--------------------- ---------------------
Preferred Depositary Preferred Depositary Amount
Share Share Shares Shares (Thousands)
--------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Series E.................... $1,000 $100 100,000 1,000,000 $100,000
Series F.................... 1,000 25 75,000 3,000,000 75,000
--------
Total.................... $175,000
========
</TABLE>
On January 16, 1998, the Corporation redeemed all of the outstanding shares
of its Adjustable Rate Preferred Stock, Series E, at $1,000 per share, plus
accrued and unpaid dividends of $14.777 per share.
The Series F stock is redeemable at stated value after May 1, 1999. Holders
of the preferred stock are entitled to its stated value upon involuntary
liquidation.
Dividend rates for the Series F Stock are determined quarterly, in advance,
based on the "Applicable Rate" (highest of the three-month Treasury bill rate,
the Treasury ten-year constant maturity rate and either the Treasury twenty-year
or thirty-year constant maturity rate, as defined), as set forth below:
<TABLE>
<CAPTION>
Per Annum Rate
(Determined Quarterly)
----------------------
Series F
----------------
<S> <C>
Dividend rate..................... 87% of
Applicable Rate
Minimum rate...................... 4.50%
Maximum rate...................... 10.50%
</TABLE>
A-19
<PAGE>
<TABLE>
<CAPTION>
Dividends Declared: Predecessor
------------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition -----------------------
1997 Date 1996 1995
------------- ----------- ---- ----
Thousands of Dollars
<S> <C> <C> <C> <C>
Adjustable Rate Preferred Stock:
Series E ($6.42, $7.00, $7.00 per depositary share)... $2,917 $ 3,500 $ 7,000 $ 7,000
Series F ($1.34, $1.45, $1.54 per depositary share)... 1,760 2,270 4,360 4,610
Common Stock ($.10, $.20, $.20 per share)................. -- 7,048 13,849 13,552
------ ------- ------- -------
Total.............................................. $4,677 $12,818 $25,209 $25,162
====== ======= ======= =======
</TABLE>
6. STOCK COMPENSATION PLANS
Effective with the Merger, outstanding options for ENSERCH common stock were
exchanged for options for 532,913 shares of TUC common stock exercisable at
prices ranging from $7.03 to $37.71 per share, and ENSERCH was precluded from
awarding further options. The estimated fair value of these options of
$3,214,000 was accounted for as a part of the cost of the acquisition. At
December 31, 1997, 402,966 of these options remained outstanding and
exercisable. Prior to the Merger, the Corporation had three fixed option plans.
Stock options had been awarded to key employees and were outstanding under all
three plans. Options generally expire ten years after the date of the grant.
<TABLE>
<CAPTION>
Summary of Stock Option Activity:
Weighted Average
Exercise Price Number of Options
-------------- -----------------------------------
1997 1996 1997 1996 1995
------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding -- Beginning of year... $17.71 $17.27 1,182,308 2,514,598 2,308,823
Granted.......................... -- 15.13 -- 326,300 263,200
Exercised (a).................... 17.15 16.47 (214,278) (1,579,289) (27,825)
Canceled or expired.............. 16.72 17.87 (126,225) (79,301) (29,600)
Converted into TUC options....... 18.00 -- (841,805) -- --
--------- ---------- ---------
Outstanding -- End of year......... -- 17.71 -- 1,182,308 2,514,598
========= ========== =========
Exercisable........................ -- 1,182,308 1,957,637
========= ========== =========
</TABLE>
(a) Price ranges for options exercised in 1997 (prior to the Merger) were $4.45
to $21.00; in 1996 were $4.45 to $21.13; and in 1995 were $12.50 to $17.00.
The weighted average fair value of stock options granted in 1996 and 1995 was
$4.97 and $4.80, respectively. The fair value for these options granted since
December 31, 1994 was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995, respectively: risk-free interest rates of 5.48% and 7.17%; dividend
yields of 1.33% and 1.48%; volatility factor of the expected market price of the
Corporation's common stock of .29; and a weighted average expected life of the
options of 6.3 years.
The stock option plans included provisions for issuing the Corporation's
common stock under performance-based grants. In 1996 and 1995, the Corporation
granted 83,500 and 59,000 shares of restricted stock under its stock option
plan, respectively. The weighted average grant-date fair value of these
restricted shares was $15.38 and $14.66, respectively. Fair value is equal to
the market value of the Corporation's common stock on the date of grant. Upon
the Board of Directors' agreement to merge with TUC in April 1996, all
restrictions were lifted on the 211,956 shares of restricted stock outstanding.
The unamortized portion of the cost of these shares of $3,100,000 was charged to
compensation expense in 1996.
A-20
<PAGE>
Pro forma information regarding net income is mandated by SFAS 123 and has
been determined as if the Corporation had accounted for its employee stock
options under the fair value method of that Statement. Had compensation cost
for the Corporation's stock option plans been determined based on the fair value
at the grant dates for awards under those plans in accordance with the provision
of SFAS 123, the Corporation's net income (loss) for the following periods would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Predecessor
--------------------------------------------
Period from
January 1,
1997
To Year Ended December 31,
Acquisition ----------------------------
Date 1996 1995
------------- ---- ----
Thousands of Dollars
<S> <C> <C> <C>
Net income (loss) (after provision for dividends on
preferred stock):
As reported.............................................. $(246,793) $7,703 $1,363
Pro forma................................................ (246,793) 5,498 1,179
</TABLE>
7. DERIVATIVE INSTRUMENTS
The Corporation enters into derivative instruments, including options, swaps,
futures and other contractual commitments to manage market risks related to
changes in interest rates and commodity price exposures. The Corporation's
participation in derivative transactions, except for the gas marketing
activities, has been designated for hedging purposes, and the derivatives
are not held or issued for trading purposes. (For a discussion of accounting
policies relating to derivative instruments, see Note 2.)
Natural Gas Marketing Activities -- EES's marketing activities involve price
commitments into the future and, therefore, give rise to market risk, which
represents the potential loss that can be caused by a change in the market value
of a particular commitment. Net open portfolio positions often result from the
origination of new transactions or in response to changing market conditions.
The Corporation closely monitors its exposure to market risk. The Corporation
utilizes a number of methods to monitor market risk, including sensitivity
analysis. The exposure for fixed price natural gas purchase and sale
commitments, and derivative financial instruments, including options, swaps,
futures and other contractual commitments, is based on a methodology that uses a
five-day holding period and a 95% confidence level. EES uses market-implied
volatilities to determine its exposure to market risk. Market risk is estimated
as the potential loss in fair value resulting from at least a 15% change in
market factors which may differ from actual results. Using 15%, the most
adverse change in fair value at December 31, 1997, as a result of this analysis,
was a reduction of $1,100,000.
EES enters into contracts to purchase and sell natural gas for physical
delivery in the future. At December 31, 1997, EES had net commitments to sell
approximately 50.6 billion cubic feet (Bcf) of natural gas through the year 2003
with offsetting net financial positions to purchase approximately 61.3 Bcf.
Concurrent with the Merger, EES conformed its accounting for its gas
marketing activities to mark-to-market accounting, which is the accounting
method used by TUC. Under mark-to-market accounting, changes (whether positive
or negative) in the value of contractual commitments to purchase and sell
natural gas in the future and from its portfolio of derivative financial
instruments, including options, swaps, futures and other contractual commitments
are recognized as an adjustment to operating revenues in the period of change.
The market prices used to value these transactions reflect management's best
estimate of market prices considering various factors including closing exchange
and over-the-counter quotations, time value of money and volatility factors
underlying the commitments. These market prices are adjusted to reflect the
potential impact of liquidating EES's position in an orderly manner over a
reasonable period of time under present market conditions.
A-21
<PAGE>
EES has a number of risks and costs associated with the future contractual
commitments included in its natural gas portfolio, including credit risks
associated with the financial condition of counterparties, product location
(basis) differentials and other risks that management policies dictate. EES
continuously monitors the valuation of identified risk and adjusts the portfolio
valuation based on present market conditions. Reserves are established in
recognition that certain risks exist until delivery of natural gas has occurred,
counterparties have fulfilled their financial commitments and related financial
instruments mature or are closed out.
The following table displays the mark-to-market values of EES's natural gas
marketing risk management assets and liabilities at December 31, 1997 and the
average value for the period from August 5, 1997 through December 31, 1997:
Assets Liabilities Net
------ ----------- ---
Thousands of Dollars
Fair Value:
Current............. $365,650 $357,044 $ 8,606
Noncurrent.......... 41,522 31,324 10,198
-------- -------- -------
Total.............. $407,172 $388,368 18,804
======== ========
Less reserves....... 9,251
-------
Net of reserves.... $ 9,553
=======
Average Value:
Total............... $291,809 $278,332 $13,477
======== ========
Less reserves....... 8,134
-------
Net of reserves.... $ 5,343
=======
The following table summarizes EES results from its gas marketing activities
for the periods presented:
<TABLE>
<CAPTION>
Predecessor
----------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition -------------------------
1997 Date 1996 1995
---------- ---------- ---------- ----------
Thousands of Dollars
<S> <C> <C> <C> <C>
Revenues........................ $858,467 $601,881 $825,009 $750,463
Net trading income (loss)....... (286) (4,709) 18,144 26,166
</TABLE>
Credit Risk -- Credit risk relates to the risk of loss that the Corporation
would incur as a result of nonperformance by counterparties to their respective
derivative instruments. The Corporation maintains credit policies with regard
to its counterparties that management believes significantly minimize overall
credit risk. The Corporation does not obtain collateral to support the
agreements but monitors the financial viability of counterparties and believes
its credit risk is minimal on these transactions. The Company believes the
risk of nonperformance by counterparties is minimal.
A-22
<PAGE>
8. INCOME TAXES
<TABLE>
<CAPTION>
Predecessor
------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
Income Tax Expense (Benefit) December 31, Acquisition -----------------------
of Continuing Operations: 1997 Date 1996 1995
-------- --------- ------- -------
Thousands of Dollars
<S> <C> <C> <C> <C>
Current
Federal................... $(20,378) $ 4,297 $ 4,745 $ 6,230
State..................... 175 9 136 92
Foreign................... -- (115) 79 50
-------- ------- ------- -------
Total.................... (20,203) 4,191 4,960 6,372
-------- ------- ------- -------
Deferred
Federal................... 18,775 (8,719) 5,429 5,185
Foreign................... -- -- 29 --
-------- ------- ------- -------
Total.................... 18,775 (8,719) 5,458 5,185
-------- ------- ------- -------
Investment Tax Credits..... (57) (84) (141) (142)
-------- ------- ------- -------
Total.................... $ (1,485) $(4,612) $10,277 $11,415
======== ======= ======= =======
</TABLE>
Reconciliation of Income Taxes (Benefit) Computed at the Federal Statutory Rate
to Income Tax Expense (Benefit) of Continuing Operations:
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition -----------------------
1997 Date 1996 1995
---------- ---------- --------- ---------
Thousands of Dollars
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before income taxes:
Domestic.................................................... $(11,072) $(22,815) $27,084 $33,020
Foreign..................................................... 22 2,826 (7,056) (243)
-------- -------- ------- -------
Total..................................................... $(11,050) $(19,989) $20,028 $32,777
======== ======== ======= =======
Income taxes (benefit) at the federal statutory rate of 35%..... $ (3,868) $ (6,996) $ 7,010 $11,472
Amortization of investment tax credits.......................... (57) (84) (141) (142)
Amortization of goodwill........................................ 2,840 -- -- --
State and foreign taxes, net of federal tax benefit............. 114 (69) 159 93
Nondeductible distribution and merger related costs............. -- 4,948 2,275 --
Nondeductible meals and entertainment........................... 175 180 324 342
Change in cash surrender value of life insurance policies....... (313) (389) (24) (19)
Increase in (reduction of) prior year tax liabilities........... -- (2,530) 601 (501)
Other --- net................................................... ( 376) 328 73 170
-------- -------- ------- -------
Income Tax Expense (Benefit).............................. $ (1,485) $ (4,612) $10,277 $11,415
======== ======== ======= =======
</TABLE>
A-23
<PAGE>
Deferred income taxes provided by the liability method for significant
temporary differences based on tax laws and statutory rates in effect at the
December 31, 1997 and 1996 balance sheet dates are as follows:
<TABLE>
<CAPTION>
Predecessor
-----------------------------
1997 1996
------------------------------ -----------------------------
Total Current Noncurrent Total Current Noncurrent
-------- -------- ---------- -------- ------- ----------
Thousands of Dollars
<S> <C> <C> <C> <C> <C> <C>
Deferred Tax Assets:
Net operating--loss and other tax--
credit carryforwards............... $163,061 $ -- $163,061 $154,558 $ -- $154,558
Retirement and other employee
benefit obligations................ 47,128 4,469 42,659 22,916 2,600 20,316
Accruals and allowances.............. 11,779 10,004 1,775 24,728 11,420 13,308
Losses of controlled foreign
corporations....................... 2,557 -- 2,557 5,936 -- 5,936
All other............................ 8,358 8,358 -- 23,712 8,053 15,659
-------- ------- -------- -------- ------- --------
Total.............................. 232,883 22,831 210,052 231,850 22,073 209,777
-------- ------- -------- -------- ------- --------
Deferred Tax Liabilities:
Property-- related differences....... 139,934 -- 139,934 136,617 -- 136,617
All other............................ 11,517 168 11,349 62,132 1,390 60,742
-------- ------- -------- -------- ------- --------
Total.............................. 151,451 168 151,283 198,749 1,390 197,359
-------- ------- -------- -------- ------- --------
Net Deferred Tax Asset............... $ 81,432 $22,663 $ 58,769 $ 33,101 $20,683 $ 12,418
======== ======= ======== ======== ======= ========
</TABLE>
At December 31, 1997, domestic net operating-loss (NOL) carryforwards total
$445 million, which begin to expire in 2003, and alternative minimum tax-credit
carryforwards total $7 million. The tax benefits of these carryforwards of $163
million, as shown above, are available to offset future tax payments. ENSERCH
expects to fully utilize such NOL's prior to their expiration date. At December
31, 1997, ENSERCH also had $17 million of general business credit carryforwards
which begin to expire in 1999. As a result of limitations on the timing of use
arising from the Merger, ENSERCH does not expect to fully utilize such tax
credit carryforwards prior to their expiration date; therefore, such credits
were written off as a purchase accounting adjustment.
<TABLE>
<CAPTION>
Predecessor
------------------------------------
Period From
Period From January 1,
Acquisition 1997
Date to To Year Ended December 31,
Cash Payments (Refunds) of Income Taxes Allocated December 31, Acquisition -----------------------
to Continuing Operations: 1997 Date 1996 1995
------------- ----------- ---------- ----------
Thousands of Dollars
<S> <C> <C> <C> <C>
Federal:
Current year, including alternative minimum tax............ $(9,245) $2,203 $2,013 $ 8,840
Prior years................................................. (586) 2,149 (535) (5,026)
------- ------ ------ -------
Total..................................................... (9,831) 4,352 1,478 3,814
State......................................................... 55 63 (82) 373
Foreign....................................................... -- -- 189 --
------- ------ ------ -------
Total..................................................... $(9,776) $4,415 $1,585 $ 4,187
======= ====== ====== =======
</TABLE>
A-24
<PAGE>
9. EMPLOYEE BENEFIT PLANS
Pension Plan -- At the date of the Merger, ENSERCH had a defined benefit
pension plan providing retirement income benefits for substantially all of its
employees. As a part of purchase accounting, the accrued pension liability was
adjusted to recognize all previously unrecognized gains or losses arising from
past experience different from that assumed, the effects of changes in
assumptions, all unrecognized prior service costs and the remainder of
unrecognized asset existing at the date of the initial application of SFAS 87.
These adjustments to the accrued pension liability, to the extent associated
with rate-regulated operations, were recorded as regulatory assets or
liabilities and, to the extent associated with non-regulated operations, as
goodwill. Accrued retirement costs are funded to the extent such amounts are
deductible for federal income-tax purposes. Plan assets consist primarily of
equity investments, government bonds and corporate bonds. Benefits are based on
years of credited service and average compensation.
Effective January 1, 1998, the ENSERCH qualified retirement plan was merged
into another retirement plan of TUC.
In connection with the Merger, certain employees of ENSERCH were offered
and accepted an early retirement option. Effects of the early retirement option
associated with ENSERCH employees were included in purchase accounting
adjustments as regulatory assets or goodwill, as appropriate.
<TABLE>
<CAPTION>
Predecessor
---------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition ------------------------
1997 Date 1996 1995
------------- ------------ ----------- -----------
Thousands of Dollars
<S> <C> <C> <C> <C>
Components of Net Pension Costs:
Service cost -- benefits earned during the period.. $ 1,758 $ 2,466 $ 5,228 $ 3,801
Interest cost on projected benefit obligation...... 11,186 14,367 24,418 23,530
Actual return on plan assets....................... (9,606) (46,504) (40,474) (46,777)
Net amortization and deferral...................... (1,016) 31,226 14,295 23,975
------- -------- -------- --------
Net periodic pension cost......................... $ 2,322 $ 1,555 $ 3,467 $ 4,529
======= ======== ======== ========
Valuation Assumptions:
Discount rate...................................... 7.25% 7.75% 7.75% 7.65%
Rate of increase in compensation levels............ 4.30% 4.30% 4.00% 4.00%
Expected long-term rate of return on assets........ 9.00% 9.00% 9.50%
Amounts Recognized:
Actuarial present value of accumulated benefits:
Accumulated benefit obligation...................... $(351,976) $(305,041)
========= =========
Vested benefit obligation........................... $(349,711) $(302,360)
========= =========
Projected pension benefit obligation for service
rendered to date.................................. $(379,217) $(333,955)
Plan assets at fair value - primarily equity
investments, government bonds and corporate bonds.... 275,863 285,810
--------- ---------
Projected benefit obligation in excess of plan assets.. (103,354) (48,145)
Unrecognized net gain from past experience different
from that assumed and effects of changes
in assumptions........................................ 24,743 3,437
Prior service cost not yet recognized in net periodic
pension expense....................................... (6,077) (3,555)
Unrecognized plan assets in excess of projected benefit
obligation at initial application.................. -- (3,406)
--------- ---------
Accrued pension cost............................ $(84,688) $ (51,669)
========= =========
</TABLE>
A-25
<PAGE>
Postretirement Benefits Other than Pensions -- In addition to the retirement
plan, ENSERCH offers certain health care and life insurance benefits to
substantially all employees and their eligible dependents at retirement. In
connection with the Merger, the plan was amended to provide coverage to those
employees hired after July 1, 1989 not previously eligible for postretirement
medical benefits. In addition, the health care benefits provided to retirees
under the Plan were enhanced to reflect the same level of benefits as offered by
other such plans of TUC companies. The unrecognized prior service cost at
December 31, 1997 arose from these two changes which occurred after the Merger
Date. Obligations have not been prefunded. Benefits received vary in level
depending on years of service and retirement dates. The purchase accounting
adjustments described above for the retirement plan of ENSERCH were also applied
to the accrued liabilities for the postretirement health care and life insurance
benefits.
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Period from
Period from January 1,
Acquisition 1997
Date to To Year Ended December 31,
December 31, Acquisition -----------------------
1997 Date 1996 1995
------------ ------------ ------------ --------
Thousands of Dollars
<S> <C> <C> <C> <C>
Components of Net Periodic Postretirement Benefit Cost:
Service cost -- benefits earned during the period.................. $ 84 $ 142 $ 309 $ 227
Interest cost on accumulated postretirement benefit
obligation...................................................... 2,514 2,899 5,473 5,966
Amortization of the transition obligation.......................... -- 2,189 4,037 4,037
Net amortization and deferral...................................... -- 128 (63) (445)
--------- ------ -------- -------
Net periodic postretirement benefits cost.......................... $ 2,598 $5,358 $ 9,756 $9,785
========= ====== ======== =======
Valuation Assumptions:
Discount rate...................................................... 7.25% 7.75% 7.75% 7.65%
Medical cost trend rate............................................ 5.0% 5.0% 6.50%
Amounts Recognized:
Accumulated postretirement benefit obligation (APBO):
Retirees........................................................ $ (82,570) $(65,997)
Fully eligible active employees................................. (3,339) (499)
Other active employees.......................................... (20,504) (6,720)
--------- --------
Total APBO...................................................... (106,413) (73,216)
Unrecognized transition obligation................................. -- 53,013
Unrecognized prior service cost.................................... 17,822 --
Unrecognized net loss.............................................. 3,455 10,718
--------- --------
Accrued postretirement benefits cost........................... $ (85,136) $ (9,485)
========= ========
</TABLE>
The expected increase in costs of future benefits covered by the plan is
projected using a health care cost trend rate of 5% in 1998 and thereafter. A
one percentage point increase in the assumed health care cost trend rate in each
future year would increase the APBO at December 31, 1997 by approximately $11.6
million and other postretirement benefits cost for 1997 by approximately $.1
million.
A-26
<PAGE>
10. COMMITMENTS AND CONTINGENT LIABILITIES
Legal Proceedings -- A lawsuit was filed on February 24, 1987, in the 112th
Judicial District of Sutton County, Texas, against subsidiaries and affiliates
of the Corporation and its utility division. The plaintiffs have claimed that
defendants failed to make certain production and minimum-purchase payments under
a gas-purchase contract. The plaintiffs initially alleged a conspiracy to
violate purchase obligations, improper accounting of amounts due, fraud,
misrepresentation, duress, failure to properly market gas and failure to act in
good faith. Under amended pleadings filed in January 1997, plaintiffs have
added allegations of negligence and gross negligence in connection with the
measurement of gas and conversion. Plaintiffs seek actual damages in excess of
$5,000,000 and punitive damages in an amount equal to .5% of the consolidated
gross revenues of the Corporation for the years 1982-1986 (approximately
$85,000,000), interest, costs and attorneys' fees.
On October 30, 1995, a lawsuit was filed in the Supreme Court of Western
Australia by Woodside Petroleum Ltd. and its joint venture partners against the
Corporation, a former subsidiary of the Corporation and others. Plaintiffs seek
damages of approximately $18,000,000 from the Corporation based on an indemnity
arrangement and approximately $208,000,000 from the other defendants for alleged
breaches of contract and breaches of a trade practice act, all in connection
with the construction of an offshore gas and condensate drilling production
platform. The Corporation has agreed to indemnify the current owner of the
former subsidiary pursuant to the provisions in the prior sales agreement.
Following a preliminary hearing, the Court, on December 4, 1997, delivered an
opinion in favor of the Corporation, the former subsidiary and the other
defendants finding that the defendants are additional insurers under certain
insurance policies owned by the plaintiffs and that the plaintiffs and their
insurers are precluded from bringing a subrogated claim against the defendants.
An appeal of this ruling is anticipated.
Management of the Corporation believes it has meritorious defenses to the
claims made in these and other actions brought in the ordinary course of
business. In the opinion of management, the Corporation will incur no liability
from these and all other pending claims and suits that is material for financial
reporting purposes.
Environmental Matters -- The Corporation is subject to federal, state and
local environmental laws and regulations that regulate the discharge of
materials into the environment. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. The level of future
expenditures for environmental matters, including costs of obtaining operating
permits, equipment monitoring and modifications under the Clean Air Act and
cleanup obligations, cannot be fully ascertained until the regulations that
implement the applicable laws have been approved and adopted. It is
management's opinion that all such costs, when finally determined, will not have
a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Corporation.
Commitments -- Future minimum commitments are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter
------- ------- ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Operating leases........ $ 6,100 $ 5,500 $4,800 $3,500 $3,200 $54,500
Gas-purchase contracts.. 87,600 33,900 8,100 5,400 3,000 1,400
</TABLE>
The Corporation had a number of noncancelable long-term operating leases at
December 31, 1997, principally for office space and machinery and equipment.
Rental expenses for continuing operations incurred under all operating leases
aggregated $2,600,000 for the pre-and post-merger periods of 1997, $3,600,000 in
1996 and $5,600,000 in 1995. Rental income received for subleased office space
was $2,000,000 in 1997, $3,400,000 in 1996 and $3,400,000 in 1995. Future
minimum rental income to be received for subleased office space is $11,500,000
over the next five years.
A-27
<PAGE>
Gas-Purchase Contracts -- Lone Star Gas buys gas under long-term, intrastate
contracts in order to assure a reliable supply to its customers. Many of these
contracts require minimum purchases of gas. Lone Star Gas has made accruals for
payments that may be required for settlement of gas-purchase contract claims
asserted or that are probable of assertion. Lone Star Gas continually evaluates
its position relative to asserted and unasserted claims, above-market prices or
future commitments. Management believes that Lone Star Gas has not incurred
losses for which reserves should be provided at December 31, 1997. Based on
estimated gas demand, which assumes normal weather conditions, requisite gas
purchases are expected to substantially satisfy purchase obligations for the
year 1998 and thereafter.
Sales of Receivables -- The Corporation has sold $100 million of receivables
under an amended limited recourse agreement that matures on September 22, 1998.
Additional receivables are continually sold to replace those collected. The
uncollected balances of receivables sold were $100 million at both year-end 1997
and 1996.
Guarantees -- The Corporation and/or its subsidiaries are the guarantor on
various commitments and obligations of others aggregating some $45,300,000 at
December 31, 1997. The Corporation is exposed to loss in the event of
nonperformance by other parties. However, the Corporation does not anticipate
nonperformance by the counterparties.
Concentrations of Credit Risk -- Lone Star Gas operations have trade
receivables from a few large industrial customers in North Central Texas arising
from the sale of natural gas. A change in economic conditions may affect the
ability of customers to meet their contractual obligations. At December 31,
1997 and 1996, the allowance for possible losses deducted from accounts
receivable was $3,902,000 and $3,968,000 respectively. The Corporation believes
that its provision for possible losses on uncollectible accounts receivable is
adequate for its credit loss exposure.
Inquiry into Lone Star Gas Company Rates -- In October 1996, Lone Star
Pipeline filed a request with the RRC to increase the rate it charges Lone Star
Gas to store and transport gas ultimately destined for residential and
commercial customers in the 550 Texas cities and towns served by Lone Star Gas.
Lone Star Gas also requested that the RRC separately set rates for costs to
aggregate gas supply for these cities. Rates previously in effect were set by
the RRC in 1982. In September 1997, the RRC issued an order reducing the
charges by Lone Star Pipeline to Lone Star Gas for storage and transportation
services. In that order, the RRC did authorize separate charges for the Lone
Star Pipeline storage and transportation services, a separate charge by Lone
Star Gas for the cost of aggregating gas supplies, and a continuation of the
100% flow through of purchased gas expense. The RRC also imposed some new
criteria for affiliate gas purchases and a new reconciliation procedure that
will require a review of purchased gas expenses every three years. The RRC
order has become final, but is being appealed by several parties including Lone
Star Pipeline and Lone Star Gas. The rates authorized by the order became
effective on December 1, 1997, and will result in an annual margin reduction of
approximately $8.2 million.
On August 20, 1996, the RRC ordered a general inquiry into the rates and
services of Lone Star Gas, most notably a review of historic gas cost and gas
acquisition practices since the last rate setting. The inquiry docket has been
separated into different phases. Two of the phases, conversion to the NARUC
account numbering system and unbundling, have been dismissed by the RRC, and one
other phase, rate case expense, is pending RRC action on the basis of a
stipulation of all parties. In the phase dealing with historic gas cost and gas
acquisition practices, Lone Star Gas and Lone Star Pipeline have filed a motion
for summary disposition stating that any retroactive rate action would be
inappropriate and unlawful. Settlement discussions with intervenor cities are
ongoing. If the motion for summary disposition is denied, a hearing has been
scheduled to begin in August 1998. A number of management and transportation
related issues have been placed in a separate phase which still has an undefined
scope and is being held in abeyance pending the resolution of the phase dealing
with gas costs. Management believes that gas costs were prudently incurred and
were properly accounted for and recovered through the gas cost recovery
mechanism previously approved by the RRC. At this time, management is unable to
determine the ultimate outcome of the inquiry.
A-28
<PAGE>
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and related estimated fair values of the Corporation's
significant financial instruments at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Carrying Estimated Carrying Estimated
or Notional Fair or Notional Fair
Amount Value Amount Value
------------ ---------- ------------ ----------
Thousand of Dollars
<S> <C> <C> <C> <C>
On-balance sheet liabilities:
Long-term debt (including current maturities) (a)........ $(646,796) $(649,089) $(934,319) $(935,626)
Off-balance sheet assets (liabilities):
Financial guarantees (b)................................. -- (45,332) -- (104,044)
EES derivatives (c)...................................... -- -- -- 749
</TABLE>
Estimated fair value: (a) variable-rate debt - approximates carrying amount,
exchange traded debt - quoted market prices, and other debt - discounted value
using rates for debt with similar characteristics; (b) approximates carrying or
notional amount; (c) 1996 based on mark-to-market valuations (see Note 7
concerning EES accounting in 1997).
The fair values of other financial instruments for which carrying amounts and
fair values have not been presented are not materially different than their
related carrying amounts.
A-29
<PAGE>
12. DISCONTINUED OPERATIONS
In connection with the merger of ENSERCH with TUC, EEX and LSEPO were merged
to form a new company (New EEX), and ENSERCH distributed to its common
shareholders its ownership interest in New EEX, which was represented by
approximately 105 million shares of New EEX common stock with a carrying value
of $583 million. In the distribution, which was tax free to the recipients,
ENSERCH shareholders of record on August 4, 1997 received approximately 1.5
shares of New EEX common stock for each share of ENSERCH common stock owned.
ENSERCH's financial statements for all periods presented have been restated to
reflect EEX and LSEPO as discontinued operations. ENSERCH's discontinued
operations also include its engineering and construction and environmental
businesses, the principal assets of which were sold in prior years. The results
of operations of ENSERCH's discontinued businesses were as follows:
<TABLE>
<CAPTION>
Predeccessor
-----------------------------------------------------
Period From Period From
Acquisition January 1, 1997
Date to To Year Ended December 31,
December 31, Acquisition -------------------------
1997 Date 1996 1995
------------- ------------ ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Revenues from exploration and production operations.. $ -- $ 159,547 $248,365 $140,199
======= ========= ======== ========
Operating income (loss) from exploration and
production operations........................... $ -- $(375,510)* $ 36,078 $ 7,929
======= ========= ======== ========
Income (loss) from exploration and production
operations...................................... $ -- $(215,006)* $ 12,947 $ (8,309)
Provision for additional costs and expenses
for the wind-up of discontinued engineering and
construction business, net of tax benefit of $5,215
in 1997 and tax provision of $2,160 in 1996......... -- (9,685) (1,560) --
------- --------- -------- --------
Total........................................ $ -- $(224,691) $ 11,387 $ (8,309)
======= ========= ======== ========
Cash Flow Information:
Net cash flows from (used for)
Operating activities................................ $(6,564) $ 111,533 $154,307 $ 81,876
Investing activities................................ -- (125,333) (73,487) (152,127)
Purchase of business, net of cash acquired.......... -- -- -- (332,888)
Financing activities................................ -- (13,614) (66,185) 412,673
------- --------- -------- --------
Net cash flows from (used for) discontinued
operations........................................ $(6,564) $ (27,414) $ 14,635 $ 9,534
======= ========= ======== ========
By Discontinued Operation:
Exploration and production.......................... $ -- $ (21,773) $ 19,636 $ 37,636
Engineering and construction........................ (6,564) (5,641) (5,001) (28,102)
------- --------- -------- --------
Total........................................ $(6,564) $ (27,414) $ 14,635 $ 9,534
======= ========= ======== ========
</TABLE>
* Includes a $426 million pretax ($236 million after-tax) write-down of the
carrying value of EEX's oil and gas properties due to the U.S. cost center
ceiling limitation at March 31, 1997.
A-30
<PAGE>
The net investment in the discontinued exploration and production business as
of December 31, 1996 consisted of the following (in thousands):
Current assets................................... $ 114,329
Net property, plant and equipment................ 1,493,210
Other assets..................................... 12,161
Current liabilities.............................. (118,191)
Long-term debt................................... (95,564)
Deferred income taxes payable.................... (258,712)
Other liabilities................................ (349,004)
----------
Net investment................................ $ 798,229
==========
Loss provisions of $9.7 million in 1997 and $1.6 million in 1996 after-tax
were recorded in recognition that certain claims and accounts receivable were
settled at amounts less than previously estimated and costs and expenses
incurred for the windup of discontinued engineering and construction businesses
would be greater than previously estimated.
At December 31, 1997, discontinued engineering and construction businesses
had assets of $42 million, consisting principally of retained claims and
accounts receivable of the Ebasco and Enserch Environmental business units, and
current and other liabilities and reserves of $14 million. The Corporation has
filed suit against certain parties to recover amounts outstanding. Management
expects that substantially all disputes will be resolved by year-end 1998 and
that adequate provision for uncollectible claims and accounts receivable,
income-tax matters and expenses for windup of discontinued engineering and
construction operations has been made.
A-31
<PAGE>
QUARTERLY RESULTS (UNAUDITED) -- The results of operations by quarters are
summarized below. In the opinion of the Corporation's management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation have been made. Previously reported amounts have been restated to
reflect EEX and LSEPO as discontinued operations and to reflect the sale of the
power development and international gas distribution operations to Texas Energy
Industries, Inc., a wholly-owned subsidiary of TUC. For accounting purposes,
the sale was considered to be effective as of the Merger date.
<TABLE>
<CAPTION>
Predecessor
----------------------------------
Period From
July 1 Period From
Quarter Ended To Acquisition Quarter
--------------------- Acquisition Date to Ended
March 31 June 30 Date September 30 December 31
---------- --------- ------------ ------------- ------------
Thousands of Dollars
<S> <C> <C> <C> <C> <C>
1997:
Revenues........................................ $ 794,813 $348,047 $135,297 $275,906 $1,000,201
Operating Income (Loss)......................... 51,328 (16,250) 11,806 (6,301) 26,125
Income (Loss) From Continuing Operations........ 18,576 (21,576) (12,377) (12,271) 2,706
Income (Loss) From Discontinued Operations...... (219,501) (8,511) 3,321 -- --
Net Income (Loss)............................... (200,925) (30,087) (9,056) (12,271) 2,706
Loss Applicable to Common Stock................. (203,787) (32,980) (10,026) (14,149) (93)
<CAPTION>
Predecessor
--------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Thousands of Dollars
<S> <C> <C> <C> <C>
1996:
Revenues........................................ $650,237 $341,432 $311,040 $591,551
Operating Income (Loss)......................... 63,911 (377) (5,589) 47,148
Income (Loss) From Continuing Operations........ 29,485 (12,805) (17,398) 10,469
Income From Discontinued Operations............. 292 6,104 2,117 2,874
Extraordinary Loss on Extinguishment of Debt.... -- -- (2,096) --
Net Income (Loss)............................... 29,777 (6,701) (17,377) 13,343
Earnings (Loss) Applicable to Common Stock...... 27,018 (9,518) (20,263) 10,466
</TABLE>
A-32
<PAGE>
RECONCILIATION OF PREVIOUSLY REPORTED AMOUNTS
Results of operations were restated for discontinued operations of EEX and
LSEPO effective with the quarterly report ended June 30, 1997. During the
fourth quarter of 1997, results of operations were also restated to reflect the
sale of the power development and international gas distribution operations
effective as of the Merger date. Following the Merger, certain
reclassifications, which only affected operating income, were made to prior
periods to conform to TUC's presentation.
<TABLE>
<CAPTION>
Increase (Decrease)
-----------------------------------------------------------------
Period From
July 1 Period From
Quarter Ended To Acquisition Quarter
---------------------- Acquisition Date to Ended
March 31 June 30 Date September 30 December 31
---------- ---------- ------------ ------------- ------------
Thousands of Dollars
<S> <C> <C> <C> <C> <C>
1997:
Revenues.................................... $ (73,154) $ -- $ -- $ (745) $ --
Operating Income (Loss)..................... 395,448 (1,481) (500) 628 --
Income From Continuing Operations........... 219,501 -- -- 1,507 --
Loss From Discontinued Operations........... (219,501) -- -- -- --
Net Income (Loss)........................... -- -- -- 1,507 --
Earnings (Loss) Applicable to Common Stock.. -- -- -- 1,507 --
<CAPTION>
Quarter Ended
----------------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
Thousands of Dollars
<S> <C> <C> <C> <C>
1996:
Revenues.................................... $ (28,406) $(73,723) $ (74,475) $ (71,761)
Operating Income (Loss)..................... (6,481) (15,452) (10,285) (9,009)
Loss From Continuing Operations............. (292) (6,104) (2,117) (4,434)
Income From Discontinued Operations......... 292 6,104 2,117 4,434
</TABLE>
A-33
Exhibit 4 (a)
March 24, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: ENSERCH Corporation
1997 Annual Report on Form 10-K
Gentlemen:
Pursuant to the exemption afforded by Item 601(b) (4) (iii) (A) of
Regulation S-K, ENSERCH Corporation (Corporation) is not filing as
exhibits to its Annual Report on Form 10-K for 1997 instruments with respect
to its long-term debt of the Corporation and/or its subsidiaries. These
instruments include agreements with respect to senior notes. Each item
of long-term debt referenced above does not exceed 10% of the total assets
of the Corporation and its subsidiaries on a consolidated basis. Reference
is made to Note 4 to Consolidated Financial Statements (included in
Appendix A of the Corporation's Annual Report on Form 10-K for 1997).
The Corporation agrees to furnish a copy of the above instruments to
the Securities and Exchange Commission upon request.
Sincerely,
/s/ J. W. Pinkerton
J. W. Pinkerton
Controller and Principal Accounting Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
ENSERCH CORPORATION AND SUBSIDIARY COMPANIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED DIVIDENDS
Predecessor (1)
--------------------------------------------------
Period from
Period From January 1
Acquisition 1997
Date to To Year Ended December 31
December 31 Acquisition ---------------------------------------
1997 Date 1996 1995 1994 1993
----------- --------- ------- -------- -------- ---------
(In thousands except ratios)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income (loss) from continuing operations before
extraordinary items $(9,565) $(15,377) $ 9,751 $21,362 $ (5,661) $22,260
Add: Equity in net losses (income) of less-than
50% owned affiliates 168 732 3,821 821 406 (385)
Dividends received from less-than 50% owned affiliates 87 178 253 340 788 766
Total federal income taxes (1,485) (4,612) 10,277 11,415 (8,475) 15,727
Fixed charges (see detail below) 32,133 45,021 77,900 73,258 70,870 73,862
Amortization of previously capitalized interest - 217 334 331 324 319
------- ------- -------- -------- -------- --------
Total earnings (2) $21,338 $26,159 $102,336 $107,527 $ 58,252 $112,549
======= ======= ======== ======== ======== ========
FIXED CHARGES:
Interest expense $31,755 $44,537 $ 76,700 $ 71,380 $ 68,861 $ 71,628
Rentals representative of the interest factor 378 484 1,200 1,878 2,009 2,234
------- ------- ------- ------- ------- -------
Fixed charges deducted from earnings 32,133 45,021 77,900 73,258 70,870 73,862
Capitalized interest 46 131 63 234 191 204
------- ------- ------- ------- ------- -------
Total fixed charges 32,179 45,152 77,963 73,492 71,061 74,066
Preferred dividends adjusted for pretax
earnings coverage (3) 5,403 8,742 23,290 17,937 29,014 21,610
------- ------- ------- ------- ------- -------
Combined fixed charges and preferred dividends $37,582 $53,894 $101,253 $ 91,429 $100,075 $ 95,676
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES (4) 0.66 0.58 1.31 1.46 0.82 1.52
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS (5) 0.57 0.49 1.01 1.18 0.58 1.18
======= ======= ======= ======= ======= =======
<FN>
(1) On August 5, 1997 (Merger Date or Acquisition Date), the merger transactions between Texas Utilities
Company (TUC) and ENSERCH were completed. TUC accounted for its acquisition of ENSERCH as a
purchase, and purchase accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the period subsequent to August 5,
1997. The ratios of ENSERCH for the periods ended before August 5, 1997, were prepared using
ENSERCH's historical basis of accounting and are designated as "Predecessor." Prior period amounts have
also been restated to reflect EEX/LESPO as discontinued operations.
(2) "Earnings" represent the aggregate of (a) income from continuing operations before extraordinary items, (b)
income taxes, (c) amortization of previously capitalized interest and (d) fixed charges deducted from
earnings, on a total enterprise basis. "Fixed Charges" represent interest expense, capitalized interest and the
portion of rental expense representative of the interest factor.
(3) The preferred stock dividend requirements are assumed to be equal to the pretax earnings which would be
required to cover such dividend requirements. The amount of such pretax earnings required to cover
preferred stock dividends was computed using tax rates for the applicable year.
(4) For the period from acquisition date to December 31, 1997, and for the period from January 1, 1997 to
acquisition date and for the year ended December 31, 1994, fixed charges exceeded earnings by $10.8
million, $19.0 million and $12.8 million, respectively.
(5) For the period from acquisition date to December 31, 1997, and for the period from January 1, 1997 to
acquisition date and for the year ended December 31, 1994, combined fixed charges and preferred dividends
exceeded earnings by $16.2 million, $27.7 million and $41.8 million, respectively.
</FN>
</TABLE>
EXHIBIT 21
<TABLE>
<CAPTION>
ENSERCH CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
(as of March 23, 1998)
State or Country of
Incorporation
<S> <C>
ENSERCH Corporation Texas
Lone Star Gas Company (an unincorporated division) Texas
Lone Star Pipeline Company (an unincorporated division) Texas
Enserch Processing, Inc. Delaware
Enserch Energy Services, Inc. Texas
Direct Gas Supply Corp. New York
Enserch Energy Services (Canada), Inc. Texas
Enserch Energy Services (New York), Inc. Delaware
Enserch Energy Services Risk Management Company Texas
Enserch Energy Services Trading Company Texas
Enserch Gas Marketing Company Texas
ALEASCO, Inc. Alaska
ENS Claims Management, Inc. Delaware
ENS Holdings I, Inc. Texas
ENS Holdings II, Inc. Texas
ENS Insurance Company Vermont
ENSERCH E&C Holdings, Inc. Nevada
ENS Equipment Corporation Delaware
ENSERCH E&C, Inc. Nevada
ESICORP Constructors International Inc. Delaware
ENS U. K. Limited (1) United Kingdom
ENS Limited (1) United Kingdom
Process Engineering International Ltd.(1) United Kingdom
ESICORP Industries Inc. (Delaware) Delaware
Ebasco Cayman Limited Cayman Islands
Ebasco Services Singapore Pte. Ltd. Singapore
Ebasco Energy A. G. Switzerland
Ebasco Services of Canada Limited Canada
Engineering International Liquidating Company, Inc. California
Ensat Pipeline Company Texas
Enserch Finance II, Inc. Texas
Enserch Finance N.V. Netherlands Antilles
Enserch Gas Transmission Company Texas
Enserch House, Inc. Texas
Enserch International Investments Limited Delaware
Humphreys and Glasgow Limited United Kingdom
Enserch Shirley, Inc. Delaware
Fleet Star of Texas, L.C. (2) Texas
LS Energy, Inc. Texas
Lone Star Dallas Energy Center, Inc. Texas
Lone Star Energy Services, Inc. Texas
Lone Star Gas Company of Texas, Inc. Texas
TRANSTAR Technologies L.C. Texas
<PAGE>
<PAGE>
(1) 99% owned by parent corporaton.
(2) 50% owned by ENSERCH Corporation.
Except as noted above, the voting stock of each subsidiary company and
their subsidiaries and affiliates is wholly owned (100%) by its parent or
a wholly-owned affiliate. The financial statements of each subsidiary
are included in the consolidated financial statements except that the equity
method of accounting is used for subsidiaries in which the Company has 50% or
less ownership. Such unconsolidated subsidiaries considered in the aggregate
do not constitute a significant subsidiary.
Affiliates
State or County
of Incorporation
or Organization
Enserch SACROC Inc. (1) Texas
ENS Holdings Limited Partnership Texas
FinaStar Partnership Texas
Lavair Cogeneration Limited Partnership Delaware
Gulf Coast Natural Gas Company (2) Texas
________________________
(1) 99.65% owned by Enserch Finance II, Inc. and .35% owned by ENS
Holdings Limited Partnership.
(2) General partnership: General Partner, Enserch Gas Transmission
Company (50%) and General/Managing Partner, Tejas Gas Transmission
Company (50%).
</TABLE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 333-43811 on Form S-3 and Registration Statement No. 333-43811-01 on
Post Effective Amendment No. 1 to Form S-3 of our report dated February 24,
1998, appearing in this Annual Report on Form 10-K of ENSERCH Corporation for
the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000033015
<NAME> ENSERCH CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 5-MOS 7-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> AUG-05-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 AUG-04-1997
<CASH> 11,770 0
<SECURITIES> 0 0
<RECEIVABLES> 506,284 0
<ALLOWANCES> 0 0
<INVENTORY> 114,244 0
<CURRENT-ASSETS> 1,055,705 0
<PP&E> 1,200,864 0
<DEPRECIATION> 24,669 0
<TOTAL-ASSETS> 3,236,784 0
<CURRENT-LIABILITIES> 987,644 0
<BONDS> 646,796 0
0 0
175,000 0
<COMMON> 2 0
<OTHER-SE> 761,642 0
<TOTAL-LIABILITY-AND-EQUITY> 3,236,784 0
<SALES> 0 0
<TOTAL-REVENUES> 1,276,107 1,278,157
<CGS> 0 0
<TOTAL-COSTS> 1,256,283 1,231,273
<OTHER-EXPENSES> (881) 22,336
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 31,755 44,537
<INCOME-PRETAX> (11,050) (19,989)
<INCOME-TAX> (1,485) (4,612)
<INCOME-CONTINUING> (9,565) (15,377)
<DISCONTINUED> 0 (224,691)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,565) (240,068)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
