UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
-- OR--
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From___________ to ___________
Exact Name of Registrant as Specified in
Commission its Charter; Address of Principal Executive I.R.S. Employer
File Number Offices; and Telephone Number Identification 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 on
Registrant Title of Each Class Which Registered
---------- -------------------- ----------------
ENSERCH Corporation Depositary Shares, Series F, New York Stock Exchange
each representing 1/40 share
of the Adjustable 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 registrants (1) have 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
registrants were required to file such reports), and (2) have 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 29, 1999: 451,000 shares, par value
$0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE - None
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TABLE OF CONTENTS
Page
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PART I
Item 1. BUSINESS 1
BUSINESS 1
COMPETITIVE STRATEGY 3
OPERATING SEGMENTS 3
US Gas Pipeline and Distribution Segment 4
US Energy Marketing Segment 7
ENVIRONMENTAL MATTERS 8
Item 2. PROPERTIES 9
CAPITAL EXPENDITURES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 11
Item 6. SELECTED FINANCIAL DATA 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 11
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 12
Item 11. EXECUTIVE COMPENSATION 15
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 26
APPENDIX A - Financial Information
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PART I
Item 1.BUSINESS
BUSINESS
--------
ENSERCH Corporation (ENSERCH or the Corporation) is an integrated company
focused primarily on natural gas. Through its divisions and subsidiaries, the
corporation is engaged in the gathering, processing, transmission and
distribution of natural gas and the marketing of natural gas and electricity.
ENSERCH is a wholly-owned subsidiary of Texas Utilities Company (TUC), a Texas
corporation. TUC is a holding company whose principal United States (US)
operations are conducted through Texas Utilities Electric Company (TU
Electric), ENSERCH, and Texas Energy Industries, Inc. (TEI). TUC's principal
international operations are conducted through TU International Holdings
Limited (TU International Holdings). Through its subsidiaries, TUC engages in
the generation, purchase, transmission, distribution and sale of electricity;
the gathering, processing, transmission and distribution of natural gas;
energy marketing; and telecommunications, retail energy services,
international gas operations, power development and other businesses primarily
in the US, the United Kingdom (UK) and Australia. Additional information
concerning subsidiaries and divisions follows. ENSERCH and its subsidiaries
possess all necessary franchises, licenses and certificates to enable them to
conduct their respective businesses.
At December 31, 1998, ENSERCH and its direct and indirect wholly-owned
subsidiaries had 1,423 full-time employees.
Merger with TUC
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions involving the former Texas Utilities Company, now known as TEI,
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. 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
those businesses.
TUC accounted for its acquisition of ENSERCH as a purchase. 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 herein 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 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 process of determining the fair value of assets
acquired, liabilities assumed and contingencies existing at the Merger Date
was completed in 1998 and resulted in an increase in goodwill of approximately
$60 million over the preliminary allocation, primarily due to refinement of
estimates of preacquisition contingencies.
The Predecessor financial statements have been restated to reflect EEX
and LSEPO as discontinued operations. 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.
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Accordingly, operating results for periods following the Merger Date exclude
those operations. Prior periods were not restated to reflect the sale.
Business of ENSERCH
ENSERCH conducts its major business operations through the following
companies:
Lone Star Pipeline Company (Lone Star Pipeline), a partially
rate-regulated division of ENSERCH, 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 US. 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 provided
to Lone Star Gas are regulated by the Railroad Commission of Texas (RRC) while
rates for services to other customers are generally established by
competitively negotiated contracts.
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 US and the largest in Texas, Lone
Star Gas provides service through over 24,000 miles of distribution mains.
Through these facilities, it purchases, distributes and sells natural gas to
over 1.37 million residential, commercial and industrial customers in
approximately 550 cities and towns, including the 11-county Dallas-Fort Worth
(DFW) Metroplex. Lone Star Gas also transports natural gas within its
distribution system as market opportunities require. The distribution service
rates that 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 70% 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.
Enserch Processing, Inc. (EPI), a wholly owned subsidiary of ENSERCH,
gathers and processes natural gas to remove impurities and extract natural gas
liquids (NGL) for sale and sells the natural gas remaining after processing.
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.
Enserch Energy Services, Inc. (EES), a wholly-owned subsidiary of
ENSERCH, is a wholesale and retail marketer of natural gas and electricity in
several areas of the US. Its primary natural gas markets, both retail and
wholesale, 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
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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 its customers. EES makes physical sales of electricity in the
wholesale market throughout the US excluding the area of the Electric
Reliability Council of Texas (ERCOT).
ENSERCH operates in the liquified and compressed natural-gas vehicular
fuel markets through its Alternative Fuel Division. 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. FinaStar, which is a partnership
between FleetStar and Fina Oil and Chemical, is 25% owned by ENSERCH. These
entities had 22 public and 9 private natural gas fueling stations in
commercial operation at the end of 1998 and sold over 3.3 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 one fueling station for the Dallas Area
Rapid Transit Authority (DART). ENSERCH is completing the construction of a
second station for DART.
COMPETITIVE STRATEGY
--------------------
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. A number of
variables, including price, reliability of service, the cost of energy
alternatives, new technologies and governmental regulations, affect the level
of competition.
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.
OPERATING SEGMENTS
------------------
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
About Segments of an Enterprise and Related Information," became effective for
reporting purposes at year-end 1998. In accordance with the provisions of
that standard, the Corporation has two reportable operating segments:
(1) US Gas Pipeline and Distribution - operations engaged in the
gathering, processing, transmission and distribution of natural gas and
selling of natural gas liquids primarily within Texas (primarily Lone Star
Gas, Lone Star Pipeline and EPI);
(2) US Energy Marketing - operations engaged in purchasing and selling
natural gas and electricity and providing risk management services for the
energy industry throughout the US (EES); and
Other - non-segment operations consist of liquified and compressed
natural gas fuels (primarily the Alternative Fuel Division of ENSERCH).
Financial information required hereunder is set forth in Note 17 to
Consolidated Financial Statements included in Appendix A to this report.
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US GAS PIPELINE AND DISTRIBUTION SEGMENT
GENERAL
US Gas Pipeline and Distribution operations (primarily Lone Star Gas,
Lone Star Pipeline and EPI) are engaged in the gathering, processing,
transmission and distribution of natural gas and selling of related natural
gas liquids primarily within Texas.
<TABLE>
<CAPTION>
US Gas Pipeline and Distribution Consolidated Operating Statistics
Years Ended December 31
Predecessor
-----------
Period from Period from
Acquisition January 1,
Date to 1997 to
December 31, Acquisition
1998 1997 Date
------ ------------ -----------
<S> <C> <C> <C>
SALES VOLUMES
Gas distribution (billion cubic feet) (Bcf):
Residential . . . . . . . . . . . . . . . . . . . 77 33 53
Commercial. . . . . . . . . . . . . . . . . . . . 49 21 33
Industrial and electric generation. . . . . . . . 4 3 7
---- ---- ----
Total gas distribution. . . . . . . . . . . . . 130 57 93
==== ==== ====
Pipeline transportation (Bcf). . . . . . . . . . . . 599 255 362
Gas liquids (million barrels). . . . . . . . . . . . 6 3 3
OPERATING REVENUES (millions of dollars)
Gas distribution:
Residential. . . . . . . . . . . . . . . . . . . $437 $206 $335
Commercial . . . . . . . . . . . . . . . . . . . 225 109 178
Industrial and electric generation . . . . . . . 20 15 38
---- ---- ----
Total gas distribution . . . . . . . . . . . . 682 330 551
Pipeline transportation. . . . . . . . . . . . . . . 121 57 77
Gas liquids. . . . . . . . . . . . . . . . . . . . . 64 37 49
Other . . . . . . . . . . . . . . . . . . . . . . . 65 51 62
Less intra-segment revenues. . . . . . . . . . . . . (78) (48) (62)
---- ---- ----
Total operating revenues . . . . . . . . . . . $854 $427 $677
==== ==== ====
GAS DISTRIBUTION CUSTOMERS
(end of year - in thousands). . . . . . . . . . . . 1,379 1,355
HEATING DEGREE DAYS (% of normal). . . . . . . . . . . . 89% 119% 97%
</TABLE>
Gas Distribution Peaking -- Lone Star Gas estimates its peak-day
availability from long-term contracts and withdrawals from underground storage
to be 1.5 Bcf. Short-term peaking contracts and daily spot contracts raise
this availability level to meet anticipated sales needs.
During 1998, the average daily demand of Lone Star Gas' residential
and commercial customers was 0.3 Bcf. Lone Star Gas' greatest daily demand in
1998 was on December 22 when the arithmetic-mean temperature was 24 degrees F.
and deliveries to all customers reached 2.1 Bcf, including estimated
deliveries to residential and commercial customers of 2.0 Bcf.
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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 available gas supply as of January 1,
1999 was 299 Bcf, which is approximately two and a half times Lone Star Gas'
purchases during 1998. Of this total, 89 Bcf are specific reserves and 34 Bcf
are working gas in storage. A total of 176 Bcf are committed to Lone Star Gas
under gas supply contracts not related to specific reserves or fields. In
1998, Lone Star Gas' gas requirement was purchased from some 268 independent
producers, non-affiliated pipeline companies and other supplies.
To meet peak-day gas demands during winter months, Lone Star Gas
utilizes the service of seven gas storage fields owned by Lone Star Pipeline,
all of which are located in Texas. These fields have a working gas capacity of
47 Bcf and a storage withdrawal capacity of up to 1.2 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 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.
Lone Star Gas buys gas under long-term and short-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 1999 and
thereafter.
The Lone Star Gas supply program is designed to contract for new
supplies of gas and to recontract targeted expiring sources. 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.
At December 31, 1998, 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 76,000. Lone Star
Pipeline also owned 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, 1998, EPI had interests in 15 processing plants, 10
of which were wholly owned, and operated approximately 1,700 miles of
gathering lines.
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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 the Federal Energy Regulatory Commission (FERC) under the
Natural Gas Act, has no sales for resale under the rate jurisdiction of the
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
distribution service 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 $2.5 million in annualized revenue increases, exclusive of changes in
gas costs, was achieved in 1998. Rate cases supporting an additional $5.9
million in annualized revenue increases were pending in a number of cities at
the end of the year. Weather normalization adjustment clauses have been
approved by almost 300 cities served by Lone Star Gas, representing 70% 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 August 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 was
separated into different phases, all of which are now resolved. Two of the
phases, conversion to the National Association of Regulatory Utility
Commissioners account numbering system and unbundling, have been dismissed by
the RRC, and one other phase, rate case expense, has been concluded. In the
phase dealing with historic gas cost and gas acquisition practices, the RRC
issued a final order on June 2, 1998, approving a stipulated settlement of the
docket. Lone Star Gas agreed to credit residential and commercial customers
$18 million to be spread over the next two heating seasons (November through
March). The earnings of Lone Star Gas were not affected by the settlement due
to previously established reserves. Lone Star Gas and the intervenors both
agreed to withdraw their appeals of the city gate rate case. The final order
approving the stipulation found that all gas costs flowed through Lone Star
Gas' monthly gas cost adjustment clause prior to October 31, 1997 were just,
reasonable, and necessary. As a part of the final order, the RRC required an
audit of an amount that Lone Star Gas credited to residential and commercial
customers under a previous voluntary stipulation. The audit report indicated
that an additional $7.3 million should be credited to residential and
commercial customers. ENSERCH believes that the additional amount noted in
the audit report was included in the $18 million settlement, but it is unable
to predict the outcome of the audit.
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COMPETITION
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. 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 US 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.
Open Access -- 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.
Customers --There are no individually significant customers upon
which the segment's business or results of operations are highly dependent.
US ENERGY MARKETING SEGMENT
GENERAL
US Energy Marketing (EES) operations are engaged in purchasing and
selling natural gas and electricity and providing risk management services
for the energy industry throughout the US, other than within ERCOT.
US Energy Marketing Operating Statistics
Years Ended December 31
<TABLE>
<CAPTION>
Predecessor
-----------
Period from Period from
Acquisition January 1,
Date to 1997 to
December 31, Acquisition
1998 1997 Date
------ ------------ -----------
<S> <C> <C> <C>
SALES VOLUMES:
Gas (Bcf). . . . . . . . . . . . . . . . . . . . . . 1,115 292 223
Electric (gigawatt-hours) (GWh). . . . . . . . . . . 16,268 - -
OPERATING REVENUES (millions of dollars) . . . . . . . . $3,199 $859 $603
</TABLE>
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Headquartered in Houston, Texas, EES serves the diversified energy
requirements of its clients from five regional centers and 17 local customer
service and support offices located across the US. EES' primary natural gas
markets, both retail and wholesale, are in Texas, the Northeast, the Midwest
and the West Coast. Other than within ERCOT, EES engages in the physical
purchase and sale of electricity in the wholesale markets throughout the US
and is also engaged in power retail marketing, primarily in the Northeast
region of the country.
In the course of providing comprehensive energy products and
services to its diversified client base, EES engages in energy price risk
management activities. In addition to the purchase and sale of physical
commodities, EES enters into futures contracts; swap agreements where
settlement is based on the difference between a fixed and floating (index
based) price for the underlying commodity; exchange traded options;
over-the-counter options, which are settled in cash or in the physical
delivery of the underlying commodity; exchange-of-futures for physical (EFP)
transactions; energy exchange transactions; storage activities; and other
contractual arrangements. EES may buy and sell certain of these instruments
to manage its exposure to price risk from existing contractual commitments as
well as other energy-related assets and liabilities. It may also enter into
contracts to take advantage of arbitrage opportunities. In order to manage
its exposure to the price risk associated with these instruments, EES has
established trading policies and limits and revalues its exposures daily
against these benchmarks. EES also periodically reviews these policies to
ensure they are responsive to changing market and business conditions.
EES' business is not specifically seasonal; however, the results of
its operations are greatly affected by price volatility in the underlying
commodity markets. Price volatility in both natural gas and electric power is
largely a result of supply and demand factors driven by weather conditions and
physical constraints in the deliverability of these commodities. Arbitrage
opportunities resulting from this price volatility are often greatest in the
late summer/early fall and winter months for natural gas and the summer months
for electricity.
COMPETITION
EES pursues opportunities to manage risks for non-affiliated
companies. 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 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.
Customers -- There are no individually significant customers upon
which the segment's business or results of operations are highly dependent.
ENVIRONMENTAL MATTERS
---------------------
ENSERCH is subject to various federal, state and local regulations
dealing with air and water quality and related environmental matters.
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, the source 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 has received 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 Corporation's estimated capital
expenditures. Any additional capital expenditures, as well as any increased
8
<PAGE>
<PAGE>
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. ENSERCH currently believes 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
operations 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.
Item 2. PROPERTIES
PROPERTIES
----------
At December 31, 1998, 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 76,000. Lone Star
Pipeline also owned 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, 1998, EPI had interests in 15
processing plants, 10 of which were wholly owned, and operated approximately
1,700 miles of gathering lines. At December 31, 1998, Lone Star Gas operated
approximately 24,000 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
other affiliates of TUC. In addition, ENSERCH owns a 21-story, 400,000
square-foot building in Houston. This building is leased, primarily to
non-affiliated parties.
CAPITAL EXPENDITURES
--------------------
The capital expenditures of the Corporation were $187 million in 1998 and
are estimated at $117 million for 1999. Approximately 94% will be spent on US
Gas Pipeline and Distribution operations and approximately 6% on US Energy
Marketing and other operations.
Item 3. LEGAL PROCEEDINGS
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 $9 million and punitive damages in an amount equal to .5% of the
consolidated gross revenues of the Corporation for the years 1982-1986
9
<PAGE>
<PAGE>
(approximately $85 million), interest, costs and attorneys' fees. On March 2,
1999, an agreement was reached to settle this matter at no material cost to
the Corporation.
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc. (EEX), TUC, David W. Biegler,
Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The Gracy
Fund sought to represent a class comprised of all purchasers of the common
stock of ENSERCH or EEX between January 26, 1996 and August 4, 1997, including
former shareholders of ENSERCH who received shares of EEX and TUC pursuant to
the merger agreement between ENSERCH and TUC dated April 13, 1996, all EEX
shareholders solicited pursuant to a proxy statement/prospectus issued by EEX
dated October 2, 1996 and all ENSERCH shareholders solicited by a joint proxy
statement/prospectus issued by ENSERCH and TUC dated September 23, 1996. The
Gracy Fund alleged that the defendants participated in a fraudulent scheme and
course of business by disseminating materially false and misleading statements
regarding EEX's and ENSERCH's business, which allegedly caused the plaintiffs
and other members of the class to purchase EEX and ENSERCH stock at
artificially inflated prices. In such connection, the plaintiffs alleged that
the defendants violated various provisions of the Securities Act of 1933
(Securities Act) and the Securities Exchange Act of 1934 (Exchange Act).
Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, ENSERCH,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and
B. K. Irani. Thorne sought to represent a class comprised of all purchasers
of the common stock of EEX during the period of August 3, 1995 through August
5, 1997. Thorne alleged that the defendants engaged in a course of conduct
designed to mislead the plaintiff and investing public in order to maintain
the price of EEX common stock at artificially high levels through false and
misleading representations concerning the gas reserves of EEX in violation of
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder.
Thorne also alleged that the defendants were negligent in making such
misrepresentations and that they constituted common law fraud against the
defendants.
In December 1998, the United States District Court for the Northern
District of Texas issued an Order in Cause No. 3-98-CV-1808-G consolidating
the Gracy Fund and the Thorne suits (the Consolidated Action). On January 22,
1999, the Gracy Fund, et al. filed an amended class action complaint in the
Consolidated Action against EEX, ENSERCH, David W. Biegler, Gary J. Junco,
Thomas Hamilton, J. Philip McCormick, Fredrick S. Addy and B. K. Irani. TUC
and Erle Nye were omitted as defendants pursuant to a tolling agreement. The
individual-named defendants in the amended complaint are current or former
officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of ENSERCH. The amended complaint alleges violations of provisions
of the Securities Act and the Exchange Act. The state law claims alleged in
the Thorne case have been omitted. The class period was amended to include
those persons acquiring stock of ENSERCH and/or EEX between August 3, 1995 and
August 5, 1997, inclusive. No amount of damages has been specified in the
Consolidated Action. The Corporation is continuing to evaluate these claims
and is unable at this time to predict the outcome of this proceeding, but it
intends to vigorously defend this suit.
ENSERCH and its subsidiaries are party to other 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 operations or cash flow.
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
10
<PAGE>
<PAGE>
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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder for the Corporation is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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
Operations included in Appendix A to 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 Comprehensive 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.
11
<PAGE>
<PAGE>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Identification of Directors, business experience and other directorships:
<TABLE>
<CAPTION>
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 in May 1999) in May 1999) Other Directorships
- ---------------- ---- ----------------------- --------------------- --------------------------------------
<S> <C> <C> <C> <C>
David W. Biegler 52 President and Chief September 1, 1991 President and Chief Operating Officer
Operating Officer of TUC, TU Electric and
ENSERCH; prior thereto,
Chairman, President and Chief
Executive Officer of
ENSERCH; other directorships:
TU Electric, Chase Bank of
Texas N.A. and Trinity
Industries, Inc. (railcars,
construction materials and
industrial equipment).
Barbara B. Curry 44 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 61 Vice Chairman of August 5, 1997 Vice Chairman of the Board of TUC
the Board and ENSERCH; prior thereto,
President of TU Electric and
prior thereto, Vice President
and Principal Financial Officer
of TUC.
Michael J. McNally 44 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.
</TABLE>
12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
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 in May 1999) in May 1999) Other Directorships
- ---------------- ---- ----------------------- --------------------- --------------------------------------
<S> <C> <C> <C> <C>
Erle Nye 61 Chairman of the Board August 5, 1997 Chairman of the Board and Chief
and Chief Executive 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 61 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.
13
<PAGE>
<PAGE>
Identification of Executive Officers and business experience:
<TABLE>
<CAPTION>
Positions and Offices Date First Elected to
Presently Held Present Office
(Current Term Expires (Current Term Expires Business Experience
Name of Officer Age in May 1999) in May 1999) (Preceding Five Years)
- ---------------- ---- ----------------------- --------------------- --------------------------------------
<S> <C> <C> <C> <C>
Erle Nye 61 Chairman of the Board January 1, 1998 Chairman of the Board and Chief
and Chief Executive 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 52 President and Chief January 1, 1998 President and Chief Operating Officer
Operating Officer of ENSERCH, TUC and TU Electric;
prior thereto, Chairman,
President and Chief
Executive Officer of
ENSERCH.
T. L. Baker 53 President of Lone January 1, 1998 President of Lone Star Gas and the
Star Gas Electric Service Division of
TU Electric; prior thereto,
Executive Vice President of TU
Electric and prior thereto, Senior
Vice President of TU Electric.
H. Jarrell Gibbs 61 Vice Chairman of the February 16, 1998 Vice Chairman of the Board of TUC and
Board ENSERCH; prior thereto,
President of TU Electric; and
prior thereto, Vice President and
Principal Financial Officer of
TUC.
Michael T. Hunter 49 President of Lone Star January 1, 1998 President of Lone Star Pipeleine; prior
Pipeline thereto, President and Chief
Operating Officer of Lone Star
Pipeleine; and prior thereto,
President and Chief Operating
Officer of Mississippi River
Transmission Corporation, a
subsidiary of Noram Energy Corp.
</TABLE>
There is no family relationship between any of the above-named Directors
and Executive Officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
All required reports relating to changes in beneficial ownership of shares
of ENSERCH have been timely filed.
14
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<PAGE>
Item 11. EXECUTIVE COMPENSATION
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:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation (6)
------------------------------------
Annual Compensation Awards Payouts
--------------------------------- ------------------------ --------
Other Restricted Securities All Othe
Annual Stock Underlying LTIP Compen-
Name and Salary Bonus Compen- Awards Options/ Payouts sation
Principal Position Year ($) ($) (5) sation ($) ($) SARs (#) ($) ($) (7)
------------------------- ----- -------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Erle Nye, 1998 818,750 350,000 - 541,250 - 19,674 156,906
Chairman of the Board 1997 0 0 - 0 - 0 0
and Chief Executive (1) 1996 0 0 - 0 - 0 0
David W. Biegler, 1998 617,500 102,500 - 244,250 - 0 174,208
President and Chief 1997 600,378 0 0 0 0 0 3,701,060
Operating Officer (2) 1996 600,000 330,000 3,600 556,800 50,000 1,009,208 768,525
H. Jarrell Gibbs, 1998 443,750 97,500 - 210,000 - 7,390 77,213
Vice Chairman of the 1997 0 0 - 0 - 0 0
Board (3) 1996 0 0 - 0 - 0 0
Michael T. Hunter 1998 329,335 70,000 - 0 - 0 173,962
President of Lone Star 1997 320,000 95,124 0 0 0 0 4,000
Pipeline Company 1996 310,000 150,000 1,000 185,600 24,000 185,600 7,408
T. L. Baker, 1998 323,083 60,000 - 135,600 - 8,212 62,011
President of Lone Star 1997 0 0 - 0 - 0 0
Gas Company (4) 1996 0 0 - 0 - 0 0
<FN>
(1) Mr. Nye was elected Chairman of the Board and Chief Executive of ENSERCH effective January 1, 1998.
Compensation amounts represent compensation paid entirely by TUC.
(2) Mr. Biegler was elected President and Chief Operating Officer of ENSERCH effective January 1, 1998;
prior thereto he was Chairman of the Board, President and Chief Executive Officer. Effective August 5,
1997, Mr. Biegler became President and Chief Operating Officer of TUC and compensation amounts
thereafter represent compensation paid by TUC.
(3) Mr. Gibbs was elected Vice Chairman of the Board of ENSERCH effective January 1, 1998; compensation
amounts represent compensation paid by Texas Utilities Services Inc.
(4) Mr. Baker was elected President of Lone Star Gas Company effective January 1, 1998; compensation
amounts represent compensation paid by TU Electric.
(5) Beginning in 1998, amounts reported as Bonus in the Summary Compensation Table are attributable to
the named officer's participation in the Annual Incentive Plan (AIP) with the exception of Mr. Hunter
whose amount represents a cash bonus. Elected corporate officers of TUC and its participating subsidiaries
with a title of Vice President or above are eligible to participate in the AIP. Under the terms of the AIP,
target incentive awards ranging from 35% to 50% of base salary, and a maximum award of 100% of base
salary, are established. The percentage of the target or the maximum actually awarded, if any, is
dependent upon the attainment of per share net income goals established in advance by the Organization
and Compensation Committee (Committee) as well as the Committee's evaluation of the participant's and
TUC's performance. One-half of each such award is paid in cash and is reflected as Bonus in the Summary
15
<PAGE>
<PAGE>
Compensation Table. Payment of the remainder of the award is deferred under the Deferred and Incentive
Compensation Plan (DICP) discussed hereinafter in footnote (6).
(6) Beginning in 1998, amounts reported as Long-Term Compensation in the Summary Compensation Table
are attributable to the named officer's participation in the DICP. Elected corporate officers of TUC and
its participating subsidiaries with the title of Vice President or above are eligible to participate in the
DICP. Participants in the DICP may defer a percentage of their base salary not to exceed a maximum
percentage determined by the Committee for each Plan year and in any event not to exceed 15% of the
participant's base salary. Salary deferred under the DICP is included in amounts reported as Salary in the
Summary Compensation Table. The employer makes a matching award (Matching Award) equal to 150%
of the participant's deferred salary. In addition, one-half of any AIP award (Incentive Award) is deferred
and invested under the DICP. The Matching Awards and Incentive Awards are subject to forfeiture under
certain circumstances. Under the DICP, a trustee purchases TUC common stock with an amount of cash
equal to each participant's deferred salary, Matching Award and Incentive Award, and accounts are
established for each participant containing performance units (Units) equal to such number of common
shares. DICP investments, including reinvested dividends, are restricted to TUC common stock. On the
expiration of the applicable maturity period (three years for the Incentive Awards and five years for
deferred salary and Matching Awards), the values of the participant's accounts are paid in cash based upon
the then current value of the Units; provided, however, that in no event will a participant's account be
deemed to have a cash value which is less than the sum of such participant's deferred salary together with
a 6% per annum (compounded annually) interest equivalent thereon. The maturity period is waived if the
participant dies or becomes totally and permanently disabled and may be extended under certain
circumstances.
Incentive Awards and Matching Awards that have been made under the DICP are included under
Restricted Stock Awards in the Summary Compensation Table for 1998. As a result of these awards,
undistributed Incentive Awards and Matching Awards made under the Plan in prior years, and dividends
reinvested thereon, the number and market value of such Units at December 31, 1998 (each of which is
equal to one share of common stock) held in the DICP accounts for Messrs. Nye, Biegler, Gibbs, Hunter
and Baker were 46,827 ($2,186,236), 5,895 ($275,223), 19,572 ($913,768), -0- ($-0-) and 14,357
($670,292), respectively.
The Long-Term Incentive Compensation Plan (LTICP) is a comprehensive, stock-based incentive
compensation plan providing for discretionary grants of TUC common stock-based awards, including
restricted stock. Outstanding awards to named executive officers vest over a three year period and such
executive officers may earn from 0% to 200% of the number of shares awarded based on TUC's total
return to shareholders over such three year period compared to the total return provided by the companies
comprising the Standard & Poor's Electric Utility Index. Dividends are paid and reinvested on such stock
awards at the same rate as dividends on TUC's common stock. As a result of restricted stock awards
under the LTICP, and dividends reinvested thereon, the number of shares of restricted stock and the value
of such shares at December 31, 1998, held for Messrs. Nye, Biegler, Gibbs, Hunter and Baker were 46,441
($2,168,214), 7,177 ($335,076),10,554 ($492,740), -0- ($-0-) and 9,529 ($444,885), respectively.
Salary deferred under the DICP is included in amounts reported as Salary in the Summary Compensation
Table. Amounts shown in the table below represent the number of shares purchased under the DICP with
such deferred salaries for 1998 and the number of shares awarded under the LTICP:
</FN>
</TABLE>
16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Deferred and Incentive
Compensation Plan Long-Term Incentive Compensation Plan
------------------------------ -----------------------------------------------------------
Number of Performance or Performance or
Shares, Other Period Number of Other Period Estimated Future Payouts
Units or Until Shares, Units Until ------------------------
Other Rights Maturation or Other Maturation or Minimum Maximum
Name (#) or Payout Rights (#) Payout (#) (#)
- ------------------ ------------ ------------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Erle Nye 3,041 5 Years 22,000 3 Years 0 44,000
David W. Biegler 2,254 5 Years 7,000 3 Years 0 14,000
H. Jarrell Gibbs 1,789 5 Years 5,000 3 Years 0 10,000
Michael T. Hunter 0 - 0 - 0 0
T. L. Baker 1,202 5 Years 4,000 3 Years 0 8,000
<FN>
The amounts reported under LTIP Payouts in the Summary Compensation Table for 1998 represent
payouts maturing during such years of earnings on deferred salary under the DICP in prior years.
(7) Amounts reported as All Other Compensation in the Summary Compensation Table for 1998 are
attributable to the named officer's participation in certain plans and as otherwise described hereinafter in
this footnote.
Under the Employees' Thrift Plan of the Texas Utilities Company System (Thrift Plan) all employees of
TUC or any of its participating subsidiaries may invest up to 16% of their regular salary or wages in
common stock of TUC, or in a variety of selected mutual funds. Under the Thrift Plan, a portion of an
employee's contributions is matched in an amount equal to 40%, 50% or 60% (depending on the employee's
length of service) of the first 6% of such employee's contributions. All matching amounts are invested in
common stock of TUC. The amounts reported under All Other Compensation in the Summary
Compensation Table include these matching amounts which, for Messrs. Nye, Biegler, Gibbs, Hunter and
Baker amounted to $5,760, $3,840, $4,800, $-0- and $5,760, respectively, during 1998.
Mr. Hunter participates in the ENSERCH Employee Stock Purchase and Savings Plan and in the
ENSERCH Deferred Compensation Plan under which ENSERCH contributed $680 and $800, respectively,
and is reported under All Other Compensation.
TUC has a Salary Deferral Program (Program) under which each employee of TUC and its participating
subsidiaries whose annual salary is equal to or greater than an amount established under the Program
($96,370 for the Program Year beginning April 1, 1998) may elect to defer a percentage of annual base
salary, or any bonus or other special cash compensation for a period of seven years, for a period ending
with the retirement of such employee, or for a combination thereof. Effective with the Program Year
beginning April 1, 1998, such deferrals may be up to a maximum of 50% of the employee's annual salary
and/or 100% of the employee's bonus or other special cash compensation. The employer makes a
matching award, subject to forfeiture under certain circumstances, equal to 100% of up to the first 8% of
salary deferred under the Program. Prior to April 1, 1998, deferrals under the Program were limited to
up to 10% of the employee's salary and the employer made a matching award equal to 100% of the
employee's salary deferral. Salary and bonuses deferred under the Program are included in amounts
reported under Salary and Bonus, respectively, in the Summary Compensation Table. Deferrals made after
April 1, 1998, are credited with earnings or losses based on the performance of investment alternatives
selected by each participant. Deferrals made prior to April 1, 1998, are, at the end of the applicable
maturity period, credited with the greater of the actual earnings of the Program assets, or the average yield
during the applicable maturity period of U.S. Treasury Notes having a maturity of ten years. At the end
of the applicable maturity period, the trustee for the Program distributes the deferrals and the applicable
earnings in cash. The distribution is in a lump sum if the applicable maturity period is seven years. If
the retirement option is elected, the distribution is made in twenty annual installments. Individuals who
were participating in the Program on March 31, 1998, were given a one time opportunity to elect (1) to
continue to have the provisions of the Program relating to permitted deferrals, matching awards,
investments and calculation of earnings in effect prior to April 1, 1998, apply to their future Program
participation; or (2) to have the Program provisions relating to investments and calculation of earnings
17
<PAGE>
<PAGE>
apply to their entire Program account, including deferrals and matching contributions which had been made
prior to April 1, 1998. Each employer is financing the retirement portion of the Program through the
purchase of corporate-owned life insurance on the lives of the participants. The proceeds from such
insurance are expected to allow the employer to fully recover the cost of the retirement option. During
1998, matching awards, which are included under All Other Compensation in the Summary Compensation
Table, were made for Messrs. Nye, Biegler, Gibbs, Hunter and Baker in the amounts of $69,375, $37,400,
$37,325, $19,947 and $27,372, respectively.
Under the Split-Dollar Life Insurance Program of the Texas Utilities Company System (Insurance
Program), split-dollar life insurance policies are purchased for elected corporate officers of TUC and its
participating subsidiaries with a title of Vice President or above, with a death benefit equal to four times
their annual Insurance Program compensation. New participants vest in the policies issued under the
Insurance Program over a six year period. The employer pays the premiums for these policies and has
received a collateral assignment of the policies equal in value to the sum of all of its insurance premium
payments. Although the Insurance Program is terminable at any time, it is designed so that if it is
continued, the employer will fully recover insurance premium payments made either upon the death of the
participant or, if the assumptions made as to policy yield are realized, upon the later of fifteen years of
participation or the participant's attainment of age sixty-five. During 1998, the economic benefit derived
by Messrs. Nye, Biegler, Gibbs, Hunter and Baker from the term insurance coverage provided and the
interest foregone on the remainder of the insurance premiums paid by their employers amounted to
$81,771, $7,968, $35,088, $2,535 and $28,879, respectively.
In connection with the acquisition of ENSERCH, TUC entered into an employment agreement with Mr.
Biegler which provides for a minimum annual salary of $600,000, minimum annual cash incentive
compensation for 1997 of $330,000 and certain severance benefits. In accordance with the agreement, a
supplemental incentive compensation payment of $125,000 was made to Mr. Biegler and is included under
All Other Compensation in the Summary Compensation Table. The agreement terminates in August 1999.
Also, Mr. Hunter was paid a retention bonus payment of $150,000, reported under All Other
Compensation, as provided by a retention bonus arrangement with ENSERCH.
</FN>
</TABLE>
As a part of the ENSERCH acquisition, options to purchase the common
stock of ENSERCH which had been granted to various employees of ENSERCH
were converted into options to acquire common shares of TUC. The table below
shows, for each of the named officers, the information specified with respect
to exercised, exercisable and unexercisable options under all existing stock
option plans, converted into shares of TUC's common stock into which such
options became exercisable at the time of the ENSERCH acquisition.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at Options at
Acquired on Value December 31, 1998 December 31, 1998
Exercise Realized (#) ($)
--------------------------- ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ------------ -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Erle Nye 0 0 0 0 0 0
David W. Biegler 26,555 314,033 129,778 0 2,907,112 0
H. Jarrell Gibbs 0 0 0 0 0 0
Michael T. Hunter 0 0 0 0 0 0
T. L. Baker 0 0 0 0 0 0
</TABLE>
TUC and its subsidiaries maintain retirement plans (TU Retirement
Plan) which are qualified under applicable provisions of the Internal Revenue
Code of 1986, as amended (Code). Annual retirement benefits under the
traditional defined benefit formula of the TU Retirement Plan, which applied
to each of the named officers, are computed as follows: for each year of
accredited service up to a total of 40 years, 1.3% of the first $7,800, plus
18
<PAGE>
<PAGE>
1.5% of the excess over $7,800, of the participant's average annual earnings
during his or her three years of highest earnings. Amounts reported under
Salary for the named officers in the Summary Compensation Table approximate
earnings as defined by the TU Retirement Plan without regard to any
limitations imposed by the Code. Benefits paid under the TU Retirement Plan
are not subject to any reduction for Social Security payments but are limited
by provisions of the Code. As of February 28, 1999, years of accredited
service under the TU Retirement Plan for Messrs. Nye, Biegler, Gibbs, Hunter
and Baker were 36, 1, 36, 1 and 28, respectively.
<TABLE>
<CAPTION>
TEXAS UTILITIES PENSION PLAN TABLE
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
1,800,000 539,688 674,610 809,532 944,454 1,079,376
</TABLE>
Before ENSERCH was acquired by TUC, Messrs. Biegler and Hunter earned
retirement benefits under the Retirement and Death Benefit Program of 1969 of
ENSERCH Corporation and Participating Subsidiary Companies (ENSERCH Retirement
Plan) which was merged into, and became a part of, the TU Retirement Plan
effective December 31, 1997. In connection with this plan merger, the TU
Retirement Plan was amended to provide that the retirement benefit of
employees who were employed by ENSERCH Corporation or one of its subsidiaries
participating in the ENSERCH Retirement Plan on August 5, 1997, and as of the
last full pay period of 1997, will equal the sum of (1) their accrued benefit
under the ENSERCH Retirement Plan through the last pay period of 1997 and (2)
their accrued benefit under the TU Retirement Plan beginning with the first
pay period of 1998; provided that the aggregate retirement benefit earned
under the traditional defined benefit plan formula of the plans can be no
less than the retirement benefit which would have been earned had such
employees remained under the ENSERCH Retirement Plan for their entire careers.
Mr. Biegler, whose employment with TUC began August 5, 1997, is treated in a
similar manner. Amounts reported for Messrs. Biegler and Hunter under Salary
and Bonus in the Summary Compensation Table approximate
earnings as defined by the ENSERCH Retirement Plan without regard
to any limitations imposed by the Code. As of February 28, 1999, Messrs.
Biegler and Hunter had 30 and 3 years, respectively, of accredited service
under the ENSERCH Retirement Plan.
<TABLE>
<CAPTION>
ENSERCH PENSION PLAN TABLE
Years of Service
-----------------------------------------------------------------------------------------
Remuneration 20 25 30 35 40 45
- ------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 12,831 $ 16,039 $ 19,246 $ 22,454 $ 23,704 $ 24,954
100,000 30,331 37,914 45,496 53,079 55,579 58,079
200,000 65,331 81,664 97,996 114,329 119,329 124,329
400,000 135,331 169,164 202,996 236,829 246,829 256,829
800,000 275,331 344,164 412,996 481,829 501,829 521,829
1,000,000 345,331 431,164 517,996 604,329 629,329 654,329
1,400,000 485,331 606,164 727,996 849,329 884,329 919,329
1,800,000 625,331 781,164 937,996 1,094,329 1,139,329 1,184,329
</TABLE>
19
<PAGE>
<PAGE>
TUC's supplemental retirement plans (Supplemental Plan) provide
for the payment of retirement benefits which would otherwise be limited by the
Code or the definition of earnings in the TU Retirement Plan or the ENSERCH
Retirement Plan, as applicable. Under the Supplemental Plan, retirement
benefits are calculated in accordance with the same formula used under the
applicable qualified plan, except that, with respect to calculating the
portion of the Supplemental Plan benefit attributable to service under the TU
Retirement Plan, earnings also include AIP awards (50% of the AIP award is
reported under the Bonus for the named officers in the Summary Compensation
Table). The tables set forth above illustrate the total annual benefit payable
at retirement under the TU Retirement Plan and the ENSERCH Retirement Plan,
respectively, inclusive of benefits payable under the Supplemental Plan, prior
to any reduction for a contingent beneficiary option which may be selected by
participants.
Change in Control Agreements
ENSERCH entered into change in control agreements with certain employees,
including Messrs. Biegler and Hunter. 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.
The following report and performance graph are presented herein for
information purposes only. This information is not required to be included
herein and shall not be deemed to form a part of this report to be "filed"
with the Securities and Exchange Commission. The report set forth hereinafter
is the report of the Organization and Compensation Committee of the Board of
Directors of TUC and is illustrative of the methodology utilized in
establishing the compensation of executive officers of TUC and ENSERCH.
References in the report to the "Company" are references to TUC.
20
<PAGE>
<PAGE>
ORGANIZATION AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors
(Committee) is responsible for reviewing and establishing the compensation of
the executive officers of the Company. The Committee consists of all of the
nonemployee directors of the Company and is chaired by James A. Middleton.
The Committee has directed the preparation of this report and has approved its
contents and submission to the shareholders.
As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation
plans should align executive compensation with returns to shareholders with
due consideration accorded to balancing both long-term and short-term
objectives. The overall compensation program should provide for an
appropriate and competitive balance between base salaries and
performance-based annual and long-term incentives. The Committee has
determined that, as a matter of policy to be implemented over time, the base
salaries of the officers will be established at the median, or 50th
percentile, of the top ten electric utilities in the United States and that
opportunities for total direct compensation (defined as the sum of base
salaries, annual incentives and long-term incentives) to reach the 75th
percentile, or above, of such utilities will be provided through
performance-based compensation plans. Such compensation principles and
practices have allowed, and should continue to allow, the Company to attract,
retain and motivate its key executives.
In furtherance of these policies, a nationally recognized compensation
consultant has been retained since 1994 to assist the Committee in its
periodic reviews of compensation and benefits provided to officers. The
consultant's evaluations include comparisons to the largest utilities as well
as to general industry with respect both to the level and composition of
officers' compensation. The consultant's recommendations including the Annual
Incentive Plan, the Long-Term Incentive Compensation Plan and certain benefit
changes have generally been implemented. The Annual Incentive Plan, which was
approved by the shareholders in 1995, is generally referred to as the AIP and
is described in this report as well as in footnote 5 to the Summary
Compensation Table. The Long-Term Incentive Compensation Plan, referred to as
the Long-Term Plan or LTICP, was approved by the shareholders in 1997 and is
described in this report as well as in footnote 6 to the Summary Compensation
Table.
In recent years, the compensation of the officers of the Company has
consisted principally of base salaries, the opportunity to participate in the
Deferred and Incentive Compensation Plan (referred to as the DICP and
described in footnote 6 to the Summary Compensation Table), the opportunity to
earn an incentive award under the AIP and, in certain instances, awards of
performance-based restricted shares under the Long-Term Plan. Benefits
provided under the DICP and the AIP have represented a substantial portion of
officers' compensation, and the value of future payments under the DICP, as
well as the value of the deferred portion of any award under the AIP, is
directly related to the future performance of the Company's common stock. It
is anticipated that performance-based incentive awards under the AIP and the
Long-Term Plan, will, in future years, continue to constitute a substantial
percentage of the officers' total compensation.
Certain of the Company's business units have developed separate annual
and long-term incentive compensation plans. Generally those plans focus on
the results achieved by those individual business units and the compensation
opportunities provided by those plans are considered to be competitive in the
markets in which those units compete. Officers may not participate in both
the traditional incentive compensation plans as discussed herein and the
business unit plans. None of the named officers participate in the individual
business unit plans.
The AIP is administered by the Committee and provides an objective
framework within which annual Company and individual performance can be
evaluated by the Committee. Depending on the results of such performance
evaluations, and the attainment of the per share net income goals established
in advance, the Committee may provide annual incentive compensation awards to
eligible officers. The evaluation of each individual participant's
performance is based upon the attainment of individual and business unit
objectives. The Company's performance is evaluated, compared to the ten
largest electric utilities and/or the electric utility industry, based upon
its total return to shareholders and return on invested capital, as well as
other measures relating to competitiveness, service quality and employee
safety. The combination of individual and Company performance results,
21
<PAGE>
<PAGE>
together with the Committee's evaluation of the competitive level of
compensation which is appropriate for such results, determines the amount,
if any, actually awarded.
The Long-Term Plan, which is also administered by the Committee, is a
comprehensive stock-based incentive compensation plan under which all awards
are made in, or based on the value of, the Company's common stock. The
Long-Term Plan provides that, in the discretion of the Committee, awards may
be in the form of stock options, stock appreciation rights, performance and/or
restricted stock or stock units or in any other stock-based form. The purpose
of the Long-Term Plan is to provide performance-related incentives linked to
long-term performance goals. Such performance goals may be based on
individual performance and/or may include criteria such as absolute or
relative levels of total shareholder return, revenues, sales, net income or
net worth of the Company, any of its subsidiaries, business units or other
areas, all as the Committee may determine. Awards under the Long-Term Plan
are expected to constitute the principal long-term component of officers'
compensation.
In establishing levels of executive compensation at its May 1998 meeting,
the Committee reviewed various performance and compensation data, including
the performance measures under the AIP and the report of its compensation
consultant. Information was also gathered from industry sources and other
published and private materials which provided a basis for comparing the
largest electric and gas utilities and other survey groups representing a
large variety of business organizations. Included in the data considered were
the comparative returns provided by the largest electric and gas utilities as
represented by the returns of the Standard & Poor's Electric Utility Index
which are reflected in the graph herein. In 1997, TU Electric, the Company's
principal subsidiary, was the largest electric utility in the United States as
measured by megawatt hour sales and, compared to other electric utilities in
the United States, was fifth in electric revenues, fifth in total assets,
fourth in net generating capability, sixth in number of customers and ninth in
number of employees. Compensation amounts were established by the Committee
based upon its consideration of the above comparative data and its subjective
evaluation of Company and individual performance at levels consistent with the
Committee's policy relating to total direct compensation.
At its meeting in May 1998, the Committee provided awards of
performance-based restricted stock under the Long-Term Plan to certain
officers, including the Chief Executive. The future value of those awards
will be determined by the Company's total return to shareholders over a
three-year period compared to the total return for that period of the
companies comprising the Standard & Poor's Electric Utility Index. Depending
upon the Company's relative return for such period, the officers may earn from
0% to 200% of the original award and their compensation is, thereby, directly
related to shareholder value. Awards granted in May 1998 contemplate that
200% of the original award will be provided if the Company's total return is
in the 81st percentile or above of the returns of the companies comprising the
Standard & Poor's Electric Utility Index and that such percentage of the
original award will be reduced as the Company's return compared to the Index
declines so that 0% of the original award will be provided if the Company's
return is in the 40th percentile or below of returns provided by the
companies comprising the Index. These awards, and any awards that may be made
in the future, are based upon the Committee's evaluation of the appropriate
level of long-term compensation consistent with its policy relating to total
direct compensation.
In May 1998 the Committee increased Mr. Nye's base salary as Chief
Executive to an annual rate of $850,000, representing a $75,000 or 9.7%
increase over the amount established for Mr. Nye in May of 1997. Based upon
the Committee's evaluation of individual and Company performance, as called
for by the AIP, the Committee also provided Mr. Nye with an AIP award of
$700,000 compared to the prior year's award of $650,000. The Committee also
awarded 22,000 shares of performance-based restricted stock to Mr. Nye. Under
the terms of the award, Mr. Nye can earn from 0% to 200% of the award
depending on the Company's total return to shareholders over a three-year
period (April 1, 1998 through March 31, 2001) compared to the total return
provided by the companies comprising the Standard & Poor's Electric Utility
Index. This level of compensation was established based upon the Committee's
subjective evaluation of the information described in this report.
In discharging its responsibilities with respect to establishing
executive compensation, the Committee normally considers such matters at its
May meeting held in conjunction with the Annual Meeting of Shareholders.
Although Company management may be present during Committee discussions of
officers' compensation, Committee decisions with respect to the compensation
of the Chairman of the Board and Chief Executive and the President are reached
in private session without the presence of any member of Company management.
22
<PAGE>
<PAGE>
Section 162(m) of the Code limits the deductibility of compensation which
a publicly traded corporation provides to its most highly compensated
officers. As a general policy, the Company does not intend to provide
compensation which is not deductible for federal income tax purposes. Awards
under the AIP in 1996 and subsequent years as well as awards under the
Long-Term Plan are expected to be fully deductible, and the DICP and the
Salary Deferral Program have been amended to require the deferral of
distributions of amounts earned in 1995 and subsequent years until the time
when such amounts would be deductible. Awards provided under the AIP in 1995
and distributions under the DICP and the Salary Deferral Program which were
earned in plan years prior to 1995, may not be fully deductible but such
amounts are not expected to be material.
Shareholder comments to the Committee are welcomed and should be
addressed to the Secretary of the Company at the Company's offices.
Organization and Compensation Committee
James A. Middleton, Chair Margaret N. Maxey
Derek C. Bonham (since November 1998) J. E. Oesterreicher
William M. Griffin Charles R. Perry
Kerney Laday Herbert H. Richardson
23
<PAGE>
<PAGE>
PERFORMANCE GRAPH
The following graph compares the performance of TUC's common
stock to the S&P 500 Index and S&P Electric Utility Index for the last five
years. The graph assumes the investment of $100 at December 31, 1993 and that
all dividends were reinvested. The amount of the investment at the end of
each year is shown in the graph and in the table which follows.
Cumulative Total Returns
for the Five Years Ended 12/31/98
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Texas Utilities 100 81 112 117 126 150
S&P 500 Index 100 101 139 171 228 293
S&P Electric Utility Index 100 86 113 113 143 166
</TABLE>
24
<PAGE>
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners at February 28, 1999:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial
Title of Class of Beneficial Owner Ownership Percent of Class
- ------------------- ----------------------- ------------------- ----------------
<S> <C> <C> <C>
Common stock, Texas Utilities Company 451,000 shares 100.00%
$0.01 par value, Energy Plaza sole voting and
of ENSERCH 1601 Bryan Street investment power
Dallas, Texas 75201
</TABLE>
Security ownership of management at February 28, 1999:
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,
1999. 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
-----------------------------------------------------
Name Beneficially Owned Deferred Plan(2) Total
- ----------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
T. L. Baker 13,321 20,700 34,021
David W. Biegler 152,867(1) 8,277 161,144
Barbara B. Curry 2,608 6,095 8,703
H. Jarrell Gibbs 20,793 27,286 48,079
Michael T. Hunter 4,343 0 4,343
Michael J. McNally 33,138 17,041 50,179
Erle Nye 76,055 63,306 139,361
Robert A. Woolridge 6,077 0 6,077
------- ------- -------
All Directors and Executive
Officers as a group (8) 309,202 142,705 451,907
======= ======= =======
<FN>
(1) Total shares include 129,778 shares subject to stock options
exercisable within sixty days of the date of this report.
(2) 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 TUC common stock as
do investments in actual shares of common stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Robert A. Wooldridge, a Director of ENSERCH, is a partner of Worsham,
Forsythe & Wooldridge, L.L.P., which provides legal services to ENSERCH.
25
<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 Operations . . . . . . . . . . . . . . . . . . . A-3
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . A-12
Statements of Consolidated Income. . . . . . . . . . . . . . . . . A-13
Statements of Consolidated Comprehensive Income. . . . . . . . . . A-14
Statements of Consolidated Cash Flows. . . . . . . . . . . . . . . A-15
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . A-16
Statements of Consolidated Common Stock Equity . . . . . . . . . . A-18
Notes to Consolidated Financial Statements . . . . . . . . . . . . A-19
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, 1998, are as follows:
Date of Report Item Reported
-------------- -------------
None
(c)Exhibits:
</TABLE>
<TABLE>
<CAPTION>
Previously Filed*
-----------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
<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>
26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Previously Filed*
-----------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
<S> <C> <C> <C>
3(a) 1-3183 3.1 -- Restated Articles of Incorporation of the
Form 10-K Corporation.
(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),
Form 10-K dated as of January 1, 1998, between
(1997) ENSERCH Corporation and The Bank of New York.
4(c) 1-12833 4(ll) -- Officer's Certificate establishing the ENSERCH
Form 10-K 6-1/4% Series A Notes due January 1, 2003.
(1997)
4(d) 1-12833 4(mm) -- Officer's Certificate establishing the ENSERCH
Form 10-K Remarketed 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
Form 10-K August 18, 1992.
(1997)
4(g) 1-12833 4(qq) -- ENSERCH Corporation 6-3/8% Note due 2004,
Form 10-K dated February 1, 1994.
(1997)
4(h) 1-12833 4(rr) -- ENSERCH Corporation 7-1/8% Note due 2005,
Form 10-K dated June 6, 1995.
(1997)
4(i) 1-12833 4(a) -- Remarketing Agreement, dated as of January
Form 8-K 30, 1998 and form of Remarketing Agreement
(filed August 28, Supplement with respect to ENSERCH Remarketed
1998) Reset Notes.
4(j) 1-12833 4(b) -- Indenture,(For Unsecured Subordinated Debt
Form 8-K Securities), dated as of June 1, 1998, between
(filed August 28, ENSERCH and The Bank of New York, as Trustee.
1998)
4(k) 1-12833 4(c) -- Officer's Certificate, dated as of July 2, 1998,
Form 8-K establishing the terms of the ENSERCH Floating
(filed August 28, Rate Junior Subordinated Debentures, issued in
1998) connection with the preferred securities ENSERCH
Capital I.
4(l) 1-12833 4(d) -- Amended and Restated Trust Agreement, dated as of
Form 8-K July 2, 1998, between ENSERCH, as Depositor, and
(filed August 28, The Bank of New York, The Bank of New York
1998) (Delaware), and the Administrative trustees
thereunder, as Trustee.
</TABLE>
27
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Previously Filed*
-----------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
<S> <C> <C> <C>
4(m) 1-12833 4(e) -- Guarantee Agreement with respect to ENSERCH
Form 8-K Capital I, dated as of July 2, 1998, between
(filed August 28, ENSERCH, as Guarantor, and The Bank of New York,
1998) as Trustee.
4(n) 1-12833 4(f) -- Agreement as to Expenses and Liabilities, dated
Form 8-K as of July 1, 1998, between ENSERCH and ENSERCH
(filed August 28, Capital I.
1998)
10(a)** 1-3183 10.6 -- ENSERCH Corporation 1981 Stock Option Plan, as
Form 10-K amended.
(1991)
10(b)** 1-3183 10.5 -- Forms of Change of Control Agreement executed by
Form 10-K certain executive officers of the Corporation.
(1996)
10(c)** 1-3183 10.12 -- ENSERCH Corporation 1991 Stock Incentive Plan
Form 10-K
(1990)
10(d)** 1-3183 10.8 -- ENSERCH Corporation Deferred Compensation Plan
Form 10-K dated September 30, 1994 and Amendment No. 1
(1996) thereto dated 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(e)** 1-3183 10.9 -- ENSERCH Corporation Deferred Compensation Trust
Form 10-K dated September 30, 1994, and Amendment No. 1
(1996) thereto effective January 1, 1996.
10(f)** 1-3183 10.10 -- ENSERCH Corporation Retirement Income Restoration
Form 10-K Plan dated December 28, 1990 (RIRP), and Amendment
(1996) No. 1 thereto dated September 30, 1994, Amendment
No. 1-A dated February 13,1996, and Amendment
No. 2 effective January 1, 1996.
10(g) -- Amendments 3 and 4, dated May 5, 1997, and
Amendment 5 dated August 1, 1997, to the RIRP.
10(h)** 1-3183 10.11 -- ENSERCH Corporation Retirement Income Restoration
Form 10-K Trust dated September 30, 1994 and Amendment
(1996) No. 1 thereto effective January 1, 1996.
10(i)** 1-3591 10(a) -- Deferred and Incentive Compensation Plan of
Form 10-Q the Texas Utilities Company System, as amended
(Quarter ended February 20, 1998.
June 30, 1995)
10(j)** 1-3591 10(f) -- Salary Deferral Program of the Texas Utilities
Form 10-Q Company System as amended February 20, 1998.
(Quarter ended
June 30, 1995)
</TABLE>
28
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Previously Filed*
-----------------
With
File As
Exhibits Number Exhibit
- -------- ------ -------
<S> <C> <C> <C>
10(k)** 1-3591 10(c) -- Restated Supplemental Retirement Plan for
Form 10-Q Employees of the Texas Utilities Company System,
(Quarter ended as restated effective January 1, 1995.
June 30, 1995)
10(l)** 1-3591 10(d) -- Long-Term Incentive Plan of the Texas Utilities
Form 10-Q Company System, dated as of May 19, 1995.
(Quarter ended
June 30, 1995)
10(m) 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(n) 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.
10(o) 1-12833 10(n) -- 364 Day Amended and Restated Competitive Advance
Form 10-K and Revolving Credit Facility Agreement, dated as
(1998) of May 28, 1998 as amended and restated as of
February 26, 1999, among Texas Utilities Company,
Texas Utilities Electric Company, ENSERCH
Corporation, Chase Bank of Texas, National
Association, as Administrative Agent and certain
banks listed therein and The Chase Manhattan Bank,
as Competitive Advance Facility Agent (US Facility A).
10(p) l-12833 (b)(2)-- 5-Year Competitive Advance and Revolving Credit
Schedule 14D-1 Facility Agreement dated as of March 2, 1998 among
(filed March 10, Texas Utilities Company, Texas Utilities Electric
1998) Company, ENSERCH Corporation, The Chase Manhattan
Bank, as Competitive Advance Facility Agent and Chase
Bank of Texas, National Association, as Administrative
Agent and certain banks listed therein (US Facility B).
10(q) l-12833 (b)(3)-- Amendment No. 1, dated March 3, 1998, to US
Schedule 14D-1 Facility A and US Facility B.
(filed March 10,
1998)
12 -- Computation of Ratio of Earnings to Fixed Charges,
and to Fixed Charges and Preferred Dividends.
21 -- Subsidiaries of the Corporation.
23 -- Consent of Deloitte & Touche, Independent Auditors
for ENSERCH.
27 -- Financial Data Schedule.
<FN>
- -----------------------
* 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.
</FN>
</TABLE>
29
<PAGE>
<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 31, 1999 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
- ----------------------------- Officer
(Erle Nye, Chairman of the
Board and Chief Executive)
/s/ KIRK R. OLIVER Principal Financial
- ----------------------------- Officer
(Kirk R. Oliver, Assistant Secretary)
/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 31, 1999
- -----------------------------
(H. Jarrell Gibbs)
/s/ MICHAEL J. McNALLY Director
- -----------------------------
(Michael J. McNally)
/s/ ROBERT A. WOOLDRIDGE Director
- -----------------------------
(Robert A. Wooldridge)
</TABLE>
30
<PAGE>
<PAGE>
Appendix A
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
INDEX TO FINANCIAL INFORMATION
December 31, 1998
Page
Selected Financial Data A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-3
Independent Auditors' Report A-12
Statements of Consolidated Income A-13
Statements of Consolidated Comprehensive Income A-14
Statements of Consolidated Cash Flows A-15
Consolidated Balance Sheets A-16
Statements of Consolidated Common Stock Equity A-18
Notes to Consolidated Financial Statements A-19
A-1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
SELECTED FINANCIAL DATA
Predecessor
-----------------------------------------
Period from Period from
Year Acquisition January 1,
Ended Date to 1997 to Year Ended December 31,
December 31, December 31, Acquisition ---------------------------
1998 1997 Date 1996 1995 1994
----------- ------------ ----------- -------- ------- -------
(Millions of Dollars, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Total assets - end of year . . . . . . . . . . . . . . . . $3,964 $3,240 $2,725 $2,535 $2,641
====== ====== ====== ====== ======
Capitalization - end of year
Long-term debt (less amounts due currently). . . . . . $ 551 $ 647 $ 933 $ 801 $ 807
ENSERCH obligated, mandatorily redeemable,
preferred securities of subsidiary trust holding
solely junior subordinated debentures of
ENSERCH (trust securities). . . . . . . . . . . . . 146 - - - -
Advances from parent . . . . . . . . . . . . . . . . . 420 293 - - -
Preferred stock. . . . . . . . . . . . . . . . . . . . 75 175 175 175 175
Common stock equity. . . . . . . . . . . . . . . . . . 741 762 743 719 726
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . $1,933 $1,877 $1,851 $1,695 $1,708
====== ====== ====== ====== ======
Capitalization ratios - end of year
Long-term debt . . . . . . . . . . . . . . . . . . . . 28.5% 34.5% 50.4% 47.3% 47.2%
ENSERCH trust securities . . . . . . . . . . . . . . . 7.6 - - - -
Advances from parent . . . . . . . . . . . . . . . . . 21.7 15.6 - - -
Preferred stock. . . . . . . . . . . . . . . . . . . . 3.9 9.3 9.4 10.3 10.3
Common stock equity. . . . . . . . . . . . . . . . . . 38.3 40.6 40.2 42.4 42.5
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Sales Volumes
Gas distribution (billion cubic feet-Bcf):
Residential . . . . . . . . . . . . . . . . . . . . 77 33 53 83 77 77
Commercial. . . . . . . . . . . . . . . . . . . . . 49 21 33 52 49 49
Industrial and electric generation. . . . . . . . . 4 3 7 19 24 26
------ ------ ------ ------ ------ ------
Total gas distribution . . . . . . . . . . . . . 130 57 93 154 150 152
====== ====== ====== ====== ====== ======
Pipeline transportation (Bcf). . . . . . . . . . . . . 599 255 362 652 561 542
Gas liquids (million barrels). . . . . . . . . . . . . 6 3 3 6 6 6
Energy marketing:
Gas (Bcf) . . . . . . . . . . . . . . . . . . . . . 1,115 292 223 315 419 488
Electric (gigawatt hours-GWh) . . . . . . . . . . . 16,268 - - - - -
Operating Revenues
Gas distribution
Residential . . . . . . . . . . . . . . . . . . . . $ 437 $ 206 $ 335 $ 515 $ 497 $ 480
Commercial. . . . . . . . . . . . . . . . . . . . . 225 109 178 275 269 264
Industrial and electric generation. . . . . . . . . 20 15 38 77 107 117
------ ------ ------ ------ ------ ------
Total gas distribution . . . . . . . . . . . . . 682 330 551 867 873 861
Pipeline transportation. . . . . . . . . . . . . . . . 121 57 77 134 143 141
Gas liquids. . . . . . . . . . . . . . . . . . . . . . 64 37 49 97 70 69
Energy marketing . . . . . . . . . . . . . . . . . . . 3,199 859 603 826 750 997
Other. . . . . . . . . . . . . . . . . . . . . . . . . 70 42 85 133 86 81
Less intercompany revenues . . . . . . . . . . . . . . (98) (48) (85) (163) (131) (135)
------ ------ ------ ------ ------ ------
Total operating revenues. . . . . . . . . . . . . . $4,038 $1,277 $1,280 $1,894 $1,791 $2,014
====== ====== ====== ====== ====== ======
Income (loss) from continuing operations . . . . . . . . . $ (22) $ (9) $ (15) $ 10 $ 21 $ (6)
====== ====== ======= ====== ====== ======
Ratio of earnings to fixed charges . . . . . . . . . . . . 0.68 0.66 0.58 1.31 1.46 0.82
Ratio of earnings to combined fixed charges and
preferred dividends. . . . . . . . . . . . . . . . . . 0.64 0.57 0.49 1.01 1.18 0.58
<FN>
Financial information of Predecessor for all periods prior to the Acquisition
Date (August 5, 1997) 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.
</FN>
</TABLE>
A-2
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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,
among others, that could cause the actual results of ENSERCH to differ
materially from those projected in such forward-looking statements: (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, (xiii) significant changes in ENSERCH's relationship with its
employees and the potential adverse effects if labor disputes or grievances
were to occur and (xiv) unanticipated problems related to the Corporation's
internal Year 2000 (Y2K) initiative and potential adverse consequences related
to Y2K non-compliance of third parties.
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 it access 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.
MERGERS AND ACQUISITIONS
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions involving the former Texas Utilities Company, now known as Texas
Energy Industries, Inc., and ENSERCH were completed. (See Note 1 to
Consolidated Financial Statements for additional information concerning the
merger.)
All of the common stock of ENSERCH was converted into common stock of a
new holding company, now known as Texas Utilities Company (TUC), and ENSERCH
became a wholly-owned subsidiary of 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.
TUC accounted for its acquisition of ENSERCH as a purchase. 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
A-3
<PAGE>
<PAGE>
adjustments, including the amortization of goodwill over a period of forty
years.
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 process of determining the fair value of assets
acquired, liabilities assumed and contingencies existing at the Merger Date
was completed in 1998 and resulted in an increase in goodwill of approximately
$60 million over the preliminary allocation, primarily due to refinement of
estimates of preacquisition contingencies.
The Predecessor financial statements reflect EEX and LSEPO as
discontinued operations. 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. Accordingly, operating results for periods following the Merger Date
exclude those operations. Prior periods were not restated to reflect the
sale.
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 has been combined with the post-merger financial information. The
continuing 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, are comparable.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flows provided from operating activities for ENSERCH before changes
in operating assets and liabilities for the year ended December 31, 1998 were
$102 million compared with $57 million and $75 million for the comparable
periods in 1997 and 1996, respectively. Changes in operating assets and
liabilities for ENSERCH for the year ended December 31, 1998 used cash of $138
million compared with $69 million for the comparable period in 1997, but
provided cash of $30 million for the same period of 1996.
Cash flows used in investing activities for the year ended December 31,
1998 totaled $194 million compared with $125 million for the same period of
1997 and $176 million for 1996. Construction expenditures were $187 million
for the current period compared with $119 million and $125 million for the
comparable periods in 1997 and 1996, respectively. Other investing activities
for 1996 include cash required for investments in unconsolidated affiliates
primarily related to international gas distribution operations that were sold
to another subsidiary of TUC at the end of 1997.
Discontinued exploration and production operations used cash of $22
million in 1997 and provided cash of $20 million in 1996. The discontinued
engineering and construction operations used cash of $3 million in 1998, $13
million in 1997 and $5 million in 1996.
Capital expenditures of the Corporation totaled $187 million in 1998, and
expenditures of $117 million are estimated for 1999. Approximately 94% will
be spent on US Gas Pipeline and Distribution operations and approximately 6%
on US Energy Marketing and other operations.
A-4
<PAGE>
<PAGE>
Total capitalization at December 31, 1998 was $1.9 billion, up slightly
from year-end 1997. The capitalization ratios of the Corporation consisted of
approximately 28% long-term debt, 22% advances from parent, 8% ENSERCH trust
securities, 4% preferred stock, and 38% common stock equity.
During the year ended December 31, 1998, ENSERCH issued, redeemed,
reacquired or made scheduled principal payments on long-term debt, preferred
stock and trust securities for cash, as follows:
<TABLE>
<CAPTION>
Issuance Retirements
-------- -----------
<S> <C> <C>
ENSERCH Capital I Trust Securities . . . . . . . $ 150 $ -
Series E Preferred Stock . . . . . . . . . . . - 100
6.375% Convertible Debentures *. . . . . . . . - 88
8.875% Senior Notes. . . . . . . . . . . . . . - 100
6.25% Series A Notes . . . . . . . . . . . . . 125 -
Remarketed Reset Notes . . . . . . . . . . . . 125 -
------ ------
Total. . . . . . . . . . . . . . . . . . . . $ 400 $ 288
====== ======
<FN>
* In addition, holders of $3 million principal amount converted such
debentures into shares of TUC common stock.
</FN>
</TABLE>
Early redemptions of preferred stock and long-term debt may occur from
time to time in amounts presently undetermined. See Notes 4, 6 and 7 to
Consolidated Financial Statements for further details concerning long-term
debt, preferred stock and trust securities.
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 million of commercial paper outstanding at the Merger
Date and $260 million of long-term debt outstanding under the credit
agreement, using advances from TUC to fund the retirements. In December 1997,
TUC purchased 200,000 additional shares of ENSERCH common stock for $200
million. In February 1999, TUC purchased 250,000 additional shares of ENSERCH
common stock for $250 million. These funds were used to reduce borrowings
from TUC.
Interest rate swaps effectively fixed the rate on $100 million of the
ENSERCH Capital I Trust Securities at 6.629% and at 6.444% on the remaining
$50 million of the trust securities to July 1, 2003.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $100 million aggregate principal
amount of securities that are currently registered with the Securities and
Exchange Commission (SEC) for offering pursuant to Rule 415 under the
Securities Act of 1933.
At December 31, 1998, TUC, TU Electric and ENSERCH had $3.5 billion of
joint US dollar-denominated lines of credit under revolving credit facility
agreements (US Credit Agreements) with a group of banking institutions. The
US Credit Agreements have two facilities. Facility A provides for short-term
borrowings aggregating up to $2.1 billion outstanding at any one time at
variable interest rates and terminates February 25, 2000. Of this, $800
million can be used for working capital and other general corporate purposes.
Facility B provides for borrowings aggregating up to $1.4 billion outstanding
at any one time at variable interest rates and terminates March 2, 2003.
Borrowings under this facility can be used for working capital and other
general corporate purposes. The combined borrowings of TUC, TU Electric and
ENSERCH under both facilities, excluding amounts restricted to finance the
acquisition of a non-US subsidiary of TUC, are limited to an aggregate of $2.2
billion outstanding at any one time. ENSERCH's borrowings under both
facilities are limited to an aggregate of $650 million outstanding at any one
time. The facilities primarily support commercial paper borrowings.
A-5
<PAGE>
<PAGE>
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 its US Energy Marketing segment, principally Enserch
Energy Services, Inc. (EES), the Corporation's participation in derivative
transactions is designated for hedging purposes and is 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 generally does
not obtain collateral to support the agreements but establishes credit limits
and monitors the financial viability of counterparties. In the event a
counterparty's credit rating declines, the Corporation may apply certain
remedies, if considered necessary. The Corporation believes the risk of
nonperformance by counterparties is minimal.
INTEREST RATE RISK -- The table below provides information concerning the
Corporation's financial instruments as of December 31, 1998 that are sensitive
to changes in interest rates, which include debt obligations (by principal
amount) and interest rate swaps. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. ENSERCH has entered into interest rate swaps under which it
has agreed to exchange the difference between fixed-rate and variable-rate
interest amounts calculated with reference to specified notional principal
amounts. The contracts require settlement of net interest receivable or
payable at specified intervals (primarily semi-annually) which generally
coincide with the dates on which interest is payable on the underlying debt.
For interest rate swaps, the table presents notional amounts and weighted
average interest rates by expected (contractual) maturity dates. Weighted
average variable rates are based on rates in effect at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------
1998 1997
There- Fair Fair
1999 2000 2001 2002 2003 after Total Value Value
---- ---- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
(including current maturities)
Fixed Rate. . . . . . . . . . . . . . $ 151 $ - $ - $ - $ 125 $ 426 $ 702 $722 $649
Average interest rate . . . . . . 7.00% - - - 6.25% 6.67% 6.67% - -
Interest Rate Swaps
(notional amounts)
Variable to Fixed . . . . . . . . . . - - - - $ 150 - $ 150 (a) (a)
Average pay rate . . . . . . . . . - - - - 6.57% - 6.57% - -
Average receive rate . . . . . . . - - - - 5.90% - 5.90% - -
<FN>
(a) Fair value amounts round to less than $1 million.
</FN>
</TABLE>
A-6
<PAGE>
<PAGE>
ENERGY MARKETING RISK -- In the course of providing comprehensive energy
products and services to its diversified client base, EES engages in energy
price risk management activities. In addition to the purchase and sale of
these physical commodities, EES enters into futures contracts; swap agreements
where settlement is based on the difference between a fixed and floating
(index based) price for the underlying commodity; exchange traded options;
over-the-counter options, which are settled in cash or the physical delivery
of the underlying commodity; exchange-of-futures for physical (EFP)
transactions; energy exchange transactions; storage activities; and other
contractual arrangements. EES may buy and sell certain of these instruments
to manage its exposure to price risk from existing contractual commitments as
well as other energy-related assets and liabilities. It may also enter into
contracts to take advantage of arbitrage opportunities.
These activities involve price commitments into the future and,
therefore, give rise to market risk. EES uses the mark-to-market method of
valuing and accounting for these activities.
In order to manage its exposure to the price risk associated with these
instruments, EES has established trading policies and limits and revalues its
exposures daily against these benchmarks. EES also periodically reviews
these policies to ensure they are responsive to changing market and business
conditions.
EES utilizes various techniques and methodologies that simulate forward
price curves in the energy markets to estimate the size and probability of
changes in market value resulting from price movements. These techniques
include, but are not limited to, sensitivity analyses. The uses of these
methodologies require a number of key assumptions including selection of
confidence levels, the holding period of the positions, and the depth and
applicability to future periods of historical price information.
The exposure of fixed price natural gas and electric power 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. The notional
amounts and terms of the portfolio as of December 31, 1998 included financial
instruments that provide for fixed price receipts of 2,643 trillion British
thermal units equivalent (TBtue) and fixed price payments of 2,799 TBtue, with
a maximum term of eight years. Additionally, sales and purchase commitments
totaling 973 TBtue, with terms extending up to nine years, are included in the
portfolio as of December 31, 1998. 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% (two standard
deviation) change in market factors, which may differ from actual results.
Using a two standard deviation change, the most adverse change in fair value
at December 31, 1998 and 1997, as a result of this analysis was a reduction of
$2.1 million and $1.1 million, respectively.
Regulation and Rates
Under a settlement of the RRC rate inquiry approved in June 1998, Lone
Star Gas Company (Lone Star Gas) agreed to credit residential and commercial
customers $18 million to be spread over the next two heating seasons (November
through March). Earnings were not affected by the settlement due to
previously established reserves. The final order approving the stipulation
found that all gas costs flowed through Lone Star Gas' monthly gas cost
adjustment clause prior to October 31, 1997 were just, reasonable, and
necessary. As a part of the final order, the RRC required an audit of an
amount that Lone Star Gas credited to residential and commercial customers
under a previous voluntary stipulation. The audit report indicated that an
additional $7.3 million should be credited to residential and commercial
customers. The Corporation believes that the additional amount noted in the
audit report was included in the $18 million settlement, but it is unable to
predict the outcome of the audit.
A-7
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
For the year ended December 31, 1998, ENSERCH had a loss from continuing
operations of $22 million, compared with a loss of $24 million in 1997 and
income of $10 million in 1996. The amortization of goodwill arising from the
merger with TUC was $21 million for 1998 and $8 million for 1997. Results for
1998 were unfavorably impacted by milder winter weather in both the first and
fourth quarters. The 1997 results were reduced by merger-related expenses of
$25 million pretax ($21 million after-tax) and an $8.6 million pretax ($5.6
million after-tax) first quarter provision for a credit Lone Star Pipeline
Company made voluntarily to its customers, but were improved by third quarter
income of $12.5 million pretax ($8.1 million after-tax) from the sale of
interests in cogeneration projects.
Consolidated revenues for 1998 were $4.0 billion compared with $2.6
billion for 1997 and $1.9 billion for 1996. The higher revenues reflect an
increase of $1.7 billion in US energy marketing revenues. (The table of
Selected Financial Data provides additional information on revenues.) Gas and
electricity purchased for resale increased from $2.0 billion in 1997 to $3.5
billion in 1998, reflecting the increase in US energy marketing activities.
Operating income was $46 million in 1998 compared with $67 million in 1997 and
$105 million in 1996. Lone Star Pipeline operating income decreased $10
million in 1998 from 1997 but increased $10 million in 1997 from 1996. The
lower results for 1998 were primarily due to milder winter weather in the
first and fourth quarters of 1998. 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. Lone Star Gas operating income decreased $31 million in 1998
from 1997 and $15 million in 1997 from 1996. The 1998 decline from 1997 was
primarily due to milder winter weather, while the 1997 decline from 1996 was
primarily due to higher operating and maintenance expenses. Natural gas
liquids activities reported an increased operating loss of $18 million in
1998 from 1997 and $12 million in 1997 from 1996. 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. US energy marketing activities reported an increase
in operating income of $49 million in 1998 from 1997 but a $32 million greater
loss in 1997 than in 1996. The 1998 results reflect an increase in US energy
marketing activity and margins, partly due to the beginning of electricity
marketing in 1998, while the 1997 losses were the result of trading losses,
inadequate system infrastructure and costs associated with new systems that
were implemented around year-end 1997. Operating income for 1998 and 1997 was
also after $21 million and $8 million, respectively, of amortization of
goodwill resulting from the merger.
Other income (deductions) - net in 1998 included $3.9 million in
investment activity for a non-qualified deferred compensation plan and
proceeds from a life insurance policy, while 1997 included $25 million of
merger-related expenses partially offset by gains of $2.4 million from the
sale of cogeneration plants. Other amounts consisted principally of gains
on disposals of assets, less losses from unconsolidated affiliates.
Interest charges for 1998 were $76 million compared with $77 million in
both 1997 and 1996. Interest charges for 1998 and 1997 included $16 million
and $11 million, respectively, 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 $225 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
US cost center ceiling limitation at March 31, 1997 and a $10 million ($15
million pre-tax) provision for estimated costs and expenses to wind-up
engineering and construction operations. For 1996, discontinued operations
had income of $11 million. (See Note 13 to Consolidated Financial
Statements).
A-8
<PAGE>
<PAGE>
YEAR 2000 ISSUES
Year 2000 (Y2K) issues of ENSERCH are being addressed with those of its
parent company, TUC. The following disclosure applicable to ENSERCH regarding
Y2K issues of TUC's US businesses is excerpted from TUC's Form 10-K for the
period ended December 31, 1998 with references in TUC's discussion to "the
Company" changed to TUC.
Overview
Many existing computer programs use only the last two digits to identify
a year in the date field. Thus, they would not recognize a year that begins
with 20 instead of 19. If not corrected, many computer applications could
fail or produce erroneous data on or about the year 2000.
TUC began its US efforts to address Y2K issues in 1996 by focusing on
information technology mainframe-based application systems (IT Corporate
Applications). In early 1997, an infrastructure project to address TUC's
information technology related hardware, operating systems and desktop
software was begun (IT Infrastructure). In late 1997, a project was begun to
address Y2K issues throughout TUC related to embedded systems, such as process
controls for energy production and delivery, and business unit owned
applications (Non-IT Equipment and Applications).
Applications and equipment in each of these three major initiatives have
been inventoried and categorized based on their criticality to TUC's business
operations. Assessments of the potential impact due to Y2K issues are
essentially complete. This process includes the solicitation of vendor
feedback, comparing information with other energy companies, and in many cases
internal verification by testing. The remediation and testing work on IT
Corporate Applications currently stands at approximately sixty percent
complete with the completion of mission critical items scheduled for the end
of the first quarter of 1999. The IT Infrastructure project is currently at
eighty percent completion. Remediation work on embedded systems is scheduled
to be completed by September 1999. A number of tests on production equipment
with embedded systems have been performed. TUC will continue to test this
equipment throughout the first half of 1999.
Readiness
The IT Corporate Applications remediation and testing activities are
approximately sixty percent complete with twenty-five percent of critical
applications tested and determined as Y2K compliant. Completion of critical
applications testing is scheduled for the end of the first quarter 1999 and
remaining applications testing is scheduled for the third quarter.
The IT Infrastructure project involves assessing the compliance of
standard computer hardware, network systems including gateways, hubs and
routers, telecommunications equipment, operating systems and IT standard
software products. Equipment is being individually tested using software
products and applicable test procedures. Network system tests have been
performed. Eighty percent of the IT Infrastructure is Y2K ready with the
remainder scheduled to be ready by the end of the first quarter of 1999.
Certain software vendors will not have Y2K ready versions of their products
available until the first or second quarter of 1999. These software product
upgrades will be tested and implemented during the second quarter of 1999.
Non-IT Equipment and Applications involve the hardware and software
products that reside in individual business units. These items include the
embedded systems that are used in energy production and delivery, and other
processes of TUC. Inventories have been conducted to identify these embedded
systems in individual business units. Assessments are substantially
complete. Some remediation needs have been identified in various business
units as a result of Y2K testing. In most cases, these concern software
upgrades that are necessary to ensure that information produced by these
A-9
<PAGE>
<PAGE>
systems can be efficiently used in TUC's business processes. The upgrades are
not required for equipment functionality. These remediation activities are
planned for completion by the end of the second quarter of 1999.
TUC is analyzing the potential impact of Y2K compliance efforts of third
parties. Over 2,000 suppliers and service providers have been contacted to
determine the status of their Y2K efforts. Approximately sixty percent of
these vendors have responded. Their responses are being prioritized and the
programs and status of the most significant among them are being analyzed in
detail. This initial analysis is complete. The more significant
interdependencies relate to telecommunications and gas suppliers.
Costs
The costs associated with TUC's Y2K efforts for its US energy businesses
are currently estimated to be approximately $36 million (primarily for TU
Electric). These costs reflect new, incremental costs and the reallocation of
resources in pre-existing maintenance budgets. The costs related to the three
major initiatives are estimated to be as follows: IT Corporate Applications -
$14 million; IT Infrastructure - $7 million; and Non IT-Equipment and
Applications - $15 million. These costs are being expensed as incurred over
the period 1996 to 2000; and, a total of approximately $17 million had been
expended through December 31, 1998. There can be no assurance that these
estimated costs will not increase as TUC's Y2K program continues.
Strategic initiatives were begun in two areas prior to beginning work on
the Y2K issue, and the costs for these initiatives are not included in the
estimate above. The energy management system for TUC's transmission grid is
being replaced. TUC's principal financial and accounting systems have been
replaced. Each of these projects will eliminate potential Y2K deficiencies;
however, that was not a significant consideration at the time replacement
decisions were made.
Risk Issues
With respect to internal risks, TUC's current assessment of the most
reasonably likely worst case scenario is that impacts on either service or
financial performance will not be materially adverse. TUC believes, based on
the results of testing that has already occurred on a large portion of its
production equipment with embedded systems, that if any disruption to service
occurs, it will be isolated and of short-term duration. TUC continues to
collaborate with other major energy suppliers through the joint Electric Power
Research Institute's embedded systems project.
As TUC's Y2K program proceeds, TUC will continue to assess its internal
and external risks, not all of which are within its control; and it will
continue to consider the most reasonably likely worst case scenario. There
can be no assurance that all material Y2K risks within TUC's control will have
been adequately identified and corrected before the end of 1999. In addition,
TUC can make no assurances regarding the Y2K readiness of systems and parties
outside its control, or the effect on TUC if those parties are not Y2K
compliant.
Contingency Plans
TUC has in place detailed emergency response and disaster recovery plans
to ensure high reliability of service to customers. These plans are utilized
routinely for abnormal service conditions. These plans have been reviewed to
identify required actions specific to the Y2K issue. Draft contingency plans
have been developed and were filed with the Public Utility Commission of Texas
(PUC) on December 31, 1998. These Y2K contingency plans address both TUC's
activities and actions necessary to mitigate the impact of third party
disruptions. These contingency plans have been coordinated with those of the
Electric Reliability Council of Texas (ERCOT), the regional independent system
operator in Texas, and the North American Electric Reliability Council
(NERC). Final contingency plans are scheduled to be completed by June 1999.
A-10
<PAGE>
<PAGE>
CHANGES IN ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for fiscal years
beginning after June 15, 1999. This standard requires that all derivative
financial instruments be recognized as either assets or liabilities on the
balance sheet at their fair values and that accounting for the changes in
their fair values is dependent upon the intended use of the derivatives and
their resulting designations. The new standard will supersede or amend
existing standards which deal with hedge accounting and derivatives. The
Corporation has not yet determined the effect adopting this standard will have
on its financial statements.
A-11
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
ENSERCH Corporation:
We have audited the accompanying consolidated balance sheets of ENSERCH
Corporation and subsidiaries (the Corporation) as of December 31, 1998 and
1997, and the related statements of consolidated income, comprehensive
income, cash flows and common stock equity for the year ended December
31, 1998, and the period from August 5, 1997 (acquisition date) to December
31, 1997, and for the Predecessor Company Operations, the period from January
1, 1997 to the acquisition date and for the year ended December 31, 1996.
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, 1998 and 1997, and the results of
their operations and their cash flows for the above stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
March 5, 1999
A-12
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED INCOME
Predecessor
-----------------------------
Period from Period from
Acquisition January 1, 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- --------------- -----------
Millions of Dollars
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . $4,038 $1,277 $1,280 $1,894
------ ------ ------ ------
OPERATING EXPENSES
Gas and electricity purchased for resale. . . . . . 3,503 1,062 955 1,330
Operation and maintenance . . . . . . . . . . . . . 346 142 198 335
Depreciation and amortization . . . . . . . . . . . 76 30 34 54
Taxes other than income . . . . . . . . . . . . . . 67 23 46 70
------ ------ ------ ------
Total operating expenses. . . . . . . . . . . 3,992 1,257 1,233 1,789
------ ------ ------ ------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . 46 20 47 105
OTHER INCOME (DEDUCTIONS) - NET. . . . . . . . . . . . . 5 1 (24) (11)
------ ------ ------ ------
INCOME BEFORE INTEREST AND INCOME TAXES. . . . . . . . . 51 21 23 94
INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . - - 2 3
INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . (76) (32) (45) (77)
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . . (25) (11) (20) 20
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . (3) (2) (5) 10
------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . . (22) (9) (15) 10
INCOME (LOSS) FROM DISCONTINUED OPERATIONS . . . . . . . - - (225) 11
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT . . . . . . . . . . . . . . . . . . . . . . - - - (2)
------ ------ ------ ------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . (22) (9) (240) 19
PREFERRED STOCK DIVIDENDS. . . . . . . . . . . . . . . . 4 5 7 11
------ ------ ------ ------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCK. . . . . . . . . . . . . . . . . . . . . . . $ (26) $ (14) $ (247) $ 8
====== ====== ====== ======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Predecessor
------------------------------
Period from Period from
Acquisition January 1, 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- -------------- -----------
Millions of Dollars
<S> <C> <C> <C> <C>
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . $ (22) $ (9) $(240) $ 19
----- ----- ----- ----
OTHER COMPREHENSIVE INCOME (LOSS) -
Net change during period:
Foreign currency translation adjustments. . . . . . . . . . - - 1 (1)
Minimum pension liability adjustments . . . . . . . . . . . (1) - - -
----- ----- ----- ----
Total. . . . . . . . . . . . . . . . . . . . . . . . . (1) - 1 (1)
----- ----- ----- ----
COMPREHENSIVE INCOME (LOSS). . . . . . . . . . . . . . . . . . . $ (23) $ (9) $(239) $ 18
===== ===== ===== ====
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-14
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Predecessor
-------------------------
Period from
Period from January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ------------ ----------- -----------
Millions of Dollars
<S> <C> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Income (loss) from continuing operations. . . . . . . . . . . . . . . . $ (22) $ (9) $ (15) $ 10
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 80 34 37 60
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 44 19 (9) 5
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . (35) (341) 133 (101)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (10) 15 (12)
Account payable:
Parent and affiliates . . . . . . . . . . . . . . . . . . . . 22 5 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) 280 (149) 98
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . 7 3 (9) 11
Other working capital. . . . . . . . . . . . . . . . . . . . . . . (60) (4) 12 24
Energy marketing risk management assets and liabilities. . . . . . (11) (13) 3 (4)
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62) - 6 14
----- ----- ----- -----
Cash provided by (used in) operating activities . . . . . . . (36) (36) 24 105
----- ----- ----- -----
CASH FLOWS - FINANCING ACTIVITIES
Issuances of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . 250 - 100 185
ENSERCH obligated, mandatorily redeemable, preferred
securities of subsidiary trusts holding solely junior
subordinated debentures of ENSERCH. . . . . . . . . . . . . . . 150 - - -
Common stock:
Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 200 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 4 27
Retirements of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (188) (269) (101) (67)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . (100) - - -
Change in notes payable:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . - (205) 67 (49)
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 6 - -
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 383 - -
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (6) (13) (25)
Debt financing expenses and other . . . . . . . . . . . . . . . . . . . (7) - - (4)
----- ----- ----- -----
Cash provided by financing activities. . . . . . . . . . . . . . . 221 109 57 67
----- ----- ----- -----
CASH FLOWS - INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . (187) (57) (62) (125)
Sale of subsidiaries to an affiliated company . . . . . . . . . . . . . - (5) - -
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (4) 3 (51)
----- ----- ----- -----
Cash used in investing activities. . . . . . . . . . . . . . . . . (194) (66) (59) (176)
----- ----- ----- -----
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS. . . . . . . . . . . . (3) (7) (28) 15
----- ----- ----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . (12) - (6) 11
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE . . . . . . . . . . . . . . 12 12 18 7
----- ----- ----- -----
CASH AND EQUIVALENTS - ENDING BALANCE . . . . . . . . . . . . . . . . . . $ - $ 12 $ 12 $ 18
===== ===== ===== =====
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
---------------------
1998 1997
---- ----
Millions of Dollars
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,212 $1,069
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 46
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,304 1,115
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 80 25
------ ------
Net of accumulated depreciation . . . . . . . . . . . . . . . . . . . 1,224 1,090
Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . 71 86
------ ------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . 1,295 1,176
------ ------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 37
------ ------
GOODWILL (net of accumulated amortization: 1998 - $29; 1997 - $8). . . . . . . . . 829 791
------ ------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12
Accounts receivable (net of allowance for uncollectible accounts: 1998 - $3;
1997 - $4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553 525
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . 832 366
Inventories - at average cost:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 114
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 23
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 8
------ ------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,559 1,055
------ ------
OTHER ASSETS
Energy marketing risk management assets . . . . . . . . . . . . . . . . . . . . 128 42
Unamortized regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . 48 52
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 73
Deferred debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14
------ ------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 237 181
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,964 $3,240
====== ======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
December 31,
---------------------
1998 1997
----- -----
Millions of Dollars
<S> <C> <C>
CAPITALIZATION
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775 771
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (9)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . (1) -
------ ------
Total common stock equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 741 762
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 175
ENSERCH obligated, mandatorily redeemable, preferred securities of subsidiary
trust holding solely junior subordinated debentures of ENSERCH . . . . . . . . . 146 -
Advances from parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 293
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . . . . 551 647
------ ------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,933 1,877
------ ------
CURRENT LIABILITIES
Notes payable - banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6
Long-term debt due currently. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 -
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483 492
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . 838 357
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 39
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 89
------ ------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,633 988
------ ------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes and unamortized investment tax credits. . . . . . . 13 13
Pensions and other postretirement benefits. . . . . . . . . . . . . . . . . . . . . . 149 166
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . . . . 93 31
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . . . . 143 165
------ ------
Total deferred credits and other noncurrent liabilities. . . . . . . . . . . . 398 375
------ ------
COMMITMENTS AND CONTINGENCIES (Note 11)
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,964 $3,240
====== ======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
Predecessor
-----------------------
Period From
Period from January 1,
Acquisition 1997 Year
Year Ended Date to To Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
Millions of Dollars
<S> <C> <C> <C> <C>
COMMON STOCK - par value $.01 per share-authorized 100 million shares:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 1 $ 305
Issued for stock plans (0; 0; 215,000; and 1,764,000 shares). . . . . . - - - 7
Reclassify par value of common stock canceled at
acquisition date. . . . . . . . . . . . . . . . . . . . . . . . . - - (1) -
Change in par value to $.01 from $4.45 per share. . . . . . . . . . . . - - - (312)
------ ------ ----- -----
Balance at end of period ( outstanding shares: 201,000; 201,000;
1,000; and 70,280,000) . . . . . . . . . . . . . . . . . . . . . . . . - - - -
------ ------ ----- -----
PAID IN CAPITAL
Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . 771 579 673 339
Issuance of common stock to parent . . . . . . . . . . . . . . . . . . - 200 - -
Excess of proceeds over par value of
common stock issued for stock plans. . . . . . . . . . . . . . . . . - - 4 22
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (5) (9) -
Change in par value of common stock . . . . . . . . . . . . . . . . . . - - - 312
Distribution of EEX to common shareholders. . . . . . . . . . . . . . . - - (583) -
Reclassify common stock and accumulated loss at acquisition date - - (172) -
Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . (53) - (133) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3) - -
------ ------ ----- -----
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716 771 (220) 673
Excess of purchase price over paid in capital at acquisition date . . . 59 - 799 -
------ ------ ----- -----
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . 775 771 579 673
------ ------ ----- -----
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . (9) - 71 77
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (9) (240) 19
Dividends declared. . . . . . . . . . . . . . . . . . . . . . . . . . . (2) - (4) (25)
Reclassify accumulated loss at acquisition date . . . . . . . . . . . . - - 173 -
------ ------ ----- -----
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . (33) (9) - 71
------ ------ ----- -----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . - - (1) -
Change during the period. . . . . . . . . . . . . . . . . . . . . . . . (1) - 1 (1)
------ ------ ----- -----
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . (1) - - (1)
------ ------ ----- -----
UNAMORTIZED RESTRICTED STOCK COMPENSATION
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . - - - (2)
Shares granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (1)
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 3
------ ------ ----- -----
Balance at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
------ ------ ----- -----
COMMON STOCK EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 741 $ 762 $ 579 $ 743
====== ====== ====== ======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
A-18
<PAGE>
<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 and distribution of natural gas and
the marketing of natural gas and electricity. Businesses and subsidiaries of
ENSERCH include Lone Star Gas Company (Lone Star Gas), a gas distribution
company in Texas, serving over 1.37 million customers and providing service
through over 24,000 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 US energy marketing (Enserch Energy
Services, Inc.).
On August 5, 1997 (Merger Date or Acquisition Date), the merger
transactions involving the former Texas Utilities Company, now known as Texas
Energy Industries, Inc., and ENSERCH were completed. All of the common stock
of ENSERCH was converted into common stock of a new holding company now known
as Texas Utilities Company (TUC), and ENSERCH became a wholly-owned subsidiary
of TUC. Immediately prior to ENSERCH's merger with TUC, Enserch Exploration,
Inc. (EEX) and Lone Star Energy Plant Operations, Inc. (LSEPO), former
subsidiaries of ENSERCH, were merged to form a new company (New EEX), and
ENSERCH distributed to its common shareholders its ownership interest in these
businesses.
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 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 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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1997 1996
---- ----
Millions of Dollars
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . . . .$2,554 $1,888
Operating income. . . . . . . . . . . . . . . . . . 62 87
Income (loss) before income taxes . . . . . . . . . (12) 11
Income taxes (benefit). . . . . . . . . . . . . . . - 12
Net income (loss) . . . . . . . . . . . . . . . . . (12) (1)
Net loss available for common stock . . . . . . . . (23) (12)
</TABLE>
A-19
<PAGE>
<PAGE>
The Predecessor financial statements reflect EEX and LSEPO as
discontinued operations. The historical financial statements of ENSERCH
reflect certain reclassifications made to conform to TUC's presentation
style. Effective August 5, 1997, ENSERCH sold, at net book value to another
subsidiary of TUC, the group of companies which had constituted the
Corporation's power development and international gas distribution operations.
Accordingly, operating results for periods following the Merger Date exclude
those operations. Prior periods were not restated to reflect the sale.
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, including its
subsidiary business trust.
All significant intercompany items and transactions have been eliminated
in consolidation. Investments in significant unconsolidated affiliates are
accounted for by the equity method.
All dollar amounts in the financial statements and notes to consolidated
financial statements, except per share amounts, are stated in millions of US
dollars unless otherwise indicated.
Use of Estimates -- The preparation of the Corporation's consolidated
financial statements 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. 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. No material adjustments, other
than those disclosed elsewhere herein, were made to previous estimates during
the current year.
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). The
Corporation applies the principles of Statement of Financial Accounting
Standards (SFAS) 71, "Accounting for the Effects of Certain Types of
Regulation" to its cost-based regulated operations.
Property, Plant and Equipment -- Gas utility plant is stated at original
cost. The cost of property additions to gas utility plant includes labor and
materials, applicable overhead and payroll-related costs. Other property is
stated at cost.
Depreciation of Property, Plant and Equipment -- The pipeline and
distribution systems are depreciated by the straight line method over the
estimated useful life of the asset, approximately 30 to 40 years from original
acquisition, respectively.
Amortization of Goodwill -- Goodwill represents the excess of the
purchase price paid by TUC over the fair value of the ENSERCH assets acquired
and liabilities assumed and is being amortized over 40 years. The processes
of determining the fair value of assets acquired, liabilities assumed and
contingencies existing at the acquisition date of ENSERCH was completed in
1998 and resulted in an overall increase in goodwill of approximately $60
million over the preliminary allocations primarily due to refinement of
estimates of preacquisition contingencies.
Revenue Recognition -- Revenues are recognized when services are provided
to customers. 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. Revenues include billings under
approved rates and adjustments under various mechanisms to recover or refund
the cost of fuel purchased that is above or below the level included in base
rates. (See Note 15 for discussion of Regulations and Rates.)
A-20
<PAGE>
<PAGE>
Derivative Instruments -- The Corporation does not enter into or trade
derivative financial instruments for speculative purposes, other than for
trading purposes in US energy marketing activities. The Corporation enters
into interest rate swaps to reduce exposure to interest rate fluctuations.
Amounts paid or received under interest rate swap agreements are accrued as
interest rates change and are recognized over the life of the agreements as
adjustments to interest expense.
Income Taxes -- The Corporation is included in the consolidated federal
income tax return of TUC and subsidiary companies, and federal income taxes
are allocated to all subsidiary companies based upon their respective taxable
income or loss. Investment tax credits are being amortized to income over the
estimated service lives of the properties. Deferred federal income taxes are
provided for temporary differences between the book and tax basis of assets
and liabilities.
Energy Marketing Activities --The Corporation, through its energy
marketing subsidiary, Enserch Energy Services, Inc. (EES), enters into a
variety of transactions in the US, including forward contracts involving
physical delivery of natural gas or electrical power commodities, as well as
swaps, futures, options and other derivative contractual arrangements. As
part of these business activities, EES offers price risk management services
to the energy sector. These transactions are primarily conducted with retail
end users, established energy companies and major financial institutions. EES
uses the mark-to-market method of valuing and accounting for these
activities. Under this method, the current market value of EES' energy
portfolio, net of future servicing costs, is reflected within the
Corporation's consolidated balance sheets as "Energy Marketing Risk Management
Assets" or "Energy Marketing Risk Management Liabilities". Resulting
unrealized gains and losses are reflected in the Corporation's consolidated
statements of income. The actual timing of cash receipts and payments,
however, may vary as contracts may be settled at intervals other than their
scheduled maturities. (See Note 8.)
Consolidated Cash Flows -- For purposes of reporting cash and cash
equivalents, temporary cash investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents.
The schedule below details the Corporation's cash payments and non-cash
investing and financing activities:
<TABLE>
<CAPTION>
Predecessor
--------------------------
Period From
Period From January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH PAYMENTS (REFUNDS)
Interest costs (net of amounts capitalized). . . . . . . . . $ 72 $ 34 $ 46 $ 76
====== ====== ====== ======
Income taxes - net . . . . . . . . . . . . . . . . . . . . . $ (58) $ (10) $ 4 $ 2
====== ====== ====== ======
NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of debentures. . . . . . . . . . . . . . . . . . $ 3 $ - $ - $ -
====== ====== ====== ======
Sales of businesses:
Book value of assets sold. . . . . . . . . . . . . . . . $ - $ (106) $ - $ -
Reduction in advances due parent . . . . . . . . . . . . - 20 - -
Liabilities sold . . . . . . . . . . . . . . . . . . . . - 86 - -
------ ------ ------ ------
Cash required . . . . . . . . . . . . . . . . . . . . - - - -
Cash sold . . . . . . . . . . . . . . . . . . . . . . . - 5 - -
------ ------ ------ ------
Net cash used . . . . . . . . . . . . . . . . . . . . $ - $ 5 $ - $ -
====== ====== ====== ======
</TABLE>
A-21
<PAGE>
<PAGE>
3. AFFILIATES
Transactions between ENSERCH, TUC and affiliates of TUC for the year
ended December 31, 1998 and the period from Acquisition Date through December
31, 1997 included $16 million and $11 million, respectively, in interest
expense related to ENSERCH borrowings from TUC. Texas Utilities Services Inc.
billed ENSERCH $55 million and $8 million for the year ended December 31, 1998
and the period from Acquisition Date through December 31, 1997, respectively
for financial, accounting, information technology, environmental, customer,
procurement and personnel services and other administrative services at
costs. ENSERCH was also billed $107 million for the year ended December 31,
1998 from Texas Utilities Electric Company primarily for employee services and
expenses at cost. In addition, ENSERCH had revenues of $18 million and $9
million from the sale and transportation of gas to other TUC subsidiaries
during the respective periods. The outstanding net amount payable to TUC and
related affiliates (including advances) was $447 million at December 31, 1998.
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 million were paid off at maturity with funds advanced to ENSERCH by TUC.
In addition, ENSERCH redeemed long-term debt of $260 million outstanding under
a revolving credit agreement with funds advanced by TUC. At December 31,
1998, advances from TUC totaled $420 million. Interest on the advances
accrues at a rate equal to the weighted average commercial paper rate, 5.96%
at December 31, 1998.
At December 31, 1998, TUC, TU Electric and ENSERCH had $3,500 million of
joint US dollar-denominated lines of credit under revolving credit facility
agreements (US Credit Agreements) with a group of banking institutions. The
US Credit Agreements have two facilities. Facility A provides for short-term
borrowings aggregating up to $2,100 million outstanding at any one time at
variable interest rates and terminates February 25, 2000. Of this, $800
million can be used for working capital and other general corporate purposes.
Facility B provides for borrowings aggregating up to $1,400 million
outstanding at any one time at variable interest rates and terminates March 2,
2003. Borrowings under this facility can be used for working capital and
other general corporate purposes. The combined borrowings of TUC, TU Electric
and ENSERCH under both facilities, excluding amounts restricted to finance the
acquisition of a non-US subsidiary by TUC, are limited to an aggregate of
$2,200 million outstanding at any one time. ENSERCH's borrowings under both
facilities are limited to an aggregate of $650 million outstanding at any one
time. The facilities primarily support commercial paper borrowings. At
December 31, 1998, ENSERCH had no borrowings outstanding under these
facilities.
<TABLE>
<CAPTION>
Long-term Debt:
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Long-term Debt:
7% Notes due 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150 $ 150
8 7/8% Notes due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . - 100
6.250% Notes due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 125 -
6 3/8% Notes due 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 150 150
7 1/8% Notes due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 150 150
6.564% Remarketed Reset Notes due 2005. . . . . . . . . . . . . . . . . 125 -
6 3/8% Convertible Subordinated Debentures due 2002 . . . . . . . . . . - 91
Unamortized premium and discount and fair value adjustments. . . . . . . . . 2 6
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702 647
Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . 151 -
------ ------
Noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 551 $ 647
====== ======
<FN>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Maturities (for next 5 years) $ 151 $ - $ - $ - $ 125
</FN>
</TABLE>
A-22
<PAGE>
<PAGE>
The carrying value of ENSERCH debt was adjusted to reflect fair value as
of the Merger date.
In July 1998, the interest rate on the Remarketed Reset Notes was reset
to a fixed rate of 6.56% payable until July 1, 2005.
ENSERCH may issue additional debt and equity securities as needed,
including the possible future sale of up to $100 million aggregate principal
amount of securities that are currently registered with the Securities and
Exchange Commission (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 $3.2
million ($2.1 million after-tax) which has been accounted for as an
extraordinary loss on early extinguishment of debt.
5.COMMON STOCK EQUITY
Common Stock -- On August 5, 1997, 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) 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
million. In February 1999, TUC purchased 250,000 shares for $250 million, and
ENSERCH used the proceeds to repay intercompany advances from TUC.
At the special shareholders meeting held 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 million to the paid-in-capital account.
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. The estimated fair value
of these options of $3.2 million was accounted for as a part of the cost
of the acquisition. At December 31, 1998, 260,151 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.
A-23
<PAGE>
<PAGE>
6. PREFERRED STOCK
<TABLE>
<CAPTION>
Adjustable Rate Preferred Stock
at December 31, 1998 and 1997: Stated Value Per Shares Outstanding
--------------------------- ---------------------------
Preferred Depositary Preferred Depositary
Share Share Shares Shares Amount
------------ ----------- ------------ ------------ -------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands) (Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series E. . . . . . . . . . . . . . $ - $1,000 $ - $100 - 100 - 1,000 $ - $100
Series F. . . . . . . . . . . . . . 1,000 1,000 25 25 75 75 3,000 3,000 75 75
---- ----
Total. . . . . . . . . . . . . . $ 75 $175
==== ====
</TABLE>
In January 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 87% of the "Applicable Rate" (highest of the three-month US
Treasury bill rate, the US Treasury ten-year constant maturity rate and either
the US Treasury twenty-year or thirty-year constant maturity rate, as defined)
with a minimum rate of 4.50% and a maximum rate of 10.50%.
Dividends Declared:
<TABLE>
<CAPTION>
Predecessor
-------------------------
Period from
Period from January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate Preferred Stock (annual rates):
Series E ($0, $6.42, $7.00 per depositary share) . . . . . . . $ - $ 3 $ 4 $ 7
Series F ($1.22, $1.34, $1.45, per depositary
share) . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2 2 4
Common Stock ($0, $.10, $.20 per share). . . . . . . . . . . . . . - - 7 14
----- ----- ----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 5 $ 13 $ 25
===== ===== ===== =====
</TABLE>
7. ENSERCH OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF ENSERCH
(TRUST SECURITIES)
In July 1998, a wholly-owned statutory business trust, ENSERCH Capital
I, established as a financing subsidiary of ENSERCH for the purpose of issuing
trust securities and holding Junior Subordinated Debentures of ENSERCH, issued
$150 million of floating rate trust securities which have a liquidation
preference of $1,000 per unit. Distributions on these trust securities are
payable quarterly based on an annual floating rate determined quarterly with
reference to a three-month LIBOR plus a margin. The only assets held by the
trust are $154.6 million principal amount of Floating Rate Junior Subordinated
Debentures Series A (Series A Debentures) of ENSERCH. The interest on the
Series A Debentures matches the distributions on the Trust Securities. The
Series A Debentures will mature on July 1, 2028 and ENSERCH has the right to
redeem the Series A Debentures and the Trust Securities in whole or in part on
or after July 1, 2003. ENSERCH owns the securities issued by its subsidiary
trust and has effectively issued a full and unconditional guarantee of the
trust's securities.
A-24
<PAGE>
<PAGE>
In 1998, interest rate swaps were entered into which effectively fixed
the rate on $100 million notional amount of the Trust Securities at 6.629% and
at 6.444% on the remaining $50 million of the Trust Securities to July 1,
2003.
8. DERIVATIVE INSTRUMENTS
The Corporation does not enter into or trade derivative financial
instruments for speculative purposes, other than for trading purposes in US
energy marketing activities. The Corporation enters into interest rate swaps
to reduce exposure to interest rate fluctuations. Amounts paid or received
under interest rate swap agreements are accrued as interest rates change and
are recognized over the life of the agreements as adjustments to interest
expense.
Interest Rate Risk Management -- At December 31, 1998, ENSERCH had two
interest rate swap agreements with respect to floating rate trust securities
of ENSERCH Capital I, with notional principal amounts of $100 million and
$50 million, respectively, that effectively fixed the rate at 6.629% and
6.444%, respectively, per annum to July 1, 2003.
US Energy Marketing Activities -- In the course of providing
comprehensive energy products and services to its diversified client base, EES
engages in energy price risk management activities. In addition to the
purchase and sale of these physical commodities, EES enters into futures
contracts; forward commitments; swap agreements where settlement is based on
the difference between a fixed and floating (index-based) price for the
underlying commodity; exchange traded options; over-the-counter options, which
are settled in cash or the physical delivery of the underlying commodity;
exchange-of-futures for physical transactions; energy exchange transactions;
storage activities; and other contractual arrangements. EES may buy and sell
certain of these instruments to manage its exposure to price and basis risk
from existing contractual commitments as well as other energy-related assets
and liabilities. It may also enter into contracts to take advantage of
arbitrage opportunities.
EES utilizes various techniques and methodologies that simulate forward
price curves in the energy markets to estimate the size and probability of
changes in market value resulting from price movements. These techniques
include, but are not limited to, sensitivity analyses. The uses of these
methodologies require a number of key assumptions including selection of
confidence levels, the holding period of the positions, and the depth and
applicability to future periods of historical price information.
EES has a number of risks and costs associated with the future
contractual commitments included in its energy portfolio, including price
risk, credit risks associated with the financial condition of counterparties,
product location (basis) differentials, market liquidity 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 energy has occurred, counterparties have fulfilled their
financial commitments and related financial instruments mature or are closed
out.
In order to manage its exposure to the price risk associated with these
instruments, EES has established trading policies and limits and revalues its
exposures daily against these benchmarks. These policies are periodically
reviewed to ensure they are responsive to changing market and business
conditions.
EES' energy portfolio is comprised of forward commitments, futures,
swaps, options and other derivative instruments related to natural gas
and electricity marketing activities. The notional amounts and terms of the
portfolio as of December 31, 1998 included financial instruments that provide
for fixed price receipts of 2,643 trillion British thermal units equivalent
(TBtue) and fixed price payments of 2,799 TBtue, with a maximum term of eight
years. Additionally, sales and purchase commitments totaling 973 TBtue, with
terms extending up to nine years, are included in the portfolio as of December
31, 1998.
A-25
<PAGE>
<PAGE>
Notional amounts reflect the volume of transactions but do not represent
the amounts exchanged by the parties to the financial instruments.
Accordingly, the notional amounts represented above do not necessarily measure
EES' exposure to market or credit risks. Additionally, the maximum term in
years is not indicative of likely future cash flows as these positions may be
offset in the markets at any time in response to EES' risk management needs.
The following table displays the mark-to-market values of EES's energy
marketing risk management assets and liabilities at December 31, 1998 and 1997
and the average value for the year ended December 31, 1998 and the period from
August 5, 1997 through December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Assets Liabilities Net Assets Liabilities Net
------ ----------- ----- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Fair Value:
Current . . . . . . . . . . . . . . . . . . . $832 $838 $ (6) $366 $357 $ 9
Noncurrent. . . . . . . . . . . . . . . . . . 128 93 35 42 31 11
---- ---- ----- ---- ---- -----
Total. . . . . . . . . . . . . . . . . . $960 $931 29 $408 $388 20
==== ==== ==== ====
Less reserves . . . . . . . . . . . . . . . . 6 9
----- -----
Net of reserves. . . . . . . . . . . . . $ 23 $ 11
===== =====
Average Value:
Total . . . . . . . . . . . . . . . . . . . . $656 $617 $ 39 $292 $279 $ 13
==== ==== ==== ====
Less reserves . . . . . . . . . . . . . . . . 7 8
----- -----
Net of reserves. . . . . . . . . . . . . $ 32 $ 5
===== =====
</TABLE>
EES recorded net trading gains (losses) of $46 million and $(0.3)
million from energy marketing activities for the year ended December 31, 1998
and for the period from August 5, 1997 through December 31, 1997,
respectively.
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 generally does
not obtain collateral to support the agreements but establishes credit limits
and monitors the financial viability of counterparties. In the event a
counterparty's credit rating declines, the Corporation may apply, certain
remedies if considered necessary. The Corporation believes the risk of
nonperformance by counterparties is minimal.
A-26
<PAGE>
<PAGE>
9. INCOME TAXES
Income Tax Expense (Benefit) of Continuing Operations:
<TABLE>
<CAPTION>
Predecessor
----------------------------
Period from
Period from January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Current
Federal. . . . . . . . . . $ (46) $ (21) $ 4 $ 5
State. . . . . . . . . . . (1) - - -
------- ------- ------- --------
Total. . . . . . . . (47) (21) 4 5
------- ------- ------- --------
Deferred
Federal. . . . . . . . . . 44 19 (9) 5
------- ------- ------- --------
Total. . . . . . . . $ ( 3) $ (2) $ (5) $ 10
======= ======= ======= ========
</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
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before income taxes:
Domestic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25) $ (11) $ (23) $ 27
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3 (7)
-------- -------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25) $ (11) $ (20) $ 20
======== ======== ======= =======
Income taxes (benefit) at the federal statutory rate of 35%. . . . . . $ (9) $ (4) $ (7) $ 7
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 7 3 - -
Nondeductible distribution and merger related costs . . . . . . . . . - - 5 2
Increase in (reduction of) prior year tax liabilities. . . . . . . . . - - (3) 1
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1) - -
-------- -------- ------- -------
Income Tax Expense (Benefit) . . . . . . . . . . . . . . . . . . $ (3) $ (2) $ (5) $ 10
======== ======== ======= =======
</TABLE>
A-27
<PAGE>
<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, 1998 and 1997 balance sheet dates are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ----------------------------
Total Current Noncurrent Total Current Noncurrent
----- ------- ---------- ----- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Deferred Tax Assets:
Net operating loss and other tax credit
carryforwards. . . . . . . . . . . . . . . . . . . $ 156 $ - $ 156 $ 163 $ - $ 163
Valuation allowance. . . . . . . . . . . . . . . . . (10) - (10) - - -
Retirement and other employee
benefit obligations. . . . . . . . . . . . . . . . 38 - 38 47 5 42
Accruals and allowances. . . . . . . . . . . . . . . 14 11 3 12 10 2
Other. . . . . . . . . . . . . . . . . . . . . . . . 38 1 37 11 8 3
------ ----- ------- ------- ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . 236 12 224 233 23 210
------ ----- ------- ------- ------ ------
Deferred Tax Liabilities and Unamortized
Investment Tax Credits:
Property related differences . . . . . . . . . . . . 156 - 156 136 - 136
Other. . . . . . . . . . . . . . . . . . . . . . . . 17 - 17 1 - 1
Deferred state income taxes. . . . . . . . . . . . . 10 - 10 10 - 10
Unamortized investment tax credits . . . . . . . . . 3 - 3 3 - 3
------ ----- ------- ------- ------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . 186 - 186 150 - 150
------ ----- ------- ------- ------ ------
Net Deferred Tax Asset . . . . . . . . . . . . . . . $ 50 $ 12 $ 38 $ 83 $ 23 $ 60
====== ===== ======= ======= ====== ======
</TABLE>
At December 31, 1998, domestic net operating-loss (NOL) carryforwards
totaled $420 million, which begin to expire in 2003, and alternative minimum
tax-credit carryforwards totaled $9 million. The tax benefits of these
carryforwards of $156 million, as shown above, are available to offset future
tax payments. A deferred tax asset valuation allowance of $10 million has
been recorded at December 31, 1998 for the NOL carryforwards. At December 31,
1998, 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 in 1997.
Separately, the ENSERCH consolidated income tax returns have been audited
and settled with the Internal Revenue service (IRS) through the year 1992.
The IRS is currently auditing the years 1993 through 1997. To the extent that
adjustments to income tax accounts for periods prior to the Merger are
required as a result of an IRS audit, the adjustment will be added to or
deducted from goodwill.
A-28
<PAGE>
<PAGE>
10. 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. Effective January 1, 1998, the ENSERCH qualified retirement plan
was merged into another retirement plan of TUC which covers TUC employees and
certain other subsidiaries. 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 and were not affected by the plan merger.
In connection with the merger, certain employees of ENSERCH were offered
and accepted an early retirement option.
The following tables provide information for the Corporation's
participation in TUC's plan, using actuarial allocations for 1998.
A-29
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Predecessor
--------------------------
Period From
Period from January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Components of Net Pension Costs:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 2 $ 2 $ 5
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . 26 11 15 24
Expected return on assets. . . . . . . . . . . . . . . . . . . (25) (11) (14) (24)
Amortization of unrecognized net transition asset. . . . . . . - - (1) (2)
Amortization of unrecognized prior service costs . . . . . . . (1) - - -
Recognized termination benefits (gain) loss. . . . . . . . . . - - 22 -
Recognized settlement (gain) loss. . . . . . . . . . . . . . . - - 2 -
----- ----- ----- ------
Net periodic pension cost. . . . . . . . . . . . . . . . . $ 5 $ 2 $ 26 $ 3
===== ===== ===== ======
Change in Pension Obligation:
Pension obligation at beginning of period. . . . . . . . . . . $ 379 $ 341 $ 334
Service cost . . . . . . . . . . . . . . . . . . . . . . . 5 2 2
Interest cost . . . . . . . . . . . . . . . . . . . . . . . 26 11 15
Plan amendments . . . . . . . . . . . . . . . . . . . . . . (1) - (6)
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . 11 35 50
Divestitures. . . . . . . . . . . . . . . . . . . . . . . . - - (23)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . (21) (10) (13)
Curtailments. . . . . . . . . . . . . . . . . . . . . . . . - - (7)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . - - (35)
Special termination benefits. . . . . . . . . . . . . . . . - - 24
----- ----- -----
Pension obligation at end of period. . . . . . . . . . . . . . $ 399 $ 379 $ 341
===== ===== =====
Change in Plan Assets:
Fair value of assets at beginning of period. . . . . . . . . . $ 276 $ 260 $ 286
Actual return on assets . . . . . . . . . . . . . . . . . . 33 24 34
Divestitures. . . . . . . . . . . . . . . . . . . . . . . . - - (17)
Employer contributions. . . . . . . . . . . . . . . . . . . 31 1 2
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . (20) (9) (13)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . - - (32)
----- ----- -----
Fair value of assets at end of period. . . . . . . . . . . . . $ 320 $ 276 $ 260
===== ===== =====
Funded Status:
Pension obligation . . . . . . . . . . . . . . . . . . . . . . $(399) $(379)
Fair value of assets . . . . . . . . . . . . . . . . . . . . . 320 276
Unrecognized prior service costs . . . . . . . . . . . . . . . (6) (6)
Unrecognized net loss. . . . . . . . . . . . . . . . . . . . . 27 24
----- -----
Accrued pension costs. . . . . . . . . . . . . . . . . . . . . $ (58) $ (85)
===== =====
Amounts Recognized in the Statement of Financial Position
Consist of:
Accrued benefit liability . . . . . . . . . . . . . . . . . . $ (59) $ (85)
Accumulated other comprehensive income (loss). . . . . . . . . 1 -
----- -----
Net amount recognized. . . . . . . . . . . . . . . . . . . . . $ (58) $ (85)
===== =====
Weighted-average assumptions:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 7.25% 7.75%
Expected return on plan assets . . . . . . . . . . . . . . . . 9.00% 9.00% 9.00%
Rate of compensation increase. . . . . . . . . . . . . . . . . 4.30% 4.30% 4.30%
</TABLE>
A-30
<PAGE>
<PAGE>
The following table provides information for the TUC defined benefit
pension plan in which the Corporation and certain other subsidiaries of TUC
participate:
Year Ended
December 31,
1998
-----------
Components of Net Pension Costs:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . $ 15
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . 44
Expected return on assets. . . . . . . . . . . . . . . . . . (46)
Amortization of unrecognized net transition asset. . . . . . (1)
-------
Net periodic pension cost. . . . . . . . . . . . . . . . $ 12
=======
Change in Pension Obligation:
Pension obligation at beginning of period. . . . . . . . . . $ 640
Service cost . . . . . . . . . . . . . . . . . . . . . . 15
Interest cost . . . . . . . . . . . . . . . . . . . . . . 44
Plan amendments . . . . . . . . . . . . . . . . . . . . . (1)
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . 7
Benefits paid . . . . . . . . . . . . . . . . . . . . . . (27)
-------
Pension obligation at end of period. . . . . . . . . . . . . $ 678
=======
Change in Plan Assets:
Fair value of assets at beginning of period. . . . . . . . . $ 569
Actual return on assets . . . . . . . . . . . . . . . . . 69
Employer contributions. . . . . . . . . . . . . . . . . . 49
Benefits paid . . . . . . . . . . . . . . . . . . . . . . (28)
-------
Fair value of assets at end of period. . . . . . . . . . . . $ 659
=======
Funded Status:
Pension obligation . . . . . . . . . . . . . . . . . . . . . $ (678)
Fair value of assets . . . . . . . . . . . . . . . . . . . . 659
Unrecognized net transition asset. . . . . . . . . . . . . . (2)
Unrecognized prior service costs . . . . . . . . . . . . . . (2)
Unrecognized net loss. . . . . . . . . . . . . . . . . . . . (32)
-------
Accrued pension costs. . . . . . . . . . . . . . . . . . . . $ (55)
=======
Weighted-average assumptions:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . 7.0%
Expected return on plan assets . . . . . . . . . . . . . . . 9.0%
Rate of compensation increase. . . . . . . . . . . . . . . . 4.3%
A-31
<PAGE>
<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. Effective January 1, 1998, the ENSERCH
postretirement benefit plan was merged into the postretirement benefit plan of
TUC. Obligations have not been prefunded. Benefits received vary in level
depending on years of service and retirement dates. The following tables
provide information for the Corporation's participation in TUC's plan, using
actuarial allocations for 1998.
<TABLE>
<CAPTION>
Predecessor
--------------------------
Period From
Period from January 1,
Acquisition 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Components of Net Periodic Postretirement Benefit Costs:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ - $ - $ -
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . 7 3 3 6
Amortization of unrecognized net transition obligation . . . . - - 2 4
Amortization of unrecognized prior service costs . . . . . . . 1 - - -
----- ----- ----- -----
Net periodic postretirement benefit cost . . . . . . . . . $ 11 $ 3 $ 5 $ 10
===== ===== ===== =====
Change in Postretirement Benefit Obligation:
Benefit obligation at beginning of period. . . . . . . . . . . $ 106 $ 98 $ 73
Service cost . . . . . . . . . . . . . . . . . . . . . . . 3 - -
Interest cost . . . . . . . . . . . . . . . . . . . . . . . 7 3 3
Participant contributions . . . . . . . . . . . . . . . . . 2 - 1
Plan amendments . . . . . . . . . . . . . . . . . . . . . . - - 18
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . (9) 8 12
Divestitures. . . . . . . . . . . . . . . . . . . . . . . . - - (6)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . (4) (3) (5)
Curtailments. . . . . . . . . . . . . . . . . . . . . . . . - - 1
Special termination benefits. . . . . . . . . . . . . . . . - - 1
----- ----- -----
Benefit obligation at end of period. . . . . . . . . . . . . . $ 105 $ 106 $ 98
===== ===== =====
Change in Plan Assets:
Fair value of assets at beginning of period. . . . . . . . . . $ - $ - $ -
Employer contributions. . . . . . . . . . . . . . . . . 1 - -
----- ----- -----
Fair value of assets at end of period. . . . . . . . . . . . . $ 1 $ - $ -
===== ===== =====
Funded Status:
Benefit obligation . . . . . . . . . . . . . . . . . . . . . . $(105) $(106)
Fair value of assets . . . . . . . . . . . . . . . . . . . . . 1 -
Unrecognized prior service costs . . . . . . . . . . . . . . . 16 18
Unrecognized net (gain) loss . . . . . . . . . . . . . . . . . (6) 3
----- -----
Accrued postretirement benefit costs . . . . . . . . . . . . . $ (94) $ (85)
===== =====
Weighted-average assumptions:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 7.25% 7.75%
Expected return on plan assets . . . . . . . . . . . . . . . . 8.50% 8.50% 8.50%
</TABLE>
A-32
<PAGE>
<PAGE>
The expected increase in costs of future benefits covered by the
postretirement benefit plan is projected using a health care cost trend rate
of 5% in 1999 and thereafter. A one percentage point increase in the assumed
health care cost trend rate in each future year would increase the accumulated
postretirement benefit obligation at December 31, 1998 by approximately $12.3
million and other postretirement benefits cost for 1998 by approximately $1.8
million.
The following table provides information for the TUC postretirement
benefit plan in which the Corporation and certain other subsidiaries of TUC
participate:
Year Ended
December 31,
1998
-----------
Components of Net Periodic Postretirement Benefit Costs:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Expected return on assets. . . . . . . . . . . . . . . . . . . . (2)
Amortization of unrecognized net transition obligation . . . . . 3
Amortization of unrecognized prior service costs . . . . . . . . 2
Amortization of net loss . . . . . . . . . . . . . . . . . . . . 1
-------
Net periodic postretirement benefit cost . . . . . . . . . . $ 27
=======
Change in Postretirement Benefit Obligation:
Benefit obligation at beginning of period. . . . . . . . . . . . $ 214
Service cost . . . . . . . . . . . . . . . . . . . . . . . . 8
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . 15
Participant contributions . . . . . . . . . . . . . . . . . . 2
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . 7
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . (9)
-------
Benefit obligation at end of period. . . . . . . . . . . . . . . $ 237
=======
Change in Plan Assets:
Fair value of assets at beginning of period. . . . . . . . . . . $ 30
Actual return on plan assets. . . . . . . . . . . . . . . 5
Employer contributions. . . . . . . . . . . . . . . . . . 12
Benefits paid . . . . . . . . . . . . . . . . . . . . . . (6)
-------
Fair value of assets at end of period. . . . . . . . . . . . . . $ 41
=======
Funded Status:
Benefit obligation . . . . . . . . . . . . . . . . . . . . . . . $ (237)
Fair value of assets . . . . . . . . . . . . . . . . . . . . . . 41
Unrecognized transition obligation . . . . . . . . . . . . . . . 18
Unrecognized prior service costs . . . . . . . . . . . . . . . . 17
Unrecognized net loss. . . . . . . . . . . . . . . . . . . . . . 25
-------
Accrued postretirement benefit costs . . . . . . . . . . . . . . $ (136)
=======
Weighted-average assumptions:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . 7.00%
Expected return on plan assets . . . . . . . . . . . . . . . . . 8.13%
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings -- 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 million
from the Corporation based on an indemnity arrangement and approximately $208
million from the other defendants for alleged breaches of contract and
A-33
<PAGE>
<PAGE>
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 other assureds 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. On
April 29, 1998, the court entered a final judgment. The plaintiff's lawsuit
was dismissed as well as the counterclaims of the defendants. The plaintiffs
served their notice of appeal on May 19, 1998. The appeal was heard by the
Full Court of the Supreme Court of Western Australia beginning February 1,
1999. In March 1999, the Full Court of the Supreme Court entered a judgment
dismissing the plaintiffs' appeal. The plaintiff are expected to seek special
leave to perfect a further appeal to the High Court of Australia.
In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation, formerly Enserch Exploration, Inc. (EEX), TUC, David W. Biegler,
Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The Gracy
Fund sought to represent a class comprised of all purchasers of the common
stock of ENSERCH or EEX between January 26, 1996 and August 4, 1997, including
former shareholders of ENSERCH who received shares of EEX and TUC pursuant to
the merger agreement between ENSERCH and TUC dated April 13, 1996, all EEX
shareholders solicited pursuant to a proxy statement/prospectus issued by EEX
dated October 2, 1996 and all ENSERCH shareholders solicited by a joint proxy
statement/prospectus issued by ENSERCH and TUC dated September 23, 1996. The
Gracy Fund alleged that the defendants participated in a fraudulent scheme and
course of business by disseminating materially false and misleading statements
regarding EEX's and ENSERCH's business, which allegedly caused the plaintiffs
and other members of the class to purchase EEX and ENSERCH stock at
artificially inflated prices. In such connection, the plaintiffs alleged that
the defendants violated various provisions of the Securities Act of 1933 and
the Securities and Exchange Act of 1934 (Exchange Act).
Also in August, 1998, Stan C. Thorne (Thorne) filed suit in the
United States District Court for the Southern District of Texas against EEX,
ENSERCH, DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S.
Addy and B. K. Irani. Thorne sought to represent a class comprised of all
purchasers of the common stock of EEX during the period of August 3, 1995
through August 5, 1997. Thorne alleged that the defendants engaged in a
course of conduct designed to mislead the plaintiff and investing public in
order to maintain the price of EEX common stock at artificially high levels
through false and misleading representations concerning the gas reserves of
EEX in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule
10b-5 thereunder. Thorne also alleged that the defendants were negligent in
making such misrepresentations and that they constituted common law fraud
against the defendants.
A-34
<PAGE>
<PAGE>
In December 1998, the United States District Court for the Northern
District of Texas issued an Order in Cause No. 3-98-CV-1808-G consolidating
the Gracy Fund and the Thorne suits (the Consolidated Action). On
January 22, 1999, the Gracy fund, et al filed an amended class action
complaint in the Consolidated Action against EEX, ENSERCH, David W. Biegler,
Gary J. Junco, Thomas Hamilton, J. Phillip McCormick, Fredrick S. Addy and B.
K. Irani. TUC and Erle Nye were omitted as defendants pursuant to the tolling
agreement. The individual named defendants in the amended complaint are
current or former officers and/or directors of EEX and Mr. Biegler has been an
officer and director of ENSERCH. The amended complaint alleges violations of
provisions of the Securities Act of 1933 and the Exchange Act. The state law
claims alleged in Thorne have been omitted. The class period was amended to
include those persons acquiring stock of ENSERCH and/or EEX between August
3, 1995 and August 5, 1997, inclusive. No amount of damages has been
specified in the Consolidation Action. ENSERCH is continuing to evaluate
these claims and is unable at this time to predict the outcome of this
proceeding, but it intends to vigorously defend this suit.
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 Federal Clean Air
Act, as amended 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.
Leases -- Rental expenses for continuing operations incurred under all
operating leases aggregated $5 million in 1998, $3 million for the pre-and
post-merger periods of 1997, and $4 million in 1996. Rental income received
for subleased office space was $5 million in 1998, $2 million in 1997 and $3
million in 1996. After 1998, the Corporation has no significant commitments
under operating leases.
Gas-Purchase Contracts -- Lone Star Gas buys gas under long-term and
short-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, 1998. Based on estimated gas demand, which
assumes normal weather conditions, requisite gas purchases are expected to
substantially satisfy purchase obligations for the year 1999 and thereafter.
Sales of Accounts Receivable -- ENSERCH has facilities with financial
institutions whereby it is entitled to sell and such financial institutions
may purchase, on an ongoing basis, undivided interests in customer accounts
receivables representing up to an aggregate of $100 million. Additional
receivables are continually sold to replace those collected. At December 31,
1998, accounts receivable of ENSERCH companies were reduced by $100 million to
reflect the sales of such receivables under such agreements.
Guarantees -- The Corporation and/or its subsidiaries are the guarantor
on various commitments and obligations of others aggregating some $30 million
at December 31, 1998. The Corporation is exposed to loss in the event of
nonperformance by other parties. However, the Corporation does not anticipate
nonperformance by the counterparties.
A-35
<PAGE>
<PAGE>
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. The
Corporation believes that its provision for possible losses on uncollectible
accounts receivable is adequate for its credit loss exposure.
12.FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and related estimated fair values of the
Corporation's significant financial instruments at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
or Notional Fair or Notional Fair
Amount Value Amount Value
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
On-balance sheet assets (liabilities):
Long-term debt (including current maturities) (a) . . . . . . . . . . $(702) $(722) $(647) $(649)
ENSERCH obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated debentures of ENSERCH (b). . . . . . . . . . . . . (146) (152) - -
Other investments (c). . . . . . . . . . . . . . . . . . . . . . . . . 44 44 - -
Off-balance sheet assets (liabilities):
Financial guarantees (c). . . . . . . . . . . . . . . . . . . . . . . (30) (30) (45) (45)
Interest rate swaps *. . . . . . . . . . . . . . . . . . . . . . . - - - -
<FN>
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) quoted market prices;
(c) approximates carrying or notional amount.
*Fair value amounts round to less than $1 million.
</FN>
</TABLE>
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-36
<PAGE>
<PAGE>
13. DISCONTINUED OPERATIONS
In connection with the merger of ENSERCH with TUC, EEX and LSEPO were
merged to form 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>
Predecessor
------------------------------
Period From Period From
Acquisition January 1, 1997
Year Ended Date to To Year Ended
December 31, December 31, Acquisition December 31,
1998 1997 Date 1996
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues from exploration and production operations. . . . $ - $ - $ 160 $ 248
==== ==== ===== =====
Operating income (loss) from exploration and
production operations. . . . . . . . . . . . $ - $ - $(376)* $ 36
==== ==== ===== =====
Income (loss) from exploration and production
operations. . . . . . . . . . . . . . . . . . $ - $ - $(215)* $ 13
Provision for additional costs and expenses
for the wind-up of discontinued engineering
and construction business, net of tax
benefit of $5 million in 1997 and tax provision of
$2 million in 1996 . . . . . . . . . . . . . . . . . . - - (10) (2)
---- ---- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $(225) $ 11
==== ==== ===== =====
Cash Flow Information:
Net cash flows from (used for)
Operating activities . . . . . . . . . . . . . . . . . . $ (3) $ (7) $ 111 $ 154
Investing activities . . . . . . . . . . . . . . . . . . - - (125) (73)
Financing activities . . . . . . . . . . . . . . . . . . - - (14) (66)
---- ---- ----- -----
Net cash flows from (used for) discontinued
operations. . . . . . . . . . . . . . . . . . . . . $ (3) $ (7) $ (28) $ 15
==== ==== ===== =====
By Discontinued Operation:
Exploration and production . . . . . . . . . . . . . . . $ - $ - $ (22) $ 20
Engineering and construction . . . . . . . . . . . . . . (3) (7) (6) (5)
---- ---- ----- -----
Total. . . . . . . . . . . . . . . . . . . . . . . . $ (3) $ (7) $ (28) $ 15
==== ==== ===== =====
<FN>
* 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
US cost center ceiling limitation at March 31, 1997.
</FN>
</TABLE>
A-37
<PAGE>
<PAGE>
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, 1998, discontinued engineering and construction
businesses had assets of $51 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 $30
million. The Corporation has filed suit against certain parties to recover
amounts outstanding. Management believes 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.
14.CHANGES IN ACCOUNTING STANDARDS
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
is effective for fiscal years beginning after June 15, 1999. This standard
requires that all derivative financial instruments be recognized as either
assets or liabilities on the balance sheet at their fair values and that
accounting for the changes in their fair values is dependent upon the intended
use of the derivatives and their resulting designations. The new standard
will supersede or amend existing standards which deal with hedge accounting
and derivatives. The Corporation has not yet determined the effect adopting
this standard will have on its financial statements.
15.REGULATIONS AND RATES
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 its residential and
commercial customers are established by the municipal governments of the
cities and towns served, with the RRC having appellate jurisdiction. 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.
Under a settlement of the RRC rate inquiry approved in June 1998, Lone
Star Gas Company (Lone Star Gas) agreed to credit residential and commercial
customers $18 million to be spread over the next two heating seasons (November
through March). Earnings were not affected by the settlement due to
previously established reserves. The final order approving the stipulation
found that all gas costs flowed through Lone Star Gas' monthly gas cost
adjustment clause prior to October 31, 1997 were just, reasonable, and
necessary. As a part of the final order, the RRC required an audit of an
amount that Lone Star Gas credited to residential and commercial customers
under a previous voluntary stipulation. The audit report indicated that an
additional $7.3 million should be credited to residential and commercial
customers. The Corporation believes that the additional amount noted in the
audit report was included in the $18 million settlement, but it is unable to
predict the outcome of the audit.
A-38
<PAGE>
<PAGE>
16.SUPPLEMENTARY FINANCIAL INFORMATION
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.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998:
Revenues. . . . . . . . . . . . . . . . . . . . . . $1,020 $873 $1,090 $1,055
Operating Income (Loss) . . . . . . . . . . . . . . 48 (15) (4) 17
Net Income (Loss) . . . . . . . . . . . . . . . . . 17 (22) (16) (1)
Net Income (Loss) Available for Common Stock. . . . 16 (23) (17) (2)
</TABLE>
<TABLE>
<CAPTION>
Predecessor
--------------------------------------
Period From
July 1 Period From
Quarter Ended to Acquisition Quarter
---------------------- Aquisition Date to Ended
March 31 June 30 Date September 30 December 31
-------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1997:
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 796 $349 $135 $ 276 $1,001
Operating Income (Loss) . . . . . . . . . . . . . . 51 (16) 12 (6) 26
Income (Loss) From Continuing Operations. . . . . . 19 (22) (12) (12) 3
Income (Loss) From Discontinued Operations. . . . . (220) (8) 3 - -
Net Income (Loss) . . . . . . . . . . . . . . . . . (201) (30) (9) (12) 3
Loss Available for Common Stock . . . . . . . . . . (204) (33) (10) (14) -
</TABLE>
17. SEGMENT INFORMATION
The Corporation's reportable segments are strategic business units that
offer different products and services or are geographically integrated. They
are managed separately because each business requires different marketing
strategies or is in a different geographic area.
The Corporation has two reportable operating segments:
(1) US Gas Pipeline and Distribution - operations engaged in the
gathering, processing, transmission, and distribution of natural gas and
selling of natural gas liquids primarily within Texas (principally Lone Star
Gas, Lone Star Pipeline and Enserch Processing, Inc.);
(2) US Energy Marketing - operations engaged in the purchasing and
selling of natural gas and electricity and providing risk management services
for the energy industry throughout the US (EES); and
Other - non-segment operations consist of liquified and compressed
natural gas fuels (primarily the Alternative Fuel Division of ENSERCH).
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Corporation evaluates
performance based on net income or loss. The Corporation accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current market prices.
A-39
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
US Gas US
Pipeline and Energy Discontinued
Distribution Marketing Other Operations Eliminations Consolidated
------------ --------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Trade Revenues-
1998. . . . . . . . . . . . . . . . . $ 830 $3,198 $ 10 $ - $ - $4,038
1997 Acquisition Date to 12/31. . . . 417 859 1 - - 1,277
1997 1/1 to Acquisition Date. . . . . 659 598 23 - - 1,280
1996. . . . . . . . . . . . . . . . . 1,051 812 31 - - 1,894
Affiliated Revenues-
1998. . . . . . . . . . . . . . . . . 24 1 - - (25) -
1997 Acquisition Date of 12/31. . . . 10 - - - (10) -
1997 1/1 to Acquisition Date. . . . . 18 5 - - (23) -
1996. . . . . . . . . . . . . . . . . 37 14 - - (51) -
Depreciation and Amortization-
1998. . . . . . . . . . . . . . . . . 55 1 20 - - 76
1997 Acquisition Date to 12/31. . . . 21 1 8 - - 30
1997 1/1 to Acquisition Date. . . . . 32 1 1 - - 34
1996. . . . . . . . . . . . . . . . . 50 1 3 - - 54
Interest and Other Charges-
1998. . . . . . . . . . . . . . . . . 42 2 73 - (41) 76
1997 Acquisition Date of 12/.31 . . . 22 2 18 - (10) 32
1997 1/1 to Acquisition Date. . . . . 29 2 28 - (14) 45
1996. . . . . . . . . . . . . . . . . 46 3 57 - (29) 77
Income Tax Expense (Benefit)-
1998. . . . . . . . . . . . . . . . . 7 3 (13) - - (3)
1997 Acquisition Date of 12/31. . . . 10 (6) (6) - - (2)
1997 1/1 to Acquisition Date. . . . . 12 (8) (9) - - (5)
1996. . . . . . . . . . . . . . . . . 33 (3) (20) - - 10
Extraordinary Item-
1998. . . . . . . . . . . . . . . . . - - - - - -
1997 Acquisition Date to 12/31. . . . - - - - - -
1997 1/1 to Acquisition Date. . . . . - - - - - -
1996. . . . . . . . . . . . . . . . . - - (2) - - (2)
Net Income (Loss)-
1998. . . . . . . . . . . . . . . . . 10 6 (38) - - (22)
1997 Acquisition Date to 12/31. . . . 8 (12) (5) - - (9)
1997 1/1 to Acquisition Date. . . . . 27 (15) (27) (225) - (240)
1996. . . . . . . . . . . . . . . . . 55 (6) (41) 11 - 19
Investment in Equity Investees-
1998. . . . . . . . . . . . . . . . . - - - - - -
1997. . . . . . . . . . . . . . . . . 4 - 2 - - 6
1996. . . . . . . . . . . . . . . . . 17 - 41 - - 58
Total Assets-
1998. . . . . . . . . . . . . . . . . 2,329 1,369 3,540 51 (3,325) 3,964
1997. . . . . . . . . . . . . . . . . 2,366 759 1,241 42 (1,168) 3,240
1996. . . . . . . . . . . . . . . . . 1,919 326 2,616 54 (2,190) 2,725
Capital Expenditures-
1998. . . . . . . . . . . . . . . . . 154 2 31 - - 187
1997 Acquisition Date to 12/31. . . . 55 1 1 - - 57
1997 1/1 to Acquisition Date. . . . . 60 1 1 - - 62
1996. . . . . . . . . . . . . . . . . 121 2 2 - - 125
</TABLE>
A-40
<PAGE>
Exhibit 4 (a)
March 30, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: ENSERCH Corporation
1998 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 1998 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 1998).
The Corporation agrees to furnish a copy of the above instruments to the
Securities and Exchange Commission upon request.
Sincerely,
/s/ Jerry W. Pinkerton
---------------------------------
Jerry W. Pinkerton
Vice President and Controller
<PAGE>
Exhibit 10(g)
AMENDMENT #3 TO THE
RETIREMENT INCOME RESTORATION PLAN
OF ENSERCH CORPORATION
AND
PARTICIPATING SUBSIDIARY COMPANIES
Pursuant to the provisions of Article V thereof, the
Retirement Income Restoration Plan of ENSERCH Corporation and
Participating Subsidiary Companies (the "Plan") is hereby amended
in the following respect only:
Section 4.3 is amended by adding to the end of such section
the following:
Notwithstanding the above, each Participating Employee
shall, in the year of his termination of employment, become
entitled to a distribution, to be made in the calendar year
following the calendar year in which such employee's benefit
payments commence hereunder, such distribution to include:
(i) an insured annuity contract purchased from a duly
licensed insurance company (selected by the
Compensation Committee using the same care, skill,
prudence and diligence as would be required of a
fiduciary under the Employee Retirement Income Security
Act of 1974) that will provide, to the extent
reasonably possible, an after-tax annuity payment equal
to the amount of after-tax benefit payments that would
otherwise have been payable hereunder after the
calendar year in which the employee's benefit payments
commence hereunder, and
1
<PAGE>
<PAGE>
(ii) a "tax gross-up" cash payment in an amount
reasonably sufficient to satisfy the total amount of
federal, state and local income taxes and employment
tax under the Federal Insurance Contributions Act
(FICA) owed by the employee with respect to the
distribution of such annuity contract and "tax
gross-up" payment.
In order to receive the distribution of such annuity
contract and "tax gross-up" payment, the employee must
agree (in such form as approved by the Compensation
Committee) that such distribution is in full settlement of
all obligations to or with respect to the employee under
this Plan and no further payments will thereafter be made
hereunder to or with respect to such employee.
If the Participating Employee should die before
receiving distribution of such annuity contract and "tax
gross-up" amount, but with a survivor entitled to survivor
benefit payments hereunder, then an annuity contract and
"tax gross-up" distribution shall be made to such survivor,
with respect to such survivor benefit payments, in the same
manner as described above.
Any amendment of this Plan to discontinue making
further annuity contract and "tax gross-up" distributions as
described above shall not be effective as to any employee
whose employment covered by this Plan has terminated prior
to the adoption of such amendment.
2
<PAGE>
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed this
5th day of May , 1997 .
----- ----- ---
ATTEST ENSERCH Corporation
/s/ R.S. Jay /s/ D.W. Biegler
----------------------------- -----------------------------
Assistant Corporate Secretary Name: D.W. Diegler
Title: Chairman and President
ENSERCH Corporation
3
<PAGE>
<PAGE>
AMENDMENT #4 TO THE
RETIREMENT INCOME RESTORATION PLAN
OF ENSERCH CORPORATION
AND
PARTICIPATING SUBSIDIARY COMPANIES
Pursuant to the provisions of Article V thereof, the
Retirement Income Restoration Plan of ENSERCH Corporation and
Participating Subsidiary Companies (the "Plan") is hereby amended
in the following respect only:
Section 4.1 is hereby amended by the addition of the
following paragraphs thereto:
As to any employee who receives the 1997 Early
Retirement Enhancement under Section 4.06 of the Basic Plan,
the above provisions of the Section will be applied
disregarding the amount of such enhancement, and
disregarding the provisions of Section 4.2 granting
additional service credit. An amount of enhancement will
then be determined to be payable to the employee hereunder
equal to the amount of excess enhancement that cannot be
provided under the Basic Plan because of the Limitations
applied thereunder. Such excess enhancement will be offset
on an actuarially equivalent basis by any multiple-of-salary
lump sum payment amount that could be received by the
employee under a change-in-control agreement with the
Company, as described in Section 4.06 of the Basic Plan.
Such actuarial equivalent offset will be determined on the
basis of the interest and mortality assumptions used under
Section 4.06 of the Basic Plan for determining actuarial
equivalent lump sums.
1
<PAGE>
<PAGE>
As to any such employee who is also entitled to
additional service credit under Section 4.2, an additional
amount of enhancement will be determined to be payable to
the employee hereunder equal to the increase in benefit,
above the regular unenhanced amount of benefit, attributable
to said additional years of service allowed under Section
4.2, but disregarding any additional years of service and
age granted under the 1997 Early Retirement Enhancement
under Section 4.06 of the Basic Plan.
After the purchase and distribution of any annuity, as
referenced in (ii) above, that covers any enhancement
payable hereunder, such enhancement shall thereafter no
longer be payable hereunder.
IN WITNESS WHEREOF, this Amendment has been executed this
5th day of May , 199 7 .
----- ------- ---
ATTEST ENSERCH Corporation
/s/ R.S. Jay /s/ D.W. Biegler
----------------------------- -----------------------------
Assistant Corporate Secretary Name: D.W. Biegler
Title: Chairman and President
ENSERCH Corporation
2
<PAGE>
<PAGE>
AMENDMENT #5 TO THE
RETIREMENT INCOME RESTORATION PLAN
OF ENSERCH CORPORATION
AND
PARTICIPATING SUBSIDIARY COMPANIES
Pursuant to the provisions of Article V thereof, the
Retirement Income Restoration Plan of ENSERCH Corporation and
Participating Subsidiary Companies (the "Plan") is hereby amended
in the following respect only:
Section 4.1 is hereby amended by the addition of the
following paragraphs thereto:
As to any employee who receives the 1997 Early
Retirement Enhancement for Enserch Exploration, Inc.
Employees under Section 4.07 of the Basic Plan, the above
provisions of the Section will be applied disregarding the
amount of such enhancement, and disregarding the provisions
of Section 4.2 granting additional service credit. An
amount of enhancement will then be determined to be payable
to the employee hereunder equal to the amount of excess
enhancement that cannot be provided under the Basic Plan
because of the Limitations applied thereunder.
As to any such employee who is also entitled to
additional service credit under Section 4.2, an additional
amount of enhancement will be determined to be payable to
the employee hereunder equal to the increase in benefit,
above the regular unenhanced amount of benefit, attributable
to said additional years of service allowed under Section
1
<PAGE>
<PAGE>
4.2, but disregarding any additional years of service and
age granted under the 1997 Early Retirement Enhancement for
Enserch Exploration, Inc. Employees under Section 4.07 of
the Basic Plan.
IN WITNESS WHEREOF, this Amendment has been executed this
1st day of August , 1997.
----- --------
ATTEST ENSERCH Corporation
/s/ R.S. Jay /s/ David W. Biegler
----------------------------- ------------------------------
Assistant Corporate Secretary Name: David W. Biegler
Title: Chairman and President
2
<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
Year ended Date to To Year Ended December 31
December 31, December 31, Acquisition ------------------------------
1998 1997 Date 1996 1995 1994
------------ ------------ ----------- -------- -------- ----------
(In thousands except ratios)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income (loss) from continuing operations before
extraordinary items $(22,386) $(9,565) $(15,377) $ 9,751 $ 21,362 $ (5,661)
Add: Equity in net losses (income) of less-than
50% owned affiliates - 168 732 3,821 821 406
Dividends received from less-than 50% owned affiliates - 87 178 253 340 788
Total federal income taxes (2,532) (1,485) (4,612) 10,277 11,415 (8,475)
Fixed charges (see detail below) 77,130 32,133 45,021 77,900 73,258 70,870
Amortization of previously capitalized interest - - 217 334 331 324
-------- ------- -------- -------- -------- --------
Total earnings (2) $ 52,212 $21,338 $ 26,159 $102,336 $107,527 $ 58,252
======== ======= ======== ======== ======== ========
FIXED CHARGES:
Interest expense $ 71,305 $31,755 $ 44,537 $ 76,700 $ 71,380 $ 68,861
Rentals representative of the interest factor 540 378 484 1,200 1,878 2,009
Distributions on trust securities of subsidiaries 5,285 - - - - -
-------- ------- -------- -------- -------- -------
Fixed charges deducted from earnings 77,130 32,133 45,021 77,900 73,258 70,870
Capitalized interest - 46 131 63 234 191
-------- ------- -------- -------- -------- -------
Total fixed charges 77,130 32,179 45,152 77,963 73,492 71,061
Preferred dividends adjusted for pretax
earnings coverage (3) 4,497 5,403 8,742 23,290 17,937 29,014
------- ------- ------- -------- -------- -------
Combined fixed charges and preferred dividends $81,627 $37,582 $53,894 $101,253 $ 91,429 $100,075
======= ======= ======= ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES (4) 0.68 0.66 0.58 1.31 1.46 0.82
======= ======= ======= ======== ======== ========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED DIVIDENDS (5) 0.64 0.57 0.49 1.01 1.18 0.58
======= ======= ======= ======== ======== ========
</TABLE>
<PAGE>
<PAGE>
[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 year ended December 31, 1998, for the period from acquisition date
to December 31, 1997, for the period from January 1, 1997 to acquisition
date and for the year ended December 31, 1994, fixed charges exceeded earnings
by $29.0 million, by $10.8 million, $19.0 million and $12.8 million,
respectively.
(5)For the year ended December 31, 1998, for the period from acquisition date
to December 31, 1997, 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 $33.4 million, by $16.2 million,
$27.7 million and $41.8 million, respectively.
</FN>
2
<PAGE>
<PAGE>
EXHIBIT 21
ENSERCH CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
(as of March 15, 1999)
State or Country
of Incorporation
ENSERCH Corporation Texas
Lone Star Gas Company (an unincorporated division)
Lone Star Pipeline Company (an unincorporated division)
Enserch Processing, Inc. Delaware
Enserch Energy Services, Inc. Texas
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 Capital I Delaware
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 Receivables, Inc. Delaware
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.
Affiliates
State or County
of Incorporation
or Organization
American Gas Finance Company, L.L.C. (1) Texas
Enserch SACROC Inc. (2) Texas
ENS Holdings Limited Partnership (3) Texas
FinaStar Partnership (4) Texas
Lavair Cogeneration Limited Partnership (5) Delaware
Gulf Coast Natural Gas Company (6) Texas
________________________
(1)5.27% owned by Lone Star Energy Services, Inc.
(2)99.65% owned by Enserch Finance II, Inc. and .35% owned by ENS Holdings
Limited Partnership.
(3)Limited partnership: ENS Holdings II, Inc. (99%) and ENS Holding I, Inc.
(1%).
(4)General partnership: ENSERCH Corporation (50%).
(5)Limited partnership: ENSERCH Corporation (43.33%).
(6)General Partnership: General partner, Enserch Gas Transmission Company
(50%).
2
<PAGE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement 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 March 5, 1999,
appearing in this Annual Report on Form 10-K of ENSERCH Corporation for the
year ended December 31, 1998.
Dallas, Texas
March 31, 1999
<PAGE>
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