SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
-- OR --
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ENSERCH Corporation
A Texas Corporation I.R.S. Employer Identification
Commission File Number 1-3183 No. 75-0399066
ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600
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 ___
Common Stock outstanding at May 11, 1999: 451,000 shares, par value $0.01 per
share.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
ENSERCH Corporation and Subsidiaries
Condensed Statements of Consolidated Income -
Three and Twelve Months Ended March 31, 1999 and 1998. . . . 3
Condensed Statements of Consolidated Comprehensive Income -
Three and Twelve Months Ended March 31, 1999 and 1998. . . . 4
Condensed Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1999 and 1998 . . . . . . . . . 5
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . 8
Independent Accountants' Report. . . . . . . . . . . . . . . 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
Twelve Months Ended March 31,
-------------------------------------
1998
--------------------------
Predecessor
-----------
Period From Period From
Three Months Ended Acquisition April 1, 1997
March 31, Date to Through
------------------ March 31, Acquisition
1999 1998 1999 1998 Date
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Millions of Dollars
OPERATING REVENUES. . . . . . . . . . . . . $1,096 $1,020 $4,114 $2,297 $ 484
------ ------ ------ ------ ------
OPERATING EXPENSES
Gas and electricity purchased for resale. . 924 844 3,583 1,906 333
Operation and maintenance . . . . . . . . . 93 86 353 228 113
Depreciation and amortization . . . . . . . 21 19 78 49 19
Taxes other than income . . . . . . . . . . 17 23 62 46 23
------ ------ ------ ------ ------
Total operating expenses. . . . . . . . . 1,055 972 4,076 2,229 488
------ ------ ------ ------ ------
OPERATING INCOME (LOSS) . . . . . . . . . . 41 48 38 68 (4)
OTHER INCOME (DEDUCTIONS) - NET . . . . . . (1) - 5 1 (23)
------ ------ ------ ------ ------
INCOME (LOSS) BEFORE INTEREST AND
INCOME TAXES . . . . . . . . . . . . . 40 48 43 69 (27)
INTEREST INCOME . . . . . . . . . . . . . . - - 1 - 1
INTEREST AND OTHER CHARGES. . . . . . . . . (20) (19) (78) (51) (26)
------ ------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . 20 29 (34) 18 (52)
INCOME TAX EXPENSE (BENEFIT). . . . . . . . 8 12 (6) 10 (18)
------ ------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS . . . . . . . . . . . . . . 12 17 (28) 8 (34)
LOSS FROM DISCONTINUED OPERATIONS . . . . . - - - - (5)
------ ------ ------ ------ ------
NET INCOME (LOSS) . . . . . . . . . . . . . 12 17 (28) 8 (39)
PREFERRED STOCK DIVIDENDS . . . . . . . . . 1 1 4 6 4
------ ------ ------ ------ ------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCK . . . . . . . . . . . . . . . $ 11 $ 16 $ (32) $ 2 $ (43)
====== ====== ====== ====== =======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
3
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<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
Twelve Months Ended March 31,
-------------------------------------
1998
--------------------------
Predecessor
-----------
Period From Period From
Three Months Ended Acquisition April 1, 1997
March 31, Date to Through
------------------ March 31, Acquisition
1999 1998 1999 1998 Date
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Millions of Dollars
NET INCOME (LOSS). . . . . . . . . . . . . . $ 12 $ 17 $ (28) $ 8 $ (39)
------ ------ ------ ------ ------
OTHER COMPREHENSIVE INCOME (LOSS) -
Net change during period:
Foreign currency translation adjustments . . - - - - 1
Minimum pension liability adjustments. . . . - - (1) - -
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . - - (1) - 1
------ ------ ------ ------ ------
COMPREHENSIVE INCOME (LOSS). . . . . . . . . $ 12 $ 17 $ (29) $ 8 $ (38)
====== ====== ====== ====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
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<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
------ ------
Millions of Dollars
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
Income from continuing operations . . . . . . . . . . . . . . . . . . . $ 12 $ 17
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 22 20
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 5 7
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 44 146
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 27
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . (7) 24
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (96)
Interest and taxes accrued . . . . . . . . . . . . . . . . . . . . . . (14) (1)
Other working capital. . . . . . . . . . . . . . . . . . . . . . . . . - (29)
Energy marketing risk management assets and liabilities - net. . . . . (44) (19)
Other - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (2)
------ ------
Cash provided by operating activities. . . . . . . . . . . . . . . . 21 94
------ ------
CASH FLOWS -- FINANCING ACTIVITIES
Issuances of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 250
Common stock - parent. . . . . . . . . . . . . . . . . . . . . . . . . 250 -
Retirements of securities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (91)
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (100)
Change in notes payable:
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (4)
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (243) (118)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2)
Debt financing expenses . . . . . . . . . . . . . . . . . . . . . . . . - (1)
------ ------
Cash provided by (used in) financing activities. . . . . . . . . . . 12 (66)
------ ------
CASH FLOWS -- INVESTING ACTIVITIES
Construction expenditures . . . . . . . . . . . . . . . . . . . . . . . (34) (20)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (7)
------ ------
Cash used in investing activities. . . . . . . . . . . . . . . . . . (35) (27)
------ ------
CASH PROVIDED BY DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . 4 3
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . 2 4
CASH AND CASH EQUIVALENTS -- BEGINNING BALANCE. . . . . . . . . . . . . - 12
------ ------
CASH AND CASH EQUIVALENTS -- ENDING BALANCE . . . . . . . . . . . . . . $ 2 $ 16
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
5
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<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
Millions of Dollars
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas distribution and pipeline. . . . . . . . . . . . . . . . . . . . . $1,249 $1,212
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 92
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,341 1,304
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . 95 80
------ ------
Net of accumulated depreciation. . . . . . . . . . . . . . . . . . 1,246 1,224
Construction work in progress. . . . . . . . . . . . . . . . . . . . . . 67 71
------ ------
Net property, plant and equipment. . . . . . . . . . . . . . . . . 1,313 1,295
------ ------
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 44
------ ------
GOODWILL (net of accumulated amortization: 1999 - $34; 1998 - $29) . . . 824 829
------ ------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 2 -
Accounts receivable (net of allowance for uncollectible accounts:
1999 - $4; 1998 - $3). . . . . . . . . . . . . . . . . . . . . . . . 509 553
Energy marketing risk management assets. . . . . . . . . . . . . . . . 569 832
Inventories - at average cost:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . 10 9
Gas stored underground . . . . . . . . . . . . . . . . . . . . . . . 68 103
Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 12 12
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 40 43
------ ------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 1,218 1,559
------ ------
OTHER ASSETS
Energy marketing risk management assets. . . . . . . . . . . . . . . . 120 128
Unamortized regulatory assets. . . . . . . . . . . . . . . . . . . . . 47 48
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 47 51
Deferred debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 10
------ ------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 226 237
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,626 $3,964
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
6
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<CAPTION>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
Millions of Dollars
<S> <C> <C>
CAPITALIZATION
Common stock (par value -- $.01 per share):
Authorized shares -- 100,000,000
Outstanding shares: 1999 -- 451,000 and 1998 -- 201,000. . . . . . . . . . . . $ - $ -
Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 775
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (33)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . (1) (1)
------ ------
Total common stock equity. . . . . . . . . . . . . . . . . . . . . . . . . . 1,002 741
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 75
ENSERCH obligated, mandatorily redeemable, preferred securities of subsidiary .
trust holding solely junior subordinated debentures of ENSERCH . . . . . . . . 147 146
Advances from parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 420
Long-term debt, less amounts due currently. . . . . . . . . . . . . . . . . . . 551 551
------ ------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,952 1,933
------ ------
CURRENT LIABILITIES
Notes payable - banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3
Long-term debt due currently. . . . . . . . . . . . . . . . . . . . . . . . . . 150 151
Accounts payable:
Parent and affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 27
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 483
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . 532 838
Interest and taxes accrued. . . . . . . . . . . . . . . . . . . . . . . . . . . 27 40
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 91
------ ------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,290 1,633
------ ------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
Accumulated deferred income taxes and unamortized investment tax credits. . . . 13 13
Pensions and other postretirement benefits. . . . . . . . . . . . . . . . . . . 150 149
Energy marketing risk management liabilities. . . . . . . . . . . . . . . . . . 84 93
Other deferred credits and noncurrent liabilities . . . . . . . . . . . . . . . 137 143
------ ------
Total deferred credits and other noncurrent liabilities. . . . . . . . . . . 384 398
------ ------
COMMITMENTS AND CONTINGENCIES (Note 7)
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,626 $3,964
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
7
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ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.BUSINESS, MERGERS AND DISPOSITIONS
ENSERCH Corporation (ENSERCH or the Corporation) is an integrated energy
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 distributions 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 United States (US)
energy marketing (Enserch Energy Services, Inc. or EES).
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 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, and purchase
accounting adjustments, including goodwill, have been pushed down and are
reflected in the financial statements of ENSERCH and its subsidiaries for the
period subsequent to August 5, 1997. The financial statements of ENSERCH for
the periods ended before August 5, 1997 were prepared using ENSERCH's
historical basis of accounting and are designated as "Predecessor". The
comparability of the operating results for the Predecessor and the periods
encompassing push down accounting are affected by the purchase accounting
adjustments, including the amortization of goodwill over a period of forty
years.
The Predecessor financial statements 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.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The condensed consolidated financial statements
of ENSERCH and its subsidiaries have been prepared on the same basis as those
in the 1998 Annual Report on Form 10-K (1998 Form 10-K) and, in the opinion of
ENSERCH, all adjustments (constituting only normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to rules and regulations of the Securities and Exchange
Commission. Certain previously reported amounts have been reclassified to
conform to current classifications.
Consolidation -- The consolidated financial statements include the
accounts of the Corporation and all of its majority-owned subsidiaries,
including its subsidiary business trust.
8
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ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts in the condensed financial statements and notes to
condensed financial statements, except per share amounts, are stated in
millions of US dollars unless otherwise indicated.
3.LINES OF CREDIT
At March 31, 1999, TUC, TU Electric Company, a wholly-owned subsidiary of
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 amount, $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 by TUC, are limited to an aggregate of $2.2 billion
outstanding at any one time. ENSERCH's borrowings under both facilities is
limited to an aggregate of $650 million outstanding at any one time. The
facilities primarily support commercial paper borrowings by TUC. At March 31,
1999, ENSERCH had no borrowings outstanding under these lines.
4.CAPITALIZATION
ENSERCH Obligated, Mandatorily Redeemable, Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of ENSERCH
(Trust Securities)-- At March 31, 1999, a 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, had $150 million of floating rate trust securities outstanding 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 $155 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.
In February 1999, TUC purchased 250,000 shares of common stock from the
Corporation for $250 million, and ENSERCH used the proceeds to repay
intercompany advances from TUC.
5.DERIVATIVE INSTRUMENTS
The Corporation enters into derivative instruments to manage market risks
related to changes in interest rates and commodity prices. The Corporation's
participation in derivative transactions, except for the energy marketing
activities of EES, have been designated for hedging purposes and are not held
or issued for trading purposes.
Interest Rate Risk Management -- At March 31, 1999, ENSERCH had various
interest rate swaps in effect, the terms and notional amounts of which had not
changed from December 31, 1998.
9
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ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Energy Marketing Activities -- 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 March 31, 1999 included financial
instruments that provide for fixed price receipts of 2,693 trillion British
thermal units equivalent (TBtue) and fixed price payments of 2,844 TBtue, with
a maximum term of seven years. Additionally, sales and purchase commitments
totaling 1,208 TBtue, with terms extending up to nine years, are included in
the portfolio as of March 31, 1999.
6.REGULATION AND RATES
Gas Utilities Docket No. 8935 -- Lone Star Gas Company (Lone Star Gas), a
division of ENSERCH, filed an application with the Railroad Commission of
Texas on February 25, 1999, to modify the gas cost adjustment provision of the
city gate rate tariff approved in November 1997. The modification will allow
for a more accurate recovery of the gas cost approved for recovery from Lone
Star Gas residential and commercial customers. Currently, cycle billing
causes Lone Star Gas to over or under recover the allowed gas costs. A Final
Order is expected in August 1999. Lone Star Gas is unable to predict the
outcome of these proceedings.
Lone Star Gas has an on-going program to identify distribution systems in
which its current rates are producing inadequate returns on its investment and
to seek rate relief from the municipalities served by those deficient
systems. Lone Star Gas filed and completed twelve such rate cases since July
1998. Approved revenue increases totaled $5.5 million on an annual basis.
Lone Star Gas currently has rate cases pending in five distribution systems in
which it is seeking rate increases totaling $9.1 million on an annual basis.
Lone Star Gas is unable to predict the outcome of these rate cases.
7.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
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 plaintiffs 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
10
<PAGE>
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 of 1933 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. Defendants filed a joint
motion to dismiss on March 8, 1999, and it is expected that under the Private
Securities Litigation Reform Act of 1995 the court will stay discovery pending
a ruling on the motion to dismiss. 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.
General -- The Corporation is involved in various legal and
administrative proceedings and has other contingencies, which, in the opinion
of management, should not have a material effect upon the Corporation's
financial position, results of operations or cash flows.
11
<PAGE>
<PAGE>
ENSERCH CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.SEGMENT INFORMATION
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.); and
(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).
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
-------------------------------------
1998
--------------------------
Predecessor
-----------
Period From Period From
Acquisition April 1, 1997
Three Months Ended Date to Through
March 31, March 31, Acquisition
1999 1998 1999 1998 Date
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Trade Revenues -
US Gas Pipeline and Distribution. $ 293 $ 335 $ 787 $ 752 $ 208
US Energy Marketing . . . . . . . 800 684 3,315 1,543 258
Other . . . . . . . . . . . . . . 3 1 12 2 18
------ ------ ------ ------ ------
Consolidated . . . . . . . . $1,096 $1,020 $4,114 $2,297 $ 484
====== ====== ====== ====== ======
Affiliated Revenues -
US Gas Pipeline and Distribution. $ 5 $ 7 $ 22 $ 17 $ 11
US Energy Marketing . . . . . . . - - 1 1 -
Eliminations. . . . . . . . . . . (5) (7) (23) (18) (11)
------ ------ ------ ------ ------
Consolidated . . . . . . . . $ - $ - $ - $ - $ -
====== ====== ====== ====== ======
Net Income (Loss) -
US Gas Pipeline and Distribution. $ 26 $ 25 $ (10) $ 33 $ (8)
US Energy Marketing . . . . . . . (7) (1) - (14) (7)
Other . . . . . . . . . . . . . . (7) (7) (18) (11) (19)
Discontinued Operations . . . . . - - - - (5)
------ ------ ------ ------ ------
Consolidated . . . . . . . . $ 12 $ 17 $ (28) $ 8 $ (39)
====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
ENSERCH Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
ENSERCH Corporation and subsidiaries (the Corporation) as of March 31, 1999,
and the related condensed statements of consolidated income and of
comprehensive income for the three-month periods ended March 31, 1999 and
1998, the twelve-month period ended March 31, 1999, and the period from the
acquisition date (August 5, 1997) through March 31, 1998, and the condensed
statements of consolidated cash flows for the three-month periods ended March
31, 1999 and 1998 and for the Predecessor Company operations the
condensed statements of consolidated income and of comprehensive income for
the period from April 1, 1997 through the acquisition date. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Corporation as of December
31, 1998, and the related statements of consolidated income, comprehensive
income, cash flows and common stock equity for the year then ended (not
presented herein); and in our report dated March 5, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998, is fairly stated in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 13, 1999
13
<PAGE>
<PAGE>
Item 2. 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) and its subsidiaries 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 factors
contained in the Forward-Looking Statements section of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation in
ENSERCH's Annual Report on Form 10-K for the year 1998 (1998 Form 10-K), as
well as, general industry trends; power costs and availability; changes in
business strategy, development plans or vendor relationships; availability of
qualified personnel; changes in, or the failure or inability to comply with,
governmental regulations, including, without limitation, environmental
regulations; changes in tax laws; and access to adequate transmission
facilities to meet changing demand, among others, that could cause the actual
results of ENSERCH to differ materially from those projected in such
forward-looking statement.
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 assess 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.
FINANCIAL CONDITION
Merger With TUC and Disposition
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 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, 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.
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.
14
<PAGE>
<PAGE>
Liquidity and Capital Resources
For information concerning liquidity and capital resources, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in ENSERCH's 1998 Form 10-K. Results for the three-month periods
presented herein are not necessarily indicative of expectations for a full
year's operations because of seasonal and other factors, including variations
in maintenance and other operating expense patterns. No significant changes or
events which might affect the financial condition of the Corporation have
occurred subsequent to year-end other than as disclosed in other reports of
ENSERCH or included herein.
Cash flows provided by operating activities before changes in
operating assets and liabilities for the three months ended March 31, 1999
were $39 million compared with $44 million in the same period of 1998.
Changes in operating assets and liabilities for the first quarter of 1999 used
cash of $18 million but provided cash of $50 million in the first quarter of
1998. Discontinued operations provided cash of $4 million in the three months
of 1999 compared with $3 million in the 1998 period.
Cash flows used in investing activities for the three-month period ended
March 31, 1999 were $35 million versus $27 million in the comparable period of
1998. Capital expenditures for the 1999 first quarter were $14 million higher
than the comparable period of 1998. Other investing activities required cash
of $1 million in the first quarter of 1999 versus $7 million in the like 1998
period.
The capitalization ratios of the Corporation as of March 31, 1999
consisted of approximately 37% long-term debt (including advances from
parent), 4% preferred stock, 8% trust securities and 51% common stock equity.
In February 1999, TUC purchased 250,000 shares of common stock from the
Corporation for $250 million, and ENSERCH used the proceeds to repay
intercompany advances from TUC.
At March 31, 1999, TUC, TU Electric Company, a wholly-owned subsidiary of
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 amount, $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 by TUC, are limited to an aggregate of $2.2 billion
outstanding at any one time. ENSERCH's borrowings under both facilities is
limited to an aggregate of $650 million outstanding at any one time. The
facilities primarily support commercial paper borrowings by TUC. At March 31,
1999, ENSERCH had no borrowings outstanding under these lines.
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 currently registered with the Securities and Exchange
Commission for offering pursuant to Rule 415 under the Securities Act of
1933.
Risk Management -- No material substantive changes in the exposure to or
management of interest rate risk have occurred subsequent to December 31,
1998.
Energy Marketing Activities -- 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 March 31, 1999 included financial
15
<PAGE>
<PAGE>
instruments that provide for fixed price receipts of 2,693 trillion British
thermal units equivalent (TBtue) and fixed price payments of 2,844 TBtue, with
a maximum term of seven years. Additionally, sales and purchase commitments
totaling 1,208 TBtue, with terms extending up to nine years, are included in
the portfolio as of March 31, 1999.
Regulation and Rates
- --------------------
ENSERCH has several rate requests pending or on appeal. (See Note 6 to
Condensed Consolidated Financial Statements for a discussion of these items).
RESULTS OF OPERATIONS
ENSERCH had income from continuing operations of $12 million for the
three-month period ended March 31, 1999, compared with income of $17 million
for the same period in 1998. The decrease was primarily due to the impact of
mild winter weather and lower margins on energy marketing activities.
For the twelve-month periods of 1999 and 1998, the Corporation had losses
from continuing operations of $28 million and $26 million, respectively. The
1998 twelve-month period results were reduced by merger-related expenses of
$24 million pretax included in other income (deductions)-net, which were
partially offset by a gain on the sale of interests in cogeneration projects
of $12.5 million pretax.
Consolidated revenues for the three and twelve months ended March 31,
1999 increased 7% and 48%, respectively, compared with the same periods for
1998. The higher revenues were primarily due to increased energy marketing
activities, particularly electricity trading. Gas and electricity purchased
for resale for the three-and twelve-month periods of 1999 increased 9% and
60%, respectively, over the 1998 periods, also due to a significant increase
in energy marketing activities.
The US Gas Pipeline and Distribution segment for the three months ended
March 31, 1999 and 1998 had net income of $26 million and $25 million,
respectively. Operating revenues for the three-month period in 1999 were $44
million lower than the same period in 1998, principally due to the impact of
much milder winter weather on demand and prices. Despite this, net income
increased over the same three-month period in 1998, primarily due to improved
margins resulting from the lower cost of gas sold to customers and to lower
gross receipts taxes, partially offset by higher operation and maintenance
expenses.
The US Energy Marketing segment had a net loss of $7 million for the
three months ended March 31, 1999 versus a net loss of $1 million for the same
period in 1998. Operating revenues for the 1999 first quarter were up 17% from
the year-earlier period; however, margins were down significantly due to a
market that was capped by mild winter weather. Operating expenses for the
first quarter this year were also higher than in the prior first quarter due
to increased infrastructure costs as a result of business growth.
The Corporation's effective income tax rate in all periods since
acquisition differs from the statutory rate primarily due to the amortization
of goodwill, which is not deductible for tax purposes.
CHANGE IN ACCOUNTING STANDARDS
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
is effective for fiscal years beginning after June 15, 1999. Many existing
contracts relating to electric and gas purchases and sales may be classified
as derivatives under the definition of derivatives in the new standard. 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 be recorded in earnings
or common stock equity as part of comprehensive income depending upon the
intended use of the derivatives and their resulting designations. The new
16
<PAGE>
<PAGE>
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.
YEAR 2000 ISSUES
Overview
- --------
Year 2000 (Y2K) issues of ENSERCH are being addressed with those of its
parent company, TUC. The following disclosure regarding Y2K issues of TUC's
US businesses is excerpted from TUC's Form 10-Q for the period ended March
31, 1999 with references in TUC's discussion to "the Company" changed to
"TUC."
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 eighty percent
complete. The IT Infrastructure project is currently eighty-five percent
complete. 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 eighty percent complete. Certification for the Y2K compliance on
mission critical core business applications was completed as scheduled by the
end of the first quarter with certification of remaining applications
scheduled for the third quarter of 1999.
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-five percent of the IT Infrastructure is Y2K ready.
Mainframe computers and support equipment within the data center have
received all necessary upgrades. Other remediation schedules were adjusted
during the quarter to improve the cost effectiveness of the work. Remediation
of equipment within major work locations will be completed May 15, 1999. Non
critical equipment in remote sites will be remediated throughout the second
and third quarters. Certain software vendors will not have Y2K ready versions
of their product available until the second quarter of 1999. These software
upgrades will be tested and implemented during the second quarter. TUC's 900
megahertz radio system is being upgraded, and is scheduled to be completed in
July 1999.
17
<PAGE>
<PAGE>
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 the production, energy 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
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 seventy 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. On site
audits of a limited number of significant third parties are being conducted
during the first half of 1999.
Costs
- -----
The costs associated with TUC's Y2K efforts for its US energy businesses
are currently estimated to be approximately $36 million. 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 (latest available information). 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 system has 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.
18
<PAGE>
<PAGE>
Contingency Plans
- -----------------
TUC has in place detailed emergency response and disaster recovery plans
designed 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 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 and North American
Electric Reliability Council. Final contingency plans are scheduled to be
completed by June 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Corporation is not
significantly different from the information set forth in Item 7A.
Quantitative and Qualitative Disclosures About Market Risk included in the
1998 Form 10-K and is therefore not presented herein.
19
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits filed as part of Part II are:
15 - Letter of Deloitte & Touche LLP as to unaudited interim
financial statements.
27 - Financial Data Schedule
(b)Reports on Form 8-K filed since December 31, 1998:
None
20
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSERCH Corporation
By /s/ Jerry W. Pinkerton
------------------------------
Jerry W. Pinkerton
Vice President and Controller,
Principal Accounting Officer
Date: May 13, 1999
21
<PAGE>
Exhibit 15
ENSERCH Corporation:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited condensed
consolidated interim financial information of ENSERCH Corporation (the
"Corporation") for the periods ended March 31, 1999 and 1998, as indicated in
our report dated May 13, 1999; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated 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 ENSERCH Corporation.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant within the meaning of
Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 13, 1999
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
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<TOTAL-NET-UTILITY-PLANT> 1,313
<OTHER-PROPERTY-AND-INVEST> 869
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<OTHER-ASSETS> 167
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