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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual]report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (fee required) for the fiscal year ended
December 31, 1996 or
[_] Transition]report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) for the transition period
from to
FORM 10-K
COMMISSION FILE NUMBER 1-11413
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ENSERCH EXPLORATION, INC.
----------------
TEXAS 75-2556975
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6688 NORTH CENTRAL EXPRESSWAY SUITE 75206-3922
1000 DALLAS, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICE)
(214) 692-4300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to section 12(b) of the Act:
COMMON STOCK ($1.00 PAR VALUE) NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE
ON WHICH REGISTERED)
Securities registered pursuant to section 12(b) of the Act:
NONE
Indicate by check mark whether Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 19 , 1997: $200,950,134.
Shares of the Registrant's Common Stock outstanding as of March 19, 1997:
126,172,796 shares.
Documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated:
NONE
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 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]
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FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. Business...................................................... 1
General....................................................... 1
Recent Developments........................................... 1
ENSERCH/Texas Utilities Company Merger........................ 1
Management Changes............................................ 1
Core Areas.................................................... 2
Offshore Activities--The Cooper Project....................... 2
Offshore Activities--The Allegheny Project.................... 2
Rocky Mountain Properties..................................... 3
International Operations...................................... 3
Sales Information............................................. 3
Major Customers............................................... 3
Competition................................................... 3
Government Regulation......................................... 3
Environmental Matters......................................... 4
Others Laws and Regulations................................... 5
Employees..................................................... 5
Offices....................................................... 5
Forward Looking Statements--Uncertainties and Risks........... 5
ITEM 2. Properties.................................................... 6
ITEM 3. Legal Proceedings............................................. 8
ITEM 4. Submission of Matters to a Vote of Security Holders........... 8
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 8
ITEM 6. Selected Financial Data....................................... 8
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
ITEM 8. Financial Statements and Supplementary Data................... 8
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 8
PART III
ITEM 10. Directors and Executive Officers of the Registrant............ 9
Directors..................................................... 9
Executive Officers............................................ 10
ITEM 11. Executive Compensation........................................ 11
Summary Compensation Table.................................... 11
Option Grants Table........................................... 13
PAGE
----
Aggregated Option Exercise Table............................ 14
Long-Term Incentive Plan Awards Table....................... 14
Pension Plan Table.......................................... 15
Compensation of Directors................................... 15
Employee Contracts, Termination of Employment and Change-in-
Control Arrangements....................................... 16
Board Compensation Committee Report on Executive
Compensation................................................ 17
Performance Graph........................................... 20
Compensation Committee Interlocks and Insider
Participation............................................... 21
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Security Ownership of Certain Beneficial Owners............. 21
Stock Ownership of Management and Board of Directors........ 22
ITEM 13. Certain Relationships and Related Transactions.............. 22
Section 16(a) Beneficial Ownership Reporting Compliance..... 23
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
APPENDIX A Financial Information...................................... A-1
2
PART I
ITEM 1. BUSINESS
GENERAL
Enserch Exploration, Inc. ("EEX" or the "Company"), an 83.3% owned
subsidiary of ENSERCH Corporation ("ENSERCH"), has been engaged in the
exploration for and the development, production and sale of natural gas and
crude oil since 1918. From 1985 through December 30, 1994, this business was
conducted primarily through Enserch Exploration Partners, Ltd. ("EP"), a
limited partnership in which a minority interest (less than 1% since 1989) was
held by the public. At year-end 1994, pursuant to a plan for the
reorganization of EP ("Reorganization"), EEX acquired, through a series of
transactions, all of the operating properties of EP Operating Limited
Partnership ("EPO"), EP's 99%-owned operating partnership, in exchange for
shares of EEX common stock. On December 30, 1994, the Reorganization was
consummated, EPO was merged into EEX, EP was liquidated and the EEX common
stock held by EP was distributed to EP's limited and general partners in
accordance with their partnership interests.
EEX is one of the largest independent exploration and production companies
in the United States, with a reserve base of 1,572 billion cubic feet of
natural gas equivalent ("Bcfe") at January 1, 1997, as estimated by DeGolyer
and MacNaughton ("D&M"), independent petroleum consultants. Approximately 77%
of these reserves consist of natural gas.
RECENT DEVELOPMENTS
ENSERCH/Texas Utilities Company Merger. In April 1996, ENSERCH announced
that it had entered into a merger agreement with Dallas-based Texas Utilities
Company ("ENSERCH/TUC Merger"). Under the terms of the agreement, a new
holding company will acquire the businesses of ENSERCH, excluding the
businesses of EEX and Lone Star Energy Plant Operations, Inc. ("LSEPO").
Immediately prior to the consummation of the ENSERCH/TUC Merger, and as a
condition thereof, EEX will be merged into LSEPO ("EEX/LSEPO Merger"), LSEPO
will change its name to "Enserch Exploration, Inc." ("New EEX"), shares of EEX
will automatically be converted into shares of New EEX on a one-for-one basis
in a tax-free transaction, and ENSERCH will distribute to its shareholders, on
a pro rata basis, all of the shares of New EEX common stock it owns
("Distribution"). LSEPO, a wholly owned subsidiary of ENSERCH, operates and
maintains, under long-term contracts, a 255-megawatt ("MW") cogeneration
facility located in Sweetwater, Texas, a 62-MW cogeneration facility located
in Buffalo, New York, and a 160-MW cogeneration facility located in
Bellingham, Washington. In the EEX/LSEPO Merger, ENSERCH will receive
approximately 778,000 shares of New EEX for the value of LSEPO.
The mergers, including the transactions contemplated by the mergers, were
approved by the shareholders of EEX, ENSERCH and TUC, in separate meetings, on
November 15, 1996. All regulatory approvals have been received except for
approval by the Securities and Exchange Commission ("SEC") under the Public
Utility Holding Company Act of 1935 where the approval process is proceeding.
The Railroad Commission of Texas ("RRC") has indicated no objection to the
ENSERCH/TUC Merger, and the Antitrust Division of the U.S. Department of
Justice ("DOJ") has notified ENSERCH and TUC that its investigation of the
proposed merger has been closed without the DOJ taking any action or requiring
TUC or ENSERCH to take any action. ENSERCH has also announced receipt of a
favorable tax ruling from the Internal Revenue Service to the effect that
neither ENSERCH nor its shareholders will recognize taxable gain in the
Distribution.
The merger and transactions related thereto are fully described in the
Company's Proxy Statement dated October 2, 1996, as filed with the SEC, which
is incorporated herein by reference.
Management Changes. On January 13, 1997, EEX named Thomas M Hamilton
Chairman and President, Chief Executive Officer of the Company, David R.
Henderson as Executive Vice President, Worldwide
1
Exploration, and B. K. Irani as Executive Vice President, Production and
Engineering. Mr. Hamilton came to EEX from Pennzoil Company where he was
Executive Vice President and President of Pennzoil Exploration & Production
Company. He succeeded Frederick S. Addy, interim Chairman, President and Chief
Executive Officer, who continues to serve as a Director of the Company. Mr.
Henderson previously was Senior Vice President of worldwide exploration at
Pennzoil Exploration & Production Company. Mr. Irani has previously served as
Senior Vice President, Offshore and International of the Company.
Core Areas. Mr. Hamilton has initiated a review of the Company's business
with a focus on enhancing performance from the Company's core areas of
activity and the development of plans for maximizing the value of non-core
assets through optimization of cash flow and the disposition of low-return,
high-cost properties. EEX operations will be focused on existing core areas of
East Texas, the Gulf of Mexico Continental Shelf and the deep water Gulf of
Mexico. EEX also intends to vigorously pursue international opportunities. The
existing core areas account for more than 75% of EEX's proved reserves and
approximately 50% of total production. More than 90% of the Company's total
probable reserves, as estimated by D&M, are in the existing core areas.
Operating costs for properties located in core areas are relatively lower than
the overall cost profile for the Company. Assets in non-core areas will be
traded or sold with proceeds reinvested into core areas or utilized to reduce
debt.
Offshore Activities--The Cooper Project. Production began at the Cooper
Project in the Garden Banks area of the Gulf of Mexico in September 1995.
Considered a deep-water project by industry standards, the floating production
facility ("FPF") is moored in 2,200 feet of water on Block 388. A 24-slot
subsea template rests on the ocean floor directly under the FPF. The FPF is
capable of drilling and producing simultaneously and is designed to
accommodate up to 40 thousand barrels ("MBbls") of oil and 120 million cubic
feet ("MMcf") of gas per day. EEX is the operator and owns a 60% interest in
this project. An affiliate of Mobil Corporation has a 40% interest. At year-
end 1996, gross daily production at the project had reached approximately 10
MBbls of oil and condensate and 15 MMcf of natural gas per day. Additional
development and exploratory drilling of identified prospects is expected
during 1997 as a part of a long-term development plan for the Cooper Project.
In late July 1996, it was announced that mechanical problems had prevented
completion of the A-1 development well at the Cooper Project. EEX and its
partner are evaluating alternate drilling strategies to develop the extensive
proven hydrocarbon column at this location.
The A-2 development well reached total depth of 9,835 feet encountering
three pay zones in the 7,200-foot, 7,600-foot and 9,800-foot sands in January
1997. In March 1997, the well was initially completed in the 9,800-foot sand,
which has a total of 116 feet of oil pay.
The SB-3 exploratory well on Garden Banks Block 387 was also completed in
March 1997. The well was drilled to a total depth of 19,000 feet and was
completed in a 50-foot sand interval at a depth of 18,170 feet. Based on
initial flow rates, the well is expected to initially produce at rates in the
range of 20 to 25 MMcf of gas per day with associated condensate.
Offshore Activities--The Allegheny Project. This project comprises a four-
block unit in the Green Canyon area of the Gulf of Mexico and is located
approximately 150 miles south of New Orleans, Louisiana, in 2,200 to 3,400
feet of water. The Allegheny Project is located in an area of the Gulf where
there is a great deal of exploration and development activity. EEX is the
operator and has a 40% interest in this project, an affiliate of Mobil
Corporation has 40% and an affiliate of Reading & Bates Corporation has 20%.
Prior to 1996, three wells and one sidetrack had been drilled on Green
Canyon Block 254 with gross proved reserves equivalent to approximately 72
million barrels ("MMBbls") of oil attributed by D&M. During 1996, a well was
drilled on Block 298, bottoming on Block 297, reaching a total depth of 16,500
feet (measured depth), encountering 350 gross feet of pay (measured depth).
Although the well extended the field 3,000 feet to the south, subsequent
interpretation of the data revealed thinning of some previously mapped
reservoirs which, coupled with the newly discovered sands, resulted in a 20
MMBbl downward revision of reserves to 52 MMBbl gross proved reserves.
2
In 1996, EEX and its partners began to identify alternative development
scenarios for the Allegheny Project. A joint project team was formed to
evaluate alternatives that are currently available for the design and
construction of production facilities. The project team will also design and
implement a development plan to optimize production from this project. The
additional engineering study and design will delay the project from its
previously planned early 1999 start-up. However, the design changes should
favorably impact the project's economics.
Rocky Mountain Properties. During 1996, EEX sold substantially all of its
Rocky Mountain area properties, which were in six states, aggregated over
250,000 net acres and had proved reserves of 148 Bcfe at January 1, 1996.
These properties were mostly acquired as part of the acquisition of DALEN
Corporation ("DALEN") in 1995 and were not considered a core area for EEX.
International Operations. In the Mudi field on the island of Java in
Indonesia, where EEX owns a 25% working interest, a development plan was
approved in 1996. Five wells have been drilled and are expected to be
completed in this field, and a stepout delineation well is being drilled.
Production is expected to commence in late 1997 or early 1998 initially at an
estimated 20 MBbls of oil per day. Gross reserves are estimated to be40 MMBbls
of oil and condensate.
SALES INFORMATION
Sales data are set forth under "Operating Data" included in Appendix A to
this report.
MAJOR CUSTOMERS
EEX sells its gas under both long- and short-term contracts. EEX markets
most of its gas through third-party gas marketing organizations while
maintaining a core staff to ensure market prices are received. In 1996,
Enserch Energy Services, Inc. ("EES"), the ENSERCH natural-gas marketing
subsidiary, was EEX's largest gas customer, purchasing gas under two long-term
variable-price contracts which terminated December 31, 1996. A division of
ENSERCH, Lone Star Gas Company ("LSG"), purchases gas under a long-term fixed-
price service contract which ends in March 1997. In 1996, approximately 34%
and 6% of EEX's natural gas volumes were sold to EES and LSG, respectively.
The termination of these contracts will not have a material adverse effect on
EEX's results of operations.
EEX sells its oil under contracts that are for one year or less. Prices
generally are based upon field posted prices plus negotiated bonuses.
EEX utilizes futures contracts, commodity price swaps and other financial
instruments to reduce exposure of its gas and oil production to price
volatility. See "Financial Review--Gas and Oil Market Volatility" and Note 10
of the Notes to Consolidated Financial Statements included in Appendix A for
additional information on hedging activities.
COMPETITION
All phases of the gas and oil industry are highly competitive. EEX competes
in the acquisition of properties, the search for and development of reserves,
the production and sale of gas and oil and the securing of the labor and
equipment required to conduct operations. EEX's competitors include major gas
and oil companies, other independent gas and oil concerns and individual
producers and operators. Many of these competitors have financial and other
resources that substantially exceed those available to EEX. Gas and oil
producers also compete with other industries that supply energy and fuel.
GOVERNMENT REGULATION
The gas and oil industry is extensively regulated by federal, state and
local authorities. Legislation affecting the gas and oil industry is under
constant review for amendment or expansion. Numerous departments and
3
agencies, both federal and state, have issued rules and regulations binding on
the gas and oil industry and its individual members, some of which carry
substantial penalties for the failure to comply. Inasmuch as such laws and
regulations are frequently amended, reinterpreted or expanded, EEX is unable
to predict the future cost or impact of complying with such laws and
regulations.
The RRC regulates the production of natural gas and oil by EEX in Texas.
Similar regulations are in effect in all states in which EEX explores for and
produces natural gas and oil. These regulations generally require permits for
the drilling of gas and oil wells and regulate the spacing of the wells, the
prevention of waste, the rate of production and the prevention and cleanup of
pollution and other materials.
Environmental Matters. Gas and oil operations are subject to extensive
federal, state and local laws and regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known
as the "Superfund Law," and similar state statutes and, with respect to
federal leases, to interruption or termination by governmental authorities on
account of environmental and other considerations. Regulations of the
Department of the Interior currently impose absolute liability upon the lessee
under a federal lease for the costs to clean-up pollution resulting from a
lessee's operations, and such lessee may also be subject to possible legal
liability for pollution damages. EEX maintains insurance against costs of
clean-up operations, but is not fully insured against all such risks. A
serious incident of pollution may result in the Department of the Interior
requiring lessees under federal leases to suspend or cease operation in the
affected area. With respect to any EEX operations conducted on offshore
federal leases, liability may generally be imposed under the Outer Continental
Shelf Lands Act for costs of clean-up and damages caused by pollution
resulting from such operations, other than damages caused by acts of war or
the negligence of third parties.
The Oil Pollution Act of 1990 and regulations thereunder impose a variety of
regulations on "responsible parties" (which includes owners and operators of
offshore facilities) related to the prevention of oil spills and liability for
damages resulting from such spills in the United States waters. In addition,
it imposes ongoing requirements on responsible parties, including proof of
financial responsibility to cover at least some costs in a potential spill.
The operations of EEX are also subject to the Clean Water Act and the Clean
Air Act, as amended, and comparable state statutes. The EPA is currently
implementing regulations pursuant to the Clean Air Act, and the states are
also implementing programs. EEX may be required to incur certain capital
expenditures over the next five to ten years for air-pollution control
equipment.
EEX's onshore operations are subject to numerous United States federal,
state and local laws and regulations controlling the discharge of materials
into the environment or otherwise relating to the protection of the
environment, including CERCLA. These regulations, among other things, impose
absolute liability on the lessee under a lease for the cost of clean-up of
pollution resulting from a lessee's operations, subject the lessee to
liability for pollution damages, may require suspension or cessation of
operations in affected areas and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater. Persons who
are or were responsible for releases of hazardous substances under CERCLA may
be subject to joint and several liability for the remediation and clean-up
costs and for damages to natural resources. EEX has been named as a
potentially responsible party at a Texas State Superfund site. However, EEX
does not believe that any liabilities in connection with such matters will
have a material adverse effect on its business or results of operations.
For offshore operations, lessees must obtain the approval of the Mineral
Management Service ("MMS"), a federal agency, and various other federal and
state agencies' approval for exploration, development and production plans
prior to the commencement of such operations. Similarly, the MMS has
promulgated other regulations governing the plugging and abandoning of wells
located offshore and the removal of all production facilities. Under certain
circumstances, including but not limited to, conditions deemed to be a threat
or harm to the environment, the MMS may also require any EEX operation on
federal leases to be suspended or terminated in the affected area.
4
Other Laws and Regulations. Various laws and regulations require permits for
drilling wells and the maintenance of bonding requirements in order to drill
or operate wells and also regulate the spacing and location of wells, the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled, the plugging and abandoning of wells,
the prevention of waste of gas and oil, the prevention and cleanup of
pollutants, the maintenance of certain gas/oil ratios and other matters.
EEX's operations are also subject to various conservation requirements.
These include the regulation of the size and shape of drilling and spacing
units or proration units, the density of wells which may be drilled, maximum
rates of production and unitization or pooling of oil and gas properties.
In the aggregate, compliance with federal and state rules and regulations is
not expected to have a material adverse effect on EEX's operations.
EMPLOYEES
At January 1, 1997, EEX had 528 full-time employees.
OFFICES
The principal offices of EEX are located at 6688 North Central Expressway,
Suite 1000, Dallas, Texas 75206-3922, and its telephone number is (214)692-
4300.
Production offices are maintained in Dallas, Houston, Athens, and
Bridgeport, Texas.
FORWARD LOOKING STATEMENTS--UNCERTAINTIES AND RISKS
Written statements throughout this report on Form 10-K relating to EEX
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that EEX's
actual results could differ materially from those projected in such forward-
looking statements. Information concerning some of the factors that could
cause actual results to differ materially from those in the forward-looking
statements are described below.
Estimating Reserves and Future Net Cash Flows. Uncertainties are inherent in
estimating quantities and values of reserves and in projecting rates of
production, net revenues and the timing of development expenditures. The
reserve data represent estimates only of the recovery of hydrocarbons from
underground accumulations and are often different from the quantities
ultimately recovered. Any downward adjustment in reserve estimates could
adversely affect EEX.
Operational Risks and Hazards. EEX's operations are subject to the risks and
uncertainties associated with finding, acquiring and developing gas and oil
properties, and producing, transporting and selling gas and oil. Operations
may be materially curtailed, delayed or canceled as a result of numerous
factors, such as accidents, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. Drilling
may involve unprofitable efforts, not only with respect to dry wells, but also
with respect to wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs. Various
field operating hazards such as fires, explosions, blow-outs, equipment
failures, abnormally pressured formations and environmental accidents may
adversely affect production from successful wells. EEX's ability to sell its
gas and oil production is dependent on the availability and capacity of
gathering systems, pipelines and other forms of transportation.
Offshore Risks. EEX's offshore Gulf of Mexico gas and oil reserves include
properties located in water depths of 20 to 3,400 feet where operations are by
their nature more difficult than drilling operations conducted on land. Deep
water drilling and operations require the application of more advanced
technologies, involving a higher risk of mechanical failure and inevitably
resulting in significantly higher drilling and operating costs. Furthermore,
offshore operations require a significant amount of time between the time of
discovery and the time the gas or oil is actually marketed, increasing the
market risk involved with such operations.
5
Volatility of Gas and Oil Markets. EEX's operations are highly dependent
upon the prices of, and demand for, gas and oil. These prices have been, and
are likely to continue to be, volatile. Prices are subject to fluctuations in
response to a variety of factors that are beyond the control of EEX, such as
worldwide economic and political conditions as they affect actions of OPEC and
Middle East and other producing countries, and the price and availability of
alternative fuels, EEX's hedging activities with respect to some of its
projected gas and oil production, which are designed to protect against price
declines, may prevent EEX from realizing the benefits of price increases above
the levels of the hedges and protect it from incurring the detriments of price
decreases below the level of hedges. Because EEX's reserve base is
approximately 80% natural gas on an energy equivalent basis, it is more
sensitive to fluctuations in the price of natural gas. EEX follows the full
cost method of accounting for gas and oil properties. A decline in gas and oil
prices could cause a future write-down of capitalized costs and a non-cash
charge against income. See "Financial Review--Capitalized Costs."
Government Regulation. EEX's business is subject to certain federal, state
and local laws and regulations relating to the drilling for the production of
gas and oil, as well as environmental and safety matters. See "Business --
Government Regulation."
ITEM 2. PROPERTIES
EEX's domestic activities were focused in four regions in 1996: the Gulf of
Mexico; East Texas; Mid-Continent and other; and the Gulf Coast Region of
Texas, Louisiana, Mississippi and Alabama. The following table sets forth
estimated net proved reserves of EEX by region, as estimated by D&M, at
January 1, 1997:
OIL
NATURAL AND GAS
GAS LIQUIDS TOTAL
REGION (BCF)* (MMBBLS) BCFE
------ ------- -------- -------
Gulf of Mexico...................................... 126.5 28.0 294.7
East Texas.......................................... 845.1 7.5 890.1
Mid-Continent and other............................. 102.8 13.7 184.9
Gulf Coast.......................................... 141.2 4.0 165.2
------- ---- -------
Total Domestic.................................. 1,215.6 53.2 1,534.9
International....................................... 0.6 6.0 36.6
------- ---- -------
Total........................................... 1,216.2 59.2 1,571.5
======= ==== =======
--------
*Billion cubic feet.
See Note 15 of the Notes to Consolidated Financial Statements included in
Appendix A to this report for additional information on gas and oil reserves.
During 1996, EEX filed Form EIA-23 with the Department of Energy reflecting
reserve estimates for the year 1995. Such reserve estimates were not
materially different from the 1995 reserve estimates reported in Note 15 of
the Notes to Consolidated Financial Statements included in Appendix A to this
report.
Developed and undeveloped lease acreage as of December 31, 1996, are set
forth below:
DEVELOPED ACRES UNDEVELOPED ACRES
--------------- -------------------
GROSS NET (1) GROSS NET (1)
------- ------- --------- ---------
Domestic
Offshore............................... 189,310 60,609 853,105 426,462
Onshore................................ 471,368 289,968 1,056,035 654,701
------- ------- --------- ---------
Total................................ 660,678 350,577 1,909,140 1,081,163
International............................ 2,489,567 618,637
------- ------- --------- ---------
Total................................ 660,678 350,577 4,398,707 1,699,800
======= ======= ========= =========
--------
(1) Represents the proportionate interest of EEX in the gross acres under
lease.
6
EEX purchased about 252,000 net acres of leasehold interests in 1996, 99,000
of which were in the Gulf of Mexico. EEX's Gulf of Mexico holdings totaled
some 487,000 net acres, with an average working interest of 43% in 234 blocks
and an overriding royalty interest in 9 blocks. EEX operates 148 offshore
blocks. EEX also canceled or allowed to expire two Gulf of Mexico leases
during 1996 following review of drilling activity on or near these areas and
after analysis of geophysical and geological findings.
EEX plans further drilling on undeveloped acreage but at this time cannot
specify the extent of the drilling or predict how successful it will be in
establishing commercial reserves sufficient to justify retention of the
acreage. The primary terms under which the undeveloped acreage can be retained
by the payment of delay rentals without the establishment of gas and oil
reserves expire as follows:
UNDEVELOPED ACRES EXPIRING
-----------------------------------
DOMESTIC INTERNATIONAL
----------------- -----------------
GROSS NET GROSS NET
--------- ------- --------- -------
1997..................................... 551,741 312,456 730,242 182,560
1998..................................... 353,191 200,015 182,560 45,640
1999 and later........................... 1,004,208 568,692 1,576,765 390,437
Drilling rights with regard to a portion of the undeveloped acreage may be
allowed to expire before the expiration of primary terms specified in this
schedule by non-payment of delay rentals.
At December 31, 1996, EEX owned interests in 1,670 gas wells (1,121.1 net)
and 1,801 oil wells (422 net) in the United States and 5 oil wells (1 net) in
Indonesia. Of these, 226 gas wells (166.4 net) and 43 oil wells (34.9 net)
were dual completions in single boreholes.
Drilling activity during the three years ended December 31, 1996, including
the activities of DALEN for all periods shown, is set forth below:
1996 1995 1994
---------- ---------- ----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
Exploratory Wells:
Productive................................ 42 30.0 38 24.6 21 13.8
Dry....................................... 32 20.7 47 26.8 56 30.5
--- ---- --- ---- --- ----
Total................................... 74 50.7 85 51.4 77 44.3
=== ==== === ==== === ====
Development Wells:
Productive................................ 82 54.3 41 26.4 90 63.0
Dry....................................... 5 4.0 6 3.5 15 7.5
--- ---- --- ---- --- ----
Total................................... 87 58.3 47 29.9 105 70.5
=== ==== === ==== === ====
Note:
Productive wells are either producing wells or wells capable of
commercial production, although currently shut-in. The term "gross"
refers to the wells in which a working interest is owned, and the term
"net" refers to gross wells multiplied by the percentage of EEX's working
interest owned therein.
At December 31, 1996, EEX was participating in 71 wells (34 net), which were
either being drilled or in some stage of completion.
The number of wells drilled is not a significant measure or indicator of the
relative success or value of a drilling program because the significance of
the reserves and economic potential may vary widely for each project. It is
also important to recognize that reported completions may not necessarily
correspond to capital expenditures, since SEC guidelines do not allow a well
to be reported as complete until it is ready for production. In the case of
offshore wells, this may be several years following initial drilling because
of the timing of construction of platforms, pipelines and other necessary
facilities.
7
Additional information relating to the gas and oil activities of EEX is set
forth in Note 15 of the Notes to Consolidated Financial Statements included in
Appendix A to this report.
Planned capital expenditures for 1997 are expected to range from $175
million to $200 million.
EEX leases approximately 205,000 square feet of office space for its offices
in Dallas, Texas, under leases expiring in December 1998 and August 2002.
ITEM 3. LEGAL PROCEEDINGS
EEX is a party to lawsuits arising in the ordinary course of its business.
EEX believes, based on its current knowledge and the advice of counsel, that
all lawsuits and claims would not have a material adverse effect on its
financial condition. Additional information required hereunder is set forth in
Note 14 of the Notes to Consolidated Financial Statements included in Appendix
A to this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required hereunder is set forth under "Common Stock Market
Prices and Dividend Information" included in Appendix A to this report.
ITEM 6. SELECTED FINANCIAL DATA
The information required hereunder is set forth under "Selected Financial
Data" included in Appendix A to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder is set forth under "Financial Review"
included in Appendix A to this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is set forth under "Independent Auditors'
Report," "Management Report on Responsibility for Financial Reporting,"
"Statements of Consolidated Operations," "Statements of Consolidated Cash
Flows," "Consolidated Balance Sheets," "Statements of Owners' Equity," "Notes
to Consolidated Financial Statements" and "Quarterly Results" included in
Appendix A to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
Directors are elected to hold office until the next annual election and
until their successors shall have been duly elected and shall qualify. The
following biographical information sets forth the name, age, principal
occupation or employment during the past five years, certain other
directorships held by each director, and the period during which he has served
as a director of the Company.
THOMAS M HAMILTON
Chairman and President, Chief Executive Officer of Enserch Exploration, Inc.
Mr. Hamilton, age 53, was elected Chairman and President, Chief Executive
Officer in January 1997. Previously Mr. Hamilton served Pennzoil Company for
five years where he was Executive Vice President, and President of Pennzoil
Exploration & Production Company. Pennzoil is engaged in exploration and
production, refining, marketing and franchise business.
D. W. BIEGLER
Chairman and President, Chief Executive Officer, ENSERCH Corporation
Mr. Biegler, age 50, is Chairman and President, Chief Executive Officer of
ENSERCH Corporation. Prior to his election to his present position with
ENSERCH in 1993, he served LSG, the utility division of ENSERCH, as President
from 1985 and as Chairman from 1989 and was elected President and Chief
Operating Officer of ENSERCH in 1991. He previously served as Chairman and
Chief Executive Officer of the managing general partner of EP from 1992 until
its conversion into the Company beginning in 1995. He served as Chairman and
Chief Executive Officer of the Company from its formation in September of 1994
until June 20, 1995, and was re-elected to such position as of February 1,
1996, which he held until September 1996. Mr. Biegler is a Director of
ENSERCH, Texas Commerce Bank National Association, and Trinity Industries,
Inc. He has been a Director of the Company since its formation in late 1994.
FREDERICK S. ADDY
Retired Executive Vice President, Amoco Corporation
Mr. Addy, age 65, is retired Executive Vice President, Chief Financial
Officer, and Director of Amoco Corporation, an international integrated oil
and gas company. Mr. Addy has been a Director of the Company since 1995. He
also served the Company as interim Chairman and Chief Executive Officer from
September 10, 1996, to January 13, 1997, and as President from October 30,
1996, to January 13, 1997. He is a Director of Baker, Fentress & Company and
The Pierpont Funds.
B. A. BRIDGEWATER, JR.
Chairman, President and Chief Executive Officer, Brown Group, Inc.
Mr. Bridgewater, age 63, is Chairman, President and Chief Executive Officer,
and Director of Brown Group, Inc., a footwear company. Mr. Bridgewater has
been a Director of the Company since 1995. He is also a Director of ENSERCH,
NationsBank Corporation, FMC Corporation, and McDonnell Douglas Corporation.
MICHAEL P. MALLARDI
Retired Senior Vice President, Capital Cities/ABC, Inc., and Retired President
of the Capital Cities/ABC Broadcast Group.
Mr. Mallardi, age 62, is retired Senior Vice President, Capital Cities/ABC,
Inc., and retired President of Capital Cities/ABC Broadcast Group, which are
part of the Walt Disney Company. Mr. Mallardi has been a Director since
October 1996. Mr. Mallardi is also the trustee of 18 mutual funds operated by
J.P. Morgan and Chairman of the Tri-State Health System, Inc.
9
WILLIAM C. MCCORD
Retired Chairman and Chief Executive Officer, ENSERCH Corporation
Mr. McCord, age 68, is retired Chairman and Chief Executive Officer of
ENSERCH. He has been a Director of the Company since September 10, 1996. He is
also a Director of ENSERCH, Lone Star Technologies, Inc. and Pool Energy
Services, Inc.
EXECUTIVE OFFICERS
NAME AGE TITLE
---- --- -----
T. M Hamilton............... 53 Chairman and President, Chief Executive Officer
D. R. Henderson............. 45 Executive Vice President, Worldwide Exploration
B. K. Irani................. 45 Executive Vice President, Production and
Engineering
M. G. Fortado............... 52 Senior Vice President, General Counsel and
Corporate Secretary
J. P. McCormick............. 55 Senior Vice President and Chief Financial
Officer
M. A. McAdams............... 52 Senior Vice President, Human Resources and
Administration
Mr. Hamilton was elected Chairman and President, Chief Executive Officer in
January 1997. Previously, Mr. Hamilton served Pennzoil Company for five years
where he was Executive Vice President, and President of Pennzoil Exploration &
Production Company.
Mr. Henderson was elected Executive Vice President, Worldwide Exploration in
January 1997. Previously he held the position of Senior Vice President of
Worldwide Exploration at Pennzoil Exploration & Production Company.
Mr. Irani has been Executive Vice President, Production and Engineering
since January 1997. He previously was Senior Vice President, Production and
Engineering Division since 1995 and Vice President, Production and Engineering
Division from 1994 to 1995. He also served as Vice President, Production and
Engineering, of EEH* since 1988.
Mr. Fortado has been Vice President and Corporate Secretary of EEX since its
formation in September 1994 and was designated Senior Vice President, General
Counsel and Chief Legal Officer in September 1996. He is also Vice President
and Corporate Secretary of ENSERCH, having served as Corporate Secretary since
September 1971 and Vice President since May 1988.
Mr. McCormick has been a Senior Vice President and Chief Financial Officer
since 1995. He served LSG, a division of ENSERCH, as Senior Vice President,
Transmission from 1993 to 1995 and as Senior Vice President, Finance from 1991
to 1993. Prior to joining LSG, he practiced public accounting for 26 years and
was a partner of KPMG Peat Marwick and KMG Main Hurdman and served in
management positions in each firm.
Mr. McAdams has been Senior Vice President, Human Resources and
Administration since July 1996. He was Vice President, Employee Relations of
LSG from July 1990 to July 1996.
There are no family relationships between any of the above officers. All
officers of the Company are elected annually by the Board of Directors.
Officers may be removed by the Board of Directors whenever, in its judgment,
the best interest of the Company will be served thereby.
- --------
* Enserch Exploration Holdings, Inc. ("EEH") was the Managing General Partner
of EP.
10
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth annual compensation, long-term compensation and
all other compensation paid by the Company and its subsidiaries for services
rendered during the periods shown for each individual serving as the chief
executive officer in 1996, each of the other most highly compensated executive
officers in 1996 who were serving at the end of the year whose total salary
and bonus exceeded $100,000 and two additional persons who were executive
officers during, but not at the end of, 1996 (the "named executive officers").
The information presented does not include periods prior to 1995 since the
Company's predecessor, a limited partnership, did not have employees and no
compensation was paid to any of the named executive officers by the Company
prior to January 1, 1995.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------------
AWARDS PAYOUTS
---------------------------- ---------
OTHER
ANNUAL RESTRICTED SECURITIES LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPEN- STOCK UNDERLYING INCENTIVE COMPEN-
NAME AND ------------------------ SATION AWARDS OPTIONS/SARS PAYOUTS SATION
PRINCIPAL POSITION(1) YEAR SALARY($) BONUS ($) ($)(5) (#) ($) ($)(10)
- --------------------- ---- --------- ------- ------- ---------- ------------ --------- ---------
F.S. Addy............... 1996 0 0 25,275(3) 92,500 2,092(3) 0 0
Chairman and President, 1995 0 0 0 0 0 0 0
Chief Executive Officer
B.K. Irani.............. 1996 210,000 100,000 0 (6) 105,000 0 4,950
Executive Vice 1995 191,042 81,755 0 0 10,000 0 3,125
President, Production
and Engineering
J.P. McCormick.......... 1996 211,042 60,000 0 (6) 70,000 0 3,110
Senior Vice President 1995 113,750 57,642 0 0 0 0 1,125
and Chief Financial
Officer
G.J. Junco.............. 1996 280,833 0 0 183,750(7) 150,000(8) 338,261(9) 2,031,042
President and Chief 1995 300,000 163,125 0 (6) 25,000 0 3,125
Operating Officer
R.L. Kincheloe.......... 1996 175,692 0 351,776(4) 0 5,000 0 364,600
Senior Vice President, 1995 240,000 900 0 0 4,000 0 33,365
Offshore and
International
D.W. Biegler............ 1996 100,000(2) 0 0 173,653(2)(7) 20,000 161,895(2)(9) 4,340(2)
Chairman and Chief 1995 0 0 0 (6) 15,000 0 0
Executive Officer
J.T. Williams........... 1996 34,848 0 0 0 (6) 0 0 4,497,920
Vice Chairman and Chief 1995 227,323 124,564 0 35,000 0 72,759
Executive Officer
- --------
(1) D.W. Biegler's principal employment is Chairman and Chief Executive
Officer of ENSERCH. He served as Chairman and Chief Executive Officer of
the Company from September 1994 through June 20, 1995, when J. T.
Williams was elected as Vice Chairman and Chief Executive Officer
effective June 20, 1995. Mr. Williams resigned as Vice Chairman and Chief
Executive Officer of the Company effective February 1, 1996, and D. W.
Biegler was re-elected Chief Executive Officer effective February 1,
1996. Mr. Biegler resigned as Chairman and Chief Executive Officer on
September 10, 1996, and F. S. Addy was elected interim Chairman and Chief
Executive Officer on September 10, 1996, and President on October 30,
1996. Mr. Junco resigned as President and Chief Operating Officer on
October 30, 1996. Mr. Addy ended his term as interim Chairman and
President, Chief Executive Officer, on January 13, 1997, and Mr. Thomas M
Hamilton was elected Chairman and President, Chief Executive Officer, on
January 13, 1997. Mr. Kincheloe retired on August 31, 1996.
11
(2) Beginning in 1996, a portion of the aggregate compensation paid by
ENSERCH Corporation to Mr. Biegler was allocated to the Company. The
allocated charges, which were related to the services of Mr. Biegler as
the Company's Chairman and Chief Executive Officer, included: base
salary--$100,000; accrued charges resulting from acceleration of vesting
of restricted stock caused by change-in-control provisions--$283,545 for
ENSERCH restricted stock issued under the ENSERCH Corporation 1991 Stock
Incentive Plan ("1991 Plan") and $52,003 for the Company's restricted
stock issued under the Company's Revised and Amended 1996 Stock Incentive
Plan ("1996 Plan"); and accruals resulting from acceleration of vesting
caused by change-in-control provisions for deferred compensation payable
on retirement, death or disability pursuant to a special supplementary
compensation plan--$4,340.
(3) Includes $25,275 in directors' fees paid, and 2,092 Phantom Stock Units
awarded under the Phantom Stock Plan for non-employee Directors, for
services rendered by Mr. Addy as a Director prior to his election as the
interim Chairman and Chief Executive Officer on September 10, 1996.
(4) Includes $351,776 which was reimbursed for payment of taxes paid in
connection with the purchase of an annuity to fund retirement benefits
under the Income Restoration Plan.
(5) As of December 31, 1996, F. S. Addy held 10,000 shares of restricted
stock having an aggregate value at December 31, 1996, of $117,500 which
were issued pursuant to an agreement relating to his service as interim
Chairman and President, Chief Executive Officer, of the Company. At
December 31, 1996, the number and value of the aggregate restricted stock
holdings under the 1996 Plan for named executive officers with
performance-based stock were as follows: B.K. Irani: 20,000 shares,
$235,000; and J. P. McCormick: 15,000 shares, $176,250. Dividends are
payable on restricted shares at the same rate as would be paid to all
shareholders.
(6) Performance-based restricted stock awards to named executive officers
under the 1996 Plan are subject to performance-based criteria.
Performance-based restricted stock awards in 1996 to the named executive
officers that were not subject to accelerated vesting by change-in-
control provisions are reported under the "Long-Term Incentive Plan
Awards" table, and reference is made to such table for information on the
number of restricted shares awarded in 1996.
(7) Awards of restricted stock in 1996 to Mr. Junco under the 1996 Plan and
to Mr. Biegler under the 1991 Plan ($139,200) and 1996 Plan ($34,453) on
which restrictions were lifted under change-in-control provisions.
Excludes award in 1996 of 25,000 shares of restricted stock which was
relinquished by Mr. Junco at severance of employment.
(8) Relinquished by Mr. Junco at severance of employment.
(9) Accrued charges resulting from acceleration of vesting caused by change-
in-control provisions for awards made prior to 1996--for Mr. Junco,
$200,448 for ENSERCH restricted stock under the 1991 Plan and payout of
$137,813 for Company restricted stock under the 1996 Plan; and for Mr.
Biegler, $144,345 for ENSERCH restricted stock under the 1991 Plan and
$17,550 for Company restricted stock under the 1996 Plan. Values are
based on the market value of the stock on the date the restrictions were
lifted.
(10) Includes Company matching contributions to the Employee Stock Purchase
and Savings Plan and Deferred Compensation Plan, respectively, as
follows: B.K. Irani--$750, $4,200; J.P. McCormick--$675, $2,435; G.J.
Junco--$625, $5,417; R.L. Kincheloe--$600, $4,800; and J.T. Williams--
$75, $600. Also includes $4,497,245 paid to Mr. Williams in connection
with his severance of employment, $2,025,000 paid to Mr. Junco in
connection with his severance of employment and for Mr. Kincheloe
$226,000 being paid in connection with his retirement and $133,200
accrued for deferred compensation pursuant to a Special Supplemental
Compensation Plan.
12
OPTION GRANTS TABLE
The table below shows, for each of the named executive officers, certain
information with respect to options granted in 1996 under the 1996 Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SAR'S EXERCISE
OPTIONS/SAR'S GRANTED TO PRICE GRANT DATE
GRANTED EMPLOYEES IN PER SHARE EXPIRATION PRESENT
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE VALUE(3)
---- ------------- ------------- --------- ---------- ----------
F. S. Addy......... 2,092(4) (4) $9.56 (4) $ --
B. K. Irani........ 30,000 1.3% 9.75 02/16/06 175,652
75,000 3.2% 9.1875 09/10/06 432,016
J. P. McCormick.... 20,000 .9% 9.75 02/16/06 117,101
50,000 2.1% 9.1875 09/10/06 288,010
G. J. Junco........ 50,000 2.1% 9.75 (5) (5)
100,000 4.3% 9.1875 (5) (5)
R. L. Kincheloe.... 5,000 .2% 9.75 02/16/06 29,275
D. W. Biegler...... 20,000 .9% 9.75 02/16/06 117,101
J. T. Williams..... 0 -- -- -- --
- --------
(1) Options are exercisable in stages of 25% on the first through the fourth
anniversaries of the grant. Options become fully vested in the event of a
change in control as defined in the plan.
(2) Fair market value on the date of grant.
(3) Represents the hypothetical present value of the option determined using
Black-Scholes Option Valuation Method based upon the terms of the option
grant and the Company's stock price as of the date of the grant. The
actual value, if any, an executive may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised and there is no assurance that the value ultimately realized
will be at or near the value estimated by the Black-Scholes Option
Valuation Method. The assumptions used to arrive at the values shown are
as follows: Risk Free Interest Rate of 5.99% for February 16, 1996, awards
and 7.09% for September 10, 1996, awards, based on the ten-year Treasury
bond rate on the date of the grant, Stock Price Volatility of 37.0% based
on the historical return volatility using weekly stock prices over the
prior three years, no dividend yield.
(4) Reflects Phantom Stock Units granted under the Phantom Stock Plan for non-
employee Directors. For a discussion of the Phantom Stock Plan, see
"Compensation of Directors."
(5) The options granted in 1996 were relinquished at Mr. Junco's severance on
October 30, 1996.
13
AGGREGATED OPTION EXERCISE TABLE
The table below shows, for each of the named executive officers, the
information specified with respect to exercised, exercisable and unexercisable
options under all existing stock option plans.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED ------------------------- -------------------------
(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
F. S. Addy.............. 0 0 0 0 $ 0 $ 0
B. K. Irani............. 0 0 40,000 75,000 80,000 192,188
J. P. McCormick......... 0 0 20,000 50,000 40,000 128,125
G. J. Junco(1).......... 0 0 0 0 0 0
R. L. Kincheloe......... 0 0 9,000 0 18,000 0
D. W. Biegler........... 0 0 35,000 0 70,000 0
J. T. Williams.......... 0 0 35,000 0 0 0
- --------
(1) Relinquished all options on severance of employment.
LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
The table below shows for each of the named executive officers, certain
information with respect to awards of performance-based restricted stock made
pursuant to the 1996 Plan.
LONG-TERM INCENTIVE PLANS--AWARD IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE BASED PLANS(1)
PERFORMANCE PERIOD ---------------------------------
NUMBER OF UNTIL MATURATION THRESHOLD(2) TARGET(2) MAXIMUM(2)
NAME SHARES OR PAYOUT(3) (#) (#) (#)
---- --------- ------------------ ------------ --------- ----------
F. S. Addy.............. 0 - 0 0 0
B. K. Irani............. 20,000 10/01/96-09/30/99 1,000 20,000 20,000
J. P. McCormick......... 15,000 10/01/96-09/30/99 750 15,000 15,000
G. J. Junco............. 20,000(4) 01/10/96-12/31/98 1,000 20,000 20,000
25,000(5) 01/01/96-09/30/99 1,250 25,000 25,000
R. L. Kincheloe......... 0 - 0 0 0
D. W. Biegler........... 15,000(4) 01/01/96-12/31/98 750 15,000 15,000
J. T. Williams.......... 0 - 0 0 0
- --------
(1) Performance-based restricted shares have been awarded and will be earned
at the end of a three-year performance period based upon the three year
total shareholder return of the Company compared to the weighted average
of the total shareholder return of the Dow Jones Oil-Secondary Index.
Regular cash dividends, if any, would be paid on the restricted shares
prior to vesting at the same rate as paid to all shareholders. All
restrictions are lifted in the event of a change in control and are
subject to allocation in the event of retirement, disability or death
during the performance period.
(2) All shares are earned if at the end of the performance term the Company's
total shareholder return is at or above 110% of the weighted average of
the peer group. For each percentage point that the Company's total
shareholder return is below 110% of the weighted average of the peer group
but above 100%, 2.5% of the shares will be forfeited and for each
percentage point below 100%, 5% of the shares will be forfeited with no
shares earned below 85%.
14
(3) Shares earned at the end of the three-year performance period will remain
restricted, subject to continued employment for two additional years.
(4) Approval by the Company's Board of Directors of the EEX/LSEPO Merger
constituted a change in control as defined in the 1996 Plan. As a result,
the forfeiture provisions with respect to these shares lapsed upon such
approval.
(5) This restricted stock award was relinquished at the time of Mr. Junco's
severance of employment.
PENSION PLAN TABLE
Employees of the Company participate in The Retirement and Death Benefit
Program of ENSERCH Corporation and Participating Subsidiary Companies (the
"Program") and the ENSERCH Income Restoration Plan (the "Restoration Plan").
The table below illustrates the amount of annual compensation benefit payable
on a normal retirement basis beginning at normal retirement age to a person in
specified average salary and years-of-service classifications under the
Program, the Restoration Plan, and any annuities previously purchased in
satisfaction of pension obligations.
PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------------------
REMUNERATION(1) 15 20 25 30 35 40 45
- --------------- -------- -------- -------- -------- -------- -------- --------
$275,000 $ 69,085 $ 92,114 $115,142 $138,170 $161,199 $168,074 $174,949
350,000 88,773 118,364 147,955 177,545 207,136 215,886 224,636
425,000 108,460 144,614 180,767 216,920 253,074 263,699 274,324
500,000 128,148 170,864 213,580 256,295 299,011 311,511 324,011
575,000 147,835 197,114 246,392 295,670 344,949 359,324 373,699
650,000 167,523 223,364 279,205 335,045 390,886 407,136 423,386
725,000 187,210 249,614 312,017 374,420 436,824 454,949 473,074
800,000 206,898 275,864 344,830 413,795 482,761 502,761 522,761
- --------
(1) Highest average covered compensation over any consecutive five-year
period.
Covered compensation under the Program includes base wages and annual-
performance based bonuses. The credited years of service under the Program, as
of February 28, 1997, for Messrs. Junco, Irani, Kincheloe, McCormick and
Williams are 19.7, 22.1, 38.1, 5.6 and 0.6 years, respectively, and the
highest average covered compensation during any consecutive five-year period
for each of them is $357,698, $201,096, $240,984, $214,838 and $620,000,
respectively. In 1996, the Company did not make any contribution or incur any
charge regarding the retirement of Mr. Biegler. Mr. Addy waived participation
in the retirement plan. The normal retirement benefit is in the form of a
benefit guaranteed for ten years and life thereafter and is not subject to any
deduction for Social Security or other offset amounts.
COMPENSATION OF DIRECTORS
Directors are compensated by an annual retainer fee of $25,000 plus $1,250
for each board or committee meeting attended. In addition, a $2,500 per annum
fee is paid for services on a Board Committee, with an additional $1,000 per
annum paid to the Chairman of a Board Committee. Directors who are also
officers of the Company do not receive fees.
In 1996, the Company adopted a Phantom Stock Plan ("Director Plan") for non-
employee directors. The purpose of the Director Plan is to align the economic
interests of the Company's directors with those of shareholders by linking
part of the compensation of directors to increases in the value of the Company
and to provide a financial incentive that will help attract and retain
directors of outstanding competence. Phantom stock units were awarded to each
non-employee director (which by the terms of the Plan also included Mr. Addy
during his service as Interim Chairman and President, Chief Executive Officer
of the Company) except
15
D. W. Biegler, who was serving at the time the Director Plan first became
effective. Awards are also made to non-employee directors at the time they are
first elected to the Board of Directors, and thereafter to each non-employee
director elected to the Board at the Company's annual meeting of shareholders.
Each award consists of phantom stock units ("Units"), the number of which is
determined by dividing $20,000 by the value of the Company's common stock on
the date of the grant. A Unit account, which is maintained for each director,
is adjusted to reflect changes in corporate capitalization, a stock split, a
transaction which may involve the merger, consolidation, separation, including
a spinoff, or other distribution of stock or property of the Company, a
corporate reorganization or any partial or complete liquidation of the
Company. Units are fully vested at the earlier of the director's retirement
from the board, his death or a change in control of the Company, as defined in
the Director Plan. The aggregate value payable on an account when it is closed
is determined by multiplying the value of one share of the Company's common
stock by the number of Units in the account. The sum paid out is payable in
cash or in the Company's common stock, at the director's election, and may be
deferred for up to ten years with interest to accrue on the account balance at
the prime rate as published in "The Wall Street Journal." In 1996, awards
valued at $20,000 each resulted in the credit of 2,092 Units to each of the
following non-employee directors: F. S. Addy, B. A. Bridgewater, Jr., M. P.
Mallardi and W. C. McCord.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Addy executed a Restricted Stock Agreement with the Company in
connection with his service as interim Chairman and Chief Executive Officer.
The agreement provides that Mr. Addy receive 10,000 restricted shares upon
execution of the agreement plus 2,500 shares of restricted stock for each full
quarter of service, with the 2,500 share award for a full quarter to be
prorated for services less than a full quarter. The restrictions may not be
removed until the first to occur of (a) September 10, 1999, (b) the date Mr.
Addy ceases to be a Director of the Company or (c) Mr. Addy's death. Mr. Addy
waived all employee benefits.
Messrs. Junco, Kincheloe, Irani and McCormick have executed change-in-
control agreements with the Company that provide certain benefits in the event
their employment is terminated in connection with a change in control of the
Company (as defined in the agreements). The agreements are for continuous
three-year terms until terminated by the Company upon specified notice and
continue for three years following a change in control of the Company. The
agreements provide that if the officer is terminated or if the officer elects
to terminate employment under certain circumstances during the period of six
months preceding and within three years following a change in control of the
Company, the officer shall be entitled to a lump-sum severance payment of
three times the sum of the officer's base salary and target bonus (but not in
excess of the aggregate base salary that could be earned up to the officer's
normal retirement date), a prorated bonus in the year of termination, the
value over exercise price of certain unexercised stock options, a three-year
continuation of employee benefits, the equivalent of two years of service
credit under the retirement program, and reimbursement of certain legal fees,
expenses, and any excise taxes. Under the terms of such agreement, the vote of
the shareholders to approve the EEX/LSEPO Merger caused a change in control to
occur.
Mr. Irani has entered into a retention bonus arrangement under which the
Company would pay a cash bonus of $210,000 upon the attainment of eighteen
months of continuous employment following the EEX/LSEPO Merger. The bonus
payment is payable on a prorated basis in the event that, on or prior to the
bonus payment date, the employee dies or becomes disabled, unless during such
period he is terminated for cause.
Mr. Junco and the Company entered into an agreement in connection with his
October 30, 1996, termination as an officer of the Company. Under the
agreement, Mr. Junco received payment as described in Note 10 to the Summary
Compensation Table which included settlement of a change-in-control agreement.
The Company also agreed to maintain Mr. Junco's life, health, accident and
disability insurance for one year and reimburse amounts required for excise
tax payments, if any. Mr. Junco also relinquished all rights to options and
shares of restricted stock of the Company and ENSERCH Corporation held by him.
Mr. Kincheloe and the Company entered into an agreement in connection with
his August 31, 1996 retirement. Under the agreement, which included settlement
of his change-in-control agreement, Mr. Kincheloe
16
received $66,000 at his retirement, monthly payments of $20,000 for the months
of September 1996 through April 1997, the continued right to receive the net
value of options for Company common stock and ENSERCH common stock, based on
their highest value within six months prior to his retirement date and the
amount required for excise tax payments, if any.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
In determining executive compensation, the Committee is guided by three
primary objectives:
. Offer incentive for business success by putting a significant portion of
each executive's total pay at risk, based on company performance
observing, in the short term, desirable operating results and, in the
long term, total shareholder return.
. Attract and keep outstanding executives by providing compensation
opportunities consistent with those in the Company's industry for similar
positions.
. Encourage career service by providing retirement income consistent with
industry practice.
The Committee's action regarding compensation of executives in the first
quarter of the year was consistent with past practices and the above stated
objectives. However, compensation matters were impacted by the announcement by
ENSERCH Corporation in April of 1996 of its intention to distribute to its
shareholders its 83.4% of the Company's shares, the issues that developed
while posturing the Company for the transition to a fully independent Company
and terminations that occurred during the year.
Chief Executive Officer--Cash Compensation. Mr. J. T. Williams served as
Chief Executive Officer for the first month of 1996, having served in that
position since mid-1995 in association with the Company's acquisition of DALEN
Corporation for which he served as Chief Executive Officer, and his
compensation was negotiated as part of an employment contract concluded at the
time of purchase. Mr. Williams resigned from the Company on February 1, 1996,
and was paid severance in accordance with his employment contract and an
applicable severance plan continuing from DALEN. Mr. Biegler began serving as
Chairman and Chief Executive Officer on February 1, 1996, and served in that
capacity until September 10, 1996, when it was determined by the Board, with
Mr. Biegler's concurrence, that it would better facilitate the transition to
an independent company for the Board to select an interim Chairman and Chief
Executive Officer to serve until a permanent chief executive officer could be
found. Mr. F. S. Addy, one of the Company's outside directors, was selected to
serve as interim Chairman and Chief Executive Officer on September 10, 1996.
Other than the award of stock options and performance-based restricted stock
as described in the tables, Mr. Biegler was not compensated by the Company in
1996. However, as described in the table, a portion of Mr. Biegler's cash
compensation from ENSERCH Corporation was allocated to the Company in 1996 for
his services made to the Company. Mr. Addy received no cash compensation
during his service with the Company but was paid in Company restricted stock
at the rate of 2,500 shares for each quarter of service with proportionate
shares for partial quarters and with an initial award of 10,000 shares.
Other Named Executive Officers--Cash Compensation. Salary levels for the
other named executive officers are based upon assessment of each individual's
performance, experience and value in attaining corporate financial and
strategic objectives and are set within salary ranges based on surveys of
prevailing practice with the mid-point targeted for the expected level of
performance, experience and value. The Committee compares the Company's annual
cash payments (both salary and annual incentive) for named executive officers
to recognized annual surveys of practice in its industry. Industry practice is
observed from surveys conducted by Organization Resources Counselors for the
"Energy 27" Comparator Group and William M. Mercer, Incorporated. Together
they constitute a statistically valid database for this purpose and the
Committee is guided by it. The industry specific surveys used include all but
one of those companies found in the performance graph's Dow Jones Oil-
Secondary Index. The sole use of the smaller number of companies in that peer
group produces
17
pay data comparisons that are not considered as statistically meaningful or
useful for the purpose of salary comparisons, and the group of companies in
that peer group does not include all of the companies that are the Company's
most direct competitors for executive talent.
During 1996, the aggregate salaries of the named executive officers who were
still employed by the Company at year end, not including Mr. Addy, summed to
an amount equal to 14% above the sum of the size-adjusted median survey
salaries for their positions. One of the named executive officers received a
salary increase during 1996 which, on an annualized basis, amounted to 4.7% of
the named executive officer's salary.
Incentive Plan Compensation. It is the practice of the Company, which is
endorsed and effected by the Committee, to encourage both desirable annual
operating results and long-term total shareholder return by annual incentive
opportunities that put an important portion of total pay at risk subject to
the achievement of financial and operating goals. The portion of compensation
at risk is intentionally higher at higher executive levels in the Company.
Consequently much of a named executive officer's compensation is at risk, with
potential annual and long-term incentives, at target levels, placing up to 50%
of total compensation opportunity at risk. The Committee also considers
comparative data when determining the potential size of both annual and long-
term incentive awards.
By year end Messrs. Irani and McCormick were the only named executive
officers participating in the Company's Performance Incentive Plan. The level
of this opportunity is designed to be consistent with industry practice. Their
target awards in 1996 ranged from 35% to 40% of salary. In 1996, Plan awards
required the achievement of goals set by the Committee at the beginning of the
year including operating income attainment and reserve finding-cost
effectiveness. Funding, based on results, could have ranged from zero to 150%
of the target awards. However, after a review of 1996 operating results, the
various performance targets and the circumstances relating to the upcoming
spin off, the Committee determined that it would be appropriate to waive
previously approved performance factors and authorized individual participant
reviews to determine the extent to which 1996 goal achievement would be
recognized for purposes of 1996 bonus payouts. This resulted in awards for
Messrs. Irani and McCormick of 136% and 71%, respectively, of target.
Stock Incentive Plan. In February of 1996, the Company offered additional
incentive for stock price growth and total shareholder return through the
award of Performance-Based restricted stock under the Company's Stock
Incentive Plan, in which Messrs. Biegler and Junco participated, and stock
options under the Company's Stock Incentive Plan, in which Messrs. Biegler,
Junco, Irani and McCormick participated. In addition, after a decision by the
full Board regarding the need to retain and extend additional incentives to
key executives in the face of certain disruptions occurring as a result of the
upcoming spin off, in September the Company made additional awards of
Performance-Based restricted stock and stock options to Messrs. Junco, Irani
and McCormick. The awards of Performance-Based restricted stock are subject to
forfeiture in whole or in part unless specific goals which have been
determined by the Compensation Committee are achieved. The goals compare the
three year total shareholder return of the Company to the Dow Jones Oil-
Secondary Index used in the performance graph in the Company's 1996 Form 10-K.
After the three year goals are met, the restricted stock is subject to an
additional requirement of continued employment for two more years. Awards are
made to achieve the earlier stated objective of causing a significant portion
of each executive's total pay to be at risk and dependent on total shareholder
return primarily through stock price growth as well as the objective of
keeping outstanding executives by providing compensation opportunities similar
to those provided in the Company's industry. The Committee considered the
objective that the executive have an important incentive for stock price gain.
In determining the size of Performance-Based restricted stock and stock option
awards, the Committee used its discretion and was not bound by any pre-adopted
formulas. Performance-Based restricted stock and stock option awards in 1996
and options held at year end are described in the tables.
Change-in-control provisions of the Company's Stock Incentive Plan operated
in 1996 to lift the restrictions on Performance-Based restrictive stock held
by Messrs. Biegler and Junco as described in the table. Mr. Junco resigned his
position on October 31, 1996, and was paid a settlement that included
surrender of his stock options, restricted stock, rights under his change-in-
control agreement and other amounts owing to him.
18
Retirement Plan. The Company encourages career employment and it is endorsed
by the Committee. Its retirement benefits are an essential part of that
policy. They are described, for the named executive officers, in the Pension
Plan Table. The Committee periodically reviews executive retirement benefits
to ensure that they continue to meet the Company's needs and are consistent
with good corporate practice.
Section 162(m). No formal policy has been adopted by the Company with
respect to qualifying compensation paid to its executive officers for
deductibility under Section 162(m) of the Internal Revenue Code. In the event
that any new compensation programs are proposed in the future, it is expected
that they will be structured with a view toward qualifying for deductibility
just as were the amendments to the 1994 Stock Incentive Plan as approved by
shareholders in 1996. The Committee does not anticipate that current
compensation levels will result in loss of any tax deductibility.
Compensation Committee
W. C. McCord, Chairman
F. S. Addy
B. A. Bridgewater, Jr.
19
PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on the Company's Common Stock against the
cumulative total return of the S&P 500 Composite Stock Index and the Dow Jones
Oil-Secondary Index since the Company's stock first began trading. The graph
assumes that the value of the investment in the Company's Common Stock and
each index was $100 at January 3, 1995, the date the Company's stock first
began trading, and that all dividends are reinvested. The publicly traded
units of EP for the period prior to 1995 are not included in the performance
graph because such partnership interest was valued on a different basis from
the Common Stock currently traded and any comparisons would be inappropriate.
COMPARISON OF CUMULATIVE TOTAL RETURN
[PERFORMANCE GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
January 3, 1995 1995 1996
- --------------------------------------------------------------------------------
Enserch Exploration, Inc. 100 115 114
S&P 500 100 137 169
Dow Jones Oil-Secondary Index 100 116 143
- --------------------------------------------------------------------------------
20
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At various times during 1996, the following individuals served as a member
of the Company's Compensation Committee: W. C. McCord, Frederick S. Addy and
B. A. Bridgewater, Jr. Except for Mr. Addy, neither of the other individuals
was or has been an officer or employee of the Company or its subsidiaries. Mr.
Addy's service on the Compensation Committee ceased in September 1996 when he
was named interim Chairman and Chief Executive Officer of the Company and its
subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company is aware of the following beneficial owners, as of December 31,
1996, of more than 5% of its Common Stock.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER (1) BENEFICIALLY OWNED OF CLASS
-------------------- ------------------ --------
ENS Holdings Limited Partnership (2)............. 53,336,434 42.3%
Enserch Exploration Holdings, Inc. (3)........... 13,883,529 11.0
ENSERCH Corporation (4).......................... 37,795,365 30.0
- --------
(1) The address for each party is 300 South St. Paul, Dallas, Texas 75201
(2) ENS Holdings Limited Partnership, a Texas limited partnership, is trustee
(the "Trustee") of the ENS Holding Trust, a Texas trust (the "Trust") of
which ENSERCH is the beneficiary. ENS Holdings I, Inc., the general
partner (the "Trustee GP") of the Trustee and ENS Holdings II, Inc., the
sole limited partner of the Trustee, are each wholly owned subsidiaries of
ENSERCH. The Trustee has voting and dispositive power with respect to the
53,336,434 shares of the outstanding Common Stock owned by the Trust and
may be deemed to beneficially own those shares. ENSERCH has the power to
revoke the Trust by giving not less than 90 days' prior notice of
revocation. Upon termination of the Trust, the assets in the Trust
(including any shares of Common Stock in the Trust at that time) would be
distributed to ENSERCH. Actions of the Trustee are effected by the Trustee
GP in its capacity a general partner of the Trustee.
(3) Enserch Exploration Holdings, Inc. is a wholly owned subsidiary of
ENSERCH.
(4) ENSERCH has sole voting and dispositive power with respect to 37,795,365
shares of the Common Stock and, by virtue if its ownership of the
securities of EEH, the Trustee and the Trustee GP, may be deemed to share
voting and dispositive power with respect to the 67,219,963 shares of
Common Stock shown in the table as owned by EEH and the Trust. ENSERCH,
therefore, may be deemed to owned beneficially, directly or indirectly,
105,015,328 shares of Common Stock.
21
STOCK OWNERSHIP OF MANAGEMENT AND BOARD OF DIRECTORS
Each director, the named executive officers, and all directors and executive
officers as a group, reported beneficial ownership as of the Record Date of
Common Stock of the Company as follows:
EEX ENSERCH
------------------------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PHANTOM SHARES
BENEFICIALLY PERCENT STOCK UNITS BENEFICIALLY PERCENT
OWNED (1) OF CLASS OWNED(2) OWNED (3) OF CLASS
------------ -------- ----------- ------------ --------
T. M Hamilton........... 100,000 * 0 0 *
F. S. Addy.............. 15,432 * 2,092 5,444 *
D. W. Biegler........... 46,000(4)(6) * 0 309,043(5) *
B. A. Bridgewater, Jr... 1,000 * 2,092 5,944 *
M. P. Mallardi.......... 0 * 2,092 0 *
W. C. McCord............ 2,000 * 2,092 66,301(5) *
R. L. Kincheloe......... 11,500(4) * 0 44,676(5) *
G. J. Junco............. 24,600 * 0 10,189(5) *
J. T. Williams.......... 35,000(4) * 0 0 *
B. K. Irani............. 61,000(4) * 0 0 *
J. P. McCormick......... 44,500(4) * 0 8,796(5) *
All Directors and Execu-
tive Officers as a
Group.................. 415,532(4) * 8,368 422,423(5) *
- --------
* Less than 1%
(1) The number of shares owned includes shares held in the ENSERCH Corporation
Employee Stock Purchase and Savings Plan and restricted shares awarded
under the 1996 Plan, where applicable.
(2) Phantom Stock Units are awarded under the Company's Phantom Stock Plan to
non-employee Directors. The Plan is described in "Compensation of
Directors."
(3) The number of shares owned includes shares held in the ENSERCH Corporation
Employee Stock Purchase and Savings Plan where applicable.
(4) The totals include shares of Common Stock of the Company subject to stock
options exercisable within 60 days of the Record Date: D. W. Biegler
35,000 shares; R. L. Kincheloe 9,000 shares; J. T. Williams 35,000 shares;
B. K. Irani 40,000 shares; J. P. McCormick 20,000 shares; and all
directors and executive officers as a group 136,000 shares.
(5) The totals include shares of Common Stock of ENSERCH subject to stock
options exercisable within 60 days of the Record Date: D. W. Biegler
246,948 shares; W. C. McCord 65,000 shares; R. L. Kincheloe 34,500 shares;
J. P. McCormick 7,500 shares; and all directors and executive officers as
a group 373,748 shares.
(6) Does not include 105,015,328 shares beneficially owned by ENSERCH and its
affiliates in which Mr. Biegler, as authorized by the Board of Directors
of ENSERCH, has sole voting power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Biegler is a Director and an executive officer, and Messrs. Bridgewater
and McCord are each Directors, of ENSERCH. The Company and ENSERCH, including
its affiliates, have in the past entered into significant arrangements with
respect to their businesses and expect to do so in the future to the extent
authorized by the Restated Articles of Incorporation of the Company.
In the ordinary course of business, the Company engages in various
transactions with ENSERCH companies. See Note 13 of the Notes to Financial
Statements in Appendix A for information on these transactions.
22
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the officers
and directors of the Company, and persons who own more than 10% of a
registered class of the equity securities of the Company, to file reports of
beneficial ownership and changes in beneficial ownership with the SEC and the
New York Stock Exchange. Based solely on its review of the copies of such
reports received by it, or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that during 1996, its officers, directors and greater than 10% shareholders
complied with all applicable filing requirements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)-1 FINANCIAL STATEMENTS
The following items appear in the Financial Information section included in
Appendix A to this report:
ITEM PAGE
---- ----
Selected Financial Data................................................. A-2
Operating Data.......................................................... A-3
Financial Review........................................................ A-4
Independent Auditors' Report............................................ A-9
Management Report on Responsibility for Financial Reporting............. A-10
Financial Statements:
Statements of Consolidated Operations................................. A-11
Statements of Consolidated Cash Flows................................. A-12
Consolidated Balance Sheets........................................... A-13
Statements of Owners' Equity.......................................... A-14
Notes to Consolidated Financial Statements............................ A-15
Quarterly Results....................................................... A-30
Common Stock Market Prices and Dividend Information..................... A-30
(A)-2 FINANCIAL STATEMENT SCHEDULES
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.
(A)-3 EXHIBITS
3.1* Restated Articles of Incorporation of the Company as currently in
effect, filed as Exhibit 3.1 to the Company's Form 10-K for the year
ended December 31, 1995.
3.2 Bylaws of the Company as currently in effect.
10.1* Lease Agreement for Garden Banks 388-1 between the Company and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included
as Exhibit 10.3 to the Company's Registration Statement on Form S-4 (No.
33-56792).
10.2* Lease Agreement for Garden Banks 388-2 between the Company and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included
as Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No.
33-56792).
10.3* Lease Agreement for Mississippi Canyon 441 between the Company and Enserch
Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included
as Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No.
33-56792).
23
10.4* Participation Agreement between EP Operating Limited Partnership and
Mobil Producing Texas and New Mexico Inc. included as Exhibit 10.6 to
the Company's Registration Statement on Form S-4 (No. 33-56792).
10.5* Stock Purchase Agreement dated as of April 12, 1995, By and Between
PG&E Enterprises, as Seller, and Registrant, as Buyer, filed as Exhibit
10.7 to the Company's Registration Statement on Form S-2 (No. 33-
60461).
10.6* Gas Purchase Contract between EP Operating Company and Lone Star Gas
Company, a division of ENSERCH Corporation, dated January 1, 1988,
Amendatory Agreement dated June 1, 1990, Amendatory Agreement dated
July 1, 1992 and Letter Amendment dated August 30, 1993, filed as
Exhibit 10.5 to the Company's Form 10-K for the year ended December 31,
1994.
10.7* Letter Agreement regarding intercompany loans effective January 1,
1995, between the Company and ENSERCH Corporation filed as Exhibit 10.8
to the Company's Registration Statement on Form S-2 (No. 33-60461).
10.8* Natural Gas Sales and Purchase Contract between EP Operating Limited
Partnership and Enserch Gas Company, each effective March 1, 1993, filed
as Exhibit 10.9 to the Company's Registration Statement on Form S-2 (No.
33-60461).
10.9* Natural Gas Sales and Purchase Contract between EP Operating
Limited Partnership and Enserch Gas Company, effective March 1, 1993, and
amendment effective November 1, 1994, filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-2 (No. 33-60461).
10.10* Agency Agreement between EP Operating Limited Partnership and Enserch
Gas Company effective March 1, 1993, filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-2 (No. 33-60461).
10.11 Credit Agreement among Enserch Exploration, Inc. as Borrower, Texas
Commerce Bank National Association, as Administrative Agent, The Chase
Manhattan Bank, N.A., as Syndication Agent, Chemical Bank, as Auction
Agent and The Lenders now or hereafter Parties hereto dated as of May
1, 1995, and Amendment No. 1, dated September 16, 1996.
10.12* Tax Sharing Agreement between ENSERCH Corporation and Enserch
Exploration, Inc., filed as Exhibit 10.21 to the Company's Registration
Statement on Form S-2 (No. 33-60461).
10.13* Amended and Restated Limited Liability Company Agreement of MIStS
Issuer L.L.C. dated August 4, 1995, filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-2 (No. 33-60461).
EXECUTIVE COMPENSATION PLAN AND ARRANGEMENTS
(EXHIBITS 10.14 THROUGH 10.20):
10.14* Enserch Exploration, Inc. 1994 Stock Incentive Plan, filed as Exhibit
10.1 to the Company's Registration Statement on Form S-4 (No. 33-
56792).
10.15 Performance Incentive Plan--Calendar Year 1997.
10.16 ENSERCH Corporation Deferred Compensation Plan dated September 30, 1994
and Amendment No. 1 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.
10.17 ENSERCH Corporation Deferred Compensation Trust dated September 30,
1994, and Amendment No. 1 thereto effective January 1, 1996.
10.18 ENSERCH Corporation Retirement Income Restoration Plan dated December
28, 1990, and Amendment No. 1 thereto dated September 30, 1994,
Amendment No. 1-A dated February 13, 1996, and Amendment No. 2
effective January 1, 1996.
10.19 ENSERCH Corporation Retirement Income Restoration Trust dated September
30, 1994, and Amendment No. 1 thereto effective January 1, 1996.
10.20 Form of Change of Control Agreement executed by certain executive
officers of the Company.
21 Subsidiaries of the Company.
24
23.1 Deloitte & Touche LLP consent letter, including consent to
incorporation by reference in Registration Statements on Form S-8 (No.
33-57715 and No. 33-60587).
23.2 Consent of DeGolyer and MacNaughton.
24 Powers of Attorney.
27 Financial Data Schedule.
99* Proxy Statement of the Company dated October 2, 1996, as filed with the
SEC.
- --------
Long-term debt is described in the Notes to Consolidated Financial
Statements included in Appendix A to this report. EEX agrees to provide the
Commission, upon request, copies of instruments defining the rights of holders
of such long-term debt, which instruments are not filed herewith pursuant to
Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K.
* Incorporated herein by reference and made a part hereof.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 31, 1996, was filed on October 31,
1996 (Resignation of Gary J. Junco as President and Director) and Current
Report on Form 8-K dated November 22, 1996, was filed on November 22, 1996
(Results of vote on proposals at Special Meeting of Shareholders held on
November 15, 1996).
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 Exploration, Inc.
By: /s/ T. M Hamilton
--------------------------------
T. M Hamilton,
Chairman and President
MARCH 21, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATE INDICATED.
SIGNATURE TITLE
T. M Hamilton, Chairman and
President, Chief Executive Officer
and Director; F. S. Addy, Director;
D. W. Biegler, Director; B. A.
Bridgewater, Jr., Director; W. C.
McCord, Director; and M. P.
Mallardi, Director
By: /s/ T. M Hamilton
-------------------------------------- March 21, 1997
T. M Hamilton
Individually and As
Attorney-in-Fact
/s/ J. P. McCormick
-------------------------------------- March 21, 1997
J. P. McCormic
Senior Vice President and
Chief Financial Officer
/s/ R. E. Schmitz
-------------------------------------- March 21, 1997
R. E. Schmitz
Vice President and Controller
26
APPENDIX A
ENSERCH EXPLORATION, INC.
INDEX TO FINANCIAL INFORMATION
DECEMBER 31, 1996
PAGE
----
Selected Financial Data.................................................... A-2
Operating Data............................................................. A-3
Financial Review........................................................... A-4
Independent Auditors' Report............................................... A-9
Management Report on Responsibility for Financial Reporting................ A-10
Financial Statements:
Statements of Consolidated Operations.................................... A-11
Statements of Consolidated Cash Flows.................................... A-12
Consolidated Balance Sheets.............................................. A-13
Statements of Owners' Equity............................................. A-14
Notes to Consolidated Financial Statements............................... A-15
Quarterly Results.......................................................... A-30
Common Stock Market Prices and Dividend Information........................ A-30
A-1
ENSERCH EXPLORATION, INC.
SELECTED FINANCIAL DATA
AS OF OR FOR YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995(A) 1994 1993 1992
-------- -------- -------- -------- --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
Natural gas revenues........ $ 221.2 $ 157.3 $ 144.5 $ 146.4 $ 118.6
Oil and condensate
revenues................... 98.9 56.5 30.9 36.9 45.1
Natural gas liquids
revenues................... 8.2 4.9 2.4 4.1 6.5
Other revenues.............. 2.1 2.1 1.3 2.4 1.3
-------- -------- -------- -------- --------
Total revenues............. 330.4 220.8 179.1 189.8 171.5
Production and operating
expenses................... 74.0 49.8 31.7 31.4 29.6
Exploration................. 12.5 11.9 9.1 8.7 11.2
Depreciation and
amortization............... 150.4 116.6 80.8 78.4 76.7
(Sale) write down of
inactive pipeline.......... (7.5) 16.5
Write down of gas and oil
properties................. 10.2
General, administrative and
other...................... 35.0 29.9 19.8 30.0 23.1
Taxes, other than income.... 21.7 18.8 13.2 15.9 15.6
-------- -------- -------- -------- --------
Total expenses............. 293.6 227.0 147.1 174.6 172.7
Operating income (loss)..... 36.8 (6.2) 32.0 15.2 (1.2)
Other income (expense)--
net........................ 2.1 .1 (.3)
Interest income............. .1 1.0 .7 2.0 3.7
Interest and other financing
costs...................... (22.7) (14.6) (20.9) (30.6) (20.7)
-------- -------- -------- -------- --------
Income (loss) before income
taxes...................... 16.3 (19.7) 11.5 (13.4) (18.2)
Income taxes (benefit)...... 5.5 (7.2) (.3) (3.4) .4
-------- -------- -------- -------- --------
Net income (loss)........... $ 10.8 $ (12.5) $ 11.8 $ (10.0) $ (18.6)
-------- -------- -------- -------- --------
Pro Forma Information--
Change in Tax Status(b):
Income (loss) before income
taxes...................... $ 11.5 $ (13.4) $ (18.2)
Income taxes (benefit)...... 4.0 (4.7) (6.4)
-------- -------- --------
Net income (loss).......... $ 7.5 $ (8.7) $ (11.8)
======== ======== ========
Net income (loss) per share
(pro forma for periods
prior to 1995)............. $ .09 $ (.11) $ .07 $ (.08) $ (.11)
Weighted average shares
outstanding................ 125.9 111.1 105.8 105.8 105.8
CASH FLOW DATA
Net cash provided by
operating activities....... $ 134.9 $ 84.0 $ 61.7 $ 79.5 $ 85.2
Net cash used in investing
activities................. (63.0) (388.2) (108.8) (129.0) (58.7)
Net cash provided by (used
in) financing activities... (72.1) 305.5 47.0 48.9 (25.7)
COMMON STOCK DATA
Market Price(c)
High........................ $ 12 $ 14 7/8 $ 11 $ 12 1/4 $ 8 1/4
Low......................... 8 1/4 9 1/4 5 3/4 7 3/8 6 1/4
Common Shareholders' Equity
per Share.................. 7.49 7.41 6.96
Shares Outstanding at Year-
end........................ 126.0 125.9 105.8
BALANCE SHEET DATA (at year
end)
Property, plant and
equipment--net............. $1,746.7 $1,670.6 $1,254.0 $1,046.4 $1,018.4
Total assets................ 1,872.1 1,776.8 1,381.2 1,111.5 1,068.8
CAPITAL STRUCTURE (at year
end)
Capital lease
obligations(d)............. $ 245.0 $ 98.0 $ 155.9 $ $
Long term debt(d)........... 115.0 160.0 298.0 266.0
Company-obligated
mandatorily redeemable
preferred
securities of subsidiary... 150.0 150.0
Owners' equity.............. 944.2 932.2 736.0 630.7 671.7
-------- -------- -------- -------- --------
Total...................... $1,454.2 $1,340.2 $ 891.9 $ 928.7 $ 937.7
======== ======== ======== ======== ========
- --------
(a) 1995 includes results of DALEN since acquisition on June 8, 1995.
(b) Pro forma net income and per share data for periods prior to 1995 include
a pro forma provision for income taxes on partnership operations based on
the applicable federal statutory tax rate.
(c) Market price share amounts for years prior to 1995 represent prices of
Enserch Exploration Partners, Ltd. units.
(d) Including current portion.
A-2
ENSERCH EXPLORATION, INC.
OPERATING DATA
AS OF OR FOR YEAR ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Sales volumes
Natural gas (Bcf)............... 100.5 90.2 67.1 70.0 65.2
Oil and condensate (MMBbls)..... 5.1 3.4 2.0 2.1 2.3
Natural gas liquids (MMBbls).... .6 .5 .2 .3 .5
Total volumes (Bcfe) (a)...... 135.0 113.4 80.5 84.9 82.2
Average sales price
Natural gas (per Mcf)........... $ 2.20 $ 1.74 $ 2.15 $ 2.09 $ 1.82
Oil and condensate (per Bbl).... 19.47 16.86 15.38 17.24 19.20
Natural gas liquids (per Bbl)... 12.35 9.38 10.85 12.09 13.38
Total (per Mcfe) (a).......... 2.43 1.93 2.21 2.21 2.07
Costs and expenses (per Mcfe) (a)
Production and operating (b).... $ .55 $ .44 $ .39 $ .37 $ .36
Exploration..................... .09 .10 .11 .10 .14
Depreciation and amortization... 1.11 1.03 1.00 .92 .93
General, administrative and oth-
er............................. .26 .26 .25 .35 .28
Taxes, other than income........ .16 .17 .16 .19 .19
Net Wells
Drilled......................... 109 81 74 79 19
Productive...................... 84 51 44 64 8
Proved Reserve Data (at year end)
Natural Gas (Bcf)............... 1,216.2 1,362.8 1,041.7 1,086.5 1,101.4
Oil and condensate (MMBbls)
(c)............................ 59.2 71.5 50.6 39.3 39.2
Total (Bcfe) (a).............. 1,571.5 1,791.8 1,345.3 1,322.3 1,336.6
Standardized Measure of Discounted
Future Net Cash Flows (in mil-
lions)........................... $1,715.1 $1,227.4 $ 879.3 $1,102.6 $1,111.3
- --------
(a) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the
basis of one barrel equals 6.0 Mcfe.
(b) Excludes related production, severance and ad valorem taxes.
(c) Reserves include natural gas liquids attributable to leasehold interests.
A-3
ENSERCH EXPLORATION, INC.
FINANCIAL REVIEW
1996 RESULTS OF OPERATIONS COMPARED WITH 1995
Net income was $10.8 million ($.09 per share) for 1996, compared with a net
loss of $12.5 million ($.11 per share) for 1995. Results for 1996 were
adversely impacted by nonrecurring charges of $2.8 million after tax ($4.3
million pre-tax) related to the Company's pending separation from ENSERCH
Corporation (ENSERCH) and associated management changes. The year to year
improvement is primarily attributable to higher commodity prices in 1996 and a
full year's contribution to production volumes from properties acquired in
1995 and the Cooper Project. Operating income was $36.8 million in 1996,
compared with an operating loss of $6.2 million in 1995.
Revenues for 1996 were $330 million, a $110 million (50%) increase from
1995, reflecting a $64 million (41%) increase in natural gas revenues, and a
$46 million (72%) improvement in oil and other revenues. The average natural
gas sales price per thousand cubic feet (Mcf) was $2.20 in 1996 compared with
$1.74 in 1995. Natural gas production increased to 101 billion cubic feet
(Bcf) in 1996, 11% higher than in 1995. The higher natural gas volumes
primarily resulted from 1996 operations containing a full year of production
from the properties acquired in the acquisition of DALEN Corporation in June
1995. Higher oil revenues in 1996 reflect a 15% improvement in the average
sales price and a 52% increase in sales volumes due primarily to the continued
development of the Cooper Project and the DALEN acquisition.
Production and operating expenses for 1996 were $24 million (49%) higher
than in 1995, primarily due to a full year's activity from the Cooper Project
(up $15 million), and the properties acquired in the DALEN acquisition.
Exploration expenses were slightly higher in 1996, reflecting increased costs
from international exploration activity. General and administrative expenses
increased $5.1 million from 1995, reflecting a full year's impact of the DALEN
acquisition and $3.4 million for costs associated with the Company's pending
separation from ENSERCH and related management changes.
The depreciation and amortization rate per thousand cubic feet of natural
gas equivalent (Mcfe) increased to $1.11 in 1996, from $1.03 in 1995,
principally due to the downward reserve revisions in two offshore deep water
projects.
EEX sold substantially all of its Rocky Mountain area properties in 1996.
Sales proceeds of $116.5 million, less $5.5 million in closing costs and
income from the April 1, 1996 effective date to the closing dates, were
received and used to reduce bank borrowings. The properties sold contributed
$1.6 million to 1996 operating income, with total revenues of $22.2 million
and operating expenses of $20.6 million. Natural gas revenues were $15.2
million on sales of 10.8 Bcf, and oil and natural gas liquids revenues totaled
$7.0 million on sales of 504 thousand barrels (MBbls).
Interest and other financing costs for 1996 were $23 million, compared with
$15 million in 1995. Interest in 1996 includes a full year's impact from the
debt incurred to finance the DALEN acquisition in June 1995 and the Cooper
Project capital lease, partially offset by the reduction in debt from proceeds
of property sales. Interest on the Cooper Project capital lease was deferred
through September 1995, the date of first production.
The pro forma incremental impact on 1997's results of operations, compared
with 1996, of refinancing the Cooper Project equipment and facilities in
December 1996 and capitalization of the associated operating sublease will be
a reduction in production and operating expense of some $15 million, an
increase in the amortization rate of approximately $0.05 per Mcfe, and an
increase in interest costs of some $10 million.
For the year ended December 31, 1996 the Cooper Project added $1.2 million
to operating income, but detracted $2.6 million from net income. Operating
results in 1996 were negatively impacted when the A-1 development well
encountered mechanical difficulties which prevented completion. Two additional
wells, the
A-4
SB-3 exploratory well on Garden Banks Block 387 and the A-2 development well
on Garden Banks Block 388 have been completed with first production expected
in the first quarter of 1997. See Item 1: Business, for additional
information.
1995 RESULTS OF OPERATIONS COMPARED WITH 1994
EEX had a net loss of $12.5 million ($.11 per share) for 1995, compared with
pro forma net income of $7.5 million ($.07 per share) in 1994 after income
taxes on partnership operations. Results for 1994 benefitted from a $4.9
million after tax ($7.6 million pre-tax) gain from the sale of assets. There
was an operating loss of $6.2 million in 1995, compared with operating income
of $32 million in 1994.
DALEN's operations are included since their acquisition on June 8, 1995 and
contributed 1995 operating income of $6.9 million, with revenues of $70.4
million and operating expenses of $63.5 million. Natural gas revenues were $49
million on sales of 31 Bcf at an average sales price of $1.60 per Mcf. Oil and
other revenues totaled $21 million; the average sales price for oil was $16.61
per barrel (Bbl), and oil sales volumes were 1.1 million barrels (MMBbls).
The following comparisons of 1995 and 1994 operating results exclude the
impact of DALEN in 1995 and the previously noted unusual item in 1994. There
was an operating loss for 1995 of $13 million, compared with income of $24
million for 1994. Revenues for 1995 were $29 million (16%) lower than in 1994,
reflecting a $37 million (25%) decrease in natural gas revenues, but an $8
million (23%) improvement in oil and other revenues. The average natural gas
sales price per Mcf of $1.82 in 1995, excluding DALEN, declined 15% from the
1994 average of $2.15, causing a $23 million decline in revenues. Natural gas
sales volumes of 59 Bcf, excluding DALEN, were 12% less than in 1994, reducing
revenues by $14 million. The lower volumes primarily resulted from less
capital spending to replace gas production due to low gas prices and the
normal decline in production from several mature fields and the Mississippi
Canyon Block 441 in the Gulf of Mexico. Higher oil revenues reflect a 10%
improvement in the average sales price and a 12% increase in sales volumes
from the start-up of production from the Cooper Project in late September, and
increased production from exploration and development activities in Hardeman
and Shackelford counties in North Texas.
Production and operating expenses for 1995, excluding DALEN, were $5.1
million (16%) higher than in 1994, primarily due to expenses of $4.4 million
for the Cooper Project and higher maintenance costs. The commencement of sales
from the Cooper Project in late September detracted from 1995 results,
producing an operating loss of $1.9 million, as fixed operating costs exceeded
revenues from the initial levels of production. Exploration expenses were $1.9
million higher than in the 1994 period due to increased international
exploration activity. General and administrative expenses increased $5.3
million from 1994, with 1995 expenses including a $1.8 million provision for
injuries and damages claims and a $1.0 million charge for severance costs
related to the DALEN acquisition, while 1994 expenses benefited from credits
of $2.0 million associated with litigation accruals.
The total amortization rate per Mcfe was $1.03 in 1995, compared with $1.00
in 1994. The increase in 1995 over 1994 was primarily due to the conversion of
a part of the Cooper Project lease from an operating to a capital lease in
connection with the year end 1994 reorganization, partially offset by a
benefit resulting from reserve additions for the Allegheny Project and DALEN.
Excluding DALEN, a lower level of production caused depreciation and
amortization to be less in 1995 than in 1994.
Interest and other financing costs for 1995 were $15 million, compared with
$21 million for 1994. The 1995 costs are primarily associated with the DALEN
acquisition. Interest for 1994 related to debt assumed by ENSERCH companies in
connection with the reorganization.
The pro forma impact on 1994's net income as shown on EEX's Statements of
Consolidated Operations of the incorporation of EP and the assumption of debt
by ENSERCH companies, would be to decrease interest $20.9
A-5
million and increase income taxes a total of $11.6 million, $4.3 million on
partnership operations and $7.3 million on the interest reduction.
RESERVES
EEX's natural gas reserves, as estimated by DeGolyer and MacNaughton,
independent petroleum consultants (D&M), at January 1, 1997 were 1.22 trillion
cubic feet (Tcf), compared with 1.36 Tcf the year earlier. Additions to and
purchases of natural gas reserves in 1996 replaced gas produced from retained
properties after adjusting for the sale of 124 Bcf of gas reserves. As a
result, natural gas reserves at year end 1996 for retained properties were
little changed from the year earlier. Oil and condensate reserves, including
natural gas liquids, were 59 MMBbls, down 8.6 MMBbls compared with the year
earlier level of 71 MMBbls after adjusting for the sale of 3.7 MMBbls,
additions at 102% of 1996 adjusted production and downward revisions of 8.2
MMBbls at the Company's deep water projects in the Gulf of Mexico. The
downward revisions resulted from the performance of two producing wells at the
Cooper Project and the thinning of some previously mapped reservoirs as a
result of additional drilling at the Allegheny Project.
GAS AND OIL MARKET VOLATILITY
Results of operations are largely dependent upon the difference between the
prices received for gas and oil produced and the costs of finding and
producing such resources. On an energy equivalent basis, gas reserves at
January 1, 1997 constituted approximately 80% of total reserves, and gas
production accounted for approximately 77% of total production for 1996.
Accordingly, variations in gas prices have a more significant impact on
operations than variations in oil prices. Gas production as a percentage of
total production is expected to decrease as a result of the development of the
offshore Gulf of Mexico properties.
A portion of the risk associated with fluctuations in the price of natural
gas and oil is managed through the use of hedging techniques such as gas and
oil swaps, collars and futures agreements. EEX fixed the price on 1996
production volumes of 43 Bcf of natural gas (43% of production) at an average
price of $2.11 per Mcf and 2.7 MMBbls of oil (52% of production) at an average
price of $19.58 per Bbl. In total, gas and oil price hedging activities
decreased 1996 revenues by $20.3 million and increased 1995 and 1994 revenues
by $.1 million and $4.3 million, respectively. At December 31, 1996, EEX had
outstanding swaps, collars and futures agreements that were entered into as
hedges extending through December 31, 1997 to exchange payments on 32 Bcf of
natural gas and 365 MBbls of oil. At December 31, 1996 there were $3.0 million
of net unrealized and unrecognized hedging gains based on the difference
between the strike price and the New York Mercantile Exchange futures price
for the applicable trading month. In addition, there were $5.1 million of
realized losses on hedging activities which were deferred and will be applied
as a reduction in revenues in January 1997, the month of physical sale of
production.
CAPITALIZED COSTS
At January 1, 1997, estimated future net cash flows, before income taxes,
from EEX's owned proved oil and gas reserves, based on average December 1996
prices of $3.37 per Mcf of natural gas and $23.33 per barrel of oil were $3.9
billion. The net present value of such cash flows after income taxes and
discounted at 10%, was $1.7 billion, which is the basis for the SEC-prescribed
cost center ceiling for the full cost accounting method. The margin between
the cost center ceiling and the unamortized capitalized costs of U.S. oil and
gas properties was about $540 million at December 31, 1996.
Product prices, production rates, levels of reserves and estimates of future
development costs all influence the calculation of the cost center ceiling,
making it difficult to project. Gas and oil prices are subject to seasonal and
other fluctuations and, from time to time, may vary significantly. Product
prices generally have the greatest impact on the cost center ceiling. At
December 31, 1996, a $0.10 per Mcf change in the price of natural gas has
about a $45 million impact on the cost center ceiling; a $1.00 per barrel
change in the oil price has about a $20 million impact.
A-6
The SEC-prescribed full cost accounting rules require registrants to
calculate the cost center ceiling limitation at the end of each quarter using
current prices and costs. Prices for natural gas and oil have declined sharply
since the end of 1996. If there is not a substantial improvement in prices or
mitigating changes in the other factors involved in the calculation by the end
of the first quarter, the carrying value of EEX's oil and gas properties
almost certainly will be above the SEC-prescribed cost center ceiling. Such
conditions would necessitate a significant write-down of gas and oil
properties and a non-cash charge against earnings for the quarter. Based on
circumstances existing in March 1997 and without any pricing improvement or
mitigating changes, such a write-down could range from $225 to $250 million
after tax.
Management believes the low prices required to be used in the calculation
are not representative of the prices EEX will receive for its production in
the future. A non-cash write-down of oil and gas properties will reduce future
depreciation and amortization expense but will not impact future cash flows.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, EEX took certain actions to assure its liquidity and access to
financial resources to fund its investment and growth opportunities. EEX
renewed its $350 million revolving credit facility extending it to five years.
At December 31, 1996, $235 million was unused. EEX converted its Cooper
Project equipment leases, which had been with an ENSERCH affiliate, to fifteen
year leveraged leases with third party financial institutions for $229
million. EEX also arranged a $200 million, seven year operating lease
commitment from a group of banks to finance the construction of its share of
the Allegheny Project offshore equipment and facilities, of which $182 million
was unused at year end. EEX made minor changes in other facilities to ensure
continued availability of its financial resources to meet its planned
activities. See Note 7 of the Notes to Consolidated Financial Statements for
additional information.
CASH FLOWS
EEX funded the 1996 business plan and reduced financings by $74 million,
primarily from operations and monetization of non-core assets. Net cash flows
from operating activities increased $51 million to $135 million, compared with
$84 million in 1995 and $62 million in 1994. Investing activities required net
cash flows of $63 million in 1996, compared with $388 million in 1995 and $109
million in 1994. The 1995 requirement included $333 million required for the
DALEN acquisition and $86 million provided by the collection of a note
receivable from an affiliated company. Proceeds from the disposition of
property, plant and equipment in 1996 include amounts received from the sale
of the Rocky Mountain area and other properties. In 1995, proceeds include
amounts received from the sale of interests in the Cooper and Allegheny
projects. Capital expenditures of $204 million in 1996 increased $15 million
from 1995, principally related to normal exploration and development
activities.
EEX intends to utilize substantially all of its internally generated cash
flows for growth of the business and expects to have ample cash flow from
operations and the continuous monetization of non-core assets to fund its
business plans. Borrowings under EEX's credit facilities may be used to
supplement temporary cash flow needs. EEX does not anticipate paying cash
dividends in the foreseeable future.
CAPITAL STRUCTURE
Debt and preferred securities of a subsidiary represented 35% of total
capitalization of $1.5 billion for December 31, 1996, compared to 30% of total
capitalization of $1.3 billion for December 31, 1995. This increase was due
primarily to the conversion of the operating sublease to a capital lease when
the Cooper Project leases were refinanced, offset by reduced bank borrowings
and improved shareholders' equity. See Note 7 of the Notes to Consolidated
Financial Statements for additional information.
A-7
CAPITAL BUDGET
Planned 1997 capital expenditures will range from $175 million to $200
million, compared with actual expenditures of $204 million in 1996 and $189
million in 1995. Capital expenditure amounts exclude costs of offshore
equipment and facilities financed under operating lease arrangements of $25
million in 1996, $24 million in 1995, and are expected to be minimal in 1997.
FOURTH QUARTER RESULTS
Fourth quarter 1996 net income was $3.3 million ($.03 per share), compared
with a net loss of $5.4 million ($.04 per share) for the 1995 fourth quarter.
Operating income for the 1996 fourth quarter was $7.8 million versus an
operating loss of $4.7 million for the same period of 1995. The increased
fourth quarter 1996 income reflects a 44% increase in the average sales prices
per Mcfe from 1995 to 1996, partially offset by costs related to the Company's
pending separation from ENSERCH and associated management changes, and
increased amortization expense as previously noted.
A-8
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Enserch Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of Enserch
Exploration, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related statements of consolidated operations, cash flows and
owners' equity for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company at December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 10, 1997 (March 7, 1997 as
to the third paragraph of Note 4)
A-9
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Enserch Exploration, Inc. is responsible for the
preparation and integrity of the financial statements and other information
contained in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and include amounts that represent management's best estimates and judgments.
Management has established practices and procedures designed to support the
reliability of the estimates and minimize the possibility of a material
misstatement.
Management has established and maintains internal accounting controls that
provide reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition and the prevention and detection of fraudulent financial
reporting. The system of internal control is supported by written policies and
procedures and the control environment is regularly evaluated by both ENSERCH
Corporation's internal auditors and Deloitte & Touche LLP, the Company's
independent auditors. The Board of Directors maintains an Audit Committee
composed of Directors who are not employees. The Audit Committee meets
periodically with management, the independent auditors and the internal
auditors to discuss significant accounting, auditing, internal accounting
control and financial reporting matters related to Enserch Exploration, Inc.
The independent auditors and the internal auditors have free access to the
Audit Committee.
Management believes that, as of December 31, 1996, the overall system of
internal accounting controls is sufficient to accomplish the objectives
described herein.
Thomas M Hamilton J. Philip McCormick
Chairman, President Senior Vice
and Chief Executive President and Chief
Officer Financial Officer
February 10, 1997
A-10
ENSERCH EXPLORATION, INC.
STATEMENTS OF CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues
Natural gas..................... $ 221,239 $ 157,308 $ 144,550
Oil and condensate.............. 98,902 56,525 30,880
Natural gas liquids............. 8,150 4,859 2,377
Other........................... 2,150 2,159 1,333
------------- ------------- -------------
Total......................... 330,441 220,851 179,140
------------- ------------- -------------
Costs and Expenses
Production and operating........ 74,020 49,792 31,667
Exploration..................... 12,453 11,848 9,136
Depreciation and amortization... 150,435 116,614 80,819
Sale of inactive pipeline....... (7,551)
General, administrative and
other.......................... 34,995 29,937 19,807
Taxes, other than income........ 21,715 18,813 13,233
------------- ------------- -------------
Total......................... 293,618 227,004 147,111
------------- ------------- -------------
Operating Income (Loss)........... 36,823 (6,153) 32,029
Other Income (Expense)--Net....... 2,092 64 (314)
Interest Income................... 66 1,027 671
Interest and Other Financing
Costs............................ (22,667) (14,617) (20,919)
------------- ------------- -------------
Income (Loss) Before Income
Taxes............................ 16,314 (19,679) 11,467
Income Taxes (Benefit)............ 5,540 (7,177) (334)
------------- ------------- -------------
Net Income (Loss)................. $ 10,774 $ (12,502) $ 11,801
============= ============= =============
Pro Forma Information--Change in
Tax Status:
Income before income taxes...... $ 11,467
Income taxes (including income
taxes on partnership
operations).................... 3,990
-------------
Net Income...................... $ 7,477
=============
Net Income (Loss) Per Share (Pro
Forma for 1994).................. $ 0.09 $ (0.11) $ 0.07
============= ============= =============
Weighted Average Shares
Outstanding...................... 125,917 111,137 105,821
============= ============= =============
See Notes to Consolidated Financial Statements.
A-11
ENSERCH EXPLORATION, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)........................... $ 10,774 $ (12,502) $ 11,801
Depreciation and amortization............... 150,435 116,614 80,819
Deferred income taxes (benefit)............. 1,795 (9,520) (366)
Sale of inactive pipeline................... (7,551)
Other....................................... (12,625) (11,760) (10,332)
Changes in current operating assets and
liabilities
Accounts receivable....................... (10,808) (22,824) 3,464
Other current assets...................... (3,361) (6,199) (26,333)
Accounts payable.......................... (2,883) 33,854 11,894
Other current liabilities................. 1,579 (3,673) (1,714)
--------- --------- ---------
Net cash flows from operating activities.. 134,906 83,990 61,682
--------- --------- ---------
INVESTING ACTIVITIES
Additions of property, plant and equipment.. (204,363) (189,399) (132,590)
Proceeds from dispositions of property,
plant and equipment........................ 140,863 54,977 13,051
Purchase of DALEN, net of cash acquired..... (332,888)
Collection of note receivable from
affiliated company......................... 86,077
Other....................................... 507 (6,939) 10,755
--------- --------- ---------
Net cash flows used in investing
activities............................... (62,993) (388,172) (108,784)
--------- --------- ---------
FINANCING ACTIVITIES
Borrowings under bank revolving credit
agreement.................................. 136,000 380,000
Repayment of borrowings under bank revolving
credit agreement........................... (181,000) (220,000)
Changes in temporary advances with
affiliated companies....................... (28,993) (89,609) 76,331
Payments of capital lease obligations....... (3,832) (4,424)
Increase (Decrease) in advances under
leasing arrangements--net.................. 5,457 (32,771)
Borrowings under bridge loan................ 150,000
Repayment of DALEN bank debt assumed at
acquisition................................ (115,000)
Issuance of common stock.................... 249 207,940
Issuance of company-obligated mandatorily
redeemable preferred securities of
subsidiary................................. 150,000
Repayment of borrowings under bridge loan... (150,000)
Proceeds from long term notes payable to
affiliated companies....................... 11,000
Cash distributions paid..................... (7,842)
Other....................................... (3,413) 275
--------- --------- ---------
Net cash flows (used in) from financing
activities............................... (72,119) 305,494 46,993
--------- --------- ---------
Net Increase (Decrease) in Cash............... (206) 1,312 (109)
Cash at Beginning of Year..................... 1,546 234 343
--------- --------- ---------
Cash at End of Year........................... $ 1,340 $ 1,546 $ 234
========= ========= =========
See Notes to Consolidated Financial Statements.
A-12
ENSERCH EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
ASSETS
Current Assets
Cash................................................... $ 1,340 $ 1,546
Accounts receivable--trade (net of allowance for
possible losses of $1,351 and $1,814)................. 61,654 46,749
Accounts receivable--affiliated companies.............. 16,549 20,646
Temporary advances--affiliated companies............... 13,133
Other.................................................. 18,181 14,820
---------- ----------
Total current assets................................. 110,857 83,761
---------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties (full cost method, $233,478 and
$243,740 excluded from amortization base)............. 2,806,536 2,602,454
Other.................................................. 21,957 20,684
---------- ----------
Total................................................ 2,828,493 2,623,138
Less accumulated depreciation and amortization......... 1,081,845 952,538
---------- ----------
Net property, plant and equipment.................... 1,746,648 1,670,600
---------- ----------
Other Assets............................................. 14,634 22,471
---------- ----------
Total................................................ $1,872,139 $1,776,832
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade................................ $ 90,922 $ 95,386
Accounts payable--affiliated companies................. 8,924 6,836
Temporary advances--affiliated companies............... 15,860
Advances under leasing arrangements.................... 5,457
Current portion of capital lease obligations........... 3,250 3,859
Other.................................................. 10,584 9,005
---------- ----------
Total current liabilities............................ 119,137 130,946
---------- ----------
Bank Revolving Credit Agreement.......................... 115,000 160,000
---------- ----------
Capital Lease Obligations................................ 241,735 94,184
---------- ----------
Other Liabilities
Deferred income taxes.................................. 273,801 271,618
Other liabilities...................................... 28,249 37,856
---------- ----------
Total other liabilities.............................. 302,050 309,474
---------- ----------
Company--Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary................................ 150,000 150,000
Commitments and Contingent Liabilities (Notes 7 and 14)
Preferred Stock--authorized 2 million shares, none issued
at December 31, 1996, 15 shares issued to subsidiary at
December 31, 1995 (eliminated in consolidation)
Shareholders' Equity..................................... 944,217 932,228
---------- ----------
Total................................................ $1,872,139 $1,776,832
========== ==========
See Notes to Consolidated Financial Statements.
A-13
ENSERCH EXPLORATION, INC.
STATEMENTS OF OWNERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996(IN THOUSANDS)
Balance, December 31, 1993........................................... $ 630,685
Net income.......................................................... 11,801
Reorganization Adjustments
Assumption by ENSERCH Companies
Assets and obligations of offshore facilities and leases.......... (24,418)
EP's notes payable to other ENSERCH Companies and EPO............. 395,077
Accrued interest on notes payable................................. 12,566
Assumption of deferred income taxes by EEX........................ (289,703)
---------
Balance December 31, 1994............................................ $ 736,008
=========
COMMON STOCK
($1.00 PAR
VALUE,
AUTHORIZED 200
MILLION SHARES) UNAMORTIZED
---------------- RESTRICTED TOTAL
SHARES PAID IN STOCK TREASURY SHAREHOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT COMPENSATION STOCK EQUITY
------- -------- -------- -------- ------------ -------- -------------
Balance, December 31,
1994................... 105,821 $105,821 $630,187 $736,008
Net loss............... $(12,502) (12,502)
Adjustment for
acquisition of
international and
SACROC operations..... (2,798) (2,798)
Additional deferred
income tax benefit
from reorganization... 3,480 3,480
Common shares issued
for
Cash sale to public.... 20,000 20,000 187,872 207,872
Stock plans............ 6 6 62 68
Unamortized restricted
stock compensation
Shares granted......... 56 56 617 $ (673)
Amortization........... 100 100
Market valuation
adjustments........... (22) 22
------- -------- -------- -------- ------- ----- --------
Balance, December 31,
1995................... 125,883 125,883 819,398 (12,502) (551) 932,228
Net income............. 10,774 10,774
Common shares issued
for stock plans....... 24 24 225 249
Unamortized restricted
stock compensation
Shares granted......... 137 137 1,145 (1,190) 92
Restrictions lifted.... 756 756
Awards canceled (25
thousand shares)...... 230 $(230)
Amortization........... 132 132
Market valuation
adjustments........... 40 (54) (14)
------- -------- -------- -------- ------- ----- --------
Balance, December 31,
1996................... 126,044 $126,044 $820,808 $ (1,728) $ (677) $(230) $944,217
======= ======== ======== ======== ======= ===== ========
See Notes to Consolidated Financial Statements.
A-14
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enserch Exploration, Inc. (EEX), a natural gas and oil exploration and
production company with activities focused in Texas and the Gulf of Mexico, is
83.3% owned by ENSERCH Corporation (ENSERCH) at year end 1996. All dollar
amounts, except per share amounts, in the notes to consolidated financial
statements are stated in thousands unless otherwise indicated.
1. ORGANIZATION AND BASIS OF PRESENTATION
Prior to December 30, 1994, the operations of EEX, a corporation, were
conducted through Enserch Exploration Partners, Ltd. (EP), a partnership. EP
was a publicly traded entity with published financial statements. On December
30, 1994, through a series of transactions, EEX acquired all of the
partnership interests of EP Operating Limited Partnership (EPO), the 99% owned
operating partnership of EP, and EP received common stock of EEX. Certain
affiliates of ENSERCH other than EEX (collectively, the "ENSERCH Companies")
also received EP's interest in and assumed EP's obligations under certain
equipment lease arrangements (the equipment was simultaneously subleased to
EEX) and assumed approximately $395 million principal amount of EP's
indebtedness, plus accrued interest.
In 1995, EEX acquired the international gas and oil and SACROC operations
from ENSERCH in exchange for cash and EEX Common Stock. ENSERCH's historical
carrying value of the assets acquired and liabilities assumed has been
recorded by EEX.
The financial statements of EEX for periods prior to December 30, 1994
include the assets, liabilities, operations and cash flows of EP, restated to
include the international gas and oil operations and the SACROC operations in
a manner similar to a pooling-of-interests since the operations were under the
common control of ENSERCH prior to the establishment of EEX. No recognition
was given to income taxes in the financial statements of EP. EEX, as a
corporation, is a taxable entity. Pro forma information for the change in tax
status includes an adjustment for income taxes on the partnerships' operations
at the applicable statutory rate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of EEX and its
subsidiaries. The preparation of financial statements requires the use of
significant estimates and assumptions by management; actual results could
differ from those estimates.
Earnings per share applicable to common stock are based on the weighted
average number of common shares outstanding during the period, including
common equivalent shares when dilutive.
Gas and Oil Properties--The full cost accounting method as prescribed by the
Securities and Exchange Commission (SEC) is followed for gas and oil
properties. Under this method, all acquisition, exploration and development
costs incurred, including salaries, benefits and other internal costs directly
attributable to these activities, are capitalized. All costs associated with
production and general corporate activities are expensed in the period
incurred. Costs directly associated with the acquisition and evaluation of
unproved gas and oil properties are excluded from the amortization base until
the related properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full cost
amortization base when appropriate. Amortization of evaluated gas and oil
properties, including assets acquired under capital leases, is computed on the
unit of production method using estimated proved gas and oil reserves
quantified on the basis of their equivalent energy content. Depreciation of
other property, plant and equipment is provided principally by the straight
line method over the estimated service lives of the related assets. At
December 31, 1996, estimates of future site restoration, dismantlement and
abandonment costs, as assessed on an overall cost center basis, were less than
estimates of future salvage values. Therefore, no accruals were required.
A-15
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Derivative Instruments--The Company frequently enters into swaps, futures,
options and other derivative contracts to hedge the impact of market
fluctuations in gas and oil prices on anticipated future gas and oil
production. The Company defers the impact of changes in the market value of
the contracts that serve as hedges until the related transaction is completed.
The Company also enters into interest rate swaps to manage risk associated
with interest rates and reduce the Company's exposure to interest rate
fluctuations. Interest rate swaps are valued on a periodic basis, with
resulting differences recognized as an adjustment to interest and other
financing costs over the term of the agreement.
Stock Based Employee Compensation--Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," (SFAS123)
encourages, but does not require companies to record compensation cost for
stock based employee compensation plans at fair value. EEX has chosen to
continue to account for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of EEX's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The final compensation cost for
restricted stock awards is based on the quoted market price of EEX's stock at
the date the award becomes vested (See Note 9).
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $23,422 in 1996,
$11,890 in 1995 and $20,248 in 1994. Net cash income taxes paid were $1,530 in
1996 and $6,011 in 1995.
The table below summarizes non cash investing and financing activities:
1996 1995 1994
-------- -------- --------
Capital asset and lease obligations assumed.... $150,775 $155,855
======== ========
Capital asset and lease obligations assumed by
others........................................ $(53,388)
========
Purchase of DALEN
Fair value of assets acquired.................. $474,755
Cash paid for acquisition...................... 332,888
--------
Liabilities assumed............................ $141,867
========
4. MERGER WITH LONE STAR ENERGY PLANT OPERATIONS, INC.
On April 15, 1996, ENSERCH announced that it had entered into a merger
agreement with Texas Utilities Company (TUC), subject to shareholder and
regulatory approval. The merger is to be preceded by the distribution of
ENSERCH's approximate 83% interest in EEX to the ENSERCH shareholders.
In connection with this distribution, EEX will merge with Lone Star Energy
Plant Operations, Inc. (LSEPO), a subsidiary of ENSERCH. LSEPO operates and
maintains, under long term contracts, three cogeneration facilities. The value
of LSEPO was fixed at $7.0 million, which includes an ENSERCH working capital
guarantee of $3.5 million. The number of shares issued by the merged entity in
exchange for the outstanding LSEPO common stock will be determined by dividing
$7 million by the average of the closing sales price of EEX common stock for
the 15 trading days preceding the fifth trading day prior to the effective
time of the merger. An average market price for EEX shares of $9.00 per share
(778,000 shares) was assumed to determine the pro forma shares outstanding and
pro forma earnings per share of the combined entities.
A-16
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 15, 1996, in separate meetings, the shareholders of TUC, ENSERCH
and EEX approved the mergers and the related distribution. All regulatory
approvals have been received except for the approval by the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935 where
the approval process is proceeding. The Antitrust Division of the U.S.
Department of Justice (DOJ) has notified ENSERCH and TUC that its
investigation of the proposed merger has been closed without the DOJ taking
any action or requiring ENSERCH or TUC to take any action. In a private letter
ruling, the Internal Revenue Service notified ENSERCH that neither ENSERCH nor
its shareholders will recognize taxable gain in the distribution of EEX stock.
Following is a summary of pro forma combined results of operations of EEX
and LSEPO:
1996 1995 1994
-------- -------- --------
Revenues....................................... $337,953 $237,358 $191,866
Operating Income (Loss)........................ 38,299 (3,904) 33,432
Net Income (Loss).............................. 11,707 (11,132) 12,614
Net Income (Loss) After Pro Forma Income Taxes
on Partnership Operations..................... 11,707 (11,132) 8,290
Net Income (Loss) Per Share.................... .09 (.10) .08
5. DALEN ACQUISITION
On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
(DALEN) for cash of $340 million and assumed DALEN's bank debt of $115
million. The acquisition was accounted for as a purchase. The assets acquired
and the liabilities assumed were recorded at their estimated fair values.
Essentially all of the valuation adjustment was assigned to gas and oil
properties.
Assuming the DALEN acquisition had occurred at the beginning of 1995, EEX
pro forma 1995 results of operations would include revenues of $269,175; an
operating loss of $5,746; a net loss of $22,201 and a net loss per share of
$0.20.
6. BORROWINGS AND CREDIT AGREEMENTS
EEX has a $350 million revolving credit line with a group of banks that
matures on August 1, 2001, of which $235 million was unused at December 31,
1996. The revolving credit agreement limits, at all times, total debt, as
defined, to the lesser of 60% of capitalization, as defined, or $900 million,
and prohibits liens on property except under certain circumstances. The
interest rate ranges from the London Inter-Bank Offered Rate (LIBOR) (5.61% in
effect at December 31, 1996) plus .35% to .75% per annum, plus a facility fee
of from .15% to .25% per annum, depending upon the consolidated capitalization
ratio.
EEX has a $50 million borrowing arrangement with ENSERCH to meet short term
cash needs. Under this arrangement, ENSERCH may advance funds to EEX, and EEX
may advance funds to ENSERCH. At December 31, 1996, EEX had a receivable from
ENSERCH of $13 million under this arrangement with interest based on LIBOR
(5.6% at December 31, 1996). This agreement will terminate upon the merger of
ENSERCH and TUC.
1996 1995 1994
------- ------- -------
Interest and Other Financing Costs:
Interest costs incurred......................... $29,123 $19,531 $25,678
Interest capitalized............................ (6,456) (4,914) (4,759)
------- ------- -------
Interest charged to expense..................... $22,667 $14,617 $20,919
======= ======= =======
A-17
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS
The equipment and facilities used in developing and producing reserves in
the Mississippi Canyon Block 441 and the Cooper Project were originally
financed under equipment leases between certain financial institutions and
EPO. In connection with the merger of EPO into EEX, the leases were assigned
to and assumed by Enserch Exploration Holdings, Inc. (EEH), wholly owned by
ENSERCH. EEX entered into three subleases with EEH for such offshore
facilities. For accounting purposes, one of the leases was an operating lease,
and two were capital leases.
A component of the payments to be made by EEX under the subleases was based
on a floating interest rate of LIBOR plus 1.50% per annum. However, effective
November 1995, ENSERCH entered into an interest rate swap on a notional amount
of $150 million to fix its costs and agreed to fix the interest rate to EEX
accordingly at 7.2% (see Note 10).
In October 1996, the Mississippi Canyon Block 441 equipment and facilities
were refinanced through certain financial institutions. EEX simultaneously
entered into a lease of the facilities which extends through October 2001. For
accounting purposes, this lease is classified as a capital lease. EEX has an
option to purchase the facilities for a fixed amount at the early buy-out date
of July 22, 2000, or for fair market value at the end of the lease term. There
are no renewal options. Interest on the lease was fixed at 6.97%.
In December 1996, the Cooper Project equipment and facilities were
refinanced through certain financial institutions. EEX simultaneously entered
into two leases of the facilities extending through December 30, 2010, with
the option to renew the leases, with the consent of the lessors, for up to
five years. For accounting purposes, these leases are classified as capital
leases. The Company has the option to purchase the facilities for fair market
value on any renewal date, or for fixed amounts or fair market value at the
end of the initial lease term. The leases also contain two early buy-out
option dates on which the Company may purchase the facilities for fixed
amounts, and other special purchase options. Interest on the leases was fixed
at 6.51%. EEX is currently required to maintain a $65 million letter of credit
in support of the equity owners of the leased facilities.
In June 1996, EEX entered into an operating lease arrangement to provide
financing for the offshore platform and related facilities of its 40% owned
Green Canyon 254 (Allegheny) project. The lessor will fund the construction
cost of the facilities quarterly, up to a maximum of $200 million. As of
December 31, 1996, a total of $18 million had been advanced to EEX under the
lease as agent for the lessor, $5.5 million of which was unexpended and
reflected as a current liability. EEX will lease the facilities for an initial
period through June 29, 2003, with the option to renew the lease, with the
consent of the lessor, for up to three successive three year periods. EEX, as
agent for the lessors, will acquire, construct, and operate the leased
property and has guaranteed completion of construction of the facilities. EEX
has the option to purchase the facilities at the end of the initial lease term
and has guaranteed an estimated residual value of approximately $160 million,
assuming the full lease amounts are advanced and expended, should the lease
not be renewed. Lease payments are being deferred during the construction
period and will be amortized when production begins.
EEX also leases buildings and office space under noncancelable operating
leases that expire at various dates through 2002.
A-18
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Estimated future minimum payments under noncancelable operating and capital
leases with initial or remaining terms of one year or more at December 31,
1996 are as follows:
OPERATING CAPITAL
LEASES LEASES
--------- --------
1997..................................................... $ 5,083 $ 12,222
1998..................................................... 4,456 23,346
1999..................................................... 2,673 25,147
2000..................................................... 3,535 30,948
2001..................................................... 4,328 25,998
Thereafter............................................... 17,777 236,705
------- --------
Total.................................................. $37,852 354,366
=======
Less interest factor................................... 109,381
--------
Capital lease obligations.............................. $244,985
========
Assets recorded under capital leases are as follows:
1996 1995
-------- --------
Property and equipment................................... $249,699 $102,467
Accumulated depreciation and amortization................ (9,560) (3,450)
-------- --------
Net.................................................... $240,139 $ 99,017
======== ========
The Company also bears an allocated share of rental expenses incurred by
ENSERCH companies under noncancelable long-term operating leases, principally
for office space and equipment. Rental expenses incurred under all operating
leases totaled $21,110, $6,468 and $3,102 in 1996, 1995 and 1994,
respectively.
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
On August 4, 1995, a subsidiary (Issuer), whose common equity interests are
wholly owned by EEX Capital L.L.C. (Capital), a limited liability company
wholly owned by EEX, completed the private placement of $150 million of
adjustable rate mandatorily redeemable preferred securities. Issuer is a
special purpose finance subsidiary and neither Issuer nor Capital has
operations independent from EEX. The proceeds were loaned, under a Demand
Note, by Issuer to Capital. Capital used the proceeds to purchase preferred
stock from EEX and EEX repaid the bridge loan. In 1996 EEX repurchased at par
the fifteen shares held by Capital for $150 million through the issuance of a
demand note in that amount. This demand note is eliminated in consolidation.
Issuer's preferred securities are reflected on the balance sheet as "Company-
obligated mandatorily redeemable preferred securities of subsidiary." Interest
payments on the EEX demand note support the interest payments due under the
Demand Note loan agreement which, in turn, support the dividend requirements
of Issuer's preferred securities. Dividends on Issuer's preferred securities
are based on LIBOR plus 0.5% to 1.0% per annum and are reflected in interest
and other financing costs in the statements of consolidated operations. In
late 1995, EEX entered into an interest rate swap which effectively fixes the
rate for the dividend on these preferred securities at 6.37% as of December
31, 1996 (see Note 10). EEX has guaranteed Capital's obligations under the
Demand Note. The mandatory redemption date for Issuer's preferred securities
is the earlier of August 4, 2005 or the Demand Note repayment date.
9. STOCK PLANS
The Company's Revised and Amended 1996 Stock Incentive Plan (the "Plan"),
provides for awards to officers, directors and key employees of restricted
stock, stock options to purchase shares of common stock of
A-19
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EEX, or a combination of both. EEX has reserved 3,698,500 shares of its common
stock for issuance under the Plan. Options granted under the Plan have an
exercise price of not less than the fair market value of the common stock on
the grant date. Options become exercisable over four years and expire after
ten years. The terms for the release of restrictions on awards of restricted
stock may be performance based, time based, or a combination of both, and each
award may have different restrictions and conditions.
The following is a summary of stock option activity under the Plan:
1996 1995
------------------ ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- ------- --------
Outstanding--Beginning of year........... 170,000 $10.94 -- --
Granted................................ 1,066,500 9.33 173,000 $10.92
Exercised.............................. 10,000 9.75 -- --
Canceled............................... 255,000 9.50 3,000 9.75
--------- ------ ------- ------
Outstanding--End of year................. 971,500 $ 9.56 170,000 $10.94
========= ====== ======= ======
The following is a summary of Plan stock options outstanding at December 31,
1996:
EXERCISABLE OPTIONS
WEIGHTED ---------------------
NUMBER AVERAGE WEIGHTED WEIGHTED
RANGE OF OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OF EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OPTIONS PRICE
------------- ----------- ------------ -------- ---------- ----------
$8.81-$9.75 927,500 10 $ 9.34 257,500 $ 9.73
$12.69-$14.50 44,000 8 $14.34 44,000 $ 14.34
------- ----------
971,500 301,500
======= ==========
A summary of restricted stock award activity follows:
NUMBER OF SHARES
-----------------
1996 1995
-------- --------
Outstanding -- Beginning of year............................ 56,000 --
Awarded................................................... 137,000 56,000
Restrictions Lifted....................................... 98,000 --
Canceled.................................................. 25,000 --
-------- -------
Outstanding -- End of year.................................. 70,000 56,000
======== =======
The weighted average grant date fair value of restricted stock awarded
during 1996 was $9.36. Fair value is equal to the common stock fair market
value on the grant date. On September 10, 1996, the Board of Directors
approved the Preliminary Plan of Merger with LSEPO. As a result, all
restrictions on outstanding shares awarded prior to that date were lifted.
In 1996 the Company adopted the Employee Stock Option Plan for eligible
employees not covered by the Plan described above. Stock options granted to
purchase shares of EEX common stock have an exercise price of not less than
the fair market value of the common stock on the grant date. EEX has reserved
1.3 million shares for issuance under this plan. Options become exercisable
over three years and expire after ten years. In 1996, the
A-20
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company granted 1,102,450 options at a weighted average exercise price of
$11.00. No options were exercised or canceled in 1996 and none were
exercisable at December 31, 1996. Exercise prices range from $10.69 to $11.25
and these options have a weighted average remaining contractual life of 10
years.
Total compensation cost recognized in income for 1996 and 1995 for stock
based employee compensation awards was immaterial. Had compensation cost for
the Company's plans been determined based on the fair value at the grant dates
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
1996 1995
------- --------
Net income (loss) As reported................... $10,774 $(12,502)
Pro forma..................... $ 9,682 $(12,603)
Net income (loss) per share As reported................... $ .09 $ (0.11)
Pro forma..................... $ .08 $ (0.11)
The effects of applying SFAS123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated.
The weighted average grant date fair value of options granted during 1996
was $4.72. Fair value of options was calculated by using the Black-Scholes
options pricing model using the following weighted average assumptions for
1996 activity: risk free interest rate of 6.17%, expected life of 6 years,
expected volatility of 37% and no dividend yield.
10. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's operations involve managing market risks related to changes in
interest rates and commodity prices. Derivative financial instruments,
specifically swaps, futures, options and other contracts, are used to reduce
and manage those risks.
Interest Rate Swaps--In November 1995, the Company entered into an interest
rate swap on a notional amount of $150 million to fix the interest rate
associated with the company-obligated mandatorily redeemable preferred
securities of subsidiary (see Note 8). The notional amount declines on a
schedule that parallels the estimated redemption of the securities and
terminates in July 2000. Under the swap agreement, EEX is to receive interest
on the outstanding notional amount at a rate (5.53% in effect at December 31,
1996) based on LIBOR, reset quarterly, and is to pay a fixed rate of 5.8%. The
net effect of the swap fixes the rate on the preferred dividends at 6.37% at
December 31, 1996. The Company is exposed to market risk under this swap
agreement due to the possibility of exchanging a lower interest rate for a
higher interest rate. The counter-parties are major financial institutions,
and the risk of incurring losses related to credit risk is considered by the
Company to be remote.
In December 1996, in connection with the refinancing of the Cooper Project
leasing arrangements (See Note 7), the Company recognized a $1.4 million after
tax ($2.2 million pre-tax) gain on the settlement of the related interest rate
swap which had been in effect since December 1995 on a notional amount of $150
million.
Commodity Hedging Activities--The Company enters into swaps, futures and
other derivative contracts to hedge the price risks associated with a portion
of anticipated future gas and oil production. Under these agreements, payments
are received or made based on the differential between a fixed and a variable
product price. These agreements are settled in cash at or prior to expiration
or exchanged for physical delivery contracts. The Company does not obtain
collateral to support the agreements but monitors the financial viability of
counter-parties and believes its credit risk is minimal on these transactions.
In the event of nonperformance by
A-21
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
counter-parties, the Company would be exposed to price risk. The Company has
some risk of accounting loss since the price received for the product at the
actual physical delivery point may differ from the prevailing price at the
delivery point required for settlement of the hedging transaction.
Gas and oil hedging activities reduced revenues $20 million in 1996 and
increased revenues $.1 million and $4.3 million in 1995 and 1994,
respectively.
At December 31, 1996, EEX had outstanding swaps, collars and futures
agreements that were entered into as hedges extending through December 31,
1997 to exchange payments on 32 Bcf of natural gas and 365 MBbls of oil. The
weighted average strike price and market price per Mcf of natural gas was
$2.47 and $2.37, respectively, and the weighted average strike price and
market price per barrel of oil was $25.00 and $25.32, respectively. At
December 31, 1996 there were $3.0 million of net unrealized and unrecognized
hedging gains based on the difference between the strike price and the New
York Mercantile Exchange futures price for the applicable trading month. In
addition, there were $5.1 million of realized losses on hedging activities
which were deferred and will be applied as a reduction in revenues in January
1997, the month of physical sale of production.
Fair Value of Financial Instruments--At December 31, 1996, the estimated
proceeds the Company would have received to terminate or otherwise settle gas
and oil swaps, collars and futures agreements were $3.0 million and interest
rate swaps were $.9 million, which represented their fair value. The fair
value of all other financial instruments at December 31, 1996 and 1995,
including the revolving credit agreement and the company-obligated mandatorily
redeemable preferred securities of subsidiary, approximated carrying value.
11. INCOME TAXES
For periods prior to 1995, except for international and SACROC operations,
the Company operated as a partnership, and the income or loss of the
partnership was includable in the tax returns of the individual partners.
Accordingly, no recognition was given to income taxes on partnership
operations. EEX, as a corporation, is a taxable entity; its operations are
included in ENSERCH's consolidated federal income tax return. Pursuant to a
tax sharing agreement, EEX and ENSERCH make or receive payments determined as
though EEX and its subsidiaries filed a separate consolidated federal income
tax return. The accompanying statements of operations for periods prior to
1995 include a pro forma provision for income taxes on the partnership
operations based on the applicable corporate federal statutory rate.
PROVISION (BENEFIT) FOR INCOME TAXES:
1996 1995 1994
------ ------- -----
Federal:
Current............................................. $3,745 $ 2,343 $ 32
Deferred............................................ 1,795 (9,520) (366)
------ ------- -----
Total............................................. $5,540 $(7,177) $(334)
====== ======= =====
A-22
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECONCILIATION OF INCOME TAXES (BENEFIT) COMPUTED AT THE FEDERAL STATUTORY
RATE TO PROVISION FOR INCOME TAXES (BENEFIT):
Income (loss) before income taxes:
Domestic..................................... $18,808 $(15,578) $12,623
Foreign...................................... (2,494) (4,101) (1,156)
------- -------- -------
Total...................................... $16,314 $(19,679) $11,467
======= ======== =======
Income taxes (benefit) computed at the federal
statutory rate of 35%......................... $ 5,710 $ (6,888) $ 4,013
Percentage depletion........................... (334) (322) (23)
Other--net..................................... 164 33
------- -------- -------
Total pro forma income taxes (benefit)..... 5,540 (7,177) 3,990
Less pro forma income taxes (benefit)
applicable to partnership operations.......... (4,324)
------- -------- -------
Provision for income taxes (benefit)....... $ 5,540 $ (7,177) $ (334)
======= ======== =======
The deferred tax effect of the difference in financial accounting basis and
income tax basis of EEX's assets and liabilities at December 31, 1996 and 1995
was as follows:
1996 1995
------------------------------- ------------------------------
TOTAL CURRENT NONCURRENT TOTAL CURRENT NONCURRENT
-------- ------- ---------- -------- ------- ----------
Deferred Tax Assets:
Retirement and other
employee benefit
obligations.......... $ 968 $ 625 $ 343 $ 1,177 $ 426 $ 751
Accruals and
allowances........... 473 473 931 230 701
Losses of controlled
foreign
corporations......... 8,079 8,079 7,367 7,367
All other............. 647 647 332 332
-------- ------- -------- -------- ----- --------
Total............... $ 10,167 $ 1,098 $ 9,069 $ 9,807 $ 656 $ 9,151
-------- ------- -------- -------- ----- --------
Deferred Tax
Liabilities:
Exploration and
intangible
development costs.... 187,501 187,501 209,443 209,443
Property-related
differences.......... 95,369 95,369 71,326 71,326
-------- ------- -------- -------- ----- --------
Total............... 282,870 282,870 280,769 280,769
-------- ------- -------- -------- ----- --------
Net deferred tax
liability (asset)...... $272,703 $(1,098)(a) $273,801 $270,962 $(656)(a) $271,618
======== ======= ======== ======== ===== ========
- --------
(a) Included in other current assets in the balance sheet.
12. EMPLOYEE BENEFIT PLANS
At December 31, 1996, substantially all employees were covered by an ENSERCH
pension plan, and some retirees are eligible for varying levels of health care
and life insurance benefits. Employees hired after July 1, 1989 are not
eligible for medical benefits when they retire. The allocation of the costs of
these plans is actuarially determined. As a result of ENSERCH's pending
distribution of EEX stock to ENSERCH Corporation shareholders (see Note 4),
the Company intends to establish new plans which will provide substantially
the same benefits as the ENSERCH plans.
A-23
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE BENEFIT PLAN COSTS (in millions):
1996 1995 1994
------- ------- -----
Pension--ENSERCH................................ $ 3.5 $ 4.5 $ 6.5
--Allocated to EEX................................ .8 .6 1.2
Postretirement health care and
life insurance--ENSERCH........................ $ 9.8 $ 9.8 $10.2
--Allocated to EEX............................. .8 .8 .8
ENSERCH PENSION PLAN INFORMATION:
Valuation Assumptions:
Discount rate................................... 7.75% 7.65% 9.00%
Rate of increase in compensation levels......... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets..... 9.50% 9.50% 9.50%
Amounts Recognized (in millions):
Actuarial present value of pension benefit
obligation:
Vested benefit obligation...................... $(302.4) $(297.0)
======= =======
Accumulated benefit obligation................. $(305.0) $(299.3)
======= =======
Projected pension benefit obligation........... $(333.9) $(327.9)
Plan assets at fair value....................... 285.8 263.1
------- -------
Projected benefit obligation in excess of plan
assets......................................... (48.1) (64.8)
Unrecognized net asset at transition............ ( 3.4) (6.0)
Unrecognized prior service cost (credit)........ ( 3.6) (3.5)
Unrecognized net actuarial loss................. 3.4 16.9
------- -------
ENSERCH accrued pension cost.................... $ (51.7) $ (57.4)
======= =======
EEX accrued pension cost........................ $ (4.9) $ (4.3)
======= =======
ENSERCH POSTRETIREMENT BENEFIT INFORMATION:
Valuation Assumptions:
Discount rate................................... 7.75% 7.65% 9.00%
Medical cost trend rate......................... 6.50% 7.00% 12.00%
Amounts Recognized (in millions):
Accumulated postretirement benefit obligation... $ (73.2) $ (75.5)
Unrecognized obligation at transition........... 53.0 58.1
Unrecognized net actuarial loss................. 10.7 10.0
------- -------
ENSERCH accrued postretirement benefit cost..... $ (9.5) $ (7.4)
======= =======
EEX accrued postretirement benefit cost......... $ (1.0) $ (.7)
======= =======
The assumed health care cost trend rate is 6.5% for 1996, declining
gradually to 4.5% after 1999, and remaining at that level thereafter. If the
health care cost trend rate were increased by 1%, the accumulated
postretirement benefit obligation of ENSERCH as of December 31, 1996 and the
net periodic postretirement benefit costs of ENSERCH for 1996 would be
increased by $4.2 million and $.3 million, respectively.
Investment Plan--At December 31, 1996 ENSERCH provided a voluntary
contributory investment plan that was available to substantially all employees
of the Company. The Company's share of costs under the plan was
A-24
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$425, $304 and $236 in 1996, 1995 and 1994, respectively. The Company intends
to establish a new plan with substantially the same provisions as the ENSERCH
plan.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company engages in various
transactions with ENSERCH and its affiliates. The Company is charged for
direct costs incurred by ENSERCH Companies that are associated with managing
the Company's business and operations. Additionally, the Company is charged
for indirect costs including the general and administrative staff costs
incurred by ENSERCH in performing accounting, treasury, internal audit, income
tax planning and compliance, legal, information systems, human resources and
other functions. Prior to July 1, 1994, the Company was not charged for the
cost of ENSERCH elected officer management of these functions. Costs are
determined on a basis that reasonably reflects the actual costs of services
performed for EEX and may include allocations based on such factors as net
capital employed, the number of employees or the percentage of time spent on
projects or services. ENSERCH charges for all indirect costs amounted to
$4,510, $2,725 and $2,162 in 1996, 1995 and 1994, respectively. Effective
January 1, 1997 responsibility for all management and administrative functions
previously performed by ENSERCH, along with selected ENSERCH employees, were
transferred to EEX and the ENSERCH allocations were discontinued.
The Company had sales to certain ENSERCH companies (Enserch Energy Services,
Inc., Lone Star Gas Company and Enserch Processing Company) that aggregated
$86,235, $87,002 and $110,036 in 1996, 1995 and 1994, respectively.
EEX incurred interest costs, including amounts capitalized, of $72, $3,389
and $21,579 in 1996, 1995 and 1994, respectively, on borrowings from ENSERCH
Companies.
Interest income on notes receivable from ENSERCH Companies was $66, $1,027
and $671 in 1996, 1995 and 1994, respectively.
See Note 1 for information concerning transactions with ENSERCH companies in
connection with the organization of the Company and Note 7 for information
concerning lease transactions with affiliates.
14. CONTINGENT LIABILITIES
Legal Proceedings--On March 23, 1994, a lawsuit was brought in the 299th
District Court of Harris County, Texas against EPO (the Company's predecessor)
and five other defendants by 19 royalty owners under leases contained within
the Corby Gas Unit in Leon County, Texas. Defendants are working interest
owners and lessees under the leases. The plaintiffs allege causes of action
involving breach of express and implied obligations under the leases,
drainage, failure to explore and develop for gas and oil under the leases,
civil conspiracy, tortious interference with contractual relationships,
specific performance, negligence and conversion. The plaintiffs seek to
recover alleged actual damages in excess of $5.4 million, punitive damages of
at least ten times the actual damages, if any, found by a jury, interest and
attorneys' fees. The Company owned a 7.1% interest in these leases.
A lawsuit was filed against ENSERCH, its utility division, EPO and EPO's
managing general partner in the 348th Judicial District Court of Tarrant
County in May 1989. Plaintiffs seek unspecified actual damages and punitive
damages in the amount of $5 million. Plaintiffs allege royalties were not
fully paid, certain expenses were improperly charged against the amount of
royalties due, negligence in the venting of gas and liquid hydrocarbons into
the air, and breach of duty of good faith and fair dealing by wrongfully
concealing certain material facts concerning sales of gas from the subject
leases to the utility division.
A-25
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A lawsuit was filed on February 24, 1987, in the 112th Judicial District of
Sutton County, Texas, against certain subsidiaries and affiliates of ENSERCH,
including predecessors of EEX. The plaintiffs initially claimed that
defendants failed to make certain production and minimum purchase payments
under a gas purchase contract. In this connection, the plaintiffs have alleged
a conspiracy to violate purchase obligations, improper accounting of amounts
due, fraud, misrepresentation, duress, failure to properly market gas and
failure to act in good faith. Under amended pleadings filed in January, 1997,
plaintiffs have added allegations of negligence and gross negligence in
connection with the measurement of gas, and conversion. Plaintiffs seek actual
damages in excess of $5 million and punitive damages in an amount equal to
0.5% of the consolidated gross revenues of ENSERCH for the years 1982 through
1986 (approximately $85 million), interest, costs and attorneys' fees.
On April 17, 1996, a subsidiary of EEX was made a third party defendant in a
lawsuit filed in the United States District Court for the Central Division of
Utah. The original suit was instituted to quiet title to an oil and gas lease
in Carbon County, Utah, which had been assigned to the plaintiffs by the
subsidiary. The defendants, previous assignees of the lease, are seeking
damages of $10 million from the subsidiary in the event the defendants lose
their rights to the lease.
Management believes that the named defendants have meritorious defenses to
the claims made in these and other actions brought in the ordinary course of
business. In the opinion of management, the Company will incur no liability
from these and all other pending claims and suits that is material for
financial reporting purposes.
Environmental Matters--The Company is subject to federal, state and local
environmental laws and regulations that regulate the discharge of materials
into the environment. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The level of future expenditures
for environmental matters, including costs of obtaining operating permits,
equipment monitoring and modifications under the Clean Air Act and cleanup
obligations, cannot be fully ascertained until the regulations that implement
the applicable laws have been approved and adopted. It is management's opinion
that all such costs, when finally determined, will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
15. SUPPLEMENTARY GAS AND OIL INFORMATION
Gas and Oil Producing Activities--The following tables set forth information
relating to gas and oil producing activities of EEX. Reserve data for natural
gas liquids attributable to leasehold interests owned by the Company are
included in oil and condensate.
CAPITALIZED COSTS 1996 1995
----------------- ---------- ----------
Proved gas and oil properties......................... $2,573,058 $2,358,714
Unproved gas and oil properties....................... 233,478 243,740
---------- ----------
Total............................................... $2,806,536 $2,602,454
========== ==========
Accumulated depreciation and amortization............. $1,066,771 $ 940,356
========== ==========
A-26
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1996 1995 1994
--------------- --------------- ---------------
NON- NON- NON-
COSTS INCURRED U.S. U.S. U.S. U.S. U.S. U.S.
-------------- -------- ------ -------- ------ -------- ------
Property acquisition costs:
Proved....................... $ 3,165 $356,326 $ 1,562
Unproved..................... 23,425 132,744 20,591
Exploration costs.............. 84,603 $2,781 68,321 $9,000 60,145 $3,076
Development costs.............. 100,395 628 77,601 56,767
-------- ------ -------- ------ -------- ------
Total...................... $211,588 $3,409 $634,992 $9,000 $139,065 $3,076
======== ====== ======== ====== ======== ======
Amortization (per MMBtu) (a)... $ 1.08 $ .98 $ .96
======== ======== ========
- --------
(a) Amortization expense per unit of production converted to a common unit of
measure, millions of British thermal units (MMBtu); on a per thousand
cubic feet of gas equivalent (Mcfe) basis, the amounts are: $1.09, $1.00
and $.98
Costs Excluded from the Amortizable Base as of December 31, 1996:
YEAR INCURRED TOTAL AT
------------------------ PRIOR DECEMBER 31,
1996 1995 1994 YEARS 1996
------- -------- ------- ------- ------------
Property acquisition costs...... $19,168 $ 56,520 $15,640 $ 1,261 $ 92,589
Exploration costs............... 21,825 14,243 10,504 2,733 49,305
Development costs............... 7,747 28,476 33,222 10,283 79,728
Interest capitalized............ 5,257 3,491 1,719 1,389 11,856
------- -------- ------- ------- --------
Total......................... $53,997 $102,730 $61,085 $15,666 $233,478
======= ======== ======= ======= ========
Approximately 51% of excluded costs relates to offshore activities in the
Gulf of Mexico, about 45% is domestic onshore exploration activities and the
remainder is non-U.S. The anticipated timing of the inclusion of these costs
in the amortization computation will be determined by the rate at which
exploratory and development activities continue, which are expected to be
accomplished within ten years.
The following information is required and defined by the Financial
Accounting Standards Board. The disclosure does not represent the results of
operations based on historical financial statements. In addition to requiring
different determinations of revenues and costs, the disclosure excludes
interest expense and corporate overhead.
1996 1995 1994
---------------- ---------------- --------------
NON- NON- NON-
U.S. U.S. U.S. U.S. U.S. U.S.
-------- ------- -------- ------- -------- -----
Results of Operations:
Revenues................. $348,606 $218,565 $173,468
Less:
Production costs (a).... 94,172 65,520 43,899
Exploration costs (b)... 10,176 $ 2,295 9,588 $ 2,260 8,407 $ 729
Depreciation and amorti-
zation (c)............. 147,740 113,624 929 79,232
Income tax effects...... 33,447 (803) 10,119 (1,116) 14,647 (255)
-------- ------- -------- ------- -------- -----
Net producing activi-
ties................. $ 63,071 $(1,492) $ 19,714 $(2,073) $ 27,283 $(474)
======== ======= ======== ======= ======== =====
- --------
(a) Includes severance, ad valorem and production taxes.
(b) Includes internal costs that cannot be directly identified with
acquisition, exploration or development activities.
(c) Amount for 1994 excludes a $7,551 gain from the sale of an inactive
offshore pipeline and facilities, which was not related to gas and oil
producing activities.
A-27
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gas and Oil Reserves (Unaudited)--The following table of estimated proved
and proved developed reserves of gas and oil has been prepared utilizing
estimates of year end reserve quantities provided by DeGolyer and MacNaughton,
independent petroleum consultants. Reserve estimates are inherently imprecise
and estimates of new discoveries are more imprecise than those of producing
gas and oil properties. Accordingly, the reserve estimates are expected to
change as additional performance data becomes available.
GAS (MMCF) OIL (MBBLS) (A)
------------------------------- -----------------------
1996 1995 1994 1996 1995 1994
--------- --------- --------- ------ ------- ------
U.S. Reserves:
At January 1............ 1,362,763 1,041,736 1,086,482 66,537 46,486 39,349
Changes in reserves
Revisions of previous
estimates............ (7,935) 26,802 (25,106) (8,173) 2,312 (499)
Extensions, discover-
ies and additions.... 72,854 62,249 47,580 4,315 21,466 9,877
Purchase of minerals
in place............. 12,347 336,668 787 11,417 14
Sales of minerals in
place................ (123,861) (14,497) (894) (3,730) (11,274) (28)
Production............ (100,544) (90,195) (67,113) (5,740) (3,870) (2,227)
--------- --------- --------- ------ ------- ------
At December 31.......... 1,215,624 1,362,763 1,041,736 53,209 66,537 46,486
========= ========= ========= ====== ======= ======
Proved Developed Re-
serves
At January 1.......... 937,372 698,643 735,093 30,110 14,437 15,380
At December 31........ 859,094 937,372 698,643 27,938 30,110 14,437
- --------
(a) Includes condensate and natural gas liquids of 1,103 MBbls for 1996, 3,593
MBbls for 1995 and 911 Mbbls for 1994.
GAS (MMCF) OIL (MBBLS)
---------- -----------------
1996 1996 1995 1994
---------- ----- ----- -----
Non-U.S. Reserves:
At January 1....................................... -- 4,963 4,105 --
Extensions, discoveries and additions............ 618 1,045 858 4,105
--- ----- ----- -----
At December 31..................................... 618 6,008 4,963 4,105
=== ===== ===== =====
Proved reserves for all periods were undeveloped.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserve Quantities (Unaudited)--has been prepared using estimated
future production rates and associated production and development costs.
Continuation of economic conditions existing at the balance sheet date was
assumed. Accordingly, estimated future net cash flows were computed by
applying prices and contracts in effect in December to estimated future
production of proved gas and oil reserves, estimating future expenditures to
develop proved reserves and estimating costs to produce the proved reserves
based on average costs for the year. Average prices used in the computations
were: Gas (per Mcf) $3.37 in 1996, $2.19 in 1995, and $2.29 in 1994; Oil (per
barrel) $23.33 in 1996, $16.91 in 1995, and $14.07 in 1994.
A-28
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because reserve estimates are imprecise and changes in the other variables
are unpredictable, the standardized measure should be interpreted as
indicative of the order of magnitude only and not as precise amounts.
1996 1995 1994
-------- -------- --------
Standardized Measure (in millions):
Future cash inflows............................ $5,474.3 $4,180.7 $3,081.5
Future production and development costs........ (1,552.9) (1,512.7) (1,065.8)
Future income tax expense...................... (1,030.2) (597.1) (542.6)
-------- -------- --------
Future net cash flows.......................... 2,891.2 2,070.9 1,473.1
Less 10% annual discount....................... 1,176.1 843.5 593.8
-------- -------- --------
Standardized measure of discounted future net
cash flows.................................... $1,715.1 $1,227.4 $ 879.3
======== ======== ========
Change in Standardized Measure (in millions):
Sales and transfers of gas and oil produced,
net of
production costs.............................. $ (254.4) $ (153.1) $ (120.5)
Changes in prices, net of production and future
development costs............................. 1,065.0 50.6 (33.9)
Extensions, discoveries and improved recovery,
less related costs............................ 185.0 175.8 158.7
Purchases of minerals in place................. 3.2 367.6 1.6
Revisions of previous quantity estimates....... (238.7) (113.9) (26.5)
Sales of minerals in place..................... (125.2) (59.2) (1.3)
Accretion of discount.......................... 144.4 102.3 102.7
Net change in income taxes..................... (329.6) (3.1) (295.3)
Other.......................................... 38.0 (18.9) (8.8)
-------- -------- --------
Total........................................ $ 487.7 $ 348.1 $ (223.3)
======== ======== ========
As the estimates of future site restoration, dismantlement and abandonment
costs on an overall cost center basis are less than estimates of future
salvage value, such costs were not included in the standardized measure.
A-29
ENSERCH EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY RESULTS (UNAUDITED)
The results of operations of the Company by quarters are summarized below.
In the opinion of the Company's management, all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation have been
made.
QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1996:
Revenues....................... $75,411 $84,936 $82,736 $87,358
Operating Income............... 5,715 14,329 9,024 7,755
Net Income..................... 84 5,273 2,073 3,344
Net Income Per Share........... $ .00 $ .04 $ .02 $ .03
1995:
Revenues....................... $41,661 $47,987 $66,807 $64,396
Operating Income (Loss)........ 564 (4,969) 2,944 (4,692)
Net Income (Loss).............. 624 (5,162) (2,611) (5,353)
Net Income (Loss) Per Share.... $ .01 $ (.05) $ (.02) $ (.04)
COMMON STOCK MARKET PRICES AND DIVIDEND INFORMATION
MARKET PRICES--EEX COMMON STOCK
The Company's common stock is traded principally on the New York Stock
Exchange under the symbol "EEX". The following table shows the high and low
sales prices per share of the common stock of the Company reported in the New
York Stock Exchange--Composite Transactions report for the periods shown as
quoted in the Wall Street Journal.
1996 1995
-------------- ------------
HIGH LOW HIGH LOW
------- ------ ------- ----
First Quarter................................. $ 12 $ 9 $11 1/8 $ 9 3/8
Second Quarter................................ 11 3/8 9 5/8 14 7/8 10 1/8
Third Quarter................................. 11 1/2 8 1/4 14 3/4 10
Fourth Quarter................................ 11 7/8 8 7/8 11 5/8 9 1/4
COMMON STOCK DATA AT YEAR-END
1996 1995 1994
------- ------- -------
Shareholders of Record............................... 1,395 1,450 1,373
Shares Outstanding (000's)........................... 126,044 125,883 105,821
DIVIDENDS PER SHARE OF COMMON STOCK
There have been no dividends declared on the Company's common stock. The
declaration of future dividends will be dependent upon business conditions,
earnings, cash requirements and other relevant factors.
A-30