SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURTIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1995 Commission File No. 1-11413
ENSERCH EXPLORATION, INC.
Incorporated - State of Texas I.R.S. Identification No. 75-2556975
4849 Greenville Avenue, Suite 1200, Dallas, Texas 75206
Registrant's telephone number, including Area Code: 214-369-7893
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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
---- ----
Number of shares of Common Stock of Registrant outstanding as of
August 11, 1995: 104,634,242.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSERCH EXPLORATION,INC.
CONDENSED STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
----------------------- --------------------
1995 1994 1995 1994
------- ------- ------ -------
(In thousands except per share amounts)
Revenues
Natural gas. . . . . . . . . . . . . . . . . . . $35,123 $35,893 $67,008 $78,417
Oil and condensate . . . . . . . . . . . . . . . 11,730 8,134 20,677 15,743
Natural gas liquids. . . . . . . . . . . . . . . 960 390 1,695 841
Other. . . . . . . . . . . . . . . . . . . . . . 174 56 268 209
------- ------- ------- -------
Total. . . . . . . . . . . . . . . . . . . . 47,987 44,473 89,648 95,210
------- ------- ------- -------
Costs and Expenses
Production and operating . . . . . . . . . . . . 11,150 7,130 19,543 15,612
Exploration. . . . . . . . . . . . . . . . . . . 2,483 2,268 5,474 4,534
Depreciation and amortization. . . . . . . . . . 27,454 20,044 46,547 40,930
General, administrative and other. . . . . . . . 7,701 3,435 14,743 7,944
Taxes, other than income . . . . . . . . . . . . 4,168 3,196 7,746 6,773
------- ------- ------- -------
Total. . . . . . . . . . . . . . . . . . . . 52,956 36,073 94,053 75,793
------- ------- ------- -------
Operating Income (Loss). . . . . . . . . . . . . . (4,969) 8,400 (4,405) 19,417
Other Income (Expense) - Net . . . . . . . . . . . 21 17 (3) 17
Interest Income. . . . . . . . . . . . . . . . . . 136 1,026 188
Interest Expense . . . . . . . . . . . . . . . . . (2,994) (3,642) (3,599) (9,885)
------- ------- ------- -------
Income (Loss) Before Income Taxes. . . . . . . . . (7,942) 4,911 (6,981) 9,737
Income Tax Benefit . . . . . . . . . . . . . . . . (2,780) (120) (2,443) (198)
------- ------- ------- -------
Net Income (Loss). . . . . . . . . . . . . . . . . $(5,162) $ 5,031 $(4,538) $ 9,935
======= ======= ======= =======
Pro Forma Information:
Income before income taxes . . . . . . . . . . . $ 4,911 $ 9,737
Income taxes (Including income taxes on
partnership operations). . . . . . . . . . . . 1,732 3,419
------- -------
Net Income . . . . . . . . . . . . . . . . . . . $ 3,179 $ 6,318
======= =======
Net Income (Loss) Per Share (Pro forma
for the three months and six months
ended June 30, 1994) . . . . . . . . . . . . . . $ (.05) $ .03 $ (.04) $ .06
======= ======= ======= =======
Weighted Average Shares Outstanding. . . . . . . . 105,695 105,695 105,695 105,695
======= ======= ======= =======
<FN>
See accompanying Notes.
1
ENSERCH EXPLORATION, INC.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
-----------------------
1995 1994
-------- ------
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ (4,538) $ 9,935
Depreciation and amortization. . . . . . . . . . . . . . . . 46,547 40,930
Deferred income-tax expense (benefit). . . . . . . . . . . . . 5,499 (30)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,400) (7,191)
Changes in current operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . (9,273) 5,242
Other current assets . . . . . . . . . . . . . . . . . . . . (4,602) (1,144)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 13,075 (5,701)
Other current liabilities. . . . . . . . . . . . . . . . . . 5,519 1,481
-------- --------
Net cash flows from operating activities . . . . . . . . . . 37,827 43,522
-------- --------
INVESTING ACTIVITIES
Purchase of DALEN, net of cash acquired. . . . . . . . . . . . (332,888)
Additions to property, plant and equipment . . . . . . . . . . (90,057) (58,251)
Retirements of property, plant and equipment . . . . . . . . . 2,715 2,615
Collection of note receivable from affiliated company. . . . . 86,077
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,453) (9,330)
-------- --------
Net cash flows used for investing activities. . . . . . . . (350,606) (64,966)
-------- --------
FINANCING ACTIVITIES
Change in temporary advances with affiliated companies . . . . (66,333) 47,669
Payments of capital lease obligations. . . . . . . . . . . . . (1,997)
Borrowings under bank revolving credit agreement . . . . . . . 350,000
Borrowings under bridge loan . . . . . . . . . . . . . . . . . 150,000
Repayment of DALEN bank debt assumed at acquisition. . . . . . (115,000)
Proceeds from long-term notes payable to affiliated companies. 8,000
Decrease in advances under leasing arrangements - net. . . . . (26,212)
Cash distributions paid. . . . . . . . . . . . . . . . . . . . (7,843)
-------- --------
Net cash flows from financing activities. . . . . . . . . . 316,670 21,614
-------- --------
Net Increase in Cash . . . . . . . . . . . . . . . . . . . . . . 3,891 170
Cash at Beginning of Period. . . . . . . . . . . . . . . . . . . 234 343
-------- --------
Cash at End of Period. . . . . . . . . . . . . . . . . . . . . . $ 4,125 $ 513
======== ========
<FN>
See accompanying Notes.
2
ENSERCH EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(June 30, 1995 Unaudited)
June 30 December 31
1995 1994
--------- -----------
(In thousands)
ASSETS
Current Assets
Cash.. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,125 $ 234
Accounts receivable - trade. . . . . . . . . . . . . . . . . 34,924 16,828
Accounts receivable - affiliated companies . . . . . . . . . 18,603 11,581
Note receivable - affiliated company . . . . . . . . . . . . 86,077
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,437 5,217
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . 71,089 119,937
---------- ----------
Property, Plant and Equipment (at cost):
Gas and oil properties (full-cost method). . . . . . . . . . 2,630,346 2,094,494
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,863 15,582
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 2,644,209 2,110,076
Less accumulated depreciation and amortization . . . . . . . 897,999 856,062
---------- ----------
Net property, plant and equipment . . . . . . . . . . . . 1,746,210 1,254,014
---------- ----------
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 24,038 7,284
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $1,841,337 $1,381,235
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable - trade . . . . . . . . . . . . . . . . . . $ 73,024 $ 58,593
Accounts payable - affiliated companies. . . . . . . . . . . 7,060
Temporary advances - affiliated companies (net). . . . . . . 39,136 105,469
Current portion of bank revolving credit agreement . . . . . 300,000
Current portion of capital lease obligations . . . . . . . . 4,760 4,760
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,914 1,728
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . 433,834 177,610
---------- ----------
Bank Revolving Credit Agreement. . . . . . . . . . . . . . . . 50,000
---------- ----------
Capital Lease Obligations. . . . . . . . . . . . . . . . . . . 149,098 151,095
---------- ----------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . 289,798 284,299
---------- ----------
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . 37,274 32,223
---------- ----------
Minority Interest - Subsidiary Preferred Stock . . . . . . . . 150,000
---------- ----------
Common Shareholders' Equity
Common stock (200,000 shares authorized;
105,723 and 105,695 shares outstanding). . . . . . . . . . 105,723 105,695
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . 630,494 630,313
Retained earnings (deficit). . . . . . . . . . . . . . . . . (4,538)
Unamortized restricted stock compensation. . . . . . . . . . (346)
---------- ----------
Common shareholders' equity . . . . . . . . . . . . . . . 731,333 736,008
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $1,841,337 $1,381,235
========== ==========
<FN>
See accompanying Notes.
3
ENSERCH EXPLORATION, INC.
Notes to Condensed Consolidated Financial Statements
1. Prior to December 30, 1994, the operations of Enserch Exploration, Inc.
("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 (then a newly formed corporation) 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.
EPO was then merged into EEX and thereafter EP was liquidated, and its
partners received one share of EEX common stock for each limited and
general partnership interest held. ENSERCH companies also received EP's
interests 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
(including $86 million of debt owed by EP to EPO that did not appear on
EP's consolidated balance sheet), plus accrued interest.
In 1995, EEX acquired the international gas and oil operations of ENSERCH
by the issuance of 1,113,545 shares of EEX Common Stock and acquired the
SACROC operations of ENSERCH for $1.65 million in cash. Both transactions
were based on the value of the underlying properties as determined by
independent petroleum engineers. ENSERCH's historical carrying value of
the assets acquired and liabilities assumed has been recorded by EEX. The
excess of ENSERCH's carrying value over the purchase price of the SACROC
properties has been credited to paid in capital. The stated number of
shares issued to acquire the international operations were determined using
an estimated value per share of EEX Common Stock of $14.00. The number of
shares will be adjusted in the future based on the actual net proceeds per
share received by EEX in a planned public offering of Common Stock.
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 1% general partners interest in EPO, and 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.
EP and EPO were partnerships and, as a result, the income or loss of the
partnerships was included in the tax returns of the individual partners.
Accordingly, no recognition was given to income taxes in the financial
statements of EP. EEX, as a corporation, is a taxable entity. Pro forma
net income includes an adjustment to provide for income taxes on the
partnerships' operations at the applicable statutory rate.
2. On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation
for cash of $340 million and refinanced DALEN's bank debt of $115 million.
The acquisition has been accounted for as a purchase. The acquired assets,
consisting principally of gas and oil properties, and the liabilities
assumed are being evaluated for purposes of assigning the purchase price.
It is anticipated that essentially all of the valuation adjustments will
4
be assigned to gas and oil properties.
EEX borrowed $350 million under a four-year revolving credit agreement (at
an interest rate based on LIBOR) to pay the purchase price and reduce
advances from ENSERCH by $10 million. In addition, EEX borrowed $150
million under a bridge loan to repay DALEN's bank debt of $115 million and
reduce advances from ENSERCH by $35 million. A registration statement for
a planned offering of approximately 20 million shares of EEX common stock
has been filed with the Securities and Exchange Commission. The borrowing
under the revolving credit agreement will be reduced with the proceeds from
the offering. Accordingly, $300 million of the borrowing under the
revolving credit agreement has been classified as a current liability. The
bridge loan was repaid on August 4, 1995 with the proceeds from a $150
million preferred stock offering by a subsidiary of EEX.
Following is a summary of pro forma results of operations of EEX assuming
the DALEN acquisition had occurred at the beginning of the periods
presented:
Six Months Ended
June 30
--------------------------------
1995 1994
------------ --------------
(In thousands, except per share)
Revenues $137,972 $174,300
Net Income (Loss) (14,873) 7,287
Net Income After Pro Forma
Income Taxes on Partnership
Operations 3,670
Net Income (Loss) Per Share (.14) .03
3. On August 4, 1995, a subsidiary of EEX completed the private placement of
$150 million of adjustable rate redeemable preferred stock that is expected
to be redeemed by August 4, 2000. The proceeds were used to purchase $150
million of EEX preferred stock, and EEX repaid the bridge loan. In the
consolidated financial statements, the EEX preferred stock is eliminated,
and the subsidiary preferred stock is reflected as minority interest.
These transactions are reflected in the June 30, 1995 balance sheet. The
dividend rate on the subsidiary preferred stock, which is adjusted
quarterly, approximates LIBOR plus .625%.
4. At June 30, 1995, based on a preliminary allocation of the DALEN purchase
price, EEX's full cost ceiling amount attributable to the properties
acquired was approximately $42 million ($27 million after tax) less than
the unamortized cost of producing properties acquired. EEX believes that
the DALEN properties have significant exploration and development
potential. EEX expects to be able to utilize its expertise, particularly
with respect to tight sands reservoirs, to enhance production and cash
flows from these properties because of the geologic similarity and
proximity of DALEN's major producing properties to EEX's properties. EEX
believes that the unamortized cost of the gas and oil properties acquired
in the DALEN acquisition is recoverable from future production and was not
5
in fact impaired at June 30, 1995. Accordingly, EEX did not recognize a
charge to earnings at June 30, 1995; however, if an excess exists after a
year of operation, a write-off may be required.
5. 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.
6. Components of current liabilities in the December 1994 balance sheet have
been reclassified to conform to the 1995 presentation.
7. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results for
the interim periods included herein have been made.
6
INDEPENDENT ACCOUNTANTS' REPORT
Enserch Exploration, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Enserch Exploration, Inc. as of June 30, 1995, and the related condensed
statements of consolidated income for the three months and six months ended
June 30, 1995 and 1994, and the condensed statements of consolidated cash
flows for the six months ended June 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management. The
consolidated financial statements give retroactive effect to the transactions
which have been accounted for in a manner similar to a pooling-of-interests,
as described in Note 1 of the Notes to Condensed Consolidated Financial
Statements.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Enserch Exploration, Inc., as of
December 31, 1994, and the related consolidated statements of income, cash
flows and common shareholders' equity for the year then ended prior to
restatement for the transactions described in Note 1 of the Notes to Condensed
Consolidated Financial Statements (not presented herein); and in our report
dated February 10, 1995, we expressed an unqualified opinion on those
consolidated financial statements. We also audited the adjustments that were
applied to restate the December 31, 1994 consolidated balance sheet of Enserch
Exploration, Inc. In our opinion, such adjustments are appropriate and have
been properly applied and the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1994, is fairly stated
in all material respects, in relation to the restated consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
August 4, 1995
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
On June 8, 1995, Enserch Exploration, Inc. (EEX) acquired for cash all of the
capital stock of DALEN Corporation (DALEN). The acquisition of DALEN
achieves the goals of increasing reserves and lowering average reserve life.
The "purchase" method was used to account for the DALEN acquisition;
therefore, EEX's results include the results of operations of DALEN from the
date of acquisition.
In 1995, EEX acquired the international gas and oil operations and the SACROC
operations of ENSERCH Corporation (ENSERCH). The financial statements of EEX
for periods prior to December 30, 1994 include the assets, liabilities,
operations and cash flows of Enserch Exploration Partners, Ltd., restated to
include the 1% general partners interest in EP Operating Limited Partnership,
and 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.
RESULTS OF OPERATIONS
QUARTERS ENDED JUNE 30, 1995 AND 1994 - EEX had a net loss for the second
quarter of 1995 of $5.2 million ($.05 per share), compared with second-
quarter 1994 net income of $3.2 million ($.03 per share), adjusted for income
taxes on partnership operations. The operating loss for the 1995 second
quarter was $5.0 million, compared with income of $8.4 million for the like
period a year ago. The loss for the second quarter of 1995 was attributable
to natural-gas prices being $.36 per thousand cubic feet (Mcf), or 17%, below
the 1994 second quarter. DALEN operations, which have been included from the
date of acquisition, added operating income of $.1 million, after a
$1.0 million charge for severance costs related to the acquisition.
Second-quarter 1995 revenues totaled $48 million, including $10.6 million
from DALEN, compared with $44 million in the 1994 second quarter. Natural-
gas revenues for the second quarter of 1995 of $35 million, including
$7.5 million from DALEN, were $.8 million below the second quarter of 1994.
Natural-gas sales volumes for the second quarter of 1995 of 20.1 billion
cubic feet (Bcf), including DALEN sales of 4.6 Bcf, were up 3.1 Bcf, or 18%,
from the second quarter of last year. However, the average price of natural
gas declined 17% from the second quarter last year to $1.75 per Mcf. Oil
revenues for the 1995 second quarter of $11.7 million, including revenues
from DALEN of $2.8 million, were $3.6 million greater than in the 1994 second
quarter. The average price received for oil increased 10% from the second
quarter last year to $17.12 per barrel, and sales volumes of 685 thousand
barrels were 31% higher than in the year-ago quarter, entirely due to DALEN
production. EEX uses gas and oil swaps, collars and futures agreements to
hedge volatile product prices for a portion (normally 30 to 70 percent) of
anticipated future gas and oil production. Hedges increased natural-gas
revenues by $1.1 million in the second quarter of 1995 versus $.5 million in
the 1994 second quarter. Hedges reduced 1995 and 1994 second-quarter oil
revenues by $.5 million and $.4 million, respectively.
8
Operating expenses for the 1995 second quarter were $53 million, compared
with $36 million in the second-quarter of 1994. The 1995 second quarter
reflects DALEN expenses of $10.5 million, including the $1.0 million charge
for severance costs related to the acquisition. Production and operating
costs were $4.0 million above the 1994 second quarter, with $1.6 million of
the increase attributable to DALEN and the remainder primarily due to higher
maintenance costs. General, administrative and other expenses increased
$4.3 million, principally due to DALEN expenses of $1.9 million and non-
recurring credits of $2.0 million associated with litigation accruals
recorded in the second quarter of last year. Excluding a $6.0 million
increase attributable to DALEN, depreciation and amortization increased
$1.4 million, with the effects of a lower level of production more than
offset by a higher-per-unit amortization of capitalized costs caused by
higher onshore exploratory expenditures and the conversion of an operating
lease to a capital lease.
SIX MONTHS ENDED JUNE 30, 1995 AND 1994 - For the first six months of 1995,
EEX had a net loss of $4.5 million ($.04 per share) versus net income in the
1994 period of $6.3 million ($.06 per share), adjusted for income taxes on
partnership operations. For the first half of 1995, EEX had an operating
loss of $4.4 million versus income of $19.4 million for the same period a
year-ago.
Revenues for the first half of 1995 of $90 million were $5.6 million, or 6%,
less than in the same period of 1994. Natural-gas revenues of $67 million
were down $11.4 million, or 15%, from the 1994 period, with the average sales
price declining 12% and sales volumes, including DALEN production, 3% lower.
Hedges increased natural-gas revenues for the 1995 year-to-date period by
$4.1 million, compared with $.5 million in the 1994 period. Oil revenues for
the first half of 1995 increased 31%, with the average sales price of $16.98
per barrel up 12% and sales volumes of 1.2 million barrels (MMBbls) some 18%
higher, principally due to volumes contributed by DALEN. Hedges reduced oil
revenues for the first six months of 1995 by $.6 million but added
$.3 million in the 1994 period.
Operating expenses for the year-to-date period were $18.3 million higher than
in the 1994 period, including the $10.5 million attributable to DALEN.
Production and operating costs were up $3.9 million from the 1994 period,
primarily due to DALEN expenses of $1.6 million and higher maintenance costs.
General, administrative and other expenses for the first half of 1995 reflect
a $1.2 million provision for the deductible portion of injuries and damages
claims and DALEN expenses of $1.9 million, while the 1994 period benefited
from non-recurring credits of $2.0 million associated with litigation
accruals. Taxes other than income increased $1 million from the prior-
year period, with the increase attributable to DALEN. Excluding $6.0 million
for DALEN, depreciation and amortization for the first half of 1995 was
$.4 million below the year-ago period, with the effects of a lower level of
production for the most part offset by a higher-per-unit amortization of
capitalized costs caused by higher onshore exploratory expenditures and the
conversion of an operating lease to a capital lease.
In April 1995, a Mobil Corporation (Mobil) affiliate exercised its option to
acquire a 40% working interest in EEX's Garden Banks project. In May 1995,
9
another affiliate of Mobil signed a letter of intent to purchase a 40%
interest in EEX's Green Canyon project. An affiliate of Reading & Bates
Corp. had previously signed a letter of intent to purchase a 20% interest in
the project. These transactions are expected to be completed in the third
quarter of 1995, after which EEX will own a 60% working interest in the
Garden Banks project and a 40% working interest in the Green Canyon project
and will remain the operator of both projects. These transactions are
expected to provide cash of approximately $31 million in the third quarter of
1995. EEX also expects to receive an interest in a gas and oil property and
future work commitments on the Garden Banks and Green Canyon projects. In
addition, EEX will be relieved of capital and operating lease obligations of
approximately $140 million on the Garden Banks project, as well as a portion
of future capital expenditure requirements on the Garden Banks and Green
Canyon projects.
Operating results for 1995 are expected to be affected by the third-quarter
commencement of production from the Garden Banks project. Revenues from the
initial production of the two existing wells may not be sufficient to cover
operating costs, amortization and the equipment lease costs on the floating
production platform and related facilities. Some operating costs and
amortization vary with production, but other costs and the equipment lease
costs are essentially fixed and decline on a per unit basis as production
increases. Operating results are expected to improve in 1996 as production
begins from several additional development wells in the Garden Banks project,
and as the related equipment lease and other fixed costs are spread over
greater production.
At June 30, 1995, EEX had outstanding swaps, collars and futures agreements
extending through June 1996 to exchange payments on some 11.6 Bcf of gas and
1.0 MMBbls of oil on which EEX had $4.6 million of net unrealized gains. At
June 30, 1995, realized gains on hedging activities of $.6 million were
deferred.
CAPITALIZED COSTS AND RESERVES
The assets acquired in the DALEN acquisition, consisting principally of gas
and oil properties, and the liabilities assumed are being evaluated for
purposes of assigning the purchase price. It is anticipated that essentially
all of the valuation adjustments will be assigned to gas and oil properties.
At June 30, 1995, based on a preliminary allocation of the DALEN purchase
price, EEX's full cost ceiling amount attributable to the properties acquired
was approximately $42 million ($27 million after tax) less than the
unamortized cost of producing properties acquired. EEX believes the DALEN
properties have significant exploration and development potential. EEX
expects to be able to utilize its expertise, particularly with respect to
tight sands reservoirs, to enhance production and cash flows from these
properties because of the geologic similarity and proximity of DALEN's major
producing properties to EEX's properties. EEX believes that the unamortized
cost of the gas and oil properties acquired in the DALEN acquisition is
recoverable from future production and was not in fact impaired at June 30,
1995. Accordingly, EEX did not recognize a charge to earnings at June 30,
1995; however, if an excess exists after a year of operation, a write-off may
be required. In addition, product prices are subject to seasonal and other
10
fluctuations. A decline in prices from June 1995 levels or other factors,
without mitigating circumstances, could cause a future write-down of
capitalized costs and a non-cash charge against income.
EEX's estimated net proved reserves at June 30, 1995, giving effect to the
DALEN acquisition, the sale of a 60% interest in the Green Canyon project and
the sale of a 40% interest in the Garden Banks project, are as follows:
Natural Oil and
Gas Gas Liquids Total
(Bcf) (MMBbls) (Bcfe) (3)
--------- ----------- -------
EEX proved reserves at December 31,
1994: (1)
As originally reported 1,041.7 46.1 1,318.6
Acquisition of ENSERCH's
international and SACROC reserves - 4.5 26.7
January through June 1995:
Additions to reserves:
Green Canyon project (2) 87.8 42.2 341.2
Other 1.8 1.0 7.7
Production (29.9) (1.2) (36.9)
Sales of reserves:
60% interest in Green Canyon project (52.7) (25.3) (204.7)
40% interest in Garden Banks project (13.6) (11.2) (81.2)
------- ------ -------
EEX proved reserves at June 30,
1995 before DALEN acquisition 1,035.1 56.1 1,371.4
DALEN proved reserves at June 30, 1995 (1)(4) 330.6 11.0 396.8
------- ------ -------
EEX proved reserves at June 30, 1995 1,365.7 67.1 1,768.2
======= ====== =======
<FN>
(1) As estimated by DeGolyer and MacNaughton (D&M), independent petroleum
consultants.
(2) Net of royalty interests. Based on D&M's report at March 1, 1995 of
gross proved reserves of 102.2 Bcf of gas and 49.2 MMBbls of oil.
(3) Billion cubic feet equivalents.
(4) After production from date of acquisition of 4.6 Bcf of gas and .2 MMBbls
of oil and gas liquids.
LIQUIDITY AND CAPITAL RESOURCES - EEX has funded its activities through cash
provided from operations, borrowings from bank credit facilities and ENSERCH,
and both operating and capital lease arrangements with an ENSERCH company.
Operating activities for the first six months of 1995 provided net cash flows
of $38 million, a $5.7 million decrease from the $44 million provided in the
first half of 1994. There was a $3.3 million reduction in income before
depreciation and amortization and deferred income taxes and a $7.2 million
greater requirement related to changes in other assets and liabilities,
including a $12.9 million increase in operating lease payments on the Garden
Banks project that are being deferred until production commences. However,
changes in current operating assets and liabilities resulted in a
$4.8 million year-to-year improvement in cash flows.
11
Investing activities required net cash flows of $351 million, including
$333 million required for the DALEN acquisition and $86 million provided by
the collection of a note receivable from an affiliated company, compared with
$65 million in the year-ago period. Capital expenditures increased 55% from
the year-earlier level to $90 million.
Planned property, plant and equipment additions for 1995 are expected to
total $175 million. The estimated expenditures are $15 million higher than
the originally planned expenditures of $160 million, reflecting a $39 million
reduction in the originally planned expenditures because of low natural-gas
prices and a $54 million addition for the 1995 exploration and development of
DALEN properties following the acquisition. Costs of the floating production
platform and related facilities for the Garden Banks project, which are being
provided under lease arrangements with an ENSERCH affiliate, are not
included. Costs for the Garden Banks facilities and equipment, including
costs related to the recent discovery on Block 387, are expected to be
approximately $350 million. The lease arrangements, which also include
$20 million of financing costs incurred by ENSERCH companies prior to the
sublease to EEX, are being modified to cover the additional costs of the
facilities and equipment. EEX's obligation under the lease arrangements is
expected to be reduced to $230 million following the completion of the
transaction with the Mobil affiliate.
On June 8, 1995, EEX borrowed $350 million under a four-year revolving credit
agreement and $150 million under a bridge loan to pay the purchase price of
$340 million for the capital stock of DALEN, repay DALEN's bank debt of
$115 million and reduce advances from ENSERCH by $45 million. A registration
statement for a planned offering of approximately 20 million shares of EEX
common stock has been filed with the Securities and Exchange Commission. The
borrowing under the revolving credit agreement will be reduced with the
proceeds from the offering. Accordingly, $300 million of the borrowing under
the revolving credit agreement has been classified as a current liability.
The EEX common stock issue, expected to be completed in the third quarter,
will increase the public ownership in EEX from less than 1% to approximately
17%. The bridge loan was repaid on August 4, 1995 with the proceeds from a
$150 million preferred stock offering by a subsidiary of EEX. Accordingly,
the $150 million bridge loan has been classified as minority interest on the
balance sheet.
EEX intends to utilize substantially all of its internally generated cash
flows for growth of the business. Internally generated cash flows may be
supplemented by borrowings to fund temporary cash deficiencies. In addition
to the revolving credit agreement noted above, EEX has a $100 million
borrowing arrangement with ENSERCH to meet short-term cash needs, of which
$39 million was outstanding at June 30, 1995. The borrowing arrangement with
ENSERCH is expected to be reduced from $100 million to $50 million upon the
conclusion of the planned common stock offering.
Total capitalization at June 30, 1995 was $1.4 billion, with common
shareholders' equity representing 53% of the total, versus $.9 billion at
December 31, 1994. The pro forma June 30, 1995 common equity ratio, adjusted
for the effects of the planned common stock offering, was 74%, compared with
83% at year-end 1994.
12
ENSERCH EXPLORATION INC.
SUMMARY OF OPERATING DATA (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1995 1994(c) 1995 1994(c)
-------- -------- ------- -------
Operating Income (Loss) (in millions) . . . . . . . $ (5.0) $ 8.4 $ (4.4) $ 19.4
======= ======= ======= =======
Revenues (in millions)
Natural gas . . . . . . . . . . . . . . . . . . . $ 35.1 $ 35.9 $ 67.0 $ 78.4
Oil and condensate . . . . . . . . . . . . . . . 11.7 8.1 20.7 15.7
Natural gas liquids . . . . . . . . . . . . . . . 1.0 .4 1.7 .9
Other . . . . . . . . . . . . . . . . . . 0.2 .1 0.2 .2
------- ------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . . $ 48.0 $ 44.5 $ 89.6 $ 95.2
======= ======= ======= =======
Sales Volumes
Natural gas (MMcf) . . . . . . . . . . . . . . . 20,092 17,039 34,453 35,409
Oil and condensate (MBbl) . . . . . . . . . . . . 685 522 1,218 1,036
Natural gas liquids (MBbl). . . . . . . . . . . . 88 38 154 84
Total volumes (MMcfe) (a) . . . . . . . . . . . . 24,730 20,399 42,685 42,129
Average Sales Price
Natural gas (per Mcf) . . . . . . . . . . . . . . $ 1.75 $ 2.11 $ 1.94 $ 2.21
Oil and condensate (per Bbl). . . . . . . . . . . 17.12 15.58 16.98 15.20
Natural gas liquids (per Bbl) . . . . . . . . . . 10.91 10.26 11.01 10.01
Total product revenue (per Mcfe) (a). . . . . . . 1.93 2.18 2.09 2.26
Cost and Expenses (per Mcfe) (a)
Production and operating (b). . . . . . . . . . . $ .45 $ .35 $ .46 $ .37
Exploration . . . . . . . . . . . . . . . . . . . .10 .11 .13 .11
Depreciation and amortization . . . . . . . . . . 1.11 .98 1.09 .97
General, administrative and other . . . . . . . . .31 .17 .35 .19
Taxes, other than income. . . . . . . . . . . . . .17 .16 .18 .16
Net Wells
Drilled . . . . . . . . . . . . . . . . . . . . . 24 19 39 35
Productive. . . . . . . . . . . . . . . . . . . . 16 13 26 21
<FN>
(a) Oil and natural gas liquids have been 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) 1994 amounts are restated to give effect to the acquisition of 1% general
partners interest in EPO, the international gas and oil operations and the
SACROC operations accounted for in a manner similar to a pooling-of-interests.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15 Letter of Deloitte & Touche LLP dated
August 11, 1995, regarding unaudited
interim financial statements.
23.1 Consent of Deloitte & Touche LLP
(included in Exhibit 15.)
23.2 Consent of DeGolyer & MacNaughton
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 13, 1995. (News Release
announcing proposed acquisition of DALEN Corporation.)
Current Report on Form 8-K dated June 8, 1995. Acquisition of
DALEN Corporation. Form 8-K includes: (i) DALEN Corporation
Consolidated Financial Statements as of December 31, 1994 and
1993, together with Auditor's Report; (ii) DALEN Corporation
Condensed Consolidated Financial Statements (Unaudited) for the
Periods Ended March 31, 1995 and 1994; and (iii) Enserch
Exploration, Inc. Condensed Pro Forma Financial Statements
(Unaudited) for the Periods Ended December 31, 1994 and
March 31, 1995.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSERCH EXPLORATION, INC.
(Registrant)
Dated August 23, 1995 By /s/A. E. Gallatin
------------------------------------------------
A. E. Gallatin
Vice President
Dated August 23, 1995 By /s/J. W. Pinkerton
----------------------------------------
J. W. Pinkerton
Vice President and Controller
15