SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
June 8, 1995
ENSERCH EXPLORATION, INC.
(Exact name of Registrant as specified in its charter)
Texas 1-1311 75-2556975
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
4849 Greenville Ave., Suite 1200, Dallas, Texas 75206-4186
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: 214-369-7893
ITEM 2. Acquisition or Disposition of Assets
On June 8, 1995, Enserch Exploration, Inc. ("EEX" or the "Company")
acquired for cash 100% of the Dallas-based affiliate of Pacific Gas & Electric
Company, DALEN Corporation, for a purchase price of $340 million and refinanced
DALEN's $115 million bank debt. The purchase price was funded through the
Company's lines of credit and the bank debt was funded by a bridge loan. EEX
intends to repay the bridge loan later this year by an asset-based financing.
Proceeds from a planned offering of common shares of EEX will be applied toward
EEX's debt.
ITEM 7. Financial Statements and Schedules
(a) Financial statements of businesses acquired
DALEN Corporation Consolidated Financial Statements as of
December 31, 1994 and 1993, together with Auditor's Report.
DALEN Corporation Condensed Consolidated Financial Statements
(Unaudited) for the Periods Ended March 31, 1995 and 1994.
(b) Pro forma financial information
Enserch Exploration, Inc. Condensed Pro Forma Financial Statements
(Unaudited) for the Periods Ended December 31, 1994 and March 31, 1995.
2
(a) Financial statements of businesses acquired
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
DALEN Corporation:
We have audited the accompanying consolidated balance sheets of DALEN
Corporation (formerly DALEN Resources Corp.) and subsidiaries as of December
31, 1994 and 1993 (as restated, see note 1), and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1994. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of DALEN Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, effective January 1, 1993,
DALEN Corporation and subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Prior year financial
statements have not been restated.
Arthur Andersen LLP
Dallas, Texas
February 24, 1995
3
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(STATED IN THOUSANDS OF DOLLARS)
1994 1993 1992
-------- -------- --------
REVENUES:
Natural gas.................................... $115,593 $152,488 $111,779
Oil and gas liquids............................ 51,054 73,852 82,003
Other.......................................... 2,341 5,144 5,822
-------- -------- --------
168,988 231,484 199,604
-------- -------- --------
OPERATING EXPENSES:
Lease operating................................ 43,533 56,367 52,389
General and administrative..................... 18,057 17,783 18,788
Depreciation, depletion and amortization....... 101,151 128,364 109,294
Exploration.................................... 24,886 19,453 25,278
-------- -------- --------
187,627 221,967 205,749
-------- -------- --------
OPERATING INCOME (LOSS).......................... (18,639) 9,517 (6,145)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income................................ 3,656 1,360 1,848
Interest expense............................... (6,002) (7,255) (6,885)
Other, net..................................... 2,845 85 1,105
-------- -------- --------
499 (5,810) (3,932)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................... (18,140) 3,707 (10,077)
INCOME TAX BENEFIT (EXPENSE):
Current........................................ 21,859 18,997 25,656
Deferred....................................... (6,653) (13,153) (22,125)
-------- -------- --------
15,206 5,844 3,531
-------- -------- --------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................. (2,934) 9,551 (6,546)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................... -- 7,958 --
-------- -------- --------
NET EARNINGS (LOSS).............................. $ (2,934) $ 17,509 $ (6,546)
======== ======== ========
See accompanying notes to consolidated financial statements.
4
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(STATED IN THOUSANDS OF DOLLARS)
1994 1993
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 10,888 $ 48,117
Accounts receivable:
Oil and gas............................................. 20,009 29,934
Trade................................................... 6,030 5,537
Affiliates.............................................. 7,616 11,154
Inventories.............................................. 2,125 3,802
Prepaid expenses......................................... 3,635 6,310
-------- --------
Total current assets................................... 50,303 104,854
-------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties, based on successful efforts
method.................................................. 787,579 916,354
Other property and equipment............................. 6,671 5,808
-------- --------
794,250 922,162
Less: Accumulated depreciation, depletion and
amortization............................................ (362,548) (353,455)
-------- --------
Net property and equipment............................. 431,702 568,707
-------- --------
OTHER ASSETS............................................... 655 1,745
-------- --------
TOTAL ASSETS............................................... $482,660 $675,306
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 15,394 $ 25,641
Interest payable......................................... 67 954
Accrued liabilities...................................... 10,998 12,937
-------- --------
Total current liabilities.............................. 26,459 39,532
-------- --------
DEFERRED INCOME TAXES...................................... 72,529 65,876
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES........... 13,864 15,156
LONG-TERM DEBT............................................. 115,000 130,000
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares authorized;
100 shares issued and outstanding....................... 1 1
Additional paid-in capital............................... 335,470 502,470
Accumulated deficit...................................... (80,663) (77,729)
-------- --------
Total stockholder's equity............................. 254,808 424,742
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................. $482,660 $675,306
======== ========
See accompanying notes to consolidated financial statements.
5
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(STATED IN THOUSANDS OF DOLLARS, EXCEPT COMMON SHARES)
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTALS
------ ------ ---------- ----------- ---------
BALANCE AT JANUARY 1, 1992...... 100 $ 1 $ 637,470 $(88,692) $ 548,779
Dividends to Parent........... -- -- (135,000) -- (135,000)
Net loss...................... -- -- -- (6,546) (6,546)
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1992.... 100 1 502,470 (95,238) 407,233
Net earnings.................. -- -- -- 17,509 17,509
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1993.... 100 1 502,470 (77,729) 424,742
Dividends to Parent........... -- -- (167,000) -- (167,000)
Net loss...................... -- -- -- (2,934) (2,934)
--- --- --------- -------- ---------
BALANCE AT DECEMBER 31, 1994.... 100 $ 1 $ 335,470 $(80,663) $ 254,808
=== === ========= ======== =========
See accompanying notes to consolidated financial statements.
6
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(STATED IN THOUSANDS OF DOLLARS)
1994 1993 1992
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................... $ (2,934) $ 17,509 $ (6,546)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization.... 101,151 128,364 109,424
Surrendered leases and impairments.......... 9,461 9,344 12,983
Dry hole expense............................ 9,352 4,143 7,482
Deferred income taxes....................... 6,653 13,153 22,125
Loss (gain) on sale of assets............... (2,509) 146 (365)
Cumulative effect of change in accounting
principle.................................. -- (7,958) --
Other....................................... (769) (2,630) (737)
--------- -------- ---------
120,405 162,071 144,366
--------- -------- ---------
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.. 8,563 34,869 (13,141)
Decrease (increase) in prepaid expenses..... 2,534 54 (1,461)
Decrease in accounts payable................ (9,842) (11,985) (22,279)
Increase (decrease) in interest payable..... (887) (529) 556
Decrease in accrued liabilities and other... (3,629) (544) (4,183)
--------- -------- ---------
Net cash provided by operating activities.. 117,144 183,936 103,858
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........... (108,105) (94,442) (89,892)
Proceeds from sales of property and equipment. 135,732 1,540 1,907
Receivable related to acquisition............. -- -- 5,573
--------- -------- ---------
Net cash provided by (used in) investing
activities................................ 27,627 (92,902) (82,412)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to Parent........................... (167,000) -- (135,000)
Long-term debt borrowing...................... 15,000 -- 111,000
Repayment of long-term debt................... (30,000) (60,007) (6)
--------- -------- ---------
Net cash used in financing activities...... (182,000) (60,007) (24,006)
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (37,229) 31,027 (2,560)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 48,117 17,090 19,650
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 10,888 $ 48,117 $ 17,090
========= ======== =========
See accompanying notes to consolidated financial statements.
7
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
1. ORGANIZATION:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of DALEN Corporation (formerly DALEN Resources Corp.) and its wholly-
owned subsidiaries (the "Company"). All significant intercompany balances and
transactions are eliminated in consolidation. The Company is a wholly-owned
subsidiary of PG&E Enterprises ("Parent"), which is 100% owned by Pacific Gas
and Electric Company ("PG&E"). The Company's primary business activity is the
exploration, development and production of natural gas and crude oil reserves
in the continental United States.
During 1994, the Parent determined that the Company did not fit within its
long-term corporate strategy. As a result, the Parent intends to sell its 100%
ownership interest in the Company through an initial public offering of the
Company's common stock or by other means. A registration statement was filed on
Form S-1 with the Securities and Exchange Commission during 1994 to effect the
disposition. The accompanying prior year financial statements were restated in
connection with the filing of the Form S-1, resulting in an increase in 1993
net earnings and stockholder's equity of $24.2 million.
2. ACCOUNTING POLICIES:
Property and Equipment
The Company uses the successful efforts method of accounting for oil and gas
properties. Under the successful efforts method, lease acquisition costs are
capitalized when incurred. Unproved leasehold costs are periodically assessed
on a property-by-property basis, and a loss is recognized when assessment
indicates a permanent impairment in value has occurred. Any remaining unproved
leasehold costs are charged to expense upon abandonment of the respective
leases.
Exploratory costs, excluding successful exploratory wells, are charged to
expense as incurred. Costs of drilling exploratory wells are initially
capitalized pending determination of whether the wells have found proved
reserves which justify commercial development. If proved reserves are not
found, the drilling costs are charged to expense. Costs applicable to
productive wells and development dry holes are capitalized and amortized on the
units-of-production method based on estimated proved reserve quantities.
The Company periodically reviews the carrying value of its proved oil and gas
properties for impairment in value on a company-wide basis by comparing
capitalized costs of proved oil and gas properties with undiscounted future net
cash flows, after income taxes. Under this policy, no impairment in carrying
value has been required during 1994, 1993, or 1992. However, in November 1993
the Financial Accounting Standards Board issued an exposure draft "Accounting
for the Impairment of Long-Lived Assets." Under this proposed standard, an
assessment of fair value of oil and gas properties will be required to be
performed using certain groupings of property costs. Fair value is to be
measured by market value, if an active market exists. If the market value is
not readily determinable, discounted future net cash flows, after income taxes,
are to be used to estimate fair value. The impact of adoption of this proposed
statement on the consolidated financial statements of the Company has not been
determined.
Other property and equipment are depreciated on a straight-line basis over
their estimated useful lives ranging from 5 to 20 years. Major renewals and
betterments, which improve or extend the life of the asset, are capitalized.
The costs of repairs and maintenance are charged to expense as incurred.
8
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Abandonment and Dismantlement Costs
Estimated abandonment and dismantlement costs of offshore wells and platforms
are accrued as liabilities on the units-of-production method based on estimated
proved reserves of the property. At December 31, 1994, total estimated future
abandonment and dismantlement costs associated with proved developed properties
were $11.3 million, of which $6.2 million was accrued.
Inventories
Inventories, consisting principally of equipment and oil field supplies, are
recorded at cost which approximates market value.
Gas Balancing Arrangements
The Company only recognizes revenue associated with volumes sold to which it is
entitled under respective property divisions of interest. Proceeds received for
natural gas volumes in excess of entitlements are deferred and recognized as
revenue when the gas is made up to the other interest owners. Accounts
receivable and payable resulting from gas balancing arrangements were not
significant at December 31, 1994 or 1993.
Hedging Transactions
The Company periodically enters into oil and natural gas hedging transactions
to minimize the risk of price decreases. Such hedging transactions also limit
revenues which might result from potential price increases. Under the hedging
transactions, the Company receives or makes payments based on the differential
between a specified price and the actual quote market price of oil and natural
gas. The Company does not use derivative financial instruments for trading
purposes.
Gains and losses resulting from hedging activities are recognized in the same
period that revenues on hedged volumes are recorded. Net gains (losses) of $2.4
million, ($8.9) million and ($12.8) million resulting from such transactions
are included in oil and natural gas revenues for the years ended December 31,
1994, 1993 and 1992, respectively. The Company had no open hedging positions at
December 31, 1994.
Income Taxes
The operations of the Company are ultimately included in the consolidated tax
return of PG&E. A tax-sharing agreement between PG&E and the Parent provides
that the Parent pay its proportionate share of state and federal income taxes
and that PG&E reimburse the Parent for related tax benefits to the extent
realized in the consolidated tax return. The Parent then allocates its
proportionate share of income taxes to the Company based on its contribution to
the consolidated tax liability or benefit.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statement or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates. The
cumulative effect of adopting SFAS No. 109 at January 1, 1993 resulted in an
increase in gas and oil properties and deferred income taxes of $22.0 million
and $14.0 million, respectively, and a cumulative gain of $8.0 million. The
financial statements for 1992 have not been restated.
Prior to 1993, the provision for income taxes was based on income and expenses
included in the consolidated statements of operations. Differences between
taxes computed on financial earnings and taxes currently payable under
applicable state and federal statutes and regulations were classified as
deferred taxes.
9
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The Company's financial
instruments are comprised of short-term investments, accounts receivable,
accounts payable and long-term debt. The carrying amount of the Company's
financial instruments approximate fair value because of the short maturity of
the instruments or because the interest rates of the instruments are based on
current market rates.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly
liquid cash investments with an original maturity of three months or less to be
cash equivalents.
Supplemental cash flow information is as follows (stated in thousands of
dollars):
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
Cash paid for interest during the year............... $ 6,889 $ 7,656 $ 6,329
======= ======= =======
Cash received from Parent for income tax benefit..... $25,196 $25,041 $14,433
======= ======= =======
3. RELATED PARTY TRANSACTIONS:
The Company sells natural gas to PG&E and to other affiliates. These sales were
made on terms approximating spot market prices at the time of the transactions.
During 1994, 1993 and 1992, such sales totaled approximately $1.2 million, $1.7
million and $2.8 million, respectively.
The Company's employee benefit plans and insurance programs are administered or
combined with affiliated companies under the Parent's control. The Company has
paid its proportionate share of related costs (administration fees to third
parties and premiums) which approximates the cost of obtaining such programs
from non-affiliates.
PG&E and the Parent perform certain other administrative functions, including
cash management services, for the Company. Costs associated with such services
for 1994, 1993 and 1992 were not significant. At December 31, 1994 and 1993,
$8.9 million and $46.1 million, respectively, of the Company's cash was held by
PG&E, at the Company's option, for cash management purposes. The average
interest rate received by the Company on such cash investments was 4.9% in 1994
and 3.8% in 1993, which approximates market rates.
Accounts receivable from affiliates at December 31, 1994 and 1993 result
primarily from income tax benefits due from the Parent, and are liquidated upon
the filing of the annual consolidated tax return of PG&E. Other accounts
receivable and payable to affiliates resulting from the above activities are
liquidated by receipts and payments in the normal course of business.
4. LONG-TERM DEBT:
The Company's credit agreement (the "Agreement"), as amended February 22, 1995,
provides for a two-year revolving loan (expiring February 1997), which is
convertible at the Company's option, to a five year term loan. The revolving
loan may be extended annually by consent of the banks. The Agreement has a
maximum commitment from the banks of $200 million, with actual commitment
amounts potentially limited
10
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by the periodic determination of a "Borrowing Base" (determined based on
discounted future net revenues expected from the Company's proved oil and gas
reserves, using various parameters set forth in the Agreement). The Borrowing
Base at December 31, 1994, was approximately $168.5 million, of which $115
million in loans was outstanding.
The Agreement, at the request of the banks, shall be secured by the Company's
interest in the Borrowing Base assets, including all related property and
equipment.
Interest on loans outstanding is based on the Agent Bank's Reference Rate, as
defined, or on the Agent Bank's CD Rate, or an adjusted Offshore Rate, and is
payable quarterly. At December 31, 1994, the interest rate in effect was 7.0%.
The Company is also required to pay certain fees in connection with the
facility, as well as comply with various covenants set forth in the Agreement.
The aggregate maturities of long-term debt outstanding as of December 31, 1994
are as follows (stated in thousands of dollars):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
1995.......................... $ --
1996.......................... --
1997.......................... 23,000
1998.......................... 23,000
1999.......................... 23,000
Thereafter...................... 46,000
--------
$115,000
========
5. INCOME TAXES:
The components of the income tax benefit (expense), before cumulative effect of
change in accounting principle, are as follows (stated in thousands of
dollars):
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
------- -------- --------
Current income taxes:
Federal....................................... $19,368 $ 17,216 $ 21,982
State......................................... 2,491 1,781 3,674
------- -------- --------
21,859 18,997 25,656
------- -------- --------
Deferred income taxes:
Federal....................................... (5,455) (11,176) (18,619)
State......................................... (1,198) (1,977) (3,506)
------- -------- --------
(6,653) (13,153) (22,125)
------- -------- --------
Total income tax benefit........................ $15,206 $ 5,844 $ 3,531
======= ======== ========
11
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of income tax benefit computed by applying the federal
statutory income tax rate to earnings (loss) before income taxes is as follows
(stated in thousands of dollars):
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- -------
Expected federal tax benefit (expense) at
statutory rate................................... $ 6,349 $(1,297) $ 3,426
State tax benefit (expense)....................... 1,097 (224) 619
Section 29 tight sands gas tax credits............ 6,112 7,434 2,128
Permanent differences arising from acquisitions
and other........................................ 1,648 (69) (2,642)
------- ------- -------
Total income tax benefit.......................... $15,206 $ 5,844 $ 3,531
======= ======= =======
The sources of deferred tax benefit (expense) and their tax effect are as
follows (stated in thousands of dollars):
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
Sale of gas and oil properties................ $ 16,498 $ -- $ --
Oil and gas property impairments.............. 4,782 2,250 5,694
Depreciation, depletion and amortization...... 1,779 13,079 1,392
Intangible drilling costs..................... (29,712) (28,482) (29,211)
-------- -------- --------
Total deferred income tax expense............. $ (6,653) $(13,153) $(22,125)
======== ======== ========
The net deferred tax liability reflected in the Company's consolidated balance
sheet at December 31, 1994 and 1993 results primarily from temporary
differences in the treatment of costs of oil and gas properties for financial
and income tax reporting purposes.
6. OVERRIDING ROYALTY INTEREST:
The Company's interest in certain gas properties acquired in 1991 is subject to
a previously existing undivided overriding royalty interest ("ORRI") held by an
unaffiliated party. The ORRI entitles the holder to receive natural gas
production (aggregating 4.0 Bcf at December 31, 1994) through March 1996,
subject to various daily and annual limitations. Shortfalls in production from
the wells subject to the ORRI must be made up by the Company with production
from other properties or through purchases on the spot market. At December 31,
1994, $1.6 million in accrued liabilities has been provided for future lease
operating expenses on the subject properties and for potential production
shortfalls.
7. EMPLOYEE BENEFIT PLAN:
The Company participates in a 401(k) savings plan ("Plan") sponsored by the
Parent. Under the Plan, eligible employees are permitted to defer receipt of up
to 7% of their compensation (subject to certain limitations by the Internal
Revenue Code of 1986, as amended). After one year of service, the Company will
contribute an amount equal to 5% of an employee's salary into the Plan, and the
Company will match employee contributions on a 100% basis, up to 5% of the
employee's salary. Amounts held under the Plan are invested among various
investment funds at the direction of the individual employee. Employee
contributions are 100% vested at the date of contribution. Company
contributions are vested 100% after five years of employment. For the years
ended December 31, 1994, 1993 and 1992, the Company expensed $1.1 million, $1.2
million and $1.2 million, respectively, for contributions made under the Plan.
12
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. MAJOR CUSTOMERS:
The Company markets its oil and gas production to numerous purchasers under a
combination of short and long-term contracts. One customer accounted for 11.1%
of the Company's consolidated revenues in 1993. There were no individual
customers which accounted for more than 10% of total revenues in 1994 or 1992.
Management believes that the loss of any major customers would not have a
material adverse effect on the Company due to the availability of other
purchasers for the Company's production.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under noncancelable leases, which extend
through 2002. In addition, certain office space no longer in use is being
subleased.
The future minimum rental payments required under the leases, net of sublease
income, are as follows (stated in thousands of dollars):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------
1995............................... $ 1,990
1996............................... 2,075
1997............................... 1,998
1998............................... 1,703
1999............................... 1,479
Thereafter........................... 3,822
-------
$13,067
=======
The Company has established a $1.9 million reserve as of December 31, 1994 for
rent payments on office space no longer in use. The reserve is net of expected
sublease proceeds of $2.5 million under sublease agreements currently in
effect.
The Company has sublet certain of the unused office space to PG&E for which
payments received aggregated $.4 million for each of the three years in the
period ended December 31, 1994. As of December 31, 1994, future sublease
payments from PG&E are expected to aggregate $1.5 million through 1998.
The Company has entered into an agreement to acquire 3-D seismic data in 1995
and 1996 for payments aggregating $3.9 million.
The Company's revenues are derived principally from uncollateralized sales to
customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other
conditions. The Company has not experienced significant credit losses on such
receivables.
The Company is directly or indirectly involved in various pending lawsuits and
claims. Reserves for lawsuits and claims are provided for when a loss is
determined to be probable and the amount can be reasonably estimated. In the
opinion of management, the ultimate outcome of such claims will not have a
material impact on the results of operations of the Company.
13
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OIL AND GAS PROPERTIES:
The following table sets forth certain information with respect to costs
incurred in connection with the Company's oil and gas producing activities
(stated in thousands of dollars):
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
-------- ------- --------
Property acquisitions:
Proved........................................... $ 14,119 $ 1,001 $ 14,308
Unproved......................................... 23,477 4,944 3,665
Development costs.................................. 49,050 76,099 70,771
Exploratory costs.................................. 26,921 9,653 11,263
-------- ------- --------
$113,567 $91,697 $100,007
======== ======= ========
Capitalized costs for oil and gas properties are as follows (stated in
thousands of dollars):
DECEMBER 31,
--------------------
1994 1993
--------- ---------
Oil and gas properties:
Proved............................................... $ 739,361 $ 880,198
Unproved............................................. 48,218 36,156
--------- ---------
787,579 916,354
Accumulated depreciation, depletion and amortization... (359,331) (351,105)
--------- ---------
$ 428,248 $ 565,249
========= =========
In the third quarter of 1994, the Company sold certain oil and gas properties
(the "Non-Strategic Properties") that did not fit within the Company's current
business strategy. The Company sold the Non-Strategic Properties, which had a
net book value of $131.7 million, to unrelated third parties for $134.0 million
in cash, resulting in a pre-tax gain of $2.3 million, which is included in
other income in the accompanying consolidated statement of operations.
In October and November 1994, the Company acquired producing and non-producing
oil and gas properties located in Louisiana, Texas and offshore Gulf of Mexico
for approximately $28.1 million in cash.
11. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED):
The estimates of proved oil and gas reserves utilized in the preparation of the
consolidated financial statements were prepared by independent petroleum
engineers at December 31, 1994. Such estimates are in accordance with
guidelines established by the Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve reports be
prepared under existing economic and operating conditions with no provision for
price and cost escalations except by contractual arrangements. All of the
Company's reserves are located in the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. In addition, a portion of the Company's proved reserves is
undeveloped, which increases the imprecision inherent in estimating reserves
which may ultimately be produced.
14
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proved oil and gas reserve information, together with the changes therein, are
as follows (oil in MBbls, gas in MMcf):
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
OIL GAS OIL GAS OIL GAS
------ ------- ------ ------- ------ -------
Proved reserves:
Beginning of year......... 20,074 364,181 23,861 414,099 23,255 406,332
Revisions................. (25) (27,253) (740) (15,631) 3,257 (11,110)
Extensions and
discoveries.............. 3,960 80,850 1,582 39,644 1,633 71,300
Purchases and minerals-in-
place.................... 557 12,529 74 2,656 433 16,900
Sales of minerals-in-
place.................... (9,346) (62,722) -- -- -- --
Production................ (3,525) (60,223) (4,703) (76,587) (4,717) (69,323)
------ ------- ------ ------- ------ -------
End of year............... 11,695 307,362 20,074 364,181 23,861 414,099
====== ======= ====== ======= ====== =======
Proved developed reserves:
Beginning of year......... 17,508 335,476 21,670 390,830 19,944 352,285
====== ======= ====== ======= ====== =======
End of year............... 11,134 262,819 17,508 335,476 21,670 390,830
====== ======= ====== ======= ====== =======
The standardized measure of discounted future net cash flows relating to proved
reserves is as follows (stated in thousands of dollars):
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
--------- ---------- ----------
Future cash inflows...................... $ 651,143 $1,073,395 $1,322,489
Future costs:
Production............................. (185,726) (313,606) (335,634)
Development............................ (45,437) (42,604) (41,961)
Income taxes........................... (74,250) (111,229) (186,259)
--------- ---------- ----------
Future net cash flows.................... 345,730 605,956 758,635
10% discount factor...................... (83,691) (156,009) (204,473)
--------- ---------- ----------
Standardized measure of discounted future
net cash flows.......................... $ 262,039 $ 449,947 $ 554,162
========= ========== ==========
15
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
Changes in the standardized measure of discounted future net cash flows
relating to proved reserves are as follows (stated in thousands of dollars):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Standardized measure, beginning of year.. $ 449,947 $ 554,162 $ 531,868
Net changes in sales prices, net of
production costs........................ (105,808) (64,251) 59,647
Revisions of quantity estimates.......... (22,467) (21,132) 10,585
Changes in future development costs,
including development costs incurred.... 12,722 8,155 15,504
Accretion of discount.................... 47,490 62,254 56,310
Extension and discoveries................ 69,331 44,267 91,800
Purchases of minerals-in-place........... 12,848 1,814 19,695
Sales of minerals-in-place............... (82,300)
Sales, net of production costs........... (121,457) (180,775) (156,480)
Net change in income taxes............... 679 43,429 (37,149)
Changes in timing and other.............. 1,054 2,024 (37,618)
--------- --------- ---------
Standardized measure, end of year........ $ 262,039 $ 449,947 $ 554,162
========= ========= =========
16
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(STATED IN THOUSANDS OF DOLLARS)
THREE MONTHS
ENDED MARCH 31,
----------------
1995 1994
------- -------
REVENUES:
Natural gas................................................. $19,140 $38,516
Oil and gas liquids......................................... 9,658 13,611
Other....................................................... 69 885
------- -------
28,867 53,012
------- -------
OPERATING EXPENSES:
Lease operating............................................. 8,536 13,689
General and administrative.................................. 4,280 4,761
Depreciation, depletion and amortization.................... 19,603 28,889
Exploration................................................. 2,695 3,770
------- -------
35,114 51,109
------- -------
OPERATING INCOME (LOSS)....................................... (6,247) 1,903
------- -------
OTHER INCOME (EXPENSE)
Interest expense............................................ (2,119) (1,392)
Interest income............................................. 155 525
Other, net.................................................. 144 140
------- -------
(1,820) (727)
------- -------
EARNINGS (LOSS) BEFORE TAXES.................................. (8,067) 1,176
INCOME TAX BENEFIT (EXPENSE):
Current..................................................... 5,727 5,439
Deferred.................................................... (1,316) (4,574)
------- -------
4,411 865
------- -------
NET EARNINGS (LOSS)........................................... $(3,656) $ 2,041
======= =======
17
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(STATED IN THOUSANDS OF DOLLARS)
MARCH 31, DECEMBER 31,
1995 1994
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 5,653 $ 10,888
Accounts receivable
Oil and gas.......................................... 11,875 20,009
Trade................................................ 6,798 6,030
Affiliates........................................... 14,708 7,616
Inventories........................................... 1,876 2,125
Prepaid expenses...................................... 2,437 3,635
--------- ---------
Total current assets............................... 43,347 50,303
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties, based on successful efforts
method.............................................. 802,337 787,579
Other property and equipment......................... 6,700 6,671
--------- ---------
809,037 794,250
Less: Accumulated depreciation, depletion and
amortization........................................ (381,754) (362,548)
--------- ---------
Net property and equipment.......................... 427,283 431,702
--------- ---------
OTHER ASSETS........................................... 540 655
--------- ---------
TOTAL ASSETS........................................... $ 471,170 $ 482,660
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 11,954 $ 15,394
Interest payable..................................... 65 67
Accrued liabilities.................................. 10,190 10,998
--------- ---------
Total current liabilities.......................... 22,209 26,459
--------- ---------
DEFERRED INCOME TAXES.................................. 73,845 72,529
ABANDONMENT, DISMANTLEMENT AND OTHER LIABILITIES....... 8,964 13,864
LONG-TERM DEBT......................................... 115,000 115,000
STOCKHOLDER'S EQUITY
Common stock......................................... 1 1
Additional paid-in capital........................... 335,470 335,470
Accumulated deficit.................................. (84,319) (80,663)
--------- ---------
Total stockholder's equity......................... 251,152 254,808
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............. $ 471,170 $ 482,660
========= =========
18
DALEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(STATED IN THOUSANDS DOLLARS)
THREE MONTHS
ENDED MARCH 31,
------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ (3,656) $ 2,041
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization................. 19,603 28,889
Deferred income taxes.................................... 1,316 4,574
Dry hole expense......................................... 933 952
Surrendered leases and other impairments................. 584 1,381
Loss (gain) on sale of assets............................ (3) (10)
Other.................................................... (1,309) (532)
-------- --------
17,468 37,295
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............... (3,540) 5,211
Decrease in prepaid expenses............................. 1,198 798
Increase (decrease) in accounts payable.................. (3,413) 170
Decrease in interest payable............................. (2) (30)
Decrease in accrued liabilities and other................ (559) (4,360)
-------- --------
Net cash provided by operating activities.............. 11,152 39,084
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (16,350) (12,358)
Decrease in drilling well accrual......................... (60) (1,576)
Proceeds from sale of property and equipment.............. 23 207
-------- --------
Net cash used in investing activities.................. (16,387) (13,727)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (5,235) 25,357
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 10,888 48,117
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 5,653 $ 73,474
======== ========
19
DALEN CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of DALEN Corporation and
Subsidiaries (the "Company") have not been audited by independent public
accountants. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the interim periods included herein have been made. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been omitted. These consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included elsewhere herein.
2. In April 1995, Enserch Exploration, Inc., 99.2% owned by ENSERCH, entered
into a definitive agreement to acquire 100% of the capital stock of the Company
for $340 million plus the assumption of $115 million of bank debt.
3. In the third quarter of 1994, the Company sold certain oil and gas
properties that did not fit within the Company's current business strategy. The
Company sold the properties, which had a net book value of $131.7 million, to
unrelated third parties for $134.0 million in cash, resulting in a pre-tax gain
of $2.3 million. As a result of the sale, operating results for the three
months ended March 31, 1995 are not comparable to the three months ended March
31, 1994.
20
(b) Pro forma financial information
ENSERCH EXPLORATION, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
On May 15, 1995, an affiliate of Mobil signed a letter of intent to purchase a
40% interest in EEX's Green Canyon project ("Green Canyon Transaction"). An
affiliate of Reading & Bates Corp. had previously signed a letter of intent to
purchase a 20% interest in this project. Upon completion of the Green Canyon
Transaction, EEX will own a 40% working interest in the Green Canyon project and
remain the operator. On April 27, 1995, another affiliate of Mobil exercised its
option to acquire a 40% interest in the Garden Banks project ("Garden Banks
Transaction"). See Note (b) of Notes to Condensed Pro Forma Financial
Statements.
In June 1995, EEX acquired the international gas and oil operations of ENSERCH
by the issuance of 1,075,147 shares of common stock of EEX and acquired the
SACROC unit Kelly field, Scurry County, Texas ("SACROC") properties from ENSERCH
for $1.65 million in cash. The number of shares issued to effect the acquisition
of the international operations will be adjusted at closing based on the net
proceeds per share received by EEX in a public offering of common stock.
The following unaudited condensed pro forma financial statements give effect
to the DALEN acquisition and related financing and the completion of the Garden
Banks and Green Canyon Transactions. The condensed pro forma financial
statements for the year ended December 31, 1994, and for the three months ended
March 31, 1995, have been prepared from the historical financial statements of
EEX and DALEN after adjustments as described below. The EEX financial
information as presented herein is based on the historical results of operations
of Enserch Exploration Partners, Ltd. ("EP"), after certain eliminations and
adjustments, including a pro forma provision for income taxes, combined with the
results of operations of the properties acquired from ENSERCH in 1995. The
financial statements of EEX at December 31, 1994 and March 31, 1995 have been
restated in a manner similar to a pooling-of-interests to reflect the
acquisition of these operations under common control. The unaudited condensed
pro forma balance sheet as of March 31, 1995, has been presented as if the above
described transactions occurred on that date. The unaudited condensed pro forma
statements of income assume that the DALEN Acquisition occurred at the beginning
of each period presented.
The unaudited condensed pro forma statements of income are not necessarily
indicative of the financial results that would have occurred had the above-
described events been consummated on the indicated dates, nor are they
necessarily indicative of future results.
EEX will account for the DALEN acquisition as a purchase. All acquired
assets, consisting principally of gas and oil properties, will be evaluated
following the acquisition for purposes of assigning the excess of the purchase
price over DALEN's book value. It is anticipated that essentially all of the
valuation adjustments will be assigned to gas and oil properties, and the
condensed pro forma financial statements have been prepared on that basis.
DALEN followed the successful efforts method of accounting for gas and oil
properties, whereby unsuccessful exploratory costs are charged to expense as
incurred. Costs applicable to productive wells and development dry holes are
capitalized and amortized on the units-of-production method based on estimated
proved reserve quantities. EEX follows the full-cost method of accounting for
gas and oil properties, whereby all exploratory costs, including costs of both
successful and unsuccessful exploratory wells, are capitalized and amortized on
the units-of-production method based on estimated proved reserve quantities.
For purposes of presenting the unaudited condensed pro forma financial
statements of the combined entities, DALEN's statements of operations have been
converted to the full-cost method of accounting.
EEX borrowed $350 million under a bank revolving credit facility to fund the
purchase of DALEN and to reduce advances from ENSERCH. A $150 million bridge
loan was used to refinance DALEN's $115 million bank debt and reduce advances
from ENSERCH. The bridge loan is expected to be repaid later this year with the
proceeds of a $150 million asset-based financing. Proceeds from a planned
offering of common stock of EEX will be applied to repay EEX's bank debt.
Although EEX expects to reduce the general and administrative expenses for
the combined operations of EEX and DALEN with the elimination of duplicative
functions, the amount of such reduction cannot be reasonably determined at this
time.
21
ENSERCH EXPLORATION, INC.
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
MARCH 31, 1995
PRO FORMA PRO FORMA
EEX DALEN ADJUSTMENTS(a) AS ADJUSTED
---------- -------- -------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents.............. $ 655 $ 5,653 $ 32,300(b) $ 38,608
Accounts receivable--trade........ 13,988 18,673 32,661
Accounts receivable--affiliates... 18,225 14,708 32,933
Other............................. 7,106 4,313 11,419
---------- -------- --------- ----------
Total........................... 39,974 43,347 32,300 115,621
---------- -------- --------- ----------
Net property, plant and equipment... 1,282,717 427,283 (71,297) 1,638,703
---------- -------- --------- ----------
Other assets........................ 16,258 540 16,798
---------- -------- --------- ----------
Total........................... $1,338,949 $471,170 $ (38,997) $1,771,122
========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bridge loan....................... $ $ $ 150,000 $ 150,000
Accounts payable--trade........... 55,554 11,954 67,508
Accounts payable--ENSERCH
Companies........................ 3,481 3,481
Temporary advances--ENSERCH
Companies (net).................. 65,449 (45,000) 20,449
Current portion of capital lease
obligations...................... 4,760 4,760
Other............................. 3,407 10,255 13,662
---------- -------- --------- ----------
Total........................... 132,651 22,209 105,000 259,860
---------- -------- --------- ----------
Capital lease obligations........... 150,419 (54,000) 96,419
---------- -------- --------- ----------
Long-term debt...................... 115,000 235,000 350,000
---------- -------- --------- ----------
Deferred income taxes............... 286,342 73,845 (73,845) 286,342
---------- -------- --------- ----------
Other liabilities................... 32,895 8,964 41,859
---------- -------- --------- ----------
Common shareholders' equity......... 736,642 251,152 (251,152) 736,642
---------- -------- --------- ----------
Total........................... $1,338,949 $471,170 $ (38,997) $1,771,122
========== ======== ========= ==========
See Notes to Unaudited Condensed Pro Forma Financial Statements.
22
ENSERCH EXPLORATION, INC.
UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
PROPERTIES
DIVESTED PRO FORMA PRO FORMA
EEX DALEN IN 1994(c) ADJUSTMENTS AS ADJUSTED
-------- -------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Natural gas........... $144,550 $115,593 $(10,271) $249,872
Oil and condensate.... 30,880 45,814 (11,677) 65,017
Natural gas liquids... 2,377 5,240 (1,408) 6,209
Other................. 1,333 2,341 (2,236) 1,438
-------- -------- -------- --------
Total............... 179,140 168,988 (25,592) 322,536
-------- -------- -------- --------
Costs and expenses:
Production and
operating............ 30,963 32,008 (9,558) 53,413
Exploration........... 9,136 24,886 (22) $(24,864)(d) 9,136
Depreciation and
amortization......... 80,308 101,151 (14,826) (12,581)(d) 154,052
Sale of inactive
pipeline............. (7,551) (7,551)
General,
administrative and
other................ 20,022 18,057 (598) 37,481
Taxes, other than
income............... 13,518 11,525 (2,015) 23,028
-------- -------- -------- -------- --------
Total............... 146,396 187,627 (27,019) (37,445) 269,559
-------- -------- -------- -------- --------
Operating income (loss). 32,744 (18,639) 1,427 37,445 52,977
Other income (expense)--
net.................... (314) 2,845 (2,280) 251
Interest income......... 7,239 3,656 (3,656)(e) 7,239
Interest expense........ -- (6,002) (25,848)(e) (31,850)
-------- -------- -------- -------- --------
Income (loss) before
income taxes........... 39,669 (18,140) (853) 7,941 28,617
Income taxes (benefit).. 13,861 (15,206) (299) 10,905 (f) 9,261
-------- -------- -------- -------- --------
Net income (loss)....... $ 25,808 $ (2,934) $ (554) $ (2,964) $ 19,356
======== ======== ======== ======== ========
Net income per share.... $ .24 $ .18
======== ========
Weighted average shares
outstanding............ 105,656 105,656
======== ========
See Notes to Unaudited Condensed Pro Forma Financial Statements.
23
ENSERCH EXPLORATION, INC.
UNAUDITED CONDENSED PRO FORMA STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1995
PRO FORMA PRO FORMA
EEX DALEN ADJUSTMENTS AS ADJUSTED
------- ------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Natural gas .......... $31,885 $19,140 $51,025
Oil and condensate.... 8,947 8,537 17,484
Natural gas liquids... 735 1,121 1,856
Other................. 94 69 163
------- ------- -------
Total............... 41,661 28,867 70,528
------- ------- -------
Costs and expenses:
Production and
operating............ 8,393 6,154 14,547
Exploration........... 2,991 2,695 $(2,695)(d) 2,991
Depreciation and
amortization......... 19,093 19,603 (2,069)(d) 36,627
General,
administrative and
other................ 7,042 4,280 11,322
Taxes, other than
income............... 3,578 2,382 5,960
------- ------- ------- -------
Total............... 41,097 35,114 (4,764) 71,447
------- ------- ------- -------
Operating income (loss). 564 (6,247) 4,764 (919)
Other income (expense)-
net.................... (24) 144 120
Interest income......... 1,026 155 (155)(e) 1,026
Interest expense........ (605) (2,119) (5,844)(e) (8,568)
------- ------- ------- -------
Income (loss) before
income taxes........... 961 (8,067) (1,235) (8,341)
Income taxes (benefit).. 337 (4,411) 829 (f) (3,245)
------- ------- ------- -------
Net income (loss)....... $ 624 $(3,656) $(2,064) $(5,096)
======= ======= ======= =======
Net income (loss) per
share.................. $ .01 $ (.05)
======= =======
Weighted average shares
outstanding............ 105,658 105,658
======= =======
See Notes to Unaudited Condensed Pro Forma Financial Statements.
24
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
(a) Adjusts the DALEN balance sheet to include in gas and oil properties the
purchase price in excess of book value, eliminate DALEN's deferred income
taxes and shareholder's equity and include the borrowings to finance the
DALEN acquisition. Also adjusts the EEX balance sheet to reflect the
completion of the Garden Banks and Green Canyon Transactions.
(IN THOUSANDS)
Adjustments to gas and oil properties:
Purchase price............................................ $340,000
Less--DALEN shareholder's equity.......................... (251,152)
DALEN deferred income taxes............................ (73,845)
--------
Remainder................................................. 15,003
Completion of Garden Banks and Green Canyon Transactions
(see Note (b)):
Reduction of capital lease obligations.................. (54,000)
Cash receipts........................................... (32,300)
--------
Total................................................. $(71,297)
========
Borrowings:
Bridge loan............................................... $150,000
Borrowing under bank revolving credit facility............ 350,000
--------
Total................................................. $500,000
========
Used for:
Payment of DALEN purchase price........................... $340,000
Repay DALEN bank debt..................................... 115,000
Reduce advances from ENSERCH.............................. 45,000
--------
Total................................................. $500,000
========
Changes in long-term debt:
Borrowing under bank revolving credit facility............ $350,000
Less DALEN bank debt repaid from proceeds of bridge loan.. (115,000)
--------
Increase in long-term debt............................ $235,000
========
The DALEN acquisition will be recorded based on the balance sheet as of the
closing date, June 8, 1995. It is anticipated that essentially all of the
valuation adjustments will be assigned to gas and oil properties, and the
condensed pro forma financial statements have been prepared on that basis.
(b) Reduces property and capital lease obligations by $54 million as of July 1,
1995, when an affiliate of Mobil is expected to complete the acquisition of
a partial interest in the Garden Banks project. Also, as consideration for
the sale of partial interests in the Garden Banks and Green Canyon
projects, EEX expects to receive cash of $32.3 million, an interest in a
gas and oil property and future work commitments related to the projects.
The cash consideration will be recorded as a reduction of the carrying
value of gas and oil properties. The conveyance of an interest in the gas
and oil property and the future work commitments do not require recording
in the financial statements of EEX.
(c) Eliminates revenues, expenses and a gain of $2.3 million in other income,
all as attributable to properties divested by DALEN in the third quarter of
1994.
25
(d) Adjusts the DALEN statements of operations from the successful efforts to
the full-cost method of accounting for gas and oil properties by
eliminating DALEN's exploratory costs from Costs and Expenses and adjusting
depreciation and amortization as follows:
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1994 1995
------------ ---------------
(IN THOUSANDS)
Eliminate successful efforts depreciation and
amortization................................ $(86,325) $(19,603)
Add full cost amortization................... 73,744 17,534
-------- --------
Net........................................ $(12,581) $ (2,069)
======== ========
(e) Adjusts interest income and interest expense to reflect EEX's financing of
a portion ($155 million) of the DALEN purchase price and refinancing of
DALEN bank debt in connection with the DALEN acquisition.
(f) Provides income taxes on pro forma adjustments to income before income
taxes at the applicable statutory federal rate of 35%. Eliminates Section
29 tight gas sands credits and permanent differences recorded by DALEN and
reduces state income taxes incurred by DALEN to the rate applicable to the
ENSERCH Companies; the eliminations and reductions total $8.1 million for
the year ended December 31, 1994, and $1.3 million for the three months
ended March 31, 1995.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Enserch Exploration, Inc.
Date: June 20, 1995 By: /s/ J. W. Pinkerton
--------------------------------
J. W. Pinkerton,
Vice President