-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEz0pppAccfZFUIsYu3euAZfWod6idarVi/Xkq8GhhFWNm0u0SBCQfjUn4684qFA KzeOMESos0cLSAx2De773A== 0000931006-96-000004.txt : 19960328 0000931006-96-000004.hdr.sgml : 19960328 ACCESSION NUMBER: 0000931006-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENSERCH EXPLORATION INC CENTRAL INDEX KEY: 0000931006 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752556975 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11413 FILM NUMBER: 96539384 BUSINESS ADDRESS: STREET 1: 4849 GREENVILLE AVE STE 1500 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2143697893 MAIL ADDRESS: STREET 1: 300 S ST PAUL ST CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: NEW ENSERCH EXPLORATION INC DATE OF NAME CHANGE: 19941004 10-K 1 =========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-11413 ENSERCH EXPLORATION, INC. Texas 75-2556975 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4849 Greenville Avenue Suite 1500 Dallas, Texas 75206 (Address of principal executive office) (Zip Code) Registrant's Telephone Number, Including Area Code - (214) 369-7893 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on which Registered ------------------- --------------------- Common Stock ($1.00 par value) New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No (_) Aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 15, 1996: $205,800,579. Shares of the Registrant's Common Stock outstanding as of March 15, 1996: 125,927,727 shares. Documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Proxy Statement filed on or about March 29, 1996 (Part III). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (_) =========================================================================== FORM 10-K ANNUAL REPORT For the Fiscal Year Ended December 31, 1995 TABLE OF CONTENTS
Page PART I ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . . . . . 1 Reorganization. . . . . . . . . . . . . . . . . 1 Recent Developments . . . . . . . . . . . . . . 1 DALEN Acquisition. . . . . . . . . . . . . 1 EEX Common Stock Offering. . . . . . . . . 1 Garden Banks Project . . . . . . . . . . . 2 Green Canyon Project . . . . . . . . . . . 2 Rocky Mountain Properties. . . . . . . . . 3 International Operations . . . . . . . . . 3 Resignation. . . . . . . . . . . . . . . . 3 Sales Information . . . . . . . . . . . . . . . 3 Major Customers . . . . . . . . . . . . . . . . 3 Competition . . . . . . . . . . . . . . . . . . 3 Government Regulation . . . . . . . . . . . . . 4 Environmental Matters. . . . . . . . . . . 4 Others Laws and Regulations. . . . . . . . 5 Employees . . . . . . . . . . . . . . . . . . . 5 Offices . . . . . . . . . . . . . . . . . . . . 6 Executive Officers of Registrant. . . . . . . . 6 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . 7 ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . .10 ITEM 4. Submission of Matters to a Vote of Security Holders.10 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . .10 ITEM 6. Selected Financial Data. . . . . . . . . . . . . . .10 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . .10 ITEM 8. Financial Statements and Supplementary Data. . . . .10 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . .10 PART III ITEM 10. Directors and Executive Officers of the Registrant .10 ITEM 11. Executive Compensation . . . . . . . . . . . . . . .10 ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . .10 ITEM 13. Certain Relationships and Related Transactions . . .10 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . .11 APPENDIX A Financial Information. . . . . . . . . . . . . . A-1
PART I ITEM 1. Business General Enserch Exploration, Inc. ("EEX" or the "Company"), an 83.4% owned subsidiary of ENSERCH Corporation ("ENSERCH"), has been engaged in the exploration for and the development, production and sale of natural gas and crude oil since 1918. EEX is one of the largest independent exploration and production companies in the United States, with a reserve base of 1,792 billion cubic feet of natural gas equivalent ("Bcfe") at January 1, 1996, as estimated by DeGolyer and MacNaughton ("D&M"), independent petroleum consultants. Approximately 75% of these reserves consist of natural gas. EEX has grown through exploration, development and acquisition activities concentrated in major production basins located offshore in the Gulf of Mexico and onshore in East Texas, North Central Texas and the U.S. Gulf Coast. Reorganization EEX's gas and oil operations represent the gas and oil exploration and production business of ENSERCH. From 1985 through December 30, 1994, this business was conducted primarily through Enserch Exploration Partners, Ltd. ("EP"), a limited partnership in which a minority interest (less than 1% since 1989), was held by the public. At year-end 1994, pursuant to a plan for the reorganization of EP ("Reorganization"), EEX acquired, through a series of transactions, all of the operating properties of EP Operating Limited Partnership ("EPO"), EP's 99%-owned operating partnership, in exchange for shares of EEX common stock. On December 30, 1994, the Reorganization was consummated, EPO was merged into EEX, EP was liquidated and the EEX common stock held by EP was distributed to EP's limited and general partners in accordance with their partnership interests. Upon the liquidation of EP and distribution of EEX common stock, public unitholders of EP received 805,914 shares (.8%) and ENSERCH received 103,775,328 shares (99.2%) of EEX's 104,581,242 shares then outstanding. Trading of EEX common stock began on the New York Stock Exchange under the symbol "EEX" on January 3, 1995. In 1995, EEX acquired ENSERCH's international and SACROC operations. Recent Developments DALEN Acquisition. On June 8, 1995, EEX acquired all of the capital stock of DALEN Corporation ("DALEN"), an independent gas and oil company engaged in the exploration for and the development and production of natural gas and crude oil (the "DALEN Acquisition"). Through the DALEN Acquisition, EEX acquired proved reserves totaling 397 Bcfe at June 30, 1995, and other assets for cash of $340 million and assumed DALEN's bank debt of $115 million. The DALEN Acquisition was initially funded through EEX's borrowings. DALEN's activities are oriented primarily toward natural gas and are concentrated in selected major production regions, including the Gulf Coast, the Gulf of Mexico and the Mid-Continent. EEX Common Stock Offering. On September 26, 1995, EEX sold 20 million shares of its common stock to the public for net proceeds of approximately $208 million after expenses, and ENSERCH's ownership was reduced to 83.4%. Proceeds from the sale were used to reduce borrowings incurred to finance the DALEN Acquisition. Garden Banks Project. In the third quarter of 1995, an affiliate of Mobil Corporation ("Mobil") acquired a 40% working interest in EEX's Garden Banks Block 388 project, a six-block unit located 200 miles southwest of New Orleans, Louisiana, in 2,200 feet of water. EEX received cash, property interests and future work commitments on the project. In addition, EEX was relieved of capital and operating lease obligations of approximately $140 million as well as 40% of the capital expenditures required to complete the project. EEX now owns a 60% working interest and remains the operator of the project. To date, two wells that had been drilled and completed prior to the facility moving in are producing on Block 388, and a third well, which is in progress, is expected to begin producing in the second quarter of 1996. Two wells have been drilled on adjacent Block 387 and are planned for subsea completion and tie-back to the production facility, which will allow production to commence during the second quarter of 1996. EEX plans to drill and complete a fourth well from the platform in 1996, bringing to six the number of wells producing by year-end. In January 1996, the combined flow rate from two wells previously drilled on Block 388 was equivalent to 4,000 barrels ("Bbls") of oil per day, down from the initial production rate, which was the equivalent of approximately 9,000 Bbls of oil per day. While a decline in daily production from the initial rate is normal, the magnitude of the decline is being carefully evaluated. Development plans, which may include water-injection wells, will be dictated by characteristics of formations and reservoirs, including flow rates and declines, which become better defined with each additional well and each additional month of operation. Gross proved reserves attributed thus far to this project by D&M at the beginning of 1996 were equivalent to 39 million barrels ("MMBbls") of oil. On September 13, 1995, EEX, together with Mobil, submitted the highest bids and was awarded exploration and development rights on ten additional blocks in the Garden Banks area. Green Canyon Project. In October 1995, another affiliate of Mobil and an affiliate of Reading & Bates Corp. purchased a 40% and 20% working interest, respectively, in EEX's Green Canyon Block 254 project, a four-block unit located approximately 150 miles south of New Orleans, Louisiana, in 2,200 to 3,400 feet of water. EEX received cash, an interest in a gas and oil property and future work commitments. EEX now owns a 40% working interest and remains the operator of the project. Gross proved reserves attributed to this project thus far by D&M are equivalent to nearly 72 MMBbls of oil, and work continues to further delineate the extent of identified hydrocarbon-bearing formations. The reserves are based on two wells and one sidetrack drilled prior to 1995 on Block 254 and a third productive well drilled in late 1995 which flowed at a rate equivalent to 3,000 Bbls of oil per day on a limited test. The next confirmation well is being drilled on Block 298 and is planned to bottom on Block 297 at 17,500 feet. The well, if successful, will extend the field limits 3,000 feet to the south and add additional proved reserves. Simultaneously, EEX and its partners are reviewing potential production alternatives that are expected to lead to the ultimate design and sizing of a production facility. Tentatively, the group is examining the merits of a floating facility capable of handling the equivalent of 70,000 Bbls of oil per day with wells connected by subsea templates and bundled flow lines. First production is expected from Green Canyon in 1999. On May 10, 1995, EEX, on behalf of its Green Canyon partners, submitted the highest bids and was awarded seven additional blocks located within ten miles of this project. Rocky Mountain Properties. In December 1995, EEX announced plans to offer for sale its Rocky Mountain area properties, which are in six states, aggregate over 250,000 net acres and had proved reserves of 169 Bcfe at January 1, 1996. These properties were mostly acquired as part of the DALEN Acquisition and are not within the core area of EEX's other properties. See "Financial Review - Natural Gas and Oil Exploration and Production" in Appendix A. International Operations. In 1995, EEX acquired the international gas and oil operations of ENSERCH in exchange for 1,240,000 shares of EEX common stock and $2.6 million in cash. The acquired operations consist of concessions in Indonesia, Malaysia and Israel and had proved reserves of 5 MMBbls of oil at January 1, 1996, all on the Indonesian properties. EEX had previously managed these properties for ENSERCH. In 1995, EEX announced the conclusion of a Memorandum of Understanding to form a joint venture with ONGC Videsh Ltd., a wholly owned subsidiary of The Oil and Natural Gas Corporation of New Delhi, India, to explore and develop hydrocarbon resources in India and other countries. Resignation. J. T. Williams, who was elected Vice Chairman and Chief Executive Officer of EEX effective July 1, 1995, resigned effective February 1, 1996. Mr. Williams was paid severance in accordance with his employment contract which was entered into as part of the acquisition of DALEN. Sales Information Sales data are set forth under "Operating Data" included in Appendix A to this report. Major Customers EEX sells its gas and oil under long- and short-term contracts. In 1995, Enserch Energy Services, Inc. ("EES"), the ENSERCH natural-gas marketing subsidiary, was EEX's largest gas customer, purchasing gas under two long-term variable-priced contracts. A division of ENSERCH, Lone Star Gas Company, purchases gas under a long-term fixed-priced service contract. In 1995, approximately 10% of EEX's natural-gas volumes was sold to Lone Star Gas Company. The continuing maturity of gas markets is causing an evolution in the gas marketing efforts of EEX. Unbundling of services by interstate pipelines, deregulation efforts of many state regulatory bodies and the explosion of financial instruments tied to gas markets have radically altered marketing opportunities for producers. EEX has concluded that it can achieve the greatest economic benefit from using the services of gas marketing organizations rather than having its own large staff, while maintaining a core staff to ensure market prices are being received. Oil sales contracts are for one year or less, and prices generally are based upon field posted prices plus negotiated bonuses. EEX may utilize futures contracts, commodity price swaps and other financial instruments to reduce exposure of EEX's gas and oil production to price volatility. See "Financial Review - Gas and Oil Market Volatility" and Note 7 of the Notes to Consolidated Financial Statements included in Appendix A for additional information on hedging activities. Competition All phases of the gas and oil industry are highly competitive. EEX competes in the acquisition of properties, the search for and development of reserves, the production and sale of gas and oil and the securing of the labor and equipment required to conduct operations. EEX's competitors include major gas and oil companies, other independent gas and oil concerns and individual producers and operators. Many of these competitors have financial and other resources that substantially exceed those available to EEX. Gas and oil producers also compete with other industries that supply energy and fuel. Government Regulation The gas and oil industry is extensively regulated by federal, state and local authorities. Legislation affecting the gas and oil industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, have issued rules and regulations binding on the gas and oil industry and its individual members, some of which carry substantial penalties for the failure to comply. Inasmuch as such laws and regulations are frequently amended, reinterpreted or expanded, EEX is unable to predict the future cost or impact of complying with such laws and regulations. The Railroad Commission of Texas regulates the production of natural gas and oil by EEX in Texas. Similar regulations are in effect in all states in which EEX explores for and produces natural gas and oil. These regulations generally require permits for the drilling of gas and oil wells and regulate the spacing of the wells, the prevention of waste, the rate of production and the prevention and cleanup of pollution and other materials. Environmental Matters. Gas and oil operations are subject to extensive federal, state and local laws and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund Law", and similar state statutes and, with respect to federal leases, to interruption or termination by governmental authorities on account of environmental and other considerations. Regulations of the Department of the Interior currently impose absolute liability upon the lessee under a federal lease for the costs of clean-up of pollution resulting from a lessee's operations, and such lessee may also be subject to possible legal liability for pollution damages. EEX maintains insurance against costs of clean-up operations but is not fully insured against all such risks. A serious incident of pollution may result in the Department of the Interior requiring lessees under federal leases to suspend or cease operation in the affected area. With respect to any EEX operations conducted on offshore federal leases, liability may generally be imposed under the Outer Continental Shelf Lands Act for costs of clean-up and damages caused by pollution resulting from such operations, other than damages caused by acts of war or the negligence of third parties. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" (which includes owners and operators of offshore facilities) related to the prevention of oil spills and liability for damages resulting from such spills in the United States waters. In addition, it imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. On August 25, 1993, the Minerals Management Service (the "MMS"), a federal agency, published an advance notice of its intention to adopt a rule under the OPA that would require owners and operators of offshore gas and oil facilities to establish $150 million in financial responsibility. Under the proposed rule, financial responsibility could be established through insurance, guaranty, indemnity, surety bond, letter of credit, qualification as a self-insurer or a combination thereof. There is substantial uncertainty as to whether insurance companies or underwriters will be willing to provide coverage under the OPA because the statute provides for direct lawsuits against insurers who provide financial responsibility coverage, and most insurers have strongly protested this requirement. The financial tests or other criteria that will be used to judge self-insurance are also uncertain. EEX cannot predict the final form of the financial responsibility rule that will be adopted by the MMS, but such rule has the potential to result in the imposition of substantial additional annual costs on EEX and otherwise materially adversely affect EEX. The impact of the rule, however, should not be any more adverse to EEX than it would be to other similarly situated owners or operators in the Gulf of Mexico. The operations of EEX are also subject to the Clean Water Act and the Clean Air Act, as amended, and comparable state statutes. The EPA is currently implementing regulations pursuant to the Clean Air Act, and the states are also implementing programs. EEX may be required to incur certain capital expenditures over the next five to ten years for air pollution control equipment. EEX's onshore operations are subject to numerous United States federal, state and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment, including CERCLA. Such regulations, among other things, impose absolute liability on the lessee under a lease for the cost of clean-up of pollution resulting from a lessee's operations, subject the lessee to liability for pollution damages, may require suspension or cessation of operations in affected areas and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the remediation and clean-up costs and for damages to natural resources. EEX has received inquiries regarding and could be named as a potentially responsible party at two Superfund sites. However, EEX does not believe that any liabilities in connection with such matters will have a material adverse effect on its business or results of operations. For offshore operations, lessees must obtain the MMS and various other federal and state agencies' approval for exploration, development and production plans prior to the commencement of such operations. Similarly, the MMS has promulgated other regulations governing the plugging and abandoning of wells located offshore and the removal of all production facilities. Under certain circumstances, including but not limited to, conditions deemed to be a threat or harm to the environment, the MMS may also require any EEX operation on federal leases to be suspended or terminated in the affected area. Other Laws and Regulations. Various laws and regulations require permits for drilling wells and the maintenance of bonding requirements in order to drill or operate wells and also regulate the spacing and location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, the prevention of waste of gas and oil, the prevention and cleanup of pollutants, the maintenance of certain gas/oil ratios and other matters. EEX's operations are also subject to various conservation requirements. These include the regulation of the size and shape of drilling and spacing units or proration units, the density of wells which may be drilled, maximum rates of production and unitization or pooling of oil and gas properties. In the aggregate, compliance with federal and state rules and regulations is not expected to have a material adverse effect on EEX's operations. Employees At December 31, 1995, EEX had 465 full-time employees. Offices The principal offices of EEX are located at 4849 Greenville Avenue, Suite 1200, Dallas, Texas 75206, and its telephone number is (214) 369-7893. Production offices are maintained in Dallas, Houston, Athens, Bridgeport, Longview and Midland, Texas. Executive Officers of Registrant Set forth below is information concerning the executive officers of EEX:
Name Age Title and Business Experience ---- --- ----------------------------- D. W. Biegler 49 Chairman and Director since September 1994 and Chief Executive Officer from September 1994 to June 1995 and since February 1996. He also served Enserch Exploration Holdings, Inc. ("EEH")* as Chairman since January 1992 and a Director since September 1991. Since May 1993, Mr. Biegler has been Chairman and President, Chief Executive Officer of ENSERCH. He served Lone Star Gas Company, the utility division of ENSERCH, as President from 1985 and as Chairman from 1989 and was elected President and Chief Operating Officer of ENSERCH in 1991. Gary J. Junco 46 President, Chief Operating Officer and Director since September 1994. He also served EEH as President, Chief Operating Officer since January 1991 and Director since 1985. R. L. Kincheloe 65 Senior Vice President, Offshore and International, since September 1994. He also served EEH as Senior Vice President, Offshore and International since January 1992 and was Senior Vice President, Drilling and Production Operations, from April 1985 to January 1992. B. K. Irani 44 Senior Vice President, Production and Engineering Division, since June 1995. He had been Vice President, Production and Engineering Division, from September 1994 to June 1995. He also served as Vice President, Production and Engineering of EEH since September 1988 and a Vice President of EEH since August 1984. J. P. McCormick 54 Senior Vice President and Chief Financial Officer since June 1995. He served Lone Star Gas Company, a division of ENSERCH, as Senior Vice President, Transmission, from February 1993 to June 1995 and as Senior Vice President, Finance, from July 1991 to 1993. Prior to joining Lone Star Gas Company, he practiced public accounting for 26 years and was a partner in KPMG Peat Marwick and KMG Main Hurdman and served in management positions in each firm. Randall B. Wilson 47 Vice President and General Counsel since June 1995. He was Vice President and General Counsel of DALEN from June 1990 to June 1995. *EEH, a Delaware corporation, was formerly named "Enserch Exploration, Inc." and served as the Managing General Partner of EP until December 30, 1994.
There are no family relationships between any of the above officers. All officers of the Company are elected annually by the Board of Directors. Officers may be removed by the Board of Directors whenever, in its judgment, the best interest of the Company will be served thereby. ITEM 2. Properties EEX's domestic activities are focused in four regions: the Gulf of Mexico; East Texas; North Central Texas; and the Gulf Coast Region of Texas, Louisiana, Mississippi and Alabama. The following table sets forth estimated net proved reserves of EEX by region, as estimated by D&M, at January 1, 1996:
Oil Natural and Gas Gas Liquids Total Region (Bcf) (MMBbls) (Bcfe) ------ ------- -------- ------ Gulf of Mexico 127.6 36.4 346.0 East Texas 846.6 7.7 892.8 North Central Texas and other 248.9 18.1 357.5 Gulf Coast 139.7 4.3 165.5 ------- ---- ------- Total Domestic 1,362.8 66.5 1,761.8 International 5.0 30.0 ------- ---- ------- Total 1,362.8 71.5 1,791.8 ======= ==== =======
See Note 12 of the Notes to Consolidated Financial Statements included in Appendix A to this report for additional information on gas and oil reserves. During 1995, EEX filed Form EIA-23 with the Department of Energy reflecting reserve estimates for the year 1994. Such reserve estimates were not materially different from the 1994 reserve estimates reported in Note 11 of the Notes to Consolidated Financial Statements included in Appendix A to this report. Developed and undeveloped lease acreage as of December 31, 1995, are set forth below:
Developed Acres Undeveloped Acres ------------------ ------------------- Gross Net(1) Gross Net(1) ------- ------- --------- --------- Domestic Offshore 141,842 40,329 755,240 416,272 Onshore 535,294 337,790 1,541,826 901,017 ------- ------- --------- --------- Total 677,136 378,119 2,297,066 1,317,289 International 2,489,567 618,637 ------- ------- --------- --------- Total 677,136 378,119 4,786,633 1,935,926 ======= ======= ========= ========= (1) Represents the proportionate interest of EEX in the gross acres under lease.
EEX purchased about 329,000 net acres of leasehold interests in 1995, 184,000 of which were in the Gulf of Mexico. EEX's Gulf of Mexico holdings totaled some 457,000 net acres, with an average working interest of 49% in 212 blocks and an overriding royalty interest in 13 other blocks. EEX operates 103 offshore blocks. EEX also canceled or allowed to expire 15 Gulf of Mexico leases during the year, which had been condemned following drilling on or near them or after geophysical and geological findings. EEX plans further drilling on undeveloped acreage but at this time cannot specify the extent of the drilling or predict how successful it will be in establishing commercial reserves sufficient to justify retention of the acreage. The primary terms under which the undeveloped acreage can be retained by the payment of delay rentals without the establishment of gas and oil reserves expire as follows:
Undeveloped Acres Expiring ------------------------------------------- Domestic International ------------------- ------------------- Gross Net Gross Net --------- ------- -------- ------- 1996 663,852 380,697 273,841 68,460 1997 424,957 243,698 456,401 114,100 1998 and later 1,208,257 692,894 1,759,325 436,077
Drilling rights with regard to a portion of the undeveloped acreage may be allowed to expire before the expiration of primary terms specified in this schedule by nonpayment of delay rentals. At December 31, 1995, EEX owned interests in 2,125 gas wells (1,384.2 net) and 2,345 oil wells (488 net) in the United States and 4 oil wells (1 net) in Indonesia. Of these, 226 gas wells (166.4 net) and 43 oil wells (34.9 net) were dual completions in single boreholes. Drilling activity during the three years ended December 31, 1995, including the activities of DALEN for all periods shown, is set forth below:
1995 1994 1993 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Exploratory Wells: Productive 38 24.6 21 13.8 7 3.8 Dry 47 26.8 56 30.5 33 15.6 -- ---- -- ---- -- ---- Total 85 51.4 77 44.3 40 19.4 == ==== == ==== == ==== Development Wells: Productive 41 26.4 90 63.0 131 86.6 Dry 6 3.5 15 7.5 9 4.5 -- ---- --- ---- --- ---- Total 47 29.9 105 70.5 140 91.1 == ==== === ==== === ==== Note: Productive wells are either producing wells or wells capable of commercial production, although currently shut-in. The term "gross" refers to the wells in which a working interest is owned, and the term "net" refers to gross wells multiplied by the percentage of EEX's working interest owned therein.
At December 31, 1995, EEX was participating in 69 wells (41 net), which were either being drilled or in some stage of completion. The number of wells drilled is not a significant measure or indicator of the relative success or value of a drilling program because the significance of the reserves and economic potential may vary widely for each project. It is also important to recognize that reported completions may not necessarily correspond to capital expenditures, since Securities and Exchange Commission guidelines do not allow a well to be reported as complete until it is ready for production. In the case of offshore wells, this may be several years following initial drilling because of the timing of construction of platforms, pipelines and other necessary facilities. Additional information relating to the gas and oil activities of EEX is set forth in Note 12 of the Notes to Consolidated Financial Statements included in Appendix A to this report. Planned property, plant and equipment additions for 1996 total $187 million. EEX leases approximately 205,000 square feet of office space for its offices in Dallas, Texas, under leases expiring in December 1998 and August 2002. ITEM 3. Legal Proceedings EEX is a party to lawsuits arising in the ordinary course of its business. EEX believes, based on its current knowledge and the advice of counsel, that all lawsuits and claims would not have a material adverse effect on its financial condition. Additional information required hereunder is set forth in Note 11 of the Notes to Consolidated Financial Statements included in Appendix A to this report. ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required hereunder is set forth under "Common Stock Market Prices and Dividend Information" included in Appendix A to this report. ITEM 6. Selected Financial Data The information required hereunder is set forth under "Selected Financial Data" included in Appendix A to this report. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required hereunder is set forth under "Financial Review" included in Appendix A to this report. ITEM 8. Financial Statements and Supplementary Data The information required hereunder is set forth under "Independent Auditors' Report," "Management Report on Responsibility for Financial Reporting," "Statements of Consolidated Operations," "Statements of Consolidated Cash Flows," "Consolidated Balance Sheets," "Statements of Owners' Equity," "Notes to Consolidated Financial Statements" and "Quarterly Results" included in Appendix A to this report. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III ITEMS 10-13. Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 (except for information set forth at the end of Part I under "Business - Executive Officers of Registrant") is incorporated by reference from EEX's definitive proxy statement which is being filed pursuant to Regulation 14A on or about March 26, 1996. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)-1 Financial Statements The following items appear in the Financial Information section included in Appendix A to this report:
Item Page ---- ---- Selected Financial Data . . . . . . . . . . . . . . . . . A-2 Operating Data. . . . . . . . . . . . . . . . . . . . . . A-4 Financial Review. . . . . . . . . . . . . . . . . . . . . A-5 Independent Auditors' Report. . . . . . . . . . . . . . . A-12 Management Report on Responsibility for Financial Reporting A-13 Financial Statements: Statements of Consolidated Operations. . . . . . . A-14 Statements of Consolidated Cash Flows. . . . . . . A-15 Consolidated Balance Sheets. . . . . . . . . . . . A-16 Statements of Owners' Equity . . . . . . . . . . . A-17 Notes to Consolidated Financial Statements. . . . . . . A-18 Quarterly Results . . . . . . . . . . . . . . . . . . . A-32 Common Stock Market Prices and Dividend Information . . A-33
(a)-2 Financial Statement Schedules The consolidated financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto. (a)-3 Exhibits 3.1 Restated Articles of Incorporation of the Company as currently in effect. 3.2 Bylaws of the Company as currently in effect. 10.1* Lease Agreement for Garden Banks 388-1 between the Company and Enserch Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included as Exhibit 10.3 to the Company's Registration Statement on Form S-4 (No. 33-56792). 10.2* Lease Agreement for Garden Banks 388-2 between the Company and Enserch Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included as Exhibit 10.4 to the Company's Registration Statement on Form S-4 (No. 33-56792). 10.3* Lease Agreement for Mississippi Canyon 441 between the Company and Enserch Exploration Holdings, Inc. (formerly Enserch Exploration, Inc.) included as Exhibit 10.5 to the Company's Registration Statement on Form S-4 (No. 33-56792). 10.4* Participation Agreement between EP Operating Limited Partnership and Mobil Producing Texas and New Mexico Inc. included as Exhibit 10.6 to the Company's Registration Statement on Form S-4 (No. 33-56792). 10.5* Stock Purchase Agreement dated as of April 12, 1995, By and Between PG&E Enterprises, as Seller, and Registrant, as Buyer, filed as Exhibit 10.7 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.6* Gas Purchase Contract between EP Operating Company and Lone Star Gas Company, a division of ENSERCH Corporation, dated January 1, 1988, Amendatory Agreement dated June 1, 1990, Amendatory Agreement dated July 1, 1992 and Letter Amendment dated August 30, 1993, filed as Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1994. 10.7* Letter Agreement regarding intercompany loans effective January 1, 1995, between the Company and ENSERCH Corporation filed as Exhibit 10.8 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.8* Natural Gas Sales and Purchase Contract between EP Operating Limited Partnership and Enserch Gas Company, each effective March 1, 1993, filed as Exhibit 10.9 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.9* Natural Gas Sales and Purchase Contract between EP Operating Limited Partnership and Enserch Gas Company, effective March 1, 1993, and amendment effective November 1, 1994, filed as Exhibit 10.10 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.10* Agency Agreement between EP Operating Limited Partnership and Enserch Gas Company effective March 1, 1993, filed as Exhibit 10.11 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.11* Credit Agreement among Enserch Exploration, Inc. as Borrower, Texas Commerce Bank National Association, as Administrative Agent, The Chase Manhattan Bank, N.A., as Syndication Agent, Chemical Bank, as Auction Agent and The Lenders now or hereafter Parties hereto dated as of May 1, 1995, filed as Exhibit 10.19 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.12* Tax Sharing Agreement between ENSERCH Corporation and Enserch Exploration, Inc., filed as Exhibit 10.21 to the Company's Registration Statement on Form S-2 (No. 33-60461). 10.13* Amended and Restated Limited Liability Company Agreement of MIStS Issuer L.L.C. dated August 4, 1995, filed as Exhibit 10.22 to the Company's Registration Statement on Form S-2 (No. 33-60461). Executive Compensation Plan and Arrangements (Exhibits 10.14 through 10.20): 10.14* Enserch Exploration, Inc. 1994 Stock Incentive Plan, filed as Exhibit 10.1 to the Company's Registration Statement on Form S-4 (No. 33-56792). 10.15 Performance Incentive Plan - Calendar Year 1996. 10.16 ENSERCH Corporation Deferred Compensation Plan and Amendment No. 1 dated March 28, 1995, and Amendment No. 2 dated January 1, 1996. 10.17* ENSERCH Corporation Deferred Compensation Trust, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.18* ENSERCH Corporation Retirement Income Restoration Plan and Amendment No. 1 thereto dated September 30, 1994, filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1994. 10.19* ENSERCH Corporation Retirement Income Restoration Trust, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.20 Form of Change of Control Agreement executed by certain executive officers of the Company. 21 Subsidiaries of the Company. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of DeGolyer and MacNaughton. 24 Powers of Attorney. 27 Financial Data Schedule. 99* Proxy Statement dated at or about March 29, 1996, being filed with the Securities and Exchange Commission on or about March 29, 1996. - -------------------- Long-term debt is described in Note 4 of the Notes to Consolidated Financial Statements included in Appendix A to this report. EEX agrees to provide the Commission, upon request, copies of instruments defining the rights of holders of such long-term debt, which instruments are not filed herewith pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K. * Incorporated herein by reference and made a part hereof. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: ENSERCH EXPLORATION, INC. March 26 , 1996 By /s/ D. W. Biegler ----- -------------------------- D. W. Biegler, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated.
Signature and Title Date ------------------- ---- D. W. Biegler, Chairman and President, Chief Executive Officer and Director; Gary J. Junco, President, Chief Operating Officer and Director; Frederick S. Addy, March 26, 1996 Director; B. A. Bridgewater, Jr., Director; -- J. P. McCormick, Senior Vice President and Chief Financial Officer; and J. W. Pinkerton, Vice President and Controller, Chief Accounting Officer
By: /s/ D. W. Biegler ----------------------- D. W. Biegler Individually and As Attorney-in-Fact APPENDIX A ENSERCH EXPLORATION, INC. INDEX TO FINANCIAL INFORMATION December 31, 1995 Page Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . A-2 Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . A-12 Management Report on Responsibility for Financial Reporting. . . . . . A-13 Financial Statements: Statements of Consolidated Operations . . . . . . . . . . . . . . . A-14 Statements of Consolidated Cash Flows . . . . . . . . . . . . . . . A-15 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . A-16 Statements of Owners' Equity. . . . . . . . . . . . . . . . . . . . A-17 Notes to Consolidated Financial Statements. . . . . . . . . . . . . A-18 Quarterly Results. . . . . . . . . . . . . . . . . . . . . . . . . . . A-32 Common Stock Market Prices and Dividend Information. . . . . . . . . . A-33
SELECTED FINANCIAL DATA-ENSERCH EXPLORATION, INC. As of or for Year Ended December 31 ----------------------------------------------------------------------- 1995(a) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------- (In millions except per share amounts) INCOME STATEMENT DATA Natural gas revenues . . . . . . $ 157.3 $ 144.5 $ 146.4 $ 118.6 $ 123.5 $ 142.8 Oil and condensate revenues. . . 56.5 30.9 36.9 45.1 54.0 64.9 Natural gas liquids revenues.. . 4.9 2.4 4.1 6.5 2.0 2.2 Other revenues . . . . . . . . . 2.1 1.3 2.4 1.3 1.5 .4 ------ -------- -------- -------- ------- -------- Total revenues. . . . . . . . . 220.8 179.1 189.8 171.5 181.0 210.3 Production and operating expenses 48.7 31.7 31.4 29.6 35.1 34.7 Exploration. . . . . . . . . . . 11.8 9.1 8.7 11.2 12.2 12.0 Depreciation and amortization. . 115.7 80.8 78.4 76.7 73.7 72.7 (Sale) write-down of inactive pipeline (7.5) 16.5 Write-down of gas and oil properties .9 10.2 53.1 .3 General, administrative and other 30.7 19.8 30.0 23.1 23.6 37.3 Taxes, other than income . . . . 19.2 13.2 15.9 15.6 17.3 16.5 -------- -------- -------- -------- -------- -------- Total expenses . . . . . . . . 227.0 147.1 174.6 172.7 215.0 173.5 Operating income (loss). . . . . (6.2) 32.0 15.2 (1.2) (34.0) 36.8 Other income (expense)-net . . . .1 (.3) 6.0 (.1) Interest income. . . . . . . . . 1.0 .7 2.0 3.7 3.2 2.9 Interest and other financing costs (14.6) (20.9) (30.6) (20.7) (20.0) (10.6) -------- -------- -------- -------- -------- -------- Income (loss) before income taxes (19.7) 11.5 (13.4) (18.2) (44.8) 29.0 Income taxes (benefit) . . . . (7.2) (.3) (3.4) .4 .9 -------- -------- -------- -------- -------- -------- Net income (loss). . . . . . . $ (12.5) $ 11.8 $ (10.0) $ (18.6) $ (44.8) $ 28.1 Pro Forma Information - Change in Tax Status (b): Income (loss) before income taxes $ 11.5 $ (13.4) $ (18.2) $ (44.8) $ 29.0 Income taxes (benefit) . . . . 4.0 (4.7) (6.4) (17.0) 9.9 -------- -------- -------- -------- -------- Net income (loss). . . . . . . $ 7.5 $ (8.7) $ (11.8) $ (27.8) $ 19.1 Net income (loss) per share (pro forma for periods prior to 1995) . $ (.11) $ .07 $ (.08) $ (.11) $ (.26) $ .18 Weighted average shares outstanding 111.1 105.8 105.8 105.8 105.8 105.8 CASH FLOW DATA Net cash provided by operating activities . . . . . . . . . $ 84.0 $ 61.7 $ 79.5 $ 85.2 $ 68.3 $ 84.9 Net cash used in investing activities . . . . . . . . . (388.2) (108.8) (129.0) (58.7) (97.7) (120.6) Net cash provided by (used in) financing activities . . . . 305.5 47.0 48.9 (25.7) 29.2 35.8 COMMON STOCK DATA Market Price (c) High . . . . . . . . . . . . $ 14 7/8 $ 11 $ 12 1/4 $ 8 1/4 $ 10 $ 11 3/8 Low. . . . . . . . . . . . . 9 1/4 5 3/4 7 3/8 6 1/4 6 1/2 8 1/4 Common Shareholders' Equity per Share 7.41 6.96 Shares Outstanding at Year-end 125.9 105.8 BALANCE SHEET DATA (at year-end) Property, plant and equipment - net $1,670.6 $1,254.0 $1,046.4 $1,018.4 $1,056.2 $1,085.1 Total assets . . . . . . . . . 1,776.8 1,381.2 1,111.5 1,068.8 1,126.7 1,156.7 CAPITAL STRUCTURE (at year-end) Capital lease obligations (d). $ 98.0 $ 155.9 $ $ $ $ Long-term debt (d) . . . . . . 160.0 298.0 266.0 234.0 202.0 Company-obligated mandatorily redeemable preferred securities of subsidiary 150.0 Owners' equity . . . . . . . . 932.2 736.0 630.7 671.7 721.4 797.3 -------- -------- ------- ------- ------- ------- Total. . . . . . . . . . . . $1,340.2 $ 891.9 $ 928.7 $ 937.7 $ 955.4 $ 999.3 (a) 1995 includes results of DALEN since acquisition on June 8, 1995. (b) Pro forma net income and per share data for periods prior to 1995 include a pro forma provision for income taxes on partnership operations based on the applicable federal statutory tax rate. (c) Market price per share amounts for years prior to 1995 represent prices of Enserch Exploration Partners, Ltd. units. (d) Including current portion.
A-2
OPERATING DATA-ENSERCH EXPLORATION, INC. As of or for Year Ended December 31 ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ----------------------------------------------------------------------- OPERATING DATA Sales volumes Natural gas (Bcf). . . . . . . . 90.2 67.1 70.0 65.2 70.0 76.8 Oil and condensate (MMBbls). . . 3.4 2.0 2.1 2.3 2.7 2.9 Natural gas liquids (MMBbls) . . .5 .2 .3 .5 .1 .1 Total volumes (Bcfe) (a) . . . 113.4 80.5 84.9 82.2 86.7 95.0 Average sales price Natural gas (per Mcf). . . . . . $ 1.74 $ 2.15 $ 2.09 $ 1.82 $ 1.76 $ 1.86 Oil and condensate (per Bbl) . . 16.86 15.38 17.24 19.20 20.35 22.36 Natural gas liquids (per Bbl). . 9.38 10.85 12.09 13.38 17.54 16.26 Total (per Mcfe) (a) . . . . . 1.93 2.21 2.21 2.07 2.07 2.21 Costs and expenses (per Mcfe) (a) Production and operating (b) . . $ .43 $ .39 $ .37 $ .36 $ .40 $ .37 Exploration. . . . . . . . . . . .10 .11 .10 .14 .14 .13 Depreciation and amortization. . 1.02 1.00 .92 .93 .85 .77 General, administrative and other .27 .25 .35 .28 .27 .39 Taxes, other than income . . . . .17 .16 .19 .19 .20 .17 Net Wells Drilled. . . . . . . . . . . . 81 74 79 19 67 53 Productive . . . . . . . . . . 51 44 64 8 52 42 Proved Reserve Data (at year-end) Natural gas (Bcf). . . . . . . 1,362.8 1,041.7 1,086.5 1,101.4 1,168.1 1,224.1 Oil and condensate (MMBbls) (c) 71.5 50.6 39.3 39.2 40.0 31.1 Total (Bcfe) (a) . . . . . . 1,791.8 1,345.3 1,322.3 1,336.6 1,408.1 1,410.7 Standardized Measure of Discounted Future Net Cash Flows (in millions) $ 1,227 $ 879 $ 1,103 $ 1,111 $ 1,064 $ 1,240 A-3 (a) Oil and natural gas liquids are converted to Mcf equivalents (Mcfe) on the basis of one barrel equals 6.0 Mcfe. (b) Excludes related production, severance and ad valorem taxes. (c) Reserves include natural gas liquids attributable to leasehold interests.
A-4 ENSERCH EXPLORATION, INC. FINANCIAL REVIEW OVERVIEW On December 30, 1994, through a series of transactions, Enserch Exploration, Inc. (EEX) acquired all of the partnership interests of EP Operating Limited Partnership, the 99% owned operating partnership of Enserch Exploration Partners, Ltd. (EP). In connection with these transactions, ENSERCH Corporation (ENSERCH) and certain of its subsidiaries (collectively, the ENSERCH companies) received EP's interest in and assumed EP's obligations under certain equipment lease arrangements (the equipment was simultaneously subleased to EEX) and assumed approximately $395 million of EP's debt. In 1995, EEX acquired the international gas and oil operations and the SACROC operations of ENSERCH, and 1994 and prior financial statements were restated. See Note 1 of the Notes to Consolidated Financial Statements for additional information. On June 8, 1995, EEX acquired all of the capital stock of DALEN Corporation (DALEN) for cash of $340 million and assumed DALEN's bank debt of $115 million. The acquisition increased proved reserves 397 billion cubic feet of natural-gas equivalent (Bcfe) and lowered the average reserve life of EEX's properties by about 25%. In the third quarter of 1995, a Mobil Corporation (Mobil) affiliate acquired a 40% working interest in EEX's Garden Banks Block 388 project, representing the sale of 81.2 Bcfe of proved reserves. EEX, which now owns a 60% working interest in and remains the operator of the project, received cash, property interests and future work commitments on the project. In addition, EEX was relieved of capital and operating lease obligations of approximately $140 million, as well as 40% of the capital expenditures required to complete the project. In October 1995, another affiliate of Mobil purchased a 40% working interest in EEX's Green Canyon Block 254 project, and an affiliate of Reading & Bates Corp. purchased a 20% working interest in the project. The Green Canyon transactions represented the sale of 206 Bcfe of reserves proved during 1995. EEX, which now has a 40% working interest in and remains the operator of the project, received cash, an interest in a gas and oil property and future work commitments. In December 1995, EEX announced plans to offer for sale its Rocky Mountain area properties, which are in six states and aggregate over 250 thousand net acres. These properties were mostly acquired as part of the DALEN acquisition and are being offered for sale because they are not within the core area of EEX's other properties. Total reserves for the Rocky Mountain properties at January 1, 1996, as estimated by DeGolyer and MacNaughton (D&M), independent petroleum consultants, were 223 Bcfe, of which 169 Bcfe were proved. Production from these properties in 1995 averaged 40 million cubic feet of natural-gas equivalent per day. The sale is expected to be concluded in the second quarter of 1996. EEX intends to use the proceeds from the sale to reduce debt. A-5 RESERVES EEX's natural-gas reserves at January 1, 1996 were 1.36 trillion cubic feet (Tcf), compared with 1.04 Tcf the year earlier, as estimated by D&M. The sharply higher gas reserves are principally attributable to the DALEN acquisition. Oil and condensate reserves, including natural gas liquids attributable to leasehold interests, were 71 million barrels (MMBbls), compared with the year-earlier level of 51 MMBbls. On a Bcfe basis, over 200% of 1995 production was replaced by additions and revisions, exclusive of the net gain from the DALEN acquisition. RESULTS OF OPERATIONS EEX had a net loss of $12.5 million ($.11 per share) for 1995, compared with net income of $7.5 million ($.07 per share) for 1994 and a net loss of $8.7 million ($.08 per share) for 1993, after income taxes on partnership operations. Results for 1994 benefited from a $4.9 million after-tax ($7.6 million pretax) gain from the sale of assets, while 1993 results included a $6.6 million after-tax ($10.2 million pretax) write-down of non- U.S. gas and oil properties. Excluding these unusual items from 1994 and 1993 results, the 1995 net loss of $12.5 million ($.11 per share) compares with net income of $2.6 million ($.02 per share) in 1994 and a net loss of $2.1 million ($.02 per share) in 1993. There was an operating loss of $6.2 million in 1995, compared with operating income, before unusual items, of $24 million in 1994 and $25 million in 1993. Operating income is strongly influenced by fluctuations in product prices and volumes as shown in the table of Operating Data. DALEN's operations are included since acquisition on June 8, 1995 and contributed 1995 operating income of $6.9 million, with revenues of $70.4 million and operating expenses of $63.5 million. DALEN's natural-gas revenues were $49 million on sales of 31 billion cubic feet (Bcf) at an average sales price of $1.60 per thousand cubic feet (Mcf). DALEN's oil and other revenues totaled $21 million; the average sales price for oil was $16.61 per barrel, and oil sales volumes were 1.1 MMBbls. The following comparisons of period-to-period operating results exclude the impact of DALEN in 1995 and the previously noted unusual items in 1994 and 1993. There was an operating loss for 1995 of $13 million, compared with income of $24 million for 1994 and $25 million for 1993. Revenues for 1995 were $29 million (16%) lower than in 1994, reflecting a $37 million (25%) decrease in natural-gas revenues, but an $8 million (23%) improvement in oil and other revenues. The average natural-gas sales price per Mcf of $1.82 in 1995, excluding DALEN, declined 15% from the 1994 average of $2.15, causing a $23 million decline in revenues. Natural-gas sales volumes of 59 Bcf, excluding DALEN, were 12% less than in 1994, reducing revenues by $14 million. The lower volumes primarily resulted from less capital spending to replace gas production due to low gas prices and the normal decline in production from several mature fields and Mississippi Canyon Block 441 in the Gulf of Mexico. The higher oil revenues reflect a 10% improvement in the average sales price and a 12% increase in sales volumes from the start-up of production from the Garden Banks project in late September and increased production from exploration and development activities in Hardeman and Shackelford counties in North Texas. A-6 Production and operating expenses for 1995, excluding DALEN, were $5.1 million (16%) higher than in 1994, primarily due to expenses of $4.4 million for the Garden Banks project and higher maintenance costs. As expected, the commencement of sales from the Garden Banks project in late September detracted from 1995 results, producing an operating loss of $1.9 million, as fixed operating costs exceeded revenues from the initial levels of production. Some operating costs and amortization vary with production, but other costs and the equipment lease costs are essentially fixed and will decline on a per unit basis as production increases. Operating results from the Garden Banks project are expected to improve in 1996 as production begins from several additional development wells and the related equipment lease and other fixed costs are spread over greater production. Based on current prices, the Garden Banks project is expected to achieve breakeven results when production reaches the equivalent of 11 to 12 thousand gross barrels of oil per day, which is projected to occur by mid-year 1996. Exploration expenses were $1.9 million higher than in the 1994 period due to increased international exploration activity. General and administrative (G&A) expenses increased $5.3 million from 1994, with 1995 expenses including a $1.8 million provision for injuries and damages claims and a $1.0 million charge for severance costs related to redundant employees of EEX as a result of the DALEN acquisition, while 1994 expenses benefited from credits of $2.0 million associated with litigation accruals. Excluding the previously mentioned unusual items, the slight decrease in operating income from 1993 to 1994 was attributable to a 6% decline in revenues resulting from decreased sales volumes for both natural gas and oil and lower oil prices, partially offset by slightly higher natural-gas prices. Natural-gas sales volumes decreased 4% due to reduced production from several high-volume fields in South Texas and offshore Louisiana. G&A expenses for 1994 were lower than in 1993 primarily due to a $9.1 million favorable variance in the provision for injuries and damages claims. All other costs and expense categories for 1994 were little changed from the year earlier. The total amortization rate per thousand cubic feet of natural-gas equivalent was $1.02 in 1995, compared with $1.00 in 1994 and $.92 in 1993. The increase in 1995 over 1994 was primarily due to the conversion of the Garden Banks lease from an operating to a capital lease in connection with the year-end 1994 reorganization, partially offset by a benefit resulting from reserve additions for Green Canyon Block 254 and DALEN. The increase in 1994 over 1993 was principally due to the conversion of the Mississippi Canyon operating lease to a capital lease and higher onshore exploratory expenditures. Excluding DALEN, a lower level of production caused depreciation and amortization to be less in 1995 than in 1994 and only slightly higher in 1994 compared with 1993. A-7 Interest expense and other financing costs for 1995 were $15 million, compared with $21 million for 1994 and $31 million for 1993. The 1995 costs are primarily associated with the DALEN acquisition. Interest for 1994 and 1993 related to debt assumed by ENSERCH companies in connection with the reorganization, and 1993 also included $6.0 million for interest due royalty owners. The following shows net income for the years ended December 31, 1994 and 1993 as adjusted for (1) the interest on the debt assumed by ENSERCH companies and related income-tax expense and (2) income-tax expense on partnership operations.
Year Ended December 31 -------------------------- 1994 1993 ---------- --------- (In thousands) Net income (loss) as shown on EEX's statements of consolidated operations $ 11,801 $(9,960) Interest expense included in statements of consolidated operations on debt assumed by ENSERCH companies 20,919 24,825 Income-tax benefit (expense) on: Partnership operations (4,324) 1,268 Interest expense on debt assumed by ENSERCH companies (7,322) (8,689) -------- ------- Net income, as adjusted $ 21,074 $ 7,444 ======== =======
GAS AND OIL MARKET VOLATILITY Results of operations are dependent upon the difference between the prices received for gas and oil produced and the costs of finding and producing such resources. On an energy equivalent basis, gas reserves at January 1, 1996 constituted approximately 75% of total reserves, and gas production accounted for approximately 80% of total production for 1995. Accordingly, variations in gas prices have a more significant impact on operations than variations in oil prices. Gas production as a percentage of total production is expected to decrease as a result of the development of the offshore Gulf of Mexico properties. A portion of the risk associated with fluctuations in the price of natural gas and oil is managed through the use of hedging techniques such as gas and oil swaps, collars and futures agreements. In total, gas and oil price hedging activities increased 1995 revenues by $.1 million versus $4.3 million in 1994 but reduced revenues by $3.7 million in 1993. As a result of a temporary cessation to the historical correlation of natural-gas prices in the physical market that serves as the delivery point for NYMEX futures contracts and the prices in certain other physical markets where the Company sells a substantial portion of its natural-gas production, a $6.0 million mark-to-market loss was recognized in the fourth quarter of 1995 on contracts that no longer served as hedges (see Note 7 of the Notes to Consolidated Financial Statements). At December 31, 1995, EEX had outstanding swaps, collars and futures agreements that were entered into as hedges extending through December 31, 1996 to exchange payments on 39 Bcf of natural A-8 gas and 655 thousand barrels of oil. At December 31, 1995, after giving effect to the $6.0 million mark-to-market loss mentioned above, there were $1.3 million of net unrealized and unrecognized hedging losses based on the difference between the strike price and the NYMEX futures price for the applicable trading month. In addition, there were $2.4 million of realized losses on hedging activities which were deferred and will be applied as a reduction in revenues in the month of physical sale of production. CAPITALIZED COSTS Gas and oil prices are subject to seasonal and other fluctuations. A decline in prices from year-end 1995 levels or other factors, without mitigating circumstances, could cause a future write-down of capitalized costs and a non-cash charge against income under the full-cost accounting method cost center ceiling limitation. At June 30 and September 30, 1995, EEX's full-cost ceiling amount attributable to properties acquired in the DALEN acquisition was significantly less than the unamortized cost of producing properties acquired, but at December 31, 1995, the ceiling amount exceeded costs by some $19 million. EEX believes that the DALEN properties have significant exploration and development potential and that the unamortized cost of the gas and oil properties acquired is recoverable from future production. The Securities and Exchange Commission has granted a waiver of the full-cost ceiling limitation on these properties through June 30, 1996. 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. Cash Flows Net cash flows from operating activities for 1995 totaled $84 million, compared with $62 million in 1994 and $80 million in 1993. Cash flows before changes in operating assets and liabilities were $95 million in 1995 versus $85 million in 1994 and $75 million in 1993. Investing activities required net cash flows of $388 million, compared with $109 million in 1994 and $129 million in 1993. The 1995 requirement included $333 million required for the DALEN acquisition and $86 million provided by the collection of a note receivable from an affiliated company. Capital expenditures of $189 million increased $57 million from 1994, principally related to the DALEN properties. Retirements of property, plant and equipment in 1995 include cash received in connection with the sale of interests in the Garden Banks and Green Canyon projects. In June 1995, EEX borrowed $500 million, including $350 million under a four-year revolving credit agreement, 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. In September 1995, EEX sold 20 million shares of its common stock to the public for net proceeds of $208 million, which were used to reduce the borrowing under the revolving credit agreement. The common stock issue increased the public A-9 ownership in EEX to 16.6%. In August 1995, the proceeds from $150 million of mandatorily redeemable preferred securities issued by a subsidiary of EEX were used to replace temporary borrowings. The dividends on the preferred securities are included in interest and other financing costs. 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. EEX has a $350 million four-year revolving credit agreement, $190 million of which was unused at December 31, 1995. In addition, EEX has a $50 million borrowing arrangement with ENSERCH to meet short-term cash needs, of which $34 million was unused at year-end 1995. EEX does not anticipate paying cash dividends in the foreseeable future. Capital Structure Total capitalization at December 31, 1995 was $1.3 billion versus $.9 billion at December 31, 1994. Common shareholders' equity at December 31, 1995 was 70% of total capitalization. EEX intends to use the proceeds from the sale of its Rocky Mountain area properties to reduce debt. In addition, EEX is obligated under operating lease arrangements with ENSERCH companies for facilities used on the Garden Banks Block 388 project (see Note 11 of the Notes to Consolidated Financial Statements). Capital Budget Planned property, plant and equipment additions for 1996 total $187 million, compared with actual expenditures of $189 million in 1995 and $133 million in 1994. FOURTH-QUARTER RESULTS EEX had a fourth-quarter 1995 net loss of $5.4 million ($.04 per share), compared with a net loss of $2.3 million ($.02 per share) for the 1994 fourth quarter, before the $4.9 million after-tax gain from the sale of assets. The operating loss for the 1995 fourth quarter was $4.7 million versus income of $2.0 million for the same period of 1994, excluding the gain from the sale of assets. The reduced fourth-quarter 1995 income reflects somewhat lower prices for natural gas, the $6 million mark-to-market loss recognized on gas price hedging activities and the previously noted operating loss associated with the start-up of Garden Banks production. A-10 NEW ACCOUNTING STANDARD Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" will become effective for the Company in 1996. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. The new standard is not expected to have a significant effect on results of operations or financial position in the foreseeable future since EEX's gas and oil properties continue to be separately evaluated at the end of each accounting period under full-cost accounting rules. A-11 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Enserch Exploration, Inc.: We have audited the accompanying consolidated balance sheets of Enserch Exploration, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related statements of consolidated operations, cash flows and owners' equity for each of the three years in the period ended December 31, 1995. 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. 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 the Consolidated Financial Statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Dallas, Texas February 9, 1996 A-12 MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of Enserch Exploration, Inc. is responsible for the preparation and integrity of the financial statements and other information contained in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts that represent management's best estimates and judgments. Management has established practices and procedures designed to support the reliability of the estimates and minimize the possibility of a material misstatement. Management has established and maintains internal accounting controls that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The system of internal control is supported by written policies and procedures and the control environment is regularly evaluated by both ENSERCH Corporation's internal auditors and Deloitte & Touche LLP, the Company's independent auditors. The Board of Directors maintains an Audit Committee composed of Directors who are not employees. The Audit Committee meets periodically with management, the independent auditors and the internal auditors to discuss significant accounting, auditing, internal accounting control and financial reporting matters related to Enserch Exploration, Inc. The independent auditors and the internal auditors have free access to the Audit Committee. Management believes that, as of December 31, 1995, the overall system of internal accounting controls is sufficient to accomplish the objectives discussed herein. /s/Gary J. Junco /s/J. Philip McCormick /s/Jerry W. Pinkerton - ------------------- ----------------------- --------------------- Gary J. Junco J. Philip McCormick Jerry W. Pinkerton President and Chief Senior Vice President Vice President Operating Officer and Chief Financial and Controller Officer February 9, 1996 A-13
ENSERCH EXPLORATION, INC. STATEMENTS OF CONSOLIDATED OPERATIONS Year Ended December 31 ------------------------------------------ 1995 1994 1993 ------------------------------------------ (In thousands except per share amounts) Revenues Natural gas . . . . . . . . . . . . . . . . $157,308 $144,550 $146,355 Oil and condensate. . . . . . . . . . . . . 56,525 30,880 36,863 Natural gas liquids . . . . . . . . . . . . 4,859 2,377 4,148 Other . . . . . . . . . . . . . . . . . . . 2,159 1,333 2,430 -------- -------- -------- Total . . . . . . . . . . . . . . . . . . 220,851 179,140 189,796 -------- -------- -------- Costs and Expenses Production and operating. . . . . . . . . . 48,695 31,667 31,404 Exploration . . . . . . . . . . . . . . . . 11,848 9,136 8,668 Depreciation and amortization . . . . . . . 115,685 80,819 78,418 Sale of inactive pipeline . . . . . . . . . (7,551) Write-down of non-U.S. gas and oil properties 929 10,191 General, administrative and other . . . . . 30,658 19,807 29,980 Taxes, other than income. . . . . . . . . . 19,189 13,233 15,950 -------- -------- -------- Total . . . . . . . . . . . . . . . . . . 227,004 147,111 174,611 -------- -------- -------- Operating Income (Loss) . . . . . . . . . . . (6,153) 32,029 15,185 Other Income (Expense) - Net. . . . . . . . . 64 (314) Interest Income . . . . . . . . . . . . . . . 1,027 671 2,041 Interest and Other Financing Costs. . . . . . (14,617) (20,919) (30,584) -------- -------- --------- Income (Loss) Before Income Taxes . . . . . . (19,679) 11,467 (13,358) Income Taxes (Benefit). . . . . . . . . . . . (7,177) (334) (3,398) -------- -------- --------- Net Income (Loss) . . . . . . . . . . . . . . $(12,502) $ 11,801 $ (9,960) ======== ======== ========= Pro Forma Information - Change in Tax Status: Income (loss) before income taxes . . . . . $ 11,467 $(13,358) Income taxes (benefit) (including income taxes on partnership operations). . . . . 3,990 (4,666) -------- -------- Net Income (Loss) . . . . . . . . . . . . . $ 7,477 $ (8,692) ======== ======== Net Income (Loss) Per Share (Pro forma for 1994 and 1993) $ (.11) $ .07 $ (.08) ======= ======== ======== Weighted Average Shares Outstanding . . . . . 111,137 105,821 105,821 ======= ======== ======= See Notes to Consolidated Financial Statements.
A-14
ENSERCH EXPLORATION, INC. STATEMENTS OF CONSOLIDATED CASH FLOWS Year Ended December 31 ------------------------------------------ 1995 1994 1993 ----------- --------- --------- (In thousands) OPERATING ACTIVITIES Net income (loss) . . . . . . . . . . . . . . . $ (12,502) $ 11,801 $ (9,960) Depreciation and amortization . . . . . . . . . 115,685 80,819 78,418 Deferred income-tax benefit . . . . . . . . . . (9,520) (366) (3,494) Sale of inactive pipeline . . . . . . . . . . . (7,551) Write-down of non-U.S. gas and oil properties . 929 10,191 Other . . . . . . . . . . . . . . . . . . . . . (11,760) (10,332) 8,994 Changes in current operating assets and liabilities Accounts receivable . . . . . . . . . . . . . (22,824) 3,464 3,839 Other current assets. . . . . . . . . . . . . (6,199) (26,333) (15,461) Accounts payable. . . . . . . . . . . . . . . 33,854 11,894 10,219 Other current liabilities . . . . . . . . . . (3,673) (1,714) (3,223) --------- -------- -------- Net cash flows from operating activities. . . 83,990 61,682 79,523 --------- -------- -------- INVESTING ACTIVITIES Purchase of DALEN, net of cash acquired . . . . (332,888) Additions of property, plant and equipment. . . . (189,399) (132,590) (118,759) Retirements of property, plant and equipment . . 54,977 13,051 (598) Collection of note receivable from affiliated company 86,077 Other . . . . . . . . . . . . . . . . . . . . . . (6,939) 10,755 (9,726) --------- -------- -------- Net cash flows used for investing activities. (388,172) (108,784) (129,083) --------- -------- -------- FINANCING ACTIVITIES Borrowings under bank revolving credit agreement 380,000 Borrowings under bridge loan. . . . . . . . . . 150,000 Repayment of DALEN bank debt assumed at acquisition (115,000) Issuance of common stock. . . . . . . . . . . . 207,940 Repayment of borrowings under bank revolving credit agreement (220,000) Issuance of company-obligated mandatorily redeemable preferred securities of subsidiary . . . . . . . . . . 150,000 Repayment of borrowings under bridge loan . . . (150,000) Change in temporary advances with affiliated companies (89,609) 76,331 34,405 Proceeds from long-term notes payable to affiliated companies 11,000 32,000 Payments of capital lease obligations . . . . . (4,424) (Decrease) increase in advances under leasing arrangements - net (32,771) 13,588 Cash distributions paid . . . . . . . . . . . . (7,842) (31,061) Other . . . . . . . . . . . . . . . . . . . . . (3,413) 275 --------- -------- -------- Net cash flows from financing activities. . . 305,494 46,993 48,932 --------- -------- -------- Net Increase (Decrease) in Cash . . . . . . . . . 1,312 (109) (628) Cash at Beginning of Year . . . . . . . . . . . . 234 343 971 --------- -------- -------- Cash at End of Year . . . . . . . . . . . . . . . $ 1,546 $ 234 $ 343 ========= ======== ======== Amounts Paid Interest and other financing costs (Net of amounts capitalized) $ 18,499 $ 20,248 $ 23,067 ========= ======== ======== Income taxes - net. . . . . . . . . . . . . . . . $ 6,011 ========= Purchase of DALEN Fair value of assets acquired . . . . . . . . . $ 474,755 Cash paid for acquisition . . . . . . . . . . . 332,888 --------- Liabilities assumed. . . . . . . . . . . . . . $ 141,867 ========= See Notes to Consolidated Financial Statements.
A-15
ENSERCH EXPLORATION, INC. CONSOLIDATED BALANCE SHEETS December 31 -------------------------- 1995 1994 ---------- ---------- (In thousands) ASSETS Current Assets Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,546 $ 234 Accounts receivable - trade (net of allowance for possible losses of $657 and $670) . . . . . . . 46,749 16,828 Accounts receivable - affiliated companies. . . . . . 20,646 11,581 Note receivable - affiliated company. . . . . . . . . 86,077 Other . . . . . . . . . . . . . . . . . . . . . . . . 14,820 5,217 ---------- ---------- Total current assets . . . . . . . . . . . . . . . 83,761 119,937 ---------- ---------- Property, Plant and Equipment (at cost) Gas and oil properties (full-cost method, $243,740 and $174,951 excluded from amortization base) . . . 2,602,454 2,094,494 Other . . . . . . . . . . . . . . . . . . . . . . . . 20,684 15,582 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . . 2,623,138 2,110,076 Less accumulated depreciation and amortization. . . . 952,538 856,062 ---------- ---------- Net property, plant and equipment . . . . . . . . 1,670,600 1,254,014 ---------- ---------- Other Assets. . . . . . . . . . . . . . . . . . . . . . 22,471 7,284 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . $1,776,832 $1,381,235 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable - trade. . . . . . . . . . . . . . . $ 95,386 $ 58,593 Accounts payable - affiliated companies . . . . . . . 6,836 7,060 Temporary advances - affiliated companies . . . . . . 15,860 105,469 Current portion of capital lease obligations. . . . . 3,859 4,760 Other . . . . . . . . . . . . . . . . . . . . . . . . 9,005 1,728 ---------- ---------- Total current liabilities . . . . . . . . . . . . . 130,946 177,610 ---------- ---------- Bank Revolving Credit Agreement . . . . . . . . . . . . 160,000 ---------- ---------- Capital Lease Obligations . . . . . . . . . . . . . . . 94,184 151,095 ---------- ---------- Other Liabilities Deferred income taxes . . . . . . . . . . . . . . . . 271,618 284,299 Other liabilities . . . . . . . . . . . . . . . . . . 37,856 32,223 ---------- ---------- Total other liabilities . . . . . . . . . . . . . . 309,474 316,522 ---------- ---------- Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary . . . . . . . . . . . . . . . . . . . . 150,000 ---------- ---------- Commitments and Contingent Liabilities (Note 11). . . . Preferred Stock-authorized 2 million shares, issued to subsidiary fifteen shares, stated value $10 million per share (eliminated in consolidation) Shareholders' Equity. . . . . . . . . . . . . . . . . . 932,228 736,008 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . $1,776,832 $1,381,235 ========== ========== See Notes to Consolidated Financial Statements.
A-16
ENSERCH EXPLORATION,INC. STATEMENTS OF OWNERS' EQUITY For the Three Years Ended December 31, 1995 (In thousands) Balance, December 31, 1992. . . . . . . . . . . . . . . $671,706 Net loss. . . . . . . . . . . . . . . . . . . . . . . (9,960) Distributions declared. . . . . . . . . . . . . . . . (31,061) -------- Balance, December 31, 1993 . . . . . . . . . . . . . 630,685 Net income. . . . . . . . . . . . . . . . . . . . . 11,801 Reorganization Adjustments Assumption by ENSERCH Companies Assets and obligations of offshore facilities and leases (24,418) EP's notes payable to other ENSERCH Companies and EPO 395,077 Accrued interest on notes payable . . . . . . . 12,566 Assumption of deferred income taxes by EEX. . . . (289,703) -------- Balance, December 31, 1994. . . . . . . . . . . . . . $736,008 ======== Common Stock ($1.00 par value, authorized 200 million shares) Unamortized Total --------------- Restricted Share- Shares Paid in Stock holders' Issued Amount Capital Deficit Compensation Equity ------ ------ ------- ------- ------------ ------- Balance, December 31, 1994. . . . . 105,821 $105,821 $630,187 $ $ $736,008 Net loss. . . . . . . . . . . . . (12,502) (12,502) Adjustment for acquisition of international and SACROC operations . . . . . (2,798) (2,798) Additional deferred income-tax benefit from reorganization . . . . . . 3,480 3,480 Common shares issued for Cash sale to public . . . . . . 20,000 20,000 187,872 207,872 Stock plans . . . . . . . . . . 6 6 62 68 Unamortized Restricted Stock Compensation Shares granted. . . . . . . . . 56 56 617 (673) Amortization of restricted stock 100 100 Market valuation adjustments. . (22) 22 ------- -------- -------- -------- ------- -------- Balance, December 31, 1995. . . . 125,883 $125,883 $819,398 $(12,502) $ (551) $932,228 ======= ======== ======== ======== ======= ======== See Notes to Consolidated Financial Statements.
A-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Enserch Exploration, Inc. (EEX), a natural gas and oil exploration and production company with activities focused in Texas and the Gulf of Mexico, is 83.4% owned by ENSERCH Corporation (ENSERCH) at year-end 1995. All dollar amounts, except per share amounts, in the notes to consolidated financial statements are stated in thousands unless otherwise indicated. 1. ORGANIZATION AND BASIS OF PRESENTATION Prior to December 30, 1994, the operations of EEX, a corporation, were conducted through Enserch Exploration Partners, Ltd. (EP), a partnership. EP was a publicly traded entity with published financial statements. On December 30, 1994, through a series of transactions, EEX acquired all of the partnership interests of EP Operating Limited Partnership (EPO), the 99% owned operating partnership of EP, and EP received common stock of EEX. 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. Certain affiliates of ENSERCH other than EEX (collectively, the "ENSERCH Companies") also received EP's interest in and assumed EP's obligations under certain equipment lease arrangements (the equipment was simultaneously subleased to EEX) and assumed approximately $395 million principal amount of EP's indebtedness, plus accrued interest. In 1995, EEX acquired the international gas and oil operations of ENSERCH in exchange for 1,240,000 shares of EEX Common Stock valued at the actual net proceeds per share of $10.45 received by EEX in the September 1995 public offering and $2.6 million in cash 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 financial statements of EEX for periods prior to December 30, 1994 include the assets, liabilities, operations and cash flows of EP, restated to include the international gas and oil operations and the SACROC operations in a manner similar to a pooling-of-interests since the operations were under the common control of ENSERCH prior to the establishment of EEX. The restatement resulted in an increase in revenues of $4.0 million and $4.8 million in 1994 and 1993, respectively, and a decrease in net income of $.2 million in 1994 and an increase in net loss of $6.1 million for 1993. 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 information for the change in tax status includes an adjustment for income taxes on the partnerships' operations at the applicable statutory rate. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of EEX and its majority-owned subsidiaries. The preparation of financial statements requires the use of significant estimates and assumptions by management; actual results could differ from those estimates. Earnings per share applicable to common stock are based on the weighted average number of common shares outstanding during the period, including common equivalent shares when dilutive. Average shares outstanding have been restated to include the shares issued to acquire the international gas and oil operations of ENSERCH. A-18 Gas and Oil Properties - The full-cost accounting method prescribed by the Securities and Exchange Commission (SEC) is followed for gas and oil properties. Under this method, all acquisition, exploration and development costs incurred, including salaries, benefits and other internal costs directly attributable to these activities, are capitalized. All costs associated with production and general corporate activities are expensed in the period incurred. Costs directly associated with the acquisition and evaluation of unproved gas and oil properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed periodically and a provision for impairment is made to the full-cost amortization base when appropriate. Amortization of evaluated gas and oil properties is computed on the unit-of-production method using estimated proved gas and oil reserves quantified on the basis of their equivalent energy content. Amortization of gas and oil properties was approximately 6.0% in 1995, 5.8% in 1994 and 6.0% in 1993. Depreciation of other property, plant and equipment is provided principally by the straight-line method over the estimated service lives of the related assets. At December 31, 1995, estimates of future site restoration, dismantlement and abandonment costs, as assessed on an overall cost center basis, were less than estimates of future salvage values. Therefore, no accruals were required. Derivative Instruments - The Company frequently enters into swaps, futures, options and other derivative contracts to hedge the impact of market fluctuations in gas and oil prices on anticipated future gas and oil production. The Company defers the impact of changes in the market value of the contracts that serve as hedges until the related transaction is completed. The Company also enters into interest-rate swaps to manage risk associated with interest rates and reduce the Company's exposure to interest rate fluctuations. Interest-rate swaps are valued on a periodic basis, with resulting differences deferred and recognized as an adjustment to interest and other financing costs over the term of the agreement. 3. DALEN ACQUISITION On June 8, 1995, EEX acquired all the capital stock of DALEN Corporation (DALEN) for cash of $340 million and assumed DALEN's bank debt of $115 million. The acquisition was accounted for as a purchase. The assets acquired and the liabilities assumed were recorded at their estimated fair value pending final evaluation. Essentially all of the valuation adjustment was assigned to gas and oil properties. 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:
Year Ended December 31 ----------------------- 1995 1994 --------- --------- Revenues. . . . . . . . . . . . . $269,175 $322,536 Operating Income (Loss) . . . . . (5,746) 52,977 Net Income (Loss) . . . . . . . . (22,201) 23,680 Net Income (Loss) After Pro Forma Income Taxes on Partnership Operations . . . (22,201) 19,356 Net Income (Loss) Per Share . . . (.20) .18
A-19 At June 30 and September 30, 1995, EEX's full-cost ceiling amount attributable to the properties acquired in the DALEN acquisition was significantly less than the unamortized cost of producing properties acquired, but at December 31, 1995, the ceiling amount exceeded costs by some $19 million. EEX believes that the acquired 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 the major producing properties to EEX's other properties. EEX believes that the unamortized cost of the gas and oil properties acquired is recoverable from future production. EEX requested and was granted a waiver of the full-cost ceiling limitation on these properties by the SEC through June 30, 1996. If an excess exists after that date, a write-down may be required. 4. BORROWINGS AND CREDIT AGREEMENTS EEX has a $350 million revolving credit line with a group of banks that matures on May 1, 1999, of which $190 million was unused at December 31, 1995. The revolving credit agreement limits, at all times, total debt, as defined, to the lesser of 60% of capitalization, as defined, or $750 million, and prohibits liens on property except under certain circumstances. The interest rate ranges from LIBOR (5.94% in effect at December 31, 1995) plus .35% to .75% per annum, plus a facility fee of from .15% to .25% per annum, depending upon the consolidated capitalization ratio. EEX has a $50 million borrowing arrangement with ENSERCH to meet short-term cash needs, of which $34 million was unused at December 31, 1995. Under these arrangements, ENSERCH may advance funds to EEX, and EEX may advance funds to ENSERCH. At December 31, 1995, the interest rate on these borrowings was 6.17%, based on LIBOR.
Interest and Other Financing Costs: 1995 1994 1993 ------- ------- ------- Interest costs incurred. . . . . . . $19,531 $25,678 $34,841 (a) Interest capitalized . . . . . (4,914) (4,759) (4,257) ------- ------ ------- Interest charged to expense. . $14,617 $20,919 $30,584 ======= ======= ======= (a) Includes $6 million provision for interest due royalty owners.
5. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES On August 4, 1995, a subsidiary (Issuer), whose common equity interests are wholly-owned by EEX Capital L.L.C. (Capital), a limited liability company wholly-owned by EEX, completed the private placement of $150 million of adjustable rate mandatorily redeemable preferred securities. Issuer is a special purpose finance subsidiary and neither Issuer nor Capital has operations independent from EEX. The proceeds were loaned, under a Demand Note, by Issuer to Capital. Capital used the proceeds to purchase preferred stock from EEX, and EEX repaid the bridge loan. The EEX preferred stock and the Demand Note are eliminated in the consolidated financial statements, and the Issuer's preferred securities are reflected on the balance sheet as "Company-obligated mandatorily redeemable preferred securities of subsidiary." Dividend payments on the EEX preferred stock support the interest payments due A-20 under the Demand Note loan agreement which, in turn, support the dividend requirements of Issuer's preferred securities. The dividends on the Issuer's preferred securities are based on LIBOR plus .696% and are reflected in interest and other financing costs in the statement of consolidated operations. In November 1995, the Company entered into an interest-rate swap to effectively fix the rate for the dividend on these preferred securities at 6.49% (see Note 7). EEX has guaranteed Capital's obligations under the Demand Note. The mandatory redemption date for Issuer's preferred securities is the earlier of August 4, 2005 or the Demand Note repayment date. 6. STOCK OPTIONS At December 31, 1995, EEX had 2.5 million shares of its common stock reserved for issuance to stock plans. The Company has a stock option plan that provides for the issuance of stock options to purchase shares of EEX common stock and the award of restricted stock. Options granted under the plan have an exercise price of not less than the fair market value of the common stock on the grant date. Options become exercisable over four years and expire after ten years. The plan covers a maximum of 2 million shares of EEX common stock. No options were exercised in 1995 and none were exercisable at December 31, 1995. Summary of Stock 1995 Number of Option Activity: Price Range Options --------------- -------- Granted. . . . . . . . . . $9.75 - $14.50 173,000 Canceled . . . . . . . . . $9.75 3,000 ------- Outstanding - End of year. $9.75 -$14.50 170,000 ======= At December 31, 1995, a total of 56,000 shares of performance-based restricted stock had been issued to certain officers and were outstanding. Performance criteria for lifting the restrictions is related to a three-year total shareholder return of EEX compared with the Dow Jones Oil Secondary Index. 7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company's operations involve managing market risks related to changes in interest rates and commodity prices. Derivative financial instruments, specifically swaps, futures, options and other contracts, are used to reduce and manage those risks. Interest-Rate Swaps - In November 1995, the Company entered into an interest- rate swap on a notional amount of $150 million to fix the interest rate associated with the company-obligated mandatorily redeemable preferred securities of subsidiary (see Note 5). The notional amount declines on a schedule that parallels the estimated redemption of the securities and terminates in July 2000. Under the swap agreement, EEX is to receive interest on the outstanding notional amount at a rate (5.94% in effect at December 31, 1995) based on LIBOR, reset quarterly, and is to pay a fixed rate of 5.8%. The net effect of the swap fixes the rate on the preferred dividends at 6.49%. The Company is exposed to market risk under this swap agreement due to the possibility of exchanging a lower interest rate for a higher interest rate. The counterparties are major financial institutions, and the risk of incurring losses related to credit risk is considered by the Company to be remote. A-21 Hedging Activities - The Company enters into swaps, futures and other derivative contracts to hedge the price risks associated with a portion of anticipated future gas and oil production. Under these agreements, payments are received or made based on the differential between a fixed and a variable product price. These agreements are settled in cash at or prior to expiration or exchanged for physical delivery contracts. The Company does not obtain collateral to support the agreements but monitors the financial viability of counterparties and believes its credit risk is minimal on these transactions. In the event of nonperformance by counterparties, the Company would be exposed to price risk. The Company has some risk of accounting loss since the price received for the product at the actual physical delivery point may differ from the prevailing price at the delivery point required for settlement of the hedging transaction. In late December 1995, there was a temporary cessation to the historical correlation of natural-gas prices in the physical market that serves as the delivery point for NYMEX futures contracts and the prices in certain other physical markets where the Company sells a substantial portion of its natural- gas production. As a result, the Company's NYMEX futures contracts for the first quarter of 1996 no longer served as effective hedges for the portion of production that would be sold in market locations other than those to which the NYMEX contracts were tied. In late December and early January, the Company closed substantially all of its first quarter 1996 NYMEX futures contracts and, as a result, recognized a loss of $6.0 million in 1995. For the full year 1995, the Company recognized a net gain of $.1 million on hedging activities related to the sale of its gas and oil production. At December 31, 1995, EEX had outstanding swaps, collars and futures agreements that were entered into as hedges extending through December 31, 1996 to exchange payments on 39 Bcf of natural gas and 655 MBbls of oil. The weighted average strike price and market price per Mcf of natural gas was $2.01 and $2.10, respectively, and the weighted average strike price and market price per barrel of oil was $18.43 and $19.03, respectively. At December 31, 1995, after giving effect to the $6.0 million mark-to-market loss mentioned above, there were $1.3 million of net unrealized and unrecognized hedging losses based on the difference between the strike price and the NYMEX futures price for the applicable trading month. In addition, there were $2.4 million of realized losses on hedging activities which were deferred and will be applied as a reduction in revenues in the month of physical sale of production. Fair Value of Financial Instruments - At December 31, 1995, the estimated cost to terminate or otherwise settle gas and oil swaps, collars and futures agreements was $1.3 million and interest-rate swaps was $1.8 million, which represented their fair value. The fair value of all other financial instruments at December 31, 1995 and 1994, including the revolving credit agreement and the company-obligated mandatorily redeemable preferred securities of subsidiary, approximated carrying value. A-22 8. INCOME TAXES For periods prior to 1995, except for international and SACROC operations, the Company operated as a partnership, and the income or loss of the partnership was includable in the tax returns of the individual partners. Accordingly, no recognition was given to income taxes on partnership operations. EEX, as a corporation, is a taxable entity; its operations are included in ENSERCH's consolidated federal income-tax return. Pursuant to a tax sharing agreement, EEX and ENSERCH make or receive payments determined as though EEX and its subsidiaries filed a separate consolidated federal income- tax return. The accompanying statements of operations for periods prior to 1995 include a pro forma provision for income taxes on the partnership operations based on the applicable corporate federal statutory rate.
Provision (Benefit) for Income Taxes: 1995 1994 1993 ------- ------ ------ Federal: Current . . . . . . . . . . . . . . . . $ 2,343 $ 32 $ 96 Deferred. . . . . . . . . . . . . . . . (9,520) (366) (3,494) ------- ------- ------- Total . . . . . . . . . . . . . . . . $(7,177) $ (334) $(3,398) ======= ======= ======= Reconciliation of Income Taxes (Benefit) Computed at the Federal Statutory Rate to Provision for Income Taxes (Benefit): Income (loss) before income taxes: Domestic. . . . . . . . . . . . . . . . $(15,578) $12,623 $ (1,948) Foreign . . . . . . . . . . . . . . . . (4,101) (1,156) (11,410) -------- ------- -------- Total . . . . . . . . . . . . . . . . $(19,679) $11,467 $(13,358) ======== ======= ======== Income taxes (benefit) computed at the federal statutory rate of 35% . . . . . . . . . $ (6,888) $ 4,013 $ (4,675) Impact of 1% increase in federal statutory rate applicable to international and SACROC operations 44 Percentage depletion. . . . . . . . . . . (322) (23) (35) Other - net . . . . . . . . . . . . . . . 33 -------- ------- ------- Total pro forma income taxes (benefit) (7,177) 3,990 (4,666) Less pro forma income taxes (benefit) applicable to partnership operations. . (4,324) 1,268 -------- ------- ------- Provision for income taxes (benefit). $ (7,177) $ (334) $(3,398) ======== ======= =======
A-23 The deferred tax effect of the difference in financial accounting basis and income-tax basis of EEX's assets and liabilities at December 31, 1995 and 1994 was as follows:
1995 1994 ---------------------------------- ---------------------------------- Total Current Noncurrent Total Current Noncurrent ---------------------------------- ---------------------------------- Deferred Tax Assets: Retirement and other employee benefit obligations. . $ 1,177 $ 426 $ 751 $ 956 $ 420 $ 536 Accruals and allowances. 931 230 701 898 898 Losses of controlled foreign corporations . . . . . . 7,367 7,367 7,130 7,130 All other. . . . . . . . . 332 332 5 5 -------- ------- -------- --------- ------- ------- Total. . . . . . . . . . 9,807 656 9,151 8,989 420 8,569 -------- ------- -------- --------- ------- ------- Deferred Tax Liabilities: Exploration and intangible development costs. . . . 209,443 209,443 234,637 234,637 Property-related differences. . . . . . . 71,326 71,326 58,231 58,231 -------- ------- -------- --------- -------- ------- Total. . . . . . . . . . 280,769 280,769 292,868 292,868 -------- ------- -------- --------- -------- ------- Net deferred tax liability (asset). . . . $270,962 $ (656)(a) $271,618 $283,879 $ (420)(a) $284,299 ======== ======= ======== ======== ======= ======== (a) Included in other current assets in the balance sheet.
A-24 9. EMPLOYEE BENEFIT PLANS Substantially all personnel associated with the Company are covered by an ENSERCH pension plan, and some retirees are eligible for varying levels of health care and life insurance benefits. Employees hired after July 1, 1989 are not eligible for medical benefits when they retire. The allocation of the costs of these plans is actuarially determined.
Employee Benefit Plan Costs (in millions): 1995 1994 1993 ------ ------ ------ Pension - ENSERCH . . . . . . . . . . . . . $ 4.5 $ 6.5 $ 7.9 - Allocated to EEX. . . . . . . . . .6 1.2 .9 Postretirement health care and life insurance - ENSERCH. . . . . . . . . $ 9.8 $ 10.2 $ 10.0 - Allocated to EEX . . . . .8 .8 .8 ENSERCH Pension Plan Information: Valuation Assumptions: Discount rate. . . . . . . . . . . . . . . . 7.65% 9.00% 7.25% Rate of increase in compensation levels. . . 4.00% 4.00% 4.00% Expected long-term rate of return on assets. 9.50% 9.50% 9.50% Amounts Recognized (in millions): Actuarial present value of pension benefit obligation: Vested benefit obligation. . . . . . . . . $(297.0) $(238.0) ======= ======= Accumulated benefit obligation . . . . . . $(299.3) $(250.2) ======= ======= Projected pension benefit obligation . . . $(327.9) $(272.1) Plan assets at fair value. . . . . . . . . . 263.1 232.2 ------- ------- Projected benefit obligation in excess of plan assets (64.8) (39.9) Unrecognized net asset at transition . . . . (6.0) (8.0) Unrecognized prior service cost (credit) . . (3.5) (2.2) Unrecognized net actuarial loss (gain) . . . 16.9 (3.7) ------- -------- ENSERCH accrued pension cost . . . . . . . . $ (57.4) $ (53.8) ======= ======= EEX accrued pension cost . . . . . . . . . . $ (4.3) $ (3.9) ======= ======= ENSERCH Postretirement Benefit Information: Valuation Assumptions: Discount rate. . . . . . . . . . . . . . . . 7.65% 9.00% 7.25% Medical cost trend rate. . . . . . . . . . . 7.00% 12.00% 12.00% Amounts Recognized (in millions): Accumulated postretirement benefit obligation $ (75.5) $ (82.9) Unrecognized obligation at transition. . . . 58.1 62.1 Unrecognized net actuarial loss. . . . . . . 10.0 15.1 ------- ------- ENSERCH accrued postretirement benefit cost. $ (7.4) $ (5.7) ======= ======= EEX accrued postretirement benefit cost. . . $ (.7) $ (.5) ======= =======
The assumed health care cost trend rate is 7.0% for 1995, declining gradually to 4.5% after 1999, and remaining at that level thereafter. If the health care cost trend rate were increased by 1%, the accumulated postretirement benefit obligation of ENSERCH as of December 31, 1995 and the net periodic postretirement benefit costs of ENSERCH for 1995 would be increased by $4.6 million and $.4 million, respectively. A-25 Investment Plan - ENSERCH provides a voluntary contributory investment plan that is available to substantially all employees of the Company. A portion of the employees' contributions is matched with ENSERCH or EEX common stock. The Company's share of costs under the plan was $304, $236 and $254 in 1995, 1994 and 1993, respectively. 10. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company engages in various transactions with ENSERCH and its affiliates. The Company is charged for direct costs incurred by ENSERCH Companies that are associated with managing the Company's business and operations. Additionally, the Company is charged for indirect costs including the general and administrative staff costs incurred by ENSERCH in performing accounting, treasury, internal audit, income tax planning and compliance, legal, information systems, human resources and other functions. Prior to July 1, 1994, the Company was not charged for the cost of ENSERCH elected officer management of these functions. Costs are determined on a basis that reasonably reflects the actual costs of services performed for EEX and may include allocations based on such factors as net capital employed, the number of employees or the percentage of time spent on projects or services. The Company believes that the method used is reasonable and approximates costs that would have been incurred if the Company had operated as an unaffiliated entity. ENSERCH charges for all indirect costs amounted to $2,725, $2,162 and $2,154 in 1995, 1994 and 1993, respectively. The Company had sales to certain ENSERCH companies (Enserch Energy Services, Inc. - formerly Enserch Gas Company, Lone Star Gas Company and Enserch Processing Company) that aggregated $87,002, $110,036 and $110,016 in 1995, 1994 and 1993, respectively. Enserch Energy Services provides marketing services for substantially all gas production not committed under existing contracts. EEX incurred interest costs, including amounts capitalized, of $3,389, $21,579 and $27,135 in 1995, 1994 and 1993, respectively, on borrowings from ENSERCH Companies. Interest income on notes receivable from ENSERCH Companies was $1,027, $671 and $2,041 in 1995, 1994 and 1993, respectively. See Note 1 for information concerning transactions with ENSERCH companies in connection with the organization of the Company and Note 11 for information concerning lease commitments with affiliates. A-26 11. COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings - On March 23, 1994, a lawsuit was brought in the 299th District Court of Harris County, Texas against EPO (the Company's predecessor) and five other defendants by 19 royalty owners under leases contained within the Corby Gas Unit in Leon County, Texas. Defendants are working interest owners and lessees under the leases. The plaintiffs allege causes of action involving breach of express and implied obligations under the leases, drainage, failure to explore and develop for gas and oil under the leases, civil conspiracy, tortious interference with contractual relationships, specific performance, negligence and conversion. The plaintiffs seek to recover alleged actual damages in excess of $5.4 million, punitive damages of at least ten times the actual damages, if any, found by a jury, interest and attorneys' fees. The Company owned a 7.1% interest in these leases. A lawsuit was filed against ENSERCH, its utility division, EPO and EPO's managing general partner in the 348th Judicial District Court of Tarrant County in May 1989. Plaintiffs seek unspecified actual damages and punitive damages in the amount of $5 million. Plaintiffs allege royalties were not fully paid, certain expenses were improperly charged against the amount of royalties due, negligence in the venting of gas and liquid hydrocarbons into the air, and breach of duty of good faith and fair dealing by wrongfully concealing certain material facts concerning sales of gas from the subject leases to the utility division. A lawsuit was filed on February 24, 1987, in the 112th Judicial District of Sutton County, Texas, against certain subsidiaries and affiliates of ENSERCH, including predecessors of EEX. The plaintiffs have claimed that defendants failed to make certain production and minimum purchase payments under a gas- purchase contract. In this connection, the plaintiffs have alleged a conspiracy to violate purchase obligations, improper accounting of amounts due, fraud, misrepresentation, duress, failure to properly market gas and failure to act in good faith. Plaintiffs seek actual damages in excess of $5 million and punitive damages in an amount equal to 0.5% of the consolidated gross revenues of ENSERCH for the years 1982 through 1986 (approximately $85 million), interest, costs and attorneys' fees. Management believes that the named defendants have meritorious defenses to the claims made in these and other actions brought in the ordinary course of business. In the opinion of management, the Company will incur no liability from these and all other pending claims and suits that is material for financial reporting purposes. Leases - The equipment and facilities used in developing and producing reserves in the Mississippi Canyon Block 441 and the Garden Banks Block 388 projects were financed under equipment leases between certain financial institutions and EPO. In connection with the merger of EPO into EEX, the leases were assigned to and assumed by Enserch Exploration Holdings, Inc. (EEH), wholly-owned by ENSERCH. EEX entered into three subleases with EEH for such offshore facilities. For accounting purposes, one of the leases is an operating lease, and two are capital leases. The operating lease is for A-27 twelve years, with an option to purchase the equipment under lease at the end of the lease term at a fixed price equal to its estimated fair value. During most of 1995, a component of the payments to be made by EEX under the subleases was based on a floating interest rate of LIBOR plus 1.50% per annum. However, effective November 1995, ENSERCH entered into an interest-rate swap to fix its costs and agreed to fix the interest rate to EEX accordingly, at 7.2%. In the third quarter of 1995, a Mobil Corporation (Mobil) affiliate acquired a 40% working interest in EEX's Garden Banks Block 388 project; accordingly, EEX was relieved of capital and operating lease obligations of approximately $140 million, as well as 40% of the capital expenditures required to complete the project. EEX now owns a 60% working interest in the project and remains the operator. Estimated future minimum lease payments for the leases at December 31, 1995, are as follows:
Operating Capital Leases Leases ----------- --------- 1996 $ 14,309 $ 11,637 1997 14,206 11,567 1998 14,206 11,567 1999 14,206 11,567 2000 14,206 12,495 Thereafter 90,460 117,886 -------- -------- Total $161,593 176,719 ======== Less interest factor 78,676 -------- Capital lease obligations $ 98,043 ========
The Company also bears an allocated share of rental expenses incurred by ENSERCH companies under noncancelable long-term operating leases, principally for office space and equipment. Rental expenses incurred under all operating leases totaled $6,468, $3,102 and $5,035 in 1995, 1994 and 1993, respectively. Environmental Matters - The Company is subject to federal, state and local environmental laws and regulations that regulate the discharge of materials into the environment. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The level of future expenditures for environmental matters, including costs of obtaining operating permits, equipment monitoring and modifications under the Clean Air Act and cleanup obligations, cannot be fully ascertained until the regulations that implement the applicable laws have been approved and adopted. It is management's opinion that all such costs, when finally determined, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. A-28 12. SUPPLEMENTARY GAS AND OIL INFORMATION Gas and Oil Producing Activities - The following tables set forth information relating to gas and oil producing activities of EEX. Reserve data for natural gas liquids attributable to leasehold interests owned by the Company are included in oil and condensate.
1995 1994 ---------- ---------- Capitalized Costs: Proved gas and oil properties. . . . . . . . . $2,358,714 $1,919,543 Unproved gas and oil properties. . . . . . . . 243,740 174,951 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . $2,602,454 $2,094,494 ========== ========== Accumulated depreciation and amortization. . . $ 940,356 $ 846,038 ========== ==========
1995 1994 1993 ------------------- ------------------ ------------------ Costs Incurred: U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. --------- -------- -------- -------- ------ -------- Property acquisition costs: Proved . . . . . . . . . . . $356,326 $ $ 1,562 $ $ 8,262 $ Unproved . . . . . . . . . . 120,987 20,591 12,554 32 Exploration costs. . . . . . . 59,218 9,000 60,145 3,076 38,028 3,536 Development costs. . . . . . . 46,179 84,249 63,067 ------- ------- -------- ------- -------- ------- Total. . . . . . . . . . . . $582,710 $ 9,000 $166,547 $ 3,076 $121,911 $ 3,568 ======== ======= ======== ======= ======== ======= Amortization (per MMBtu)(a). . $ .98 $ .96 $ .89 ======== ======== ======== (a)Amortization expense per unit of production converted to a common unit of measure, millions of British thermal units (MMBtu); on a per thousand cubic feet of gas equivalent (Mcfe) basis, the amounts are: $1.00, $.98 and $.91.
Costs Excluded from the Amortizable Base as of December 31, 1995:
Total at Prior December 31, Year Incurred 1995 1994 1993 Years 1995 -------- -------- -------- --------- ------------ Property acquisition costs . $117,945 $18,760 $ 9,256 $1,899 $147,860 Exploration costs. . . . . . 20,167 14,267 3,873 1,074 39,381 Development costs. . . . . . 45,360 45,360 Interest capitalized . . . . 4,510 2,972 2,110 1,547 11,139 -------- ------- ------- ------ -------- Total. . . . . . . . . . . $142,622 $81,359 $15,239 $4,520 $243,740 ======== ======= ======= ====== ========
Approximately 35% of excluded costs relates to offshore activities in the Gulf of Mexico, about 62% is domestic onshore exploration activities and the remainder is non-U.S. The anticipated timing of the inclusion of these costs in the amortization computation will be determined by the rate at which exploratory and development activities continue, which are expected to be accomplished within ten years. A-29 The following information is required and defined by the Financial Accounting Standards Board. The disclosure does not represent the results of operations based on historical financial statements. In addition to requiring different determinations of revenues and costs, the disclosure excludes interest expense and corporate overhead.
1995 1994 1993 --------------------- -------------------- ------------------- Results of Operations: U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. -------- -------- --------- -------- -------- -------- Revenues . . . . . . . . . . . . $218,565 $ $ 173,468 $ $191,027 $ Less: Production costs (a) . . . . . 65,520 43,899 46,243 22 Exploration costs (b). . . . . 9,588 2,260 8,407 729 7,603 1,065 Depreciation and amortization (c) 113,624 929 79,232 77,034 10,191 Income-tax effects . . . . . . 10,119 (1,116) 14,647 (255) 21,009 (3,947) -------- ------- --------- ------- -------- ------- Net producing activities . . $ 19,714 $(2,073) $ 27,283 $ (474) $ 39,138 $(7,331) ======== ======= ========= ======= ======== ======= (a) Includes severance, ad valorem and production taxes. (b) Includes internal costs that cannot be directly identified with acquisition, exploration or development activities. (c) Amounts for 1995 and 1993 include write-downs of non-U.S. exploratory projects of $929 and $10,191, respectively. Amount for 1994 excludes a $7,551 gain from the sale of an inactive offshore pipeline and facilities, which were not related to gas and oil producing activities.
Gas and Oil Reserves (Unaudited) - The following table of estimated proved and proved developed reserves of gas and oil has been prepared utilizing estimates of year-end reserve quantities provided by DeGolyer and MacNaughton, indepen- dent petroleum consultants. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing gas and oil properties. Accordingly, the reserve estimates are expected to change as additional performance data become available.
Gas (MMcf) Oil (MBbls)(a) ---------------------------------- ------------------------- U.S. Reserves: 1995 1994 1993 1995 1994 1993 --------- --------- --------- ------- ------- ------ At January 1 . . . . . . . . 1,041,736 1,086,482 1,101,426 46,486 39,349 39,231 Changes in reserves Revisions of previous estimates 26,802 (25,106) 20,196 2,312 (499) 1,344 Extensions, discoveries and additions. . . . . . . . 62,249 47,580 34,549 21,466 9,877 1,292 Purchase of minerals in place 336,668 787 4,379 11,417 14 3 Sales of minerals in place (14,497) (894) (4,042) (11,274) (28) (40) Production . . . . . . . . (90,195) (67,113) (70,026) (3,870) (2,227) (2,481) -------- --------- --------- ------ ------ ------ At December 31 . . . . . . . 1,362,763 1,041,736 1,086,482 66,537 46,486 39,349 ========= ========= ========= ====== ====== ====== Proved Developed Reserves At January 1 . . . . . . . 698,643 735,093 676,851 14,437 15,380 14,844 At December 31 . . . . . . 937,372 698,643 735,093 30,110 14,437 15,380 (a) Includes condensate and natural gas liquids attributable to leasehold interests of 3,593 MBbls for 1995, 911 MBbls for 1994 and 1,117 MBbls for 1993.
A-30
Oil (MBbls) --------------- Non-U.S. Reserves: 1995 1994 ----- ------ At January 1 . . . . . . . . 4,105 Extensions, discoveries and additions. . . . . . . . . 858 4,105 ----- ----- At December 31 . . . . . . 4,963 4,105 ===== ===== Proved Developed . . . . . 0 0 ===== =====
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserve Quantities (Unaudited) - has been prepared using estimated future production rates and associated production and development costs. Continuation of economic conditions existing at the balance sheet date was assumed. Accordingly, estimated future net cash flows were computed by applying prices and contracts in effect in December to estimated future production of proved gas and oil reserves, estimating future expenditures to develop proved reserves and estimating costs to produce the proved reserves based on average costs for the year. Average prices used in the computations were: Gas (per Mcf) $2.19 in 1995, $2.29 in 1994 and $2.38 in 1993; Oil (per barrel) $16.91 in 1995, $14.07 in 1994 and $11.73 in 1993. Because reserve estimates are imprecise and changes in the other variables are unpredictable, the standardized measure should be interpreted as indicative of the order of magnitude only and not as precise amounts.
Standardized Measure (in millions): 1995 1994 1993 -------- -------- -------- Future cash inflows. . . . . . . . . . $4,180.7 $3,081.5 $3,047.0 Future production and development costs (1,512.7) (1,065.8) (1,057.9) Future income-tax expense (a). . . . . (597.1) (542.6) -------- -------- -------- Future net cash flows. . . . . . . . . 2,070.9 1,473.1 1,989.1 Less 10% annual discount . . . . . . . 843.5 593.8 886.5 -------- -------- -------- Standardized measure of discounted future net cash flows . . . . . . . . . . . $1,227.4 $ 879.3 $1,102.6 ======== ======== ======== Change in Standardized Measure (in millions): Sales and transfers of gas and oil produced, net of production costs . . . . . . . . . . $ (153.1) $ (120.5) $ (136.1) Changes in prices, net of production and future development costs. . . . . . . . . . 50.6 (33.9) (.6) Extensions, discoveries and improved recovery, less related costs . . . . . . . . . 175.8 158.7 41.4 Purchases of minerals in place . . . . 367.6 1.6 9.4 Revisions of previous quantity estimates (113.9) (26.5) (28.5) Sales of minerals in place . . . . . . (59.2) (1.3) Accretion of discount. . . . . . . . . 102.3 102.7 105.5 Net change in income taxes . . . . . . (3.1) (295.3) 1.2 Other. . . . . . . . . . . . . . . . . (18.9) (8.8) (1.0) -------- -------- -------- Total . . . . . . . . . . . . . . . $ 348.1 $ (223.3) $ (8.7) ======== ======== ======== (a) EEX operated as a partnership, except for the international operations and SACROC operations, until December 30, 1994. Accordingly, no income taxes were applicable to its partnership operations until December 31, 1994.
As the estimates of future site restoration, dismantlement and abandonment costs on an overall cost center basis are less than estimates of future salvage value, such costs were not included in the standardized measure. A-31 QUARTERLY RESULTS (UNAUDITED) - The results of operations of the Company by quarters are summarized below. In the opinion of the Company's management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been made. The 1994 financial statements include interest charges on the debt now assumed by certain ENSERCH Companies. Amounts for 1994 have been restated to include the acquisition of the international and SACROC operations from ENSERCH.
Quarter Ended ----------------------------------------------------- March 31 June 30 September 30 December 31 ----------------------------------------------------- 1995: Revenues . . . . . . . . $41,661 $47,987 $66,807 $64,396 Operating Income (Loss) 564 (4,969) 2,944 (4,692) Net Income (Loss). . . . 624 (5,162) (2,611) (5,353) Net Income (Loss) Per Share .01 (.05) (.02) (.04) 1994: Revenues . . . . . . . . $50,737 $44,473 $41,426 $42,504 Operating Income . . . . 11,017 8,400 3,059 9,553 Net Income (Loss). . . . 4,904 5,031 (2,189) 4,055 Net Income (Loss) after Pro Forma Income Taxes 3,139 3,179 (1,475) 2,634 Net Income (Loss) Per Share .03 .03 (.01) .02 Includes amounts for international and SACROC operations as follows: Revenues . . . . . . . . $1,028 $ 1,046 $ 1,022 $ 942 Net Income (Loss). . . . (13) (154) (107) 109
A-32 COMMON STOCK MARKET PRICES AND DIVIDEND INFORMATION MARKET PRICES - EEX COMMON STOCK The Company's common stock is traded principally on the New York Stock Exchange. The following table shows the high and low sales prices per share of the common stock of the Company reported in the New York Stock Exchange - Composite Transactions report for the periods shown as quoted in The Wall Street Journal.
1995 -------------------- High Low -------------------- First Quarter . . . . . . . . . $11 1/8 $ 9 3/8 Second Quarter. . . . . . . . . 14 7/8 10 1/8 Third Quarter . . . . . . . . . 14 3/4 10 Fourth Quarter. . . . . . . . . 11 5/8 9 1/4
COMMON STOCK DATA AT YEAR-END 1995 1994 ------- ------- Shareholders of Record 1,450 1,373 ------- ------- Shares Outstanding (000's) 125,883 105,821 ------- -------
DIVIDENDS PER SHARE OF COMMON STOCK There have been no dividends declared on the Company's common stock. The declaration of future dividends will be dependent upon business conditions, earnings, cash requirements and other relevant factors. A-33 EX-3 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF ENSERCH EXPLORATION, INC. 1. Enserch Exploration, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts Restated Articles of Incorporation which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date and such Restated Articles of Incorporation contain no change in any provision. thereof. 2. The Restated Articles of Incorporation were adopted by resolution of the Board of Directors of the Corporation on December 27, 1994. 3. The Restated Articles of Incorporation and all amendments and supplements thereto are hereby superseded by the following Restated Articles of Incorporation which accurately copy the entire text thereof: ARTICLE ONE The name of the Company is Enserch Exploration, Inc. ARTICLE TWO The period of its duration is perpetual. ARTICLE THREE The purposes for which the Company is organized are: (1) To engage in all phases of the oil and gas business and related activities, including, but not by way of limitation, engaging in exploration, drilling, development, and production of oil and gas properties; (2) To store, transport, buy and sell, oil, gas, salt, brine and other mineral solutions and liquefied minerals; (3) To explore for, produce, purchase and sell, store, process and manufacture, transport and distribute oil, gas and all other minerals; (4) To manufacture, produce, purchase or otherwise acquire, sell or dispose of, distribute, mortgage, pledge, lease, repair, install, operate, deal in and with, whether as principal or agent, products, goods, appliances, wares, merchandise, fixtures, plants, structures, machinery, and materials of every kind and description, to lend money for the carrying out of such purposes, and to take and hold real and personal property for the payment of such funds so loaned; and (5) To transact any or all lawful business for which corporations may be incorporated under the Texas Business Corporation Act, as amended and in effect from time to time (the "TBCA"). ARTICLE FOUR (A) Authorized Capital Stock: The aggregate number of shares of all classes of stock which the Company shall have authority to issue is 202,000,000 consisting of and divided into: (i) one class of 200,000,000 shares of Common Stock, par value $1.00 per share (the "Common Stock"); and (ii) one class of 2,000,000 shares of Preferred Stock, of no par value (the "Preferred Stock"), which may be divided into and issued in one or more series, as hereinafter provided. (B) Series: The Preferred Stock may be divided into and issued in, at any time and from time to time, one or more series as the Board of Directors of the Company shall determine pursuant to the authority hereby vested in it. The Board of Directors shall have the authority to establish series of unissued shares of Preferred Stock, at any time and from time to time, by fixing and determining the designations, preferences, limitations and relative rights of the shares of the series, subject to and within the limitations of the TBCA and the Articles of Incorporation, including without limitation the following: (a) the number of shares constituting the series and the distinctive designation of that series; (b) the dividend rate on shares of the series, the dividend payment dates, whether dividends shall be cumulative (and, if so, from which date or dates), non-cumulative, or partially cumulative, and the relative rights of priority, if any, of payment of dividends on the shares of the series; (c) the amount payable to the holders of shares of the series upon any voluntary or involuntary liquidation of the Company; (d) the preference in the assets of the Company over any other class, classes or series of shares upon the voluntary or involuntary liquidation of the Company; (e) whether the shares of the series are redeemable at the option of the Company, the shareholder or another person or upon occurrence of a designated event and, if so, the price payable upon redemption of shares of the series and the terms and conditions on which such shares are redeemable; (f) the provisions of the sinking fund, if any, for the redemption or purchase of shares of the series; (g) the voting rights, if any, of the shares of the series; (h) the terms and conditions, if any, on which such shares may be converted, at the option of the Company, the shareholder or another person or upon occurrence of a designated event, into shares of any other class or series; (i) the terms and conditions, if any, on which such shares may be exchanged, at the option of the Company, the shareholder or another person or upon occurrence of a designated event, for shares, obligations, indebtedness, evidences of ownership, rights to purchase securities or other securities of the Company or one or more other domestic or foreign corporations or other entities or for other property or for any combination of the foregoing; and (j) any other special rights and qualifications, limitations or restrictions permitted by the TBCA to be granted to or imposed on the series. Any of the designations, preferences, limitations and relative rights of the shares of any series so established may be made dependent upon facts ascertainable outside the Articles of Incorporation, which facts may include future acts of the Company, provided that the manner in which such facts shall operate upon the designations, preferences, limitations and relative rights of the shares of any series shall be set forth in the resolution or resolutions establishing the series. All shares within the same series of Preferred Stock shall be identical except as to the date of issue and the dates from which dividends on shares of the series issued on different dates will cumulate, if cumulative. The Board of Directors shall have the authority to increase or decrease the number of shares within each series of Preferred Stock; provided, however, that the Board of Directors may not decrease the number of shares within a series to less than the number of shares within such series that are then issued. (C) Preemptive Rights. No shareholder of the Company shall by reason of the shareholder's holding shares of any class or series have any preemptive or preferential right to purchase or subscribe to any shares of any class or series of the Company, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class or series, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such shareholders, other than such rights, if any, as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class or series of the Company, or any notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of any class or series, without offering any such shares of any class or series, either in whole or in part, to the existing shareholders of any class or series. (D) Subordination of Common Stock: The Common Stock shall be subject and subordinate to the rights, privileges and preferences of any series of Preferred Stock to the extent set forth in the resolution adopted by the Board of Directors establishing the series. (E) Other Provisions Applicable to Capital Stock: (a) Each outstanding share of Common Stock shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as otherwise provided by the TBCA or as set forth in the resolutions adopted by the Board of Directors establishing any series of Preferred Stock. (b) At each election for directors, every shareholder entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote; provided that cumulative voting in the election for directors is prohibited. (c) In the event of any dissolution, liquidation or winding up of the Company, but subject to the rights of the holders of any series of Preferred Stock, holders of Common Stock shall be entitled to receive pro rata all of the remaining assets of the Company available for distribution to its shareholders. (d) Any action required by the TBCA to be taken at any annual or special meeting of shareholders, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders or shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. (e) Subject to the rights of the holders of Preferred Stock as set forth in the resolutions adopted by the Board of Directors establishing any series of Preferred Stock, dividends may be paid upon Common Stock to the exclusion of Preferred Stock out of any assets of the Company available therefor. ARTICLE FIVE The Company will not commence business until it has received for the issuance of its shares consideration of the value of at least One Thousand Dollars ($1,000.00) consisting of money, labor done, or property actually received. ARTICLE SIX The street address of its initial registered office is 300 South St. Paul, Dallas, Texas 75201, and the name of its initial registered agent at such address is Michael G. Fortado. ARTICLE SEVEN Subject to the provisions of Article Four, the number of directors constituting the initial Board of Directors is two (2), subject to being increased or decreased as the Bylaws of the Company may provide. The names and addresses of the persons who are to serve as directors until the first annual meeting of the shareholders or until their successors be elected and qualified are: D. W. Biegler 300 South St. Paul Dallas, Texas 75201 G. J. Junco Energy Square II 4849 Greenville Avenue Dallas, Texas 75206 ARTICLE EIGHT (A) Power to Alter, Amend or Repeal Bylaws. The power to alter, amend or repeal the Bylaws or to adopt new Bylaws shall be vested in the Board of Directors; provided however that any Bylaw or amendment thereto as adopted by the Board of Directors may be altered, amended or repealed by vote of the shareholders entitled to vote for the election of directors or a new Bylaw in lieu thereof may be adopted by vote of such shareholders. No Bylaw that has been altered, amended or adopted by such a vote of the shareholders may be altered, amended or repealed by vote of the directors until two years shall have expired since such action by vote of such shareholders. (B) Stock Ownership Restrictions. The Board of Directors of the Company shall have the power and authority, from time to time, to adopt, alter or amend the Bylaws of the Company to add or amend such provisions as in their judgment may be necessary or appropriate to ensure that the Company and its shareholders satisfy the citizenship or other requirements imposed by any federal or state law relating to the ownership, possession or leasing of gas, oil or other minerals, land, vessels or any other property, licenses or rights of any nature whatsoever in which the Company or any of its subsidiaries may have or hereafter have, or seek to have, any right or interest. Without limiting such general powers, the Board of Directors shall have the power and authority, from time to time, to adopt, alter or amend the Bylaws to add or amend provisions which for such purpose impose restrictions on the transfer or registration of transfer of the shares of the Company, including, without limitation, restrictions which: (1) obligate the holders of the restricted shares to offer to the Company or to any other holders of shares of the Company or to any other person or to any combination of the foregoing, a prior opportunity, to be exercised within a reasonable time, to acquire the restricted shares; (2) provide that the Company or the holders of any class of shares of the Company must consent to any proposed transfer of the restricted shares or approve the proposed transferee of the restricted shares before the transfer may be effected; (3) prohibit the transfer of the restricted shares to designated persons or classes of persons; or (4) maintain any tax or other status or advantage to the Company. ARTICLE NINE To the fullest extent permitted by law, a director of the Company shall not be liable to the Company or its shareholders for monetary damages for any act or omission in his capacity as a director. Any repeal or modification of this Article shall be prospective only and shall not adversely affect any limitation of the personal liability of a director of the Company existing at the time of the repeal or modification. ARTICLE TEN The name and address of the incorporator are: W. T. Satterwhite........300 South St. Paul Dallas, Texas 75201 ARTICLE ELEVEN INTERESTED DIRECTORS, OFFICERS AND SECURITYHOLDERS (A) Validity. A contract or other transaction between the Company and ENSERCH Corporation ("EC"), or any subsidiary or other corporation, partnership, limited liability company or other entity in which EC is directly or indirectly interested (collectively with EC, an "EC Person"), shall not be invalid because of this relationship or because of the presence of a director, officer or securityholder of an EC Person at the meeting authorizing the contract or transaction, or such person's participation or vote in the meeting or authorization or in a unanimous or other written consent thereto, if the contract or other transaction is effected in accordance with any of paragraphs (B), (C), (D), (E), (F), (G), or (H) below. (B) Disclosure; Approval; Fairness. Paragraph (A) shall apply if: (1) the material facts of the relationship or interest of each EC Person or such director, officer or securityholder are known or disclosed: (a) to the Board of Directors of the Company, or a committee of the Board of Directors, and it nevertheless authorizes or ratifies the contract or transaction by a majority of the directors present; or (b) to the shareholders of the Company and they nevertheless authorize or ratify the contract or transaction by a majority of the shares present, each such EC Person or other interested person to be counted for quorum and voting purposes; or (2) the contract or transaction is fair to the Company as of the time it is authorized or ratified by the Board of Directors or the shareholders of the Company. (C) Loans from or to an EC Person. (1) Any EC Person may lend to the Company funds needed by the Company for such periods of time as may be determined by the Board of Directors of the Company or otherwise in accordance with the Bylaws of the Company; provided, however, that such EC Person may not charge the Company interest at a rate greater than the lesser of (i) the EC Person's actual average interest cost (including points or other financing charges or fees, if any), or (ii) the rate (including points or other financing charges or fees) that would be charged the Company (without reference to the Company's financial abilities or guaranties) by unrelated lenders on comparable loans. The Company shall reimburse the EC Person for any costs incurred by the EC Person in connection with the borrowing of funds obtained by the EC Person and loaned to the Company. (2) The Company may lend funds to any EC Person; provided however that the Company may not charge interest at a rate lesser than the rate (including points or other financing charges or fees) that would be charged the EC Person (without reference to third parties' financial abilities or guaranties) by unrelated lenders on comparable loans. (D) Common Personnel. Officers, directors, employees, attorneys and agents of the Company may also serve as directors, officers, employees, attorneys or agents of an EC Person, provided that the Company and the EC Person shall each compensate its directors, officers, employees, attorneys and agents in respect of the services performed for it, unless a compensation sharing arrangement has been effected in accordance with paragraph (B). (E) IntraCompany Transactions. EC Persons may sell gas, oil, goods and services to, and may purchase gas, oil, goods and services from, the Company, provided that such transactions shall be (i) on terms comparable to those effected with unaffiliated persons or (ii) effected in accordance with paragraph (B). (F) Services Provided by an EC Person. An EC Person may provide the Company with certain services including, but not limited to, the following: accounting and treasury, internal audit, human resources (such as training, employment and salary and benefit plan administration), tax planning and compliance, legal, financial management, corporate development and planning, investor relations, information systems, materials management, risk and claims management and office services and the management of these functions. The Company shall reimburse each EC Person for the direct and indirect costs incurred in connection with the furnishing of such services to the Company. Costs shall be determined on a basis reasonably calculated to reflect the actual costs of the services performed by such EC Person and may include allocations based on such factors as net capital employed, the number of employees or the percentage of time spent on projects or services. (G) Purchase or Sale of Shares. An EC Person may purchase or otherwise acquire and sell or otherwise dispose of shares or other securities of the Company for its own account (i) in transactions with persons other than the Company or (ii) in transactions with the Company effected in accordance with paragraph (B). (H) Outside Activities. Any EC Person shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, may engage in the acquisition, ownership, operation and management of working, nonparticipating or other interests or royalties in gas and oil properties, and any other businesses or activities, including business interests and activities in direct competition with the Company, for their own account and for the account of others, and may own interests in the same properties as those in which the Company owns an interest, without having or incurring any obligation to offer any interest in such properties, businesses or activities to the Company. Neither the Company nor any of its shareholders shall have any preferential or other right to acquire any interest or participate in any business venture of any EC Person. (I) Non-Exclusive. This provision shall not be construed to invalidate a contract or transaction that would be valid in the absence of this provision. Dated this 27th day of December, 1994. ENSERCH EXPLORATION, INC. By /s/ Gary J. Junco -------------------------- President STATEMENT OF RESOLUTION ESTABLISHING ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES A, OF ENSERCH EXPLORATION, INC. To the Secretary of State of the State of Texas: Pursuant to the provisions of Article 2.13 of the Texas Business Corporation Act, the undersigned corporation submits the following statement for the purpose of establishing and designating the Adjustable Rate Cumulative Preferred Stock, Series A, of its preferred stock and fixing and determining the relative rights and preferences thereof: 1. The name of the corporation is Enserch Exploration, Inc. 2. The following resolution, establishing and designating the Adjustable Rate Cumulative Preferred Stock, Series A, and fixing and determining the relative rights and preferences thereof, was duly adopted by the Board of Directors of the Company on August 1, 1995: RESOLVED, That the Board of Directors of this Company, acting pursuant to Article Four of the Restated Articles of Incorporation of this Company, hereby creates a new series of Preferred Stock of the Company which shall consist of fifteen (15) shares of no par value, Stated Value of $10,000,000 per share ("Stated Value"), which shall be designated and known as "Adjustable Rate Cumulative Preferred Stock, Series A" (hereinafter referred to as "Preferred Stock, Series A"). The Preferred Stock, Series A shall have the terms, conditions, rights and preferences, as follows: 1. Dividends. (a) Dividend rates on the shares of Preferred Stock, Series A, shall be (i) for the period (the "Initial Dividend Period") from the date of their original issue to and including October 31, 1995, at a rate per annum of the then Stated Value thereof equal to 6.70% and (ii) for each quarterly dividend period (hereinafter referred to as a "Quarterly Dividend Period"; and the Initial Dividend Period or any Quarterly Dividend Period being hereinafter individually referred to as a "Dividend Period" and collectively referred to as "Dividend Periods") thereafter, which Quarterly Dividend Periods shall commence on February 1, May 1, August 1 and November 1 in each year and shall be on and include the day next preceding the first day of the next Quarterly Dividend Period, at a rate per annum of the Stated Value thereof equal to the Applicable Rate (as hereinafter defined) in respect of such Quarterly Dividend Period. Dividends shall be cumulative from the date of original issue of the shares. The amount of dividends payable for the Initial Dividend Period or any Period shorter than a full Quarterly Dividend Period shall be computed on the basis of 30-day months and a 360-day year. (b) The Applicable Rate for each Quarterly Dividend Period shall be determined as follows:
Quarterly Dividend Applicable Quarterly Dividend Applicable Period Commencing Rate Period Commencing Rate November 1, 1995 LIBOR Rate + .75% February 1, 2003 LIBOR Rate + 6.25% through May 1, 2000 May 1, 2003 LIBOR Rate + 6.75% August 1, 2000 LIBOR Rate + 1.25% August 1, 2003 LIBOR Rate + 7.25% November 1, 2000 LIBOR Rate + 1.75% November 1, 2003 LIBOR Rate + 7.75% February 1, 2001 LIBOR Rate + 2.25% February 1, 2004 LIBOR Rate + 8.25% May 1, 2001 LIBOR Rate + 2.75% May 1, 2004 LIBOR Rate + 8.75% August 1, 2001 LIBOR Rate + 3.25% August 1, 2004 LIBOR Rate + 9.25% November 2, 2001 LIBOR Rate + 3.75% November 1, 2004 LIBOR Rate + 9.75% February 1, 2002 LIBOR Rate + 4.25% February 1, 2005 LIBOR Rate + 10.25% May 1, 2002 LIBOR Rate + 4.75% May 1, 2005 and LIBOR Rate + 10.75% August 1, 2002 LIBOR Rate + 5.25% thereafter November 1, 2002 LIBOR Rate + 5.75%
"LIBOR Rate" shall be a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted by Chase Manhattan Bank, N.A., or its successors ("Chase") at approximately 11:00 A.M., London time (or as soon thereafter as practicable), two (2) Business Days prior to the first day of a Quarterly Dividend Period for the offering by Chase to leading banks in the London interbank market for U.S. Dollar deposits having a term comparable to such Quarterly Dividend Period. "Business Day" shall mean any date on which dealings in U.S. Dollar deposits are carried out in the London interbank market. (c) If the LIBOR Rate cannot be determined for any Quarterly Dividend Period, then the Applicable Rate for the preceding dividend period will be continued for such Quarterly Dividend Period. (d) The amount of dividends per share payable for each Quarterly Dividend Period shall be computed by dividing the Applicable Rate for such dividend period by four and applying such rate against the Stated Value per share of the Preferred Stock, Series A. 2. Dividends on each share of Preferred Stock, Series A, shall commence to accrue and be cumulative, whether or not earned or declared, from and after the date of issue of such share. So long as any of the Preferred Stock, Series A, remains outstanding, in no event shall any dividend (other than a dividend payable in the Common Stock of the Company) or other distribution be paid upon or declared or set apart for the common shares, nor shall any common shares be redeemed, purchased, retired or otherwise acquired by the Company unless and until all dividends on the then outstanding shares of Preferred Stock, Series A, for all past Quarterly Dividend Periods shall have been paid or declared and set apart for payment, but without interest, and the full dividends thereon for the then current Quarterly Dividend Period shall have been concurrently paid or declared and set apart for payment. After such full dividends on the Preferred Stock, Series A, shall have been so paid or declared and set apart for payment, then and not otherwise dividends may be declared and paid on the common shares when and as determined by the Board of Directors out of any funds legally available for dividends. 3. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of the Preferred Stock, Series A, shall be entitled to receive for each share thereof an amount equal to Ten Million Dollars ($10,000,000), together with unpaid accumulated dividends without interest, before any distribution of the assets of the Company shall be made to the holders of common shares. After such payment shall have been made in full to the holders of the outstanding Preferred Stock, Series A, or funds necessary for such payment shall have been set aside in trust for the account of the holders of the outstanding Preferred Stock, Series A, so as to be and continue to be available therefor, the holders of the outstanding Preferred Stock, Series A, shall be entitled to no further participation in such distribution of assets of the Company. Thereafter, the remaining assets of the Company shall be divided and distributed among the holders of the common shares then outstanding according to their respective shares. If, upon such liquidation, dissolution or winding up, the assets of the Company distributable as aforesaid among the holders of the Preferred Stock, Series A, shall be insufficient to permit the payment to them of all amounts payable thereon, the entire assets shall be distributed ratably among the holders of the Preferred Stock, Series A, and any other series of preferred stock of the Company which ranks equal to the Preferred Stock, Series A. A consolidation or merger of the Company, a sale or transfer of all or substantially all of its assets, or any purchase or redemption of shares of the Company of any class or series, shall not be regarded as a "liquidation, dissolution, or winding up" within the meaning of this paragraph. 4. The Company, at the option of the Board of Directors, may redeem, in whole or in part (including a fraction of a whole share) the Preferred Stock, Series A, then outstanding upon notice duly given as hereinafter provided, by paying for each share thereof an amount equal to Ten Million Dollars ($10,000,000), together with unpaid accumulated dividends to the date fixed for redemption. In case less than all of the outstanding shares of Preferred Stock, Series A, are to be redeemed, the shares to be redeemed shall be selected pro rata or by lot or by such other equitable method as the Board of Directors may determine. Notice of redemption of any shares of Preferred Stock, Series A, shall be mailed, postage prepaid, to the holders of record of the shares to be redeemed at their respective addresses then appearing on the record of shareholders of the Company not less than fifteen (15) or more than sixty (60) days prior to the date designated for such redemption. If such notice of redemption shall have been duly given, and if on or before the redemption date named therein, the funds necessary for such redemption shall have been set aside by the Company in trust for the account of the holders of the Preferred Stock, Series A, so called for redemption so as to be and continue available therefor, then from and after the giving of such notice and the setting aside of such funds, notwithstanding that any certificate for shares of Preferred Stock, Series A, so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding and the holders of such certificate or certificates shall have, with respect to such shares, no rights in or with respect to the Company except the right to receive for each share thereof an amount equal to the redemption price per share as set forth above, together with unpaid accrued dividends, less the sum of any dividends paid thereon, without interest, upon the surrender of such certificate or certificates . 5. The holders of the Preferred Stock Series A, shall have no voting rights other than the voting rights as are specifically provided for by law. 6. No holder of any shares of the Preferred Stock, Series A, shall be entitled as of right to purchase or subscribe for any part of any shares of the Company authorized by the Restated Articles of Incorporation of the Company or of any additional shares of any class to be issued by reason of any increase of the authorized shares of the Company, or of any bonds, certificates or indebtedness, debentures or other securities convertible into shares of the Company, but any shares authorized by this Certificate, or any such additional authorized issue of new shares or of securities convertible into shares, may be issued and disposed of and options for the purchase thereof may be issued and disposed of, by the Board of Directors or such persons, firms, corporations or associations for such consideration, value or benefit and upon such terms and in such manner as the Board of Directors may in their discretion determine, without offering any thereof on the same terms or on any terms to the holders of the Preferred Stock, Series A. WITNESS THE EXECUTION HEREOF on this 1st day of August, 1995. Enserch Exploration, Inc. By: /s/ J. W. Pinkerton Name: J. W. Pinkerton Title: Vice President EX-3 3 EXHIBIT 3.2 BYLAWS OF ENSERCH EXPLORATION, INC., A CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS -------------------------------------- PURPOSE AND SCOPE OF BYLAWS These Bylaws shall constitute the private laws of ENSERCH EXPLORATION, INC., a corporation duly incorporated under the laws of the State of Texas (herein called the "corporation"), for the administration and regulation of the affairs of the corporation. In the event any provision of these Bylaws is or may be in conflict with any applicable law of the United States or the State of Texas, or of any order, rule, regulation, decree or judgment of any governmental body or power or court having jurisdiction over this corporation, or over the subject matter to which such provision of these Bylaws applies or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law or order, rule, regulation, decree or judgment, and shall in all other respects be in full force and effect. ARTICLE I OFFICES Section 1. The registered office of the corporation shall be at ENSERCH Center, 300 South St. Paul, in the City of Dallas, County of Dallas, State of Texas, and the registered agent of the corporation at such address shall be such person as the Board of Directors may from time to time designate. Section 2. The corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All meetings of the shareholders shall be held at the registered office of the corporation or at such other place either within or without the State of Texas as shall be designated from time to time by the Board of Directors. Section 2. The initial annual meeting of shareholders shall be held on May 14, 1996, at 2:00 P.M., and thereafter the annual meeting of shareholders shall be held on the second Tuesday of May in each year, at 2:00 P.M., for the election of a Board of Directors and the transaction of such other business as may properly be brought before the meeting. Section 3. Special meetings of the shareholders may be called by the Chairman, the Board of Directors, or the holders of not less than one-tenth of all the shares entitled to vote at the meetings. Business transacted at all special meetings shall be confined to the objects stated in the notice of meeting. Section 4. Written or printed notice stating the place, day and hour of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the Corporate Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 5. The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima-facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Section 6. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by written proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Each outstanding share, of any class, shall be entitled to as many votes per share as the Articles of Incorporation shall provide, on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation or these Bylaws. The vote for the election of Directors and, upon demand by any shareholder, the vote upon any question before the meeting shall be by ballot. Cumulative voting is expressly prohibited. Section 8. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy executed in writing by such shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. All proxies shall be revocable unless expressly provided therein to be irrevocable and are coupled with an interest and shall be filed with the Corporate Secretary of the corporation prior to or at the time of the meeting at which they are to be voted. Section 9. When a quorum is present at any meeting, matters brought before the meeting shall be determined by the shareholders in the following manner: (a) with respect to any matter, other than the election of Directors or a matter for which the affirmative vote of a specified portion of the shares entitled to vote is required by the statutes, the act of the shareholders shall be the affirmative vote of the holders of a majority of the shares entitled to vote on, and voted for or against, that matter at a meeting of shareholders at which a quorum is present and (b) with respect to the election of Directors, the act of the shareholders electing the Directors shall be a plurality of the votes cast by the holders of shares entitled to vote in the election of Directors at a meeting of shareholders at which a quorum is present, unless the question is one upon which, by express provision of the statutes or of the Articles of Incorporation or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 10. The Chairman shall preside at all meetings of the shareholders. In his absence, the President or an officer of the corporation designated by the Board of Directors shall preside and perform the duties of the Chairman at such meeting. He shall appoint two inspectors of voting to serve at each such meeting. Before acting at any meeting, the inspectors shall be sworn faithfully to execute their duties with strict impartiality and according to the best of their ability. The inspectors shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, the existence of a quorum, the qualification of the voters, the authenticity, validity and effect of proxies, receive votes and ballots, hear and determine all challenges and questions in any way arising in connection with the vote, count and tabulate all votes and determine and announce the result of the voting. Section 11. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, otherwise properly brought before the meeting by or at the direction of the Board, or otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Corporate Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Corporate Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 11; provided, however, that nothing in this Section 11 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedure. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 11, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 12. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nominations of persons for election to the Board of the corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or by any shareholder of the corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Section 12. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Corporate Secretary. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice to the Corporate Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Rule 14a under the Securities Exchange Act of 1934 as amended; and (b) as to the shareholder giving the notice (i) the name and record address of shareholder and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the shareholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as Director of the corporation. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III DIRECTORS Section 1. The business and affairs of the corporation shall be managed by its Board of Directors who may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 2. The Board of Directors shall consist of not less than two Directors, none of whom need be shareholders or residents of the State of Texas; the exact number of Directors to be determined from time to time by resolution adopted by the Board of Directors. A person shall be ineligible to be a Director of the corporation after the date of the annual meeting of shareholders of the corporation in the year in which such person's seventieth birthday occurs. The Directors shall be elected at the annual meeting of the shareholders, except as provided in Section 4 of this Article III. Unless he shall resign or become ineligible, each Director shall hold office until his successor shall be elected and shall qualify. Section 3. Any Director may resign at any time either by oral tender of resignation at any meeting of the Board of Directors or by giving written notice thereof to the Corporate Secretary. Resignations shall take effect when tendered or at the time specified in the tender and, unless otherwise specified, the acceptance of a resignation shall not be necessary to make it effective. Section 4. Any Director may be removed either for or without cause, at any special meeting of shareholders by the affirmative vote of the holders of record of a majority of the shares present in person or by proxy at such meeting and entitled to vote for such removal, if notice of the intention to act upon such matter shall have been given in the notice calling for such meeting. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining Directors even though such remaining Directors shall be less than a quorum of the Board of Directors. A Director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose or may be filled by the Board of Directors for a term of office continuing until the next election of one or more Directors by the shareholders; provided that the Board of Directors may not fill more than two such directorships between any two successive annual meetings of shareholders. Section 5. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members one or more committees, each of which shall be comprised of one or more of its members, and may designate one or more of its members as alternate members of any committee, who may, subject to any limitations imposed by the Board of Directors, replace absent or disqualified members at any meeting of that committee. Any such committee, to the extent provided in such resolutions or in the Articles of Incorporation or the Bylaws, shall have and may exercise all of the authority of the Board of Directors, provided that no committee of the Board of Directors shall have the authority of the Board of Directors in reference to: (1) amending the Articles of Incorporation, except that a committee may, to the extent provided in the resolution designating that committee or in the Articles of Incorporation or the Bylaws, exercise the authority of the Board of Directors vested in it in accordance with Article 2.13 of the Texas Business Corporation Act ("Act"); (2) proposing a reduction of the stated capital of the Corporation in the manner permitted by Article 4.12 of the Act; (3) approving a plan of merger or share exchange of the Corporation; (4) recommending to the shareholders the sale, lease, or exchange of all or substantially all of the property and assets of the Corporation otherwise than in the usual and regular course of its business; (5) recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof; (6) amending, altering, or repealing the Bylaws of the Corporation or adopting new Bylaws of the Corporation; (7) filling vacancies in the Board of Directors; (8) filling vacancies in or designating alternate members of any such committee; (9) filling any directorship to be filled by reason of an increase in the number of Directors; (10) electing or removing officers of the Corporation or members or alternate members of any such committee; (11) fixing the compensation of any member or alternate members of such committee; or (12) altering or repealing any resolution of the Board of Directors that by its terms provides that it shall not be so amendable or repealable; and, unless such resolution designating a particular committee, the Articles of Incorporation, or the Bylaws expressly so provide, no committee of the Board of Directors shall have the authority to authorize a distribution or to authorize the issuance of shares of the Corporation. MEETINGS OF THE BOARD OF DIRECTORS Section 6. The Directors of the corporation may hold their meetings, both regular and special, either within or without the State of Texas. Section 7. The first meeting of each newly elected Board of Directors shall be held without further notice immediately following the annual meeting of shareholders, and at the same place, unless by unanimous consent of the Directors then elected and serving such time or place shall be changed. Section 8. Regular meetings of the Board of Directors may be held with or without notice at such time and place as shall from time to time be determined by the Board of Directors. Section 9. Special meetings of the Board of Directors may be called on twenty-four (24) hours' notice to each Director, or such shorter period of time as the person calling the meeting deems appropriate in the circumstances, either personally, or by mail, or by telegram; special meetings shall be called by the Chairman or, in the event of the inability of the Chairman to act, the President or the Corporate Secretary in like manner and on like notice on the written request of two Directors. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. Section 10. At all meetings of the Board of Directors the presence of a majority of the Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all members of the Board of Directors. If a quorum shall not be present at any meeting of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 11. COMPENSATION OF DIRECTORS. The Board of Directors shall have authority to establish, from time to time, the amount of compensation which shall be paid to its members for their services as Directors. ARTICLE IV NOTICES Section 1. Whenever under the provisions of the statutes or of the Articles of Incorporation or of these Bylaws, notice is required to be given to any Director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, by mail, postage prepaid, addressed to such Director or shareholder at such address as appears on the books of the corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same shall be thus deposited in the United States mails as aforesaid. Section 2. Whenever any notice is required to be given to any shareholder or Director of the corporation under the provisions of the statutes or of the Articles of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except when a Director attends a meeting for the express purpose, in writing filed at the meeting, of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or held. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be a Chairman, a President, one or more Executive Vice Presidents, Senior Vice Presidents or Vice Presidents, a General Counsel, a Controller, a Corporate Secretary and a Treasurer, all of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person. Each such officer shall have such authority and perform such duties in the management of the corporation as may be determined by resolution of the Board of Directors. Section 2. The Board of Directors may elect or appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such term and who shall have such authority and perform such duties as may be prescribed by the Board of Directors or the Chairman. The power to appoint such other officers and agents may be delegated by the Board of Directors to the Chairman to the extent the Board may delineate by resolution. Section 3. Each officer of the corporation shall hold office until his successor is chosen and qualified in his stead or until his death or until his resignation, retirement or removal from office. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 4. THE CHAIRMAN. The Chairman shall be the chief executive officer of the corporation. He shall, subject to the direction and control of the Board of Directors, be their representative and medium of communication. He shall see that all orders, resolutions and policies adopted by the Board of Directors are carried into effect. He shall preside at all meetings of shareholders and at all meetings of the Board of Directors. He shall be in complete charge with attendant responsibility and accountability of the entire corporation and its affairs. Section 5. THE PRESIDENT. The President shall be the chief operating officer of the corporation. He shall, subject to the direction of the Chairman, have responsibility for such operations and functions assigned to him; and in the absence of the Chairman, shall preside at all meetings of the shareholders and at all meetings of the Board of Directors. Section 6. EXECUTIVE VICE PRESIDENTS. Each Executive Vice President shall have such powers and responsibilities, and shall perform such duties, as delineated by the Board or by the President. They shall be directly responsible to such officer as the President may from time to time prescribe. Section 7. SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER. The Senior Vice President, Chief Financial Officer, shall have such powers and responsibilities and shall perform such duties, as delineated by the Board of Directors or by the President. He shall be responsible to the President in said performance. Section 8. OTHER SENIOR VICE PRESIDENTS. Other Senior Vice Presidents shall have such powers and responsibilities, and shall perform such duties, as delineated by the Board or by the President. They shall be directly responsible to such officer as the President may from time to time prescribe. Section 9. THE GENERAL COUNSEL. The General Counsel shall have general control over all matters of a legal nature concerning the corporation and shall perform such duties as delineated by the Board or by the President. He shall be directly responsible to the President in said performance. Section 10. VICE PRESIDENTS. Each Vice President shall have such powers and responsibilities, and shall perform such duties, as may be delineated by the Board or the President. They shall be directly responsible to such officer as the President may from time to time prescribe. Section 11. THE CONTROLLER. The Controller shall be in general control of the accounts of the corporation, shall be responsible for the making of adequate audits, shall prepare and interpret required accounting, financial and statistical statements, and shall be directly responsible to such officer and shall perform such other duties as the Board or President may from time to time prescribe. Section 12. THE CORPORATE SECRETARY. The Corporate Secretary shall attend all meetings of the Board of Directors and shareholders and act as secretary thereof and shall record all votes and the minutes of all proceedings of the Board of Directors and shareholders in a book for that purpose maintained and kept in his custody. He shall keep in his custody the seal of the corporation and shall in general perform all the duties incident to the office of Secretary of a corporation. He shall act as Transfer Agent of the corporation and/or Registrar of its capital stock and other securities; provided that the Board of Directors may by resolution appoint one or more other persons or corporations as Transfer Agents and/or Registrars or as Co-Transfer Agents and/or Co-Registrars. He shall be directly responsible to such officer and shall perform such other duties as the Board or President may from time to time prescribe. Section 13. THE TREASURER. The Treasurer shall have custody of all the funds and securities of the corporation and shall keep full and accurate accounts of receipts and disbursements. He may endorse checks, notes and other obligations on behalf of the corporation for collection and shall deposit the same, together with all monies and other valuable effects, to the credit of the corporation in banks or depositories as the Board of Directors may designate by resolution or as may be established in accordance with Article VIII of these Bylaws. He shall be directly responsible to such officer as the President may from time to time designate and shall perform all duties incident to the office of Treasurer of a corporation or as the Board or President shall designate. Section 14. ASSISTANT CORPORATE SECRETARY, ASSISTANT TREASURER, ASSISTANT CONTROLLER. The Board of Directors may appoint one or more Assistant Corporate Secretaries, Assistant Treasurers and Assistant Controllers and such other appointive officers as may be appropriate and required. They shall be directly responsible to such officer and shall perform such duties as the Board or President may from time to time designate. ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1. The shares of stock of this corporation shall be deemed personal estate, and shall be transferable only on the books of the corporation in such manner as these Bylaws prescribe. Section 2. Every shareholder in the corporation shall be entitled to have a certificate or certificates representing the number of shares owned by him. The certificates of shares of stock of the corporation shall be numbered and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares, and shall be signed by the Chairman, the President or a Vice President, and the Treasurer or an Assistant Treasurer and bear the corporate seal; but the signatures of such officers and the seal of the corporation upon such certificates may be facsimiles, engraved or printed where such certificate is signed by a duly authorized Transfer Agent or Co-Transfer Agent and a Registrar or Co-Registrar. Section 3. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer, conversion, and registration of certificates for shares of the capital stock of the corporation. Section 4. LOST CERTIFICATES. The Board of Directors may direct a new certificate representing shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of such lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the corporation a bond in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the corporation and its Transfer Agents and Registrars and its Co-Transfer Agents and Co-Registrars with respect to the certificate alleged to have been lost or destroyed. Section 5. TRANSFER OF SHARES. Transfers of shares of stock shall be made on the books of the corporation only by the person named in the certificate or by attorney, lawfully constituted in writing, and upon surrender of the certificate therefor. Section 6. The Board of Directors may close the stock transfer books of the corporation for a period not to exceed sixty (60) days for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any distribution and share dividend, or in order to make a determination of shareholders for any purpose, provided that if such books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a shareholders' meeting, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of so closing the stock transfer books, the Board of Directors may fix a date in advance, not exceeding sixty (60) days preceding the date of any meeting of shareholders, or the date for the payment of any distribution and share dividend or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the respective determination of the shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such distribution and share dividend, or to any such allotment of rights, or to exercise rights in respect of any such change, conversion or exchange of capital stock and in such case such shareholders and only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such distribution and share dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares of stock on the books of the corporation after any such record date fixed as aforesaid. In the absence of any designation with respect thereto by the Board of Directors, the date upon which the notice of a meeting is mailed or resolutions declaring a distribution and share dividend are adopted shall be the record date for such determination in regard to meetings of shareholders or declarations of distributions and share dividends. Section 7. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Texas. Section 8. BONDS, DEBENTURES AND EVIDENCES OF INDEBTEDNESS. Bonds, debentures and other evidence of indebtedness of the corporation shall be signed by the Chairman, the President or any Vice President and the Treasurer or an Assistant Treasurer and shall bear the corporate seal and when so executed shall be binding upon the corporation, but not otherwise. The seal of the corporation thereon may be facsimile, engraved or printed, and where any such bond, debenture or other evidence of indebtedness is authenticated with the manual signature of an authorized officer of the corporation or trustee appointed or named by an indenture of trust or other agreement under which such security is issued, the signature of any of the corporation's officers authorized to execute such security may be facsimile. Section 9. SIGNATURES ON SHARE CERTIFICATES, BONDS, DEBENTURES AND EVIDENCES OF INDEBTEDNESS. In case any officer who signed, or whose facsimile signature has been placed on any certificate representing shares of stock, bond, debenture or evidence of indebtedness of this corporation shall cease to be an officer of the corporation for any reason before the same has been issued or delivered by the corporation, such certificate, bond, debenture or evidence of indebtedness may nevertheless be issued and delivered as though the person who signed it or whose facsimile signature had been placed thereon had not ceased to be such officer. ARTICLE VII DEEDS AND OTHER INSTRUMENTS OF CONVEYANCE Section 1. Deeds and other instruments of the corporation conveying land or any interest in land shall be signed by the Chairman, the President or a Vice President or attorney-in-fact of the corporation when authorized by appropriate resolution of the Board of Directors or shareholders, and when required by law, shall be attested by the Corporate Secretary or an Assistant Corporate Secretary and shall bear the corporate seal, and when so executed shall be binding upon the corporation, but not otherwise. ARTICLE VIII CHECKS, DRAFTS AND BILLS OF EXCHANGE Section 1. The Chairman or the President of the corporation may from time to time establish General Bank Accounts, Depository Bank Accounts, and such Special Bank Accounts as in the judgment of either of them may be needed in carrying on and dispatching the business of the corporation. All checks, drafts and bills of exchange issued in the name of the corporation and calling for the payment of money out of said General Accounts, Depository Accounts, or Special Accounts of the corporation shall be signed by the Controller or Assistant Controller, or such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Controller, and countersigned by the Treasurer or any Assistant Treasurer, or such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Treasurer; and when so designated by the Chairman or the President, the signature of the Treasurer or an Assistant Treasurer may be affixed by the use of a check-signing machine; provided that for the purpose of transferring funds from any bank or depository at which the corporation has funds on deposit to any other bank or depository of the corporation for credit to the corporation's account, a form of check having plainly printed upon its face "DEPOSITORY TRANSFER CHECK," and being by its wording payable to a bank or depository for credit to the account of the corporation, is hereby authorized, and such checks shall require no signature other than the name of the corporation printed at the lower right corner; and further provided that checks, drafts and bills of exchange issued in the name of the corporation in the amount of $5,000.00 or less need bear only one signature and that being the signature of the Treasurer or an Assistant Treasurer, affixed either manually or by the use of a check-signing machine, or the manual signature of such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Treasurer; and provided further that checks and drafts issued in the name of the corporation and calling for the payment of production revenue or royalties need bear only one signature and that being the signature of the Treasurer or an Assistant Treasurer, affixed either manually or by the use of a check-signing machine, or the manual signature of such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Treasurer; and provided further that checks and drafts issued in the name of the corporation and calling for payment of money out of Special Bank Accounts established for the payment of dividends need bear only one signature and that being the signature of the Treasurer or an Assistant Treasurer, affixed either manually or by the use of a check-signing machine, or the manual signature of such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Treasurer; and further provided that no person authorized to sign checks or drafts may sign a check or draft payable to himself. When signed in such applicable manner, but not otherwise, every check, draft or bill of exchange issued in the name of the corporation and calling for the payment of money out of the General Bank Accounts, Depository Bank Accounts, and Special Bank Accounts of the corporation shall be valid and enforceable according to its wording, tenor and effect, but not otherwise. Provided, however, that for the purpose of transferring funds between accounts of the corporation, from accounts of the corporation to accounts of subsidiaries and affiliates, from accounts of the corporation for the purpose of investment of corporate funds, and from accounts of the corporation for the payment of dividends, the Treasurer or an Assistant Treasurer, or such agents and employees as the Chairman or the President may from time to time designate and authorize, may make such transfer of funds by bank wire transfers through oral or written instructions; and for the purpose of transferring funds from accounts of the corporation to accounts of other third parties, such funds may be transferred by bank wire transfers but only upon written instructions from the Treasurer or an Assistant Treasurer, or such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Treasurer, and countersigned by the Controller or Assistant Controller, or such agents and employees as the Chairman or the President may from time to time designate and authorize to sign for the Controller. Section 2. The Treasurer of the corporation may establish special bank accounts designated as Agent's Account in such bank or banks as in his judgment may be needed in carrying on and dispatching the business of the corporation, provided that the Treasurer in establishing and maintaining such accounts shall keep only such funds therein and in such amount as may be required for the local needs of such accounts and provided that checks or drafts issued against or drawn on such accounts shall be valid and binding on the corporation according to their wording, tenor and effect when signed by either the Treasurer of the corporation or by such agent or employee of the corporation as may be designated by the Treasurer in writing to such bank or when signed in such manner and by such agent or employee of the corporation as may be designated by the Chairman or the President of the corporation; and further provided that checks and drafts issued in the name of the corporation against funds in such Agent's Account in the amount of $1,000.00 or more must be countersigned by two persons authorized to sign such checks or drafts. ARTICLE IX FISCAL YEAR Section 1. The fiscal year shall begin on the first day of January in each year. ARTICLE X DISTRIBUTIONS AND SHARE DIVIDENDS Section 1. Distributions and share dividends upon the outstanding shares of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Distributions may be paid in cash or property, and share dividends may be paid in shares of the authorized but unissued shares or in treasury shares, of the corporation subject to the provisions of the Articles of Incorporation. ARTICLE XI RESERVES Section 1. There may be created by resolution of the Board of Directors out of the earned surplus of the corporation such reserve or reserves as the Directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the corporation, or for such other purpose as the Directors shall think beneficial to the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE XII SEAL Section 1. The corporation's seal shall have inscribed thereon the name of the corporation, the year of the organization and the words "Corporate Seal, Texas." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XIII INDEMNIFICATION Section 1. The corporation shall indemnify, and advance or reimburse reasonable expenses incurred by, any person who (1) is or was a director, officer, employee or agent of the corporation, or (2) while a director, officer, employee or agent of the corporation, its divisions or subsidiaries, is or was serving at the request of the corporation, pursuant to a resolution adopted by the Board of Directors, as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the fullest extent that a corporation may or is required to grant indemnification to a director under the Texas Business Corporation Act. The corporation, pursuant to a resolution adopted by the Board of Directors, may indemnify any such persons to such further extent as permitted by law. Action by the Board of Directors to amend, modify or terminate this ARTICLE XIII, Section 1. shall be prospective from the effective date of such action and any rights or obligations resulting from an event or events occurring prior thereto shall be governed by the provisions of this ARTICLE XIII, Section 1, as of the date of such event or events. ARTICLE XIV AMENDMENTS Section 1. The power to alter, amend, suspend or repeal the Bylaws or to adopt new Bylaws shall be vested in the Board of Directors; provided, however, that any Bylaw or Amendment thereto as adopted by the Board of Directors may be altered, amended, suspended or repealed by vote of the shareholders entitled to vote for the election of Directors or a new Bylaw in lieu thereof may be adopted by vote of such shareholders. No Bylaw which has been altered, amended or adopted by such a vote of the shareholders may be altered, amended, suspended or repealed by vote of the Directors until two years after such action by vote of the shareholders. ARTICLE XV RESTRICTIONS ON FOREIGN OWNERSHIP Section 1. PURPOSE AND EFFECTIVENESS. The purpose of this Article XV is to limit ownership and control of shares of any class of capital stock of the corporation by persons who are not Eligible Citizens in order to permit the corporation or any of its Subsidiaries to conduct its business as a U.S. Mineral Lessee. The Board of Directors is hereby authorized to adopt such resolutions, and to effect any and all other measures reasonably necessary or desirable (consistent with applicable law and the provisions of the Articles of Incorporation) to fulfill the purpose and implement the restrictions of this Article XV, including without limitation, requiring, as a condition precedent to the transfer of shares on the records of the corporation, representations and other proof as to the identity of existing or prospective shareholders and persons on whose behalf of shares of any class of capital stock of the corporation or any interest therein or right thereof are or are to be held and as to whether or not such persons are Eligible Citizens. Section 2. RESTRICTION ON TRANSFERS. Any transfer, or attempted or purported transfer, of any shares of any class of capital stock issued by the corporation or any interest therein or right thereof, which would result in the ownership or control by one or more non-Eligible Citizens of the shares of any class of capital stock of the corporation or of any interest or right therein will, until such condition no longer exists, be void and will be ineffective as against the corporation and the corporation will not recognize the purported transferee as a shareholder of the corporation for any purpose other than the transfer of such shares to a person who is an Eligible Citizen; provided, however, that such shares may nevertheless be deemed to be shares held or owned by non-Eligible Citizens for the purposes of this Article XV. Section 3. SUSPENSION OF VOTING, DIVIDEND AND DISTRIBUTION RIGHTS. No shares of the outstanding capital stock of the corporation or any class thereof transferred to, or acquired or held by, a non-Eligible Citizen shall be entitled to receive or accrue any rights with respect to any dividends or other distributions of assets declared payable or paid to the holders of such capital stock during such period. Furthermore, no shares held by or for the benefit of any non-Eligible Citizen will be entitled to vote with respect to any matter submitted to stockholders of the corporation so long as such condition exists. Section 4. REDEMPTION. If at any time (i) the corporation is named, or is threatened to be named, as a party in a judicial or administrative proceeding that seeks the cancellation or forfeiture of any property, lease, right or license in which the corporation has an interest or (ii) if, in the opinion of the Board of Directors, the corporation's ability to hold any property, lease, right or license would be prohibited or restricted because of the nationality, citizenship, residence, or other status, of any shareholder of the corporation (or, in the case of a shareholder which is a corporation, partnership or association, of any shareholder, owner, partner or member of such shareholder), the corporation may redeem the shares held by such shareholder at the then Current Market Price and upon such terms as shall be determined by the Board of Directors, in their sole discretion. Section 5. DEFINITIONS. "Current Market Price" per share of capital stock of the corporation on any date is the average of the Quoted Prices of such class of capital stock during the four trading weeks before the date in question. In the absence of one or more such quotations, the Board of Directors shall determine the current market price on the basis of such quotations as it considers appropriate. "Eligible Citizen" means any person (including a corporation, partnership or other entity) whose ownership, holding or control of shares in the corporation would not, by reason of such person's citizenship or the citizenship of its members or owners or otherwise, (1) disqualify the corporation or any of its Subsidiaries from owning, acquiring, holding, possessing, or leasing oil, gas or other minerals, mineral deposits, land, vessels or any other property, licenses, or rights of any nature whatsoever in federal lands or leases under federal laws and regulations in effect from time to time, (2) violate any other qualifications as the Board of Directors deems in its reasonable discretion are necessary or appropriate to permit the corporation and its Subsidiaries to engage in any other business activities for which there may be qualifications or restrictions on shareholders of the corporation or any of its Subsidiaries applicable under federal or state law. A person is an Eligible Citizen if the applicable following requirement is met: (1) for an individual, that he is native-born, naturalized or a derivative Citizen of the United States or otherwise qualifies as a United States citizen; (2) for a corporation, that is organized or existing under the laws of the United States, a state, the District of Columbia or United States territory or possession, that at least 75% of the ownership interest in, and the voting power over, the corporation is held by Eligible Citizens, that the corporation's president or other chief executive officer and the chairman of its board of directors are United States citizens and that no more than a minority of the number of directors required to constitute a quorum are non- United States citizens; (3) for a partnership, that all of the interests in the partnership, are owned by Eligible Citizens; (4) for a trust, that each of its trustees and each of its beneficiaries is an Eligible Citizen; and (5) for an association, joint venture, or other entity, that all members, venturers or other equity participants are Eligible Citizens and that such association, joint venture or other entity is capable of holding leases or other interest in federal minerals or lands under the laws of the United States. "Quoted Price" means, with respect to any class of capital stock of the corporation, the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case on the principal national securities exchange on which the shares of such class of capital stock are listed or admitted to trading or, if not listed or admitted to trading, the last sale price regular way for such shares as published by NASDAQ, or if such last price is not so published by NASDAQ or if no such sale takes place on such day, the mean between the closing bid and asked prices for such shares as published by NASDAQ or in the absence of any of the foregoing, the fair market value as determined by the Board of Directors. "Subsidiary" means any corporation more than 50% of the outstanding capital stock of which is owned by the corporation or any Subsidiary of the corporation. "U.S. Mineral Lessee" means any corporation or other entity directly or indirectly owning, acquiring, holding, possessing, or leasing oil, gas or other minerals, mineral deposits, lands, vessels or any other property, licenses, or rights of any nature whatsoever in federal lands or leases under federal laws and regulations in effect from time to time, including, without limitation, the Mineral Leasing Act of 1920, as amended, 30 U.S.C.A. Section 181 et seq. Revised 02/13/96 EX-10 4 EXHIBIT 10.15 ENSERCH EXPLORATION, INC. PERFORMANCE INCENTIVE PLAN CALENDAR YEAR 1996 I. Purposes The purposes of the Enserch Exploration, Inc. Performance Incentive Plan (the "Plan") are to: A. Encourage and reward improved performances by the segment. B. Provide reward incentives for the achievement of specific perfor- mance goals or objectives that may be periodically established. C. Provide an appropriate level of executive compensation commensurate with that of similar businesses. D. Provide an incentive for key management personnel to perform in a manner that ultimately benefits the Corporation's shareholders and the Company's customers. II. Eligibility Key managers as specifically designated shall be eligible for participa- tion in the Plan. Participation in the Plan shall occur upon the recommendation of the Chairman of Enserch Exploration, Inc. and approval of the Compensation Committee of Enserch Exploration, Inc. The existence of this Plan does not prevent the existence of other bonus plans. However, Participants in this Plan may not participate in any other cash bonus or incentive plans or programs offered by ENSERCH, or any of its subsidiaries or affiliates, other than compensation and incentive plans made generally available to all executives of Enserch Exploration, Inc. The Compensation Committee of Enserch Exploration, Inc. may also award special bonuses on a discretionary basis to reward meritorious performance not compensated by this Plan. III. Definitions and Bonus Factors Subject to the conditions and limitations described herein, bonus award payments may be made to the Participants under the Plan as hereinafter set out. For purposes of the Plan, the following definitions apply: A. Participant Each of the key management personnel of the business segment recommended for participation by the Chairman of Enserch Explora- tion, Inc. and approved by the Compensation Committee of Enserch Exploration, Inc. is a Participant. Each Participant will be individually notified of his or her participation together with the applicable factors approved for the determination of each individual bonus opportunity. B. Base Salary The annual Base Salary designated for the Participant is that contained in the applicable payroll records and earned by the Participant, exclusive of any payment under any bonus plan, deferred compensation, salary deferral plan, expense reimbursement or fringe benefit, for the annual period covered by the bonus award. C. Target Bonus Factor A specified percentage of the Participant's Base Salary which would be the bonus payable to a Participant upon 100% goal achievement. The Target Bonus Factor applied to Base Salary is the Target Bonus. D. Performance Goals Expressed, measurable goals established as the basis for bonus awards for the annual bonus period, each having a corresponding weighting factor expressed as a percentage. No more than five Performance Goals will be used for any annual period. The weighting factors for all Performance Goals for an annual period aggregate 100%. E. Goal Achievement Factor A percentage representing the level of actual achievement of each Performance Goal, calculated at the end of each Plan year (calendar year). F. Performance Factor The sum of the individual weightings multiplied by the corre- sponding Goal Achievement Factor which is applied to the Target Bonus to derive the bonus. G. Bonus Calculation In summary: Target Bonus = Base Salary x Target Factor Bonus = Target Bonus Factor x Performance Factor Performance Factor = Weighting1 x Goal Achievement Factor1 + Weighting2 x Goal Achievement Factor2 + Weighting3 x Goal Achievement Factor3 + Weighting4 x Goal Achievement Factor4 + Weighting5 x Goal Achievement Factor5 The minimum bonus shall be zero. IV. Bonus Payments A. A Participant's bonus will be paid in cash to a Participant as follows, provided the Participant continues to be eligible under the terms of the Plan. One-half of the bonus will be paid in cash, in a single lump sum, less applicable withholding taxes, as soon as practicable after the end of the calendar year to which the bonus relates, but in any event, not later than April 1 of the following year. The remaining one-half of the bonus will be divided into two equal payments, each in cash, less applicable withholding taxes, and paid not later than April 1 of each of the two years immediately following the year of the payment of the current award, provided the Participant remains eligible for payments. B. To be eligible for receipt of each payment of the bonus, a Participant must continue to be employed by the Company at the time each payment is to be paid, unless that Participant's employment terminates by reason of retirement, death or disability, or as described in D below. Participants who terminate their employment voluntarily or who are terminated by the Company, other than under circumstances described below, will not be eligible to receive any portion of any bonus award which has been granted for prior years but unpaid as of the date of termination. C. All bonus payments credited to a Participant under this Plan during his or her active employment shall be paid under the terms of the Plan to any Participant who retires at age 60 or above in accordance with his/her employer's approved retirement plan, or to any Participant who becomes disabled and receives disability benefits in accordance with its long-term disability plan. In the event of a Participant's retirement at or above age 60 or death during a Plan year, assuming employee has worked for at least one-half of the Plan Year, to the extent practicable, any bonus awarded for achievement of goals to which the Participant contributed shall be prorated and the appropriate portion paid. A decision by the Chairman of Enserch Exploration, Inc. as to what may be an appropriate portion shall be final and binding on all parties. In the event of a Participant's death, all bonus awards resulting from a partial award for a prorated portion of the Plan Year or those which have been credited to such Participant prior to the date of death but remain unpaid and which would otherwise have been received will be paid to the designated beneficiary or, if no beneficiary is designated, to the employee's estate, in one lump sum as soon as practicable, but no later than six months following the death of the employee. In the event a Participant's employment terminates for any reason other than retirement, disability or death, or as described in D below, prior to the time a bonus payment is paid, no bonus shall be payable for either a portion of or for a full Plan year, or for any unpaid bonus awards credited in prior years. D. In the event that Enserch Exploration, Inc. shall, pursuant to action by its Board, at any time propose to merge into, consolidate with, or sell or otherwise transfer all or substantially all of the assets of the segment to another corpora- tion, in which Enserch Exploration, Inc. would be in a minority position, all bonus awards which have been granted but remain unpaid, and a bonus award based on a 100% performance factor the Plan Year in which such action occurs, shall be immediately paid to Participant and the Participant shall not be required to be employed by the Corporation in order to receive the payment. V. Establishment of Performance Goals Performance Goals will be established annually by the President of Enserch Exploration, Inc. after receiving requisite approval, with one to five certain expressed, specific, objective and measurable goals in such Plan defined as the Performance Goals for which bonus will be paid if achieved. A minimum of 50% of the weighting will be applied to the attainment of operating income goal achievement or specific oil and gas production goals that determine operating income. VI. Operating Income Goal Achievement The Goal Achievement Factor pertaining to achievement of operating income goals is standardized as follows: If Operating Income Ratio is: Operating Income Goal Achievement Factor will be: less than 0.90 0% minus 0.5% for each 0.01 less than 0.90 between 0.90 and 1.00 20% plus 8% for each 0.01 greater than 0.90 above 1.00 100% plus 1% for each $1 million greater than budgeted operating income, as adjusted, up to a maximum of 150% Achievement Factors will be prorated between the amounts nearest percentages specified above. The following definitions apply: Operating Income Ratio The ratio of the applicable business unit's actual operating income for the Plan year to the budgeted operating income, which budgeted operating income is adjusted to take into account the effects of product price and severance tax variations when applicable. The accrual of expense for this Plan will be included as expense deducted for the determination of actual operating income. Price Adjustment A factor used to adjust budgeted operating income such that the Partici- pant will not benefit from or be penalized by oil, gas and NGL price fluctuations when measuring the attainment of budgeted operating income for the particular unit or for the Company. In summary: Operating Income Ratio = (Actual Operating Income)/(Budgeted Operating Income + Price Adjustment) Price Adjustment = (Actual Average Oil Price - Budgeted Oil Price) x Budgeted Net Interest Oil Sales Volume + (Actual Average Gas Price - Budgeted Gas Price) x Budgeted Net Interest Gas Sales Volume + (Budgeted Severance Taxes - Actual Severance Taxes) VII. Reserve Addition Goal For the purposes of defining Performance Goals related to reserve additions, the following definitions and provisions apply. A. Finding Cost The cost of reserve additions utilizing the Company's methodologies, statistics, reserve values, and accounting and other data as calculated in the Company's sole judgment. B. Reserve Additions Reserve additions or reductions shall be based upon the estimates of DeGolyer and MacNaughton submitted in the final report for a calendar year. No adjustments will be made in future years for revisions or adjustments made in these estimates in subsequent years' reports. VIII. Conflict of Interest If at any time during the period the Participant is to receive or accrue payments hereunder, the Participant engages in the employment, consulta- tion or representation of any corporation, partnership, individual, political subdivision, or any enterprise that is engaged in any action or proceeding that could be reasonably construed as being adverse to the interest of the Company, the Participant and his beneficiaries or heirs shall forfeit all rights to receive payments of bonus awards provided under this Plan regardless of whether or not such payments had been previously approved by the Company; except that before any such termina- tion under this section of the Participant's right to receive payments, the Company shall notify the Participant in writing of its opinion about the adversary situation, after which time the Participant shall have a period of 15 days to correct the situation to the satisfaction of the Company as to preclude benefit termination. This provision shall apply to full-time and part-time employees of the Company and to retired or terminated employees. For purposes of this Plan, the Company shall determine within its sole discretion whether or not the Participant's actions can be reasonably construed as adverse to the Company's interests. IX. Administrative Provisions A. Discretion Notwithstanding any calculation of bonus in accordance with the foregoing provisions, the Chairman of Enserch Exploration, Inc. may within his sole discretion alter or eliminate any bonus award developed under this Plan in order to achieve equity in the administration of the Plan within Enserch Exploration, Inc. as a whole. B. Termination This Plan may be terminated at any time by the Company. Notifica- tion of termination will be given to the then Participants. A Plan termination will not prevent payment of bonuses where goal achievement has been completed in a calendar year for which Performance Goals had been approved. If the Plan is terminated during a Plan year in which Performance Goals have been established under the Plan, performance will be prorated and bonuses paid proportionally. The Company's decision relative to such payment shall be final and binding on all parties. Such termination will be applicable to new bonus awards and will not affect credited but unpaid bonus amounts from prior bonus years. C. Effective Date This Plan is effective with the calendar year commencing January 1, 1996 and for the ensuing calendar years until terminated. D. No Contract Nothing in this Performance Incentive Plan shall be deemed by implication, action or otherwise to constitute a contract of employment or otherwise to impose any limitation on any right of the Corporation nor any of its operating units to terminate a Participant's employment at any time. E. Under provisions of the ENSERCH Retirement and Death Benefit Program of 1969, this bonus program qualifies as an "annual performance based incentive plan" and is to be included in "final average pay" for purposes of pension calculations. EX-10 5 EXHIBIT 10.16 ENSERCH CORPORATION DEFERRED COMPENSATION PLAN THIS PLAN, made and executed at Dallas, Texas by ENSERCH Corporation, a Texas corporation (the "Company"), is being established primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Company and its participating affiliates. ARTICLE I. DEFINITIONS Section 1.1 Definitions. Unless the context clearly indicates otherwise, when used in this Plan: (a) "Adjustment Date" means the last day of each calendar quarter and such other dates as the Administrative Committee in its discretion may prescribe. (b) "Affiliated Company" means any corporation or organization which together with the Company would be treated as a single employer under Section 414 of the Code. (c) "Administrative Committee" means the committee designated pursuant to Section 2.1 to administer this Plan. (d) "Board" means the Board of Directors of ENSERCH Corporation. (e) "Change of Control" means a change in control of a nature that would be required to be reported in response to Item 1(a) of the Securities and Exchange Commission Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), or would have been required to be so reported but for the fact that such event had been "previously reported" as that term is defined Rule 12b-2 of Regulation 12B under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities ordinarily (apart from rights accruing under special circumstances) having the right to vote at elections of directors ("Voting Securities"), or (ii) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (ii), considered as though such person were a member of the Incumbent Board, or (iii) a recapitalization of the Company occurs which results in either a decrease by 33% or more in the aggregate percentage ownership of Voting Securities held by Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) or an increase in the aggregate percentage ownership of Voting Securities held by non-Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) to greater than 50%. For purposes of this subsection (e), the term "Person" shall mean and include any individual, corporation, partnership, group, association or other "person", as such term is used in Section 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company or any employee benefit plan(s) sponsored or maintained by the Company or any subsidiary thereof, and the term "Independent Shareholder" shall mean any shareholder of the Company except any employee(s) or director(s) of the Company or any employee benefit plan(s) sponsored or maintained by the Company or any subsidiary thereof. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Company" means ENSERCH Corporation and its successors. (h) "Compensation Committee" means the Compensation Committee of the Board. (i) "Deferral Account" means the account established and maintained on the books of an Employer to record a Participant's interest under this Plan attributable to amounts credited to such Participant pursuant to Plan Section 3.1 and Section 3.2. (j) "Disability" means total and permanent disability of the Participant as determined under the provisions of his or her Employer's group long-term disability plan. (k) "Election Period" means such period immediately prior to the beginning of a Plan Year (or, with respect to the Plan's first Plan Year, the period immediately prior to October 1, 1994) specified by the Administrative Committee for the making of deferral elections for such Plan Year pursuant to Plan Sections 3.1 and 3.2. (l) "Eligible Employee" means any employee of an Employer who is one of a select group of management or highly compensated employees and (i) whose annual base salary equals or exceeds $125,000 or (ii) whose annual base salary equals or exceeds $100,000 and whose position is of significant impact on the operations of his or her Employer as determined by the Administrative Committee in its absolute discretion. (m) "Employer" includes the Company and any Affiliated Company which adopts this Plan. (n) "Participant" means an Eligible Employee or former Eligible Employee for whom a Deferral Account is being maintained under this Plan. (o) "Plan" means this ENSERCH Corporation Deferred Compensation Plan as in effect from time to time on and after October 1, 1994. (p) "Plan Year" means the twelve-month period commencing January 1 and ending the following December 31. (q) "Retirement Age" means the age used as the retirement age for the Participant under Section 216(l) of the Social Security Act. ARTICLE II. PLAN ADMINISTRATION Section 2.1 Administrative Committee. This Plan shall be administered by an Administrative Committee composed of at least three individuals appointed by the Compensation Committee. Each member of the Administrative Committee so appointed shall serve in such office until his or her death, resignation or removal by the Compensation Committee. The Compensation Committee may remove any member of the Administrative Committee at any time by giving written notice thereof to the members of the Administrative Committee. Vacancies shall likewise be filled from time to time by the Compensation Committee. The Administrative Committee shall have discretionary and final authority to interpret and implement the provisions of the Plan, including without limitation, authority to determine eligibility for benefits under the Plan. The Administrative Committee shall act by a majority of its members at the time in office and such action may be taken either by a vote at a meeting or in writing without a meeting. The Administrative Committee may adopt such rules and procedures for the administration of the Plan as are consistent with the terms hereof and shall keep adequate records of its proceedings and acts. Every interpretation, choice, determination or other exercise by the Administrative Committee of any power or discretion given either expressly or by implication to it shall be conclusive and binding upon all parties having or claiming to have an interest under the Plan or otherwise directly or indirectly affected by such action, without restriction, however, on the right of the Administrative Committee to reconsider and redetermine such action. ARTICLE III. DEFERRED COMPENSATION PROVISIONS Section 3.1 Compensation Deferral Election. During the Election Period prior to the beginning of each Plan Year, an Eligible Employee may elect to have the payment of an amount of up to 50% of the annual base salary otherwise payable by an Employer to such Eligible Employee for such Plan Year deferred for payment in the manner and at the time specified in Article IV; provided, however, that the minimum amount that may be deferred by an Eligible Employee for a Plan Year pursuant to this Section 3.1 is $5,000 (or such other amount as shall be determined by the Administrative Committee in its discretion). The amount of annual base salary a Participant elects to defer pursuant to this Section 3.1 shall be deducted from the Participant's pay in substantially equal amounts over all pay periods during the Plan Year. All elections made pursuant to this Plan Section 3.1 shall be made in writing on a form prescribed by and filed with the Administrative Committee and shall be irrevocable; provided, however, that effective as of the first day of any calendar quarter during a Plan Year, an Eligible Employee may revoke his or her deferral election and thereby suspend further salary deferrals for the remainder of such Plan Year by providing written notice thereof to the Administrative Committee no later than 15 days prior to the effective date of such suspension. Any Eligible Employee who so suspends his or her salary deferrals pursuant to this Section shall not be permitted to elect future salary deferrals pursuant to this Section to be effective earlier than the first day of the next Plan Year. Section 3.2 Bonus Deferral Election. During the Election Period prior to the beginning of each Plan Year (other than the first Plan Year), an Eligible Employee may elect to have the payment of an amount up to 100% of the cash portion of any future bonus otherwise payable by an Employer with respect to services to be performed by such Eligible Employee during such Plan Year deferred for payment in the manner and at the time specified in Article IV; provided, however, that the minimum amount that may be deferred by an Eligible Employee pursuant to this Section 3.2 is $5,000 (or such other amount as shall be determined by the Administrative Committee in its discretion); provided, further, that there shall be no minimum deferral amount pursuant to this Section 3.2 with respect to an Eligible Employee who elects to defer in the same Plan Year at least $5,000 (or such other amount as shall be determined by the Administrative Committee in its discretion) pursuant to Section 3.1. All elections made pursuant to this Plan Section 3.2 shall be made in writing on a form prescribed by and filed with the Administrative Committee and shall be irrevocable. Section 3.3 Participant Deferral Accounts. An Employer shall establish and maintain on its books a Deferral Account for each Eligible Employee employed by such Employer who elects to participate in this Plan. Each such Deferral Account shall be designated by the name of the Participant for whom it is established. The amount of any base salary and/or cash bonus from an Employer for a Plan Year that is deferred for a Participant pursuant to Section 3.1 and/or Section 3.2 shall be credited by such Employer to such Participant's Deferral Account as of the date such amount would otherwise have been paid to such Participant by such Employer. An Employer shall continue maintaining a Deferral Account as long as a positive balance remains credited to such Deferral Account. Section 3.4 Deferral Account Adjustments. As of each Adjustment Date, the amount credited to a Deferral Account shall be adjusted to reflect such gain, loss and/or expenses incurred based on the experience of the investments selected by the Participant prior to the date prescribed by the Administrative Committee for the investment of his or her Deferral Account and taking into account additional deferrals credited to and distributions made from such Deferral Account since the last Adjustment Date. The Administrative Committee shall have sole and absolute discretion with respect to the number and type of investment choices made available for selection by Participants pursuant to this Section, the timing of Participant elections and the method by which adjustments are made. The designation of investment choices by the Administrative Committee shall be for the sole purpose of adjusting Deferral Accounts pursuant to this Section and this provision shall not obligate the Employers to invest or set aside any assets for the payment of benefits hereunder; provided, however, that an Employer may invest a portion of its general assets in investments, including investments which are the same as or similar to the investment choices designated by the Administrative Committee and selected by Participants, but any such investments shall remain part of the general assets of such Employer and shall not be deemed or construed to grant a property interest of any kind to any Participant, designated beneficiary or estate. The Administrative Committee shall notify the Participants of the investment choices available and the procedures for making and changing investment elections. Section 3.5 Vesting. Subject to Section 4.6, all amounts credited to a Participant's Deferral Account shall be fully vested and nonforfeitable at all times. ARTICLE IV. BENEFITS Section 4.1 Source of Benefit Payments. Benefit payments to be made with respect to a Participant's Deferral Account maintained pursuant to the Plan will be paid in cash and will be the obligation solely of the Employer maintaining such Deferral Account; provided, however, that whenever a payment hereunder is to be made by an Employer, the Company may, in its discretion, satisfy such payment obligation on behalf of such Employer, and the Company will be obligated to satisfy any such payment obligation in the event the Employer otherwise liable therefor fails to pay such amount when due for any reason. Section 4.2 Amount of Benefit Payments. The amount payable from a Participant's Deferral Account shall be determined based upon the amount credited to such Deferral Account as of the Adjustment Date last preceding the date of payment plus any deferrals credited to and less any distributions made from such Deferral Account since such Adjustment Date. The amount of each payment made with respect to a Deferral Account and any forfeiture amounts applied pursuant to Section 4.6 shall be deducted from the balance credited to such Deferral Account at the time of payment or forfeiture. Section 4.3 Early Termination. Upon a Participant's termination of employment with an Employer or Affiliated Company prior to the date which is ten years prior to such Participant's Retirement Age for any reason other than death, Disability or transfer to employment with another Employer or Affiliated Company, the amount payable from such Participant's Deferral Account, as determined in accordance with Section 4.2, shall be paid by the Employer to such Participant in a single lump sum as soon as practicable following such termination of employment. Section 4.4 Death. Upon a Participant's termination of employment by reason of death, the amount payable from such Participant's Deferral Account, as determined in accordance with Section 4.2, shall be paid by the Employer to the beneficiary or beneficiaries designated by such Participant pursuant to Section 4.7 in one of the following forms as elected by the Participant during the Participant's initial Election Period: (a) a single lump sum to be paid as soon as practicable following the Participant's death; or (b) if the amount payable from a Deferral Account is $50,000 or more as of the date of the Participant's death, annual installments over the period certain selected by the Participant not to exceed 15 years commencing in payment as soon as practicable following the Participant's death with each annual installment equal to the Deferral Account balance multiplied by a fraction the numerator of which is one and the denominator of which is the number of payments remaining; provided, however, that if a beneficiary of a deceased Participant who is entitled to installment payments hereunder encounters an unforeseeable emergency (as determined in accordance with Section 4.8 hereof), the Administrative Committee, in its absolute discretion, may direct the Employer to accelerate such portion of the installment payments as the Administrative Committee shall determine to be necessary to alleviate the severe financial hardship of the beneficiary caused by such unforeseeable emergency. Section 4.5 Retirement or Disability. Upon a Participant's termination of employment with an Employer or Affiliated Company (i) on or after the date which is ten years prior to such Participant's Retirement Age for any reason other than death or transfer to employment with another Employer or Affiliated Company or (ii) on account of his or her Disability, the amount payable from such Participant's Deferral Account, as determined in accordance with Section 4.2, shall be paid by the Employer to such Participant (or, in the event of his or her subsequent death, to the beneficiary or beneficiaries designated by such Participant pursuant to Plan Section 4.7) in one of the following forms as elected by the Participant during the Participant's initial Election Period: (a) a single lump sum to be paid as soon as practicable following the Participant's termination of employment or, in the case of termination of employment on account of Disability or prior to Retirement Age and the Participant so elects, the Participant's Retirement Age; or (b) if the amount payable from a Deferral Account is $50,000 or more as of the date of the Participant's termination of employment, annual installments over the period certain selected by the Participant not to exceed 15 years commencing in payment as soon as practicable following the Participant's termination of employment or, in the case of termination of employment on account of Disability or prior to Retirement Age and the Participant so elects, the Participant's Retirement Age, with each annual installment equal to the Deferral Account balance multiplied by a fraction the numerator of which is one and the denominator of which is the number of payments remaining; provided, however, that if a Participant who is entitled to a delayed lump sum or installment payments hereunder encounters an unforeseeable emergency (as determined in accordance with Section 4.8 hereof), the Administrative Committee, in its absolute discretion, may direct the Employer to accelerate such portion of the lump sum or installment payments as the Administrative Committee shall determine to be necessary to alleviate the severe financial hardship of the Participant caused by such unforeseeable emergency. Section 4.6 Option to Request Immediate Payout. In lieu of any other benefits or payments to be made pursuant to this Plan, each Participant (or beneficiary in the case of a deceased Participant) shall have the right at any time to elect a lump sum payment in an amount equal to: (a) the amount payable from the Participant's Deferral Account, determined in accordance with Section 4.2, minus (b) a forfeiture amount equal to 20% of (a) above, provided, however, that if the election is made on or within two years following the date a Change of Control occurs, such forfeiture amount shall be determined substituting 10% for 20%. A Participant's election for an immediate payout pursuant to this Section must be in the form of a written notice provided to the Administrative Committee. The Administrative Committee shall notify any Employer maintaining a Deferral Account with respect to such Participant of the election and the amount so determined shall be paid to the Participant (or, in the case of a deceased Participant, to the beneficiary or beneficiaries designated by such Participant pursuant to Plan Section 4.7) by the Employers no later than fifteen days following receipt of notice by the Administrative Committee. Any amount remaining credited to the Participant's Deferral Account shall be forfeited at the time payment is made. Section 4.7 Designation of Beneficiaries. Any amount payable under this Plan on account of the death of a Participant shall be paid when otherwise due hereunder to the beneficiary or beneficiaries designated by such Participant. Such designation of beneficiary or beneficiaries shall be made in writing on a form prescribed by and filed with the Administrative Committee and shall remain in effect until changed by such Participant by the filing of a new beneficiary designation form with the Administrative Committee. If a Participant fails to so designate a beneficiary, or in the event all of the designated beneficiaries are individuals who either predecease the Participant or survive the Participant but die prior to receiving the full amount payable under this Plan, any remaining amount payable under this Plan shall be paid to such Participant's estate when otherwise due hereunder. Section 4.8 Hardship Distributions. If a Participant encounters an unforeseeable emergency, the Administrative Committee in its absolute discretion may direct the Employer maintaining such Deferral Account to pay to such Participant and deduct from such Deferral Account such portion of the amount then credited to such Deferral Account (including, if appropriate, the entire amount determined in accordance with Section 4.2) as the Administrative Committee shall determine to be necessary to alleviate the severe financial hardship of such Participant caused by such unforeseeable emergency. For this purpose, an "unforeseeable emergency" shall be a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but in any case, payment may not be made to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Participant's assets, to the extent liquidation of such assets would not itself cause severe financial hardship, or (iii) by cessation of deferrals under the Plan. No distribution shall be made to a Participant pursuant to this Section 4.8 unless such Participant requests such a distribution in writing and provides to the Administrative Committee such information and documentation with respect to his or her unforeseeable emergency as may be requested by the Administrative Committee. Section 4.9 Change of Distribution Form. Each Participant may elect at any time after a Participant's initial Election Period, but no more often than once during each calendar year, to change the distribution forms elected with respect to all amounts credited to such Participant's Deferral Account; provided, however, that such election shall not be effective unless made by the end of the second calendar year preceding the calendar year in which distributions are to be made or commence to such Participant pursuant to Sections 4.4 or 4.5 hereof. ARTICLE V. AMENDMENT AND TERMINATION Section 5.1 Amendment and Termination. The Compensation Committee shall have the right and power at any time and from time to time to amend this Plan, in whole or in part, on behalf of all Employers, and the Board shall have the right and power at any time to terminate this Plan or any Employer's participation hereunder. Any amendment to or termination of this Plan shall be made by or pursuant to a resolution duly adopted by the Compensation Committee or the Board, as the case may be, and shall be evidenced by such resolution or by a written instrument executed by such person as the Compensation Committee or the Board, as the case may be, shall authorize for such purpose. Any provision of this Plan to the contrary notwithstanding, no amendment to or termination of this Plan shall reduce the amounts actually credited to a Participant's Deferral Accounts as of the date of such amendment or termination, or further defer the dates for the payment of such amounts, without the consent of the affected Participant. Upon termination of this Plan, the Board, in its sole discretion, may require the Administrative Committee to calculate final Deferral Account balances as of such Adjustment Date as it may prescribe, and direct each Employer to make immediate lump sum payments to each Participant (or beneficiary in the case of a deceased Participant) with respect to which such Employer maintains a Deferral Account in the amount determined to be credited to such Participant's Deferral Account as of such final Adjustment Date. Section 5.2 Change of Control. The preceding provisions of this Article to the contrary notwithstanding, no action taken on or within two years following a Change of Control to amend or terminate this Plan shall be effective unless written consent thereto is obtained from a majority of the Participants. ARTICLE VI. MISCELLANEOUS PROVISIONS Section 6.1 Nature of Plan and Rights. This Plan is unfunded and maintained by the Employers primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Employers. The Deferral Accounts established and maintained under this Plan by an Employer are for its accounting purposes only and shall not be deemed or construed to create a trust fund or security interest of any kind for or to grant a property interest of any kind to any Participant, designated beneficiary or estate. The amounts credited by an Employer to Deferral Accounts maintained under this Plan are and for all purposes shall continue to be a part of the general assets and liabilities of such Employer, and to the extent that a Participant, designated beneficiary or estate acquires a right to receive a payment from such Employer pursuant to this Plan, such right shall be no greater than the right of any unsecured general creditor of such Employer. Section 6.2 Spendthrift Provision. No Deferral Account balance or other right or interest under this Plan of a Participant, designated beneficiary or estate may be assigned, transferred or alienated, in whole or in part, either directly or by operation of law, and no such balance, right or interest shall be liable for or subject to any debt, obligation or liability of such Participant, designated beneficiary or estate. Section 6.3 Employment Noncontractual. The establishment of this Plan shall not enlarge or otherwise affect the terms of any Participant's employment with an Employer, and such Employer may terminate the employment of such Participant as freely and with the same effect as if this Plan had not been established. Section 6.4 Adoption by Other Employers. With the consent of the Compensation Committee, this Plan may be adopted by any Affiliated Company, such adoption to be effective as of the date specified by such Affiliated Company at the time of adoption. Section 6.5 Claims Procedure. If any person (hereinafter called the "Claimant") feels that he or she is being denied a benefit to which he or she is entitled under this Plan, such Claimant may file a written claim for said benefit with the Administrative Committee. Within sixty days following the receipt of such claim the Administrative Committee shall determine and notify the Claimant as to whether he or she is entitled to such benefit. Such notification shall be in writing and, if denying the claim for benefit, shall set forth the specific reason or reasons for the denial, make specific reference to the pertinent provisions of this Plan, and advise the Claimant that he or she may, within sixty days following the receipt of such notice, in writing request to appear before the Administrative Committee or its designated representative for a hearing to review such denial. Any such hearing shall be scheduled at the mutual convenience of the Administrative Committee or its designated representative and the Claimant, and at any such hearing the Claimant and/or his or her duly authorized representative may examine any relevant documents and present evidence and arguments to support the granting of the benefit being claimed. The final decision of the Administrative Committee with respect to the claim being reviewed shall be made within sixty days following the hearing thereon, and Administrative Committee shall in writing notify the Claimant of said final decision, again specifying the reasons therefor and the pertinent provisions of this Plan upon which said final decision is based. The final decision of the Administrative Committee shall be conclusive and binding upon all parties having or claiming to have an interest in the matter being reviewed. Section 6.6 Reimbursement of Expenses. In the event that a dispute arises between a Participant or beneficiary and the Participant's Employer or the Company with respect to the payment of benefits hereunder and the Participant or beneficiary is successful in pursuing a benefit to which he or she is entitled under the terms of the Plan against the Participant's Employer, the Company or any other party in the course of litigation or otherwise and incurs attorneys' fees, expenses and costs in connection therewith, the Participant's Employer and the Company shall reimburse the Participant or beneficiary for the full amount of any such attorneys' fees, expenses and costs. Section 6.7 Withholding Tax. There shall be deducted from all amounts paid under this Plan any taxes required to be withheld by any Federal, state, local or other government. The Participant and/or his or her beneficiary (including his or her estate) shall bear all taxes on amounts paid under this Plan to the extent that no taxes are withheld, irrespective of whether withholding is required. Section 6.8 Applicable Law. This Plan shall be governed and construed in accordance with the internal laws (and not the principles relating to conflicts of laws) of the State of Texas, except where superseded by federal law. IN WITNESS WHEREOF, this Plan has been executed on this 30th day of September, 1994 to be effective as of October 1, 1994. ENSERCH CORPORATION By /s/ D. W. Biegler Title: Chairman, President and Chief Executive Officer AMENDMENT NO. 1 TO THE ENSERCH CORPORATION DEFERRED COMPENSATION PLAN Pursuant to the provisions of Section 5.1 thereof, the ENSERCH Corporation Deferred Compensation Plan (the "Plan") is hereby amended in the following respect only: Article III of the Plan is hereby amended effective as of January 1, 1995 by adding the following new Section to the end thereof: Section 3.6 Deferred Compensation Awards. Effective as of January 1, 1995, the President of ENSERCH Corporation may enter into "Deferred Compensation Award Agreements" with such Eligible Employees as may from time to time be approved by the Compensation Committee. Such Agreements shall provide for the grant of a deferred compensation award, either fixed as to amount or determinable pursuant to a formula, to the Eligible Employee subject to such vesting requirements, including performance criteria, as shall be approved by the Compensation Committee. The amount of any deferred compensation award which vests pursuant to the terms of a Deferred Compensation Award Agreement entered into with an Eligible Employee shall be credited to such Participant's Deferral Account as of the date of such vesting, if such individual is an Eligible Employee as of the date of vesting, and any such vested award so credited to a Deferral Account shall for all purposes be considered to be, and shall be treated in the same manner as, a deferral credited to such Deferral Account. The Administrative Committee may maintain separate subaccounts within a Participant's Deferral Account for amounts attributable to deferrals and deferred compensation awards if separate identification is desired, but the amounts credited to any subaccounts shall be treated the same for all purposes of this Plan. IN WITNESS WHEREOF, this Amendment has been executed this 28th day of March, 1995. ENSERCH CORPORATION By /s/ D. W. Biegler Title: Chairman and President AMENDMENT NO. 2 TO THE ENSERCH CORPORATION DEFERRED COMPENSATION PLAN Pursuant to the provisions of Section 5.1 thereof, the ENSERCH Corporation Deferred Compensation Plan (the "Plan") is hereby amended in the following respects only: FIRST: Effective as of January 1, 1996, Article I, Section 1.1 of the Plan is hereby amended by restating subsection (i) thereof to read as follows: (i) "Deferral Account" means the account established and maintained on the books of an Employer to record a Participant's interest under this Plan attributable to amounts credited to such Participant pursuant to Plan Sections 3.1, 3.2, 3.6 and 3.7. SECOND: Effective as of January 1, 1996, Article I, Section 1.1 of the Plan is hereby amended by adding the following new subsections to the end thereof: (r) "Compensation" shall mean Compensation as defined in Section 1.2(f) of the ENSERCH Corporation Employee Stock Purchase and Savings Plan. (s) "Contribution Service" shall mean Contribution Service as described in Section 2.1 of the ENSERCH Corporation Employee Stock Purchase and Savings Plan. THIRD: Effective as of January 1, 1996, Article III of the Plan is hereby amended by adding the following new section to the end thereof: Section 3.7 Employer Contributions. (a) Matching Contributions. For each payroll period, each Employer shall make a matching contribution to the Plan for each Participant who is an Eligible Employee during such pay period in an amount which will equal: (1) with respect to a Participant who has completed less than five years of Contribution Service as of the end of that pay period, 30% of the amounts deferred by such Participant pursuant to Section 3.1 for that pay period to the extent that such amounts deferred do not exceed 2% of such Participant's Compensation for such pay period; (2) with respect to a Participant who has completed at least five but less than fifteen years of Contribution Service as of the end of that pay period, 40% of the amounts deferred by such Participant pursuant to Section 3.1 for that pay period to the extent that such amounts deferred do not exceed 3% of such Participant's Compensation for such pay period; (3) with respect to a Participant who has completed at least fifteen but less than twenty-five years of Contribution Service as of the end of that pay period, 50% of the amounts deferred by such Participant pursuant to Section 3.1 for that pay period to the extent that such amounts deferred do not exceed 4% of such Participant's Compensation for such pay period; and (4) with respect to a Participant who has completed at least twenty-five years of Contribution Service as of the end of that pay period, 60% of the amounts deferred by such Participant pursuant to Section 3.1 for that pay period to the extent that such amounts deferred do not exceed 5% of such Participant's Compensation for such pay period. Employer matching contributions made under this Plan for a Participant shall be credited each month to such Participant's Deferral Account under the Plan. (b) Discretionary Contributions. In addition to the Employer contributions made pursuant to Section 3.7(a), for each Plan Year each Employer shall contribute to the Plan as an Employer contribution such amount, if any, to be determined by the Compensation Committee. Any Employer contribution made for a Plan Year pursuant to this Section shall be credited to the Deferral Accounts of those Participants specified by the Compensation Committee in the manner determined by the Compensation Committee in its absolute discretion. IN WITNESS WHEREOF, this Amendment has been executed this 1st day of January, 1996. ENSERCH Corporation By /s/ D. W. Biegler Title: President EX-10 6 EXHIBIT 10.20 February 13, 1996 -------------------- -------------------- -------------------- Dear : ----------------- On February 13, 1996, the Board of Directors of Enserch Exploration, Inc. authorized the following Change in Control Agreement upon the condition that your Change in Control Agreement with ENSERCH Corporation dated February 21, 1989, as amended on December 4, 1995 be canceled and all rights thereunder terminated. This new agreement replaces the above-referenced agreement with ENSERCH Corporation in its entirety. The principal changes in this agreement from the previous agreement with ENSERCH Corporation are summarized in a separate list provided herewith. Enserch Exploration, Inc. (the "Company") considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's, its division's and subsidiaries' management including yourself, to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, this Agreement sets forth certain benefits which the Company agrees will be provided to you in the event there is a termination of your employment with the Company that is associated with (as described in Section 3 hereof) a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. TERM. This Agreement shall have an initial term expiring on the earlier of (a) the third anniversary of the date hereof, assuming there has been no change in control of the Company, or (b) your Normal Retirement Date as defined herein; provided, however, that upon each anniversary date of this Agreement the term of this Agreement under clause (a) (as the same may be extended by this proviso) shall be automatically extended annually for an additional period of one (1) year on a continuing basis unless either party shall give written notice of intention not to so extend at least six (6) months prior to such anniversary date. No notice by the Company of its intention not to extend shall be effective if, within one year prior to the original expiration date, or if this Agreement is in a renewal period, within one year prior to the termination date proposed by the Company, the Company has received notice, official or unofficial, or otherwise has reason to believe that a Person (as defined herein) has taken or is considering steps that would when completed bring about a change in control of the Company. This Agreement shall in any case continue in effect for three (3) years following a change in control of the Company. 2. CHANGE IN CONTROL. For purposes of this Agreement, a "change in control of the Company" or a "change in control" shall mean a change in control of a nature that would be required to be reported in response to Item l(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act") or would have been required to be so reported but for the fact that such event had been "previously reported" as that term is defined in Rule 12b-2 of Regulation 12B of the Exchange Act; provided that, without limitation such a change in control shall be deemed to have occurred if (a) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities ordinarily (apart from rights accruing under special circumstances) having the right to vote at elections of directors ("Voting Securities"), or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least two-thirds thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Incumbent Board, or (c) a recapitalization of the Company occurs which results in either a decrease by 33% or more in the aggregate percentage ownership of Voting Securities held by Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) or an increase in the aggregate percentage ownership of Voting Securities held by non-Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) to greater than 50%, or (d) the shareholders of the Company have approved an agreement to merge or consolidate with or into another corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including a plan of liquidation), or (e) ENSERCH Corporation reduces its ownership of the Company's Voting Securities to below 50%, or (f) a change in control of ENSERCH Corporation occurs during such time as ENSERCH Corporation owns 50% or more of the Company's Voting Securities. For purposes of this Agreement, a change in control of ENSERCH Corporation is defined in Exhibit A hereto. For purposes of this Agreement, the term "Person" shall mean and include any individual, corporation, partnership, group, association or other "person," as such term is used in Section 14(d) of the Exchange Act, other than ENSERCH Corporation, a subsidiary of ENSERCH Corporation or any employee benefit plan(s) sponsored or maintained by ENSERCH Corporation or any subsidiary thereof, and the term "Independent Shareholder" shall mean any shareholder of the Company except any employee(s) or director(s) of the Company or any employee benefit plan(s) sponsored or maintained by the Company or any subsidiary thereof. 3. TERMINATION ASSOCIATED WITH A CHANGE IN CONTROL. If and only if any of the events described in Section 2 hereof constituting a change in control of the Company shall occur, you shall be entitled to the benefits provided in Section 4 hereof upon the termination of your employment as provided in this Section 3 within six (6) months prior to such change in control, or within six (6) months prior to the date that the Board of Directors of the Company authorizes a merger, consolidation or other transaction or event that if consummated would constitute a change in control and such action is consummated (collectively herein referenced to as "termination preceding a change in control"), or within three (3) years after such change in control, unless such termination is (a) because of your death, or Retirement on or after your Normal Retirement Date (that is, early retirement initiated by the Company shall be treated as a dismissal and not a voluntary early retirement), (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (including voluntary early retirement when there is no concurrent Good Reason) (In the case of termination preceding a change in control, references in the definition of "Good Reason" to conditions in effect immediately prior to a change in control shall be deemed to mean conditions in effect immediately prior to your termination.) References to actions by and employment with the Company shall include actions by and employment with the divisions and subsidiaries of the Company where the context so requires. (i) Disability; Retirement. (A) If, as a result of your incapacity due to physical or mental illness, you shall have been unable for more than six (6) months to perform your duties with the Company on a full time basis, and within thirty (30) days after written notice of termination is given you shall not have returned to the full time performance of your duties, the Company may terminate your employment for "Disability." (B) Termination of your employment based on "Retirement" shall mean retirement in accordance with the terms of the Retirement and Death Benefit Plan of 1969 of ENSERCH Corporation and Participating Subsidiary Companies as in effect on January 1, 1996, or any successor plan thereto or replacement retirement plan of the Company (the "Retirement Plan"), including early retirement, or in accordance with any retirement arrangement established with your consent with respect to you. "Normal Retirement Date" as used herein shall have the meaning provided in the Retirement Plan or any successor or substitute plan or plans of the Company put into effect prior to a change in control of the Company. (ii) Cause. Termination of your employment by the Company for "Cause" shall mean termination upon (A) the willful and continued failure by you substantially to perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chairman or President of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, and a reasonable period of opportunity for such substantial performance is provided, or (B) the willful engaging by you in illegal misconduct materially and demonstrably injurious to the Company. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) in this paragraph and specifying the particulars thereof in detail. (iii) Good Reason. "Good Reason" for you to terminate your employment shall mean: (A) an adverse change in your status or position(s) as an executive of the Company as in effect immediately prior to the change in control, including, without limitation, any adverse change in your status or position as a result of a material diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that less than 50% of the Company's voting securities are publicly owned or the fact that your position becomes a position with a subsidiary or division), or a material change in your business location or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or a substantial increase in your business travel, or any removal of you from or any failure to reappoint or reelect you to such position(s) (except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company in your base salary as in effect immediately prior to the change in control or in the number of vacation days to which you are then entitled under the Company's normal vacation policy as in effect immediately prior to the change in control; (C) the taking of any action by the Company (including the elimination of a plan without providing substitutes therefor or the reduction of your awards thereunder) that would diminish or the failure by the Company to take any action which would maintain the aggregate projected value of your awards under the Company's bonus, stock option or management incentive unit plans in which you were participating at the time of a change in control of the Company; (D) the taking of any action by the Company that would diminish or the failure by the Company to take any action which would maintain the aggregate value of the benefits provided you under the Company's medical, health, dental, accident, disability, life insurance, stock purchase or retirement plans in which you were participating at the time of a change in control of the Company; (E) the taking of any action by the Company that would diminish or the failure of the Company to take any action that would maintain indemnification or insurance for officers' liability; or (F) a failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; or (G) any purported termination by the Company of your employ- ment that is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (iv) below (and, if applicable, paragraph (ii) above); for purposes of this Agreement, no such purported termination shall be effective. (iv) Notice of Termination. Any termination by the Company pursuant to paragraphs (i) or (ii) above or by you pursuant to paragraph (iii) above shall be communicated by written Notice of Termination to the other party hereto. In the event of termination preceding a change in control, written Notice of Termination to the other party hereto shall be communicated within thirty (30) days following a change in control in order to reflect termination by the Company pursuant to paragraphs (i) or (ii) above or by you pursuant to paragraph (iii) above. For purposes of this Agreement, a "Notice of Termination" shall mean a notice specifying the termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so specified. (v) Date of Termination. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (B) if you terminate your employment pursuant to paragraph (iii) above, the date specified in the Notice of Termination, (C) in the case of a termination preceding a change in control, the date of discharge if termination is by the Company or the date notice of intention to leave is given by the executive in the case of termination for Good Reason, and (D) if your employment is terminated for any other reason except death or Retirement, the date on which Notice of Termination is given. 4. COMPENSATION UPON CHANGE IN CONTROL, TERMINATION OR DURING DISABILITY. (i) Compensation During Disability. During any period that you fail to perform your duties hereunder as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate then in effect, and any time of service for vesting purposes under any plan shall continue to accrue during such period of incapacity until and if your employment is terminated pursuant to Section 3(i) hereof (and for any longer period as may be provided under applicable plans). (ii) Compensation Upon Termination for Cause. If your employment is terminated for Cause, the Company shall pay you your full base salary and accrued vacation pay through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any plans have been earned or become payable, but which have not yet been paid to you, and shall have no further obligations to you under this Agreement. (iii) Compensation Upon Termination Other than For Disability or Cause or Good Reason. Subject to Section 8 hereof, if the Company terminates your employment other than for Disability or Cause pursuant to Section 3(i) or (ii) hereof or if you terminate your employment for Good Reason (which termination may be effected by Retirement prior to your Normal Retirement Date), then the Company shall pay to you (without regard to the provisions of any benefit plan) in a lump sum on or before the tenth business day following the Date of Termination ("Payment Date") an amount equal to the sum of the following paragraphs (A) through (F), reduced by any of such amounts already paid and the value of any severance amounts agreed to between you and the Company and paid at the time of severance from the Company in the case of a termination preceding a change in control: (A) Your full base salary through the Date of Termination at the rate in effect just prior to the time Notice of Termination is given, plus any earned vacation time, plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any plans have been earned or become payable, but which have not yet been paid to you; plus (B) An amount equal to the greater of your largest target bonus during either of the two years preceding the year in which the change in control occurs or your target bonus for the year in which the Date of Termination occurs, prorated for the current year; plus (C) An amount equal to three times your "Annual Compensation", as defined below, provided however, that such amount shall in no event exceed the Annual Compensation you would have otherwise received had your employment continued at such rate until your Normal Retirement Date ("Annual Compensation" shall mean the greater of your annual base salary on the Date of Termination or your highest annual base salary in effect during either of the two years immediately prior to the change in control plus an amount equal to the greater of your target bonus for the year in which the Date of Termination occurs or your highest target bonus during either of the two years immediately prior to the change in control); plus (D) An amount equal to the balance contained in your account in the Management Incentive Program Unit Plan; plus (E) If you choose to receive cash for some or all unexercised Company stock options in lieu of exercising such options, which choice shall be communicated by you in writing to the Company, an amount equal to the market value of the Company's common stock on the Date of Termination or on any other date within 180 days preceding the Date of Termination, on whichever date the value is highest, multiplied by the number of options granted to you prior to the Date of Termination (you should seek legal advice before choosing to receive cash for options held less than six (6) months) under any stock option plan of the Company or other arrangement pursuant to which options to purchase common stock of the Company have been issued and which have not been exercised through the Payment Date, less the aggregate value of the option price of such options; and plus (F) If you choose to receive cash for some or all unexercised ENSERCH Corporation stock options in lieu of exercising such options, which choice shall be communicated by you in writing to ENSERCH Corporation, an amount equal to the market value of ENSERCH Corporation's common stock on the Date of Termination or on any other date within 180 days preceding the Date of Termination, on whichever date the value is highest, multiplied by the number of options granted to you prior to the Date of Termination under any stock option plan of ENSERCH Corporation or other arrangement pursuant to which options to purchase common stock of ENSERCH Corporation have been issued and which have not been exercised through the Payment Date, less the aggregate value of the option price of such options. (iv) Discharge of Company's Obligation. The payment to you of appropriate amounts under paragraphs (D), (E) and (F) shall be considered for all purposes a discharge of all obligations pursuant to such plans except as to options not cashed out under paragraphs (E) and (F). (v) Base Salary; Severance Pay. For purposes of this Agreement, the term "base salary" shall include any amounts deducted pursuant to Sections 125 and 401K of the Internal Revenue Code of 1986, as amended (the "Code"), and any amounts deducted under the ENSERCH Corporation Deferred Compensation Plan. Amounts paid pursuant to this paragraph shall be deemed severance pay and in lieu of any further salary for periods subsequent to the Date of Termination. (vi) Gross-Up Provision. In the event that you become entitled to the payments provided by Sections 4(iii) hereof (the "Agreement Payments"), if any of the Agreement Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you at the time specified in Subsection (vii) below an additional amount (the "Gross-up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the Gross-up Payment provided for by this subsection (vi), but before deduction for any federal, state or local income tax on the Agreement Payments, shall be equal to the "Total Payments," as defined below. For purposes of determining whether any of the Agreement Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a change in control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of control of the Company or any person affiliated with the Company or such person) (which, together with the Agreement Payments, shall constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax, (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(l) of the Code (after applying clause (a), above), and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280(G)(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made and the applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the portion of the Gross-up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (vii) Time of Gross-Up Payment; Estimated Payments; Loan Provision. The Gross-up Payment or portion thereof provided for in Subsection (vi) above shall be paid not later than the thirtieth day following payment of any amounts under Sections 4(iii); provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than the forty-fifth day after payment of any amounts under Section 4(iii). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (viii) Continuation of Certain Benefits. If the Company terminates your employment other than for Disability or Cause pursuant to Section 3(i) or 3(ii) hereof or if you terminate your employment for Good Reason (either of which termination may be effected by Retirement prior to your Normal Retirement Date), the Company shall assign to you any club membership held for your benefit and the Company shall maintain in full force and effect for your continued benefit for a period terminating on the earliest of (A) three years after the Date of Termination or (B) your Normal Retire- ment Date, all life, health, accident and disability insurance plans and programs in which you were a participant immediately prior to the Date of Termination, provided that your continued participation is possible under the terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Company shall provide you with benefits substantially similar to those to which you would be entitled as a participant in such plans and programs. Any required statutory period of COBRA health benefit continuation that terminated employees may elect shall not begin until the end of the period of coverage provided hereby. The benefits provided under this Section, other than assignment of any club membership, shall be reduced to the extent of benefits received by you from another employer. At the end of the period of coverage, you shall have the option to have assigned to you, at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to you. (ix) Lump Sum Payment for Additional Two Years of Service. If you are not a participant in the Retirement Income Restoration Plan of ENSERCH Corporation ("RIRP") (the RIRP has provisions comparable to this subparagraph (ix)) when your employment with the Company is terminated within the first three years after a change in control, by the Company without Cause or by you for Good Reason, you shall receive from the Company, at the time you first receive any payment under or with respect to the Retirement Plan, an amount (calculated and paid in the form of a lump sum) equal to the difference between (i) the "Lump Sum", as defined below, value of any payment you receive at such time (or any monthly annuities that you then become entitled to receive) from (a) the Retirement Plan and (b) from the Company with respect to the portion, if any, of your Retirement Plan pension which exceed the limitations on pension amounts to which the Retirement Plan is subject and (ii) the Lump Sum value of payments that would have been payable if it or they had been calculated as if you had been deemed to have had two (2) additional "Years of Service", as defined below. "Years of Service" shall be as defined in the Retirement Plan and shall be applied as if you were a participant thereunder at the time of your termination of employment, and "Lump Sum" shall mean an amount calculated in accordance with the interest rate and other actuarial assumptions set forth or used in connection with lump sum calculations under the Retirement Plan. (x) Lump Sum Payment if Not Vested under Retirement Plan. If you are not vested under the Retirement Plan when your employment with the Company is terminated within the first three years after a change in control by the Company without Cause or by you for Good Reason, you shall receive from the Company at the time payments are made pursuant to paragraph (iii) above, an amount (calculated and paid in a lump sum) equal to the Lump Sum value of any payment you would have been entitled to receive at your Normal Retirement Date (or any annuities that you would have been entitled to receive) from the Retirement Plan and the RIRP calculated (a) as if you were 100% vested under such plans and (b) using actual years of service increased by two (2) additional Years of Service. (xi) Mitigation. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor (except as provided in Section 4(viii)) shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned or benefit received by you as the result of employment by another employer after the Date of Termination, or otherwise. (xii) Deferred Payment Election. Upon entering into this Agreement and for a period of 14 days following each anniversary of the date hereof (the "Election Period"), you may, in writing, direct the Company that any amounts which should become payable to you pursuant to Section 4(iii) hereof shall be paid to you in three (3) equal annual installments, with the first such installment payable within five (5) business days of the Date of Termination and each successive installment paid on the anniversary of the Date of Termination or the next following business day if such date is not a business day (the "Deferred Payment Election"). A Deferred Payment Election, once made, cannot be revoked except during an Election Period; provided, however, that no Deferred Payment Election can be made or revoked by you during an Election Period that occurs after a change in control of the Company or at a time when, in the judgment of the Company, a change in control may occur within sixty (60) days of such Election Period. Notwithstanding anything in the foregoing to the contrary, a Deferred Payment Election shall be automatically revoked should you terminate your employment under the circumstances described in Section 6 below. 5. EMPLOYEE'S COMMITMENT: RIGHT TO TERMINATE. (i) Employee's Right to Terminate. Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time, subject to the Company's providing the benefits specified herein in accordance with the terms hereof. (ii) Employee's Commitment In Event of Tender or Exchange Offer. In the event a tender offer or exchange offer is made by a Person for more than 20% of the combined voting power of the Company's Voting Securities, including shares of Common Stock of the Company, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Normal Retirement) and will render the services contemplated in this Agreement until such tender offer or exchange offer has been abandoned or terminated or a change in control of the Company has occurred. (iii) Employee's Duty. During the life of this Agreement, you will faithfully perform your duties to the best of your ability and in accordance with the directions of the Chief Executive Officer and the Board of Directors, provided that after a change in control of the Company such directions do not constitute Good Reason for you to terminate your employment; and you will devote to the performance of such duties your full working time, attention and energies. (iv) Confidential and Proprietary Information. You will not at any time during the life of this Agreement, or thereafter, communicate or disclose to any unauthorized person, or use for your own account, without the written consent of the Company, any proprietary processes, or other confidential information of the Company or any subsidiary concerning their business or affairs, suppliers or customers, it being understood, however, that the obligations of this paragraph shall not apply to the extent that the aforesaid matters (A) are disclosed in circumstances in which you are legally required to do so or (B) become generally known to and available for use by the public otherwise than by your wrongful act or omission. 6. SUCCESSOR'S BINDING AGREEMENT. (i) Successor's Binding Agreement. The Company will seek, by written request at least five (5) business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person, by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (A) three business days prior to the time such Person becomes a Successor or (B) two business days after such person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a change in control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities or otherwise. Whether or not such assent is given by a Successor, this Agreement shall be binding on the Successor and its assigns. (ii) Enforceability by Employee's Successors. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die before all amounts that would still be payable to you hereunder if you had continued to live are paid, all such unpaid amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there be no such designee, to your estate. 7. FEES AND EXPENSES. The Company shall pay all legal fees, expenses of arbitration and related expenses incurred by you in connection with this Agreement following a change in control of the Company, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment following a change in control or incurred by you in seeking advice with respect to the matters set forth in Section 6 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement. 8. TAXES. All payments to be made to you under this Agreement will be subject to required withholding of applicable federal, state and local taxes. 9. INTEREST. All payments due under this Agreement and unpaid shall bear interest at the rate of 10% per annum, compounded daily, beginning on the next ensuing day after the Payment Date or such other date as they may be due. 10. NON-ALIENABILITY. Your interest under this Agreement is not subject to anticipation, alienation, assignment or attachment and may not be transferred or encumbered in any manner, either voluntarily or involuntarily, and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to your debts, contracts, liabilities, engagement, or torts, nor shall they be subject to garnishment, attachment, or other legal or equitable process nor shall they be an asset in bankruptcy, except that not amount shall be payable hereunder until and unless any and all amounts representing debts or other obligations owed to any company by you shall have been fully paid and satisfied. 11. SURVIVAL. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 4, 5, 6, 7, 8, and 15 of this Agreement shall survive termination of this Agreement. 12. NOTICE. Notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid addressed to the respective addresses set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. All notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company. 13. MISCELLANEOUS. This Agreement does not supersede any other plan of the Company or agreement with the Company. No provision of this Agreement may be modified, waived or discharged except in writing specifically referring to such provision and signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver at any time by either party hereto of the breach of any condition or provision of this Agreement, or of compliance by the other party with the same, shall be deemed a waiver of any other condition or provision at the same or at any other time. No agreement or representation still in effect, oral or otherwise, express or implied, with respect to the subject matter hereof has been made by either party other than (i) those set forth expressly in this Agreement or (ii) those in any stock option agreements, restricted stock agreements, or deferred compensation agreements. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas. 14. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the city nearest to your principal residence which has an office of the American Arbitration Association by one arbitrator in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 15. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our entire agreement on the subject matter hereof including your agreement to cancel and terminate your Change in Control Agreement with ENSERCH Corporation dated February 21, 1989 and as amended on December 4, 1995, kindly sign and return one copy of this letter each to the Company and to ENSERCH Corporation which will then constitute our agreement on this subject. Sincerely, Enserch Exploration, Inc. By: ----------------------- D. W. Biegler ENSERCH Corporation By: ----------------------- AGREED to as of the date first above written. ---------------------------- EXHIBIT A A "change in control of ENSERCH Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item l(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act") or would have been required to be so reported but for the fact that such event had been "previously reported" as that term is defined in Rule 12b-2 of Regulation 12B of the Exchange Act; provided that, without limitation such a change in control shall be deemed to have occurred if (a) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of ENSERCH Corporation representing 20% or more of the combined voting power of ENSERCH Corporation's then outstanding securities ordinarily (apart from rights accruing under special circumstances) having the right to vote at elections of directors ("Voting Securities"), or (b) individuals who constitute the ENSERCH Corporation Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least two-thirds thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by ENSERCH Corporation's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of ENSERCH Corporation in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Incumbent Board, or (c) a recapitalization of ENSERCH Corporation occurs which results in either a decrease by 33% or more in the aggregate percentage ownership of Voting Securities held by Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) or an increase in the aggregate percentage ownership of Voting Securities held by non-Independent Shareholders (on a primary basis or on a fully diluted basis after giving effect to the exercise of stock options and warrants) to greater than 50%, or (d) the shareholders of ENSERCH Corporation have approved an agreement to merge or consolidate with or into another corporation or an agreement to sell or otherwise dispose of all or substantially all of ENSERCH Corporation's assets (including a plan of liquidation). The term "Person", as used in this Exhibit A, shall mean and include any individual, corporation, partnership, group, association or other "person," as such term is used in Section 14(d) of the Exchange Act, other than ENSERCH Corporation, a subsidiary of ENSERCH Corporation or any employee benefit plan(s) sponsored or maintained by ENSERCH Corporation or any subsidiary thereof, and the term "Independent Shareholder" shall mean any shareholder of ENSERCH Corporation except any employee(s) or direc- tor(s) of ENSERCH Corporation or any employee benefit plan(s) sponsored or maintained by ENSERCH Corporation or any subsidiary thereof. EX-21 7 EXHIBIT 21 Enserch Exploration, Inc., its subsidiaries and their subsidiaries and affiliates, respectively, on March 15, 1996, are listed below. State or Country Name of Company Incorporation Enserch Exploration, Inc.(1) Texas EEX Capital L.L.C. Texas MIStS Issuer L.L.C.(2) Texas Enserch Offshore, Inc. Texas Enserch Oil & Gas, Inc. Texas Enserch Preferred Capital, Inc. Delaware DALEN Resources California Company Delaware Corpus Christi Energy Company Delaware Corpus Christi Hydrocarbons Company Delaware Enserch International Oil & Gas, Inc. Texas Enserch International Exploration Ltd. Cayman Islands Enserch Far East Ltd. Cayman Islands Enserch India, Inc. Texas Enserch Malaysia Ltd. Cayman Islands Enserch Middle East Ltd. Texas Enserch (U.K.) Oil & Gas Limited United Kingdom ________________________________ (1) 17% owned by public shareholders. (2) .999% owned by EEX Capital L.L.C. and .001% owned by Enserch Preferred Capital, Inc. Except as noted above, the voting stock of each subsidiary company and their subsidiaries and affiliates is wholly owned (100%) by its parent. The financial statements of each subsidiary are included in the consolidated financial statements except that the equity method of accounting is used for subsidiaries in which the Company has 50% or less ownership. Such unconsolidated subsidiaries considered in the aggregate do not constitute a significant subsidiary. EX-23 8 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT Enserch Exploration, Inc.: We consent to the incorporation by reference in Registration Statement No. 33-57715 and No. 33-60587 of Enserch Exploration, Inc. on Form S-8 of our report dated February 9, 1996, appearing in this Annual Report on Form 10-K of Enserch Exploration, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Dallas, Texas March 26, 1996 EX-23 9 EXHIBIT 23.2 DeGolyer and MacNaughton One Energy Square Dallas, Texas 75206 March 26, 1996 Enserch Exploration, Inc. 4849 Greenville Avenue Dallas, Texas 75206 Gentlemen: We hereby consent to (a) the references to us in "Business - General - Recent Developments - Garden Banks Project and Green Canyon Project," and "Properties" in Part I and in "Financial Review" and Note 12 of the Notes to Financial Statements in your Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and to the use of information contained in our "Report as of January 1, 1996 on Reserves in Certain Properties owned by Enserch Exploration, Inc." and our "Report as of January 1, 1996 on the Oil Reserves attributable to Enserch Far East, Ltd. in the MUDI Field in East Java, Republic of Indonesia," and (b) the incorporation by reference in Registration Statements No. 33-57715 and No. 33-60587 on Form S-8 of the references to us described in (a) above. Very truly yours, DeGOLYER and MacNAUGHTON EX-24 10 EXHIBIT 24 POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1995, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of EEX, does hereby appoint G. J. Junco his true and lawful attorney to execute in his name, place and stead in his capacity as a director or officer or both, as the case may be, of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Said attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 26th day of March, 1996. /s/ D. W. Biegler ________________________________________ D. W. Biegler POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1995, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of EEX, does hereby appoint D. W. Biegler his true and lawful attorney to execute in his name, place and stead in his capacity as a director or officer or both, as the case may be, of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Said attorney shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 26th day of March, 1996. /s/ Gary J. Junco ________________________________________ Gary J. Junco POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1995, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as a director of EEX, does hereby appoint D. W. Biegler or G. J. Junco, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 26th day of March, 1996. /s/ B. A. Bridgewater, Jr. _______________________________________ B. A. Bridgewater, Jr. POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1994, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as a director of EEX, does hereby appoint D. W. Biegler or G. J. Junco, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 26th day of March, 1996. /s/ Frederick S. Addy ________________________________________ Frederick S. Addy POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1995, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as an officer of EEX, does hereby appoint D. W. Biegler or G. J. Junco, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as an officer of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1996. /s/ J. P. McCormick ________________________________________ J. P. McCormick POWER OF ATTORNEY WHEREAS, Enserch Exploration, Inc. ("EEX"), a Texas corporation, intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1995, with such amendment or amendments thereto in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Form 10-K; NOW, THEREFORE, the undersigned in his capacity as an officer of EEX, does hereby appoint D. W. Biegler or G. J. Junco, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as an officer of EEX, said Form 10-K and any and all amendments thereto and all instruments necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 26th day of March, 1996. /s/ J. W. Pinkerton ________________________________________ J. W. Pinkerton EX-27 11
5 0000931006 ENSERCH EXPLORATION, INC. 1,000 YEAR YEAR YEAR DEC-31-1995 DEC-31-1994 DEC-31-1993 DEC-31-1995 DEC-31-1994 DEC-31-1993 1,546 234 0 0 0 0 67,395 114,486 0 (657) (670) 0 0 0 0 14,820 5,217 0 2,623,138 2,110,076 0 (952,538) (856,062) 0 1,776,832 1,381,235 0 130,946 177,610 0 160,000 0 0 150,000 0 0 0 0 0 932,228 736,008 0 0 0 0 1,776,832 1,381,235 0 0 0 0 220,851 179,140 189,796 0 0 0 227,004 147,111 174,611 (64) 314 0 0 0 0 14,617 20,919 30,584 (19,679) 11,467 (13,358) (7,177) (334) (3,398) (12,502) 11,801 (9,960) 0 0 0 0 0 0 0 0 0 (12,502) 11,801 (9,960) (.11) .07 (.08) (.11) .07 (.08)
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