<PAGE>
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate box:
[_] Preliminary Information Statement
[X] Definitive Information Statement
Enserch Exploration Partners, Ltd.
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(Name of Registrant As Specified in Charter)
Enserch Exploration Partners, Ltd.
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(Name of Person(s) Filing the Information Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g).
[_] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:/1/
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4) Proposed maximum aggregate value of transaction:
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/1/Set forth the amount on which the filing fee is calculated and state how it
was determined.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$125
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2) Form, Schedule or Registration Statement No.:
Preliminary Schedule 14(c)
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3) Filing Party:
Enserch Exploration Partners, Ltd.
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4) Date Filed:
September 2, 1994
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<PAGE>
PROSPECTUS/INFORMATION STATEMENT
NEW ENSERCH EXPLORATION, INC.
ENSERCH EXPLORATION PARTNERS, LTD.
104,581,242 Shares of Common Stock
This Prospectus/Information Statement is being sent to holders of
Depositary Units Representing Limited Partnership Interests ("EP Depositary
Units") of Enserch Exploration Partners, Ltd. ("EP"). Enserch Exploration, Inc.,
a Delaware corporation ("EEI"), as Managing General Partner of EP, is proposing
a plan of reorganization (the "Reorganization"). EEI is a wholly owned
subsidiary of ENSERCH Corporation ("EC"). EC and its controlled corporate
subsidiaries and their controlled partnerships (including EEI, but not EP and
EPO (as defined below)) are collectively referred to herein as the "EC
Companies." Pursuant to the Reorganization a newly organized Texas corporation,
also to be named Enserch Exploration, Inc. ("Newco"), will acquire all of the
outstanding partnership interests of EP Operating Limited Partnership ("EPO"),
which is a limited partnership in which EP has a 99% limited partner interest
and which holds EP's gas and oil properties, in exchange for shares of common
stock of Newco, par value $1.00 per share ("Common Stock"). EPO will then be
merged into Newco. Thereafter EP will be liquidated, with all partners of EP
receiving shares of Common Stock, and the EC Companies also receiving EP's
interests in and assuming EP's obligations under certain equipment lease
arrangements (the equipment will be subleased to Newco) and assuming
approximately $395 million principal amount of EP's indebtedness, plus accrued
interest. Upon the liquidation of EP and the distribution of Common Stock, the
EC Companies and the other holders (the "Public Unitholders") of outstanding
limited partnership interests ("Units") will receive one share of Common Stock
for each Unit then held. Public Unitholders will receive an aggregate of 805,914
shares of Common Stock pursuant to the Reorganization and the EC Companies,
collectively, will receive 103,775,328 shares of Common Stock pursuant to the
Reorganization. The ratio of exchange to be used in the Reorganization does not
result in any change in the relative holdings of the Public Unitholders and the
EC Companies with respect to their ownership interests in EP. The ratio of
exchange was not changed as a result of the assumption of EP debt by the EC
Companies or the assignment and assumption of the equipment leases. Consummation
of the Reorganization is expected to commence on December 30, 1994. Prior to
this time there has been no public market for the Common Stock. However, the New
York Stock Exchange (the "NYSE") has indicated to Newco that the Common Stock to
be distributed to the Public Unitholders pursuant to the Reorganization will be
approved for listing on the NYSE, subject to official notice of issuance, under
the symbol "EEX."
The Reorganization must be approved by the holders of a majority of the
outstanding Units. Since the EC Companies own an aggregate of approximately
99.2% of the outstanding Units, and intend to consent to the steps necessary to
consummate the Reorganization, the approval of the proposal is assured without
the consent of any other holder of Units.
<PAGE>
ACCORDINGLY, EP IS NOT SOLICITING YOUR CONSENT TO THE REORGANIZATION, AND YOU
ARE REQUESTED NOT TO SEND EP A CONSENT OR PROXY WITH RESPECT TO THE
REORGANIZATION.
All Public Unitholders of record at the close of business on December 5,
1994 will receive this Prospectus/Information Statement.
_______________
For a discussion of certain special factors that should be considered, see
"Special Considerations." In particular, Public Unitholders should consider the
following factors:
. EEI may be viewed as having a potential conflict of interest with the
Public Unitholders with respect to the determination of the terms of the
Reorganization.
. The terms of the Reorganization were evaluated and determined by EEI
without independent representation of the Public Unitholders.
. Unlike EP, Newco will be subject to corporate tax, and its earnings and
profits distributed to shareholders will also be subject to taxation to
the shareholders.
. Public Unitholders will have no dissenters' rights in the Reorganization
and therefore cannot elect to receive cash for their EP Depositary Units
based on an appraisal.
. Immediately following the consummation of the Reorganization, the EC
Companies will own over 99% of the outstanding Common Stock.
. Newco, like EP, will be subject to all of the business and operating
risks inherent in gas and oil exploration and production activities.
_______________
EP IS NOT ASKING YOU FOR A CONSENT OR PROXY AND YOU ARE REQUESTED NOT TO
SEND EP A CONSENT OR PROXY.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________
The date of this Prospectus/Information Statement is December 9, 1994.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY..................................................................... 1
Introduction............................................................. 1
Business................................................................. 2
Special Considerations................................................... 3
The Reorganization.................................................... 3
Conflicts of Interest of EEI....................................... 3
Shareholder Rights Differ from Limited Partner
Rights............................................................ 3
No Previous Market for Common Stock................................ 4
Double Taxation.................................................... 4
Newco................................................................. 4
Control of Newco by EC............................................. 4
Lack of Termination Date........................................... 4
Future Dilution of Common Stock.................................... 4
Elimination of General Partner Liability........................... 4
No Dissenters', Appraisal or Similar Rights for
Public Unitholders................................................ 4
Reserve Development and Production Risks........................... 5
Volatility of Gas and Oil Markets.................................. 5
Developments of Additional Reserves................................ 5
Uncertainties in Estimating Reserves and Future
Net Cash Flows.................................................... 5
The Reorganization....................................................... 5
Reorganization Steps............................................... 5
No Public Unitholder Consent Required.............................. 6
Calculation of Exchange Ratio...................................... 6
Reasons to Convert EP into Corporate Form.......................... 7
Fairness Opinion................................................... 8
Delivery of EP Depositary Unit Certificates........................ 9
Comparison of EP Depositary Units and Common Stock....................... 9
Summary of Material Federal Income Tax Consequences...................... 10
SPECIAL CONSIDERATIONS...................................................... 12
The Reorganization....................................................... 12
Potential Conflicts of Interest.................................... 12
No Independent Representation...................................... 12
Shareholder Rights Differ from Limited Partner
Rights............................................................ 12
No Previous Market for Common Stock................................ 13
Double Taxation.................................................... 13
Newco.................................................................... 13
Control of Newco by EC............................................. 13
Lack of Termination Date........................................... 14
Future Dilution of Common Stock.................................... 14
Elimination of General Partner Liability........................... 15
No Dissenters', Appraisal or Similar Rights for
Public Unitholders................................................ 15
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Differing Fiduciary Duties......................................... 15
Reserve Development and Production Risks........................... 16
Volatility of Gas and Oil Markets.................................. 16
Development of Additional Reserves................................. 17
Uncertainties in Estimating Reserves and Future
Net Cash Flows.................................................... 17
Competition........................................................ 17
Governmental Regulation............................................ 17
Hedging............................................................ 18
Transaction Costs.................................................. 18
THE REORGANIZATION.......................................................... 19
Background............................................................... 19
Calculation of Exchange Ratio............................................ 24
Reorganization Steps..................................................... 25
The Plan of Liquidation.................................................. 26
Contribution of EPO Interests to Newco............................. 26
EP's Plan of Liquidation........................................... 26
Comparison of EP Depositary Units and Common Stock....................... 28
Reasons to Convert EP into Corporate Form................................ 34
Absence of Distributions........................................... 34
Tax Consequences and Tax Reporting................................. 35
Expansion of Potential Investor Base and Greater Access to
Equity Markets
Acquisition Currency............................................... 35
Reduced Legal Costs and Uncertainty................................ 36
Fairness Opinion......................................................... 36
Review of Certain Assumptions of the
Reorganization Proposal........................................... 37
Comparison of EP and Freeport-McMoRan Energy
Partners.......................................................... 38
Historical Review of EP and Pro Forma Analysis
of EP and Newco................................................... 38
Analysis of MLP Marketplace........................................ 38
Analysis of Capital Markets for Gas and Oil Exploration and
Production Companies.............................................. 39
Analysis of Selected Gas and Oil Exploration and Production
Companies......................................................... 39
Analysis of Certain Financial Ratios Derived from Financial and
Operating Data Provided by EEI Management......................... 40
Review of Market Prices of EP, Comparable Companies and Various
Related Indices................................................... 40
Analysis of Equity Research Coverage............................... 40
No Public Unitholder Consent Required.................................... 41
Procedure for Delivery of EP Depositary Unit Certificates................ 42
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES............................. 42
Ownership of Shares................................................... 42
Conflicts of Interest................................................. 42
DIVIDEND POLICY OF NEWCO.................................................... 44
CAPITALIZATION.............................................................. 45
SELECTED FINANCIAL AND OPERATING DATA....................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 49
Results of Operations................................................. 49
Pro Forma Results of Operations of Newco.............................. 52
Capital Resources and Liquidity....................................... 52
New Accounting Standards.............................................. 54
BUSINESS.................................................................... 55
Glossary.............................................................. 55
Operations............................................................ 56
Gulf of Mexico........................................................ 57
1993 Onshore.......................................................... 58
1994 Onshore.......................................................... 59
Competition........................................................... 60
Regulation............................................................ 60
Legal Proceedings..................................................... 61
Properties............................................................ 62
MANAGEMENT.................................................................. 67
Directors and Executive Officers...................................... 67
Director Compensation................................................. 68
Committees of the Board of Directors.................................. 69
Executive Compensation................................................ 69
Compensation Table................................................. 69
Employee Benefit Plans............................................. 70
The Stock Option Plan.............................................. 70
SECURITY OWNERSHIP.......................................................... 71
CERTAIN TRANSACTIONS........................................................ 71
Allocations........................................................... 71
Restructuring of Equipment Leases..................................... 72
Other................................................................. 74
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
FEDERAL INCOME TAX CONSIDERATIONS........................................... 75
Introduction.......................................................... 75
Public Unitholders.................................................... 75
Pre-Reorganization Operations of EP................................ 75
Pre-Reorganization Sale of Units................................... 75
Reorganization Consequences........................................ 77
Newco................................................................. 80
The Newco Contribution and Merger.................................. 80
Post-Reorganization Operations..................................... 80
Other Taxation........................................................ 80
DESCRIPTION OF THE CAPITAL STOCK............................................ 81
Common Stock.......................................................... 81
Preferred Stock....................................................... 81
Stock Ownership Restrictions.......................................... 83
No Previous Market for Common Stock................................... 84
LEGAL MATTERS............................................................... 84
EXPERTS..................................................................... 84
INDEX TO FINANCIAL STATEMENTS............................................... 86
</TABLE>
EXHIBITS
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A. Fairness Opinion of Dean Witter
B. Amendment to EPO Partnership Agreement/Contribution of
Partnership Interests Agreement
C. Amendment to EP Partnership Agreement/EP Plan of Liquidation
D. Newco Restated Articles of Incorporation
(iv)
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/INFORMATION
STATEMENT IN CONNECTION WITH THE ACTIONS TO BE TAKEN OR THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NEWCO, EP OR ANY OTHER
PERSON. THIS PROSPECTUS/INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO
OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS/INFORMATION STATEMENT NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NEWCO OR EP SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
EP is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed by EP with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission at Seven World Trade Center, 13th Floor, New York, New
York 10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Units held by Public Unitholders are listed on the
NYSE. Reports, proxy statements and other information concerning EP can also be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
Newco has filed a Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
distribution of securities described herein (the "Registration Statement"). This
Prospectus/Information Statement does not contain all of the information set
forth in or incorporated by reference in the Registration Statement. Copies of
the Registration Statement and the exhibits thereto are on file at the offices
of the Commission and may be obtained upon payment of a prescribed fee or may be
examined without charge at the public reference facility of the Commission in
Washington, D.C.
(v)
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission by EP,
are incorporated herein by reference and made a part hereof:
(i) Annual Report on Form 10-K for the year ended December 31, 1993;
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1994;
(iii) Quarterly Report on Form 10-Q for the quarter ended June 30, 1994;
and
(iv) Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
This Prospectus/Information Statement incorporates documents by reference
that are not presented herein or delivered herewith. Such documents are
available without charge to any person to whom a copy of this
Prospectus/Information Statement is delivered, upon the written or oral request
of such person. Written or telephonic requests for copies should be directed to
Enserch Exploration Partners, Ltd., 300 S. St. Paul, Dallas, TX 75201,
Attention: Michael G. Fortado.
[CURRENT OWNERSHIP STRUCTURE APPEARS HERE]
(vi)
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus/Information Statement. This summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information appearing elsewhere in this Prospectus/Information Statement. Public
Unitholders are urged to review carefully this Prospectus/Information Statement
in its entirety. Capitalized terms used herein without definition have the
meanings ascribed to them elsewhere in this Prospectus/Information Statement.
In this Prospectus/Information Statement, (i) Enserch Exploration Partners,
Ltd., a publicly traded Texas limited partnership, is referred to as "EP," (ii)
Enserch Exploration, Inc., a Delaware corporation and Managing General Partner
of EP, is referred to as "EEI," (iii) EP Operating Limited Partnership, a Texas
limited partnership which holds all of EP's gas and oil properties, is referred
to as "EPO," (iv) New Enserch Exploration, Inc., a newly organized Texas
corporation that will change its name to Enserch Exploration, Inc., is referred
to as "Newco," (v) ENSERCH Corporation, a Texas corporation ("EC"), and its
controlled corporate subsidiaries and their controlled partnerships (other than
EP and EPO) are referred to collectively as the "EC Companies," and (vi) the
limited partnership interests in EP, including those evidenced by EP Depositary
Units, are referred to as "Units."
Introduction
Following the Reorganization, the business now conducted by EP, a limited
partnership, will be conducted by Newco, a corporation. EP, EC and EEI will
contribute their partnership interests in EPO to Newco in exchange for shares of
Common Stock. EPO will then be merged into Newco. Soon thereafter, EP will be
liquidated, with (i) Common Stock being distributed to the Public Unitholders
and the EC Companies that are partners of EP pro rata in relation to their
interests in EP, (ii) EEI receiving EP's interests in, and assuming EP's
obligations under, certain equipment lease arrangements relating to the Garden
Banks Block 388 Project and the Mississippi Canyon Block 441 Project (together
with certain associated assets, the "Equipment Leases") and the equipment will
be subleased to Newco (see "CERTAIN TRANSACTIONS") and (iii) the EC Companies
assuming approximately $395 million in aggregate principal amount of debt of EP
($86 million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to Newco,
plus accrued interest.
Currently, the EC Companies own approximately 99.2% of EP. The remaining
approximate .8% limited partner interest in EP is represented by EP Depositary
Units that are traded on the NYSE, and are owned by the Public Unitholders.
The EC Companies own the following interests in EP:
(1) The Managing General Partner of EP is EEI, which owns a 1% general
partner interest in EP. EEI is a wholly-owned corporate subsidiary of
EC.
<PAGE>
(2) Enserch Processing Partners, Ltd., a Texas limited partnership
("EPPL") in which EC directly or indirectly owns all of the general
and limited partner interests, owns a 98.2% limited partner interest
in EP.
EP owns a 99% limited partner interest in EPO, which holds EP's
various gas and oil exploration and production assets. EEI owns a .99% general
partner interest in EPO, and EC owns a .01% general partner interest in EPO. As
part of the Reorganization, all of these interests in EPO will be contributed to
Newco in exchange for Common Stock.
Business
EP, through EPO, is engaged in the exploration for and the development,
production and marketing of natural gas and crude oil throughout Texas, offshore
in the Gulf of Mexico, onshore in the Gulf Coast and in various other areas of
the United States. Activities include geological and geophysical studies;
acquisition of domestic gas and oil leases; drilling of exploratory wells;
development and operation of producing properties; acquisition of interests in
developed or partially developed properties; and the marketing of natural gas,
crude oil and condensate. Production offices are maintained in Dallas, Houston,
Athens, Bridgeport, Longview and Midland, Texas. The address of each of EP and
Newco is 4849 Greenville Avenue, Suite 1500, Dallas, Texas 75206-4186 and the
telephone number of each is (214) 748-1110. See "BUSINESS."
It is expected that EC will conduct all of its domestic gas and oil
exploration and production business through Newco, and, therefore, EC intends to
make any acquisition of domestic gas and oil properties through Newco. There may
be circumstances, however, in which it is either necessary or appropriate for EC
to make an acquisition or undertake domestic operations without Newco's
participation. EP has not conducted international gas and oil operations and EC
will continue to conduct these through affiliates other than Newco. After the
Reorganization, Newco will be provided the opportunity to purchase the remainder
of EC's domestic gas and oil properties, which are presently believed by EEI to
have a fair market value of $1.4 million. The book value of these properties is
$5.3 million. Therefore, EC would receive $3.9 million less than the carrying
value of the properties. The $1.4 million proceeds would be credited to EC's
property account under full-cost accounting rules and no gain or loss would be
recognized for accounting purposes. For tax purposes, since it has no tax basis
in the properties EC would realize a gain equal to the proceeds and would pay
current income taxes of $.5 million. The Board of Directors of Newco will
consider such decision in the ordinary course of its deliberations. No EC
Company intends to conduct any domestic gas and oil exploration and production
activities following the Reorganization.
Newco will conduct substantially the same business as was conducted by EP
prior to the reorganization. For information regarding reserves, if any, for
obligations not paid prior to liquidation of EP see "THE REORGANIZATION--THE
PLAN OF LIQUIDATION." There are not expected to be any material differences
between the business plans, cash distribution policies or management
compensation policies of Newco and EP. Pursuant to a change in EC's
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<PAGE>
corporate practice that was effective before the Reorganization was initiated,
certain costs incurred by EC are being allocated to Newco in the amount of
approximately $1 million annually. Prior to 1994, management fees were not
allocated to EP by EC because they were not material. See "DIVIDEND POLICY OF
NEWCO", "MANAGEMENT" and "CERTAIN TRANSACTIONS."
Certain conflicts of interest could arise as a result of the relationships
between the EC Companies and Newco. For example, the EC Companies will purchase
and market natural gas produced from Newco's properties. These transactions
create the potential for conflicts over pricing, terms of delivery and other
matters. A number of transactions and relationships between Newco and the EC
Companies are contemplated and specifically authorized by Article Eleven of
Newco's Restated Articles of Incorporation. For example, Article Eleven
authorizes Newco to enter into contracts with any EC Company (including entities
in which EC has a direct or indirect interest) as long as the transaction is
authorized or ratified by a majority of the Board of Directors of Newco. Except
as set forth in Article Eleven, Newco does not have any policy or procedure in
effect for approving transactions between Newco and EC Companies. See
"RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES--CONFLICTS OF INTEREST."
Special Considerations
Public Unitholders should carefully consider the following factors in
addition to the other information included in this Prospectus/Information
Statement. These factors are summarized below and described in more detail under
"SPECIAL CONSIDERATIONS."
The Reorganization
Conflicts of Interest of EEI. There is a potential conflict of interest
between EEI and the Public Unitholders with respect to the determination of the
exchange ratio in the Reorganization. A benefit to each of EEI and EC which is
not shared by all Public Unitholders is the elimination of their liability as
general partners for the obligations and liabilities of Newco that occur after
the Reorganization. Additionally, Public Unitholders were not represented in
establishing the terms of the Reorganization. Such representation might have
caused the terms of the Reorganization to be different in some respects from
those described herein, including the number of shares of Common Stock, or the
percentage of Common Stock, to be allocated to the Public Unitholders in
connection with the Reorganization.
Shareholder Rights Differ from Limited Partner Rights. As a result of the
Reorganization, Public Unitholders will lose certain rights associated with
their ownership of Units, including without limitation the right to receive
distributions, if any, free from any income tax at the partnership level, and
will acquire certain rights associated with their ownership of Common Stock,
including without limitation the right to vote in the election of directors.
- 3 -
<PAGE>
No Previous Market for Common Stock. At present there is no trading market
for the Common Stock. There can be no assurance that holders of the Common Stock
will be able to sell their shares at favorable prices or that the trading price
for a share of Common Stock will be comparable to the trading price for an EP
Depositary Unit immediately before the Reorganization is consummated.
Double Taxation. Unlike EP, Newco's taxable income will be subject to
taxation at the corporate level, and its earnings and profits distributed to
shareholders will also be subject to taxation at the shareholder level.
Newco
There are several factors to be considered because Newco will be operating
in corporate form. In addition, Newco will conduct the same business as was
conducted by EP. Accordingly, the same risks inherent in the gas and oil
exploration and production business present in EP will be present in Newco.
Control of Newco by EC. Immediately following the consummation of the
Reorganization, the EC Companies will own over 99% of the outstanding Common
Stock. So long as EC directly or indirectly continues to own more than 50% of
the Common Stock, EC will be able to elect all of the members of the Board of
Directors of Newco, and thus be able to control Newco. In addition, certain
conflicts of interest could arise as a result of the relationship between the EC
Companies and Newco.
Lack of Termination Date. Newco will have an indefinite life, whereas EP
has a definite termination date of December 31, 2035. Investors in Newco may
have to sell their shares of Common Stock in order to liquidate their
investment.
Future Dilution of Common Stock. Newco will be permitted to issue
additional equity or debt securities, including shares of preferred stock.
Issuances of additional shares of Common Stock or shares of preferred stock
could adversely affect shareholders' equity interest in Newco and the market
price of the Common Stock, and the interests in the assets, liabilities, cash
flow and results of operations of Newco represented by the shares of Common
Stock issued pursuant to the Reorganization may be diluted. Newco intends to
increase the level of minority ownership in Newco. Such an increase would have
the effect of diluting the percentage of Newco owned by the Public Unitholders
and the EC Companies.
Elimination of General Partner Liability. If the Reorganization is
consummated, EEI will be a shareholder of Newco instead of a general partner,
and will not have liability for the debts and obligations of Newco that it
previously had because it was the Managing General Partner of EP.
No Dissenters', Appraisal or Similar Rights for Public Unitholders. Public
Unitholders who object to the Reorganization will have no appraisal, dissenters'
or similar rights. Therefore,
- 4 -
<PAGE>
Public Unitholders will not be entitled to receive cash payments from EP for the
value of their Units if they disagree with the Reorganization. Public
Unitholders who object to the Reorganization should, however, be able to sell
either their Units or shares of Common Stock, as the case may be, on the NYSE
either before or after the Reorganization. The lack of dissenters', appraisal or
similar rights in connection with the transaction will not prevent a Public
Unitholder from challenging the fairness of the Reorganization through
appropriate legal proceedings.
Reserve Development and Production Risks. Newco's gas and oil exploration,
development and production operations will involve numerous risks that could
result in the failure to find new reserves or fully produce existing and
discovered reserves.
Volatility of Gas and Oil Markets. The operating results of Newco will be
dependent to a substantial degree on prices for natural gas and oil, both of
which are affected by many factors beyond the control of producers and have
demonstrated a high degree of volatility.
Developments of Additional Reserves. Newco's future success will depend on
its ability to find or acquire additional reserves that are economically
recoverable. There can be no assurance that Newco's acquisition, development and
exploration activities will result in significant additional reserves or that
Newco will continue to be able to drill productive wells at acceptable costs.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties inherent in estimating quantities and values of proved
gas and oil reserves and in projecting future rates of production and the timing
of development expenditures. The historical and pro forma reserve data included
in this Prospectus/Information Statement represent estimates only and should not
be construed as being exact. Any downward adjustment to Newco's reserve
estimates could adversely affect its future prospects and the market value of
its securities.
The Reorganization
Reorganization Steps. EP, EC and EEI will contribute their partnership
interests in EPO to Newco in exchange for shares of Common Stock. EPO will then
be merged into Newco. Soon thereafter, EP will be liquidated, with (i) Common
Stock being distributed to the Public Unitholders and the EC Companies that are
partners of EP pro rata in relation to their interests in EP, (ii) EEI receiving
EP's interests in, and assuming EP's obligations under, the Equipment Leases and
the equipment will be subleased to Newco (see "CERTAIN TRANSACTIONS") and (iii)
the EC Companies assuming approximately $395 million in aggregate principal
amount of debt of EP ($86 million of which is debt owed by EP to EPO and thus
does not appear on EP's consolidated financial statements) owed to certain EC
Companies and to Newco, plus accrued interest. The Second Amended and Restated
Agreement of Limited Partnership of EP dated as of April 30, 1985, as amended by
Amendment No. 1 thereto dated as of September 1, 1992 and Amendment No. 2
thereto dated as of August 30, 1994 (the "EP Partnership Agreement"), will be
amended to the extent required to provide for these actions. See "THE
REORGANIZATION
- 5 -
<PAGE>
- -- BACKGROUND" for a discussion of the Reorganization, its background and
reasons for its structure.
As a result of the Reorganization, both EP and EPO will cease to exist. The
Public Unitholders will own approximately .8% of the outstanding Common Stock,
and the EC Companies will own approximately 99.2% of the outstanding Common
Stock. See "CAPITALIZATION."
No Public Unitholder Consent Required. The consent of holders of a majority
of the Units is necessary to approve the Reorganization. The EC Companies own
approximately 99.2% of the outstanding Units. Therefore, since the EC Companies
intend to consent to the Reorganization, approval of the Reorganization will be
effected without the consent of any of the Public Unitholders being required or
solicited.
Each Public Unitholder who notifies EEI of a proper purpose related to such
Public Unitholder's interest in EP is entitled to receive a list of the names
and amounts in interest of all limited partners of EP as of the date specified
in the request. The list will be furnished at the expense of the person
requesting it. The partners in EPO are EP, its limited partner, with a 99%
interest, EEI, its Managing General Partner, with a 0.99% interest, and EC, its
Special General Partner, with a 0.01% interest.
Calculation of Exchange Ratio. The Board of Directors of EEI proposed the
ratio of exchange to be used in the Reorganization because it does not result in
any change in the proportionate holdings of the Public Unitholders and the EC
Companies with respect to their ownership interests in the underlying business
as EP is converted into Newco. Such ratio and the number of shares of Common
Stock to be issued in the Reorganization were calculated as follows: (i)
1,045,812 shares were attributed to EEI and EC in recognition of their 1%
general partner interest in EPO, (ii) 1,035,354 shares were attributed to EEI in
recognition of its 1% general partner interest in EP and (iii) 102,500,076
shares were attributed to the limited partner interests in EP. The Public
Unitholders, in recognition of their 805,914 Units (.786% of the Units), were
allocated 805,914 shares (.771%) of the Common Stock to be issued in the
Reorganization. The .015% difference in the Public Unitholders' ownership of
Units and Common Stock is due to the shares of Common Stock attributable to the
general partner interests in EPO and EP.
In determining the exchange ratio, EEI considered other factors, including
the assumption by the EC Companies of approximately $395 million principal
amount of outstanding indebtedness of EP ($86 million of which is debt owed by
EP to EPO and thus does not appear on EP's consolidated financial statements)
owed to certain EC Companies and to Newco, plus accrued interest, the tax
consequences of the Reorganization to the EC Companies and the Public
Unitholders and the assignment and assumption of the Equipment Leases, but did
not alter the exchange ratio as a result of those factors. See "THE
REORGANIZATION--BACKGROUND."
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<PAGE>
Reasons to Convert EP into Corporate Form. The Reorganization will convert
EP into corporate form, replacing partnership interests presently held by Public
Unitholders and limited and general partner interests held by EC Companies with
stock of Newco, a corporation. EEI, as Managing General Partner of EP, believes
there are several advantages of converting into corporate form at this time:
Absence of Distributions. EP's recent results and current business plan
required it to conserve cash resources by discontinuing distributions to holders
of Units after January 1994. EP's capital expenditures have consistently
exceeded its cash flow, which has been depressed because gas and oil prices
continue to be below the levels that existed at the time EP was organized.
Historically, funds for cash distributions were provided from investment in
additional Units by EC or from borrowings. The dilution created by the
investment and the level of borrowings required to support the cash
distributions increased to a point that the Board of Directors of EEI, the
Managing General Partner, determined that cash distributions should be
eliminated in order to continue EP as a nonliquidating entity. See "THE
REORGANIZATION--BACKGROUND." The EP Partnership Agreement presently provides
that EEI, as Managing General Partner, will review EP's accounts quarterly to
determine whether distributions are appropriate. EEI, as Managing General
Partner, has full discretion whether or not to make current distributions and as
to the source of funds for such distributions. The ability to distribute cash
free of a second level of income tax, combined with the expectation that EP
could sustain a policy of making large cash distributions, were the principal
reasons EP adopted the partnership form in 1985. Thus, as a result of the
discontinuation of distributions, the principal advantage of operating in
partnership form is not being realized by EP or holders of Units, and is not
likely to be realized in the foreseeable future. See "DIVIDEND POLICY OF NEWCO."
EEI believes that there are no significant advantages of operating as a
partnership that warrant continuing EP's operations in that form.
Tax Consequences and Tax Reporting. If EP retained its partnership
structure, holders of Units would be required to pay income taxes on income of
EP despite the fact that no substantial cash distributions are expected to be
made by EP in the foreseeable future, and, under current law, holders of Units
may be unable to use operating losses of EP to offset either income from other
sources or investment income of EP, because of basis, at risk or passive loss
limitations, although such operating losses could be used to offset EP
partnership income. Because a corporation is a distinct taxable entity apart
from its shareholders, Newco's operating losses cannot be used to offset the
shareholders' income, including dividend income, if any, received from Newco. In
addition, EEI believes that the complexities of tax reporting associated with
partnership investments are regarded as unduly burdensome for most Public
Unitholders under current conditions. The ownership of stock rather than
partnership units will greatly simplify tax reporting with respect to an
investment in EP on each Public Unitholder's individual federal and state income
tax returns for future years. Newco, however, will be subject to income taxes on
its taxable income at the corporate level.
Expansion of Potential Investor Base and Greater Access to Equity Markets.
EEI anticipates that the Reorganization will expand EP's potential investor base
to include
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institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
Furthermore, EP expects that Newco will have greater access to the public and
private equity capital markets than EP, potentially enabling it to raise capital
on more favorable terms than are now available to EP. This greater access may be
of particular benefit if Newco proposes to issue equity securities to seek
additional funds for capital expenditures or to expand its business. Although
the issuance of additional equity by Newco would have the effect of diluting the
equity interest of the former Public Unitholders in EP, it could also result in
the Common Stock receiving additional investor interest through increased review
by research analysts. Newco intends to increase the level of minority ownership
in Newco, with the view of enabling the public market to value directly and more
effectively its gas and oil assets. However, it currently has no definitive
plans to issue additional equity securities.
Acquisition Currency. EEI believes that current industry conditions may
provide opportunities for EP to grow through the acquisition of businesses and
assets which are complementary to its existing business at attractive prices. In
certain cases, EP may want to be able to issue equity interests as payment of
the purchase price for such acquisitions. EEI believes that an equity interest
in a corporation will be a more attractive acquisition currency than an interest
in a partnership. The issuance of additional equity by Newco would have the
effect of diluting the equity interest of the former Public Unitholders in EP.
Reduced Legal Costs and Uncertainty. While there is an extensive body of
legal guidance with respect to corporations and their governance, there is no
comparable body of legal guidance for publicly traded limited partnerships. The
Reorganization should reduce legal costs inherent in maintaining EP as a
publicly traded limited partnership and provide greater certainty to management
with respect to a number of legal issues that are generally more settled with
respect to corporations than publicly traded limited partnerships, although EC
would owe fiduciary duties to Newco and its minority shareholders .
Fairness Opinion. EEI, in its capacity as Managing General Partner of EP,
has retained Dean Witter Reynolds Inc. ("Dean Witter") to render an opinion to
its Board of Directors as to the fairness of the Reorganization, taken as a
whole, to the Public Unitholders from a financial point of view. Management of
EEI met with counsel and representatives of Dean Witter on several occasions
commencing on August 24, 1994 to review generally the issues involved in
determining the fairness of the Reorganization from a financial point of view.
Dean Witter has delivered its written opinion, dated November 15, 1994, to
the Board of Directors of EEI, to the effect that, as of the date of its
opinion, the Reorganization, taken as a whole, is fair to the Public Unitholders
from a financial point of view.
A copy of Dean Witter's opinion, which sets forth the assumptions made,
matters considered and procedures followed by Dean Witter in rendering its
opinion, is attached to this Prospectus/Information Statement as Exhibit A and
should be read in its entirety. See "THE REORGANIZATION -- FAIRNESS OPINION."
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<PAGE>
Delivery of EP Depositary Unit Certificates. Each Public Unitholder is
urged to fill out the Letter of Transmittal enclosed with the
Prospectus/Information Statement and to return it along with all certificates
representing EP Depositary Units possessed by the Public Unitholder to Harris
Trust Company of New York, c/o Harris Trust and Savings Bank, 11th Floor,
Shareholder Services, 311 West Monroe Street, Chicago, Illinois 60606-4607.
Comparison of EP Depositary Units and Common Stock
After consummation of the Reorganization, the business of Newco will be the
same business conducted by EP. However, the rights and limitations to which
holders of Common Stock will be subject will be similar in some respects and
will differ in other respects from those to which they are subject as holders of
Units. These rights and limitations include, but are not limited to, the
following:
Units Common Stock
----- ------------
. Units are freely . The Common Stock will
transferable (subject be freely transferable
to certain (subject to certain
restrictions on restrictions on
foreign ownership foreign ownership
required by applicable required by applicable
law) and trade on the law) and Common Stock
NYSE. will be approved for
listing on the NYSE.
The transferability
rights of the
shareholders will be
comparable to those of
Public Unitholders.
. EP files reports . Newco will file
required by the reports required under
Exchange Act and the Exchange Act and
provides Public provide its
Unitholders with shareholders with
reports required under reports required under
the rules of the the rules of the
Commission and the Commission and the
NYSE. NYSE. The reporting
requirements of Newco
are comparable to
those of EP.
. Public Unitholders . Holders of the Common
have limited voting Stock are entitled to
rights on issues such elect all of the
as certain amendments members of the Board
of the EP Partnership of Directors and vote
Agreement, dissolution upon all corporate
of EP or EPO, sale of matters. Shareholders
substantially all of of Newco will have the
their assets, removal right to vote on a
and replacement of the wider range of matters
general partners and than those on which
mergers or Public Unitholders may
consolidations. vote and, as a general
matter, will have a
greater opportunity to
participate in the
affairs of Newco.
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<PAGE>
Units Common Stock
----- ------------
. Meetings of Public . Newco is required by
Unitholders are not law to hold annual
held annually, and meetings, where its
Public Unitholders do shareholders will be
not vote for EP's entitled to elect the
management. members of its Board
of Directors and to
vote on any other
matters properly
before the meeting.
. EP, as a partnership, . Newco, as a
is not a taxable corporation, is a
entity, and Public taxable entity
Unitholders report and separate from its
pay taxes on their shareholders, and it
distributive share of will report and pay
EP's taxable income, taxes on its income,
gains, losses, gains, losses,
deductions and credits deductions and
(whether or not any credits. Shareholders
cash is distributed to pay tax only on
them). taxable dividends
actually distributed
to them. Amounts
available for
dividends may be
reduced by taxes at
the corporate level.
. EEI, as Managing . Members of Newco's
General Partner, is Board of Directors are
not subject to required to be elected
re-election at any at each annual meeting
time. EEI can be of shareholders.
removed as Managing Directors may be
General Partner by the removed by the vote of
limited partners only the holders of a
by the affirmative majority of the
vote of holders of 66 outstanding Common
2/3% of the Units. Stock present and
entitled to vote at a
meeting at which
quorum is present.
Since the former
Public Unitholders
will own less than 1%
of the outstanding
Common Stock, they
will be unable to
elect or remove any
directors.
. The EP Partnership . Newco's Restated
Agreement provides for Articles of
EP to continue in Incorporation provide
existence until for perpetual
December 31, 2035, existence, subject to
unless earlier Texas law. Therefore,
terminated in investors in Newco
accordance with the EP would have to sell
Partnership Agreement. their shares of Common
Stock in order to
liquidate their
investment.
See "DESCRIPTION OF THE CAPITAL STOCK."
Summary of Material Federal Income Tax Consequences
Public Unitholders will not recognize any taxable gain or loss in
connection with the Reorganization, unless immediately prior to each
contribution by EP to Newco of limited partnership interests in EPO (i) EP's tax
basis in its limited partnership interest is less than EP's share of EPO's
liabilities transferred to Newco or Newsub (as defined herein) or (ii) a Public
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<PAGE>
Unitholder's tax basis in his Units is less than his share of EPO's liabilities.
In the opinion of Jackson & Walker, L.L.P., special tax counsel to EP, based on
representations of EEI, the Managing General Partner of EP and EPO, neither of
the exceptions set forth in (i) and (ii) above exists; hence Public Unitholders
will not recognize taxable gain or loss in connection with the Reorganization.
This section summarizes such counsel's opinion that is more fully discussed
under "FEDERAL INCOME TAX CONSIDERATIONS."
After the Reorganization, Newco will be subject to tax on any net taxable
income subsequently derived. Shareholders of Newco will realize taxable income
from the ownership of stock in Newco to the extent that Newco pays dividends to
shareholders that are made out of Newco's current or accumulated earnings and
profits. In addition, shareholders of Newco will realize taxable gain to the
extent Newco does not have current or accumulated earnings and profits and makes
distributions that are in excess of a shareholder's basis in his stock.
After EP's distribution of Common Stock to the Public Unitholders, each
Public Unitholder will have a tax basis in the Common Stock received in the
distribution equal to the Public Unitholder's tax basis in his Units immediately
before the liquidation, as adjusted (i) for 1994 operations, (ii) for any gain
recognized on the Reorganization, and (iii) by excluding any share of EP debts
that a Public Unitholder had previously included in his basis in his Units. This
basis will be prorated among all shares of Common Stock received by the Public
Unitholder. To the extent any Common Stock distributed to a Public Unitholder
ends up with a tax basis lower than its fair market value, gain will be
recognized upon the subsequent sale or other taxable disposition of that Common
Stock. Correspondingly, to the extent any Common Stock distributed to a Public
Unitholder ends up with a tax basis greater than its fair market value, loss
will be recognized upon the subsequent sale or other taxable disposition of that
Common Stock. Common Stock held by a Public Unitholder will have both a short
term and a long term holding period even though the Public Unitholder may have
owned his Units for more than one year. See "FEDERAL INCOME TAX CONSIDERATIONS--
HOLDING PERIOD."
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely held corporations and personal service corporations can
only deduct losses from passive activities (activities in which the taxpayer
does not materially participate) that are not in excess of the taxpayer's income
from such passive activities or investments. A shareholder can utilize suspended
passive losses upon the sale of all of his Common Stock to an unrelated person
in a transaction in which all gain or loss is recognized. Recently issued
regulations also indicate that some portion of a shareholder's passive losses
can be utilized to offset gain on the sale of Common Stock if the shareholder
sells substantially all of his stock to an unrelated party. Jackson & Walker,
L.L.P., special counsel to EP, is of the opinion that such losses cannot be used
to offset dividend income from Newco. The treatment of suspended passive losses
now appears to be consistent with the treatment of suspended passive losses and
sales of Units before the Reorganization.
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<PAGE>
For an expanded discussion of tax considerations, Public Unitholders should
carefully review the information contained in "FEDERAL INCOME TAX
CONSIDERATIONS" and "THE REORGANIZATION -- BACKGROUND." PUBLIC UNITHOLDERS ARE
URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES TO THEM, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE OR
LOCAL INCOME TAX AND OTHER LAWS.
SPECIAL CONSIDERATIONS
Each Public Unitholder should carefully examine this Prospectus/Information
Statement and the Exhibits hereto. Public Unitholders should give particular
consideration to the facts set forth below.
The Reorganization
Potential Conflicts of Interest. EEI is proposing the Reorganization
because it believes that it is in the best interests of both the Public
Unitholders and the EC Companies. EEI may, however, be viewed as having a
potential conflict of interest with the Public Unitholders with respect to the
determination of the terms of the Reorganization. The EC Companies, as holders
of over 99% of the outstanding Units, together with EEI, acting as Managing
General Partner, have the ability acting unilaterally to determine the terms of
the Reorganization. In addition, the EC Companies expect to receive benefits
from the Reorganization that will not be available to all holders of Units
generally involving (i) the elimination of their general partner liability for
obligations and liabilities of EP and EPO under partnership law and (ii) the
reduction of the EC Companies' deferred income tax liabilities by approximately
$55 million. See "THE REORGANIZATION -- BACKGROUND." If certain of these
potential conflicts of interest did not exist, it is possible that the terms of
the Reorganization might be different than the terms approved by the Board of
Directors of EEI. For additional information concerning the potential conflicts
of interest between EEI and the Public Unitholders in the Reorganization, see
"RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES."
No Independent Representation. The terms of the Reorganization were
evaluated and determined by EEI without independent representation of the Public
Unitholders. Such separate representation might have caused the terms of the
Reorganization to be different in some respect from those described herein,
including the number of shares of Common Stock, or the percentage of Common
Stock, to be allocated to the Public Unitholders in connection with the
Reorganization.
Shareholder Rights Differ from Limited Partner Rights. As a result of the
Reorganization, Public Unitholders will lose certain rights associated with
their ownership of Units, including without limitation the right to receive
distributions, if any, free from income tax at the partnership level, and will
acquire certain rights associated with their ownership of Common Stock,
including without limitation the right to vote in the election of directors. A
further
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<PAGE>
comparison of these factors, which may relate to investment objectives of Public
Unitholders, is set forth in "DESCRIPTION OF THE CAPITAL STOCK--COMPARISON OF
UNITS AND COMMON STOCK."
No Previous Market for Common Stock. At present there is no trading market
for the Common Stock. However, the NYSE has indicated to Newco that the Common
Stock to be distributed to the Public Unitholders pursuant to the Reorganization
will be approved for listing on the NYSE, subject to official notice of
issuance. There can be no assurance that holders of Common Stock will be able to
sell their shares at favorable prices or that the trading price for a share of
Common Stock will be comparable to the trading price for an EP Depositary Unit
immediately before the Reorganization is consummated.
Double Taxation. The principal tax disadvantage of converting EP into
corporate form is that a corporation pays taxes on its taxable income, and its
shareholders generally pay taxes on any dividends from the corporation out of
current or accumulated earnings and profits. In contrast, a partnership pays no
tax and its partners pay tax on their distributive share of the partnership's
taxable income, gain, loss, deductions and credits. Because there is no current
plan to make distributions to Newco's shareholders, this distinction is not
expected to have any immediate or near term economic effect, but could have
economic effects on Newco and its shareholders (i) at such time as Newco makes a
distribution to shareholders out of Newco's current or accumulated earnings and
profits, or (ii) if Newco disposes of its assets in a taxable transaction,
whether by sale or otherwise, at a time when the value of its assets exceeds its
basis in such assets and thereafter distributes the proceeds to its
shareholders. As a result of a conversion of EP into corporate form, holders of
Units will forego the potential future tax benefits associated with operating in
partnership form, including the receipt of cash distributions free of corporate
income tax. Furthermore, holders of Units will not be able to use their
suspended passive losses to offset dividend income received from Newco, whereas
such losses could be used to offset their distributive share of operating income
from EP.
Newco
There are several factors to be considered because Newco will be operating
in corporate form. In addition, Newco will conduct the same business as was
conducted by EP. Accordingly, the same risks inherent in the gas and oil
exploration and production business present in EP will be present in Newco.
Control of Newco by EC. Immediately following the consummation of the
Reorganization, the EC Companies will own over 99% of the outstanding Common
Stock. So long as EC directly or indirectly continues to own more than 50% of
the Common Stock, EC will be able to elect all of the members of the Board of
Directors of Newco, and thus be able to control Newco. Certain of Newco's
directors and officers are also directors and/or officers of EC or its other
subsidiaries. Newco and the EC Companies expect to engage in future
transactions, the terms of which will be determined through negotiations between
Newco and the EC Companies. The officers and employees of EEI will become the
officers and employees
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<PAGE>
of Newco and will be compensated by Newco (except for certain officers that
are compensated by EC). Previously the costs of these officers and
employees were charged to EP by EEI and thus there will be no change in the
cost of these officers and employees charged to Newco as a result of the
Reorganization. The management cost allocation payable by Newco to EC of
approximately $1 million annually, which became effective July 1, 1994, is
not related to the Reorganization and will not be altered as a result of
EEI officers and employees becoming officers and employees of Newco because
such cost allocation relates to costs incurred solely by EC with respect to
EC personnel, not EEI personnel. Certain officers of EC will also serve as
officers of Newco but they will receive no direct compensation from Newco.
See "CERTAIN TRANSACTIONS."
EC intends to conduct all of its domestic gas and oil exploration and
production business through Newco, and, therefore, EC intends to make any
acquisition of domestic gas and oil properties through Newco. There may be
circumstances, however, in which it is either necessary or appropriate for EC to
make an acquisition or undertake domestic operations without Newco's
participation.
Certain conflicts of interest could arise as a result of the relationships
between the EC Companies and Newco. For example, the EC Companies will purchase
and market natural gas produced from Newco's properties. These transactions
create the potential for conflicts over pricing, terms of delivery and other
matters. A number of transactions and relationships between Newco and the EC
Companies are contemplated and specifically authorized by Article Eleven of
Newco's Restated Articles of Incorporation. For example, Article Eleven
authorizes Newco to enter into contracts with any EC Company (including entities
in which EC has a direct or indirect interest) as long as the transaction is
authorized or ratified by a majority of the Board of Directors of Newco. In
determining whether this majority vote has been achieved, the vote of a director
of EC who is also a director of Newco may be counted toward the authorization or
ratification. In addition, under Article Eleven an EC Company may engage in
direct competition with Newco without first being obligated to offer the
transaction or other opportunity to Newco. Except as set forth in Article
Eleven, Newco does not have any policy or procedure in effect for approving
transactions between Newco and EC Companies. See "RELATIONSHIP BETWEEN NEWCO AND
THE EC COMPANIES--CONFLICTS OF INTEREST."
Lack of Termination Date. Newco will have an indefinite life, whereas EP
has a definite termination date of December 31, 2035. Consequently, were EP to
remain in partnership form, it would be required to dissolve by December 31,
2035 (unless extended by an amendment to the EP Partnership Agreement), whereas
if EP converts into corporate form, Newco could continue in existence
indefinitely. Therefore, investors in Newco may have to sell their shares of
Common Stock in order to liquidate their investment.
Future Dilution of Common Stock. Newco will be permitted to issue
additional equity or debt securities, including shares of preferred stock. Under
the current rules of the NYSE, Newco may not issue shares of Common Stock equal
to 20% or more of the then outstanding
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<PAGE>
shares in connection with any single future transaction without shareholder
approval. Issuances of additional shares of Common Stock or shares of preferred
stock could adversely affect shareholders' equity interest in Newco and the
market price of the Common Stock, and the interests in the assets, liabilities,
cash flow and results of operations of Newco represented by the shares of Common
Stock issued pursuant to the Reorganization may be diluted. Issuances of
additional shares may be more likely after the Reorganization because EEI, as
the Managing General Partner of EP, believes that one of the advantages of the
Reorganization is that the corporate form will expand the potential investor
base, provide greater access to equity markets and permit the use of capital
stock as acquisition currency. Newco intends to increase the level of minority
ownership in Newco. Such an increase would have the effect of diluting the
percentage of Newco owned by both the Public Unitholders and the EC Companies.
Elimination of General Partner Liability. EEI, as the Managing General
Partner of each of EP and EPO, and EC, as a general partner of EPO, will each
receive a benefit from the Reorganization that is not shared by all holders of
Units generally in the elimination of their liability for obligations and
liabilities of EP and EPO that may occur after the Reorganization. Under Texas
law, as a general partner of a partnership, each of EEI and EC is liable to the
extent of its assets for the debts and obligations of EP (in the case of EEI)
and EPO. If the Reorganization is consummated, EEI and EC would be shareholders
of Newco and would not have liability for the debts and obligations of Newco.
No Dissenters', Appraisal or Similar Rights for Public Unitholders. Under
the EP Partnership Agreement, the action by the holders of a majority of the
outstanding Units as of the record date, December 5, 1994, to approve the
Reorganization will bind all holders of Units. Under Texas law and the terms of
the EP Partnership Agreement, holders of Units will have no dissenters',
appraisal or similar rights in connection with the Reorganization, nor will such
rights be voluntarily accorded to holders of Units by EP or Newco. Therefore,
holders of Units will have no opportunity to dissent and demand to receive cash
payment from EP for the fair value of their Units after the Reorganization is
approved and consummated. The Units held by the Public Unitholders are listed on
the NYSE. The Common Stock to be distributed to the Public Unitholders pursuant
to the Reorganization will be listed on the NYSE. Thus, any Public Unitholders
who object to the Reorganization should be able to sell their Units or shares of
Common Stock, as the case may be, on the NYSE either before or after the
Reorganization. The lack of dissenters', appraisal or similar rights in
connection with the transaction will not prevent a Public Unitholder from
challenging the fairness of the Reorganization through appropriate legal
proceedings.
Differing Fiduciary Duties. The fiduciary duties owed by the directors of
Newco after the Reorganization may be less than the fiduciary duties owed by the
general partners of EP prior to the Reorganization. EEI's fiduciary duties to
the Public Unitholders include duties of loyalty and care. The general duties
owed by directors of Newco to its shareholders are similar to those applicable
to EEI in respect of EP's limited partners. At least one Texas court has stated
that the fiduciary duties of a general partner to limited partners are
comparable to those of a director to shareholders. Other courts, however, have
indicated that the fiduciary duties
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<PAGE>
of a general partner are greater than those of a director to shareholders.
Therefore, although it is unclear whether or to what extent there are any
differences in such fiduciary duties, it is possible that the fiduciary duties
of directors of Newco to its shareholders could be less than those of EEI to the
Public Unitholders. The remedy of shareholders for a breach of fiduciary duty of
directors is to request that the corporation bring suit against the directors
or, if the corporation fails to act, to initiate a shareholder derivative
lawsuit against the directors in the name of the corporation.
Reserve Development and Production Risks. Newco's gas and oil exploration,
development and production operations will involve numerous risks that could
result in the failure to find new reserves or fully produce discovered and
existing reserves. Gas and oil exploration, development and production
operations involve numerous risks, including depositional or trapping
uncertainties, encountering unusual or unexpected formations and pressures or
other conditions that may result in dry holes, failure to produce gas or oil in
commercial quantities or inability to fully produce discovered reserves. Gas and
oil drilling may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. Completion of a well does not
assure a profit on the investment or recovery of drilling, completion and
operating costs. In addition, drilling hazards or environmental damage could
greatly increase the cost of operations, and various field operating conditions
may adversely affect Newco's production from successful wells. While close well
supervision and effective maintenance operations can contribute to maximizing
production rates over time, production delays and declines from normal field
operating conditions cannot be eliminated and can be expected to adversely
affect revenue and cash flow levels to varying degrees. Furthermore, various
wells can be expected to require recompletions or workovers at some point in
their productive lives. While the gradual depletion of producing reserves and
the need for recompletion of wells that have multiple reservoirs with limited
volume or workover of wells that develop mechanical problems is neither unusual
nor unexpected in the gas and oil industry, the timing and extent of production
declines and recompletion requirements for wells in which Newco will own
interests after the Reorganization cannot be predicted with any certainty.
Volatility of Gas and Oil Markets. The revenues generated by Newco's
operations are highly dependent upon the prices of, and demand for, gas and oil.
For the last several years, prices of these products have reflected a worldwide
surplus of supply over demand for oil. The price received by Newco for its
natural gas and crude oil will depend upon numerous factors beyond Newco's
control, including economic conditions in the United States and elsewhere and
the world political situation as it affects OPEC, the Middle East (including the
current embargo of Iraqi crude oil from worldwide markets) and other producing
countries, the actions of OPEC and governmental regulation. The fluctuation in
world oil prices continues to reflect market uncertainty regarding OPEC's
ability to control member country production and underlying concern about the
balance of world demand for and supply of gas and oil.
Since 1985, when EP received an average sales price of $2.94 per Mcf for
natural gas, a nationwide deliverability surplus of natural gas has prompted a
decrease in sales under higher
- 16 -
<PAGE>
priced, long term contracts with traditional pipeline customers. Lower priced
gas sold in the spot market has been made readily available to end-users because
of gas-to-gas competition, lower oil prices and improved transportation
opportunities. Gas sales prices were higher in 1993 and through September 30,
1994; however, recent prices are lower due to unseasonably warm weather and
above average storage levels.
Decreases in the prices of gas and oil have had, and could have in the
future, an adverse effect on development and exploration programs, proved
reserves, revenues, profitability, cash flow and dividend levels.
Development of Additional Reserves. Newco's future success will depend not
only on developing existing gas and oil reserves but also on its ability to find
or acquire additional reserves that are economically recoverable. The rate of
production from gas and oil properties generally declines as reserves are
depleted. Without successful exploration and development activities or reserve
acquisitions, the proved reserves of Newco will decline as gas and oil is
produced from its proved developed reserves. There can be no assurance that
Newco's acquisition, development and exploration activities will result in
significant additional reserves or that Newco will continue to be able to drill
productive wells at acceptable costs. If prevailing gas and oil prices were to
increase significantly, Newco's costs to add reserves could also be expected to
increase.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties inherent in estimating quantities and values of proved
gas and oil reserves and in projecting future rates of production and the timing
of development expenditures, including factors involving reservoir engineering,
pricing and both operating and regulatory constraints. The reserve data included
in this Prospectus/Information Statement represent estimates only and should not
be construed as being exact. Reserve assessment is a subjective process of
estimating the recovery from underground accumulations of natural gas and other
hydrocarbons that cannot be measured in an exact way. Accordingly, reserve
estimates are often different from the quantities of natural gas and other
hydrocarbons ultimately recovered. Any downward adjustment could adversely
affect Newco's future prospects and the market value of its securities.
Competition. The gas and oil industry is highly competitive. Newco will
compete with major and other independent gas and oil companies for the
acquisition of additional properties as well as the equipment and labor required
to develop and operate its properties. Many of these competitors have
substantially greater financial and other resources than Newco.
Governmental Regulation. The gas and oil business is subject to broad
federal and state regulations which, among other things, control the rate of gas
and oil production and establish the maximum price at which gas is sold. Newco
will also be required to comply with federal and state laws and regulations
relating to environmental matters. There can be no assurance that present and
future regulation of the gas and oil industry will not adversely affect the
operations of Newco.
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<PAGE>
Hedging. Newco may hedge some of its projected gas and oil production from
time to time through a variety of financial arrangements designed to protect
against price declines, including swaps, collar agreements and futures
agreements. To the extent Newco engages in such activities, it may be prevented
from benefiting from price increases above the levels of the hedges.
Transaction Costs. Transaction costs of approximately $1,000,000 will be
paid by EP, including the fee and expenses of Dean Witter, whether or not the
Reorganization is completed.
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<PAGE>
THE REORGANIZATION
Background
EP was formed in 1985 to succeed to substantially all of the domestic gas
and oil exploration and production business of EC. In April 1985, EC contributed
to EP substantially all of its domestic developed and undeveloped gas and oil
properties and EP assumed certain liabilities in connection with such
contribution, including approximately $230 million of long-term debt. In
exchange, EP issued Units to EC. At the same time, EP sold 11,250,000 Units to
the public at a price of $21.50 per Unit. After this offering EC held
approximately 85% of the Units and 15% of the Units were held by Public
Unitholders. Proceeds of the offering were used by EP to repay debt assumed from
EC.
In offering Units to the public in April 1985, EP stated its intent to
distribute $.60 per Unit on a quarterly basis through 1986 and indicated its
belief that the annual distribution rates per Unit for 1987 through 1989 would
be at least equal to the anticipated annual distribution rate for 1986, but that
there could be no assurance that future conditions would permit distributions at
such levels during such years or thereafter. EC stated that it intended, but
that it was not obligated, to invest, directly or indirectly, amounts in EP to
the extent necessary to provide funds through 1989 both to support cash
distributions to Public Unitholders and to support EP's exploration and
development expenditures at anticipated levels. EC anticipated that such funds
would be provided through loans and purchases of additional Units. EP also
stated that if its exploration and development capital expenditure budgets and
anticipated revenues over such periods remained at projected levels, it was
probable that without substantial investment by EC, EP would be unable to fund
both its anticipated cash distributions and all of its planned capital
expenditures, although EP believed that it could make up a significant portion
of any shortfall with sales of additional Units to others, borrowing or other
financings.
During the latter half of 1985 and continuing into 1986, gas and oil prices
declined severely. This was reflected in a similar decline in EP's revenues and
net cash flows from operations. As a result, capital expenditures and
distributions to holders of Units exceeded aggregate net cash flows from EP's
operations. The cash shortfall was funded principally by additional EC
investment through purchasing Units and making loans and advances.
In July 1986, due to the reduction in revenues and cash flow, EP announced
a reduction in quarterly distributions from $.60 per Unit to $.30 per Unit,
beginning in the first quarter of 1987. This reduction in distributions preceded
the changes in federal tax law that adversely affected the tax treatment of
publicly traded limited partnerships.
From April 30, 1985 through October 2, 1987, EC supported EP's cash
distributions and exploration and development expenditures through the purchase
of additional Units. In accordance with the terms of the EP Partnership
Agreement, the price of Units purchased by EC was the average of the last
reported sales prices per Unit, regular way, for the five trading days
- 19 -
<PAGE>
immediately preceding the date of determination. The following table summarizes
the purchases of Units from EP by EC.
<TABLE>
<CAPTION>
Date Number of Units Per Unit Price
---- --------------- --------------
<S> <C> <C>
August 31, 1985 2,299,354 $ 20.10
November 13, 1985 2,380,346 20.00
December 30, 1985 2,819,000 17.40
January 2, 1986 554,229 /1/ 17.25
March 31, 1986 991,600 14.90
April 1, 1986 556,085 /1/ 14.40
June 30, 1986 4,105,000 12.675
July 1, 1986 557,962 /1/ 12.65
September 30, 1986 3,946,600 13.90
January 5, 1987 2,081,800 13.75
April 2, 1987 1,646,000 17.775
July 2, 1987 1,990,300 14.95
October 2, 1987 2,321,800 13.075
</TABLE>
- ------------
/1/ These Units were subsequently distributed to EC shareholders.
In October 1989, EC exchanged one-half share of EC common stock (market
value $10.00) plus $1.00 in cash for each of the 12,112,362 Units. An additional
$3.42 per Unit, plus interest, was paid in 1994 as the result of litigation
relating to the exchange.
In January 1988, EC announced that it would not continue to invest
distributions on the Units it owned by purchasing additional Units at then
prevailing market rates but instead would lend funds to EP in amounts necessary
to support distributions and capital expenditures and indicated that future
investment would be influenced by the market price of Units and other factors.
Although the precise effects could not be predicted, the change in debt
financing was not expected to have a material effect on the market price for
Units. In the short run, any effect was expected to be somewhat favorable since
on the basis of then prevailing interest rates and Unit prices the reduction in
earnings per Unit resulting from debt financing was expected to be somewhat less
than would result from the dilution caused by the issuance of additional Units
to EC.
- 20 -
<PAGE>
In February 1988, EP made an in-place sale of approximately 133 billion
cubic feet ("Bcf") of natural gas reserves to Encogen One Partners, Ltd.
("Encogen"), a partnership formed to own and operate a cogeneration plant in
Sweetwater, Texas. An EC Company holds a 1% general partner interest in Encogen.
EP received $158 million ($156 million net of the general partners' interests),
which was used to repay EP's and EPO's then outstanding debts to EC of $115
million incurred to finance previous capital expenditures and to fund
distributions to Public Unitholders.
In February 1989, EP publicly announced that quarterly distributions on
Units would be reduced to $.075 per Unit and that EC would make an exchange
offer for Units at .5 share of EC common stock per Unit. EC also stated that if
more than half of the publicly held Units were tendered in response to its
exchange offer, the tendering would be treated as a vote favoring liquidation of
EP and that EC would liquidate EP if the Public Unitholders so voted. During the
succeeding months the exchange offer was modified to drop the proposed
liquidation of EP and add $1.00 in cash for each Unit exchanged.
In September 1989, an exchange offer commenced which offered .5 share of EC
common stock and $1.00 in cash for each Unit. Upon completion of this exchange
offer, 805,914 Units, or .8% of the outstanding Units, remained held by the
Public Unitholders.
On April 12, 1989 a class action complaint was filed in the Court of
Chancery of the State of Delaware, seeking damages in connection with the
exchange offer. Following a trial of the case, the court found that the exchange
offer prospectus did not disclose adequately the basis of the exchange ratio,
that the structure and timing of the transaction were unfair to holders of Units
and that the price paid was not a fair price. Damages of $3.42 per Unit were
awarded to the plaintiff class. The award ultimately included $41 million
additional consideration for the Units and $21 million in prejudgment and post-
judgment interest. The judgment was paid by EC in January 1994.
In February 1994, EP announced that it would discontinue distributions to
holders of Units. EP's capital expenditures had consistently exceeded EP's cash
flow, which had remained depressed because gas and oil prices continued to be
below their levels at the time EP was organized, and borrowings to support
distributions were causing EP's debt to grow inappropriately. Thus, a principal
advantage of operating in partnership form was no longer being realized by EP or
the Public Unitholders.
As noted above, EC initially stated that it intended, but that it was not
obligated, to invest, directly or indirectly, amounts in EP to support its cash
distributions and exploration and development expenditures at anticipated
levels. Through December 1987 the EC Companies had invested cash distributions
of approximately $387 million in return for additional Units; as a result the
number of Units outstanding had increased approximately 34% to the current level
of 102,500,076. In January 1988, in a move to halt the growth in the number of
Units outstanding, the EC Companies began to support EP's cash flow requirements
by lending funds to EP. Through September 1994 the EC Companies had loaned EP
approximately $309 million to
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<PAGE>
support its cash flow requirements. This debt amounts to approximately 33% of
EP's capitalization.
Under these circumstances EEI considered whether to continue the operations
of EP. EC and its predecessors have a long history of conducting gas and oil
exploration and production activities. EEI considered that it was in the best
interests of the EC Companies and the other partners of EP to continue in the
business of owning and operating the business and properties of EP, and to
remain as part of an integrated natural gas operation. EEI also considered the
fact that it did not have any duty or obligation to offer or sell to any third
party such business and properties. EEI determined that it wanted the ownership
of the properties of EP and EPO to remain in the EC Companies, which own over a
99% interest therein through EP and EPO. EEI considered the possibility of a
liquidation of EP such that the Public Unitholders would receive cash for their
Units and the EC Companies would receive all of the properties of EP and EPO in
liquidation of their partnership interests. EEI determined that it did not want
to force the Public Unitholders to take cash for their Units because it wanted
the Public Unitholders to have the option to continue as equityholders of the
business and it wanted to maintain a publicly traded entity, and determined that
there were enough advantages to be obtained from converting EP into a
corporation to justify doing so. See "Reasons to Convert EP Into Corporate
Form." Therefore, in August 1994 EEI announced that it intended to convert EP
into a publicly traded corporation. No third party offers were solicited, made
or considered.
In reviewing the various structures available under state law for effecting
the conversion of EP into a corporation, it was recognized that a merger of EP,
EPO and the new corporation would be the most efficient structure for
transferring ownership of EPO's assets. Merger structures other than the
structure used in the Reorganization, however, could have resulted in materially
adverse financial accounting and income tax consequences to the EC Companies,
the Public Unitholders and the new corporation. For example, the EC Companies
and the Public Unitholders could have been taxed immediately upon formation of
the new corporation on a significant amount of gain resulting from assumption of
debt of EP by the new corporation, EPPL or EPO. The income taxes that the EC
Companies and the Public Unitholders would have incurred could have been
substantial. In addition, because the EC Companies would not have assumed $395
million in principal amount of debt ($86 million of which is debt owed by EP to
EPO and thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, plus accrued interest, under these other
merger structures, the new corporation would have had less equity capital and
substantially more debt outstanding than Newco will have after the
Reorganization, so that it would have had significantly less financial strength
and flexibility than Newco will have.
The final structure for the Reorganization avoids the adverse consequences
described above. Approximately $395 million principal amount of debt of EP,
including approximately $86 million owed to EPO that does not appear on EP's
consolidated financial statements, plus accrued interest, will be assumed by EC
Companies, resulting in a strong financial structure and improved financial
flexibility for Newco in funding its growth. The elimination of interest expense
on $309 million of debt and the receipt of interest income on $86 million will
enhance
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<PAGE>
Newco's operating results and cash flows by an estimated $27 million per year
before income taxes. The EC Companies expect the following substantial favorable
tax consequences to result from the structure chosen for the Reorganization: (i)
the avoidance of tax that could have resulted under the other merger structures
from the assumption of the EP debt by the new corporation, EPPL or EPO, and (ii)
the preservation of the EC Companies' tax basis in EP through the substitution
of such tax basis into the assets distributed to the EC Companies upon the
liquidation of EP, as required by the Internal Revenue Code of 1986. It is
estimated that the Reorganization will result, under SFAS No. 109, in the
reduction of the EC Companies' deferred income tax liability by approximately
$55 million, which reflects the fact that the EC Companies are expected to pay
less in federal income taxes in the future than they would have paid if the
Reorganization had not occurred. These consequences are not available to the
Public Unitholders.
In addition, the Public Unitholders will receive the benefit of a special
allocation in the EP Partnership Agreement that accommodates the assumption by
the EC Companies of all of EP's approximately $395 million principal amount of
outstanding indebtedness of EP ($86 million of which is debt owed by EP to EPO
and thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, plus accrued interest, including that portion
of EP's indebtedness otherwise allocable to the Public Unitholders. This special
allocation allows the Public Unitholders to receive one share of Common Stock
for each Unit they own and will be tax free to them. See "FEDERAL INCOME TAX
CONSIDERATIONS."
The Board of Directors of EEI proposed the ratio of exchange to be used in
the Reorganization because it does not result in any change in the relative
holdings of the Public Unitholders and the EC Companies with respect to their
ownership interests in EP. The EC Companies do not receive any additional
relative holdings as a result of assuming the $395 million of EP debt, plus
accrued interest. In addition, the Board of Directors retained Dean Witter to
render an opinion as to the fairness, from a financial point of view, of the
Reorganization, taken as a whole, to the Public Unitholders. Through these
actions EEI sought to minimize the extent to which the consideration of the
Reorganization was subject to the conflict of interest between the EC Companies
and the Public Unitholders. Nevertheless, the interests of the Public
Unitholders were not separately represented in establishing the terms of the
Reorganization. Such representation might have caused the terms of the
Reorganization to be different in some respects from those described herein.
EEI, as the Managing General Partner of EP, believes the Reorganization,
taken as a whole, is fair to and in the best interests of EP and all of its
general and limited partners, including without limitation the Public
Unitholders. This belief is principally based upon the opinion of Dean Witter,
the fact that the relative ownership interests of the EC Companies and the
Public Unitholders with respect to EP are not changed, and the fact that the EC
Companies are assuming approximately $395 million principal amount of debt ($86
million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to Newco,
plus accrued interest, and receiving the Equipment
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<PAGE>
Leases. EEI also considered the fact that it will no longer have any
liability for the obligations and liabilities of EP after the
Reorganization and will no longer have a fiduciary duty to EP and its
partners. EEI also considered the advantages of operating in corporate
form mentioned above and the tax consequences to the EC Companies and to
the Public Unitholders. No particular weight was assigned to any one
factor in arriving at its decision.
Newco was organized on September 1, 1994 under the laws of the State
of Texas for the initial purpose of becoming the successor to EP in
corporate form in accordance with the Reorganization. Upon consummation of
the Reorganization, Newco will acquire all partnership interests in EPO and
will merge EPO into Newco. In this manner Newco will acquire EPO's assets
and liabilities. Newco intends to continue EP's business of gas and oil
exploration, development and production. Newco has conducted no business
to date and currently has no significant assets and no employees or
operating history. Newco will not acquire any material assets until
consummation of the Reorganization and has no material arrangements with EP
other than pursuant to the Reorganization.
Calculation of Exchange Ratio.
The Board of Directors of EEI proposed the ratio of exchange to be
used in the Reorganization because it does not result in any change in the
proportionate holdings of the Public Unitholders and the EC Companies with
respect to their ownership interests in EP. Such ratio and the number of
shares of Common Stock to be issued in the Reorganization were calculated
as follows: (i) 1,045,812 shares were attributed to EEI and EC in
recognition of their 1% general partner interest in EPO, (ii) 1,035,354
shares were attributed to EEI in recognition of its 1% general partner
interest in EP and (iii) 102,500,076 shares were attributed to the limited
partner interests in EP. The Public Unitholders, in recognition of their
805,914 Units (.786% of the Units), were allocated 805,914 shares (.771%)
of the Common Stock to be issued in the Reorganization. The .015%
difference in the Public Unitholders' ownership of Units and Common Stock
is due to the shares of Common Stock attributable to the general partner
interests in EPO and EP.
In calculating the exchange ratio, only the above analysis was
considered. However, in determining whether the exchange ratio, as so
calculated, was fair, the following factors were also considered: (i) the
elimination of all general partner liability of EC Companies with respect
to EP and EPO and the elimination of EEI's general partner fiduciary
duties; (ii) the assumption by the EC Companies, and the related discharge
of EP's liability for, the $309 million indebtedness, plus accrued
interest; (iii) the tax consequences of the Reorganization to the EC
Companies and to the Public Unitholders; (iv) the EC Companies assuming
approximately $86 million of intercompany debt, plus accrued interest, owed
by EP to EPO; and (v) the assignment to and assumption by EEI of the
Equipment Leases and the corresponding subleasing of the related equipment
to Newco. EEI believes that the exchange ratio is fair to all of the
partners of EP principally because it does not change the proportionate
holdings of the Public Unitholders and the EC Companies with respect to
their ownership interests in EP. EEI did not alter the exchange ratio
after considering the listed factors because, after considering these
factors as a
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<PAGE>
whole, EEI continued to conclude that the exchange ratio was fair to and in
the best interests of EP and all of its general and limited partners
because the cumulative effect of such factors and their impact on the
Reorganization was not detrimental to any of the parties such that an
adjustment to the exchange ratio was necessary.
Reorganization Steps
The Reorganization of EP involves the following steps:
1. Capitalization of Newco. EP, EC and EEI will contribute their
-----------------------
partnership interests in EPO to Newco in exchange for shares of Common
Stock. EPO will then be merged into Newco. As a result, Newco will have
all of the assets of EPO (including gas and oil properties, associated
operating assets and working capital) and all of EPO's liabilities and
obligations (other than the Equipment Leases and the assumed liabilities as
described herein). As a result of these transactions, the shareholders'
equity of Newco will be enhanced by $395 million (before recording deferred
federal income taxes) plus accrued interest when contrasted with the equity
of EP, because Newco will not assume indebtedness in the principal amount
of $309 million now owed by EP to EC Companies, and, in addition, Newco
will hold an $86 million note receivable from EP that will be assumed by EC
Companies. At the end of this step, EP will hold approximately 99% of the
Common Stock and the EC Companies will hold approximately 1% of the Common
Stock.
2. Liquidation of EP. After the merger of EPO into Newco, EP will
-----------------
be liquidated, with (i) Common Stock being distributed to each of the
Public Unitholders, EPPL and EEI, (ii) EC Companies assuming approximately
$395 million in aggregate principal amount of debt of EP owed to certain EC
Companies and to Newco ($86 million of which is debt owed by EP to EPO and
thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, together with accrued interest thereon
and (iii) EEI receiving EP's interests in, and assuming EP's obligations
under, the Equipment Leases. See "CERTAIN TRANSACTIONS." The portion of
the assumed $395 million principal amount of EP debt, excluding accrued
interest, that corresponds with the Public Unitholders' pro rata interest
in EP, as an economic matter, is approximately $3.1 million.
As a result of the Reorganization, both EP and EPO will cease to
exist. The Public Unitholders will own approximately .8% of the
outstanding Common Stock, and the EC Companies will own approximately 99.2%
of the outstanding Common Stock. See "CAPITALIZATION."
Neither EP nor Newco has any definitive plans with respect to the sale
of any material assets, the purchase of any material assets or the making
of any borrowings, other than in the ordinary course of its business.
The initial Board of Directors of Newco will be as set forth in
"MANAGEMENT." The officers and employees of EEI will become the officers
and employees of Newco and will be
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<PAGE>
compensated by Newco (except for certain officers that are compensated by
EC). Previously the costs of these officers and employees were charged to
EP by EEI and thus there will be no change in the cost of these officers
and employees charged to Newco as a result of the Reorganization. The
management cost allocation payable by Newco to EC, which became effective
July 1, 1994, is not related to the Reorganization and will not be altered
as a result of EEI officers and employees becoming officers and employees
of Newco because such cost allocation relates to costs incurred solely by
EC with respect to EC personnel, not EEI personnel. Certain officers of EC
will also serve as officers of Newco but they will receive no direct
compensation from Newco. See "CERTAIN TRANSACTIONS." Before the
consummation of the Reorganization, EEI will change its name to avoid
confusion with Newco.
The Plan of Liquidation
Contribution of EPO Interests to Newco. The contribution of EPO
interests to Newco will be effected pursuant to an amendment to the EPO
Partnership Agreement substantially in the form attached as Exhibit B (the
"EPO Partnership Agreement Amendment"). The EPO Partnership Agreement
Amendment has been authorized by the Board of Directors of EEI as Managing
General Partner of EP and EPO. The EPO Partnership Agreement Amendment
will be deemed to have been adopted and will be effective on the date it is
approved by certain EC Companies holding approximately 99% of the
outstanding Units. Such actions will constitute the approval by EP that is
required by the EP Partnership Agreement and the EPO Partnership Agreement.
The Public Unitholders will not be asked to vote on the EPO Partnership
Agreement Amendment.
The structure described below saves the complexities and costs
associated with EPO transferring to Newco 13,308 gas and oil leases in 467
counties and parishes in 17 states, plus numerous federal onshore and
offshore leases, plus associated rights-of-way, easements, contracts and
other interests.
EP, EC and EEI will contribute their partnership interests in EPO to
Newco in exchange for shares of Common Stock in stages pursuant to a
Contribution of Interests Agreement attached as Appendix EPO-1 to Exhibit
B, and EPO will merge into Newco. The first stage will involve the
transfer by EP through Newco of a 1% limited partnership interest in EPO to
the capital of Enserch Newsub, Inc. ("Newsub"), a newly formed Texas
corporation wholly owned by Newco. Then EP will contribute the remaining
98% limited partner interest in EPO to Newco for more Common Stock, and EC
and EEI will contribute their general partner interests in EPO to Newco in
exchange for Common Stock. These transfers will be accomplished serially
and will result in EPO continuing as a limited partnership owned by Newco
and Newsub. EPO and Newsub then will merge into Newco. EPO and Newsub
will no longer exist and EPO's properties will have passed by merger into
Newco.
EP's Plan of Liquidation. EP's proposed Plan of Liquidation (the "EP
Plan of Liquidation") and the related proposed amendments to the EP
Partnership Agreement are attached as Exhibit C. EEI, the Managing General
Partner of EP, has elected to dissolve EP
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<PAGE>
and has determined that the complete liquidation of EP following
dissolution is in the best interests of EP and its partners. EEI
recommends that EP be liquidated following its dissolution in accordance
with the provisions of the EP Plan of Liquidation some time after the
merger of EPO into Newco. The EP Plan of Liquidation will be deemed to
have been adopted, and will be effective, on the date it is approved by EEI
and EP, as the general partners of EP, and by certain EC Companies holding
approximately 99% of the outstanding Units.
After the effective date of the EP Plan of Liquidation, EP will engage
only in those activities that are necessary or proper to wind up its
business and affairs and to distribute its assets in accordance with the EP
Plan of Liquidation. Subject to the order of priorities set forth in the
EP Partnership Agreement, upon the payment or assumption of obligations and
the establishment of reserves as provided below, EEI, as the Managing
General Partner, will distribute all of the Common Stock then held by or
for the account of EP to the holders of record of Units and general partner
interests in EP at the close of business on the liquidation record date
selected by EEI. The liquidating distribution of Common Stock and related
transactions will be made as and when specified by EEI in the following
manner:
(a) Shares of Common Stock will be distributed in kind to all
partners of EP as follows:
(i) to the Public Unitholders, one share of Common
Stock for each Unit held (an aggregate of 805,914 shares) pro
rata in relation to their capital account balances on the
liquidation record date (the distribution is designed to result
in the Public Unitholders receiving shares of Common Stock at an
exchange rate of one share for each Unit held, and will be made
to the Public Unitholders at or prior to the time any
distribution of Common Stock is made to any EC Companies on
account of the liquidation of EP), and
(ii) to EEI, EC and EPPL, an aggregate of 103,775,328
shares, which will give them the same aggregate pro rata
ownership in Newco as their general and limited partnership
interests in EP and EPO represent (as a general partner of EPO,
EC receives its shares when it contributes its EPO interest to
Newco).
(b) EEI and EPPL will assume an aggregate of approximately $395
million principal amount of indebtedness of EP ($86 million of which
is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to
Newco, plus accrued interest thereon.
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<PAGE>
(c) EEI will receive EP's interests in and will assume EP's
obligations under, the Equipment Leases. EEI will sublease the
equipment covered by the Equipment Leases to Newco. See "CERTAIN
TRANSACTIONS."
Prior to commencing the liquidating distributions, EP will pay or
discharge all known and admitted debts, liabilities and expenses of EP to
the fullest extent practicable and to the extent not assumed as described
above, and will establish reserves for any other obligations, including
unascertained or contingent liabilities and expenses. EEI, as the Managing
General Partner, does not currently believe that any such reserves will be
necessary. Any assets remaining in EP after satisfaction of all
obligations of EP, including payment of expenses of the Reorganization
(which remaining assets, if any, are expected to consist of a de minimis
amount of cash and cash equivalents), will be contributed to the capital of
Newco for no additional consideration.
The liquidation of EP may be terminated by EEI at any time EEI deems
the termination to be in the best interests of EP or its partners, without
the consent or approval of any other partners, even though the
Reorganization already may have been implemented in part. If the
Reorganization were terminated, EP would still be responsible for the
expenses incurred in connection with the Reorganization, currently
estimated to be $1,000,000. EP expects that the Reorganization will be
consummated within one day after it commences on December 30, 1994.
Comparison of EP Depositary Units and Common Stock
The following provides a comparison of the rights associated with EP
Depositary Units and the Common Stock:
Units Common Stock
----- ------------
Taxation
Under current law, EP is not a Newco is a taxable entity with
taxpaying entity. Rather, respect to its income and gains
each holder of Units includes after allowable deductions and
his share of the income and credits. Shareholders will have
gain and, subject to certain taxable income from Newco only
limitations, the losses, to the extent taxable dividends
deductions and credits of EP and other distributions are
in computing taxable income declared and paid on the Common
without regard to the cash Stock. Shareholders will not be
distributed to the holder. able to take advantage of the
Generally, cash distributions tax benefits associated with the
to holders of Units are not partnership form.
taxable, unless distributions
exceed the holder's basis in
his Units.
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Units Common Stock
----- ------------
A tax-exempt holder's share of No portion of the earnings of,
EP's taxable income constitutes or any dividends received from,
unrelated business taxable Newco will constitute unrelated
income to the tax-exempt holder. business taxable income to tax-
exempt shareholders, except to
the extent their investment in
stock of Newco is considered
debt-financed. Shareholders will
have taxable income from Newco's
operations only to the extent
that taxable dividends and other
distributions are declared and
paid on the Common Stock.
Distributions and Dividends
In general, EEI, as Managing The Board of Directors of Newco
General Partner, may make such has the discretion to determine
distributions as it in its whether or not and when to
discretion may determine from declare and pay dividends and
time to time. EEI, as the the amount of any dividend.
Managing General Partner, Holders of Common Stock will
believes that the need to fund have no contractual right to
exploration and development receive dividends.
activities would leave EP
without sufficient cash for
distributions for the
foreseeable future if EP were to
continue in existence.
If EP were to continue in Newco does not expect to pay
existence, it would not expect substantial dividends on the
to pay substantial distributions Common Stock until Newco's
on Units until EP's earnings and earnings and the current
the current industry outlook industry outlook improve.
improve. Dividends may be paid if, as and
when declared by the Board of
Directors in its discretion,
subject to legal and contractual
limitations. Accordingly, in the
short term the Reorganization
will not affect the ability of
Newco to make distributions.
Management
The business and affairs of EP The business and affairs of
are managed by the Managing Newco are managed by and under
General Partner of EP, currently the direction of the Board of
EEI. Directors of Newco.
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Units Common Stock
----- ------------
The Managing General Partner may Shareholders of Newco will have
be removed only by vote of rights to elect and remove
66 2/3% of the outstanding Units directors that are greater than
held by limited partners. those currently held by holders
of Units with respect to the
Managing General Partner.
Voting Rights
Under applicable law and the EP Generally, holders of Common
Partnership Agreement, limited Stock will have the right to
partners have voting rights with vote on matters specified by
respect to (i) the removal and Texas law affecting the
replacement of the Managing corporate structure of Newco,
General Partner (but not the including the right to elect all
election thereof), (ii) the of the members of the Board of
merger of EP, (iii) the sale of Directors. Shareholders of Newco
all or substantially all of the will have the right to vote on a
assets owned, directly or wider range of matters than
indirectly, by EP, (iv) the those on which holders of Units
dissolution of EP or EPO, (v) may vote and, as a general
material amendments to the EP matter, will have a greater
Partnership Agreement, and (vi) opportunity to participate in
taking material actions with the affairs of Newco.
respect to EPO.
Each Unit entitles each holder Each share of Common Stock
thereof who is admitted as a entitles its holder to cast one
limited partner of EP to cast vote on each matter presented to
one vote on all matters shareholders.
presented to holders of Units.
Approval of any matters Approval of any matter submitted
submitted to EP's limited to shareholders generally
partners generally requires the requires the affirmative vote of
affirmative vote of limited holders of more than 50% of the
partners holding more than 50% Common Stock outstanding and
of the Units then outstanding. entitled to vote. Certain other
Certain other matters require matters (e.g., amendments to the
the approval of at least 66 2/3% Articles of Incorporation and
and, in certain instances, 95% certain mergers) require the
of the outstanding units held by approval of at least 66 2/3% of
limited partners (e.g., removal the Common Stock outstanding and
of the Managing General Partner, entitled to vote.
amendment of the EP Partnership
Agreement resulting in the loss
of limited liability of any
limited partner or EP being
treated as an association
taxable as a corporation or the
reduction of limited partner
voting rights).
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<PAGE>
Units Common Stock
----- ------------
Any action that may be taken at Any action that may be taken at
a meeting of limited partners a meeting of shareholders may be
may be taken by written consent taken by a written consent in
in lieu of a meeting executed by lieu of a meeting if such
limited partners sufficient to consent is executed by
authorize such action at a shareholders holding a number of
meeting of limited partners. shares sufficient to authorize
such action at a meeting of
shareholders.
Special Meetings
Special meetings of limited Holders of at least 25% of all
partners may be called by EEI or shares entitled to vote at a
by limited partners holding at proposed special meeting may
least 20% of the outstanding call a special meeting of
Units. shareholders.
Conversion Rights
The Units are not convertible The Common Stock is not
into any other securities. convertible into any other
securities.
Redemption
Units are not subject to The Common Stock is not subject
mandatory redemption. EP may, to mandatory redemption.
however, redeem certain units However, the Bylaws of Newco
owned by (i) non-citizens of the that may be necessary or
United States or (ii) holders appropriate to avoid violation
who have not provided EP with of the restrictions on the
citizenship information, to the ownership of Common Stock by
extent necessary to avoid non-United States citizens
violation of the restrictions on imposed by applicable law.
the ownership of Units by non-
United States citizens imposed
by applicable law.
Liquidation Rights
In the event of the liquidation In the event of a liquidation of
of EP, the assets of EP Newco, the holders of Common
remaining after the payment of Stock would be entitled to share
all debts and liabilities of EP, ratably in any assets remaining
the payment of expenses of the after satisfaction of
liquidation of EP and the obligations to creditors and any
establishment of a reasonable liquidation preferences on any
reserve in connection therewith, series of preferred stock of
are distributed to holders of Newco that may then be
Units and the general partners outstanding.
pro rata in proportion to the
positive balances, if any, in
their capital accounts.
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<PAGE>
Units Common Stock
----- ------------
Right to Compel Dissolution
Holders of Units have no right Under Texas law, shareholders
to compel dissolution of EP. EP may compel dissolution of Newco,
may be dissolved at the election absent prior action by the Board
of EEI, as Managing General of Directors, only if all
Partner, which election is shareholders consent in writing.
approved by limited partners A plan of dissolution adopted by
holding more than 50% of the the Board of Directors must be
outstanding Units. approved by 66 2/3% of the
Common Stock outstanding and
entitled to vote.
Limited Liability
In general, holders of Units are Shares of Common Stock will be
limited partners in a Texas fully paid and nonassessable.
limited partnership, and do not Shareholders generally will not
have personal liability for have personal liability for
obligations of EP. obligations of Newco.
Liquidity and Marketability
Subject to the restrictions Subject to the transfer
relating to foreign ownership restrictions relating to foreign
described below, the EP ownership described below, the
Depositary Units are freely Common Stock will be freely
transferable and are listed and transferable and the Common
traded on the NYSE. After the Stock has been approved for
Reorganization, the Units will listing on the NYSE.
cease to be traded.
Restrictions on Transfer; Foreign Ownership
In order to comply with the The Bylaws of Newco restrict
restrictions imposed by transfers of Newco shares to
applicable law, the EP persons who are not Eligible
Partnership Agreement limits Citizens, suspend voting,
ownership of units by persons dividend and distribution rights
who are qualified under of persons who are not Eligible
applicable law to hold interests Citizens and provide for the
on gas and oil leases on federal redemption of shares held by
lands. Purchasers of Units are such persons in certain
required to provide information circumstances. See "DESCRIPTION
at the time of purchase as to OF CAPITAL STOCK --STOCK
status as an "Eligible Citizen." OWNERSHIP RESTRICTIONS."
EP may redeem Units held by
persons who are not Eligible
Citizens or who have failed to
provide such information to EP.
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<PAGE>
Units Common Stock
----- ------------
Continuity of Existence
The EP Partnership Agreement Newco's Restated Articles of
provides for EP to continue in Incorporation provide for
existence until December 31, perpetual existence, subject to
2035, unless earlier terminated Texas law. Therefore, investors
in accordance with the EP in Newco would have to sell
Partnership Agreement or their shares of Common Stock in
extended by amendment. order to liquidate their
investment.
Financial Reporting
EP is subject to the reporting Newco will be subject to the
requirements of the Exchange Act reporting requirements of the
and files annual and quarterly Exchange Act and will file
reports thereunder. EP also annual and quarterly reports
provides annual and quarterly thereunder. Newco also will
reports to Public Unitholders. provide annual and quarterly
reports to its shareholders.
Certain Legal Rights
Texas law allows a holder of Texas law affords shareholders
Units to institute legal action of a corporation similar rights
on behalf of the partnership (a to bring shareholder derivative
partnership derivative action) actions when the board of
to recover damages from a third directors has failed to
party or a general partner where institute an action against
the general partner has failed third parties or directors of
to institute the action. In the corporation, and class
addition, a limited partner may actions to recover damages from
institute legal action on behalf directors for violations of
of himself or all other their fiduciary duties.
similarly situated holders of Shareholders may also have
Units (a class action) to rights to bring actions in
recover damages from a general federal courts to enforce
partner for violations of his federal rights. These rights are
fiduciary duties to the comparable to the rights of the
unitholders. Holders of Units holders of Units.
may also have rights to bring
actions in federal courts to
enforce federal rights.
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<PAGE>
Units Common Stock
----- ------------
Right to List of Holders; Inspection of Books and Records
Upon reasonable demand, at his Under Texas law, upon written
own expense and for a purpose request, at reasonable times and
reasonably related to his for a proper purpose, any
interest in EP, a holder of shareholder of record who has
Units may have access, at been a shareholder for at least
reasonable times, to certain six months or is the holder of
information regarding the status at least 5% of all of the
of the business and financial outstanding shares has the right
condition of EP, including tax to examine and copy Newco's
returns, financial statements, relevant books and records of
governing instruments of EP and account, minutes and share
a current list of the partners transfer records, including a
of EP, provided that EEI may list of current stockholders. In
keep confidential any trade certain circumstances, such as
secrets or any other information shareholders who own less than
the disclosure of which could 5% of Newco or have owned their
damage or violate any agreement shares for less than six months,
or applicable law. under Texas corporation law
shareholders may not have the
same right to information
regarding Newco that they
currently have under the EP
Partnership Agreement with
respect to information regarding
EP.
Reasons to Convert EP into Corporate Form
The Reorganization will convert EP into corporate form, replacing
all outstanding partnership interests with stock of a corporation. EEI, as
Managing General Partner of EP, believes there are several advantages of
converting into corporate form at this time:
Absence of Distributions. EP's recent results and current
business plan required it to conserve cash resources by discontinuing
distributions to holders of Units after January 1994. EP's capital
expenditures have consistently exceeded its cash flow, which has been
depressed because gas and oil prices continue to be below the levels that
existed at the time EP was organized. Historically, funds for cash
distributions were provided from investment in additional Units by EC or
from borrowings. The dilution created by the investment and the level of
borrowings required to support the cash distributions increased to a point
that the Board of Directors of EEI, the Managing General Partner,
determined that cash distributions should be eliminated in order to
continue EP as a nonliquidating entity. See "THE REORGANIZATION--
BACKGROUND." The EP Partnership Agreement presently provides that EEI, as
Managing General Partner, will review EP's accounts quarterly to determine
whether distributions are appropriate. EEI, as Managing General Partner,
has full discretion whether or not to make current distributions and as to
the source of funds for such distributions. The ability to distribute cash
free of a second level of income tax, combined with the expectation that EP
could sustain a policy of making large cash distributions, were the
principal reasons EP adopted the
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<PAGE>
partnership form in 1985. Thus, as a result of the discontinuation of
distributions, the principal advantage of operating in partnership form is
not being realized by EP or holders of Units, and is not likely to be
realized in the foreseeable future. See "DIVIDEND POLICY OF NEWCO." EEI
believes that there are no significant advantages of operating as a
partnership that warrant continuing EP's operations in that form.
Tax Consequences and Tax Reporting. If EP retained its
partnership structure, holders of Units would be required to pay income
taxes on income of EP despite the fact that no substantial cash
distributions are expected to be made by EP in the foreseeable future, and,
under current law, holders of Units may be unable to use operating losses
of EP to offset either income from other sources or investment income of
EP, because of basis, at risk or passive loss limitations, although such
operating losses could be used to offset EP partnership income. Because a
corporation is a distinct taxable entity apart from its shareholders,
Newco's operating losses may be used to offset Newco's operating income.
In addition, EEI believes that the complexities of tax reporting associated
with partnership investments are regarded as unduly burdensome for most
Public Unitholders under current conditions. The ownership of stock rather
than partnership units will greatly simplify tax reporting with respect to
an investment in EP on each Public Unitholder's individual federal and
state income tax returns for future years. Newco, however, will be subject
to income taxes on its taxable income at the corporate level.
Expansion of Potential Investor Base and Greater Access to Equity
Markets. EEI anticipates that the Reorganization will expand EP's
potential investor base to include institutional and other investors who do
not typically invest in limited partnership securities because of various
tax and administrative reasons. Furthermore, EP expects that Newco will
have greater access to the public and private equity capital markets than
EP, potentially enabling it to raise capital on more favorable terms than
are now available to EP. This greater access may be of particular benefit
if Newco proposes to issue equity securities to seek additional funds for
capital expenditures or to expand its business. Although the issuance of
additional equity by Newco would have the effect of diluting the equity
interest of the former Public Unitholders, it could also result in the
Common Stock receiving additional investor interest through increased
review by research analysts. Newco intends to increase the level of
minority ownership in Newco, with the view of enabling the public market to
value directly and more effectively its gas and oil assets. However, it
currently has no definitive plans to issue additional equity securities.
Acquisition Currency. EEI believes that current industry
conditions may provide opportunities for EP to grow through the acquisition
of businesses and assets which are complementary to its existing business
at attractive prices. In certain cases, EP may want to be able to issue
equity interests as payment of the purchase price of such acquisitions.
EEI believes that an equity interest in a corporation will be a more
attractive acquisition currency than an interest in a partnership. The
issuance of additional equity by Newco would have the effect of diluting
the existing equity interest of the former Public Unitholders.
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<PAGE>
Reduced Legal Costs and Uncertainty. While there is an extensive
body of legal guidance with respect to corporations and their governance,
there is no comparable body of legal guidance for publicly traded limited
partnerships. The Reorganization should reduce legal costs inherent in
maintaining EP as a publicly traded limited partnership and provide greater
certainty to management with respect to a number of legal issues that are
generally more settled with respect to corporations than publicly traded
limited partnerships, although EC would owe fiduciary duties to Newco and
its minority shareholders.
Fairness Opinion
EEI, in its capacity as Managing General Partner of EP, retained
Dean Witter in August 1994 to render an opinion to its Board of Directors
as to the fairness of the Reorganization, taken as a whole, to the Public
Unitholders from a financial point of view. Management of EEI met with
counsel and representatives of Dean Witter on several occasions commencing
on August 24, 1994 to review generally the issues involved in determining
the fairness of the Reorganization from a financial point of view.
Dean Witter was not requested to and did not make any
recommendation to the EEI Board of Directors as to the structure or the
terms of the Reorganization. No limitations were imposed by the EEI Board
of Directors upon Dean Witter with respect to the investigations made or
procedures followed by it in rendering its opinion.
At a meeting of the EEI Board of Directors on November 15, 1994,
Dean Witter delivered its written opinion to the Board of Directors of EEI
to the effect that the terms of the Reorganization, taken as a whole, were
fair, from a financial point of view, to the Public Unitholders. A copy of
the opinion, which sets forth the assumptions made, matters considered and
procedures followed by Dean Witter in rendering its opinion, is attached
hereto as Exhibit A and incorporated herein by reference. The summary of
the opinion of Dean Witter set forth in this Prospectus/Information
Statement is qualified in its entirety by reference to the full text of its
opinion.
In connection with the preparation of its opinion, Dean Witter,
among other things: (i) reviewed a draft of the Registration Statement on
Form S-4 to be filed by Newco with the Commission related to the
Reorganization; (ii) reviewed EP's Annual Reports on Form 10-K since
inception through December 31, 1993 and Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1994, June 30, 1994 and September 30, 1994;
(iii) reviewed and discussed EP's Reserve Report (dated January 1, 1994)
with representatives of DeGolyer and MacNaughton, EP's independent
petroleum engineering firm that prepared such report (the "Reserve
Report"); (iv) reviewed historic financial and operating results of EP
(since its original public offering on April 23, 1985) and discussed with
senior management of EEI and EC their business plans for Newco, including
(a) their intention to increase the percentage ownership of Newco held by
the public, (b) their intention to reinvest Newco's cash flow in its
business and (c) their intention to maintain a significant ownership
interest in Newco; (v) reviewed and discussed with management financial and
operating projections, including certain reserve
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<PAGE>
economic forecasts, provided by EEI regarding the business plans and
prospects for Newco, including its capital expenditure program and dividend
policy; (vi) reviewed certain financial ratios, derived from financial and
operating data provided by EEI management, of EP and Newco on a pro forma
basis giving effect to the Reorganization; (vii) reviewed the historical
market prices, distributions and trading volumes of the Units; (viii)
reviewed and contrasted the distribution rights of the Public Unitholders
to those of certain other publicly traded partnerships offered subsequent
to EP's original offering; (ix) analyzed the current marketplace
receptivity for natural resource publicly traded partnerships; (x) analyzed
the financial and operating results of certain oil and gas exploration and
production companies which Dean Witter deemed to be reasonably similar to
EP, and studied the marketplace for the securities, including common stock,
of such issuers; and (xi) reviewed such other financial studies, analyses
and investigations as Dean Witter deemed appropriate.
In rendering its opinion, Dean Witter relied on the accuracy and
completeness of all information supplied or otherwise made available to
Dean Witter by EC and EEI, and Dean Witter did not independently verify
such information or undertake an independent appraisal of the assets of EP.
Dean Witter also relied upon the management of EEI as to the reasonableness
of and the ability to achieve the financial forecasts (which include the
reserve economic forecasts) of Newco provided to Dean Witter, and assumed
that such forecasts have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of EEI's management as to
the future operating performance of Newco. Dean Witter assumed that the
Reserve Report has been reasonably prepared and reflects the best currently
available estimates and judgments of DeGolyer and MacNaughton as to the
reserves and future production volumes of EP. Dean Witter also relied on
the determination of EEI and its legal counsel as to the federal income tax
consequences of the Reorganization as to the Public Unitholders, which is
described in this Prospectus/Information Statement.
At the meeting of the EEI Board of Directors on November 15,
1994, Dean Witter presented certain quantitative and qualitative analyses
with respect to the Reorganization, which presentation was accompanied by
written materials. Such analyses are summarized below. The summary set
forth below does not purport to be a complete description of the subjects
discussed or the written materials presented by Dean Witter in its
presentation to the Board in connection with the Reorganization.
Review of Certain Assumptions of the Reorganization Proposal.
Dean Witter reviewed certain considerations and assumptions relating to the
Reorganization proposal, including the following: (i) the Reorganization
will result in EEI receiving EP's interests in, and assuming its
liabilities under, the Equipment Leases and the EC Companies assuming $395
million in aggregate principal amount of debt of EP owed to EC Companies
and to Newco, plus accrued interest; (ii) shares of Common Stock
distributed to the Public Unitholders will trade on the New York Stock
Exchange; (iii) Common Stock will be distributed to each of the Public
Unitholders and the EC Companies pro rata in relation to their interests in
EP prior to the Reorganization; (iv) management intends to increase the
percentage ownership of Newco held by the public; (v) it is the intention
of EEI and EC management to cause Newco to utilize substantially all of
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<PAGE>
its internally generated cash flow in connection with the growth of the
corporation, although the Board of Directors may consider declaration of a
nominal dividend primarily to increase Newco's attractiveness to certain
institutional investors; and (vi) EC intends to maintain a significant
ownership interest in Newco.
Comparison of EP and Freeport-McMoRan Energy Partners. The
written materials included a comparison of terms, market performance and
dividend history for EP and Freeport-McMoRan Energy Partners ("FMP"), which
were two exploration and production master limited partnerships or publicly
traded partnerships ("MLPs") offered within four days of each other in
April 1985. Freeport-McMoRan Inc., the corporate sponsor and general
partner of FMP, provided strong distribution support to FMP's public
unitholders, committing for a five year period to reinvest its
distributions for partnership units in order to support the public's
indicated distribution rate and stating its intention to cut its
exploration program first before curtailing the public unitholders'
distributions. EP did not provide Public Unitholders a distribution
support mechanism similar to, or as strong as, that provided by FMP. While
the financial, operating and asset characteristics differed between the two
MLPs, the structure of the FMP distribution support mechanism was primarily
responsible for FMP achieving a lower offering yield, or cost, at offering
compared to EP. This analysis was included to provide a better
understanding of the market for exploration and production MLPs in 1985
when EP was initially offered as well as the market receptivity at that
time to alternative partnership security structures.
Historical Review of EP and Pro Forma Analysis of EP and Newco.
Dean Witter's written materials also provided a historical financial review
of EP since its initial public offering through September 30, 1994 and
reserve information through January 1, 1994. Dean Witter also prepared a
comparable analysis with financial forecasts for EP and Newco from 1994
through 1997 based on information supplied by EC and EEI. A comparison of
the projected income statements for EP and Newco indicated that Newco would
generate higher earnings compared to EP in each period analyzed. In
addition, comparisons of net operating cash flow indicated that Newco
would, in the aggregate, generate a greater amount of operating cash flow
compared to EP over the periods reviewed. Newco would also have a more
conservative capital structure due to the reduction in aggregate debt and a
projected ratio of current assets to current liabilities in 1995 of 0.81x
compared to EP's projected ratio of current assets to current liabilities
of 0.11x in 1995. In this analysis, Dean Witter also made adjusted net
worth (adjusted book value) calculations on a per share basis in corporate
and MLP form. Adjusted net worth was calculated to value EP's proved
reserves as of January 1, 1994 based on reported private sales of oil and
gas assets using various pricing assumptions and to exclude deferred taxes.
Due to the planned reduction in aggregate debt and the improvement in the
ratio of current assets to current liabilities, the per share adjusted net
worth values were higher in corporate than MLP form.
Analysis of MLP Marketplace. Dean Witter presented analyses
pertaining to the MLP marketplace from its inception in 1982 through
November 9, 1994, including offering statistics for each of the 127 MLP
public offerings completed since 1982. Dean Witter reviewed and compared
financial characteristics of various MLPs at their initial public offerings
and contrasted the current distribution rights of the Public Unitholders
with those of certain other publicly
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<PAGE>
traded partnerships offered subsequent to EP's initial public offering.
Dean Witter noted that the MLP market has evolved to a point where any
potential MLP security offering must provide terms, including distribution
rights, which are substantially more restrictive to the issuer and
therefore more generous to the investor than those terms provided to the
Public Unitholders. Dean Witter also discussed the appropriateness of such
more generous distribution rights in the context of a commodity based
business, like EP, which needs to reinvest most, if not all, of its cash
flow in its operations. Dean Witter concluded that it would be very
difficult, if not impossible, for EP to sell MLP units in any meaningful
amount to the public in their current structure and at their current price
in today's marketplace.
Analysis of Capital Markets for Gas and Oil Exploration and
Production Companies. Dean Witter analyzed and compared the capital
raising efforts of gas and oil exploration and production companies
structured in limited partnership form with those in corporate form. Dean
Witter noted that since 1990, exploration and production companies in
corporate form have completed 99 public equity offerings that raised over
$8.8 billion, compared with three offerings by exploration and production
companies in limited partnership form that raised $113 million. Further
analysis also indicated that a substantial majority of exploration and
production MLPs previously offered have either been converted into
corporate form or have been liquidated. Dean Witter concluded that an
exploration and production company in today's marketplace would have a much
higher chance of successfully completing a public equity offering in
corporate form than in MLP form.
Analysis of Selected Gas and Oil Exploration and Production
Companies. Using publicly available information, Dean Witter analyzed
certain financial information of selected publicly traded gas and oil
exploration and production companies (including both limited partnerships
and corporations) which it deemed to be reasonably similar to EP. These
companies included five corporations (Anadarko Petroleum Corporation,
Apache Corporation, Noble Affiliates, Inc., Parker Parsley Petroleum
Company and Seagull Energy Corporation) and four MLPs (Kelley Oil and Gas
Partners, Ltd., Sun Energy Partners, Hallwood Energy Partners and Samson
Energy Co.). Dean Witter also compared the financial attributes of EP and
Newco to an index composed of the exploration and production companies
followed by Dean Witter Equity Research, which included the following:
Anadarko Petroleum Corporation, Apache Corporation, Burlington Resources,
Inc., Cabot Oil and Gas Corporation, Enron Oil and Gas Company, The
Louisiana Land and Exploration Co., Maxus Energy Corporation, Noble
Affiliates, Inc., Oryx Energy Company, Parker and Parsley Petroleum
Company, Santa Fe Energy Resources, Inc. and Vintage Petroleum, Inc.
Financial data on EP was presented in these analyses based on its market
price one day prior to the Reorganization announcement and as of November
9, 1994. Analysis of certain ratios indicated that EP's assets may achieve
a higher valuation in corporate form. For example, EP's market value to
pre-tax SEC-10 value was 0.76x based on the pre-announcement unit price of
$8.125 compared with the average of 1.17x for the five comparable
corporations. Market value and aggregate value (market value plus long-
term debt) per barrel of oil equivalent of proved reserves was $6.25 and
$8.51, respectively, for the five comparable corporations versus $3.84 and
$5.24, respectively, for EP. While the analysis of certain other ratios
might indicate that EP's assets could achieve a higher valuation in limited
partnership
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<PAGE>
form, Dean Witter concluded that a purely financial comparison between
exploration and production MLPs and exploration and production corporations
was not meaningful since there are only four publicly traded exploration
and production MLPs other than EP, each of which has a small public float
and small traded volume compared to the publicly traded exploration and
production corporations; and two of those MLPs recently announced their own
restructuring plans to convert to corporate form. Dean Witter believes
that a complete understanding of such comparable company analysis involves
qualitative as well as quantitative judgments concerning similarities and
differences between the financial operating characteristics of companies
under review.
Analysis of Certain Financial Ratios Derived from Financial and
Operating Data Provided by EEI Management. Dean Witter analyzed certain
financial ratios and prepared other financial analyses that were derived
from projections specifically prepared by EEI management in connection with
the Reorganization. Dean Witter noted that due to the reduction of $309
million of long term debt and the creation of lease obligations resulting
from the restructuring of the Equipment Leases as a result of the
Reorganization, Newco would have a long term debt to capitalization ratio
of 14%, compared to EP's long term debt to capitalization ratio of 33%
without the Reorganization. As a result of the lower interest expense due
to the reduction in long term obligations and the receipt of interest
income on the $86 million note receivable from an EC Company, Newco's
projected cash flow from operations and net income would be similar to or
greater than projected cash flow from operations and net income without the
Reorganization over the periods analyzed. Although various book value
computations were made under different asset pricing assumptions, the
majority of the analyses prepared by Dean Witter assumed EC would maintain
a significant ownership interest in Newco.
Review of Market Prices of EP, Comparable Companies and Various
Related Indices. Dean Witter compared the price performance of EP on an
absolute basis and relative to indices of comparable publicly traded
limited partnerships, including some that have either been liquidated or
converted into corporate form, Standard & Poor's Energy Composite Index and
an index of comparable publicly traded exploration and production companies
followed by Dean Witter Equity Research. The review focused on two periods
it considered relevant: (i) April 26, 1985 (the date of EP's initial
public offering) to November 9, 1994 and (ii) July 1, 1994 (four weeks
immediately preceding the public announcement of the Reorganization) to
November 9, 1994. This review indicated that on a relative basis EP's
price appreciation exceeded the price appreciation of comparable
exploration and production companies and the selected market indices for
the period from July 1, 1994 through November 9, 1994. Further, this
review indicated that as of November 9, 1994, the Unit price had increased
approximately 29% from the closing price of $8.125 on the day immediately
preceding EP's public announcement of the Reorganization.
Analysis of Equity Research Coverage. Dean Witter compared
equity research coverage for EP and the four remaining publicly traded
exploration and production MLPs and a selected group of other well-known
master limited partnerships with selected exploration and production
corporations. This analysis indicated that exploration and production
corporations receive more
- 40 -
<PAGE>
research coverage than entities structured as MLPs. The potential for
greater research coverage, which would increase investor awareness of
Newco's securities, would improve Newco's ability to offer its securities
in the public marketplace in corporate rather than limited partnership
form.
Dean Witter believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could
create a misleading view of the processes underlying its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to summary description. In its analyses, Dean Witter made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters. Any estimates contained therein
are not necessarily indicative of actual values, which may be significantly
more or less favorable than as set forth therein. Because such estimates
are inherently subject to uncertainty, none of EC, EEI, Dean Witter or any
other person assumes responsibility for their accuracy.
EEI selected Dean Witter to give the opinion referred to above
primarily because of Dean Witter's reputation as an investment banking firm
with substantial experience in evaluating gas and oil companies and
transactions. As a part of its business, Dean Witter is continually
engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate, and other purposes. Dean Witter has not
provided any material investment banking services to any of the EC
Companies in the past two years.
Pursuant to a letter agreement dated August 29, 1994, Dean Witter
has been paid a fee of $100,000 for its services. The fee was not
contingent upon the consummation of the Reorganization or any other
occurrence. In addition, EEI and EC have agreed to reimburse Dean Witter
for its reasonable out-of-pocket expenses and to indemnify Dean Witter
against certain liabilities, including liabilities under the Securities Act
and the Exchange Act, arising out of or in conjunction with its rendering
of services pursuant to its engagement.
No Public Unitholder Consent Required
The consent of holders of a majority of the outstanding Units is
necessary to approve the Reorganization. The EEI Board of Directors has
fixed the close of business on December 5, 1994 as the record date for the
determination of holders entitled to notice of and to consent to the
Reorganization. As of that date, there were outstanding 102,500,076 Units.
Since the EC Companies held approximately 99.2% of such Units on that date
and intend to approve the Reorganization, approval of the Reorganization is
assured without the consent of any other holder of Units. ACCORDINGLY, EP
IS NOT SOLICITING YOUR CONSENT TO THE REORGANIZATION, AND YOU ARE REQUESTED
NOT TO SEND EP A CONSENT OR PROXY WITH RESPECT TO THE REORGANIZATION.
- 41 -
<PAGE>
Procedure for Delivery of EP Depositary Unit Certificates
Enclosed with this Prospectus/Information Statement is a Letter
of Transmittal, which should be filled out by each Public Unitholder and
returned to Harris Trust Company of New York, c/o Harris Trust and Savings
Bank, 11th Floor, Shareholder Services, 311 West Monroe Street, Chicago,
Illinois 60606-4607, along with all certificates representing EP Depositary
Units possessed by such Public Unitholder. Common Stock certificates will
be issued in accordance with the information supplied by the Public
Unitholder in the completed Letter of Transmittal. The Letter of
Transmittal contains detailed instructions regarding its completion on its
reverse side.
Until surrender of certificates representing their EP Depositary
Units for exchange, Public Unitholders will not be entitled to receive any
dividends that may be declared and payable to holders of record of Common
Stock. Any such dividends will be remitted to the Public Unitholders
entitled thereto, without interest, at the time that such certificates
representing EP Depositary Units are surrendered for exchange, subject to
applicable abandoned property, escheat or similar law. After consummation
of the Reorganization, however, certificates representing EP Depositary
Units will be deemed for all other corporate purposes to evidence ownership
of Common Stock distributable with respect thereto.
RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES
Ownership of Shares
After consummation of the Reorganization, the EC Companies will
own over 99% of the outstanding Common Stock. Through this ownership, EC
will have the ability, directly or indirectly, to control Newco. EC, as
the majority shareholder of Newco, will have a fiduciary obligation under
Texas law to act in good faith and to exercise its control of Newco in a
manner that is fair and reasonable to the other shareholders.
Conflicts of Interest
Certain conflicts of interest could arise as a result of the
relationships between the EC Companies and Newco. See "BUSINESS." For
example, EC Companies will purchase and market natural gas produced from
Newco's properties. These transactions create the potential for conflicts
over pricing, terms of delivery and other matters. Other conflicts may
include the purchase of goods and services from EC Companies and involve
operational matters such as the availability of personnel and the
allocation of costs. See Note 4 of the Notes to Financial Statements for
the year ended December 31, 1993.
A number of transactions and relationships between Newco and the
EC Companies are contemplated and specifically authorized by Article Eleven
("Article Eleven") of Newco's Restated Articles of Incorporation attached
hereto as Exhibit D, including the following:
- 42 -
<PAGE>
. Any EC Company may lend funds to Newco at an interest rate that
is not greater than the lesser of the EC Company's actual
interest cost of the funds or the rate that Newco would be
charged by unrelated lenders on comparable loans. Newco may lend
funds to EC Companies so long as Newco does not charge interest
at a rate less than would be charged by unrelated lenders on
comparable loans.
. Officers, directors, employees, attorneys and agents of Newco may
also serve as officers, directors, employees, attorneys and
agents of EC Companies. In those situations, each party using
the services will be responsible for compensation in respect of
the services performed for it.
. An EC Company may provide Newco with certain services that
include, but are 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, office
services and the management of these functions. Newco will
reimburse each EC Company for the direct and indirect costs
incurred in connection with the furnishing of the services to
Newco. Costs will be determined on a basis reasonably calculated
to reflect the actual costs of the services performed by such EC
Company and may include allocations based on such factors as net
capital employed, the number of employees or percentage of time
spent on projects and services.
. EC Companies may sell gas, oil, goods and services to, and may
purchase gas, oil, goods and services from, Newco in conformity
with the provisions of Article Eleven discussed below. EC
Companies are authorized to effect sales to and purchases from
Newco on terms that have not been determined to be fair as long
as the transaction is authorized or ratified by the Newco Board
of Directors.
Other transactions not specifically provided for above may occur.
Article Eleven provides that a contract or other transaction between Newco
and any EC Company will not be invalid because of the relationship between
Newco and the EC Companies or because of the presence of a director,
officer or securityholder of an EC Company 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 (1) the material facts of the relationship or interest of each
EC Company or such director, officer or security holder are known and
disclosed, either (a) to the Board of Directors of Newco, or a committee of
the Board of Directors, and it nevertheless authorizes or ratifies the
contract by a majority of the directors present or (b) to the shareholders
of Newco, and they nevertheless authorize or ratify the contract or
transaction by a majority of the shares present, or (2) the contract or
transaction is fair to Newco as of the time it is authorized or ratified by
the Board of Directors or shareholders of Newco.
- 43 -
<PAGE>
Article Eleven is intended to validate transactions between Newco and
EC Companies effected in conformity with Article Eleven. The effect of
Article Eleven on the Newco directors' fiduciary duties of loyalty and
care, however, is unclear under Texas law.
Any EC Company may have business interests and engage in business
activities in addition to those relating to Newco, 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 business or activities, including business interests and
activities in direct competition with Newco, for their own account and for
the account of others, and may own interests in the same properties as
those in which Newco owns an interest, without having or incurring any
obligation to offer any interest in those properties, business or
activities to Newco. However, it is expected that EC will conduct all of
its domestic gas and oil exploration and production business through Newco,
and therefore, EC intends to make any acquisition of domestic gas and oil
properties through Newco. There may be circumstances, however, in which it
is either necessary or appropriate for EC to make an acquisition or
undertake domestic operations without Newco's participation. The Restated
Articles of Incorporation of Newco provide that EC and the other EC
Companies may at any time engage in gas and oil activities for their own
accounts. EP has not conducted international gas and oil operations and EC
will continue to conduct these operations through affiliates other than
Newco. After the Reorganization, Newco will be provided the opportunity to
purchase the remainder of EC's domestic gas and oil properties, which are
presently believed by EEI to have a fair market value of $1.4 million. The
book value of these properties is $5.3 million. Therefore, EC would
receive $3.9 million less than the carrying value of the properties. The
$1.4 million proceeds would be credited to EC's property account under
full-cost accounting rules and no gain or loss would be recognized for
accounting purposes. For tax purposes, since it has no tax basis in the
properties EC would realize a gain equal to the proceeds and would pay
current income taxes of $.5 million. The Board of Directors of Newco will
consider such decision in the ordinary course of its deliberations. No EC
Company intends to conduct any domestic gas and oil exploration and
production activities following the Reorganization.
See "CERTAIN TRANSACTIONS" for additional discussion of transactions
between Newco and the EC Companies.
DIVIDEND POLICY OF NEWCO
It is the intention of Newco to utilize substantially all of its
internally generated cash flow in connection with the growth of the
corporation. Internally generated cash flow may not be sufficient to
sustain this growth in the future, and borrowings may be utilized to fund
cash deficiencies. Nevertheless, the Board of Directors may consider
declaration of a nominal dividend primarily in order to increase Newco's
attractiveness to certain institutional investors.
- 44 -
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of EP and
reflects the pro forma adjustments described in the Notes to the Pro Forma
Financial Statements to arrive at the pro forma capitalization of Newco.
<TABLE>
<CAPTION>
September 30, 1994
---------------------------------------
Adjustments
EP Increase Newco
Historical (Decrease)(a) Pro Forma
----------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
Temporary Advances - affiliated companies $ 54,742 $ 221(b) $ 54,963(c)
======== ========= ==========
Long-term Debt - affiliated companies $309,000 $(309,000) $
Capital Lease Obligations (includes 156,000 156,000
current portion)
Partners' Capital:
General Partners' 1% interest 14,612 (14,612)
Limited Partners' 99% interest 603,645 (603,645)
(102,500,076 Units outstanding)
Common Shareholders' Equity
(Authorized: 200,000,000 shares; to
be outstanding 104,581,242 shares) (d) 735,405 735,405
-------- --------- --------
Total Capitalization $927,257 $ (35,852) $891,405
======== ========= ========
</TABLE>
- 45 -
<PAGE>
(a) Reconciliation of Partners' Capital of EP to Common Shareholders' Equity of
Newco (in thousands):
<TABLE>
<CAPTION>
EP Partners' Capital:
<S> <C>
General Partners.......................... $ 14,612
Limited Partners.......................... 603,645
---------
Total................................. 618,257
1% General Partners' interest in EPO:
Temporary advances -
affiliated companies.................... 557
Other..................................... 9,729
---------
Total................................. 10,286
EP Balances not assumed by Newco:
Long-term debt - affiliated companies..... 309,000
Note receivable - affiliated companies.... 85,217
Net assets related to lease arrangements.. (7,762)
Other..................................... 5,693
---------
Total................................. 392,148
Deferred federal income taxes............... (285,286)
---------
Common Shareholders' Equity of Newco........ $ 735,405
=========
<CAPTION>
(b) Consists of:
<S> <C>
1% General Partners' interest
in temporary advances..................... $ 557
EP Note Receivable balance
not assumed by Newco...................... (336)
-----
$221
=====
</TABLE>
(c) At September 30, 1994, Newco also has a note receivable from an affiliated
company of $86,080.
(d) The aggregate number of shares of Common Stock to be issued in the
Reorganization was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
General Partners' Interest in EPO 1,045,812
General Partners' Interest in EP 1,035,354
Limited Partners' Interest in EP 102,500,076
-----------
Total shares of Common Stock
to be issued 104,581,242
===========
</TABLE>
Public Unitholders hold 805,914 Units (.786% of the Units outstanding)
and will hold 805,914 shares of Common Stock (.771% of the Common
Stock to be outstanding).
The EC Companies will receive 103,775,328 shares of Common Stock
pursuant to the Reorganization.
- 46 -
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The historical selected financial information of EP set forth below is
derived from the historical financial statements of EP. The pro forma
information includes adjustments as explained in the unaudited pro forma
financial statements of Newco and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Financial data in thousands except ratios and per Unit/Share amounts)
HISTORICAL INCOME STATEMENT DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Natural gas............... $ 110,731 $ 104,191 $ 144,889 $ 117,418 $ 122,164 $ 141,287 $ 137,778
Oil and condensate........ 21,416 26,078 33,920 41,179 49,344 58,721 47,928
Natural gas liquids....... 1,137 3,430 3,790 6,037 1,503 1,695 1,590
Other..................... 256 1,403 2,393 1,274 1,479 332 3,778
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $ 133,540 $ 135,102 $ 184,992 $ 165,908 $ 174,490 $ 202,035 $ 191,074
========== ========== ========== ========== ========== ========== ==========
Operating Income (Loss).... $ 23,082 $ 21,545 $ 26,386 $ (70) $ (30,185) $ 36,457 $ 50,830
Net Income (Loss).......... 8,020 2,651 (3,881) (20,265) (49,644) 25,993 42,720
Net Income (Loss) per
Unit (a).................. .08 .03 (0.04) (.20) (.48) .25 .41
Distributions Declared per
Unit...................... .225 .30 .30 .30 .30 .30
Weighted Average Units
Outstanding............... 102,500 102,500 102,500 102,500 102,500 102,500 102,500
Ratio of earnings to fixed
charges (b)............... 1.15 1.05 0.86 0.18 (0.94) 2.08 3.09
<CAPTION>
HISTORICAL CASH FLOW DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash
equivalents............... $ 2,368 $ (555) $ (628) $ 848 $ (37) $ 30 $ (805)
Net cash provided by
operating
activities................ 87,352 73,556 76,364 88,501 75,702 81,294 108,031
Net cash used for investing
activities................ (96,469) (93,089) (124,140) (68,866) (105,175) (116,905) (96,774)
Net cash flows (required
for) from
operating and investing
activities............... (9,117) (19,533) (47,776) 19,635 (29,473) (35,611) 11,257
Distributions.............. (7,765) (23,295) (31,061) (31,061) (31,061) (31,061) (54,356)
<CAPTION>
HISTORICAL BALANCE SHEET DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.. $ 2,677 $ 382 $ 309 $ 937 $ 89 $ 126 $ 96
Property, Plant and
Equipment-Gross........... 1,913,996 1,787,009 1,809,528 1,742,490 1,811,204 1,776,642 1,675,327
Property, Plant and
Equipment-Net............. 1,091,767 1,018,543 1,030,311 993,038 1,030,653 1,043,673 995,326
Total Assets............... 1,144,376 1,062,059 1,086,303 1,039,185 1,077,619 1,109,203 1,041,266
Total Liabilities
(including long term debt) 526,119 437,523 476,066 394,006 381,114 331,993 258,988
Capitalization
Long-term debt -
affiliated companies..... $ 309,000 $ 290,000 $ 298,000 $ 266,000 $ 234,000 $ 202,000 $ -
General and limited
partners' equity
General partners........ 14,612 14,676 14,532 14,882 15,396 16,203 16,254
Limited partners........ 603,645 609,860 595,705 630,297 681,109 761,007 766,024
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $ 927,257 $ 914,536 $ 908,237 $ 911,179 $ 930,505 $ 979,210 $ 782,278
========== ========== ========== ========== ========== ========== ==========
Book Value per Unit (a).. $ 5.97 $ 6.03 $ 5.89 $ 6.23 $ 6.73 $7.51 $7.56
<CAPTION>
PRO FORMA INFORMATION OF NEWCO
<S> <C> <C> <C> <C> <C>
Net Income (Loss).......... $ 18,550 $ 15,450 $ 16,274 $ 1,061 $ (23,042)
Income (Loss) per Share.... .18 .15 .16 .01 (.22)
Book Value per Share....... 7.03
Shares Outstanding......... 104,581 104,581 104,581 104,581 104,581
</TABLE>
- 47 -
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Financial data in thousands except ratios and per Unit/Share amounts)
HISTORICAL OPERATING DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Volumes
Natural gas (MMcf)........ 51,141 50,983 69,318 64,509 69,326 75,983 75,464
Oil and condensate (MBbl). 1,413 1,477 1,972 2,147 2,424 2,635 2,767
Natural gas liquids (MBbl) 109 276 313 452 80 95 125
Average Sales Price
Natural gas (per Mcf)..... $ 2.17 $ 2.04 $ 2.09 $ 1.82 $ 1.76 $ 1.86 $ 1.83
Oil and condensate (per
Bbl)..................... 15.16 17.66 17.20 19.18 20.36 22.29 17.32
Natural gas liquids (per
Bbl)..................... 10.43 12.43 12.11 13.36 18.79 17.84 12.72
Net Wells
Drilled................... 48 62 79 19 66 53 18
Productive................ 30 52 64 8 52 42 14
Data in Equivalent Energy
Content (MMBtu) (c).......
Average sales price....... $ 2.15 $ 2.12 $ 2.14 $ 2.02 $ 2.00 $ 2.12 $ 1.97
Average production costs.. .51 .54 .54 .53 .56 .50 .48
Amortization.............. .93 .91 .91 .91 .83 .75 .67
</TABLE>
- -----------------------
(a) Net Income (Loss) and Book Value per Unit are after deduction of the general
partners' 1% interest.
(b) For the years ended December 31, 1993, 1992 and 1991, "fixed charges"
exceeded "earnings" by $5 million, $23 million and $53 million,
respectively. Results for 1991 included a $51 million noncash write-down of
gas and oil properties and 1992 included a $16 million noncash write-off of
an idle pipeline and shallow-water production facility from an abandoned
offshore project.
(c) For purposes of providing a common unit of measure, natural gas, oil and
natural gas liquids are converted to an approximate equivalent unit on the
basis of relative energy content: one Mcf of natural gas equals 1.05 MMBtu,
one barrel of oil equals 5.6 MMBtu and one barrel of natural gas liquids
equals 4.2 MMBtu.
- 48 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Operating income for EP closely follows fluctuations in product prices
and volumes that are shown in the table of Selected Financial and Operating
Data. As an independent gas and oil producer, EP's 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. See
"SPECIAL CONSIDERATIONS--NEWCO--VOLATILITY OF GAS AND OIL MARKETS." Gas
reserves at December 31, 1993 constitute approximately 84% of EP's reserves
and gas production accounts for approximately 85% of its production for the
year 1993 on an energy equivalent basis. Accordingly, variations in gas
prices have a more significant impact on EP than variations in oil prices.
The average gas prices received by EP for its production ranged from a high
of $2.32 per Mcf in the quarter ended March 31, 1994 to a low of $1.52 per
Mcf in the quarter ended September 30, 1991.
Oil and condensate and natural gas liquids volumes have declined since
1989 as the result of the natural decline in production from older
producing fields. Projected oil production in 1995 and future years,
because of the Garden Banks 388 project, are expected to be significantly
above current levels. The decline in natural gas liquids production results
from EPO's election not to extract natural gas liquids when allowed by
contract due to low product prices and the decline in production from a
major South Texas field. Natural gas production in 1994 should approximate
1993 production, while 1995 production is expected to decline moderately.
For the nine months ended September 30, 1994, EP had net income of
$8.0 million, compared with $2.7 million for the 1993 period, reflecting a
decrease in operating expenses and a 20% reduction in interest costs. Nine-
month operating income of $23 million was 7% higher than the same period of
1993. Year-to-date revenues were slightly less than the year ago period.
Natural gas revenues were up 6% due to improvement in the average sales
price, as sales volumes were virtually the same as the year-earlier period.
Oil revenues decreased 18% due to declines in both prices and sales
volumes. Costs and expenses for the first nine months were $3.1 million
less than the 1993 period, with 1994 results reflecting a $2.0 million
credit associated with the reversal by an appellate court of an adverse
lower court judgment and settlements of other litigation. The decrease in
interest expense for the nine months was primarily due to the refinancing
of the affiliated debt at a lower interest rate.
EP had a net loss of $4 million for the full year 1993, compared with
a loss of $20 million in 1992 and a loss of $50 million in 1991. The 1992
loss included a $16 million write-off of an idle pipeline and shallow-water
production facility from an abandoned offshore project, and 1991 results
included a $51 million noncash charge for a write-down under the "ceiling
test" for the "full cost" method of accounting. Excluding the write-downs,
EP's 1993 net loss was about the same as in 1992 and compares with income
of $1.8 million in 1991.
- 49 -
<PAGE>
Excluding the write-downs, operating income for 1993 was $26 million
versus $16 million in 1992 and $21 million in 1991. The improvement
resulted from significantly increased natural gas prices and higher sales
volumes. Revenues for 1993 of $185 million were 12% higher than 1992 and 6%
above 1991.
Natural gas revenues were $145 million in 1993, compared with $117
million for 1992 and $122 million for 1991. The average natural gas price
per thousand cubic feet ("Mcf") in 1993 was $2.09, up 15% from $1.82 in
1992 and 19% from $1.76 in 1991. Natural gas sales volumes in 1993 of 69
billion cubic feet increased 7% from the 1992 level and were virtually the
same as in 1991. The increase in volumes for 1993 was principally due to
accelerated natural gas development drilling in East Texas and offshore
production from Mississippi Canyon Block 441 in the Gulf of Mexico, which
went on stream in the second quarter of 1993.
Variable-priced sales, which include monthly and long-term contract
sales, covered about 75% of 1993 gas sales, compared with 80% in 1992 and
80% in 1991. During the first nine months of 1994, the percentage of
variable-priced gas sales was about 75%, and the percentage is expected to
continue in this proportion for the remainder of the year.
Oil revenues were $34 million in 1993, compared with $41 million in
1992 and $49 million in 1991. The average sales price per barrel for 1993
of $17.20 was 10% below 1992 and 16% under 1991. Oil sales volumes for 1993
were 2.0 million barrels ("MMBbls"), an 8% decline from the 1992 level
which was down 11% from the 1991 level. The lower volumes in 1993 were
primarily the result of declining production from several North Texas
reservoirs.
Excluding the previously noted write-downs, costs and expenses for
1993 were $159 million, compared with $150 million in 1992 and $153 million
in 1991. The increase in expenses for 1993 reflects provisions totaling
$7.1 million for pending litigation. Also, depreciation and amortization
expense for 1993 of $77 million was $1.6 million higher than 1992,
primarily due to increased production. The overall rate of amortization was
$.91 per million British thermal units ("MMBtu") produced for both 1993 and
1992, compared with $.83 in 1991. Costs of additional offshore projects and
increased development costs associated with older fields largely account
for the increase from 1991. Average production cost per MMBtu in 1993 was
$.54, compared with $.53 in 1992 and $.56 in 1991.
Interest expense in 1993 of $30 million was approximately $10 million
higher than both 1992 and 1991. The increase reflects a $6 million
provision for interest due royalty owners. A higher level of debt and less
interest capitalized also contributed to the 1993 increase.
EP's natural gas reserves at January 1, 1994, were 1.09 trillion cubic
feet ("Tcf"), compared with 1.10 Tcf the year earlier, as estimated by
DeGolyer and MacNaughton, independent petroleum consultants. Oil and
condensate reserves, including natural gas liquids attributable to
leasehold interest, were 38 MMBbls, virtually the same as the year-ago
level.
- 50 -
<PAGE>
At January 1, 1994, estimated future net cash flows from EP's owned
proved gas and oil reserves, based on average prices and contracts in
effect in December 1993, were $2.0 billion, about the same as the year
earlier. The net present value of such cash flows, discounted at the SEC-
prescribed 10%, was $1.1 billion, virtually the same as the prior year.
These discounted cash flow amounts are the basis for the SEC-prescribed
cost-center ceiling under the full-cost accounting method. The margin
between the cost-center ceiling and the unamortized capitalized costs of
U.S. gas and oil properties was approximately $150 million at December 31,
1993, and at September 30, 1994, had declined to approximately $16 million,
based on average prices and contracts in effect in September 1994. Product
prices are subject to seasonal and other fluctuations. A significant
decline in prices from September 30, 1994 or other factors, without
mitigating circumstances, could cause a future write-down of capitalized
costs and a noncash charge against earnings.
EP uses gas and oil swaps, collars and futures agreements to hedge
volatile product prices for a portion (normally 30 to 70 percent) of
anticipated future monthly gas and oil production. The purpose of these
hedging activities is to fix the prices to be received. Under these
agreements, EP receives or makes payments based on the differential between
a fixed and a variable product price. These agreements are typically
settled in cash at or prior to expiration or exchanged for physical
delivery contracts. Realized gains and losses on hedging activities are
deferred and included in income during the month that the related physical
sale occurs.
At December 31, 1993, EP had outstanding swap and collar agreements
extending through December 1994 to exchange payments on 4,970,000 MMBtu's
of gas and 121,000 barrels of oil on which EP had $1.4 million of net
unrealized gains based on the difference between the strike price and the
NYMEX futures price for the applicable trading month. At December 31, 1993
realized gains on hedging activities of $1.4 million were deferred. The
weighted average strike price and market price per MMBtu of natural gas was
$2.21 and $1.99, respectively, and the weighted average strike price and
market price per barrel of oil was $17.15 and $14.25, respectively, at
December 31, 1993. Natural gas hedge transactions reduced gas revenues $4.1
million in 1993 and $0.8 million in 1992. In 1993 oil hedges resulted in a
$0.4 million increase of oil revenues.
At September 30, 1994, EP had outstanding swaps, collars and futures
agreements extending through December 1995 to exchange payments on
11,250,000 MMBtu's of gas and 1,650,000 barrels of oil on which EP had $.4
million of net unrealized gains based on the difference between the strike
price and the NYMEX futures price for the applicable trading month. At
September 30, 1994 realized gains on hedging activities of $1.3 million
were deferred. The weighted average strike price and market price per MMBtu
of natural gas was $2.02 and $1.92, respectively, and the weighted average
strike price and market price per barrel of oil was $17.81 and $18.48,
respectively, at September 30, 1994. Hedge transactions in the first nine
months of 1994 increased gas and decreased oil revenues $2.1 million and
$0.6 million, respectively, and in the first nine months of 1993 reduced
gas revenues $3.9 million.
- 51 -
<PAGE>
Pro Forma Results of Operations of Newco
Newco will conduct substantially the same business as was conducted by
EP prior to the Reorganization. In the table below, EP's results of
operations are adjusted to include the effects of (i) the assumption by EC
Companies of $395 million in aggregate principal amount of debt of EP ($86
million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to
Newco, plus accrued interest, (ii) the 1% general partner interest in EPO,
(iii) the changes in equipment lease terms and (iv) the allocation of
additional management costs to Newco. EP's results are also adjusted for
corporate income taxes that were not payable by EP, but that would have
been paid by Newco. A summary reconciliation of EP's reported net income
(loss) to Newco's pro forma net income (loss) is presented below.
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------
1994 1993 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income (loss) reported by EP.............. $ 8,020 $ 2,651 $(3,881) $(20,265) $(49,644)
Pro forma adjustments:
Decrease in interest costs by
assumption of debt by EC Companies.......... $19,899 21,218 29,034 22,863 16,070
1% General Partner Interest in EPO.......... 238 214 216 10 (338)
Effect of changes in equipment lease terms.. 881 436 668
Management cost allocation from EC.......... (500) (750) (1,000) (1,000) (1,000)
------- ------- ------- -------- --------
Pro forma income (loss) before income taxes... 28,538 23,769 25,037 1,608 (34,912)
Pro forma income (tax) benefit................ (9,988) (8,319) (8,763) (547) 11,870
------- ------- ------- -------- --------
Pro forma net income (loss) of Newco.......... $18,550 $15,450 $16,274 $ 1,061 $(23,042)
======= ======= ======= ======== ========
</TABLE>
In connection with the Reorganization, Newco will enter into three
sublease agreements with respect to the equipment underlying the Equipment
Leases. Pro forma combined future minimum lease payments for the three
subleases are as follows (in thousands): $37,133 for 1995; $40,361 for
1996; $41,338 for 1997; $41,764 for 1998; and $41,957 for 1999. Over the
life of the subleases, the costs to Newco of the assignment and assumption
of the Equipment Leases, and the subleasing of the related equipment to
Newco, will not be materially different from the costs that would have been
incurred under the Equipment Leases. See "CERTAIN TRANSACTIONS."
Capital Resources and Liquidity
Net cash flows from operating activities for the first nine months of
1994 were $87 million, up 19% from $74 million a year earlier. Investing
activities required net cash flows of $96 million, compared with $93
million for the same period of 1993, with an $8 million increase in
property additions. For the nine months ended September 30, 1994, net cash
of $9
- 52 -
<PAGE>
million was required for investing activities after cash provided by
operations. In addition, there was an $8 million requirement for
distributions to unitholders, and disbursements for the Garden Banks Block
388 facilities under construction exceeded advances under leasing
arrangements by $19 million. These requirements were provided by an
increase in temporary advances from EC Companies.
Net cash flows from operating activities for the full year 1993 were
$76 million, $12 million lower than 1992 primarily due to less cash
provided by changes in net current operating assets and liabilities, and
were virtually the same as in 1991. Investing activities required net cash
flows of $124 million, compared with $69 million in 1992 and $105 million
in 1991. The increase in 1993 is primarily due to a higher level of
capital spending for natural gas and oil exploration and development
programs. In 1993, $48 million was required for investing activities after
cash provided by operations, and cash of $31 million was required for the
payment of distributions to holders of Units. The total requirement of $79
million was provided by an increase in borrowings from EC Companies and
advances under leasing arrangements that temporarily exceeded disbursements
for the facilities under construction.
Planned property, plant and equipment additions for 1994 total $114
million. In addition, construction of the offshore platform and related
facilities associated with EP's interest in the Garden Banks Block 388
development project in the Gulf of Mexico is being financed through an
operating lease arrangement as noted below.
In 1992, EP entered into operating lease arrangements to provide
financing for its portion of the offshore platforms and related facilities
for the Mississippi Canyon Block 441 (37.5% owned) and Garden Banks Block
388 (100% owned) projects. A total of $34 million was required for the
Mississippi Canyon Block 441 project, which was completed in early 1993;
the lease was renewed in the second quarter of 1994 under terms that
resulted in capital lease accounting treatment. An operating lease
arrangement is providing financing for up to $235 million for the equipment
and facilities associated with the Garden Banks project. The cost for the
equipment and facilities will be greater than the amount of the current
lease financing because of costs not originally covered by the lease, the
addition of equipment, higher-than-expected costs for both labor and
materials, design modifications and other factors. Financing options for
the additional costs are currently being evaluated, including an addition
to the current operating lease arrangement. The total cost of the
equipment and facilities is expected to be approximately $280 million.
On January 3, 1994, EP paid a quarterly distribution of $.075 per
unit. In February 1994, EP discontinued quarterly distributions to holders
of Units.
Even though inflation has abated considerably from the levels of the
early 1980s, and was only about 2.5% in 1993, it continues to have some
influence on EP's operations. Most notable is that allowances for
depreciation and amortization based on the historical cost of fixed assets
may be insufficient to cover the replacement of some long-lived fixed
assets.
- 53 -
<PAGE>
The impact of the Clean Air Act Amendments of 1990 (the "Clean Air
Act") on EP cannot be fully ascertained until the regulations that
implement the Clean Air Act have been approved and adopted. Management
currently believes that operating costs that will be incurred under the new
permit fee structure, any capital expenditures associated with equipment
modifications, and any other miscellaneous permitting costs required under
the Clean Air Act will not have a material adverse effect on EP's results
of operations. Management expects the provisions of the Clean Air Act will
increase the attractiveness of natural gas as compared with certain
alternative fuels; however, it is impossible to quantify any increase in
demand for natural gas, if any, that may be created by the Clean Air Act.
New Accounting Standards
SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other
than Pensions," which mandates the accounting for medical and life
insurance and other nonpension benefits provided to retired employees, was
adopted by EP effective January 1, 1993.
SFAS No. 112, "Employer's Accounting for Postemployment Benefits,"
became effective for EP in 1994. This standard covers the accounting for
estimated costs of benefits provided to former or inactive employees before
their retirement. EP receives an allocation of these benefits from EC
which currently accrues costs of benefits to former or inactive employees
by varying methods. The new standard did not have a significant effect on
results of operations or financial condition.
- 54 -
<PAGE>
BUSINESS
Glossary
Barrel - The unit of volume measurement used for petroleum products.
1 barrel (Bbl) = 42 U.S. gallons.
Barrel Equivalent - A measure used to equate an amount of natural gas with
the same amount of energy in a barrel of oil. Six thousand cubic feet of
natural gas have approximately the same energy content as one barrel of
oil. For the purpose of providing a common unit of measure, natural gas,
oil and natural gas liquids are converted to an approximate equivalent unit
on the basis of relative energy content: One Mcf of natural gas equals
1.05 MMBtu, one barrel of oil equals 5.6 MMBtu, and one barrel of natural
gas liquids equals 4.2 MMBtu.
Basin - A synclinal structure in the subsurface, once the bed of a
prehistoric sea. Regarded as a good prospect for gas and oil exploration.
Block - Numerical designation of a specific location in an offshore area.
Btu - British thermal unit, the quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Condensate - A hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is produced; similar to crude oil.
Cubic Foot - The amount of gas that occupies one cubic foot under standard
temperature and pressure conditions; standard volume measurement for
natural gas.
Mcf: thousand cubic feet
MMcf: million cubic feet
Bcf: billion cubic feet
Tcf: trillion cubic feet
Development Drilling - The drilling-related activities to recover gas and
oil after initial discovery.
Development Well - A well drilled in a reservoir of gas or oil that
contains proved reserves.
Exploratory Well - A well drilled in a previously untested geologic
structure or formation to determine the presence of gas or oil.
Gross Acres/Gross Wells - Total acreage or total wells in which a company
holds varying interests.
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<PAGE>
Leasehold - Property or acreage offered under contract for the exploration
and production of gas, oil or other minerals.
Net Acres/Net Wells - Proportionate company interest in gross acres or
gross wells.
Operator - The individual or company responsible for the exploration and
production of a gas or oil well or lease. The operator typically holds the
largest working interest in the well or lease.
Production - The phase of the petroleum industry that deals with bringing
the well fluids and gas to the surface, with the separating them and with
storing, gauging, and otherwise preparing the product for the pipeline.
Also, the amount of gas or oil produced in a given period.
Reserves - Amount of gas or oil believed to be economically recoverable
under existing conditions.
Royalty - Mineral owner's share of the gross gas or oil production on his
property.
Standardized Measure of Discounted Future Net Cash Flows After Tax - Net
present value of the estimated future revenue stream from proved gas and
oil reserves using current period prices plus contractual escalations, less
future costs to develop and produce the reserves, discounted at the
prescribed 10% rate and adjusted for income-tax effects.
Working Interest - Represents a share of the ownership in drilling and
production of gas and oil.
Operations
EP was formed in 1985 to succeed to substantially all of the domestic
gas and oil exploration and production business of EC. After the
Reorganization, Newco will continue the same business as EP.
EP operates through EPO, in which EP holds a 99% limited partner
interest and the general partners own a 1% interest. EEI is the Managing
General Partner and EC is the Special General Partner of EP and EPO.
EP is engaged in the exploration for and the development, production
and marketing of natural gas and crude oil throughout Texas, offshore in
the Gulf of Mexico, onshore in the Gulf Coast and in various other areas in
the United States. Activities include geological and geophysical studies;
acquisition of gas and oil leases; drilling of exploratory wells;
development and operation of producing properties; acquisition of interests
in developed or partially developed properties; and the marketing of
natural gas, crude oil and condensate. Production offices are maintained
in Dallas, Houston, Athens, Bridgeport, Longview and Midland, Texas.
- 56 -
<PAGE>
EP has no officers, directors or employees. Instead, officers,
directors and employees of EEI perform all management and operating
functions for EP. At September 30, 1994, EEI employed 378 persons,
including 33 geologists, 21 geophysicists and 19 land representatives who
investigate prospective areas, generate drilling prospects, review
submitted prospects and acquire leasehold acreage in prospective areas. In
addition, EEI maintains a staff of 55 engineers and 45 technologists who
plan and supervise the drilling and completion of wells, evaluate
prospective gas and oil reservoirs, plan the development and management of
fields, and manage the daily production of gas and oil. All of the
employees of EEI will become employees of Newco effective January 1, 1995.
Until that time, Newco will pay EEI for the services of the employees. No
employee will receive an increase in compensation as a result of the
Reorganization.
Variable-priced sales, which include monthly and long-term contract
sales, covered about 75% of 1993 gas sales, compared with 80% in 1992 and
1991. During the first nine months of 1994, the percentage of variable-
priced gas sales was about 75% and is expected to continue in this
proportion for the remainder of the year. Approximately 75% of EP's
natural gas sales volumes (75% of gas revenues) for the year ended December
31, 1993 and 81% of natural gas sales volumes (79% of gas revenues) during
the first nine months of 1994 was sold to affiliated customers. Effective
March 1, 1993, affiliated revenues include gas sales under new contracts
with Enserch Gas Company, a wholly owned subsidiary of EC, covering
essentially all gas production not committed under then existing contracts.
Affiliated purchasers do not have a preferential right to purchase natural
gas produced by EP other than under existing contracts. See "SELECTED
FINANCIAL AND OPERATING DATA" for a discussion of EP's aggregate annual
production of natural gas, oil and condensate.
Following is a summary of EP's exploration and development activity
during 1993 and the first nine months of 1994:
Gulf of Mexico. Offshore exploration provides EP the opportunity to
improve its ratio of production to reserve base by the addition of gas and
oil wells with relatively higher production rates. State-of-the-art
technology, including three-dimensional ("3-D") seismic, specialized
seismic processing, and innovative well completion and production
techniques, are being used to help accomplish these objectives.
Mississippi Canyon Block 441, the first development project in the
Gulf of Mexico that EP has operated, is indicative of this approach. A 3-D
seismic program, prior to field development, confirmed that the majority of
the reservoir lies beneath a shipping fairway. A production program was
developed that involved drilling highly deviated wells under the shipping
fairway, subsea completing the deep-water wells, and tying the wells back
to a conventional shallow-water production platform using bundled
flowlines. The high-angle wells required special gravel-pack completion
techniques. After 17 months of production, the field has been essentially
maintenance free, and currently produces some 63 million cubic feet
("MMcf") of natural gas and more than 350 barrels ("Bbls") of condensate
per day from six wells. The 3-D seismic on Mississippi Canyon Block 441 is
being reprocessed, using depth
- 57 -
<PAGE>
migration and other state-of-the-art techniques to aid in the
identification of deeper exploratory targets, which, if successfully
drilled, could add to the field reserves. EP has a 37.5% working interest
in this project.
The Garden Banks Block 388 project in the Gulf of Mexico remains on
schedule, with initial production anticipated in mid-1995. Completion of
three pre-drilled wells (two oil and one gas condensate) will commence as
soon as the floating facility is properly moored on location. These
operations should be completed by the end of 1995, followed by the drilling
of new development wells. Initial daily oil production rates from each
pre-drilled oil well should be between 2,500 and 5,000 barrels of oil. In
July 1994, the tow out and placement of the subsea drilling and production
template was completed.
Also in July 1994, EP completed an agreement with Mobil Corporation
under which Mobil has conducted an additional 3-D seismic survey over the
unit and is participating in an exploratory well currently drilling on
Garden Banks Block 387, which was spudded in August 1994. Mobil has an
option to acquire, for additional consideration, a 40% interest in the
Garden Banks unit and in the production system. EP, which currently owns
100% of the project, will remain the project operator.
A successful delineation well on Green Canyon Block 254 offshore
Louisiana was drilled in 1994, which encountered more than 400 feet of net
gas and oil pay below 12,000 feet. The delineation well is an appraisal
well to a discovery drilled in 1991 that encountered multiple sands with a
combined thickness of more than 300 feet of net oil pay. EP has a 25%
working interest in prior work in the project and assumed a 100% working
interest and operation of the sidetrack well. EP also has a 25% working
interest in three adjacent blocks.
1993 Onshore. EP participated in 78 development wells (62 net) in 1993,
with the majority completed as gas producers in East Texas. In East Texas,
EP is positioned in a prolific gas-prone area which, despite its maturity,
provides growth opportunities. EP is one of the oldest and most active
operators in this basin, which includes the Opelika, Tri-Cities, Whelan,
Willow Springs, North Lansing and Freestone fields.
In early 1993, EP initiated a 26-well program in East Texas to
accelerate the development of natural gas reserves from the Travis Peak
formation in the Opelika field. The program was targeted to test new
techniques for shortening the average life of its reserve base. The
project was completed in seven months yielding initial daily per well
production rates of up to 1.8 MMcf of gas and 48 Bbls of oil. EP has a
100% working interest in these wells.
EP performed additional development drilling in the Freestone field,
where seven well completions flowed at daily rates ranging from 1.0 MMcf to
2.3 MMcf of gas per well. EP has 50% to 100% working interest in these
wells.
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<PAGE>
In the Bralley field in West Texas, the combined daily oil production
rate from six wells increased to 800 Bbls from 500 Bbls following
production optimization work. EP owns a 50% working interest in each of
these wells.
In South Texas, seven wells drilled and completed in the Fashing field
flowed at daily rates of 1.2 MMcf to 2.6 MMcf of gas and 14 Bbls to 30 Bbls
of oil per well. Twelve wells drilled and completed in the Boonsville
field in north central Texas resulted in daily production of .4 MMcf to 1.5
MMcf of gas per well.
1994 Onshore. In the Hardeman Basin in North Texas, EP has acquired over
120 square miles of 3-D seismic data in Hardeman and Wilbarger counties
since December 1992, including projects currently being shot or processed.
Since December 1993, EP has drilled four 8,000-foot producers based on this
technology, with all wells being drilled in EP's Weatherman Area in
Hardeman County. The four wells potentialed at rates between 226 and 294
Bbls of oil per day from the Mississippian formation. EP has nearly a 100%
working interest in these four wells. In addition, EP participated with a
20% working interest in a well based on 2-D seismic, which flowed at rates
of approximately 100 Bbls of oil per day early in 1994. For the remainder
of 1994, EP plans to acquire an additional 30 square miles of 3-D data and
drill seven more wells. EP controls 81,000 gross acres and 74,000 net
acres in the Hardeman Basin and has further 3-D shoots planned for 1995.
In Shackelford County in Central Texas, EP has acquired approximately
115 square miles of 3-D seismic data since mid-1993, including projects
currently being shot and processed. Since December 1993, EP has drilled
five 5,000-foot Mississippian Reef producers. The oil wells potentialed at
rates between 22 and 160 Bbls of oil per day. One gas well potentialed for
2.4 MMcf and 33 barrels of condensate per day. Initial sales from these
wells commenced early in the third quarter of 1994, when the pipeline
connection was completed. EP has a 75% working interest in the wells. For
the remainder of 1994, EP plans to acquire an additional 30 square miles of
3-D data and drill an additional nine wells in the area. EP controls some
44,000 gross and 33,000 net acres in the area and has additional 3-D
seismic shoots planned for 1995.
EP drilled and completed nine development wells (7.6 net) in the first
six months of 1994. Four wells were in the Boonsville field in north
central Texas, two gas and two oil wells. Daily gas production ranged from
0.7 MMcf to 1.0 MMcf and daily oil production from 42 to 89 barrels. EP
has a 100% working interest in these wells.
EP continued development in the Freestone field where three well
completions potentialed at daily rates ranging from 1.9 MMcf to 2.6 MMcf of
gas per well. EP has a 73% to 82% working interest in these wells.
Planned onshore development activity for the remainder of 1994
includes drilling approximately 15 wells including eight outside East
Texas.
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<PAGE>
Competition
Competition in the natural gas and oil exploration and production
business is intense and is present from a large number of firms of varying
sizes and financial resources, some of which are much larger than EP.
Competition involves all aspects of marketing products (including terms,
prices, volumes and length of contracts), terms relating to lease bonus and
royalty arrangements, and the schedule of future development activity.
Regulation
Environmental Protection Agency ("EPA") rules, regulations and orders
affect the operations of EP. EPA regulations promulgated under the
Superfund Amendments and Reauthorization Act of 1986 require EP to report
on locations and estimates of quantities of hazardous chemicals used in
EP's operations. The EPA has determined that most gas and oil exploration
and production wastes are exempt from the hazardous waste management
requirements of the Resource Conservation Recovery Act. However, the EPA
determined that certain exploration and production wastes resulting from
the maintenance of production equipment and transportation are not exempt,
and these wastes must be managed and disposed of as hazardous waste. Also,
regulations issued by the EPA under the Clean Water Act require a permit
for "contaminated" stormwater discharges from exploration and production
facilities.
The Oil Pollution Act of 1990 ("OPA 90") requires responsible parties
to provide evidence of financial responsibility in the amount of
$150,000,000 to clean up oil spills into the navigable waters of the United
States. The financial responsibility requirements apply to offshore
facilities and possibly to onshore facilities in, on or under navigable
waters. The Mineral Management Service ("MMS") is the agency charged with
the administration and enforcement of OPA 90. The ultimate impact of the
financial responsibility requirements cannot be determined until final
regulations are issued by the MMS. Further Congressional action on these
requirements is also possible, and the final MMS regulations could be
challenged in court. The $150,000,000 requirement will not become
effective until regulations under OPA 90 are issued, probably in 1996. The
insurance industry has indicated that insurance will not be available to
evidence financial responsibility under OPA 90 as currently written.
However, EP has qualified as a self-insurer using the "identified assets"
test under the current $35,000,000 financial responsibility requirement
using EP's interest in Tri-Cities Field as the identified assets. It is
believed that EP has sufficient assets to qualify as a self-insurer for
$150,000,000 under the identified assets test if the current self-insurance
test is included in the OPA 90 regulations. However, the transfer of EP's
assets to a publicly traded corporation might affect the ability to self-
insure under OPA 90. Currently the certification of self-insurance is made
by EC on behalf of EP. It is unclear whether the new regulations will
allow EC to provide certification of self-insurance on behalf of a new
publicly traded corporation which is controlled by EC, or whether Newco
will qualify as a self-insurer on its own behalf. Alternatively, Newco
believes it could meet the current OPA 90 financial responsibility
requirements by the purchase of a surety bond, although the cost of such
bonds is generally much higher than insurance. The availability of surety
bonds generally could also be affected by the requirements of the final MMS
regulations.
- 60 -
<PAGE>
Many states have issued new regulations under authority of the Clean
Air Act, and such regulations are in the process of being implemented.
These regulations may require certain gas and oil related installations to
obtain federally enforceable operating permits and may require the
monitoring of emissions; however, the impact of these regulations on EP is
expected to be minor.
Several states have adopted regulations on the handling,
transportation, storage, and disposal of naturally occurring radioactive
materials that are found in gas and oil operations. Although applicable to
certain EP facilities, it is not believed that such regulations will
materially impact current or future operations.
In the aggregate, compliance with federal and state environmental
rules and regulations is not expected to have a material effect on EP's
operations.
The Railroad Commission of Texas regulates the production of natural
gas and oil by EP in Texas. Similar regulations are in effect in all
states in which EP 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.
Legal Proceedings
A lawsuit was filed against EEI, EC, its utility division and EPO in
the 348th Judicial District Court of Tarrant County, Texas 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 the 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. No environmental claim has been made by
plaintiffs or any environmental agency with respect to the facts underlying
this matter, nor is any such claim expected.
A lawsuit was filed on February 24, 1987, in the 112th Judicial
District of Sutton County, Texas, against subsidiaries and affiliates of
EC, as well as its utility division. 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. In this case, 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 EC for the years 1982
through 1986 (approximately $85 million), interest, costs and attorneys'
fees.
On December 26, 1989, a lawsuit was filed against EEI and EPO in the
130th Judicial District Court of Matagorda County, Texas. The plaintiff
claims that the defendants breached
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<PAGE>
an alleged contract to sell a working interest and net revenue interest in
two leases located in Matagorda County. Trial of the case resulted in a
jury verdict in favor of the plaintiff. Judgment was entered by the trial
court on October 8, 1992, ordering EEI and EPO to convey the leases to the
plaintiff and to pay damages of $3.1 million, which includes principal,
prejudgment interest, attorneys' fees and costs. In an opinion issued June
23, 1994, the Corpus Christi Court of Appeals reversed the decision of the
trial court. The plaintiff has filed an application for writ of error with
the Texas Supreme Court.
In addition, EP is a party to lawsuits arising in the ordinary course
of its business. EEI believes, based on its current knowledge and the
advice of counsel, that all lawsuits and claims would not have a material
adverse effect on EP's financial condition.
Properties
The following table sets forth a summary of certain information
relating to EP's gas and oil properties:
<TABLE>
<CAPTION>
At December 31
----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Proved Developed and
Undeveloped Reserves:
Gas (Bcf)(1)................... 1,085.5 1,100.4 1,167.3 1,223.2 1,221.3
Oil (MMBbl)(1)(2).............. 38.2 37.9 38.0 28.7 23.1
Estimated Future Net Cash Flows
from Proved Reserves
(in millions).................. $1,988.8 $2,017.1 $2,061.1 $2,606.8 $2,299.9
Present Value of Future Net Cash
Flows from Proved Reserves
(before income taxes and
discounted at 10% per annum)
(in millions).................. $1,102.4 $1,108.4 $1,060.4 $1,229.3 $1,089.3
</TABLE>
------------------
Note: Billion cubic feet ("Bcf"), million barrels ("MMBbl").
(1) Estimated by DeGolyer and MacNaughton, independent petroleum
consultants.
(2) Includes oil, condensate and natural gas liquids attributable to
leasehold interests.
The 1994 capital spending budget has been set at $114 million, about
the same as 1993 actual capital expenditures. More than half of 1994
capital expenditures is earmarked for domestic onshore projects. Through
September 30, 1994, $91 million has been expended. The exploration program
includes a balanced mix of projects with regard to reserve potential and
risk, focusing on as many core area opportunities as possible
- 62 -
<PAGE>
During 1994, EP filed Form EIA-23 with the Department of Energy
reflecting reserve estimates for the year 1993.
For a summary of EP's average sales prices, average production costs
and amortization see "SELECTED FINANCIAL AND OPERATING DATA".
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<PAGE>
EP owned leasehold interests or licenses in 17 states and offshore
Texas and Louisiana, as of June 30, 1994, as follows:
<TABLE>
<CAPTION>
Gross Acres Net Acres/(1)/
--------------------------------- -------------------------------
Developed Undeveloped Total Developed Undeveloped Total
<S> <C> <C> <C> <C> <C> <C>
Alabama 75 1,805 1,880 37 1,029 1,066
Arkansas - 19,892 19,892 - 11,283 11,283
Colorado 10,989 23,142 34,131 3,641 15,070 18,711
Idaho - 14,730 14,730 - 14,730 14,730
Kansas 400 11,568 11,968 200 5,937 6,137
Louisiana 1,710 35,772 37,482 643 17,937 18,580
Mississippi 3,863 43,267 47,130 1,949 15,001 16,950
Montana 6,415 59,213 65,628 3,201 35,083 38,284
Nebraska 160 480 640 160 480 640
Nevada - 105,303 105,303 - 49,497 49,497
New Mexico 2,680 5,827 8,507 1,902 4,196 6,098
North Dakota 1,560 9,334 10,894 1,246 5,327 6,573
Ohio 102 14,950 15,052 - - -
Oklahoma 32,366 22,605 54,971 17,730 9,582 27,312
Texas 263,912 444,201 708,113 201,342 185,576 386,918
Utah 3,719 109,742 113,461 533 54,081 54,614
Wyoming 3,558 56,237 59,795 1,641 44,220 45,861
U. S. Offshore 56,800 281,490 338,290 12,860 116,341 129,201
------- --------- --------- ------- ------- -------
Total 388,309 1,259,558 1,647,867 247,085 585,370 832,455
======= ========= ========= ======= ======= =======
- --------------
</TABLE>
(1) Represents the proportionate interest of EP in the gross acres under
lease.
EP purchased about 220,000 net acres of leasehold interests in 1993,
26,000 of which were in the Gulf of Mexico. In the first six months of
1994, EP purchased about 100,000 net acres, 39,000 of which were in the
Gulf of Mexico. At June 30, 1994 EP's Gulf of Mexico holdings totaled some
129,000 net acres, with an average working interest of 43% in 60 leases and
an overriding royalty interest in seven other leases. EP operates 24
leases. EP also canceled and/or allowed to expire nineteen Gulf of Mexico
leases during 1994. These either had been condemned by drilling on or near
them, or had been judged, after geophysical and geological studies, to have
insufficient potential to merit drilling.
EP 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 8% in 1994, 17% in 1995, 34% in 1996, 15% in 1997,
7% in 1998, 10% in 1999 and 9% thereafter. A portion of the undeveloped
acreage may be allowed to expire prior to the
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<PAGE>
expiration of primary terms specified in this schedule by nonpayment of
delay rentals. Aside from Texas and the Gulf of Mexico, EP has no material
concentration of undeveloped acreage in single areas at this time.
EP participated in 109 wells (79 net) during 1993. Of these wells, 83
(64 net) were successfully completed, resulting in a net success rate of
81%. Of the successful wells, seven wells (four net) were exploratory and
76 wells (60 net) were development.
In the first nine months of 1994, EP participated in 69 wells (48
net). Of these wells, 38 (30 net) were successfully completed, resulting
in a net success rate of 63%. Of the successful wells, 10 wells (9 net)
were exploratory and 28 wells (21 net) were development. At September 30,
1994, EP was participating in 30 wells (18 net), which were either being
drilled or in some stage of completion.
In the 1993 drilling program, 16 wells (4.9 net) were offshore. Of
these wells, nine (2.6 net) gas wells and one (.1 net) oil well were
successfully completed. During 1992, four (1.6 net) offshore wells were
drilled of which two (.8 net) gas wells were successfully completed. In
the first six months of 1994, three wells (0.8 net) were offshore. Of
these wells one (0.1 net) gas well and one (0.4 net) oil well were
successfully completed.
At December 31, 1993, EP owned working interests in 1,303 (980 net)
gas wells and 1,121 (277 net) oil wells. Of these, 173 (141 net) gas wells
and 37 (32 net) oil wells were dual completions in single boreholes.
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<PAGE>
Drilling activity for the nine months ended September 30, 1994
and for each of the years 1993, 1992 and 1991 is set forth below:
<TABLE>
<CAPTION>
Exploratory Development
Drilling Drilling
----------- -----------
<S> <C> <C>
Productive Wells
----------------
1994:
Gross Wells........ 10.0 28.0
Net Wells.......... 8.2 21.3
1993:
Gross Wells........ 7.0 76.0
Net Wells.......... 3.8 60.1
1992:
Gross Wells........ 3.0 12.0
Net Wells.......... 2.2 6.3
1991:
Gross Wells........ 11.0 54.0
Net Wells.......... 5.9 46.2
Nonproductive Wells
-------------------
1994:
Gross Wells........ 30.0 1.0
Net Wells.......... 17.1 1.0
1993:
Gross Wells........ 24.0 2.0
Net Wells.......... 13.0 1.8
1992:
Gross Wells........ 13.0 5.0
Net Wells.......... 8.1 2.6
1991:
Gross Wells........ 15.0 10.0
Net Wells.......... 7.8 6.1
</TABLE>
--------------------
Note: Productive wells are either producing wells or wells capable of
commercial production, although currently shut-in.
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 track capital expenditures, since the Commission's
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 construction of platforms, pipelines
and other necessary facilities.
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<PAGE>
Additional information relating to the gas and oil activities of EP is
set forth in Note 7 of the Notes to Financial Statements for the year ended
December 31, 1993.
MANAGEMENT
Directors and Executive Officers
EP is managed by EEI, as Managing General Partner, and Public
Unitholders have no power to direct or participate in the management of
either EP or EPO. EP does not have any directors, officers or employees.
In place of directors, officers and employees, EEI and EC perform all
management functions for EP. The executive officers of EEI will be the
executive officers of Newco upon completion of the Reorganization.
Newco's initial Board of Directors currently consists of two members,
described below, who will serve until the first annual meeting of Newco's
shareholders. Officers are elected annually by the Board of Directors.
The initial directors and executive officers of Newco are:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
D.W. Biegler 48 Chairman, Chief Executive
Officer, Director
G.J. Junco 44 President, Chief
Operating
Officer, Director
S.R. Singer 64 Senior Vice President,
Chief Financial Officer
R.L. Kincheloe 64 Senior Vice President
B.K. Irani 43 Vice President
F.S. Addy 62 (1)
B.A. Bridgewater, Jr. 60 (1)
</TABLE>
---------------
(1) Messrs. Addy and Bridgewater have agreed to become members of the
Board of Directors and members of the Compensation Committee upon
consummation of the Reorganization.
Shortly after consummation of the Reorganization, one other director
will be elected to the Board of Directors who is not an officer or employee
of the EC Companies or Newco. The new director will also be a member of
the Compensation Committee of the Board of Directors, together with Messrs.
Addy and Bridgewater.
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<PAGE>
D.W. Biegler has been Chairman and Chief Executive Officer of EEI
since January 1992 and a Director since September 1991. Since May 1993 he
has been Chairman and President, Chief Executive Officer of EC. He served
as President and Chief Operating Officer of EC from 1991 until 1993. He
was President of Lone Star Gas Company, the utility division of EC, from
1985 until 1993 and was Chairman from 1989 until 1993. Mr. Biegler is a
Director of Texas Commerce Bancshares, Inc. and Trinity Industries, Inc.
G.J. Junco has been President and Chief Operating Officer of EEI since
January 1991 and a Director since 1985. He was Senior Vice President of
the Land and Marketing Division from 1985 until December 1990.
S.R. Singer has served as a Senior Vice President, Finance and
Corporate Development and as Chief Financial Officer of EC since 1968.
R.L. Kincheloe has served as Senior Vice President, Offshore and
International of EEI since January 1992. Prior to that, he served as
Senior Vice President, Drilling and Production Operations of EEI from 1985
until January 1992.
B.K. Irani has served as Vice President, Production and Engineering of
EEI since September 1988. He has been a Vice President of EEI since August
1984.
F.S. Addy is the retired Executive Vice President and Chief Financial
Officer, and Director of Amoco Corporation, an international integrated oil
and gas company. Mr. Addy was elected to such position with Amoco in 1990
and retired as an officer and Director effective April 1, 1994. He
previously served Amoco as Vice President, Finance, from 1983 to 1990, and
before that served in various executive positions. He is a Director of EC;
Baker, Fentress & Company; and The Pierpont Funds.
B.A. Bridgewater, Jr. is Chairman, President and Chief Executive
Officer, and a Director of Brown Group, Inc., a consumer products company
with operations in footwear and specialty retailing. Mr. Bridgewater has
been a Director of EC since 1987, where he serves as Chairman of the Policy
and Conflicts of Interest Committee and is a member of the Audit Committee.
He is a Director of Boatmen's Bancshares, Inc.; FMC Corporation; and
McDonnell Douglas Corporation.
Director Compensation
Directors will be compensated by an annual retainer fee of $16,000
plus $1,000 for each board or committee meeting attended, with a maximum of
$1,500 if more than one meeting is held on the same day. In addition, a
$1,500 per annum fee is paid for services on a committee of the Board of
Directors, with an additional $750 per annum paid to the chairman of a
committee. Directors who are also officers of Newco do not receive any
fees.
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<PAGE>
Committees of the Board of Directors
The Board of Directors of Newco will have an Audit Committee and a
Compensation Committee to devote attention to specific subjects and to
assist it in the discharge of its responsibilities.
The functions of the Audit Committee will include meeting periodically
with the independent and internal auditors; reviewing annual financial
statements and the independent auditors' work and report thereon; reviewing
the independent auditors' report on internal controls and related matters;
selecting and recommending to the Board of Directors the appointment of the
independent auditors, subject to ratification by the shareholders;
reviewing the letter of engagement and statement of fees which pertain to
the scope of the annual audit and certain special audit and non-audit work
which may be required or suggested by the independent auditors; receiving
and reviewing information pertaining to internal audits; directing and
supervising special investigations; reviewing transactions between Newco
and EC Companies and taking such action as it deems appropriate in order to
provide reasonable assurances of fair dealings between such entities; and
performing any other function deemed appropriate by the Board of Directors.
The function of the Compensation Committee will be to establish,
approve, or recommend to the Board of Directors, in those instances where
their approval is required, the compensation and major items related to
compensation of directors and of officers and other employees whose annual
base compensation exceeds a certain amount as determined by the Board of
Directors. The Committee also administers the Enserch Exploration, Inc.
1994 Stock Option Plan (the "Plan").
Newco does not have a nominating committee. The functions customarily
attributable to a nominating committee will be performed by the Board of
Directors as a whole.
Executive Compensation
Compensation Table
The following table sets forth the initial annual salary that Newco
will pay to its Chief Operating Officer and the other executive officers
who will devote substantially their full time to Newco and whose annual
compensation exceeds $100,000.
<TABLE>
<CAPTION>
Name Salary
---- ------
<S> <C>
G.J. Junco $275,000
R.L. Kincheloe 240,000
B.K. Irani 177,000
</TABLE>
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<PAGE>
Any bonus, stock option, long-term compensation or other compensation
to be paid by Newco to Messrs. Junco, Kincheloe and Irani after the
Reorganization will be determined by the Compensation Committee of the
Newco Board of Directors after the Reorganization. Such items of
compensation have not been determined at this time. During 1994, Messrs.
Junco, Kincheloe and Irani received bonuses for services rendered during
1993 to EEI, of $95,000, $66,000 and $13,736, respectively.
D.W. Biegler, Chairman and Chief Executive Officer of Newco and S.R.
Singer, Chief Financial Officer of Newco, each are employed and will
continue to be employed in identical positions with EC and each are
directly paid all of their compensation by EC. It is not presently
anticipated that D.W. Biegler or S.R. Singer will receive any direct
compensation from Newco in 1995. The current salaries of D.W. Biegler and
S.R. Singer are $550,000 and $347,000, respectively. All other cash
compensation (including bonus) paid by EC during 1994 under plans currently
in effect for services rendered in 1993 for D.W. Biegler and S.R. Singer
totaled $218,489 and $102,636, respectively. It is anticipated that in
1995 none of D.W. Biegler's compensation and less than $100,000 of S.R.
Singer's compensation will be allocated from EC to Newco under the
management cost allocation or under any other arrangement.
None of the executive officers of Newco listed above, or any other
officer or employee of Newco, will receive an increase in his total
compensation as a result of the Reorganization.
Employee Benefit Plans
Directors and executive officers of EEI have previously been included
in employee benefit plans of EC. It is anticipated that those individuals
will remain under the EC employee benefit plans immediately following the
Reorganization. Newco does not currently have any employee benefit plans,
other than the Plan, which is described below. It is possible that after
the Reorganization Newco will adopt other employee benefit plans sponsored
by EC.
The Stock Option Plan
The Plan provides for the issuance of stock options ("Options") to
officers and other key employees to purchase shares of Common Stock and the
award to officers of shares that are subject to vesting based on the
achievement of performance criteria ("Restricted Stock"). Under the Plan,
(a) the option price may not be less than the fair market value of the
shares on the date of grant, (b) options are exercisable in stages of 25%
after one year to 100% after four years and (c) options may not be
exercised after ten years from the date of grant.
The Plan covers a maximum of 2,000,000 shares of Common Stock, subject
to adjustment in the event of certain changes in the capital structure of
Newco. Such shares may be authorized but unissued shares or shares held in
Newco's treasury. If an Option or an award of Restricted Stock is
forfeited (where the forfeiting participant received no benefits of
ownership), expires or terminates before being exercised, the shares
covered thereby will be
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<PAGE>
available for subsequent Option or Restricted Stock awards within the
maximum number stated above.
An award of Restricted Stock may be granted under the Plan, either at
no cost to the recipient or for such cost as may be required by law or
otherwise as determined by the Compensation Committee of the Board of
Directors. The terms and conditions of the Restricted Stock will be
specified at the time of the grant. Restricted Stock may not be disposed
of by the recipient until the restrictions specified in the award expire.
The Compensation Committee will determine at the time of the award what
rights, if any, the person to whom an award of Restricted Stock is made
will have with respect to Restricted Stock during the restriction period,
including the right to vote the shares and the right to receive any
dividends or other distributions applicable to the shares.
SECURITY OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of EP. No director or executive officer of EC or EEI owns any
Units.
<TABLE>
<CAPTION>
Percent Percent
Title of Class Name/(1)/ Number of Units of EP of Class
-------------- --------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
General Partner Interests EEI/(2)/ N/A 1% 100%
EC/(3)/ N/A 1% 100%
Limited Partner Interests EPPL/(4)/ 101,694,162 98.2% 99.2%
EC/(5)/ 101,694,162 98.2% 99.2%
</TABLE>
------------
(1) The address for all entities is 300 S. St. Paul, Dallas, Texas 75201.
(2) The general partner of EP does not have the right to vote on matters
submitted to holders of Units. However, the general partner does have the
ability to determine what matters are submitted to a vote and has wide
discretion with respect to other matters regarding governance of EP.
(3) Represents a 1% general partner interest held by EEI, which is a wholly
owned subsidiary of EC.
(4) EPPL is a Texas limited partnership in which Enserch Processing, Inc., a
wholly owned subsidiary of EC, owns a .99% general partner interest, Lone Star
Energy Company, a wholly owned subsidiary of EC, owns a .01% general partner
interest, and EC owns a 99% limited partner interest. These Units may be
exchanged at any time for EP Depositary Units.
(5) Represents 101,694,162 Units owned by EPPL, which is wholly owned, either
directly or indirectly, by EC.
CERTAIN TRANSACTIONS
Allocations
Prior to July 1, 1994, EP was charged for the general and
administrative staff costs incurred by EC in performing accounting, treasury,
internal audit, income tax planning and compliance, legal and other functions,
but was not charged for the cost of higher level management (i.e. all of the
elected officers of EC) of these functions. The staff costs are allocated to
EP on such factors as net capital employed, the number of employees and
percentage
- 71 -
<PAGE>
of time spent. Such charges by EC amounted to approximately $1.8 million,
$1.9 million, $2.0 million and $1.1 million in 1991, 1992, 1993 and the nine
months ended September 30, 1994, respectively. Effective July 1, 1994, EC
began charging all of its affiliates, including EP, for the cost of management
by higher level EC personnel of these functions, and such cost allocation to
EP from EC was $.2 million for the third quarter of 1994. Prior to 1994, EC
did not charge its affiliates for the allocated cost of management from EC
because the amounts involved were not considered material to any specific
business segment since they involved management of several business segments.
During 1993, EEI and the other affiliates of EC eliminated positions that had
performed management of these functions, which are now undertaken by EC
management personnel. Also, a reorganization of EC, the last step of which
was only recently concluded, resulted in divestment of two major business
segments as well as elimination of several foreign operations. Thus, EC had
fewer business segments over which to spread management costs, and the costs
became material to the remaining segments. The management cost allocation to
Newco (currently estimated to be approximately $1 million annually) is
calculated in accordance with the guidelines set forth in Article Eleven of
Newco's Restated Articles of Incorporation. There is no written agreement
regarding this arrangement or any other services to be provided. See
"MANAGEMENT--EXECUTIVE COMPENSATION."
This management cost allocation would be charged to EP regardless of
whether the Reorganization were proposed. The EP Partnership Agreement
presently provides that EEI is entitled to reimbursement for its direct and
allocated expenses incurred in connection with EP, although it is not entitled
to compensation for its services as Managing General Partner. The EP
Partnership Agreement presently provides that all items of gain, loss and
deduction, for purposes of maintaining the partners' capital accounts, are
allocated in accordance with partnership interests. The EP Partnership
Agreement also presently provides that current distributions, if made, are
made in accordance with partnership interests. Allocations and distributions
are made according to partnership interests, and do not take into account the
management functions of EEI.
There will be no cash or other distributions made by Newco to any of
the EC Companies that are not made to the other shareholders of Newco.
Restructuring of Equipment Leases
The equipment and facilities being used by EP in developing and
producing reserves in the Mississippi Canyon Block 441 Project ("MC 441") and
Garden Banks Block 388 Project ("GB 388") are being financed under (i) a
Master Lease Agreement dated as of April 30, 1992, between CIBC Leasing, Inc.,
certain financial institutions and EPO, relating to offshore production and
related equipment for the MC 441 project, and (ii) the Master Lease Agreement
dated as of September 30, 1992, between State Street Bank and Trust Company of
Connecticut, National Association, Trustee, and EPO, relating to offshore
production and related equipment for the GB 388 project (such leases, together
with approximately $12.2 million of associated equipment to be financed
pursuant to a modification thereof, the "Equipment Leases"). The lessors' net
book value of the leased equipment at September 30, 1994 under the Equipment
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<PAGE>
Leases is approximately $32 million for MC 441 and $235 million for GB 388.
EC fully guarantees EPO's obligations under these arrangements. In connection
with the Reorganization, all rights and obligations under the Equipment Leases
will be assigned to and assumed by EEI, with Newco entering into sublease
arrangements, with purchase options, with EEI. The net economic benefit to
EEI of the assignment of the Equipment Leases is estimated to be approximately
$12.2 million. The portion of this sum attributable to the Public
Unitholders, as an economic matter, is approximately $96,000. These assets
will be assigned to EEI in connection with the assignment and assumption of
the Equipment Leases to EEI and will be subleased to Newco as part of the
subleases described below.
The total cost for the GB 388 equipment and facilities will be greater
than the amount of the current lease financing because of costs not originally
covered by the Equipment Lease, the addition of equipment, higher than
expected costs for both labor and materials, design modifications and other
factors. The EC Companies and EPO are currently evaluating financing options
for the additional costs, including an addition to the existing lease
arrangement. The total cost of the equipment and facilities is expected to be
approximately $280 million.
The equipment and facilities needed to develop MC 441 and GB 388 will
be utilized by Newco under new sublease arrangements with EEI (collectively,
the "Equipment Subleases"). The Equipment Subleases will provide Newco with
more financial flexibility for longer terms than the Equipment Leases. Newco
will have options under the Equipment Subleases to (i) purchase the subleased
equipment at fixed prices based on projected fair market value as of the end
of the Equipment Sublease term or (ii) extend the Equipment Subleases, for
additional five year periods, on terms set at fair market value determined as
of the date of extension. The Equipment Leases and Equipment Subleases each
contain fixed price purchase options and options to extend the lease on terms
set at fair market value determined at the dates of extension (new leases), or
each can be terminated at the expiration of the lease term. The Equipment
Subleases also provide that in the event the Equipment Subleases terminate
without Newco having exercised its renewal or purchase options, or as a result
of Newco's default thereunder, EEI will have the option to purchase Newco's
interest in the MC 441 and GB 388 units at a purchase price equal to the fair
market value thereof as of the date of purchase. The Equipment Leases, if
terminated, require a guaranteed residual payment while the Equipment
Subleases do not. A component of the payments to be made by Newco under the
Equipment Subleases will be based on a floating interest rate of LIBOR plus
1.75% per annum (the "Applicable Rate"), which includes a charge of 1% per
annum to compensate the EC Companies for (i) the use of their credit, (ii) the
fact that the terms of the Equipment Subleases will be longer than the terms
of the Equipment Leases, and (iii) the assumption by EEI of residual value
risk in connection with Newco's options to purchase the subleased equipment.
The MC 441 Equipment Sublease will provide for payments by Newco of
approximately $4.5 million annually for five years, based on an estimate of
the Applicable Rate. Newco will have an option to purchase the subleased
equipment for approximately $5 million at the end of the five-year term.
- 73 -
<PAGE>
The GB 388 equipment will be subleased under two Equipment Subleases,
one covering the floating production facility (the "FPF Sublease") and the
other covering the subsea equipment, pipeline and shallow water production
facility (the "Subsea Sublease"). The FPF Sublease will have a term of 20
years and will provide for payments by Newco of approximately $12.6 million
annually, based on an estimate of the Applicable Rate. At the end of the
fifth year of the FPF Sublease, Newco will have an option to purchase the
subleased equipment for its then fair market value, estimated to be
approximately $124 million, and at the end of the seventh year EEI will have
the right to require Newco to purchase the subleased equipment for its then
fair market value, estimated to be approximately $117 million. If neither of
the events referred to in the preceding sentence has occurred by the end of
the twenty-year term, Newco will have an option to purchase the subleased
equipment for approximately $34 million. The Subsea Sublease will have an
initial term of 12 years and will provide for payments by Newco of
approximately $19 million annually, based on an estimate of the Applicable
Rate. Newco will have an option to purchase the subleased equipment for
approximately $46 million at the end of the sublease term.
Newco believes that the assignment and assumption of the Equipment
Leases, and the subleasing of the related equipment to Newco, including the
costs associated with the Applicable Rate, are on terms no less favorable than
could be obtained from unrelated parties.
Other
Both EP and EPO maintain separate short-term borrowing arrangements
with EC to meet operating needs. Under these arrangements, EC may advance
funds to EP or EPO, and EP or EPO may advance funds to EC. EPO further
maintains a short-term borrowing arrangement with EEI by which EEI may advance
funds to EPO and EPO may advance funds to EEI. Under all these arrangements,
the aggregate amount of short-term loans available between the parties is at
the lender's sole discretion, and any amounts advanced under the arrangements
mature within 12 months from the date the advance is made. The interest rate
is the 30-day commercial paper rate available for similar amounts on
commercial paper borrowings by EC. Interest is payable monthly. These
arrangements are renewed annually. At December 31, 1993 and September 30,
1994, there were approximately $27 million and $55 million of net short-term
borrowings outstanding under these arrangements, respectively.
The EC Companies have provided long-term debt financing to EP at EC's
borrowing cost. The amount of such long-term debt at September 30, 1994 was
$309 million.
Net interest costs incurred by EP on affiliated borrowings were
approximately $23 million, $25 million, $27 million and $18 million in 1991,
1992, 1993 and the nine months ended September 30, 1994, respectively.
EP had sales to affiliated companies of approximately $33 million, $33
million, $109 million and $87 million in 1991, 1992, 1993 and the nine months
ended September 30, 1994, respectively. In 1993, affiliated revenues included
gas sales of $91 million under new contracts
- 74 -
<PAGE>
effective March 1, 1993 with Enserch Gas Company covering essentially all gas
production not committed under existing contracts.
Newco believes that all transactions described herein are on terms no
less favorable than could be obtained with unrelated parties.
FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following section summarizes the opinion of Jackson & Walker,
L.L.P., special tax counsel to EP, regarding the material federal income tax
consequences of the Reorganization that should be considered by the Public
Unitholders. The opinion and this summary do not, however, address or
otherwise comment on all of the tax aspects of the Reorganization. The
opinion is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, current
administrative rulings and court decisions, and certain factual
representations by EC Companies and assumptions set forth herein. There can
be no assurance that the legal authorities on which this discussion is based
will not change, perhaps retroactively, or that the factual representations
and assumptions underlying the opinion will be accurate. Counsel has relied
upon the representations of the EC Companies without independent verification.
Furthermore, there can be no assurance that the Internal Revenue Service (the
"Service") will not disagree with conclusions described below, and no ruling
from the Service on any aspect of the Reorganization has been or will be
requested. ACCORDINGLY, PUBLIC UNITHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE REORGANIZATION TO THEM.
Public Unitholders
Pre-Reorganization Operations of EP. The income and deductions of EP
that accrue during the portion of 1994 prior to the Reorganization will be
allocated among its partners, and these allocations and adjustments will be
made in essentially the same manner as they would have been made absent the
Reorganization. Each Public Unitholder's capital account and tax basis in his
Units will be adjusted by these allocations. Each Public Unitholder will
receive a Schedule K-1 for 1994 reflecting the income and deductions allocated
to him for the portion of 1994 during which he was a Unitholder, even if he
sells his Units prior to the Reorganization.
Pre-Reorganization Sale of Units. The tax consequences to a Public
Unitholder who sells Units prior to the Reorganization will not be affected by
the Reorganization. The tax consequences of any such sale are as follows:
(a) Character and Amount of Gain or Loss. A Public Unitholder will
recognize both ordinary income and capital gain or loss on a sale of
Units. The ordinary income component will be equal to the amount of
ordinary income that would have been
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<PAGE>
allocated to the Public Unitholder in respect of the Units that are
sold if EP and EPO had sold all of their assets. The ordinary income
element if EP and EPO had sold all of their assets would be that
amount of gain which is attributable to Section 751 assets (unrealized
receivables and substantially appreciated inventory), including
recapture of depreciation and intangible drilling and development
costs. The capital gain or loss amount will equal the difference
between the amount realized from the sale of the Units (reduced by the
portion resulting in ordinary income) and the Public Unitholder's
adjusted tax basis in the Units that are sold (reduced by the portion
allocable to the ordinary income component). If the ordinary income
element realized on the sale of his Units reduces the amount realized
on the sale of his Units below his tax basis, a Public Unitholder will
realize a capital loss on the sale portion of his Units. A Public
Unitholder's capital gain or loss will be treated as long-term capital
gain or loss if the Public Unitholder owned the Units that were sold
for more than one year prior to the sale and the Public Unitholder
held his Units as capital assets. If the Unitholder had a holding
period of one year or less, the Public Unitholder's capital gain or
loss will be treated as short-term capital gain or loss. If a Public
Unitholder sells less than all of his Units, for purposes of
determining gain or loss on the Units sold, his adjusted basis in all
of his Units held immediately prior to the sale must be allocated
among the Units sold and Units retained based on the ratio of the fair
market value of the Units sold over the fair market value of all his
Units immediately before the sale.
(b) Suspended Deductions.
A Public Unitholder may be limited in his ability to utilize
previously suspended deductions and losses on a sale of his Units prior to
the Reorganization. Utilization of previously suspended deductions and
losses is discussed below:
(i) Any losses previously allocated to a Public Unitholder
which he has not been allowed to use through the date of
sale of his Units because of the Code Section 704(d) basis
limitation rule will be lost and cannot be utilized to
offset any gain realized on the sale. Section 704(d)
limits the use of partnership losses to a partner's
adjusted basis in his partnership interest.
(ii) Any losses previously allocated to a Public Unitholder
that he has not been allowed to use because of the at-risk
limitations can (subject to (b)(iii) below), under
Proposed Regulation Sections 1.465-66 and 1.465-12, be
used to the extent of any gain recognized on the sale of
Units.
(iii) Any losses previously allocated to a Public Unitholder
that are not subject to the limitations set forth in (i)
or (ii) above but that he has not been allowed to use
because of the passive loss limitations ("suspended
passive losses") can be used in full if the Public
Unitholder sells all his Units to an unrelated person in a
transaction in which all gain or loss is recognized.
- 76 -
<PAGE>
(iv) A Public Unitholder who sells less than all of his Units
will be entitled to deduct suspended passive losses to the
extent of any gain recognized on the sale, if the Public
Unitholder is a calendar year taxpayer and sells either a
portion or substantially all of his Units before the
effective date of the Reorganization in 1994. Final
regulations recently issued indicate that for taxable
years beginning after October 4, 1994, a Public Unitholder
will have to sell substantially all of his Units in order
to utilize any suspended passive losses. In addition, a
Public Unitholder's suspended passive losses are only
deductible to the extent that the gain recognized on such
a partial sale is allocable to passive activities. The
portion of any such gain that is allocable to passive
activities will be equal to the amount determined by
multiplying the Public Unitholder's gain by a fraction,
the numerator of which is the net gain that would have
been allocated to the Public Unitholder if EPO had sold
all of its appreciated trade or business and rental
activities for their fair market value and the denominator
of which is the amount of net gain that would have been
allocated to the Public Unitholder if EPO had sold all of
its appreciated activities, including investment
activities, for their fair market value. Based upon
representations of EEI, as Managing General Partner of EP,
all of the Public Unitholder's gain will be properly
allocable to passive activities because all of EPO's
appreciated assets are used in business or rental
activities and not investment activities.
Reorganization Consequences. The material federal income tax
consequences to a Public Unitholder who receives shares of Common Stock as
a result of the Reorganization will be as follows:
(a) General Non-Recognition. Public Unitholders will not recognize
any gain or loss on the Reorganization, except as otherwise stated
below.
(b) Non-Recognition on Newco Contribution. EP, EEI and EC's
contribution of all of their partnership interests in EPO to Newco
(the "Newco Contribution") will be tax free and will be tax-free to
the Public Unitholders unless (i) EP's tax basis in its partnership
interest in EPO is less than EP's share of EPO's liabilities
transferred to Newco, as determined pursuant to Section 752 of the
Code, in which case EP will recognize gain which will be partially
allocated to the Public Unitholders or (ii) a Public Unitholder's tax
basis in his Units is less than his share of EPO's liabilities, as
determined pursuant to Section 752 of the Code, immediately before the
Newco Contribution. Based upon representations of EEI, as Managing
General Partner of EP, no Public Unitholder will recognize gain on the
Newco Contribution or the Reorganization.
(c) Liquidation Premium Allocation. In connection with the
Reorganization, the EP Partnership Agreement is being amended to
include a special allocation to the Public
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<PAGE>
Unitholders of unrealized appreciation in EP's partnership interest in
EPO (the "Liquidation Premium Allocation"), which results in positive
capital account adjustments but has no effect on a Public Unitholder's
tax basis. Because of the increased value attributable to the Public
Unitholders' Units, the assumption by the EC Companies of all of EP's
liabilities will not reduce the Public Unitholders' exchange ratio of
one share of Common Stock for each Unit held. See "THE
REORGANIZATION." This Liquidation Premium Allocation does not result
in any material tax consequences and will not cause the Public
Unitholders to recognize any gain in connection with the
Reorganization. The assumption by the EC Companies as part of the
Reorganization of $395 million of EP liabilities will have no tax
consequences to the Public Unitholders or the EC Companies.
(d) Tax Basis. A Public Unitholder's aggregate tax basis in all
shares of Common Stock received in the Reorganization will equal the
Public Unitholder's aggregate tax basis in his Units, as adjusted (i)
for 1994 operations to the date of the Reorganization and (ii) by
excluding any share of EP debts that a Public Unitholder had
previously included in his basis in his Units. This basis will be
prorated among all shares of Common Stock received by the Public
Unitholder. To the extent any Common Stock distributed to a Public
Unitholder results in a tax basis lower than its fair market value,
gain will be recognized upon the subsequent sale or other taxable
disposition of that Common Stock. Correspondingly, to the extent any
Common Stock distributed to a Public Unitholder results in a tax basis
greater than its fair market value, loss may be recognized upon the
subsequent sale or other taxable disposition of that Common Stock.
(e) Holding Period. For holding period purposes, each share of Common
Stock will be divided into two parts. One part will be the portion of
the value of the share that is attributable to EPO's Code Section 751
assets that are neither capital assets nor Section 1231 assets
(ordinary income assets). The holding period for this part will begin
on the day following the transfer of EPO's partnership interests. The
other part will include the holding period EP has in its partnership
interest in EPO. This other part will have satisfied the long-term
capital gain requirement for a holding period of more than one year
and will therefore qualify a portion of each share attributable to
this other part for a long-term capital gain treatment when sold
(assuming that the Common Stock is held as a capital asset). As a
result of this multiple holding period rule, a Public Unitholder who
receives Common Stock in the Reorganization has to hold each share for
at least one year to insure that all gain upon its sale will be long
term capital gain. The holding period that a Public Unitholder has
for his Units is totally disregarded in determining the Public
Unitholder's holding period for Common Stock received in the
Reorganization.
(f) Suspended Deductions. Any operating loss allocated to a Public
Unitholder in prior years or during 1994 that has not been used
because of the at-risk limitations cannot be used since no taxable
gain will be recognized on the Reorganization. A Public Unitholder
also will not be entitled to deduct suspended passive losses since no
gain will be recognized by the Public Unitholders as a result of the
Reorganization. Any passive losses not used may be used thereafter
only as provided below under "Sale of Shares."
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<PAGE>
Any suspended at-risk loss not so used, and any unused loss suspended
by a basis limitation, will be eliminated and be unavailable to Public
Unitholders thereafter in connection with a sale of Common Stock
received in the Reorganization.
(g) Sale of Shares. A Public Unitholder who receives shares of Common
Stock in the Reorganization and thereafter sells those shares will
recognize gain or loss equal to the difference between the amount
realized on the sale and the Public Unitholder's tax basis in the
shares sold. A shareholder will be able to utilize the entire amount
of his suspended passive losses upon the sale of all of his Common
Stock to an unrelated person in a transaction in which all gain or
loss is recognized. Recently issued regulations also indicate that a
pro rata portion of a shareholder's passive losses can be utilized to
offset gain on the sale of Common Stock if the shareholder sells
substantially all of his stock to an unrelated party. Depending on
the holding period of the Common Stock (see "Holding Period" above), a
shareholder will realize long or short term gain or loss upon a sale
of shares.
(h) Ownership of Shares. After the Reorganization, a shareholder will
be taxed only on distributions received from Newco, if any.
Nonliquidating distributions will be taxable as dividends to the
extent of any current or accumulated earnings and profits of Newco.
Any nonliquidating distributions in excess of the current or
accumulated earnings and profits of Newco and any liquidating
distributions will be treated as a tax free return of capital to the
extent of the shareholder's basis in his shares of Common Stock and as
capital gain to the extent of the excess, assuming that the shares are
held as capital assets. Any losses incurred by Newco will not flow
through to shareholders for use on their income tax returns, but
instead will be used by Newco in filing its corporate income tax
returns. Although, there are no statutory regulations, rulings or
cases covering the point, counsel is of the opinion that a former
Public Unitholder will not be entitled to use any suspended passive
losses allocable to his shares to offset any dividends received from
Newco.
(i) Legislation. Under current law, a partner recognizes gain to the
extent that money distributed by a partnership exceeds the basis of
his partnership interest immediately before the distribution.
Congress, however, has recently passed legislation that will, under
certain circumstances, treat a portion of the value of the common
stock distributed to a partner as a distribution of money. Absent any
adverse regulations which apply retroactively, it appears that this
legislation will not apply to EP's liquidating distribution of Common
Stock to the Public Unitholders because the legislation does not apply
to publicly traded partnership liquidations, such as the one
constituting a part of the Reorganization, until after 1997. No
assurance can be given, however, that the regulations, when issued,
will not be retroactive and apply in a materially adverse way.
- 79 -
<PAGE>
Newco
The Newco Contribution and Merger. The contribution by EP of a 1%
limited partnership interest in EPO to Newco and Newco's contribution of
that partnership interest to Newsub will both be tax free to Newco and
Newsub. Thereafter, the contribution by EP, EEI and EC of the remaining
partnership interests in EPO to Newco will also be tax free to Newco
although such contribution will constitute a constructive termination of
EPO for federal tax purposes. As a result of such constructive
termination, EPO will be deemed to have distributed all of its assets and
liabilities pro rata to Newco and Newsub, and Newco and Newsub will be
deemed to have recontributed such assets and liabilities to a new
partnership. The constructive termination and re-contribution will have no
material adverse tax consequences unless the amount of cash constructively
distributed to Newco and Newsub exceeds their respective tax bases in their
partnership interests. If the cash distributed does exceed their
respective tax bases, gain will be recognized to Newco and Newsub to the
extent of such excess.
The merger of EPO and Newsub into Newco will be treated as a transfer
of assets and liabilities from EPO to Newco and from Newsub to Newco and
the aggregate tax basis of Newco in the assets transferred will be equal to
the tax basis that Newco and Newsub had in their respective partnership
interests in EPO. Newco's tax basis in a substantial portion of its assets
will generate future tax deductions for Newco.Although Public Unitholders
with relatively higher bases in their Units than other Public Unitholders
may be viewed (through EP's and EPO's Code Section 754 election) as having
a greater share of such basis, no consideration has been given to this
expected future tax benefit in arriving at the number of shares of Common
Stock received by each Public Unitholder. Newco's holding period for each
asset acquired in the Merger will equal the holding period that EPO had in
its assets prior to the constructive termination of EPO. See "THE
REORGANIZATION--BACKGROUND."
Post-Reorganization Operations. Following the Newco Contribution, the
income and deductions attributable to the assets and liabilities previously
held by EPO will be included in the corporate tax return filed by Newco,
and Newco will pay taxes on any taxable profits it recognizes from time to
time. Additionally, net operating losses incurred by Newco after the Newco
Contribution and Merger will be available to offset Newco's income in
subsequent years.
Other Taxation
After the Newco Contribution and Merger, Newco will also be subject to
state and local taxes. Counsel has not independently attempted to:
(i) determine the state or local tax that may be imposed on EP, EPO,
or Newco as a result of the Reorganization; or
(ii) determine any tax that may be imposed on a Public Unitholder by
the country, state or other jurisdiction in which he resides or
is a citizen.
- 80 -
<PAGE>
THE FOREGOING DISCUSSION IS INTENDED ONLY TO BE A SUMMARY OF THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION. PUBLIC
UNITHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE SPECIFIC
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE REORGANIZATION TO
THEM.
DESCRIPTION OF THE CAPITAL STOCK
The following description of the capital stock does not purport to be
complete and is subject to, and is qualified in its entirety by reference
to, the more complete statements thereof set forth in Newco's Restated
Articles of Incorporation, which have been attached as Exhibit D to this
Prospectus/Information Statement. Newco is currently authorized by its
Restated Articles of Incorporation to issue 200,000,000 shares of Common
Stock, par value $1 per share, and 2,000,000 shares of Preferred Stock of
no par value.
Common Stock
Currently, 1,000 shares of Common Stock are outstanding in the name of
EPO, solely for the purpose of authorizing Newco to do business under Texas
law, which will be canceled in connection with the merger of EPO into
Newco.
Subject to the rights of the holders of any Preferred Stock that may
be outstanding from time to time, holders of Common Stock are entitled to
receive such dividends as are declared by the Board of Directors from any
funds legally available therefor, to one vote for each share on all matters
voted upon by shareholders, including election of directors (cumulative
voting being prohibited), and to share ratably in assets available for
distribution upon any liquidation. Common Stock has no preemptive rights
and is not subject to redemption or to any further call or assessment.
Generally, holders of the Common Stock are entitled to elect all
members of the Board of Directors and vote upon all corporate matters.
However, any Preferred Stock that may be issued in the future may have
voting rights. Cumulative voting is prohibited by Newco's Restated
Articles of Incorporation.
The Transfer Agent and Registrar of the Common Stock will be Harris
Trust Company of New York, New York.
Preferred Stock
The Common Stock will be subject and subordinate to the rights,
privileges and preferences of any series of Preferred Stock to the extent
set forth in the resolutions adopted by the Board of Directors establishing
the series. The Preferred Stock may be divided into and issued in one or
more series as the Board of Directors of Newco may determine pursuant to
authority vested in it by the Articles of Incorporation. The Board of
Directors may establish
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<PAGE>
series of Preferred Stock 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 Texas Business Corporation Act
(the "TBCA") and the Restated 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 Newco;
(d) the preference in the assets of Newco over any other class,
classes or series of shares upon the voluntary or involuntary
liquidation of Newco;
(e) the redemption terms, if any, for the shares of the series;
(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 conversion rights, if any, of the shares of the series;
(i) the exchange rights, if any, of the shares of the series; 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 may be made dependent upon facts ascertainable
outside the Restated Articles of Incorporation, which facts may include
future acts of Newco, 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 will 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 will have the authority to increase or decrease the
number of shares within each series but may not decrease the number of
shares within a
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<PAGE>
series to less than the number of shares within that series that are then
issued. Preferred Stock has no preemptive rights and is not subject to any
further call or assessment.
Stock Ownership Restrictions
The Mineral Leasing Act of 1920, as amended (the "Mineral Act"),
provides that citizens of another country, the laws, customs, or
regulations of which deny similar or like privileges to citizens or
corporations of the United States, shall not by stock ownership, stock
holding, or stock control, own any interest in any gas, oil or other
mineral lease acquired thereunder.
In order to comply with the Mineral Act and any other laws which may
from time to time be applicable, Article Eight of Newco's Restated Articles
of Incorporation (attached as Exhibit D) authorizes the Board of Directors
of Newco to adopt, alter, or amend the Bylaws of Newco to add or amend such
provisions as in their judgment may be necessary or appropriate to ensure
that Newco and its shareholders satisfy the citizenship or other
requirements imposed by any federal or state law for the ownership,
possession or leasing of gas, oil or other minerals, land, or any other
property, licenses, or rights of any nature whatsoever in which Newco or
any of its subsidiaries may have or hereafter have, or seek to have, any
right or interest.
Article XV of the Bylaws of Newco restricts transfers of Newco capital
stock to persons who are not "Eligible Citizens" (as defined), suspends
voting, dividend and distribution rights of persons who are not Eligible
Citizens and provides for the redemption of capital stock held by such
persons in certain circumstances.
"Eligible Citizen" is defined in the Bylaws as any person whose
ownership, holding or control of Newco capital stock would not, by reason
of such person's citizenship or the citizenship of its members or owners or
otherwise, (i) disqualify Newco or any of its subsidiaries from owning,
acquiring, holding, possessing or leasing oil and gas and other minerals,
mineral deposits, lands, vessels, or 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 or (ii) violate any other
qualifications as the Board of Directors deems in its reasonable discretion
are necessary or appropriate to permit Newco and its subsidiaries to engage
in any other business activities for which there may be qualifications or
restrictions on shareholders of Newco or any of its subsidiaries under
federal or state laws. 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; (2) for a
corporation, that it is organized or existing under the laws of the United
States, a state, the District of Columbia or a 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
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<PAGE>
other equity participants are Eligible Citizens and that such association,
joint venture or other entity is capable of holding leases or other
interests in federal minerals or lands under the laws of the United States.
The Bylaws further provide that any transfer, or attempted or
purported transfer, of any Newco capital stock or interests or rights
therein which would result in the ownership or control thereof by one or
more non-Eligible Citizens will be void and ineffective as against Newco,
and Newco will not recognize the transfer, provided that the shares may be
transferred to a person who is an Eligible Citizen. Newco capital stock
held by non-Eligible Citizens is not entitled to dividends or other
distributions or to vote so long as they are so held. Further, if in the
opinion of the Board of Directors the ability of Newco to hold any of its
properties, leases, rights or licenses would be prohibited or restricted,
or if Newco is named or threatened to be named in any judicial or
administrative proceeding, because of the nationality, citizenship,
residence or other status of any shareholder, Newco may redeem the shares
held by the shareholder at the then current market price and upon such
terms as shall be determined by Newco's Board of Directors.
No Previous Market for Common Stock
At present, there is no trading market for the Common Stock. However,
the NYSE has indicated to Newco that the Common Stock to be distributed to
the Public Unitholders pursuant to the Reorganization will be approved for
listing on the NYSE, subject to official notice of issuance. There can be
no assurance that an active trading market for the Common Stock will
develop, that holders of Common Stock will be able to sell their shares at
favorable prices or that the trading price for a share of Common Stock will
be comparable to the trading price for an EP Depositary Unit immediately
before the Reorganization.
LEGAL MATTERS
The validity of the Common Stock to be issued in connection with the
Reorganization will be passed upon for Newco by Jackson & Walker, L.L.P.,
Dallas, Texas.
EXPERTS
The financial statements as of December 31, 1993 and 1992 and for each
of the three years in the period ended December 31, 1993 of EP and the
financial statement as of September 1, 1994 of Newco included in this
Prospectus/Information Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein, and
are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The estimates of the proved reserves of gas and oil of EP and EPO made
by DeGolyer and MacNaughton, independent petroleum consultants, have been
included herein in reliance
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<PAGE>
upon such estimates and appraisal given upon such firm's authority as
experts with respect to the matters contained therein.
- 85 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Newco Pro forma Financial Statements (Unaudited):
Pro forma Balance Sheet, September 30, 1994...................... F-2
Pro forma Statements of Operations for the Nine Months
Ended September 30, 1994 and 1993 and for the
Years Ended December 31, 1993, 1992 and 1991............ F-3
Notes to Pro forma Financial Statements.......................... F-4
Enserch Exploration Partners, Ltd.:
Condensed Statements of Income for the Nine Months
Ended September 30, 1994 and 1993....................... F-7
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1994 and 1993....................... F-8
Condensed Balance Sheets, September 30, 1994..................... F-9
Notes to Condensed Financial Statements.......................... F-10
As of December 31, 1993:
Independent Auditors' Report..................................... F-11
Statements of Operations for the Three Years Ended
December 31, 1993....................................... F-12
Statements of Cash Flows for the Three Years Ended
December 31, 1993....................................... F-13
Balance Sheets, December 31, 1993 and 1992....................... F-14
Statements of Changes in Partners' Capital for the
Three Years Ended December 31, 1993..................... F-15
Notes to Financial Statements.................................... F-16
New Enserch Exploration, Inc.
Independent Auditors' Report..................................... F-27
Balance Sheet, September 1, 1994................................. F-28
Note to Balance Sheet............................................ F-28
</TABLE>
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<PAGE>
NEWCO
PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The pro forma financial statements are presented based on the historical
financial statements of EP, after certain eliminations and adjustments as
described below. Newco is a recently formed Texas corporation which will have
no substantial assets, liabilities or operations until it succeeds to the gas
and oil exploration and production business of EPO.
EPO is the operating entity underlying EP and is 99% owned by EP. EP's
financial statements include the operations of EPO combined with financing
activities of EP, principally related to borrowings from EC Companies for
capital expenditures and payment of distributions to Unitholders. Newco
represents EPO in corporate form and does not include transactions relating to
EP's financing activities.
For financial accounting purposes, the Reorganization will be treated as a
reorganization of affiliated entities. Accordingly, the assets and liabilities
transferred to Newco from EPO will be recorded at their historical amounts.
The pro forma balance sheet as of September 30, 1994 has been presented as if
the EPO assets and liabilities were conveyed to Newco on that date. The pro
forma statements of operations assumes that the Reorganization occurred at the
beginning of each period presented.
It is also contemplated that Newco will acquire, at fair value, all other
domestic gas and oil properties of the EC Companies.
The Reorganization is more fully discussed elsewhere in this
Prospectus/Information Statement. These unaudited pro forma financial
statements of Newco should be read in conjunction with the historical financial
statements of EP, Selected Financial and Operating Data and Managements'
Discussion and Analysis of Financial Condition and Results of Operations. The
unaudited pro forma financial statements are not necessarily indicative of the
financial results that would have occurred had the Reorganization been
consummated on the above indicated dates, nor are they necessarily indicative of
future results.
F-1
<PAGE>
NEWCO
PROFORMA BALANCE SHEET
September 30, 1994
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------------------------------------------
EC Companies EP Balances
Historical 1% interest Not Assumed Other
EP in EPO(a) by Newco (b) Adjustments Newco
---------- ---------- ----------- ------------- ----------
(In thousands except per Unit/Share amounts)
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Current Assets
Cash $ 2,677 $ 27 $ (6) $ $ 2,698
Accounts receivable:
Trade 15,741 159 15,900
EC companies 9,422 104 9,526
Note receivable -
affiliated companies 863 85,217 86,080
Other 2,587 27 2,614
---------- ---------- --------- --------- ----------
Total current assets 30,427 1,180 85,211 116,818
---------- ---------- --------- --------- ----------
Net property, plant
and equipment 1,091,767 11,026 (32,980) 156,000 (c) 1,225,813
Other Assets 22,182 222 (19,531) 1,000 (e) 3,873
---------- -------- --------- --------- ----------
Total $1,144,376 $12,428 $ 32,700 $ 157,000 $1,346,504
========== ======== ========= ========= ==========
LIABILITIES
- -----------------------------------
Current Liabilities
Accounts payable-trade $ 57,897 $ 584 $ (104) $ $ 58,377
Accounts payable-
affiliated companies 26,524 215 (5,259) 21,480
Temporary advances-
affiliated companies 54,742 557 (336) 54,963
Current portion of capital lease
obligations 5,556 (c) 5,556
Payable under leasing
arrangements 44,302 447 (44,749)
Other 5,996 60 1,000 (e) 7,056
---------- ------- -------- --------- ----------
Total current
liabilities 189,461 1,863 (50,448) 6,556 147,432
Long-term Debt-
EC Companies 309,000 (309,000)
Capital Lease Obligations
(noncurrent portion) 150,444 (c) 150,444
Deferred Income Taxes 285,286 (d) 285,286
Other Liabilities 27,658 279 27,937
Partners' Capital/
Shareholders Equity (f,g) 618,257 10,286 392,148 (285,286)(d,e) 735,405
---------- ------- -------- --------- ----------
Total $1,144,376 $12,428 $ 32,700 $ 157,000 $1,346,504
========== ======= ======== ========= ==========
Book Value per Unit/
Share $ 5.97 $ 7.03
========== ==========
</TABLE>
F-2
<PAGE>
NEWCO
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
------------------------ ----------------------------------
1994 1993 1993 1992 1991
----- ------ ------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Natural gas...................... $111,849 $105,244 $146,352 $118,604 $123,398
Oil and condensate............... 21,632 26,341 34,263 41,595 49,843
Natural gas liquids.............. 1,149 3,465 3,828 6,098 1,518
Other............................ 259 1,417 2,418 1,287 1,494
-------- -------- -------- -------- --------
Total.......................... 134,889 136,467 186,861 167,584 176,253
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses............... 27,887 26,404 35,273 37,436 42,597
Revenue related taxes............ 5,550 7,335 9,710 9,223 10,215
Depreciation and amortization.... 59,287 58,696 78,163 75,824 72,912
Write-down of gas and oil
properties.................... 16,500 52,000
General, administrative and
other......................... 18,583 22,061 36,621 29,666 30,013
-------- -------- -------- -------- --------
Total.......................... 111,307 114,496 159,767 168,649 207,737
-------- -------- -------- -------- --------
Operating Income (Loss)............ 23,582 21,971 27,094 (1,065) (31,484)
Other Income (Expense) - Net....... 26 4 (3) 2
Interest Income.................... 5,285 4,440 6,147 2,795 440
Interest Expense................... (355) (2,646) (8,204) (119) (3,870)
-------- -------- -------- -------- --------
Income (Loss) before Income Taxes.. 28,538 23,769 25,037 1,608 (34,912)
Income Tax (Benefit)............... 9,988 8,319 8,763 547 (11,870)
-------- -------- -------- -------- --------
Net Income (Loss).................. $ 18,550 $ 15,450 $ 16,274 $ 1,061 $(23,042)
======== ======== ======== ======== ========
Net Income (Loss) per share of
Common Stock of Newco............ $ .18 $ .15 $ .16 $ .01 $ (.22)
======== ======== ======== ======== ========
Average Common Shares Outstanding... 104,581 104,581 104,581 104,581 104,581
======== ======== ======== ======== ========
</TABLE>
See note (h) for a reconciliation of net income of EP to pro forma net income of
Newco.
F-3
<PAGE>
NEWCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Adjustment to transfer the EC Companies 1% general partners' interest in
the assets and liabilities of EPO in exchange for shares of Common Stock
of Newco.
(b) Adjustment for certain EP assets and liabilities not being assumed by
Newco. The principal items are $309 million of long-term debt payable to
EC Companies, $85 million of Notes Receivable from affiliated companies
and the assets and obligations relating to leased properties (See "THE
REORGANIZATION").
(c) Effective on the transfer of EPO assets and obligations to Newco, Newco
will enter into subleasing arrangements for offshore production
facilities with EC Companies. One of the lease agreements will be
accounted for as an operating lease, while two leases will be accounted
for as capital leases with the lease obligations and related assets of
approximately $156 million. Pro forma combined future minimum lease
payments for the three leases are as follows (in thousands): $37,133 for
1995; $40,361 for 1996; $41,338 for 1997; $41,764 for 1998; and $41,957
for 1999. The operating lease has a lease term of twelve years and an
option to purchase the equipment under lease at the end of the lease term
at estimated fair value.
(d) To reflect deferred income taxes attributable to Newco. Since EP is a
partnership, its income or loss for tax purposes is reported in the tax
return of the individual partners. Newco, as a corporation, will be a
taxable entity. Accordingly, the deferred tax effect of the difference in
financial accounting basis and income tax basis of Newco's assets and
liabilities will be recorded upon the formation of Newco.
(e) To reflect the organization costs and related estimated liability for
the expenses of the Reorganization of $1,000.
(f) Reconciliation of Partners Capital of EP to Common Shareholders' Equity
of Newco (in thousands):
<TABLE>
<CAPTION>
<S> <C>
EP Partners' Capital:
General Partners $ 14,612
Limited Partners 603,645
---------
Total 618,257
1% General Partners' Interest in EPO:
Temporary advances - EC Companies 557
Other 9,729
---------
Total 10,286
EP Balances Not Assumed by Newco:
Long-term debt - EC Companies 309,000
Note receivable - affiliated companies 85,217
Net assets under operating lease (7,762)
Other 5,693
---------
Total 392,148
Deferred Federal Income Taxes (285,286)
---------
Common Shareholders' Equity of Newco $ 735,405
=========
</TABLE>
(g) The number of shares of Common Stock to be issued in the reorganization
was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
General Partners' Interest in EPO 1,045,812
General Partners' Interest in EP 1,035,354
Limited Partnership Interest in EP 102,500,076
-----------
Total shares of Common Stock to be issued 104,581,242
-----------
</TABLE>
Public Unitholders hold 805,914 Units of EP (.79% of Units
outstanding) and will hold 805,914 shares of Common Stock (.77% of
Common Stock to be outstanding.)
F-4
<PAGE>
(h) The following table reconciles net income (loss) of EP to pro forma net
income (loss) of Newco:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31,
-------------------------- ------------------------------------
1994 1993 1993 1992 1991
-------- -------- ------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) reported
by EP $ 8,020 $ 2,651 $(3,881) $(20,265) $(49,644)
Add 1% Minority interest in EPO(1):
Revenues 1,349 1,365 1,869 1,676 1,763
Cost and expenses 1,113 1,143 1,597 1,671 2,062
------- ------- ------- -------- --------
Operating income (loss) adjustment 236 222 272 5 (299)
Interest income (expense)-net 2 (8) (56) 5 (39)
Effect of change in lease terms(2) 881 436 668
Management cost allocation from EC(3) (500) (750) (1,000) (1,000) (1,000)
Interest income on note
receivable-affiliated companies(4) 4,597 3,029 4,209 2,213 440
Eliminate interest expense
on debt of EP(5) 15,302 18,189 24,825 20,650 15,630
------- ------- ------- -------- --------
Pro forma income (loss) before
income taxes 28,538 23,769 25,037 1,608 (34,912)
Pro forma provision for income tax
(benefit)(6) 9,988 8,319 8,763 547 (11,870)
------- ------- ------- -------- --------
Pro forma net income (loss) of Newco $18,550 $15,450 $16,274 $ 1,061 $(23,042)
======= ======= ======= ======== ========
</TABLE>
(1) To include revenues and costs attributable to EC Companies' 1%
interest in EPO.
(2) The EC Companies will assume EPO's interests in and liabilities of
certain offshore equipment lease arrangements, and Newco will enter
into sublease arrangements for the offshore production facilities with
the EC Companies. One of the lease agreements will be accounted for as
an operating lease, while the other two leases will be accounted for
as capital leases with the lease obligations and related assets of
approximately $156 million. (See "CERTAIN TRANSACTIONS-Restructuring
of Equipment Leases").
(3) To provide for the management cost allocation to be charged by EC for
management of certain corporate services. EP was charged and Newco
will be charged for indirect costs (principally general and
administrative costs) applicable to gas and oil operations. Prior to
July 1, 1994, EP was not charged for management by EC of its
operations including supervision of finance, accounting, tax and legal
functions. As a separate company Newco will be charged approximately
$1,000,000 annually to cover the cost of those functions. EP was
charged $250 thousand for management cost allocation in the third
quarter of 1994. (See "CERTAIN TRANSACTIONS-Allocations").
(4) To include interest income on the note receivable-affiliated companies
at average balances at 7.5% interest per annum.
F-5
<PAGE>
(5) To eliminate interest expense on long-term borrowings from an
affiliated company which is not being assumed by Newco. Newco will
benefit in that interest expense will not be incurred as a result of
the assumption of $309 million of EP debt by EC companies in the
Reorganization. EP incurred interest expense of $15.3 million and
$18.2 million in the nine months ended September 30, 1994 and 1993,
respectively, and $24.8 million for the year ended December 31, 1993
related to such borrowings.
(6) To provide for income taxes on pro forma income before taxes at the
applicable statutory federal rate.
F-6
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1994 1993
------ -------
(In thousands except
per Unit amount)
<S> <C> <C>
Revenues:
Natural gas........................ $110,731 $104,191
Oil and condensate................. 21,416 26,078
Natural gas liquids................ 1,137 3,430
Other.............................. 256 1,403
-------- --------
Total............................ 133,540 135,102
-------- --------
Costs and Expenses:
Operating expenses................. 28,306 27,537
Revenue related taxes.............. 5,494 7,261
Depreciation and amortization...... 58,753 57,656
General, administrative and other.. 17,905 21,103
-------- --------
Total............................ 110,458 113,557
-------- --------
Operating Income.................... 23,082 21,545
Other Income-Net.................... 26 4
Interest Expense.................... (15,088) (18,898)
-------- --------
Net Income.......................... 8,020 2,651
Less 1% General Partners' Interest.. 80 27
-------- --------
Income Applicable to
Limited Partners' Interest........ $ 7,940 $ 2,624
======== ========
Net Income Per Unit................. $ 0.08 $ .03
======== ========
Weighted Average Units Outstanding.. 102,500 102,500
======== ========
Distributions Declared Per Unit..... $ $ .225
======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1994 1993
------ ------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 8,020 $ 2,651
Adjustment to reconcile net income to net cash
flows from operating activities-
Depreciation and amortization.................... 58,753 57,656
Cash effect of changes in current operating
assets and liabilities........................... 20,579 13,249
-------- --------
Net cash flows from operating activities....... 87,352 73,556
-------- --------
INVESTING ACTIVITIES
Property, plant and equipment additions............ (90,820) (82,321)
Other.............................................. (5,649) (10,768)
-------- --------
Net cash flows used for investing activities.. (96,469) (93,089)
-------- --------
Net cash flows used for operating and
investing activities....................... (9,117) (19,533)
-------- --------
FINANCING ACTIVITIES
Change in temporary advances with affiliated
companies......................................... 27,526 8,937
Proceeds from long-term notes payable to
affiliated companies.............................. 11,000 24,000
Advances under leasing arrangements................ (19,276) 9,336
Cash distributions paid............................ (7,765) (23,295)
-------- --------
Net cash flows from financing activities........ 11,485 18,978
-------- --------
Net Increase (Decrease) in Cash...................... 2,368 (555)
Cash at Beginning of Period.......................... 309 937
-------- --------
Cash at End of Period................................ $ 2,677 $ 382
======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED BALANCE SHEETS
(September 30, 1994 Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
----------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash............................................ $ 2,677 $ 309
Accounts receivable-trade....................... 15,741 17,120
Accounts receivable-affiliated companies........ 9,422 13,952
Materials and supplies, at average cost......... 1,842 1,749
Other........................................... 745 272
---------- ----------
Total current assets........................ 30,427 33,402
---------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties (full-cost method)....... 1,907,726 1,803,581
Other........................................... 6,270 5,947
---------- ----------
Total....................................... 1,913,996 1,809,528
Less accumulated depreciation and amortization.. 822,229 779,217
---------- ----------
Net property, plant and equipment........... 1,091,767 1,030,311
---------- ----------
Other Assets..................................... 22,182 22,590
---------- ----------
Total....................................... $1,144,376 $1,086,303
---------- ----------
LIABILITIES
Current Liabilities
Accounts payable-trade.......................... $ 57,897 $ 67,693
Accounts payable-affiliated companies........... 26,524 3,531
Temporary advances-affiliated companies......... 54,742 27,216
Payables under leasing arrangements............. 44,302 30,928
Distributions payable to unitholders............ 7,765
Other........................................... 5,996 2,690
---------- ----------
Total current liabilities...................... 189,461 139,823
---------- ----------
Long-term Debt-Affiliated Companies.............. 309,000 298,000
Deferred Royalties............................... 26,188 28,554
Other Liabilities................................ 1,470 9,689
Partners' Capital................................ 618,257 610,237
---------- ----------
Total....................................... $1,144,376 $1,086,303
========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
Notes to Condensed Financial Statements
1. Enserch Exploration Partners, Ltd. issued 5-year promissory notes for $8
million and $3 million on January 3 and August 17, 1994, respectively
payable to affiliates of ENSERCH Corporation.
2. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results of
operations for the interim periods included herein have been made.
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Enserch Exploration Partners, Ltd.:
We have audited the accompanying balance sheets of Enserch Exploration
Partners, Ltd. as of December 31, 1993 and 1992, and the related statements of
operations, cash flows and changes in partners' capital for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 1993 and
1992, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 7, 1994
F-11
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1993 1992 1991
---------- ---------- -----------
(In thousands except per unit amounts)
<S> <C> <C> <C>
Revenues:
Natural gas (Notes 2 and 4).................. $144,889 $117,418 $122,164
Oil and condensate (Note 2).................. 33,920 41,179 49,344
Natural gas liquids.......................... 3,790 6,037 1,503
Other........................................ 2,393 1,274 1,479
---------- ----------- ----------
Total 184,992 165,908 174,490
---------- ----------- ----------
Costs and Expenses:
Operating expenses........................... 37,022 37,062 42,171
Revenue related taxes........................ 9,613 9,131 10,113
Depreciation and amortization (Note 2)....... 76,700 75,066 72,183
Write-down of gas and oil properties (Note 2) 16,335 51,480
General, administrative and other............ 35,271 28,384 28,728
---------- ----------- ----------
Total 158,606 165,978 204,675
---------- ----------- ----------
Operating Income (Loss)........................... 26,386 (70) (30,185)
Other Income (Expense) - Net...................... (3) 2
Interest Expense (Notes 4 and 6).................. 30,267 20,192 19,461
---------- ----------- ----------
Net Loss.......................................... (3,881) (20,265) (49,644)
Less 1% General Partners' Interest................ (39) (203) (496)
---------- ----------- ----------
Loss Applicable to
Limited Partners' Interest.................... $ (3,842) $(20,062) $(49,148)
========== =========== ==========
Net Loss Per Unit................................. $(.04) $(.20) $( .48)
========== =========== ==========
Weighted Average Units Outstanding................ 102,500 102,500 102,500
========== =========== ==========
Distributions Declared Per Unit................... $.30 $.30 $.30
========== =========== ==========
See Notes to Financial Statements.
</TABLE>
F-12
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1993 1992 1991
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $ (3,881) $(20,265) $(49,644)
Adjustments to reconcile net loss to net cash flows:
Depreciation and amortization (Note 2).................. 76,700 75,066 72,183
Writedown of gas and oil properties (Note 2)............ 16,335 51,480
Cash effect of changes in current operating assets and
liabilities (Note 6).................................... 3,545 17,365 1,683
----------- ---------- ----------
Net cash flows from operating activities.............. 76,364 88,501 75,702
----------- ---------- ----------
INVESTING ACTIVITIES
Property, plant and equipment additions.................. (113,380) (63,223) (115,131)
Other.................................................... (10,760) (5,643) 9,956
----------- ---------- ----------
Net cash flows used for investing activities.......... (124,140) (68,866) (105,175)
----------- ---------- ----------
Net cash flow (required for) from operating and
investing activities.................................. (47,776) 19,635 (29,473)
----------- ---------- ----------
FINANCING ACTIVITIES
Change in temporary advances with affiliated companies... 32,756 (37,201) 28,497
Proceeds from long-term notes payable to an affiliated
company................................................. 32,000 32,000 32,000
Advances under leasing arrangements (Note 5)............. 13,453 17,475
Cash distributions paid.................................. (31,061) (31,061) (31,061)
----------- ---------- ----------
Net cash flows from (used for) financing activities.. 47,148 (18,787) 29,436
----------- ---------- ----------
Net (Decrease) Increase in Cash........................... (628) 848 (37)
Cash at Beginning of Year................................. 937 89 126
----------- ---------- ----------
Cash at End of Year....................................... $ 309 $ 937 $ 89
=========== ========== ==========
Interest Paid (Net of Amounts Capitalized)................ $ 24,791 $ 20,192 $ 17,047
=========== ========== ==========
See Notes to Financial Statements.
</TABLE>
F-13
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
1993 1992
------------- -------------
ASSETS (In thousands)
<S> <C> <C>
Current Assets:
Cash................................................................ $ 309 $ 937
Accounts receivable - trade (net of allowance for possible losses of
$699 and $953)...................................................... 17,120 21,679
Accounts receivable - affiliated companies (Note 4)................. 13,952 7,011
Temporary advances - affiliated companies (net) (Notes 3 and 4)..... 5,540
Materials and supplies, at average cost............................. 1,749 3,431
Other............................................................... 272 335
---------- ----------
Total current assets............................................. 33,402 38,933
---------- ----------
Property, Plant and Equipment (at cost) (Notes 2 and 7):
Gas and oil properties (full - cost method) 1,803,581 1,737,708
($82,236 and $86,005 excluded from amortization base)
Other............................................................... 5,947 4,782
---------- ----------
Total............................................................ 1,809,528 1,742,490
Less accumulated depreciation and amortization...................... 779,217 749,452
---------- ----------
Net property, plant and equipment................................ 1,030,311 993,038
---------- ----------
Other Assets.......................................................... 22,590 7,214
---------- ----------
Total............................................................ $1,086,303 $1,039,185
========== ==========
LIABILITIES
Current Liabilities:
Accounts payable - trade............................................ $ 67,693 $ 58,865
Accounts payable - affiliated companies (Note 4).................... 3,531 7,455
Temporary advances - affiliated companies (net) (Notes 3 and 4)..... 27,216
Distributions payable to unitholders................................ 7,765 7,765
Advances under leasing arrangements (Note 5)........................ 30,928 17,475
Other............................................................... 2,690 5,826
---------- ----------
Total current liabilities........................................ 139,823 97,386
---------- ----------
Long-term Debt - Affiliated Companies (Note 3)........................ 298,000 266,000
Deferred Royalties.................................................... 28,554 26,150
Other Liabilities..................................................... 9,689 4,470
Commitments and Contingent Liabilities (Note 5).......................
Partners' Capital..................................................... 610,237 645,179
---------- ----------
Total............................................................ $1,086,303 $1,039,185
========== ==========
See Notes to Financial Statements.
</TABLE>
F-14
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------------- ------------- ----------
(In thousands)
<S> <C> <C> <C>
Balance, December 31, 1990.......... $16,203 $761,007 $777,210
Net Loss............................ (496) (49,148) (49,644)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1991.......... 15,396 681,109 696,505
Net Loss............................ (203) (20,062) (20,265)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1992.......... 14,882 630,297 645,179
Net Loss............................ (39) (3,842) (3,881)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1993.......... $14,532 $595,705 $610,237
================ ================ ==============
See Notes to Financial Statements.
</TABLE>
F-15
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND CONTROL
Enserch Exploration Partners, Ltd. ("EP"), a Texas limited partnership, was
formed in 1985 to succeed to substantially all of the domestic gas and oil
exploration and production business of ENSERCH Corporation ("ENSERCH"). At
December 31, 1993, ENSERCH and Enserch Processing Partners, Ltd. ("Processing")
owned 3,112,362 (3.0%) and 98,581,800 (96.2%), respectively, of EP's limited
partnership units outstanding. The balance of 805,914 (.8%) of EP's units
outstanding is held by the public. For administrative convenience, EP operates
through EP Operating Limited Partnership, a Texas limited partnership ("EPO"),
formerly EP Operating Company, in which EP holds a 99% limited partner's
interest and the general partners own a 1% interest. Enserch Exploration, Inc.
("EEI") is the managing general partner and ENSERCH is the special general
partner of EP and EPO.
EP has no officers, directors or employees. Instead, officers, directors and
employees of EEI perform all management and operating functions for EP. Neither
ENSERCH nor EEI, as general partners of EP, receives any carried interests,
promotions, back-ins or other compensation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements of EP have been prepared in
conformity with generally accepted accounting principles but will not be the
basis for reporting taxable income to unitholders. The proportional
consolidation method is used whereby the financial statements reflect EP's 99%
interest in EPO's assets, liabilities and operations. All dollar amounts except
per unit amounts in the notes to financial statements are stated in thousands
unless otherwise indicated.
Natural Gas and Oil Hedging Contracts - Gains and losses from transactions
to hedge against volatile product prices are deferred and included in revenues
in the statements of operations during the month that the related physical sale
occurs.
Gas and Oil Properties - The full-cost method, as prescribed by the
Securities and Exchange Commission (SEC), is used whereby the costs of proved
and unproved gas and oil properties, together with successful and unsuccessful
exploration and development costs, are capitalized. The carrying value is
limited to the present value of estimated future net revenues of proved
reserves, the cost of excluded properties and the lower of cost or market value
of unproved properties being amortized ("full-cost ceiling"). The full-cost
ceiling is calculated quarterly under current SEC rules. In March 1991, EP
recorded a $51 million noncash write-down of the carrying value of its gas and
oil properties due to the full-cost center ceiling limitation test.
Dry-hole costs resulting from exploration activities are classified as
evaluated costs and are included in the amortization base. Costs directly
associated with the acquisition and
F-16
<PAGE>
evaluation of unproved 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. Sales of gas and oil properties are
credited to capitalized costs unless the sale would have a significant impact on
the amortization rate.
In December 1992, EP recorded a $16 million noncash write-off of an idle
pipeline and shallow-water production facility from an abandoned offshore
project.
As a full cost company, EP assesses future site restoration, dismantlement
and abandonment costs on an overall cost center basis. At December 31, 1993,
estimates of future salvage values exceed the estimated costs of site
restoration, dismantlement and abandonment costs. Therefore, no accruals are
required.
Depreciation and Amortization - 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.
Depreciation of other property, plant and equipment is provided principally by
the straight-line method over the estimated service lives of the related assets.
Income Taxes - EP is a partnership and, as a result, the income or loss of
the partnership, which reflects differences in the timing of the deduction of
certain gas and oil drilling and development costs for federal income tax
purposes, is includable in the tax returns of the individual partners.
Accordingly, no recognition has been given to income taxes in the financial
statements of EP. The assets and liabilities reported in the financial
statements of EP exceeded the federal income-tax bases by approximately $704
million and $720 million at December 31, 1993 and 1992, respectively.
Retirement Plan - Substantially all personnel who are associated with EP are
covered by an ENSERCH retirement plan and are eligible for certain health care
and life insurance benefits upon retirement. Total pension costs allocated to
EP were $867, $1,054, and $929 in 1993, 1992 and 1991, respectively. Post-
retirement health care and life insurance benefit costs allocated to EP were
$821, $550, and $577 in 1993, 1992 and 1991, respectively. Postretirement
benefits in 1993 reflect the impact of SFAS No. 106 "Employer's Accounting for
Postretirement Benefits Other Than Pensions", effective in January 1993. This
new standard requires the accrual of these benefits over the working life of the
employee rather than charging to expense on a cash basis.
Fair Value of Financial Instruments - The fair values of financial
instruments has been estimated using valuation methodologies in accordance with
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments".
Determinations of fair value are based on subjective data and significant
judgment relating to timing of payments and collections and the amounts to be
realized. Accordingly, the estimates presented are not necessarily indicative of
the amounts that EP could realize in a current market exchange.
F-17
<PAGE>
Management believes that the fair value of financial instruments, other than
long-term debt, is not materially different than the related carrying value.
The estimated fair value for long-term debt is presented in Note 3.
3. LINE OF CREDIT AND BORROWINGS
Short-term Borrowing Arrangements - Both EP and EPO maintain separate short-
term borrowing arrangements with ENSERCH to meet operating needs. Under these
arrangements, ENSERCH may advance funds to EP or EPO, and EP or EPO may advance
funds to ENSERCH. EPO further maintains a short-term borrowing arrangement with
EEI by which EEI may advance funds to EPO and EPO may advance funds to EEI.
Under all these arrangements, the aggregate amount of short-term loans available
between the parties is at the respective lender's sole discretion, and any
amounts advanced under the arrangements mature within 12 months from the date
the advance is made. The interest rate is the 30-day commercial paper rate
available for similar amounts on commercial paper borrowings by ENSERCH.
Interest is payable monthly. These arrangements are renewed annually. At
December 31, 1993, there were $27,216 of net short-term borrowings outstanding
under these arrangements at an interest rate of 3.28%.
Long-term Notes Payable - Long-term notes payable to Processing are
summarized below:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
9.2% Notes due 2000................... $ 16,000 $ 16,000
9.95% Notes due 2000.................. 16,000 16,000
9.9% Notes due 2000................... 170,000 170,000
9.9% Notes due 2001................... 8,000 8,000
9.8% Notes due 2001................... 16,000 16,000
9.0% Note due 2001.................... 8,000 8,000
8.5% Notes due 2002................... 16,000 16,000
9.05% Notes due 2002.................. 8,000 8,000
8.75% Notes due 2002.................. 8,000 8,000
8.35% Notes due 2003.................. 8,000
6.35% Notes due 1998.................. 8,000
6.30% Notes due 1998.................. 8,000
5.30% Notes due 1998.................. 8,000
---------- ----------
Total $298,000 $266,000
========== ==========
</TABLE>
F-18
<PAGE>
Interest on the above notes is payable semiannually on June 30 and December
31. The estimated fair value of these notes was $352 million at December 31,
1993 and $300 million at December 31, 1992. The calculation was made using a
discounted cash flow approach based on the interest rates currently available to
ENSERCH for debt with similar terms and remaining maturities.
4. RELATED PARTY TRANSACTIONS
In the ordinary course of business, EP engages in various transactions with
ENSERCH and its affiliates. All such transactions are subject to review by the
Policy and Conflicts of Interest Committee of ENSERCH, a committee composed
solely of outside directors. The Committee has found no unfair dealings between
and among such parties. EP is charged for direct costs incurred by ENSERCH and
EEI that are associated with managing EP's business and operations.
Additionally, indirect costs (principally general and administrative costs)
applicable to EP are allocated to EP by ENSERCH. Such charges amounted to
$2,026, $1,927 and $1,798 in 1993, 1992 and 1991, respectively.
EP had sales to affiliated companies (Enserch Gas Company, Lone Star Gas
Company and Processing) of $108,916, $32,508 and $32,710 in 1993, 1992 and 1991,
respectively. In 1993, affiliated revenues include gas sales of $91,000 under
new contracts effective March 1, 1993 with Enserch Gas Company covering
essentially all gas production not committed under existing contracts.
Net interest costs incurred on affiliated borrowings were $27,120, $25,336,
and $22,872 in 1993, 1992 and 1991, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
Advances Under Leasing Arrangements - In May 1992, EP entered into an
operating leasing arrangement to provide financing for its portion of the
offshore platform and related facilities for the 37 1/2% owned Mississippi
Canyon Block 441 project. A total of $34 million was required for the project,
which was completed in early 1993. EP leased the facilities for an initial
period through May 20, 1994, with an option to renew the lease, with the consent
of the lessor, for up to 10 successive six-month periods. The lease has been
renewed through November 20, 1994 and EP expects to renew the lease for all
renewal periods. EP has the option to purchase the facilities throughout the
lease periods and as of December 31, 1993, has guaranteed an estimated residual
value for the facilities of approximately $27 million should the lease not be
renewed. Expenses incurred under the lease in 1993 were $2.1 million. The
estimated future minimum net rentals for the Mississippi Canyon operating lease
are $6.3 million for 1994.
In September 1992, EP entered into an operating lease arrangement to
provide financing for the offshore platform and related facilities of its 100%
owned Garden Banks Block 388 project. The lessor will fund the construction
cost of the facilities quarterly, up to a maximum of $235 million. As of
December 31, 1993, a total of $60 million had been advanced to EP
F-19
<PAGE>
under the lease as agent for the lessors, $31 million of which was unexpended
and reflected as a current liability. EP will lease the facilities for an
initial period through March 31, 1997, with the option to renew the lease, with
the consent of the lessor, for up to three successive two-year periods. EP, as
agent for the lessor, will acquire, construct and operate the units of leased
property and has guaranteed completion of construction of the facilities. EP
has the option to purchase the facilities throughout the lease periods and has
guaranteed an estimated residual value for the facilities of approximately $188
million, assuming the full lease amounts are advanced and expended, should the
lease not be renewed. The estimated future minimum net rentals for the Garden
Banks operating lease are as follows: $4.8 million for 1994; $9.1 million for
1995; $9.1 million for 1996; and $2.3 million for 1997. Lease payments are
being deferred during the construction period and will be amortized when
production begins.
At December 31, 1993, EEI had several noncancelable operating leases,
principally for buildings and office space, that expire at various dates through
1998. EP bears an allocated share of rental expenses incurred by EEI under
noncancelable operating leases. EP's allocated share of rental expenses (99% of
EEI's rental expenses) totaled $4,985, $3,547 and $2,938 in 1993, 1992 and 1991,
respectively. Future minimum rentals under such leases, of which EP would bear
its proportionate share, are as follows: $1.3 million for 1994; $1.3 million
for 1995; $1.4 million for 1996; $1.5 million for 1997; and $1.4 million for
1998.
Legal Proceedings - A lawsuit was filed against EEI, ENSERCH, its utility
division and EPO 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 subsidiaries and affiliates of ENSERCH, as well as
its utility division. 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. In this case, plaintiffs seek actual damages in excess of $5
million and punitive damages in an amount equal to 0.5% of the consolidated
gross revenues of ENSERCH for the years 1982 through 1986 (approximately $85
million), interest, costs and attorneys' fees.
On December 26, 1989, a lawsuit was filed against EEI and EPO in the 130th
Judicial District Court of Matagorda County, Texas. The plaintiff claims that
the defendants breached an alleged contract to sell a working interest and net
revenue interest in two leases located in Matagorda County. Trial of the case
resulted in a jury verdict in favor of the plaintiff. Judgment was entered by
the trial court on October 8, 1992, ordering EEI and EPO to convey the leases to
the plaintiff and to pay damages of $3.1 million, which includes principal,
prejudgment interest, attorneys' fees and costs. This judgment was appealed to
the Corpus
F-20
<PAGE>
Christi Court of Appeals on September 2, 1992. Counsel has advised that there
is a reasonable basis to believe that the decision of the trial court will be
reversed.
On October 25, 1991, a lawsuit was filed against EEI, EPO and ENSERCH in
the 111th District Court of Webb County Texas. Other parties have intervened.
The plaintiffs and intervenors claim that the defendants' failure to reassign
part of a gas and oil lease covering approximately 33,000 net mineral acres in
breach of defendants' contractual reassignment obligations entitles them to
recover the fair market value of the lost leasehold estate and lost overriding
royalty interests. Plaintiffs and intervenors claim actual damages of
approximately $3.1 million for the lost leasehold estate, and approximately $2.2
million for the lost overriding royalty interests. They also seek pre-judgment
interest, attorney's fees and costs.
Management believes that the named defendants have meritorious defenses to
the claims made in these and other actions. In the opinion of management, EP
will incur no liability from these and all other pending claims and suits that
would be considered material for financial reporting purposes.
6. SUPPLEMENTAL FINANCIAL INFORMATION
Quarterly Results (Unaudited) - The results of operations by quarters are
summarized below. In the opinion of EP's management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been made.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
1993:
Revenues............................................................. $39,755 $47,709 $47,638 $49,890
Operating Income..................................................... 5,118 9,160 7,267 4,841 (a)
Net Income (Loss).................................................... (640) 2,743 548 (6,532) (a)
Net Income (Loss) Per Unit........................................... (.01) .03 .01 (.06)
1992:
Revenues............................................................. $41,333 $39,454 $41,224 $ 43,897
Operating Income (Loss).............................................. 4,228 1,538 4,346 (10,182) (b)
Net Loss............................................................. (610) (3,267) (862) (15,526)
Net Income Per Unit.................................................. (.01) (.03) (.01) (.15)
</TABLE>
____________________
(a) Fourth quarter 1993 operating income is after a charge of $7.1 million for
pending litigation. The net loss for the fourth quarter of 1993 reflects
the $7.1 million provision for litigation and, in addition, includes a $6
million provision for interest due royalty owners.
(b) Includes a $16,335 noncash write-off of an idle pipeline and shallow-water
production facility from an abandoned offshore project.
F-21
<PAGE>
Decrease (Increase) in Current Operating Assets and Liabilities by Components
is summarized below:
<TABLE>
<CAPTION>
1993 1992 1991
---------------- -------------- --------------
<S> <C> <C> <C>
Accounts Receivable.................................................... $ (2,382) $ 10,737 $ 16,580
Materials and Supplies................................................. 1,682 833 (187)
Other Current Assets................................................... 63 891 (1,105)
Accounts Payable....................................................... 7,318 5,437 (14,654)
Other Current Liabilities.............................................. (3,136) (533) 1,049
---------------- -------------- --------------
Total................................................................ $ 3,545 $ 17,365 $ 1,683
================ ============== ==============
Interest Costs are summarized below:
1993 1992 1991
---------------- -------------- --------------
Interest Capitalized................................................... $ 4,214 $ 5,262 $ 6,871
Interest Charged to Expense............................................ 30,267(a) 20,192 19,461
---------------- -------------- --------------
Interest Costs Incurred.............................................. $ 34,481 $ 25,454 $ 26,332
================ ============== ==============
</TABLE>
(a) Includes $6 million provision for interest due royalty owners
7. SUPPLEMENTAL GAS AND OIL INFORMATION
Gas and Oil Producing Activities - The following tables set forth information
relating to gas and oil producing activities. Reserve data for natural gas
liquids attributable to leasehold interests owned by EP are included in oil and
condensate.
<TABLE>
<CAPTION>
December 31
-------------------------------------
1993 1992
------------ ------------
<S> <C> <C>
Capitalized Costs:
Proved gas and oil properties....................................................... $1,721,345 $1,651,703
Unproved gas and oil properties..................................................... 82,236 86,005
------------ ------------
Total........................................................................... $1,803,581 $1,737,708
============ ============
Accumulated depreciation and amortization............................................. $ 775,570 $ 746,657
============ ============
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1993 1992 1991
----------------- ----------------- ------------------
<S> <C> <C> <C>
Costs Incurred:
Property acquisition costs:
Proved........................................ $ 8,179 $ 886 $ 659
Unproved...................................... 12,429 8,969 9,527
Exploration costs................................ 36,397 35,030 46,901
Developments costs............................... 62,401 16,355 62,586
----------------- ----------------- ------------------
Total $119,406 $61,240 $119,673
================= ================= ==================
Amortization (per MMBtu)(a)........................ $ .91 $ .91 $ .83
================= ================= ==================
(a) Amortization expense per unit of production converted to a common unit of measure,
millions of British thermal units (MMBtu).
</TABLE>
Excluded Costs - The following table sets forth the composition of
capitalized costs excluded from the amortizable base as of December 31, 1993:
<TABLE>
<CAPTION>
Amounts Incurred In
---------------------------------------------------
Total as of
Prior December 31,
1993 1992 1991 Years 1993
---------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Property Acquisition Costs.. $12,311 $ 5,260 $ 3,792 $18,539 $39,902
Exploration Costs........... 5,498 10,864 9,337 3,148 28,847
Interest Capitalized........ 3,990 4,367 2,895 2,235 13,487
---------- --------- --------- -------- ------------
Total..................... $21,799 $20,491 $16,024 $23,922 $82,236
========== ========= ========= ======== ============
</TABLE>
At December 31, 1993, approximately 43% of excluded costs relates to offshore
activities in the Gulf of Mexico and the remainder relates to domestic onshore
exploration activities. 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 is expected to be
accomplished within ten years.
Gas and Oil Reserves (Unaudited) - The following table of estimated proved and
proved developed reserves of gas and oil has been prepared utilizing estimates
of year end reserve quantities provided by DeGolyer and MacNaughton, independent
petroleum consultants. Reserve
F-23
<PAGE>
estimates are inherently imprecise and estimates of new discoveries are more
imprecise than those of producing gas and oil properties. Accordingly, the
reserve estimates are expected to change as additional performance data becomes
available. Oil reserves (which include condensate and natural gas liquids
attributable to leasehold interests) are stated in thousands of barrels (MBbl).
Gas reserves are stated in million cubic feet (MMcf). All reserves are located
in the United States.
<TABLE>
<CAPTION>
Oil Gas
MBbl MMcf
---------- ----------
<S> <C> <C>
Proved Reserves:
Balance, January 1, 1991....................................... 28,725 1,223,180
Revisions of previous estimates................................ (117) (54,709)
Extensions, discoveries and additions.......................... 1,478 57,081
Purchase of minerals in place.................................. 10,516 12,307
Sale of minerals in place...................................... (36) (549)
Production..................................................... (2,529) (70,026)
---------- ----------
Balance, December 31, 1991..................................... 38,037 1,167,284
Revisions of previous estimates................................ 1,023 (7,054)
Extensions, discoveries and additions.......................... 1,444 20,817
Purchase of minerals in place.................................. 102 198
Sale of minerals in place...................................... (42) (15,665)
Production..................................................... (2,625) (65,161)
---------- ----------
Balance, December 31, 1992..................................... 37,939 1,100,419
Revisions of previous estimates................................ 1,331 20,179
Extensions, discoveries and additions.......................... 1,292 34,549
Purchase of minerals in place.................................. 3 4,379
Sale of minerals in place...................................... (40) (4,042)
Production..................................................... (2,307) (70,018)
---------- ----------
Balance, December 31, 1993..................................... 38,218 1,085,466
Less 1% general partners' interest in EPO...................... 382 10,855
---------- ----------
Net........................................................... 37,836 1,074,611
========== ==========
Proved Developed Reserves:
January 1, 1991................................................ 19,245 1,035,898
December 31, 1991.............................................. 17,763 974,031
December 31, 1992.............................................. 13,552 675,844
December 31, 1993.............................................. 14,249 734,077
Less 1% general partners' interest in EPO...................... 142 7,341
---------- ----------
Net........................................................... 14,107 726,736
========== ==========
</TABLE>
F-24
<PAGE>
Included in oil reserve estimates are natural gas liquids for leasehold
interest of 931 MBbl for 1993; 789 MBbl for 1992; and 743 MBbl for 1991.
Results of Operations for Producing Activities (excluding corporate overhead
and interest costs) - are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................. $186,224 $164,634 $173,011
Production Costs.......................... 45,684 43,132 48,374
Exploration Costs (1)..................... 6,276 8,128 9,752
Depreciation and Amortization............. 75,917 74,378 71,599
Write-down of Gas and Oil Properties (2).. 51,480
-------- -------- --------
Net..................................... $ 58,347 $ 38,996 $ (8,194)
======== ======== ========
- ------------------
</TABLE>
(1) Includes internal costs that cannot be directly identified with
acquisition, exploration or development activities.
(2) Excludes a $16,335 noncash write-off in 1992 of an idle pipeline and
shallow water production facility from an abandoned offshore project that
was not a gas and oil producing activity.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserve Quantities (Unaudited) - has been prepared by EP using
estimated future production rates and associated production and development
costs. Continuation of economic conditions existing at the balance sheet date
was assumed. Accordingly, estimated future net cash flows were computed by:
applying prices in contracts in effect in December to estimated future
production of proved gas and oil reserves; estimating future expenditures to
develop proved reserves; and estimating costs to produce the proved reserves
based on average costs for the year. Average prices used in the computations
were:
<TABLE>
<CAPTION>
1993 1992 1991
------ -------- ---------
<S> <C> <C> <C>
Natural Gas (per Mcf).......................$ 2.38 $ 2.18 $ 2.03
Oil (per Bbl)............................... 11.68 18.16 18.35
</TABLE>
Because of the imprecise nature of reserve estimates and the unpredictable
nature of other variables used, the standardized measure should be interpreted
as indicative of the order of magnitude only and not as precise amounts.
F-25
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
-------------- ----------- ---------
(In millions)
<S> <C> <C> <C>
Future Cash Inflows........................ $3,031.6 $3,056.4 $3,041.7
Future Production and Development Costs.... 1,042.8 1,039.3 980.6
-------------- ----------- ---------
Future Net Cash Flows...................... 1,988.8 2,017.1 2,061.1
Less 10% Annual Discount................... 886.4 908.7 1,000.7
-------------- ----------- ---------
Standardized Measure of Discounted Future 1,102.4 1,108.4 1,060.4
Net Cash Flows........................
Less 1% General Partners' Interest in EPO.. 11.0 11.1 10.6
-------------- ----------- ---------
Net................................... $1,091.4 $1,097.3 $1,049.8
============== =========== =========
</TABLE>
The following table sets forth an analysis of changes in the standardized
measure of discounted future net cash flows from proved gas and oil reserves:
<TABLE>
<CAPTION>
1993 1992 1991
--------------- ----------- ---------
(In millions)
<S> <C> <C> <C>
Sales and Transfers of Gas and Oil Produced, Net
of Production Costs............................. $(135.6) $(114.5) $(116.0)
Changes in Prices, Net of Production and Future
Development Costs............................... 3.6 20.7 (252.4)
Extensions, Discoveries, and Improved Recovery,
Less Related Costs.............................. 41.4 22.3 47.4
Purchase of Minerals in Place..................... 9.4 .9 84.8
Revisions of Previous Quantity Estimates.......... (29.6) 16.4 (38.3)
Sale of Minerals in Place......................... (4.9) (.7)
Accretion of Discount............................. 105.1 102.4 110.3
Other............................................. (.3) 4.7 (4.0)
Less 1% General Partners' Interest in EPO......... (.1) .5 (1.7)
--------------- ----------- ---------
Net.................................... $ (5.9) $ 47.5 $(167.2)
=============== =========== =========
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
NEW ENSERCH EXPLORATION, INC.:
We have audited the accompanying balance sheet of New Enserch Exploration,
Inc. as of September 1, 1994. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit 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 statement is 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 audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at September 1, 1994, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
September 1, 1994
F-27
<PAGE>
NEW ENSERCH EXPLORATION, INC.
BALANCE SHEET
September 1, 1994
Cash ........................................................ $1,000
======
Shareholder's equity - Common Stock, $1.00 par value;
200,000,000 shares authorized, 1,000 shares outstanding...... $1,000
======
See note below.
________________
NOTE TO BALANCE SHEET
New Enserch Exploration, Inc. ("Newco") was formed on September 1, 1994 to
succeed to the gas and oil exploration and production business of EPO. Newco
has had no operations to date and will not have significant assets, liabilities
or operations until the merger with EPO is completed.
Newco also has authorized 2,000,000 shares of Preferred Stock. See
"DESCRIPTION OF THE CAPITAL STOCK."
F-28
<PAGE>
EXHIBIT A
---------
[Letterhead of Dean Witter
appears here]
November 15, 1994
Board of Directors
Enserch Exploration, Inc.
ENSERCH Center
300 South St. Paul Street
Dallas, TX 75201
Gentlemen:
We understand that Enserch Exploration, Inc. ("EEI"), as Managing General
Partner of Enserch Exploration Partners, Ltd. ("EP" or the "Partnership") is
proposing a plan of reorganization (the "Reorganization"), pursuant to which (i)
New Enserch Exploration, Inc., a newly organized Texas corporation that will
change its name to Enserch Exploration, Inc. ("Newco"), will acquire all of the
outstanding partnership interests of EP Operating Limited Partnership ("EPO"),
which is the limited partnership in which EP has a 99% limited partner interest
and which holds EP's gas and oil properties, in exchange for shares of common
stock of Newco, par value $1.00 per share ("Common Stock"); (ii) EPO will then
be merged into Newco and (iii) EP then will be liquidated, with all partners
receiving shares of Common Stock, and with ENSERCH Corporation ("EC") and its
corporate subsidiaries and affiliated partnerships (collectively with EC, the
"EC Companies") also receiving certain leases and the concomitant obligations of
EP and retaining approximately $395 million of EP's liabilities upon the
liquidation of EP. Upon the liquidation of EP and the distribution of Common
Stock, holders of outstanding limited partnership interests ("Units") other than
the EC Companies (the "Public Unitholders") will receive one share of Common
Stock for each Unit then held, which shares of Common Stock will be traded on
the New York Stock Exchange.
You have asked us to render our opinion as to the fairness of the
Reorganization to the Public Unitholders from a financial point of view.
In arriving at our opinion, we have, among other things:
(1) Reviewed a draft of the Registration Statement to be filed by Newco
with the Securities and Exchange Commission;
(2) Reviewed the Partnership's Annual Reports on Form 10-K since
inception through December 31, 1993 and Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1994, June 30, 1994 and September 30,
1994;
(3) Reviewed and discussed the Partnership's Reserve Report (dated January
1,
<PAGE>
Page 2
1994) with representatives of DeGolyer and MacNaughton, the
Partnership's independent petroleum engineering firm that prepared
such report (the "Reserve Report");
(4) Reviewed historic financial and operating results of the Partnership
(since its original public offering on April 23, 1985) and discussed
with senior management of EEI and EC their business plans for Newco,
including (i) their intention to increase the percentage ownership of
Newco held by the public, (ii) their intention to reinvest Newco's
cash flow in its business and (iii) their intention to maintain a
significant ownership interest in Newco;
(5) Reviewed and discussed with management financial and operating
projections, including certain reserve economic forecasts, provided by
EEI regarding the business plans and prospects for Newco, including
its capital expenditure program and dividend policy;
(6) Reviewed certain financial ratios, derived from financial and
operating data provided by EEI management, of (i) the Partnership and
(ii) Newco on a pro forma basis giving effect to the Reorganization;
(7) Reviewed the historical market prices, distributions and trading
volumes of the EP units;
(8) Reviewed and contrasted the distribution rights of the Public
Unitholders to those of certain other publicly traded partnerships
offered subsequent to EP's original offering;
(9) Analyzed the current marketplace receptivity for natural resource
publicly traded partnerships;
(10) Analyzed the financial and operating results of certain oil and gas
exploration and production corporations which we deemed to be
reasonably similar to the Partnership, and studied the marketplace for
the securities, including common stock, of such prospective issuers;
and
(11) Reviewed such other financial studies, analyses and investigations as
we deemed appropriate.
In our review, and in arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us by EC and EEI, and we have not independently verified such
information or undertaken an independent appraisal of the assets of the
Partnership. We have also relied upon the management of EEI as to the
reasonableness of and the ability to achieve the financial forecasts (which
include the reserve
<PAGE>
Page 3
economic forecasts) of Newco and EP as provided to us, and we have assumed that
such forecasts have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of such management as to the future
operating performance of Newco and EP. We have assumed that the Reserve Report
has been reasonably prepared and reflects the best currently available estimates
and judgments of DeGolyer and MacNaughton as to the reserves and future
production volumes of EP. We have also relied on the determination of EEI and
its legal counsel as to the federal income tax consequences of the
Reorganization to the Public Unitholders, which is described in the
Prospectus/Information Statement.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Reorganization, taken as a whole, is fair to the Public Unitholders
from a financial point of view.
Sincerely,
DEAN WITTER REYNOLDS INC.
<PAGE>
EXHIBIT B
---------
AMENDMENT NO. 5
TO
AMENDED AND RESTATED
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
EP OPERATING LIMITED PARTNERSHIP
This AMENDMENT NO. 5 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP (this "Amendment") is executed on December 30, 1994, to be effective
as of December 30, 1994, by ENSERCH EXPLORATION HOLDINGS, INC. (the "Managing
General Partner"), a Delaware corporation formerly named Enserch Exploration,
Inc., ENSERCH CORPORATION (the "Special General Partner"), a Texas corporation,
ENSERCH EXPLORATION PARTNERS, LTD. (the "Limited Partner"), a Texas limited
partnership.
RECITALS:
A. EP Operating Limited Partnership, formerly EP Operating Company,
Ltd. and EP Operating Company (the "Partnership"), was organized as a Texas
limited partnership pursuant to the provisions of the Texas Uniform Limited
Partnership Act (Article 6132a, Vernon's Texas Statutes) (the "Uniform Act")
upon the filing with the Secretary of State of the State of Texas on March 7,
1985 of a Certificate of Limited Partnership for the Partnership and pursuant to
an original Agreement of Limited Partnership. The original Agreement of Limited
Partnership was amended and restated as of April 30, 1985 and was thereafter
amended by Amendment No. 1 dated as of September 1, 1992, Amendment No. 2 dated
as of October 23, 1992, Amendment No. 3 dated as of July 9, 1993 and Amendment
No. 4 dated as of December 8, 1994 (as so amended, the "Agreement").
B. The Managing General Partner has determined that it is in the best
interests of the Partnership and the Partners that the Agreement be further
amended as set forth herein and has proposed this Amendment to the Agreement.
The Special General Partner and the Limited Partner have consented to this
Amendment.
NOW, THEREFORE, Managing General Partner, Special General Partner and
Limited Partner hereby amend the Agreement as set forth below pursuant to
Section 14.1(a) of the Agreement:
1. Article X of the Agreement is amended by adding the following
Section 10.4 thereto:
"10.4 Contributions to Newco. Any other provision of
this Agreement notwithstanding, the Managing General Partner,
Special
1
<PAGE>
General Partner, and Limited Partner may assign, contribute
and transfer their Partnership Interests to New Enserch
Exploration, Inc., a Texas corporation organized in 1994 as
New Enserch Exploration, Inc. ("Newco") whose name will be
changed to Enserch Exploration, Inc. in the merger with the
Partnership authorized below, in exchange for shares of Newco
common stock pursuant to a Contribution of Partnership
Interests Agreement substantially in the form of APPENDIX
`EPO-1' hereto, the execution and delivery of which on behalf
of the Partnership are hereby authorized. Newco may assign,
contribute and transfer a portion of such Partnership
Interests to a wholly owned subsidiary of Newco and the
Partnership may merge with Newco and that subsidiary pursuant
to a plan of merger adopted for the Partnership by Newco as
successor Managing General Partner of the Partnership, with
Newco being the surviving entity of such merger. The
permission to transfer Partnership Interests contained in this
Section 10.4 does not otherwise affect or amend the
restrictions on transfer contained in Section 10.1(b), which
is hereby ratified."
2. Article XIII of the Agreement is amended to amend Section 13.4 in
its entirety to read as follows:
"13.4 Distribution in Kind. Notwithstanding the provisions
of Section 13.3 which require the liquidation of the assets of
the Partnership, but subject to the order of priorities set
forth therein, if on dissolution of the Partnership the
Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause
undue loss to the Partners, the Liquidator may, in its
absolute discretion, defer for a reasonable time the
liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (other than those to Partners)
and may, in its absolute discretion, distribute to the
Partners, in lieu of cash, in accordance with the provisions
of Sections 13.3(c) and 13.3(d), such Partnership assets as
the Liquidator deems appropriate, including non pro rata
distributions. Any distributions in kind shall be subject to
such conditions relating to the disposition and management
thereof as the Liquidator deems reasonable and equitable and
to any joint operating agreements or other agreements
governing the operation of such properties at such time. The
Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of
valuation as it may adopt."
3. Except as specifically amended hereby, the Agreement remains in full
force and effect as written.
IN WITNESS HEREOF, Managing General Partner, Special General Partner and
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Limited Partner have caused this Amendment to be executed by their duly
authorized officers on and as of the dates first above written.
MANAGING GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
a Delaware corporation formerly
named Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
SPECIAL GENERAL PARTNER:
ENSERCH CORPORATION
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
LIMITED PARTNER:
ENSERCH EXPLORATION PARTNERS, LTD.
300 South St. Paul
Dallas, Texas 75201
By: Enserch Exploration Holdings, Inc.,
Managing General Partner
300 South St. Paul
Dallas, Texas 75201
By:_____________________________
Its:____________________________
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APPENDIX "EPO-1"
CONTRIBUTION OF PARTNERSHIP INTERESTS AGREEMENT
(EP, EC AND EEI TO NEWCO)
THIS CONTRIBUTION OF PARTNERSHIP INTERESTS AGREEMENT ("Contribution
Agreement") is executed this 30th day of December, 1994 by ENSERCH EXPLORATION
HOLDINGS, INC. ("EEI"), a Delaware corporation formerly named Enserch
Exploration, Inc., ENSERCH CORPORATION ("EC"), a Texas corporation, ENSERCH
EXPLORATION PARTNERS, LTD. ("EP"), a Texas limited partnership, NEW ENSERCH
EXPLORATION, INC. ("Newco"), a Texas corporation organized in 1994 whose name is
to be changed to Enserch Exploration, Inc. in the merger authorized in paragraph
7 below, and ENSERCH NEWSUB, INC. ("Newsub"), a Texas corporation which is a
wholly owned subsidiary of Newco.
RECITALS:
A. EP Operating Limited Partnership, formerly EP Operating Company,
Ltd. and EP Operating Company ("EPO"), is a Texas limited partnership existing
pursuant an Amended and Restated Agreement of Limited Partnership dated as of
April 30, 1985, as amended by Amendment No. 1 dated as of September 1, 1992,
Amendment No. 2 dated as of October 23, 1992, Amendment No. 3 dated as of July
9, 1993, Amendment No. 4 dated as of December 8, 1994 and Amendment No. 5 dated
as of December 30, 1994 (as so amended, the "EPO Partnership Agreement"). Terms
used in this Contribution Agreement have the same meanings given in the EPO
Partnership Agreement, unless a different definition is given in this
Contribution Agreement.
B. EEI is the Managing General Partner of EPO and EEI's Percentage
Interest as Managing General Partner in EPO is 0.99%. EC is the Special General
Partner of EPO and EC's Percentage Interest as Special General Partner in EPO is
0.01%. EP is the Limited Partner of EPO and EP's Percentage Interest as Limited
Partner in EPO is 99%.
C. EEI, EC and EP wish to contribute and assign their Partnership
Interests in EPO to Newco in exchange for the issuance to them of Common Stock,
par value $1.00 per share, of Newco ("Newco Common Stock").
D. Newco wishes to contribute and assign a portion of the Partnership
Interest in EPO assigned to it by EP to Newsub as a capital contribution to
Newsub.
E. Newco wishes to accept the contribution and assignment of EEI's,
EC's and EP's Partnership Interests and Newsub wishes to accept the contribution
and assignment of a portion of the Partnership Interest in EPO assigned to Newco
by EP.
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NOW, THEREFORE, for valuable consideration, the parties agree as follows:
1. ASSIGNMENTS OF PARTNERSHIP INTERESTS. The parties hereby make the
following contributions and assignments of Partnership Interests in EPO. The
contributions and assignments are made serially, in the order set forth in this
Paragraph 1. Each contribution and assignment is deemed completed before the
subsequent assignment is made. The parties specifically disclaim any intention
that the contributions and assignments described in this Contribution Agreement
occur simultaneously. It is the intention of the parties that the Partnership
Interests assigned and contributed by this Contribution Agreement not all be
owned by Newco at any one time but that at all times there be at least two
persons owning such Partnership Interests.
a. In exchange for the issuance of 1,045,812 shares of Newco Common
Stock by Newco to EP, EP by these presents does CONTRIBUTE, ASSIGN,
TRANSFER AND CONVEY unto Newco a one percent (1%) Partnership Interest as
Limited Partner in EPO.
b. As a contribution to the capital of Newsub, Newco by these presents
does CONTRIBUTE, ASSIGN, TRANSFER AND CONVEY unto Newsub a one percent
(1%) Partnership Interest as Limited Partner in EPO.
c. In exchange for the issuance of an aggregate of 103,535,430 shares
of Newco Common Stock by Newco to EP, EEI and EC, EP, EEI and EC by these
presents do CONTRIBUTE, ASSIGN, TRANSFER AND CONVEY unto Newco all of (i)
EP's remaining Partnership Interest as Limited Partner in EPO and (ii)
EEI's Partnership Interest as Managing General Partner of EPO and EC's
Partnership Interest as Special General Partner of EPO. The aggregate of
103,535,430 shares of Newco Common Stock so issued shall be apportioned
between EP, EC and EEI so that the entire 104,581,242 shares of Newco
Common Stock issued in connection with this Contribution Agreement are
apportioned among EP, EC and EEI in accordance with the balances in their
respective capital accounts in EPO at such time.
2. ACCEPTANCE OF ASSIGNMENTS. Each assignee of a Partnership Interest
hereby accepts the contribution and assignment to it of such Partnership
Interest.
3. ISSUANCE OF SHARES. Newco hereby agrees to issue shares of Newco
Common Stock in consideration of the assignments and contributions described in
Paragraph 1, in the amounts, at the times and with respect to the assignments
and contributions described in Paragraph 1. Newco shall promptly deliver
certificates representing such shares to the persons entitled thereto.
4. WARRANTIES AND REPRESENTATIONS OF ASSIGNORS. EP, EEI and EC each
warrants and represents to Newco that it has granted no other assignments or
security interests in its respective Partnership Interests contributed,
assigned, transferred and conveyed by this
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<PAGE>
Contribution Agreement, that it has the full right, power and authority to
execute this Contribution Agreement, that all consents required for this
Contribution Agreement have been obtained and that, immediately prior to its
assignment thereof, it was the owner of the Partnership Interests assigned by
it.
5. WARRANTIES AND REPRESENTATIONS OF ASSIGNEES. Newco and Newsub each
warrants, represents and certifies to EP, EEP, EC and Newco and to EPO that it
is an Eligible Citizen.
6. ADMISSION OF NEWCO AND NEWSUB TO THE PARTNERSHIP. Newco is hereby
admitted to EPO as Managing General Partner, Special General Partner and Limited
Partner, each to the extent of the Partnership Interests assigned to Newco in
paragraph 1 in full substitution of EEI, EC and EP as to such interests. Newsub
is hereby admitted to EPO as the Limited Partner. From and after this
Assignment, EEI is no longer the Managing General Partner of EPO, EC is no
longer the Special General Partner of EPO and EP is no longer the Limited
Partner of EPO, and each is deemed to have withdrawn from EPO as a result of
this Assignment and the admission of Newco and Newsub in their respective places
as Partners.
7. MERGER OF EPO, NEWSUB AND NEWCO. Promptly after the contributions to
Newco and Newsub described in paragraph 1 and the admission of Newco and Newsub
to the Partnership as described in paragraph 6, EPO and Newsub shall merge with
Newco pursuant to a plan of merger adopted for the Partnership by Newco, with
Newco being the surviving entity of such merger (the "Merger") and with the name
of Newco being changed to Enserch Exploration, Inc. in the Merger. In the Merger
the 1,000 shares of Newco Common Stock originally issued to EPO in the
organization of Newco shall be cancelled.
8. FURTHER ASSURANCES. Each party shall execute such further
documentation that may reasonably be required in order to effect the
contributions, assignments and issuances of shares of stock described herein.
EXECUTED on the date set forth above.
ENSERCH EXPLORATION HOLDINGS, INC.
a Delaware corporation formerly
named Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
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<PAGE>
ENSERCH CORPORATION
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
ENSERCH EXPLORATION PARTNERS, LTD.
300 South St. Paul
Dallas, Texas 75201
By: Enserch Exploration Holdings, Inc.,
Managing General Partner
300 South St. Paul
Dallas, Texas 75201
By:______________________________
Its:_____________________________
ENSERCH EXPLORATION, INC.
a Texas corporation organized
in 1994 as New Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
4
<PAGE>
ENSERCH NEWSUB, INC.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
5
<PAGE>
EXHIBIT C
---------
AMENDMENT NO. 3
TO
AMENDED AND RESTATED
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
ENSERCH EXPLORATION PARTNERS, LTD.
This AMENDMENT NO. 3 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP is executed on December 30, 1994, to be effective as of December 30,
1994, by ENSERCH EXPLORATION HOLDINGS, INC., a Delaware corporation formerly
named Enserch Exploration, Inc., as the Managing General Partner and as the
Special General Partner.
RECITALS:
A. Enserch Exploration Partners, Ltd. (the "Partnership") was organized
as a Texas limited partnership pursuant to the provisions of the Texas Uniform
Limited Partnership Act (Article 6132a, Vernon's Texas Statutes) (the "Uniform
Act") upon the filing with the Secretary of State of the State of Texas on March
7, 1985 of a Certificate of Limited Partnership for the Partnership and pursuant
to an original Agreement of Limited Partnership. The original Agreement of
Limited Partnership was amended and restated as of April 30, 1985 and thereafter
was amended by Amendment No. 1 dated as of September 1, 1992 and Amendment No. 2
dated as of August 30, 1994 (as so amended, the "Agreement").
B. It is in the best interests of the Partnership and the Partners that
the Agreement be further amended as set forth herein.
NOW, THEREFORE, the General Partners do hereby amend the Agreement as set
forth below pursuant to Section 15.1 of the First Restated Agreement:
1. Article II of the Agreement is amended to add to the definition of the
term "Operating Partnership" the following sentence:
"The `Operating Partnership' also means all successors and assigns of the
Operating Partnership, whether or not such successors and assigns are
partnerships or other entities, specifically including New Enserch
Exploration, Inc. (`Newco'), a Texas corporation organized in 1994 whose
name is to be changed to Enserch Exploration, Inc. in the merger with the
Operating Partnership contemplated in Article XVI."
2. Article III of the Agreement is amended by adding the following
sentence at the end thereof:
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"In addition to the foregoing, the purpose and business of the Partnership
shall include owning the Newco Common Stock (as defined in Section 5.5(a))
and exercising all rights connected with the ownership of the Newco Common
Stock."
3. Article IV of the Agreement is amended to amend Section 4.6(a) in its
entirety as follows:
"4.6 Capital Accounts. (a) The Partnership shall maintain for each
Partner a separate Capital Account. Such Capital Account shall be increased
by (i) the cash amount or Net Agreed Value of all Capital Contributions
made by such Partner to the Partnership pursuant to this Agreement, (ii)
all items of Partnership income and gain computed in accordance with
Section 4.6(b) and allocated to such Partner pursuant to Section 5.1, (iii)
Unrealized Gain computed in accordance with, and allocated to such Partner
pursuant to, Section 4.6(d), and decreased by (iv) the cash amount or Net
Agreed Value of all actual and deemed distributions of cash or property
made to such Partner pursuant to this Agreement, (v) all items of
Partnership deduction and loss computed in accordance with Section 4.6(b)
and allocated to such Partner pursuant to Section 5.1, and (vi) Unrealized
Loss computed in accordance with, and allocated to such Partner pursuant
to, Section 4.6(d)."
9. Article IV of the Agreement is further amended to amend Section
4.6(d)(iii) in its entirety as follows:
"(iii) In addition, immediately prior to the distribution of any
Partnership property pursuant to Section 5.3(a) or Section 14.3 or 14.4,
the Capital Accounts of all Partners (and the Carrying Values of all
Partnership properties) shall, immediately prior to any such distribution,
be adjusted (consistent with the provisions hereof and Section 704 of the
Code) upwards or downwards to reflect any Unrealized Gain or Unrealized
Loss attributable to all Partnership properties (as if such Unrealized Gain
or Unrealized Loss had been recognized upon an actual sale of such
properties, immediately prior to such distribution, and was allocated to
the Partners, at such time, pursuant to Section 5.1). In determining such
Unrealized Gain or Unrealized Loss attributable to the properties, the fair
market value of Partnership properties shall be determined by the Managing
General Partner using such reasonable methods of valuation as it may
adopt."
5. Article V of the Agreement is amended to amend Section 5.3 in its
entirety as follows:
"5.3 Current Distributions. (a) The Managing General Partner shall
review the Partnership's accounts at the end of each calendar quarter to
determine whether distributions are appropriate. The Managing General
Partner may make such distributions, including non pro rata distributions,
as it in its discretion may determine, without being limited to current or
accumulated income or gains. Such distributions may be made from
Partnership revenues, Capital Contributions
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<PAGE>
or Partnership borrowings. The Managing General Partner may in its sole
discretion distribute to the Partners other Partnership property."
6. Article V of the Agreement is further amended by adding the following
Section 5.5:
"5.5 Additional Special Allocation. (a) Terms used in this Section
5.5 have the following meanings, notwithstanding any contrary definitions
given in the Agreement:
"(i) `Affiliate Holders' means (i) EPPL and each other
corporation or partnership that is an Affiliate of ENSERCH and is a
Record Holder of Units, and (ii) the Managing General Partner and the
Special General Partner as the holders of general partner interests in
the Partnership.
"(ii) `Newco' means New Enserch Exploration, Inc., a Texas
corporation organized in 1994 whose name is to be changed to Enserch
Exploration, Inc. in the merger with the Operating Partnership
contemplated in Article XVI.
"(iii) `Newco Common Stock' means the common stock of Newco, par
value $1.00 per share.
"(iv) `Public Unitholder' means a Record Holder of Units that
is not an Affiliate Holder.
"(b) Notwithstanding any contrary provisions of Section 5.1 or 5.2,
all items of income and gain (computed in accordance with Section 4.6(b))
shall be allocated to the Public Unitholders until the aggregate amount of
income and gain equals the excess of (i) the product obtained by
multiplying (A) the Public Unitholders' aggregate Percentage Interest times
(B) the fair market value of the Newco Common Stock held by the Partnership
immediately prior to its liquidation (as determined by the Managing General
Partner), over (ii) the Public Unitholders' aggregate capital account
balance at such time (adjusted for all other allocations of income, gain,
deduction or loss)."
7. Article XIV of the Agreement is amended to amend Section 14.4 to read
in its entirety as follows:
"14.4 Distribution in Kind. Notwithstanding the provisions of
Section 14.3 which require the liquidation of the assets of the
Partnership, but subject to the order of priorities set forth therein, the
Liquidator may, in its absolute discretion, defer for a reasonable time the
liquidation of any assets except those necessary to satisfy liabilities of
the Partnership (other than those to Partners) and may, in its absolute
discretion, distribute to the Partners, in lieu of cash, in accordance with
the provisions of Sections 14.3(c) and 14.3(d), such Partnership
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<PAGE>
assets as the Liquidator deems appropriate, including non-prorata
distributions. Any distributions in kind shall be subject to such
conditions relating to the disposition and management thereof as the
Liquidator deems reasonable and equitable and to any joint operating
agreements or other agreements governing the operation of such properties
at such time. The Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of valuation as
it may adopt."
8. Article XIV of the Agreement is further amended by adding the
following Section 14.7.
"14.7 Plan of Liquidation. The Partnership has adopted the Plan of
Liquidation attached hereto as APPENDIX `EP-1' and incorporated herein by
reference. The Managing General Partner is the Liquidator for the purpose
of effecting the Plan of Liquidation, and, as such, the Managing General
Partner has the authority, and is hereby directed, to carry out the Plan of
Liquidation and to take all actions required thereby or that the Managing
General Partner believes to be in the best interests of the Partnership and
in accordance with the Plan of Liquidation. To the extent the Plan of
Liquidation requires or permits actions to be taken that are not otherwise
authorized by Article XIV of this Agreement, the Plan of Liquidation
controls and the Managing General Partner is authorized to take such
actions. Without limiting the generality of the foregoing grant of
authority, the Managing General Partner is authorized to make distributions
of Partnership assets in kind to the Partners in accordance with the Plan
of Reorganization even though the allocation may not be proportionate to
the interests of the Partners."
9. Article XVI of the Agreement is amended to amend Section 16.1(b) to
add the following:
"A Majority Interest has consented to certain amendments to the Operating
Partnership Agreement and to the contribution and assignment of the
partnership interests of EEI, EC and the Partnership in the Operating
Partnership to Newco in exchange for Newco Common Stock, and the subsequent
merger of the Operating Partnership and a subsidiary of Newco with Newco,
in which Newco will be the surviving entity of such merger and the name of
Newco will be changed to Enserch Exploration, Inc."
10. Except as specifically amended hereby, the Agreement remains in full
force and effect as written.
IN WITNESS HEREOF, the General Partners have caused this Amendment to be
executed by their respective officers thereunto duly authorized on and as of the
dates first above written.
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<PAGE>
MANAGING GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
300 South St. Paul
Dallas, Texas 75201
By:
-----------------------------
Its:
-----------------------------
SPECIAL GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
300 South St. Paul
Dallas, Texas 75201
By:
-----------------------------
Its:
-----------------------------
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<PAGE>
APPENDIX "EP-1"
ENSERCH EXPLORATION PARTNERS, LTD.
PLAN OF COMPLETE LIQUIDATION
The following is the Plan of Complete Liquidation ("Plan") of ENSERCH
EXPLORATION PARTNERS, LTD. (the "Partnership"), a Texas limited partnership,
which will accomplish the dissolution and complete liquidation of the
Partnership in conformity with the Internal Revenue Code of 1986 (the "Code")
and Article XIV of the Partnership's Second Amended and Restated Agreement of
Limited Partnership (as subsequently amended, the "Agreement").
1. DEFINITIONS. Terms defined in the Agreement have the same meanings
when used in this Plan unless otherwise specified herein. In addition, the
following definitions apply to terms used in this Plan:
a. "Affiliate Holders" means (i) EPPL and each other corporation or
partnership that is an Affiliate of ENSERCH and is a Record Holder of
EP Units, and (ii) EEI and ENSERCH as the holders of general partner
interests in the Partnership.
b. "EEI" means Enserch Exploration Holdings, Inc., a Delaware
corporation, formerly named Enserch Exploration, Inc., and a wholly
owned subsidiary of ENSERCH.
c. "Effective Date" means the date of Unitholder Approval of the Plan.
d. "EPPL" means Enserch Processing Partners, Ltd., a Texas limited
partnership in which ENSERCH directly or indirectly owns all of the
general and limited partner interests.
e. "EP-to-EPPL Note" means that certain promissory note dated as of March
11, 1994 made payable by the Partnership to EPPL in the original
principal amount of $306 million.
f. "Leases" means (i) the Master Lease Agreement dated as of September
30, 1992, between State Street Bank and Trust Company of Connecticut,
National Association, Trustee, and the Operating Partnership, relating
to offshore production and related equipment for use on the Garden
Banks 388 offshore mineral tract, (ii) a certain Master Lease
Agreement dated as of April 30, 1992, between CIBC Leasing, Inc.,
certain financial institutions and the Operating Partnership, relating
to offshore production and related equipment for use on the
Mississippi Canyon 441 offshore mineral tract and (iii) any equipment
acquired by or on behalf of the Partnership or the Operating
Partnership under the terms of either of the Master Lease Agreements
referred to in (i) or (ii) or with a view to ultimately being made
subject thereto or to a modification thereof.
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g. "Lease Rights" means the right, title and interest of the lessee in,
to or under the Leases.
h. "Liquidation Record Date" means the date set by the Managing General
Partner (which may be the Effective Date) on which the holders of
record of Units and general partner interests in the Partnership are
determined for purposes of making the liquidating distribution of the
Partnership's assets in the manner contemplated by Paragraph 8.
i. "Newco" means New Enserch Exploration, Inc., a Texas corporation
organized in 1994 whose name is being changed to Enserch Exploration,
Inc. in a merger with the Operating Partnership.
j. "Newco Common Stock" means the shares of common stock of Newco, par
value $1.00 per share.
k. "Public Unit" means a Unit held by a Public Unitholder.
l. "Public Unitholder" means a Record Holder of Units that is not an
Affiliate Holder.
m. "Unit" means a Depositary Unit or an EP Unit that is not on deposit
with the Depositary pursuant to the Deposit Agreement.
n. "Unitholder Approval" means the approval by a Majority Interest at a
meeting of Record Holders of Units held pursuant to Article XV of the
Agreement.
2. ELECTION BY MANAGING GENERAL PARTNER. EEI, the Managing General
Partner of the Partnership, has elected to dissolve the Partnership pursuant to
Section 14.1(d) of the Agreement and has determined that the complete
liquidation of the Partnership following dissolution is advisable, expedient and
in the best interests of the Partnership and its Partners. The Managing General
Partner recommends that the Partnership be liquidated following its dissolution
in accordance with the provisions of this Plan.
3. ADOPTION OF PLAN. This Plan will be deemed to have been adopted upon
Unitholder Approval.
4. EFFECTIVE DATE. This Plan will be effective as of the Effective Date.
The Partnership shall be dissolved on the date selected by Managing General
Partner, which date shall be on or after the Effective Date.
5. NEWCO. The Operating Partnership has formed Newco. The Partnership,
the Managing General Partner and the Special General Partner have contributed
all of their interests as limited and general partners in the Operating
Partnership to Newco in exchange for an aggregate of 104,581,242 shares of Newco
Common Stock.
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<PAGE>
6. WINDING UP; CESSATION OF BUSINESS. After the Effective Date, the
Partnership shall engage only in those activities that are necessary or proper
to wind up its business and affairs and to distribute its assets in accordance
with the Plan. The Managing General Partner shall wind up the Partnership's
business and affairs, commencing on the Effective Date.
7. PAYMENT OF OBLIGATIONS; RESERVES.
a. The Managing General Partner shall assume all of the Partnership's
obligations in respect of the Leases.
b. The Managing General Partner and EPPL shall each assume a portion of
the remaining obligations and indebtedness of the Partnership in
amounts determined by the Managing General Partner.
c. The Partnership shall pay or discharge all known and admitted debts,
liabilities and expenses of the Partnership (not otherwise assumed by
the Managing General Partner or EPPL) to the fullest extent
practicable, and shall establish reserves for all other obligations,
including unascertained or contingent liabilities and expenses. The
Managing General Partner, in its best judgment and in good faith in
the light of all facts known by it at the time, shall establish
reserves in the amounts the Managing General Partner considers to be
sufficient to pay and discharge all remaining claims, debts,
liabilities, expenses and obligations of the Partnership, including
unascertained or contingent liabilities and expenses.
8. LIQUIDATING DISTRIBUTION OF ASSETS.
a. Notwithstanding Sections 14.3 and 14.4 of the Agreement, but subject
to the order of priorities set forth in Section 14.3 of the Agreement,
upon the assumption or payment of obligations and the establishment of
reserves as provided in Paragraph 7 above, the Managing General
Partner shall make the following distributions to the Partners:
(1) The Managing General Partner shall distribute 805,914 shares of
Newco Common Stock to the Public Unitholders of record at the
close of business on the Liquidation Record Date. The 805,914
shares of Newco Common Stock shall be distributed in kind to all
such holders pro rata in relation to the number of Units held by
each. Such distribution is designed to result in the Public
Unitholders receiving Newco Common Stock at an exchange ratio of
one share for each Unit held on the Liquidation Record Date and
shall be made to the Public Unitholders at or prior to the time
any distribution of Newco Common Stock is made to the Affiliate
Holders on account of the liquidation of the Partnership. No
fractional shares of Newco Common Stock will be distributed;
Public Unitholders are instead entitled to cash payments in lieu
of any fractional share equivalents.
(2) The Managing General Partner shall distribute the Lease Rights to
EEI, subject to the Lease obligations with respect thereto.
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<PAGE>
(3) The Managing General Partner shall distribute all of the
remaining Newco Common Stock not distributed or distributable
pursuant to (1) above then held by or for the account of the
Partnership to EEI and EPPL in relation to their respective
Capital Accounts, adjusted for the liabilities assumed by them in
Paragraphs 7 and 8a(2) and the Lease Rights distributed to EEI in
Paragraph 8a(2).
b. Any assets remaining in the Partnership after the distribution of
Newco Common Stock referred to in a. above shall be contributed to the
capital of Newco by the Managing General Partner after the payment of
the obligations of the Partnership as provided in Paragraph 7.
c. The transfer books of the Partnership will be permanently closed at
the close of business on the Liquidation Record Date. Units will not
be assignable or transferable on the books of the Partnership after
the Liquidation Record Date except by will, intestate succession or
operation of law.
d. The Newco Common Stock to be distributed to Public Unitholders will be
delivered to the Depositary to hold for delivery to each Public
Unitholder entitled thereto upon the surrender to the Depositary by
such Person of (i) Depositary Receipts or (ii) certificates
representing the Units, registered in the name of such Person as of
the close of business on the Liquidation Record Date. Any Newco Common
Stock which Public Unitholders have the right to receive, but which
have not been distributed to Public Unitholders because Depositary
Receipts or Certificates representing such Units have not been
surrendered to the Depositary, will be held by the Depositary until
Depositary Receipts or Certificates representing such Units have been
surrendered to the Depositary or until the Depositary has received
evidence satisfactory to it, in the Depositary's sole discretion, or
the Depositary has received other security or indemnity as it may
require, in the Depositary's sole discretion, at which time the
Depositary shall deliver to such Persons the Newco Common Stock to
which the Persons are entitled. The Newco Common Stock Affiliate
Holders have the right to receive will be delivered upon the surrender
to the Managing General Partner of certificates representing the Units
and general partner's interests held by the Affiliate Holders on the
Liquidation Record Date.
e. No Partner is entitled to receive assets as a liquidating distribution
from the Partnership other than specified in a. above. The Managing
General Partner is not required to make any distribution other than in
accordance with the provisions of this Paragraph 8 and is not liable
for implementing the Plan of Liquidation (including without limitation
making the liquidating distribution in accordance with this Paragraph
8).
9. AUTHORITY AND AUTHORIZATIONS. Notwithstanding any other provisions of
the Agreement and for purposes of this Plan, Unitholder Approval (a) constitutes
approval of an election to dissolve the Partnership by the Managing General
Partner as permitted by Section 14.1(c) of the Agreement and (b) constitutes
approval and adoption of, and the due
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<PAGE>
authorization of implementation of, this Plan in accordance with its terms.
Additionally, Unitholder Approval: (x) empowers and authorizes the Managing
General Partner (and its officers) to put this Plan into effect and to do and
perform any and all acts and things and to make, execute, deliver and file any
and all agreements, acquisitions (including the acquisition of Newco Common
Stock), transfers, certificates, information returns, tax returns and other
papers and documents of every kind and character as the officers of the Managing
General Partner deem necessary or appropriate to implement and carry out the
provisions of the Plan, including, without limitation, requiring the surrender
of all Depositary Receipts or certificates representing Units or pursuant to the
Plan, executing a certificate of cancellation pursuant to, and in conformity
with, the provisions of the Texas Act, and causing such certificate of
cancellation to be filed in the office of the Secretary of State of the State of
Texas, withdrawing the authority of the Partnership to do business as a foreign
limited partnership in states in which it has such authority, and doing all
other things necessary or appropriate to the winding up of the Partnership
including all those things provided in Sections 14.3 and 14.4 of the Agreement;
and (y) constitutes a power of attorney permitting the Managing General Partner
to execute on behalf of the Partners any documents that may be necessary or
appropriate to accomplish any of the foregoing and any matters related thereto.
The Managing General Partner has the power to authorize such variations from or
amendments of the provisions of this Plan that may be necessary or appropriate
to effectuate the complete liquidation of the Partnership and the distribution
of its assets to the holders of Units in accordance with the applicable sections
of the Code, the Texas Act and all other applicable laws. The Partnership shall
indemnify the Managing General Partner and its shareholders, officers and
directors and the liability of the Managing General Partner and its
shareholders, directors and officers is limited, in the manner and to the extent
provided in the Agreement or in this Plan.
10. RETURNS AND REPORTS. Without limitation of the foregoing provisions,
the Managing General Partner shall cause the final income tax returns of the
Partnership to be executed and filed along with all other returns, reports and
other instruments, together with the additional information required by the
applicable regulations, and all other related documents and information required
to be filed by reason of, or determined by the managing general Partner, in its
sole discretion, to be necessary or appropriate in connection with, the Plan and
the complete liquidation of the Partnership.
11. REGULATORY APPROVALS. Implementation and completion of the Plan by the
Managing General Partner is subject to any regulatory approvals for the Plan
having been obtained.
12. TERMINATION. The Plan may be terminated by the Managing General
Partner at any time that it deems the termination to be in the best interests of
the Partnership or the partners, even though the Plan already may have been
implemented in part and without the consent or approval of any other partner.
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EXHIBIT D
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RESTATED ARTICLES OF INCORPORATION
OF
NEW ENSERCH EXPLORATION, INC.
SECTION ONE
New 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 as further amended by such
Restated Articles of Incorporation as hereinafter set forth and which contain no
other change in any provision thereof.
SECTION TWO
The Restated Articles of Incorporation restate and integrate and further
amend the Articles of Incorporation heretofore in effect by substituting for the
provisions of such Articles of Incorporation in their entirety the provisions of
the Restated Articles of Incorporation, the text of which is set forth below in
SECTION FIVE of these Restated Articles of Incorporation. The further
amendments effected by the Restated Articles of Incorporation affect the
following articles of the Restated Articles of Incorporation: Article Four
(authorized shares); Article Eight (bylaws); and Article Eleven (interested
directors, officers and security holders).
SECTION THREE
Each such amendment made by these Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and such Restated Articles of Incorporation and each such
amendment made by the Restated Articles of Incorporation were duly adopted by
the shareholders of the Company on October 3, 1994.
SECTION FOUR
The number of share outstanding was 1,000, and the number of shares
entitled to vote on the Restated Articles of Incorporation as so amended was
1,000, the holders of all of which have signed a written consent to the adoption
of such Restated Articles of Incorporation as so amended.
SECTION FIVE
The 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 and as amended as above set forth:
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ARTICLE ONE
The name of the Company is NEW 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.
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(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.
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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
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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
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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.
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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
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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
8
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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 31st day of October, 1994.
NEW ENSERCH EXPLORATION, INC.
By:/s/ Gary J. Junco,
President
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GRAPHICS APPENDIX LIST
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EDGAR Version
- -------------
Current Ownership Structure
Newco is 100% owned by EPO, which is 1% owned by EC (.01%) and EEI (.99%) as
general partners and 99% owned by EP as limited partner. EP is .79% owned by the
public limited partnership interests and 99.21% owned (EPPL--98.21% limited
partnership interest and EEI--1% general partnership interest) by the EC
Companies.
Ownership Structure After Reorganization
Newco is 99.23% owned by the EC Companies and .77% owned by public shareholders.
